Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report 55 330K
2: EX-4.1 Amended and Restated Credit Agreement 79 310K
4: EX-10.11 1995 Directors' Deferred Compensation Plan 11 38K
5: EX-10.13 Compensation Arrangement With David Yun 1 7K
6: EX-10.14 Amended and Restated Lease 113 362K
7: EX-10.15 Amended and Restated Sublease 30 78K
3: EX-10.9 Stock Option Plan 5 23K
8: EX-21 Subsidiaries of the Registrant 1 8K
9: EX-23 Consent of Independent Auditors 1 7K
10: EX-27.1 Financial Data Schedule 1 7K
11: EX-27.2 Financial Data Schedule 1 7K
SCHOLASTIC
FISCAL 1999
FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value The NASDAQ Stock Market
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock, par value $0.01, held by
non-affiliates as of August 5, 1999, was approximately $555,225,000. As of such
date, non-affiliates held no shares of the Class A Stock, par value $0.01. There
is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant's voting stock
as of August 5, 1999 was as follows: 15,669,892 shares of Common Stock and
828,100 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders to be held
September 15, 1999.
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PART I
ITEM 1 BUSINESS
OVERVIEW
Scholastic Corporation (together with its subsidiaries, "Scholastic" or the
"Company") is a global children's publishing and media company which creates and
distributes innovative, quality educational materials for use in schools and
homes, including children's books, textbooks, magazines, technology, teacher
materials, television programming, videos and toys. The Company is the world
leader in children's school book clubs and school book fairs and is among the
largest publishers and distributors of children's books worldwide.
Internationally, Scholastic operates wholly-owned companies in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong, and India.
Scholastic distributes most of its products directly to children and teachers in
elementary and secondary schools. During its seventy-nine years of serving
schools, Scholastic has developed strong name recognition associated with
quality and dedication to learning. The Company develops successful children's
books and then builds these brands into multimedia assets.
The Company's operations are categorized in four segments: Children's Book
Publishing and Distribution; Educational Publishing; Media, Licensing and
Advertising; (which together represent the Company's domestic operations); and
International.
The Company's Children's Book Publishing and Distribution segment includes the
publication and distribution in the United States of children's books through
its school-based book clubs (including home continuity programs), school-based
book fairs and trade channels. 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 1999, Scholastic distributed in excess of 250 million
children's books in the United States.
The Company's Educational Publishing segment includes the publication and
distribution of K-12 textbooks, supplementary materials, classroom magazines and
instructional technology for core and supplemental use in United States schools
and libraries. In fiscal 1999, the United States circulation of the Company's
classroom magazines was approximately 7.8 million. The Company believes it has
one of the leading core curriculum reading programs - Scholastic Literacy
Place(R) in the United States.
The Company's Media, Licensing and Advertising segment includes the production
and the distribution by the Company's United States-based operations of
entertainment products (including television programming, videos and motion
pictures), Internet services and CD-ROM-based products and Scholastic-branded
licensed properties, as well as advertising and promotional activities.
The International segment includes the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong and India. For the
year ended May 31, 1999, approximately 80% of the Company's International
revenues were derived from the sale of children's books. The Company believes
that it operates the largest school book club program and the largest school
book fair business in the United Kingdom, Canada, Australia and New Zealand.
Most of the Company's revenues are generated by targeted direct mail programs to
schools and through telemarketing representatives. Additionally, the Company has
a sales force of full-time and part-time representatives calling on schools to
sell its core curriculum materials, supplementary texts, educational software,
magazines and library book programs. 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 following table sets forth revenues by operating segment for the three
fiscal years ended May 31:
(Amounts in millions)
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1999 1998 1997
Children's Book Publishing
and Distribution $ 657.9 $ 560.9 $511.6
Educational Publishing 190.6 196.1 163.4
Media, Licensing
and Advertising 115.6 105.3 112.2
International 190.6 196.1 179.1
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TOTAL $ 1,154.7 $ 1,058.4 $ 966.3
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Scholastic's revenues have grown at an average annual compounded rate of
approximately 9.3% from fiscal 1997 through fiscal 1999.
Scholastic Corporation was incorporated under the laws of Delaware in 1986 and
through its subsidiaries and predecessor entities has been in business since
1920.
annual report/fiscal 1999 1
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
(57.0% of fiscal 1999 revenues)
GENERAL
The Company's Children's Book Publishing and Distribution segment includes the
publication and distribution of children's books in the United States through
its school-based book clubs (including home continuity programs), school-based
book fairs and the trade channel.
The Company has published books since 1948 and is one of the largest United
States publishers of children's books. The Company believes it is the largest
operator of school-based book clubs and book fairs in the United States and is
also one of the leading sellers of children's books through the trade channel.
The Company offers a broad range of quality children's literature. Many of the
books offered by the Company have received awards for excellence in children's
literature, including the Caldecott and the Newbery awards.
The Company obtains titles for sale in its distribution channels from three
principal sources. First, the Company publishes paperback and/or hardcover
editions of books written by outside authors under exclusive publication
agreements with the Company or written by the Company's editorial staff.
Scholastic generally owns rights to sell these original titles in all channels
of distribution, including school and trade. The second source consists of
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 the Company's purchase of finished books
from other publishers to be sold in the school market. The Company currently
maintains a backlist (a list of titles published as new titles in prior years)
of over 5,000 titles.
All of the Company's books are manufactured by outside printers. The printers
are generally selected on the 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.
BOOK CLUBS
The Company operates ten school-based book clubs: Firefly(R), serving
pre-kindergarten and kindergarten students; Seesaw(R), serving kindergarten and
first grade students; two Carnival(R) clubs, one serving students in
kindergarten through second grade and the other serving third through sixth
grade students; Lucky Book Club(R), serving second and third grade students;
Arrow Book Club(R), serving fourth through sixth grade students; TAB Book
Club(R), serving sixth, seventh and eighth grade students; and three Trumpet(R)
clubs, which together serve pre-K through sixth grade students. In addition, the
Company creates special theme-based offers targeted to the different grade
levels during the year, such as holiday offers, science offers, curriculum
offers, Spanish offers, etc. The Company also operates various book club
continuity programs, including All About You, Animorphs(R) Alliance, The
Baby-Sitters Collector Club, Clifford's Clubhouse, Scholastic At Home Phonics
Reading Program, The Magic School Bus(R), Arthur's Adventure, Star Wars Missions
and Goosebumps Collectors Club. These programs are promoted primarily through
book clubs and deliver the products to children at home and bill parents at
home.
From fiscal 1997 through fiscal 1999, domestic book club revenues grew primarily
as a result of volume increases, increases in the number of special book club
offers, price increases, the expansion of book club continuity programs and the
selection by children of higher priced items.
The Company founded its first book club in 1948. The Company estimates that over
80% of all elementary school teachers in the United States participate in book
clubs, with approximately 80% of these teachers using Scholastic book clubs at
least once during the year.
The Company believes that teachers participate in school book clubs because it
is their opinion that quality books at affordable prices will be of interest to
students and improve students' reading skills. The Company also believes
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 generally fifty or more selections at
substantial reductions from retail prices. The teacher consolidates the
students' orders and payments, and mails or phones the orders to the Company,
which then delivers the books to the teacher for distribution to the students.
Teachers who participate
2 scholastic corporation
in the book clubs receive bonus points for use by their school, which may be
redeemed for the purchase of additional books and other items for their
classrooms.
The Company processes and fulfills orders for its book clubs from its primary
warehouse and distribution facility in Jefferson City, Missouri. Continuity
orders are fulfilled from its Des Plaines, Illinois warehouse and distribution
center. Orders for the book clubs are generally shipped to customers within two
to four days from receipt of the teacher's order.
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 costs and its large number of promotion
mailings, enable the Company to compete effectively.
BOOK FAIRS
The Company entered the book fair business in 1981. Since that time, the
Company's book fair business has grown primarily through geographic expansion,
selected acquisitions, increased penetration of its existing markets, increased
frequency of multiple fairs for the same school and growth in revenue on a per
fair basis. In June 1998, the Company acquired certain assets of Pages Book
Fairs Inc. for $10.5 million, including inventory, book fair cases and customer
lists.
Book fairs are generally weeklong events conducted on school premises and
sponsored by school librarians and/or parent-teacher organizations. Book fair
events expose children to hundreds of new books and allow them the opportunity
to purchase books and other select products of their choice. Although the
Company provides the school with the books and book display cases, the school
itself conducts the book fair. The Company believes that the primary motivation
of the schools in sponsoring fairs is to make quality books available to their
students at reasonable prices in order to help them become more interested in
reading. In addition, the school retains a portion of the book fair revenues
that can be used to purchase books, supplies and equipment for the school.
The Company operates book fairs in all fifty states under the name Scholastic
Book Fairs(R). The Company markets fairs branded as Showcase Book Fairs(TM),
Explorastory Bookfairs(TM), Read Street(R) and Discovery Fairs(TM), which
feature non-fiction, science, technology, arts, crafts and interactive products.
The Company also offers premium fairs under the names Scholastic Literacy
Festival(R) and Scholastic Books on Tour(R), which feature an expanded list of
titles supported by exciting merchandise displays and book character costumes
designed to create a dynamic book fair event open to the entire family.
The Company operates its book fairs in the United States on a regional basis
through over 20 sales offices and over 80 warehouse locations. The marketing of
book fairs is performed from the sales offices by telephone sales and field
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 sales offices, supported by
field representatives. The sources of books for the Company's book fairs are
original Scholastic publications, reprints licensed from other publishers for
school distribution and finished books purchased from other publishers.
The Company believes that its competitive advantages in the book fair business
include the strength of the relationship between its sales representatives and
schools, broad geographic coverage, a high level of customer service and its
breadth of product selection. Over 90% of the schools that sponsored a
Scholastic book fair in fiscal 1998 sponsored a Scholastic book fair again in
fiscal 1999.
TRADE
The Company distributes its original, and some licensed 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 2,500 titles are maintained for trade
distribution, including the branded series Harry Potter(TM), Animorphs(R), Dear
America(R), Goosebumps(R), The Baby-Sitters Club(R), The Magic School Bus(R) and
Clifford the Big Red Dog(R). Recent licensed properties published by the Company
include TeleTubbies(R) and Star Wars(R).
The Company has a trade field sales organization which focuses on selling the
broad range of Scholastic books to book store accounts. The Company outsources
certain services including invoicing, billing, returns processing and collection
services in connection with trade distribution.
The Company's sales in the trade market have been led by Animorphs, which was
first published in 1996 and as of July 1999 had forty-four titles and thirty-one
million copies in print; the Goosebumps series, with 169 titles and 216 million
copies in print; and The Baby-Sitters Club series, with 340 titles and 173
million copies in print. Two other Scholastic-developed properties that also
annual report/fiscal 1999 3
generate significant sales are The Magic School Bus series with ninety-one
titles and forty-three million copies in print and the new Dear America
hardcover series with twenty titles and six million copies in print. The
Scholastic Children's Dictionary(R), published in 1996 and with approximately
1.9 million copies in print, has greatly enhanced the Company's reference line.
During fiscal 1999, several of Scholastic's titles were included on the
bestseller lists of USA Today and The New York Times, including books from the
Harry Potter, Animorphs, and Star Wars series.
Scholastic's export department oversees the licensing of foreign-language rights
in eligible Scholastic titles to other publishing companies around the world and
the sales of books to countries where the Company does not operate. Scholastic
titles have been licensed in over twenty-five languages and the Company's books
are sold in most countries in the world.
EDUCATIONAL PUBLISHING
(16.5% of fiscal 1999 revenues)
GENERAL
The Company's Educational Publishing segment includes the publication and
distribution of K-12 textbooks, supplemental materials, classroom magazines and
instructional technology for core and supplemental use in United States schools
and libraries. Scholastic has been providing quality innovative educational
materials to schools and libraries since it began publishing classroom magazines
in the 1920's. The Company added supplementary books and texts to its product
line in the 1940's, professional books for teachers in the 1980's, early
childhood products and core curriculum materials in the 1990's and in 1996,
strengthened its Spanish language offerings through the acquisition of Lectorum,
the largest Spanish language book distributor to schools and libraries in the
United States.
CLASSROOM MAGAZINES
Scholastic has been for many years a leading publisher of classroom magazines.
These magazines are used as supplementary educational materials by the teachers
in grades K-12. The Company's classroom 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 magazines.
The Company's thirty-four classroom magazines are designed to encourage students
to read and to supplement the formal learning program by bringing subjects of
current interest into the classroom. The subjects covered include English,
reading, literature, math, science, current events, social studies and foreign
languages. The most well known of the Company's domestic magazines are
Scholastic News(R) and Junior Scholastic(R).
The Company's classroom magazine circulation in the United States in each of
fiscal years 1999 and 1998 was approximately 7.8 million. Approximately
two-thirds of the circulation is in grades K-6, with the balance in grades seven
through twelve. In fiscal 1999, teachers in approximately 60% of the elementary
schools and 70% of the high schools in the United States used the Company's
classroom magazines.
The various classroom magazines are distributed on a weekly, bi-weekly and
monthly basis during the school year. The majority of the cost of the magazines
is paid for by the schools and the remainder is paid by the students.
Circulation revenue accounted for substantially all of the Company's classroom
magazine revenues in fiscal 1999.
CORE, SUPPLEMENTAL, EARLY CHILDHOOD AND PROFESSIONAL PUBLISHING
The Company's core and supplemental publishing operations develop and distribute
instructional materials (both core and supplemental curriculum programs)
directly to schools in the United States, purchased through school budgets.
The Company's strategy is to publish and distribute a full array of products in
reading and language arts, concentrating on grades K-8, to meet the spectrum of
schools' needs in these disciplines. As described below, the Company's offerings
range from core textbooks to supplemental materials, including print products
(broad selections of paperback books and specialized products such as phonics
readers), to technology-based products that help teach reading (Wiggleworks),
help manage school reading incentive programs (Scholastic Reading Counts!) and
help fourth through eighth grade students who are reading below grade level
(Read 180).
The Company's largest programs are Scholastic Literacy Place, its K-5 market
core curriculum reading program, and Scholastic Solares(TM), its Spanish
elementary reading program. During fiscal 1999, Scholastic Literacy Place was
cited as the second most purchased reading program in the
4 scholastic corporation
United States by Educational Marketer magazine. Scholastic Literacy Place was
also adopted by the Department of Defense Education Activity for use in 119
schools around the world. The Company is in the process of updating these
programs for sales in open territory and adoption states, including the upcoming
Texas adoption.
The professional publishing division publishes professional books designed for
and generally purchased by teachers. The Company also distributes a successful
line of supplemental phonics products. The Company is publishing additional
books and Spanish phonics materials to meet growing demand.
MEDIA, LICENSING AND ADVERTISING
(10.0% of fiscal 1999 revenues)
GENERAL
The Company's Media, Licensing and Advertising segment includes the production
and the distribution of entertainment products (including television
programming, videos and motion pictures), Internet services and CD-ROM-based
products and Scholastic-branded licensed properties, as well as advertising and
promotional activities.
