UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2002 Commission File No. 0-19860
Scholastic Corporation
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
557 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value The NASDAQ Stock Market
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Common Stock, par value $0.01, held by
non-affiliates as of August 10, 2002 was approximately $1,211,050,000. As of
such date, non-affiliates held no shares of the Class A Stock, $0.01 par value.
There is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant's voting stock
as of August 10, 2002 was as follows: 37,424,421 shares of Common Stock and
1,656,200 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders to be held
September 24, 2002.
Part I
ITEM 1 o BUSINESS
OVERVIEW
Scholastic Corporation (together with its subsidiaries, "Scholastic" or the
"Company") is a global children's publishing and media company. The Company
believes that it is the world's largest publisher and distributor of children's
books. Scholastic creates quality educational and entertaining materials and
products for use in school and at home, including children's books, textbooks,
magazines, technology-based products, teacher materials, television programming,
videos and toys. The Company distributes its products and services through a
variety of channels, including school-based book clubs, school-based book fairs,
school-based and direct-to-home continuity programs, retail stores, schools,
libraries, television networks and the Internet. The Company's Website,
Scholastic.com, is a leading site for teachers, classrooms and parents and an
award-winning destination for children. With the June 2000 acquisition of
Grolier Incorporated ("Grolier") for $400 million in cash, the Company became
the leading operator in the United States of direct-to-home book clubs primarily
serving children age five and under, and the leading print and on-line publisher
of children's reference and non-fiction products sold primarily to United States
school libraries. Internationally, Scholastic has long-established operations in
Canada, the United Kingdom, Australia and New Zealand, and newer operations in
Argentina, Hong Kong, India, Ireland and Mexico. The Grolier acquisition
expanded the Company's international operations in Canada, the United Kingdom,
Australia and Southeast Asia.
During its 82 years of operation, Scholastic has emphasized quality
products and a dedication to learning. Scholastic Corporation was incorporated
under the laws of Delaware in 1986 and, through predecessor entities, has been
in business since 1920. Grolier, through its predecessor entities, has been in
business since 1895.
OPERATING SEGMENTS
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.
During the three-year period ended May 31, 2002, Scholastic's revenues have
grown at an average annual compounded rate of 18.0%, including the Grolier
acquisition, and 10.0%, excluding the Grolier acquisition. The following table
sets forth revenues by operating segment for the three fiscal years ended May
31:
(Amounts in millions)
2002 2001 2000
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Children's Book Publishing and Distribution $1,168.6 $1,221.9 $ 857.9
Educational Publishing 315.5 309.4 212.5
Media, Licensing and Advertising 131.2 134.3 108.1
International 301.7 296.7 224.0
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TOTAL $1,917.0 $1,962.3 $1,402.5
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Reported revenues for fiscal 2002 and 2001 include Grolier's operations
since June 22, 2000, the date of acquisition. Selected pro forma information for
Grolier is included in the Consolidated Financial Statements in Part II, Item 8.
The addition of Grolier's revenues in fiscal 2002 and 2001 did not significantly
change the Company's sales mix by operating segment. Additional financial
information covering the Company's operating segments is included in Note 2 of
Notes to Consolidated Financial Statements in Item 8, which is incorporated
herein by reference.
CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION
(61.0% of fiscal 2002 revenues)
GENERAL
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes
the publication and distribution of children's books in the United States
through school-based book clubs and book fairs, school-based and direct-to-home
continuity programs and the trade channel. The direct-to-home continuity and
trade businesses formerly operated by Grolier are incorporated in this segment
from June 22, 2000, the date on which Grolier was acquired.
The Company believes it is the largest publisher and distributor of
children's books and is the largest operator of school-based book clubs and
school-based book fairs in the United States. The Company is also a leading pub-
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lisher of children's books distributed through the trade channel and the leading
distributor in the United States of children's books through the direct-to-home
channel, primarily for children ages five and younger. In fiscal 2002, the
Company distributed in excess of 320 million children's books in the United
States.
Scholastic offers a broad range of quality children's literature. Many of
the Company's books have received awards for excellence in children's
literature, including the Caldecott and Newbery awards.
The Company obtains titles for sale in its distribution channels from three
principal sources. The first source for titles is the Company's publication of
books written under exclusive publication agreements with authors, book
packagers or other media companies. Scholastic generally owns the rights to sell
these titles in all United States channels of distribution. Scholastic's second
source of titles is licenses to publish books exclusively in specified channels
of distribution, including reprints of books originally published by other
publishers, for which the Company acquires rights to sell in the school market,
and licenses to publish books for exclusive sale in the direct-to-home channel.
The third source of titles is the Company's purchase of finished books from
other publishers to be sold in the school market. At May 31, 2002, the Company's
active backlist (a list of titles published as new titles in prior years)
included more than 5,500 titles.
SCHOOL-BASED BOOK CLUBS
Scholastic founded its first school-based book club in 1948. The Company
operates ten school-based book clubs: FIREFLY(R), serving pre-kindergarten
("pre-K") and kindergarten ("K") students; SEESAW(R), serving students grades K
to 1; two CARNIVAL(R) clubs, one serving students grades K to 2, and the other
serving students grades 3 to 6; LUCKY BOOK CLUB(R), serving students grades 2 to
3; ARROW BOOK CLUB(R), serving students grades 4 to 6; TAB BOOK CLUB(R), serving
students grades 6 to 8; and three TRUMPET(R) clubs, serving pre-K to grade 6
students. In addition to its regular periodic offerings, the Company creates
special theme-based offers targeted to the different grade levels during the
year, such as holiday offers, science offers, curriculum offers and Spanish
language offers.
The Company estimates that over 80% of all elementary school teachers in
the United States participate in school-based book clubs, with substantially all
of these teachers using Scholastic book clubs at least once during the school
year. The Company believes that teachers participate in school-based book clubs
because it is their opinion that quality books at affordable prices will be of
interest to students and improve students' reading skills. The Company also
believes that teachers participate because the school-based book clubs offer
easy access to a broad range of books.
The Company mails promotional materials containing order forms to teachers
in the vast majority of the pre-K to grade 8 classrooms in the United States.
Participation in any offer does not create an obligation to participate in any
subsequent offer, nor does it preclude participation in other book clubs.
Teachers who wish to participate in a school-based book club distribute the
order forms to their students, who may choose from generally 80 or more
selections at substantial reductions from list prices. The teacher consolidates
the students' orders and forwards them to the Company. Orders are then shipped
to the teacher for distribution to the students. Teachers who participate in the
book clubs receive bonus points for use by their school, which may be redeemed
for the purchase of additional books and other items for their classrooms.
In its school-based book club business, the Company competes on the basis
of book selection, price, promotion and customer service. The Company believes
that its broad offerings of titles, many of which are distributed in this
channel exclusively by Scholastic, combined with low costs and its efficient use
of promotional mailings, enable the Company to compete effectively.
SCHOOL-BASED BOOK FAIRS
Scholastic entered the school-based book fair business in 1981. The Company
has grown this business by expanding into new markets, including through
selected acquisitions, and by increasing its business in existing markets by
reaching new school customers, holding more fairs per year at its existing
school customers and growing revenue on a per fair basis. The Company is the
leading operator of school-based book fairs in the United States. In July 2001,
the Company acquired certain assets of Troll Book Fairs Inc., a national
school-based book fair operator.
School book fairs are generally week-long events conducted on school
premises, operated by school librarians and/or parent-teacher organizations.
Book fair events provide children with access to hundreds of different titles
and allow them to purchase books and other select products of their choice at
the school. Although the Company provides the school with the books and book
display cases, the school itself conducts the book fair. The Company believes
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that the primary motivation for schools sponsoring fairs is to make quality
books available to their students at reasonable prices in order to stimulate
reading interests. In addition, the school retains a portion of the book fair
revenues, which can then be used to purchase books, supplies and equipment for
the school.
The Company operates school-based book fairs in all 50 states under the
name SCHOLASTIC BOOK FAIRS(R). Books and display cases are delivered to schools
from the Company's warehouses by a fleet of leased vehicles. Sales and customer
service functions are performed from regional sales offices, supported by field
representatives. The Company believes that its competitive advantages in the
book fair business include the strength of the relationship between its sales
representatives and schools, broad geographic coverage, quality customer service
and breadth of product selection. Over 90% of the schools that sponsored a
Scholastic book fair in fiscal 2001 sponsored a Scholastic book fair again in
fiscal 2002.
CONTINUITY PROGRAMS
The Company operates continuity programs whereby children and their
families generally place a single order and receive more than one shipment of
books. Continuity programs are promoted through (i) direct-to-home offers
primarily through direct mail, telemarketing and print and on-line
advertisements, and (ii) offers in school-based book clubs. The Company's
direct-to-home business, acquired as part of the Grolier acquisition, is the
leading direct-to-home seller of children's books, primarily serving children
age five and under. In fiscal 2002, the Company's direct-to-home continuity
business included Scholastic publishing properties, such as CLIFFORD &
COMPANY(TM), HELLO KITTY(TM), MAGIC UNIVERSITY(TM) and BARNEY(TM), as well as
the licensed programs previously operated by Grolier, such as DISNEY BOOK
CLUB(TM), BARBIE(TM) and DR. SEUSS(TM) BEGINNING READERS PROGRAM. In April 2002,
the Company acquired Baby's First Book Club(R), a direct marketer through
continuity programs oF age-appropriate books and toys for young children.
Continuity programs offered primarily through Scholastic's school-based book
clubs include I SPY(TM), CLIFFORD THE BIG RED DOG(TM), DEAR AMERICA(TM),
DINOFOURS(TM) and FRANKLIN.
TRADE
Scholastic is one of the leading sellers of children's books through
bookstores and mass merchandisers in the United States. The Company maintains
over 4,000 titles for trade distribution. Scholastic's original publications
include HARRY POTTER(R), I SPY(TM), CLIFFORD THE BIG RED DOG(R), ANIMORPHS(R),
DEAR AMERICA(R), THE BABY-SITTERS CLUB(R), THE MAGIC SCHOOL BUS(R), CAPTAIN
UNDERPANTS(R) and MISS SPIDER(R) and licensed properties such as BARNEY(R), STAR
WARS(R) and SCOOBY DOO(R). In April 2002, the Company purchased Klutz, a
publisher and creator of "books plus" products for children. The Company's trade
sales organization focuses on marketing and selling Scholastic's publishing
properties to book store accounts and mass merchandisers.
The Company's fiscal 2002 sales in the trade market were led by the HARRY
POTTER books. Other Scholastic bestsellers during fiscal 2002 included books
from the DEAR AMERICA, I SPY, CLIFFORD THE BIG RED DOG and CAPTAIN UNDERPANTS
series.
EDUCATIONAL PUBLISHING
(16.5% of fiscal 2002 revenues)
GENERAL
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 K
to 12 in the United States. The U.S. reference and non-fiction business formerly
operated by Grolier is included in this segment from June 22, 2000, the date on
which Grolier was acquired.
Scholastic has been providing quality innovative educational materials to
schools and libraries since it began publishing classroom magazines in the
1920's. The Company added supplementary books and texts to its product line in
the 1960's, professional books for teachers in the 1980's and early childhood
products and core curriculum materials in the 1990's. In 1996, the Company
strengthened its Spanish language offerings through the acquisition of Lectorum
Publications, Inc., the largest Spanish language book distributor to schools and
libraries in the United States. Through the acquisition of Grolier in June 2000,
the Company became the leading print and on-line publisher of children's
reference and non-fiction products sold primarily to school libraries in the
United States. The Company markets and sells its EDUCATIONAL PUBLISHING products
through a combination of field representatives, direct mail and telemarketing.
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CURRICULUM PUBLISHING
The Company's curriculum publishing operations develop and distribute
instructional materials directly to schools in the United States, primarily
purchased through school and district budgets. The Company's curriculum
publishing includes reading improvement programs, individual paperbacks and
collections and professional books designed for, and generally purchased by,
teachers.
In April 2001, the Company decided to focus its supplemental and core
publishing efforts on reading improvement materials. As part of this focus, the
Company decided not to update SCHOLASTIC LITERACY PLACE(R), its principal basal
textbook program, for any future state adoptions. Scholastic's reading
improvement programs include technology-based products such as READ 180(R), a
reading intervention program for students in grades 4 to 8 reading at least two
years below grade level, and the recently announced version of READ 180 for high
school students; WIGGLEWORKS(R), which assists in teaching reading to students;
and SCHOLASTIC READING COUNTS!(TM), which encourages reading through a
school-managed incentive program. Other reading improvement products include
READ XL(TM), a reading improvement program for students in grades 6 to 8, which
provides high-interest and increasingly demanding text to assist students
reading one to three years below grade level; BUILDING LANGUAGE FOR
LITERACY(TM), a program of books and audio tapes to guide children through the
critical pre-K to K stages of literacy development; and SCHOLASTIC PHONICS
READING PROGRAM(TM), which is a beginning phonics instruction program for grades
K to 1. In December 2001, the Company acquired the assets of Tom Snyder
Productions, Inc., a leading developer and publisher of interactive educational
software.
The teaching resources group publishes professional books designed for and
generally purchased by teachers and distributes individual paperbacks and
collections to schools. The Company also distributes a successful line of
supplemental phonics products. In April 2002, the Company acquired Teacher's
Friend Publications, Inc., a leading producer and marketer of materials that
teachers use to decorate their classrooms.
CLASSROOM MAGAZINES
Scholastic is a leading publisher of classroom magazines. Teachers in
grades K to 12 use these magazines as supplementary educational materials.
Publishing the Company's classroom magazines under the Scholastic name
reinforces the Company's educational reputation with students, teachers and
school administrators. The Company believes that publishing quality magazines,
maintaining an extensive magazine mailing list and having a large customer base
of teachers helps generate customers for its school-based book clubs and other
Scholastic products. At the same time, the Company leverages its school-based
book club mailings to help secure additional circulation for its classroom
magazines.
The Company believes that its magazines play an important role in educating
students about world events at an age appropriate level. The Company's 33
classroom magazines supplement the school's formal learning program by bringing
subjects of current interest into the classroom. The magazines are designed to
encourage students to read and also to cover diverse subjects, including
English, reading, literature, math, science, current events, social studies and
foreign languages. The most well known of the Company's domestic magazines are
SCHOLASTIC NEWS(R) and JUNIOR SCHOLASTIC(R).
Scholastic's classroom magazine circulation in the United States in fiscal
2002 was more than 7 million, with approximately two-thirds of the circulation
in grades K to 6 and the balance in grades 7 to 12. In fiscal 2002, teachers in
over 60% of the elementary schools and in over 70% of the secondary schools in
the United States used the Company's classroom magazines. The various classroom
magazines are distributed either on a weekly, bi-weekly or monthly basis during
the school year.
The majority of the magazines purchased are paid for with school funds,
with teachers or students paying for the balance. Circulation revenue accounted
for substantially all of the classroom magazine revenues in fiscal 2002.
LIBRARY PUBLISHING
Scholastic is a leading publisher of quality children's reference and
non-fiction products and encyclopedias sold primarily to schools and libraries
in the United States. Products include print and on-line versions of
ENCYCLOPEDIA AMERICANA(R), THE NEW BOOK OF KNOWLEDGE(R) and CUMBRE(TM), a
Spanish language encyclopedia; reference materials published under the
Grolier(R) name; and quality non-fiction books published in the United States
under the imprints Children's Press(R) and Franklin Watts(R).
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MEDIA, LICENSING AND ADVERTISING
(6.8% of fiscal 2002 revenues)
GENERAL
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the
production and/or distribution in the United States of software and Internet
services and the production and/or distribution by and through the Company's
subsidiary, Scholastic Entertainment Inc. ("SEI"), of programming and consumer
products (including children's television programming, videos, software, feature
films, promotional activities and non-book merchandise). The consumer software
business formerly operated by Grolier is included in this segment from June 22,
2000, the date on which Grolier was acquired.
PRODUCTION AND DISTRIBUTION
SEI extends the Company's franchises by creating programming and managing
global brands based on Scholastic's strong publishing properties as well as
original concepts. SEI develops and produces children's television programming,
videos, software, feature films, branded web sites, promotional activities and
non-book consumer products. SEI's multimedia programming also generates
awareness for brand building and merchandising activities worldwide. The
December 2001 acquisition of the assets of Tom Snyder Productions, Inc. included
assets of the television production company Soup2Nuts.
SEI has built a television library of over 265 half-hour productions
including: CLIFFORD THE BIG RED DOG(TM), Scholastic's THE MAGIC SCHOOL BUS(R),
GOOSEBUMPS(R), ANIMORPHS(R) and DEAR AMERICA(R). These television series
initially aired on PBS Kids, PBS, Fox Kid's Network, Nickelodeon and HBO,
respectively, and collectively have been licensed for broadcast in more than 50
countries. In fall 2000, SEI launched CLIFFORD THE BIG RED DOG, an animated
television series based on the Company's best-selling books by Norman Bridwell,
which were first published in 1963. Since its launch, this award winning series,
nominated for 10 Emmys, has become a top rated show on PBS Kids. In addition to
the original 40 episodes, in fiscal 2002 PBS Kids began airing an additional 25
new episodes. CLIFFORD THE BIG RED DOG also began airing in markets outside of
North America in fiscal 2002. In fiscal 2003, SEI is scheduled to launch 26
episodes of I SPY(TM) on HBO, based on the Company's best-selling book series.
BRAND MARKETING AND CONSUMER PRODUCTS
SEI creates and develops global branding campaigns for Scholastic
properties. For example, the successful CLIFFORD THE BIG RED DOG program on PBS
is part of a comprehensive brand marketing campaign including TV tie-in books,
consumer products and interactive media, supporting Clifford's position as a
leading pre-school brand. In connection with its branding campaigns, SEI has
received numerous marketing and licensing awards and has partnered with industry
leaders in consumer promotions. In addition, SEI creates, manufactures and
distributes high-quality consumer products primarily based on Scholastic's
literary properties, such as a line of upscale plush toys and wooden puzzles
based on CLIFFORD THE BIG RED DOG(TM), Scholastic's THE MAGIC SCHOOL BUS(R), THE
REAL MOTHER GOOSE(TM) and STELLALUNA(TM). The products are available through
independent toy/gift stores, specialty chains, department stores, mail order
catalogs and bookstores, as well as through Scholastic's school-based book
clubs, school-based book fairs and continuity programs. Scholastic boutiques at
Toys "R" Us feature Scholastic-branded learning toys. The Company also produces
and markets videos in the school market through its subsidiary, Weston Woods, a
producer of videos based on high quality children's books.
