- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSIONUnited States
Securities and Exchange CommissionWashington, D.C. 20549
FORMForm 10-K
ANNUAL REPORT PURSUANT TO SECTIONAnnual Report pursuant to section 13
ORor 15(d)OF THE SECURITIES EXCHANGE ACT OFof
the Securities Exchange Act of 1934For the fiscal year ended May 31,
20012004 | Commission File No.0-19860 SCHOLASTIC CORPORATION (Exact000-19860Scholastic 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) 557 BROADWAY, NEW YORK, NEW YORK 10012 (Address of principal executive offices) (Zip Code) Registrant's
Delaware (State or other jurisdiction of incorporation or organization) | 13-3385513 (IRS Employer Identification No.) |
557 Broadway, New York, New York (Address of principal executive offices) | 10012 |
Registrant’s telephone number, including area codecode: (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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Title of class Common Stock, $0.01 par value | Name of Each Exchange on Which Registered The NASDAQ Stock Market |
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'sRegistrant’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]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes X No _
The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of August 10, 2001,July 26, 2004, was approximately $1,125,585,000.$854,089,000. As of such date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant'sRegistrant’s voting stock as of August 10, 2001July 26, 2004 was as follows: 33,577,49237,947,917 shares of Common Stock and 1,656,200 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated By Reference
Part III incorporates certain information by reference from the Registrant'sRegistrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 20, 2001.
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21, 2004.
Part I
ITEM
Item 1 o BUSINESS
OVERVIEW
| Business
Overview
Scholastic Corporation (together(the “Corporation” and together with its subsidiaries, "Scholastic"“Scholastic” or the "Company"“Company”) is a global children'schildren’s publishing and media company. The Company believes that it is the world'sworld’s largest publisher and distributor of children'schildren’s books. Scholastic creates quality educational and entertaining materials and products for use in school and at home, including children'schildren’s books, textbooks, magazines, technology-based products, teacher materials, television programming, film, videos and toys. The Company's Website, Scholastic.com,Company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries and television networks. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents, and an award-winning destination for children. With the June 2000 acquisition of Grolier Incorporated ("Grolier"(“Grolier”) for $400
million in cash,, the Company became the leading operator in the United States of direct-to-home book clubs primarily serving children age five and under, and the leading print and on-line publisher of children'schildren’s reference and non-fiction and reference products sold primarily to United States school libraries. Internationally, Scholastic has long-established operations in Canada, the United Kingdom, Australia and New Zealand, and newer operations in Argentina, Hong Kong, India, Ireland and Mexico. The Grolier acquisition expanded the Company'sCompany’s international operations in Canada, the United Kingdom, Australia and Southeast Asia.
During its 8184 years of operation, Scholastic has emphasized quality products and a dedication to learning. Scholastic Corporation was incorporated under the laws of Delaware in 1986 and, through predecessor entities, has been in business since 1920. Grolier, through its predecessor entities, has been in business since 1895.
OPERATING SEGMENTS
Operating Segments
The Company'sCompany categorizes its businesses are categorized into four operating segments: CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING (whichChildren’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the Company'sCompany’s domestic operations); and INTERNATIONAL.International. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources. During the three-year period ended May 31, 2001,
Scholastic's2004, Scholastic’s revenues have grown at an average annual compounded rate of 30.1%,
including the Grolier acquisition, and 16.6%, excluding the Grolier acquisition.4.4%. The following table sets forth revenues by operating segment for the three fiscal years ended May 31:
(AMOUNTS IN MILLIONS)
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2001 2000 1999
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CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION $ 1,221.9 $ 857.9 $ 656.9
EDUCATIONAL PUBLISHING 309.7 212.5 196.9
MEDIA, LICENSING
AND ADVERTISING 134.0 108.1 105.8
INTERNATIONAL 296.7 224.0 205.9
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TOTAL $ 1,962.3 $ 1,402.5 $ 1,165.5
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Reported revenues for fiscal 2001 include Grolier's operations since
(Amounts in millions) 2004 2003 2002 Children’s Book Publishing
and Distribution $ 1,358.6 $ 1,189.9 $ 1,168.6 Educational Publishing 369.1 325.9 316.9 Media, Licensing and Advertising 136.4 123.5 129.8 International 369.7 319.0 301.7 Total $ 2,233.8 $ 1,958.3 $ 1,917.0
Additional financial information covering the date of
acquisition. Reported revenues for fiscal 2000 and 1999 do not include Grolier's
operations. Selected pro forma information for GrolierCompany’s operating segments is included in Part II,Note 2 of Notes to Consolidated Financial Statements in Item 8, Consolidated“Consolidated Financial Statements and Supplementary Data. Data,” which is incorporated herein by reference.
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
(60.8% of fiscal 2004 revenues)
General
The addition
of Grolier's revenues in fiscal 2001 did not significantly change the Company's
sales mix by operating segment.
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
(62.3% OF FISCAL 2001 REVENUES)
GENERAL
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTIONCompany’s Children’s Book Publishing and Distribution segment includes the publication and distribution of children'schildren’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs school-based book fairs and the trade channel.
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The Company believes it is the largest publisher and distributor of children'schildren’s books and is the largest operator of school-based book clubs and school-based book fairs in the United States. The Company is also a leading publisher of children'schildren’s books distributed through the trade channel and the leading distributor in the United States of children'schildren’s books through the direct-to-home channel,continuity programs primarily for children ages five and younger. In fiscal 2001,2004, the Company distributed in excess of 325350 million children'schildren’s books in the United States through this business segment.
States.
Scholastic offers a broad range of quality children'schildren’s literature. Many of the Company'sCompany’s books have received awards for excellence in children'schildren’s literature, including the Caldecott and Newbery awards.
The Company obtains titles for sale inthrough its distribution channels from variousthree principal sources. The Company's first source for titles is the Company'sCompany’s publication of books written under exclusive publication agreements with authors, book packagers or other media companies. Scholastic generally owns the rights to sell these titles in all United States channels of distribution. Scholastic'sScholastic’s second source of titles is licenses to publish books exclusively in specified channels of distribution, including reprints of books originally published by other publishers, for which the Company acquires rights to sell in the school market and licenses to publish books for exclusive sale in the direct-to-home channel.continuity programs. The third source of titles is the Company'sCompany’s purchase of finished books from other publishers to be sold in the school market. At May 31, 2001,2004, the Company'sCompany’s active backlist (a list of titles published as new titles in prior years) included more than 5,0006,000 titles.
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SCHOOL BOOK CLUBS
School-Based Book Clubs
Scholastic founded its first schoolschool-based book club in 1948. The Company operates tena number of school-based book clubs: FIREFLY(R)clubs, including: Firefly®, serving pre-kindergarten ("pre-K"(“pre-K”) and kindergarten ("K"(“K”) students; SEESAW(R)SeeSaw®, serving students grades K to 1; two
CARNIVAL(R) clubs, one serving students grades K to 2, and the other serving
students grades 3 to 6; LUCKY BOOK CLUB(R)Lucky®, serving students grades 2 to 3; ARROW BOOK CLUB(R), serving students grade 4 to 6; TAB BOOK CLUB(R)Arrow®, serving students grades 64 to 8; and6; TAB®, serving students grades 7 to 12; three TRUMPET(R)Trumpet® clubs, serving students pre-K to grade 6
students.6; three Troll®/Carnival® clubs, serving students K to grade 6; Honeybee®, serving children ages 11/2 to 4; and Club Leo™, which provides Spanish language offers to students pre-K to grade 8. In addition to its regular periodic offerings,offers, the Company creates special theme-based offers targeted to the different grade levels during the year, such as holiday offers, science offers, curriculum offers and Spanish
languageteen offers.
The Company estimates that over 80% of all elementary school teachers in the United States participate in schoolthe Company’s school-based book clubs, with substantially all of these
teachers using Scholastic book clubs at least once during the school year.clubs. The Company believes that teachers participate in schoolschool-based book clubs because it is their opinion that quality books at affordable prices will be of interest to studentsfamilies and will improve students'students’ reading skills. The Company also believes that teachers participate because the schoolschool-based book clubs offer easy access to a broad range of books.
The Company mails promotional piecesmaterials containing order forms to teachers in the vast majority of the pre-K to grade 8 classrooms in the United States. Participation in any offer does not create an obligation to participate in any
subsequent offer, nor does it preclude participation in other book clubs.
Teachers who wish to participate in a schoolschool-based book club distribute the order forms to their students, who may choose from generally 8075 or more selections at substantial reductions from list prices. The teacher consolidates the students'students’ orders and forwards them to the Company. OrdersCompany by phone, fax, mail or the Internet, which in fiscal 2004 accounted for approximately 30% of orders. The orders are then shipped to the teacher for distribution to the students. Teachers who participate in the book clubs receive bonus points for use by their school, which may be redeemed for the purchase of additional books and other items for their classrooms.
In its school book club business, the Company competes on the basis of book
selection, price, promotion and customer service. The Company believes that its
broad offerings of titles, many of which are distributed in this channel
exclusively by Scholastic, combined with low costs and its efficient use of
promotional mailings, enable the Company to compete effectively.
CONTINUITY PROGRAMS
The Company operates continuity programs, in which children and their families
generally place a single order and receive more than one shipment of books.
Continuity programs are promoted through (i) direct-to-home clubs offers
primarily through direct mail, telemarketing and print and on-line
advertisements, and (ii) offers primarily in school-based book clubs. The
Company's direct-to-home business, acquired as part of the Grolier acquisition,
is the leading direct-to-home seller of children's books primarily serving
children age five and under. Beginning in fiscal 2002, the Company's
direct-to-home continuity business will include Scholastic publishing
properties, such as CLIFFORD & COMPANY, HELLO KITTY(TM), MAGIC UNIVERSITY(TM)
and BARNEY(TM), as well as the licensed programs previously operated by Grolier,
such as DISNEY BOOK CLUB(TM), BARBIE(TM) and DR. SEUSS(TM) BEGINNING READERS
PROGRAM. Continuity programs offered primarily through Scholastic's school book
clubs include I SPY(TM), CLIFFORD THE BIG RED DOG(TM), DEAR AMERICA(TM),
DINOFOURS(TM), FRANKLIN, BARNEY, POWERPUFF GIRLS(TM), and QUESTIONS KIDS ASK(R).
SCHOOL BOOK FAIRS
School-Based Book Fairs
Scholastic entered the school-based book fair business in 1981. The Company has grown this business by expanding into new markets, including through selected acquisitions, and by increasing its business in existing markets by reaching new school customers, holding more fairs
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per year at its existing school customers and growing revenue on a per fair basis. The Company is the leading operator of schoolschool-based book fairs in the United States. In July 2001, the Company acquired
certain assets of Troll Book Fairs Inc.
Book fairs are generally week-long events conducted on school premises, operated by school librarians and/or parent-teacher organizations. School bookBook fair events provide children with access to hundreds of different titles and allow them to purchase books and other select products of their choice at the school. 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 for schools sponsoring fairs is to make quality books available to their students at reasonable prices in order to stimulate reading interests.interest in reading. In addition, the school retains a portion of the book fair revenues, which can then be used to purchase books, supplies and equipment for the school.
The Company operates schoolschool-based book fairs in all 50 states under the name SCHOLASTIC BOOK FAIRS(R)Scholastic Book Fairs®. The Company also markets fairs branded as SCHOLASTIC
SHOWCASE BOOK FAIRS, SCHOLASTIC EXPLORASTORY BOOK FAIRS(TM) and READ STREET BOOK
FAIRS(R). In addition, the Company offers premium book fairs under the names
SCHOLASTIC LITERACY FESTIVAL(TM) and SCHOLASTIC BOOKS ON TOUR(R), which feature
an expanded list of titles supported by merchandise displays and costumed book
characters. Books and display cases are delivered to schools from the Company'sCompany’s warehouses principally by a fleet of leased vehicles. Sales and customer service functions are performed from regional sales offices, supported by field representatives. The Company believes that its competitive advantages in the book fair business include the strength of the relationship between its sales representatives and schools, broad geographic coverage, quality customer service and breadth of product selection. Over 90% of the schools that sponsored a Scholastic book fair in fiscal 20002003 sponsored a Scholastic book fair again in fiscal 2001.
TRADE
2004.
Continuity Programs
The Company operates continuity programs whereby children and their families generally place a single order and receive more than one shipment of books. Continuity programs are promoted through (i) direct-to-home offers, primarily through telemarketing, direct mail and print and on-line advertisements, and (ii) offers in school-based book clubs. The Company’s direct-to-home continuity business, acquired as part of the Grolier acquisition, is the leading direct-to-home seller of children’s books primarily serving children age five and under. In fiscal 2004, the Company’s direct-to-home continuity business included Scholastic publishing properties, such as Clifford & Company™, Hello Kitty™, Scooby Doo and Nick Jr., as well as programs previously operated by Grolier, such as Disney Book Club™, Barbie™, Dr. Seuss™ Beginning Readers Program and The New Book of Knowledge® encyclopedia. In fiscal 2002, the Company acquired Baby’s First Book Club®, a direct marketer through continuity programs of age-appropriate books and toys for young children. Continuity programs offered primarily through Scholastic’s school-based book clubs include Spy University™, Clifford The Big Red Dog®, Nick Zone, Space University™ and DisneyPrincess.
Trade
Scholastic is one of the leading sellers of children'schildren’s books through trade bookstores and mass merchandisers in the United States. The Company maintains over 3,6006,000 titles for trade distribution, approximately 500 of which were added
through the Grolier acquisition. Scholastic'sdistribution. Scholastic’s original
[GRAPHIC]2 [LOGO]
HARRY POTTER, Harry Potter®, I SPY(TM)Spy™, CLIFFORD THE BIG RED DOG(R)Clifford The Big Red Dog®, ANIMORPHS(R)Goosebumps®, DEAR AMERICA(R)The Baby-sitters Club®, THE BABY-SITTERS CLUB(R)The Magic School Bus®, THE MAGIC SCHOOL
BUS(R), CAPTAIN UNDERPANTS(TM)Captain Underpants® and MISS SPIDER(R)Geronimo Stilton® and licensed properties such as BARNEY(R)Barney®, STAR WARS(R)Scooby Doo® and SCOOBY DOO(TM) Shrek 2®. In fiscal 2002, the Company purchased Klutz, a publisher and creator of “books plus” products for children. The Company'sCompany’s trade sales organization focuses on marketing and selling Scholastic'sScholastic’s publishing properties to book store accountsstores, mass merchandisers and mass merchandisers.
specialty sales outlets.
The Company'sCompany’s fiscal 20012004 sales in the trade market were led by the HARRY POTTERHarry Potter series of books. Other Scholastic bestsellers during fiscal 20012004 included books from the DEAR AMERICA, Clifford The Big Red Dog, I SPY, CLIFFORD THE BIG RED DOGSpy and CAPTAIN UNDERPANTSCaptain Underpants series.
EDUCATIONAL PUBLISHING
(15.8% OF FISCAL 2001 REVENUES)
GENERAL
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EDUCATIONAL PUBLISHING
(16.5% of fiscal 2004 revenues)
General
The Company's EDUCATIONAL PUBLISHINGCompany’s Educational Publishing segment includes the publication and distribution to schools and libraries of supplemental and corecurriculum materials, children’s books, classroom magazines and print and on-line non-fictionreference and referencenon-fiction products for grades Kpre-K to 12 in the United States.
Scholastic has been providing quality innovative educational materials to schools and libraries since it began publishing classroom magazines in the 1920's.1920’s. The Company added supplementary books and texts to its product line in the 1940's,1960’s, professional books for teachers in the 1980's1980’s and early childhood products and core curriculum materials in the 1990's.1990’s. In 1996, the Company strengthened its Spanish language offerings through the acquisition of Lectorum Publications, Inc., the largest Spanish language book distributor to schools and libraries in the United States. Through the acquisition of Grolier in June 2000, the Company became the leading print and on-line publisher of children'schildren’s reference and non-fiction and reference products sold primarily to school libraries in the United States. The Company markets and sells its EDUCATIONAL PUBLISHINGEducational Publishing products through a combination of field representatives, direct mail and telemarketing.
SUPPLEMENTAL AND CORE PUBLISHING
The Company's supplemental
Curriculum Publishing and coreTeaching Resources
Scholastic’s curriculum publishing and teaching resources operations develop and distribute instructional materials directly to schools in the United States, primarily
purchased through school and district budgets. The Company's supplemental
publishing includesStates. These operations include reading improvement programs, individual paperbacks and collections and professional books designed for, and generally purchased by, teachers.
The Company's primary core product has been SCHOLASTIC LITERACY
PLACE(R), its K to 6 basal textbook reading program.
In April 2001, the Company announced its decision to focusfocuses its supplemental and core curriculum publishing efforts on reading improvement materials. As partmaterials, most of this focus
onwhich use technology to support learning. Scholastic’s reading improvement programs the Company also announced in April 2001 its
decision not to update SCHOLASTIC LITERACY PLACE for any future state adoptions.
Scholastic's reading improvement programs include technology-based products such
as READ 180(R)are led by Read 180®, a reading intervention program for students in grades 4 to 812 reading at least two years below grade level; WIGGLEWORKS(R)level, and other technology-based products such as Wiggleworks®, which assists in teaching reading to students;students, and SCHOLASTIC READING COUNTS!(TM)Scholastic Reading Counts!™, which encourages reading through a school-managed incentive program. Other reading improvement products include READ XL(TM)Scholastic Read XL®, a reading improvement program for students in grades 6 to 8, which provides high-interest and increasingly demanding text to assist students reading one to three years below grade level; BUILDING LANGUAGE FOR LITERACY(TM)Building Language for Literacy™, a program of books and audio tapes to guide children through the critical pre-K to K stages of literacy development; and SCHOLASTIC PHONICS READING PROGRAM(TM)Scholastic Phonics Reading Program™, which is a beginning phonics instruction program for grades K to 1. In fiscal 2002, the Company acquired the assets of Tom Snyder Productions, Inc., a leading developer and publisher of interactive educational software.
The teaching resources group publishes professional books designed for and generally purchased by teachers and distributes individual paperbacks and collections to schools. Theschools and school districts. In addition, the Company also distributesprovides paperbacks and collections to literacy organizations. In fiscal 2002, the Company launched an on-line Teacher Store, which provides professional books and other educational materials to schools and teachers. Scholastic.com is a successful lineleading website for teachers and classrooms, offering multimedia teaching units, lesson plans, teaching tools and on-line activities. In fiscal 2002, the Company acquired Teacher’s Friend Publications, Inc., a leading producer and marketer of supplemental phonics products.
CLASSROOM MAGAZINES
materials that teachers use to decorate their classrooms.
Classroom Magazines
Scholastic is a leading publisher of classroom magazines. Teachers in grades K to 12 use these magazines as supplementary educational materials. The Company'sCompany’s 34 classroom magazines carry the Scholastic name, which reinforces the Company's
educational reputation with students, teachers and school administrators. The
Company believes that its reputation for publishing quality magazines,
maintaining an extensive magazine mailing list and having a large customer base
of teachers helps generate customers for its school book clubs and other
Scholastic products as well as for its magazines. At the same time, the Company
uses its school book club mailings to help secure additional circulation for its
classroom magazines.
The Company's 33 classroom magazines are designed to encourage students to read
and to supplement the school'sschool’s formal learning program by bringing subjects of current interest into the classroom. The magazines are designed to encourage students to read and also to cover diverse subjects, covered includeincluding English, reading, literature, math, science, current events, social studies and foreign languages. The most well
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known of the Company'sCompany’s domestic magazines are SCHOLASTIC NEWS(R)Scholastic News® and JUNIOR SCHOLASTIC(R)Junior Scholastic®.
Scholastic's
Scholastic’s classroom magazine circulation in the United States in fiscal 20012004 was more than 7 million. Approximately7.5 million, with approximately two-thirds of the circulation was in grades K to 6, with the balance in grades 7 to 12.6. In fiscal 2001,2004, teachers in over 60% of the elementary schools and in overapproximately 70% of the secondary schools in the United States used the Company'sCompany’s classroom magazines. The various classroom magazines are distributed either on a weekly, bi-weekly or monthly basis during the school year.
The majority of the magazines purchased are paid for with school funds, with teachers or students paying for the balance. Circulation revenue accounted for substantially all of the Company's classroom magazine revenues in fiscal 2001.
NON-FICTION AND REFERENCE PUBLISHING
2004.
Library Publishing
Scholastic is a leading publisher of quality children'schildren’s reference and non-fiction and
reference products and encyclopedias sold primarily to schools and libraries in the United States under the Grolier name.States. Products include printEncyclopedia Americana®, The New Book of Knowledge® and on-line
versions of ENCYCLOPEDIA AMERICANA(R), THE NEW BOOK OF KNOWLEDGE(R) and
CUMBRE(TM)Cumbre™, a Spanish language encyclopedia, as well as reference materials published under the Grolier® name. Grolier Online® provides subscriptions to reference databases for schools and qualitylibraries. The Company’s products also include non-fiction books published in the United States under the imprints Children'sChildren’s Press® and Franklin Watts.
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MEDIA, LICENSINGWatts®.
MEDIA, LICENSING AND ADVERTISING
(6.8% OF FISCAL 2001 REVENUES)
GENERAL
ADVERTISING
(6.1% of fiscal 2004 revenues)
General
The Company's MEDIA, LICENSING AND ADVERTISINGCompany’s Media, Licensing and Advertising segment includes the production and/or distribution of software in the United States of software, Internet services andStates; the production and/or distribution primarily by and through the Company'sCompany’s subsidiary, Scholastic Entertainment Inc. ("SEI"(“SEI”),; of programming and consumer products (including children'schildren’s television programming, videos, software, feature films, promotional activities and non-book merchandise).
PRODUCTION AND DISTRIBUTION, and advertising revenue; including sponsorship programs.
Production and Distribution
Through SEI, extendsSoup2Nuts Inc. (“S2N”) and the Company'sWeston Woods Studio, the Company creates and produces television programming, videos, feature films, software and branded websites. SEI builds consumer awareness and value for the Company’s publishing franchises by creating family-focused programming that form the basis for global branding campaigns. SEI generates revenue by exploiting programming assets globally across multiple media formats and managing global
brands based on Scholastic's strong publishing properties. SEI developsby developing and produces children's television programming, videos, software, feature films and
non-book products. SEI's multimedia programming also generates extensive
awareness for brand building and consumer product activities worldwide.
executing brand-marketing campaigns.
SEI has built a television media library of over 200 half-hours315 half-hour productions, including: CLIFFORD THE BIG RED DOG(TM)Clifford The Big Red Dog®, SCHOLASTIC'S THE MAGIC SCHOOL BUS(R)Clifford’s Puppy Days™, GOOSEBUMPS(R)The Magic School Bus®, ANIMORPHS(R)I Spy™, Goosebumps®, Animorphs®, Dear America® and DEAR AMERICA(R)The Baby-sitters Club®. These television series initially airedhave been sold in the United States and internationally. Since its debut, Clifford The Big Red Dog, an award-winning animated series based on PBS Kids, PBS, Fox Kid's NETWORK, Nickelodeonthe Company’s best-selling books by Norman Bridwell, has consistently been the top rated show with children age 5 and HBO,
respectively,under. A total of 65 episodes have been produced, and collectively havethe show has been licensed for broadcast in more than 50over 85 countries. In fall 2000,February 2004, SEI released Clifford’s Really Big Movie, a feature length film. During fiscal 2004, SEI completed production of 25 episodes of its new series Clifford’s Puppy Days, a Clifford brand extension, which launched CLIFFORD THE BIG RED DOG, a new animated
television seriesin September 2003. Also in fiscal 2004, SEI produced 13 additional episodes of I Spy™, based on the Company's best-selling literary classics by
Norman Bridwell which were first published in 1963. Since its launch, this award
winning series, nominated for five Emmys, has become a top rated show on PBS
Kids. In addition to the original 40 episodes, PBS Kids has ordered 25 new
episodes and CLIFFORD THE BIG RED DOG will begin airing in markets outside of
North America in fiscal 2002. Other SEI programming initiatives for fiscal 2002
include the launch of 26 episodes of I SPY(TM) on HBO, based on the Company'sCompany’s best-selling book series, and the launchcommenced production of 65 episodes of its original television series, Maya & Miguel, which is expected to be launched on PBS Kids in the international marketfall of 262004.
In fiscal 2002, the Company acquired S2N, an award-winning producer of animated television and web programming, as part of the acquisition of the assets of Tom Snyder Productions, Inc. S2N has produced over 60 half-hour episodes of HORRIBLE HISTORIES(TM),television programming, primarily of animated shows for adults, such as Home Movies™ and Hey Monie.
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Weston Woods Studios creates audiovisual adaptations of classic children’s picture books, such as Where the Wild Things Are, Chrysanthemum and Make Way for Ducklings, that are initially produced for the school and library market as a supplemental educational resource. SEI has repackaged 16 titles for sale to the consumer market under the Scholastic Video Collection banner. Weston Woods Studios has received numerous awards, including five Andrew Carnegie Medals for Excellence in Children’s Video and an animated adaptation of Scholastic UK's
best-selling book series.
BRAND MARKETING AND CONSUMER PRODUCTS
Academy Award nomination.
Brand Marketing and Consumer Products
SEI creates and develops global branding campaigns for Scholastic properties. For
example, the successful launchproperties in order to extend and strengthen Scholastic’s consumer connection with parents, children and teachers. The Clifford The Big Red Dog series is part of CLIFFORD THE BIG RED Dog on PBS was coupled
with a comprehensive licensing program to support the property, making Cliffordbrand marketing campaign, including home entertainment, consumer products, publishing extensions, such as television tie-in books, interactive media and consumer promotions, supporting Clifford’s position as a leading pre-school brand and generating additional sales of Scholastic's
Clifford books, toys, videos, CD-ROMs and consumer products.brand. In connection with its branding campaigns, SEI has received numerous marketing and licensing awards, and has partnered with industry leaders inincluding a 2003 LIMA award for Clifford as “Best Character License.”
In addition to licensing rights for consumer promotions. In addition,products, SEI creates, manufactures and distributes high-quality consumer products primarily based on Scholastic'sScholastic’s literary properties, such as a line of upscale plush toys and wooden puzzles based on CLIFFORD THE BIG RED DOG(TM)Clifford The Big Red Dog®, SCHOLASTIC'S THE MAGIC
SCHOOL BUS(R)The Magic School Bus®, THE REAL MOTHER GOOSE(TM)The Real Mother Goose™ and STELLALUNA(TM)Stellaluna™. The products are available through independent toy/gift stores, specialty chains, department stores, mail order catalogs and bookstores, as well as through Scholastic's
schoolScholastic’s school-based book clubs, schoolschool-based book fairs and continuity programs. SEI also developed, in conjunction with Toys “R” Us, a major toy retailer, a line of Scholastic-branded learning toys that are merchandised in Scholastic also
producesboutiques at Toys “R” Us stores in the United States and markets videos to the school market through Weston Woods, a
producer of videos based on high quality children's books.
CONSUMER SOFTWARE
Canada.
Consumer Software
Scholastic sellsdistributes original and licensed consumer software, handheld and console products and accessories and DVD’s for grades K to 8 through its school-based software clubs, schoolschool-based book clubs, school-based book fairs and school book fairs.continuity programs, as well as the school-based library/teacher market. The Company acquires software and multi-media products for distribution in all of these channels through a combination of licensing, purchases of product from software publishers and internal development. Scholastic's schoolScholastic’s school-based software clubs are marketed onin the same basismanner as the Company's schoolits school-based book clubs. The Company's internally
developedCompany’s original CD-ROM titles includinginclude the award-winning series of Clifford®, I SPY(TM)
CD-ROMs, are also sold through trade channels.
SCHOLASTIC.COM
Scholastic.com is a leading website for teachersSpy™ and classrooms and an
award-winning destination for children. For teachers, Scholastic.com offers
multimedia teaching units, lesson plans, teaching tools and on-line activities.
For children, Scholastic.com offers sites with favorite characters, such as
HARRY POTTER(TM), CLIFFORD THE BIG RED DOG(TM), I Spy(TM) and ANIMORPHS(TM)Math Missions.
Scholastic.com was the winner of the 2000 Webby Award for "Best Kid's Website".
