Cost of goods sold as a percentage of revenues increased by 0.6% to 45.0% in fiscal 2003 from 44.4% in fiscal 2002, principally due to an unfavorable change in revenue mix. In fiscal 2002, Cost of goods sold as a percentage of revenues improved as compared to 45.8% in fiscal 2001, primarily attributable to the Company’s cost savings program, which produced approximately $25 million in savings, or 1.3% of revenues, in fiscal 2002.
Bad debt expense increased to $72.3 million, or 3.7% of revenues, in fiscal 2003 as compared to $68.7 million, or 3.6% of revenues, in fiscal 2002. As a percentage of revenues, bad debt expense increased modestly as the continuity business, which has proportionately higher bad debt expense, experienced greater revenue growth than the overall Company growth rate. Fiscal 2002 bad debt expense decreased $6.8 million from $75.5 million, or 3.8% of revenues, in fiscal 2001. This decrease was primarily attributable to better credit performance for the direct-to-home continuity business.
Depreciation expense for fiscal 2003 increased by $10.0 million to $45.6 million, as compared to $35.6 million in fiscal 2002. This increase was primarily due to incremental depreciation of $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. In fiscal 2002, depreciation expense increased by $7.4 million from $28.2 million in fiscal 2001. Incremental depreciation of $2.6 million in fiscal 2002 related to information technology projects, including the Internet sites placed into service in fiscal 2002, and $2.2 million was due to the expansion of the Company’s facilities in metropolitan New York.
On May 28, 2003, the Company announced a reduction in its global work force of approximately 400 positions, or 4%. This decision resulted in a pre-tax charge of $10.9 million, or 0.6% of revenues, and is recorded as a Special severance charge. The Company expects to realize more than $15 million in salary related savings in fiscal 2004 related to the reduction in work force.
Goodwill and other intangibles amortization was $0.5 million and $1.0 million in fiscal 2003 and 2002, respectively. In fiscal 2002, goodwill and other intangibles amortization decreased $13.2 million from $14.2 million in fiscal 2001 due to the Company’s adoption of SFAS No. 142. Under this pronouncement,
the Company is required to take an impairment-only approach to amortizing goodwill and other intangibles assets with indefinite lives, which accordingly reduced amortization expense.
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 with Robert Harris and Harris Entertainment, Inc., for which the Company had established a $6.7 million liability in fiscal 2000. The $1.2 million charge represents the amount by which the settlement and related legal expenses exceeded the previously recorded liability.
Operating income for fiscal 2003 decreased by $68.0 million, or 36.4%, to $118.7 million, or 6.1% of revenues, as compared to $186.7 million, or 9.7% of revenues, in fiscal 2002. This decrease is primarily due to lower profits of $41.3 million in the Children’s Book Publishing and Distribution segment, which includes $2.4 million of the Special severance charge, as well as the $8.5 million balance of the Special severance charge of $10.9 million. Operating income for fiscal 2002 increased by $88.0 million, or 89.2%, from $98.7 million, or 5.0% of revenues, in fiscal 2001. Fiscal 2001 included the impact of the $72.9 million Special charge.
Other income was $2.9 million in fiscal 2003, representing a gain from the sale of a portion of an interest in a French publishing company. Other expense was $2.0 million in fiscal 2002, representing a charge for the write-off of an equity investment.
Interest expense was $31.5 million and $31.4 million in fiscal 2003 and 2002, respectively. In fiscal 2002, net interest expense decreased by $10.2 million from $41.6 million in fiscal 2001, primarily due to lower interest rates.
The Company’s effective tax rates were 35.0%, 35.6% and 36.5% of earnings before taxes for fiscal 2003, 2002 and 2001, respectively.
In fiscal 2002, the Company recorded an after-tax charge of $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 Distributors of Films”.
Net income was $58.6 million, or 3.0% of revenues, in fiscal 2003, $93.5 million, or 4.9% of revenues, in fiscal 2002 and $36.3 million, or 1.8% of revenues, in fiscal 2001. The basic and diluted earnings per share of Class A Stock and Common Stock were $1.50 and $1.46, respectively, in fiscal 2003, $2.55 and $2.38, respectively, in fiscal 2002 and $1.05 and $1.01, respectively, in fiscal 2001.
Results of Operations — Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
The Company’s Children’s Book Publishing and Distribution segment includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
| ($ amounts in millions) |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Revenue | | $ 1,189.9 | | $ 1,168.6 | | $ 1,221.9 | |
| Operating profit | | 137.1 | | 178.4 | | 202.9 | |
|
| Operating margin | | 11.5% | | 15.3% | | 16.6% | |
Children’s Book Publishing and Distribution revenues accounted for 60.8% of the Company’s revenues in fiscal 2003, 61.0% in fiscal 2002 and 62.3% in fiscal 2001. Fiscal 2003 revenues of $1,189.9 million increased 1.8%, or $21.3 million, 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. The fiscal 2003 segment revenue increase also reflects increases in school-based continuities and school-based book fairs of $17.3 million and $14.5 million, respectively. These increases were partially offset by lower Harry Potter trade revenues of approximately $30 million. Excluding the direct-to-home continuity business, described in the table below,
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segment revenues in fiscal 2003 increased by $18.0 million to $977.6, million as compared to $959.6 million in fiscal 2002.
Fiscal 2002 revenues decreased 4.4%, or $53.3 million, from $1,221.9 million in fiscal 2001. This decrease reflects the impact of lower Harry Potter trade revenues of approximately $120 million in fiscal 2002, partially offset by revenue increases in school-based book fairs and school-based book clubs of $46.8 million and $29.6 million, respectively, compared to fiscal 2001. Excluding the direct-to-home continuity business, segment revenues in fiscal 2002 decreased $44.4 million from $1,004.0 million in fiscal 2001.
School-based book club revenues accounted for 29.5% of Children’s Book Publishing and Distribution revenues in fiscal 2003, compared to 30.8% in fiscal 2002 and 26.9% in fiscal 2001. Fiscal 2003 school-based book club revenues decreased by 2.2%, or $8.0 million, over fiscal 2002, primarily due to a decrease in orders. Fiscal 2002 school-based book club revenues grew by 9.0%, or $29.6 million, over fiscal 2001, primarily reflecting an increase in orders.
Revenues from school-based book fairs accounted for 27.5% of segment revenues in fiscal 2003, compared to 26.8% in fiscal 2002 and 21.8% in fiscal 2001. Revenue growth for school-based book fairs was 4.6%, or $14.5 million, in fiscal 2003, primarily due to growth in fair count of approximately 7%. Fiscal 2002 revenues from school-based book fairs of $313.1 million increased 17.6%, or $46.8 million, from $266.3 million in fiscal 2001. The increase in fiscal 2002 was primarily due to growth in fair count of approximately 13%, helped by the acquisition of assets of Troll Book Fairs in July 2001, which accounted for approximately 4% of the revenue growth.
Fiscal 2003 continuity revenues accounted for 25.4% of segment revenues, as compared to 24.0% in fiscal 2002 and 24.7% in fiscal 2001. Revenues from the direct-to-home continuity business were 17.9%, 17.9% and 17.8% of segment revenues in fiscal 2003, 2002 and 2001, respectively. Revenues from school-based continuity programs were 7.5%, 6.1% and 6.9% of segment revenues in fiscal 2003, 2002 and 2001, respectively. Fiscal 2003 revenues of $212.3 million from the direct-to-home continuity business increased 1.6%, or $3.3 million, from $209.0 million in fiscal 2002, primarily due to the 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. Fiscal 2002 revenues from the direct-to-home continuity business decreased 4.1%, or $8.9 million, from $217.9 million in fiscal 2001, primarily due to the elimination of less profitable programs, partially offset by the impact of three additional weeks of revenues of $17.8 million in fiscal 2002. Lower enrollments from school-based continuity programs resulted in a decrease of $12.0 million in revenues in fiscal 2002 as compared to fiscal 2001.
The Company’s trade distribution channel accounted for 17.6% of segment revenues in fiscal 2003, as compared to 18.4% in fiscal 2002 and 26.6% in fiscal 2001. Trade revenues decreased in fiscal 2003 by $6.5 million, or 3.0%, to $208.3 million, principally due to the decline in Harry Potter backlist revenues of approximately $30 million and other backlist titles of approximately $6 million, partially offset by the incremental revenue of $31.3 million from the fiscal 2002 acquisition of Klutz. Trade revenues in fiscal 2002, including Klutz revenue of $5.6 million, decreased $109.9 million to $214.8 million, or 33.8%, due primarily to the decline in Harry Potter revenues of approximately $120 million. Trade revenues for Harry Potter accounted for approximately $50 million, $80 million and $200 million in fiscal 2003, 2002 and 2001, respectively.
Segment operating profit in fiscal 2003 declined $41.3 million, or 23.1%, to $137.1 million, or 11.5% of revenues, compared to $178.4 million, or 15.3% of revenues, in fiscal 2002, and fiscal 2002 operating profit decreased $24.5 million, or 12.1%, from $202.9 million, or 16.6% of revenues, in fiscal 2001. The segment operating margin decreases in fiscal 2003 and 2002 were primarily related to the revenue decline in higher margin Harry Potter and other trade backlist titles. Operating profit for the Company’s 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 and increased $26.2 million in fiscal 2002 from $13.5 million, or 6.2% of revenues, in fiscal 2001. The $9.0 million decrease in operating profit in fiscal 2003 was primarily related to an
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increase of approximately $6 million in Selling, general and administrative expenses. The $26.2 million increase in operating profit in fiscal 2002 reflected the impact of planned lower revenues due to the elimination of less profitable programs and favorable bad debt experience. Excluding the direct-to-home continuity business, the segment operating profit in fiscal 2003 decreased to $106.4 million, or 10.9% of revenues, from $138.7 million, or 14.5% of revenues, in fiscal 2002, and fiscal 2002 operating profit decreased $50.7 million from $189.4 million in fiscal 2001.
The following table highlights the results of the direct-to-home continuity programs, which consist primarily of the business formerly operated by Grolier and are included in the Children’s Book Publishing and Distribution segment.
| ($ amounts in millions) |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Revenue | | $ 212.3 | | $ 209.0 | | $ 217.9 | |
| Operating profit | | 30.7 | | 39.7 | | 13.5 | |
|
| Operating margin | | 14.5% | | 19.0% | | 6.2% | |
| |
EDUCATIONAL PUBLISHING
The Company’s Educational Publishing segment includes the publication and distribution to schools and libraries of curriculum materials, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.
| ($ amounts in millions) |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Revenue | | $ 325.9 | | $ 316.9 | | $ 311.2 | |
| Operating profit/(loss) | | 41.7 | | 44.1 | | (67.1)(1) | |
|
| Operating margin | | 12.8% | | 13.9% | | * | |
| |
| * not meaningful |
| (1) | The fiscal 2001 operating loss included the Special Charge of $72.9. |
Segment revenues accounted for 16.6% of the Company’s revenues in fiscal 2003, compared to 16.5% in fiscal 2002 and 15.9% in fiscal 2001. In fiscal 2003, Educational Publishing revenues increased to $325.9 million from $316.9 million in fiscal 2002 and $311.2 million in fiscal 2001. The $9.0 million revenue increase in fiscal 2003 was primarily due to $10.4 million of incremental revenues related to fiscal 2002 acquisitions and increased curriculum publishing revenues of $9.3 million, partially offset by decreased revenues from library publishing of $7.2 million. In fiscal 2002, Educational Publishing revenues increased $5.7 million over fiscal 2001, primarily due to increased revenues from paperbacks and collections of $11.4 million and $5.4 million of incremental revenues related to fiscal 2002 acquisitions, partially offset by decreased curriculum publishing revenues of $11.6 million.
Operating profit for this segment in fiscal 2003 of $41.7 million decreased by $2.4 million from $44.1 million in fiscal 2002, primarily due to the portion of the Special severance charge related to this segment of $2.1 million. Fiscal 2002 operating profit increased $111.2 million from a loss of $67.1 million in fiscal 2001, which included the Special Charge of $72.9 million. In addition to the impact of the Special Charge, the improved operating profit in fiscal 2002 reflected reduced prepublication amortization of $18.8 million, principally related to the decision not to update Scholastic Literacy Place, and reduced amortization of goodwill and other intangibles of $6.1 million resulting from the adoption of SFAS No.142.