CONSUMER SOFTWARE
Scholastic sells original and licensed consumer software for grades K to 8
through school-based software clubs, school-based book clubs and school-based
book fairs. The Company acquires software for distribution in all of these
channels through a combination of licensing, purchases of product from software
publishers and internal development. Scholastic's school-based software clubs
are marketed in the same manner as the Company's school-based book clubs. The
Company's internally developed CD-ROM titles, including the award-winning series
of CLIFFORD(TM) and I SPY(TM), are also sold through trade channels.
INTERNET
Scholastic.com is a leading website for teachers and classrooms and is an
award-winning destination for children. For teachers, Scholastic.com offers
multimedia teaching units, lesson plans, teaching tools and on-line activities.
For children, Scholastic.com offers sites with favorite characters, such as
HARRY POTTER(TM), CAPTAIN UNDERPANTS(TM), CLIFFORD THE BIG RED DOG(TM), I
SPY(TM) and ANIMORPHS(TM).
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In fiscal 2002, the Company expanded the use of its Internet platform to
generate e-commerce sales with the introduction of book club on-line ordering
for teachers, an on-line Teacher Store (www.Scholastic.com), dedicated to
serving teachers in the school, and the on-line Scholastic Store
(www.ScholasticStore.com), for parents and families with children from newborn
to twelve years old.
ADVERTISING
Certain of the Company's magazine properties generate advertising revenues
as their primary source of revenue, including INSTRUCTOR(TM), SCHOLASTIC
ADMINISTRATOR(TM), SCHOLASTIC EARLY CHILDHOOD TODAY(TM) and COACH AND ATHLETIC
DIRECTOR(TM), which are directed to teachers and education professionals and are
distributed during the academic year. Total circulation for these magazines was
approximately 350,000 in fiscal 2002. Subscriptions for these magazines are
solicited primarily by direct mail. SCHOLASTIC PARENT AND CHILD(R) magazine,
which is directed at parents and distributed through schools and child care
programs, had circulation of approximately 1.4 million in fiscal 2002. These
magazines carry paid advertising, advertising for Scholastic's other products
and paid advertising for clients that sponsor customized programs.
Also included in this group are: Scholastic In School Marketing, which
develops sponsored educational materials and supplementary classroom programs in
partnership with corporations, government agencies and nonprofit organizations;
and Quality Education Data, which develops and markets databases and provides
research and analysis focused on teachers, schools and education.
INTERNATIONAL
(15.7% of fiscal 2002 revenues)
GENERAL
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. The international
businesses formerly operated by Grolier are included in this segment from June
22, 2000, the date on which Grolier was acquired.
Scholastic has long-established operations in Canada, the United Kingdom,
Australia and New Zealand and newer operations in Argentina, Hong Kong, India,
Ireland and Mexico. With the acquisition of Grolier, the Company expanded into
the direct-to-home book club business primarily serving children age five and
under in Canada, the United Kingdom and Australia, and added the publication and
distribution of reference products and services outside the United States,
principally in Southeast Asia.
Scholastic's operations in Canada, the United Kingdom, Australia and New
Zealand generally mirror Scholastic's United States business model. Each of
these international operations has original trade and educational publishing
programs, distributes children's books, software and other materials through
school-based book clubs, school-based book fairs and trade channels, distributes
magazines and offers on-line services. Each of these operations has established
export and foreign rights licensing programs and is a licensee of book tie-ins
for major media properties. Original books published by each of these operations
have received awards of excellence in children's literature.
CANADA
Scholastic Canada, founded in 1957, is a leading publisher and distributor
of English and French language children's books, is the largest school-based
book club and school-based book fair operator in Canada and is one of the
leading suppliers of original or licensed children's books to the Canadian trade
market. Since 1965, Scholastic Canada has produced quality Canadian-authored
books and educational materials. Grolier Canada is a leading operator of
direct-to-home book clubs in Canada.
UNITED KINGDOM
Scholastic UK, founded in 1964, is a leading children's publisher in the
United Kingdom, where its trade books appear frequently on children's bestseller
lists. Scholastic UK is the largest school-based book club and school-based book
fair operator in the United Kingdom. Scholastic UK's best selling original book
series, HORRIBLE HISTORIES(R), has been adapted for television by SEI.
Scholastic UK also publishes five monthly magazines for teachers and
supplemental educational materials, including professional books. Grolier UK is
a leading operator of direct-to-home book clubs in the United Kingdom.
On June 24, 2002, the Company entered into a joint venture with The Book
People, Ltd., a leading 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. The
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Company also acquired a 15% equity interest in The Book People Group Ltd.
AUSTRALIA
Scholastic Australia, founded in 1968, is the leading publisher and
distributor of children's educational materials in Australia and has the largest
school-based book club and book fair operation in the country, reaching 90% of
the primary schools. Scholastic Australia's imprints include: Scholastic Press,
Omnibus Books and Margaret Hamilton Books. Grolier Australia is a leading
operator of direct-to-home book clubs in Australia.
NEW ZEALAND
Scholastic New Zealand, founded in 1964, is the largest children's book
publisher and the leading book distributor to schools in New Zealand. Through
its school-based book clubs and school-based book fairs, Scholastic New Zealand
reaches 90% of the country's schools.
SOUTHEAST ASIA
Scholastic's Southeast Asian operations sell English language reference
materials and local language product through a network of approximately 2,500
independent door-to-door sales representatives in India, Indonesia, Malaysia,
Philippines, Singapore, Taiwan and Thailand.
OTHER INTERNATIONAL OPERATIONS
The Company has operations in Mexico (1994), India (1997), Ireland (1998)
and Argentina (1999). These businesses principally distribute, through
school-based book fairs and/or school-based book clubs, books and educational
materials published by Scholastic's other operations as well as merchandise from
other publishers. In fiscal 1999, Scholastic India began its own Hindi and
English language original publishing program.
FOREIGN RIGHTS AND EXPORT
The Company licenses the foreign-language rights to selected Scholastic
titles to other publishing companies around the world in over 25 languages. The
Company's export business sells Scholastic books and products in regions of the
world not otherwise serviced by Scholastic subsidiaries.
MANUFACTURING AND DISTRIBUTION
The Company's books, magazines, software and other materials and products
are manufactured by third parties through arm's-length negotiation or
competitive bidding. As appropriate, the Company enters into multi-year
agreements that guarantee specified volume in exchange for favorable pricing
terms. Paper is purchased from third party sources. The Company does not
anticipate any difficulty in continuing to satisfy its manufacturing and paper
requirements.
In the United States, the Company processes and fulfills school-based book
club, trade, curriculum publishing and export orders mainly from its primary
warehouse and distribution facility in Jefferson City, Missouri. Magazine orders
are processed at the Jefferson City facility and are shipped directly from
printers. The Company ships school-based book club originated continuity orders
primarily from its warehouse and distribution facility in Des Plaines, Illinois.
On June 5, 2002, the Company acquired a distribution facility in Maumelle,
Arkansas, which will serve as the Company's direct-to-home continuity packaging
and fulfillment center, replacing services that are currently outsourced. The
Company's reference and non-fiction orders are fulfilled at the Jefferson City
facility. In connection with its trade business, the Company generally
outsources certain services, including invoicing, billing, returns processing
and collection services, and may also ship product directly from printers to
customers. School-based book fair orders are fulfilled through a network of
warehouses across the country. The Company's international school-based book
club, school-based book fair, trade and educational operations use similar
distribution systems.
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 are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are
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.
| 7 | SCHOLASTIC |
COMPETITION
The markets for children's educational and entertainment materials are
highly competitive. Competition is based on the quality and range of educational
materials made available, price, promotion, customer service and distribution
channels. Competitors include numerous other book, textbook and supplementary
text publishers, distributors and other resellers (including over the Internet)
of children's books and other educational materials, national publishers of
classroom and professional magazines with substantial circulation, numerous
producers of television, video and film programming (many of which are
substantially larger than the Company), television networks and cable networks,
publishers of computer software and distributors of products and services on the
Internet. In the United States, competitors include another national
school-based book club operator as well as regional and local school-based book
fair operators, including bookstores. Competition may increase to the extent
that other entities enter the market and to the extent that current competitors
or new competitors develop and introduce new materials that compete directly
with the products distributed by the Company or develop or expand competitive
sales channels.
EMPLOYEES
At May 31, 2002, the Company employed approximately 7,200 people in
full-time jobs and 900 people in part-time jobs in the United States and
approximately 2,500 people internationally. The number of part-time employees
fluctuates during the year because significant portions of the Company's
business are closely correlated with the school year. The Company believes that
relations with its employees are good.
COPYRIGHT AND TRADEMARKS
SCHOLASTIC is a registered trademark in the United States and in a number
of countries where the Company conducts business. Scholastic Inc., the Company's
principal U.S. operating subsidiary, has registered and/or has pending
applications to register its U.S. trademarks for the names of each of its
domestic book clubs, the titles of its magazines and the names of all its core
curriculum programs. The Company's international subsidiaries have also
registered trademarks in the name of Scholastic Inc. for the names of their
respective book clubs and magazines. Although individual book titles are not
subject to trademark protection, Scholastic Inc. has registered and/or has
pending applications to register trademarks in the United States and in a number
of countries for the names of certain series of books and consumer products,
such as THE MAGIC SCHOOL BUS, ANIMORPHS, CLIFFORD THE BIG RED DOG and HORRIBLE
HISTORIES. Grolier is a registered trademark in the United States and a number
of countries where it conducts business. All of the Company's publications,
including books, magazines and software, are subject to copyright protection.
Where applicable, the Company consistently copyrights its magazines, books and
software in the name of Scholastic Inc. or one of its subsidiaries. Copyrights
and trademarks are vigorously defended by the Company and, as necessary, outside
counsel may be retained to assist in such protection.
ITEM 2 o PROPERTIES
The Company maintains its principal offices in the metropolitan New York
area, where it owns or leases approximately 600,000 square feet of space. The
Company also owns or leases approximately 1.8 million square feet of office and
warehouse space for its National Service Operation located in the Jefferson
City, Missouri area and approximately 400,000 square feet of office and
warehouse space related to its Grolier operations in Danbury, Connecticut and
other United States locations. In addition, the Company owns or leases
approximately 2.4 million square feet of office and warehouse space in over 90
facilities in the United States for Scholastic Book Fairs. The Company's
acquisitions in fiscal 2002 added approximately 200,000 square feet of
additional office and warehouse space in various locations across the U.S.
On June 5, 2002, the Company acquired a warehouse facility in Maumelle,
Arkansas consisting of a 500,000 square foot main floor and a 246,000 square
foot mezzanine. This facility will serve as the packaging and fulfillment center
for the Company's continuity businesses and provide room for growth for other
Scholastic businesses.
Additionally, the Company owns or leases approximately 1.0 million square
feet of office and warehouse space in over 100 facilities in Canada, the United
Kingdom, Australia, New Zealand, Southeast Asia and elsewhere around the world
for its international businesses.
The Company considers its properties adequate for its present needs. With
respect to the Company's leased properties, no difficulties are anticipated in
negotiating
| 8 | SCHOLASTIC |
renewals as leases expire or in finding other satisfactory space, if current
premises become unavailable. For further information concerning the Company's
obligations under its leases, see Note 4 of Notes to Consolidated Financial
Statements.
ITEM 3 o LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed
in the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, In re Scholastic Corporation Securities Litigation, 97 Civ.II
2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder, resulting from purportedly materially false and
misleading statements to the investing public concerning the financial condition
of the Company. Specifically, the Complaint alleged misstatements and omissions
by the Company pertaining to adverse sales and returns of its popular Goosebumps
book series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001, the
Court of Appeals for the Second Circuit reversed the dismissal of the Second
Amended Consolidated Complaint and remanded the case for further proceedings. On
December 10, 2001, the Supreme Court of the United States denied the Company's
petition for a Writ of Certiorari to review the Second Circuit's decision. The
Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the
Company commenced an action in the Supreme Court of the State Court of New York,
New York County, against Parachute Press, Inc. ("Parachute"), the licensor of
certain publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. In August 2000, the
Court of Appeals for the Second Circuit vacated the dismissal and remanded the
case for further proceedings. The second action, captioned Parachute Press, Inc.
v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc. (Index No. 99/600507), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court
of New York, New York County. In its two complaints and its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of the total of approximately $36.1
million of advances over the term of the contract, of which approximately $15.3
million had been paid at the time the first Parachute litigation began, and
payment of royalties set-off by Scholastic
| 9 | SCHOLASTIC |
against amounts claimed by the Company. On July 21, 2000, the Company and
Parachute each filed motions for partial summary judgment in the pending state
court cases, which on April 4, 2002 were denied in all material respects. On May
18, 2001, each party filed motions for summary judgment in the federal court
case. The Company is seeking declaratory relief and damages for, among other
claims, breaches of contract, fraud and acts of unfair competition. Damages
sought by the Company include repayment by Parachute of a portion of the $15.3
million advance already paid. The Company intends to vigorously defend its
position in these proceedings. The Company does not believe that this dispute
will have a material adverse effect on its financial condition.
On July 30, 2002, the Company agreed in principle to settle a lawsuit more
fully described in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In addition to the above actions, 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.
ITEM 4 o SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to the vote of security holders, through the solicitation
of proxies or otherwise.
Part II
ITEM 5 o MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Scholastic Corporation's common stock, par value $.01 per share (the
"Common Stock"), is traded on the NASDAQ National Market System under the symbol
SCHL. Scholastic Corporation's Class A Stock, par value $.01 per share (the
"Class A Stock"), is convertible into Common Stock on a share-for-share basis.
There is no established public trading market for the Class A Stock. The table
below sets forth, for the periods indicated, the quarterly high and low selling
prices on the NASDAQ National Market System for the Common Stock. On January 16,
2001, Scholastic Corporation paid a 100% stock dividend in the form of a 2-for-1
stock split (the "2-for-1 Stock Split") on its Class A Stock and Common Stock.
Common Stock prices prior to that date have been adjusted in the following table
to give retroactive effect to the 2-for-1 Stock Split.
For fiscal years ended May 31,
2002 2001
================================================================================
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $43.17 $36.00 $32.98 $26.59
Second Quarter 47.65 37.27 40.31 31.45
Third Quarter 51.91 42.19 48.56 35.38
Fourth Quarter 56.40 45.35 45.00 35.13
- --------------------------------------------------------------------------------
Scholastic Corporation has not paid any cash dividends since its initial
public offering in February 1992 and has no current plans to pay any dividends
on the Class A Stock or the Common Stock. In addition, certain of the Company's
credit facilities restrict the payment of dividends. See Note 3 of Notes to
Consolidated Financial Statements for further information.
The number of holders of record of Class A Stock and Common Stock as of
August 10, 2002 were 3 and approximately 14,700, respectively.
| 10 | SCHOLASTIC |
ITEM 6 o SELECTED FINANCIAL DATA
(Amounts in millions, except share and per share data)
For fiscal years ended May 31,
2002 2001 2000 1999 1998
================================================================================================================================
STATEMENT OF INCOME DATA:
Total revenues $1,917.0 $1,962.3 $1,402.5 $1,165.5 $1,069.8
Cost of goods sold 852.1 899.7 692.8 586.1 560.4
Cost of goods sold - Special Literacy Place
and other charges(1) -- 72.9 -- -- --
Selling, general and administrative expenses 773.7 773.1 557.6 462.1 413.5
Bad debt expense 68.7 75.5 20.5 17.0 14.6
Other operating costs:
Depreciation and amortization 36.6 42.4 24.1 22.4 21.7
Litigation and other charges(2) 1.2 -- 8.5 -- 11.4
Operating income 184.7 98.7 99.0 77.9 48.2
Gain on sale of the SOHO Group -- -- -- -- 10.0
Interest expense, net (31.4) (41.6) (18.6) (19.0) (20.1)
Net income before cumulative effect
of accounting change 98.7 36.3 51.4 36.8 23.6
Cumulative effect of accounting change
(net of income taxes)(3) (5.2) -- -- -- --
Net income 93.5 36.3 51.4 36.8 23.6
Earnings per share before cumulative
effect of accounting change:
Basic $ 2.69 $ 1.05 $ 1.54 $ 1.13 $ 0.73
Diluted $ 2.51 $ 1.01 $ 1.48 $ 1.10 $ 0.72
Earnings per share:
Basic $ 2.55 $ 1.05 $ 1.54 $ 1.13 $ 0.73
Diluted $ 2.38 $ 1.01 $ 1.48 $ 1.10 $ 0.72
Weighted average shares outstanding-basic 36.7 34.7 33.4 32.8 32.4
Weighted average shares outstanding-diluted 40.1 36.1 37.1 33.4 32.8
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 468.1 $ 394.6 $ 253.9 $ 222.4 $ 201.0
Total assets 1,636.7 1,501.8 983.2 842.3 763.6
Long-term debt 525.8 585.3 241.1 248.0 243.5
Total stockholders' equity 718.9 493.7 430.0 361.4 318.1
- --------------------------------------------------------------------------------------------------------------------------------
Certain prior year amounts have been reclassified to conform with the present year presentation, and share amounts have been
adjusted for the 2-for-1 Stock Split.
- --------------------------------------------------------------------------------------------------------------------------------
(1) In fiscal 2001, the Company decided not to update SCHOLASTIC LITERACY
PLACE(R), which resulted in a $72.9 pre-tax special charge recorded in Cost
of goods sold. The impact on Earnings per diluted share of this charge was
$1.20.
(2) The fiscal 2002 charge of $1.2 pre-tax or $0.02 per diluted share, and $6.7
of the fiscal 2000 charges, relate to a lawsuit with Robert Harris and
Harris Entertainment, Inc., which was settled on July 30, 2002.
