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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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                                    FORM 10-K

              [X]/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED MAY 31, 19961997

                                       OR

            [  ]/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                           COMMISSION FILE NO. 0-19860

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                             SCHOLASTIC CORPORATION

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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                 DELAWARE                                  13-3385513
      (STATE OR OTHER JURISDICTION OF          (IRS EMPLOYER IDENTIFICATION NO.)
      INCORPORATION OR ORGANIZATION)

     555 BROADWAY, NEW YORK, NEW YORK                         10012
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

        
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 343-6100 ------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED - - ------------------------------------------------ ------------------------------------------------ Common Stock, $.01 Par Value The NASDAQ Stock Market'sm' -- NASDAQ National Market'r'
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED -------------- ------------------------------------ Common Stock, $.01 par value The NASDAQ Stock Market(SM) NASDAQ National Market(R) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X/x/ No --- ---/ / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Voting Stock held by non-affiliates was approximately $748,797,732$436.5 million based on the average bid and asked prices of the Common Stock on the National Association of Securities Dealers, Inc., Automated Quotations -- National Market System on July 31, 1996.1997. On June 28, 1996,30, 1997, 828,100 shares of Class A Stock, par value $.01, and 15,048,54015,370,032 shares of Common Stock, par value $.01, were outstanding exclusive of treasury shares. The Class A Stock is convertible at the option of the holders into shares of Common Stock at any time on a share-for-share basis. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held September 17, 1996. ________________________________________________________________________________ 16, 1997. ================================================================================ PART I ITEM I. BUSINESS Scholastic Corporation, together with its subsidiaries and affiliates (collectively hereinafter referred to as 'Scholastic'"Scholastic" or the 'Company'"Company"), is among the leading publishers and distributors of children's books, classroom and professional magazines and other educational materials, with its principal operations in the United States, Canada, the United Kingdom, Australia, New Zealand France and Mexico. Scholastic distributes most of its products directly to children and teachers in elementary and secondary schools. During its seventy-sixseventy-seven years of serving schools, Scholastic has developed strong name recognition associated with quality and dedication to learning and has achieved a leading market position in the school-based distribution of children's books and magazines. The Company's domestic book publishing business consists primarily of the publication and distribution of children's books in paperback editions through school book clubs, school book fairs, trade distribution in retail stores and classroom and library sales. Based on its market research, competitive intelligence and information obtained through the conduct of its business, the Company believes that it operates the largest school book club program and the largest school book fair businessbusinesses in the United States.States, Canada, Australia, the United Kingdom and New Zealand. In fiscal 1996,1997, Scholastic sold in excess of 200 million children's books in the United States. The Company's book publishing operations also include the publication of supplementary texts for classroom use as well as professional books and other materials sold to classroom teachers. Additionally, the Company has entered the market for core-curriculumcore curriculum materials and has been investinginvested heavily in this area as a source of future growth in sales and profits. Scholastic's domestic magazine publishing business consists primarily of the publication of classroom magazines distributed to children in school, professional magazines directed to teachers and other education professionals and two consumer magazines. In fiscal 1996,1997, the United States circulation of the Company's classroom magazines was 7.17.5 million. The Company's other domestic operations include the production and distribution of educational computer software, the production and distribution of child and family-orientedchildren's video and television programming, and the merchandising and licensing of successful book properties. The Company's School Group, formed in June 1997, manages the development and distribution of substantially all Scholastic's school material designed for curriculum use and paid for with school funds. The School Group encompasses the Company's instructional publishing, classroom and professional magazines (excluding two consumer magazines), early childhood and professional books divisions, as well as the Company's sales of supplementary materials to classrooms and libraries. Most of the Company's domestic revenues are generated by targeted direct mail programs to schools and by telephone sales representatives. Additionally, the Company has a school sales force of full-time and part-time representatives calling on schools to sell its supplementary texts, educational software, magazines and library book programs, and its newly developed core-curriculumcore curriculum materials. For trade distribution, the Company has a retail sales force calling on bookstores and other retail outlets that include the sale of children's books. The Company's international business consists of six operating subsidiaries, four of which publish and distribute children's books, magazines, supplementary text products and educational software and two of which serve primarily as distributors ofdistribute through schools children's books published by Scholastic as well as outside publishers. For the year ended May 31, 1996,1997, approximately 80%90% of international revenues were derived from the sale of children's books. The following table sets forth revenues by product line for the five fiscal years ended May 31:
1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------------ ---- ---- ---- ---- (AMOUNTS IN THOUSANDS)MILLIONS) Domestic Domestic Book publishing................................. $657,511 $516,827 $428,283 $361,282 $305,896publishing........................... $646.0 $657.5 $516.8 $428.3 $361.3 Magazine publishing............................. 81,595 84,027 72,964 66,661 64,037 Video and New Media............................. 39,795 19,491 17,998 17,550 15,762 International........................................ 149,698 129,546 112,345 106,784 103,650 -------- -------- -------- -------- -------- Total...................................... $928,599 $749,891 $631,590 $552,277 $489,345 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------publishing ...................... 81.3 81.6 84.0 73.0 66.7 Media, TV/movie productions & licensing 60.2 39.8 19.5 18.0 17.5 International............................... 178.8 149.7 129.6 112.3 106.8 ------ ------ ------ ------ ------ Total................................... $966.3 $928.6 $749.9 $631.6 $552.3 ====== ====== ====== ====== ======
Scholastic's revenues have grown at an average annual compounded rate (the 'compounded"compounded growth rate'rate") of approximately 17%15% from fiscal 19921993 through fiscal 1996. This growth was driven primarily by1997. 1 Scholastic's domestic book publishing revenues which have yielded a compounded growth rate of approximately 21%. DOMESTIC BOOK PUBLISHING (71%(67% OF REVENUES) CHILDREN'S BOOK PUBLISHING The Company has published books since 1948 and is one of the largest English language publishers of children's books. The majority of children's books sold by the Company are distributed in the United States and internationally directly to children and teachers through its school-based clubs and book fairs. The Company has created and maintained a long-standing franchise in the educational market and in addition, has significantly expanded itsis one of the leading sellers of children's books through the trade presence in recent years. As a result, Scholastic's domesticchannel. Domestic book publishing revenues have more thannearly doubled from fiscal 19921993 through fiscal 1996.1996 before declining 2% in fiscal 1997, primarily due to lower trade and club sales. The Company offers a broad range of quality children's literature. Many of the books offered by the Company have received awards for excellence in children's literature, including the Caldecott and the Newbery awards. The Company obtains titles for sale in its distribution channels from three principal sources. First, the Company publishes paperback and/or hardcover editions of books written by outside authors under exclusive publication agreements with the Company or written by the Company's editorial staff. Scholastic generally owns rights to sell these original titles in all channels of distribution including school and trade. The second source for titles consists of paperback reprints of books originally published by other publishers for which the Company acquires rights under license agreements to sell exclusively in the school market. The third source for titles is from the Company's purchase of finished books from other publishers to be sold in the school market. The Company currently maintains a backlist (a list of titles published as new titles in prior years) of over 5,000 titles. All of the Company's books are manufactured by independentoutside printers. The printers are generally are selected on a basis of competitive bidding, and the Company, when it deems it to be appropriate, enters into multi-year agreements which guarantee printers a certain percentage of Scholastic volume in exchange for favorable pricing terms. Scholastic purchases its paper from paper manufacturers, wholesalers, distributors and printers. The Company distributes its children's books principally through four distribution channels: school book clubs, school book fairs, sales to classrooms and libraries and trade distribution to retail bookstores.book stores. In the school market, the Company distributes books directly to teachers and students through school book clubs (including continuity programs) and school book fairs. The Company believes that it is the largest operator of school book clubs and school book fairs in the United States. The Company also distributes books to the school market through sales to classrooms and libraries. The fourth distribution channel is sales to the trade market. The Company's trade channel has grown significantly in recent years, with sales in fiscal 1996 up in excess of 60% over fiscal 1995 and more than double the fiscal 1994 level. By utilizing these distribution channels and distributing its products internationally, the Company's volumes permit it to realize economies in book production and distribution. The Company believes its multiple distribution channels and volumesvolume help attract top quality authors, editors, illustrators and publishers seeking widespread distribution in both the specialized school market and the trade market. In September 1996, the Company acquired Lectorum Publications, Inc., the largest distributor in the U.S. of Spanish language books to schools and libraries. BOOK CLUBS In fiscal 1996,1997, the Company operated ten school-basedschool based book clubs: Firefly'r'FIREFLY(R), serving pre-kindergarten and kindergarten students; SeeSaw'r'SEESAW(R), serving kindergarten and first grade students ('K-1' grades);students; two Carnival'r'CARNIVAL(R) clubs, one serving students in kindergarten through second grade and the other serving third through sixth grade students; Lucky Book Club'r'LUCKY BOOK CLUB(R), serving second and third grade students; Arrow Book Club'r'ARROW BOOK CLUB(R), serving fourth through sixth grade students andstudents; TAB Book Club'r'BOOK CLUB(R), serving sixth, seventh, and eighth grade students. As of January 23,students; and thRee TRUMPET(R) clubs, which were acquired from Bantam Doubleday Dell in 1996 the Company acquired and began running three Trumpet clubs, which together serve pre-K through sixth grade students. InIN addition, the Company creates special theme basedtheme-based offers targeted to the different grade levels during the year, e.g. --such as holiday offers, science offers, curriculum offers, Spanish offers etc. The Company also operates Fun-Tastic-At-Home!FUN-TASTIC-AT-HOME!, The Baby-sitters Collector Club,THE BABY-SITTERS COLLECTOR CLUB, and The Baby-sitters Little Sister Friendship Club, 2 ThrillsTHE BABY-SITTERS LITTLE SISTER FRIENDSHIP CLUB, THRILLS & Chills, Clifford's Learning Library, Hello Reader, Box Car, Thriller, The Magic School BusCHILLS(R), CLIFFORD'S LEARNING LIBRARY, HELLO READER(R), BOX CAR, THRILLER, THE MAGIC SCHOOL BUS(R), ARTHUR'S ADVENTURE and Laugh Attack,FRANKLIN & FRIENDS, which are book club continuity programs promoted primarily through schools, which deliver paperback books to children at home and bill parents at home. From fiscal 1993 through fiscal 1996 domestic book club revenues grew primarily as a result of the expansion of book club continuity programs, volume increases in the Company's school-based book clubs, the purchase of additional clubs, increases in special book club offers, and to a lesser degree, because of 2 inflation-related price increases and the selection by children of higher priced items. In fiscal 1997, a decrease in domestic book club revenues due to fewer orders and lower revenue per order was only partially offset by revenues resulting from the January 1996 acquisition of the TRUMPET book clubs. The Company founded its first book club in 1948 and believes that it currently operates the largest school book club program in the United States. The Company estimates that over 80% of all elementary school teachers in the United States participate in book clubs, with more thanapproximately 75% of these teachers using Scholastic book clubs sometimeat least once during the year. Domestic book club revenues have grown in recent years, primarily as a result of the expansion of book club continuity programs, volume increases in its school-based book clubs, the purchase of additional clubs, increases in special book club offers, and to a lesser degree, because of inflation-related price increases and the selection by children of higher-priced items. The Company believes that teachers participate in school book clubs because they feel that quality books at affordable prices will be of interest to students and improve students' reading skills. The Company also believes teachers are attracted because the book clubs offer easy access to a broad range of books. The Company mails promotional pieces containing order forms to teachers in the vast majority of the pre-K through eighth grade classrooms in the United States on a monthly basis throughout the school year. Participation in any month does not create an obligation to participate in any subsequent month, nor does it preclude participation in a competitor's book club. Teachers who wish to participate in a book club distribute the order forms to their students, who may choose from approximately 40 to 50 selections at substantial reductions from retail prices. The teacher consolidates the students' orders and payments and mails or phones themorders to the Company, which then delivers the books to the teacher for distribution to the students. Teachers who participate in the book clubs may accumulate credits for the purchase of additional books and other items primarily for use in their classrooms. The sources of books for the Company's school book clubs are original publications, reprints licensed from other publishers for school distribution original publications and finished books purchased from other publishers. The Company generally re-offers titles from its backlist through the book clubs every two or three years. The Company processes and fulfills most orders for its book clubs, as well as for its other school sales (except book fairs) and trade distribution, from its warehouse and distribution facilityfacilities in Jefferson City, Missouri.Missouri and Des Plaines, Illinois. Orders for the book clubs are shipped to customers by Roadway Package System, U.S. Mail and United Parcel Service and U.S. Mail and generally are delivered within 1410-14 days from whenthe time the teacher places the order in the mail. The Jefferson City facility has an automated inventory picking and order processing system which allows the Company to provide a high level of customer service and timely delivery to its customers. Customer service representatives are also available to handle customer inquiries, expedite shipments and expedite shipments.handle phone orders. In its book club business, the Company competes on the basis of book selection, price, promotion and customer service. The Company believes that its broad selection of titles, many of which are distributed in this channel exclusively by Scholastic, combined with low unit manufacturing costs and its large number of promotion mailings, enable the Company to compete effectively. BOOK FAIRS The Company believes it operates the largest school book fair business in the United States. The Company entered the book fair business in 1981 through an acquisition in California. In 1983, the Company became a national book fair operator as a result of its acquisition of Great American Book Fairs'r'Fairs(R). Since that time, the Company has grown itsCompany's book fair business has grown primarily through geographic expansion, selected acquisitions and increased penetration of its existing markets. The Company operates book fairs in all 50 states under the name Scholastic Book Fairs.SCHOLASTIC BOOK FAIRS(R). The sources of books for the Company's book fairs are finished books purchased from other publishers, reprints licensed from other publishers for school distribution and original publications. Book fairs are generally one week-long events conducted on school premises and sponsored by school librarians and/or parent-teacher organizations. Book fair events expose children to hundreds of 3 new books and allow children the opportunity to purchase books of their choice. Although the Company provides the school with the books and book display cases, the school actually conducts the book fair. The Company believes that the primary motivation of the schools is to provide their students with quality books at reasonable prices in order to help them become more interested in reading. In addition, the schools retainschool retains a portion of book fair sale proceedsrevenues to be used to purchase books, supplies and equipment for the school. 