TV/MOVIE PRODUCTIONS AND LICENSING
Scholastic Entertainment Inc. ("SEI"), formerly Scholastic Productions, Inc., a
wholly-owned subsidiary of the Company, extends the Company's franchises by
creating and managing global brands based on Scholastic's strong publishing
properties. SEI's multimedia programming also provides support for branding and
consumer products activities worldwide.
FILMED ENTERTAINMENT
SEI has built a media library of over 150 half-hour and six one-hour television
episodes including:
Scholastic's the Magic School Bus(r)
The popular animated children's television series, Scholastic's The Magic School
Bus(R), first aired for four seasons on PBS through the spring of 1998. In the
fall of 1998, Scholastic's The Magic School Bus moved from PBS and began airing
on Fox Kid's Network ("FKN") where it continues to receive high ratings. A total
of fifty-two half-hour episodes of the show have been produced. The show has won
numerous awards, including an Emmy for Lily Tomlin, and was the most popular
series for school-aged children on PBS. In addition, the series has been
licensed for television in over forty international territories. The series is
also available worldwide on home video.
Goosebumps(r)
Goosebumps, which debuted in 1995 on FKN, was one of the top-rated children's
series on television with a total of sixty-two half-hour episodes and six
one-hour specials. Additionally, Goosebumps has been licensed in over 100
countries worldwide and is currently airing in many major international
territories. The series has been especially popular in the United Kingdom where
it has been the number one rated children's series. Goosebumps has been released
on video in several major international territories.
Animorphs(r)
SEI has produced twenty half-hour live action episodes of Animorphs, based on
Scholastic's bestselling book series, which were first aired on Nickelodeon in
fiscal 1999. Animorphs also aired in Canada on both YTV (a basic cable channel)
and the Global Television Network (broadcast market). Nickelodeon is
distributing the series in television markets outside of North America. SEI is
producing six additional half-hour episodes of Animorphs for Nickelodeon, which
are scheduled to be aired in the fall of 1999.
Dear America(TM)
During fiscal 1999, SEI produced six half-hour episodes for Home Box Office
("HBO") based on Scholastic's popular and critically acclaimed book series, Dear
America. HBO has contracted for six additional specials to be produced for
airing in fiscal 2000.
Other Development
Another major Scholastic franchise in development is an animated television
series based on the beloved book series, Scholastic's Clifford the Big Red
Dog(TM). SEI also has other original children's and family oriented projects in
various stages of development.
LICENSING
SEI develops branding campaigns with high profile licensing and promotional
programs, primarily for brands produced in other media. In June 1997, SEI was
awarded the LIMA (Licensing Industry Merchandiser's Association) award for
"Licensing Agency of the Year." Examples of SEI's licensing and promotional
activities include:
Scholastic's The Magic School Bus
o The award-winning series of CD-ROMs, co-produced with Microsoft. All seven of
the Scholastic's The Magic School Bus CD-ROMs have been in the all-time top
twenty bestselling educational titles for children.
o Scholastic's Traveling Magic School Bus is an actual thirty-five foot long
yellow school bus that travels throughout North America. Over 1.5 million
fans have boarded the bus at schools, libraries, book fairs, events and book
stores since its launch in 1995.
annual report/fiscal 1999 5
o Consumer promotion partnerships with Howard Johnson, Kids Cuisine and Colgate
Palmolive.
o A live stage show tours the United States and Canada along with an exhibit
featured at children's museums.
Goosebumps
o The 1997 LIMA award "License of the Year" for Goosebumps.
o Two CD-ROMs, co-produced with Dreamworks SKG, the first of which reached
number one on the children's best seller list.
o The 1996 Reggie Award-winning Goosebumps Halloween Promotion with Pepsi,
Frito-Lay, Hershey, Taco Bell and Target retail stores.
Animorphs
o A targeted licensing and marketing campaign for Animorphs developed in
conjunction with the television series launch in fall 1998.
o Licensing partnerships with fifteen industry leaders, including Hallmark,
Antioch, Giant and Hasbro Toys.
o A multiyear consumer promotion agreement with Tricon (corporate parent of
Taco Bell, KFC and Pizza Hut) for a consumer promotion which commenced in the
fourth calendar quarter of 1998.
SPECIAL MARKETS
In addition, SEI creates, manufactures and distributes high-quality consumer
products primarily based on Scholastic's literary properties. In fiscal 1997,
the first product line of upscale plush toys, Sidekicks(TM), was launched with
items based on Clifford the Big Red Dog and Clifford the Small Red Puppy(R).
During fiscal 1998, additional products were introduced to the marketplace based
on The Magic School Bus character, Liz. The products are available through
independent toy/gift stores, specialty chains, department stores, mail order
catalogs and bookstores, as well as through Scholastic's proprietary channels
(i.e. book clubs and book fairs). A second product line of stationery items,
Paper Scissors Rock(TM), was launched in Spring 1999.
WESTON WOODS
The Company produces and markets videos to the school market through Weston
Woods, a producer of videos based on high quality children's books, which was
acquired in 1996.
NEW MEDIA
The Company sells consumer software through its book clubs and book fairs, and
through three classroom software clubs modeled on its classroom book clubs,
reaching children from kindergarten to eighth grade. The Company acquires
software for distribution in all of these channels through a combination of
licensing, purchases of product from software publishers and internal
development. In fiscal 1998, the Company also initiated sales of its internally
developed CD-ROM titles, including the award-winning I SPY CD-ROM, in the retail
channel through a third party distribution arrangement.
In fiscal 1994, the Company launched the Scholastic Network, the first online
service developed especially for educators and students. By offering teachers
supporting material and compelling in-class experiences for the kindergarten
through eighth grade market, it became the largest teacher-oriented subscription
service on the Internet. In addition, the Company has operated its home page on
the World Wide Web since 1994. This site, Scholastic.com, provides an overview
of the Company's activities, resource libraries for educators and special
programming tied to the Scholastic Network's content.
In fiscal 2000, the Company plans to significantly expand the Scholastic Network
and change the service from paid to free to increase teacher utilization. In the
later part of fiscal 2000, the Company intends to add e-commerce capabilities to
www.scholastic.com in two ways. First, the Company expects to enable teachers to
order book club and software club selections, as well as other Scholastic
paperbacks and professional resources, through the Internet; and second, the
Company expects to provide a direct-to-home service for parents to buy materials
to support their child's learning. Shortly thereafter, the Company expects to
offer a home learning subscription service which would be recommended by
teachers, purchased by parents and used by students.
Scholastic Network and Scholastic.com have generated a loss since inception. The
Company anticipates that the loss will increase in fiscal 2000 as a result of
this planned expansion.
ADVERTISING
The Company publishes three magazines directed at teachers and education
professionals: Instructor, Scholastic Early Childhood Today(TM) and Coach and
Athletic Director(TM). In fiscal 1999, advertising revenue represented the
majority of these magazines' revenue. Total circulation for these magazines in
fiscal 1999 was approximately 300,000. The magazines are distributed throughout
the
6 scholastic corporation
academic year. Subscriptions are solicited by direct mail and are
cross-marketed to teachers through the book clubs. The Company also publishes
Scholastic Parent and Child(R) magazine, which is directed at parents and
distributed through schools and day care programs. The circulation for
Scholastic Parent and Child is approximately 1.3 million. The magazines carry
outside advertising, advertising for the Company's other products and
advertising for clients that sponsor customized programs.
The Company's Scholastic Marketing Partners group develops and distributes
customized programs sponsored by corporations.
INTERNATIONAL
(16.5% of fiscal 1999 revenues)
GENERAL
The International segment includes the distribution of products and services
outside the United States by the Company's operations in the United Kingdom,
Canada, Australia, New Zealand, Mexico, Hong Kong and India. The businesses in
the United Kingdom, Canada, Australia and New Zealand generally mirror the
Company's Children's Book Publishing and Distribution and Educational Publishing
segments in the United States and include publishing and/or distributing
children's books, magazines, school text materials and educational software. The
Company's businesses in Mexico, Hong Kong and India principally distribute
through schools books published by Scholastic and other publishers. Products
from the United States appropriate to each specific market are distributed where
rights are available.
United Kingdom
Scholastic UK, founded in 1964, is Scholastic's largest international
subsidiary. It is the United Kingdom's largest book club and book fair operator,
based in part on the Company's acquisition of Red House Books Ltd. in 1997 and
of School Book Fairs, Ltd. in 1996. Scholastic UK also publishes five monthly
magazines for teachers and a substantial list of children's and educational
books. Scholastic UK's trade books appear frequently in the UK children's
bestseller lists.
Canada
Scholastic Canada, founded in 1957, distributes both English and French language
products used in more than 80% of Canadian schools. It also is Canada's leading
operator of book clubs and book fairs and publishes original works for
distribution in Canada.
Australia
Scholastic Australia, founded in 1968, is the leading publisher and distributor
of children's educational materials in Australia. Its book clubs and book fairs
reach 90% of the country's primary schools. Local imprints include Omnibus Books
and Margaret Hamilton Books.
New Zealand
Scholastic New Zealand, founded in 1964, is the leading book distributor to
schools and the largest children's book publisher in New Zealand. It publishes
about thirty new titles each year and has won annual picture book and junior
fiction awards, including the Aim Children's Book Awards and the New Zealand
Library and Information Association Awards.
Emerging Countries
The Company has operations in emerging marketplaces within Mexico, Hong Kong and
India. The Mexican and Indian businesses distribute books in both English and
local languages, principally through school book fairs and/or school book clubs.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis. Therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company experiences a substantial loss from operations in the first quarter.
Typically, book club and book fair revenues are proportionately larger in the
second quarter of the fiscal year, while revenues from the sale of instructional
materials are the highest in the first quarter. See Supplementary Financial
Information in Item 8.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August and generally have peaked in September or October, and have been at
the lowest point in May.
COMPETITION
The market for children's educational and entertainment materials is highly
competitive. Competition is based on the quality and range of educational
materials made available, price, promotion and customer service. In the United
States, competitors include one other national school book club operator and one
other national school book fair operator as well as smaller regional operators,
including local bookstores. Competitors in the entertainment market include
well-established companies, networks and cable operators. Domestically and
internationally, competitors include numerous other paperback book, textbook and
supplementary text
annual report/fiscal 1999 7
publishers, distributors and other resellers (including over the Internet) of
children's books and other educational materials, national publishers of
classroom and professional magazines with substantial circulation, numerous
producers of television, video and film programming (many of which are
substantially larger than the Company), publishers of computer software and
distributors of products and services on the Internet. Competition may increase
further to the extent that other entities enter the market and to the extent
that current competitors or new competitors develop and introduce new materials
that compete directly with the products distributed by the Company or develop or
expand competitive sales channels.
EMPLOYEES
As of May 31, 1999, Scholastic employed approximately 5,100 persons in full-time
jobs and 470 in hourly or part-time jobs in the United States and approximately
1,970 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
SCHOLASTIC is a registered trademark in the United States and in a number of
countries where the Company conducts business. Scholastic Inc., the Company's
principal US operating subsidiary, has registered and/or has pending
applications to register its trademarks in the United States for the names of
each of its domestic book clubs, the titles of its magazines and the names of
all its core curriculum programs. The Company's international subsidiaries have
also registered trademarks in the name of Scholastic Inc. for the names of their
respective book clubs and magazines. Although individual book titles are not
subject to trademark protection, Scholastic Inc. has registered and/or has
pending applications to register its trademarks in the United States and in a
number of countries for the names of certain series of books and consumer
products, such as The Baby-Sitters Club, The Magic School Bus and Animorphs.
All of the Company's publications, including books, magazines and software, are
subject to copyright protection. The Company consistently copyrights its
magazines, books and software in the name of the Company. Copyrights and
trademarks are vigorously defended by the Company and, as necessary, outside
counsel may be retained to assist in such protection.
ITEM 2 / PROPERTIES
The Company maintains its headquarters in the metropolitan New York area, where
it leases approximately 434,000 square feet of space for executive offices and
certain of its operating divisions. The Company intends to expand its New York
facilities by constructing a 120,000 square-foot facility adjoining its current
headquarters. The Company also owns or leases approximately 1.5 million square
feet of office and warehouse space for its National Service Operation located in
the Jefferson City, Missouri area.
In addition, the Company owns or leases approximately 1.6 million square feet of
office and warehouse space in over eighty facilities in the United States for
Scholastic Book Fairs.
Additionally, the Company owns or leases approximately 800,000 square feet of
office and warehouse space in twenty facilities in Canada, the United Kingdom,
Australia, New Zealand and elsewhere around the world for its international
businesses.
With respect to the Company's leased properties, no difficulties are anticipated
in negotiating renewals as leases expire or in finding other satisfactory space,
if current premises become unavailable. For further information concerning the
Company's obligations under its leases, see Note 4 of the Notes to Consolidated
Financial Statements. The Company considers its properties adequate for its
present needs.
ITEM 3 / LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed in
the United States District Court for the Southern District of New York against
the Company and certain officers seeking, among other remedies, damages
resulting from defendants' alleged violations of federal securities laws. The
complaints were consolidated. The Consolidated Amended Class Action Complaint
(the "Complaint") was served and filed on August 13, 1997. The Complaint was
styled as a class action, In re Scholastic Securities Litigation, 97 Civ. 2447
(JFK), on behalf of all persons who purchased Company Common Stock from December
10, 1996 through February 20, 1997. The Complaint alleged, among other things,
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder, resulting from purportedly materially false and
misleading statements to
8 scholastic corporation
the investing public concerning the financial condition of the Company.
Specifically, the Complaint alleged misstatements and omissions by the Company
pertaining to adverse sales and returns of its popular Goosebumps book series
prior to the Company's interim earnings announcement on February 20, 1997. In an
order dated December 14, 1998, the United States District Court for the Southern
District of New York granted the Company's motion to dismiss the Complaint. In
dismissing the Complaint, the Court held that the plaintiffs had failed to state
a claim upon which relief could be granted and granted plaintiffs leave to amend
and refile the Complaint. Pursuant to that order, plaintiffs filed a second
Consolidated Amended Class Action Complaint, on or about February 16, 1999,
alleging substantially similar claims against the Company and one of its
officers. The Company continues to believe that the litigation is without merit
and will continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court of New York County
of New York against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), is also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in a federal court for
the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. Parachute has filed an
appeal of the dismissal. The second action, captioned Parachute Press, Inc. v.
Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment Inc.
(Index No. 600507/99), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court
of New York County of New York. In its two complaints and its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of the total of approximately $36.1
million of advances over the term of the contract, of which approximately $15.3
million had been paid at the time the first Parachute litigation began and
payment of royalties set-off by Scholastic against amounts claimed by the
Company. The Company is seeking declaratory relief and damages for, among other
claims, breaches of contract, fraud and acts of unfair competition. Damages
sought by the Company include repayment by Parachute of a portion of the $15.3
million advance already paid. The Company intends to vigorously pursue its
claims against Parachute and the other named defendants and to vigorously defend
against the lawsuit and appeal. The Company does not believe that this dispute
will have a material adverse effect on its financial condition.