(3) In fiscal 2002, the Company adopted Statement of Position No. 00-2,
"Accounting by Producers and Distributors of Films," which resulted in a
$5.2 after-tax charge, recorded as a Cumulative effect of accounting
change. The impact on Earnings per diluted share of this adoption was
$0.13.
| 11 | SCHOLASTIC |
ITEM 7 o MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Scholastic is a global children's publishing and media company. The Company
distributes its products and services through a variety of channels, including
school-based book clubs, school-based book fairs, school-based and
direct-to-home continuity programs, retail stores, schools, libraries,
television networks and the Internet. 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 prior year amounts have been reclassified to conform with the
current year presentation. The following discussion and analysis of the
Company's financial position should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes included in Item 8,
Consolidated Financial Statements and Supplementary Data.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL:
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, which are necessary in order
to form a basis for making judgments about 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 its calculations, including, but not limited to:
collectability of accounts receivable; sales returns; amortization periods; and
recoverability of inventories, deferred promotion costs, prepublication costs,
royalty advances, goodwill and other intangibles.
The Company has identified the following policies and account descriptions
as critical to its business operations and the understanding of its results of
operations:
REVENUE RECOGNITION:
The Company's revenue recognition policies for its principal businesses are
as follows:
o SCHOOL-BASED BOOK CLUBS - Revenue from school-based book clubs is recognized
upon shipment of the products.
o SCHOOL-BASED BOOK FAIRS - Revenue from school-based book fairs is recognized
ratably as the book fair occurs.
o 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 for the reserve for estimated returns is based on historical
return rates and sales patterns. Actual returns could differ from the
Company's estimate.
o TRADE - Revenue from the sale of children's books to bookstores and mass
merchandisers 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 for the reserve for estimated returns is based on historical
return rates and sales patterns. Actual returns could differ from the
Company's estimate.
O 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
| 12 | SCHOLASTIC |
is recorded in accordance with royalty agreements at the time licensed materials
are available to the licensee and collections are reasonably assured.
o MAGAZINES - Revenue is deferred and recognized ratably over the subscription
period, as the magazines are delivered.
o EDUCATIONAL PUBLISHING - For shipments to schools, revenue is recognized on
passage of title, which generally occurs upon shipment. Shipments to
depositories are on consignment. Revenue is recognized based on actual
shipments from the depositories to the schools. For certain software-based
product, the Company offers new customers installation and training. In such
cases, revenue is recognized when installation and training are complete.
o ADVERTISING - Revenue is recognized when the magazine is on sale and
available to the subscribers.
o SCHOLASTIC IN SCHOOL MARKETING - Revenue is recognized when the Company has
satisfied the contractual/legal obligations of the program, has delivered the
product or services and the customer has acknowledged acceptance.
ACCOUNTS RECEIVABLE:
Accounts receivable are recorded net of allowance for doubtful accounts and
reserve 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. Evaluation of the
aging and collections experience is utilized 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.
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 trends. 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. The impairment review process entails estimating the fair
value of the Company's identified reporting units utilizing discounted cash
flows, which are then compared to the carrying values of the reporting units.
The determination of cash flows requires management to make significant
estimates and assumptions about its reporting units' future operating
performance. Actual operating results may differ from those estimates and
assumptions. The Company's determination of whether impairment indicators exist
is based on market conditions and operational performance of the reporting
units. Prior to adoption of SFAS No. 142, the Company amortized goodwill and
other intangible assets over their estimated useful lives.
| 13 | SCHOLASTIC |
OVERVIEW
During the three-year period ended May 31, 2002, Scholastic's revenues have
grown at an average annual compounded rate of 18.0%, including the Grolier
acquisition, and 10.0%, excluding the Grolier acquisition.
Reported revenues for fiscal 2002 and 2001 include Grolier's operations
since June 22, 2000, the date of acquisition. Selected pro forma information for
Grolier is included in Item 8, Consolidated Financial Statements and
Supplementary Data. The addition of Grolier's revenues in fiscal 2002 and 2001
did not significantly change the Company's sales mix by operating segment.
During fiscal 2003, the Company plans to maintain its overall strategic
objective of strengthening and developing its core businesses while continuing
to improve overall profitability. In addition, the Company will seek to build
shareholder value through revenue growth coupled with improved margins.
RESULTS OF OPERATIONS ($ amounts in millions, except per share data)
For fiscal years ended May 31,
2002 2001 2000
====================================================================================================================================
$ %(1) $ %(1) $ %(1)
Revenues:
Children's Book Publishing and Distribution 1,168.6 61.0 1,221.9 62.3 857.9 61.2
Educational Publishing 315.5 16.5 309.4 15.8 212.5 15.2
Media, Licensing and Advertising 131.2 6.8 134.3 6.8 108.1 7.7
International 301.7 15.7 296.7 15.1 224.0 15.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,917.0 100.0 1,962.3 100.0 1,402.5 100.0
Cost of goods sold 852.1 44.4 899.7 45.8 692.8 49.4
Cost of goods sold - Special Literacy Place
and other charges(2) -- -- 72.9 3.7 -- --
Gross profit 1,064.9 55.6 989.7 50.4 709.7 50.6
Selling, general and administrative expenses 773.7 40.4 773.1 39.4 557.6 39.8
Bad debt expense 68.7 3.6 75.5 3.8 20.5 1.5
Depreciation and amortization 36.6 1.9 42.4 2.2 24.1 1.7
Litigation and other charges(3) 1.2 0.1 -- -- 8.5 0.6
Operating income 184.7 9.6 98.7 5.0 99.0 7.1
Interest expense, net (31.4) 1.6 (41.6) 2.1 (18.6) 1.3
Earnings before income taxes and cumulative
effect of accounting change 153.3 8.0 57.1 2.9 80.4 5.7
Cumulative effect of accounting change
(net of income taxes)(4) (5.2) 0.3 -- -- -- --
Net income 93.5 4.9 36.3 1.8 51.4 3.7
Earnings per share before cumulative effect
of accounting change:
Basic 2.69 1.05 1.54
Diluted 2.51 1.01 1.48
Earnings per share:
Basic 2.55 1.05 1.54
Diluted 2.38 1.01 1.48
- ------------------------------------------------------------------------------------------------------------------------------------
Certain prior year amounts have been reclassified to conform with the present year presentation, including certain segment
classifications, and share amounts have been adjusted for the 2-for-1 Stock Split.
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents percentage of total revenue.
(2) In fiscal 2001, the Company decided not to update SCHOLASTIC LITERACY
PLACE, which resulted in a $72.9 pre-tax special charge recorded in Cost of
goods sold. The impact on Earnings per diluted share of this charge was
$1.20.
(3) The fiscal 2002 charge of $1.2 pre-tax or $0.02 per diluted share, and $6.7
of the fiscal 2000 charges, relate to a lawsuit with Robert Harris and
Harris Entertainment, Inc., which was settled on July 30, 2002.
(4) The Company adopted Statement of Position No. 00-2, "Accounting by
Producers and Distributors of Films," which resulted in a $5.2 after-tax
charge, recorded as a Cumulative effect of accounting change. The impact on
Earnings per diluted share of this adoption was $0.13.
| 14 | SCHOLASTIC |
RESULTS OF OPERATIONS - CONSOLIDATED
Fiscal 2002 revenues of $1,917.0 million declined 2.3%, or $45.3 million,
from $1,962.3 million in fiscal 2001, primarily as a result of lower HARRY
POTTER trade sales of approximately $120 million in the CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION segment. The lower trade sales were partially offset
by revenue increases of 17.6% or $46.8 million in school-based book fairs and
9.0% or $29.6 million in school-based book clubs. The school-based book fair
revenue increase was primarily due to a higher number of fairs. The school-based
book club revenue increase primarily reflected the impact of a higher number of
orders.
Revenues in fiscal 2001 were $1,962.3 million, an increase of $559.8
million or 39.9% when compared to fiscal 2000. The revenue growth in fiscal 2001
was driven by the addition of $378.0 million in Grolier revenues, coupled with
the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment growth
(excluding Grolier) of $142.3 million or 16.6%, principally driven by the
success of HARRY POTTER.
Cost of goods sold as a percentage of revenues improved by 1.4% to 44.4% in
fiscal 2002, as compared to 45.8% in fiscal 2001. This improvement was primarily
attributable to the Company's ongoing cost savings program, which produced
approximately $25 million in savings or 1.3% of revenues in fiscal 2002.
Cost of goods sold as a percentage of revenues improved to 45.8% in fiscal
2001, as compared to 49.4% in fiscal 2000, principally due to improved sales mix
in the Company's CHILDREN'S BOOK PUBLISHING AND Distribution segment of $48.9
million or 3.8% of segment revenue.
Fiscal 2001 expenses included the $72.9 million, or 3.7% of revenues, Cost
of goods sold-Special Literacy Place and other charges (the "Special Charge")
primarily related to the Company's decision not to update SCHOLASTIC LITERACY
PLACE. (See Note 12 of Notes to Consolidated Financial Statements.)
As a percentage of revenues, Selling, general and administrative expenses
increased to 40.4% in fiscal 2002 from 39.4% in fiscal 2001. Fiscal 2001
Selling, general and administrative expenses as a percentage of revenues
benefitted from the higher HARRY POTTER revenues that did not carry a
proportionate increase in marketing and promotional expenses. In fiscal 2002,
the Company recorded a $4.1 million benefit related to the adjustment of certain
acquisition related reserves reflecting lower than anticipated Grolier
integration costs partially offset by a $2.0 million charge related to the write
off of an equity investment, resulting in a net reduction in Selling, general
and administrative expenses of $2.1 million. Selling, general and administrative
costs as a percentage of revenues decreased modestly to 39.4% in fiscal 2001, as
compared to 39.8% in fiscal 2000.
Bad debt expense decreased to $68.7 million or 3.6% of revenues in fiscal
2002, as compared to $75.5 million or 3.8% of revenues in fiscal 2001. This
decrease is primarily attributable to better credit performance for the Grolier
direct-to-home continuity business. Fiscal 2001 bad debt expense increased by
$55.0 million to $75.5 million or 3.8% of revenues, as compared to $20.5 million
or 1.5% of revenues in fiscal 2000, primarily due to the inclusion of $42.8
million, or 2.2% of revenues, of bad debt expense from the Grolier
direct-to-home continuity business, which experiences higher bad debt rates than
the Company's previously existing businesses.
Depreciation expense for fiscal 2002 increased by $7.4 million to $35.6
million as compared to $28.2 million in fiscal 2001. Incremental depreciation of
$2.6 million relates to information technology projects, including the Internet
sites placed into service in fiscal 2002 and incremental depreciation of $2.2
million due to the expansion of the Company's facilities in metropolitan New
York. Depreciation expense for fiscal 2001 increased to $28.2 million as
compared to $19.7 million in fiscal 2000, primarily due to incremental
depreciation associated with the Grolier acquisition.
Goodwill and other intangibles amortization decreased $13.2 million to $1.0
million in fiscal 2002 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 intangible assets with indefinite lives, which
accordingly reduced amortization expense. Goodwill and other intangibles
amortization in fiscal 2001 increased to $14.2 million as compared to $4.4
million in fiscal 2000, primarily due to the amortization of goodwill and other
intangibles related to the acquisition of Grolier.
On July 30, 2002, the Company agreed in principle to settle the previously
disclosed lawsuit filed in 1995, SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS,
INC. V. ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., for which the Company had
established a $6.7 million 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
| 15 | SCHOLASTIC |
formed primarily to produce motion pictures. The settlement agreement resulted
in a pre-tax charge of $1.2 million in fiscal 2002, reflected in Litigation and
other charges, representing the amount by which the settlement and related legal
expenses exceeded the previously recorded liability.
Operating income for fiscal 2002 increased by $86.0 million or 87.1% to
$184.7 million or 9.6% of revenues as compared to $98.7 million or 5.0% of
revenues in fiscal 2001, which includes the impact of the Special Charge of
$72.9 million or 3.7% of revenues. Operating income in fiscal 2001 remained
relatively flat as compared to fiscal 2000, as margin increases from higher
HARRY POTTER revenues in fiscal 2001 were largely offset by the Special Charge.
Net interest expense decreased by $10.2 million to $31.4 million in fiscal
2002 as compared to $41.6 million in fiscal 2001 due to lower interest rates and
lower debt levels. Debt levels decreased primarily as a result of the conversion
of $110.0 million of the Company's Convertible Subordinated Debentures into
equity, partially offset by approximately $70 million of additional debt related
to acquisitions. Fiscal 2001 net interest expense increased by $23.0 million as
compared to fiscal 2000 primarily due to the debt incurred in connection with
the Grolier acquisition.
The Company's effective tax rates were 35.6%, 36.5% and 36.1% of earnings
before taxes for fiscal 2002, 2001 and 2000, respectively. The decrease in the
effective tax rate in fiscal 2002 from fiscal 2001 is primarily due to a lower
foreign tax impact of 3.6%, partially offset by a reduction in the tax benefit
realized from charitable contributions of 1.5% and increases resulting from the
impact of higher state and local deferred taxes of 1.1%.
In the first quarter of fiscal 2002, the Company adopted Statement of
Position 00-2, "Accounting by Producers and Distributors of Films" ("SOP 00-2").
As a result, the Company recorded an after-tax charge of $5.2 million, which was
reflected as a Cumulative effect of accounting change.
Net income was $93.5 million or 4.9% of revenues in fiscal 2002, $36.3
million or 1.8% of revenues in fiscal 2001 and $51.4 million or 3.7% of revenues
in fiscal 2000. The basic and diluted earnings per share of Class A Stock and
Common Stock were $2.55 and $2.38, respectively, in fiscal 2002, $1.05 and
$1.01, respectively, in fiscal 2001 and $1.54 and $1.48, respectively, in fiscal
2000.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes
the publication and distribution of children's books in the United States
through school-based book clubs and book fairs, school-based and direct-to-home
continuity programs and the trade channel. The direct-to-home continuity and
trade businesses formerly operated by Grolier are incorporated in this segment
from June 22, 2000, the date on which Grolier was acquired.
($ amounts in millions)
2002 2001 2000
================================================================================
Revenue $1,168.6 $1,221.9 $ 857.9
Operating profit 189.8 216.7 170.6
- --------------------------------------------------------------------------------
Operating margin 16.2% 17.7% 19.9%
The following table highlights the results of the direct-to-home continuity
business included in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment,
formerly operated by Grolier, from June 22, 2000, the date on which Grolier was
acquired.
($ amounts in millions)
2002 2001
===============================================================================
Revenue $ 207.5 $ 217.9
Operating profit 35.2 12.7
- -------------------------------------------------------------------------------
Operating margin 17.0% 5.8%
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION revenues accounted for 61.0% of
the Company's revenues in fiscal 2002, 62.3% in fiscal 2001 and 61.2% in fiscal
2000. Fiscal 2002 revenues of $1,168.6 million decreased 4.4% or $53.3 million
from $1,221.9 million in fiscal 2001. Businesses acquired in fiscal 2002
contributed revenues of $19.6 million to this segment. Excluding the Grolier
direct-to-home continuity business, segment revenues in fiscal 2002 decreased by
$42.9 million to $961.1 million as compared to $1,004.0 million in fiscal 2001.
The fiscal 2002 segment 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
| 16 | SCHOLASTIC |
2001. Fiscal 2001 revenues of $1,221.9 million increased 42.4% or $364.0 million
from $857.9 million in fiscal 2000. This increase reflects the acquisition of
Grolier, which accounted for $217.9 million of revenue, and an increase in trade
revenue of $101.7 million, due primarily to the success of HARRY POTTER.
School-based book club revenues accounted for 30.8% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION revenues in fiscal 2002, compared to 26.9% in fiscal
2001 and 37.4% in fiscal 2000. Fiscal 2002 school-based book club revenues
increased by 9.0% over fiscal 2001, primarily due to an increase in orders.
Fiscal 2001 school-based book club revenues grew by 2.4% over fiscal 2000
reflecting an increase in orders.
Revenues from school-based book fairs accounted for 26.8% of segment
revenues in fiscal 2002, compared to 21.8% in fiscal 2001 and 27.2% in fiscal
2000. Revenue growth for school-based book fairs was 17.6% in fiscal 2002 over
fiscal 2001, primarily due to growth in fair count of 13%, helped by the
acquisition of assets of Troll Book Fairs in July 2001, which accounted for 4.0%
of the revenue growth. Fiscal 2001 revenues from school-based book fairs of
$266.3 million increased 14.3% or $33.3 million from $233.0 million in fiscal
2000, primarily due to the growth in fair count of approximately 5.0% combined
with revenue per fair growth of approximately 4.0%.
Fiscal 2002 continuity revenues accounted for 24.0% of segment revenues as
compared to 24.7% in fiscal 2001 and 9.4% in fiscal 2000. Revenues from the
Grolier direct-to-home business were 17.8% of segment revenues in both fiscal
2002 and fiscal 2001. Revenues from the school-based continuity programs were
6.2%, 6.9% and 9.4% of segment revenues in fiscal 2002, 2001 and 2000,
respectively. Fiscal 2002 revenues of $207.5 million from the Grolier
direct-to-home continuity business decreased 4.8% or $10.4 million from $217.9
million in fiscal 2001, primarily due to the elimination of less profitable
programs, which were partially offset by the impact of three additional weeks of
revenue 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 18.4% of CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION revenues in fiscal 2002, as compared to 26.6%
in fiscal 2001 and 26.0% in fiscal 2000. Net trade revenues, including Klutz
revenues of $5.6 million, decreased from fiscal 2001 by $109.9 million or 33.8%
to $214.8 million, in fiscal 2002, due principally to the decline in HARRY
POTTER revenues. Trade revenues in fiscal 2001 increased $101.7 million to
$324.7 million or 45.6% over fiscal 2000 due primarily to the success of HARRY
POTTER. Trade revenues for HARRY POTTER accounted for approximately $80 million,
$200 million and $90 million in fiscal 2002, 2001 and 2000, respectively.
Segment operating profit in fiscal 2002 declined $26.9 million or 12.4% to
$189.8 million or 16.2% of revenues, compared to $216.7 million or 17.7% of
revenues in fiscal 2001 and $170.6 million or 19.9% of revenues in fiscal 2000.
Excluding the Grolier direct-to-home continuity business, segment operating
profit in fiscal 2002 decreased to $154.6 million or 16.1% of revenues from
$204.0 million or 20.3% of revenues in fiscal 2001. The segment operating margin
decrease in fiscal 2002 was primarily related to the decline in HARRY POTTER
trade as a percentage of revenues. Operating profit for the Company's
direct-to-home continuity business increased in fiscal 2002 to $35.2 million or
17.0% of revenues from $12.7 million or 5.8% of revenues in fiscal 2001. This
increased operating profit reflects the impact of planned lower revenues due to
the elimination of less profitable programs, and increased operating margins,
helped by favorable bad debt experience. Operating margins for the segment
decreased to 17.7% in fiscal 2001 from 19.9% in fiscal 2000 due to the inclusion
of lower margin direct-to-home continuity sales.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of curriculum materials, classroom
magazines and print and on-line reference and non-fiction products for grades K
to 12 in the United States. The U.S. reference and non-fiction business formerly
operated by Grolier is included in this segment from June 22, 2000, the date on
which Grolier was acquired.