MEDIA, LICENSING AND ADVERTISING
The Company’s Media, Licensing and Advertising segment includes the production and/or distribution of software in the United States, the production and/or distribution by and through SEI of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise), and advertising revenue, including sponsorship programs.
| ($ amounts in millions) |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Revenue | | $ 123.5 | | $ 129.8 | | $ 132.5 | |
| Operating loss | | (5.4) | | (0.2) | | (3.5) | |
|
| Operating margin | | * | | * | | * | |
Media, Licensing and Advertising revenues accounted for 6.3% of the Company’s revenues in fiscal 2003, 6.8% in fiscal 2002 and 6.7% in fiscal 2001. In fiscal 2003, revenues decreased by 4.9%, or $6.3 million, primarily due to lower sales of software and multimedia products of
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$9.7 million and lower non-book consumer merchandise revenues of $3.3 million. The decreased revenues were partially offset by increased programming revenues of $3.7 million from Clifford The Big Red Dog and incremental programming revenues of $3.6 million relating to fiscal 2002 acquisitions. In fiscal 2002, revenues decreased by 2.0%, or $2.7 million, principally due to reduced programming revenues of $8.0 million attributable to the delivery of fewer episodes of the television series Clifford The Big Red Dog in fiscal 2002 and the benefit in fiscal 2001 of a $3.9 million license of Scholastic’s The Magic School Bus series, partially offset by increased licensing royalty revenue in fiscal 2002 from the Clifford property of $8.0 million.
The operating loss for the Media, Licensing and Advertising segment in fiscal 2003 was $5.4 million, compared to operating losses of $0.2 million in fiscal 2002 and $3.5 million in fiscal 2001. In fiscal 2003, the operating loss increased by $5.2 million as compared to fiscal 2002, primarily due to the related margin on decreased revenues, offset by reductions in marketing and promotional expenses of $1.1 million. The operating loss for fiscal 2002 improved by $3.3 million, primarily due to reductions in marketing and promotional expenses.
INTERNATIONAL
The International segment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
| ($ amounts in millions) |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Revenue | | $ 319.0 | | $ 301.7 | | $ 296.7 | |
| Operating profit | | 19.4 | | 24.6 | | 24.8 | |
|
| Operating margin | | 6.1% | | 8.2% | | 8.4% | |
| |
International revenues accounted for 16.3% of the Company’s revenues in fiscal 2003, 15.7% in fiscal 2002 and 15.1% in fiscal 2001. Segment revenues increased $17.3 million, or 5.7%, to $319.0 million in fiscal 2003 from $301.7 million in fiscal 2002. This revenue growth was primarily due to the favorable impact of foreign currency exchange rates of $16.8 million. In fiscal 2002, International revenues increased $5.0 million, or 1.7%, from $296.7 million in fiscal 2001, primarily due to increased revenues of $5.0 million from Australia, $4.4 million from Canada and $2.6 million from the Asia Pacific Region, partially offset by the adverse impact of foreign currency exchange rates of approximately $7.5 million.
International operating profit decreased by $5.2 million to $19.4 million, or 6.1% of revenues, in fiscal 2003 from $24.6 million, or 8.2% of revenues, in fiscal 2002, primarily due to the portion of the Special severance charge related to this segment of $3.8 million. In fiscal 2002, International operating profit experienced a modest decrease of $0.2 million from fiscal 2001.
Seasonality
The Company’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company’s business is highly seasonal. As a consequence, the Company’s revenues in the first and third quarters of the fiscal year generally are 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 greatest 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, the Company experiences negative cash flow due to 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.
Liquidity and Capital Resources
The Company’s cash and cash equivalents were $58.6 million at May 31, 2003, compared to $10.7 million at May 31, 2002 and $13.8 million at May 31, 2001.
Cash flow provided by operations was $179.2 million in fiscal 2003, resulting from net income adjusted for non-cash items of $209.6 million, offset by net working capital and other increases of $30.4 million.
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Cash outflow for investing activities was $214.0 million for fiscal 2003. Additions to property, plant and equipment totaled $83.9 million in fiscal 2003, an increase of $5.5 million from fiscal 2002, largely as a result of the acquisition of the Maumelle Facility. Equity investment and related loan totaled $23.3 million primarily due to the Company’s 15% equity investment in The Book People in June 2002 of £12.0 million (equivalent to $17.9 million as of the date of the transaction), and a related credit facility of £3.0 million, which was fully drawn at May 31, 2003 (equivalent to $4.9 million). Acquisition-related payments of $10.2 million consist primarily of a $9.7 million payment for the purchase of worldwide rights to the Goosebumps™ property. Fiscal 2003 prepublication expenditures of $55.7 million, payments for royalty advances of $30.3 million and production expenditures of $15.5 million were generally consistent with prior year levels.
As more fully described in “Financing” below, on April 4, 2003, Scholastic Corporation issued $175.0 million of 5% Notes due 2013 (the “5% Notes”). Net proceeds of $171.3 million were used to retire all outstanding indebtedness of $36.0 million under the Grolier Facility, which was then cancelled, and to reduce $135 million of indebtedness outstanding under the Loan Agreement and the Revolver, as such terms are defined in “Financing” below. Scholastic Corporation expects to repay all $125.0 million of its outstanding 7% Notes due 2003 at maturity in December 2003, principally using borrowings available under the Loan Agreement and the Revolver made possible by the issuance of the 5% Notes. Consequently, the Company has increased cash and increased debt levels at May 31, 2003.
The Company believes its existing cash position, combined with funds generated from operations and available under the Loan Agreement and the Revolver will be sufficient to finance its ongoing working capital requirements for the next fiscal year. The Company anticipates 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, 2003, the Company’s contractual cash obligations by future period (see Notes 3 and 4 of Notes to Consolidated Financial Statements):
| | | Payments Due by Period |
|
| Contractual Obligations | | Less than
1 Year | 1–3 Years | 4–5 Years | After
5 Years | Total |
|
| Long-term debt | | $ — | | $ 300.2 | | $ — | | $ 175.0 | | $ 475.2 | |
| Lines of credit and short-term debt | | 153.7 | | — | | — | | — | | 153.7 | |
| Operating leases | | 41.9 | | 74.1 | | 22.1 | | 154.5 | | 292.6 | |
| Royalty advances | | 8.2 | | 2.4 | | — | | — | | 10.6 | |
| Other obligations | | 5.1 | | — | | — | | — | | 5.1 | |
|
| Total | | $ 208.9 | | $ 376.7 | | $ 22.1 | | $ 329.5 | | $ 937.2 | |
|
| |
Financing
On April 4, 2003, Scholastic Corporation issued $175 million of 5% Notes, which are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable on April 15 and October 15 of each year, beginning October 15, 2003. The Company may at any 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 interest discounted to the date of redemption. For a description of the use of proceeds from the sale of the 5% Notes, see “Liquidity and Capital Resources.”
On June 22, 2000, Scholastic Inc. established a credit facility to finance $350.0 million of the $400.0 million Grolier purchase price (the “Grolier Facility”). A portion of the proceeds from the sale of the 5% Notes was used to repay all outstanding amounts under this facility, which was then cancelled effective April 10, 2003. At May 31, 2002, $50.0 million was outstanding under the Grolier Facility at a weighted average interest rate of 2.4%.
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On February 5, 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 would receive a fixed interest rate payment based on a notional amount and pay a variable interest rate to the counterparty, which is reset semi-annually based on six-month LIBOR (as defined). This agreement was entered into in the notional amount of $100.0 million to exchange the fixed interest rate payments on a portion of Scholastic Corporation’s $300.0 million in principal amount of 5.75% Notes due 2007 for variable interest rate payments. On May 28, 2003, $50.0 million of the initial notional amount was settled, for which the Company received a payment of $5.4 million from the counterparty.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an amended and restated loan agreement with certain banks, effective August 11, 1999 and amended June 22, 2000 (the “Loan Agreement”). The Loan Agreement, which expires on August 11, 2004, provides for aggregate borrowings of up to $170.0 million (with a right in certain circumstances to increase borrowings to $200.0 million), including the issuance of up to $10.0 million in letters of credit. Interest under this facility is either at the prime rate or 0.325% to 0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of May 31, 2003 were 0.475% over LIBOR, 0.150% and 0.075%, respectively. The Loan Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2003 and 2002, $0 million and $50.0 million, respectively, were outstanding under the Loan Agreement. The weighted average interest rate at May 31, 2002 was 2.7%.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under a Revolving Loan Agreement with a bank, effective November 10, 1999 and amended June 22, 2000 (the “Revolver”). The Revolver provides for unsecured revolving credit of up to $40.0 million and expires on August 11, 2004. Interest under this facility is either at the prime rate minus 1%, or 0.325% to 0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of May 31, 2003 were 0.475% over LIBOR and 0.150%, respectively. The Revolver has certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2003 and 2002, there were no borrowings outstanding under the Revolver.
In addition, unsecured lines of credit available in local currencies to Scholastic Corporation’s international subsidiaries were equivalent to $57.8 million at May 31, 2003, as compared to $53.5 million at May 31, 2002. These lines are used primarily to fund local working capital needs. At May 31, 2003, borrowings equivalent to $28.5 million were outstanding under these lines of credit, as compared to $23.3 million at May 31, 2002, at weighted average interest rates of 6.9% and 5.4% in fiscal 2003 and 2002, respectively.
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.
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 million.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt this statement by the first quarter of fiscal 2004. The Company does not expect that the adoption of SFAS No. 143 will have a material impact on its financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires variable interest entities to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 is effective immediately for all new variable interest entities created after January 31, 2003. For variable interest entities created or acquired before February 1, 2003, the provisions of FIN 46 become effective for the Company on September 1, 2003. The Company does not expect that the adoption of FIN 46 will have a material impact on its financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Except as noted below, the Company is required to adopt this statement by the first quarter of fiscal 2004. Certain provisions of this statement relating to SFAS No. 133 implementation issues that have been effective for prior fiscal quarters will continue to be applied in accordance with their respective effective dates. The Company does not expect that the adoption of SFAS No. 149 will have a material impact on its financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for the Company on September 1, 2003. The Company does not expect that the adoption of SFAS No. 150 will have a material impact on the Company’s financial position, results of operations or cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This Annual Report on Form 10-K contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (“SEC”) filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’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’s filings with the SEC:
| • | | 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 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; | |
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| • | | 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 “Do Not Call” lists; | |
| • | | 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 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 | 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’s current international operations. In the normal course of business, the Company’s non-U.S. operations enter into short-term forward contracts (generally not exceeding $20.0 million) to match purchases not denominated in their respective local currencies.
Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed by balancing the mix of variable- versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, are used to manage interest rate exposures. Approximately 12% of the Company’s debt at May 31, 2003 bore interest at a variable rate and was sensitive to changes in interest rates. As a result of seasonal borrowings at variable rates, this percentage is expected to peak at approximately 35% during fiscal 2004. The Company is subject to the risk that market interest rates will increase and thereby increase the interest charged under its variable-rate debt.
Additional information relating to the Company’s outstanding financial instruments is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
25
The following table sets forth information about the Company’s debt and other interest rate sensitive instruments as of May 31, 2003 (see Note 3 of Notes to Consolidated Financial Statements):
| $ amounts in millions) |
|
| | | Fiscal Year Maturity | | Fair
Value
as of | |
| | |
| | May 31, | |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | Thereafter | | Total | | 2003 | |
|
| Debt Obligations |
| Lines of credit | | $ 28.5 | | $ — | | $ — | | $ — | | $ — | | $ — | | $ 28.5 | | $ 28.5 | |
| Average interest rate | | 6.89 | % | | | | | | | | | | | | | | |
Long-term debt including
current portion: |
Fixed-rate debt | | $ 125.0 | | $ — | | $ — | | $ 300.2 | | $ — | | $ 175.0 | | $ 600.2 | | $ 633.8 | |
Average interest rate | | 7.00 | % | | | | | 5.75 | % | | | 5.00 | % | | | | |
Variable-rate debt | | $ 0.2 | | $ — | | $ — | | $ — | | $ — | | $ — | | $ 0.2 | | $ 0.2 | |
Average interest rate | | 4.75 | % | | | | | | | | | | | | | | |
|
Interest rate derivative financial
instruments related to debt |
| Interest rate swaps: |
| Notional amount | | $ — | | $ — | | $ — | | $ 50.0 | | $ — | | $ — | | $ 50.0 | | $ 5.6 | |
| Average variable pay rate | | | | | | | | 2.17 | % | | | | | | | | |
| Average fixed receivable rate | | | | | | | | 5.75 | % | | | | | | | | |
|
| |
26
Item 8 | Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
| | Page(s)
| |
Consolidated Statements of Income for the three years ended May 31, 2003, 2002 and 2001
| | 28 | |
Consolidated Balance Sheets at May 31, 2003 and 2002
| | 29-30 | |
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
for the three years ended May 31, 2003, 2002 and 2001
| |
31-32 | |
Consolidated Statements of Cash Flows for the three years ended May 31, 2003, 2002 and 2001
| | 33 | |
Notes to Consolidated Financial Statements
| | 34-53 | |
Report of Independent Auditors
| | 54 | |
Supplementary Financial Information — Summary of Quarterly Results of Operations (unaudited)
| | 55 | |
The following consolidated financial statement schedule for the three years ended
May 31, 2003, 2002 and 2001 is included in Item 15(d):
| | |
| Schedule II — Valuation and Qualifying Accounts and Reserves | | 63 | |
| |
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.