3 In fiscal 1994, the Company launched a new class of fairs called Scholastic Books on Tour'r'SCHOLASTIC BOOKS ON TOUR(R). This program features an expanded list of titles supported by exciting merchandise displays and book character costumes designed to create a dynamic Book Fair event open to the entire family. Over two-thirds of all titles offered in the Company's book fairs are licensed reprints or are purchased directly from other publishers. The Company operates its book fairs in the United States on a regional basis through 15over 20 sales offices and 73over 70 warehouse locations. The marketing of book fairs is performed from the sales offices by telephone sales representatives. The Company's books and display cases are delivered to schools from the Company's warehouses by a fleet of leased vehicles. The Company's customer service function is performed from the regional and branch offices, supported by field service representatives. The Company believes that its competitive advantages in the book fair business includes the strength of the relationship between its sales representatives and schools, broad geographic coverage, a high level of customer service and breadth of product selection. Approximately 90% of the schools that sponsored a Scholastic Book Fair in fiscal 19951996 sponsored a Scholastic Book Fair again in fiscal 1996.1997. TRADE The Company distributes its original publications through the trade distribution channel. Almost all of the titles distributed to the trade market are also offered in the Company's school book clubs and book fairs. In the Company's publishing program, over 2,000 titles are maintained for trade distribution, including the popular Goosebumps'r'GOOSEBUMPS(R), The Baby-sitters Club'r'ANIMORPHS(TM), The Magic School Bus'r'THE BABY-SITTERS CLUB(R), THE MAGIC SCHOOL BUS(R) and Clifford The Big Red Dog'r'CLIFFORD THE BIG RED DOG(R) series. The Company believes that its increased presence in the trade market is important inIN attracting outside authors for publication and complements the Company's school-based book distribution businesses.business. The Company has a field sales organization which focuses on selling the broad range of Scholastic books to book store accounts. Penguin USA performs invoicing, billing, returns processing and collectionscollecting for Scholastic in connection with trade distribution. The Company's sales in the trade market arehave been led by the highly successful Goosebumps'r'GOOSEBUMPS series, with 68103 titles and 150approximately 200 million copies in print, and The Baby-sitters Club'r'THE BABY-SITTERS CLUB, series, with 245279 titles published and 149approximately 155 million copies in print. Another Scholastic-developed property that also generates significant sales is The Magic School Bus'r'THE MAGIC SCHOOL BUS, series, with 2333 titles published and 2429 million copies in print. Two new series, ANIMORPHS and DEAR AMERICA(TM), are building quickly with ten and five published titleS, respectively. Series such as I Spy'tm'SPY(TM), Clifford The Big Red Dog'r'CLIFFORD THE BIG RED DOG and Hello Reader'r'HELLO READER(R) continue to anchor the successful Cartwheel Books'r'CARTWHEEL BOOKS(R), imprint. LITTLE BILL(TM), a new young reader series written by Bill Cosby, will be distributed in the fall of 1997. The Scholastic Children's Dictionary is beingSCHOLASTIC CHILDREN'S DICTIONARY was published in the Summersummer of 1996 and willimmediately became a best seller, greatly enhanceenhancing the reference line which already includes successful series such as First Discoveryline. THE BLUE SKY PRESS and Voyages of Discovery. The Blue Sky Press'r' and Scholastic Press'r'SCHOLASTIC PRESS imprints have attracted some of the best talents in children's publishing, including Eve Bunting, Leo and Diane Dillon, Virginia Hamilton, Barry Moser, Walter Dean Myers, Dav Pilkey, Cynthia Rylant, Mark Teague Nancy Willard and Ed Young.Audrey Wood. CLASSROOM AND LIBRARY SALES Many elementary school teachers use paperback books in conjunction with basal textbooks to teach reading and other subjects. In addition to offering book clubs and book fairs, Scholastic serves this need by offering individual titles and collections of paperback books for classrooms and school libraries. In fiscal 1996,1997, approximately two-thirds of the school districts in the United States ordered books and collections from the Company. The majority of the titles sold directly to school classrooms and libraries are the same as those offered through the Company's book clubs and book fairs. 4 The purchase of individual titles and book collections are generally funded by school budgets. Classrooms and libraries may order directly through catalogs mailed to the schools and through the Company's school group sales force. Processing and fulfillment of these orders are handled in the Jefferson City distribution center. INSTRUCTIONAL PUBLISHING The Instructional Publishing group develops and distributes instructional materials (both supplemental and core-curriculumcore curriculum programs) directly to schools in addition to managing classroom and library sales of children's books through the Company's school sales force.schools. Based on industry research, the Company believes that the K-6kindergarten through sixth grade ("K-6") market for instuctionalinstructional material in suchthe areas asof language arts math,and science social studies, health, etc. is in excess of $2.0approximately $1.0 billion annually. 4 Publishing for the K-6 market is being affected by a number of factors includingwhich include the shift toward skill-based instruction balanced with the philosophy of literature-based instruction (the teaching of reading and other subjects utilizing whole books such as trade or paperback books) and the increasing role of teachers in selecting materials for use in the classroom. Additionally, there is increasing flexibility in 'adoption'"adoption" states, where state boards approve or 'list'"list" instructional materials that local school boards, individual schools and teachers can purchase. In these states, the state boards are listing a greater number of instructional materials, thereby giving the local school boards, individual schools and teachers a wider range of instructional materials from which to select. The Company believes that these changes provide an opportunity to substantially expand its presence in the instructional materials market. To capitalize on this opportunity, the Company's strategies are the following: focus its publishing in language arts and science where the Company has successful book and magazine publishing programs; publish multimedia programs which provide schools with innovative alternatives to programs offered by other publishers; concentrate its publishing in the K-6 grade market, which is the largest part of the market; focus its publishing in language arts and science where the Company has successful book and magazine publishing programs; use existing books and magazines from other Scholastic publishing groups; and cross-market its new programs to the more than one million teachers who currently participate in Scholastic's book clubs and use its magazines. To implement these strategies, the Company has expanded its marketing and editorial staff and is investing in training and expanding its school sales force. Pursuant to this strategy, the Company completed the publication of Scholastic Literacy Place'r'published SCHOLASTIC LITERACY PLACE(R), its K-6 market reading program, and Solares'tm'SCHOLASTIC SOLARES(TM), aits Spanish elementary reading program. In fiscal 1997, SCHOLASTIC LITERACY PLACE was adopted by a number of major schoOl districts including the U.S. Department of Defense, San Francisco, CA., San Bernadino, CA., Atlanta, GA., Tampa, FL. and Milwaukee, WI. The Company, through its sales of SCHOLASTIC LITERACY PLACE and SCHOLASTIC SOLARES, is pleased withamong the market reaction to Scholastic Literacy Place'r', especiallyleading suppliers in Florida and certain midwestern states. The program is also being submitted for adoption inthe California the single largest adoption market, and several other states. The Company is confident the program meets the curriculum requirements for California and those other states.reading market. In fiscal 1996,1997, the Company also completed publication of SCHOLASTIC SPELLING(TM), a revision and update ofK-6 spelling program, which was submitted In Texas for its popular K-6 grade science program, Scholastic Science Place'r'. Sales of Scholastic Science Place in Kentucky, Alabama and other states were strong.upcoming spelling adoption. The Company expects continued success in open terrritory states withthat the updated program as it plans the publicationmarket shift to skill-based instruction will help sales of the second edition of Scholastic Science Place.SCHOLASTIC SPELLING beyond Texas. The Company expanded Wiggleworks'r'launched a series of phonics products in fiscal 1997. Over 4.5 million phonics readers were sold to teachers and parents through the Book Clubs. The PHONEMIC AWARENESS KIT, PHONICS CHAPTER BOOKS and PHONICS WORKBOOKS were also published to meet the growing demand for phonics instruction. In fiscal 1997, the Company introduced network versions of Wiggleworks(R), its standard-setting CD-ROM basedCD-ROM-based beginning literacy program, to include a Windows'r' version, in addition to theliteracY program. Demand remains strong for this popular Macintosh-based product. Also, a network version will be ready for shipment in fiscal 1997.technology. The Early Childhood publishingPublishing division's The Early Childhood Workshop'tm'SCHOLASTIC EARLY CHILDHOOD WORKSHOP(TM), a pre-kindergarten and kindergarten core-curriculumcoRe curriculum program, was successfully sold in Texas, primarily in the Company's first quarter of fiscal 1996, garnering approximately two-thirds of the market. The total spending on prepublication costs relating to these core-curriculum programs in early childhood, reading, language arts, science, technology and math has been approximately $100.0 million from fiscal 1991 to fiscal 1996. In the fourth quarter of fiscal 1996, the Company recorded a charge for programs that did not meet market needs or are being deemphasized. This charge consisted of the unamortized prepublication and inventory costs of the Company's K-2 math program and several older supplemental instructional programs. 5 MAGAZINE PUBLISHING (9%(8% OF REVENUES) GENERAL Scholastic complements its school-based book publishing business with the publication of classroom magazines, which are used as supplementary educational materials, and professional magazines, directed at teachers and education professionals. Most of the Company's classroom and professional magazines carry the Scholastic name, which reinforces the Company's widely recognized educational reputation with students, teachers and school administrators. The Company's reputation for publishing quality magazines, maintaining an extensive magazine mailing list and having a large customer base of teachers helpshelp generate customers for its book clubs and other Scholastic products as well as its magazines. At the same time, the Company uses its book club mailings to help secure additional circulation for its classroom and professional magazines. The Company also publishesis exploring the possible sale of its Small Office, Home Office ("SOHO") group, which includes two consumer magazines for small business and home office professionals and a magazine for parents of children in pre-K and Kindergarten classes.professionals. CLASSROOM MAGAZINES The Company's 3435 classroom magazines are designed to encourage students to read and to supplement the formal learning program by bringing subjects of current interest into the classroom. The subjects covered include English, reading, literature, math, science, current events, social studies and foreign languages. The most well known of the Company's U.S.domestic magazines are Scholastic News'r'SCHOLASTIC NEWS(R) and Junior Scholastic'r'JUNIOR SCHOLASTIC(R). 5 The Company's classroom magazine circulation in the United States for fiscal 1997 and 1996 was 7.5 and 7.1 million.million, respectively. Approximately two-thirds of the circulation is in the K-6, grades, with the balance in grades seven through twelve. In fiscal 1996,1997, teachers in approximately 60% of the elementary schools and 70% of the high schools in the United States used the Company's classroom magazines. The various classroom magazines are distributed on a weekly, bi-weekly orand monthly basis during the school year. A majority of circulation revenue is paid for by the schools and the remainder by students. Circulation revenue accounted for approximately two-thirds of the Company's classroom magazine revenues in fiscal 1996.1997. Several of the magazines distributed in secondary schools carry advertising. The Company markets its classroom magazines largely by direct mail and telephone sales representatives and field sales representatives. The Company maintains an extensive database of teachers and schools which it utilizes for promotional efforts. The order processing for classroom magazines is conducted at the Company's Jefferson City facility. Additionally, the Company develops and distributes customized marketing programs sponsored by major corporations, government agencies and other organizations which want to reach young people and educators. Customized programs may include single-sponsor magazines, posters, teaching guides, integrated teaching kits, educational videos and other promotional media. In fiscal 1996, the Companymedia and are developed programsprincipally for the United States Department of Agriculture, Discover Card Services, Inc., Fuji Photo Film USA, NYNEX Corporation, the Michael Jordan Foundation, Paramount Pictures Inc.Fortune 500 corporations and AT&T.governmental agencies. PROFESSIONAL PUBLISHING AND EARLY CHILDHOOD PUBLISHING The Company publishes fourthree magazines directed at teachers and educational professionals: Instructor'tm', Early Childhood Today'tm', Electronic Learning'r'INSTRUCTOR, SCHOLASTIC EARLY CHILDHOOD TODAY and Scholastic Coach.COACH AND ATHLETIC DIRECTOR(TM). Total circulation for these magazines in fiscal 19961997 was in excess of 400,000.300,000. The magazines are distributed throughout the academic year. Subscriptions are solicited by direct mail to teachers and subscriptions are cross-marketed to teachers through the book clubs. The Company also publishes Scholastic Parent and Child 'r'SCHOLASTIC PARENT AND CHILD(R) magazine, which is directed at parents and distributed through schools and day care programs. Scholastic Parent and Child'sPARENT AND CHILD's circulation is approximately 1.01.1 million. The magazines carry outside advertising, advertising for the Company's other products and advertising for clients that sponsor customized programs. Sponsors include Microsoft Corp., Apple Computer, Viacom International Inc., General Mills, Inc., Disney and the Chrysler Corporation. In fiscal 1996,1997, advertising revenue represented the majority of the professional publishing and early childhood magazine revenues. 6 The professional publishing division also publishes professional books and continuity programs consisting of instructional materials designed for and generally purchased by teachers. Professional books are marketed through Scholastic book clubs, catalogs, direct mail solicitations and by the Company's trade sales force to teacher stores and book stores. The early childhood division also publishes children's books and a pre-Kpre-kindergarten and kindergarten curriculum program, The Early Childhood Workshop. In fiscal 1996, sales of The Early Childhood Workshop represented approximately two-thirds of the market share in the Texas state adoption, producing revenues of approximately $20.0 million.SCHOLASTIC EARLY CHILDHOOD WORKSHOP. Revenues from these items are included in domestic book publishing revenues. SCHOLASTIC SOHO GROUP In 1983, the Company introducedThe SOHO Group is comprised of four complementary businesses: HOME OFFICE COMPUTING(R), now in its 14th year, a national consumermonthly magazine now calledtargeted at technology reliant home-office professionals; SMALL BUSINESS COMPUTING(TM), Home Office Computing'r'. In its 13th year, Home Office Computing is a leading magazineComputing's sister publication launched in 1996, targeted at professionals in small business; SOHO Publishing, which produces specialized newsletters, principally for technology reliant home office professionals. In recognition of the magazine's rapidly expanding franchise as the leading publisher for the small officeFortune 100 companies and home office ('SOHO') market, the Company reorganized this business as the SOHO group.Smalloffice.com, an advertising supported web site. In fiscal 1996, the group launched a sister publication entitled Small Business Computing'tm'. This new offering, combined with the growth of custom publishing, is expected to result in higher revenues for the SOHO group in fiscal 1997. With combined circulation of 560,000, both magazines attract companies such as America Online, Epson, IBM, Microsoft Corp. and Hewlett Packard, among others, as its principal advertisers. In fiscal 1996,1997, the SOHO group carried 890approximately 950 pages of advertising. The group also provides specialized newsletters and books. It also has a presence on America Online and the World Wide Web and sells sponsorships for both sites. VIDEO AND NEW MEDIA, (4%TV/MOVIE PRODUCTIONS & LICENSING (6% OF REVENUES) FILMED ENTERTAINMENT AND ENTERTAINMENT/MARKETING AND CONSUMER PRODUCTS Scholastic Productions, Inc. ('SPI'("SPI"), a wholly-owned subsidiary of the Company, extends the Company's franchises worldwide by developing and producing quality children's programming for distribution in multimedia formats. In addition, SPI licenses and develops products originated by third parties. SPI orchestrates consumer marketing campaigns and manages the licensing of consumer products and promotionscreates and develops global branding campaigns for each franchise. SPI is also responsible for the selection of video cassettes sold through the book clubs and for sales of books and other products through non-traditional channels.major Scholastic properties. In fiscal 1996,1997, the SPI-produced The Magic School Bus'tm' ('MSB'Scholastic's THE MAGIC SCHOOL BUS(R) ("MSB") television series aired its secondthird season, and moved from a weekly program to a daily series airing Monday through Friday and Sunday on PBS and completed production of an additional 13 episodes for the third season.PBS. Thirteen additional episodes will be producedcommenced production in fiscal 1997 to be completed in fiscal 1998, bringing the series total number of episodes to 52. The series will air daily in fall 1996. MSB, which has won 6 numerous awards including an Emmy for Lily Tomlin, is the most popular series for school-aged children on PBS.PBS and will start its fourth season in the fall of 1997. In November 1995, SPI launched theScholastic's Traveling Magic School Bus, an actuala recreation of the bus from the book and animated series, which through April 1996May 1997 has traveled around the country visitingvisited over 50100 schools, libraries, retail stores and book fairs in the U.S., reaching nearly 250,000over 600,000 fans. In addition to the continuation of the domesticworldwide marketing and consumer products programprograms for MSB managed by SPI, initiated an international licensing program during fiscal 1996 in conjunction with independent licensing agents in the United Kingdom, Italy, Germany and France. The series' television rights to MSB continue to be licensed internationally by Nelvana Ltd. and the home video rights to certain international territories have been licensed in all major international territories by Nelvana Ltd., Scholastic's international distributor.to Twentieth Century Fox Home Video. Domestically, Warner Home Video has successfully continued to release thereleased a total of 14 episodes of the first two seasons domestically on video cassette. SPI co-produced its third and fourthMicrosoft introduced the fifth and sixth titles, "Dinosaurs" and "Rain Forest" in athe award-winning series of MSB CD-ROM's co-produced with Microsoft Corporation on Oceans and Geology.Microsoft. "MSB Explores the Rain Forest" received the 1997 Kids First! Seal of Approval. All MSB CD-ROM'sof the MSB-CD ROM's are in the top 20 best-selling titles for children. In October 1995,During fiscal 1997, SPI continued to produce the SPI-produced Goosebumps'r'GOOSEBUMPS(R) TV series premiered with a one-hour special on thefor Fox Children's Network ('FCN'("FCN"). with the completion of the second season order of 17 one-half hour episodes and five one hour specials. FCN has ordered an additional 24 episodes for the third season of the series which officially commences in the fall of 1997. This will bring the total