($ amounts in millions)
2002 2001 2000
- -------------------------------------------------------------------------------
Revenue $ 315.5 $ 309.4 $ 212.5
Operating profit/(loss) 51.5 (56.9)(1) (13.3)
- -------------------------------------------------------------------------------
Operating margin 16.3% * *
* not meaningful
(1) The fiscal 2001 operating loss included the Special Charge of $72.9.
| 17 | SCHOLASTIC |
Segment revenues accounted for 16.5% of the Company's revenues in fiscal
2002, compared to 15.8% in fiscal 2001 and 15.2% in fiscal 2000. In fiscal 2002,
EDUCATIONAL PUBLISHING revenues increased to $315.5 million from $309.4 million
in fiscal 2001 and $212.5 million in fiscal 2000. The $6.1 million revenue
increase in fiscal 2002 was primarily due to higher revenues from paperback
reading collections of $11.4 million, increased revenues from supplemental
reading improvement materials of $8.0 million and the inclusion of $5.4 million
of revenues related to fiscal 2002 acquisitions. Fiscal 2002 revenue increases
were partially offset by the anticipated decreased revenues from SCHOLASTIC
LITERACY PLACE of $17.3 million. In fiscal 2001, EDUCATIONAL PUBLISHING revenues
increased 45.6% or $96.9 million over fiscal 2000, primarily due to the
inclusion of sales from Scholastic Library Publishing (formerly known as
Grolier) of print and on-line children's reference and non-fiction products of
$66.1 million and increased revenues from SCHOLASTIC LITERACY PLACE of $11.7
million, paperbacks and collections products of $9.4 million, Read 180(R) of
$4.7 million and classroom magazines of $3.5 million.
Operating profit for this segment in fiscal 2002 of $51.5 million increased
by $108.4 million, from a loss of $56.9 million in fiscal 2001, including the
Special Charge of $72.9 million. Excluding the Special Charge of $72.9 million
in fiscal 2001, operating profit for this segment more than tripled from $16.0
million in fiscal 2001 to $51.5 million in fiscal 2002. The operating profit
improvement benefited from 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 in fiscal 2002. Operating profit in
fiscal 2002 also increased due to reduced marketing and promotional expenses of
$6.0 million and margin improvements of $3.5 million. Segment operating results
for fiscal 2001, excluding the Special Charge, resulted in an operating profit
of $16.0 million or an increase of $29.3 million, compared to a loss of $13.3
million in fiscal 2000. This increase was largely the result of gross profit
increases of $27.1 million as well as the benefit of the integration of
Scholastic Library Publishing, which contributed $4.4 million in profits, offset
by increases in related administrative expenses of $2.1 million.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the
production and/or distribution in the United States of software and Internet
services and the production and/or distribution by and through the Company's
subsidiary, Scholastic Entertainment Inc. ("SEI"), of programming and consumer
products (including children's television programming, videos, software, feature
films, promotional activities and non-book merchandise). The consumer software
business formerly operated by Grolier is included in this segment from June 22,
2000, the date on which Grolier was acquired.
($ amounts in millions)
2002 2001 2000
===============================================================================
Revenue $ 131.2 $ 134.3 $ 108.1
Operating loss (15.6) (23.5) (11.9)
- -------------------------------------------------------------------------------
Operating margin * * *
* not meaningful
MEDIA, LICENSING AND ADVERTISING revenues accounted for 6.8% of the
Company's revenues in fiscal 2002, compared to 6.8% in fiscal 2001 and 7.7% in
fiscal 2000. In fiscal 2002, revenue decreased by 2.3% or $3.1 million primarily
due to reduced programming revenue of $8.0 million, attributable to the delivery
of fewer episodes of the TV series CLIFFORD THE BIG RED DOG(TM) in fiscal 2002
and the benefit in fiscal 2001 of the $3.9 million license with FOX TV of
Scholastic's THE MAGIC SCHOOL BUS(R) series, partially offset by increased
licensing royalty revenue in fiscal 2002 from the CLIFFORD property of $8.0
million. In fiscal 2001, revenues increased by 24.2% or $26.2 million to $134.3
million, compared to fiscal 2000 revenue of $108.1 million. The fiscal 2001
increase is due to increased entertainment revenue of $15.4 million, principally
due to the impact of production fees for CLIFFORD THE BIG RED DOG, improved
sales of educational software and multimedia products of $5.6 million and
increased advertising and subscription revenue of $5.2 million from the
Company's professional and consumer magazines.
The operating loss for the MEDIA, LICENSING AND ADVERTISING segment in
fiscal 2002 was $15.6 million, compared to $23.5 million in fiscal 2001 and
$11.9 million in fiscal 2000. In fiscal 2002, the operating loss decreased by
33.6% or $7.9 million as compared to fiscal 2001, primarily due to reductions in
marketing and promotional expenses of $7.1 million. The operating loss for
fiscal 2001
| 18 | SCHOLASTIC |
increased by $11.6 million as compared to fiscal 2000 reflecting the planned
increase in spending related to SCHOLASTIC.COM to facilitate the launch of
e-commerce initiatives in fiscal 2002.
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of
products and services outside the United States by the Company's international
operations and its export and foreign rights businesses. The international
businesses formerly operated by Grolier are included in this segment from June
22, 2000, the date on which Grolier was acquired.
($ amounts in millions)
2002 2001 2000
- -------------------------------------------------------------------------------
Revenue $ 301.7 $ 296.7 $ 224.0
Operating profit 20.2 19.3 9.9
- -------------------------------------------------------------------------------
Operating margin 6.7% 6.5% 4.4%
INTERNATIONAL revenues accounted for 15.7% of the Company's revenues in
fiscal 2002, 15.1% in fiscal 2001 and 15.9% in fiscal 2000. Segment revenues
increased $5.0 million or 1.7% to $301.7 million in fiscal 2002 from $296.7
million in fiscal 2001. This revenue growth of $5.0 million over fiscal 2001 was
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. These increases were
partially offset by the adverse impact of foreign currency exchange rates of
approximately $7.5 million. In fiscal 2001, INTERNATIONAL revenues increased
$72.7 million or 32.5% to $296.7 million, including $80.9 million from the
Grolier international businesses. Excluding Grolier, fiscal 2001 revenues in
local currencies increased slightly over fiscal 2000, primarily due to increased
revenue from Scholastic's Canadian and export operations of $9.7 million and
$5.3 million, respectively, but declined 4% in U.S. dollars. These increases
were partially offset by revenue declines in the United Kingdom of $5.0 million
and Australia of $3.2 million. In addition, reported revenues in Australia and
in the United Kingdom were adversely impacted by the strengthening of the U.S.
dollar in fiscal 2001.
INTERNATIONAL operating profit increased $0.9 million to $20.2 million or
6.7% of revenues in fiscal 2002 from $19.3 million in fiscal 2001 or 6.5% of
revenues. This increase is attributed primarily to Australian increases in
operating profit of $3.0 million, partially offset by decreases in operating
profit of $1.6 million from the export business. In fiscal 2001, INTERNATIONAL
operating profit increased $9.4 million from fiscal 2000 due to the addition of
$9.4 million of profit from the Grolier businesses, export profit increases of
$4.2 million and Canadian profit increases of $2.6 million, partially offset by
lower United Kingdom profit of $3.4 million and Australian profit of $3.4
million.
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 are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are
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 $10.7 million at May 31, 2002,
compared to $13.8 million at May 31, 2001 and $9.0 million at May 31, 2000.
Cash flow provided by operations of $164.6 million in fiscal 2002 was
partially offset by working capital increases of $77.2 million.
Cash outflows for investing activities were $238.5 million for fiscal 2002,
related to capital expenditures, acquisition related payments, prepublication
costs, royalty advances and production cost expenditures. The Company's capital
expenditures totaled $78.4 million in fiscal 2002. Capital expenditures,
including capitalized interest, decreased $12.1 million from fiscal 2001 due to
the completion of the Company's metropolitan New York facilities. Acquisition
related payments totaled $66.7 million as a result of the acquisitions of the
stock or assets of Klutz, Tom Snyder Productions, Inc., Baby's
| 19 | SCHOLASTIC |
First Book Club(R), Teacher's Friend Publications, Inc., Troll Book Fairs Inc.
and Nelson B. Heller & Associates. Prepublication expenditures totaled $53.5
million for fiscal 2002. Payments for royalty advances totaled $31.7 million for
fiscal 2002.
The Company believes its existing cash position, combined with funds
generated from operations and available under the Loan Agreement, the Revolver
and the amended Grolier Facility as defined below 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 free cash flow.
================================================================================
The following table summarizes as of May 31, 2002, the Company's
contractual cash obligations by future period (see Notes 3 and 4 of Notes to
Consolidated Financial Statements):
(Amounts in millions) PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------
Long-term debt $ -- $225.2 $300.0 $ -- $525.2
Lines of credit and short-term debt 23.5 -- -- -- 23.5
Operating leases 43.4 84.8 28.1 179.1 335.4
Royalty advances 10.7 2.2 0.0 -- 12.9
Other obligations 5.7 1.9 -- -- 7.6
- -----------------------------------------------------------------------------------------------------
TOTAL $ 83.3 $314.1 $328.1 $179.1 $904.6
- -----------------------------------------------------------------------------------------------------
FINANCING
On January 11, 2002, pursuant to the exercise of Scholastic Corporation's
optional redemption rights, $109.8 million of the Company's 5.0% Convertible
Subordinated Debentures were converted at the option of the holders into 2.9
million shares of Common Stock and $0.2 million were redeemed for cash.
On January 23, 2002, the Company issued $300.0 million of 5.75% Notes (the
"5.75% Notes"). The 5.75% Notes are unsecured and unsubordinated obligations of
the Company and 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 on a semiannual basis. The net proceeds were used to repay the
majority of the $350.0 million facility (the "Grolier Facility") established in
connection with the acquisition of Grolier. At May 31, 2002, the Company had
outstanding $50.0 million under the Grolier Facility, which was amended into a
revolving credit agreement on June 21, 2002, providing for aggregate borrowings
of up to $100.0 million and expiring June 20, 2003. Under these amended terms,
Scholastic Inc., a subsidiary of Scholastic Corporation, is the borrower and
Scholastic Corporation is the guarantor. Borrowings bear interest at the prime
rate or 0.39% to 1.10% over LIBOR (as defined). As amended, the Grolier Facility
also provides for a facility fee ranging from 0.085% to 0.25%. The amounts
charged vary based upon the Company's credit rating. The interest rate and
facility fee as of the amendment date were 0.650% over LIBOR and 0.150%,
respectively. The Grolier Facility contains certain financial covenants related
to debt and interest coverage ratios (as defined) and limits dividends and other
distributions. The weighted average interest rate under the Grolier Facility at
May 31, 2002 was 2.4%.
On February 5, 2002, the Company 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," where the
Company receives a fixed interest rate payment based on a notional amount
totaling $100.0 million and pays a variable interest rate to the counterparty,
which is reset semi-annually based on six-month LIBOR (as defined). This
agreement was entered into to exchange the fixed interest rate payments on a
portion of the 5.75% Notes for variable interest rate payments. Under SFAS No.
133, changes in the fair value of the interest rate swap offset changes in the
fair value of the fixed rate debt due to changes in market interest rates. As
such, there was no ineffective portion to the hedge recognized in earnings
during fiscal 2002.
| 20 | SCHOLASTIC |
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, 2002 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, 2002 and 2001, $50.0 million and $0.0, 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"). As amended, the Revolver provides for
unsecured revolving credit of up to $40.0 million and expires on August 11,
2004. Interest under this facility is 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, 2002 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, 2002 and 2001, there were no borrowings outstanding
under the Revolver.
In addition, unsecured lines of credit available in local currencies to the
Company's international subsidiaries were equivalent to $53.5 million at May 31,
2002. These lines are used primarily to fund local working capital needs. At May
31, 2002, $23.3 million in borrowings were outstanding under these lines of
credit at a weighted average interest rate of 5.4%.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects.
Consistent with this strategy, on June 22, 2000, the Company consummated
the acquisition of Grolier for $400.0 million in cash. In fiscal 2002, the
Company completed acquisitions including:
o On July 6, 2001, the Company acquired assets of Troll Book Fairs Inc., a
national school-based book fair operator, for $4.2 million in cash. Since the
date of acquisition, the operating results are included in the CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION segment.
o On December 21, 2001, the Company acquired assets of Tom Snyder Productions,
Inc., a developer and publisher of interactive educational software and
producer of television programming for $9.0 million in cash. Since the date
of acquisition, the operating results of its educational software and
television programs are included in the EDUCATIONAL PUBLISHING and MEDIA,
LICENSING AND ADVERTISING segments, respectively.
o On April 4, 2002, the Company acquired 100% of the outstanding stock of
Sandvik Publishing Ltd., d/b/a Baby's First Book Club, a direct marketer of
age-appropriate books and toys for young children, for $7.5 million in cash.
Since the date of acquisition, the operating results are included in the
continuity business within the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
segment.
o On April 8, 2002, the Company acquired 100% of the outstanding stock of
Klutz, a publisher and creator of "books plus" products for children. The
Company's initial payment was $42.8 million in cash. The agreement provides
for additional payments of up to $31.3 million to be made to the seller in
2004 and 2005, contingent upon the achievement of certain revenue thresholds
for Klutz. Since the date of acquisition, the operating results are included
in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment.
o On April 24, 2002, the Company acquired 100% of the outstanding stock of
Teacher's Friend Publications, Inc., a producer and marketer of materials
that teach-
| 21 | SCHOLASTIC |
ers use to decorate their classrooms, for $5.9 million. Since the date of
acquisition, the operating results are included in the EDUCATIONAL PUBLISHING
segment.
SUBSEQUENT EVENT
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. The Company also acquired a 15% equity interest in
The Book People Group, Ltd. for (pound)12.0 million (equivalent to approximately
$18.0 million as of the date of the transaction), with a possible additional
payment of (pound)3.0 million based on operating results and contingent on
repayment of all borrowings under a (pound)3.0 million (equivalent to
approximately $4.5 million as of the date of the transaction) 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 will be used to fund
the expansion of The Book People and for working capital purposes.
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 November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to
a Customer or a Reseller of the Vendor's Products." The issue addresses the
recognition, measurement and income statement classification of sales incentives
or other consideration, free or discounted product or services and cash given by
a vendor to a customer. The Company adopted the provisions of EITF Issue No.
01-9 for fiscal 2002. This adoption resulted in a reclassification of Selling,
general and administrative expense to Cost of goods sold totaling $33.8 million,
$34.5 million and $14.5 million in the fiscal years ended May 31, 2002, 2001 and
2000, respectively, with no change to reported net income.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model, based upon the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," for long-lived assets to be disposed of by sale and addresses
significant implementation issues. The Company is required to adopt this
statement by the first quarter of fiscal 2003. The Company does not expect that
the adoption of SFAS No. 144 will have a material impact on its financial
position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement supercedes the guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Since this statement only affects the timing
of the recognition of the liabilities to be incurred if an entity makes a
decision to exit or dispose of a particular activity, the Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
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:
o The Company's ability to continue to produce successful educational, trade,
entertainment and software products;
| 22 | SCHOLASTIC |
o The ability of the Company's book clubs and fairs to continue to successfully
meet market needs;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment and software markets;
o Competition from other educational and trade publishers and media,
entertainment and Internet companies;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
o The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
o The Company's ability to effectively use the Internet to support its existing
businesses and to launch successful new Internet initiatives;
o The general risks attendant to the conduct of business in foreign countries;
o 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 o 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
$15.0 million) to match purchases not denominated in their respective local
currencies.
Market risks relating to the Company's operations result primarily from
changes in interest rates, which are managed by balancing the mix of variable-
versus fixed-rate borrowings. Additionally, financial instruments, including
swap agreements, are used to hedge exposure to changes in interest rates.
Approximately forty percent of the Company's debt at May 31, 2002 bore interest
at a variable rate and was sensitive to changes in interest rates. As a result
of seasonal borrowings at variable rates, this percentage is expected to peak at
approximately fifty percent during fiscal 2003. The Company is subject to the
risk that market interest rates will increase and thereby increase the interest
rates currently being charged under the variable-rate debt.
Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
| 23 | SCHOLASTIC |
The following table sets forth information about the Company's debt and
other interest rate sensitive instruments as of May 31, 2002 (see Note 3 of
Notes to Consolidated Financial Statements):
($ amounts in millions)
FISCAL YEAR MATURITY FAIR VALUE
------------------------------------------------------------------------ AS OF MAY 31,
DEBT OBLIGATIONS 2003 2004 2005 2006 2007 TOTAL 2002
==================================================================================================================================
Lines of credit $ 23.3 $ -- $ -- $ -- $ -- $ 23.3 $ 23.3
Average interest rate 5.43%
Long-term debt including current portion:
Fixed rate debt $ -- $ 125.0 $ -- $ -- $ 300.0 $ 425.0 $ 429.7
Average interest rate 7.00% 5.75%
Variable rate debt $ 0.2 $ 50.2 $ 50.0 $ -- $ -- $ 100.4 $ 100.4
Average interest rate 5.00% 2.42% 2.72%
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest rate swaps:
Notional amount $ -- $ -- $ -- $ -- $ 100.0 $ 100.0 $ 1.8
Average variable pay rate 2.87%
Average fixed receive rate 5.75%
- ----------------------------------------------------------------------------------------------------------------------------------
| 24 | SCHOLASTIC |
ITEM 8 o CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and
Financial Statements Schedule PAGE(S)
Consolidated Statements of Income for the three years ended
May 31, 2002, 2001 and 2000 26
Consolidated Balance Sheets at May 31, 2002 and 2001 27-28
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for the three years ended
May 31, 2002, 2001 and 2000 29-30
Consolidated Statements of Cash Flows for the three years
ended May 31, 2002, 2001 and 2000 31
Notes to Consolidated Financial Statements 32-50
Report of Independent Auditors 51
Supplementary Financial Information - Summary of
Quarterly Results of Operations (unaudited) 52
The following consolidated financial statement schedule
for the three years ended May 31, 2002, 2001 and 2000
is included in Item 14(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.
| 25 | SCHOLASTIC |
CONSOLIDATED STATEMENTS OF INCOME (Amounts in millions, except per share data)
Years ended May 31,
2002 2001 2000
===============================================================================
REVENUES $1,917.0 $1,962.3 $1,402.5
Operating costs and expenses:
Cost of goods sold (exclusive of depreciation) 852.1 899.7 692.8
Cost of goods sold - Special Literacy Place
and other charges (Note 12) -- 72.9 --
Selling, general and administrative expenses 773.7 773.1 557.6
Bad debt expense 68.7 75.5 20.5
Other operating costs:
Depreciation 35.6 28.2 19.7
Goodwill and other intangibles amortization 1.0 14.2 4.4
Litigation and other charges 1.2 -- 8.5
- -------------------------------------------------------------------------------
Total operating costs and expenses 1,732.3 1,863.6 1,303.5
- -------------------------------------------------------------------------------
OPERATING INCOME 184.7 98.7 99.0
Interest expense, net (31.4) (41.6) (18.6)
- -------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of accounting change 153.3 57.1 80.4
Provision for income taxes 54.6 20.8 29.0
- -------------------------------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 98.7 36.3 51.4
Cumulative effect of accounting change
(net of income taxes of $2.9) (5.2) -- --
- -------------------------------------------------------------------------------
NET INCOME $ 93.5 $ 36.3 $ 51.4
===============================================================================
EARNINGS PER SHARE OF CLASS A AND COMMON STOCK:
Earnings before cumulative effect of
accounting change:
Basic $ 2.69 $ 1.05 $ 1.54
Diluted $ 2.51 $ 1.01 $ 1.48
Cumulative effect of accounting change
(net of income taxes):
Basic $ (0.14) $ -- $ --
Diluted $ (0.13) $ -- $ --
Net income:
Basic $ 2.55 $ 1.05 $ 1.54
Diluted $ 2.38 $ 1.01 $ 1.48
- -------------------------------------------------------------------------------
See accompanying notes
| 26 | SCHOLASTIC |
CONSOLIDATED BALANCE SHEETS
ASSETS 2002 2001
- -------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 10.7 $ 13.8
Accounts receivable (less allowance for
doubtful accounts of $62.6 at May 31, 2002
and $70.1 at May 31, 2001) 243.8 220.7
Inventories 359.5 340.3
Deferred promotion costs 44.6 44.0
Deferred income taxes 81.3 89.3
Prepaid and other current assets 58.4 61.4
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 798.3 769.5
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 9.1 9.0
Buildings 59.8 56.4
Furniture, fixtures and equipment 220.2 159.5
Leasehold improvements 153.1 134.7
- -------------------------------------------------------------------------------
442.2 359.6
Less accumulated depreciation and amortization (140.8) (102.3)
- -------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 301.4 257.3
- -------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs 113.6 103.3
Royalty advances 50.7 45.9
Production costs 9.1 13.8
Goodwill 256.2 221.9
Other intangibles 63.8 64.2
Noncurrent deferred taxes 19.6 1.0
Other 24.0 24.9
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND DEFERRED CHARGES 537.0 475.0
- -------------------------------------------------------------------------------
TOTAL ASSETS $1,636.7 $1,501.8
===============================================================================
See accompanying notes
| 27 | SCHOLASTIC |
(Amounts in millions, except share data)
Balances at May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- -------------------------------------------------------------------------------
CURRENT LIABILITIES:
Lines of credit and short-term debt $ 23.5 $ 23.3
Accounts payable 134.3 157.3
Accrued royalties 38.5 45.7
Deferred revenue 16.2 12.1
Other accrued expenses 117.7 136.5
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 330.2 374.9
- -------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 525.8 585.3
Other noncurrent liabilities 61.8 47.9
- -------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 587.6 633.2
- -------------------------------------------------------------------------------
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-1,656,200 shares 0.0 0.0
Common Stock, $.01 par value
Authorized-70,000,000 shares;
Issued-37,417,222 shares
(33,632,047 shares at May 31, 2001) 0.4 0.3
Additional paid-in capital 373.7 233.7
Deferred compensation (0.4) (0.2)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (13.5) (12.8)
Minimum pension liability adjustment (13.9) (3.6)
Retained earnings 372.6 279.1
Less 55,319 shares of Common Stock in treasury,
at cost at May 31, 2001 -- (2.8)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 718.9 493.7
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,636.7 $1,501.8
===============================================================================
| 28 | SCHOLASTIC |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
Class A Stock Common Stock Additional
---------------- ----------------- Paid-in
Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 828,100 $ 0.0 16,946,803 $ 0.2 $ 212.3
Comprehensive income:
Net income
Other comprehensive loss:
Foreign currency translation adjustment
Total comprehensive income
Proceeds from issuance of common stock
pursuant to employee stock plans, net 80,387 0.0 6.3
Tax benefit realized from stock
option transactions 4.1
- ------------------------------------------------------------------------------------------------------
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
======================================================================================================
See accompanying notes
| 29 | SCHOLASTIC |
EQUITY AND COMPREHENSIVE INCOME
(Amounts in millions, except share data)
Years ended May 31, 2002, 2001 and 2000
Foreign Minimum Treasury Stock Total
Deferred Currency Pension Retained ----------------------- Stockholders'
Compensation Translation Liability Earnings Shares Amount Equity
- --------------------------------------------------------------------------------------------------------------------------
$ -- $ (5.7) $ -- $ 191.4 (1,301,658) $ (36.8) $ 361.4
51.4 51.4
(5.4) (5.4)
------
46.0
450,652 12.2 18.5
4.1
- --------------------------------------------------------------------------------------------------------------------------
-- (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
==========================================================================================================================
| 30 | SCHOLASTIC |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in millions)
Years ended May 31,
2002 2001 2000
=============================================================================================
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 93.5 $ 36.3 $ 51.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepublication and production costs 50.2 68.8 47.3
Depreciation and amortization 36.6 42.4 24.1
Royalty advances expensed 26.6 28.7 29.2
Deferred income taxes 18.0 (15.1) (15.1)
Tax benefit realized from stock option transactions 8.8 6.9 4.1
Non-cash portion of Cost of goods sold -
Special Literacy Place and other charges -- 71.4 --
Non-cash portion of accounting change
and Litigation and other charges 8.1 -- 8.5
Changes in assets and liabilities:
Accounts receivable, net (14.1) 22.5 (20.8)
Inventories (7.3) (25.7) (66.8)
Prepaid and other current assets 5.5 (22.0) (5.4)
Deferred promotion costs (0.5) (1.6) 0.9
Accounts payable and other accrued expenses (42.5) (17.7) 66.3
Accrued royalties (10.1) 4.7 9.2
Deferred revenue 4.1 (0.3) 3.1
Other, net (12.3) 6.3 14.3
- ---------------------------------------------------------------------------------------------
Total adjustments 71.1 169.3 98.9
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 164.6 205.6 150.3
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (78.4) (90.5) (46.0)
Acquisition related payments (66.7) (396.4) (0.2)
Prepublication costs (53.5) (54.5) (61.4)
Royalty advances (31.7) (25.5) (23.4)
Production costs (13.0) (13.7) (13.8)
Other 4.8 3.3 (0.4)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (238.5) (577.3) (145.2)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 835.2 552.3 342.8
Repayments of Loan Agreement and Revolver (785.2) (558.1) (347.3)
Borrowings under Grolier Facility -- 350.0 --
Repayment of Grolier Facility (300.0) -- --
Proceeds received from issuance of 5.75% Notes,
net of related costs 296.7 -- --
Borrowings under lines of credit 151.8 100.1 122.2
Repayments of lines of credit (150.7) (90.7) (133.1)
Proceeds pursuant to employee stock plans, net 22.8 24.2 16.7
Other 0.2 (1.3) (3.2)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 70.8 376.5 (1.9)
Effect of exchange rate changes on cash 0.0 0.0 (0.1)
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3.1) 4.8 3.1
Cash and cash equivalents at beginning of year 13.8 9.0 5.9
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10.7 $ 13.8 $ 9.0
=============================================================================================
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 27.5 $ 58.6 $ 17.5
Interest paid $ 28.0 $ 43.5 $ 20.1
- ---------------------------------------------------------------------------------------------
See accompanying notes
| 31 | SCHOLASTIC |
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, which are necessary in order
to form a basis for making judgments about 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 its calculations, including, but not limited to:
collectability of accounts receivable; sales returns; amortization periods; 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 the 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
for the reserve for estimated returns is based on historical return rates and
sales patterns.
TRADE--Revenue from the sale of children's books to bookstores and mass
merchandisers 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 for 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 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 shipment. 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.
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 the contractual/legal obligations of the program, has delivered the
product or services and the customer has acknowledged acceptance.
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 allowance for doubtful accounts and
reserve for returns. In the normal course of business, the Company extends
credit to customers that satisfy predefined credit criteria.
| 32 | SCHOLASTIC |
The Company is required to estimate the collectability of its receivables.
Evaluation of the aging and collections experience is utilized 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.
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.
ROYALTY ADVANCES
The Company records a reserve for the recoverability of its outstanding
advances to authors based primarily upon historical trends. 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. The impairment review process entails estimating the fair
value of the Company's identified reporting units utilizing discounted cash
flows, which are then compared to the carrying values of the reporting units.
The determination of cash flows requires management to make significant
estimates and assumptions about its reporting units' future operating
performance. Actual operating results may differ from those estimates and
assumptions. The Company's determination of whether impairment indicators exist
is based on market conditions and operational performance of the reporting
units. 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.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options. Under APB 25, compensation expense is recognized only
when the exercise price of options is below the market price of the underlying
stock on the date of grant where the exercise price and number of shares subject
to grant are fixed.
FOREIGN CURRENCY TRANSLATION
The balance sheets of 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 current rates prevailing during each reporting period. Net gains or
losses resulting from
| 33 | SCHOLASTIC |
the translation of the foreign financial statements and the effect of exchange
rate changes on long-term inter company balances are accumulated and charged
directly to the foreign currency translation adjustment component of
stockholders' equity.
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 considers the Common Stock issuable upon exercise 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation. In November 2001, the Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") reached a consensus on Issue No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." The issue addresses the recognition,
measurement and income statement classification of sales incentives or other
consideration, free or discounted product or services and cash given by a vendor
to a customer. The Company adopted the provisions of EITF Issue No. 01-9 for
fiscal 2002. This adoption resulted in a reclassification of Selling, general
and administrative expenses to Cost of goods sold totaling $33.8, $34.5 and
$14.5 in the fiscal years ended May 31, 2002, 2001 and 2000, respectively, with
no change to reported net income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the 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 October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model, based upon the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," for long-lived assets to be disposed of by sale and addresses
significant implementation issues. The Company is required to adopt this
statement by the first quarter of fiscal 2003. The Company does not expect that
the adoption of SFAS No. 144 will have a material impact on its financial
position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement supercedes the guidance provided by the EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Since this statement only affects the timing
of the recognition of the liabilities to be incurred if an entity makes a
decision to exit or dispose of a particular activity, the Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
financial position, results of operations or cash flows.
| 34 | SCHOLASTIC |
2. SEGMENT INFORMATION
The Company categorizes its businesses into four operating segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING; 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.
o CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION includes the publication and
distribution of children's books in the United States through school-based
book clubs and book fairs, school-based and direct-to-home continuity
programs and the trade channel. The direct-to-home continuity and trade
businesses formerly operated by Grolier Incorporated ("Grolier") are
incorporated in this segment from June 22, 2000, the date on which Grolier
was acquired.
o 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 K to 12 in the United
States. The U.S. reference and non-fiction business formerly operated by
Grolier is included in this segment from June 22, 2000, the date on which
Grolier was acquired.
o MEDIA, LICENSING AND ADVERTISING includes the production and/or distribution
in the United States of software and Internet services and the production
and/or distribution by and through the Company's subsidiary, Scholastic
Entertainment Inc. ("SEI"), of programming and consumer products (including
children's television programming, videos, software, feature films,
promotional activities and non-book merchandise). The consumer software
business formerly operated by Grolier is included in this segment from June
22, 2000, the date on which Grolier was acquired.
o 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. The international businesses
formerly operated by Grolier are included in this segment from June 22, 2000,
the date on which Grolier was acquired.
| 35 | SCHOLASTIC |
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, including certain
segment classifications.
Children's
Book Media,
Publishing Licensing
and Educational and Total
2002 Distribution Publishing Advertising Overhead(1) Domestic International Consolidated
===================================================================================================================================
Revenues $ 1,168.6 $ 315.5 $ 131.2 $ 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 6.1 1.7 5.1 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) 189.8 51.5 (15.6) (61.2) 164.5 20.2 184.7
Segment assets 688.2 289.5 69.4 369.2 1,416.3 220.4 1,636.7
Goodwill 129.5 82.9 10.0 0.0 222.4 33.8 256.2
Long-lived assets (4) 278.2 183.3 42.9 227.2 731.6 63.2 794.8
Expenditures for long-lived assets (5) 108.7 48.6 29.5 47.8 234.6 8.7 243.3
2001
===================================================================================================================================
Revenues $ 1,221.9 $ 309.4 $ 134.3 $ 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 4.5 1.7 3.8 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) 216.7 (56.9)(6) (23.5) (56.9) 79.4(6) 19.3 98.7 (6)
Segment assets 647.4 248.1 68.3 322.6 1,286.4 215.4 1,501.8
Goodwill 109.2 71.1 8.4 0.0 188.7 33.2 221.9
Long-lived assets (4) 265.2 173.9 40.4 168.2 647.7 58.7 706.4
Expenditures for long-lived assets (5) 269.2 185.7 23.0 74.6 552.5 28.1 580.6
2000
===================================================================================================================================
Revenues $ 857.9 $ 212.5 $ 108.1 $ 0.0 $ 1,178.5 $ 224.0 $ 1,402.5
Bad debt 16.4 1.2 0.7 0.0 18.3 2.2 20.5
Depreciation 3.6 1.0 2.1 9.3 16.0 3.7 19.7
Amortization (2) 12.8 29.5 8.0 0.0 50.3 1.4 51.7
Royalty advances expensed 22.6 1.6 3.4 0.0 27.6 1.6 29.2
Segment profit/(loss) (3) 170.6 (13.3) (11.9) (56.3) 89.1 9.9 99.0
Segment assets 356.8 223.3 61.2 204.7 846.0 137.2 983.2
Goodwill 17.1 10.2 9.1 0.0 36.4 27.1 63.5
Long-lived assets (4) 97.5 111.8 35.0 127.0 371.3 51.9 423.2
Expenditures for long-lived assets (5) 37.9 47.3 26.8 28.4 140.4 4.4 144.8
- -----------------------------------------------------------------------------------------------------------------------------------
(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 2000, includes charges
related to the establishment of a litigation reserve of $6.7 and to the
liquidation of certain stock options of $1.8. For fiscal 2002, includes
$1.2 regarding the settlement of the 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 National Service Operation located in
Missouri and an industrial/office building complex in Connecticut.
(2) In fiscal 2002, includes amortization of other intangibles with definite
lives, prepublication costs and production costs. In fiscal 2001 and 2000,
includes amortization of goodwill, other intangibles, prepublication costs
and production costs.
(3) Segment profit/(loss) represents earnings before 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.
(4) Includes property, plant and equipment, prepublication costs, goodwill,
other intangibles, royalty advances and production costs.
(5) Includes expenditures for property, plant and equipment, investments in
prepublication and production costs, royalty advances and acquisitions of
businesses.
(6) EDUCATIONAL PUBLISHING segment loss for fiscal 2001 reflects the Company's
decision not to update SCHOLASTIC LITERACY PLACE(R), which resulted in a
$72.9 special charge to cost of goods sold.
| 36 | SCHOLASTIC |
The following table separately sets forth information for the two fiscal
years ended May 31 for the U.S. direct-to-home continuity business formerly
operated by Grolier, which, effective June 22, 2000, is 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
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
===========================================================================================================================
Revenues $ 207.5 $ 217.9 $ 961.1 $ 1,004.0 $ 1,168.6 $ 1,221.9
Bad debt 38.4 43.4 20.1 19.4 58.5 62.8
Depreciation 0.4 0.3 5.7 4.2 6.1 4.5
Amortization (1) 0.7 3.6 15.3 13.0 16.0 16.6
Royalty advances expensed 1.2 0.2 22.4 22.7 23.6 22.9
Business profit (2) 35.2 12.7 154.6 204.0 189.8 216.7
Business assets 233.0 241.6 455.2 405.8 688.2 647.4
Goodwill 87.5 88.4 42.0 20.8 129.5 109.2
Long-lived assets (3) 136.7 137.9 141.5 127.3 278.2 265.2
Expenditures for long-lived assets (4) 3.6 213.9 105.1 55.3 108.7 269.2
- ----------------------------------------------------------------------------------------------------------------------------
(1) In fiscal 2002, includes amortization of other intangibles with definite
lives and prepublication costs. In fiscal 2001, includes amortization of
goodwill, other intangibles and prepublication costs.
(2) Business profit represents earnings before interest and income taxes.
(3) Includes property, plant and equipment, prepublication costs, goodwill,
other intangibles and royalty advances.
(4) Includes expenditures for property, plant and equipment, investments in
prepublication costs, royalty advances and acquisitions of businesses.