27
Consolidated Statements of Income
(Amounts in millions, except per share data)
Years ended May 31, |
|
| | 2003 | 2002 | | 2001 | |
|
| Revenues | | $ 1,958.3 | | $ 1,917.0 | | $ 1,962.3 | |
| Operating costs and expenses: |
Cost of goods sold (exclusive of depreciation) | | 882.1 | | 852.1 | | 899.7 | |
Cost of goods sold — Special Literacy Place and other charges (Note 14) | | — | | — | | 72.9 | |
| Selling, general and administrative expenses | | 826.3 | | 771.7 | | 773.1 | |
| Bad debt expense | | 72.3 | | 68.7 | | 75.5 | |
| Other operating costs: |
Depreciation | | 45.6 | | 35.6 | | 28.2 | |
Special severance charge | | 10.9 | | — | | — | |
Goodwill and other intangibles amortization | | 0.5 | | 1.0 | | 14.2 | |
Litigation and other charges | | 1.9 | | 1.2 | | — | |
|
| Total operating costs and expenses | | 1,839.6 | | 1,730.3 | | 1,863.6 | |
|
| Operating income | | 118.7 | | 186.7 | | 98.7 | |
| Other income (expense) | | 2.9 | | (2.0 | ) | — | |
| Interest expense | | 31.5 | | 31.4 | | 41.6 | |
|
| Earnings before income taxes and Cumulative effect of accounting change | | 90.1 | | 153.3 | | 57.1 | |
| Provision for income taxes | | 31.5 | | 54.6 | | 20.8 | |
|
| Earnings before Cumulative effect of accounting change | | 58.6 | | 98.7 | | 36.3 | |
| Cumulative effect of accounting change (net of income taxes of $2.9) | | — | | (5.2 | ) | — | |
|
| Net income | | $ 58.6 | | $ 93.5 | | $ 36.3 | |
|
| Earnings per Share of Class A and Common Stock: |
| Earnings before Cumulative effect of accounting change: |
Basic | | $ 1.50 | | $ 2.69 | | $ 1.05 | |
Diluted | | $ 1.46 | | $ 2.51 | | $ 1.01 | |
| Cumulative effect of accounting change (net of income taxes): |
Basic | | $ — | | $ (0.14 | ) | $ — | |
Diluted | | $ — | | $ (0.13 | ) | $ — | |
| Net income: |
Basic | | $ 1.50 | | $ 2.55 | | $ 1.05 | |
Diluted | | $ 1.46 | | $ 2.38 | | $ 1.01 | |
|
| |
See accompanying notes
28
Consolidated Balance Sheets
|
| ASSETS | | 2003 | | 2002 | |
|
| Current Assets: |
Cash and cash equivalents | | $ 58.6 | | $ 10.7 | |
Accounts receivable (less allowances for doubtful accounts of $60.5 at May 31, 2003
and $62.6 at May 31, 2002) | | 266.2 | | 243.8 | |
Inventories | | 382.6 | | 359.5 | |
Deferred promotion costs | | 52.8 | | 44.6 | |
Deferred income taxes | | 74.6 | | 81.3 | |
Prepaid and other current assets | | 47.3 | | 58.6 | |
|
Total current assets | | 882.1 | | 798.5 | |
|
| Property, Plant and Equipment: |
Land | | 10.0 | | 9.1 | |
Buildings | | 77.2 | | 59.8 | |
Furniture, fixtures and equipment | | 285.5 | | 220.2 | |
Leasehold improvements | | 158.0 | | 153.1 | |
|
| | | 530.7 | | 442.2 | |
Less accumulated depreciation and amortization | | (189.0 | ) | (140.8 | ) |
|
Net property, plant and equipment | | 341.7 | | 301.4 | |
|
| Other Assets and Deferred Charges: |
Prepublication costs | | 122.0 | | 113.6 | |
Royalty advances | | 49.8 | | 50.7 | |
Production costs | | 11.0 | | 9.1 | |
Goodwill | | 246.0 | | 256.2 | |
Other intangibles | | 74.2 | | 63.8 | |
Noncurrent deferred taxes | | 7.7 | | 11.0 | |
Other | | 66.5 | | 25.3 | |
|
Total other assets and deferred charges | | 577.2 | | 529.7 | |
|
Total assets | | $ 1,801.0 | | $ 1,629.6 | |
|
| |
29
(Amounts in millions, except share data)
Balances at May 31, |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | 2003 | | 2002 | |
|
| Current Liabilities: |
Lines of credit and short-term debt | | $ 153.7 | | $ 23.5 | |
Accounts payable | | 139.4 | | 134.3 | |
Accrued royalties | | 32.3 | | 38.5 | |
Deferred revenue | | 18.8 | | 16.2 | |
Other accrued expenses | | 133.5 | | 119.2 | |
|
Total current liabilities | | 477.7 | | 331.7 | |
|
| Noncurrent Liabilities: |
Long-term debt | | 482.2 | | 525.8 | |
Other noncurrent liabilities | | 68.5 | | 53.2 | |
|
Total noncurrent liabilities | | 550.7 | | 579.0 | |
|
| 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—37,608,333 shares
(37,417,222 shares at May 31, 2002) | | 0.4 | | 0.4 | |
Additional paid-in capital | | 379.9 | | 373.7 | |
Deferred compensation | | (1.1 | ) | (0.4 | ) |
Accumulated other comprehensive loss: | | | |
Foreign currency translation adjustment | | (9.8 | ) | (13.5 | ) |
Minimum pension liability adjustment | | (28.0 | ) | (13.9 | ) |
Retained earnings | | 431.2 | | 372.6 | |
|
Total stockholders’ equity | | 772.6 | | 718.9 | |
|
| Total liabilities and stockholders’ equity | | $ 1,801.0 | | $ 1,629.6 | |
|
| |
30
| | | Consolidated Statements of Changes in | |
| | | | | | | | | | | | |
| | | Class A Stock | | Common Stock | | | |
| | |
| |
| | Additional
Paid-in | |
| | | Shares | | Amount | | Shares | | Amount | | Capital | |
|
| Balance at May 31, 2000 | | 828,100 | | $ 0.0 | | 17,027,190 | | $ 0.2 | | $ 222.7 | |
| Comprehensive income: | | | | | | | | | | | |
Net income | | | | | | | | | | | |
Other comprehensive loss: | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | |
Minimum pension liability adjustment | | | | | | | | | | | |
Total other comprehensive loss | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | |
| 100% stock dividend | | 828,100 | | | | 16,604,857 | | 0.1 | | (0.1) | |
| Deferred compensation, net of amortization | | | | | | | | | | | |
| Proceeds from issuance of common stock | | | | | | | | | | | |
pursuant to employee stock plans | | | | | | | | | | 4.2 | |
| Tax benefit realized from stock option transactions | | | | | | | | | | 6.9 | |
|
| Balance at May 31, 2001 | | 1,656,200 | | 0.0 | | 33,632,047 | | 0.3 | | 233.7 | |
| Comprehensive income: | | | | | | | | | | | |
Net income | | | | | | | | | | | |
Other comprehensive loss: | | | | | | | | | | | |
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): | | | | | | | | | | | |
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 | |
|
| |
31
Stockholders’ Equity and Comprehensive Income
(Amounts in millions, except share data)
Years ended May 31, 2003, 2002 and 2001 |
| | | | | | | | | | | | | | |
| | | Foreign | Minimum | | | Treasury Stock | Total |
| Deferred | Currency | Pension | Retained |
| Stockholders’ |
| Compensation | Translation | Liability | Earnings | Shares | Amount | Equity |
|
| $ — | | $ (11.1 | ) | $ — | | $ 242.8 | | (851,006 | ) | $ (24.6 | ) | $ 430.0 | |
| | |
| | | | | | | 36.3 | | | | | | 36.3 | |
| | |
| | | (1.7 | ) | | | | | | | | | (1.7 | ) |
| | | | | (3.6 | ) | | | | | | | (3.6 | ) |
| | | | | | | | | | | | | (5.3 | ) |
| | | | | | | | | | | | | 31.0 | |
| | | | | | | | | | | | | 0.0 | |
| (0.2 | ) | | | | | | | | | | | (0.2 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | 795,687 | | 21.8 | | 26.0 | |
| | | | | | | | | | | | | 6.9 | |
|
| (0.2 | ) | (12.8 | ) | (3.6 | ) | 279.1 | | (55,319 | ) | (2.8 | ) | 493.7 | |
| | | | | | | | | | | | | | |
| | | | | | | 93.5 | | | | | | 93.5 | |
| | | | | | | | | | | | | | |
| | | (0.7 | ) | | | | | | | | | (0.7 | ) |
| | | | | (10.3 | ) | | | | | | | (10.3 | ) |
| | | | | | | | | | | | | (11.0 | ) |
| | | | | | | | | | | | | 82.5 | |
| (0.2 | ) | | | | | | | | | | | 0.2 | |
| | | | | | | | | | | | | | |
| | | | | | | | | 55,319 | | 2.8 | | 22.8 | |
| | | | | | | | | | | | | 8.8 | |
| | |
| | | | | | | | | | | | | 110.9 | |
|
| (0.4 | ) | (13.5 | ) | (13.9 | ) | 372.6 | | — | | — | | 718.9 | |
| | | | | | | | | | | | | | |
| | | | | | | 58.6 | | | | | | 58.6 | |
| | | | | | | | | | | | | | |
| | | 3.7 | | | | | | | | | | 3.7 | |
| | | | | (14.1 | ) | | | | | | | (14.1 | ) |
| | | | | | | | | | | | | (10.4 | ) |
| | | | | | | | | | | | | 48.2 | |
| (0.7 | ) | | | | | | | | | | | 0.5 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 4.7 | |
| | | | | | | | | | | | | 0.3 | |
|
| $ (1.1 | ) | $ (9.8 | ) | $ (28.0 | ) | $ 431.2 | | — | | $ — | | $ 772.6 | |
|
32
Consolidated Statements of Cash Flows
(Amounts in millions)
Years ended May 31, |
|
| | | 2003 | | 2002 | | 2001 | |
|
| Cash flows provided by operating activities: |
Net income | | $ 58.6 | | $ 93.5 | | $ 36.3 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Amortization of prepublication and production costs | | 61.0 | | 50.2 | | 68.8 | |
Depreciation and amortization | | 46.1 | | 36.6 | | 42.4 | |
Royalty advances expensed | | 31.6 | | 26.6 | | 28.7 | |
Deferred income taxes | | 12.3 | | 18.0 | | (15.1) | |
Non-cash portion of Cost of goods sold - Special Literacy Place and other charges | | — | | — | | 71.4 | |
Non-cash portion of Cumulative effect of accounting change | | — | | 8.1 | | — | |
Changes in assets and liabilities: | | | | | | | |
Accounts receivable, net | | (17.9) | | (14.1) | | 22.5 | |
Inventories | | (16.7) | | (7.3) | | (25.7) | |
Deferred promotion costs | | (7.5) | | (0.5) | | (1.6) | |
Prepaid and other current assets | | 12.3 | | 5.5 | | (22.0) | |
Accounts payable and other accrued expenses | | 21.5 | | (42.5) | | (17.7) | |
Accrued royalties and deferred revenue | | (4.1) | | (6.0) | | 4.4 | |
Tax benefit realized from stock option transactions | | 0.3 | | 8.8 | | 6.9 | |
Other, net | | (18.3) | | (12.3) | | 6.3 | |
|
| Total adjustments | | 120.6 | | 71.1 | | 169.3 | |
|
Net cash provided by operating activities | | 179.2 | | 164.6 | | 205.6 | |
| Cash flows used in investing activities: |
Additions to property, plant and equipment | | (83.9) | | (78.4) | | (90.5) | |
Prepublication costs | | (55.7) | | (53.5) | | (54.5) | |
Royalty advances | | (30.3) | | (31.7) | | (25.5) | |
Equity investment and related loan | | (23.3) | | — | | — | |
Production costs | | (15.5) | | (13.0) | | (13.7) | |
Acquisition-related payments | | (10.2) | | (66.7) | | (396.4) | |
Proceeds from sale of investment | | 5.2 | | — | | — | |
Other | | (0.3) | | 4.8 | | 3.3 | |
|
Net cash used in investing activities | | (214.0) | | (238.5) | | (577.3) | |
| Cash flows provided by financing activities: |
Borrowings under Loan Agreement and Revolver | | 521.1 | | 835.2 | | 552.3 | |
Repayments of Loan Agreement and Revolver | | (571.1) | | (785.2) | | (558.1) | |
Borrowings under Grolier Facility | | 138.0 | | — | | 350.0 | |
Repayments of Grolier Facility | | (188.0) | | (300.0) | | — | |
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 | | 184.7 | | 151.8 | | 100.1 | |
Repayments of lines of credit | | (183.7) | | (150.7) | | (90.7) | |
Proceeds pursuant to employee stock plans | | 5.1 | | 22.8 | | 24.2 | |
Other | | 5.4 | | 0.2 | | (1.3) | |
|
Net cash provided by financing activities | | 82.8 | | 70.8 | | 376.5 | |
Effect of exchange rate changes on cash | | (0.1) | | 0.0 | | 0.0 | |
|
Net increase (decrease) in cash and cash equivalents | | 47.9 | | (3.1) | | 4.8 | |
Cash and cash equivalents at beginning of year | | 10.7 | | 13.8 | | 9.0 | |
|
| Cash and cash equivalents at end of year | | $ 58.6 | | $ 10.7 | | $ 13.8 | |
|
| Supplemental information: | | | | |
Income taxes paid | | $ 14.6 | | $ 27.5 | | $ 58.6 | |
Interest paid | | $ 32.5 | | $ 28.0 | | $ 43.5 | |
|
| See accompanying notes |
33
Notes to Consolidated Financial Statements
(Amounts in millions, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Scholastic Corporation and all wholly-owned subsidiaries (the “Company”). All significant intercompany transactions are eliminated.