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.
ITEM 4 / SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise.
annual report/fiscal 1999 9
Part II
ITEM 5 / MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market system under
the symbol SCHL. The Class A Stock is convertible into Common Stock on a
share-for-share basis. There is no active market for the Class A Stock. The
following table sets forth, for the periods indicated, the quarterly and
one-year high and low selling prices on the NASDAQ National Market system for
the Company's Common Stock.
(Years ended May 31,)
--------------------------------------------------------------------------------
1999 1998
HIGH LOW HIGH LOW
--------------------------------------------------------------------------------
First Quarter 45 3/4 35 3/4 36 3/8 29
Second Quarter 52 3/4 35 1/2 45 19/32 33 7/8
Third Quarter 59 1/2 46 5/8 42 1/2 28 7/8
Fourth Quarter 56 1/4 44 43 7/8 35 9/16
Year 59 1/2 35 1/2 45 19/32 28 7/8
--------------------------------------------------------------------------------
The Company has not paid any dividends since its initial public offering in
February 1992 and has no current plans to pay any dividends on its Common Stock
and Class A Stock. In addition, certain of the Company's credit facilities
restrict the payment of dividends. See Note 3 of the Notes to Consolidated
Financial Statements.
The number of holders of record of Class A and Common Stock as of August 5, 1999
were three and approximately 5,000, respectively.
ITEM 6 / SELECTED FINANCIAL DATA
For fiscal years ended May 31,
(Amounts in millions, except per share data)
[Enlarge/Download Table]
====================================================================================================================================
1999 1998 1997 1996 1995
====================================================================================================================================
STATEMENT OF INCOME DATA:
Total revenues $ 1,154.7 $ 1,058.4 $ 966.3 $ 928.6 $ 749.9
Cost of goods sold 561.1 536.8 530.7 466.0 356.0
Selling, general and administrative expenses 493.3 440.3 399.6 367.4 316.2
Other operating costs
Goodwill and trademark amortization
and depreciation 22.4 21.7 18.3 13.1 10.0
Impairment of assets -- 11.4 --. 24.3 --
Operating income 77.9 48.2 17.7 57.8 67.7
Gain on sale of the SOHO Group -- 10.0 --. -- --
Interest expense, net (19.0) (20.1) (16.7) (11.2) (5.4)
Net income 36.8 23.6 0.4 31.9 38.6
Net income per share-basic $ 2.25 $ 1.46 $ 0.02 $ 2.02 $ 2.48
Net income per share- diluted $ 2.20 $ 1.45 $ 0.02 $ 1.97 $ 2.38
Weighted average shares outstanding-basic 16.4 16.2 16.0 15.8 15.6
Weighted average shares outstanding-diluted 16.7 16.4 16.3 16.2 16.2
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BALANCE SHEET DATA (END OF YEAR):
Working capital $ 222.4 $ 201.0 $ 215.7 $ 177.1 $ 136.8
Total assets 842.3 763.6 784.4 673.2 505.9
Long-term debt 248.0 243.5 287.9 186.8 91.5
Stockholders' equity 361.4 318.1 297.5 288.6 250.2
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10 scholastic corporation
ITEM 7 / MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Scholastic is a global children's publishing and media company. The Company has
four operating segments: Children's Book Publishing and Distribution;
Educational Publishing; Media, Licensing and Advertising (which together
comprise the Company's domestic operations); and International. Such segment
classification reflects the nature of the Company' s products and services
consistent with how senior management assesses operating performance and
allocates resources. Prior year comparisons have been restated to conform with
current year segment presentation. The following discussion and analysis of the
Company's financial position should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes and Selected Financial Data
included in this report.
OVERVIEW
During the three-year period ended May 31, 1999, the Company reported steady
revenue growth with significant improvement in net income, operating margins and
earnings per share. This improved performance reflects the Company's focused
development of its core businesses, careful management of capital expenditures
and cost controls as part of a turnaround plan established following the
breakeven fiscal 1997.
During fiscal 2000, the Company plans to maintain its overall strategic
objective of strengthening and developing its core businesses through planned
investments while continuing to improve overall profitability through growth and
cost containment. Over the next years, the Company will seek to build
shareholder value through continued revenue growth coupled with improved
margins, while funding strategic initiatives such as developing Internet
opportunities.
SCHOLASTIC
RESULTS OF OPERATIONS
For fiscal years ended May 31,
(Amounts in millions, except per share data)
[Enlarge/Download Table]
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1999 1998 1997
$ % (1) $ % (1) $ % (1)
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Revenue:
Children's Book Publishing and Distribution 657.9 57.0 560.9 53.0 511.6 53.0
Educational Publishing 190.6 16.5 196.1 18.5 163.4 16.9
Media, Licensing and Advertising 115.6 10.0 105.3 10.0 112.2 11.6
International 190.6 16.5 196.1 18.5 179.1 18.5
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Total revenue 1,154.7 100.0 1,058.4 100.0 966.3 100.0
Cost of goods sold 561.1 48.6 536.8 50.7 530.7 54.9
Gross profit 593.6 51.4 521.6 49.3 435.6 45.1
Selling, general and administrative costs 493.3 42.7 440.3 41.6 399.6 41.4
Operating income 77.9 6.8 48.2 (2) 4.6 17.7 1.8
Income before taxes 58.9 5.1 38.1 (3) 3.6 1.0 0.1
Net income 36.8 3.2 23.6 2.2 0.4 0.0
Earnings per share:
Basic 2.25 1.46 0.02
Diluted 2.20 1.45 0.02
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(1) Represents percentage of revenue
(2) Includes a non-cash charge of $11.4 million related to the impairment of
certain assets including unamortized prepublication costs and inventory
(3) Includes a gain of approximately $10.0 million resulting from the sale of
the SOHO Group
annual report/fiscal 1999 11
RESULTS OF OPERATIONS - CONSOLIDATED
Revenue in fiscal 1999 continued to grow, increasing approximately $96.3
million, or 9%, from fiscal 1998. Revenue growth in fiscal 1998 was
approximately $92.1 million, or 10%, when compared to fiscal 1997. This steady
increase in revenues was driven primarily by the Company's Children's Book
Publishing and Distribution segment, which accounted for 57% of the Company's
revenues in fiscal 1999, and 53% in both fiscal 1998 and 1997.
Gross profit margin improved to 51% for fiscal 1999, up two percentage points
from fiscal 1998, and up six percentage points from fiscal 1997. This trend
reflects the Company's continued focus on cost containment in the manufacturing
and distribution process and favorable paper prices, combined with improved
sales mix in the Company's Children's Book Publishing and Distribution segment.
Operating income increased approximately $30.0 million in both fiscal 1999 and
1998 reflecting improved operating margins of 6.8% and 4.6%, respectively, as
compared to 1.8% in fiscal 1997. In the third quarter of fiscal 1998, the
Company incurred a non-cash charge of $11.4 million related to the impairment of
certain assets including unamortized prepublication costs and inventory.
Excluding this non-cash charge, fiscal 1998 had an operating margin of 5.6% of
sales. Savings generated through cost containment and improved manufacturing
costs were the primary cause of the improved margins. Selling, general and
administrative costs increased as a percentage of sales to 42.7% in fiscal 1999
from 41.6% in fiscal 1998 due primarily to increased information technology
costs which were in part related to the Company's Year 2000 initiatives. In
fiscal 1998, selling, general and administrative costs as a percentage of
revenues were flat to the prior fiscal year.
Results for fiscal 1998 include a non-operating pre-tax gain of approximately
$10.0 million resulting from the January 1998 sale of the Company's Small Office
Home Office Group ("SOHO Group"), for approximately $19.2 million.
Net interest expense decreased slightly to $19.0 million in fiscal 1999 from
$20.1 million in fiscal 1998 reflecting lower average debt levels and the
capitalization of interest related to the construction of additional office
space in New York during fiscal 1999. Fiscal 1998 interest expense was $3.4
million greater than in fiscal 1997 ($16.7 million), reflecting higher average
debt levels in fiscal 1998 partially due to the January 1997 acquisition of Red
House Books Ltd. and a higher weighted-average interest rate due to the issuance
in December 1996 of the Company's 7% Notes due 2003.
The Company's effective tax rates were 37.5%, 38.0% and 64.6% of earnings before
taxes, for fiscal years 1999, 1998 and 1997, respectively. The decreases from
fiscal 1997 reflect the impact of lower relative state and local tax burdens,
which are computed on an unconsolidated basis.
Net income was $36.8 million in fiscal 1999, $23.6 million in fiscal 1998 and
$0.4 million in fiscal 1997. The basic and diluted net income per Class A and
Common Share were $2.25 and $2.20, respectively, in fiscal 1999, $1.46 and
$1.45, respectively, in fiscal 1998 and $0.02 for both basic and diluted net
income per share in fiscal 1997.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's Children's Book Publishing and Distribution segment includes the
publication and distribution in the United States of children's books through
its school-based book clubs (including home continuity programs), book fairs and
trade channels.
(Amounts in millions)
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Revenue $ 657.9 $ 560.9 $ 511.6
Operating profit 109.3 84.6 65.0
--------------------------------------------------------------------------------
Operating margin 16.6% 15.1% 12.7%
Children's Book Publishing and Distribution revenues accounted for 57% of the
Company's revenues in fiscal 1999, and 53% in fiscal 1998 and fiscal 1997. These
revenues increased 17% to $657.9 million in fiscal 1999 from $560.9 million in
fiscal 1998. Book club revenues, inclusive of continuity programs, accounted for
slightly more than half of Children's Book Publishing and Distribution sales in
fiscal 1999, down slightly from the prior fiscal year. Revenues from the club
and continuity programs increased approximately 14% in fiscal 1999 and
approximately 15% in fiscal 1998 reflecting growth in order volume as well as
increased revenue per order. Revenues from book fairs accounted for
approximately 30% of Children's Book Publishing and Distribution sales in fiscal
1999, up slightly from fiscal years 1998 and 1997. Sales growth for book fairs
of approximately 20% in fiscal 1999 and approximately 15% in fiscal 1998 was due
in part to an increased number of fairs and in part an increase in revenue per
fair from fairs offering a broader product selection. In fiscal 1999, growth in
the number of
12 scholastic corporation
fairs is primarily due to the impact of the June 1998 acquisition of the assets
of Pages Book Fairs Inc. The Company's trade distribution channel accounted for
approximately 16% of Children's Book Publishing sales in fiscal 1999, 15% in
fiscal 1998 and 19% in fiscal 1997. Net trade sales increased by approximately
25% in fiscal 1999 due to the continued success of Scholastic branded properties
such as Harry Potter, Animorphs, Dear America, I Spy, Clifford the Big Red Dog
and Scholastic Reference books. Trade sales also benefited from titles based on
licensed properties such as Star Wars and TeleTubbies. In fiscal 1998, net Trade
sales decreased by more than 14% due to the continued decline in the sales of
the Goosebumps series. Trade sales of properties other than Goosebumps increased
approximately 24% in fiscal 1998 when compared to fiscal 1997.
Operating income for Children's Book Publishing and Distribution increased $44.3
million during the three fiscal years ended May 31,1999 to $109.3 million or
16.6% of sales. Operating income was $84.6 million or 15.1% of sales and $65.0
million or 12.7% of sales for fiscal 1998 and 1997, respectively. Operating
margins improved largely as a result of the benefit of cost reductions in
manufacturing and fulfillment activities and changes in product mix in both
fiscal 1999 and fiscal 1998. In fiscal 1998, the segment also benefited from a
lower return rate in the Trade channel. Selling, general and administrative
costs as a percentage of revenue were approximately equal to the prior year at
34%. During fiscal 1998, marketing and promotion costs for the Children's Book
Publishing and Distribution segment increased as a result of increased volume in
the book clubs and book fairs.
EDUCATIONAL PUBLISHING
The Company's Educational Publishing segment includes the publication and
distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazines and instructional technology for core and
supplemental use in United States schools and libraries. In fiscal 1999, the
United States circulation of the Company's classroom magazines was approximately
7.8 million.
(Amounts in millions)
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Revenue $ 190.6 $ 196.1 $ 163.4
Operating profit/(loss) 2.3 0.5 (21.1)
--------------------------------------------------------------------------------
Operating margin 1.2% 0.3% *
* not meaningful
Educational Publishing revenues accounted for approximately 17% of the Company's
revenues in fiscal 1999, approximately 19% in fiscal 1998 and approximately 17%
in fiscal 1997. In fiscal 1999, Educational Publishing revenues declined
approximately 3% to $190.6 million from $196.1 million in fiscal 1998 and
revenues related to sales of core and supplemental instructional materials to
schools decreased to 75% of Educational Publishing revenues from 77% in fiscal
1998. These decreases were primarily due to the impact of the anticipated
wind-down of the California adoption of the Company's reading program Scholastic
Literacy Place, partially offset by an increase in sales of the Company's
supplemental materials and classroom magazines. In fiscal 1998, Educational
Publishing revenues increased approximately 20% from $163.4 million in fiscal
1997. Revenues related to sales of core and supplemental instructional materials
to schools increased 30% over fiscal 1997 primarily due to the impact of strong
sales of Scholastic Literacy Place in the first year of the California reading
adoption.
Educational Publishing operating income increased $1.8 million from $0.5 million
in fiscal 1998, to $2.3 million in fiscal 1999. Excluding the effect of the $8.3
million portion of the non-cash charge related to the impairment of certain
Educational Publishing assets incurred in the third quarter of fiscal 1998,
operating income decreased $6.5 million from $8.8 million in fiscal 1998 (4.5%
of sales) to $2.3 million in fiscal 1999 (1.2% of sales). Gross margins remained
relatively constant as a percentage of revenue to the prior year at
approximately 52%. In fiscal 1999, promotion and other selling and general
administrative costs associated with the launch of the Company's new Scholastic
Reading Counts! program were primarily responsible for the decline in margins.
Excluding the effect of the non-cash charge, fiscal 1998 operating income of
$8.8 million (4.5% of sales) represented an improvement of $29.8 million from an
operating loss of $21.1 million in fiscal 1997. During fiscal 1998, the segment
benefited from the high margin of incremental Scholastic Literacy Place sales as
well as the effect of planned cost reductions within the core and supplemental
instructional materials groups.