3. DEBT
The following summarizes debt as of May 31:
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
2002 2001
================================================================================
Lines of Credit $ 23.3 $ 23.3 $ 23.1 $ 23.1
Grolier Facility 50.0 50.0 350.0 350.0
Loan Agreement and Revolver 50.0 50.0 -- --
7% Notes due 2003, net of discount 124.9 130.4 124.9 128.4
5.75% Notes due 2007, net of discount 300.7 301.1 -- --
Convertible Subordinated Debentures -- -- 110.0 122.2
Other debt 0.4 0.4 0.6 0.6
- -------------------------------------------------------------------------------
Total debt 549.3 555.2 608.6 624.3
Less lines of credit and short-term debt (23.5) (23.5) (23.3) (23.3)
- -------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $525.8 $531.7 $585.3 $601.0
===============================================================================
Short-term debt is carried at cost which approximates fair value. Fair values
were estimated based on market quotes, where available, or dealer quotes.
| 37 | SCHOLASTIC |
The following table sets forth the maturities of the carrying values of the
Company's debt obligations as of May 31, 2002 for fiscal years ended May 31:
================================================================================
2003 $ 23.5
2004 175.1
2005 50.0
2006 --
2007 300.7
Thereafter --
- --------------------------------------------------------------------------------
TOTAL DEBT $549.3
================================================================================
LINES OF CREDIT
The Company's international subsidiaries had unsecured lines of credit
available in local currencies equivalent to $53.5 and $50.5 at May 31, 2002 and
2001, respectively. There were $23.3 and $23.1 outstanding under these credit
lines at May 31, 2002 and 2001, respectively. These lines of credit are
considered short-term in nature. The weighted average interest rates on the
outstanding amounts were 5.43% and 7.45% at May 31, 2002 and 2001, respectively.
GROLIER FACILITY
On June 22, 2000, the Company established a credit facility (the "Grolier
Facility") to finance $350.0 of the $400.0 Grolier purchase price. The net
proceeds from the issuance of the 5.75% Notes in January 2002 were used to repay
a majority of the Grolier Facility (see 5.75% Notes due 2007 below). On June 21,
2002, the Grolier Facility was amended into a revolving credit agreement, which
expires on June 20, 2003 and provides for aggregate borrowings of up to $100.0.
Under these amended terms, Scholastic Inc. is the borrower, and Scholastic
Corporation is the guarantor. Borrowings bear interest at the prime rate or
0.39% to 1.10% over LIBOR (as defined). As amended, the Grolier Facility also
provides for a facility fee ranging from 0.085% to 0.25%. The amounts charged
vary based upon the Company's credit rating. The interest rate and facility fee
as of the amendment date were 0.650% over LIBOR and 0.150%, respectively. As of
May 31, 2002, the interest rate and facility fee were 0.575% over LIBOR and
0.125%, respectively. The Grolier Facility contains certain financial covenants
related to debt and interest coverage ratios (as defined) and limits dividends
and other distributions. At May 31, 2002 and 2001, $50.0 and $350.0 were
outstanding under the Grolier Facility at a weighted average interest rate of
2.4% and 5.1%, respectively.
LOAN AGREEMENT
Scholastic Corporation and its subsidiary 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, 2002 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, 2002 and 2001, $50.0 and $0.0, 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"). As amended, the Revolver provides for
unsecured revolving credit of up to $40.0 and expires on August 11, 2004.
Interest under this facility is 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, 2002 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, 2002 and 2001, there were no borrowings outstanding
under the Revolver.
7% NOTES DUE 2003
On December 23, 1996, the Company issued $125.0 of 7% Notes (the "7%
Notes"). The 7% Notes are unsecured and unsubordinated obligations of the
Company
| 38 | SCHOLASTIC |
and will 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, the Company issued $300.0 of 5.75% Notes (the "5.75%
Notes"). The 5.75% Notes are unsecured and unsubordinated obligations of the
Company and 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 on a semiannual basis. The net proceeds were used to repay the
majority of the $350.0 Grolier Facility.
INTEREST RATE SWAP AGREEMENT
On February 5, 2002, the Company 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," where the
Company receives a fixed interest rate payment based on a notional amount
totaling $100.0 and pays a variable interest rate to the counterparty, which is
reset semi-annually based on six-month LIBOR (as defined). This agreement was
entered into 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 value of the 5.75% Notes increased by $1.8 to reflect an increase in
their fair value as of May 31, 2002 and a corresponding swap asset of $1.8 was
recorded in Other assets. Under SFAS No. 133, changes in the fair value of the
interest rate swap offset changes in the fair value of the fixed rate debt due
to changes in market interest rates. As such, there was no ineffective portion
to the hedge recognized in earnings during fiscal 2002.
CONVERTIBLE SUBORDINATED DEBENTURES
On August 18, 1995, the Company sold $110.0 of its 5.0% Convertible
Subordinated Debentures due August 15, 2005 (the "Debentures"). 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 holder into
2.9 million shares of Common Stock and $0.2 were redeemed for cash.
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 $48.7, $44.0 and $35.9 for the fiscal
years ended May 31, 2002, 2001 and 2000, 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, 2002 under all
non-cancelable operating leases, totaling $335.4 are as follows: 2003 - $43.4;
2004 - $35.6; 2005 - $27.7; 2006 - $21.5; 2007 - $16.0; later years - $191.2.
The Company had certain contractual commitments, principally relating to
royalty advances, at May 31, 2002 totaling $20.5. The aggregate annual
commitments are as follows: 2003 - $16.4; 2004 - $2.1; 2005 - $1.7 ; 2006 -
$0.3; 2007 - $0; later years - none.
CONTINGENCIES
As previously reported, three purported class action complaints were filed
in the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, In re Scholastic Corporation Securities Litigation, 97 Civ.II
2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder, resulting from purportedly materially false and
misleading statements to the investing public concerning the financial condition
of the Company.
Specifically, the Complaint alleged misstatements and omissions by the
Company pertaining to adverse sales and returns of its popular Goosebumps(R)
book series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was
| 39 | SCHOLASTIC |
entered granting the Company's motion to dismiss plaintiffs' Second Amended
Consolidated Complaint without leave to further amend the complaint. Previously,
on December 14, 1998, an order was entered granting the Company's motion to
dismiss plaintiffs' First Amended Consolidated Complaint, with leave to amend
the complaint. On June 1, 2001, the Court of Appeals for the Second Circuit
reversed the dismissal of the Second Amended Consolidated Complaint and remanded
the case for further proceedings. On December 10, 2001, the Supreme Court of the
United States denied the Company's petition for a Writ of Certiorari to review
the Second Circuit's decision. The Company continues to believe that the
litigation is without merit and will continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the
Company commenced an action in the Supreme Court of the State Court of New York,
New York County, against Parachute Press, Inc. ("Parachute"), the licensor of
certain publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. In August 2000, the
Court of Appeals for the Second Circuit vacated the dismissal and remanded the
case for further proceedings. The second action, captioned Parachute Press, Inc.
v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc. (Index No. 99/600507), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State of New
York, New York County. In its two complaints and its counterclaims, Parachute
alleges that the exercise of contractual remedies by the Company was improper
and seeks declaratory relief and unspecified damages for, among other claims,
alleged breaches of contract and acts of unfair competition. Damages sought by
Parachute include the payment of the total of approximately $36.1 of advances
over the term of the contract, of which approximately $15.3 had been paid at the
time the first Parachute litigation began, and payment of royalties set-off by
Scholastic against amounts claimed by the Company. On July 21, 2000, the Company
and Parachute each filed motions for partial summary judgment in the pending
state court cases, which on April 4, 2002 were denied in all material respects.
On May 18, 2001, each party filed motions for summary judgment in the federal
court case. The Company is seeking declaratory relief and damages for, among
other claims, breaches of contract, fraud and acts of unfair competition.
Damages sought by the Company include repayment by Parachute of a portion of the
$15.3 advance already paid. The Company intends to vigorously defend its
position in these proceedings. The Company does not believe that this dispute
will have a material adverse effect on its financial condition.
In addition to the above actions, 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 Inc., 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(R), 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 &
| 40 | SCHOLASTIC |
Associates, a publisher of business-to-business newsletters. The aggregate
purchase price, net of cash received, and related goodwill and other intangibles
of the aforementioned acquisitions, were $66.7 and $35.9, respectively. 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.
The assets and liabilities of each business acquired as of the date of
acquisition were adjusted to their fair values, with the excess purchase price
over the fair market value assigned to goodwill.
The following summarizes the allocation of the initial purchase price of
the fiscal 2002 acquisitions:
VALUE
================================================================================
Accounts receivable $ 8.0
Inventory 8.6
Other current assets 6.4
Property, plant and equipment 1.2
Goodwill and other intangibles 35.9
Noncurrent deferred taxes 18.6
Other assets 0.4
Current liabilities (12.4)
- -------------------------------------------------------------------------------
CASH PAID FOR ACQUISITIONS, NET OF CASH RECEIVED $ 66.7
===============================================================================
The allocation of the aggregate purchase price is preliminary and will be
finalized in fiscal 2003. Future adjustments to the purchase price allocation
are not expected to be material. 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 of including the results of the acquired business operations on
a pro forma basis would not be material.
In connection with the fiscal 2002 acquisitions, the Company has
established liabilities of $3.2 relating primarily to severance and other exit
costs. As of May 31, 2002, $2.9 of these liabilities remain unpaid. Payment of
these liabilities will be made principally in fiscal 2003.
FISCAL 2001 ACQUISITION - GROLIER
On June 22, 2000, Scholastic Inc. acquired all of the issued and
outstanding capital stock of Grolier, a Delaware corporation, for $400.0 in
cash. The acquisition was financed by the Company using bank debt, of which
$350.0 was borrowed under the Grolier Facility and $50.0 was borrowed under the
Company's existing credit facility.
Through the purchase of Grolier, the Company acquired the leading operator
of United States direct-to-home continuity book clubs serving children primarily
age five and under and the leading print and on-line publisher of children's
reference and non-fiction products sold primarily to school libraries in the
United States. The acquisition also expanded the Company's operations in the
United Kingdom, Canada and Southeast Asia. In accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
Company has analyzed economic characteristics, similarity of nature of products,
similarity of the nature of production, class of customer and method of
distribution of products of the acquired Grolier businesses. Accordingly, the
Grolier businesses have been included in the following business segments: the
domestic direct-to-home continuity and trade operations have been included in
the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment; the children's
reference and non-fiction operations have been included in the EDUCATIONAL
PUBLISHING segment; consumer software operations have been included in the
MEDIA, LICENSING AND ADVERTISING segment; and all international operations have
been included in the INTERNATIONAL segment.
The Grolier acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Grolier have been included
in the Company's consolidated results of operations since the date of
acquisition. The assets and liabilities at the acquisition date were adjusted to
their fair values, based upon an independent valuation, with the excess purchase
price over the fair value assigned to goodwill. The valuation was finalized as
of the end of fiscal 2001. With regard to any possible future adjustments to
established liabilities, such adjustments would be included in the determination
of net income.
The following summarizes the final allocation of the purchase price, based
upon an independent valuation, including the related transaction and financing
costs:
VALUE
================================================================================
Accounts receivable $ 95.3
Inventory 45.5
Other current assets 60.3
Property, plant and equipment 18.9
Goodwill and other intangibles 229.7
Other assets 44.2
Current liabilities (85.3)
Noncurrent liabilities (12.2)
- --------------------------------------------------------------------------------
CASH PAID FOR ACQUISITION, NET OF CASH RECEIVED $396.4
================================================================================
| 41 | SCHOLASTIC |
The following summarizes the Goodwill and Other intangibles arising from
the acquisition of Grolier:
VALUE
- -------------------------------------------------------------------------------
Goodwill $168.1
- -------------------------------------------------------------------------------
Titles 29.8
Licenses 17.8
Major sets 11.8
Customer lists 2.2
- -------------------------------------------------------------------------------
Total other intangibles 61.6
- -------------------------------------------------------------------------------
TOTAL GOODWILL AND OTHER INTANGIBLES $229.7
- -------------------------------------------------------------------------------
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. This amount, originally established at $12.4, was
increased at May 31, 2001 as the Company refined its estimate of the costs of
the integration plan. At the end of fiscal 2002, the established liabilities for
integration costs were in excess of the expected costs by $4.1, of which $2.1
related to severance and other exit costs and $2.0 related primarily to the
favorable settlement of certain contractual obligations which existed at the
date of acquisition. This resulted in a decrease in the recorded liabilities,
which was reflected as a reduction of Selling, general and administrative
expenses. As of May 31, 2002, $4.6 of these liabilities remained unpaid and will
be settled over the next three years.
A summary of the activity in the established liabilities is detailed in the
following table:
SEVERANCE AND OTHER
RELATED COSTS EXIT 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
================================================================================
The following table reflects the unaudited pro forma results of operations
of the Company, giving effect to the acquisition of Grolier as if it was
consummated as of the first day of the fiscal period ended May 31, 2001, includ
ing the effect of increased interest expense for debt related to the
acquisition. This information does not necessarily reflect the actual results of
operations that would have occurred had the purchase been made at the beginning
of the period presented, nor is it necessarily indicative of future results of
operations of the combined companies.
2001
================================================================================
Revenues $1,997.9
Net income 37.5
Net income per Share of Class A Stock and Common Stock:
Basic $ 1.08
Diluted $ 1.04
- --------------------------------------------------------------------------------
6. 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 2002, the Company completed the required
transitional and 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 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 June 1,
1999:
Fiscal years ended May 31,
2001 2000
================================================================================
Net income, as reported $ 36.3 $ 51.4
Add back: amortization expense, net of tax 8.3 2.8
- --------------------------------------------------------------------------------
Pro forma net income $ 44.6 $ 54.2
Basic net income per Share of Class A
Stock and Common Stock:
As reported $ 1.05 $ 1.54
Pro forma $ 1.29 $ 1.62
Diluted net income per Share of Class A
Stock and Common Stock :
As reported $ 1.01 $ 1.48
Pro forma $ 1.24 $ 1.56
- --------------------------------------------------------------------------------
| 42 | SCHOLASTIC |
The following table summarizes the activity in Goodwill as of May 31:
2002 2001 2000
================================================================================
Beginning balance $ 221.9 $ 63.5 $ 67.9
Additions due to acquisitions 35.4 169.9 0.9
Amortization -- (10.3) (4.4)
Other adjustments (1.1) (1.2) (0.9)
- --------------------------------------------------------------------------------
TOTAL $ 256.2 $ 221.9 $ 63.5
================================================================================
The following table summarizes Other intangibles subject to amortization as
of May 31:
2002 2001
================================================================================
Customer lists $ 2.8 $ 2.2
Accumulated amortization (2.2) (1.3)
- --------------------------------------------------------------------------------
Net customer lists 0.6 0.9
- --------------------------------------------------------------------------------
Other intangibles 3.9 3.9
Accumulated amortization (2.1) (2.0)
- --------------------------------------------------------------------------------
Net other intangibles 1.8 1.9
- --------------------------------------------------------------------------------
TOTAL $ 2.4 $ 2.8
================================================================================
The following table summarizes Other intangibles not subject to amortization
as of May 31:
2002 2001
================================================================================
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 1.8 1.8
- --------------------------------------------------------------------------------
TOTAL $ 61.4 $ 61.4
================================================================================
Amortization expense for Other intangibles totaled $1.0, $3.9 and $0.6 for
the fiscal years ended May 31, 2002, 2001 and 2000, respectively.
7. INCOME TAXES
The provisions for income taxes for the fiscal years ended May 31 are based
on earnings/(losses) before taxes and cumulative effect of accounting change as
follows:
2002 2001 2000
================================================================================
United States $ 144.7 $ 50.0 $ 82.4
Non-United States 8.6 7.1 (2.0)
- --------------------------------------------------------------------------------
$ 153.3 $ 57.1 $ 80.4
================================================================================
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:
2002 2001 2000
- --------------------------------------------------------------------------------
Federal
Current $ 29.4 $ 26.9 $ 37.6
Deferred 15.4 (13.5) (12.8)
- --------------------------------------------------------------------------------
$ 44.8 $ 13.4 $ 24.8
================================================================================
State and local
Current $ 3.7 $ 4.0 $ 4.2
Deferred 2.0 (2.8) (2.4)
- --------------------------------------------------------------------------------
$ 5.7 $ 1.2 $ 1.8
================================================================================
International
Current $ 3.5 $ 5.0 $ 2.3
Deferred 0.6 1.2 0.1
- --------------------------------------------------------------------------------
$ 4.1 $ 6.2 $ 2.4
================================================================================
TOTAL
CURRENT $ 36.6 $ 35.9 $ 44.1
DEFERRED 18.0 (15.1) (15.1)
- --------------------------------------------------------------------------------
$ 54.6 $ 20.8 $ 29.0
================================================================================
The provisions for income taxes attributable to earnings before cumulative
effect of accounting change differ from the amount of tax determined by applying
the federal statutory rate as follows:
2002 2001 2000
================================================================================
Computed federal statutory provision $ 53.7 $ 20.0 $ 28.1
State income tax provision,
net of federal income tax benefit 3.6 0.8 1.2
Difference in effective tax rates on
earnings of foreign subsidiaries (0.7) 1.8 0.2
Charitable contributions (1.8) (1.6) (0.8)
Other - net (0.2) (0.2) 0.3
- --------------------------------------------------------------------------------
TOTAL PROVISION FOR
INCOME TAXES $ 54.6 $ 20.8 $ 29.0
================================================================================
EFFECTIVE TAX RATES 35.6% 36.5% 36.1%
================================================================================
The undistributed earnings of foreign subsidiaries at May 31, 2002 are
$16.3. Any remittance of foreign earnings would not result in any significant
additional tax.
At May 31, 2002, the Company has a charitable deduction carryforward of
$4.1, which expires in the fiscal year ending May 31, 2007.
| 43 | SCHOLASTIC |
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes as determined under enacted tax
laws and rates. The tax effects of these items that give rise to deferred tax
assets and liabilities as of May 31 for the indicated fiscal years are as
follows:
2002 2001
================================================================================
Net deferred tax assets:
Tax uniform capitalization $ 26.5 $ 26.1
Inventory reserves 18.4 23.1
Allowance for doubtful accounts 19.9 22.4
Other accounting reserves 21.8 23.4
Post-retirement, post-employment and pension obligations 16.3 11.6
Prepaid expenses (12.2) (11.8)
Depreciation and amortization (0.3) (11.7)
Other - net (2.7) (4.4)
- --------------------------------------------------------------------------------
TOTAL NET DEFERRED TAX ASSETS $ 87.7 $ 78.7
================================================================================
Net deferred tax assets of $87.7 at May 31, 2002 and $78.7 at May 31, 2001
include $13.2 and $11.6 in Other noncurrent liabilities at May 31, 2002 and
2001, respectively.