In fiscal 2002, the Company will expand the use of its Internet platform to
generate e-commerce sales to both teachers and parents with the introduction of
book club on-line ordering and two new on-line stores dedicated to serving
teachers in the school and parents/families at home.
ADVERTISING
Advertising
Certain of the Company'sCompany’s magazine properties generate advertising revenues as their primary source of revenue, including INSTRUCTOR(TM)Instructor™, SCHOLASTIC EARLY
CHILDHOOD TODAY(TM)Scholastic Administrator™, Instructor New Teacher®, Scholastic Early Childhood Today™ and COACH AND ATHLETIC DIRECTOR(TM)CoachandAthletic Director™, which are directed to teachers and education professionals and are distributed during the academic year. Total circulation for these magazines was approximately 315,000500,000 in fiscal 2001.2004. Subscriptions for these magazines are solicited primarily by direct mail. SCHOLASTIC PARENT AND CHILD(R)Scholastic Parent and Child® magazine, which is directed at parents and distributed through schools and child carechildcare programs, had a paid circulation of approximately 1.2 million in fiscal 2001.2004. These magazines carry paid advertising, advertising for Scholastic'sScholastic’s other products and paid advertising for clients that sponsor customized programs.
Other
Also included in this groupsegment are: Scholastic In-School Marketing, Partners, which develops sponsored educational materials and supplementary classroom programs in partnership with corporations, government agencies and nonprofit organizations; Back to Basics Toys®, acquired in August 2003, a direct-to-home catalog business specializing in children’s toys (“Back to Basics”); and Quality Education Data, which develops and
6
markets databases and provides research and analysis focused on teachers, schools and education.
INTERNATIONAL
(15.1% OF FISCAL 2001 REVENUES)
GENERAL
INTERNATIONAL
(16.6% of fiscal 2004 revenues)
General
The INTERNATIONALInternational segment includes the publication and distribution of products and services outside the United States [GRAPHIC]4 [LOGO]
Company'sCompany’s international operations, and its domestic export and foreign rights businesses.
Internationally,
Scholastic has long-established operations in Canada, the United Kingdom, Australia and New Zealand and newer operations in Argentina, Hong Kong, India, Ireland and Mexico. With the acquisition of Grolier, the Company expanded into the direct-to-home book clubcontinuity business primarily serving children age five and under in Canada, the United Kingdom and Australia, and also added the publication and distribution of reference products and services outside the United States, principally in Southeast Asia.
Scholastic's
Scholastic’s operations in Canada, the United Kingdom, Australia and New Zealand generally mirror Scholastic'sits United States business model. Each of these international operations havehas original trade and educational publishing programs, distribute children'sdistributes children’s books, software and other materials through school-based book clubs, school-based book fairs and trade channels, distributedistributes magazines and offeroffers on-line services. Each of these operations has established its own export and foreign rights licensing programs and is a licensee of book tie-ins for major media properties. Original books published by each of these operations have received awards of excellence in children's literature both domestically
and internationally.
CANADA
children’s literature.
Canada
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children'schildren’s books, is the largest school-based book club and school-based book fair operator in Canada and is one of the leading suppliers of original or licensed children'schildren’s books to the Canadian trade market. Since 1965, Scholastic Canada has produced quality Canadian-authored books and educational materials. Grolier Canada is a leading operator of direct-to-home book clubscontinuity programs in Canada.
UNITED KINGDOM
United Kingdom
Scholastic UK, founded in 1964, is the largest school-based book club and school-based book fair operator and is a leading children'schildren’s publisher in the United Kingdom, where its trade books appear frequently on children'schildren’s bestseller lists. Scholastic UK is the largest school book club and school book fair operator in
the United Kingdom. Scholastic UK's best selling original book series, HORRIBLE
HISTORIES(TM), is being adapted for television by SEI. Scholastic UK also publishes five monthly magazines for teachers and supplemental educational materials, including professional books. Grolier UK is a leading operator of direct-to-home book clubscontinuity programs in the United Kingdom.
AUSTRALIA
In fiscal 2003, the Company entered into a joint venture with The Book People Ltd. (together with its affiliates, “The Book People”), a direct marketer of books in the United Kingdom, to distribute books to the home under the Red House® name and through schools under the School Link™ name.
Australia
Scholastic Australia, founded in 1968, is the leading publisher and distributor of children'schildren’s educational materials in Australia and has the largest schoolschool-based book club and book fair operation in the country, reaching approximately 90% of the country’s primary schools. Scholastic Australia's imprints include: Scholastic Press, Omnibus
Books and Margaret Hamilton Books. Grolier Australia is a leading operator of
direct-to-home book clubs in Australia.
NEW ZEALAND
New Zealand
Scholastic New Zealand, founded in 1964, is the largest children'schildren’s book publisher and the leading book distributor to schools in New Zealand. Through its schoolschool-based book clubs and school book fairs, Scholastic New Zealand reaches approximately 90% of the country'scountry’s primary schools.
SOUTHEAST ASIA
Grolier's Southeast Asian
Asia
The Company’s Asia operations primarily sell English language Grolier reference materials and local language product through a network of approximately 2,500over 2,000 independent door-to-door sales representatives in India, Indonesia, Malaysia, the Philippines,
7
Singapore, Taiwan and Thailand. CommencingIn India, the Company also operates school-based book clubs and book fairs and publishes original titles in fiscal 2002, this
network will also test market booksthe English and software from Scholastic's other
operations.
OTHER INTERNATIONAL OPERATIONS
TheHindi languages.
Latin America
In Latin America, the Company has launched operations in Mexico, (1994), India (1997), Ireland
(1998)Argentina and Argentina (1999).Puerto Rico. These businesses principally distribute through
school book fairs and/or school book clubs, books and educational materialsmaterial published by Scholastic's other operationsScholastic, as well as merchandise from other publishers.publishers, through school-based book clubs and book fairs. In fiscal 1999,Puerto Rico, Scholastic India began its own Hindidistributes Spanish language reference materials though a network of independent door-to-door sales representatives.
Foreign Rights and English
language original publishing program.
FOREIGN RIGHTS AND EXPORT
Export
The Company licenses the foreign-language rights to selected Scholastic titles to other publishing companies around the world in over 2537 languages. The Company'sCompany’s export business sells Scholastic books and products in regions of the world not otherwise serviced by Scholastic subsidiaries. In 1998, the Company
established Scholastic Hong Kong Ltd. to handle export sales in the Asia-Pacific
region.
MANUFACTURING
MANUFACTURING AND DISTRIBUTION
DISTRIBUTION
The Company'sCompany’s books, magazines, software and other materials and products are manufactured by third parties under contracts entered into through arm's length negotiationarm’s-length negotiations or competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volume in exchange for favorable pricing terms. Paper is purchased from third party sources. The Company does not anticipate any difficulty in continuing to satisfy its manufacturing and paper requirements.
In the United States, the Company mainly processes and fulfills schoolschool-based book club, trade, supplementalcurriculum publishing, reference and core,non-fiction products and export orders primarily from its primary warehouse and distribution facility in Jefferson City, Missouri. Magazine orders are processed at the Jefferson City Missouri facility and are shipped directly from printers. TheIn fiscal 2003, the Company ships school-based book club originated continuity
orders primarily from its warehouse andacquired a distribution facility in Des Plaines,
IllinoisMaumelle, Arkansas (the “Maumelle Facility”), which serves as the Company’s primary packaging and direct-to-home originatedfulfillment center for its continuity orders through a third party
arrangement. Grolier non-fiction and reference orders are processed and
fulfilled at the Company's Danbury facility.programs. In connection with its trade business, the Company generally outsources certain services, including invoicing, billing, returns processing and collection services, and may also shipships product directly from printers to customers. SchoolSchool-based book fair orders are fulfilled through a [LOGO] [GRAPHIC]5
Company'sCompany’s international schoolschool-based book club, school-based book fair, trade, continuity businesses and educational operations use similar distribution systems.
SEASONALITY
SEASONALITY
The Company'sCompany’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company'sCompany’s business is highly seasonal. As a consequence, the Company'sCompany’s revenues in the first and third quarters of the fiscal year generally are generally lower than its revenues in the other two fiscal quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are proportionately largergreatest in the second quarter of the fiscal year, while revenues from the sale of instructional materials are the highest in the first quarter. In the June through October time period, theThe Company experiences negative cash
flow due toa substantial loss from operations in the seasonality of its business. As a result of the Company's
business cycle, seasonal borrowings have historically increased during June,
July and August, have generally peaked in September or October, and have been at
their lowest point in May.
COMPETITION
first quarter.
8
COMPETITION
The markets for children'schildren’s educational and entertainment materials are highly competitive. Competition is based on the quality and range of educational
materials made available, price, promotion, customer service and distribution channels. Competitors include numerous other book, textbook, library, reference material and supplementary text publishers, distributors and other resellers (including over the Internet) of children'schildren’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), television networks and cable networks, publishers of computer software and distributors of products and services on the Internet. In the United States, competitors also include another national school book
club operator as well as regional and local schoolschool-based book fair operators, including bookstores. Competition may increase further to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels.
EMPLOYEES
At May 31, 2001, the Company employed approximately 6,700 people in full-time
jobs and 1,000 people in hourly or part-time jobs in the United States and
approximately 2,500 people internationally. The number of part-time employees
fluctuates during the year because significant portions of the Company's
business are closely correlated with the school year. The Company believes that
relations with its employees are good.
COPYRIGHT
COPYRIGHT AND TRADEMARKS
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'sCorporation’s principal U.S. operating subsidiary in the United States, has registered and/or has pending applications to register its trademarks in the United States its trademarks 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'sCorporation’s international subsidiaries have also registered trademarks in the name of Scholastic Inc. for the names of their respective book clubs and magazines.magazines in their respective countries. Although individual book titles are not subject to trademark protection, Scholastic Inc. has registered and/or has pending applications to register trademarks in the United States and in a number of countries for the names of certain series of books and consumer products, such as THE MAGIC SCHOOL BUS, ANIMORPHS, CLIFFORD THE BIG RED DOGThe Magic School Bus and HORRIBLE
HISTORIES.Clifford The Big Red Dog. GROLIER is a registered trademark in the United States and a number of countries where itthe Company conducts business. All of the Company'sCompany’s publications, including books, magazines and software, are subject to copyright protection. Where applicable, the Company consistently copyrightsfiles copyright registrations for its magazines, books and software in the name of Scholastic Inc., except for Grolier's publications,
which currently continue to be copyrighted under the name or one of Grolier
Incorporated or its wholly-owned subsidiaries. Copyrights and trademarks are vigorously defended by the Company, and as necessary, outside counsel may be retained to assist in such protection.
ITEM
EMPLOYEES
At May 31, 2004, the Company employed approximately 7,200 people in full-time jobs and 1,000 people in part-time jobs in the United States and approximately 2,600 additional people internationally. The number of part-time employees fluctuates during the year because significant portions of the Company’s business are closely correlated with the school year. On May 28, 2003, the Company announced a reduction in its global work force of approximately 400 positions, the majority of which took effect in the first quarter of fiscal 2004. The Company believes that relations with its employees are good.
9
Executive Officers
Each of the following individuals serves as an executive officer of Scholastic until the first meeting of the Corporation’s Board of Directors following the Annual Meeting of Stockholders of Scholastic Corporation in September 2004 and until their successors have been elected or appointed and qualified or until such officer’s earlier resignation or removal. Employed by Name Age Registrant Since Position(s) for Past Five Years Richard Robinson 67 1962 Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975). Mary A. Winston 42 2004 Executive Vice President and Chief Financial
Officer (since 2004). Prior to joining the Company, Vice President and Controller (2003–2004) and Vice President and Treasurer (2002–2003) of Visteon Corporation, a global automotive supplier; and between 1995 and 2002, various senior financial management roles at Pfizer and Warner-Lambert, which merged in June 2000, including Vice President, Global Financial Operations for the pharmaceutical business (2000–2002) and Vice President, Finance and Administration (1998–2000). Deborah A. Forte 50 1983 Executive Vice President (since 1996), President, Scholastic Entertainment Inc. (since 2001), and Division Head, Scholastic Entertainment Inc. (1995–2001). Donna M. Iucolano 40 2000 Executive Vice President (since 2000), President, e-Scholastic (since 2003), President, Scholastic Internet Group (2001–2003), Executive Vice President, Scholastic Internet Group (2000–2001); and prior to joining the Company, positions including Senior Vice President (2000) and Vice President (1998–2000) at
1-800-FLOWERS.COM (1994–2000), where she served as the chief e-business strategist. Linda B. Keene 52 2004 Executive Vice President, Marketing (since 2004); and prior to joining the Company, a director of Scholastic Corporation (1999–2004), principal of Waterford Marketing Group, an independent consulting agency for marketing and organizational issues (2001–2004), and Vice President of Market Development for American Express Financial Advisors (1994–2001). Barbara A. Marcus 53 1983 Executive Vice President (since 1991), President, Children’s Book Publishing and Distribution (since 1999) and Executive Vice President, Children’s Book Publishing and Distribution (1991–1999).
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Employed by Name Age Registrant Since Position(s) for Past Five Years Margery W. Mayer 52 1990 Executive Vice President (since 1990), President, Scholastic Education (since 2002) and Executive Vice President, Learning Ventures (1998–2002). Hugh R. Roome 52 1991 Executive Vice President (since 1996), President, International Group (since 2001), Executive Vice President, International (2000–2001) and Executive Vice President, Magazine Group (1996–2000). Richard M. Spaulding 67 1960 Director (since 1974) and Executive Vice President, Marketing (since 1974). Judith A. Corman 65 1999 Senior Vice President, Corporate Communications and Media Relations (since 1999). Charles B. Deull 44 1995 Senior Vice President (since 1995), General Counsel (since 1999), Senior Vice President, Legal and Business Affairs (1995–1999) and Corporate Secretary (since 1996). Ernest B. Fleishman 67 1989 Senior Vice President, Education and Corporate Relations (since 1989). Beth Ford 40 2000 Senior Vice President, Global Operations and Information Technology (since 2002), Senior Vice President, Global Operations (2000–2002); and prior to joining the Company, Director, Supply Chain at Pepsi Bottling Group/Pepsico (1997–2000). Larry V. Holland 45 1994 Senior Vice President, Corporate Human Resources and Employee Services (since 1997). Heather J. Myers 39 2003 Senior Vice President, Strategic Planning & Business Development (since 2003). Prior to joining the Company, Independent Media & Entertainment Consultant (2002-2003); and from 1995-2001, various positions at Vivendi Universal (formerly Seagram Company Ltd.), including Executive Vice President/General Manager, Universal Global e, Universal Music Group (1999-2001); Vice President, Acquisition Integration of PolyGram, Universal Music Group (1998-1999); and Senior Director, Corporate Development, Universal Studios, Inc. (1997-1998). Judith A. Newman 46 1993 Senior Vice President and President, Book Clubs and Scholastic At Home (since 2004), Senior Vice President, Book Clubs (1997–2004) and Vice President, Marketing (1993–1997). Karen A. Maloney 47 1997 Vice President and Corporate Controller (since 1998).
11
Available Information
The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are accessible at the Investor Relations portion of its website, www.scholastic.com, by clicking on the “SEC Filings” tab and are available, without charge, as soon as reasonably practicable after such reports are electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The Company also posts on the “Calendar and Presentations” portion of its website the dates of its upcoming financial press releases, telephonic investor calls and investor presentations at least five days prior to the event. The Company’s investor calls are open to the public and remain available through the Company’s website for at least one year thereafter.
Item 2 o PROPERTIES
| Properties
The Company maintains its principal offices in the metropolitan New York area, where it owns or leases approximately 600,000 square feet of space. The Company also owns or leases approximately 1.71.6 million square feet of office and warehouse space for its National Service Operationprimary warehouse and distribution facility located in the Jefferson City, Missouri area and approximately 400,000 square feet of office and
warehouse space related to its Grolier operations in Danbury, Connecticut and
other United States locations.area. In addition, the Company owns or leases approximately 2.42.7 million square feet of office and warehouse space in over 80 facilities in the United States, principally for Scholastic Book Fairs.
In fiscal 2003, the Company acquired the Maumelle Facility, consisting of a 500,000 square foot main floor and a 246,000 square foot mezzanine. This facility serves as the Company’s primary packaging and fulfillment center for its continuity programs.
Additionally, the Company owns or leases approximately 1.31.2 million square feet of office and warehouse space in over 90100 facilities in Canada, the United Kingdom, Australia, New Zealand, Southeast Asia and elsewhere around the world for its international businesses.
The Company considers its properties adequate for its presentcurrent needs. With respect to the Company'sCompany’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'sCompany’s obligations under its leases, see Note 4 of Notes to Consolidated Financial Statements.
ITEMStatements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Item 3 o LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was
[GRAPHIC]6 [LOGO]
served and filed on August 13, 1997. The Complaint was styled as a class action,
In re Scholastic Corporation Securities Litigation, 97 Civ.II 2447 (JFK), on
behalf of all persons who purchased Company common stock from December 10, 1996
through February 20, 1997. The Complaint alleged, among other things, violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder, resulting from purportedly materially false and misleading
statements to the investing public concerning the financial condition of the
Company. Specifically, the Complaint alleged misstatements and omissions by the
Company pertaining to adverse sales and returns of its popular Goosebumps book
series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001, the
Court of Appeals for the Second Circuit reversed the dismissal of the Second
Amended Consolidated Complaint and remanded the case for further proceedings.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court of New York County
of New York against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. In August 2000, the
Court of Appeals for the Second Circuit vacated the dismissal and remanded the
case for further proceedings. The second action, captioned Parachute Press, Inc.
v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc. (Index No. 99/600507), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court
of New York County of New York. In its two complaints and its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of the total of approximately $36.1
million of advances over the term of the contract, of which approximately $15.3
million had been paid at the time the first Parachute litigation began, and
payment of royalties set-off by Scholastic against amounts claimed by the
Company. On July 21, 2000, the Company and Parachute each filed motions for
partial summary judgement in the pending state court cases and on May 18, 2001,
each party filed motions for summary judgement in the federal court case. The
Company is seeking declaratory relief and damages for, among other claims,
breaches of contract, fraud and acts of unfair competition. Damages sought by
the Company include repayment by Parachute of a portion of the $15.3 million
advance already paid. The Company intends to vigorously defend its position in
these proceedings. The Company does not believe that this dispute will have a
material adverse effect on its financial condition.
In addition to the above actions, various| Legal Proceedings
Various claims and lawsuits arising in the normal course of business are pending against the Company. The results of these proceedings are not expected to have a material adverse effect on the Company'sCompany’s consolidated financial position or results of operations.
ITEM
Item 4 o SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to the vote of security holders, through the solicitation of proxies or otherwise.
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12
Part II
ITEM 5 o MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock
Item 5 | | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Scholastic Corporation’s common stock, par value $0.01 per share (the “Common Stock”), is traded on the NASDAQ National Market System under the symbol SCHL. TheScholastic Corporation’s Class A Stock, par value $0.01 per share (the “Class A Stock”), is convertible into Common Stock on a share-for-share basis. There is no established public trading market for the Class A Stock. The table below sets forth, for the periods indicated, the quarterly and one-year high and low selling prices on the NASDAQ National Market System for the Company's Common Stock. On December 14, 2000, the Company's Board
of Directors authorized a 2-for-1 Stock Split (the "2-for-1 Stock Split") in the
form of a 100% stock dividend on its Common Stock and Class A Stock, payable
January 16, 2001 to holders of record as of December 29, 2000. Common Stock
prices prior to the effective date of the 2-for-1 Stock Split have been adjusted
in the following table to give retroactive effect to the stock split.
FOR FISCAL YEARS ENDED MAY 31,
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
FIRST QUARTER $ 32.98 $ 26.59 $ 26.88 $ 19.81
- -------------------------------------------------------------------------------
SECOND QUARTER 40.31 31.45 27.81 19.50
- -------------------------------------------------------------------------------
THIRD QUARTER 48.56 35.38 35.38 24.00
- -------------------------------------------------------------------------------
FOURTH QUARTER 45.00 35.13 28.50 21.75
- -------------------------------------------------------------------------------
YEAR 48.56 26.59 35.38 19.50
- -------------------------------------------------------------------------------
The Company
For fiscal years ended May 31, First Quarter $ 32.25 $ 26.99 $ 46.45 $ 33.62 Second Quarter 35.12 28.38 48.89 40.83 Third Quarter 35.39 31.55 45.02 23.01 Fourth Quarter 32.42 26.65 32.68 23.00
Scholastic Corporation has not paid any cash dividends since its initial public offering in February 1992 and has no current plans to pay any dividends on itsthe Class A Stock or the Common Stock. In addition, certain of the Company'sCompany’s credit facilities restrict the payment of dividends. See Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” for further information.
The number of holders of record of Class A Stock and Common Stock as of August 10,
2001July 26, 2004 were 3 and approximately 9,200,13,100, respectively.
13
Item 6 | Selected Financial Data
Certain prior year amounts have been reclassified to conform with the present year presentation, and share amounts have been adjusted (Amounts in millions, except per share data) For fiscal years ended May 31, 2004 2003 2002 2001 2000 Statement of Income Data: Total revenues $ 2,233.8 $ 1,958.3 $ 1,917.0 $ 1,962.3 $ 1,402.5 Cost of goods sold 1,080.0 882.1 852.1 899.7 692.8 Cost of goods sold – Continuity charges (1) 6.8 — — — — Cost of goods sold – Special Literacy Place and
other charges (2) — — — 72.9 — Selling, general and administrative expenses 869.7 826.3 771.7 773.1 557.6 Selling, general and administrative expenses –
Continuity charges (1) 15.2 — — — — Bad debt expense 88.3 72.3 68.7 75.5 20.5 Bad debt expense – Continuity charges (1) 2.0 — — — — Other operating costs: Depreciation and amortization 53.5 46.1 36.6 42.4 24.1 Special severance charges (3) 3.3 10.9 — — — Litigation and other charges (4) — 1.9 1.2 — 8.5 Operating income 115.0 118.7 186.7 98.7 99.0 Other income (expense) (5) 8.0 2.9 (2.0) — — Interest expense, net 32.5 31.5 31.4 41.6 18.6 Earnings before Cumulative effect of accounting change 58.4 58.6 98.7 36.3 51.4 Cumulative effect of accounting change
(net of income taxes) (6) — — (5.2) — — Net income 58.4 58.6 93.5 36.3 51.4 Earnings per share before Cumulative effect
of accounting change: Basic $ 1.48 $ 1.50 $ 2.69 $ 1.05 $ 1.54 Diluted $ 1.46 $ 1.46 $ 2.51 $ 1.01 $ 1.48 Earnings per share: Basic $ 1.48 $ 1.50 $ 2.55 $ 1.05 $ 1.54 Diluted $ 1.46 $ 1.46 $ 2.38 $ 1.01 $ 1.48 Weighted average shares outstanding – basic 39.4 39.1 36.7 34.7 33.4 Weighted average shares outstanding – diluted 40.1 40.1 40.1 36.1 37.1 Balance Sheet Data: Working capital $ 485.3 $ 390.5 $ 454.6 $ 382.3 $ 253.9 Cash and cash equivalents 17.8 58.6 10.7 13.8 9.0 Total assets 1,755.8 1,801.0 1,629.6 1,501.8 983.2 Long-term debt 492.5 482.2 525.8 585.3 241.1 Total debt 516.6 635.9 549.3 608.6 624.3 Total stockholders’ equity 856.0 772.6 718.9 493.7 430.0 forto reflect a 100% stock dividend in the form of a 2-for-1 stock split on the Class A Stock Split.
- -------------------------------------------------------------------------------
(1) In fiscal 2001, the Company announced its decision not to update SCHOLASTIC
LITERACY PLACE(R), which resulted in a $72.9 special charge recorded in
cost of goods sold. Net income and earnings per diluted share excluding the
$72.9 pre-tax cost of goods sold-Special Literacy Place and other charges
would have been $82.9 and $2.22, respectively.
(2) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $1.63,
respectively.
(3) Fiscal 1998 net income and earnings per share excluding the $11.4 pre-tax
non-recurring charges and the non-operating gain of $10.0 would have been
$24.5 and $0.75, respectively.
[GRAPHIC]8 [LOGO]
Common Stock paid on January 16, 2001.
(1) | In fiscal 2004, the Company recorded pre-tax charges of $25.4, or $0.41 per diluted share, in connection with the review of its continuity business. These charges have been recorded primarily as components of Cost of goods sold; Selling, general and administrative expenses; and Bad debt expense. | ||
(2) | In fiscal 2001, the Company decided not to update Scholastic Literacy Place, which resulted in a pre-tax special charge of $72.9, or $1.20 per diluted share, recorded in Cost of goods sold. | ||
(3) | In fiscal 2004 and 2003, the Company recorded pre-tax Special severance charges of $3.3, or $0.05 per diluted share, and $10.9, or $0.18 per diluted share, respectively, relating to a reduction in its work force announced in May 2003 but implemented in those periods. | ||
(4) | The fiscal 2003 pre-tax charge of $1.9, or $0.03 per diluted share, relates to the settlement of a securities lawsuit initiated in 1997. The fiscal 2002 pre-tax charge of $1.2, or $0.02 per diluted share, and $6.7 of the fiscal 2000 charges, relate to the settlement of a lawsuit initiated in 1995. | ||
(5) | In fiscal 2004, the Company recorded a pre-tax net gain of $8.0, or $0.13 per diluted share, in connection with the early termination of a sublease by one of its tenants. In fiscal 2003, the Company sold a portion of an equity investment, resulting in a pre-tax gain of $2.9, or $0.05 per diluted share. In fiscal 2002, the Company wrote off an equity investment, resulting in a pre-tax loss of $2.0, or $0.03 per diluted share. | ||
(6) | In fiscal 2002, the Company adopted Statement of Position No. 00-2, “Accounting by Producers and Distributors of Films,” which resulted in an after-tax charge of $5.2, or $0.13 per diluted share, recorded as a Cumulative effect of accounting change. |
14
Item 7 | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
Scholastic is a global children'schildren’s publishing and media company. The Company hasdistributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries and television networks. The Company categorizes its businesses into four operating segments: Children'sChildren’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the Company'sCompany’s domestic operations); and International. Such segmentInternational. This classification reflects the nature of the Company's products and services consistent with how the method by which the Company’s chief operating decision makerdecision-maker assesses operating performance and allocates resources.
On December 14, 2000, the Company's Board of Directors authorized a 2-for-1
Stock Split in the form of a 100% stock dividend on its Common Stock and Class A
Stock, effective January 16, 2001 to shareholders of record as of December 29,
2000. Stockholders of record received one additional share of Common Stock or
Class A Stock for each share held on the record date. All outstanding rights
under stock options and stock purchase plans to acquire the Company Common Stock
and under the Company's 5% Convertible Subordinated Debentures due 2005 were
adjusted to give effect to the 2-for-1 Stock Split.
All amounts reported regarding the Company's capital stock prior to the 2-for-1
Stock Split have been adjusted to give effect to the 2-for-1 Stock Split except
for the share information reported on the Consolidated Balance Sheets and the
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income financial statements.
Certain other prior year amounts have been reclassified to conform withto the current year presentation, including segment
classifications.presentation. The following discussion and analysis of the Company'sCompany’s financial position should be read in conjunction with the Company'sCompany’s Consolidated Financial Statements and the related Notes and Selected Financial Data included in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Overview and Outlook
Fiscal 2004 revenues increased 14.1% to over $2 billion as a result of revenue growth in each of the Company’s four operating segments. This revenue growth was principally attributed to growth in the Children’s Book Publishing and Distribution segment led by the record trade sales of Harry Potter and the Order of the Phoenix in the first quarter of the fiscal year, combined with growth in school-based book clubs and school-based book fairs. Revenue growth also benefited from increases in the Educational Publishing segment, led by strong sales of classroom libraries and Read 180, and higher International revenues, including the effect of currency changes.
Operating income declined by 3.1%, to $115.0 million, principally because strong operating profit improvements in Educational Publishing, International and the Company’s school-based book clubs and trade businesses included in the Children’s Book Publishing and Distribution segment were more than offset by profit deterioration in its continuity business. In response to weakness in its continuity business, including the impact of the National Do Not Call Registry legislation, the Company strategically reviewed the business, which resulted in charges of approximately $25 million.