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 involves the use of estimates and assumptions by 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 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; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, prepublication costs, royalty advances, goodwill and other 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.
Continuities — The Company operates continuity programs whereby customers generally place a single order and receive multiple shipments of books over a period of time. Revenue from continuities 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.
Film Production and Licensing — 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. 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.
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.
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.
34
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of less than three months.
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 realization 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. 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, except for certain direct marketing and telemarketing promotion costs that are deferred as discussed above.
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are recorded on a 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.
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
Effective June 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” under which goodwill and other intangible assets with indefinite lives are no longer amortized. The Company reviews its goodwill and non-amortizable intangibles on an annual basis for impairment, or more frequently if impairment indicators arise, in accordance with the provision of SFAS No. 142. Prior to adoption of SFAS No. 142, the Company amortized goodwill and other intangible assets over their estimated useful lives.
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.
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
35
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 its employees who meet certain eligibility requirements. The Company follows 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 U.S. cash balance plan are based on formulas in which the employees’ balances are credited monthly with interest based on 1-year U.S. 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 including healthcare and life insurance benefits to retired U.S. employees. A majority of the Company’s U.S. 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. 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.
Foreign currency translation
The Company’s non-U.S. dollar denominated assets and liabilities are translated into United States dollars at prevailing rates at the balance sheet date and the revenues, costs and expenses are translated at the average 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 balances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders’ equity.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Earnings per share
Basic earnings per share is based on the weighted average shares of Class A Stock and Common Stock outstanding. Diluted earnings per share is based on the weighted average shares of Class A Stock and Common Stock outstanding adjusted for the impact of potentially dilutive securities outstanding. The dilutive impact of options outstanding is calculated using the treasury stock method, which treats the Common Stock issuable upon the exercise of the options outstanding 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. The dilutive impact of convertible debt outstanding is calculated on an if-converted basis, adjusting for interest foregone and Common Stock issuable upon conversion of the debt as if it was converted at the beginning of the period. Any potentially dilutive security is excluded from the computation of diluted earnings per share for any period in which it has an anti-dilutive effect.
Stock-based compensation
Under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its stock option plans. In accordance with APB 25, no compensation expense was recognized with respect to the Company’s stock option plans, as 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.
36
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 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:
|
| | | 2003 | | 2002 | | 2001 | |
|
| Net income — as reported | | $ 58.6 | | $ 93.5 | | $ 36.3 | |
Add: Stock-based employee
compensation included in reported
net income, net of tax* | | 0.3 | | 0.2 | | 0.0 | |
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method, net of tax | | 14.3 | | 9.6 | | 12.3 | |
|
| Net income — pro forma | | $ 44.6 | | $ 84.1 | | $ 24.0 | |
|
Basic earnings per
share — as reported | | $ 1.50 | | $ 2.55 | | $ 1.05 | |
Basic earnings per
share — pro forma | | $ 1.14 | | $ 2.29 | | $ 0.69 | |
Diluted earnings per
share — as reported | | $ 1.46 | | $ 2.38 | | $ 1.01 | |
Diluted earnings per
share — pro forma | | $ 1.14 | | $ 2.22 | | $ 0.69 | |
|
| * | | Related to the Management Stock Purchase Plan | |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions for the three fiscal years ended May 31 as follows:
|
| | | 2003 | | 2002 | | 2001 | |
|
| Expected divided yield | | 0.0 | % | 0.0 | % | 0.0 | % |
| Expected stock price volatility | | 61.5 | % | 66.1 | % | 44.5 | % |
| Risk-free interest rate | | 3.45 | % | 4.59 | % | 6.03 | % |
| Expected life of options | | 5 years | | 5 years | | 5 years | |
|
The weighted average fair value of options granted during fiscal 2003, 2002 and 2001 was $18.00, $25.24 and $15.59 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 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt this statement by the first quarter of fiscal 2004. The Company does not expect that the adoption of SFAS No. 143 will have a material impact on its financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”
(“FIN 46”), which requires variable interest entities to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 is effective for all new variable interest entities created after January 31, 2003. For variable interest entities created or acquired before February 1, 2003, the provisions of FIN 46 become effective for the Company on September 1, 2003. The Company does not expect that the adoption of FIN 46 will have a material impact on its financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Except as noted below, the Company is required to adopt this statement by the first quarter of fiscal 2004. Certain provisions of this statement relating to SFAS No. 133 implementation issues that have been effective for prior fiscal quarters will continue to be applied in accordance with their respective effective dates. The Company does not expect that the adoption of SFAS No. 149 will have a material impact on its financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for the Company on September 1,
37
2003. The Company does not expect that the adoption of SFAS No. 150 will have a material impact on the Company’s financial position, results of operations or cash flows.
2. SEGMENT INFORMATION
The Company categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the Company’s domestic operations); and International. 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.
Certain revenues and expenses related to the Company’s Internet activities have been reallocated to reflect the transition from a developing platform previously included in the Media, Licensing and Advertising segment to operational systems included in the Children’s Book Publishing and Distribution and Educational Publishing segments. Prior year segment results have been restated to reflect this reclassification.
| • | | 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, 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 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 for the Company’s segments. Certain prior year amounts have been reclassified to conform with the present year presentation.
| | | Children’s | | | | | | | | | | | | |
| | | Book | | | | Media, | | | | | | | | |
| | | Publishing | | | | Licensing | | | | | | | | |
| | | and | | Educational | | and | | | | Total | | | | |
| | | Distribution | | Publishing | | Advertising | | Overhead(1) | | Domestic | | International | | Consolidated | |
|
| 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 | | 10.1 | | 3.9 | | 3.1 | | 25.3 | | 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) | | 137.1 | | 41.7 | | (5.4 | ) | (74.1 | ) | 99.3 | | 19.4 | | 118.7 | |
| Segment assets | | 745.6 | | 300.2 | | 66.3 | | 416.6 | | 1,528.7 | | 272.3 | | 1,801.0 | |
| Goodwill | | 126.3 | | 82.3 | | 10.2 | | 0.0 | | 218.8 | | 27.2 | | 246.0 | |
| Expenditures for long-lived assets(4) | | 73.5 | | 38.1 | | 24.9 | | 49.1 | | 185.6 | | 33.3 | | 218.9 | |
| Long-lived assets(5) | | 299.3 | | 191.7 | | 39.9 | | 250.5 | | 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 | | 8.0 | | 3.4 | | 1.5 | | 18.3 | | 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 | | 685.5 | | 303.8 | | 55.3 | | 362.1 | | 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) | | 283.2 | | 187.6 | | 33.6 | | 227.2 | | 731.6 | | 72.8 | | 804.4 | |
|
| 2001 | | | | | | | | | | | | | | | |
|
| Revenues | | $ 1,221.9 | | $ 311.2 | | $ 132.5 | | $ 0.0 | | $ 1,665.6 | | $ 296.7 | | $ 1,962.3 | |
| Bad debt | | 62.8 | | 1.2 | | 2.5 | | 0.0 | | 66.5 | | 9.0 | | 75.5 | |
| Depreciation | | 6.4 | | 3.4 | | 0.2 | | 13.9 | | 23.9 | | 4.3 | | 28.2 | |
| Amortization(2) | | 16.6 | | 46.6 | | 17.2 | | 0.3 | | 80.7 | | 2.3 | | 83.0 | |
| Royalty advances expensed | | 22.9 | | 0.9 | | 3.4 | | 0.0 | | 27.2 | | 1.5 | | 28.7 | |
| Segment profit (loss)(3) | | 202.9 | | (67.1 | )(6) | (3.5 | ) | (58.4 | ) | 73.9 | (6) | 24.8 | | 98.7 | (6) |
| Segment assets | | 640.0 | | 263.5 | | 56.9 | | 322.6 | | 1,283.0 | | 218.8 | | 1,501.8 | |
| Goodwill | | 109.2 | | 71.1 | | 8.4 | | 0.0 | | 188.7 | | 33.2 | | 221.9 | |
| Expenditures for long-lived assets(4) | | 271.4 | | 187.6 | | 18.9 | | 74.6 | | 552.5 | | 28.1 | | 580.6 | |
| Long-lived assets(5) | | 268.3 | | 178.6 | | 34.6 | | 168.2 | | 649.7 | | 68.3 | | 718.0 | |
|
(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, its fulfillment and distribution facilities located in Missouri and Arkansas, and an industrial/office building complex in Connecticut. | |
| (2) | | In fiscal 2003 and 2002, includes amortization of prepublication costs, production costs and other intangibles with definite lives. In fiscal 2001, includes amortization of prepublication costs, production costs, goodwill and other intangibles. | |
| (3) | | Segment profit/(loss) represents earnings before other income (expense), interest and income taxes. In fiscal 2002, it excludes the cumulative effect of accounting change of $5.2 net of tax, or $0.13 per diluted share, related to the Media, Licensing and Advertising segment. The impact on segment profit (loss) of the reclassification of Internet revenues and expenses was: a decrease in Children’s Book Publishing and Distribution segment profit of $12.8, $8.6 and $10.4 in fiscal 2003, 2002 and 2001, respectively; a decrease in Educational Publishing segment profit of $4.7 and $7.4 in fiscal 2003 and 2002, respectively, and an increase in Educational Publishing segment loss of $9.0 in fiscal 2001; offset by a decrease in the Media, Licensing and Advertising segment loss of $17.5, $16.0 and $19.4 in fiscal 2003, 2002 and 2001, respectively. | |
| (4) | | Includes expenditures for property, plant and equipment, investments in prepublication and production costs, royalty advances and acquisitions of, and investments in, businesses. | |
| (5) | | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles, royalty advances, production costs and long-term investments. | |
| (6) | | Educational Publishing segment loss for fiscal 2001 reflects the Company’s decision not to update Scholastic Literacy Place®, which resulted in a $72.9 special charge to cost of goods sold. | |
|
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The following table separately sets forth information for the three fiscal years ended May 31 for the U.S. direct-to-home continuity programs, which consist primarily of the business formerly operated by Grolier Incorporated (“Grolier”), and are included in the Children’s Book Publishing and Distribution segment, and for all other businesses included in the segment:
| | | Direct-to-home | | All Other | | Total | |
|
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 | |
|
| Revenues | | $ 212.3 | | $ 209.0 | | $ 217.9 | | $ 977.6 | | $ 959.6 | | $ 1,004.0 | | $ 1,189.9 | | $ 1,168.6 | | $ 1,221.9 | |
| Bad debt | | 41.9 | | 39.6 | | 43.4 | | 22.2 | | 18.9 | | 19.4 | | 64.1 | | 58.5 | | 62.8 | |
| Depreciation | | 0.3 | | 0.4 | | 0.3 | | 9.8 | | 7.6 | | 6.1 | | 10.1 | | 8.0 | | 6.4 | |
| Amortization(1) | | 1.5 | | 0.7 | | 3.6 | | 15.4 | | 15.3 | | 13.0 | | 16.9 | | 16.0 | | 16.6 | |
Royalty advances
expensed | | 4.5 | | 1.2 | | 0.2 | | 21.3 | | 22.4 | | 22.7 | | 25.8 | | 23.6 | | 22.9 | |
| Business profit(2) | | 30.7 | | 39.7 | | 13.5 | | 106.4 | | 138.7 | | 189.4 | | 137.1 | | 178.4 | | 202.9 | |
| Business assets | | 258.4 | | 241.8 | | 243.1 | | 487.2 | | 443.7 | | 396.9 | | 745.6 | | 685.5 | | 640.0 | |
| Goodwill | | 93.0 | | 93.4 | | 88.4 | | 33.3 | | 36.1 | | 20.8 | | 126.3 | | 129.5 | | 109.2 | |
Expenditures for
long-lived assets(3) | | 6.8 | | 9.5 | | 213.9 | | 66.7 | | 103.0 | | 57.5 | | 73.5 | | 112.5 | | 271.4 | |
| Long-lived assets(4) | | 142.5 | | 142.6 | | 137.9 | | 156.8 | | 140.6 | | 130.4 | | 299.3 | | 283.2 | | 268.3 | |
|
| |
| (1) | | In fiscal 2003 and 2002, includes amortization of prepublication costs and other intangibles with definite lives. In fiscal 2001, includes amortization of prepublication costs, goodwill and other intangibles. | |
| (2) | | Business profit represents earnings before other income (expense), interest and income taxes. | |
| (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 | |
|
| | | 2003 | 2002 |
|
| Lines of Credit | | $ 28.5 | | $ 28.5 | | $ 23.3 | | $ 23.3 | |
| Grolier Facility | | — | | — | | 50.0 | | 50.0 | |
| Loan Agreement and Revolver | | — | | — | | 50.0 | | 50.0 | |
| 7% Notes due 2003, net of discount | | 125.0 | | 128.5 | | 124.9 | | 130.4 | |
| 5.75% Notes due 2007, net of premium/discount | | 303.8 | | 322.4 | | 298.9 | | 297.5 | |
| 5.75% Notes due 2007 - swap valuation adjustment | | 5.6 | | 5.6 | | 1.8 | | 1.8 | |
| 5% Notes due 2013, net of discount | | 172.6 | | 182.7 | | — | | — | |
| Other debt | | 0.4 | | 0.4 | | 0.4 | | 0.4 | |
|
Total debt | | 635.9 | | 668.1 | | 549.3 | | 553.4 | |
| Less lines of credit and short-term debt | | (153.7 | ) | (157.2 | ) | (23.5 | ) | (23.5 | ) |
|
| Total long-term debt | | $ 482.2 | | $ 510.9 | | $ 525.8 | | $ 529.9 | |
|
| |
| Short-term debt is carried at cost which approximates fair value. Fair values were estimated based on market quotes, where available, or dealer quotes. | |
40
The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of May 31, 2003 for fiscal years ended May 31:
|
| 2004 | | $ 153.7 | |
| 2005 | | 0.1 | |
| 2006 | | 0.1 | |
| 2007 | | 309.4 | |
| 2008 | | — | |
| Thereafter | | 172.6 | |
|
| Total debt | | $ 635.9 | |
|
| |
Lines of Credit
Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $57.8 and $53.5 at May 31, 2003 and 2002, respectively. There were $28.5 and $23.3 outstanding under these credit lines at May 31, 2003 and 2002, respectively. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 6.89% and 5.43% at May 31, 2003 and 2002, respectively.
Grolier Facility
On June 22, 2000, Scholastic Inc. established a credit facility to finance $350.0 of the $400.0 Grolier purchase price (the “Grolier Facility”). As described in “5% Notes due 2013” below, the Grolier Facility was cancelled effective April 10, 2003. At May 31, 2002, $50.0 was outstanding under the Grolier Facility at a weighted average interest rate of 2.4%.
Loan Agreement
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an amended and restated loan agreement with certain banks, effective August 11, 1999 and amended June 22, 2000 (the “Loan Agreement”). The Loan Agreement, which expires on August 11, 2004, provides for aggregate borrowings of up to $170.0 (with a right in certain circumstances to increase borrowings to $200.0), including the issuance of up to $10.0 in letters of credit. Interest under this facility is either at the prime rate or 0.325% to 0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of May 31, 2003 were 0.475% over LIBOR, 0.150% and 0.075%, respectively. The Loan Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2003 and 2002, $0 and $50.0, respectively, were outstanding under the Loan Agreement. The weighted average interest rate at May 31, 2002 was 2.7%.
Revolver
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under a Revolving Loan Agreement with a bank, effective November 10, 1999 and amended June 22, 2000 (the “Revolver”). The Revolver provides for unsecured revolving credit of up to $40.0 and expires on August 11, 2004. Interest under this facility is either at the prime rate minus 1%, or 0.325% to 0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of May 31, 2003 were 0.475% over LIBOR and 0.150%, respectively. The Revolver has certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At May 31, 2003 and 2002, there were no borrowings outstanding under the Revolver.
7% Notes due 2003
On December 23, 1996, Scholastic Corporation issued $125.0 of 7% Notes (the “7% Notes”). The 7% Notes are senior unsecured obligations that mature on December 15, 2003. The 7% Notes are not redeemable prior to maturity. Interest on the 7% Notes is payable semi-annually on December 15 and June 15 of each year.
5.75% Notes due 2007
On January 23, 2002, Scholastic Corporation issued $300.0 of 5.75% Notes (the “5.75% Notes”). The 5.75% Notes are senior unsecured obligations that mature on January 15, 2007. Interest on the 5.75% Notes is payable semi-annually on July 15 and January 15 of each year. The Company may, at any time, redeem all or a 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, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption.
41
Interest Rate Swap Agreement
On February 5, 2002, Scholastic Corporation entered into an interest rate swap agreement, designated as a fair value hedge as defined under SFAS No. 133, whereby the Company would receive a fixed interest rate payment based on a notional amount and pay a variable interest rate to the counterparty, which is reset semi-annually based on six-month LIBOR (as defined). This agreement was entered into in the notional amount of $100.0 to exchange the fixed interest rate payments on a portion of the 5.75% Notes for variable interest rate payments. In accordance with SFAS No. 133, the swap is considered perfectly effective and all changes in fair value are recorded to Other assets and Long-term debt. On May 28, 2003, $50.0 of the initial notional amount was settled, and the Company received a payment of $5.4 from the counterparty. The cash received was used to partially reduce the Other asset previously established, and the corresponding credit will be amortized over the remaining term of the 5.75% Notes. The fair value recorded as of May 31, 2003 and 2002 was $5.6 and $1.8, respectively.
5% Notes due 2013
On April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable on April 15 and October 15 of each year, beginning October 15, 2003. The Company may at any 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 interest discounted to the date of the redemption. Net proceeds from the sale, after deducting discounts, commissions and estimated expenses, were used to retire all outstanding indebtedness under the Grolier Facility, which was then cancelled; and to reduce indebtedness outstanding under the Loan Agreement and the Revolver.
4. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases warehouse space, office space and equipment under various operating leases. Certain of these leases provide for rent increases based on price-level factors. In most cases, management expects that in the normal course of business leases will be renewed or replaced by other leases. The Company has no significant capitalized leases. Total rent expense relating to the Company’s operating leases was $48.3, $44.2 and $41.5 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. The rent payments are subject to escalation provisions and are net of sublease income. The aggregate minimum future annual rental commitments at May 31, 2003 under all non-cancelable operating leases, totaling $292.6, are as follows: 2004 - $41.9; 2005 - $33.0; 2006 - - $24.6; 2007 - $16.5; 2008 - $11.8; later years - $164.8.
The Company had certain contractual commitments, principally relating to royalty advances, at May 31, 2003 totaling $15.7. The aggregate annual commitments are as follows: 2004 - $13.3; 2005 - $2.0; 2006 - $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’s consolidated financial position or results of operations.
5. ACQUISITIONS
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, and the related goodwill and other intangibles was $31.9. In addition to the initial purchase price paid for Klutz of $42.8, additional payments of up to $31.3 may be made to the seller in 2004 and 2005, contingent upon the achievement of certain revenue thresholds.
42
The assets and liabilities of each business acquired were adjusted to their fair values as of the date of acquisition, with the purchase price in excess of the fair market value assigned to goodwill.
The following summarizes the allocation of the aggregate purchase price 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 and other intangibles | | 31.9 | |
| Noncurrent deferred taxes | | 18.6 | |
| Other assets | | 0.4 | |
| Current liabilities | | (11.8 | ) |
|
| Cash paid for acquisitions, net of cash received | | $ 66.7 | |
|
| |
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 acquired business operations on a pro forma basis would not be material.
In connection with the fiscal 2002 acquisitions, the Company established liabilities of $3.2 at May 31, 2002, relating primarily to severance and other exit costs. As of May 31, 2003, $1.6 of these liabilities remain unpaid.
Fiscal 2001 Acquisition — Grolier
On June 22, 2000, Scholastic Inc., a subsidiary of Scholastic Corporation, acquired all of the issued and outstanding capital stock of Grolier. In connection with the Grolier acquisition, the Company established a plan for integrating Grolier’s operations. Accordingly, the Company established liabilities of approximately $17.7 relating primarily to severance, fringe benefits and related salary continuance, as well as certain exit costs associated with the integration of certain of Grolier’s operational and administrative functions. At May 31, 2003 and 2002, the established liabilities for integration costs related to severance and other exit costs were in excess of the expected costs by $0.5 and $2.1, respectively, resulting in a decrease in the recorded liabilities and a reduction of Selling, general and administrative expenses, which are reflected in the table below. As of May 31, 2003, $1.5 of these liabilities remain unpaid and are expected to be paid over the next two fiscal years.
A summary of the activity in the established liabilities is detailed in the following table:
|
| | | Severance | | | | | |
| | | and | | Other | | | |
| | | Related | | Exit | | | |
| | | Costs | | Costs | | Total | |
|
Liabilities established
at acquisition | | $ 13.3 | | $ 4.4 | | $ 17.7 | |
| Fiscal 2001 payments | | (1.8 | ) | (1.2 | ) | (3.0 | ) |
|
| Balance at May 31, 2001 | | 11.5 | | 3.2 | | 14.7 | |
| Fiscal 2002 payments | | (7.3 | ) | (0.7 | ) | (8.0 | ) |
| Fiscal 2002 adjustment | | (1.2 | ) | (0.9 | ) | (2.1 | ) |
|
| Balance at May 31, 2002 | | 3.0 | | 1.6 | | 4.6 | |
|
| Fiscal 2003 payments | | (2.2 | ) | (0.4 | ) | (2.6 | ) |
| Fiscal 2003 adjustment | | (0.2 | ) | (0.3 | ) | (0.5 | ) |
|
| Balance at May 31, 2003 | | $ 0.6 | | $ 0.9 | | $ 1.5 | |
|
| |
6. ACQUISITION OF GOOSEBUMPS RIGHTS
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 Press, Inc.
7. INVESTMENT
On June 24, 2002, 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 Scholastic School Link name. Accordingly, $9.6 relating to Red House has been recorded as an investment in the joint venture (See Note 8). 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
43
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, 2003, £3.0 (equivalent to $4.9) was outstanding under the revolving credit facility. The equity investment in The Book People Group, Ltd. and credit facility are included in Other in the Other Assets and Deferred Charges section of the Consolidated Balance Sheets.