MEDIA, LICENSING AND ADVERTISING
The Company's Media, Licensing and Advertising segment includes the production
and the distribution by the Company's United States-based operations of
entertainment products (including television programming, videos and motion
pictures), Internet services and CD-ROM-based products and Scholastic-branded
licensed properties, as well as advertising and promotional activities.
annual report/fiscal 1999 13
(Amounts in millions)
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Revenue $ 115.6 $ 105.3 $ 112.2
Operating profit/(loss) 0.0 (9.5) (6.5)
--------------------------------------------------------------------------------
Operating margin 0.0% * *
* not meaningful
Media, Licensing and Advertising revenues accounted for approximately 10% of the
Company's revenues in both fiscal 1999 and 1998 and approximately 12.0% in
fiscal 1997. In fiscal 1999, revenues increased approximately 10% to $115.6
million from $105.3 million in fiscal 1998. Increased software and multimedia
product sales and merchandise licensing sales were partially offset by the
absence of revenues of $11.8 million due to the sale of the Company's SOHO
Group, effective January 1, 1998. In fiscal 1998, revenues reflected a decline
of 6% from the fiscal 1997 level of $112.2 million as increased software and
multimedia product sales of $10.4 million were more than offset by the impact of
decreased licensing revenue related to Goosebumps products and the absence of
SOHO Group revenues for five months of fiscal 1998.
Operating income for the Media, Licensing and Advertising segment reached
breakeven in fiscal 1999 from an operating loss of $9.5 million in fiscal 1998.
This includes the effect of the $3.1 million of the non-cash charge related to
the impairment of certain assets incurred in the third quarter of fiscal 1998.
The improvement was largely the result of strong software product sales in the
club and fair selling channels combined with improved product cost efficiencies.
Media, Licensing and Advertising had an operating loss of approximately $6.5
million in both fiscal 1998 (exclusive of the $3.1 million non-cash charge) and
fiscal 1997. The adverse impact of the decline of the high margin Goosebumps
licensing revenue in fiscal 1998 was offset by stronger CD-ROM sales.
INTERNATIONAL
The International segment consists of the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong and India. For the
year ended May 31, 1999, approximately 80% of the Company's International
revenues were derived from the sale of children's books.
(Amounts in millions)
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
Revenue $ 190.6 $ 196.1 $ 179.1
Operating profit 4.9 9.7 11.6
--------------------------------------------------------------------------------
Operating margin 2.6% 5.0% 6.5%
International sales accounted for approximately 17% of the Company's revenues in
fiscal 1999 and approximately 19% in both fiscal 1998 and fiscal 1997.
International revenues decreased approximately 3% from $196.1 million in fiscal
1998 to $190.6 million in fiscal 1999. This reflects a decline in the United
Kingdom sales, principally in the book club, trade and book fair channels.
Revenues from the Company's Canadian operation increased, despite disruptions
from a move to a new warehouse, with growth in the supplementary text, book
clubs and book fairs channels. In fiscal 1998, International revenues increased
approximately 9% from $179.1 million in fiscal 1997, principally attributable to
an increase in revenues from the Company's United Kingdom operation in fiscal
1998, which improved approximately 33%, reflecting the full year benefit of the
January 1997 acquisition of Red House Books Ltd. along with continued strength
in the trade distribution channel. In both fiscal 1999 and fiscal 1998, revenues
in Canada, Australia and New Zealand were adversely impacted by weakness in
their respective currencies relative to the stronger US dollar.
International operating income decreased $4.8 million to $4.9 million (2.6% of
sales) in fiscal 1999 from $9.7 million in fiscal 1998 (5.0% of sales). During
fiscal 1999, the Company's Australian subsidiary was impacted by increased cost
of product as a result of changes in product mix and higher product costs for US
dollar denominated purchases. The Canadian subsidiary incurred additional costs
related to the opening of its new distribution facility. Additionally, the
Canadian and Australian subsidiaries incurred increased promotion costs
primarily as a result of higher book club kit and bonus point costs. During
fiscal 1998, increased spending by the United Kingdom subsidiary for customer
service to support the acquisition of Red House Books Ltd. was the primary cause
of the decrease in operating income.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company experiences a substantial loss from operations in the first quarter.
Typically, book clubs and book fairs experience the largest revenues in the
second quarter of the fiscal year, while revenues from the sale of instructional
materials are highest in the first quarter. See Supplementary Financial
Information in Item 8. For the June through October time period, the Company
experiences negative cash flow due to the seasonality of its
14 scholastic corporation
business. Historically, as a result of the Company's business cycle, seasonal
borrowings have increased during June, July and August and have generally peaked
in September or October, and have been at the lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents remained virtually unchanged for fiscal
years 1999, 1998 and 1997.
Cash outflows for investing activities were $136.8 million for fiscal 1999,
primarily related to royalty advances, business and trademark
acquisition-related payments, capital expenditures and prepublication and
production cost expenditures.
Payments for royalty advances totaled $27.8 million for fiscal 1999. Business
and trademark acquisition-related payments were $14.9 million for the year,
including the June 1998 acquisition of certain book fair assets of Pages Book
Fairs, Inc. and the January 1999 acquisition of certain assets of Quality
Education Data. The Company's capital expenditures totaled $29.6 million in
fiscal 1999. Capital expenditures, including capitalized interest, increased
$9.3 million to from fiscal 1998 primarily due to commencement of the expansion
of the Company's corporate headquarters. Prepublication cost expenditures
totaled $46.8 million, increasing $21.4 million from fiscal 1998, largely due to
higher investments in core publishing and technology-based products, primarily
in the planned revision to Scholastic Literacy Place and the development of Read
180. The Company expects significant increases in its capital expenditures and
prepublication spending in fiscal 2000 over fiscal 1999. The expected increase
in capital expenditures is primarily due to the expansion of the Company's
headquarters and Information Systems and Internet development. The expected
increase in prepublication costs is primarily due to costs associated with
completion of the Scholastic Literacy Place revision.
The Company believes its existing cash position, combined with funds generated
from operations and increased funds available under the amended Loan Agreement
and the Revolver will be sufficient to finance its ongoing working capital
requirements for the next fiscal year.
FINANCING
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $205.0 million
(with a right, in certain circumstances, to increase to $235.0 million),
including the issuance of up to $10.0 million in letters of credit. The Company
uses these facilities to fund seasonal cash flow needs and other working capital
requirements. At May 31, 1999, the Company had $10.0 million in borrowings
outstanding under these facilities at a weighted average interest rate of
5.3075%.
The foregoing information reflects amendments effected on August 11, 1999 to one
of the credit facilities which extended the expiration date of the facility to
August 11, 2004 and expanded the facility from $135.0 million to $170.0 million
(with a right, in certain circumstances, to increased to $200.0 million). The
Company anticipates amending and restating the Revolver in the second quarter of
fiscal 2000 to increase the amount available thereunder to $40.0 million and
extend its expiration to 2004. The Company does not anticipate any difficulty in
negotiating satisfactory credit arrangements.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $37.9 million at May 31,
1999. These lines are used primarily to fund local working capital needs. At May
31, 1999, $18.0 million in borrowings were outstanding under these lines at a
weighted average interest rate of 7.15%.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects. Consistent with this
strategy, in June 1998 the Company acquired certain assets of Pages Book Fairs,
Inc. for approximately $10.5 million, and in January 1999, the acquisition of a
leading USeducational information company, certain assets of Quality Education
Data.
YEAR 2000 READINESS DISCLOSURE
As previously reported, management has initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the Year 2000, as
well as to identify and address any other Year 2000 operational issues which may
affect the Company. Progress reports on the Company's Year 2000 program are
presented regularly to the Company's Board of Directors and senior management.
The Company's Year 2000 program, which was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consists of the
following three components relating to the Company's operations: (i) information
technology ("IT") computer
annual report/fiscal 1999 15
systems and applications which may be impacted by the Year 2000 problem and the
actions related thereto, (ii) non-IT systems and equipment which include
embedded technology which may be impacted by the Year 2000 problem and the
actions related thereto and (iii) third party suppliers and customers with which
the Company has material relationships and which could adversely affect the
Company if such parties fail to be Year 2000 compliant and the actions related
thereto. The general phases common to all three components of the Company's Year
2000 program are: (1) Assessment (the identification, assessment and
prioritization of the Year 2000 issues facing the Company in each of the above
areas and the actions to be taken in respect of such issues or items); (2)
Remediation (implementation of the specific actions determined upon assessment,
including repair, modification or replacement of items that are determined not
to be Year 2000 compliant); (3) Testing (testing of the new or modified
information systems, other systems and equipment to verify Year 2000 readiness);
(4) Contingency Planning (designing appropriate contingency and business
continuation plans for each Company business unit and location); and (5)
Implementation (actual operation of such systems and equipment and, if
necessary, the actual implementation of any contingency plans in the event Year
2000 problems occur, notwithstanding the Company's remediation program).
The progress to date of the three components of the Company's Year 2000 program
for principal systems, applications or issues affected by the Year 2000 is as
follows:
IT Systems and Applications The principal IT systems and applications of the
Company affected by Year 2000 issues include: order entry, purchasing,
distribution and financial reporting. Issues related to vendor supplied software
include financial reporting and certain infrastructure and operating system
software. The Company has substantially completed the Assessment, Remediation
and Testing phases with respect to its principal IT systems and applications. In
addition, the Company anticipates that the Contingency Planning phase should be
substantially completed by the end of August 1999. A test plan is in place.
Excluding normal system upgrades, the Company estimates that total costs for
conversion and testing of new or modified IT systems and applications will
aggregate approximately $11.8 million through fiscal 2000, of which $8.0 million
has been incurred through May 31, 1999.
Non-IT Systems and Equipment
The principal non-IT systems and equipment of the Company incorporating embedded
technology affected by Year 2000 issues include: security systems, phone
systems, business machines, computers and distribution systems. The Company has
substantially completed the Assessment and the Remediation phases of its
principal non-IT software and applications related to these principal systems.
The Testing, Contingency Planning and Implementation phases should be
substantially completed by the end of August 1999. In addition to the foregoing,
the Company expects to implement the remainder of Year 2000 remediated non-IT
systems and applications prior to September 30, 1999. The Company estimates the
total costs for modifying or replacing new systems and equipment in this area
will be approximately $0.2 million through fiscal 2000, of which $0.1 million
has been incurred through May 31, 1999.
Material Third Party Relationships.
Material third party supplier relationships affected by Year 2000 issues relate
primarily to printing, paper supplies, distribution, fulfillment, licensing and
financial services. The Assessment and Remediation phases for determining the
Year 2000 readiness of the Company's principal suppliers are an ongoing process.
Substantially all of the Company's principal suppliers have reported that they
have initiated Year 2000 programs. The Company will seek updates from these
parties to attempt to ascertain the adequacy of their programs as it relates to
the Company. Testing of critical systems or services will be done on an as
needed basis. The Company anticipates that it will develop contingency plans
with respect to its principal third party suppliers by October 1999. There can
be no assurance, however, that the Company will be able to predict adequately
Year 2000 problems experienced by its suppliers or to develop adequate
contingency plans related thereto. The costs to the Company in implementing its
Year 2000 program in this area, excluding costs due to unanticipated third party
Year 2000 problems, will principally consist of internal staff costs, which are
not expected to be material. No single vendor or group of vendors are material
to the Company's financial condition.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program, which includes total costs noted
above for IT systems and applications, will be approximately $12.0 million, of
which total program costs through May 31, 1999 have been $8.1 million. These
costs include costs
16 scholastic corporation
related to the matters described above, which include consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare the Company for the Year 2000. The costs also include expenses related
to internal staff incurred in connection with the implementation of the program.
The Year 2000 costs for fiscal 1999 comprised approximately 25% of the Company's
IT budget for that period. Based on the current progress of the Company's Year
2000 program, the Company anticipates its Year 2000 program will be
substantially completed by August 31, 1999. As a result of the Company's Year
2000 program, delays in other new and continuing IT projects have occurred.
However, no material adverse effect is anticipated from such delays as the
Company has procedures in place in an effort to ensure that critical projects
will continue to be handled in a timely manner. The cost of the Company's Year
2000 program and the remaining dates on which the Company plans to complete the
components of the Year 2000 program are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, many of
which are beyond the Company's control.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company. Such failures could materially and adversely affect
the Company's financial condition, results of operations and cash flows. Based
on current plans and assumptions, the Company does not expect that the Year 2000
issue will have a material adverse impact on the Company as a whole. However,
due to the general uncertainty inherent in the Year 2000 problem there can be no
assurance that all Year 2000 problems will be foreseen and corrected, or if
foreseen, corrected on a timely basis, or that no material disruption to the
Company's business or operations will occur. Further, the Company's expectations
are based on the assumption that there will be no general failure of external
local, national or international systems (including financial, power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those scenarios
in which unexpected failures would have a material adverse effect on the Company
and will attempt to develop contingency plans designed to respond to such
scenarios. However, there can be no assurance that successful contingency plans
can, in fact, be developed or implemented.
All statements regarding Year 2000 Readiness are "Year 2000 Readiness
Disclosures" as defined by the Year 2000 Information and Readiness Disclosure
Act of October 19, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
Effective August 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This statement
establishes the standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. The
presentation of comprehensive income is included in the Statement of Changes in
Stockholders' Equity and Comprehensive Income.
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information." This statement requires that public business enterprises
report certain information about operating segments in financial statements of
the enterprise issued to stockholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The required
disclosures are presented in Note 2 to the Consolidated Financial Statements.
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employer's Disclosures about Pensions and Other
Post-Retirement Benefits." This statement revises employer's disclosures about
pension and other post-retirement benefit plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures required under prior standards. The required disclosures are
presented in Note 7 included to the Consolidated Financial Statements.
The Financial Accounting Standards Board issued in June 1998, Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of
annual report/fiscal 1999 17
both the hedge and the hedged item recognized in earnings or in accumulated
comprehensive income in the same period. Changes in the fair value of
derivatives that do not meet the criteria of one of these three categories of
hedges are included in income. The Company is required to adopt the provisions
of SFAS 133 in the first quarter of fiscal 2002.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to factors including the following and other risks and factors
identified from time to time in the Company's filings with the SEC:
o The Company's ability to produce successful educational, trade,
entertainment, software products and Internet;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment, software markets and Internet;
o Competition from other educational and trade publishers and media,
entertainment companies and Internet;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
o The effect on the Company of volatility in the price of paper and
periodic increases in postage rates; and
o The Company's ability to effectively use the Internet to support its existing
businesses and to launch successful new Internet initiatives;
o The Company's ability to manage seasonality;
o The general risks attendant to the conduct of business in foreign countries;
o The effects of the Year 2000 problems as more fully described herein; and
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management does not consider the impact of currency fluctuations to represent a
significant risk. The Company does not generally enter into derivative financial
instruments in the normal course of business, nor are such instruments used for
speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The majority of the Company's long-term debt bears interest
at a fixed rate. However, the fair market value of the fixed rate debt is
sensitive to changes in interest rates. The Company is subject to the risk that
market interest rates will decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. Under its current policies,
the Company does not utilize any interest rate derivative instruments to manage
its exposure to interest rate changes.