For fiscal 2005, the Company’s goals include higher profits on lower revenues. These goals are based on: (1) revenue and profit growth in the school-based book clubs, school-based book fairs and non-Harry Potter front list trade components of the Children’s Book Publishing and Distribution segment, partially offsetting the revenue and profit impact from lower Harry Potter revenue in a year with no scheduled release of a new title in the series; (2) lower revenue and higher profit from the reorganized continuity business, as the Company strengthens its relationships with its most productive customers through product and service improvements; (3) growth in revenue and operating profit in its Educational Publishing segment, built on ongoing strength in reading improvement materials, including technology based products and classroom libraries; (4) continued growth in the International segment; and (5) achieving operating improvements and efficiencies, with a continued focus on generating free cash flow.
Critical Accounting Policies and Estimates
General:
The Company’s discussion and analysis of its financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management,
15
which affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes, prepublication costs, royalty advances, goodwill and other intangibles.
The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:
Revenue recognition:
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs – Revenue from school-based book fairs is recognized ratably as each book fair occurs.
Continuity Programs – The Company operates continuity programs whereby customers generally place a single order and receive multiple shipments of books and other products over a period of time. Revenue from continuity programs is recognized at the time of shipment or, in applicable cases, upon customer acceptance. Reserves for estimated returns are established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns. Actual returns could differ from the Company’s estimate. A one percentage point change in the estimated reserve for returns rate by product and media would result in an increase or decrease in operating income of approximately $0.5 million.
Trade – Revenue from the sale of children’s books for distribution in the retail channel primarily is recognized at the time of shipment, which generally is when title transfers to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns. Actual returns could differ from the Company’s estimate. A one percentage point change in the estimated reserve for returns rate would result in an increase or decrease in operating income of approximately $1.8 million.
Educational Publishing – For shipments to schools, revenue is recognized on passage of title, which generally occurs upon receipt by the customer. Shipments to depositories are on consignment. Revenue is recognized based on actual shipments from the depositories to the schools. For certain software-based products, the Company offers new customers installation and training. In such cases, revenue is recognized when installation and training are complete.
Toy Catalog – Revenue from the sale of children’s toys to the home through catalogs is recognized at the time of shipment, which is generally when title transfers to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is
16
available for showing or exploitation. Licensing revenue is recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
Magazine Advertising – Revenue is recognized when the magazine is on sale and available to the subscribers.
Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service.
For the fiscal years ended May 31, 2004, 2003 and 2002, no significant changes have been made to the underlying assumptions related to the revenue recognition policy or the methodology applied.
Accounts receivable:
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for returns are based on historical return rates and sales patterns. Allowances for doubtful accounts are established through the evaluation of accounts receivable agings and prior collection experience to estimate the ultimate collection of these receivables. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable agings, would result in an increase or decrease in operating income of approximately $1 million.
Inventories:
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based of its products.
Deferred promotion costs:
Deferred promotion costs represent direct mail and telemarketing promotion costs incurred to acquire customers in the Company’s continuity and magazine businesses. Promotional costs are deferred when incurred and amortized in the proportion that current revenues bear to estimated total revenues. The Company regularly evaluates the operating performance of the promotions over their life cycle based on historical and forecasted demand and adjusts the carrying value accordingly. All other advertising costs are expensed as incurred, except for certain direct marketing and telemarketing costs that are deferred as discussed above. A ten percentage point change in estimated direct mail and telemarketing revenues would affect operating performance, resulting in an increase or decrease in the amortization of promotional expense of approximately $0.9 million.
Prepublication costs:
The Company capitalizes the art, prepress, editorial and other costs incurred in the creation of the master copy of a book or other media (the “prepublication costs”). Prepublication costs are amortized on a straight-line basis over a three to seven year period. The Company regularly reviews the recoverability of the capitalized costs.
Royalty advances:
The Company records a reserve for the recoverability of its outstanding advances to authors based primarily upon historical earndown experience. Royalty advances are expensed as related revenues are earned or when future recovery appears doubtful.
Goodwill and other intangibles:
Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise. With regard to goodwill, these reviews require the Company to estimate the fair value of its identified reporting units. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of
17
the projected future cash flows of the units, which is compared to the carrying value of the net assets of the reporting units. With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value.
Other noncurrent liabilities:
All of the rate assumptions discussed below impact the Company’s calculations of its pension and post-retirement obligations. The rates applied by the Company are based on the portfolios’ past average rates of return and discussions with actuaries. Any change in market performance, interest rate performance, assumed health care costs trend rate, or compensation rates could result in significant changes in the pension and post-retirement obligations.
Pension obligations – Scholastic Corporation and certain of its subsidiaries have defined benefit pension plans covering the majority of their employees who meet certain eligibility requirements. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions,” in calculating the existing benefit obligations and net cost under the plans. These calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets, and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. A one percentage point change in the discount rate and expected long-term return on plan assets would result in an increase or decrease in operating income of approximately $2.2 million and $1.2 million, respectively. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment period.
Other post-retirement benefits – Scholastic Corporation provides post-retirement benefits, consisting of healthcare and life insurance benefits, to retired United States-based employees. A majority of these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. The post-retirement medical plan benefits are funded on a pay-as-you-go basis, with the Company paying a portion of the premium and the employee paying the remainder. The Company follows SFAS No. 106, “Employers’ Accounting for Post-Retirement Benefits Other than Pensions,” in calculating the existing benefit obligation, which is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the expected and accumulated benefit obligations and the service and interest cost components of net periodic post-retirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long term expected increase in medical claims. A one percentage point change in the discount rate and the medical trend rate would result in an increase or decrease in operating income of approximately $0.3 million and $0.2 million, respectively.
Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Corporation’s Board of Directors. The Audit Committee has reviewed the Company’s disclosure relating to the policies described in this report.
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
18
Results of Operations
($ amounts in millions, except per share data) For fiscal years ended May 31, 2004 $ %(1) $ %(1) $ %(1) Revenues: Children’s Book Publishing and Distribution 1,358.6 60.8 1,189.9 60.8 1,168.6 61.0 Educational Publishing 369.1 16.5 325.9 16.6 316.9 16.5 Media, Licensing and Advertising 136.4 6.1 123.5 6.3 129.8 6.8 International 369.7 16.6 319.0 16.3 301.7 15.7 Total revenues 2,233.8 100.0 1,958.3 100.0 1,917.0 100.0 Cost of goods sold (exclusive of depreciation) 1,080.0 48.3 882.1 45.0 852.1 44.4 Cost of goods sold – Continuity charges (2) 6.8 0.3 — — — — Selling, general and administrative expenses 869.7 38.9 826.3 42.2 771.7 40.3 Selling, general and administrative expenses – Continuity charges (2) 15.2 0.7 — — — — Bad debt expense 88.3 4.0 72.3 3.7 68.7 3.6 Bad debt expense – Continuity charges (2) 2.0 0.1 — — — — Depreciation and amortization 53.5 2.4 46.1 2.3 36.6 1.9 Special severance charges (3) 3.3 0.1 10.9 0.6 — — Litigation and other charges (4) — — 1.9 0.1 1.2 0.1 Operating income 115.0 5.1 118.7 6.1 186.7 9.7 Other income (expense) (5) 8.0 0.4 2.9 0.1 (2.0) 0.1 Interest expense, net 32.5 1.5 31.5 1.6 31.4 1.6 Earnings before income taxes and Cumulative
effect of accounting change 90.5 4.1 90.1 4.6 153.3 8.0 Cumulative effect of accounting change
(net of income taxes) (6) — — — — (5.2) 0.3 Net income 58.4 2.6 58.6 3.0 93.5 4.9 Earnings per share before Cumulative effect
of accounting change: Basic 1.48 1.50 2.69 Diluted 1.46 1.46 2.51 Earnings per share: Basic 1.48 1.50 2.55 Diluted 1.46 1.46 2.38
(1) | Represents percentage of total revenues. | ||
(2) | In fiscal 2004, the Company recorded pre-tax charges of $25.4, or $0.41 per diluted share, in connection with the review of its continuity business. These charges have been recorded primarily as components of Cost of goods | ||
(3) | In fiscal 2004 and 2003, the Company recorded pre-tax Special severance charges | ||
(4) | The fiscal 2003 pre-tax charge of $1.9, or $0.03 per diluted share, relates to the settlement of a securities lawsuit initiated in 1997. The fiscal 2002 pre-tax charge of $1.2, or $0.02 per diluted share, relates to the settlement of a lawsuit initiated in 1995. | ||
(5) | In fiscal 2004, the Company recorded a pre-tax net | ||
(6) | In fiscal 2002, the Company adopted Statement of Position No. 00-2, “Accounting by Producers and Distributors of Films,” which resulted in an after-tax charge of $5.2, or $0.13 per diluted share, recorded as a Cumulative effect of accounting change. |
19
Results of Operations – Consolidated
Revenues for fiscal 2004 increased 14.1%, or $275.5 million, to conform with the present
year presentation, including certain segment classifications, and share amounts
have been adjusted for the 2-for-1 Stock Split.
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(1) Represents percentage of total revenue.
(2) In$2,233.8 million, as compared to $1,958.3 million in fiscal 2001, the Company announced its decision not2003, due to update SCHOLASTIC
LITERACY PLACE, which resulted in a $72.9 special charge recorded in cost
of goods sold. Net income and earnings per diluted share excluding the
$72.9 pre-tax cost of goods sold-Special Literacy Place and other charges
would have been $82.9 and $2.22, respectively.
(3) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $1.63,
respectively.
[LOGO] [GRAPHIC]9
OVERVIEW
During the three-year period ended May 31, 2001, the Company reported revenue growth in each of $796.8the Company’s four operating segments. Children’s Book Publishing and Distribution segment revenue grew by $168.7 million, primarily from higher Harry Potter revenues, which increased approximately $125 million, substantially due to internal growth, led by the Children'sJune 21, 2003 release of Harry Potterand the Order of the Phoenix, the fifth book in the Harry Potter series. In fiscal 2003, revenues increased 2.2%, or $41.3 million, as compared to $1,917.0 million in fiscal 2002, primarily as a result of increased revenues in the Children’s Book Publishing and Distribution segment and the International segment of $21.3 million and $17.3 million, respectively. Businesses acquired in fiscal 2002 contributed approximately $58 million of incremental revenues fromto the operationsCompany in fiscal 2003.
Cost of Grolier Incorporated ("Grolier")goods sold as a percentage of revenues increased to 48.6%, which was acquired for $400.0including the Cost of goods sold – Continuity charges of $6.8 million, in cash on June 22, 2000.
During fiscal 2002, the Company plans to maintain its overall strategic
objective of strengthening and developing its businesses while continuing to
improve overall profitability, despite anticipated modest reductions2004, from 45.0% in overall
revenuesfiscal 2003, primarily due to lower Harry Potter(TM) and Scholastic Literacy Place(R) sales.
In the future, the Company will seek to build shareholder value through revenue
growth coupled with improved margins.
RESULTS OF OPERATIONS - CONSOLIDATED
Revenue in fiscal 2001 grew significantly, increasing $559.8 million or 39.9%,
from fiscal 2000. Revenue growth in fiscal 2000 was $237.0 million or 20.3%,
when compared to fiscal 1999. The revenue growth in fiscal 2001 was driven by
the addition of $378.0 million in Grolier revenues coupled with the Company's
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment growth (excluding Grolier)
of $142.3 million or 16.6%. This segment accounted for 62.3% of the Company's
revenues in fiscal 2001, versus 61.2% and 56.3% in fiscal 2000 and 1999,
respectively.
Gross profit margin improved to 52.2% for fiscal 2001, up approximately one half
of a percentage point from fiscal 2000, and up over one percentage point from
fiscal 1999. This trend reflects improved sales mix in the Company's CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION segment combined with the Company's continued
focus on cost containment in the manufacturing and distribution process and the
acquisition of Grolier, partially offset by the $72.9 million cost of goods
sold-Special Literacy Place and other charges (the "Special Charge") recorded in
the fourth quarter of fiscal 2001. This Special Charge is primarilyhigher costs related to the decision notrelease of Harry Potter and the Order of the Phoenix. In fiscal 2003, Cost of goods sold as a percentage of revenues increased to update SCHOLASTIC LITERACY PLACE.
45.0% from 44.4% in fiscal 2002, principally due to an unfavorable change in revenue mix.
Selling, general and administrative costs increasedexpenses as a percentage of salesrevenues decreased to 45.0% in fiscal 2001 versus 42.3% in fiscal 200039.6%, including the Selling, general and 42.3% in fiscal 1999 due
primarily to the inclusionadministrative – Continuity charges of Grolier costs, increases in information systems
costs, and consulting costs incurred as a result of the Grolier integration
effort. Depreciation and amortization increased from $24.1$15.2 million, in fiscal 20002004, from 42.2% in fiscal 2003. The decrease was primarily due to $42.4higher Harry Potter revenues without a corresponding increase in expenses. In fiscal 2003, Selling, general and administrative expenses as a percentage of revenues increased to 42.2% from 40.3% in fiscal 2002, primarily due to higher costs of general and health care insurance and other employee benefit costs.
Bad debt expense increased to $90.3 million, or 4.1% of revenues, including the Bad debt expense – Continuity charges of $2.0 million, in fiscal 2001,2004, as compared to $72.3 million, or 3.7% of revenues, in fiscal 2003. This increase was primarily dueattributable to higher bad debt expense from the amortizationCompany’s continuity programs, which are primarily included in the Children’s Book Publishing and Distribution segment. In fiscal 2003, Bad debt expense increased $3.6 million from $68.7 million, or 3.6% of goodwill and intangibles related to the acquisition of Grolier. Depreciation and
amortization is expected to declinerevenues, in fiscal 2002, due to growth in continuity programs.
Depreciation expense for fiscal 2004 increased by $7.6 million to $53.2 million, as compared to $45.6 million in fiscal 2003, primarily due to the adoptioncompletion of Statementinformation technology projects in the prior fiscal year. In fiscal 2003, depreciation expense increased by $10.0 million from $35.6 million in fiscal 2002. This increase was primarily due to incremental depreciation of Financial Accounting Standards No. 142 ("SFAS 142")$4.8 million related to the completion of capital projects, including information technology and Internet projects, and $2.7 million related to the expansion of facilities.
On May 28, 2003, the Company announced a reduction in its global work force of approximately 400 positions. This decision resulted in a Special severance charge of $10.9 million in fiscal 2003. In connection with that announcement, Special severance charges totalling $3.3 million were recorded in fiscal 2004 for employees notified in that fiscal year.
Litigation and other charges reflect a $1.9 million charge recorded in fiscal 2003 for the settlement of a securities lawsuit initiated in 1997, which represents the portion of the total settlement amount of $7.5 million that was not paid by the insurance carrier. In fiscal 2002, the Company recorded a $1.2 million charge for the settlement of a lawsuit filed in 1995, which represents the amount by which the settlement and related legal expenses exceeded the previously recorded liability.
The resulting operating income decreased by $3.7 million, or 3.1%, "Goodwillto $115.0 million, or 5.1% of
20
revenues, in fiscal 2004, as compared to $118.7 million, or 6.1% of revenues, in fiscal 2003. This decrease includes the effect of the continuity charges of approximately $25 million recorded in fiscal 2004, of which approximately $22 million was reflected in the results of the Children’s Book Publishing and Other Intangible Assets."Distribution segment. Including these continuity charges, operating profit in the Children’s Book Publishing and Distribution segment decreased by $19.6 million, primarily due to weaker results in the Company’s continuity business. The decrease in the continuity business was largely offset by improvements in the balance of the Children’s Book Publishing and Distribution segment and in each of the Company’s remaining three operating segments. Operating income for fiscal 20012003 decreased by $68.0 million, or 36.4%, from $186.7 million, or 9.7% of revenues, in fiscal 2002. This decrease was adversely affectedprimarily due to lower profits of $44.0 million in the Children’s Book Publishing and Distribution segment and the Special severance charge of $10.9 million recorded in fiscal 2003.
In fiscal 2004, the Company recorded $8.0 million in Other income, representing the net gain on the early termination of a sublease by one of its tenants. Other income was $2.9 million in fiscal 2003, representing a gain from the $72.9sale of a portion of an interest in a French publishing company. Other expense was $2.0 million Special Charge and decreased fromin fiscal 2000 by $0.3 million. Fiscal 2000
operating income2002, representing a charge for the write-off of an equity investment.
Net interest expense for fiscal 2004 increased over$1.0 million to $32.5 million, as compared to $31.5 million in fiscal 1999 by $21.12003. This increase was primarily due to $7.4 million despite the second
quarter fiscal 2000 non-recurring charges of $8.5 million, primarilyin interest expense related to the establishment$175.0 million of a litigation reserve. Excluding these non-recurring charges
and the Special Charge, operating income5% Notes due 2013 (the “5% Notes”) issued by Scholastic Corporation in fiscal 2001 would have increased to
$171.6 million from $107.5 million in fiscal 2000 and $77.9 million in fiscal
1999, representing 8.7%, 7.7% and 6.7% of total revenues in fiscal 2001, 2000
and 1999, respectively.
Operating margins have benefitted from favorable sales mix, the Company's cost
containment program and lower manufacturing costs.
NetApril 2003, partially offset by reduced interest expense increased to $41.6of $4.0 million in fiscal 2001 from $18.6
million in fiscal 2000 due primarily to the Grolier acquisition. Fiscal 2000repayment of $125.0 million of 7% Notes of Scholastic Corporation (the “7% Notes”) at maturity in December 2003 (see “Liquidity and Capital Resources”) and a $2.7 million reduction in interest expense was $0.4 million lower than in fiscal 1999on revolving credit agreements as a result of lower average debt levels.
utilization of these agreements due primarily to the issuance of the 5% Notes.
The Company'sCompany’s effective tax rates were 36.5%35.5%, 36.1%35.0% and 37.5%35.6% of earnings before taxes for fiscal years 2001, 20002004, 2003 and 1999,2002, respectively. The decrease from
In fiscal 1999 reflects2002, the impactCompany recorded an after-tax charge of lower relative state$5.2 million, which was reflected as a Cumulative effect of accounting change, as a result of its adoption of Statement of Position No. 00-2, “Accounting by Producers and local tax burdens.
Distributors of Films.”
Net income was $36.3$58.4 million, or 2.6% of revenues, in fiscal 2001, $51.42004, $58.6 million, or 3.0% of revenues, in fiscal 20002003 and $36.8$93.5 million, or 4.9% of revenues, in fiscal 1999.2002. The basic and diluted earnings per share of Class A Stock and Common ShareStock were $1.05$1.48 and $1.01,$1.46, respectively, in fiscal 2001, $1.542004, $1.50 and $1.48,$1.46, respectively, in fiscal 20002003 and $1.13$2.55 and $1.10,$2.38, respectively, in fiscal 1999. Diluted net income per share, excluding the non-recurring charges2002.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
The Company’s Children’s Book Publishing and the
Special Charge, would have been $2.22 in fiscal 2001, $1.63 in fiscal 2000, and
$1.10 in fiscal 1999.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION Distribution segment includes the publication and distribution of children'schildren’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs school-based book fairs and the trade channel.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 1,221.9 $ 857.9 $ 656.9
OPERATING PROFIT 217.0 170.6 109.6
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OPERATING MARGIN 17.8% 19.9% 16.7%
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
($ amounts in millions) 2004 2003 2002 Revenue $1,358.6 $1,189.9 $1,168.6 Operating profit 114.8 (1) 134.4 178.4 Operating margin 8.4 % 11.3 % 15.3 %
(1) | The fiscal 2004 operating profit includes the portion of the continuity charges related to this segment of approximately $22, reflected primarily in Cost of goods sold; Selling, general and administrative expenses; and Bad debt expense. |
Children’s Book Publishing and Distribution revenues accounted for 62.3%60.8% of the Company'sCompany’s revenues in fiscal 2001, 61.2%2004, 60.8% in fiscal 20002003 and 56.3%61.0% in fiscal 1999. These2002. In fiscal 2004, segment revenues increased 42.4%14.2%, or $168.7 million, to $1,358.6 million from $857.9$1,189.9 million in fiscal 20002003.
21
The fiscal 2004 segment revenue increase relates primarily to $1,221.9higher Harry Potter trade revenues of approximately $125 million and increases in school-based book club and school-based book fair revenues of $53.5 million and $18.0 million, respectively. These revenue increases were partially offset by a decline in continuity program revenues of $15.5 million as compared to the prior fiscal year. Excluding the direct-to-home continuity business described in the table below, segment revenues in fiscal 2004 increased by $177.2 million to $1,154.8 million, as compared to $977.6 million in fiscal 2001, which included $221.72003.
In fiscal 2003, segment revenues increased 1.8%, or $21.3 million, primarily from $1,168.6 million in fiscal 2002. Businesses acquired in fiscal 2002 contributed incremental revenues of $43.4 million to this segment in fiscal 2003. In fiscal 2003, revenues from school-based continuity programs and school-based book fairs increased $17.3 million and $14.5 million, respectively, compared to fiscal 2002. These increases were partially offset by lower Harry Potter trade revenues of approximately $30 million in fiscal 2003. Excluding the Grolier direct-to-home continuity business.
The Company's trade distribution channel accounted for 26.6% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION salesbusiness described in fiscal 2001, as compared to 26.0% in fiscal
2000 and 16.5% in fiscal 1999. Net trade sales increased $97.8 million to $320.8
million, or 43.8% over fiscal 2000, due to the success of HARRY POTTER, CLIFFORD
THE BIG RED DOG(R), and other book series including CAPTAIN UNDERPANTS(TM), DEAR
AMERICA(R) and I SPY(TM). Trade sales for fiscal 2000 increased by 105.7% due to
the success of HARRY POTTER, POKEMON(TM) and other series including DEAR
AMERICA, I SPY, and CAPTAIN
[GRAPHIC] 10 [LOGO]
UNDERPANTS. HARRY POTTER accounted for approximately $190.0 million, $90.0
million and $5.0 million of tradetable below, segment revenues in fiscal years 2001, 2000, and 1999,
respectively.
School2003 increased by $18.0 million from $959.6 million in fiscal 2002.
School-based book club revenues accounted for 26.9%29.7% of CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION salesChildren’s Book Publishing and Distribution revenues in fiscal 2001,2004, compared to 37.4%29.5% in fiscal 20002003 and 42.0%30.8% in fiscal 1999. Fiscal 20012002. In fiscal 2004, school-based book club revenues grewincreased by 2.4%15.3%, or $53.5 million, over fiscal 2000, reflecting higher order volume, partially offset2003, primarily due to an increase in the number of orders aided by lower revenue
per order, due in part to lower POKEMON sales. Fiscal 2000the July 2003 acquisition of selected assets of Troll Holdings, Inc., formerly a national school-based club operator and publisher (“Troll”). In fiscal 2003, school-based book club growth of 16.5%revenues declined by 2.2%, or $8.0 million, over fiscal 1999 reflected higher revenue per order and
more orders, helped by strong POKEMON sales.
Continuity revenues accounted for 24.7% of segment sales2002, primarily due to a decrease in fiscal 2001
comprised of 17.8% from the Grolier direct-to-home business and 6.9% from
school-based continuity programs. Revenues from school-based continuity programs
accounted for 9.4% and 11.2% of segment revenues in fiscal years 2000 and 1999,
respectively.
orders.
Revenues from school-based book fairs accounted for 21.8%25.4% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION salessegment revenues in fiscal 2001,2004, compared to 27.2%27.5% in fiscal 20002003 and 30.3%26.8% in fiscal 1999. Sales2002. In fiscal 2004, school-based book fair revenues increased by 5.5%, or $18.0 million, to $345.6 million, over fiscal 2003, primarily due to growth forin revenue per fair. In fiscal 2003, revenues from school-based book fairs of 14.3%
inincreased 4.6%, or $14.5 million, over fiscal 2001 was2002, primarily due to the continued growth in fair count and revenue per
fair, plus the introduction of the Reading Jamboree subscription program.
Operating incomeapproximately 7%.
In fiscal 2004, continuity revenues accounted for CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION increased
significantly during the past three fiscal years21.0% of segment revenues, as compared to $217.0 million or 17.8% of
sales25.3% in fiscal 2001, compared to $170.6 million or 19.9% of sales for fiscal
20002003 and $109.6 million or 16.7% of sales for fiscal 1999. Operating margin
decreased to 17.8%24.0% in fiscal 2001, due to2002. Revenues from the inclusiondirect-to-home continuity business were 15.0%, 17.8% and 17.9% of the lower margin
direct-to-home sales, partially offset by improved sales mix and cost
reductions. Operating margins improvedsegment revenues in fiscal 2000 largely2004, 2003 and 2002, respectively. Revenues from school-based continuity programs were 6.0%, 7.5% and 6.1% of segment revenues in fiscal 2004, 2003 and 2002, respectively. In fiscal 2004, revenues from the direct-to-home continuity business decreased 4.0%, or $8.5 million, to $203.8 million, from $212.3 million in fiscal 2003, principally as a result of sales mixlower net revenues generated through telemarketing, which was adversely affected by the implementation, effective October 1, 2003, of the National Do Not Call Registry legislation. Revenues from school-based continuity programs in fiscal 2004 decreased 7.9%, or $7.0 million, in revenues, as compared to fiscal 2003. In fiscal 2003, revenues from the direct-to-home continuity business increased 1.6%, or $3.3 million, from $209.0 million in fiscal 2002, primarily due to incremental revenues of $12.2 million from the fiscal 2002 acquisition of Baby’s First Book Club. Higher enrollments from school-based continuity programs resulted in an increase of $17.3 million in revenues in fiscal 2003 as compared to fiscal 2002.
The trade distribution channel accounted for 23.9% of segment revenues in fiscal 2004, as compared to 17.7% in fiscal 2003 and 18.4% in fiscal 2002. Trade revenues increased in fiscal 2004 by $112.7 million, or 53.6%, compared to $208.3 million in fiscal 2003, substantially due to the June 21, 2003 release of Harry Potter and the benefitOrder of cost reductionsthe Phoenix. In fiscal 2003, Trade revenues decreased 3.0%, or $6.5 million, from $214.8 million in manufacturingfiscal 2002, principally due to a decline in revenues from Harry Potter backlist titles of approximately $30 million and fulfillment
activities.other backlist titles of approximately $6 million, partially offset by incremental revenues of $31.3 million from the fiscal 2002 acquisition of Klutz. Trade revenues for Harry Potter accounted for
22
approximately $175 million, $50 million and $80 million in fiscal 2004, 2003 and 2002, respectively.
Segment operating profit in fiscal 2004 declined $19.6 million, or 14.6%, to $114.8 million, or 8.4% of revenues, compared to $134.4 million, or 11.3% of revenues, in fiscal 2003. The decline in segment operating profit in fiscal 2004 was primarily due to lower operating results for continuity programs, partially offset by improvements in the Company’s trade business of approximately $21 million, resulting primarily from higher Harry Potter revenues, and in the school-based book club business of approximately $17 million. In fiscal 2004, the Company experienced greater than anticipated challenges in its continuity business, including the effects of the National Do Not Call Registry legislation. These challenges resulted in lower net revenues generated through telemarketing, increased promotion costs and higher bad debt provisions. As a result, the Company reviewed and made changes in its continuity business in fiscal 2004, resulting in continuity charges of approximately $22 million for this segment, primarily representing write-downs of deferred promotion costs of approximately $11 million and inventory from discontinued programs of approximately $6 million. In fiscal 2004, the direct-to-home continuity business operating loss was $10.7 million, which includes approximately $15 million of the continuity charges, as compared to operating income of $30.7 million in fiscal 2003. Excluding the direct-to-home continuity business described in the table below, segment operating profit in fiscal 2004 increased $21.8 million to $125.5 million, or 10.9% of revenues, from $103.7 million, or 10.6% of revenues, in fiscal 2003.