8. GOODWILL AND
OTHER INTANGIBLES
The Company adopted SFAS No. 142, effective as of June 1, 2001. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise. In fiscal 2003 and 2002, the Company completed the required annual impairment reviews of goodwill. These reviews required the Company to estimate the fair value of its identified reporting units. For each of the reporting units, the estimated fair value was determined utilizing the expected present value of the projected future cash flows of the units. In all instances, the estimated fair value of the reporting units exceeded their book values and therefore no write-down of goodwill was required.
The following table reflects unaudited pro forma results of operations of the Company, giving effect to SFAS No. 142 as if it were adopted on the first day of the fiscal year ended May 31, 2001:
|
| | | 2001 | |
|
| Net income, as reported | | $ 36.3 | |
| Add back: amortization expense, net of tax | | 8.3 | |
|
| Pro forma net income | | $ 44.6 | |
| Basic net income per Share of Class A Stock and | | | |
Common Stock: | | |
As reported | | $ 1.05 | |
Pro forma | | $ 1.29 | |
| Diluted net income per Share of Class A Stock and | | | |
Common Stock: | | |
As reported | | $ 1.01 | |
Pro forma | | $ 1.24 | |
|
| |
The following table summarizes the activity in Goodwill as of May 31:
|
| | | 2003 | | 2002 | | 2001 | |
|
| Beginning balance | | $ 256.2 | | $ 221.9 | | $ 63.5 | |
| Additions due to acquisitions | | 0.4 | | 35.4 | | 169.9 | |
| Investment in joint venture | | (9.6 | ) | — | | — | |
| Amortization | | — | | — | | (10.3 | ) |
| Other adjustments | | (1.0 | ) | (1.1 | ) | (1.2 | ) |
|
| Total | | $ 246.0 | | $ 256.2 | | $ 221.9 | |
|
| |
The following table summarizes Other intangibles subject to amortization as of May 31:
|
| | | 2003 | | 2002 | |
|
| Customer lists | | $ 2.9 | | $ 2.8 | |
| Accumulated amortization | | (2.5 | ) | (2.2 | ) |
|
Net customer lists | | 0.4 | | 0.6 | |
|
| Other intangibles | | 3.9 | | 3.9 | |
| Accumulated amortization | | (2.3 | ) | (2.1 | ) |
|
Net other intangibles | | 1.6 | | 1.8 | |
|
| Total | | $ 2.0 | | $ 2.4 | |
|
| |
Amortization expense for Other intangibles totaled $0.5, $1.0 and $3.9 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. Amortization expense for these assets is currently estimated to total $0.3 for each of the fiscal years ending May 31, 2004 through 2006, and $0.2 for each of the fiscal years ending May 31, 2007 and 2008. The weighted average amortization periods for these assets by major asset class are three years and 14 years for customer lists and other intangibles, respectively.
The following table summarizes Other intangibles not subject to amortization as of May 31:
|
| | | 2003 | | 2002 | |
|
| 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 | | 12.6 | | 1.8 | |
|
| Total | | $ 72.2 | | $ 61.4 | |
|
| |
44
9. INCOME TAXES
The provisions for income taxes for the fiscal years ended May 31 are based on earnings before taxes and Cumulative effect of accounting change as follows:
|
| | | 2003 | | 2002 | | 2001 | |
|
| United States | | $ 81.8 | | $ 144.7 | | $ 50.0 | |
| Non-United States | | 8.3 | | 8.6 | | 7.1 | |
|
| | | $ 90.1 | | $ 153.3 | | $ 57.1 | |
|
| |
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:
|
| | | 2003 | | 2002 | | 2001 | |
|
| Federal |
Current | | $ 11.5 | | $ 29.4 | | $ 26.9 | |
Deferred | | 13.4 | | 15.4 | | (13.5 | ) |
|
| | | $ 24.9 | | $ 44.8 | | $ 13.4 | |
|
| State and local |
Current | | $ 3.4 | | $ 3.7 | | $ 4.0 | |
Deferred | | 0.9 | | 2.0 | | (2.8 | ) |
|
| | | $ 4.3 | | $ 5.7 | | $ 1.2 | |
|
| International |
Current | | $ 4.3 | | $ 3.5 | | $ 5.0 | |
Deferred | | (2.0 | ) | 0.6 | | 1.2 | |
|
| | | $ 2.3 | | $ 4.1 | | $ 6.2 | |
|
| Total |
Current | | $ 19.2 | | $ 36.6 | | $ 35.9 | |
Deferred | | 12.3 | | 18.0 | | (15.1 | ) |
|
| | | $ 31.5 | | $ 54.6 | | $ 20.8 | |
|
| |
The provisions for income taxes attributable to earnings before Cumulative effect of accounting change for the fiscal year ended May 31 differ from the amount of tax determined by applying the federal statutory rate as follows:
|
| | | 2003 | | 2002 | | 2001 | |
|
Computed federal
statutory provision | | $ 31.5 | | $ 53.7 | | $ 20.0 | |
State income tax provision,
net of federal income tax benefit | | 2.8 | | 3.6 | | 0.8 | |
Difference in effective tax rates
on earnings of foreign subsidiaries | | (1.4 | ) | (0.7 | ) | 1.8 | |
| Charitable contributions | | (1.4 | ) | (1.8 | ) | (1.6 | ) |
| Other — net | | 0.0 | | (0.2 | ) | (0.2 | ) |
|
| Total provision for income taxes | | $ 31.5 | | $ 54.6 | | $ 20.8 | |
|
| Effective tax rates | | 35.0 | % | 35.6 | % | 36.5 | % |
|
| |
The undistributed earnings of foreign subsidiaries at May 31, 2003 are $18.1. Any remittance of foreign earnings would not result in any significant additional tax.
At May 31, 2003, the Company has a charitable deduction carryforward of $9.6, which expires in the fiscal years ending May 31, 2007 and 2008 and a foreign tax credit carryforward of $0.8 which expires in the fiscal year ending May 31, 2007.
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 items that give rise to deferred tax assets and liabilities as of May 31 for the indicated fiscal years are as follows:
|
| | | 2003 | | 2002 | |
|
| Net deferred tax assets: | | | |
Tax uniform capitalization | | $ 24.3 | | $ 26.5 | |
Inventory reserves | | 16.7 | | 18.4 | |
Allowance for doubtful accounts | | 19.6 | | 19.9 | |
Other accounting reserves | | 18.4 | | 21.8 | |
Post-retirement, post-employment
and pension obligations | | 21.3 | | 16.3 | |
Tax carryforwards | | 5.1 | | 1.5 | |
Prepaid expenses | | (15.2 | ) | (12.2 | ) |
Depreciation and amortization | | (10.7 | ) | (0.3 | ) |
Other — net | | (1.5 | ) | (4.2 | ) |
|
| Total net deferred tax assets | | $ 78.0 | | $ 87.7 | |
|
| |
45
Net deferred tax assets of $78.0 at May 31, 2003 and $87.7 at May 31, 2002 include $1.2 in Other accrued expenses at May 31, 2003 and $3.1 and $4.6 in Other noncurrent liabilities at May 31, 2003 and 2002, respectively.
10. CAPITAL STOCK AND STOCK OPTIONS
Scholastic Corporation has authorized capital stock of 2,500,000 shares of Class A Stock, par value $0.01 per share (the “Class A 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”).
Class A and Common Stock
At May 31, 2003, 1,656,200 shares of Class A Stock and 37,608,333 shares of Common Stock were outstanding. At May 31, 2003, Scholastic Corporation had reserved for issuance 11,346,808 shares of Common Stock. Of these shares, 9,314,998 shares were reserved for issuance under the Company’s stock option plans (including shares available for grant and options currently outstanding), 1,656,200 shares were reserved for issuance upon conversion of the Class A Stock and 375,610 shares were reserved for future issuances under the Company’s 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. Scholastic Corporation has not paid any cash dividends since its public offering in 1992 and has no current plans to pay any dividends on its Class A Stock or Common Stock.
Preferred Stock
The Preferred Stock may be issued in one or more series, 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
The Company presently has three stockholder-approved employee stock plans: the Scholastic Corporation 1992 Stock Option Plan (the “1992 Plan”), under which no further options are issuable, the Scholastic Corporation 1995 Stock Option Plan (the “1995 Plan”) and the Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”). The 1995 Plan provides for the issuance of non-qualified stock options and incentive stock options. The 2001 Plan provides for the issuance of non-qualified stock options, incentive stock options, restricted stock and other stock-based awards. At May 31, 2003, non-qualified stock options to purchase 678,900; 4,316,358; and 1,587,500 shares of Common Stock were outstanding under the 1992 Plan, 1995 Plan and 2001 Plan, respectively; and 0; 27,490; and 2,411,250 shares of Common Stock were available for additional awards under the 1992 Plan, 1995 Plan and 2001 Plan, respectively.
The Company also maintains two stockholder-approved stock option plans for outside directors: the 1992 Outside Directors’ Stock Option Plan (the “1992 Directors’ Plan”), under which no further options are issuable, and the 1997 Outside Directors’ Stock Option Plan (the “1997 Directors’ Plan”), which provide for the grant of non-qualified stock options. The 1997 Directors’ Plan, as amended, provides for the automatic grant of 6,000 options to non-employee directors on the date of each annual Stockholders’ meeting. At May 31, 2003, options to purchase 257,500 and 12,000 shares of Common Stock were outstanding and 24,000 and 0 shares of Common Stock were available for additional awards under the 1997 Directors’ Plan and the 1992 Directors’ Plan, respectively. In September 2002 and January 2002, options were awarded under the 1997 Directors’ Plan at exercise prices of $43.54 and $49.70, respectively. On July 14, 2003, the Board of Directors approved Amendment No. 2 to the 1997 Directors’ Plan, subject to approval by the Class A Stockholders, to increase the shares of Common Stock authorized for issuance under the plan by 270,000.
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 after the date of grant.
46
The following table sets forth the stock option activity for the three fiscal years ended May 31:
| | | 2003 | 2002 | 2001 |
|
| | | | | Weighted | | | | Weighted | | | | Weighted | |
| | | | | Average | | | | Average | | | | Average | |
| | | Options | | Exercise Price | | Options | | Exercise Price | | Options | | Exercise Price | |
|
| Outstanding — beginning of year | | 5,539,712 | | $ 27.58 | | 6,035,804 | | $ 25.28 | | 5,568,966 | | $ 22.05 | |
| Granted | | 1,392,240 | | 32.69 | | 692,000 | | 42.62 | | 1,724,000 | | 32.81 | |
| Exercised | �� | (59,694 | ) | 21.49 | | (911,292 | ) | 22.07 | | (1,170,012 | ) | 20.68 | |
| Cancelled | | (20,000 | ) | 34.31 | | (276,800 | ) | 32.79 | | (87,150 | ) | 30.16 | |
|
| Outstanding — end of year | | 6,852,258 | | $ 28.65 | | 5,539,712 | | $ 27.58 | | 6,035,804 | | $ 25.28 | |
|
| Exercisable — end of year | | 4,669,518 | | $ 26.05 | | 4,083,962 | | $ 24.52 | | 3,588,804 | | $ 22.47 | |
|
| |
The following table sets forth information as of May 31, 2003 regarding weighted average exercise prices and weighted average remaining contractual lives for the remaining outstanding stock options, sorted by range of exercise price:
| | | Options Outstanding | | Options Exercisable | |
|
| | | | | | | Weighted | | | | | |
| | | | | | | Average | | | | Weighted | |
| | | | | Weighted | | Remaining | | | | Average | |
| | | | | Average | | Contractual | | Number | | Exercise | |
| Options Price Range | | Number | | Exercise Price | | Life | | Exercisable | | Price | |
|
| $15.73 — $20.97 | | 1,726,868 | | $ 18.34 | | 4.5 years | | 1,726,868 | | $ 18.34 | |
| $20.98 — $26.21 | | 1,433,000 | | 25.19 | | 7.0 years | | 919,000 | | 25.37 | |
| $26.22 — $31.45 | | 740,400 | | 29.44 | | 3.5 years | | 730,400 | | 29.42 | |
| $31.46 — $36.69 | | 2,166,740 | | 33.69 | | 7.8 years | | 972,500 | | 32.06 | |
| $36.70 — $41.94 | | 142,250 | | 38.36 | | 8.5 years | | 58,250 | | 38.08 | |
| $41.95 — $47.18 | | 551,000 | | 43.02 | | 8.5 years | | 198,000 | | 43.13 | |
| $47.19 — $52.42 | | 92,000 | | 50.25 | | 7.7 years | | 64,500 | | 49.92 | |
|
| |
47
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (“ESPP”), which is offered to eligible U.S. employees. The ESPP permits participating employees to purchase Common Stock, through after-tax payroll deductions, on a quarterly basis at a 15% discount from the lower of the closing price of the Common Stock on NASDAQ on the first or last business day of each fiscal quarter. During fiscal 2003, 2002 and 2001, the Company issued 131,417, 71,073 and 55,630 shares under the ESPP at a weighted average price of $25.54, $35.87 and $28.41 per share, respectively. At May 31, 2003, 34,807 shares were authorized to be issued under the ESPP. On July 14, 2003, the Board of Directors approved an amendment to the ESPP, subject to approval by the Class A Stockholders, in order to increase the number of shares of Common Stock authorized for issuance under the ESPP by 500,000.