number of episodes to 54 and the total number of specials to six. The first 13 episodes of Goosebumpsseries will be aired this fiscal year and wasweekday afternoons in addition to Saturday mornings. GOOSEBUMPS continues to be rated the #1 children's series on television. The inaugural video cassette released byIn addition, during the fiscal year, Fox Home Video in March 1996,released three more GOOSEBUMPS(R) videos. The first release, "The Haunted Mask," continues to hold the premiere one-hour prime time special, 'The Haunted Mask', was onrecord for the listmost successful video release of top-selling videos when initially released. An additional 17 episodes and four one hour specials have been ordered by FCN; two of the specials aired in fiscal 1996, with the balance to air during the 1996/1997 broadcast year.a TV show. The successpopularity of the TV series hasshow helped to launch a veryand sustain the successful Goosebumpsworldwide marketing and consumer products program. There are currently 33 Goosebumpsover 35 domestic GOOSEBUMPS licensees producing 7 over 1,000 different products. In addition, during fiscalSPI received the 1996 Reggie Award for its GOOSEBUMPS Halloween Promotion with Pepsi, Frito-Lay, Hershey, Taco Bell and Target retail stores. Additionally, in June 1997, SPI was able to secure major domestic promotional campaigns with General Millsawarded the prestigious 1997 LIMA (Licensing Industry Merchandisers' Association) award for "Licensing Agency of the Year" and Kraft. Major domestic consumer promotions planned for fiscal 1997 include four divisionsGOOSEBUMPS was named "License of PepsiCo (Taco Bell, Frito Lay, Pepsi and Pizza Hut), as well as the Hershey Corporation. Saban International, on behalf of FCN, is currently licensing Goosebumps TV rights internationally.Year". During fiscal 1997, Goosebumps marketing andlicensing of consumer products programs will launch internationallyand promotions were launched in Australia, New Zealand, the United Kingdom Germany and Canada.Canada with roll-outs commencing throughout Europe. Also during fiscal 1997, Saban International, the international distributor of GOOSEBUMPS, licensed the series in all major territories; it is currently airing in Australia, New Zealand, Spain and Portugal with most of the remaining European territories launching in the fall of 1997. SPI co-produced the first in a series of CD-ROM's with Dreamworks SKG, "Escape from Horrorland." Released during the 1996 holiday season, it became an instant success, reaching #1 on the best-seller list. The first Goosebumpssecond CD-ROM, "Attack of the Mutant," is expected to be released by DreamWorks SKG, in conjunction with their partner Microsoft Corporation,the fall of 1997. SPI has received an order from the popular children's basic cable television channel, Nickelodeon, for 13 one-half hour live-action episodes of ANIMORPHS(TM), based on Scholastic's new best-selling book series. These episodes will be substantially produced during fiscal 1997.1998 for a series launch in the fall of 1998. Nickelodeon has licensed the U.S. and international TV rights; SPI has retained the worldwide home video and other ancillary distribution rights. SPI is developing its domestic and international branding and consumer products campaigns in coordination with the development and launch of the TV series. Other Scholastic franchises in development for potential multimedia exploitation in multiple media platforms include Animorphs'tm', one of the Company's new children's book series.CLIFFORD and DEAR AMERICA. SPI also has a variety of original children's and family oriented projects in development as the basis of future programming opportunities. Duringopportunities and has licensed media and other rights to properties not originally published by Scholastic. SPECIAL MARKETS In fiscal 1996, SPI-produced properties, including1997, SPI's Special Markets group launched a new line of high quality plush toys, SIDEKICKS(TM), based on book-based company franchises. The Magic School Bus and Goosebumps TV series episodes, as well as the feature films Indianfirst products, which were introduced in the Cupboardspring of 1997, are available through independent toy/gift stores, specialty chains, department stores, mail order catalogs, book stores and The Baby-sitters Club, generated strong video cassette sales through Scholastic's Book Clubs. Book salesproprietary channels (i.e. book clubs and book fairs). The initial product line was based on CLIFFORD THE BIG RED DOG and CLIFFORD THE SMALL RED PUPPY(R). SPI also manages the sale of books and other items through non-traditional channels increased as a result of strong merchandising placement for the Company's franchises in retail accounts as well as promotional premium book opportunities working cooperatively with SPI's marketing group.channels. These book revenues are included in domestic book publishing revenues. 7 TECHNOLOGY AND NEW MEDIA In fiscal 1994, the Company created a technology and new media division. The mission of thisthe Technology and New Media division is threefold: (1) publish and sell educational software and multimedia products to schools and homes; (2) support other Scholastic divisions' technology efforts (including the creation and integration of technology components integrated into the Instructional Publishinginstructional publishing group's core-curriculumcore curriculum materials); and (3) explore and develop opportunities in telecommunications and interactive networks, including the Scholastic Network'tm'SCHOLASTIC NETWORK(TM), which is available to educators via America Online and the Internet, as well as Internet-based applications for delivery of Scholastic products and services. The Company has published educational computer software since 1982, which is sold to schools by sales representatives, catalog and other direct marketing methods and educational distributors serving the school market. The Company also sells consumer software through book clubs, and since 1991, has also sold software through a classroom software club modeled afteron its classroom book clubs. In fiscal 1997, the Company will launchlaunched a second software club aimed at younger children. The Company acquires software for distribution in all of these channels through a combination of licensing, internal development, contracting with independent software developers and third-party distribution arrangements. In fiscal 1994, the Company launched through a special arrangement with America Online, the Scholastic Network'tm',SCHOLASTIC NETWORK, the first online service developed especially for educators and students.students, which moved to the Internet in fiscal 1997. It offers teachers supporting material and compelling in-class experiences for the kindergarten through twelftheighth grade market and will be available on the Internet in fiscal 1997. Also in fiscal 1994, themarket. The Company initiated a corporate presence on the Internet with ahas operated its home page on the World Wide Web. Scholastic.comWeb since 1994. This site, SCHOLASTIC.COM, provides users of the World Wide Web with an overview of the Company's activities, resource libraries for educators, an education store and special programming tied to Scholastic Network'sSCHOLASTIC NETWORK'S content. In fiscal 1997, the Scholastic Network'tm' will be part of Scholastic.com asThe SCHOLASTIC NETWORK is featured on SCHOLASTIC.COM and is a paid service. Scholastic increasedIn fiscal 1998, the Company will initiate sales of its video presenceinternally developed CD-ROM titles in the retail channel through a new distribution arrangement with CUC Software. This distribution will complement sales through the acquisition in fiscal 1996 ofCompany's book clubs, software clubs and school fairs. The Company also produces and markets videos to the school market through Weston Woods, Studios, Inc., a producer of award-winning videos of animated versions ofbased on higher quality children's books.books, which was acquired in 1996. Revenues from video and new media groupMedia, TV/Movie Production & Licensing in the aggregate have historically been less than 5% of the Company's revenues and profitability has been marginal.marginal, although, fiscal 1997 was highly profitable due to the large amount of GOOSEBUMPS licensing revenue. The Scholastic Network'tm'SCHOLASTIC NETWORK has generated a loss since its launch in fiscal 1994. INTERNATIONAL (16%(19% OF REVENUES) Scholastic conducts its international operations through six wholly-owned subsidiaries located in Canada, Australia, the United Kingdom, New Zealand, FranceMexico and Mexico.India. The operations in FranceCompany's Canada, Australia, the United Kingdom, and Mexico are tests of school-based distribution in these countries while the Company's other 8 New Zealand subsidiaries publish and distribute children's books, magazines, supplementaryschool text productsmaterials, and educational software. The Company's subsidiary in Mexico primarily distributes children's books through schools. In fiscal 1996, approximately 80%1997, the Company established a subsidiary to distribute children's books through schools in India. Approximately 90% of international revenues were derived from the sale of children's books.books in fiscal 1997. The Company markets its products internationally in the same manner as in the United States, and, therefore, markets primarily to schools through book clubs and book fairs. Although book clubs account for the largest share of international revenues, book fairs and the trade market have grown rapidly in recent years. Each subsidiary is responsible for its own editorial, production, sales and fulfillment operations. The Canadian subsidiary primarily distributes a substantial percentage of United States originated Scholastic product. Approximately 45% of the books whereasdistributed by the United Kingdom subsidiary distributes very few.Australian and New Zealand companies are originally published by Scholastic products that were originated in the United States account for approximately 40% of Australia's and New Zealand's linesStates. The United Kingdom company primarily distributes material developed in the United Kingdom. In fiscal 1997, the Company acquired the Red House Books Ltd. ("Red House"), a leading United Kingdom distributor of children's books.books to the school and home markets. The Company is in the process of integrating its own school book clubs with the Red House book clubs. Also in 1997, the Company acquired a children's book publisher in Australia, Margaret Hamilton Books. In fiscal 1996, the Company acquired School Book Fairs, Ltd. ('School("School Book Fairs'Fairs"), the United Kingdom subsidiary of Pages, Inc. School Book Fairs has been integrated into the Company's United Kingdom school book fair business, Scholastic Book Fairs. 8 The Company is in the process of integrating School Book Fairs withclosing its own school book fair business, Scholastic Book Fairs, to formoperations in France. The Company, however, remains a single operating unit while continuing to marketsmall shareholder in Gallimard, the two separate and competitive book fair brands. In fiscal 1994,well known French publisher. The Company represents Gallimard Jeunesse, the children's division of Gallimard, in the United States. The Company purchasedalso owns a minority interest in Usborne Publishing Ltd., the United Kingdom based Mary Glasgow Publications, a publisher of foreign language and English language reading magazines which are distributed throughout Europe and North America. Scholastic's domestic classroom magazine division distributes these foreign language magazines in the United States and Scholastic's Canadian subsidiary markets these in Canada.children's reference books. COMPETITION The domestic market for educational materials is highly competitive. Competition is based on the quality and range of educational materials made available, price, promotion and customer service. There are many competitors in the domestic educational materials market, including one other national school book club operator, two other national school book fair operators (together with smaller regional operators, including local bookstores), numerous other paperback book, textbook and supplementary text publishers, national publishers of classroom, professional and personal computer magazines with substantial circulation, numerous producers of television, video and filmed programming (many of which are larger than the Company) and publishers of computer software. Competition may increase further to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new educational materials that compete directly with the educational materialsproducts distributed by the Company. The Company also has numerous competitors in each of the foreign countries in which it conducts business. EMPLOYEES As of May 31, 1996,1997, Scholastic employed approximately 3,8004,200 persons in full-time jobs and 650670 in hourly or part-time jobs in the United States and approximately 1,0001,700 persons in its international subsidiaries. The number of part-time employees fluctuates during the year because the Company's business is closely correlated with the school year. The Company believes that its relations with employees are good. COPYRIGHT AND TRADEMARKS The name 'Scholastic'"Scholastic" is a registered trademark in the United States and in a number of countries where the Company has international subsidiaries.conducts business. The Company has also registered in the United States the names of each of its major domestic book clubs, the titles of all of its major magazines and the names of all of its core-curriculumcore curriculum programs. The Company's international subsidiaries have also registered some names of their respective book clubs and magazines. Although individual book titles are not subject to trademark protection, the Company has registered the names of certain series, such as The Baby-sitters Club'r'THE BABY-SITTERS CLUB, and The Magic School Bus'r'.THE MAGIC SCHOOL BUS. All of the Company's publications, including books, magazines and software, are subject to copyright protection. The Company consistently copyrights its magazines, books and software in the name of the Company. Copyright and trademark infringement is vigorously defended by the Company and, as necessary, outside counsel may be retained to assist in such protection. (Space Intentionally Left Blank) 9 ITEM 2. PROPERTIES The principal facilities of the Company are as follows:
- - ------------------------------------------------------------------------------------------------------------------=========================================================================================================== LOCATION USE SIZE OWNED/LEASED =========================================================================================================== UNITED STATES New York, New York Offices 418,924 sq. ft. Leased Jefferson City, Missouri Office and warehouses 1,257,2621,270,312 sq. ft. Owned New York, New York Offices and warehouse 422,075 sq. ft. Leased Des Plaines, Illinois Warehouse 127,800 sq. ft. Leased Anaheim, California Office and warehouse 64,570 sq. ft. Leased Monroe, Connecticut Office and warehouse 50,000 sq. ft. Leased Lake Mary, Florida Office and warehouse 45,000 sq. ft. Owned Land only 4.2 acres Owned Olympia, Washington Office and warehouse 30,000 sq. ft. Leased Union City, California Office and warehouse 43,000 sq. ft. Leased Longwood, Florida Office and warehouse 42,000 sq. ft. Owned Elk Grove, Illinois Office and warehouse 39,416 sq. ft. Leased Cranbury, New Jersey Office and warehouse 39,000 sq. ft. Leased Lyndhurst, New Jersey Accounting and informationOffice 30,510 sq. ft. Leased processing center Boone County, Missouri Office and warehouse 15,000 sq. ft. Owned San Diego, California Office and warehouse 10,104 sq. ft. Leased Tempe, Arizona Office and warehouse 8,584 sq. ft. Leased Norwalk, Connecticut Warehouse 6,385 sq. ft. Leased Weston, Connecticut Office 5,882 sq. ft. Owned Land only 5 acres Owned Bartlett, Tennessee Office and warehouse 5,550 sq. ft. Leased Westport, Connecticut Office 3,695 sq. ft. Leased INTERNATIONAL Gosford, N.S.W., Australia Office and warehouses 119,007121,332 sq. ft. Owned Land only 10 acres Owned Lindfield, Australia Office 12,411 sq. ft. Leased Victoria, Australia Land and residence 24 acres Owned Somersby, N.S.W., Australia Land only 17 acres Owned Lindfield, Australia Office 12,411 sq. ft. Leased Richmond Hill, Ontario, Canada Office and warehouse 141,837 sq. ft. Leased Office and warehouse 85,364 sq. ft. Owned Office and warehouse 108,302 sq. ft. Leased Land only 5 acres Owned Southam, England Office and warehouse 51,500 sq. ft. Owned Warehouse 48,851 sq. ft. Leased Christchurch, England Office and Warehouse 33,792warehouse 33,972 sq. ft. Leased Leamington Spa, England Office 23,358 sq. ft. Leased London, England Office 9,230 sq. ft. Leased Sussex, England Warehouse 7,4207,417 sq. ft. Leased Somerset, England Warehouse 6,630 sq. ft. Leased Paris, France Warehouse 4,779 sq. ft. Leased Mexico City, Mexico Office and warehouse 6,466 sq. ft. Leased Auckland, New Zealand Office and warehouse 39,197 sq. ft. Leased
10 In addition to the facilities listed, the Company's book fairs leasefair group leases various regional warehouse locations in the United States comprising 715,314944,014 square feet in total. The Company also owns or leases other smaller facilities and property in the United States, Canada, Australia, the United Kingdom and New Zealand and France.Zealand. Management believes that these facilities are adequate and suitable for the Company's current needs. See Note 5 -- 'Commitments'5--"Commitments and Contingencies" in the Notes to Consolidated Financial Statements for information concerning the Company's obligations under all leases. ITEM 3. LEGAL PROCEEDINGS Three purported class action complaints were filed in the United States District Court for the Southern District of New York against Scholastic Corporation and certain officers, seeking, among other remedies, damages resulting from defendants' alleged violations of federal securities laws. The complaints have now been consolidated. The Consolidated Amended Class Action Complaint (the "Consolidated Complaint"), served and filed on August 13, 1997. The Consolidated Complaint is styled as a class action on behalf of all persons who purchased Company common stock from December 10, 1996 through February 20, 1997. The Consolidated Complaint alleges, among other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from purported materially false and misleading statements to the investing public concerning the financial condition of the Company. Specifically, the Consolidated Complaint alleges 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. The litigation is still in the preliminary stages. The Company has not yet answered or moved against the Consolidated Complaint and discovery has not yet begun. The Company believes that the suit is without merit and intends to vigorously defend against this action. A number of lawsuits and administrative proceedings which have arisen in the ordinary course of business are pending or threatened against the Company. The Company believes there are meritorious defenses to substantially all such claims. From time to time the Company is involved in proceedings with states seeking to collect sales and use taxes, for which the Company accrues a reserve it believes to be adequate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the holders of the Company's Common Stock during the last quarter of its fiscal year ended May 31, 1996.1997. (Space Intentionally Left Blank) 11 PART II ITEM 5. MARKET5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market'r'Market system under the symbol SCHL. Class A Stock is convertible into Common Stock on a share-for-share basis. The table below sets forth, for the periods indicated, the quarterly and one year high and low selling prices on the Nasdaq'r'-NasdaqNasdaq National Market'r'Market system for the Company's Common Stock.