In fiscal 2003, segment operating profit declined $44.0 million, or 24.6%, to $134.4 million, or 11.3% of revenues, compared to $178.4 million, or 15.3% of revenues, in fiscal 2002. This decrease was primarily related to a revenue decline in higher margin Harry Potter and other trade backlist titles. Operating profit for the direct-to-home continuity business decreased in fiscal 2003 to $30.7 million, or 14.5% of revenues, from $39.7 million, or 19.0% of revenues, in fiscal 2002. The $9.0 million decrease in operating profit in fiscal 2003 was primarily related to an increase of approximately $6 million in Selling, general and administrative costs as a percentage of revenue
increased from 35.2% in fiscal 2000 to 41.4% in fiscal 2001, due primarily toexpenses. Excluding the acquisition of the Grolier direct-to-home continuity business partially
offsetdescribed in the table below, segment operating profit in fiscal 2003 decreased $35.0 million to $103.7 million, or 10.6% of revenues, from $138.7 million, or 14.5% of revenues, in fiscal 2002.
The following table highlights the results of the direct-to-home portion of the Company’s continuity programs, which consist primarily of the business formerly operated by improved sales mixGrolier and planned cost reductions.
EDUCATIONAL PUBLISHING
are included in the Children’s Book Publishing and Distribution segment.
($ amounts in millions) 2004 2003 2002 Revenue $203.8 $212.3 $209.0 Operating (loss) profit (10.7) (1) 30.7 39.7 Operating margin * 14.5 % 19.0 %
* | not meaningful | |
(1) | The fiscal 2004 operating loss includes the direct-to-home portion of the continuity charges related to this segment of approximately $15, reflected primarily in Cost of goods sold; Selling, general and administrative expenses; and Bad debt expense. |
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING Company’s Educational Publishing segment includes the publication and distribution to schools and libraries of supplemental and corecurriculum materials, children’s books, classroom magazines and print and on-line non-fictionreference and referencenon-fiction products for grades Kpre-K to 12 in the United States.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
REVENUE $ 309.7 $ 212.5 $ 196.9
OPERATING LOSS (57.0)(1) (13.3) 0.0
- -------------------------------------------------------------------------------
OPERATING MARGIN * * *
* not meaningful
(1) The fiscal 2001 operating loss included the Special Charge of $72.9. The
segment's operating profit excluding the Special Charge would have been
$15.9.
Educational Publishing
($ amounts in millions) 2004 2003 2002 Revenue $ 369.1 $ 325.9 $ 316.9 Operating profit 53.2 41.9 44.1 Operating margin 14.4 % 12.9 % 13.9 %
Segment revenues accounted for 15.8%16.5% of the Company'sCompany’s revenues in fiscal 2001,2004, compared to 15.2%16.6% in fiscal 20002003 and 16.9%16.5% in fiscal 1999.2002. In fiscal 2001, 2004, Educational Publishing revenues increased 45.7% to $309.7$369.1 million from $212.5$325.9 million in fiscal 2000 and $196.9 in fiscal 1999. Segment revenues
in fiscal 2001 related to sales of supplemental and core instructional materials
to schools represented 58.2%, while sales by Grolier accounted for 21.1%.2003. The $43.2 million revenue increase in fiscal 20012004 was due to higher sales of children’s books, primarily sold to public school systems as
23
classroom libraries and other collections, of $28.3 million and increased Read 180® revenues of $19.2 million. These increases were partially offset by a decrease in Scholastic Literacy Place® revenues. In fiscal 2003, the $9.0 million increase in Educational Publishing revenues as compared to fiscal 2002 was primarily due to the inclusion$10.4 million of sales by
Grolier of print and on-line children's non-fiction and reference products, an
increase in sales of SCHOLASTIC LITERACY PLACE, higher sales of supplemental and
core materials including the Company's reading intervention program (READ
180(R)), and paperbacks and collections products. Inincremental revenues related to fiscal 2000, Educational
Publishing revenues increased 7.9% over fiscal 1999, primarily due to increased
sales of SCHOLASTIC READING COUNTS(TM) and SCHOLASTIC READING INVENTORY(TM).
2002 acquisitions.
Segment operating results, excluding the Special Charge of $72.9profit for this segment in fiscal 2004 increased by $11.3 million, would
have resulted in a profit of $15.9or 27.0%, to $53.2 million, as compared to the prior fiscal year, primarily due to the increase in revenues, as well as higher gross margins resulting from a loss of $13.3favorable sales mix. In fiscal 2003, operating profit decreased $2.2 million from $44.1 million in fiscal 2000. The impact2002, primarily due to the $2.1 million portion of the Special Charge was partially offset by
the benefit of the integration of Grolier, lower cost of product and reduced
promotion costs. The fiscal 2000 operating loss of $13.3 million, compared to
the breakeven level of fiscal 1999, was primarily the result of higher promotion
and selling and administrative costs associated with the Texas reading adoption
program and the launch costsseverance charge related to READ 180.
MEDIA, LICENSINGthis segment in fiscal 2003.
MEDIA, LICENSING AND ADVERTISING
ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISINGCompany’s Media, Licensing and Advertising segment includes the production and/or distribution of software in the United States of software, Internet services andStates; the production and/or distribution primarily by and through the Company's subsidiary,
Scholastic Entertainment Inc. ("SEI"),SEI; of programming and consumer products (including children'schildren’s television programming, videos, software, feature films, promotional activities and non-book merchandise).
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 134.0 $ 108.1 $ 105.8
OPERATING LOSS (23.0) (11.9) (4.3)
- -------------------------------------------------------------------------------
OPERATING MARGIN , and advertising revenue; including sponsorship programs.
($ amounts in millions) 2004 2003 2002 Revenue $136.4 $123.5 $129.8 Operating loss (2.5) (2.9) (0.2) Operating margin * * *
* * *
* not meaningful
MEDIA, LICENSING AND ADVERTISING
Media, Licensing and Advertising revenues accounted for 6.8%6.1% of the Company's
revenueCompany’s revenues in fiscal 2001, compared to 7.7%2004, 6.3% in fiscal 20002003 and 9.1%6.8% in fiscal 1999.2002. In fiscal 2001, entertainment revenue more than doubled, reflecting2004, revenues increased by $12.9 million, or 10.4%, to $136.4 million from $123.5 million in fiscal 2003, primarily due to $17.5 million of incremental revenues generated from the impactBack to Basics direct-to-home toy catalog business that the Company acquired in August 2003. Additionally, programming revenues increased by $5.9 million, primarily due to the February 2004 completion and delivery of production fees for CLIFFORD THE BIG RED DOG(TM), the animated TV series
launched on PBS Kids in the fall of 2000, and increased advertisingfeature film Clifford’s Really Big Movie. These revenues
from consumer magazines such as COACH AND ATHLETIC DIRECTOR(TM), SCHOLASTIC
EARLY CHILDHOOD TODAY(TM) and SCHOLASTIC PARENT & CHILD(R). In fiscal 2000,
increased revenues from consumer magazines
[LOGO] [GRAPHIC]11
and software were partially offset by declines$9.6 million in entertainmentdecreased revenues from software and multimedia product sales.
Operating lossesproducts. In fiscal 2003, revenues decreased by 4.9%, or $6.3 million, from $129.8 million in fiscal 2002, primarily due to lower sales of software and multimedia products of $9.7 million and lower non-book merchandise revenues of $3.3 million, partially offset by increased television programming revenues of $3.7 million from Clifford the Big Red Dog and incremental television programming revenues of $3.6 million relating to fiscal 2002 acquisitions.
The operating loss for the MEDIA, LICENSING AND ADVERTISINGMedia, Licensing and Advertising segment in fiscal 2001
were $23.02004 improved by $0.4 million to $2.5 million, compared to $11.9an operating loss of $2.9 million in fiscal 2000 and $4.32003, as contributions from Back to Basics were offset by lower margins as a result of changes in business mix. In fiscal 2003, segment operating loss increased by $2.7 million from $0.2 million in fiscal 1999. These results reflect the planned increase in expenses related2002, primarily due to Scholastic.com, as well as modestly increased marketing and promotional costs.
Excluding the Scholastic.com operating expenses, the operating profit/(loss) for
the segment for fiscal 2001, 2000 and 1999 would be approximately breakeven.
INTERNATIONAL
decreased revenues.
INTERNATIONAL
The INTERNATIONAL International segment includes the publication and distribution of products and services outside the United States by the Company'sCompany’s international operations, and its domestic export and foreign rights businesses.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 296.7 $ 224.0 $ 205.9
OPERATING PROFIT 19.0 9.9 7.9
- -------------------------------------------------------------------------------
OPERATING MARGIN 6.4% 4.4% 3.8%
INTERNATIONAL sales
($ amounts in millions) 2004 2003 2002 Revenue $369.7 $319.0 $301.7 Operating profit 24.3 (1) 19.4 24.6 Operating margin 6.6 % 6.1 % 8.2 %
(1) | The fiscal 2004 operating profit includes the portion of the continuity charges related to this segment of approximately $3, reflected primarily in Cost of goods sold and Selling, general and administrative expenses. |
International revenues accounted for 15.1%16.6% of the Company'sCompany’s revenues in fiscal 2001, 15.9%2004, 16.3% in fiscal 2000
24
2003 and 17.7%15.7% in fiscal 1999. INTERNATIONAL2002. Segment revenues increased 32.5%$50.7 million, or 15.9%, to $296.7 million, including $80.9 million from the Grolier
international businesses, in fiscal 2001 from $224.0$369.7 million in fiscal 2000.
Excluding Grolier,2004 from $319.0 million in fiscal 20012003. This revenue in local currencies increased slightly
over fiscal 2000,growth was primarily due to increased revenue from Scholastic's Canadian
and export operations, but declined 4% in U.S. dollars. The Canadian revenue
increase reflected growth in school-based book club, continuities and book fair
channels. This increase was partially offset by sales declines in the United
Kingdom and Australia, principally in their school-based book club and trade
channels. In fiscal 2001, revenues in the United Kingdom, Australia and Canada
were also adversely impacted by the strengthening of the U.S. dollar. In fiscal
2000, INTERNATIONAL revenues increased 8.8% from $205.9 million in fiscal 1999,
due to the growth in the Company's Canadian and Australian trade, school-based
book club and school-based book fair channels. Revenues in fiscal 2000 for the
United Kingdom and New Zealand were adversely impacted by the strengthening U.S.
dollar.
INTERNATIONAL operating income increased $9.1 million to $19.0 million (6.4% of
sales) in fiscal 2001 from $9.9 million in fiscal 2000 (4.4% of sales). This
increase is attributed to strong Canadian and export results combined with $8.4
million of profit from the Grolier businesses, partially offset by the impact of
foreign exchange fluctuations and lower Australian and United Kingdom revenues.
In fiscal 2000, INTERNATIONAL operating income increased $2.0 million from
fiscal 1999 due to revenue increases in Canada and Australia, which were
partially offset by the adversefavorable impact of foreign currency exchange rates.
SEASONALITY
rates of $36.5 million and increased revenues from the Company’s export business of $12.3 million. In fiscal 2003, International revenues increased $17.3 million, or 5.7%, from $301.7 million in fiscal 2002, primarily due to the favorable impact of foreign currency exchange rates of $16.8 million.
International operating profit increased $4.9 million to $24.3 million, or 6.6% of revenues, in fiscal 2004 from $19.4 million, or 6.1% of revenues, in fiscal 2003, primarily due an increase in operating profit from the export business. In fiscal 2003, operating profit decreased $5.2 million from $24.6 million, or 8.2% of revenues, in fiscal 2002, primarily due to the $3.8 million portion of the Special severance charge related to this segment in fiscal 2003.
Seasonality
The Company'sCompany’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company'sCompany’s business is highly seasonal. As a consequence, the Company'sCompany’s revenues in the first and third quarters of the fiscal year generally are generally lower than its revenues in the other two fiscal quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are proportionately largergreatest in the second quarter of the fiscal year, while revenues from the sale of instructional materials are the highest in the first quarter. The Company experiences a substantial loss from operations in the first quarter.
In the June through October time period, the Company experiences negative cash flow due to the seasonality of its business. As a result of the Company'sCompany’s business cycle, seasonal borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash
Liquidity and Capital Resources
Cash and cash equivalents were $17.8 million at May 31, 2004, compared to $58.6 million at May 31, 2003 and $10.7 million at May 31, 2002.
Cash flow provided by operations increased $33.1 million to $13.8$212.3 million forin fiscal year 2001,2004, including $10.0 million received in connection with the early termination of a sublease by one of the Company’s tenants, compared to $179.2 million in fiscal 2003. Deferred promotion costs decreased $12.6 million in fiscal 2004 compared to an increase of $4.8 million over fiscal 2000 and $7.9 million over
fiscal 1999.
Cash flow provided from operations was $198.7 million resulting from increased
revenue and improved operating margins, partially offset by working capital
increases to support business growth.
Cash outflows for investing activities were $577.3 million for fiscal 2001,
primarily related to acquisition related payments, capital expenditures,
prepublication costs, royalty advances and production cost expenditures.
Acquisition related expenditures totaled $396.4 million as a result of the
acquisition of Grolier. The Company's capital expenditures totaled $90.5$7.5 million in fiscal 2001. Capital expenditures, including capitalized interest, increased
$44.5 million from fiscal 20002003, primarily due to the expansionwrite-down of deferred promotion costs included in the Company's
corporate headquarters. Prepublication expenditurescontinuity charges. Amortization of prepublication and production costs increased $18.1 million to $79.1 million in fiscal 2004 compared to $61.0 million in fiscal 2003, primarily due to higher amortization of prepublication costs for product updates in the Company’s EducationalPublishing segment. Depreciation and amortization increased $7.4 million in fiscal 2004 as compared to fiscal 2003, primarily due to the completion of information technology projects in fiscal 2003. Accounts payable and other accrued expenses increased $8.3 million in fiscal 2004 compared to an increase of $21.5 million in fiscal 2003, primarily due to the timing of payments.
Cash outflow for investing activities was $147.6 million for fiscal 2004. Additions to property, plant and equipment totaled $54.5$43.4 million decreasing $6.9in fiscal 2004, a decrease of $40.5 million from fiscal 2000, largely2003. This decrease was principally due to the decision notacquisition of the Maumelle Facility for $14.7 million, spending on the expansion of Internet operations of $11.1 million and expenses related to update SCHOLASTIC LITERACY PLACE partially offsetthe development of an inventory planning software system of $10.0 million in fiscal 2003. Acquisition-related payments of $8.8 million in fiscal 2004 relate to the purchase of certain assets of Troll and the purchase of Back to Basics.
In April 2003, Scholastic Corporation issued the 5% Notes. Net proceeds of $171.3 million were used: (a)
25
to retire all outstanding indebtedness of $36.0 million under a credit facility that had been established by investmentsthe Company in Grolier. For
fiscal 2001, paymentsJune 2000 to finance a portion of the purchase price for royalty advances totaled $25.5 million.
Grolier, which was then canceled; and (b) to reduce $135 million of indebtedness outstanding under the Loan Agreement and the Revolver, as defined in “Financing” below. Scholastic Corporation repaid all $125.0 million of the outstanding 7% Notes at maturity on December 15, 2003 using cash on hand and borrowings available under the Loan Agreement and the Revolver made possible by the issuance of the 5% Notes. Consequently, the Company had decreased cash and lower debt levels at May 31, 2004 as compared to May 31, 2003.
The Company believes its existing cash position, combined with funds generated from operations and available under the amended LoanCredit Agreement, described in “Financing” below, and the Revolver, will be sufficient to finance its ongoing working capital requirements for the
next fiscal year.
FINANCINGrequirements. The Company maintains twoanticipates refinancing its debt obligations prior to their respective maturity dates, to the extent not paid through cash flow.
The following table summarizes, as of May 31, 2004, the Company’s contractual cash obligations by future period (see Notes 3 and 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):
Payments Due by Period Long-term debt $ — $ 300.0 $ 14.2 $ 175.0 $ 489.2 Lines of credit and short-term debt 24.1 — — — 24.1 Operating leases 43.1 76.0 23.1 162.7 304.9 Royalty advances 7.9 2.0 — — 9.9 Other obligations 6.9 1.9 — — 8.8 Total $ 82.0 $ 379.9 $ 37.3 $ 337.7 $ 836.9
Financing
On March 31, 2004, Scholastic Corporation and Scholastic Inc. entered into an unsecured revolving credit facilities, the Loanagreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire on August 11, 2004 (the “Loan Agreement”). The Credit Agreement, and
the Revolver, which provideexpires on March 31, 2009, provides for aggregate borrowings of up to $210.0$190.0 million (with a right in certain circumstances to increase borrowings to $240.0$250.0 million), including the issuance of up to $10.0 million in letters of credit. BothInterest under this facility is either at the Loanprime rate or 0.325% to 0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.25% if borrowings exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of May 31, 2004 were 0.55% over LIBOR and 0.15%, respectively. The Credit Agreement contains certain financial covenants related to debt and Revolver expire on August 11, 2004. The Company uses these
facilities to fund seasonal cash flow needsinterest coverage ratios (as defined) and limits dividends and other working capital
requirements. Atdistributions. On May 31, 2001, the Company had no borrowings outstand-
[GRAPHIC]12 [LOGO]
ing under these facilities. The Company borrowed $350.02004, $12.0 million under an
unsecured loan agreement, expiring June 21, 2002, in order to finance the
purchase of Grolier on June 22, 2000, and borrowed $50.0 millionwas outstanding under the Loan
Agreement. At May 31, 2001, the Company had $350.0 million in borrowings
outstanding under these facilitiesCredit Agreement at a weighted average interest rate of 5.1%1.7%. There were no borrowings outstanding under the Loan Agreement at May 31, 2003.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, the Revolver provides for unsecured revolving credit of up to $40.0 million and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon the Company’s credit rating. The
26
interest rate and facility fee as of May 31, 2004 were 0.60% over LIBOR and 0.15%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2004, $2.2 million was outstanding under the Revolver at a weighted average interest rate of 3.0%. There were no borrowings outstanding under the Revolver at May 31, 2003.
Scholastic Corporation repaid the 7% Notes at maturity on December 15, 2003, in part using borrowings available under the Loan Agreement and the Revolver made possible by the issuance of the 5% Notes.
In addition, unsecuredFebruary 2002, Scholastic Corporation entered into an interest rate swap agreement, designated as a fair value hedge as defined under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” whereby the Company received a fixed interest rate payment from, and paid an amount based on a variable interest rate to, the counterparty based on a notional amount, in order to exchange the fixed rate payments on a portion of the Corporation’s $300.0 million in outstanding 5.75% Notes due 2007 issued in January 2002 (“the 5.75% Notes”) for variable rate payments. In accordance with SFAS No. 133, the swap was considered perfectly effective and all changes in fair value were recorded to Other assets and Long-term debt. On May 28, 2003, $50.0 million of the original $100.0 million notional amount was settled and the Company received a payment of $5.4 million from the counterparty. On November 3, 2003, the remaining $50.0 million under the agreement was settled, and the Company received a payment of $3.8 million from the counterparty. The cash received was used to fully reduce the Other asset previously established, and the corresponding credit is being amortized over the remaining term of the 5.75% Notes.
Unsecured lines of credit available in local currencies to the Company'sScholastic Corporation’s international subsidiaries totaled $50.5were equivalent to $62.1 million at May 31, 2001.2004, as compared to $57.8 million at May 31, 2003. These lines are used primarily to fund local working capital needs. At May 31, 2001, $23.12004, borrowings equivalent to $23.0 million in
borrowings were outstanding under these lines of credit, as compared to $28.5 million at aMay 31, 2003, at weighted average interest raterates of 7.45%.
ACQUISITIONS
5.5% and 6.9% at May 31, 2004 and 2003, respectively.
The Company’s total debt obligations at May 31, 2004 and 2003 were $516.6 million and $635.9 million, respectively, primarily due to the issuance of the 5% Notes in April 2003 and the repayment at maturity of the 7% Notes in December 2003. For a complete description of all the Company’s debt obligations, see Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Acquisitions
In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such opportunities and prospects. Consistent with this
strategy, in June 1998 the Company acquired certain assets of Pages Book Fairs,
Inc. for approximately $10.5 million, and in January 1999 acquired certain
assets of Quality Education Data.
On June 22, 2000, the Company consummated the
acquisition of Grolier for $400.0 million in cash, and in July 2001,1, 2003, the Company acquired certain assets of Troll for $4.0 million in cash and the assumption of certain ordinary course liabilities. On August 8, 2003, the Company acquired the stock of BTBCAT, Inc., which operates the Back to Basics direct-to-home toy catalog business, for $4.8 million in cash.
During fiscal 2002, the Company completed the acquisitions of the stock or assets of the following companies: Troll Book Fairs LLC, a national school-based book fair operator; Tom Snyder Productions, Inc.
NEW ACCOUNTING PRONOUNCEMENTS, a developer and publisher of interactive educational software and producer of television programming; Sandvik Publishing Ltd., d/b/a Baby’s First Book Club, a direct marketer of age-appropriate books and toys for young children; Klutz, a publisher and creator of “books plus” products for children; Teacher’s Friend Publications, Inc., a producer and marketer of materials that
27
teachers use to decorate their classrooms; and Nelson B. Heller & Associates, a publisher of business-to-business newsletters. The Company has adopted the provisionsaggregate purchase price for these acquisitions, net of Staff Accounting Bulletin 101 ("SAB
101"), "Revenue Recognition in Financial Statements", issued by the Securities
and Exchange Commission (the "SEC"). SAB 101 provides the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The adoption of SAB 101 resulted in revenue reduction of
$1.9 million and a net pre-tax impact of $1.1 million, equivalent to $0.02
after-tax per diluted share, to the Company's fiscal 2001 results of operations.
cash received, was $66.7 million.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998,January 2003, the Financial Accounting Standards Board ("FASB"(“FASB”) issued StatementFASB Interpretation No. 46, “Consolidation of Financial Accounting Standards ("SFAS"Variable Interest Entities” (“FIN 46”) No. 133, "Accounting, which requires variable interest entities to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 was effective immediately for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the Company to
recognize all derivatives as either assetsvariable interest entities created after January 31, 2003. For variable interest entities created or liabilities on the balance sheet
and to measure them at fair value. The Company will adoptacquired before February 1, 2003, the provisions of this
standard inFIN 46 became effective for the firstCompany during the fourth quarter of fiscal 2002.2004. The Company does not expect that
theCompany’s adoption of SFAS No. 133 willFIN 46 did not have a material impact on its financial position, results of operations or cash flows.
In June 2000,May 2004, the Accounting Standards Executive CommitteeFASB issued StatementStaff Position 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of Position No. 00-2 ("SOP 00-2"2003” (“FSP 106-2”), "Accounting. FSP 106-2 applies only to a single-employer defined benefit post-retirement health care plan for which an employer has concluded that prescription drug benefits available under the plan are “actuarially equivalent” to the prescription drug benefit now provided under Medicare pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and therefore qualify for a federal subsidy introduced by Producers or Distributors of
Films", effectivethat Act. Although the Company is not required to apply the guidance in FSP 106-2 until its fiscal quarter ending November 30, 2004, it has determined that its plan qualifies for fiscal years beginning after December 15, 2000. SOP 00-2
replaces SFAS No. 53, "Financial Reporting by Producerssuch subsidy and Distributors of
Motion Picture Films." SOP 00-2 concludes that film costs should be accounted
for under an inventory model and discusses various topics such as revenue
recognition, fee allocation among multiple films,has elected to begin accounting for exploitation
costs and impairment assessment. The Company will adopt the provisions of SOP
00-2 in the first quarter of fiscal 2002. This adoption is expected to result in
a pre-tax charge of approximately $8.0 million and will be accounted for as a
cumulative effect of a change in accounting principle.
Effective June 2001, the FASB approved SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits
the useeffects of the pooling-of-interests method for acquisitions completed after June
30, 2001. SFAS No. 142 institutes new requirements for identifying intangible
assets and requires that an impairment-only approach is taken in amortizing
goodwill and other intangible assets with indefinite lives. The Company will
adopt SFAS No. 142 on June 1, 2001. Adoption of SFAS No. 142 is expected to
lower the Company's annual amortization expense by approximately $13.0 million.
The Company has not yet determined the impact, if any, onsubsidy during its earnings and
financial position of the required impairment tests of goodwill and other
indefinite lived intangible assets.
FACTORS THAT MAY AFFECT FUTURE RESULTSfiscal quarter ended May 31, 2004.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 CommissionSEC filings and otherwise. The Company cautions readers that results predictedor expectations expressed by forward-looking statements, including, without limitation, those relating to the Company'sCompany’s future business prospects, revenues, operating margins, 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'sCompany’s filings with the SEC:
o The Company's ability to continue to produce successful educational, trade,
entertainment and software products;
o The ability of the Company's book clubs and fairs to continue to
successfully meet market needs;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment and software markets;
o Competition from other educational and trade publishers and media,
entertainment and Internet companies;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
• | The Company’s ability to continue to produce successful educational, trade, entertainment and software products; | ||
• | The ability of the Company’s school-based book clubs and book fairs to continue to successfully meet market needs; | ||
• | The Company’s ability to maintain relationships with its creative talent; | ||
• | Changes in purchasing patterns in and the strength of educational, trade, entertainment and software markets; | ||
• | Competition from other educational and trade publishers and media, entertainment and Internet companies; | ||
• | Significant changes in the publishing industry, especially relating to the distribution and sale of books; | ||
• | The effect on the Company of volatility in the price of paper and periodic increases in postage rates; | ||
• | The Company’s ability to effectively use the Internet to support its existing businesses and to launch successful new Internet initiatives; | ||
• | The impact of governmental initiatives, including the expansion of restrictions on communications with actual and potential customers; |
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• | The general risks attendant to the conduct of business in foreign countries; | ||
• | The general risks inherent in the market impact of rising interest rates with regard to its variable-rate debt facilities. |
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 o QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Item 7a | | Quantitative and Qualitative Disclosures about Market Risk |
The Company has operations in various foreign countries. In the normal course of business, these operations are exposed to fluctuations in currency values. Management believes that the impact of currency fluctuations does not represent a significant risk in the context of the Company'sCompany’s current international operations. The Company does not generally enter into derivative financial
instruments inIn the normal course of business, nor are such instruments used for
speculative purposes.
the Company’s operations outside the United States periodically enter into short-term forward contracts (generally not exceeding $20.0 million) to match selected purchases not denominated in their respective local currencies.
Market risks relating to the Company'sCompany’s operations result primarily from changes in interest rates. Atrates, which are managed by balancing the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 7% of the Company’s debt at May 31, 2001, approximately 60% of the Company's long-term
debt2004 bore interest at a variable rate. Therefore, therate and was sensitive to changes in interest rates, compared to approximately 12% at May 31, 2003. The Company is subject to the risk that market interest rates will increase. Underincrease and thereby increase the interest charged under its current policies, the
Company does not utilize any interest rate derivative instruments to manage its
exposure to interest rate changes.
At May 31, 2001, the balance outstanding under the facilities which have
variable rates was $373.1 million, at a weighted average interest rate of 5.2%.
A 15% increase or decrease in the average interest rate on the Company's
variable rate debt at May 31, 2001 would not have had a significant impact on
the Company's financial position and results of operations.
variable-rate debt.
Additional information relating to the Company'sCompany’s outstanding financial instruments is included in Item 7, - Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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ITEM”
The following table sets forth information about the Company’s debt instruments as of May 31, 2004 (see Note 3 of Notes to Consolidated Financial Statements in Item 8, o CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
“Consolidated Financial Statements and Supplementary Data”):
2005 2006 2007 2008 2009 Thereafter Total Lines of credit $ 23.0 $ — $ — $ — $ — $ — $ 23.0 $ 23.0 Average interest rate 5.48 % Long-term debt including current portion: Fixed-rate debt $ 1.1 $ — $ 300.0 $ — $ 175.0 $ 476.1 $ 477.7 Average interest rate 7.10 % 5.75 % 5.00 % Variable-rate debt $ — $ — $ — $ — $ 14.2 (1) $ — $ 14.2 $ 14.2 Average interest rate 1.93 %
(1) | Represents amounts drawn on the Credit Agreement and Revolver with credit lines totaling $230.0, which expire in fiscal 2009. |
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Item 8 | Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statements Schedule | Page(s) | ||
Consolidated Statements of Income for the | 32 | ||
Consolidated Balance Sheets at May 31, | 33-34 | ||
Consolidated Statements of Changes in Income for the | 35-36 | ||
Consolidated Statements of Cash Flows for the | 37 | ||
Notes to Consolidated Financial Statements | 38-58 | ||
Report of Independent | 59 | ||
Supplementary Financial Information | 60 | ||
The following consolidated financial statement schedule for the ended May 31, | |||
Schedule II | 67 |
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.