Management Stock Purchase Plan
The Company maintains a Management Stock Purchase Plan (“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”). The RSUs are purchased by the employee at a discount from the lowest closing price of the Common Stock on NASDAQ during the fiscal quarter in which such bonuses are payable and are converted into shares of 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 2003, 2002 and 2001, the Company allocated 62,071 RSUs, 45,301 RSUs, and 27,330 RSUs to participants under the MSPP at a weighted average price of $25.22, $30.60 and $22.61 per RSU, resulting in an expense of $0.5, $0.2 and $0.1, 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%.
11. EMPLOYEE BENEFIT PLANS
The Company has a cash balance retirement plan (the “Pension Plan”), which covers the majority of the U.S. 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 annual pensionable earnings. It is the Company’s policy to fund the minimum amount required by the Employee Retirement Income Security Act (“ERISA”) of 1974, as amended.
Scholastic Ltd., one of the Company’s wholly-owned subsidiaries, has a defined benefit pension plan (the “U.K. Pension Plan”) that covers United Kingdom 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. subsidiary and its employees.
Grolier Ltd., the Company’s wholly-owned subsidiary in Canada, provides a defined benefit pension plan (the “Grolier Canada Pension Plan”) that covers employees who meet certain eligibility requirements. All full time employees are eligible to participate in the plan after two years of employment. The Company’s contributions to the fund have been suspended due to an actuarial surplus. Employees are not required to contribute to the fund.
The Company provides certain Post-Retirement Benefits (the “U.S. Post-Retirement Benefits”) consisting of certain healthcare and life insurance benefits provided to retired U.S. employees. A majority of the Company’s U.S. employees may become eligible for these benefits if they reach normal retirement age while working for the Company. In fiscal 2003, the Company amended the U.S. 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 was recorded as unrecognized prior service cost and will be amortized over 14½ years. At May 31, 2003, the unrecognized prior service cost remaining is $8.1.
48
The following table sets forth the change in benefit obligation and plan assets and reconciliation of funded status under the Pension Plan, the U.K. Pension Plan, the Grolier Canada Pension Plan and the U.S. Post-Retirement Benefits for the two fiscal years ended May 31:
|
| | | Pension Benefits | Post-Retirement
Benefits |
|
| | | 2003 | | 2002 | | 2003 | | 2002 | |
|
| Change in benefit obligation | | | | | |
Benefit obligation at beginning of year | | $ 111.6 | | $ 103.4 | | $ 23.4 | | $ 18.3 | |
Service cost | | 5.9 | | 4.7 | | 0.5 | | 0.4 | |
Interest cost | | 7.7 | | 7.4 | | 1.8 | | 1.3 | |
Plan participants’ contributions | | 0.6 | | 0.6 | | — | | — | |
Amendments | | 0.2 | | — | | (8.6 | ) | — | |
Actuarial losses | | 11.8 | | 4.2 | | 13.9 | | 5.1 | |
Curtailment loss | | — | | 0.2 | | — | | — | |
Foreign currency exchange rate changes | | 2.3 | | (0.3 | ) | — | | — | |
Benefits paid | | (8.9 | ) | (8.6 | ) | (2.2 | ) | (1.7 | ) |
|
| Benefit obligation at end of year | | $ 131.2 | | $ 111.6 | | $ 28.8 | | $ 23.4 | |
|
| Change in plan assets | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ 87.3 | | $ 93.0 | | $ — | | $ — | |
Actual (loss) on plan assets | | (2.3 | ) | (1.3 | ) | — | | — | |
Company contributions | | 11.0 | | 4.5 | | — | | — | |
Plan participants’ contributions | | 0.4 | | 0.4 | | — | | — | |
Administrative expenses | | (0.8 | ) | (0.3 | ) | — | | — | |
Foreign currency exchange rate changes | | 2.2 | | (0.4) | | — | | — | |
Benefits paid | | (8.9 | ) | (8.6 | ) | — | | — | |
|
| Fair value of plan assets at end of year | | $ 88.9 | | $ 87.3 | | $ — | | $ — | |
|
| Funded status | | | | | |
Underfunded status of the plans | | $ (42.3 | ) | $ (24.3 | ) | $ (28.8 | ) | $ (23.4 | ) |
Unrecognized net actuarial loss | | 54.0 | | 30.6 | | 18.9 | | 6.0 | |
Unrecognized prior service cost | | (2.1 | ) | (2.6 | ) | (8.1 | ) | (0.2 | ) |
Unrecognized net asset obligation | | 0.4 | | 0.5 | | — | | — | |
|
| Accrued benefit asset/(liability) | | $ 10.0 | | $ 4.2 | | $ (18.0 | ) | $ (17.6 | ) |
|
| Amounts recognized in the Consolidated Balance Sheets | | | | | |
Prepaid benefit cost | | $ 8.8 | | $ 3.3 | | $ — | | $ — | |
Accrued benefit liability | | (43.3 | ) | (21.9 | ) | (18.0 | ) | (17.6 | ) |
Intangible asset | | 0.1 | | — | | — | | — | |
Accumulated other comprehensive loss | | 43.2 | | 21.8 | | — | | — | |
|
| Net amount recognized | | $ 8.8 | | $ 3.2 | | $ (18.0 | ) | $ (17.6 | ) |
|
| Weighted average assumptions | | | | | |
Discount rate | | 6.0% | | 7.1% | | 6.0% | | 7.3% | |
Compensation increase factor | | 4.0% | | 4.1% | | — | | — | |
|
The Company’s pension plans have different measurement dates as follows: for the Pension Plan—May 31, 2003; for the U.K. Pension Plan—March 31, 2003; and for the Grolier Canada Pension Plan—December 31, 2002. Plan assets consist primarily of stocks, bonds, money market funds and U.S. government obligations.
49
Information with respect to the pension plans with accumulated benefit obligations in excess of plan assets is as follows for the fiscal years ended May 31:
|
| | | 2003 | | 2002 | |
|
| Projected benefit obligations | | $ 124.9 | | $ 106.0 | |
| Accumulated benefit obligations | | 118.9 | | 103.0 | |
| Fair value of plan assets | | 81.7 | | 80.1 | |
| Projected weighted average return of plan assets | | 8.9 | % | 9.4 | % |
|
| |
The following table sets forth the components of the net periodic benefit costs under the Pension Plan, U.K. Pension Plan and Grolier Canada Pension Plan and the U.S. Post-Retirement Benefits for the three fiscal years ended May 31:
| | | Pension Benefits | Post-Retirement Benefits | |
|
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 | |
|
| Components of Net Periodic Benefit Cost: | | | | | | | |
Service cost | | $ 5.9 | | $ 4.7 | | $ 5.1 | | $ 0.5 | | $ 0.4 | | $ 0.3 | |
Interest cost | | 7.7 | | 7.4 | | 7.3 | | 1.8 | | 1.3 | | 1.4 | |
Expected return on assets | | (8.6 | ) | (8.8 | ) | (9.7 | ) | — | | — | | — | |
Net amortization and deferrals | | 0.1 | | (0.2 | ) | 0.1 | | (0.6 | ) | — | | — | |
Curtailment loss | | — | | 0.2 | | — | | — | | — | | — | |
Recognized net actuarial loss/(gain) | | 1.2 | | 0.5 | | (0.2 | ) | 1.0 | | — | | — | |
|
| Net periodic benefit cost | | $ 6.3 | | $ 3.8 | | $ 2.6 | | $ 2.7 | | $ 1.7 | | $ 1.7 | |
|
The accumulated Post-Retirement benefit obligation was determined using a discount rate of 6.0%. Service cost and interest components were determined using a discount rate of 7.3%. The assumed health care cost trend rate was 10.0%, with an annual decline of 0.5% until the rate reaches its ultimate rate of 5% in fiscal 2013. A decrease of 1.0% in the health care cost trend rate would result in decreases of approximately $2.7 in the accumulated benefit obligation and $0.3 in the annual net periodic post-retirement benefit cost. An increase of 1.0% in the health care cost trend rate would result in increases of approximately $3.2 in the accumulated benefit obligation and $0.3 in the annual net periodic post-retirement benefit cost.
The Company also provides defined contribution plans for certain eligible employees. In the U.S., the Company sponsors a 401(k) plan and has contributed $5.8, $4.7 and $4.0 for fiscal 2003, 2002 and 2001, respectively. For its internationally based employees, the expenses under these plans totaled $1.9, $1.4 and $1.2 for fiscal 2003, 2002, and 2001, respectively.
50
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three years ended May 31:
| (amounts in millions, except per share data) |
|
| | | 2003 | | 2002 | | 2001 | |
|
Net income for basic earnings
per share | | $ 58.6 | | $ 93.5 | | $ 36.3 | |
| Dilutive effect of Debentures | | — | | 2.1 | | — | |
|
Adjusted net income for diluted
earnings per share | | $ 58.6 | | $ 95.6 | | $ 36.3 | |
|
Weighted average Shares of
Class A Stock and Common Stock
outstanding for basic earnings
per share | | 39.1 | | 36.7 | | 34.7 | |
Dilutive effect of Common Stock
issued pursuant to employee
stock plans | | 1.0 | | 1.6 | | 1.4 | |
| 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 | | 36.1 | |
|
Earnings per Share of Class A Stock
and Common Stock: | | | | | | | |
Earnings before Cumulative effect
of accounting change: | | | | |
Basic | | $ 1.50 | | $ 2.69 | | $ 1.05 | |
Diluted | | $ 1.46 | | $ 2.51 | | $ 1.01 | |
Cumulative effect of accounting
change (net of income taxes): | | | | | | | |
Basic | | $ — | | $ (0.14 | ) | $ — | |
Diluted | | $ — | | $ (0.13 | ) | $ — | |
| Net income: | | | | |
Basic | | $ 1.50 | | $ 2.55 | | $ 1.05 | |
Diluted | | $ 1.46 | | $ 2.38 | | $ 1.01 | |
|
For fiscal 2001, the effect of the potential conversion of $110.0 of Scholastic Corporation’s 5% Convertible Subordinated Debentures (the “Debentures”) into 2.9 million shares on Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings per share was anti-dilutive and was not included in the calculation. On January 11, 2002, pursuant to the exercise of Scholastic Corporation’s optional redemption rights, $109.8 of the Debentures were converted at the option of the holders into 2.9 million shares of Common Stock and $0.2 were redeemed for cash.
13. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On June 1, 2001, the Company adopted Statement of Position No. 00-2 (“SOP 00-2”), “Accounting by Producers and Distributors of Films,” which replaced SFAS No. 53, “Financial Reporting by Producers and Distributors of Motion Picture Films.” SOP 00-2 provides that film costs should be accounted for under an inventory model and discusses 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 Company’s ultimate revenue projections.
The Company recognizes revenue from its film licensing arrangements when the film is complete and delivered, the license period has begun, the fee is fixed or determinable and collection is reasonably assured. The costs of producing film and acquiring film distribution rights are capitalized and amortized using the individual-film-forecast method. This method amortizes such residual costs in the same ratio that current period revenue bears to estimated remaining unrecognized revenue as of the beginning of the fiscal year. All exploitation costs are expensed as incurred. 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. Management estimates that these costs will be amortized over the next three years.