YEAR ENDED MAY 31, --------------------------------------------------------------- 1996 1995 ----------------------------- ----------------------------- HIGH LOW HIGH LOW ------------ ------------ ------------ ------------ First Quarter.............................................YEARS ENDED MAY 31, ----------------------------------- 1997 1996 ------------- -------------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter................... 70 1/4 59 66 3/4 52 1/4 Second Quarter.................. 78 1/2 66 3/4 71 58 3/4 Third Quarter................... 74 1/2 32 3/4 78 3/4 65 3/4 Fourth Quarter.................. 33 3/8 20 3/4 73 3/4 60 Year............................ 78 1/2 20 3/4 52 1/4 46 1/2 35 1/2 Second Quarter............................................ 71 58 3/4 50 45 Third Quarter............................................. 78 3/4 65 3/4 53 3/4 45 3/4 Fourth Quarter............................................ 73 3/4 60 57 49 3/4 Year...................................................... 78 3/4 52 1/4 57 35 1/2
The Company has not paid any dividends since its initial public offering and has no current plans to pay any dividends on its Common Stock and Class A Stock. In addition, certain of the Company's credit facilities restrict paymentsthe payment of dividends. See Note 4 of the Notes to Consolidated Financial Statements. The approximate number of holders of Class A and Common Stock as of June 30, 19961997 were 3three and 6,000,5,500, respectively. On August 18, 1995, the Company sold $110.0 million of 5.0% Convertible Subordinated Debentures due August 15, 2005 (the 'Debentures') under Regulation S and Rule 144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg Stock Exchange and the Debentures offered pursuant to Rule 144A are designated for trading in the Portal system of the National Association of Securities Dealers, Inc. See Note 4 of the Notes to Consolidated Financial Statements. 12 ITEM 6. SELECTED FINANCIAL DATA Years ended May 31 (Amounts in thousandsmillions except per share data)
- - ----------------------------------------------------------------------------------------------------------------============================================================================================================== 1997 1996 1995 1994 1993 1992============================================================================================================== STATEMENT OF INCOME DATA: STATEMENT OF INCOME DATA: Total revenues................................. $928,599 $749,891 $631,590 $552,277 $489,345revenues................... $966.3 $928.6 $749.9 $631.6 $552.3 Cost of goods sold............................. 466,030 355,968 297,069 265,675 236,032sold............... 530.7 466.0 356.0 297.1 265.7 Selling, general and administrative expenses... 367,376 316,263 271,354 231,736 203,903expenses........ 399.6 367.4 316.2 271.3 231.7 Other operating costs: Goodwill, Trademarks, and LicenseIntangible amortization and depreciation........... 13,054 10,010 7,603 5,808 6,134depreciation.............. 18.3 13.1 10.0 7.6 5.8 Impairment of assets...................... 24,304(1)assets........ -- 24.3(1) -- -- -- -- Other charges............................. -- -- -- -- 10,291(2) Operating income............................... 57,835 67,650 55,564 49,058 32,985income................. 17.7 57.8 67.7 55.6 49.1 Interest expense, net.......................... 11,170 5,395 2,856 2,259 11,408net............ 16.7 11.2 5.4 2.9 2.3 Net income..................................... 31,897(3) 38,578 24,794(4) 28,104 12,953income....................... 0.4 31.9(1) 38.6 24.8(2) 28.1 Net income per share --share-- fully diluted.......... $1.97(3)diluted.................. $0.02 $1.97(1) $2.37 $1.53(4)$1.53(2) $1.75 $1.05 Weighted average shares outstanding -- fully diluted...................................... 17,341 16,286 16,155 16,430 13,329outstanding--fully diluted...... 16.4 16.2 16.3 16.2 16.4 BALANCE SHEET DATA (END OF YEAR): Working capital................................ $177,082 $136,775 $100,297capital.................. $215.7 $177.1 $136.8 $100.3 $ 62,997 $ 64,51363.0 Total assets................................... 673,166 505,864 390,040 263,191 226,043assets..................... 784.4 673.2 505.9 390.0 263.2 Long-term debt................................. 186,810 91,518 39,605 3,261 23,387debt................... 287.9 186.8 91.5 39.6 3.3 Stockholders' equity........................... 288,647 250,213 205,832 153,493 111,707equity............. 297.5 288.6 250.2 205.8 153.5
- --------------- (1) Fiscal 1996 includes a non-cash pre-tax charge relating to the impairment of certain assets of $24,304.$24.3. A significant portion of this charge was determined in connection with the Company's early adoption of Statement of Financial Accounting Standards No. 121 (SFAS 121), which requires an evaluation of the realization of long-lived asset carrying values. This charge consists of the unamortized prepublication ($10,809) and inventory ($13,495) costs of the Company's K-2 math program, several older supplemental instructional publishing programs and other selected titles. The fully diluted impact of the charge is $0.88 per share. (2) Fiscal 1992 includes a provision for nonrecurring relocation charges of $4,100 relating to the consolidation of the Company's New York staff and includes a provision for a nonrecurring charge of $6,191, relating to the restructuring of the Company's financial commitment for theatrical motion picture productions. The combined fully diluted impact of these provisions is $0.46 per share. (3) Fiscal 1996 net income and net income per share-fully diluted excluding the $24,304$24.3 non-cash pre-tax charge would have been $46,801$46.8 and $2.85, respectively. (4)(2) Fiscal 1994 includes a provision for a nonrecurring charge of $8,135$8.1 (net of tax) with a fully dilutedan impact of $0.51 per share relating to the cumulative effect of changes in accounting principles due to the adoption of financial accounting standards on postretirement benefits (other than pensions), postemployment benefits and income taxes. Also included is a $1,305$1.3 tax benefit to reflect the effect on net deferred income taxes resulting from the increase in the federal tax rate from 34% to 35%. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes and Selected Financial Data. FISCAL 1997 COMPARED TO FISCAL 1996 Fiscal 1997 revenues increased approximately 4% from $928.6 million in fiscal 1996 to $966.3 million in fiscal 1997. Domestic book publishing revenues accounted for a majority of the Company's revenues in fiscal 1997. Domestic book publishing revenues decreased 2% from $657.5 million in fiscal 1996 to $646.0 million in fiscal 1997. Book club revenues (including continuity programs) accounted for approximately 42% of domestic book publishing sales. Book club revenues decreased approximately 4% over fiscal 1996. The decrease in book club revenues due to lower orders and decreased revenue per order was only partially offset by revenues due to the January 1996 acquisition of the Trumpet book clubs. Book fairs accounted for approximately 23% of domestic book publishing sales and generated sales growth of 18%, as a result of an increased number of fairs held and an increase in the average revenue generated per fair. The trade or retail based distribution channel accounted for approximately 16% of domestic book publishing sales. Net trade sales decreased approximately $40 million or 30% due primarily to increases in the rate of returns and a decline in the sales of the GOOSEBUMPS series, particularly beginning in January/February 1997. Also included in domestic book publishing revenues are sales of instructional materials to schools. Instructional publishing sales accounted for approximately 14% of domestic book publishing revenues and were approximately at the same level of last year as first year sales of the Company's reading program SCHOLASTIC LITERACY PLACE more than offset a decrease in sales of the SCHOLASTIC EARLY CHILDHOOD WORKSHOP. In fiscal 1997, domestic magazine publishing revenue remained at the same level as in the prior year at approximately $81 million. Domestic magazine publishing revenues are comprised primarily of advertising revenues and circulation revenues. The Company's SOHO group accounted for 27% of total domestic magazine publishing revenues. The Company is exploring the possible sale of the SOHO group. Domestic media, TV/movie production & licensing revenues increased from $39.8 million in fiscal 1996 to $60.2 million in fiscal 1997. This revenue growth was largely due to the increases in licensing revenue from the sale of GOOSEBUMPS products. International revenues grew by 19% in U.S. dollars from $149.7 million in fiscal 1996 to $178.8 million in fiscal 1997. The United Kingdom revenue significantly benefited from the fiscal 1996 acquisition of School Book Fairs and the fiscal 1997 acquisition of Red House. The United Kingdom and Canada also had increases in trade sales. Cost of goods sold increased 14% from $466.0 million in fiscal 1996 to $530.7 million in fiscal 1997. Cost of goods sold as a percentage of revenues increased from 50% in fiscal 1996 to 55% in fiscal 1997. This increase resulted from a planned increase in prepublication amortization, restructuring charges, increases in inventory reserves and the impact of increases in trade returns reserves. The major components of cost of goods sold and their respective approximate percentage of total cost of goods sold in fiscal 1997 were as follows: printing and binding (35%), paper (13%), royalty expense (9%), prepublication costs (6%) and editorial expense (8%). The balance of cost of goods sold includes shipping and labor, delivery charges and other manufacturing costs. As a percentage of total cost of goods sold, printing and binding increased from 27% in fiscal 1996 due to product mix and the impact of increasing trade returns reserves and paper costs decreased from 19% in fiscal 1996, due primarily to changes in product mix and decreases in paper prices. Selling, general and administrative expenses increased by 9%, from $367.4 million in fiscal 1996 to $399.6 million in fiscal 1997, due primarily to increased salaries, marketing and promotion costs and the Company's restructuring charge. Selling, general and administrative expenses as a percentage of revenue remained approximately 40%. Marketing and promotion costs, which include the costs of catalogs, direct mail, book club kits, book club credits and advertising, constituted approximately 57% of selling, general and administrative expenses in fiscal 1997, approximately the same as in fiscal 1996. The balance of selling, general and administrative expenses is comprised of facility-related costs, office equipment rentals, salary, salary related expenses and the majority of the Company's restructuring charge. 14 Other operating costs decreased from $37.4 million in fiscal 1996 to $18.3 million in fiscal 1997. In the fourth quarter of fiscal 1996, the Company incurred a non-cash charge related to the impairment of certain assets of $24.3 million. A significant portion of this charge was determined in connection with the Company's early adoption of Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Operating income decreased $40.1 million or 69% from $57.8 million in fiscal 1996 (6% of sales) to $17.7 million in fiscal 1997 (2% of sales). Net interest expense increased from $11.2 million in fiscal 1996 to $16.7 million in fiscal 1997. This increase was principally attributable to higher debt levels incurred to fund working capital growth, mid-year fiscal 1996 acquisitions of approximately $19 million, acquisitions in fiscal 1997 totalling approximately $32 million and a higher interest rate in part resulting from the December 23, 1996 issuance of $125.0 million of 7% Notes due 2003. Earnings before provision for income taxes decreased from $46.6 million in fiscal 1996 to $1.0 million in fiscal 1997. Income tax expense decreased from $14.7 million in fiscal 1996 to $0.6 million in fiscal 1997. In fiscal 1997 and 1996, the Company's effective tax rates were 64.6% and 31.6% of earnings before taxes, respectively. The increase in the effective tax rate primarily is due to state and local taxes, which are computed on an unconsolidated basis. Net income decreased from $31.9 million in fiscal 1996 to $0.4 million in fiscal 1997. The primary and fully diluted net income per Class A, Common and Class A Share and Common Share Equivalents was $0.02 in fiscal 1997 and $1.97 in fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 Fiscal 1996 revenues increased approximately 24% from $749.9 million in fiscal 1995 to $928.6 million in fiscal 1996. Domestic book publishing revenues accounted for a majority of the Company's revenues in both fiscal 1996 and fiscal 1995. Domestic book publishing revenues increased 27% from $516.8 million in fiscal 1995 to $657.5 million in fiscal 1996. Book clubs (including continuity programs) accounted for 43% of domestic book publishing sales in fiscal 1996. Book club revenues increased approximately 12% over fiscal 1995 primarily as a result of the growth and expansion of the book club continuity programs and the purchase of Trumpet book clubs. The trade or retail based distribution channel accounted for 21% of domestic book publishing sales in fiscal 1996. It led the increase in domestic book publishing by recording more than 60% growth in fiscal 1996 over fiscal 1995. This growth reflectsreflected the continued success of the Company's series publishing, particularly the GoosebumpsGOOSEBUMPS book series. Book fairs accounted for approximately 19% of domestic book publishing sales in fiscal 1996 and generated sales growth in excess of 20%, as a result of an increased number of fairs held and an increase in the average revenue generated per fair. Also included in domestic book publishing revenues are sales of instructional materials to schools. Instructional publishing sales accounted for approximately 13% of domestic book publishing revenues in fiscal 1996 and experienced a growth of 56% due largely to the success of the Early Childhood Workshop sales recorded in the first quarter of fiscal 1996 relating to the Texas adoption. Domestic magazine publishing revenue decreased 3% from $84.0 million in fiscal 1995 to $81.6 million in fiscal 1996. Domestic magazine publishing revenues are comprised primarily of advertising revenues and circulation revenues. A decrease in circulation revenues of $1.9 million from fiscal 1995 contributed to the majority of the decrease in domestic magazine publishing revenue. The Company's SOHO group accounted for 25% of total domestic magazine publishing revenues and had an increase of 16% from fiscal 1995 as a result of increased advertising and custom publishing revenues. Domestic video and new media, TV/movie productions & licensing revenues more than doubled from $19.5 million in fiscal 1995 to $39.8 million in fiscal 1996. This revenue growth was led by Scholastic Productions, Inc., due in a large part to the increase in television programming, merchandising and licensing revenue of $13.8 million from fiscal 1995. The success of the GoosebumpsGOOSEBUMPS and Magic School BusTHE MAGIC SCHOOL BUS television series were major contributors to this increase. 15 International revenues grew by 16% in U.S. dollars from $129.5$129.6 million in fiscal 1995 to $149.7 million in fiscal 1996. Sales increases in Canada, the United Kingdom and Australia were fueled by strong trade sales. The United Kingdom also showed an increase in book fair sales, in part due to the March 1996 acquisition of School Book Fairs Ltd. Cost of goods sold increased 31% from $356.0 million in fiscal 1995 to $466.0 million in fiscal 1996. Cost of goods sold as a percentage of revenues increased from 47.5% in fiscal 1995 to 50% in fiscal 1996 primarily due to the Company's sales mix, specifically the impact of trade sales growth, which has a higher cost of sales than the Company's other channels. The major components of cost of goods sold and their respective approximate percentage of total cost of goods sold in fiscal 1996 were as follows: printing and binding (27%), paper (19%), royalty expense (12%) and editorial expense (10%). The balance of cost of goods sold includes amortization of prepublication costs, shipping and labor, delivery charges and other manufacturing costs. Selling, general and administrative expenses increased by 16%, from $316.3$316.2 million in fiscal 1995 to $367.4 million in fiscal 1996, due to volume increases in trade and increased costs associated with the launch of Scholastic Literacy Place.SCHOLASTIC LITERACY PLACE. Selling, general and administrative expenses decreased as a percentage of revenues due to sales mix, specifically the impact of trade sales growth, which has lower selling, general and administrative expenses than the Company's other channels (42% in fiscal 1995 and 40% in fiscal 1996). Marketing and promotion costs, which include the costs of catalogs, direct mail, 14 book club kits, book club credits and advertising, constituted approximately 57% of selling, general and administrative expenses in fiscal 1996 compared to 58% in fiscal 1995. The balance of selling, general and administrative expenses is comprised of facility-related costs, office equipment rentals, salary and salary related expenses. Other operating costs increased from $10.0 million in fiscal 1995 to $37.4 million in fiscal 1996. In the fourth quarter of fiscal 1996, the Company incurred a non-cash charge related to the impairment of certain assets of $24.3 million. A significant portion of this charge was determined in connection with the Company's early adoption of Statement of Financial Accounting Standards No. 121 (SFAS 121), 'Accounting"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of'.of." The charge consistsconsisted of the unamortized prepublication ($10.8 million) and inventory ($13.5 million) costs of the Company's K-2 math program, several older supplemental instructional publishing programs and other selected titles. Operating income, excluding the fourth quarter charge of $24.3 million, increased 21% from $67.7 million in fiscal 1995 to $82.1 million in fiscal 1996. Operating income (excluding the charge) as a percentage of sales has remained stable at approximately 9.0%. Operating income and profit margins for the Company's international operations increased in fiscal 1996 compared to fiscal 1995 due to growth in the Australian, United Kingdom and Canadian subsidiaries' businesses. Net interest expense increased from $5.4 million in fiscal 1995 to $11.2 million in fiscal 1996. This increase was attributable to higher debt levels in part resulting from the August 18, 1995, issuance of $110.0 million of theConvertible Subordinated Debentures. During fiscal 1996, higher debt levels were necessary to fund working capital growth arising from increased sales and changes in mix of sales. Higher debt levels also helped fund various business acquisitions in fiscal 1996, which totalledtotaled $32.1 million. Earnings before provision for income taxes decreased 25% from $62.3 million in fiscal 1995 to $46.7$46.6 million in fiscal 1996. Excluding the $24.3 million charge, earnings would have increased approximately 14% from $62.3 million in fiscal 1995 to $71.0 million in fiscal 1996. Income tax expense decreased from $23.7 million in fiscal 1995 to $14.8$14.7 million in fiscal 1996. In fiscal 1996 and 1995, the Company's effective tax rates were 31.6% and 38.0% of earnings before taxes, respectively. The decrease in the effective tax rate is primarily due to the tax benefit realized from charitable contributions, as well as the Company's utilization of foreign tax credit carryforwards in fiscal 1996. Net income decreased from $38.6 million in fiscal 1995 to $31.9 million in fiscal 1996. The primary and fully diluted net income per Class A, Common and Class A Share and Common Share Equivalents was $1.97 in each case in fiscal 1996 and $2.38 and $2.37, respectively, in fiscal 1995. Excluding the effect of the fourth quarter charge relating to the impairment of assets, fiscal 1996 net income and fully diluted earnings per share would have been $46.8 million and $2.85, respectively. FISCAL 1995 COMPARED TO FISCAL 1994 Revenues for fiscal 1995 totaled $749.9 million, an increase of approximately 19% compared to fiscal 1994 revenues of $631.6 million. Domestic book publishing revenues accounted for a majority of the Company's revenues in both fiscal 1995 and 1994 and increased 21% from $428.3 million in fiscal 1994 to $516.8 million in fiscal 1995. The increase in domestic book publishing revenues resulted from double digit increases in book club, trade and book fair revenues. The Company experienced increased volume in all of its distribution channels for childrens books. Inflation-related price increases also contributed, to a lesser extent, to the revenue increases. Book clubs accounted for 49% of domestic book publishing sales. Growth in book clubs resulted from additional teachers sponsoring Scholastic book clubs, the expansion of book club continuity programs and, to a lesser degree, because of inflation-related price increases and the selection by children of higher priced items. Book fairs, the Company's second largest distribution channel, generated sales growth in excess of 20% as a result of an increased number of fairs held and an increase in the average revenue generated on a per fair basis. The trade or retail based distribution channel recorded more than a 60% growth, primarily due to the success of the Goosebumps book series. In 15 addition, domestic book publishing revenues include the sales of instructional materials to schools. Instructional publishing revenues remained virtually unchanged from fiscal 1994. Domestic magazine publishing revenues totaled $84.0 million in fiscal 1995 and were 15% greater than fiscal 1994 revenues of $73.0 million. Domestic magazine publishing revenues are comprised primarily of advertising revenues and circulation revenues. Advertising revenues increased 35% from fiscal 1994 to $37.3 million in fiscal 1995. Circulation revenues remained virtually unchanged from fiscal 1994. A substantial portion of the domestic magazine revenue growth came from the Company's Home Office Computing magazine which experienced a 35% revenue increase, in addition to the launch of the national 'Reading Together' program created by the Company and sponsored by the Chrysler Corporation. Domestic video and new media revenues increased 8% from fiscal 1994 to $19.5 million in fiscal 1995. International revenues grew by 15% in U.S. dollars from $112.3 million in fiscal 1994 to $129.5 million in fiscal 1995. This revenue growth was led by sales increases in Canada with strong trade sales in each of the other subsidiaries combined with favorable currency translation. Cost of goods sold increased 20% from $297.1 million in fiscal 1994 to $356.0 million in fiscal 1995. Cost of goods sold as a percentage of revenues increased slightly from 47% in fiscal 1994 to 47.5% in fiscal 1995 primarily due to sales mix, specifically the impact of trade sales growth, which has a higher cost of sales than the Company's other channels. The major components of cost of goods sold and their respective approximate percentage of total cost of goods sold in fiscal 1995 were as follows: printing and binding (30%), paper (18%), royalty expense (11%), and editorial expenses (12%). The balance of cost of goods