As of May 31, 1999, the balance outstanding under the facilities which have
variable rates, was $10.0, at an average interest rate of 5.31%. A 15% increase
or decrease in the average cost of the Company's variable rate debt under the
facility would not have a significant impact on the Company's results of
operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
18 scholastic corporation
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, 1999, 1998 and 1997 21
Consolidated Balance Sheet at May 31, 1999 and 1998 22-23
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income for the three years ended
May 31, 1999, 1998 and 1997 24
Consolidated Statement of Cash Flows for the three years
ended May 31, 1999, 1998 and 1997 25
Notes to Consolidated Financial Statements 26-36
Report of Independent Auditors 37
Supplementary Financial Information - Summary of Quarterly
Results of Operations (unaudited) 38
The following consolidated financial statement schedule of
the Company is included in Item 14(d):
PAGE
Schedule II-- Valuation and Qualifying Accounts and Reserves 48
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.
annual report/fiscal 1999 19
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20 scholastic corporation
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CONSOLIDATED STATEMENT OF INCOME
Years ended May 31,
(Amounts in millions, except per share data) 1999 1998 1997
Revenues $ 1,154.7 $ 1,058.4 $ 966.3
Operating costs and expenses:
Cost of goods sold 561.1 536.8 530.7
Selling, general and administrative expenses 493.3 440.3 399.6
Other operating costs:
Depreciation 16.9 15.0 12.8
Goodwill and trademark amortization 5.5 6.7 5.5
Impairment of assets -- 11.4 --
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Total operating costs and expenses 1,076.8 1,010.2 948.6
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Operating income 77.9 48.2 17.7
Sale of SOHO Group -- 10.0 --
Interest expense, net (19.0) (20.1) (16.7)
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Earnings before income taxes 58.9 38.1 1.0
Provision for income taxes 22.1 14.5 0.6
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Net income $ 36.8 $ 23.6 $ 0.4
====================================================================================================================================
Net income per Class A and Common Share:
Basic $ 2.25 $ 1.46 $ 0.02
Diluted $ 2.20 $ 1.45 $ 0.02
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See accompanying notes
annual report/fiscal 1999 21
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CONSOLIDATED BALANCE SHEET
Balances at May 31,
(Amounts in millions except share and per share data)
Assets 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 5.9 $ 5.1
Accounts receivable (less allowance for doubtful accounts
of $12.3 in 1999 and $10.1 in 1998) 136.4 116.7
Inventories 227.4 200.3
Deferred taxes 41.8 41.8
Prepaid and other deferred expenses 22.7 18.8
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TOTAL CURRENT ASSETS 434.2 382.7
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PROPERTY, PLANT AND EQUIPMENT:
Land 6.7 6.4
Buildings 40.1 41.1
Furniture, fixtures and equipment 97.6 79.8
Leasehold improvements 70.1 63.8
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214.5 191.1
Less accumulated depreciation and amortization (65.4) (54.3)
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NET PROPERTY, PLANT AND EQUIPMENT 149.1 136.8
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OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs 95.3 86.3
Goodwill and trademarks 71.1 66.7
Royalty advances 54.4 45.6
Other 38.2 45.5
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TOTAL OTHER ASSETS AND DEFERRED CHARGES 259.0 244.1
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TOTAL ASSETS $ 842.3 $ 763.6
====================================================================================================================================
22 scholastic corporation
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LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
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CURRENT LIABILITIES:
Lines of credit $ 18.0 $ 9.8
Current portion of long-term debt 0.2 0.3
Accounts payable 97.0 76.9
Accrued royalties 23.7 19.4
Deferred revenue 6.7 10.5
Other accrued expenses 66.2 64.8
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TOTAL CURRENT LIABILITIES 211.8 181.7
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NONCURRENT LIABILITIES:
Long-term debt 248.0 243.5
Other noncurrent liabilities 21.1 20.3
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TOTAL NONCURRENT LIABILITIES 269.1 263.8
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COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value
Authorized-1,000,000 shares; Issued-None -- --
Class A Stock, $.01 par value
Authorized-2,500,000 shares; Issued-828,100 shares 0.0 0.0
Common Stock, $.01 par value
Authorized-25,000,000 shares
Issued-16,946,803 shares (16,741,190 shares at 5/31/98) 0.2 0.2
Additional paid-in capital 212.3 205.1
Accumulated other comprehensive income:
Foreign currency translation adjustment (5.7) (5.0)
Retained earnings 191.4 154.6
Less 1,301,658 shares of Common Stock in treasury, at cost (36.8) (36.8)
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TOTAL STOCKHOLDERS' EQUITY 361.4 318.1
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 842.3 $ 763.6
====================================================================================================================================
See accompanying notes
annual report/fiscal 1999 23
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
Years ended May 31, 1999, 1998 and 1997
(Amounts in millions)
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ACCUMULATED
ADDITIONAL OTHER TOTAL
CLASS A COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL INCOME EARNINGS STOCK EQUITY
====================================================================================================================================
BALANCE AT JUNE 1, 1996 $ 0.0 $ 0.2 $ 194.8 $ (0.2) $ 130.6 $ (36.8) $ 288.6
Comprehensive income:
Net income 0.4 0.4
Other comprehensive income:
Foreign currency translation
adjustment (0.5) (0.5)
----
Total comprehensive income (0.1)
Stock options exercised 0.0 4.7 4.7
Tax benefit realized from stock
option transactions 4.2 4.2
Stock granted 0.1 0.1
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BALANCE AT MAY 31, 1997 0.0 0.2 203.8 (0.7) 131.0 (36.8) 297.5
Comprehensive income:
Net income 23.6 23.6
Other comprehensive income:
Foreign currency translation
adjustment (4.3) (4.3)
----
Total comprehensive income 19.3
Stock options exercised 0.0 0.7 0.7
Tax benefit realized from stock
option transactions 0.6 0.6
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BALANCE AT MAY 31, 1998 0.0 0.2 205.1 (5.0) 154.6 (36.8) 318.1
Comprehensive income:
Net income 36.8 36.8
Other comprehensive income:
Foreign currency translation
adjustment (0.7) (0.7)
----
Total comprehensive income 36.1
Stock options exercised 0.0 5.8 5.8
Tax benefit realized from stock
option transactions 1.4 1.4
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BALANCE AT MAY 31, 1999 $ 0.0 $ 0.2 $ 212.3 $ (5.7) $ 191.4 $ (36.8) $ 361.4
====================================================================================================================================
See accompanying notes
24 scholastic corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended May 31,
(Amounts in millions)
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1999 1998 1997
====================================================================================================================================
Cash flows provided by operating activities:
Net income $ 36.8 $ 23.6 $ 0.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 22.4 21.7 18.3
Amortization of prepublication and production costs 51.2 43.2 40.1
Royalty advances expensed 21.8 17.7 15.2
Provision for losses on accounts receivable 17.0 14.6 11.7
Deferred income taxes (2.1) (8.4) (7.0)
Impairment of assets -- 11.4 --
Gain on the sale of the SOHO Group -- (10.0) --
Changes in assets and liabilities (net of effects from business
acquisitions and dispositions):
Accounts receivable (35.5) (38.9) 7.6
Inventory (23.3) 13.8 (29.3)
Prepaid expenses (4.0) 18.6 (19.8)
Accounts payable and other accrued expenses 26.5 (0.5) 17.3
Accrued royalties 6.8 9.3 (6.9)
Deferred revenues (3.7) 3.1 (0.2)
Other, net 3.7 (1.5) (0.7)
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Total adjustments 80.8 94.1 46.3
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Net cash provided by operating activities 117.6 117.7 46.7
Cash flows used in investing activities:
Proceeds received from the sale of the SOHO Group -- 19.2 --
Royalty advances (27.8) (31.7) (34.2)
Business and trademark acquisition-related payments (14.9) (6.0) (32.1)
Additions to property, plant and equipment (29.6) (20.3) (29.5)
Prepublication costs (46.8) (25.4) (26.9)
Production costs (13.8) (13.0) (12.5)
Other (3.9) (2.0) (2.3)
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Net cash used in investing activities (136.8) (79.2) (137.5)
Cash flows provided by (used in) financing activities:
Borrowings under Loan Agreement and Revolver 269.2 243.9 301.5
Repayments of Loan Agreement and Revolver (264.7) (288.3) (326.2)
Proceeds from issuance of 7% Notes due 2003 -- -- 123.9
Borrowings under lines of credit 66.9 68.6 39.3
Repayments of lines of credit (58.7) (63.6) (55.6)
Proceeds from exercise of stock options 5.8 0.7 4.7
Tax benefit realized from stock option transactions 1.4 0.6 4.2
Other -- (0.3) (0.4)
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Net cash provided by (used in) financing activities 19.9 (38.4) 91.4
Effect of exchange rate changes on cash 0.1 0.1 0.0
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Net increase in cash and cash equivalents 0.8 0.2 0.6
Cash and cash equivalents at beginning of year 5.1 4.9 4.3
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Cash and cash equivalents at end of year $ 5.9 $ 5.1 $ 4.9
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Supplemental information:
Income taxes paid $ 23.0 $ 17.1 $ 24.7
Interest paid 20.1 21.5 13.1
See accompanying notes
annual/fiscal 1999 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Scholastic
Corporation and all wholly-owned subsidiaries (the "Company"). All intercompany
transactions are eliminated. Certain prior year amounts have been reclassified
to conform to the current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication and film production costs and recoverability of other long-lived
assets.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of
less than three months.
Inventories
Inventories are stated at the lower of cost using the first-in, first-out method
or market.
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. Buildings have an estimated useful
life, for purposes of depreciation, of forty years. Furniture, fixtures and
equipment are depreciated over periods not exceeding ten years. Leasehold
improvements are amortized over the life of the lease or the life of the assets,
whichever is shorter. Interest is capitalized on major construction projects
based on the outstanding construction in progress balance for the period and the
average borrowing rate during the period.
Other assets and deferred charges
Prepublication costs are amortized on the straight-line basis over a two to five
year period commencing with publication.
Goodwill and trademarks acquired by the Company are amortized on the
straight-line basis over the estimated future periods, which are generally
between fifteen and twenty-five years.
Royalty advances are expensed as related revenues are earned or when future
recovery appears doubtful.
Production costs are stated at the lower of cost less amortization or net
realizable value. Production costs are amortized using the film forecast in the
proportion that current revenues bear to estimated remaining total lifetime
revenues.
The Company regularly evaluates the remaining lives and recoverability of the
above costs.
Income tax
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to enter into the determination of taxable income.
Revenue recognition
Sales of books and software are recognized upon the shipment of product. Sales
made on a returnable basis are recorded net of provisions for estimated returns
and allowances. A reserve for estimated book returns is established at the time
of sale. Actual returns are charged against the reserve as received.
Revenue from magazine subscriptions is deferred at the time of sale. As
magazines are delivered to subscribers, proportionate amounts of revenue and
related acquisition expenses are recognized.
Revenue from the sale of film rights, principally for the home video and
domestic and foreign syndicated television markets, is recognized when the film
is available for showing or exploitation. Income from licensing is recorded, in
accordance with royalty agreements, at the time characters are available to the
licensee and collections are reasonably assured.
Stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) in accounting for its
employee stock options. Under APB No. 25, compensation expense is recognized
only when the exercise price of options is below the market price of the
underlying stock on the date of grant where the exercise price and number of
shares subject to grant are fixed.
26 scholastic corporation
Earnings per share
Earnings per share are based on the combined weighted-average number of Class A
and Common Shares outstanding using the treasury stock method, in accordance
with the Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share." Potentially dilutive securities are excluded from the
computation of diluted earnings per share for the periods in which they have an
anti-dilutive effect.
Recent accounting principles
Effective August 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This statement
establishes the standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. The
presentation of comprehensive income is included in the Consolidated Statement
of Changes in Stockholders' Equity and Comprehensive Income.
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information." This statement requires that public business enterprises
report certain information about operating segments in financial statements of
the enterprise issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The required
disclosures are presented in Note 2 included herein.
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employer's Disclosures about Pensions and Other
Post-Retirement Benefits." This statement revises employer's disclosures about
pension and other post-retirement benefit plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits, requires
additional information on changes in the benefit obligations and fair value of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures required under prior standards. The required disclosures are
presented in Note 7 included herein.
The Financial Accounting Standards Board issued in June 1998, Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
hedges are included in income. The Company is required to adopt the provisions
of SFAS 133 in the first quarter of fiscal 2002.
2. SEGMENT INFORMATION
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong and India and distributes its products and services through a
variety of channels, including book clubs, book fairs and trade.
The Company's operations are categorized in the four segments identified below.
Such segment classification reflects the nature of products and services
consistent with how the chief operating decision maker assesses operating
performance and allocates resources.
The Company's segments are:
o Children's Book Publishing and Distribution includes the publication and
distribution of children's books in the United States to children, parents
and teachers through school-based book clubs (including home continuity
programs), school-based book fairs and trade channels.
o Educational Publishing includes the publication and distribution of K-12
textbooks, supplementary materials, classroom magazines and instructional
technology for core and supplemental use in United States schools and
libraries.
o Media, Licensing and Advertising includes the production and distribution
by the Company's United States-based operations of entertainment products
(including television programming, video and motion pictures), Internet
services and CD-ROM-based products and Scholastic-branded licensed
properties, as well as advertising and promotional activities.
o International includes the distribution of products and services outside
the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong and India.