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Consolidated Statements of Income
(Amounts in millions, except per share data) Years ended May 31, 2004 2003 2002 Revenues $ 2,233.8 $ 1,958.3 $ 1,917.0 Operating costs and expenses: Cost of goods sold (exclusive of depreciation) 1,080.0 882.1 852.1 Cost of goods sold – Continuity charges 6.8 — — Selling, general and administrative expenses 869.7 826.3 771.7 Selling, general and administrative expenses – Continuity charges 15.2 — — Bad debt expense 88.3 72.3 68.7 Bad debt expense – Continuity charges 2.0 — — Other operating costs: Depreciation 53.2 45.6 35.6 Special severance charges 3.3 10.9 — Goodwill and other intangibles amortization 0.3 0.5 1.0 Litigation and other charges — 1.9 1.2 Total operating costs and expenses 2,118.8 1,839.6 1,730.3 Operating income 115.0 118.7 186.7 Other income (expense) 8.0 2.9 (2.0 ) Interest expense, net 32.5 31.5 31.4 Earnings before income taxes and Cumulative effect of accounting change 90.5 90.1 153.3 Provision for income taxes 32.1 31.5 54.6 Earnings before Cumulative effect of accounting change 58.4 58.6 98.7 Cumulative effect of accounting change (net of income taxes of $2.9) — — (5.2 ) Net income $ 58.4 $ 58.6 $ 93.5 Earnings per Share of Class A and Common Stock: Earnings before Cumulative effect of accounting change: Basic $ 1.48 $ 1.50 $ 2.69 Diluted $ 1.46 $ 1.46 $ 2.51 Cumulative effect of accounting change (net of income taxes): Basic $ — $ — $ (0.14 ) Diluted $ — $ — $ (0.13 ) Net income: Basic $ 1.48 $ 1.50 $ 2.55 Diluted $ 1.46 $ 1.46 $ 2.38
See accompanying notes |
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Consolidated Balance Sheets
Current Assets: Cash and cash equivalents $ 17.8 $ 58.6 Accounts receivable (less allowance for doubtful accounts of $63.2 at May 31, 2004 and $55.6 at May 31, 2003) 265.7 252.3 Inventories 402.6 382.6 Deferred promotion costs 40.6 52.8 Deferred income taxes 73.4 74.6 Prepaid and other current assets 42.6 47.3 Total current assets Property, Plant and Equipment: Land 10.7 10.0 Buildings 80.9 77.2 Furniture, fixtures and equipment 326.0 285.5 Leasehold improvements 159.8 158.0 577.4 530.7 Less accumulated depreciation and amortization (242.8 ) (189.0 ) Net property, plant and equipment Other Assets and Deferred Charges: Prepublication costs 116.7 122.0 Installment receivables (less allowance for doubtful accounts of $5.1 at May 31, 2004 and $4.9 at May 31, 2003) 13.1 13.9 Royalty advances 47.8 49.8 Production costs 5.5 11.0 Goodwill 250.3 246.0 Other intangibles 78.9 74.2 Noncurrent deferred income taxes 5.1 7.7 Other 61.1 66.5 Total other assets and deferred charges Total assets
See accompanying notes
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(Amounts in millions, except share data) Balances at May 31, LIABILITIES AND STOCKHOLDERS’ EQUITY 2004 2003 Current Liabilities: Lines of credit and short-term debt $ 24.1 $ 153.7 Accounts payable 150.1 139.4 Accrued royalties 30.7 32.3 Deferred revenue 22.7 18.8 Other accrued expenses 129.8 133.5 Total current liabilities 357.4 477.7 Noncurrent Liabilities: Long-term debt 492.5 482.2 Other noncurrent liabilities 49.9 68.5 Total noncurrent liabilities 542.4 550.7 Commitments and Contingencies — — Stockholders’ Equity: Preferred Stock, $1.00 par value; Authorized – 2,000,000 shares; Issued-None — — Class A Stock, $.01 par value; Authorized – 2,500,000 shares; Issued and
outstanding – 1,656,200 shares 0.0 0.0 Common Stock, $.01 par value; Authorized – 70,000,000 shares; Issued and
outstanding – 37,930,986 shares (37,608,333 shares at May 31, 2003) 0.4 0.4 Additional paid-in capital 388.1 379.9 Deferred compensation (0.6 ) (1.1 ) Accumulated other comprehensive loss: Foreign currency translation adjustment (4.5 ) (9.8 ) Minimum pension liability adjustment (17.0 ) (28.0 ) Retained earnings 489.6 431.2 Total stockholders’ equity 856.0 772.6 Total liabilities and stockholders’ equity $ 1,755.8 $ 1,801.0
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Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income Balance at May 31, 2001 1,656,200 $ 0.0 33,632,047 $ 0.3 $ 233.7 Comprehensive income: Net income Other comprehensive loss, net: Foreign currency translation adjustment Minimum pension liability adjustment Total other comprehensive loss Total comprehensive income Deferred compensation, net of amortization 0.4 Proceeds from issuance of common stock pursuant to employee stock plans 927,374 0.1 19.9 Tax benefit realized from stock option transactions 8.8 Conversion of Convertible Subordinated Debentures and related costs 2,857,801 0.0 110.9 Balance at May 31, 2002 1,656,200 0.0 37,417,222 0.4 373.7 Comprehensive income: Net income Other comprehensive income (loss), net: Foreign currency translation adjustment Minimum pension liability adjustment Total other comprehensive loss Total comprehensive income Deferred compensation, net of amortization 1.2 Proceeds from issuance of common stock pursuant to employee stock plans 191,111 0.0 4.7 Tax benefit realized from stock option transactions 0.3 Balance at May 31, 2003 1,656,200 0.0 37,608,333 0.4 379.9 Comprehensive income: Net income Other comprehensive income, net: Foreign currency translation adjustment Minimum pension liability adjustment Total other comprehensive income Total comprehensive income Deferred compensation, net of amortization 4,102 0.0 0.0 Proceeds from issuance of common stock pursuant to employee stock plans 318,551 0.0 7.6 Tax benefit realized from stock option transactions 0.6 Balance at May 31, 2004 1,656,200 $ 0.0 37,930,986 $ 0.4 $ 388.1
See accompanying notes
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(Amounts in millions, except share data) Years ended May 31, 2004, 2003 and 2002 Balance at May 31, 2001 $ (0.2) $ (12.8) $ (3.6) $ 279.1 (55,319) $ (2.8) $ 493.7 Comprehensive income: Net income 93.5 93.5 Other comprehensive loss, net: Foreign currency translation adjustment (0.7) (0.7) Minimum pension liability adjustment (10.3) (10.3) Total other comprehensive loss (11.0) Total comprehensive income 82.5 Deferred compensation, net of amortization (0.2) 0.2 Proceeds from issuance of common stock pursuant to employee stock plans 55,319 2.8 22.8 Tax benefit realized from stock option transactions 8.8 Conversion of Convertible Subordinated Debentures and related costs 110.9 Balance at May 31, 2002 (0.4) (13.5) (13.9) 372.6 — — 718.9 Comprehensive income: Net income 58.6 58.6 Other comprehensive income (loss), net: Foreign currency translation adjustment 3.7 3.7 Minimum pension liability adjustment (14.1) (14.1) Total other comprehensive loss (10.4) Total comprehensive income 48.2 Deferred compensation, net of amortization (0.7) 0.5 Proceeds from issuance of common stock pursuant to
employee stock plans 4.7 Tax benefit realized from stock option transactions 0.3 Balance at May 31, 2003 (1.1) (9.8) (28.0) 431.2 — — 772.6 Comprehensive income: Net income 58.4 58.4 Other comprehensive income, net: Foreign currency translation adjustment 5.3 5.3 Minimum pension liability adjustment 11.0 11.0 Total other comprehensive income 16.3 Total comprehensive income 74.7 Deferred compensation, net of amortization 0.5 0.5 Proceeds from issuance of common stock pursuant to
employee stock plans 7.6 Tax benefit realized from stock option transactions 0.6 Balance at May 31, 2004 $ (0.6) $ (4.5) $ (17.0) $ 489.6 — $ — $ 856.0
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Consolidated Statements of Cash Flows (Amounts in millions) Years ended May 31, 2004 2003 2002 Cash flows provided by operating activities: Net income $ 58.4 $ 58.6 $ 93.5 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepublication and production costs 79.1 61.0 50.2 Depreciation and amortization 53.5 46.1 36.6 Royalty advances expensed 28.5 31.6 26.6 Deferred income taxes 3.0 12.3 18.0 Non-cash portion of Cumulative effect of accounting change — — 8.1 Changes in assets and liabilities: Accounts receivable, net (9.0) (17.9) (14.1) Inventories (14.7) (16.7) (7.3) Prepaid and other current assets 7.0 12.3 5.5 Deferred promotion costs 12.6 (7.5) (0.5) Accounts payable and other accrued expenses 8.3 21.5 (42.5) Accrued royalties and deferred revenue 1.0 (4.1) (6.0) Tax benefit realized from stock option transactions 0.6 0.3 8.8 Other, net (16.0) (18.3) (12.3) Total adjustments 153.9 120.6 71.1 Net cash provided by operating activities 212.3 179.2 164.6 Cash flows used in investing activities: Prepublication expenditures (53.2) (55.7) (53.5) Additions to property, plant and equipment (43.4) (83.9) (78.4) Royalty advances (26.1) (30.3) (31.7) Equity investment and related loan — (23.3) — Production expenditures (15.6) (15.5) (13.0) Acquisition-related payments (8.8) (10.2) (66.7) Proceeds from sale of investment — 5.2 — Other (0.5) (0.3) 4.8 Net cash used in investing activities (147.6) (214.0) (238.5) Cash flows (used in) provided by financing activities: Borrowings under Loan Agreement, Revolver and Credit Facility 599.4 521.1 835.2 Repayments of Loan Agreement, Revolver and Credit Facility (585.2) (571.1) (785.2) Borrowings under Grolier Facility — 138.0 — Repayments of Grolier Facility — (188.0) (300.0) Repayment of 7% Notes (125.0) — — Proceeds received from issuance of 5.75% Notes, net of related costs — — 296.7 Proceeds received from issuance of 5% Notes, net of related costs — 171.3 — Borrowings under lines of credit 294.1 184.7 151.8 Repayments of lines of credit (300.7) (183.7) (150.7) Proceeds pursuant to employee stock plans 7.6 5.1 22.8 Other 3.9 5.4 0.2 Net cash (used in) provided by financing activities (105.9) 82.8 70.8 Effect of exchange rate changes on cash 0.4 (0.1) 0.0 Net (decrease) increase in cash and cash equivalents (40.8) 47.9 (3.1) Cash and cash equivalents at beginning of year 58.6 10.7 13.8 Cash and cash equivalents at end of year $ 17.8 $ 58.6 $ 10.7 Supplemental information: Income taxes paid $ 24.5 $ 14.6 $ 27.5 Interest paid $ 39.0 $ 32.5 $ 28.0
See accompanying notes
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Notes to Consolidated Financial Statements
(Amounts in millions, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Principles of consolidation
The consolidated financial statements include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned subsidiaries (the "Company"(collectively “Scholastic” or the “Company”). All significant intercompany transactions are eliminated.
USE OF ESTIMATES
Use of estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in conformity with generally accepted
accounting principles, requires management to makeinvolves the use of estimates and assumptions thatby management, which affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results couldmay differ from those estimates and assumptions. SignificantOn an on-going basis, the Company evaluates the adequacy of its reserves and the estimates that affect the financial statements include,used in calculations, including, but are not limited to: collectability of accounts receivable; bookreceivable and installment receivables; sales returns; amortization periods; pension obligations; and recoveryrecoverability of inventory, advances to authors,
prepublication costs,inventories, deferred promotion costs, film productiondeferred income taxes, prepublication costs, royalty advances, goodwill and other long-lived assets.
CASH EQUIVALENTS
intangibles.
Revenue recognition
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs – Revenue from school-based book fairs is recognized ratably as each book fair occurs.
Continuity Programs – The Company operates continuity programs whereby customers generally place a single order and receive multiple shipments of books and other products over a period of time. Revenue from continuity programs is recognized at the time of shipment or, in applicable cases, upon customer acceptance. Reserves for estimated returns are established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.
Trade – Revenue from the sale of children’s books for distribution in the retail channel primarily is recognized at the time of shipment, which generally is when title transfers to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.
Educational Publishing – For shipments to schools, revenue is recognized on passage of title, which generally occurs upon receipt by the customer. Shipments to depositories are on consignment. Revenue is recognized based on actual shipments from the depositories to the schools. For certain software-based products, the Company offers new customers installation and training. In such cases, revenue is recognized when installation and training are complete.
Toy Catalog – Revenue from the sale of children’s toys to the home through catalogs is recognized at the time of shipment, which is generally when title transfers to the customer. A reserve for estimated returns is established at the time of sale and
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recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
MagazineAdvertising – Revenue is recognized when the magazine is on sale and available to the subscribers.
Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of less than three months.
INVENTORIES
Accounts receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for returns are based on historical return rates and sales patterns. Allowances for doubtful accounts are established through the evaluation of accounts receivable agings and prior collection experience to estimate the ultimate collection of these receivables.
Inventories
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. PROPERTY, PLANT AND EQUIPMENT
The Company records a reserve for excess and obsolete inventory based primarily upon a calculation of forecasted demand utilizing the historical sales patterns of its products.
Deferred promotion costs
Deferred promotion costs represent direct mail and telemarketing promotion costs incurred to acquire customers in the Company’s continuity and magazine businesses. Promotional costs are deferred when incurred and amortized in the proportion that current revenues bear to estimated total revenues. The Company regularly evaluates the operating performance of the promotions over their life cycle based on historical and forecasted demand and adjusts the carrying value accordingly. All other advertising costs are expensed as incurred.
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are providedrecorded on thea 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
The Company capitalizes the art, prepress, editorial and other costs incurred in the creation of the master copy of a book or other media (the “prepublication costs”). Prepublication costs are amortized on thea straight-line basis over a twothree to seven-year period commencing with publication. Goodwill and other intangibles
acquired byseven year period. The Company regularly reviews the recoverability of the capitalized costs.
Royalty advances
The Company are amortized onrecords a reserve for the straight-line basis over the
estimated future periods, which are generally between fifteen and twenty-five
years.recoverability of its outstanding advances to authors based primarily upon historical earndown
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experience. 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 and are amortized in the
proportion that current revenues bear to estimated remaining total lifetime
revenues.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets, including goodwill
Goodwill and other intangibles
Goodwill and other intangible assets with indefinite lives are reviewed for impairment whenever eventsannually, or changes in circumstances indicate
thatmore frequently if impairment indicators arise. With regard to goodwill, these reviews require the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assetsCompany to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceedestimate the fair value of the assets as determined by estimated discounted cash
flows. Assets to be disposed of are reported at the lowerits identified reporting units. For each of the carrying amount
orreporting units, the estimated fair value less costsis determined utilizing the expected present value of the projected future cash flows of the units, which is compared to sell.
INCOME TAXES
the carrying value of the net assets of the reporting units. With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income.
REVENUE RECOGNITION
Sales
It is the Company’s policy to establish reserves for probable exposures as a result of booksan examination by tax authorities. The Company establishes the reserves based upon management’s assessment of exposure associated with permanent tax differences, tax credits and softwareinterest expense applied to temporary difference adjustments. The tax reserves are recognizedanalyzed periodically (at least annually) and adjustments are made, as events occur to warrant adjustment to the reserve.
Other noncurrent liabilities
All of the rate assumptions discussed below impact the Company’s calculations of its pension and post-retirement obligations. The rates applied by the Company are based on the portfolios’ past average rates of return and discussions with actuaries. Any change in accordancemarket performance, interest rate performance, assumed health care costs trend rate, or compensation rates could result in significant changes in the pension and post-retirement obligations.
Pension obligations – Scholastic Corporation and certain of its subsidiaries have defined benefit pension plans covering the majority of their employees who meet certain eligibility requirements. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions,” in calculating the existing benefit obligations and net cost under the plans. These calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets, and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with shipping terms,
upon customer acceptance. Amounts billed relatedinterest based on the average rate for one-year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment period.
Other post-retirement benefits – Scholastic Corporation provides post-retirement benefits, consisting of healthcare and life insurance benefits, to shipping and handlingretired United States-based employees. A majority of these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. The post-retirement medical plan benefits are recognized as revenue. Sales madefunded on a returnablepay-as-you-go basis, are recorded netwith the Company paying a
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portion of provisionsthe premium and the employee paying the remainder. The Company follows SFAS No. 106, “Employers’ Accounting for estimated returnsPost-Retirement Benefits Other than Pensions,” in calculating the existing benefit obligation, which is based on the discount rate and allowances. A reserve for estimated book
returnsthe assumed health care cost trend rate. The discount rate is established at the time of sale. Actual returns are charged against
the reserve as received.
Revenue from school-based book fair operations is deferred at the time of
delivery to the school. Revenue is recognized as the school book fair occurs.
Revenue from magazine subscriptions is deferred at the time of sale. As
magazines are delivered to subscribers, proportionate amounts of revenue and
related acquisition expenses are recognized.
Revenue from the sale of film rights, principally for the home video and
domestic and foreign syndicated television markets, is recognized when the film
has been delivered and is available for showing or exploitation. Income from
licensing is recorded in accordance with royalty agreements, at the time
characters are available to the licensee and collections are reasonably assured.
DEFERRED PROMOTION COSTS
Deferred promotion costs represent direct mail and telemarketing promotion
advertising costs incurred to acquire classroom magazine subscriptions and
customersused in the Company's continuity businesses. Promotion costs are deferred
when incurred,measurement of the expected and amortizedaccumulated benefit obligations and the service and interest cost components of net periodic post-retirement benefit cost. The assumed health care cost trend rate is used in the proportion that current revenues bear to
estimated total revenues.
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STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options. Under APB 25, compensation expense is recognized only
when the exercise price of options is below the market pricemeasurement of the underlying
stock on the date of grant where the exercise pricelong term expected increase in medical claims.
Foreign currency translation
The Company’s non-United States dollar denominated assets and number of shares subject
to grant are fixed.
FOREIGN CURRENCY TRANSLATION
The balance sheets of the Company's foreign subsidiariesliabilities are translated into United States dollars at prevailing rates at the current balance sheet rates,date and the revenues, costs and expenses are translated at the average current rates prevailing during each reporting period. Net gains or losses resulting from the translation of the foreign financial statements and the effect of exchange rate changes on long-term intercompany transactionsbalances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders'stockholders’ equity.
EARNINGS PER SHARE
Earnings per share are based on the combined weighted average number of Class A
and Common Shares outstanding using the treasury stock method. Potentially
dilutive securities are excluded from the computation of diluted earnings per
share for the periods in which they have an anti-dilutive effect.
On December 14, 2000, the Company's Board of Directors authorized a 2-for-1
stock split in the form of a 100% stock dividend on its Common Stock and Class A
Stock, effective January 16, 2001 to shareholders of record as of December 29,
2000 (the "2-for-1 Stock Split"). Stockholders of record received one additional
share of Common Stock or Class A Stock for each share held on the record date.
All outstanding rights under stock options and stock purchase plans to acquire
the Company's Common Stock and under the Company's 5% Convertible Subordinated
Debentures due 2005 were adjusted to give effect to the 2-for-1 Stock Split.
RECLASSIFICATIONS/2-FOR-1 STOCK SPLIT
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. All amounts reported regarding
Earnings per share
Basic earnings per share is based on the Company's capital stock prior
toweighted average shares of Class A Stock and Common Stock outstanding. Diluted earnings per share is based on the 2-for-1weighted average shares of Class A Stock Split have beenand Common Stock outstanding adjusted to give effect to the 2-for-1
Stock Split, except for the impact of potentially dilutive securities outstanding. The dilutive impact of options outstanding is calculated using the treasury stock method, which treats the options as if they were exercised at the beginning of the period, adjusted for Common Stock assumed to be repurchased with the proceeds and tax benefit realized upon exercise. Any potentially dilutive security is excluded from the computation of diluted earnings per share information reported on the Consolidated
Balance Sheets and the Consolidated Statements of Changesfor any period in Stockholders'
Equity and Comprehensive Income financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
The Companywhich it has adoptedan anti-dilutive effect.
Stock-based compensation
Under the provisions of StaffSFAS No. 123, “Accounting for Stock-Based Compensation,” the Company applies Accounting Bulletin 101 ("SAB
101"Principles Board (“APB”), "Revenue Recognition Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in Financial Statements", issued by the Securities
and Exchange Commission (the "SEC"). SAB 101 provides the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The adoption of SAB 101 resulted in revenue reduction of
$1.9 and a net pre-tax impact of $1.1, equivalent to $0.02 after-tax per diluted
share,for its stock option plans. In accordance with APB No. 25, no compensation expense was recognized with respect to the Company'sCompany’s stock option plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and in respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net income and basic and diluted earnings per share for the three fiscal 2001 resultsyears ended May 31 would have been reduced to the pro forma amounts indicated in the following table:Net income–as reported $ 58.4 $ 58.6 $ 93.5 Add: Stock-based employee compensation included inreported net income, net of tax 0.4 0.3 0.2 Deduct: Total stock-based employee compensation expense determined under fair value-based method, net of tax 13.6 14.3 9.6 Net income–proforma Earnings pershare – as reported Basic $ 1.48 $ 1.50 $ 2.55 Diluted $ 1.46 $ 1.46 $ 2.38 Earnings per share – pro forma Basic $ 1.15 $ 1.14 $ 2.29 Diluted $ 1.13 $ 1.12 $ 2.17
The fair value of operations.
each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, with the weighted average
41
assumptions for the three fiscal years ended May 31 as follows:Expected dividend yield 0.0% 0.0% 0.0% Expected stock price volatility 60.5% 61.5% 66.1% Risk-free interest rate 2.92% 3.45% 4.59% Expected life of options 5 years 5 years 5 years
The weighted average fair value of options granted during fiscal 2004, 2003 and 2002 was $15.60, $18.00 and $25.24 per share, respectively. For purposes of pro forma disclosure, the estimated fair value of the options is amortized over the options’ vesting periods.
New accounting pronouncements
In June 1998,January 2003, the Financial Accounting Standards Board ("FASB"(“FASB”) issued StatementFASB Interpretation No. 46, “Consolidation of Financial Accounting Standards ("SFAS"Variable Interest Entities” (“FIN 46”) No. 133, "Accounting, which requires variable interest entities to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 was effective immediately for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the Company to
recognize all derivatives as either assetsvariable interest entities created after January 31, 2003. For variable interest entities created or liabilities on the balance sheet
and to measure them at fair value. The Company will adoptacquired before February 1, 2003, the provisions of this
standard inFIN 46 became effective for the firstCompany during the fourth quarter of fiscal 2002.2004. The Company does not expect that
theCompany’s adoption of SFAS No. 133 willFIN 46 did not have a material impact on its financial position, results of operations or cash flows.
In June 2000,May 2004, the Accounting Standards Executive CommitteeFASB issued StatementStaff Position 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of Position No. 00-2 ("SOP 00-2"2003” (“FSP 106-2”). FSP 106-2 applies only to a single-employer defined benefit post-retirement health care plan for which an employer has concluded that prescription drug benefits available under the plan are “actuarially equivalent” to the prescription drug benefit now provided under Medicare pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, (the “2003 Medicare Act”), "Accountingwhich was signed into law in December 2003, and therefore qualify for a federal subsidy introduced by Producers or Distributors of
Films", effectivethat Act. Although the Company is not required to apply the guidance in FSP 106-2 until its fiscal quarter ending November 30, 2004, it has determined that its plan qualifies for fiscal years beginning after December 15, 2000. SOP 00-2
replaces SFAS No. 53, "Financial Reporting by Producerssuch subsidy and Distributors of
Motion Picture Films." SOP 00-2 concludes that film costs should be accounted
for under an inventory model and discusses various topics such as revenue
recognition, fee allocation among multiple films,has elected to begin accounting for exploitation
costs and impairment assessment. The Company will adopt the provisions of SOP
00-2 in the first quarter of fiscal 2002. This adoption is expected to result in
a pre-tax charge of approximately $8.0 and will be accounted for as a cumulative
effect of a change in accounting principle.
Effective June 2001, the FASB approved SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits
the useeffects of the pooling-of-interests method for acquisitions completed after June
30, 2001. SFAS No. 142 institutes new requirements for identifying intangible
assets and requires that an impairment-only approach is taken in amortizing
goodwill and other intangible assets with indefinite lives. The Company will
adopt SFAS No. 142 on June 1, 2001. Adoption of SFAS No. 142 is expected to
lower the Company's annual amortization expense by approximately $13.0. The
Company has not yet determined the impact, if any, onsubsidy during its earnings and financial
position of the required impairment tests of goodwill and other indefinite lived
intangible assets.
fiscal quarter ended May 31, 2004.
2. SEGMENT INFORMATION
The Company's operations are categorized inCompany categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the following four segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING;Company’s domestic operations); and INTERNATIONAL. Such segmentInternational. This classification reflects the nature of products and services consistent with the method by which the Company'sCompany’s chief operating decision-maker assesses operating performance and allocates resources.
O CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION includes the publication and
distribution of children's books in the United States through school-based
book clubs, school-based and direct-to-home continuity programs, school-based
book fairs and the trade channel.
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• | Children’s Book Publishing and Distribution includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel. | ||
• | Educational Publishing includes the publication and distribution to schools and libraries of curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. | ||
• | Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution primarily by and through the Company’s subsidiary, Scholastic Entertainment Inc.; of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise), and advertising revenue; including sponsorship programs. | ||
• | International includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses. |
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The following table sets forth information for the three fiscal years ended May 31 aboutfor the Company'sCompany’s segments. Certain prior year amounts have been reclassified to conform with the present year presentation, including certain
segment classifications.
presentation. Children’s Book Media, Publishing Licensing and Educational and Total Distribution Publishing Advertising Overhead(1) Domestic International Consolidated 2004 Revenues $ 1,358.6 $ 369.1 $ 136.4 $ 0.0 $ 1,864.1 $ 369.7 $ 2,233.8 Bad debt 78.6 1.0 1.2 0.0 80.8 9.5 90.3 Depreciation 13.2 3.2 1.8 28.5 46.7 6.5 53.2 Amortization (2) 16.0 36.3 24.6 0.0 76.9 2.5 79.4 Royalty advances expensed 20.7 0.9 4.7 0.0 26.3 2.2 28.5 Segment profit (loss) (3) 114.8 53.2 (2.5) (74.8) 90.7 24.3 115.0 Segment assets 737.7 311.8 60.3 347.2 1,457.0 298.8 1,755.8 Goodwill 127.9 82.5 10.7 0.0 221.1 29.2 250.3 Expenditures for long-lived assets (4) 53.3 35.5 27.6 21.5 137.9 9.2 147.1 Long-lived assets (5) 304.7 187.5 34.4 240.7 767.3 103.4 870.7 2003 Revenues $ 1,189.9 $ 325.9 $ 123.5 $ 0.0 $ 1,639.3 $ 319.0 $ 1,958.3 Bad debt 64.1 0.8 1.0 0.0 65.9 6.4 72.3 Depreciation 10.9 3.9 3.1 24.5 42.4 3.2 45.6 Amortization (2) 16.9 27.8 16.3 0.0 61.0 0.5 61.5 Royalty advances expensed 25.8 2.5 0.9 0.0 29.2 2.4 31.6 Segment profit (loss) (3) 134.4 41.9 (2.9) (74.1) 99.3 19.4 118.7 Segment assets 749.1 300.2 66.3 408.2 1,523.8 277.2 1,801.0 Goodwill 126.3 82.3 10.2 0.0 218.8 27.2 246.0 Expenditures for long-lived assets (4) 73.8 38.1 24.9 48.8 185.6 33.3 218.9 Long-lived assets (5) 302.8 191.7 39.9 247.0 781.4 99.9 881.3 2002 Revenues $ 1,168.6 $ 316.9 $ 129.8 $ 0.0 $ 1,615.3 $ 301.7 $ 1,917.0 Bad debt 58.5 0.9 2.1 0.0 61.5 7.2 68.7 Depreciation 8.6 3.4 1.5 17.7 31.2 4.4 35.6 Amortization (2) 16.0 22.8 11.4 0.0 50.2 1.0 51.2 Royalty advances expensed 23.6 1.6 0.8 0.0 26.0 0.6 26.6 Segment profit (loss) (3) 178.4 44.1 (0.2) (60.2) 162.1 24.6 186.7 Segment assets 689.5 303.8 55.3 358.1 1,406.7 222.9 1,629.6 Goodwill 129.5 82.9 10.0 0.0 222.4 33.8 256.2 Expenditures for long-lived assets (4) 112.5 51.9 22.4 47.8 234.6 8.7 243.3 Long-lived assets (5) 287.2 187.6 33.6 223.2 731.6 72.8 804.4
(1) | Overhead includes all domestic corporate amounts not allocated to reportable segments, which includes unallocated expenses and costs related to the management of corporate assets. For fiscal 2003, includes $1.9 for the settlement of a securities lawsuit initiated in 1997. For fiscal 2002, includes $1.2 regarding the settlement of a litigation and related costs. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, fulfillment and distribution facilities located in Missouri and Arkansas, and an industrial/office building complex in Connecticut. | ||
(2) | Includes amortization of prepublication costs, production costs and other intangibles with definite lives. | ||
(3) | Segment profit/(loss) | ||
(4) | Includes expenditures for | ||
(5) | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles, royalty advances, |
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The following table separately sets forth information for the three fiscal years ended May 31 for the United States direct-to-home continuity programs, which includes unallocated expensesconsist primarily of the business formerly operated by Grolier Incorporated (“Grolier”) and the costs
related to the management of corporate assets. For fiscal 2000, this
includes non-recurring charges related to the establishment of a litigation
reserve of $6.7 and to the liquidation of certain stock options of $1.8.