sold includes amortization of prepublication costs, shipping and labor, delivery charges, and other miscellaneous manufacturing costs. As a percentage of total cost of goods sold, each of these components did not change significantly from fiscal 1994. Selling, general and administrative expenses increased by 17%, from $271.4 million in fiscal 1994 to $316.3 million in fiscal 1995 due to volume increases in book clubs and trade and increased costs associated with the continued expansion of the Company's instructional publishing business. Selling, general and administrative expenses decreased as a percentage of revenues due to sales mix (43% in fiscal 1994 and 42% in fiscal 1995). Marketing and promotion costs, which include the costs of catalogs, direct mail, book club kits, book club credits, and advertising, constituted approximately 58% of selling, general and administrative expenses in both fiscal 1995 and in fiscal 1994. The balance of selling, general and administrative expenses is comprised of facility-related costs, office equipment rentals, salary, and salary-related expenses. Other operating costs increased from $7.6 million in fiscal 1994 to $10.0 million in fiscal 1995. Other operating costs include the amortization of intangible assets and depreciation. Operating income increased 22% from $55.6 million in fiscal 1994 to $67.7 million in fiscal 1995. Operating income of the Company's domestic operations improved in fiscal 1995 compared to fiscal 1994. Operating income profit margins of domestic operations also improved reflecting significant growth in book publishing margins and improvements in magazine publishing margins which more than offset the increase in costs related to the instructional publishing expansion. Operating income and profit margins for the Company's international operations increased in fiscal 1995 compared to fiscal 1994 due to growth in the Canadian subsidiary's businesses. Net interest expense increased from $2.9 million in fiscal 1994 to $5.4 million in fiscal 1995. This increase was mostly attributable to higher debt levels during fiscal 1995, which resulted from additional funding provided for prepublication costs, capital expenditures, additional working capital to support sales growth and, to a lesser extent, an increase in rates. Earnings before provision for income taxes and the cumulative effect of accounting changes increased 18% from $52.7 million in fiscal 1994 to $62.3 million in fiscal 1995. Income tax expense increased from $19.8 million in fiscal 1994 to $23.7 million in fiscal 1995. Income tax expense for fiscal 1994 included a $1.3 million tax benefit to reflect the effect on net deferred income taxes resulting from the increase in the federal tax rate from 34% to 35%. In fiscal 16 1995 and fiscal 1994, the Company's effective tax rates were 38.0% and 37.5% of earnings before taxes, excluding the cumulative effect of accounting changes, respectively. Earnings before cumulative effect of accounting changes increased from $32.9 million in fiscal 1994 to $38.6 million in fiscal 1995. The primary and fully diluted net income per Class A, Common, and Class A Share and Common Share Equivalents (excluding cumulative effects of accounting changes) was $2.38 and $2.37, respectively, and $2.04 in each case in fiscal 1994. During the first quarter of fiscal 1994, the Company adopted financial accounting standards on postretirement benefits (other than pensions), postemployment benefits and income taxes. The cumulative effect of these accounting changes resulted in a nonrecurring charge of $8.1 million, net of tax. Including the cumulative effect of accounting changes previously mentioned, net income for fiscal 1994 was $24.8 million, or $1.53 per share. SEASONALITY The Company's book clubs, book fairs, and most of its magazines operate on a school-year basis, and the Company's business is, therefore, highly seasonal. As a consequence, the Company's revenues in the first quarter of the fiscal year are lower than its revenues in the following fiscal quarters, and the Company experiences a substantial loss from operations in that quarter. Typically, book club and book fair revenues are proportionately greatest in the second quarter of the fiscal year.year, while instructional publishing revenues are greatest in the first quarter. See Supplementary Financial Information in Item 8. InFor the months of June July and August,through September time period, the Company experiences negative cash flow due to the seasonality of the business. Historically, seasonal borrowings increase during June, July and August, and generally peak in September and October each year, and are at the lowest point in May, as a result of the Company's business cycle. Seasonal reductions in debt levels inIn fiscal years 1996 were more than offset by increases in debtand 1997, borrowings increased to fund (i) higher working capital levels resulting from revenue growth and changes in business mix and (ii)as well as business acquisitions. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents remained virtually unchanged for fiscal years 1997, 1996 1995 and 1994.1995. In each of these fiscal years, the net cash used in investing activities waswere funded from cash provided by financing and operating activities. Net cash provided by operating activities in fiscal 1997, 1996 and 1995 and 1994 was $50.6$46.7 million, $28.5$52.7 million and $37.6$29.1 million, respectively. In each of these fiscal years, net cash provided by operating activities was derived from the net income of the Company adjusted for the addback of non-cash charges offset by the effect of increased working capital requirements resulting from bothrequirements. In fiscal 1997, inventory increased primarily in anticipation of SCHOLASTIC LITERACY PLACE(R) summer sales and the Company's higher revenue base and a changeincrease in business mix toward receivable-based sales channels.prepaid expense related to an overpayment of federal income tax. Cash outflows for investing activities were $154.4$137.5 million, $95.0$156.5 million and $93.7$95.6 million for fiscal 1997, 1996 1995 and 1994,1995, respectively. Investing activities primarily consist of prepublication and production cost expenditures,payments for royalty advances, business and trademark acquisition-related payments, and payments for capital expenditures and prepublication and production cost expenditures. Payments for royalty advances. Prepublication cost expendituresadvances totaled $33.2 million, $20.1 million and $14.6 million for fiscal 1997, 1996 and 1995, respectively. The $13.1 million increase in advance payments from fiscal 1996 to fiscal 1997 primarily reflects the impact of an extended agreement entered into by the Company to publish GOOSEBUMPS. The Company expects royalty advances to decrease slightly in fiscal 1996 were $54.9 million, an increase of $9.6 million from $45.3 million in fiscal 1995. The majority of this increase relates to1998, including continuing advance payments under the Company's expansion of its instructional publishing activities through investing in the development of a literacy program, expansion of the Company's science program and investment in technology-related products. In fiscal 1997, the Company estimates that total prepublication cost expenditures will approximate $43.0 million.extended GOOSEBUMPS agreement. Business and trademark acquisition-related payments increased significantlywere $32.1 million, $32.1 million and $7.8 million in fiscal 1996. Acquisition related expenditures1997, 1996 and 1995, respectively. Fiscal 1997 acquisitions include Lectorum Publications, Inc. on September 4, 1996, the United Kingdom subsidiary's acquisition of $32.1 million are primarily due toRed House Books Ltd. on January 22, 1997 and the Company's acquisition of the assets of Trumpet Book Clubs, Inc.,investment in Gallimard S. A. on January 23, 1996, the Company's acquisition of School Book Fairs Ltd., on March 6, 1996 and the April 29, 1996 acquisition of all of the outstanding stock of Weston Woods Studios, Inc.October 16, 1996. The Company's capital expenditures totalledtotaled $29.5 million in fiscal 1997, $30.4 million in fiscal 1996 and $21.7 million in fiscal 19951995. Prepublication cost expenditures totaled $26.9 million, $54.3 million and $41.5$45.3 million in fiscal 1994.1997, 1996 and 1995, respectively. Prepublication costs decreased $27.4 million and $18.4 million from fiscal 1996 and fiscal 1995, respectively, largely due to higher investments by the Company during prior years in its instructional publishing and technology based activities, primarily in the development of SCHOLASTIC LITERACY PLACE. The $8.7Company expects capital and prepublication expenditures in fiscal 1998 to be approximately equivalent to fiscal 1997. Production cost expenditures decreased $4.4 million from fiscal 1996 reflecting lower spending for THE MAGIC SCHOOL BUS and GOOSEBUMPS television series. The $6.9 million increase from fiscal 1995 to fiscal 1996 resulted primarily from the Company's continued expansion of warehouse facilities and leasehold improvements incurred as the Company continues to consolidate its corporate headquarters in New York City. The $19.8 million decrease from fiscal 1994 to fiscal 1995 was primarily due to the absence of construction costs incurred in fiscal 1994 to complete the new corporate 17 headquarters. The Company estimates that its capital expenditures will increase approximately $12.0 million to approximately $42.0 million in fiscal 1997, primarily due to the expansion of its corporate headquarters. Payments for royalty advances increased $5.5 million in fiscal 1996 as a result of the Company entering into more multi-book agreements and paying generally higher advances in order to remain competitive in the children's book club and trade publishing industry. The Company expects further increases in author advances as it extends its series publishing strategy combined with the renewal of existing series. Preproduction cost expenditures increased significantly from fiscal 1995. The $11.3 million increase resulted primarily from the Company's development of The Magic School Bus'r' and Goosebumps'r' televisionthese series. Increases in investing activities were funded by cash flows from operations, the issuance of debt instruments described below and through borrowings under the loan agreement, which the Company and Scholastic Inc., as joint and several borrowers, entered into on May 27, 1992 with a group of banks, and which was last amended on May 1, 199628, 1997 (the 'Loan Agreement'"Loan Agreement") and under the revolving loan agreement, which the Company and Scholastic Inc., entered into on June 19, 1995 with Sun Bank, National Association (the 'Revolver'"Revolver") and which was last amended on August 14, 1996 to increase the maximum borrowing availability by $15.0 million to $35.0 million.May 30, 1997. Both the Loan Agreement and the Revolver expire May 31, 2000. On December 23, 1996, the Company issued $125.0 million of 7% Notes due 2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of the Company and will mature on December 15, 2003. The Notes are not redeemable prior to maturity. The net proceeds (including accrued interest) from the issuance of the Notes were $123.9 million, after deducting an underwriting discount and other related offering costs. On August 18, 1995 the Company sold 17 $110.0 million of the5.0% Convertible Subordinated Debentures (the "Debentures") which bear interest at 5.0% and mature on August 15, 2005. The funds received in connection with the issuance of the Notes and Debentures have also been a primary source of the Company's liquidity. See Note 4 of the Notes to Consolidated Financial Statements for additional information on the Loan Agreement, the Revolver, the Notes and the Debentures. In fiscal 1997, 1996 1995 and 1994,1995, net cash provided by financing activities was $91.4 million, $104.2 million $66.2 million and $56.1$66.2 million, respectively. Financing activities consisted of borrowings and paydowns under the Loan Agreement and the Revolver, the issuance of the Notes in fiscal 1997, the sale of the Debentures in fiscal 1996 and borrowings and paydowns on lines of credit, which resulted from overdraft agreements between the international subsidiaries and various banks. In fiscal 1997, 1996 1995 and 1994,1995, options to purchase a total of 338,175, 165,579 185,180 and 119,700185,180 shares of Common Stock were exercised at aggregatedaggregate exercise prices of $4.7 million, $2.1 million $2.6 million and $1.0$2.6 million, respectively. The exercise of options in fiscal 1996, 19951997 and 19941996 reduced current taxes payable by $4.2 million and $3.0 million, respectively. In fiscal 1995, the exercise of options combined with a net operating loss carryforward, which resulted from the exercise of options in fiscal 1994 and 1993, reduced current taxes payable by $10.0 millionmillion. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This Statement specifies the computation, presentation and $16.4 million, respectively.disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. See Note 1 of the Notes to Consolidated Financial Statements for additional information on the impact of adopting SFAS 128. The Company believes its existing cash position, combined with funds generated from operations and funds available under the Loan Agreement and the Revolver, will be sufficient to finance its on-going working capital requirements for the next fiscal year. FORWARD LOOKING STATEMENTS This 10-K includes certain forward looking statements. Such forward looking statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including (i) the Company's ability to produce successful educational products (ii) the effect on the Company of volatility in the price of paper and periodic increases in postage rates, (iii) the Company's ability to manage seasonality, (iv) the Company's ability to maintain relationships with its creative talent, (v) significant changes in the publishing industry, especially relating to the distribution and sale of books, (vi) competition in the publishing industry from other educational publishers and media and entertainment companies and (vii) the general risks attendant to the conduct of business in foreign countries. 18 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S) -------- Consolidated Statement of Income for the three years ended May 31, 1996, 1995 and 1994............................................................................... 21 Consolidated Balance Sheet at May 31, 1996 and 1995.................................. 22-23 Consolidated Statement of Changes in Stockholders' Equity for the three years ended May 31, 1996, 1995 and 1994 24 Consolidated Statement of Cash Flows for the three years ended May 31, 1996, 1995 and 1994............................................................................... 25 Notes to Consolidated Financial Statements........................................... 26-34 Report of Independent Auditors....................................................... 35 Supplementary Financial Information -- Summary of Quarterly Results of Operations (unaudited)........................................................................PAGE(S) ------- Consolidated Statement of Income for the three years ended May 31, 1997, 1996 and 1995................................ 21 Consolidated Balance Sheet at May 31, 1997 and 1996................. 22-23 Consolidated Statement of Changes in Stockholders' Equity for the three years ended May 31, 1997, 1996 and 1995..... 24 Consolidated Statement of Cash Flows for the three years ended May 31, 1997, 1996 and 1995................................ 25 Notes to Consolidated Financial Statements.......................... 26-35 Report of Independent Auditors...................................... 36
Supplementary Financial Information - Summary of Quarterly Results of Operations (unaudited)................................ 37 The following consolidated financial statement schedule of Scholastic Corporation is included in Item 14(d):
PAGE ----- Schedule II -- Valuation and Qualifying Accounts and Reserves.........................PAGE ---- Schedule II-- Valuation and Qualifying Accounts and Reserves.......... S-1
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto. 19 This page left blank intentionallyintentionally. 20 CONSOLIDATED STATEMENT OF INCOME Years ended MayYEARS ENDED MAY 31, 1997, 1996 AND 1995 (AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) ================================================================================ 1997 1996 1995 ================================================================================ Revenues........................................... $966.3 $928.6 $749.9 Operational costs and 1994 (Amounts in thousands except sharesexpenses: Cost of goods sold............................... 530.7 466.0 356.0 Selling, general and administrative expenses..... 399.6 367.4 316.2 Other operating costs: Intangible amortization........................ 5.5 3.1 2.1 Depreciation................................... 12.8 10.0 7.9 Impairment of assets........................... -- 24.3 -- ----- ----- ----- Total operating costs and expenses................. 948.6 870.8 682.2 ----- ----- ----- Operating Income................................... 17.7 57.8 67.7 Interest expense, net.............................. 16.7 11.2 5.4 ----- ----- ----- Earnings before taxes.............................. 1.0 46.6 62.3 Provision for income taxes......................... 0.6 14.7 23.7 ----- ----- ----- Net income......................................... $ 0.4 $ 31.9 $ 38.6 ===== ====== ====== Net income per share data)
- - --------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Revenues................................................................. $928,599 $749,891 $631,590 Operational costs and expenses: Cost of goods sold.................................................. 466,030 355,968 297,069 Selling, general and administrative expenses........................ 367,376 316,263 271,354 Other operating costs: Goodwill, Trademarks, and License amortization................. 3,085 2,108 1,774 Depreciation................................................... 9,969 7,902 5,829 Impairment of assets........................................... 24,304 -- -- -------- -------- -------- Total operating costs and expenses........................ 870,764 682,241 576,026 -------- -------- -------- Operating income......................................................... 57,835 67,650 55,564 Interest expense, net.................................................... 11,170 5,395 2,856 -------- -------- -------- Earnings before taxes and cumulative effect of accounting changes........ 46,665 62,255 52,708 Provision for income taxes............................................... 14,768 23,677 19,779 -------- -------- -------- Earnings before cumulative effect of accounting changes.................. 31,897 38,578 32,929 Cumulative effect of accounting changes.................................. -- -- 8,135 -------- -------- -------- Net income............................................................... $ 31,897 $ 38,578 $ 24,794 -------- -------- -------- -------- -------- -------- Earnings per Class A Common and Class A Share and Common Share Equivalents (excluding cumulative effect of accounting changes): Primary............................................................. $ 1.97 $ 2.38 $ 2.04 Fully diluted....................................................... $ 1.97 $ 2.37 $ 2.04 Net income per Class A, Common and Class A Share and Common Share Equivalents: Primary............................................................. $ 1.97 $ 2.38 $ 1.53 Fully diluted....................................................... $ 1.97 $ 2.37 $ 1.53 Weighted average Class A, Common and Class A Share and Common Share Equivalents outstanding: Primary............................................................. 16,195,856 16,242,521 16,154,719 Fully diluted....................................................... 17,341,037 16,285,510 16,154,719
See accompanying notesClass A, Common and Class A Share and Common Share Equivalents: Primary........................................ $0.02 $1.97 $2.38 Fully diluted.................................. $0.02 $1.97 $2.37 Weighted average Class A, Common and Class A Share and Common Share Equivalents outstanding: Primary......................................... 16.4 16.2 16.2 Fully diluted................................... 16.4 16.2 16.3 SEE ACCOMPANYING NOTES 21 CONSOLIDATED BALANCE SHEET Balances at MayBALANCES AT MAY 31, 1997 AND 1996 (DOLLARS IN MILLIONS EXCEPT SHARE DATA) ASSETS ================================================================================ 1997 1996 ================================================================================ CURRENT ASSETS: Cash and 1995 (Amountscash equivalents.......................... $ 4.9 $ 4.3 Accounts receivable (less allowance for doubtful accounts of $7.8 in thousands except shares)
ASSETS - - ----------------------------------------------------------------------------------------------------------------- 1996 1995 CURRENT ASSETS: Cash and cash equivalents............................................................ $ 4,300 $ 3,708 Accounts receivable (less allowance for doubtful accounts of $11,290 in 1996 and $6,989 in 1995)..................................................................... 118,390 77,361 Inventories: Paper........................................................................... 9,041 10,281 Books and other................................................................. 180,937 154,540 Deferred taxes....................................................................... 22,694 17,697 Prepaid and other deferred expenses.................................................. 15,118 15,866 -------- -------- Total current assets....................................................... 350,480 279,453 PROPERTY, PLANT AND EQUIPMENT: Land................................................................................. 6,310 5,873 Buildings............................................................................ 37,511 32,703 Furniture, fixtures and equipment.................................................... 53,852 40,760 Leasehold improvements............................................................... 48,482 37,052 -------- -------- 146,155 116,388 Less accumulated depreciation and amortization....................................... 32,018 23,151 -------- -------- Net property, plant and equipment............................................... 114,137 93,237 OTHER ASSETS AND DEFERRED CHARGES: Prepublication costs................................................................. 105,016 81,817 Goodwill and trademarks.............................................................. 41,594 9,507 Royalty advances..................................................................... 24,758 16,829 Other................................................................................ 37,181 25,021 -------- -------- Total other assets and deferred charges.................................... 208,549 133,174 -------- -------- $673,166 $505,864 -------- -------- -------- --------