51
14. COST OF GOODS SOLD — SPECIAL LITERACY PLACE AND OTHER CHARGES
On April 16, 2001, the Company decided not to update Scholastic Literacy Place, its grade K to 6 basal reading textbook program, for any future state adoptions. This decision resulted in a pre-tax charge in fiscal 2001 of $72.9. The impact of this charge on fiscal 2001 earnings per diluted share was $1.20. The charge consisted of the following related to Literacy Place and other exited programs: previously capitalized prepublication costs of $51.6, inventory write-offs of $19.8 and severance and other related costs of $1.5, of which $0.3 and $0.5 remained on the Consolidated Balance Sheets at May 31, 2003 and 2002, respectively.
15. SPECIAL SEVERANCE CHARGE
On May 28, 2003, the Company announced a reduction in its global work force of approximately 400 positions, or 4%, the majority of which were scheduled to take effect in the first quarter of fiscal 2004. Severance and related costs related to the reduction in work force totaled $10.9, which is reflected in the Company’s income statement as the Special severance charge.
The following table sets forth total severance and related costs, by segment:
|
| | | Amount | |
|
| Children’s Book Publishing and Distribution | | $ 2.4 | |
| Educational Publishing | | 2.1 | |
| International | | 3.8 | |
| Media, Licensing and Advertising | | 1.0 | |
| Overhead | | 1.6 | |
|
| Total severance costs | | $ 10.9 | |
|
A summary of the activity in the established liabilities is detailed in the following table:
|
| | | Amount | |
|
| Liabilities established | | $ 10.9 | |
| Fiscal 2003 payments | | (1.2) | |
|
| Balance at May 31, 2003 | | $ 9.7 | |
|
| |
The remaining liability of $9.7 represents payments in the form of salary continuance pursuant to severance agreements, which are expected to be paid over the next two fiscal years.
16. LITIGATION AND OTHER CHARGES
On September 23, 2002, the Company announced that it had agreed in principle to settle a class action lawsuit initiated in 1997, captioned In re Scholastic Corporation Securities Litigation, 97 Civ. 2447 (JFK). The settlement agreement resulted in a pre-tax charge in fiscal 2003
of $1.9, which represents the portion of the total settlement amount of $7.5 that is not being paid by the insurance carrier.
On July 30, 2002, the Company agreed in principle to settle a lawsuit filed in 1995 with Robert Harris and
Harris Entertainment, Inc., for which the Company had established a $6.7 liability in the second quarter of fiscal 2000. The case involved stock appreciation rights allegedly granted to Mr. Harris by the Company in 1990 in connection with a joint venture formed primarily to produce motion pictures. The settlement agreement resulted in a fiscal 2002 pre-tax charge of $1.2, which represents the amount by which the settlement and related legal expenses exceeded the previously recorded liability.
17. OTHER INCOME (EXPENSE)
On December 30, 2002, 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 fiscal 2003 earnings per diluted share was $0.05 in fiscal 2003.
In fiscal 2002, the Company wrote off an equity investment of $2.0. The impact of this charge on earnings per diluted share was $0.03 in fiscal 2002.
52
18. OTHER FINANCIAL DATA
Deferred promotion costs were $52.8 and $44.6 at May 31, 2003 and 2002, respectively. Promotion costs expensed were $109.1, $94.5 and $94.7 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. Promotional expense consists of $99.9, $88.0 and $86.6 for direct-to-home continuity program promotions and $9.2, $6.5 and $8.1 for magazine advertising for fiscal 2003, 2002 and 2001, respectively.
Other advertising expenses were $161.4, $164.2 and $179.9 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively.
The financial statement impact of write-downs of deferred promotion costs to net realizable value during the periods presented was not material.
Accumulated amortization of prepublication costs was $76.3 and $62.4 at May 31, 2003 and 2002, respectively. The Company amortized $47.5, $42.6 and $54.8 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively.
Other accrued expenses include a reserve for unredeemed credits issued in conjunction with the Company’s school-based book club and book fair operations of $12.4 and $12.3 at May 31, 2003 and 2002, respectively.
53
Report of Independent Auditors
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SCHOLASTIC CORPORATION
We have audited the accompanying consolidated balance sheets of Scholastic Corporation (the “Company”) as of May 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended May 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at May 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 8 to the consolidated financial statements, the Company changed its accounting for goodwill and other indefinite lived intangible assets in 2002.
New York, New York
July 14, 2003
54
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 | |
|
| 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
| |
|
| 2002 | | | | | | | | | | | |
|
| Revenues | | $ 306.1 | | $ 637.2 | | $ 432.7 | | $ 541.0 | | $ 1,917.0 | |
| Cost of goods sold | | 159.5 | | 275.1 | | 199.6 | | 217.9 | | 852.1 | |
Earnings/(loss) before Cumulative effect
of accounting change | | (31.8 | ) | 66.5 | | 11.9 | | 52.1 | | 98.7 | |
Cumulative effect of accounting
change (net of tax) | | (5.2 | ) | — | | — | | — | | (5.2 | ) |
| Net income/(loss) | | (37.0 | ) | 66.5 | | 11.9 | | 52.1 | | 93.5 | |
Earnings/(loss) per share before Cumulative
effect of accounting change: | | | | | | |
Basic | | $ (0.90 | ) | $ 1.88 | | $ 0.32 | | $ 1.33 | | $ 2.69 | |
Diluted | | $ (0.90 | ) | $ 1.69 | | $ 0.31 | | $ 1.28 | | $ 2.51 | |
| Earnings/(loss) per share: | | | | | | | | | | | |
Basic | | $ (1.05 | ) | $ 1.88 | | $ 0.32 | | $ 1.33 | | $ 2.55 | |
Diluted | | $ (1.05 | ) | $ 1.69 | | $ 0.31 | | $ 1.28 | | $ 2.38 | |
|
| |
| (1) | | 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. | |
55
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A | Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of Scholastic Corporation (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 were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect these controls subsequent to that evaluation, and there were no significant deficiencies or material weaknesses in such controls requiring corrective actions.
Part III
Item 10 | Directors and Executive Officers of the Registrant
Information regarding directors required by this item is incorporated herein by reference from the Corporation’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 Exchange Act.
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
Item 13 | Certain Relationships and Related Transactions
Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
Item 14 | Principal Accountant Fees and Services
Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
56
Part IV
Item 15 | 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, 2003, 2002 and 2001 | |
| | | Consolidated Balance Sheets at May 31, 2003 and 2002 | |
| | | Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the three years ended May 31, 2003, 2002 and 2001 | |
| | | Consolidated Statements of Cash Flows for the three years ended May 31, 2003, 2002 and 2001 | |
| | | 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 (incorporated by reference to the Corporation’s Registration Statement on Form S-8 (Registration No. 33-46338) as filed with the SEC on March 12, 1992); together with Certificate of Amendment, effective as of September 19, 2000, to the Corporation’s Amended and Restated Certificate of incorporation (incorporated by reference to the Corporation’s Quarterly Report filed with the SEC in October 16, 2000). | |
| | | | |
| 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 | | Amended and Restated Credit Agreement, dated as of August 11, 1999, among the Corporation 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 Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 2000), together with Amendment No. 1, dated as of June 22, 2000 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 25, 2000). | |
| | | | |
| 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. | |
| | | | |
| 4.3* | | Credit Agreement Facility, dated November 2, 1999, between Scholastic Canada Ltd. and Canadian Imperial Bank of Commerce. | |
| | | | |
| 4.4* | | Credit Agreement Facility, dated June 24, 1993, between Scholastic Ltd. and Citibank, N.A. | |
| | | | |
| 4.5* | | Credit Agreement, dated May 14, 1992, as amended between Scholastic Ltd. and Midland Bank. | |
57
| 4.6* | | Credit Agreement, dated December 21, 2001, between Scholastic Australia Pty. Ltd. and Westpac Banking Corporation. | |
| | | | |
| 4.7* | | Indenture dated December 15, 1996 for 7% Notes due December 15, 2003 issued by the Corporation. | |
| | | | |
| 4.8 | | 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). | |
| | | | |
| 4.9* | | 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 Number 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) 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 Number 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 Director 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 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). | |
| | | | |
| 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** | | Description of split dollar life insurance arrangements for the benefit of Richard Robinson. | |
| | | | |
| 10.9** | | 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). | |
58
| 10.10 | | 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). |
|
| | | |
10.11 | | 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 Independent Auditors. |
| | | |
| 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, 2003 reporting under Item 5 (Other Events) a press release announcing the sale of the 5% Notes. |
| | | |
| | | A Current Report on Form 8-K was filed with the SEC on May 28, 2003 reporting under Item 5 (Other Events) a press release announcing a workforce reduction. |
| | | |
| | | A Current Report on Form 8-K was filed with the SEC on July 11, 2003 reporting under Item 12 (Results of Operations and Financial Condition) a press release regarding estimates of results of operations for the Corporation’s quarter and fiscal year ended May 31, 2003. |
| | | | |
| | | A Current Report on Form 8-K was filed with the SEC on July 15, 2003 reporting under Item 12 (Results of Operations and Financial Condition) a press release regarding results of operations for the Corporation’s quarter and fiscal year ended May 31, 2003. |
* | | 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. | |
| |
59
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 15, 2003 | SCHOLASTIC CORPORATION |
| | |
| | By: /s/ Richard Robinson |
| | Richard Robinson, Chairman of the Board,
President and Chief Executive Officer |
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Robinson his or her true and lawful attorney-in-fact and agent, with power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary and requisite to be done, as fully and to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date | |
| | | | | | |
| /s/ Richard Robinson | | Chairman of the Board, President, | | August 15, 2003 | |
| Richard Robinson | | Chief Executive Officer and Director (Principal Executive Officer)
| | | |
| | | | | | |
| /s/ Kevin J. McEnery | | Executive Vice President and Chief | | August 15, 2003 | |
| Kevin J. McEnery | | Financial Officer (Principal Financial Officer) | | |
| | | | | | |
| /s/ Karen A. Maloney | | Vice President and Controller | | August 15, 2003 | |
| Karen A. Maloney | | (Principal Accounting Officer) | | |
| | | | | | |
| /s/ Rebeca M. Barrera | | Director | | August 15, 2003 | |
| Rebeca M. Barrera | | | |
| | | | | | |
| /s/ Ramon C. Cortines | | Director | | August 15, 2003 | |
| Ramon C. Cortines | | | |
| | | | | | |
| /s/ John L. Davies | | Director | | August 15, 2003 | |
| John L. Davies | | | |
| | | | | | |
| /s/ Charles T. Harris III | | Director | | August 15, 2003 | |
| Charles T. Harris III | | | |
| | | | | | |
| /s/ Andrew S. Hedden | | Director | | August 15, 2003 | |
| Andrew S. Hedden | | | |
| |
60
| Signature | | Title | | Date | |
| | | | | | |
/s/ Mae C. Jemison | | Director | | August 15, 2003 | |
| Mae C. Jemison | | | |
| | | | | | |
| /s/ Linda B. Keene | | Director | | August 15, 2003 | |
| Linda B. Keene | | | |
| | | | | | |
| /s/ Peter M. Mayer | | Director | | August 15, 2003 | |
| Peter M. Mayer | | | |
| | | | | | |
| /s/ John G. McDonald | | Director | | August 15, 2003 | |
| John G. McDonald | | | |
| | | | | | |
| /s/ Augustus K. Oliver | | Director | | August 15, 2003 | |
| Augustus K. Oliver | | | |
| | | | | | |
| /s/ Richard M. Spaulding | | Director | | August 15, 2003 | |
| Richard M. Spaulding | | | |
| |
61
Scholastic Corporation
Financial Statement Schedule
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 2003
ITEM 15(d)
62
Schedule II
Valuation and Qualifying Accounts and Reserves
(Amounts in millions)
Years ended May 31, |
| | | Balance at | | | | | | | |
| | | Beginning | | Charged | | Write-Offs | | Balance at | |
| | | Of Year | | to Income | | and Other | | End of Year | |
|
| 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 | |
|
| 2001 | | | | | |
|
| Allowance for doubtful accounts | | $ 14.7 | | $ 75.5 | | $ 20.1 | | $ 70.1 | |
| Reserve for returns | | 44.1 | | 160.4 | | 141.5 | (1) | 63.0 | |
| Reserve for obsolescence | | 41.8 | | 51.9 | (2) | 29.0 | | 64.7 | |
| Reserve for royalty advances | | 38.8 | | 4.4 | | 0.2 | | 43.0 | |
|
| |
| (1) | | Represents actual returns charged to the reserve. | |
| (2) | | Includes $19.8 pertaining to the Special Charge related to the Company’s decision not to update Scholastic Literacy Place. | |
|
63