Unallocated assets are principally comprised of deferred income taxes and
property, plant and equipment related to the Company's headquartersincluded in the metropolitan New York area, its National Service Operation locatedChildren’s Book Publishing and Distribution segment, and for all other businesses included in Missouri and an industrial/office building complex in Connecticut.
(2) Includes amortization of goodwill, intangible assets, and prepublication
and production costs.
(3) Segment profit/(loss) represents earnings before interest and income taxes.
(4) EDUCATIONAL PUBLISHING segment loss for fiscal 2001 reflects the Company's
decision not to update SCHOLASTIC LITERACY PLACE(R), which resulted in a
$72.9 special charge to cost of goods sold.
(5) Includes property, plant and equipment, prepublication costs, goodwill and
other intangibles, royalty advances and production costs.
(6) Includes expenditures for property, plant and equipment, investments in
prepublication, production costs, royalty advances, and acquisitions of
businesses.
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2004 2003 2002 2004 2003 2002 2004 2003 2002 Revenues $ 203.8 $ 212.3 $ 209.0 $ 1,154.8 $ 977.6 $ 959.6 $ 1,358.6 $ 1,189.9 $ 1,168.6 Bad debt 49.9 41.9 39.6 28.7 22.2 18.9 78.6 64.1 58.5 Depreciation 0.5 0.3 0.4 12.7 10.6 8.2 13.2 10.9 8.6 Amortization (1) 1.3 1.5 0.7 14.7 15.4 15.3 16.0 16.9 16.0 Royalty advances
expensed 0.8 4.5 1.2 19.9 21.3 22.4 20.7 25.8 23.6 Business profit (loss) (2) (10.7) 30.7 39.7 125.5 103.7 138.7 114.8 134.4 178.4 Business assets 234.8 252.1 240.8 502.9 497.0 448.7 737.7 749.1 689.5 Goodwill 92.4 93.0 93.4 35.5 33.3 36.1 127.9 126.3 129.5 Expenditures for
long-lived assets (3) 4.6 6.8 9.5 48.7 67.0 103.0 53.3 73.8 112.5 Long-lived assets (4) 143.9 142.5 142.6 160.8 160.3 144.6 304.7 302.8 287.2
(1) | Includes amortization of prepublication costs and other intangibles with definite lives. | ||
(2) | Business profit (loss) represents earnings (loss) before other income (expense), interest expense, net and income taxes. In fiscal 2004, Direct-to-home and All Other include charges of $14.9 and $7.8, respectively, related to the Company’s review of the continuity business. | ||
(3) | Includes expenditures for property, plant and equipment, investments in prepublication costs, royalty advances and acquisitions of businesses. | ||
(4) | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles and royalty advances. |
3. DEBT
The following summarizes debt as of May 31: Carrying Fair Carrying Fair Value Value Value Value Lines of Credit $ 23.0 $ 23.0 $ 28.5 $ 28.5 Credit Agreement and Revolver 14.2 14.2 — — 7% Notes due 2003, net of discount — — 125.0 128.5 5.75% Notes due 2007, net of premium/discount 305.5 313.5 303.8 322.4 5.75% Notes due 2007 – swap valuation adjustment — — 5.6 5.6 5% Notes due 2013, net of discount 172.8 163.1 172.6 182.7 Other debt 1.1 1.1 0.4 0.4 Total debt 516.6 514.9 635.9 668.1 Less lines of credit and short-term debt (24.1) (24.1) (153.7) (157.2) Total long-term debt $ 492.5 $ 490.8 $ 482.2 $ 510.9
Short-term debt is carried at cost that approximates fair value. Fair values were estimated based on market quotes, where available, or dealer quotes. |
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The acquisition of Grolier Incorporated ("Grolier") for $400.0 was financed byfollowing table sets forth the Company using bank debt, of which $350.0 was borrowed under a new credit
facility (the "Grolier Facility") and the remaining $50.0 was borrowed under the
Company's existing Loan Agreement (described below). The Grolier Facility became
effective on June 22, 2000, and expires on June 21, 2002. Scholastic Inc., (a
wholly-owned subsidiarymaturities of the Company) iscarrying values of the borrower, and the Company is the
guarantor. AtCompany’s debt obligations as of May 31, 2001, the Company2004 for fiscal years ended May 31:
2005 $ 24.1 2006 — 2007 305.5 2008 — 2009 14.2 Thereafter 172.8 Total debt
Lines of Credit
Scholastic Corporation’s international subsidiaries had $350.0unsecured lines of credit available in local currencies equivalent to $62.1 and $57.8 at May 31, 2004 and 2003, respectively. There were borrowings equivalent to $23.0 and $28.5 outstanding under the Grolier Facilitythese credit lines at aMay 31, 2004 and 2003, respectively. These lines of credit are considered short-term in nature. The weighted average interest rate of 5.1%.
Borrowings bear interest at the prime rate or 0.39% to 1.10% over LIBOR (as
defined). The Grolier Facility also provides for a facility fee ranging from
0.085% to 0.25%, basedrates on the Company's credit rating. Based on the Company's
current credit rating, the interest rateoutstanding amounts were 5.48% and facility fee charged are 0.575%
over LIBOR6.89% at May 31, 2004 and 0.125%,2003, respectively. The Grolier Facility contains certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions.
LOAN AGREEMENT
The Company
Credit Agreement
On March 31, 2004, Scholastic Corporation and Scholastic Inc. are joint and several borrowers underentered into an amended
and restated loanunsecured revolving credit agreement with certain banks effective(the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire on August 11, 1999 and
amended June 22, 20002004 (the "Loan Agreement"“Loan Agreement”). The LoanCredit Agreement, which expires on August 11, 2004,March 31, 2009, provides for aggregate borrowings of up to $170.0$190.0 (with a right in certain circumstances to increase borrowings to $200.0)$250.0), including the issuance of up to $10.0 in letters of credit, of which none was outstanding at
May 31, 2001.credit. Interest under this facility is either at the prime rate or 0.325% to 0.90%0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.15%0.25% if borrowings exceed 33%50% of the total facility. The amounts charged vary based upon the Company'sCompany’s credit rating. Based on the Company's current credit rating, theThe interest rate and facility fee and utilization fee are 0.475%as of May 31, 2004 were 0.55% over LIBOR 0.150% and 0.075%0.15%, respectively. The LoanCredit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. REVOLVER
The CompanyOn May 31, 2004, $12.0 was outstanding under the Credit Agreement at a weighted average interest rate of 1.7%.
Revolver
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under a
Revolving Loan Agreementan unsecured revolving loan agreement with a bank effective November 10, 1999 and amended
June 22, 2000 (the "Revolver"“Revolver”). ItAs amended effective April 30, 2004, the Revolver provides for unsecured revolving credit loans of up to $40.0 and expires on August 11, 2004, of which none was outstanding at
MayMarch 31, 2001.2009. Interest under this facility is either at the prime rate minus 1%, or 0.325%0.375% to 0.90%1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon the Company'sCompany’s credit rating. Based on the Company's current credit rating, theThe interest rate and facility fee are 0.475%as of May 31, 2004 were 0.60% over LIBOR and 0.150%0.15%, respectively. The Revolver hascontains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2004, $2.2 was outstanding under the Revolver at a weighted average interest rate of 3.0%. There were no borrowings outstanding under the Revolver at May 31, 2003.
7% NOTES DUENotes due 2003
On December 23, 1996, the Company issued
Scholastic Corporation repaid all $125.0 of its 7% Notes (the "Notes"). The
Notes are unsecured and unsubordinated obligations of the Company and will
matureat maturity on December 15, 2003.2003, using cash on hand and borrowings available under the Loan Agreement and the Revolver made possible by the issuance of the 5% Notes, as defined below.
45
5.75% Notes due 2007
In January 2002, Scholastic Corporation issued $300.0 of 5.75% Notes (the “5.75% Notes”). The 5.75% Notes are not redeemable prior to maturity.senior unsecured obligations that mature on January 15, 2007. Interest on the 5.75% Notes is payable semi-annually on DecemberJuly 15 and June 15 of
each year.
CONVERTIBLE SUBORDINATED DEBENTURES
On August 18, 1995, the Company sold $110.0 of 5.0% Convertible Subordinated
Debentures due August 15, 2005 (the "Debentures") under Regulation S and Rule
144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg
Stock Exchange and are designated for trading in the Portal system of the
National Association of Securities Dealers, Inc.
Interest on the Debentures is payable semi-annually on August 15 and FebruaryJanuary 15 of each year. The Debentures are redeemable at the option of the Company in
whole, but not in part,may, at any time, onredeem all or after August 15, 1998a portion of the 5.75% Notes at a redemption price (plus accrued interest to the date of redemption) equal to the greater of (i) 100% of the principal amount, plus accrued interest. Each Debenture is convertible, ator (ii) the holder's option any time prior to maturity, into Common Stocksum of the Company at
a conversion pricepresent values of $38.43 per share.
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The Debentures are subordinatedthe remaining scheduled payments of principal and interest discounted to the Loandate of redemption.
Interest Rate Swap Agreement
In February 2002, Scholastic Corporation entered into an interest rate swap agreement, designated as a fair value hedge as defined under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” whereby the RevolverCompany received a fixed interest rate payment from, and paid an amount based on a variable rate to, the counterparty based on a notional amount, in order to exchange the fixed rate payments on a portion of the 5.75% Notes for variable rate payments. In accordance with SFAS No. 133, the swap was considered perfectly effective and all changes in fair value were recorded to Other assets and Long-term debt. On May 28, 2003, $50.0 of the original $100.0 notional amount was settled and the Company received a payment of $5.4 from the counterparty. On November 3, 2003, the remaining $50.0 under the agreement was settled, and the Company received a payment of $3.8 from the counterparty. The cash received was used to fully reduce the Other asset previously established, and the corresponding credit is being amortized over the remaining term of the 5.75% Notes. LINES OF CREDIT
The Company's international subsidiaries had unsecured linesfair value of credit available
of $50.5 and $37.1this interest rate swap agreement was $5.6 at May 31, 2001 and 2000, respectively. There were $23.1 and
$8.5 outstanding under these credit lines at May 31, 2001 and 2000,
respectively. These lines2003.
5% Notes due 2013
On April 4, 2003, Scholastic Corporation issued $175.0 of credit5% Notes (the “5% Notes”). The 5% Notes are considered short-term in nature. The
weighted average interest ratessenior unsecured obligations that mature on April 15, 2013. Interest on the outstanding amounts were 7.45%5% Notes is payable semi-annually on April 15 and 6.40%October 15 of each year. The Company may at May 31, 2001any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and 2000, respectively.
interest discounted to the date of redemption.
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
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'sCompany’s operating leases was $44.0, $35.9$47.8, $48.3 and $32.2$44.2 for the fiscal years ended May 31, 2001, 20002004, 2003 and 1999,2002, respectively. These rentals includeThe rent payments under the
terms of theare subject to escalation provisions and are net of sublease income. The aggregate minimum future annual rental commitments at May 31, 2001,2004 under all non-cancelable operating leases, totaling $345.9$304.9, are as follows: 2002 - $38.2;
2003 - $33.7; 2004 - $29.0; 2005 - $21.8;– $43.1; 2006 - $18.6;– $34.1; 2007 – $24.1; 2008 – $17.8; 2009 – $13.2; later years - $204.6.
– $172.6.
The Company had certain contractual commitments, principally relating to royalty advances, at May 31, 20012004 totaling $27.4.$18.7. The aggregate annual commitments are as follows: 2002 - $24.7; 2003 - $1.9; 2004
- - $0.4 ; 2005 - $0.4;– $14.8; 2006 - $0; later years - none.
CONTINGENCIES
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, In re Scholastic Corporation Securities Litigation, 97 Civ.II
2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder, resulting from purportedly materially false and
misleading statements to the investing public concerning the financial condition
of the Company. Specifically, the Complaint alleged misstatements and omissions
by the Company pertaining to adverse sales and returns of its popular Goosebumps
book series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001, the
Court of Appeals for the Second Circuit reversed the dismissal of the Second
Amended Consolidated Complaint and remanded the case for further proceedings.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court of New York County
of New York against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. In August 2000, the
Court of Appeals for the Second Circuit vacated the dismissal and remanded the
case for further proceedings. The second action, captioned Parachute Press, Inc.
v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc. (Index No. 99/600507), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court
of New York County of New York. In its two complaints and its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of the total of approximately $36.1 of
advances over the term of the contract, of which approximately $15.3 had been
paid at the time the first Parachute litigation began, and payment of royalties
set-off by Scholastic against amounts claimed by the Company. On July 21, 2000,
the Company and Parachute each filed motions for partial summary judgement in
the pending state court cases and on May 18, 2001, each party filed motions for
summary judgement in the federal court case. 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. The Company intends to
vigorously defend its position in these proceedings. The Company does not
believe that this dispute will have a material adverse effect on its financial
condition.
[GRAPHIC]26 [LOGO]
In addition to the above actions, various– $3.5; 2007 – $0.4.
Contingencies
Various claims and lawsuits arising in the normal course of business are pending against the Company. The results of these proceedings are not expected to have a material adverse effect on the Company'sCompany’s consolidated financial position or results of operations.
46
5. ACQUISITION OF GROLIER
ACQUISITIONS
Fiscal 2004 Acquisitions
On June 22, 2000, Scholastic Inc. acquired all of the issued and outstanding
capital stock of Grolier, a Delaware corporation, for $400.0 in cash. The
acquisition was financed byJuly 1, 2003, the Company using bank debt,acquired certain assets of which $350.0 was
borrowed underTroll Holdings, Inc. (“Troll”), formerly a national school-based book club operator and publisher, for $4.0 in cash and the Grolier Facility and $50.0 was borrowed under the Company's
existing Loan Agreement. (See Note 3)
Through the purchaseassumption of Grolier,certain ordinary course liabilities. On August 8, 2003, the Company acquired the leading operatorstock of United StatesBTBCAT, Inc., which operates Back to Basics Toys (“Back to Basics”), a direct-to-home book clubs serving children primarily age fivecatalog business specializing in children’s toys, for $4.8 in cash. The assets and under andliabilities of each business acquired were adjusted to their fair values as of the leading print and on-line publisherdate of children's non-fiction and
reference products sold primarily to school libraries in the United States. The
acquisition, also expanded the Company's operations in the United Kingdom, Canada
and Southeast Asia.
The Grolier acquisition has been accounted for underwith the purchase methodprice in excess of accounting and, accordingly, the fair market value assigned to goodwill.
The following summarizes the allocation of the aggregate purchase price of the fiscal 2004 acquisitions:
Value | ||||||||
Inventory | $ 1.7 | |||||||
Other current assets | 1.0 | |||||||
Goodwill | 3.0 | |||||||
Other intangibles | 4.9 | |||||||
Noncurrent deferred taxes | 0.2 | |||||||
Current liabilities | (2.0) | |||||||
Cash paid for acquisitions, net of cash received | $ 8.8 | |||||||
The operating results of Groliereach fiscal 2004 acquisition have been included in the Company'sCompany’s consolidated results of operations since the daterespective dates of acquisition. The effect on operating results of including the acquired business operations on a pro forma basis would not be material.
Fiscal 2003 Acquisition
In fiscal 2003, the Company acquired all worldwide rights to the Goosebumps™ property from Parachute Press, Inc. and its affiliates (“Parachute”) and the parties settled all outstanding disputes between them. Under the agreement, the Company paid $9.7 to acquire all Parachute’s rights in the Goosebumps trademark, to publish existing and future Goosebumps books and to develop and exploit the property on a worldwide basis in all media, without future royalty obligations to Parachute.
Fiscal 2002 Acquisitions
During fiscal 2002, the Company completed the acquisitions of the stock or assets of the following companies: Troll Book Fairs LLC, a national school-based book fair operator; Tom Snyder Productions, Inc., a developer and publisher of interactive educational software and producer of television programming; Sandvik Publishing Ltd., d/b/a Baby’s First Book Club®, a direct marketer of age-appropriate books and toys for young children; Klutz, a publisher and creator of “books plus” products for children; Teacher’s Friend Publications, Inc., a producer and marketer of materials that teachers use to decorate their classrooms; and Nelson B. Heller & Associates, a publisher of business-to-business newsletters. The aggregate purchase price for these acquisitions, net of cash received, was $66.7. In addition to the initial purchase price paid for Klutz of $42.8, the purchase agreement provided for additional payments of up to $31.3 in 2004 and 2005, contingent upon the achievement of certain revenue thresholds. The Company does not expect to make any payment for 2004.
The assets and liabilities at the acquisiton dateof each business acquired were adjusted to their fair values based upon an independent valuation,as of the date of acquisition, with the excess purchase price overin excess of the fair market value assigned to goodwill.
The following summarizes the final allocation of the aggregate purchase price based upon an independent valuation,of the fiscal 2002 acquisitions:
Value | ||||||||
Accounts receivable | $ 9.6 | |||||||
Inventory | 10.7 | |||||||
Other current assets | 6.1 | |||||||
Property, plant and equipment | 1.2 | |||||||
Goodwill | 31.5 | |||||||
Other intangibles | 0.4 | |||||||
Noncurrent deferred taxes | 18.6 | |||||||
Other assets | 0.4 | |||||||
Current liabilities | (11.8) | |||||||
Cash paid for acquisitions, net of cash received | $ 66.7 | |||||||
47
The allocation of the aggregate purchase price was finalized during fiscal 2003. The operating results of each fiscal 2002 acquisition have been included in the Company’s consolidated results of operations since the respective dates of acquisition. The effect on operating results of including the related transaction and financing costs:
- -------------------------------------------------------------------------------
VALUE
- -------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE $ 95.3
INVENTORY 45.5
OTHER CURRENT ASSETS 58.5
PROPERTY, PLANT AND EQUIPMENT, NET 18.9
GOODWILL AND OTHER INTANGIBLES 231.5
OTHER ASSETS 44.2
CURRENT LIABILITIES (85.3)
NON-CURRENT LIABILITIES (12.2)
- -------------------------------------------------------------------------------
CASH PAID FOR ACQUISITION, NET OF CASH RECEIVED $ 396.4
===============================================================================
The following summarizes the goodwill and other intangibles arising from the
acquisition of Grolier:
- -------------------------------------------------------------------------------
VALUE LIFE
- -------------------------------------------------------------------------------
GOODWILL $ 169.9 25 years
- ------------------------------------------
TITLES 29.8 25 years
MAJOR SETS 11.8 25 years
LICENSES 17.8 25 years
CUSTOMER LISTS 2.2 3 years
- ------------------------------------------
TOTAL OTHER INTANGIBLES 61.6
TOTAL GOODWILL AND
OTHER INTANGIBLES $ 231.5
==========================================
acquired business operations on a pro forma basis would not be material.
In connection with the Grolier acquisition,fiscal 2002 acquisitions, the Company established liabilities of approximately $17.7$3.2 at May 31, 2002, relating primarily to severance fringe benefits and related salary continuance as well as certainother exit costs associated with the
integration of certain of Grolier's operational and administrative functions.costs. As of May 31, 2001, approximately $14.72004, $0.2 of these reservesliabilities remained unpaid, whichunpaid.
6. INVESTMENT
In fiscal 2003, the Company entered into a joint venture with The Book People, Ltd., a direct marketer of books in the United Kingdom, to distribute books to the home under the Red House name and through schools under the School Link name. Accordingly, £5.9 (equivalent to $9.1 as of the date of the transaction) relating to Red House was recorded as an investment in the joint venture (see Note 7). The Company also acquired a 15% equity interest in The Book People Group, Ltd. for £12.0 (equivalent to $17.9 as of the date of the transaction) with a possible additional payment of £3.0 based on operating results and contingent on repayment of all borrowings under a £3.0 revolving credit facility established at the date of the transaction by the Company in favor of The Book People Group, Ltd. The revolving credit facility is available to fund the expansion of The Book People Group, Ltd. and for working capital purposes. As of May 31, 2004, £3.0 (equivalent to $5.5 at that date) was outstanding under the revolving credit facility. The equity investment in The Book People Group, Ltd. is included in Other within the Other Assets and Deferred Charges section of the Consolidated Balance Sheets.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets with indefinite lives are expected to be substantially paid during fiscal 2002.
reviewed for impairment annually, or more frequently if impairment indicators arise.
The following table reflects unaudited pro forma resultssummarizes the activity in Goodwill for the years ended of operations of the
Company, giving effectMay 31: 2004 2003 Beginning balance $ 246.0 $ 256.2 Additions due to acquisitions 3.0 0.4 Investment in joint venture — (9.1) Other adjustments 1.3 (1.5) Ending balance $ 250.3 $ 246.0
The following table summarizes Other intangibles subject to the acquisition of Grolier as if it was consummatedamortization as of May 31: 2004 2003 Customer lists $ 2.9 $ 2.9 Accumulated amortization (2.7) (2.5) Net customer lists 0.2 0.4 Other intangibles 4.0 3.9 Accumulated amortization (2.4) (2.3) Net other intangibles 1.6 1.6 Total $ 1.8 $ 2.0
Amortization expense for Other intangibles totaled $0.3, $0.5 and $1.0 for the first dayfiscal years ended May 31, 2004, 2003 and 2002, respectively. Amortization expense for these assets is currently estimated to total $0.3 for each of the fiscal periods endedyears ending May 31, 20012005 and 2006, and $0.2 for each of the fiscal years ending May 31, 2000,2007 through 2009. The weighted average amortization periods for these assets by major asset class are two years and adjusted13 years for the effectscustomer lists and other intangibles, respectively.
48
The following table summarizes Other intangibles not subject to amortization as of amortization of goodwillMay 31: 2004 2003 Net carrying value by major class: Titles $ 31.0 $ 31.0 Licenses 17.2 17.2 Major sets 11.4 11.4 Trademarks and other 17.5 12.6 Total $ 77.1 $ 72.2
Trademarks and other increased interest
expense on debt relatedby $4.9, relating to the acquisition. This information does not
necessarily reflect the actual results of operations that would have occurred
had the purchase been made at the beginning of the periods presented, nor is it
necessarily indicative of future results of operations of the combined
companies.
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
REVENUES $ 1,997.9 $ 1,844.5
NETfiscal 2004 Troll and Back to Basics acquisitions.
8. INCOME 37.5 34.2
NET INCOME PER CLASS A
AND COMMON SHARE:
BASIC $ 1.08 $ 1.02
DILUTED $ 1.04 $ 1.01
[LOGO] [GRAPHIC]27
6. INCOME TAXES
The provisions for income taxes for the fiscal years ended May 31 are based on earnings/ (losses)earnings before taxes and Cumulative effect of accounting change as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
UNITED STATES $ 50.0 $ 82.4 $ 63.0
NON-UNITED STATES 7.1 (2.0) (4.1)
- -------------------------------------------------------------------------------
$ 57.1 $ 80.4 $ 58.9
===============================================================================
2004 2003 2002 United States $ 89.9 $ 81.8 $ 144.7 Non-United States 0.6 8.3 8.6 $ 90.5 $ 90.1 $ 153.3
The provisions for income taxes attributable to earnings before Cumulative effect of accounting change for the fiscal years ended May 31 consist of the following components:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
FEDERAL
CURRENT $ 26.9 $ 37.6 $ 21.3
DEFERRED (13.5) (12.8) (2.6)
- -------------------------------------------------------------------------------
$ 13.4 $ 24.8 $ 18.7
===============================================================================
STATE AND LOCAL
CURRENT $ 4.0 $ 4.2 $ 2.7
DEFERRED (2.8) (2.4) 0.2
- -------------------------------------------------------------------------------
$ 1.2 $ 1.8 $ 2.9
===============================================================================
INTERNATIONAL
CURRENT $ 5.0 $ 2.3 $ 0.2
DEFERRED 1.2 0.1 0.3
- -------------------------------------------------------------------------------
$ 6.2 $ 2.4 $ 0.5
===============================================================================
TOTAL
CURRENT $ 35.9 $ 44.1 $ 24.2
DEFERRED (15.1) (15.1) (2.1)
- -------------------------------------------------------------------------------
$ 20.8 $ 29.0 $ 22.1
===============================================================================
2004 2003 2002 Federal Current $ 18.9 $ 11.5 $ 29.4 ��Deferred 6.2 13.4 15.4 $ 25.1 $ 24.9 $ 44.8 State and local Current $ 4.7 $ 3.4 $ 3.7 Deferred 0.8 0.9 2.0 $ 5.5 $ 4.3 $ 5.7 International Current $ 5.6 $ 4.3 $ 3.5 Deferred (4.1) (2.0) 0.6 $ 1.5 $ 2.3 $ 4.1 Total Current $ 29.2 $ 19.2 $ 36.6 Deferred 2.9 12.3 18.0 $ 32.1 $ 31.5 $ 54.6
The provisions for income taxes attributable to continuing operationsearnings before Cumulative effect of accounting change for the fiscal years ended May 31 differ from the amount of tax determined by applying the federal statutory rate as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
COMPUTED FEDERAL
STATUTORY PROVISION $ 20.0 $ 28.1 $ 20.6
STATE INCOME TAX PROVISION,
NET OF FEDERAL INCOME
TAX BENEFIT 0.8 1.2 1.9
DIFFERENCE IN EFFECTIVE
TAX RATES ON EARNINGS OF
FOREIGN SUBSIDIARIES 1.8 0.2 (0.1)
CHARITABLE CONTRIBUTIONS (1.6) (0.8) (0.5)
OTHER - NET (0.2) 0.3 0.2
- -------------------------------------------------------------------------------
TOTAL PROVISION FOR
INCOME TAXES $ 20.8 $ 29.0 $ 22.1
===============================================================================
EFFECTIVE TAX RATES 36.5% 36.1% 37.5%
===============================================================================
The undistributed earnings of foreign subsidiaries at May 31, 2001 are $15.4.
Any remittance of foreign earnings would not result in any significant
additional tax.