See accompanying notes1997 and $9.2 in 1996)....... 100.5 118.4 Inventories: Paper............................................ 8.1 9.1 Books and other.................................. 213.9 180.9 Deferred taxes..................................... 30.2 22.7 Prepaid and other deferred expenses................ 38.7 15.1 ----- ----- Total current assets........................... 396.3 350.5 PROPERTY, PLANT AND EQUIPMENT: Land............................................... 6.5 6.3 Buildings.......................................... 41.0 37.5 Furniture, fixtures and equipment.................. 68.4 53.8 Leasehold improvements............................. 61.3 48.5 ----- ----- 177.2 146.1 Less accumulated depreciation and amortization..... (43.2) (32.0) ----- ----- Net property, plant and equipment................ 134.0 114.1 OTHER ASSETS AND DEFERRED CHARGES: Prepublication costs............................... 102.1 104.4 Goodwill and trademarks............................ 67.8 41.6 Royalty advances................................... 43.4 24.8 Other.............................................. 40.8 37.8 ----- ----- Total other assets and deferred charges........ 254.1 208.6 ----- ----- $784.4 $673.2 ====== ====== SEE ACCOMPANYING NOTES 22
LIABILITIES AND STOCKHOLDERS' EQUITY - - ----------------------------------------------------------------------------------------------------------------- 1996 1995 CURRENT LIABILITIES: Lines of credit...................................................................... $ 20,933 $ 9,024 Current portion of long-term debt.................................................... 271 455 Accounts payable..................................................................... 63,148 52,412 Accrued royalties.................................................................... 19,074 13,509 Deferred revenue..................................................................... 9,216 11,809 Other accrued expenses............................................................... 60,756 55,469 -------- -------- Total current liabilities....................................................... 173,398 142,678 NONCURRENT LIABILITIES: Long-term debt....................................................................... 186,810 91,518 Other noncurrent liabilities......................................................... 24,311 21,455 -------- -------- Total noncurrent liabilities.................................................... 211,121 112,973 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred Stock, $1.00 par value Authorized -- 1,000,000 shares; Issued -- None..................................................................... -- -- Class A Stock, $.01 par value Authorized-2,500,000 shares; Issued-828,100 shares.............................................................. 8 8 Common Stock, $.01 par value Authorized-25,000,000 shares Issued-16,331,698 shares (16,164,779 shares at 5/31/95)............................ 163 162 Additional paid-in capital........................................................... 194,785 189,563 Foreign currency translation adjustment.............................................. (140) (1,454) Accumulated earnings................................................................. 130,643 98,746 Less 1,301,658 shares of Common Stock in treasury, at cost........................... (36,812) (36,812) -------- -------- Total stockholders' equity...................................................... 288,647 250,213 -------- -------- $673,166 $505,864 -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY ================================================================================ 1997 1996 ================================================================================ CURRENT LIABILITIES: Lines of credit................................................$ 5.0 20.9 Current portion of long-term debt.............................. 0.3 0.3 Accounts payable............................................... 74.2 62.9 Accrued royalties.............................................. 12.2 19.1 Deferred revenue............................................... 9.0 9.2 Other accrued expenses......................................... 79.9 61.0 ----- ----- Total current liabilities..................................180.6 173.4 NONCURRENT LIABILITIES: Long-term debt.................................................287.9 186.8 Other noncurrent liabilities................................... 18.4 24.4 ----- ----- Total noncurrent liabilities...............................306.3 211.2 COMMITMENTS AND CONTINGENCIES ................................... -- -- STOCKHOLDERS' EQUITY: Preferred Stock, $1.00 par value Authorized--1,000,000 shares; Issued-None.................... -- -- Class A Stock, $.01 par value Authorized--2,500,000 shares; Issued-828,100 shares.......... 0.0 0.0 Common Stock, $.01 par value Authorized--25,000,000 shares Issued--16,671,690 shares (16,331,698 shares at 5/31/96)..... 0.2 0.2 Additional paid-in capital.................................... 203.8 194.8 Foreign currency translation adjustment........................ (0.7) (0.2) Accumulated earnings........................................... 131.0 130.6 Less 1,301,658 shares of Common Stock in treasury, at cost... (36.8) (36.8) ------ ------ Total stockholders' equity................................. 297.5 288.6 ------ ------ $784.4 $673.2 ====== ====== 23 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended MayYEARS ENDED MAY 31, 1997, 1996 AND 1995 and 1994 (Amounts in thousands) - - --------------------------------------------------------------------------------(DOLLARS IN MILLIONS) ================================================================================
FOREIGN ADDITIONAL CURRENCY TOTAL CLASS A COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY STOCKHOLDERS' STOCK STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY ----- ----- ------- ------ ---------- ------------------- ----------- -------- ------------- BALANCE AT MAY 31, 1993............. $ 8 $159 $156,660 $ (1,896) $ 35,374 $(36,812) $ 153,493JUNE 1, 1994 ............... $0.0 $0.2 $184.4 $(2.1) $60.1 $(36.8) $205.8 Net income.......................... 24,794 24,794income............................. 38.6 38.6 Translation adjustment.............. (163) (163)adjustment................. 0.6 0.6 Stock options exercised............. 1 1,020 1,021exercised................ 0.0 2.6 2.6 Tax benefit realized from stock option transactions............... 1,503 1,503 Tax benefit recognized upon adoption of SFAS 109....................... 25,139 25,139transactions............ 2.6 2.6 Stock granted....................... 45 45 ---granted.......................... 0.0 0.0 ---- ---- ----- ---------- ---------- ----------- -------- -------------- ----- ----- ----- BALANCE AT MAY 31, 1994............. 8 160 184,367 (2,059) 60,168 (36,812) 205,8321995 ............... 0.0 0.2 189.6 (1.5) 98.7 (36.8) 250.2 Net income.......................... 38,578 38,578income............................. 31.9 31.9 Translation adjustment.............. 605 605adjustment................. 1.3 1.3 Stock options exercised............. 2 2,593 2,595exercised................ 0.0 2.1 2.1 Tax benefit realized from stock option transactions............... 2,558 2,558transactions............ 3.0 3.0 Stock granted....................... 45 45 ---granted.......................... 0.1 0.1 ---- ---- ----- ---------- ---------- ----------- -------- --------------- ----- ----- ----- BALANCE AT MAY 31, 1995............. 8 162 189,563 (1,454) 98,746 (36,812) 250,2131996 ............... 0.0 0.2 194.8 (0.2) 130.6 (36.8) 288.6 Net income.......................... 31,897 31,897income............................. 0.4 0.4 Translation adjustment.............. 1,314 1,314adjustment................. (0.5) (0.5) Stock options exercised............. 1 2,129 2,130exercised................ 0.0 4.7 4.7 Tax benefit realized from stock option transactions............... 2,993 2,993transactions............ 4.2 4.2 Stock granted....................... 100 100 ---granted.......................... 0.1 0.1 ---- ---- ----- ---------- ---------- ----------- -------- --------------- ----- ----- ----- BALANCE AT MAY 31, 1996............. $ 8 $163 $194,785 $ (140) $ 130,643 $(36,812) $ 288,647 --- ------ ---------- ---------- ----------- -------- ----------- --- ------ ---------- ---------- ----------- -------- -----------1997 ............... $0.0 $0.2 $203.8 $(0.7) $131.0 $(36.8) $297.5 ==== ==== ====== ===== ====== ====== ======
See accompanying notesSEE ACCOMPANYING NOTES 24 CONSOLIDATED STATEMENT OF CASH FLOWS Years ended MayYEARS ENDED MAY 31, 1997, 1996 AND 1995 and 1994 (Amounts in thousands)(DOLLARS IN MILLIONS)
- - -----------------------------------------------------------------------------------------------------------------============================================================================================================= 1997 1996 1995 1994============================================================================================================= CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................................income............................................... $ 31,8970.4 $ 38,57831.9 $ 24,79438.6 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation..................................... 42,482 24,003 21,699 Impairment of assets.............................................. 24,304 -- --depreciation........................ 58.4 42.5 24.0 Royalty advances expensed......................................... 13,455 11,666 10,019expensed............................ 15.2 13.5 11.7 Provision for losses on accounts receivable....................... 9,565 6,614 3,716receivable.......... 11.7 9.6 6.6 Deferred income taxes............................................. (4,737) 2,643 (44) Cumulative effecttaxes................................ (7.0) (4.7) 2.6 Impairment of accounting changes...........................assets................................. -- 24.3 -- 8,135 Changes in assets and liabilities net of effects from business acquisitions and dispositions: Decrease (increase) in accounts receivable....... 7.6 (49.2) (27.5) Increase in accounts receivable.............................. (49,164) (27,467) (22,385) Increase in inventory........................................ (31,641) (42,767) (17,549)inventory............................ (29.3) (31.6) (42.8) (Increase) decrease in prepaid expenses...................... 1,470 (2,495) (3,410) Increase in accrued royalties................................ 5,548 3,890 2,033expenses.......... (19.8) 1.5 (2.5) Increase in accounts payable and other accrued expenses...... 3,839 12,604 8,113 Increase (decrease)expenses..................... 17.3 3.8 12.6 (Decrease) increase in accrued royalties......... (6.9) 5.5 3.9 (Decrease) increase in deferred revenues..................... (2,678) 2,595 2,254revenues......... (0.2) (2.7) 2.6 Other, net........................................................ 6,265 (1,411) 180 --------- --------- --------net......................................... (0.7) 8.3 (0.7) ---- ---- ---- Total adjustments....................................... 18,708 (10,125) 12,761 --------- --------- --------adjustments.................................... 46.3 20.8 (9.5) ---- ---- ---- Net cash provided by operating activities......................... 50,605 28,453 37,555activities.......... 46.7 52.7 29.1 CASH FLOWS FROM INVESTING ACTIVITIES: Prepublication cost expenditures....................................... (54,924) (45,346) (34,533)Royalty advances paid.................................... (33.2) (20.1) (14.6) Business and trademark acquisition-related payments.................... (32,059) (7,760) (3,804)acquisition--related payments...... (32.1) (32.1) (7.8) Additions to property, plant and equipment............................. (30,362) (21,653) (41,494) Royalty advances paid.................................................. (20,141) (14,592) (12,368)equipment............... (29.5) (30.4) (21.7) Prepublication cost expenditures......................... (26.9) (54.3) (45.3) Production cost expenditures........................................... (16,886) (5,606) (1,533) --------- --------- --------expenditures............................. (12.5) (16.9) (5.6) Other expenditures....................................... (3.3) (2.7) (0.6) ---- ---- ---- Net cash used in investing activities............................. (154,372) (94,957) (93,732)activities.............. (137.5) (156.5) (95.6) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under loan agreement and revolver........................... 209,581 158,921 102,668revolver............. 301.5 209.6 158.9 Principal paydowns on loan agreement and revolver...................... (224,220) (106,615) (66,068)revolver........ (326.2) (224.2) (106.6) Proceeds from issuance of 7% Notes due 2003.............. 123.9 -- -- Proceeds from issuance of convertible debt............................. 107,250debt............... -- 107.3 -- Borrowings under lines of credit....................................... 53,930 45,250 41,070credit......................... 39.3 53.9 45.3 Principal paydowns on lines of credit.................................. (46,728) (43,661) (38,474)credit.................... (55.6) (46.7) (43.7) Proceeds from exercise of stock options.................. 4.7 2.1 2.6 Tax benefit realized from stock option transactions.................... 2,993 9,989 16,369 Proceeds from exercise of stock options................................ 2,130 2,595 1,021 Payments of deferred financing costs................................... (692) (312) (439) --------- --------- --------transactions...... 4.2 3.0 10.0 Other.................................................... (0.4) (0.8) (0.3) ---- ---- ---- Net cash provided by financing activities......................... 104,244 66,167 56,147activities.......... 91.4 104.2 66.2 Effect of exchange rate changes on cash................................ 115 (57) 47 --------- --------- --------cash.................. 0.0 0.2 (0.1) ---- ---- ---- Net increase (decrease) in cash and cash equivalents................... 592 (394) 17equivalents..... 0.6 0.6 (0.4) Cash and cash equivalents at beginning of year......................... 3,708 4,102 4,085 --------- --------- --------year........... 4.3 3.7 4.1 ---- ---- ---- Cash and cash equivalents at end of year...............................year................. $ 4,3004.9 $ 3,7084.3 $ 4,102 --------- --------- -------- --------- --------- --------3.7 ===== ===== ===== SUPPLEMENTAL INFORMATION: Income taxes paid...................................................... $ 22,251 $ 12,223 $ 3,478paid........................................ $24.7 $22.3 $12.2 Interest paid.......................................................... 9,775 4,952 2,404paid............................................ 13.1 9.8 5.0
See accompanying notesSEE ACCOMPANYING NOTES 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Scholastic Corporation and all wholly-owned subsidiaries (the 'Company'"Company"). All intercompany transactions are eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions. Significant estimates that affect the financial statements include, but are not limited to, book returns, recoverability of inventory, recoverability of advances to authors, amortization periods, recoverability of prepublication costs and litigation reserves. NATURE OF OPERATIONS The Company has operations in the United States, Canada, Mexico, the United Kingdom, France, Australia and New Zealand and the Company distributes its materials through a variety of channels, including book clubs, book fairs and retail. The Company is engaged in one segment of business -- thebusiness--the production, publication and sale of educational materials. CASH EQUIVALENTS Cash equivalents consist of short-term investments with original maturities of less than three months. INVENTORIES Inventories are stated at the lower of cost (first-in,using the first-in, first-out method)method or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation and amortization are provided on the straight-line basis. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Furniture, fixtures and equipment are depreciated over periods not exceeding ten years. Leasehold improvements are amortized over the life of the lease or the life of the assets, whichever is shorter. OTHER ASSETS AND DEFERRED CHARGES Prepublication costs are amortized on the straight-line basis over a two to five year period commencing with publication. The Company regularly evaluates the remaining lives and recoverability of such costs. The accumulated amortization of prepublication costs at May 31, 1997 and 1996 was $41.8 and 1995 was $24.9, million and $18.8 million, respectively. Royalty advances are expensed as earned or when future recovery appears doubtful. The reserve for royalty advances was $18.4 million$25.1 and $16.6 million$18.4 at May 31, 19961997 and 1995,1996, respectively. Goodwill and trademarks acquired by the Company are being amortized on the straight-line basis over the estimated future periods to be benefited, not exceeding 40 years. The accumulated amortization of goodwill and other intangible assets at May 31, 1997 and 1996 was $8.2 and 1995 was $4.5, million and $3.1 million, respectively. 26 INCOME TAX The Company adoptedprovides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), 'Accounting"Accounting for Income Taxes'Taxes". Under SFAS 109,this method, deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporarydetermined based on differences between the financial reporting and tax bases of the Company's assets and liabilities based onand are measured using enacted tax rates and other provisionslaws that will be in 26 effect when the differences are expected to enter into the determination of tax law.taxable income. OTHER ACCRUED EXPENSES Other accrued expenses include a reserve for book returns of $19.0 at May 31, 1997. Other accrued expenses also include a reserve for unredeemed credits issued in conjunction with the Company's book club operations of $8.9 million$8.8 and $10.3 million and$8.9, accrued taxes of $8.8 and $9.0 million and $9.3 million,accrued interest of $6.2 and $2.1, at May 31, 19961997 and 1995,1996, respectively. DEFERRED REVENUE Revenues from magazine subscriptions are deferred at the time of sale. As magazines are delivered to subscribers, proportionate shares of the receipts are credited to revenue. EARNINGS PER SHARE Earnings per share are based on the combined weighted average number of Class A, Common and Class A Share and Common Share Equivalents outstanding using the treasury stock method. NEWmethod, in accordance with the Accounting Principles Board ("APB"), Opinion No. 15, "Earnings per Share." Common Share Equivalents are excluded from the computation of primary earnings per share in which they have an anti-dilutive effect. RECENT ACCOUNTING PRINCIPLES Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), 'Employers' Accounting for Postretirement Benefits Other Than Pensions' (See Note 8); Statement of Financial Accounting Standards No. 112 (SFAS 112), 'Employers' Accounting for Postemployment Benefits' (See Note 8); and Statement of Financial Accounting Standards No. 109 (SFAS 109), 'Accounting for Income Taxes' (See Note 7). The cumulative effect of these accounting changes resulted in a nonrecurring charge of $8.1 million, net of tax, or $0.51 per share. Excluding the cumulative effect, adoption of these statements did not have a significant effect on net income in fiscal 1994. Effective March 1, 1996, the Company early adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), 'Accounting"Accounting for the Impairment of Long-livedLong-Lived Assets to be Disposed of'.of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. It also requires that long-lived and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair market value less cost to sell. Statement of Financial Accounting Standards No. 123 (SFAS 123), 'Accounting"Accounting for Stock-Based Compensation'Compensation", was issued in October 1995. SFAS 123 permits entitiesadopted by the Company for fiscal 1997. The statement requires expanded disclosure of stock-based compensation arrangements and encourages, but does not require, compensation cost to record expense for employee stock compensation plansbe measured based on the fair value of the equity instrument awarded. Companies are permitted to continue to apply the provisions of APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company applied APB 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost due to the exercise price of options being at fair market value at date of grant. Note 6 contains a summary of the pro forma effects on reported net income and earnings per share for 1997 and 1996 if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This statement specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or to utilize the intrinsic value method.potential common stock. The Company plansis required to continueadopt the provisions of SFAS 128 for the quarter ended February 28, 1998. The principal differences between the provisions of SFAS 128 and previous authoritative pronouncements is related to measure compensation cost using the intrinsic value method,exclusion of common stock equivalents in the determination of basic earnings per share and the market price at which common stock equivalents are calculated in the determination of diluted earnings per share. In accordance with APB Opinionthe provisions of SFAS 128, basic and diluted earnings per share are $0.02 and $0.02 at May 31, 1997, $2.02 and $1.97 at May 31, 1996 and $2.48 and $2.38 at May 31, 1995, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 25, 'Accounting130, (SFAS 130), "Reporting Comprehensive Income". This statement establishes the standards for Stock Issuedthe reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company is required to Employees'.adopt the provisions of SFAS 130 for fiscal 1999. 27 2. IMPAIRMENT OF ASSETS Fiscal 1996 includesRESTRUCTURING COSTS The Company established certain restructuring reserves in fiscal 1997, resulting in a non-cashpretax charge relatingof approximately $5.0. This charge consisted primarily of employee severance and relocation costs of $3.3. The balance of the reserve, $1.7, related to the impairment of certain assets of $24.3 million pre-tax, $14.9 million after-tax, or $0.88 per fully diluted share. A significant portion of this charge was determined in connection with the Company's early adoption of SFAS No. 121. This charge consists of unamortized prepublication ($10.8 million) and inventory costs ($13.5 million)restructuring of the Company's K-2 math program, several older supplemental instructionaloperations including the closedown of the French operations, productivity improvements at its distribution facility in Jefferson City, Missouri and the consolidation of certain of its school publishing programsoperations. At May 31, 1997, other accrued liabilities include remaining reserves for severance and other selected titles. 27 the closedown of the French operations of $2.8. 3. INTERNATIONAL AND DOMESTIC OPERATIONS International operations consist of the Company's book publishing and distribution operations in Canada, Australia, the United Kingdom, New Zealand, FranceMexico and Mexico.India. As of May 31, 1997, 1996 1995 and 1994,1995, equity in the wholly-owned subsidiaries in these countries was $48.2, $40.8 million,and $36.2, million and $37.2 million, respectively. The following table summarizes certain information for the fiscal years ended May 31, 1997, 1996 1995 and 19941995, regarding the Company's domestic and international operations (in millions).