annual report/fiscal 1999 27
The following table sets forth information for the fiscal years ended May 31,
1999, 1998 and 1997 about the Company's segments:
[Enlarge/Download Table]
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
====================================================================================================================================
1999
====================================================================================================================================
Revenues $ 657.9 $ 190.6 $ 115.6 $ 964.1 $ 190.6 $-- $ 1,154.7
Depreciation 3.1 0.8 0.8 4.7 3.5 8.7 16.9
Amortization (2) 13.2 24.5 15.1 52.8 3.2 0.7 56.7
Royalty advance expense 15.0 1.6 3.7 20.3 1.5 -- 21.8
Segment profit/(loss) (3) 109.3 2.3 0.0 111.6 4.9 (38.6) 77.9
Segment assets 303.0 173.8 58.6 535.4 142.4 164.5 842.3
Long-lived assets (4) 84.3 103.6 29.0 216.9 57.5 104.5 378.9
Expenditures for
long-lived assets (5) 37.5 34.5 19.1 91.1 10.7 16.2 118.0
====================================================================================================================================
1998
====================================================================================================================================
Revenues 560.9 196.1 105.3 862.3 196.1 -- 1,058.4
Depreciation 2.4 0.9 0.7 4.0 3.5 7.5 15.0
Amortization (2) 12.8 23.7 9.9 46.4 2.6 0.9 49.9
Royalty advance expense 13.8 0.8 1.9 16.5 1.2 -- 17.7
Segment profit/(loss) (3) 84.6 0.5 (9.5) 75.6 9.7 (37.1) 48.2
Segment assets 241.2 185.6 47.1 473.9 134.1 155.6 763.6
Long-lived assets (4) 71.0 96.1 24.1 191.2 56.8 97.2 345.2
Expenditures for
long-lived assets (5) 43.2 12.4 18.2 73.8 7.4 9.2 90.4
====================================================================================================================================
1997
====================================================================================================================================
Revenues 511.6 163.4 112.2 787.2 179.1 -- 966.3
Depreciation 2.0 0.9 0.4 3.3 3.6 5.9 12.8
Amortization (2) 12.1 20.0 11.0 43.1 2.1 0.4 45.6
Royalty advance expense 12.9 0.5 1.1 14.5 0.7 -- 15.2
Segment profit/(loss) (3) 65.0 (21.1) (6.5) 37.4 11.6 (31.3) 17.7
Segment assets 223.6 220.1 44.5 488.2 134.5 161.7 784.4
Long-lived assets (4) 67.0 109.6 24.4 201.0 61.1 95.5 357.6
Expenditures for
long-lived assets (5) 46.7 15.5 17.6 79.8 5.1 18.2 103.1
(1) Overhead includes unallocated corporate-related items, certain
non-recurring items and as it relates to the segment profit/(loss),
expenses not allocated to reportable segments including costs related to
the management of corporate assets, net interest expense and provision for
income taxes. Unallocated assets are principally comprised of deferred
income taxes and property, plant and equipment as it relates to the
Company's headquarters in the metropolitan New York area and its National
Service Operation located in the Jefferson City, Missouri area
(2) Includes amortization of goodwill, intangible assets, and prepublication
and production costs
(3) Segment profit/(loss) represents earnings before interest and taxes
(4) Includes property, plant and equipment, prepublication costs, goodwill and
trademarks, royalty advances and production costs
(5) Includes purchase of property, plant and equipment, investment in
prepublication and production costs, and royalty advances
[Enlarge/Download Table]
3. DEBT
Long-term debt consisted of the following at May 31,
====================================================================================================================================
1999 1998
====================================================================================================================================
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------------------------------------------------------------
Loan Agreement and Revolver $ 10.0 $ 10.0 $ 5.3 $ 5.3
7% Notes due 2003, net of discount 124.8 126.1 124.8 127.3
Convertible Subordinated Debentures 110.0 106.7 110.0 101.4
Other debt 3.4 3.4 3.7 3.7
------------------------------------------------------------------------------------------------------------------------------------
Total debt 248.2 246.2 243.8 237.7
Less current portion (0.2) (0.2) (0.3) (0.3)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 248.0 $ 246.0 $ 243.5 $ 237.4
====================================================================================================================================
Short-term debt is carried at cost which approximates fair value. Fair values
were estimated based on market quotes, where available, or dealer quotes.
28 scholastic corporation
Loan Agreement
The Company and Scholastic Inc. (a wholly-owned subsidiary) 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 up to
$135.0, with a right, in certain circumstances, to increase it to $160.0.
Interest charged under this facility was either at the Prime Rate or .325% to
.90% over LIBOR (as defined). There was a commitment fee charged which ranges
from .10% to .3625% on the unused portion. The amounts charged varied based upon
the Company's credit ratings. The Loan Agreement contains certain financial
covenants related to debt and interest coverage ratios (as defined) and limits
dividends and other distributions. The Loan Agreement was to expire on May 31,
2000. The Company has amended and restated its Loan Agreement, effective August
11, 1999, under which amendment the term is extended until August 11, 2004 (see
Note 12 - Subsequent Event).
Revolver
On June 19, 1995, the Company and Scholastic Inc. entered into a Revolving Loan
Agreement (the "Revolver") with Sun Bank, N. A., which provides for revolving
credit loans and expires on May 31, 2000. The Revolver has certain financial
covenants related to debt and interest coverage ratios (as defined) and limits
dividends and other distributions. On August 14, 1996, the Revolver was amended
to increase the aggregate principal amount to $35.0 and was last amended on
November 28, 1997.
7% Notes Due 2003
On December 23, 1996, the Company issued $125.0 million of 7% Notes due 2003
(the "Notes"). The Notes are unsecured and unsubordinated obligations of the
Company and will mature on December 15, 2003. The Notes are not redeemable prior
to maturity. Interest on the Notes is payable semi-annually on December 15 and
June 15 of each year.
Convertible Subordinated Debentures
On August 18, 1995, the Company sold $110.0 of 5.0% Convertible Subordinated
Debentures due August 15, 2005 (the "Debentures") under Regulation S and Rule
144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg
Stock Exchange and the portion sold under Rule 144A is designated for trading in
the Portal system of the National Association of Securities Dealers, Inc.
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
principal amount plus accrued interest. Each debenture is convertible, at the
holder's option any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
The Debentures are subordinated to the Loan Agreement, the Revolver and the
Notes, which are pari persue.
Other lines of credit -- short term
The Company's international subsidiaries had lines of credit available of $37.9
at May 31, 1999. There were $18.0 outstanding under these credit lines at May
31, 1999. The weighted-average interest rates on the outstanding amounts were
7.15% at May 31, 1999.
4. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases warehouse space, office space and equipment under various
operating leases. Certain of these leases provide for rent increases based on
price-level factors. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. The Company has
no significant capitalized leases. Total rent expense relating to the Company's
operating leases was $32.2, $26.2 and $24.4 for the fiscal years ended May 31,
1999, 1998 and 1997, respectively. These rentals include payments under the
terms of the escalation provisions and are net of sublease income.
The aggregate minimum future annual rental commitments at May 31, 1999, under
all non-cancelable operating leases, totaling $162.3, are as follows: 2000 -
$30.6; 2001 - $25.5; 2002 - $21.8; 2003 - $17.8; 2004 - $12.9; later years -
$53.7.
The Company had certain contractual commitments at May 31, 1999 totaling $22.4.
The aggregate annual commitments were as follows: 2000 - $17.1; 2001 - $3.3;
2002 - $1.7; 2003 - $0.3; 2004 - none; later years - none.
Contingencies
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On December 14, 1998, an
order was entered granting the Company's motion to dismiss plaintiffs'
complaint. In dismissing the complaint, the court held that plaintiffs failed to
state a claim upon which relief can be granted and granted plaintiffs leave to
amend the complaint. Pursuant to that order, plaintiffs filed a second
consolidated amended complaint, on or about February 16, 1999, alleging
substantially similar
annual report/fiscal 1999 29
claims against the Company and one of its officers. The Company filed a motion
to dismiss the complaint on April 16, 1999. The Company continues to believe
that the litigation is without merit and will continue to vigorously defend
against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State Court of New York County of New York against
Parachute Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the Goosebumps(R) series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such Goosebumps rights are
licensed to the Company. The issues in the case are also, in part, the subject
of two litigations commenced by Parachute following repeated notices from the
Company to Parachute of material breaches by Parachute of the agreements under
which such rights are licensed and the exercise by the Company of its
contractual remedies under the agreements. The first Parachute action, in which
two subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on November
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. Parachute has filed an appeal of the dismissal. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State Court of New York County of
New York. In its two complaints and in its counterclaims, Parachute alleges that
the exercise of contractual remedies by the Company was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract and acts of unfair competition. Damages sought by Parachute
include the payment of a total of approximately $36.1 of publishing advances
over the term of the contract (of which approximately $15.3 had been paid at the
time the first Parachute litigation began) and payments of royalties set off by
Scholastic against amounts claimed by the Company. The Company is seeking
declaratory relief and damages for, among other claims, breaches of contract,
fraud and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid.
Discovery, which has been consolidated for the litigations, has commenced. The
Company intends to vigorously pursue its claims against Parachute and the other
named defendants and to vigorously defend against Parachute's lawsuit and
appeal. The Company does not believe that this dispute will have a material
adverse effect on its financial condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
5. INCOME TAX EXPENSE
Consolidated income tax expense for the indicated fiscal years ended May 31 was
based on earnings before taxes as follows:
================================================================================
1999 1998 1997
================================================================================
Domestic $ 63.0 $ 36.6 $ (3.3)
International wholly-owned
subsidiaries (4.1) 1.5 4.3
--------------------------------------------------------------------------------
$ 58.9 $ 38.1 $ 1.0
================================================================================
Income tax expense/(benefit) for the indicated fiscal years ended May 31
consists of the following components:
================================================================================
1999 1998 1997
================================================================================
FEDERAL
Current $ 21.3 $ 18.4 $ 1.9
Deferred (2.6) (8.6) (7.6)
--------------------------------------------------------------------------------
$ 18.7 $ 9.8 $ (5.7)
================================================================================
STATE AND LOCAL
Current $ 2.7 $ 3.0 $ 2.9
Deferred 0.2 0.1 0.6
--------------------------------------------------------------------------------
$ 2.9 $ 3.1 $ 3.5
================================================================================
INTERNATIONAL
Current $ 0.2 $ 1.5 $ 2.8
Deferred 0.3 0.1 0.0
--------------------------------------------------------------------------------
$ 0.5 $ 1.6 $ 2.8
================================================================================
TOTAL
Current $ 24.2 $ 22.9 $ 7.6
Deferred (2.1) (8.4) (7.0)
--------------------------------------------------------------------------------
$ 22.1 $ 14.5 $ 0.6
================================================================================
30 scholastic corporation
The provisions for income taxes attributable to continuing operations differ
from the amount of tax determined by applying the federal statutory rate as
follows:
================================================================================
1999 1998 1997
================================================================================
Computed federal
statutory provision $ 20.6 $ 13.3 $ 0.4
State income tax provision net of
federal income tax benefit 1.9 2.0 2.2
Difference in effective tax rates on
earnings of foreign subsidiaries (0.1) (0.9) (0.2)
Charitable contributions (0.5) 0.0 (1.8)
Other - net 0.2 0.1 0.0
--------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES$ 22.1 $ 14.5 $ 0.6
================================================================================
EFFECTIVE TAX RATES 37.5% 38.0% 64.6%
================================================================================
The undistributed earnings of foreign subsidiaries at May 31, 1999 are $23.7.
Any remittance of foreign earnings would not result in significant additional
tax.
Deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes as determined
under enacted tax laws and rates. The tax effects of these items that give rise
to deferred tax assets and liabilities at May 31 for the indicated fiscal years
are as follows:
================================================================================
1999 1998
================================================================================
NET DEFERRED TAX ASSETS:
Tax uniform capitalization $ 23.6 $ 16.8
Inventory reserves 11.7 11.4
Other accounting reserves 3.6 7.3
Tax carryforwards 1.3 2.5
Post-retirement, post-employment
and pension obligations 7.0 6.3
Theatrical motion picture accounting 2.4 2.4
Depreciation (3.6) (2.8)
Other - net (4.3) (0.7)
--------------------------------------------------------------------------------
Net deferred tax assets $ 41.7 $ 43.2
================================================================================
Net deferred tax assets of $41.7 at May 31, 1999 and $43.2 at May 31, 1998
include $1.2 and $4.0 in Other assets, and $(1.3) and $(2.6) in Other noncurrent
liabilities at May 31, 1999 and 1998, respectively.
6. CAPITAL STOCK AND STOCK OPTIONS
The Company has authorized capital stock of 25,000,000 shares of Common Stock,
$.01 par value (the "Common Stock"), 2,500,000 shares of Class A Stock, $.01 par
value (the "Class A Stock"), and 1,000,000 shares of Preferred Stock, $1.00 par
value (the "Preferred Stock"). At May 31, 1999, 15,645,145 shares of Common
Stock, 828,100 shares of Class A Stock and no shares of the Preferred Stock were
issued and outstanding and 1,301,658 shares of common stock were designated as
treasury stock. At May 31, 1999, the Company had reserved 2,425,546 shares of
Common Stock for issuance under its stock option plans, 828,100 shares were
reserved for issuance upon conversion of the Class A Stock, and 1,431,174 shares
were reserved for issuance upon conversion of the Convertible Debentures.
The only voting rights vested in the holders of Common Stock, except as required
by law, are the election of such number of directors as shall equal at least
one-fifth of the members of the Board of Directors. The holders of Class A Stock
are entitled to elect all other directors and to vote on all other matters.
Holders of Class A Stock and Common Stock are entitled to one vote per share on
matters on which they are entitled to vote. The holders of Class A Stock have
the right, at their option, to convert shares of Class A Stock into shares of
Common Stock on a share-for-share basis.
With the exception of voting rights and conversion rights, and as to the rights
of holders of Preferred Stock if issued, the Class A Stock and the Common Stock
are equal in rank and are entitled to dividends and distributions, when and if
declared by the Board of Directors. The Company has not paid any dividends since
its public offering in 1992 and has no current plans to pay any dividends on its
Common Stock or Class A Stock.
PREFERRED STOCK
The Company's authorized Preferred Stock may be issued in one or more series
with full or limited voting rights, with the rights of each series to be
determined by the Board of Directors before each issuance. No shares of
Preferred Stock have been issued.
annual report/fiscal 1999 31
WARRANTS
During fiscal 1999, the Company granted a warrant to purchase 45,000 shares of
Common Stock at a price of $39.12 to a third party. These warrants vest based on
meeting certain performance criteria and expire on August 6, 2003. At such time
as these criteria are met, the fair value of the warrants at that date will be
recorded as expense.
Stock Options
In fiscal 1996, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), which provides for the grant of non-qualified stock options and
incentive stock options. Two million shares of Common Stock were initially
reserved for issuance upon the exercise of options granted under this plan. In
September 1998, the holders of the Class A Stock authorized the issuance of an
additional 1.5 million shares of Common Stock under the 1995 Option Plan. The
1995 Plan supplemented the 1992 Stock Option Plan (the "1992 Plan"). At May 31,
1999, options to purchase 1,959,272 and 671,725 shares of Common Stock were
outstanding under the 1995 Plan and the 1992 Plan, respectively; 1,454,434
shares and no shares of Common Stock were available for additional awards under
the 1995 Plan and 1992 Plan, respectively.
In fiscal 1998, the Company adopted the stockholder approved 1997 Outside
Directors' Stock Option Plan (the "Director Option Plan"), which provides for
the grant of non-qualified options to purchase Common Stock, with 180,000 shares
reserved for issuance. This plan provides for the automatic grant to
non-employee directors each January of options to purchase 3,000 shares of
Common Stock. At May 31, 1999, options to purchase 63,000 shares of Common Stock
were outstanding and options on 114,000 shares of Common Stock were available
for additional awards under this plan. In January 1999 and 1998, options were
awarded under this plan at exercise prices of $56.94 and $35.75, respectively.
In fiscal 1997, the Company issued an aggregate of 1,683 shares of Common Stock
under a Non-Employee Director Stock-for-Retainer Plan, which was terminated in
fiscal 1998 concurrently with the adoption of the Director Option Plan. Under a
prior director stock option plan, options to purchase 24,000 shares of Common
Stock are outstanding.
Generally, options granted under the various plans may not be exercised for a
minimum of one year after grant and expire ten years and one day after grant.