2004 2003 2002 Computed federal statutory provision $ 31.7 $ 31.5 $ 53.7 State income tax provision, net of federal income tax benefit 3.6 2.8 3.6 Difference in effective tax rateson earnings of foreign subsidiaries (3.0) (1.4) (0.7) Charitable contributions — (1.4) (1.8) Other – net (0.2) 0.0 (0.2) Total provision for income taxes $ 32.1 $ 31.5 $ 54.6 Effective tax rates 35.5% 35.0% 35.6%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes as determined under enacted tax laws and rates. The tax effects of these items that give rise to deferred tax assets and liabilities as of May 31 for the indicated fiscal years are as follows:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS:
TAX UNIFORM CAPITALIZATION $ 26.1 $ 28.0
INVENTORY RESERVES 23.1 14.2
ALLOWANCE FOR DOUBTFUL ACCOUNTS 22.4 4.8
OTHER ACCOUNTING RESERVES 23.4 8.0
POST-RETIREMENT, POST-EMPLOYMENT
AND PENSION OBLIGATIONS 11.6 7.6
THEATRICAL MOTION PICTURE
ACCOUNTING - 2.5
PREPAID EXPENSES (11.8) -
DEPRECIATION (11.7) (4.8)
OTHER - NET (4.4) (5.3)
- -------------------------------------------------------------------------------
TOTAL NET DEFERRED TAX ASSETS $ 78.7 $ 55.0
===============================================================================
2004 2003 Net deferred tax assets: Tax uniform capitalization $ 24.2 $ 24.3 Inventory reserves 18.5 16.7 Allowance for doubtful accounts 21.5 19.6 Other accounting reserves 13.5 18.4 Post-retirement, post-employment and pension obligations 13.6 21.3 Tax carryforwards 5.7 5.1 Prepaid expenses (11.0) (15.2) Depreciation and amortization (23.9) (10.7) Other – net (1.5) (1.5) Total net deferred tax assets $ 60.6 $ 78.0
Net deferred tax assets of $78.7$60.6 at May 31, 20012004 and $55.0$78.0 at May 31, 20002003 include $1.0$4.0 and $1.1$1.2 in Other assetsaccrued expenses at May 31, 2004 and $(11.6)2003, respectively, and $(3.3)$13.9 and $3.1 in Other noncurrent liabilities at May 31, 20012004 and 2000,2003, respectively.
7.
49
The undistributed earnings of foreign subsidiaries at May 31, 2004 were $22.7. Any remittance of foreign earnings would not result in any significant additional tax.
At May 31, 2004, the Company had a charitable deduction carryforward of $7.2, which expires in the fiscal year ending 2008, and foreign operating loss carryforwards of $10.7, which do not have expiration dates.
The Company had tax reserves totaling $8.3 and $8.0 at May 31, 2004 and 2003, respectively.
9. CAPITAL STOCK AND STOCK OPTIONS
On September 23, 2000, the Company's stockholders approved an increase in the
total number
Scholastic Corporation has authorized capital stock of shares authorized to be issued by the Company to 74,500,000
shares: 70,000,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"); 2,500,000 shares of Class A Stock, par value $0.01 per share (the "Class“Class A Stock"Stock”); 70,000,000 shares of Common Stock, par value $0.01 per share (the “Common Stock”); and 2,000,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"“Preferred Stock”).
Pursuant to the 2-for-1 Stock Split, on January 16, 2001, shareholders of record
as of December 29, 2000 received one additional share of
Class A and Common Stock or Class A
Stock for each share held on the record date. All outstanding rights under stock
options and stock purchase plans to acquire the Company's Common Stock and under
the Company's 5% Convertible Subordinated Debentures due 2005 were adjusted to
give effect to the 2-for-1 Stock Split.
At May 31, 2001, 33,632,047 shares of Common Stock,2004, 1,656,200 shares of Class A Stock and no shares of Preferred Stock were issued and outstanding, and 55,31937,930,986 shares of Common Stock were designated as Treasury Stock.outstanding. At May 31, 2001, the
Company2004, Scholastic Corporation had reserved for issuance 11,375,96011,794,154 shares of Common Stock. Of these shares, 6,278,9849,387,702 shares were reserved for issuance under the Company's stock
optionCompany’s stock-based plans (including shares available for grant and stock options currently outstanding), 1,656,200 shares were
[GRAPHIC]28 [LOGO]
578,428and 750,252 shares were reserved for future issuances under the Company's Management and Employee Stock
Purchase Plans, and 2,862,348 shares were reserved for issuance upon conversion
of the Convertible Debentures.
COMMON AND CLASS A STOCK
Company’s employee stock purchase plans.
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 CompanyScholastic Corporation has not paid any cash dividends since its public offering in 1992 and has no current plans to pay any dividends on its Common or Class A Stock or Common Stock.
PREFERRED STOCK
Preferred Stock
The Company's authorized Preferred Stock may be issued in one or more series, with limited voting rights, with the rights of each series, including voting rights, to be determined by the Board of Directors before each issuance. To date, no shares of Preferred Stock have been issued.
STOCK OPTIONS
In fiscal 1996,
50
Stock Options
At May 31, 2004, the Company adoptedmaintained three stockholder-approved employee stock-based benefit plans: the Scholastic Corporation 1992 Stock Option Plan (the “1992 Plan”), under which no further awards can be made; the Scholastic Corporation 1995 Stock Option Plan (the "1995
Plan"“1995 Plan”), which; and the Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”). The 1995 Plan provides for the grantissuance of two types of options to purchase Company stock: incentive stock options, which qualify for special treatment under the Internal Revenue Code, and options that are not so qualified, called non-qualified stock options. The 2001 Plan provides for the issuance of non-qualified stock options, and
incentive stock options. The 1995 Plan supplemented the 1992 Stock Option Plan
(the "1992 Plan").options, restricted stock and other stock-based awards. At May 31, 2001,2004, non-qualified stock options to purchase 5,099,904594,956; 4,219,256; and 743,9002,894,875 shares of Common Stock were outstanding under the 1992 Plan, 1995 Plan and 1992 Plans,2001 Plan, respectively; 111,180 and no19,990 and 1,095,125 shares of Common Stock were available for additional awards under the 1995 and 1992 Plans, respectively. On July 18, 2001,
the Board of Directors authorized, subject to the approval of the holders of the
Class A Stock, the Scholastic Corporation 2001 Stock Incentive Plan (the "2001
Plan"), which provides for the issuance of up to 4,000,000 shares of Common
Stock in connection with the grant of stock options, restricted stock and other
stock-based awards. The 2001 Plan, will be submittedrespectively.
The Company also maintains two stockholder-approved stock option plans for outside directors: the approval of the
holders of the Class A Stock at the Company's annual meeting of stockholders to
be held on September 20, 2001.
In fiscal 1998, the Company adopted the stockholder approved 19971992 Outside Directors'Directors’ Stock Option Plan (the "1997 Directors'“1992 Directors’ Plan”), under which no further awards can be made, and the 1997 Outside Directors’ Stock Option Plan"Plan (the “1997 Directors’ Plan”), which provides
for the grant of non-qualified options to purchase Common Stock, with 360,000
shares originally reserved for issuance. This plan. The 1997 Directors’ Plan, as amended, provides for the automatic grant of options to non-employee directors on the date of each Januaryannual stockholders’ meeting of non-qualified stock options to purchase 3,0006,000 shares of Common Stock. The 1997 Directors' Option Plan supplemented the 1992 Outside
Directors' Stock Option Plan (the "1992 Directors' Option Plan"). At May 31, 2001,2004, options to purchase 162,000311,500 and 30,00012,000 shares of Common Stock were outstanding under the 1997 Directors’ Plan and options on 132,000the 1992 Directors’ Plan, respectively, and zero240,000 shares of Common Stock were available for additional awards under the 1997 and 1992 Directors' Option Plans,
respectively.Directors’ Plan. In January 2001 and 2000,September 2003, options were awarded under the 1997 Directors' OptionDirectors’ Plan at an exercise pricesprice of $43.88 and $30.39, respectively.
$30.88. On September 23, 2003, the Class A Stockholders approved an increase in the number of shares of Common Stock available for issuance under the 1997 Directors’ Plan of 270,000 shares.
Generally, options granted under the various plans may not be exercised for a minimum of one year after the date of grant and expire ten years and one day
after the date of grant.
[LOGO] [GRAPHIC]29
The following table sets forth activity under the various stock option plansactivity for the three fiscal years ended May 31:
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - BEGINNING OF YEAR 5,568,966 $ 22.05 5,435,994 $ 19.94 5,235,318 $ 19.21
GRANTED 1,724,000 32.81 1,310,200 26.04 666,800 21.82
EXERCISED (1,170,012) 20.68 (1,046,228) 15.90 (411,226) 14.08
CANCELLED (87,150) 30.16 (131,000) 23.67 (54,898) 17.70
- -----------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - END OF YEAR 6,035,804 $ 25.28 5,568,966 $ 22.05 5,435,994 $ 19.94
===================================================================================================================================
EXERCISABLE - END OF YEAR 3,588,804 $ 22.47 3,180,814 $ 21.17 3,327,442 $ 19.23
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding – beginning of year 6,852,258 $ 28.65 5,539,712 $ 27.58 6,035,804 $ 25.28 Granted 1,599,000 27.90 1,392,240 32.69 692,000 42.62 Exercised (197,296) 23.23 (59,694) 21.49 (911,292) 22.07 Cancelled (221,375) 32.89 (20,000) 34.31 (276,800) 32.79 Outstanding – end of year 8,032,587 $ 28.52 6,852,258 $ 28.65 5,539,712 $ 27.58 Exercisable – end of year 5,279,912 $ 27.43 4,669,518 $ 26.05 4,083,962 $ 24.52
51
The following table sets forth information as of May 31, 20012004 regarding weighted average exercise prices and weighted average remaining contractual lives andfor the
remaining outstanding stock options, under the various stock option plans, sorted by range of exercise price:
- -----------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
OPTIONS WEIGHTED AVERAGE REMAINING NUMBER WEIGHTED AVERAGE
PRICE RANGE NUMBER EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
$ 13.16 - $ 17.55 48,000 $ 16.83 2.3 years 48,000 $ 16.83
$ 17.56 - $ 21.94 2,317,824 18.29 6.5 years 1,885,024 18.31
$ 21.95 - $ 26.33 1,166,080 25.45 7.7 years 891,880 25.40
$ 26.34 - $ 30.71 765,900 29.52 5.3 years 739,900 29.56
$ 30.72 - $ 35.10 1,401,000 31.76 9.0 years 24,000 33.24
$ 35.11 - $ 43.88 337,000 37.23 9.6 years - -
- -----------------------------------------------------------------------------------------------------------------------------------
Under the provisions of SFAS 123, the Options Outstanding Weighted Average Weighted Weighted Remaining Average Average Contractual Number Exercise Number Exercise Price Life Exercisable Price $ 15.73 — $ 20.97 1,663,666 $ 18.36 3.5years 1,663,666 $ 18.36 $ 20.98 — $ 26.21 1,292,281 25.28 6.2 years 992,856 25.42 $ 26.22 — $ 31.45 2,211,400 28.32 7.0 years 727,900 29.45 $ 31.46 — $ 36.69 2,117,990 33.60 7.0 years 1,391,990 32.93 $ 36.70 — $ 41.94 131,750 38.30 6.1 years 80,500 38.18 $ 41.95 — $ 47.18 533,500 43.03 7.5 years 354,000 43.12 $ 47.19 — $ 52.42 82,000 49.99 7.6 years 69,000 49.88
Employee Stock Purchase Plan
The Company applies APB 25 and related
interpretations in accounting for its stock option plans. In accordance with APB
25, no compensation expense was recognized because the exercise price of the
Company's stock options was equal to the market price of the underlying stock on
the date of grant and the exercise price and number of shares subject to grant
were fixed. During fiscal 2000, the Company recordedmaintains an expense of $1.8 relating
to the liquidation of certain stock options.
If the Company had elected to recognize compensation expense based on the fair
value of the options granted at the date of grant and in respect to shares
issuable under the Company's employee stock purchase plans as prescribed by SFAS
123, net income and diluted earnings per share for the three fiscal years ended
May 31 would have been reduced to the pro forma amounts indicated in the table
below:
Management Stock Purchase Plan
The Company implemented themaintains a Management Stock Purchase Plan ("MSPP"(“MSPP”), which allows certain members of senior management to defer up to 100% of their annual cash bonus payment in the form of restricted stock units ("RSUs"(“RSUs”). For fiscal 2001, theThe RSUs are purchased by the employee at a 15% discount from the lowest closing price of the Company's Common Stock on NASDAQ during the fiscal quarter in which such bonuses are payable and are converted into shares of the Company's Common Stock on a one-for-one basis at the end of the applicable deferral period. Effective June 1, 2002, the MSPP was amended to increase the discount on the purchase of RSUs to 25% from 15%. During fiscal 2001,2004, 2003 and 2002, the Company allocated 27,3300 RSUs, 62,071 RSUs, and 45,301 RSUs to participants under the MSPP at a weighted average price of $22.61$0, $25.22 and $30.60 per RSU, resulting in an expense of $0.1.
8.$0.4, $0.5 and $0.2, respectively. Effective December 18, 2002, the MSPP was amended to allow certain additional management personnel to purchase RSU’s at a discount rate of 10%.
10. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has a defined benefit pensioncash balance retirement plan (the "U.S. Pension Plan"“Pension Plan”), which covers the majority of the U.S.United States employees who meet certain eligibility requirements. The Company funds all of the contributions for the Pension Plan. Benefits generally are based on the Company’s contributions and interest credits allocated to participants accounts based on years of benefit service and on career average
compensation. Effective June 1, 1999, the U.S. Pension Plan was converted to a
cash balance plan which is funded entirely by contributions from the Company. In
prior years, the U.S. Pension Plan was funded by contributions from both
participants and the Company.
As a result of the acquisition of Grolier, the Grolier Defined Benefit Plan (the
"Grolier Plan"), which covered substantially all its U.S. employees, was merged
into the Company's U.S. Pension Plan in January, 2001. The results of the
combination are reflected in the following tables.annual pensionable earnings. It is the Company'sCompany’s policy to fund the minimum amount required by the Employee Retirement Income Security Act ("ERISA"(“ERISA”) of 1974, as amended.
The Company's U.K. operation
Scholastic Ltd., an indirect subsidiary of Scholastic Inc. located in the United Kingdom, has a defined
52
benefit pension plan (the "U.K.“U.K. Pension Plan"Plan”) whichthat covers certain United Kingdomits employees who meet various eligibility requirements. Benefits are based on years of service and on a percentage of compensation near retirement. The U.K. Pension Plan is funded by contributions from the U.K. subsidiaryScholastic Ltd. and its employees.
The Company's
Grolier Canadian operationLtd., an indirect subsidiary of Scholastic Inc. located in Canada, provides a defined benefit pension plan (the "Grolier“Grolier Canada Pension Plan"Plan”) whichthat covers a majority ofits employees who meet certain eligibility requirements. All full time employees are eligible to participate in the plan after two years of employment. The Company'sGrolier Ltd.’s contributions to the fund have been suspended due to an actuarial surplus. Employees are not required to contribute to the fund.
The Company’s pension plans have different measurement dates as follows: for the Pension Plan – May 31, 2004; for the U.K. Pension Plan and the Grolier Canada Pension Plan – March 31, 2004.
Post-Retirement Benefits
The Company provides certain Post-Retirement Benefits to retired United States-based employees (the "U.S. Post-Retirement
Benefits"“Post-Retirement Benefits”) consisting of certain healthcare and life insurance benefits that the
Company provides to retired U.S. employees.benefits. A majority of the Company's U.S.these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. [LOGO] [GRAPHIC]In fiscal 2004, the Company amended the Post-Retirement Benefits by changing the prescription drug co-pay schedule for Medicare-eligible participants to be the same as for non-Medicare eligible participants. The impact of this amendment was to reduce the benefit obligation by $2.8. In fiscal 2003, the Company amended the Post-Retirement Benefits by increasing the participants’ contribution rate. The impact of this amendment was to reduce the benefit obligation by $8.6. The balance of these two amendments was recorded as unrecognized prior service cost and will be amortized over 141/2 years. At May 31,
The following table sets forth the change inweighted average actuarial assumptions utilized to determine the benefit obligation and plan assets
and reconciliation of funded status underobligations for the U.S. Pension Plan, the U.K. Pension Plan and the Grolier Canada Pension Plan (collectively the “Pension Plans”) at May 31: Weighted average assumptions used to
determine benefit obligations: Discount rate 6.5% 6.0% 6.7% 6.0% Rate of compensation increase 4.0% 4.0% — — Weighted average assumptions used to
determine net periodic benefit cost: Discount rate 6.0% 7.3% 6.0% 7.3% Expected long-term return on plan assets 8.9% 8.9% — — Rate of compensation increase 4.0% 4.0% — —
To develop the expected long-term rate of return on assets assumption for its pension plans, the Company, with the assistance of its actuaries, considers historical returns and future expectations. Over the 15-20 year periods ending May 31, 2003, the returns on the portfolio, assuming it was invested at the current target asset allocation in the prior periods, would have been a compounded annual average of 10%-12%. Considering this information and the U.S.potential for lower future returns due to a generally lower interest rate environment, the Company selected an assumed weighted average long-term rate of return of 8.9% for all plans.
53
The following table sets forth changes in benefit obligation and plan assets, the reconciliation of funded status and the (decrease) increase in the minimum pension liability included in accumulated other comprehensive loss for the Pension Plans and the Post-Retirement Benefits for the two fiscal years ended May 31:
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2001 2000 2001 2000
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Pension Benefits Post-Retirement Benefits
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CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 34.5 $ 32.0 $ 14.6 $ 11.5
Service cost 5.1 4.6 0.3 0.7
Interest cost 7.3 2.1 1.4 0.8
Plan participants' contributions 0.5 - - -
Amendments (2.8) (0.9) - -
Actuarial (gains)/losses 3.7 (1.0) 0.8 2.9
Acquisition 63.0 - 2.7 -
Foreign currency exchange rate changes (1.7) (0.5) - -
Benefits paid (6.2) (1.8) (1.5) (1.3)
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BENEFIT OBLIGATION AT END OF YEAR $ 103.4 $ 34.5 $ 18.3 $ 14.6
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CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 26.6 $ 26.2 $ - $ -
Actual (loss)/gain return on plan assets (2.4) 1.4 - -
Company contributions 3.0 1.1 0.2 -
Plan participants' contributions 0.4 - - -
Acquisition 70.6 - - -
Foreign currency exchange rate changes 1.0 (0.3) - -
Benefits paid (6.2) (1.8) (0.2) -
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FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 93.0 $ 26.6 $ 0.0 $ -
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FUNDED STATUS
Underfunded status of the plan(s) $ (10.4) $ (7.9) $ (18.3) $ (14.6)
Unrecognized net actuarial loss 16.4 1.5 0.9 0.1
Unrecognized prior service cost (2.9) (0.2) (0.1) (0.2)
Unrecognized net asset obligation 0.6 0.7 - -
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ACCRUED BENEFIT ASSET/(LIABILITY) $ 3.7 $ (5.9) $ (17.5) $ (14.7)
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AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
Prepaid benefit cost $ 3.3 $ - $ - $ -
Accrued benefit liability (6.0) (5.9) (17.5) (14.7)
Accumulated other comprehensive loss 5.6 - - -
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NET AMOUNT RECOGNIZED $ 2.9 $ (5.9) $ (17.5) $ (14.7)
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WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.6% 7.5% 7.5% 8.0%
Compensation increase factor 4.2% 4.6% - -
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Plan assets consist primarily of stocks, bonds, money market funds 2004 2003 2004 2003 Change in benefit obligation Benefit obligation at beginning of year $ 131.2 $ 111.6 $ 28.8 $ 23.4 Service cost 7.0 5.9 0.5 0.5 Interest cost 7.7 7.7 2.0 1.8 Plan participants’ contributions 0.5 0.6 — — Amendments — 0.2 (2.8) (8.6) Actuarial (gains) losses (7.2) 11.8 5.5 13.9 Foreign currrency exchange rate changes 3.2 2.3 — — Benefits paid (11.2) (8.9) (2.6) (2.2) Benefit obligation at end of year $131.2 $131.2 $ 31.4 $ 28.8 Change in plan assets Fair value of plan assets at beginning of year $ 88.9 $ 87.3 $ — $ — Actual gain (loss) on plan assets 15.8 (2.3) — — Company contributions 19.4 11.0 — — Plan participants’ contributions 0.5 0.4 — — Administrative expenses (0.9) (0.8) — — Foreign currrency exchange rate changes 2.2 2.2 — — Benefits paid (11.2) (8.9) — — Fair value of plan assets at end of year $114.7 $ 88.9 $ — $ — Funded status Underfunded status of the plans $ (16.5) $ (42.3) $ (31.4) $ (28.8) Unrecognized net actuarial loss 37.7 54.0 22.4 18.9 Unrecognized prior service cost (1.8) (2.1) (10.1) (8.1) Unrecognized net asset obligation 0.2 0.4 — — Accrued benefit asset (liability) $ 19.6 $ 10.0 $(19.1) $(18.0) Amounts recognized in the Consolidated Balance Sheets Prepaid benefit cost $ 19.6 $ 8.8 $ — $ — Accrued benefit liability (26.1) (43.3) (19.1) (18.0) Intangible asset 0.1 0.1 — — Accumulated other comprehensive loss 26.0 43.2 — — Net amount recognized $ 19.6 $ 8.8 $(19.1) $(18.0) (Decrease) increase in minimum liability included
in other comprehensive income $ (17.2) $ 21.4 $ — $ —
The accumulated benefit obligation for all Pension Plans was $123.3 and U.S.
government obligations.
[GRAPHIC]32 [LOGO]
pension plansPension Plans with accumulated benefit obligationobligations in excess of plan assets wereis as follows for the fiscal years ended May 31:
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2001 2000
- -------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION $ 97.5 $ 34.5
ACCUMULATED BENEFIT OBLIGATION 90.2 31.5
FAIR VALUE OF PLAN ASSETS 84.5 26.6
WEIGHTED AVERAGE RETURN OF PLAN ASSETS 9.5% 9.1%
- -------------------------------------------------------------------------------
2004 2003 Projected benefit obligations $ 124.0 $ 124.9 Accumulated benefit obligations 117.0 118.9 Fair value of plan assets 106.6 81.7
54
The following table sets forth the components of the net periodic benefit costs under the U.S. Pension Plan, U.K. Pension Plan, Grolier Canada Pension PlanPlans and the U.S. Post-Retirement Benefits for the three fiscal years ended May 31:
2004 2003 2002 2004 2003 2002 Components of Net Periodic Benefit Cost: Service cost $ 7.0 $ 5.9 $ 4.7 $ 0.4 $ 0.5 $ 0.4 Interest cost 7.7 7.7 7.4 2.0 1.8 1.3 Expected return on assets (8.0) (8.6) (8.8) — — — Net amortization and deferrals 0.3 0.1 (0.2) (0.8) (0.6) — Curtailment loss — — 0.2 — — — Decrease in valuation allowance (1.2) — — — — — Recognized net actuarial loss 2.5 1.2 0.5 2.0 1.0 — Net periodic benefit cost $ 8.3 $ 6.3 $ 3.8 $ 3.6 $ 2.7 $ 1.7
Plan Assets
The Company’s investment policy is to actively manage, within acceptable risk parameters, certain asset classes where the potential exists to outperform the broader market.
The total weighted average asset allocations for the Pension Plans at May 31 by asset category are as follows: 2004 2003 Small cap equities 17.0% 17.4% International equities 9.2 10.0 Index fund equities 44.5 42.7 Bonds and fixed interest products 27.0 28.4 Real estate 0.1 — Other 2.2 1.5 Total 100.0% 100.0%
The Company’s investments include weighted average target asset allocations as follows: Grolier U.K. Canada Pension Pension Pension Plan Plan Plan Equity 70.0% 68.0% 35.0% Debt and cash equivalents 30.0 25.0 65.0 Real estate — 7.0 — Total 100.0% 100.0% 100.0%
Contributions
Scholastic Ltd. expects to contribute $0.8 to the U.K. Pension Plan and Scholastic expects to contribute $2.5 to its Post-Retirement Benefits in 2005.
55
Estimated Future Benefit Payments
The following table sets forth the expected future benefit payments under the Pension Plans and the Post-Retirement Benefits by fiscal year:
Pension Benefit Subsidy Benefits Payments Receipts 2005 $ 7.8 $ 2.5 $ — 2006 7.6 2.6 0.1 2007 8.6 2.7 0.3 2008 8.5 2.8 0.3 2009 8.9 2.9 0.3 2010-2014 42.1 14.8 1.7
The 2003 Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy of 28% to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the benefit under Medicare Part D. In May 2004, the FASB issued FSP 106-2 to provide disclosure requirements and guidance in accounting for the impact of the federal subsidy provided by the 2003 Medicare Act. Based on this guidance, the Company has determined that the Post-Retirement Benefits provided to the portion of its post-65 retiree population that have retained a 100% Company-sponsored prescription drug coverage, are the actuarial equivalent of the benefits under Medicare. As a result, in fiscal 2004, the Company recognized a reduction of its accumulated Post-Retirementpost-retirement benefit obligation of $3.9 due to the federal subsidy under the 2003 Medicare Act. Pending any changes to the 2003 Medicare Act of the law, the effect of the subsidy on the measurement of net periodic Post-Retirement Benefits for the current period was determined using a discount ratereduction of 7.75%. Service cost and interest components were determined
using a discount rate of 7.0%. The$0.3.
Assumed health care cost trend rate assumed was 6.2%
with an annual decline of 1% until the rate reaches 5.0% in the year 2002. A
decrease of 1% in therates at May 31: 2004 2003 Health care cost trend rate assumed for the next fiscal year 11.0% 10.0% Rate to which the cost trend is assumed to decline (the ultimate trend rate) 5.0% 5.0% Year that the rate reaches the ultimate trend rate 2013 2013
Assumed health care cost trend rate would resultrates have a significant effect on the amounts reported for the Company’s health care plans. A one percentage point change in decreases of
approximately $1.6 in the accumulated benefit obligation and $0.2 in the annual
net periodic post-retirement benefit cost. An increase of 1% in theassumed health care cost trend raterates would result in increases of approximately $1.1 inhave the accumulated benefit obligation and $0.1 in the annual net periodic
post-retirement benefit cost.
following effects: Increase (Decrease) Total service and interest cost $ 0.2 $ (0.1) Post-retirement benefit obligation 2.3 (1.5)
The Company also provides defined contribution plans for its U.S.-based employees other benefit plans
includingcertain eligible employees. In the United States, the Company sponsors a 401(k) Plan. Forretirement plan and has contributed $5.9, $5.8 and $4.7 for fiscal year 20012004, 2003 and 2000, the Company's
contributions for all plans were $5.2 and $3.8,2002, respectively. For its foreign
subsidiaries,internationally-based employees, the Company provides other defined contribution plans.
9.expenses under these plans totaled $2.3, $1.9 and $1.4 for fiscal 2004, 2003 and 2002, respectively.
56
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three years endingended May 31:
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2001 2000 1999
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NET INCOME FOR BASIC EARNINGS PER SHARE $ 36.3 $ 51.4 $ 36.8
DILUTIVE EFFECT OF DEBENTURES - 3.5 -
ADJUSTED NET INCOME FOR DILUTED EARNINGS PER SHARE $ 36.3 $ 54.9 $ 36.8
WEIGHTED AVERAGE CLASS A AND COMMON SHARES OUTSTANDING
FOR BASIC EARNINGS PER SHARE 34.7 33.4 32.8
DILUTIVE EFFECT OF SHARES ISSUED PURSUANT TO EMPLOYEE STOCK PLANS 1.4 0.8 0.6
DILUTIVE EFFECT OF DEBENTURES - 2.9 -
DILUTIVE EFFECT OF WARRANTS - 0.0 0.0
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ADJUSTED WEIGHTED AVERAGE CLASS A AND COMMON
SHARES FOR DILUTED EARNINGS PER SHARE OUTSTANDING 36.1 37.1 33.4
===================================================================================================================================
EARNINGS PER CLASS A AND COMMON SHARE:
BASIC $ 1.05 $ 1.54 $ 1.13
DILUTED $ 1.01 $ 1.48 $ 1.10
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For fiscal years 2001 and 1999,(Amounts in millions, except per share data) 2004 2003 2002 Net income for basic earningsper share $ 58.4 $ 58.6 $ 93.5 Dilutive effect of Debentures — — 2.1 Adjusted net income for dilutedearnings per share $ 58.4 $ 58.6 $ 95.6 Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings per share 39.4 39.1 36.7 Dilutive effect of Common Stock issued pursuant to stock-based benefit plans 0.7 1.0 1.6 Dilutive effect of Debentures — — 1.8 Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings per share 40.1 40.1 40.1 Earnings per share of Class A Stock and Common Stock: Earnings before Cumulative effect of accounting change: Basic $ 1.48 $ 1.50 $ 2.69 Diluted $ 1.46 $ 1.46 $ 2.51 Cumulative effect of accounting change (net of income taxes): Basic $ — $ — $ (0.14) Diluted $ — $ — $ (0.13) Net income: Basic $ 1.48 $ 1.50 $ 2.55 Diluted $ 1.46 $ 1.46 $ 2.38
On January 11, 2002, pursuant to the effectexercise of the 5.0%Scholastic Corporation’s optional redemption rights, $109.8 of Scholastic Corporation’s 5% Convertible Subordinated Debentures were converted at the option of the holders into 2.9 million shares onof Common Stock and $0.2 were redeemed for cash.
12. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On June 1, 2001, the adjusted weighted average Class ACompany adopted Statement of Position No. 00-2 (“SOP 00-2”), “Accounting by Producers and Common Shares outstandingDistributors of Films.” SOP 00-2 provides that film costs should be accounted for diluted earnings per share is anti-dilutiveunder an inventory model and is
notdiscusses various topics such as revenue recognition and accounting for exploitation costs and impairment assessment. In addition, SOP 00-2 establishes criteria for which revenues should be included in the calculation.
[LOGO] [GRAPHIC]33
10. COST OF GOODS SOLD -Company’s ultimate revenue projections. As a result of the adoption of SOP 00-2, the Company recorded a net of tax charge of $5.2 in the first quarter of fiscal 2002 to reduce the carrying value of its film production costs. This charge is reflected in the Company’s consolidated statements of operations as a Cumulative effect of accounting change and is attributed entirely to the Media, Licensing and Advertising segment.
13. SPECIAL LITERACY PLACE AND OTHERSEVERANCE CHARGES
On April 16, 2001,May 28, 2003, the Company announced a reduction in its decision not to update SCHOLASTIC
LITERACY PLACE(R), its grade K to 6 basal reading textbook program, for any
future state adoptions. This decision has resulted in a pre-tax charge of $72.9.global work force. The impact on earnings per diluted share of this charge is $1.20 per share. The
charge consistedmajority of the following related to Literacy Placeaffected employees were notified in the fiscal year ended May 31, 2003, and other exited
programs: previously capitalized prepublication costs of $51.6, inventory
write-offs of $19.8, andaccordingly the Company established liabilities for severance and other related costs of $1.5, of which
$1.1 remained on$10.9 for that fiscal year. In the Balance Sheet atfiscal year ended May 31, 2001.
11. NON-RECURRING CHARGES
Fiscal 2000 included pre-tax charges2004, the Company established liabilities of approximately $8.5 primarily$3.3 for severance and other related costs with respect to the establishmentaffected employees notified in that fiscal year. These charges are reflected in the Company’s income statement as the Special severance charges for the years ended May 31, 2003 and May 31, 2004.
A summary of a litigation reservethe activity in the established liabilities is detailed in the following an adverse decision in a
lawsuit, which was received on December 10, 1999. table:
Amount | ||||||
Fiscal 2003 liabilities | $ 10.9 | |||||
Fiscal 2003 payments | (1.2) | |||||
Balance at May 31, 2003 | 9.7 | |||||
Fiscal 2004 additional liabilities | 3.3 | |||||
Fiscal 2004 payments | (10.9) | |||||
Balance at May 31, 2004 | $ 2.1 | |||||
57
The case, Scholastic Inc. and
Scholastic Productions, Inc. v. Robert Harris and Harris Entertainment, Inc.,
involved stock appreciation rights allegedly grantedremaining liability of $2.1 is expected to Mr. Harris in 1990 in
connectionbe paid over the next two fiscal years under salary continuance arrangements with a joint venture formed primarily to produce motion pictures.
Although the Company disagreed with the judge's decision and appealed the
ruling,certain affected employees.
14. LITIGATION AND OTHER CHARGES
In fiscal 2003, the Company recorded a pre-tax charge of $1.9 for the settlement of a class action securities lawsuit initiated in 1997, which represented the portion of the total settlement amount of $7.5 that was not paid by the insurance carrier.
In fiscal 20002003, the Company recorded a pre-tax charge of $6.7 to fully reserve
with respect$1.2, related to the case. On July 26, 2001,settlement of a lawsuit filed in 1995, which represents the Courtamount by which the settlement and related legal expenses exceeded a previously recorded liability.
15. OTHER INCOME (EXPENSE)
In the fourth quarter of Appealsfiscal 2004, the Company received a payment of $10.0 in connection with the early termination of a sublease by one of its tenants. This transaction resulted in a pre-tax net gain of $8.0. The impact of this gain on earnings per diluted share was $0.13.
In fiscal 2003, the Company sold a portion of its interest in a French publishing company for $5.2, resulting in a pre-tax gain of $2.9. The impact of this gain on earnings per diluted share was $0.05.
In fiscal 2002, the Second
Circuit reversedCompany wrote off an equity investment of $2.0. The impact of this charge on earnings per diluted share was $0.03.
16. CONTINUITY CHARGES
In fiscal 2004, the lower court decisionCompany recorded charges of $25.4 related to its continuity business. These continuity charges represent write-downs of deferred promotion costs of $12.7 and remanded the case for further
proceedings.inventory from discontinued programs of $6.8, and an increase in bad debts of $2.0, as well as modest increases in returns provisions and related severance costs. These charges are primarily reflected as Cost of Goods Sold; Selling, general and administrative expenses; and Bad debt expense. The Company believes it is correctimpact of this charge on the merits of the case and
intends to vigorously defend its position. The $8.5 of charges also included an
unrelated expense of $1.8 for the liquidation of certain stock options.
12.earnings per diluted share was $0.41.
17. OTHER FINANCIAL DATA
Deferred promotion costs were $44.0$40.6 and $4.8$52.8 at May 31, 20012004 and 2000,2003, respectively. Promotion costs expensed were $94.7, $9.0$119.2, $109.1 and $8.1$94.5 for the fiscal years ended May 31, 2001, 20002004, 2003 and 1999,2002, respectively. ThesePromotional expense consists of $111.1, $99.9 and $88.0 for continuity program promotions and $8.1, $9.2 and $6.5 for magazine advertising for fiscal 2004, 2003 and 2002, respectively.
Other advertising expenses were comprised
of $86.6 of direct-to-home promotions for fiscal 2001$160.1, $161.4 and $8.1, $9.0 and $8.1 of
magazine advertising$164.2 for the fiscal years ended May 31, 2001, 20002004, 2003 and 1999,2002, respectively.
Property, plant
Accumulated amortization of prepublication costs was $77.8 and equipment includes capitalized interest costs of $3.3, $1.4$76.3 at May 31, 2004 and $0.62003, respectively. The Company amortized $57.8, $47.5 and $42.6 for the fiscal years ended May 31, 2001, 20002004, 2003 and 1999, respectively,
and construction in progress of $63.6 and $30.1 at May 31, 2001 and 2000,
respectively, related to the expansion of the Company's headquarters.
Goodwill is net of accumulated amortization of $27.6 and $17.3 at May 31, 2001
and 2000,2002, respectively. The Company amortized $10.3, $3.8 and $3.8 for the
fiscal years ended May 31, 2001, 2000 and 1999, respectively.
Other Intangibles are net of accumulated amortization of $7.4 and $3.5 at May
31, 2001 and 2000, respectively. The Company amortized $3.9, $0.6, and $1.7 for
the fiscal years ended May 31, 2001, 2000 and 1999, respectively.
Prepublication costs are net of accumulated amortization of approximately $46.7
and $95.2 at May 31, 2001 and 2000, respectively. The Company amortized $54.8,
$41.1 and $37.8 for the fiscal years ended May 31, 2001, 2000 and 1999,
respectively.
Other accrued expenses include a reserve for unredeemed credits issued in conjunction with the Company'sCompany’s school-based book club and book fair operations of $14.2$12.5 and $11.6$12.4 at May 31, 20012004 and 2000,2003, respectively.
[GRAPHIC]34 [LOG0]
58
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SCHOLASTIC CORPORATION
We have audited the accompanying consolidated balance sheets of Scholastic Corporation (the "Company"“Company”) as of May 31, 20012004 and 2000,2003, and the related consolidated statements of income, changes in stockholders'stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended May 31, 2001.2004. Our audits also included the financial statement schedule listed in the Index at Item 14(a)15(a). These financial statements and schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted ourthe audits in accordance with auditingthe standards generally accepted
inof the United States.Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at May 31, 20012004 and 20002003 and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 20012004 in conformity with accounting principlesU.S. generally accepted in the United
States.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
----------------------
As discussed in Note 12 to the consolidated financial statements, effective June 1, 2001 the Company changed its accounting for production costs and recorded a cumulative effect of accounting change of $5.2 million.
New York, New York
July 18, 2001
[LOGO] [GRAPHIC]35
20, 2004
59
Supplementary Financial Information
Summary of Quarterly Results of Operations (Unaudited, amounts in millions except per share data) Years ended May 31, | ||||||||||
First | Second | Third | Fourth | |||||||
Quarter | Quarter | Quarter | Quarter | (1) | Year | |||||
2004 | ||||||||||
Revenues | $ 475.4 | $ 699.0 | $ 472.0 | $ 587.4 | $ 2,233.8 | |||||
Cost of goods sold | 281.4 | 305.5 | 229.7 | 263.4 | 1,080.0 | |||||
Cost of goods sold – Continuity charges | — | — | — | 6.8 | 6.8 | |||||
Net income (loss) | (24.8) | 66.7 | (6.0) | 22.5 | 58.4 | |||||
Earnings (loss) per share: | ||||||||||
Basic | $ (0.63) | $ 1.70 | $ (0.15) | $ 0.57 | $ 1.48 | |||||
Diluted | $ (0.63) | $ 1.67 | $ (0.15) | $ 0.56 | $ 1.46 | |||||
2003 | ||||||||||
Revenues | $ 306.9 | $ 660.3 | $ 433.7 | $ 557.4 | $ 1,958.3 | |||||
Cost of goods sold | 160.2 | 281.8 | 198.3 | 241.8 | 882.1 | |||||
Net income (loss) | (44.6) | 75.0 | (0.5) | 28.7 | 58.6 | |||||
Earnings (loss) per share: | ||||||||||
Basic | $ (1.14) | $ 1.92 | $ (0.01) | $ 0.73 | $ 1.50 | |||||
Diluted | $ (1.14) | $ 1.85 | $ (0.01) | $ 0.72 | $ 1.46 | |||||
(1) | The fourth quarter of fiscal 2004 includes pre-tax charges of $25.4, or $0.41 per diluted share, in connection with the Company’s review of its continuity business, and a pre-tax net gain of $8.0, or $0.13 per diluted share, in connection with the early termination of a sublease by one of its tenants. The fourth quarter of fiscal 2003 includes a pre-tax Special severance charge of $10.9, or $0.18 per diluted share, relating to a reduction in work force. |
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a | Controls and Procedures
The secondChief Executive Officer and Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended May 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
60
Part III
Item 10 | Directors and Executive Officers of fiscal 2000 includes non-recurring charges related to
the establishment of a litigation reserve of $6.7 and the liquidation of
certain stock options of $1.8. The impact on earnings per diluted share of
these charges is $0.15 per share.
(2) The fourth quarter of fiscal 2001 includes a special pre-tax charge of
$72.9 included under cost of goods sold primarily related to the decision
not to update SCHOLASTIC LITERACY PLACE. The impact on earnings per diluted
share ofRegistrant
Information required by this charge is $1.20 per share.
ITEM 9 o CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
[GRAPHIC]36 [LOGO]
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directorsitem is incorporated herein by reference from the Company'sCorporation’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A under the Exchange Act. Certain information regarding the Corporation’s Executive Officers is set forth in Part I – Item 1 – Business.
Item 11 | Executive Compensation
Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange ActAct.
Item 12 | Security Ownership of 1934.
- -----------------------------------------------------------------------------------------------------------------------------------
EMPLOYED BY
NAME AGE REGISTRANT SINCE POSITIONS(S) FOR PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
Richard Robinson 64 1962 Chairman of the Board (since 1982), President (since 1974) and
Chief Executive Officer (since 1975).
Kevin J. McEnery 53 1993 Executive Vice President and Chief Financial Officer (since 1995).
Deborah A. Forte 47 1984 Executive Vice President (since 1996), Senior Vice President (1995)
and Division Head, Scholastic Entertainment Inc. (since 1995).
Donna M. Iucolano 37 2000 Executive Vice President, Scholastic Internet Group (since 2000);
and prior to joining the Company, positions including Senior Vice
President (2000) and Vice President (1998 - 2000) at
1-800-FLOWERS.COM (1994 - 2000).
Barbara A. Marcus 50 1983 Executive Vice President (since 1991), President, Children's Book
Publishing Group and Distribution (since 1999) and Executive Vice
President, Children's Book Publishing and Distribution (1991-1999).
Margery W. Mayer 49 1990 Executive Vice President (since 1990), Learning Ventures (since
1998) and Instructional Publishing and Scholastic School Group
(1990 - 1997).
Julie A. McGee 58 2000 Executive Vice President, Educational Publishing (since 2000), and
prior to joining the Company, positions including President (1991 to
2000) and Editor-in-Chief at McDougal Littell Inc. (1988 - 2000).
Hugh Roome 49 1991 Executive Vice President (since 1996), International (since
2000) and Senior Vice President Magazine Group (1993 - 1996).
Richard M. Spaulding 64 1960 Director (since 1974) and Executive Vice President (since 1974).
Judith A. Corman 63 1999 Senior Vice President, Corporate Communications and Media
Relations (since 1999); and prior to joining the Company, Senior Vice
President at Lerer & Montgomery (1994 - 1999) .
Charles B. Deull 41 1995 Senior Vice President (since 1995), General Counsel (since 1999),
Senior Vice President, Legal and Business Affairs (1995 - 1999) and
Corporate Secretary (since 1996).
Ernest B. Fleishman 64 1989 Senior Vice President, Education and Corporate Relations
(since 1989).
Jean Feiwel 48 1983 Senior Vice President, Children's Book Publishing and Distribution
(since 1993) and Publisher (since 1997).
Beth Ford 37 2000 Senior Vice President, Global Operations (since 2000); and prior to
joining the Company, Director, Supply Chain at Pepsi Bottling
Group/Pepsico (1997 - 2000) and Director, Operations at Preseco
Company (1996 - 1997) .
[LOGO] [GRAPHIC]37
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EMPLOYED BY
NAME AGE REGISTRANT SINCE POSITIONS(S) FOR PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
Maurice Greenfield 58 1999 Senior Vice President and Chief Information Officer (since 1999);
and prior to joining the Company, Vice President, MIS at National
Broadcasting Company (1985-1999).
Larry V. Holland 42 1994 Senior Vice President, Corporate Human Resources and Employee
Services (since 1997) and Vice President, Human Resources
(1994-1997).
Linda S. Koons 46 1990 Senior Vice President, Education Group (since 1998) and Publisher
(since 1995), Group Head, Education Group (1999 -2000) and
Vice President (1995-1998).
Judith A. Newman 43 1993 Senior Vice President, Book Clubs (since 1997) and Vice President,
Marketing (1993-1997).
David J. Walsh 65 1983 Senior Vice President, International Operations (since 1983).
Helen V. Benham 51 1974 Director (since 1992) and Corporate Vice President, Early Childhood
Advisor (since 1996).
Claudia H. Cohl 61 1975 Vice President (since 1978), Internal Communications (since 1999)
and Editorial Planning and Development, Scholastic Education Group
(1993-1999).
Raymond Marchuk 50 1983 Vice President, Finance & Investor Relations (since 1983).
Karen A. Maloney 44 1997 Vice President and Corporate Controller (since 1998), Director of
Accounting and Financial Operations (1997-1998); and prior to
joining the Company, Vice President and Controller at
Calvin Klein, Inc. (1996-1997).
Vincent M. Marzano 38 1987 Vice President (since 2000) and Treasurer (since 1993).
David Krishock 46 2001 President, Scholastic Book Fairs (since 2001); and prior to joining
the Company, President and Chief Executive Officer at
Suntory Water Group Ltd. (1998-2001); Vice Chairman, Global
Business Development at Saatchi & Saatchi plc. (1997); Managing
Director at Lion Nathan Ltd. (1994-1998).
[GRAPHIC]38 [LOGO]
ITEM 11 o EXECUTIVE COMPENSATION
Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated herein by reference from the Company'sCorporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 12 o SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Act.
Item 13 | Certain Relationships and Related Transactions
Incorporated herein by reference from the Company'sCorporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
ITEM 13 o CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Act.
Item 14 | Principal Accountant Fees and Services
Incorporated herein by reference from the Company'sCorporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934.
PARTAct.
Part IV
ITEM 14 O EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following consolidated financial statements are included in
Item 8:
Consolidated Statements of Income for the three years ended May 31,
2001, 200015 | Exhibits, Financial Statement Schedules and 1999
Consolidated Balance Sheets at May 31, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the three years ended May 31, 2001, 2000,
and 1999
Consolidated Statements of Cash Flows for the three years ended May
31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULE:
The following consolidated financial statement schedule is included
in Item 14(d):
Schedule II- Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements or the Notes
thereto.
(a)(3) EXHIBITS:
2.1 Stock Purchase Agreement, dated April 13, 2000, among Scholastic
Inc., a New York corporation, Hachette Book Group USA, Inc., a
Delaware corporation, and Lagardere North America, Inc., a
Delaware corporation and parent of Hachette, together with
Amendment No. 1 to Stock Purchase Agreement, dated June 22, 2000
(incorporated by reference to the Company's Current ReportReports on Form 8-K as filed with the Commission on July 7, 2000).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-46338) as filed with the Commission
on March 12, 1992); together with Certificate of Amendment,
effective as of September 19, 2000, to the Company's Amended and
Restated Certificate of Incorporation (incorporated by reference to
the Company's Quarterly Report filed with the Commission on October
16, 2000).
3.2 Bylaws of the Company, amended and restated as of March 16, 2000
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Commission on April 14, 2000).
4.1 Amended and Restated Credit Agreement, dated as of August 11, 1999,
among the Company and Scholastic Inc., as borrowers, the Initial
Lenders named therein, Citibank, N.A., as administrative agent,
Salomon Smith Barney Inc., as arranger, and Chase Manhattan Bank,
N.A., and Fleet Bank, N.A., as syndication agents (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 23, 2000), together with Amendment No. 1,
dated as of June 22, 2000 (incorporated by reference to the
Company's Annual Report on Form 10-K as filed with the Commission on
August 25, 2000).
4.2 Credit Agreement, dated as of June 22, 2000, among the Company, as
guarantor, Scholastic Inc., as borrower, the initial Lenders named
therein, Citibank, N.A., as agent for the lenders, and Salomon Smith
Barney Inc. and Credit Suisse First Boston, as joint lead arrangers,
and the other agents named therein (incorporated by reference to the
Company's Annual Report on Form 10-K as filed with the Commission on
August 25, 2000).
[LOGO] [GRAPHIC]39
(a)(1) | Financial Statements: | ||
The following consolidated financial statements are included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data”: | |||
Consolidated Statements of Income for the years ended May 31, 2004, 2003 and 2002 | |||
Consolidated Balance Sheets at May 31, 2004 and 2003 | |||
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended May 31, 2004, 2003 and 2002 | |||
Consolidated Statements of Cash Flows for the years ended May 31, 2004, 2003 and 2002 | |||
Notes to Consolidated Financial Statements | |||
(a)(2) | Financial Statement Schedule: | ||
The following consolidated financial statement schedule is included in Item 15(d): Schedule II – Valuation and Qualifying Accounts and Reserves | |||
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto. | |||
(a)(3) | Exhibits: | ||
3.1 | Amended and Restated Certificate of Incorporation of the Corporation, as amended to date. |
61
3.2 | Bylaws of the Corporation, amended and restated as of March 16, 2000 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on April 14, 2000). | ||
4.1 | Credit Agreement, dated as of March 31, 2004, among the Corporation and Scholastic Inc., as borrowers, the Initial Lenders named therein, Citibank, N.A., as administrative agent, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and JPMorgan Chase Bank, N.A. and Fleet Bank, N.A., as syndication agents (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on April 2, 2004). | ||
4.2* | Amended and Restated Revolving Loan Agreement, dated November 10, 1999, among the Corporation, Scholastic Inc. and Sun Bank, National Association, together with Amendment No. 1, dated June 22, 2000, and Amendment No. 2, dated as of April 30, 2004. | ||
4.3 | Indenture dated January 23, 2002 for 5.75% Notes due January 15, 2007 issued by the Corporation (incorporated by reference to the Corporation’s Registration Statement on Form S-3 (Registration No. 333-55238) as filed with the SEC on February 8, 2001). | ||
4.4* | Indenture dated April 4, 2003 for 5% Notes due 2013 issued by the Corporation. | ||
10.1** | Scholastic Corporation 1992 Stock Option Plan (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 27, 1992, SEC File No. 000-19860), together with Amendment No. 1 to the Scholastic Corporation 1992 Stock Option Plan, effective as of July 18, 2001 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 24, 2001). | ||
10.2** | Scholastic Corporation 1995 Stock Option Plan, effective as of September 21, 1995 (incorporated by reference to the Corporation’s Registration Statement on Form S-8 (Registration No. 33-98186) as filed with the SEC on October 16, 1995), together with Amendment No. 1 to the Scholastic Corporation 1995 Stock Option Plan, effective September 16, 1998 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 15, 1998, SEC File No. 000-19860), and Amendment No. 2 to the Scholastic Corporation 1995 Stock Option Plan, effective as of July 18, 2001 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 24, 2001). | ||
10.3** | Scholastic Corporation 1992 Outside Directors’ Stock Option Plan (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 27, 1992, SEC File No. 000-19860). | ||
10.4** | Scholastic Corporation Management Stock Purchase Plan, amended and restated effective as of December 18, 2002 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 14, 2003). | ||
10.5** | Scholastic Corporation 1997 Outside Directors’ Stock Option Plan, amended and restated as of May 25, 1999 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999), together with Amendment No. 1 dated September 20, 2001 to the Scholastic Corporation 1997 Outside Directors’ Stock Option Plan (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 14, 2002) and Amendment No. 2 to the Scholastic Corporation 1997 Outside Directors’ Stock Option Plan (incorporated by reference to Appendix B to the Corporation’s definitive Proxy Statement as filed with the SEC on August 19, 2003). |
62
10.6** | Scholastic Corporation 1995 Director’s Deferred Compensation Plan, amended and restated as of May 25, 1999 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999). | ||
10.7** | Scholastic Corporation Executive Performance Incentive Plan, effective as of June 1, 1999 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 15, 1999). | ||
10.8** | Scholastic Corporation 2001 Stock Incentive Plan (incorporated by reference to Appendix A of the Corporation’s definitive Proxy Statement as filed with the SEC on August 24, 2001). | ||
10.9 | Amended and Restated Lease, effective as of August 1, 1999, between ISE 555 Broadway, LLC, landlord, and Scholastic Inc., tenant, for the building known as 555 Broadway, NY, NY (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999). | ||
10.10 | Amended and Restated Sublease, effective as of October 9, 1996, between Kalodop Corp., as sublandlord, and Scholastic Inc., as subtenant, for the premises known as 557 Broadway, NY, NY (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999). | ||
21 | Subsidiaries of the Corporation. | ||
23 | Consent of Ernst & Young LLP. | ||
31.1 | Certification of the Chief Executive Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of the Chief Financial Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | Certifications of the Chief Executive Officer and the Chief Financial Officer of the Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
(b) | Reports on Form 8-K. | ||
A Current Report on Form 8-K was filed with the SEC on April 3, 2004 reporting under Items 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12 (Results of Operations and Financial Condition) a press release regarding results of operations for the Corporation’s fiscal quarter ended February 29, 2004. | |||
A Current Report on Form 8-K was filed with the SEC on July 15, 2004 reporting under Item 12 (Results of Operations and Financial Condition) a press release regarding charges recorded in the fourth quarter of the Corporation’s fiscal year ended May 31, 2004 related to its continuity business and estimates of results of operations for that year. | |||
A Current Report on Form 8-K was filed with the SEC on July 21, 2004 reporting under Items 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12 (Results of Operations and Financial Condition) a press release regarding results of operations for the Corporation’s fiscal year ended May 31, 2004. | |||
* | Such long-term debt does not individually amount to more than 10% of the total assets of the Corporation 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 Corporation hereby agrees to furnish a copy of any such instrument to the SEC 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. |
63 Signatures
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 24, 2001 SCHOLASTIC CORPORATION
By: /s/ Richard Robinson
------------------------
Dated: August 2, 2004 | SCHOLASTIC CORPORATION |
By: /s/ Richard Robinson | |
Richard Robinson, Chairman of the Board, |
Power of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Robinson his or her true and lawful attorney-in-fact and agent, with power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary and requisite to be done, as fully and to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | |||
/s/ Richard Robinson | Chairman of the Board, President, | August | ||
________________________________ | Chief Executive Officer and | |||
Richard Robinson | Director (Principal Executive Officer) | |||
/s/ Mary A. Winston | Executive Vice President and Chief | August | ||
________________________________ | Financial Officer (Principal Financial Officer) | |||
Mary A. Winston | ||||
/s/ Karen A. Maloney | Vice President and Controller | August | ||
________________________________ | (Principal Accounting Officer) | |||
Karen A. Maloney | ||||
/s/ Rebeca M. Barrera | Director | August | ||
________________________________ | ||||
Rebeca M. Barrera |
/s/ Ramon C. Cortines | Director | August | ||
________________________________ | ||||
Ramon C. Cortines | ||||
/s/ John L. Davies | Director | August | ||
________________________________ | ||||
John L. Davies | ||||
/s/ Charles T. Harris III | Director | August | ||
________________________________ | ||||
Charles T. Harris III | ||||
/s/ Andrew S. Hedden | Director | August | ||
________________________________ | ||||
Andrew S. Hedden |
64
Signature | Title | Date | ||
/s/ Mae C. Jemison | Director | August | ||
________________________________ | ||||
Mae C. Jemison | ||||
/s/ Peter M. Mayer | Director | August | ||
________________________________ | ||||
Peter M. Mayer | ||||
/s/ John G. McDonald | Director | August | ||
________________________________ | ||||
John G. McDonald | ||||
/s/ Augustus K. Oliver | Director | August | ||
________________________________ | ||||
Augustus K. Oliver | ||||
/s/ Richard M. Spaulding | Director | August | ||
________________________________ | ||||
Richard M. Spaulding |
65
Scholastic Corporation
Financial Statement Schedule
ANNUAL REPORT ON FORM 10-K
Year Ended May
YEAR ENDED MAY 31, 2001
Item 14(D)
[GRAPHIC]44 [LOGO]
2004
ITEM 15(d)
66
Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Valuation and Qualifying Accounts and Reserves
Years Ended May 31, Balance at Beginning Write-Offs Balance at Of Year Expensed and Other End of Year 2004 Allowance for doubtful accounts $ 60.5 $ 90.3 $ 82.5 $ 68.3 Reserve for returns 58.2 193.5 199.1 (1) 52.6 Reserve for obsolescence 54.4 29.9 25.1 59.2 Reserve for royalty advances 45.8 4.3 0.3 49.8 2003 Allowance for doubtful accounts $ 62.6 $ 72.3 $ 74.4 $ 60.5 Reserve for returns 61.3 164.1 167.2 (1) 58.2 Reserve for obsolescence 55.1 26.7 27.4 54.4 Reserve for royalty advances 44.6 5.0 3.8 45.8 2002 Allowance for doubtful accounts $ 70.1 $ 68.7 $ 76.2 $ 62.6 Reserve for returns 63.0 156.8 158.5 (1) 61.3 Reserve for obsolescence 64.7 22.1 31.7 55.1 Reserve for royalty advances 43.0 3.7 2.1 44.6
(1) Represents actual returns charged to the reserve. |
67