DOMESTIC INTERNATIONAL OPERATIONS OPERATIONS CONSOLIDATED - - ----------------------------------------------------------------------------------------------------------------------- 1996 Revenues................................................................. $778.9 $ 149.7 $928.6 Operating income......................................................... 48.8(1) 9.0 57.8(1) Identifiable assets...................................................... 565.9 107.3 673.2 - - ---------------------------------------------------------------------------------------------------------------------- 1995 Revenues................................................................. $620.3 $ 129.6 $749.9 Operating income......................................................... 63.6 4.1 67.7 Identifiable assets......................................................operations. DOMESTIC INTERNATIONAL OPERATIONS OPERATIONS CONSOLIDATED ================================================================================ 1997 ================================================================================ Revenues $787.4 $178.9 $966.3 Operating income 9.4 8.3 17.7 Identifiable assets 653.4 131.0 784.4 ================================================================================ 1996 ================================================================================ Revenues $778.9 $149.7 $928.6 Operating income 48.9 8.9 57.8(1) Identifiable assets 566.0 107.2 673.2 ===-============================================================================ 1995 ================================================================================ Revenues $620.3 $129.6 $749.9 Operating income 63.6 4.1 67.7 Identifiable assets 423.6 82.3 505.9 - - ------------------------------------------------------------------------------------------------------------------ 1994 Revenues................................................................. $519.3 $ 112.3 $631.6 Operating income......................................................... 51.7 3.9 55.6 Identifiable assets...................................................... 317.7 72.3 390.0
- - ------------ (1) Includes a non-cash charge relating to the impairment of certain assets of $24.3. 4. LONG-TERM DEBT Long-term debt consisted of the following at May 31, 1997 and 1996: ================================================================================ 1997 1996 ================================================================================ CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- -------- ---------- Loan agreement and 1995 (in millions):
- - ------------------------------------------------------------------------------------------------------------------ 1996 1995 Loan Agreement and Revolver.................................................................. $ 74.0 $ 88.5 Debentures................................................................................... 110.0 -- Other debt................................................................................... 3.1 3.5 ------ ----------- Total debt.............................................................................. 187.1 92.0 Less current portion......................................................................... (.3) (.5) ------ ----------- Total long-term debt.................................................................... $186.8 $ 91.5 ------ ----------- ------ -----------
A.revolver $ 49.5 $ 49.5 $ 74.0 $ 74.0 7% Notes due 2003, net of discount 124.7 122.0 -- -- Convertible subordinated debentures 110.0 89.4 110.0 115.0 Other debt 4.0 4.0 3.1 3.1 ------ ------ ------ ------ Total debt 288.2 264.9 187.1 192.1 Less current portion (.3) (.3) (.3) (.3) ------ ------ ------ ------ Total long-term debt $287.9 $264.6 $186.8 $191.8 ====== ====== ====== ====== Fair values were estimated based upon market quotes. LOAN AGREEMENT The Company and Scholastic Inc. are joint and several borrowers under a Loan Agreement (the 'Loan Agreement'"Loan Agreement") with certain banks, which provides for revolving credit loans and letters of credit. On April 11, 1995, the Company amended and restated the Loan Agreement, extending the expiration date to May 31, 2000 and expanding the facility to $135.0, million, with a right, in certain circumstances, to increase it to $160.0 million, and extending the due date to May 31, 2000. On$160.0. The Loan Agreement was amended further on May 1, 1996 the Loan Agreement was further amended.and May 28, 1997. Interest charged under this facility is either at the prime rate or .325% to .90% over LIBOR (as defined). There is a 28 commitment fee charged which ranges from .10% to .3625% on the unused portion. The amounts charged vary based upon certain financial measurements. The Loan Agreement contains certain financial covenants related to debt and interest coverage ratios (as these terms are defined) and limits dividends and other distributions. B. REVOLVER On June 19, 1995, Scholastic Corporation and Scholastic Inc., (the "Borrowers") entered into a Revolving Loan Agreement (the 'Revolver'"Revolver") with Sun Bank, National Association,N. A., which provides for revolving credit 28 loans in an aggregate principal amount of up to $20.0 million.and expires on May 31, 2000. The Revolver has certain financial covenants related to debt and interest coverage ratios (as these terms are defined), and limits dividends and other distributionsdistributions. On August 14, 1996, the Revolver was amended to increase the aggregate principal amount to $35.0 and expireswas amended further on May 31, 2000. C.30, 1997. 7% NOTES DUE 2003 On December 23, 1996, the Company issued $125.0 million of 7% Notes due 2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of the Company and will mature on December 15, 2003. The Notes are not redeemable prior to maturity. Interest on the Notes is payable semi-annually on December 15 and June 15 of each year. The proceeds (including accrued interest) from the issuance of the Notes were $123.9 after deducting an underwriting discount and other related offering costs. The Company utilized the net proceeds primarily to repay amounts outstanding under the Loan Agreement and the Revolver. CONVERTIBLE SUBORDINATED DEBENTURES On August 18, 1995, the Company sold $110.0 million of 5.0% Convertible Subordinated Debentures due August 15, 2005 (the 'Debentures'"Debentures") under Regulation S and Rule 144A of the Securities Act of 1933. The Debentures are listed on the Luxembourg Stock Exchange and the portion sold under Rule 144A areis designated for trading in the Portal system of the National Association of Securities Dealers, Inc. Interest on the Debentures is payable semi-annually on August 15 and February 15 of each year. The Debentures are redeemable at the option of the Company, in whole, but not in part, at any time on or after August 15, 1998 at 100% of the principal amount plus accrued interest. Each debenture is convertible, at the holder's option any time prior to maturity, into Common Stock of the Company at a conversion price of $76.86 per share. The net proceeds from the sale of the Debentures were $107.3 million after deduction of underwriting fees and offering expenses. D. OTHER LINES OF CREDIT The Company's international subsidiaries havehad lines of credit amounting to $30.1 millionavailable of $33.0 at May 31, 1996.1997. There was $20.9 million$5.0 and $9.0 million$20.9 outstanding under these credit lines at May 31, 19961997 and 1995,1996, respectively. The weighted average interest rate on the outstanding amounts was 7.5%6.25% and 7.6%7.5% at May 31, 19961997 and 1995,1996, respectively. 5. COMMITMENTS AND CONTINGENCIES LEASE 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 $24.4, $20.5 million,and $16.9 million and $14.2 million net of sublease income for the fiscal years ended May 31, 1997, 1996 1995 and 1994,1995, respectively. These rentals include payments under the terms of the escalation provisions.provisions and are net of sublease income. The aggregate minimum future annual rental commitments at May 31, 1996,1997, under all noncancelable operating leases, totaling $119.1 million$130.0, are as follows (in millions): 1997 - $19.4; 1998 - $16.6; 1999 - $13.0; 2000 - $10.3; 2001 - $8.5;follows: 1998-$23.5; 1999-$18.5; 2000-$15.5; 2001-$12.0; 2002-$9.5; later years - $51.3.years-$51.0. 29 CONTINGENCIES The Company and certain officers have been named as defendants in litigation which alleges, among other things, violations of Sections 10(b) and 20(a) of the Securities and 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. The litigation is in the early stages and the Company believes that such litigation is without merit and plans to vigorously defend against it. The Company is also engaged in various legal proceedings incident to its normal business activities. In the opinion of the Company, none of such proceedings is material to the consolidated financial position of the Company. 6. CAPITAL STOCK AND STOCK OPTIONS The voting rights of the holders of Common Stock, except as provided by statute, and except as may be established by the Board of Directors in favor of any series of Preferred Stock which may be issued, are limited to the election of such number of directors as shall equal at least one-fifth of the members of the Board of Directors; the remaining directorsremainder are elected by the holders of Class A Stock. Holders of Class A Stock and Common Stock are entitled to one vote per share on matters on which they are entitled to vote. The holders of Class A Stock have the right, at their option, to convert shares of Class A Stock into shares of Common Stock on a share-for-share basis. At May 31, 1996,1997, there were 161,50023,000 options available for grant under the Company's 1992 Stock Option Plan (the 'Stock"Stock Option Plan'Plan"), which provides for the grant of incentive stock options ('ISO's'("ISO's") and nonqualified stock options. NoThe Stock Option Plan expired on July 16, 1997 and no ISO's have been granted under the Stock Option Plan. On September 22,21, 1995, the Company adopted the 1995 Stock Option Plan. An aggregatePlan (the "1995 Plan"), which provides for the grant of twoISO's and nonqualified stock options. Two million shares of Common Stock have beenwere reserved for issuance upon the exercise of options granted under this plan. For the year ended May 31, 1996, no options were granted under the plan. 29 On May 19, 1992, the Company adopted the Outside Directors' Stock Option Plan (the 'Outside Directors' Plan'). At May 31, 1996,1997, there were 3,0001,977,875 options available for grant under the Outside Directors'1995 Plan. Generally, options granted under the various plans may not be exercised for a minimum of one year after grant and expire ten years and one day after grant. Activity under the various stock option plans for the indicated fiscal years ended May 31 1996, 1995 and 1994 was as follows:
- - ---------------------------------------------------------------------------------------------------------------------------================================================================================================================ 1997 1996 1995 1994 OPTION OPTION================================================================================================================ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTION OPTIONOPTIONS EXERCISE PRICE OPTION OPTIONOPTIONS EXERCISE PRICE SHARES RANGE SHARES RANGE SHARES RANGE ----------------- ---------------- ----------------- ---------------- ----------------- ---------------- Outstanding -- beginning of year................OUTSTANDING-- BEGINNING OF YEAR 1,075,400 $29.32 953,729 $ 1.14-47.88$17.88 1,067,159 $ 1.09-47.88 944,859 $ 1.09-35.25 Granted..................$15.35 Granted 218,500 64.23 288,750 57.56-64.6357.70 82,500 39.68-46.69 242,000 34.50-47.88 Exercised................44.14 Exercised (338,175) 13.88 (165,579) 1.26-34.5012.87 (185,180) 1.09-35.25 (119,700) 1.18-31.25 Cancelled................14.01 Cancelled (54,875) 56.30 (1,500) 34.50 (10,750) 34.50 ---------- --------- --------- --------- Outstanding -- end-------- OUTSTANDING-- END OF YEAR 900,850 $41.94 1,075,400 $29.32 953,729 $17.88 ======== ========= ======== EXERCISABLE-- END OF YEAR 436,363 $25.33 643,250 $14.50 737,479 $11.93
At May 31, 1997, for each of the following classes of options as determined by range of exercise price, the information regarding weighted-average exercise prices and weighted-average remaining contractual lives of each said class is as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING NUMBER OF WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE OF CONTRACTUAL LIFE OF OPTIONS EXERCISE PRICE OF OPTION OPTIONS OUTSTANDING OUTSTANDING CURRENTLY OPTIONS CURRENTLY PRICE RANGE OUTSTANDING OPTIONS OPTIONS EXERCISABLE EXERCISABLE ----------- ----------- -------------- --------------- ----------- ----------------- $9.03 - $14.78 220,000 $9.39 3.0 years 220,000 $9.39 $27.75 - $39.68 193,400 $34.96 6.5 years 138,100 $34.52 $46.69 - $68.81 487,450 $59.40 8.3 years 78,263 $53.94
30 The Company adopted SFAS 123 for fiscal 1997. As provided for under the provisions of SFAS 123, the Company applies APB 25 and related interpretations in accounting for its stock option plans. In accordance with APB 25, no compensation expense was recognized because the option price of the Company's stock options equaled the market price of the underlying stock on the date of grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
================================================================================ 1997 1996 ================================================================================ Net income - as reported........................... $0.4 $31.9 Net income (loss) - pro forma...................... (0.8) 31.1 Primary earnings per share - as reported........... $0.02 $1.97 Primary earnings (loss) per share- pro forma....... (0.05) 1.93 The fair value of year................... 1,075,400 1.14-64.63 953,729 1.14-47.88 1,067,159 1.09-47.88 --------- --------- --------- --------- --------- --------- Exercisable -- endeach option grant is estimated on the date of year................... 643,250 1.14-47.88 737,479 1.14-47.88 774,159 1.09-35.25grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
================================================================================ 1997 1996 ================================================================================ Expected dividend yield............................ 0.00% 0.00% Expected stock price volatility ................... 0.184 0.195 Risk-free interest rate............................ 6.63% 6.53% Expected life of options........................... 5 years 5 years The weighted average fair value of options granted during 1997 and 1996 were $20.39 and $18.54 per share, respectively. For purposes of proforma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period and does not include grants prior to June 1, 1995. As such, the pro forma net income and earnings per share are not indications of future years. On July 15, 1997, the Company granted options to purchase 1,277,738 shares of Common Stock at a per share price of $35.19, which was the fair market value as defined in the option plan at the date of grant. A portion of these were issued in lieu of cash compensation and all vest over one to four years. On December 14, 1993, the Company adopted the Non-Employee Director Stock-For-Retainer Plan (the 'Stock-For-Retainer Plan'"Stock-For-Retainer Plan"). During the years ended May 31, 1997, 1996 1995 and 1994,1995, the Company issued 1,340,1,683, 1,474 and 891 and 1,044 shares of Common Stock at per share prices of $65.50, $74.88 $50.63 and $43.13,$50.63, respectively, pursuant to the Stock-For-Retainer Plan. 31 7. INCOME TAX EXPENSE Consolidated income tax expense for the indicated fiscal years ended May 31 1996, 1995 and 1994 was based on earnings before taxes and cumulative effect of accounting changes as follows (in millions):
- - --------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Domestic........................................................................... $40.7 $ 61.3 $ 50.6 International wholly owned subsidiaries............................................ 6.0 1.0 2.1 ----- ----------- ----------- $46.7 $ 62.3 $ 52.7 ----- ----------- ----------- ----- ----------- -----------
30 follows: ================================================================================ 1997 1996 1995 ================================================================================ Domestic.......................................... $(3.3) $40.6 $61.3 International wholly owned subsidiaries........... 4.3 6.0 1.0 ----- ----- ----- $1.0 $46.6 $62.3 ===== ===== ===== Income tax expense (benefit) for the indicated fiscal years ended May 31 1996, 1995 and 1994 consists of the following components (in millions):
- - ---------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Federal Current(1).................................................................... $15.1 $ 18.9 $ 17.6 Deferred...................................................................... (5.3) 2.8 (2.2) ----- ----------- ----------- $ 9.8 $ 21.7 $ 15.4 ----- ----------- ----------- ----- ----------- ----------- State and local Current....................................................................... $ 1.7 $ 1.7 $ 1.1 Deferred...................................................................... (.1) (.1) 2.1 ----- ----------- ----------- $ 1.6 $ 1.6 $ 3.2 ----- ----------- ----------- ----- ----------- ----------- International Current....................................................................... $ 2.7 $ .4 $ 1.1 Deferred...................................................................... .7 -- .1 ----- ----------- ----------- $ 3.4 $ .4 $ 1.2 ----- ----------- ----------- ----- ----------- ----------- Total Current....................................................................... $19.5 $ 21.0 $ 19.8 Deferred...................................................................... (4.7) 2.7 -- ----- ----------- ----------- $14.8 $ 23.7 $ 19.8 ----- ----------- ----------- ----- ----------- -----------
components: ================================================================================ 1997 1996 1995 ================================================================================ FEDERAL Current (1) .................................... $1.9 $15.1 $18.9 Deferred........................................ (7.6) (5.3) 2.8 ----- ----- ----- $(5.7) $ 9.8 $21.7 ===== ===== ===== STATE AND LOCAL Current.........................................$ 2.9 $1.7 $1.7 Deferred........................................ 0.6 (0.1) (0.1) ----- ----- ----- $ 3.5 $1.6 $1.6 ===== ===== ===== INTERNATIONAL Current.........................................$ 2.8 $ 2.6 $0.4 Deferred........................................ 0.0 0.7 0.0 ----- ----- ----- $ 2.8 $ 3.3 $0.4 ===== ===== ===== TOTAL Current.........................................$ 7.6 $19.4 $21.0 Deferred........................................ (7.0) (4.7) 2.7 ----- ----- ----- $ 0.6 $14.7 $23.7 ===== ===== ===== - - ---------------------- (1) For the fiscal years ended May 31, 1997, 1996 1995 and 1994 federal1995 current taxes payable (receivable) are ($2.0), $12.2 $9.1, and $1.2,$9.1, respectively. The difference between the current taxes payable or receivable and the current federal income tax expense for each year is due to the federal tax benefit associated with stock option exercises which have been reflected as an increase to additional paid-in capital. Total tax expense for the fiscal years ended May 31, 1997, 1996 1995 and 19941995 results in effective tax rates of 31.6%64.6%, 38.0%31.6% and 37.5%38.0%, respectively. The provisions for income taxes attributable to continuing operations differ from the amount of tax determined by applying the federal statutory rate as follows (in millions):