Activity under the various stock option plans for the indicated fiscal years
ended May 31 was as follows:
[Enlarge/Download Table]
1999 1998 1997
==== ==== ====
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning
of year 2,617,659 $ 38.42 900,850 $ 41.94 1,075,400 $ 29.32
Granted 333,400 43.64 1,870,560 35.43 218,500 64.23
Exercised (205,613) 28.15 (69,500) 9.93 (338,175) 13.88
Cancelled (27,449) 35.40 (84,251) 44.12 (54,875) 56.30
------------------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 2,717,997 $ 39.87 2,617,659 $ 38.42 900,850 $ 41.94
====================================================================================================================================
Exercisable - end of year 1,663,721 $ 38.46 539,651 $ 36.49 436,363 $ 25.33
------------------------------------------------------------------------------------------------------------------------------------
At May 31, 1999, for each of the following classes of options as determined by
range of exercise price, the information regarding weighted-average exercise
prices and weighted-average remaining contractual lives of each said class is as
follows:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------- -------------------
WEIGHTED-AVERAGE
OPTIONS WEIGHTED-AVERAGE REMAINING NUMBER WEIGHTED-AVERAGE
PRICE RANGE NUMBER EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------------------------
$ 9.03-- $ 14.78 97,500 $ 9.74 1.0 years 97,500 $ 9.74
$ 27.75-- $ 39.94 2,055,947 $ 36.26 8.1 years 1,270,147 $ 36.21
$ 46.47-- $ 68.81 564,550 $ 58.22 7.1 years 296,074 $ 57.57
-----------------------------------------------------------------------------------------------------------------------------------
32 scholastic corporation
Under the provisions of SFAS 123, the Company applies APB 25 and related
interpretations in accounting for its stock option plans. In accordance with APB
25, no compensation expense was recognized because the exercise price of the
Company's stock options was equal to the market price of the underlying stock on
the date of grant when the exercise price and number of shares subject to grant
were fixed.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
================================================================================
1999 1998 1997
================================================================================
Net income - as reported $ 36.8 $ 23.6 $ 0.4
Net income/(loss) - pro forma 27.7 14.5 (0.8)
Diluted earnings per share -
as reported $ 2.20 $ 1.45 $ 0.02
Diluted earnings/(loss) per -
share pro forma 1.67 0.89 (0.05)
--------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
================================================================================
1999 1998 1997
================================================================================
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 0.409 0.346 0.184
Risk-free interest rate 5.24% 6.02% 6.63%
Expected life of options 5 years 5 years 5 years
--------------------------------------------------------------------------------
The weighted-average fair value of options granted during fiscal 1999, 1998 and
1997 were $18.89, $14.64 and $20.39 per share, respectively. For purposes of pro
forma disclosure, the estimated fair value of the options is amortized over the
options' vesting period. The pro forma information above is not likely to be
representative of the effects on reported net income for future years as options
are generally granted each year and vest over several years and only include
grants subsequent to June 1, 1995.
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the "US Pension Plan") which
covers the majority of the US employees who meet certain eligibility
requirements. Benefits are based on years of service and on career average
compensation. The US Pension Plan is funded by contributions from participants
and the Company. It is the Company's policy to fund the minimum amount required
by the Employee Retirement Income Security Act of 1974, as amended.
The international subsidiary in the United Kingdom has a defined benefit pension
plan (the "UK Pension Plan") covering those employees meeting minimum length of
service requirements. Benefits are based on years of service and on a percentage
of compensation near retirement. The UK Pension Plan is funded by contributions
from the subsidiary and its employees.
Other benefits consist of certain healthcare and life insurance benefits that
the Company provides for retired employees. A majority of the Company's domestic
employees may become eligible for these benefits if they reach normal retirement
age while working for the Company.
--------------------------------------------------------------------------------
space intentionally left blank
annual report/fiscal 1999 33
Total defined benefit pension plan costs under the US and UK Pension Plans for
the indicated fiscal years ended May 31 are summarized as follows:
[Enlarge/Download Table]
PENSION BENEFITS OTHER BENEFITS
====================================================================================================================================
1999 1998 1999 1998
====================================================================================================================================
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 26.9 $ 20.9 $ 11.0 $ 11.4
Service cost 2.5 1.7 0.5 0.4
Interest cost 1.9 1.6 0.8 0.8
Plan participants' contributions 0.6 0.6 0.1 0.1
Amendments -- -- (0.2) --
Actuarial (gains)/losses 1.4 3.4 0.1 (1.1)
Benefits paid (1.3) (1.3) (0.8) (0.6)
------------------------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR 32.0 26.9 11.5 11.0
------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 24.1 20.7 -- --
Actual return on plan assets 1.3 2.8 -- --
Company contributions 2.2 1.9 -- --
Plan particpants' contributions -- -- -- --
Benefits paid (1.3) (1.3) -- --
------------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 26.3 24.1 -- --
------------------------------------------------------------------------------------------------------------------------------------
Underfunded status of the plan (5.7) (2.8) (11.5) (11.0)
Unrecognized net actuarial gain (2.8) (1.2) (2.8) (3.1)
Unrecognized prior service cost 0.8 1.1 (0.2) 0.0
Unrecognized net asset obligation 0.8 1.0 0.0 0.0
------------------------------------------------------------------------------------------------------------------------------------
ACCRUED BENEFIT COST (6.9) (1.9) (14.5) (14.1)
------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.1% 7.0% 7.3% 7.0%
Compensation increase factor 4.3% 5.0% -- --
------------------------------------------------------------------------------------------------------------------------------------
Plan assets consist primarily of stocks, bonds, money market funds and US
government obligations. The assumed weighted-average long-term rate of return on
plan assets for plans with accumulated benefits obligations that exceed their
assets was 9.3% for fiscal 1999 and 1998.
The components of the net periodic post-retirement benefit costs for the
indicated fiscal years ended May 31 are as follows:
[Enlarge/Download Table]
Pension Benefits Other Benefits
====================================================================================================================================
1999 1998 1997 1999 1998 1997
====================================================================================================================================
Components of Net Periodic Benefit Cost
Service cost $ 2.5 $ 1.7 $ 1.5 $ 0.5 $ 0.4 $ 0.3
Interest cost 1.9 1.6 1.4 0.8 0.8 0.8
Expected return on assets (0.9) (2.9) (3.2) -- -- --
Net amortization and deferrals 0.3 0.3 0.3 (0.1) -- --
Recognized net actuarial gain (1.4) 1.0 1.7 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2.4 $ 1.7 $ 1.7 $ 1.2 $ 1.2 $ 1.1
====================================================================================================================================
34 scholastic corporation
The accumulated post-retirement benefit obligation was determined using a
discount rate of 7.25%. Service cost and interest components were determined
using a discount rate of 7.0%. The health care cost trend rate assumed was 9.0%
with an annual decline of 1% until the rate reaches 5.0% in the year 2003. A
decrease of 1% in the health care cost trend rate would result in decreases of
approximately $1.4 in the accumulated benefit obligation and $0.2 in the annual
net periodic post-retirement benefit cost. An increase of 1.0% in the health
care cost trend rate would result in increases of approximately $1.7 in the
accumulated benefit obligation and $0.3 in the annual net periodic
post-retirement benefit cost.
The Company also provides other benefit plans including the 401(k) Plan and the
Employee Stock Purchase Plan.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
[Enlarge/Download Table]
========================================================================================================
1999 1998 1997
========================================================================================================
Net Income $ 36.8 $ 23.6 $ 0.4
Weighted average Class A and Common Shares
outstanding for basic earnings per share 16.4 16.2 16.0
Dilutive effect of employee stock options 0.3 0.2 0.3
Dilutive effect of warrants 0.0 -- --
--------------------------------------------------------------------------------------------------------
Adjusted weighted average Class A and Common
Shares for diluted earnings per share outstanding 16.7 16.4 16.3
========================================================================================================
Net Income per Class A and Common Shares
Basic $ 2.25 $ 1.46 $ 0.02
Diluted $ 2.20 $ 1.45 $ 0.02
--------------------------------------------------------------------------------------------------------
For all periods presented, the effect of the 5.0% Convertible Subordinated
Debentures of 1.5 million shares on the adjusted weighted-average Class A and
Common Shares for diluted earnings per share is anti-dilutive and is not
included in the calculation.
9. IMPAIRMENT OF ASSETS
Fiscal year 1998 includes non-cash charges relating to the impairment of certain
assets of $11.4. Approximately $8.3 and $3.1 of the charges relate to the
Company's Educational Publishing segment and the Media, Licensing and
Advertising segment, respectively. A significant portion of these charges was
determined in accordance with SFAS 121 and was based on the Company's assessment
of the recoverability of the investments and ongoing cash flows. These charges
consist primarily of unamortized prepublication of $6.9 and related inventory
costs of $4.5.
10. DISPOSITION
Effective January 1, 1998, the Company sold its SOHO Group, including Home
Office Computing(R) magazine, for approximately $19.2 and the assumption of
certain liabilities, resulting in a pre-tax gain of approximately $10.0.
11. OTHER FINANCIAL DATA
Prepaid and other deferred expenses include deferred magazine acquisition
expenses of $5.7 and $4.6 at May 31, 1999 and 1998, respectively. The Company
expensed $8.1, $7.3 and $0.0 of magazine acquisition expenses in fiscal years
1999, 1998 and 1997, respectively.
Property, plant and equipment include capitalized interest of $0.6 and $0.0 and
construction in progress of $13.1 and $5.1 at May 31, 1999 and 1998,
respectively, related to the expansion of the Company's headquarters.
Goodwill and Trademarks are net of accumulated amortization of $16.6 and $12.0
at May 31, 1999 and 1998, respectively.
Other assets and deferred charges are net of accumulated amortization of
prepublication costs of $68.1 and $49.8 at May 31, 1999 and 1998, respectively.
Other accrued expenses include a reserve for unredeemed credits issued in
conjunction with the Company's book club and book fair operations of $11.6 and
$11.8, and accrued taxes of $7.9 and $10.2 at May 31, 1999 and 1998,
respectively.
annual report/fiscal 1999 35
12. SUBSEQUENT EVENT
As indicated in Note 3, effective August 11, 1999, the Company, Scholastic Inc.
and the banks party thereto have amended and restated the Loan Agreement. The
amended Loan Agreement expires August 11, 2004, provides for aggregate
borrowings of up to $170.0 (with a right in certain circumstances to increase it
to $200.0) including the issuance of up to $10.0 in letters of credit. Interest
under this facility is either at the prime rate or 0.325% to 0.90% over LIBOR
(as defined). There is a commitment fee ranging from 0.10% to 0.30% on the
facility and a utilization fee ranging from 0.05% to 0.15% if borrowings exceed
33% of the total facility. The amounts charged vary based upon the Company's
credit ratings. At the Company's current credit ratings, the spread over LIBOR,
commitment fee and utilization fee are 0.475%, 0.150% and 0.075%, respectively.
The Loan Agreement contains certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions.
--------------------------------------------------------------------------------
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36 scholastic corporation
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, 1999 and 1998, and the related
consolidated statement of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended May 31, 1999. 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
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at May 31, 1999 and 1998 and the consolidated results of its operations,
and its cash flows for each of the three years in the period ended May 31, 1999
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.
/s/ERNST & YOUNG LLP
New York, New York
July 8, 1999,
except for Note 12, as to which the date is
August 11, 1999
annual report/fiscal 1999 37
SUPPLEMENTARY FINANCIAL INFORMATION
Summary of Quarterly Results of Operations for the fiscal years ended May 31,
1999 and 1998 (Unaudited, amounts in millions except per share data)
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
===================================================================================================================================
1999
===================================================================================================================================
Revenues $ 150.2 $ 403.2 $ 267.3 $ 334.0 $ 1,154.7
Cost of goods sold 85.2 187.3 133.5 155.1 561.1
Net income/(loss) (17.5) 31.7 0.2 22.4 36.8
Net income/(loss) per share:
Basic (1.08) 1.94 0.01 1.36 2.25
Diluted (1.08) 1.81 0.01 1.27 2.20
===================================================================================================================================
1998
===================================================================================================================================
Revenues $ 166.6 $ 354.8 $ 239.0 $ 298.0 $ 1,058.4
Cost of goods sold 96.1 176.6 121.8 142.3 536.8
Net income/(loss) (13.2) 26.0 (3.1) 13.9 23.6
Net income/(loss) per share:
Basic (0.81) 1.61 (0.19) 0.86 1.46
Diluted (0.81) 1.51 (0.19) 0.83 1.45
------------------------------------------------------------------------------------------------------------------------------------
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
--------------------------------------------------------------------------------
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38 scholastic corporation
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.
[Enlarge/Download Table]
Executive Officers (as of July 15, 1999)
====================================================================================================================================
NAME AGE EMPLOYED BY REGISTRANT SINCE POSITION(S) FOR PAST FIVE YEARS
====================================================================================================================================
Richard Robinson 62 1962 Chairman of the Board (since 1982), President (since
1974) and Chief Executive Officer (since 1975).
Kevin J. McEnery 51 1993 Executive Vice President and Chief Financial
Officer (since 1995), Vice President of Strategic Planning
and Operations, Magazine and Technology Groups
(1993-1995).
Deborah A. Forte 45 1984 Executive Vice President (since 1996), Senior Vice
President (1995) and Division Head, Scholastic Entertainment
Inc. ("SEI") (since 1995); Executive Vice President of SEI
(1994) and Vice President of SEI (1984-1994).
Barbara A. Marcus 48 1983 Executive Vice President, Children's Book
Publishing (since 1991).
Margery W. Mayer 47 1990 Executive Vice President (since 1990)--Learning
Ventures (since 1998), Instructional Publishing and
Scholastic School Group (1990-1997).
Ruth L. Otte 50 1996 Executive Vice President (since 1996)--Internet and
Software (since 1999), Education Group (1998-1999) and
New Media Division (1996-1998); and prior to joining
the Registrant, President (1994-1995),Knowledge Adventure.
Hugh Roome 47 1991 Executive Vice President (since 1996), Senior Vice
President (1993-1996)--Magazine Group (since 1993).
Richard M. Spaulding 62 1960 Director (since 1974) and Executive Vice President
(since 1974).
Judith A. Corman 61 1999 Senior Vice President, Corporate Communications and
Media Relations (since 1999); and prior to joining the
Registrant, Senior Vice President, Lerer & Montgomery
(1994-1999).
Charles B. Deull 39 1995 Senior Vice President, Legal and Business Affairs
(since 1995); Secretary (since 1996); and prior to
joining the Registrant, Associate, law firm of Cleary,
Gottlieb, Steen and Hamilton (1986-1995).
Jean L. Feiwel 46 1983 Senior Vice President, Publisher, Children's Book
Publishing (since 1993).
annual report/fiscal 1999 39
[Enlarge/Download Table]
====================================================================================================================================
NAME AGE EMPLOYED BY REGISTRANT SINCE POSITION(S) FOR PAST FIVE YEARS
====================================================================================================================================
Ernest B. Fleishman 62 1989 Senior Vice President, Education and Corporate
Relations (since 1989).