8. 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, 2002, 1,656,200 shares of Class A Stock and 37,417,222 shares of
Common Stock were outstanding. At May 31, 2002, the Company had reserved for
issuance 12,094,919 shares of Common Stock. Of these shares, 9,374,692 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 507,027
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. The Company 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. On January 16, 2001, the Company
effected a 2 for 1 Stock Split through payment of a 100% stock dividend on its
Class A Stock and Common Stock. All outstanding rights under stock options and
stock purchase plans to acquire the Company's Common Stock were adjusted to give
effect to the 2-for-1 Stock Split.
PREFERRED STOCK
The Company's authorized Preferred Stock may be issued in one or more
series with limited voting rights, with the rights of each series 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 employee stock option plans: the Scholastic
Corporation 1992 Stock Option Plan (the "1992 Plan"), the Scholastic Corporation
1995 Stock Option Plan (the "1995 Plan") and the Scholastic Corporation 2001
Stock Incentive Plan (the "2001 Plan"). The 1995 Plan supplemented the 1992 Plan
and provides for the grant of non-qualified stock options and incentive stock
options. On September 20, 2001, the holders of Class A Stock approved the 2001
Plan, which provides for the issuance of 4,000,000 shares of Common Stock in
connection with the grant of stock options, restricted stock and other
stock-based awards. At May 31, 2002, options to purchase 678,900; 4,346,312; and
293,000 shares of Common Stock were outstanding under the 1992 Plan, 1995 Plan
and 2001 Plan, respectively; and 0; 49,980 and 3,707,000 shares of Common Stock
were available for additional awards under the 1992 Plan, 1995 Plan and 2001
Plan, respectively.
| 44 | SCHOLASTIC |
The Company also maintains the stockholder-approved 1997 Outside Directors'
Stock Option Plan (the "1997 Directors' Option Plan"), which provides for the
grant of non-qualified options to purchase Common Stock, with 360,000 shares
originally reserved for issuance. The 1997 Directors' Option Plan originally
provided for the automatic grant of options to non-employee directors each
January to purchase 3,000 shares of Common Stock. As amended in September 2001,
this plan provides for the automatic grant of 6,000 options to non-employee
directors on the date of each annual shareholders' meeting, commencing September
2002. The 1997 Directors' Option Plan supplemented the 1992 Outside Directors'
Stock Option Plan (the "1992 Directors' Option Plan"). At May 31, 2002, options
to purchase 203,500 and 18,000 shares of Common Stock were outstanding and
options on 78,000 and 0 shares of Common Stock were available for additional
awards under the 1997 and 1992 Directors' Option Plans, respectively. In January
2002 and 2001, options were awarded under the 1997 Directors' Option Plan at
exercise prices of $49.70 and $43.88, respectively.
Generally, options granted under the various plans may not be exercised for
a minimum of one year after the date of grant and expire ten years and one day
after the date of grant.
The following table sets forth activity under the various stock option
plans for the three fiscal years ended May 31:
2002 2001 2000
===========================================================================================================================
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - BEGINNING OF YEAR 6,035,804 $ 25.28 5,568,966 $ 22.05 5,435,994 $ 19.94
GRANTED 692,000 42.62 1,724,000 32.81 1,310,200 26.04
EXERCISED (911,292) 22.07 (1,170,012) 20.68 (1,046,228) 15.90
CANCELLED (276,800) 32.79 (87,150) 30.16 (131,000) 23.67
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - END OF YEAR 5,539,712 $ 27.58 6,035,804 $ 25.28 5,568,966 $ 22.05
===========================================================================================================================
EXERCISABLE - END OF YEAR 4,083,962 $ 24.52 3,588,804 $ 22.47 3,180,814 $ 21.17
- ---------------------------------------------------------------------------------------------------------------------------
The following table sets forth information as of May 31, 2002 regarding
weighted average exercise prices, weighted average remaining contractual lives
and the remaining outstanding stock options under the various stock option
plans, sorted by range of exercise price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
===========================================================================================================================
WEIGHTED WEIGHTED AVERAGE WEIGHTED
OPTIONS AVERAGE REMAINING NUMBER AVERAGE
PRICE RANGE NUMBER EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
$ 15.73 - $ 20.97 1,762,812 $ 18.34 5.5 years 1,724,812 $ 18.32
$ 20.98 - $ 26.21 978,000 25.38 6.6 years 873,000 25.36
$ 26.22 - $ 31.45 730,400 29.42 4.5 years 709,400 29.49
$ 31.46 - $ 36.69 1,369,500 32.16 8.2 years 721,750 31.95
$ 36.70 - $ 41.94 113,000 37.78 9.3 years 1,000 41.48
$ 41.95 - $ 47.18 494,000 42.96 9.4 years 54,000 43.88
$ 47.19 - $ 52.42 92,000 50.25 9.7 years - -
- ---------------------------------------------------------------------------------------------------------------------------
Under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company applies APB 25 and related interpretations in
accounting for its stock option plans. In accordance with APB 25, no
compensation expense was recognized because the exercise price of the Company's
stock options was equal to the market price of the underlying stock on the date
of grant and the exercise price and number of shares subject to grant were
fixed. During fiscal 2000, the Company recorded an expense of $1.8 relating to
the liquidation of certain stock options.
| 45 | SCHOLASTIC |
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:
2002 2001 2000
================================================================================
Net income - as reported $ 93.5 $ 36.3 $ 51.4
Net income - pro forma $ 86.0 $ 24.0 $ 43.7
Diluted earnings per share - as reported $ 2.38 $ 1.01 $ 1.48
Diluted earnings per share - pro forma $ 2.27 $ 0.69 $ 1.28
- --------------------------------------------------------------------------------
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:
2002 2001 2000
================================================================================
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 66.1% 44.5% 41.7%
Risk-free interest rate 4.59% 6.03% 5.80%
Expected life of options 5 years 5 years 5 years
- --------------------------------------------------------------------------------
The weighted average fair value of options granted during fiscal 2002, 2001
and 2000 was $25.24, $15.59 and $11.42 per share, respectively. For purposes of
pro forma disclosure, the estimated fair value of the options is amortized over
the options' vesting periods.
EMPLOYEE STOCK PURCHASE PLAN
In fiscal 2000, the Company implemented the Employee Stock Purchase Plan
("ESPP"), which is offered to eligible U.S. employees. The ESPP permits
participating employees to purchase, through after-tax payroll deductions,
Common Stock at a 15% discount from the lower of the closing price value of the
Common Stock on the first or last business day of each fiscal quarter. During
fiscal 2002 and 2001, the Company issued 71,073 and 55,630 shares under the ESPP
at a weighted average price of $35.87 and $28.41 per share, respectively.
MANAGEMENT STOCK PURCHASE PLAN
In fiscal 2000, the Company implemented the Management Stock Purchase Plan
("MSPP"), which allows certain members of senior management to defer up to 100%
of their annual 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 during the fiscal quarter in which such bonuses are
payable and are converted into shares of the 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 2002 and 2001, the Company allocated 45,301 and 27,330 RSUs under
the MSPP at a weighted average price of $30.60 and $22.61 per RSU, resulting in
an expense of $0.2 and $0.1, respectively.
| 46 | SCHOLASTIC |
9. 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 contributions and interest credits
allocated to participants accounts based on years of benefit service and annual
pensionable earnings.
Following the acquisition of Grolier, the Grolier Defined Benefit Plan (the
"Grolier Plan"), which covered substantially all of its U.S. employees, was
merged into the Pension Plan in January 2001. The results of the combination are
reflected in the following tables. 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") which 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") which 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.
| 47 | SCHOLASTIC |
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:
POST-RETIREMENT
PENSION BENEFITS BENEFITS
================================================================================
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 103.4 $ 34.5 $ 18.3 $ 14.6
Service cost 4.7 5.1 0.4 0.3
Interest cost 7.4 7.3 1.3 1.4
Plan participants' contributions 0.6 0.5 -- --
Amendments -- (2.8) -- --
Actuarial losses 4.2 3.7 5.1 0.8
Acquisition -- 63.0 -- 2.7
Curtailment loss 0.2 -- -- --
Foreign currrency exchange rate changes (0.3) (1.7) -- --
Benefits paid (8.6) (6.2) (1.7) (1.5)
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 111.6 $ 103.4 $ 23.4 $ 18.3
- --------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 93.0 $ 26.6 $ -- $ --
Actual (loss) on plan assets (1.3) (2.4) -- --
Company contributions 4.5 3.0 -- 0.2
Plan participants' contributions 0.4 0.4 -- --
Acquisition -- 70.6 -- --
Administrative expenses (0.3) -- -- --
Foreign currrency exchange rate changes (0.4) 1.0 -- --
Benefits paid (8.6) (6.2) -- (0.2)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 87.3 $ 93.0 $ -- $ 0.0
- --------------------------------------------------------------------------------
Funded Status
Underfunded status of the plans $ (24.3) $ (10.4) $ (23.4) $ (18.3)
Unrecognized net actuarial loss 30.6 16.4 6.0 0.9
Unrecognized prior service cost (2.6) (2.9) (0.2) (0.1)
Unrecognized net asset obligation 0.5 0.6 -- --
- --------------------------------------------------------------------------------
ACCRUED BENEFIT ASSET/(LIABILITY) $ 4.2 $ 3.7 $ (17.6) $ (17.5)
- --------------------------------------------------------------------------------
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit cost $ 2.6 $ 3.3 $ -- $ --
Accrued benefit liability (21.9) (6.0) (17.6) (17.5)
Accumulated other comprehensive loss 21.8 5.6 -- --
- --------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 2.5 $ 2.9 $ (17.6) $ (17.5)
- --------------------------------------------------------------------------------
Weighted Average Assumptions
Discount rate 7.1% 7.6% 7.3% 7.5%
Compensation increase factor 4.1% 4.2% -- --
- --------------------------------------------------------------------------------
The Company's pension plans have different measurement dates as follows: for the
Pension Plan--May 31, 2002; for the U.K. Pension Plan--March 31, 2002; and for
the Grolier Canada Pension Plan--December 31, 2001. Plan assets consist
primarily of stocks, bonds, money market funds and U.S. government obligations.
Information with respect to the pension plans with accumulated benefit
obligation in excess of plan assets is as follows for the fiscal years ended May
31:
2002 2001
================================================================================
Projected benefit obligation $ 106.0 $ 97.5
Accumulated benefit obligation 103.0 90.2
Fair value of plan assets 80.1 84.5
Weighted average return of plan assets 9.4% 9.5%
| 48 | SCHOLASTIC |
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
=====================================================================================================================
2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $ 4.7 $ 5.1 $ 4.6 $ 0.4 $ 0.3 $ 0.7
Interest cost 7.4 7.3 2.1 1.3 1.4 0.8
Expected return on assets (8.8) (9.7) (1.5) - - -
Net amortization and deferrals (0.2) 0.1 0.1 - - (0.1)
Curtailment loss 0.2 - - - - -
Recognized net actuarial loss/(gain) 0.5 (0.2) (1.0) - - -
- ---------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $ 3.8 $ 2.6 $ 4.3 $ 1.7 $ 1.7 $ 1.4
=====================================================================================================================
The accumulated Post-Retirement benefit obligation was determined using a
discount rate of 7.3%. Service cost and interest components were determined
using a discount rate of 7.8%. The assumed health care cost trend rate was 5.0%,
which reached its ultimate rate in fiscal 2002. A decrease of 1.0% in the health
care cost trend rate would result in decreases of approximately $2.6 in the
accumulated benefit obligation and $0.4 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 $3.1 in the accumulated benefit
obligation and $0.5 in the annual net periodic post-retirement benefit cost.
The Company also provides for its U.S.-based employees other benefit plans
including a 401(k) Plan. For fiscal years 2002, 2001 and 2000, the expense for
such plans were $6.1, $5.2 and $3.8, respectively.
10. 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)
2002 2001 2000
===========================================================================================================================
Net income for basic earnings per share $ 93.5 $ 36.3 $ 51.4
Dilutive effect of Debentures 2.1 -- 3.5
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income for diluted earnings per share $ 95.6 $ 36.3 $ 54.9
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average Shares of Class A Stock and Common Stock outstanding
for basic earnings per share 36.7 34.7 33.4
Dilutive effect of shares issued pursuant to employee stock plans 1.6 1.4 0.8
Dilutive effect of Debentures 1.8 -- 2.9
Dilutive effect of Warrants -- -- 0.0
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average Shares of Class A Stock and Common Stock
outstanding for diluted earnings per share 40.1 36.1 37.1
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per Share of Class A Stock and Common Stock:
Earnings before cumulative effect of accounting change:
Basic $ 2.69 $ 1.05 $ 1.54
Diluted $ 2.51 $ 1.01 $ 1.48
Cumulative effect of accounting change (net of income taxes):
Basic $ (0.14) $ -- $ --
Diluted $ (0.13) $ -- $ --
Net income:
Basic $ 2.55 $ 1.05 $ 1.54
Diluted $ 2.38 $ 1.01 $ 1.48
- ---------------------------------------------------------------------------------------------------------------------------
For fiscal 2001, the effect of the potential conversion of the Debentures into
2.9 million shares on the 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.
| 49 | SCHOLASTIC |
11. 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. 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 100% of the costs of its
unamortized films will be amortized over the next three years.
12. 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 $0.5
and $1.1 remained on the Consolidated Balance Sheets at May 31, 2002 and 2001,
respectively.
13. LITIGATION AND OTHER CHARGES
On July 30, 2002, the Company agreed in principle to settle the previously
disclosed lawsuit filed in 1995, SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS,
INC. V. 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.
The Company recorded a charge in fiscal 2000 of $6.7 related to the Harris
case and an unrelated expense of $1.8 for the liquidation of certain stock
options.
14. OTHER FINANCIAL DATA
Deferred promotion costs were $44.6 and $44.0 at May 31, 2002 and 2001,
respectively. Promotion costs expensed were $94.5, $94.7 and $9.0 for the fiscal
years ended May 31, 2002, 2001 and 2000, respectively. Promotional expense
consists of $88.0, $86.6 and $0.0 for direct-to-home promotions and $6.5, $8.1
and $9.0 for magazine advertising for fiscal 2002, 2001 and 2000, respectively.
Property, plant and equipment includes capitalized interest costs of $1.8,
$3.3 and $1.4 for the fiscal years ended May 31, 2002, 2001 and 2000,
respectively, and construction in progress of $4.1 and $63.6 at May 31, 2002 and
2001, respectively, principally related to the expansion of the Company's
offices in the New York metropolitan area.
Accumulated amortization of prepublication costs was $62.4 and $46.7 at May
31, 2002 and 2001, respectively. The Company amortized $42.6, $54.8 and $41.1
for the fiscal years ended May 31, 2002, 2001 and 2000, 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 $12.3 and $14.2 at May 31, 2002 and 2001, respectively.
15. SUBSEQUENT EVENT
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. The Company also acquired a 15% equity interest in
The Book People Group, Ltd. for (pound)12.0, (equivalent to approximately $18.0
as of the date of the transaction) with a possible additional payment of
(pound)3.0 based on operating results and contingent on repayment of all
borrowings under a (pound)3.0 (equivalent to approximately $4.5 as of the date
of the transaction) 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 will be used to fund the expansion of The Book People and for
working capital purposes.
| 50 | SCHOLASTIC |
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, 2002 and 2001, 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, 2002. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with 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, 2002 and 2001 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 2002 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.
/s/ Ernst & Young
New York, New York
July 17, 2002, except for the first
paragraph of Note 13, as to which
the date is July 30, 2002.
| 51 | SCHOLASTIC |
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
2002 QUARTER(1) QUARTER QUARTER(2) QUARTER(3)(4) YEAR
===========================================================================================================================
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
Net income/(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
- --------------------------------------------------------------------------------------------------------------------------
2001
==========================================================================================================================
Revenues $ 362.1 $ 668.3 $ 433.0 $ 498.9 $1,962.3
Cost of goods sold 192.0 297.0 207.4 203.3 899.7
Cost of goods sold - Special Literacy Place
and other charges -- -- -- 72.9 72.9
Net income/(loss) (10.6) 56.3 3.7 (13.1) 36.3
Earnings/(loss) per share:
Basic $ (0.31) $ 1.63 $ 0.11 $ (0.39) $ 1.05
Diluted $ (0.31) $ 1.48 $ 0.10 $ (0.39) $ 1.01
- --------------------------------------------------------------------------------------------------------------------------
(1) The first quarter of fiscal 2002 includes a Cumulative effect of accounting
change related to the adoption of SOP 00-2, which resulted in an after-tax
charge of $5.2 or $0.15 per diluted share.
(2) The third quarter of fiscal 2002 includes a reduction in bad debt expense
related to reserves taken in the first half of the year of $6.1 pre-tax or
$0.10 per diluted share. The third quarter of fiscal 2001 includes a
reduction in the trade reserve for returns recorded in the first half of
the year of $5.6 pre-tax or $0.10 per diluted share.
(3) The fourth quarter of fiscal 2002 includes a litigation and other charge of
$1.2 pre-tax or $0.02 per diluted share as a result of a lawsuit settlement
with Robert Harris and Harris Entertainment, Inc.
(4) The fourth quarter of fiscal 2001 includes a pre-tax charge of $72.9
included under cost of goods sold, primarily related to the decision not to
update SCHOLASTIC LITERACY PLACE. The impact on earnings per diluted share
of this charge was $1.20.
ITEM 9 o CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| 52 | SCHOLASTIC |
Part III
ITEM 10 o DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
EMPLOYED BY
REGISTRANT
NAME AGE SINCE POSITION(S) FOR PAST FIVE YEARS
================================================================================
Richard Robinson 65 1962 Chairman of the Board (since 1982),
President (since 1974) and Chief
Executive Officer (since 1975).
Kevin J. McEnery 54 1993 Executive Vice President and Chief
Financial Officer (since 1995).
Deborah A. Forte 48 1984 Executive Vice President (since 1996),
President, Scholastic Entertainment Inc.
(since 2001) and Division Head,
Scholastic Entertainment Inc.
(1995-2001).
Donna M. Iucolano 38 2000 Executive Vice President (since 2000),
President, Scholastic Internet Group
(since 2001), Executive Vice President,
Scholastic Internet Group (2000-2001);
and prior to joining the Company,
positions including Senior Vice President
(2000) and Vice President (1998-2000) at
1-800-FLOWERS.COM (1994-2000).
Barbara A. Marcus 51 1983 Executive Vice President (since 1991),
President, Children's Book Publishing and
Distribution (since 1999) and Executive
Vice President, Children's Book
Publishing and Distribution (1991-1999).