Maurice Greenfield 56 1999 Senior Vice President and Chief Information Officer
(since 1999); and prior to joining the Registrant, Vice
President, MIS, National Broadcasting Company (1985-1999).
Frank Grohowski 58 1985 Senior Vice President, Operations (since 1995) and
Vice President, Operations (1985-1995).
Larry V. Holland 40 1994 Senior Vice President, Corporate Human Resources
and Employee Services (since 1997) and Vice President,
Human Resources (1994-1997).
Linda S. Koons 44 1990 Senior Vice President (since 1998), Vice President
(1995-1998); Publisher (since 1994), Group Head, Education
Group (since 1999), Education Group (1998-1999);
Supplementary Publishing (1997-1998), Early
Childhood Division (1995-1997); and from 1994 to 1995,
Director of School Product Development, Disney Interactive.
David J. Walsh 63 1983 Senior Vice President, International Operations
(since 1983).
Helen V. Benham 49 1974 Director (since 1992), Corporate Vice President,
Early Childhood Advisor (since 1996); Vice President and
Publisher, Early Childhood Division (1990-1996).
Claudia H. Cohl 59 1975 Vice President (since 1978)--Internal Communications
(since 1999), Editorial Planning and Development, Scholastic
Education Group (1993-1999).
Raymond Marchuk 48 1983 Vice President (since 1983), Finance & Investor
Relations.
Karen A. Maloney 42 1997 Vice President and Corporate Controller (since
1998), Director of Accounting and Financial Operations
(1997-1998); and prior to joining the Registrant, Vice
President and Corporate Controller, Calvin Klein, Inc.
(1996-1997); Vice President and Corporate Controller, Bernard
Chaus, Inc.(1995-1996).
Vincent M. Marzano 36 1987 Treasurer (since 1993).
David D. Yun 51 1988 President, Scholastic Book Fairs (since 1992).
40 scholastic corporation
ITEM 11 EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(3) Exhibits:
Exhibit Number
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-46338) as filed with the Commission on March 12,
1992).
3.2 By-Laws of the Company (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")).
4.1 Amended and Restated Credit Agreement dated August 11, 1999 among the
Company and Scholastic Inc., as borrowers, the Initial lenders named
therein, Citibank, N.A., as administrative agent, Salomon Solomon Smith
Barney Inc., as arranger, and Chase Manhattan Bank, N.A., and Fleet Bank,
N.A., as syndication agents, replacing in its entirety the Amended and
Restated Loan Agreement dated April 11, 1995 between the Company and
Citibank, N.A., as agent, Marine Midland Bank, Chase Manhattan Bank, N.A.,
The First National Bank of Boston and United Jersey Bank (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), together with
Amendment No. 1 to the Loan Agreement dated May 1, 1996 (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with the
Commission on August 28, 1996); Amendment No. 2 to the Loan Agreement dated
May 28, 1997 (incorporated by reference to the Company's Form 10-Q for the
quarter ended August 31, 1997 as filed with the Commission on October 15,
1997); and Amendment No. 3 to the Loan Agreement dated November 28, 1997
(incorporated by reference to the Company's Form 10-Q for the quarter ended
November 30, 1997 as filed with the Commission on January 14, 1998).
4.2* Revolving Loan Agreement dated June 19, 1995 among the Company, Scholastic
Inc. and Sun Bank, National Association, as amended August 14, 1996, May
30, 1997, and November 28, 1997.
4.3* Credit Agreement Facility dated June 1, 1992, as amended on October 30,
1995, between Scholastic Canada Ltd. and CIBC.
4.4* Credit Agreement Facility dated June 24, 1993 between Scholastic Ltd.
(formerly known as Scholastic Publications Ltd.) and Citibank, N.A.
4.5* Overdraft Facility dated May 14, 1992, as amended on June 30, 1995, between
Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and
Midland Bank.
4.6* Credit Agreement, dated February 12, 1993, as amended on January 31, 1995,
between Scholastic Australia Pty. Ltd. (formerly known as Ashton Scholastic
Pty. Ltd.) and National Australia Bank Ltd.
annual report/fiscal 1999 41
4.7* Credit Agreement, dated April 20, 1993 between Scholastic New Zealand
Ltd. (Formerly Ashton Scholastic Ltd.) and ANZ Banking Group Ltd.
4.8* Credit Agreement, dated May 28, 1998 between Scholastic Australia Pty.
Ltd. and Hong Kong Bank of Australia Ltd.
4.9 Indenture dated August 15, 1995 for 5% Convertible Subordinated
Debentures due August 15, 2005 issued by the Company (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with the
Commission on August 28, 1995).
4.10 Indenture dated December 15, 1996 for 7% Notes due December 15, 2003
issued by the Company (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-17365) as filed
with the Commission on December 11, 1996).
10.2** Scholastic Corporation 1992 Stock Option Plan (incorporated by reference
to the Company's Annual Report on Form 10-K as filed with the Commission
on August 27, 1992).
10.4** Scholastic Corporation 1995 Stock Option Plan (incorporated by reference
to the Company's Registration Statement Form S-8 (Registration No.
33-98186) as filed with the Commission on October 16, 1995), together
with Amendment No. 1 to the Scholastic Corporation 1995 Stock Option
Plan (incorporated by reference to the Company's Quarterly Report on
Form 10-Q as filed with the Commission on October 15, 1998).
10.5** Form of Stock Option Agreement for Scholastic Corporation 1995 Stock
Option Plan (incorporated by reference to the Company's Annual Report on
Form 10-K as filed with the Commission on August 26, 1998).
10.6** Scholastic Corporation 1998 Employee Stock Purchase Plan, effective as
of January 1, 1999 (incorporated by reference to the Company's Quarterly
Report on Form 10-Q as filed with the Commission on April 14, 1999).
10.7** Scholastic Corporation 1998 Management Stock Purchase Plan, effective as
of January 1, 1999 (incorporated by reference to the Company's Quarterly
Report on Form 10-Q as filed with the Commission on April 14, 1999).
10.8** Scholastic Corporation 1992 Outside Directors' Stock Option Plan
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 27, 1992).
10.9** Scholastic Corporation 1997 Outside Director Stock Option Plan, amended
and restated as of May 25, 1999.
10.10** Form of Stock Option Agreement for Scholastic Corporation 1997 Outside
Director Plan (incorporated by reference to the Company's Annual Report
on Form 10-K as filed with the Commission on August 26, 1998).
10.11** Scholastic Corporation 1995 Director's Deferred Compensation Plan,
amended and restated as of May 25, 1999.
10.12** Employment Agreement between Jean L. Feiwel and Scholastic Inc., dated
April 6, 1998 (incorporated by reference to the Company's Annual Report
on Form 10-K as filed with the Commission on August 26, 1998).
10.13** Description of contingent long-term incentive arrangement between David
D. Yun and Scholastic Inc., effective September 16, 1998.
10.14** Scholastic Corporation Non-Employee Director Stock-For-Retainer Plan
(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).
10.15 Amended and Restated Lease, effective as of August 1, 1999, between ISE
555 Broadway, LLC, landlord, and Scholastic Inc., tenant, for the
building known as 555 Broadway, NY, NY.
10.16 Amended and Restated Sublease, effective as of October 9, 1996, between
Kalodop Corp., as sublandlord, and Scholastic Inc., as subtenant, for
the premises known as 557 Broadway, NY, NY.
10.17 Agreements with Industrial Development Agency of the City of New York
including (i)Lease Agreement dated
42 scholastic corporation
December 1, 1993; (ii) Indenture of Trust agreement dated December 1, 1993;
(iii) Project Agreement dated December 1, 1993; (iv) Sales Tax letter dated
December 3, 1993 (each of the foregoing are incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission on
August 26, 1994).
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
27.1 Financial Data Schedule for the year ended May 31, 1999.
27.2 Financial Data Schedule restated for the year ended May 31, 1998.
(b) Reports on Form 8-K.
No current Report on Form 8-K was filed during the fourth quarter ended May
31, 1999.
* Such long-term debt does not individually amount to more than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such
instrument is not filed herewith. The Company hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
** The referenced exhibit is a management contract or compensation plan or
arrangement described in Item 601(b) (10) (iii) of Regulation S-K.
--------------------------------------------------------------------------------
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annual report/fiscal 1999 43
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 20, 1999 SCHOLASTIC CORPORATION
By: /s/ Richard Robinson
------------------------
Richard Robinson, Chairman of the
Board, President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard Robinson his or her true and lawful
attorney-in-fact and agent, with power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing necessary and requisite to be done, as fully and to all the
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
/s/ Richard Robinson Chairman of the Board, President, August 20, 1999
------------------------------- Chief Executive Officer and
Richard Robinson Director (Principal Executive Officer)
/s/ Richard M. Spaulding Executive Vice President and Director August 20, 1999
-------------------------------
Richard M. Spaulding
/s/ Kevin J. McEnery Executive Vice President and Chief August 20, 1999
------------------------------- Financial Officer (Principal
Kevin J. McEnery Financial Officer)
/s/ Karen A Maloney Vice President and Corporate August 20, 1999
------------------------------- Controller (Principal Accounting Officer)
Karen A. Maloney
/s/ Rebeca M. Barrera Director August 20, 1999
-------------------------------
Rebeca M. Barrera
/s/ Helen V. Benham Director August 20, 1999
-------------------------------
Helen V. Benham
/s/ Frederic J. Bischoff Director August 20, 1999
-------------------------------
Frederic J. Bischoff
/s/ John Brademas Director August 20, 1999
-------------------------------
John Brademas
44 scholastic corporation
SIGNATURE TITLE DATE
/s/ Ramon C. Cortines Director August 20, 1999
-------------------------------
Ramon C. Cortines
/s/ Alonzo A. Crim Director August 20, 1999
-------------------------------
Alonzo A. Crim
/s/ Charles T. Harris, III Director August 20, 1999
-------------------------------
Charles T. Harris, III
/s/ Andrew S. Hedden Director August 20, 1999
-------------------------------
Andrew S. Hedden
/s/ Mae C. Jemison Director August 20, 1999
-------------------------------
Mae C. Jemison
/s/ Richard A. Krinsley Director August 20, 1999
-------------------------------
Richard A. Krinsley
/s/ John G. McDonald Director August 20, 1999
-------------------------------
John G. McDonald
/s/ Peter M. Mayer Director August 20, 1999
-------------------------------
Peter M. Mayer
/s/ Augustus K. Oliver Director August 20, 1999
-------------------------------
Augustus K. Oliver
--------------------------------------------------------------------------------
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annual report/fiscal 1999 45
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46 scholastic corporation
SCHOLASTIC CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 1999
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULE
annual report/fiscal 1999 47
SCHEDULE II
SCHOLASTIC CORPORATION
Valuation And Qualifying Accounts And Reserves
Years Ended May 31, 1999, 1998 and 1997
(Amounts in millions)
[Enlarge/Download Table]
BALANCE AT CHARGED TO WRITE-OFF'S BALANCE AT
DESCRIPTION BEGINNING OF YEAR INCOME AND OTHER END OF YEAR
====================================================================================================================================
MAY 31, 1999
====================================================================================================================================
Reserve for royalty advances $ 29.7 $ 2.3 $ 0.1 $ 31.9
====================================================================================================================================
Reserve for obsolescence $ 30.7 $ 18.8 $ 13.4 $ 36.1
====================================================================================================================================
Reserve for returns $ 20.5 $ 45.9 $ 42.1 (1) $ 24.3
====================================================================================================================================
Allowance for doubtful accounts $ 10.1 $ 17.0 $ 14.8 $ 12.3
====================================================================================================================================
MAY 31, 1998
====================================================================================================================================
Reserve for royalty advances $ 25.1 $ 4.6 $-- $ 29.7
====================================================================================================================================
Reserve for obsolescence $ 34.0 $ 15.7 $ 19.0 $ 30.7
====================================================================================================================================
Reserve for returns $ 30.2 $ 41.8 $ 51.5 (1) $ 20.5
====================================================================================================================================
Allowance for doubtful accounts $ 7.8 $ 14.6 $ 12.3 $ 10.1
====================================================================================================================================
May 31, 1997
====================================================================================================================================
Reserve for royalty advances $ 24.9 $ 2.3 $ 2.1 $ 25.1
====================================================================================================================================
Reserve for obsolescence $ 27.1 $ 21.1 $ 14.2 $ 34.0
====================================================================================================================================
Reserve for returns $ 27.6 $ 68.7 $ 66.1 (1) $ 30.2
====================================================================================================================================
Allowance for doubtful accounts $ 9.2 $ 11.7 $ 13.1 $ 7.8
====================================================================================================================================
(1) Represents actual returns charged to reserve
48 scholastic corporation
SCHOLASTIC CORPORATION
EXHIBITS
TO THE ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED MAY 31, 1999
EXHIBIT INDEX
Regulation S-K
Exhibit Number Description of Document
4.1 Amended and Restated Credit Agreement dated August 11, 1999 among
the Company and Scholastic Inc., as borrowers, the Initial lenders
named therein, Citibank, N.A., as administrative agent, Salomon
Solomon Smith Barney Inc., as arranger, and Chase Manhattan Bank,
N.A., and Fleet Bank, N.A., as syndication agents, replacing in its
entirety the Amended and Restated Loan Agreement dated April 11,
1995 between the Company and Citibank, N.A., as agent, Marine
Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of
Boston and United Jersey Bank (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), together with Amendment No.
1 to the Loan Agreement dated May 1, 1996 (incorporated by reference
to the Company's Annual Report on Form 10-K as filed with the
Commission on August 28, 1996); Amendment No. 2 to the Loan
Agreement dated May 28, 1997 (incorporated by reference to the
Company's Form 10-Q for the quarter ended August 31, 1997 as filed
with the Commission on October 15, 1997); and Amendment No. 3 to the
Loan Agreement dated November 28, 1997 (incorporated by reference to
the Company's Form 10-Q for the quarter ended November 30, 1997 as
filed with the Commission on January 14, 1998).
10.9 Scholastic Corporation 1997 Outside Directors' Stock Option Plan,
amended and restated as of May 25, 1999.
10.11 Scholastic Corporation Director's Deferred Compensation Plan,
amended and restated as of May 25, 1999.
10.13 Description of contingent long-term incentive arrangement between
David D. Yun and Scholastic Inc., effective as of September 16,
1998.
10.14 Amended and Restated Lease, effective as of August 1, 1999, between
ISE 555Broadway, LLC, landlord, and Scholastic Inc., tenant, for the
building known as 555 Broadway, NY, NY.
10.15 Amended and Restated Sublease, effective as of October 9, 1996,
between Kalodop Corp., as sublandlord, and Scholastic Inc., as
subtenant, for the premises known as 557 Broadway, NY, NY.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27.1 Financial Data Schedule for the year ended May 31, 1999.
27.2 Financial Data Schedule restated for the year ended May 31, 1998.
Dates Referenced Herein and Documents Incorporated by Reference
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