Margery W. Mayer 50 1990 Executive Vice President (since 1990),
President, Scholastic Education (since
2002) and Executive Vice President,
Learning Ventures (1998-2002) and
Instructional Publishing and Scholastic
School Group (1990-1997).
Hugh Roome 50 1991 Executive Vice President (since 1996),
President, International Group (since
2001), Executive Vice President,
International (2000-2001) and Senior Vice
President, Magazine Group (1993-1996).
Richard M. Spaulding 65 1960 Director (since 1974) and Executive Vice
President, Marketing (since 1974).
| 53 | SCHOLASTIC |
EMPLOYED BY
REGISTRANT
NAME AGE SINCE POSITION(S) FOR PAST FIVE YEARS
================================================================================
Judith A. Corman 64 1999 Senior Vice President, Corporate
Communications and Media Relations (since
1999); and prior to joining the Company,
Senior Vice President at Lerer &
Montgomery (1994-1999).
Charles B. Deull 42 1995 Senior Vice President (since 1995),
General Counsel (since 1999), Senior Vice
President, Legal and Business Affairs
(1995-1999) and Corporate Secretary
(since 1996).
Ernest M. Fleishman 65 1989 Senior Vice President, Education and
Corporate Relations (since 1989).
Beth Ford 38 2000 Senior Vice President, Global Operations
(since 2000); and prior to joining the
Company, Director, Supply Chain at Pepsi
Bottling Group/Pepsico (1997-2000) and
Director, Operations at Preseco Company
(1996-1997).
Maurice Greenfield 59 1999 Senior Vice President and Chief
Information Officer (since 1999); and
prior to joining the Company, Vice
President, MIS at National Broadcasting
Company (1985-1999).
Larry V. Holland 43 1994 Senior Vice President, Corporate Human
Resources and Employee Services (since
1997) and Vice President, Human Resources
(1994-1997).
Helen V. Benham 52 1974 Director (since 1992) and Corporate Vice
President, Early Childhood Advisor (since
1996).
Karen A. Maloney 45 1997 Vice President and Corporate Controller
(since 1998), Director of Accounting and
Financial Operations (1997-1998); and
prior to joining the Company, Vice
President and Controller at Calvin Klein,
Inc. (1996-1997).
| 54 | SCHOLASTIC |
ITEM 11 o EXECUTIVE COMPENSATION
Incorporated herein by reference from the Scholastic Corporation definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
ITEM 12 o SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLANS
The following table presents information regarding the Company's equity
compensation plans at May 31, 2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
========================================================================================================================
(a) (b) (c)
Equity Compensation plans
approved by security holders 5,539,712 $27.58 4,342,007 (1)
Equity Compensation plans
not approved by security holders -- -- --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 5,539,712 $27.58 4,342,007(1)
========================================================================================================================
(1) Includes 207,356 shares of Common Stock under the ESPP; 299,671 shares of
Common Stock under the MSPP and 3,707,000 shares of Common Stock under the
2001 Plan, in addition to shares of Common Stock available for purposes of
future option grants.
The additional information required by this item is incorporated herein by
reference from the Scholastic Corporation definitive proxy statement to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13 o CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Scholastic Corporation definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
| 55 | SCHOLASTIC |
Part IV
ITEM 14 o EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following consolidated financial statements are included in
Item 8:
Consolidated Statements of Income for the three years ended May 31,
2002, 2001 and 2000
Consolidated Balance Sheets at May 31, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the three years ended May 31, 2002, 2001, and
2000
Consolidated Statements of Cash Flows for the three years ended May
31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULE:
The following consolidated financial statement schedule is included
in Item 14(d): Schedule II- Valuation and Qualifying Accounts and
Reserves
All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements or the Notes
thereto.
(a)(3) EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of Scholastic
Corporation (the "Company") (incorporated by reference to the
Company's Registration Statement on Form S-8 (Registration No.
33-46338) as filed with the Securities and Exchange Commission (the
"Commission") on March 12, 1992); together with Certificate of
Amendment, effective as of September 19, 2000, to the Company's
Amended and Restated Certificate of Incorporation (incorporated by
reference to the Company's Quarterly Report on Form 10Q filed with the
Commission on October 16, 2000).
3.2 Bylaws of the Company, amended and restated as of March 16, 2000
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Commission on April 14, 2000).
4.1. Amended and Restated Credit Agreement, dated as of August 11, 1999,
among the Company and Scholastic Inc., as borrowers, the Initial
lenders named therein, Citibank, N.A., as administrative agent,
Salomon Smith Barney Inc., as arranger, and Chase Manhattan Bank,
N.A., and Fleet Bank, N.A., as syndication agents (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 23, 2000), together with Amendment No. 1,
dated as of June 22, 2000 (incorporated by reference to the Company's
Annual Report on Form 10-K as filed with the Commission on August 25,
2000).
4.2 Credit Agreement, dated as of June 22, 2000 (the "Credit Agreement"),
among the Company, as guarantor, Scholastic Inc., as borrower, the
initial lenders named therein, Citibank, N.A., as agent for the
lenders, and Salomon Smith Barney Inc. and Credit Suisse First Boston,
as joint lead arrangers, and the other agents named therein
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 25, 2000).
4.3* Amendment No. 1 to the Credit Agreement, dated as of June 21, 2002,
among the Company, as Guarantor for Scholastic Inc. as borrower, the
initial lenders named therein and Citibank, N.A., as agent for the
lenders.
4.4* Amended and Restated Revolving Loan Agreement, dated November 10,
1999, among the Company, Scholastic Inc. and Sun Bank, National
Association, together with Amendment No. 1, dated June 22, 2000.
4.5* Credit Agreement Facility, dated June 1, 1992, as amended on October
30, 1995, between Scholastic Canada Ltd. and CIBC.
4.6* Credit Agreement Facility, dated June 24, 1993, between Scholastic
Ltd. and Citibank, N.A.
4.7* Credit Agreement, dated May 14, 1992, as amended on June 30, 1995,
between Scholastic Ltd. (formerly known as Scholastic Publications
Ltd.) and Midland Bank.
| 56 | SCHOLASTIC |
4.8* Credit Agreement, dated December 21, 2001, between Scholastic
Australia Pty. Ltd. and Westpac Banking Corporation.
4.9 Indenture dated December 15, 1996 for 7% Notes due December 15, 2003
issued by the Company (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-17365) as
filed with the Commission on December 11, 1996).
4.10 Indenture dated January 23, 2002 for 5.75% Notes due January 15, 2007
issued by the Company (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-55238) as
filed with the Commission on February 8, 2001).
10.1** Scholastic Corporation 1992 Stock Option Plan (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 27, 1992).
10.2** Amendment No. 1 to the Scholastic Corporation 1992 Stock Option Plan,
effective as of July 18, 2001 (incorporated by reference to the
Company's Annual Report on Form 10-K as filed with the Commission on
August 24, 2001).
10.3** Scholastic Corporation 1995 Stock Option Plan, effective as of
September 21, 1995 (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 33-98186) as
filed with the Commission on October 16, 1995), together with
Amendment No. 1 to the Scholastic Corporation 1995 Stock Option Plan,
effective September 16, 1998 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q as filed with the Commission
on October 15, 1998).
10.4** Amendment No. 2 to the Scholastic Corporation 1995 Stock Option Plan,
effective as of July 18, 2001 (incorporated by reference to the
Company's Annual Report on Form 10-K as filed with the Commission on
August 24, 2001).
10.5** Form of Stock Option Agreement for Scholastic Corporation 1995 Stock
Option Plan (incorporated by reference to the Company's Annual Report
on Form 10-K as filed with the Commission on August 26, 1998).
10.6** Scholastic Corporation 1992 Outside Directors' Stock Option Plan
(incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Commission on August 27, 1992).
10.7** Scholastic Corporation Employee Stock Purchase Plan, amended and
restated effective as of March 1, 2000 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q as filed with the
Commission on April 14, 2000).
10.8** Scholastic Corporation Management Stock Purchase Plan, amended and
restated effective as of December 15, 1999 (incorporated by reference
to the Company's Quarterly Report on Form 10-Q as filed with the
Commission on January 14, 2000).
10.9** Amendment No. 1 to the Scholastic Corporation Management Stock
Purchase Plan, effective July 18, 2001 (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 24, 2001).
10.10** Scholastic Corporation 1997 Outside Director Stock Option Plan,
amended and restated as of May 25, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
10.11** Amendment No. 1 dated September 20, 2001 to the 1997 Outside
Directors' Stock Option Plan (amended and restated as of May 25, 1999)
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Commission on January 14, 2002.)
10.12** Form of Stock Option Agreement for Scholastic Corporation 1997 Outside
Director Plan (incorporated by reference to the Company's Annual
Report on Form 10-K as filed with the Commission on August 26, 1998).
10.13** Scholastic Corporation 1995 Director's Deferred Compensation Plan,
amended and restated as of May 25, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
10.14** Scholastic Corporation Executive Performance Incentive Plan, effective
as of June 1, 1999 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q as filed with the Commission on October
15, 1999).
| 57 | SCHOLASTIC |
10.15** Employment Agreement between Jean L. Feiwel and Scholastic Inc., dated
as of May 25, 2000 (incorporated by reference to the Company's Annual
Report on Form 10-K as filed with the Commission on August 25, 2000).
10.16** Description of split dollar life insurance arrangements for the
benefit of Richard Robinson and Helen Benham (incorporated by
reference to the Company's Annual Report on Form 10-K as filed with
the Commission on August 25, 2000).
10.17 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 Company's Annual Report on Form 10-K as filed with the Commission
on August 23, 1999).
10.18 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 Company's Annual Report on Form 10-K
as filed with the Commission on August 23, 1999).
10.19 Agreements with Industrial Development Agency of the City of New York
including (i) Lease Agreement dated December 1, 1993; (ii) Indenture
of Trust agreement dated December 1, 1993; (iii) Project Agreement
dated December 1, 1993; (iv) Sales Tax letter dated December 3, 1993
(each of the foregoing are incorporated by reference to the Company's
Annual Report on Form 10-K as filed with the Commission on August 26,
1994).
10.20** Scholastic Corporation 2001 Stock Incentive Plan (incorporated by
reference to Appendix A of the Company's definitive Proxy Statement as
filed with the Commission on August 24, 2001).
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on August 1, 2002, noticing a
pre-tax charge resulting from the settlement of a lawsuit, SCHOLASTIC
INC. AND SCHOLASTIC PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS
ENTERTAINMENT, INC. (Items 5 and 7).
- ----------
* Such long-term debt does not individually amount to more than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such
instrument is not filed herewith. The Company hereby agrees to furnish a copy
of any such instrument to the Commission upon request.
** The referenced exhibit is a management contract or compensation plan or
arrangement described in Item 601(b) (10) (iii) of Regulation S-K.
| 58 | SCHOLASTIC |
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 22, 2002 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 22, 2002
- ------------------------- Chief Executive Officer
Richard Robinson and Director (Principal
Executive Officer)
/s/ Kevin J. McEnery Executive Vice President and Chief August 22, 2002
- ------------------------- Financial Officer
Kevin J. McEnery (Principal Financial Officer)
/s/ Karen A. Maloney Vice President and Controller August 22, 2002
- ------------------------- (Principal Accounting Officer)
Karen A. Maloney
/s/ Rebeca M. Barrera Director August 22, 2002
- -------------------------
Rebeca M. Barrera
/s/ Helen V. Benham Corporate Vice President
- ------------------------- and Director August 22, 2002
Helen V. Benham
/s/ Ramon C. Cortines Director August 22, 2002
- -------------------------
Ramon C. Cortines
/s/ John L. Davies Director August 22, 2002
- --------------------------
John L. Davies
/s/ Charles T. Harris III Director August 22, 2002
- -------------------------
Charles T. Harris III
/s/ Andrew S. Hedden Director August 22, 2002
- -------------------------
Andrew S. Hedden
| 59 | SCHOLASTIC |
SIGNATURE TITLE DATE
/s/ Mae C. Jemison Director August 22, 2002
- -------------------------
Mae C. Jemison
/s/ Linda B. Keene Director August 22, 2002
- -------------------------
Linda B. Keene
/s/ Peter M. Mayer Director August 22, 2002
- -------------------------
Peter M. Mayer
/s/ John G. McDonald Director August 22, 2002
- -------------------------
John G. McDonald
/s/ Augustus K. Oliver Director August 22, 2002
- -------------------------
Augustus K. Oliver
/s/ Richard M. Spaulding Director August 22, 2002
- -------------------------
Richard M. Spaulding
| 60 | SCHOLASTIC |
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| 61 | SCHOLASTIC |
Scholastic Corporation
Financial Statement Schedule
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 2002
ITEM 14(D)
| 62 | SCHOLASTIC |
Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in millions)
Years Ended May 31,
BALANCE AT
BEGINNING CHARGED WRITE-OFFS BALANCE AT
2002 OF YEAR TO INCOME AND OTHER END OF YEAR
================================================================================
Reserve for royalty advances $ 43.0 $ 3.7 $ 2.1 $ 44.6
Reserve for obsolescence 64.7 22.1 31.7 55.1
Reserve for returns 63.0 156.8 158.5(1) 61.3
Allowance for doubtful accounts 70.1 68.7 76.2 62.6
================================================================================
2001
================================================================================
Reserve for royalty advances $ 38.8 $ 4.4 $ 0.2 $ 43.0
Reserve for obsolescence 41.8 51.9(2) 29.0 64.7
Reserve for returns 44.1 160.4 141.5(1) 63.0
Allowance for doubtful accounts 14.7 75.5 20.1 70.1
================================================================================
2000
================================================================================
Reserve for royalty advances $ 31.9 $ 8.1 $ 1.2 $ 38.8
Reserve for obsolescence 37.1 23.9 19.2 41.8
Reserve for returns 25.8 82.5 64.2(1) 44.1
Allowance for doubtful accounts 12.3 20.5 18.1 14.7
================================================================================
(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 | SCHOLASTIC |
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION
Scholastic Inc. New York
Scholastic Book Clubs, Inc. Missouri
Scholastic Entertainment Inc. New York
SE Distribution Inc. Delaware
Scholastic Book Services, Inc. Delaware
Scholastic UK Group Ltd. Delaware
Scholastic Ltd. England
School Book Fairs Ltd. England
Scholastic Book Clubs Ltd. England
Red House Books Ltd. England
Scholastic Educational Magazines Ltd. England
Scholastic Ireland Ltd. Ireland
Weston Woods Studios, Inc. Delaware
Georgetown Studios, Inc. Connecticut
Children's Music Library, Inc. New York
Lectorum Publications, Inc. New York
The Electronic Bookshelf, Inc. Indiana
Quality Education Data, Inc. Delaware
The Scholastic Store, Inc. New York
Scholastic Interactive Xchange, Inc. Delaware
Tom Snyder Productions, Inc. Delaware
Scholastic Distribution Services, Inc. Delaware
Soup2Nuts Inc. Delaware
Science Court Inc. Delaware
Klutz California
Sandvik Publishing Ltd. Nevada
Teacher's Friend Publications, Inc. California
Scholastic Australia Pty. Ltd. Australia
Bookshelf Publishing Australia Pty. Ltd. Australia
Troll School Book Clubs and Fairs Australia Pty. Ltd. Australia
Scholastic Australia Superannuation Pty. Ltd. Australia
Scholastic Executive Superannuation Pty. Ltd. Australia
Oldmeadow Booksellers (Aust.) Pty. Ltd. Australia
Scholastic Canada Ltd. Canada
Scholastic Productions Canada Ltd. Canada
Scholastic Bookfairs Canada Inc. Canada
Scholastic Hong Kong Limited Hong Kong
Scholastic India Private Limited India
Scholastic Mexico S.A. de C.V. Mexico
Scholastic New Zealand Ltd. New Zealand
Scholastic Argentina S.A. Argentina
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SUBSIDIARIES OF THE REGISTRANT (Continued)
JURISDICTION
GrolierIncorporated Delaware
Scholastic at Home Inc. (formerly Grolier Enterprises Inc.) Delaware
Grolier Interactive Inc. Delaware
Grolier Publishing Co., Inc. Delaware
Grolier Reading Programs Inc. Delaware
Grolier Telemarketing, Inc. Delaware
Grolier (New York) Incorporated Delaware
Orchard Books, Inc. New York
Publishers World Trade Corporation Delaware
Federated Credit Corp. Delaware
Grolier International, Inc. Delaware
Grolier Direct Marketing Pty. Ltd. Australia
Grolier International Finance Inc. (Philippines) (60% owned) Philippines
Grolier International Private Limited (India) India
Grolier (Malaysia) SDN BHD (40% owned) Malaysia
Grolier Overseas Incorporated Delaware
Grolier Limited (Canada) Canada
Caribe Grolier, Inc. Puerto Rico
Grolier Limited (U.K.) England
Grolier Credit Services (U.K.) Limited England
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Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-48655, No. 33-69058 and No. 33-91090) pertaining to the
Scholastic Corporation 401(K) Savings and Retirement Plan; Registration
Statement (Form S-8 No. 33-46338) pertaining to the 1992 Stock Option Plan;
Registration Statement (Form S-8 No. 33-50128) pertaining to the 1992 Outside
Directors' Stock Option Plan; Registration Statement (Form S-3 No. 333-17365)
pertaining to $175,000,000 of Securities; Registration Statement (Form S-8 No.
333-62297) pertaining to Scholastic Corporation 1997 Outside Directors' Stock
Option Plan; Registration Statement (Form S-8 No. 333-65757) pertaining to the
Scholastic Corporation 1995 Stock Option Plan; Registration Statement (Form S-8
No. 333-68181) pertaining to the Scholastic Corporation Employee Stock Purchase
Plan; Registration Statement (Form S-8 No. 333-68185) pertaining to the
Scholastic Corporation Management Stock Purchase Plan; Registration Statement
(Form S-8 No. 33-98186) pertaining to the Scholastic Corporation 2001 Stock
Incentive Plan; and Registration Statement (Form S-3 No. 333-55238) pertaining
to the issuance of up to $400,000,000 of Securities of our report dated July 17,
2002, except for the first paragraph of Note 13, as to which the date is July
30, 2002, with respect to the consolidated financial statements and schedule of
Scholastic Corporation included in this Annual Report (Form 10-K) for the year
ended May 31, 2002.
/s/ Ernst & Young
New York, New York
August 22, 2002
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