- - --------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Computed federal statutory provision............................................... $16.3 $ 21.8 $ 18.4 State income tax provision net of federal income tax benefit....................... 1.0 1.0 2.1 Effect of enacted federal tax rate change on net deferred tax assets............... -- -- (1.3) Difference in effective tax rates on earnings of foreign subsidiaries.............. (.8) .1 .5 Charitable contributions........................................................... (2.0) (.3) -- Other -- net....................................................................... .3 1.1 .1follows: ================================================================================ 1997 1996 1995 ================================================================================ Computed federal statutory provision................ $ 0.4 $16.3 $21.8 State income tax provision net of federal income tax benefit........................ 2.2 1.0 1.0 Difference in effective tax rates on earnings of foreign subsidiaries.............................. (0.2) (0.8) 0.1 Charitable contributions............................ (1.8) (2.0) (0.3) Other - net......................................... 0.0 0.2 1.1 ----- ----- ----- ----------- ----------- Total provision for income taxes.............................................. $14.8 $ 23.7 $ 19.8 ----- ----------- ----------- ----- ----------- -----------
Effective June 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS 109.taxes.................. $ 0.6 $14.7 $23.7 ===== ===== ===== 32 The undistributed earnings of foreign subsidiaries at May 31, 19961997 are $31.7 million.$35.8. It is the Company's intention to reinvest all remaining unremitted earnings of its subsidiaries where permitted by foreign jurisdictions. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable. The tax on any distribution of such earnings would be substantially reduced by foreign tax credits. At May 31, 1997, the Company has a charitable deduction carryforward of $15.1 which expires in fiscal years ended May 31, 2001 and 2002. Deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for 31 income tax purposes as determined under enacted tax laws and rates. The tax effects of these items that give rise to deferred tax assets and liabilities at May 31 1996 and 1995for the indicated fiscal years are as follows (in millions):
- - --------------------------------------------------------------------------------------------------------------------- 1996 1995 Deferred tax assets: Accounting reserves....................................................................... $ 9.3 $ 8.1 Inventory accounting...................................................................... 9.0 3.3 Postretirement, postemployment and pension obligations.................................... 5.1 5.2 Theatrical motion picture accounting...................................................... 2.8 2.8 Other -- net.............................................................................. -- .8 ----- ----------- Total deferred tax assets............................................................ 26.2 20.2 Valuation allowance for deferred tax assets.................................................... -- (.7) ----- ----------- Deferred tax assets after valuation allowance............................................. 26.2 19.5 ----- ----------- Deferred tax liabilities: Depreciation.............................................................................. 2.7 2.4 Other -- net.............................................................................. 1.4 -- ----- ----------- Total deferred tax liabilities....................................................... 4.1 2.4 ----- ----------- Net deferred tax assets.............................................................. $22.1 $ 17.1 ----- ----------- ----- -----------
follows: ================================================================================ 1997 1996 ================================================================================ Deferred tax assets: Inventory accounting..................................... $12.6 $9.0 Other accounting reserves................................ 7.6 9.3 Tax carryforwards........................................ 6.0 1.5 Postretirement, postemployment and pension obligations... 5.6 5.1 Theatrical motion picture accounting..................... 2.6 2.8 Other--net............................................... 1.5 -- ----- ---- Total deferred tax assets.............................. 35.9 27.7 ===== ==== Deferred tax liabilities: Depreciation............................................. 2.3 2.7 Other--net............................................... -- 2.9 ----- ---- Total deferred tax liabilities......................... 2.3 5.6 ----- ---- Net deferred tax assets................................ $33.6 $22.1 ===== ==== 8. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan (the 'Plan'"Plan") which covers a majority of allthe U.S. employees who meet certain eligibility requirements. Benefits are based on years of service and on career average compensation. The Plan is funded by contributions from membersparticipants and the Company. It is the Company's policy to fund the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. In accordance with the provisions of Statement of Financial Accounting Standards No. 87, (SFAS 87) 'Employers' Accounting for Pensions,' the Company recorded an additional minimum pension liability of $0.5 million at May 31, 1995. This liability is offset by an intangible asset of an equal amount. The international subsidiaries in Australia and the United Kingdom have defined benefit pension plans which cover those employees meeting minimum length of service requirements. Benefits are based on years of service and on a percentage of compensation near retirement. The plans are funded by contributions from these subsidiaries and their employees. In fiscal year ended May 31, 1995, the majority of the employees of the Australian subsidiary terminated participation in the defined benefit pension plan and began participating in a defined contribution plan. For fiscal years ended May 31, 1997, 1996 and 1995 the total expenses for these plans were $0.6, $0.5 million and $0.4, million, respectively. Canada's pension plan was terminated on September 30,in fiscal 1993. Contributions made to the pension plan were rolled over to a private plan to which employees now have an option to contribute. Total defined benefit pension plan costs for the indicated fiscal years ended May 31 1996, 1995 and 1994 are summarized as follows (in millions):
- - ----------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Service cost..................................................................... $ 1.4 $ 1.1 $ 1.6 Interest cost.................................................................... 1.2 1.1 1.1 Actual return on plan assets..................................................... (2.2) (1.5) (.6) Net amortization (deferral)...................................................... 1.2 .8 (.2) ----------- ----------- ----- Total pension cost............................................................... $ 1.6 $ 1.5 $ 1.9 ----------- ----------- ----- ----------- -----------follows: ================================================================================ 1997 1996 1995 ================================================================================ Service cost............................... $ 1.6 $ 1.4 $ 1.1 Interest cost.............................. 1.5 1.2 1.1 Actual return on plan assets............... (3.2) (2.2) (1.5) Net amortization........................... 2.0 1.2 0.8 -----
32 ----- ----- Total pension cost....................... $ 1.9 $ 1.6 $ 1.5 ===== ===== ===== 33 The funded status of the pension plans at May 31 1996 and 1995, is as follows (in millions):follows:
- - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ACCUMULATED BENEFITS PLAN ASSETS EXCEED BENEFITS ACCUMULATED EXCEED PLAN ASSETS ACCUMULATED BENEFITS ------------------------ ---------------------------------------------- ----------------- ============================================================================================================= 1997 1996 1997 1996 ============================================================================================================= Actuarial present value of benefit obligations: Vested benefits.............................................. $ 13.1 $ 11.3 $ 1.8 $ 1.6benefits....................................... $15.3 $13.1 $2.2 $1.8 Non-vested benefits.......................................... .7 .6benefits................................... 0.6 0.7 -- -- ----------- ----------- ----- ----- ---- ---- Accumulated benefit obligation....................................obligation.......................... 15.9 13.8 11.92.2 1.8 1.6 Effect of projected future salary increases..................increases........... 2.2 1.8 1.4 .3 .3 ----------- -----------0.6 0.3 ----- ----- ---- ---- Projected benefit obligation......................................obligation............................ 18.1 15.6 13.32.8 2.1 1.9 Plan assets at fair value.........................................value............................... 17.7 13.5 11.22.9 2.3 2.1 ----------- ----------- ----- ----- ---- ---- Plan assets less than (greater than) projected benefit obligation.................................................obligation.................................. 0.4 2.1 2.1 (.2) (.2)(0.1) (0.2) Unrecognized net gain........................................gain................................. 3.0 1.4 .6 .2 .10.2 0.2 Unrecognized net transition asset (obligation)....................... (1.2) (1.3) (1.4) .1 .20.2 0.1 Unrecognized prior service cost..............................cost....................... (0.9) (1.0) (1.1) (.1) (.1) Additional liability resulting from minimum liability provisions................................................. -- .5 -- -- ----------- -----------(0.3) (0.1) ----- ----- ---- ---- Accrued pension cost included in financial statements............. $ 1.2 $ .7 $ -- $ -- ----------- ----------- ----- ----- ----------- ----------- ----- -----statements.................................. $1.3 $1.2 $-- $-- ===== ===== === ==== Assumed rates: Discount rate................................................rate......................................... 8.0% 8.0% 9.0% 9.0% Compensation increase factor................................. 5.0 5.0 7.0 7.0 Return on assets............................................. 9.5 9.5 9.0 9.0factor.......................... 5.0% 5.0% 7.0% 7.0%
Plan assets consist primarily of stocks, bonds, money market funds, insurance contracts and U.S. government obligations. The weighted-average long-term rate of return on plan assets was 9.5% for plans with accumulated benefits obligations that exceed their assets and 9.0% for plans with assets in excess of their accumulated benefit obligations for fiscal 1997, 1996 and 1995. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially allA majority of the Company's domestic employees may become eligible for these benefits if they reach normal retirement age while working for the Company. Effective June 1, 1993, the Company adopted SFAS 106 which requires that the expected cost of providing these postretirement benefits be accrued during the years employees render the necessary service. The Company recognized the transition obligation at the date of adoption immediately as the effect of a change in accounting principle. The transition obligation, a one-time noncash charge, was approximately $10.3 million (pretax) with a related tax benefit of approximately $3.8 million. Prior to adopting SFAS 106, the cost of retiree health care and life insurance benefits was recognized as expense as claims were paid. The components of the net periodic postretirement benefit costs for the indicated fiscal years ended May 31 are as follows: ================================================================================ 1997 1996 1995 and 1994 are as follows (in millions):
- - ------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Service cost....................................................................... $ .5 $ .4 $ .4 Interest cost on accumulated benefit obligation.................................... .8 .9 .9 ----- ----- ----- Net periodic postretirement benefit cost........................................... $ 1.3 $ 1.3 $ 1.3 ----- ----- ----- -----================================================================================ Service cost.......................................... $0.3 $0.5 $0.4 Interest cost on accumulated benefit obligation....... 0.8 0.8 0.9 ---- ----- -----
33 Net periodic postretirement benefit cost.............. $1.1 $ 1.3 $ 1.3 ==== ===== ===== The components of the accumulated postretirement benefit obligation included in other noncurrent liabilities at May 31 1996 and 1995 are as follows (in millions):
- - ------------------------------------------------------------------------------------------------------------------- 1996 1995 Retirees....................................................................................... $ 6.7 $ 6.9 Fully eligible active plan participants........................................................ 2.0 2.0 Other active plan participants................................................................. 2.8 2.8 ----- ----------- Accumulated postretirement benefit obligation.................................................. 11.5 11.7 Unrecognized net actuarial gain................................................................ 1.2 .2 ----- ----------- Accrued postretirement benefit obligation...................................................... $12.7 $ 11.9 ----- ----------- ----- -----------
follows: ================================================================================ 1997 1996 ================================================================================ Retirees........................................... $ 6.9 $ 6.7 Fully eligible active plan participants............ 1.6 2.0 Other active plan participants..................... 2.9 2.8 ----- ----- Accumulated postretirement benefit obligation...... 11.4 11.5 Unrecognized net actuarial gain.................... 2.0 1.2 ----- ----- Accrued postretirement benefit obligation.......... $13.4 $12.7 ===== ===== 34 The accumulated postretirement benefit obligation was determined using a discount rate of 8.0%. Service cost and interest components were determined using a discount rate of 8.0%. The health care cost trend rate assumed was 12%11.0% with an annual decline of 1%1.0% until the rate reaches 5%5.0% in the year 2002. An increase of 1%1.0% in the health care cost trend rate would result in increases of approximately $1.4 million$1.5 in the accumulated benefit obligation and $0.2 million in the annual net periodic postretirement benefit cost. Effective June 1, 1993, the Company adopted SFAS 112 which requires an accrual method of recognizing certain postemployment benefits such as severance. The Company recognized the transition obligation, a one-time noncash charge, as the cumulative effect of a change in accounting principle in the amount of $2.3 million (pretax) with a related tax benefit of $0.8 million. The Scholastic Inc. 401(k) Savings and Retirement Plan (the '401(k)'"401(k)") allows participating employees to authorize payroll deductions up to 15%, except for highly compensated employees who are limited to 10%, of their income on a pretax basis and/or an after-tax basis. The payroll deductions are invested at the direction of the participant in certain investment funds or in the Company's Common Stock. For the 401(k) plan years endingended May 31, 1997, 1996 1995 and 1994,1995, the Company matched the employees' pretax payroll deductions (up to the lesser of 6% of compensation)compensation or $9,500) by one dollar for each dollar of the first one hundred dollars contributed and fifty cents for each dollar above one hundred dollars. Such matching was made in cash. The terms of the 401(k) provide that the Company's Board of Directors shall determine the Company's matching contributions annually.for each 401(k) plan year. The Company, at its sole discretion, may also make discretionary contributions for the benefit of all participants regardless of whether they elected to make pretax contributions to the 401(k). For the fiscal years ended May 31, 1997, 1996 1995 and 1994,1995, the Company's 401(k) matching contributions were $2.6, $2.0 million,and $1.9, millionrespectively. 9. IMPAIRMENT OF ASSETS Fiscal 1996 includes a non-cash charge relating to the impairment of certain assets of $24.3 pre-tax, $14.9 after-tax, or $0.88 per fully diluted share. A significant portion of this charge was determined in connection with the Company's early adoption of SFAS 121. This charge consists of unamortized prepublication and $1.5 million, respectively. 34 inventory costs of the Company's K-2 math program, several older supplemental instructional publishing programs and other selected titles. 35 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS SCHOLASTIC CORPORATION We have audited the accompanying consolidated balance sheet of Scholastic Corporation (the 'Company'"Company") as of May 31, 1996,1997 and 1995,1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended May 31, 1996.1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes addressingassessing 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, 19961997 and 19951996 and the consolidated results of its operations, and its cash flows for each of the three years in the period ended May 31, 19961997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described in Note (1) to the financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions, postemployment benefits and income taxes in the year ended May 31, 1994. /s/ Ernst & Young LLP Ernst & Young LLP New York, New York July 3, 1997 36 Supplementary Financial Information SUMMARY OF QUARTERLY RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31, 1997 AND 1996 35 SUPPLEMENTARY FINANCIAL INFORMATION Summary of Quarterly Results of Operations for the fiscal years ended May 31, 1996 and 1995 (Unaudited, amounts in thousands except per share data)(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
- - ----------------------------------------------------------------------------------------------------------------------- 1996============================================================================================================== 1997 ============================================================================================================== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER(1) YEAR(1) Revenues............................................. $135,191 $294,610 $216,085 $ 282,713 $928,599 Cost of goods sold................................... 78,816 134,620 108,150 144,444 466,030 Net income (loss).................................... (9,792) 31,122 8,889 1,678 31,897 Net income (loss) per share: Primary......................................... (.62) 1.92 .55 .10 1.97 Fully diluted................................... (.62) 1.81 .55 .10 1.97
- - ----------------------------------------------------------------------------------------------------------------------- 1995 FIRST SECOND THIRD QUARTER QUARTER QUARTER FOURTH QUARTER YEAR Revenues............................................. $ 87,065 $254,063 $179,930 $ 228,833 $749,891Revenues............................... $158.6 $342.2 $210.7 $254.8 $966.3 Cost of goods sold................................... 51,569 112,000 85,230 107,169 355,968sold..................... 93.7 165.8 118.8 152.4 530.7 Net income (loss).................................... (11,169) 27,320 7,974 14,453 38,578...................... (14.0) 38.5 (12.5) (11.6) 0.4 Net income (loss) per share: Primary......................................... (.72) 1.68 .49 .89 2.38Primary.............................. (0.88) 2.36 (0.78) (0.72) 0.02 Fully diluted................................... (.72) 1.68 .49 .89 2.37diluted........................ (0.88) 2.21 (0.78) (0.72) 0.02 ============================================================================================================== 1996 ============================================================================================================== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR Revenues............................... $135.2 $294.6 $216.1 $282.7 $928.6 Cost of goods sold..................... 78.8 134.6 108.2 144.4 466.0 Net income (loss)...................... (9.8) 31.1 8.9 1.7(1) 31.9 Net income (loss) per share: Primary.............................. (0.62) 1.92 0.55 0.10(1) 1.97 Fully diluted........................ (0.62) 1.81 0.55 0.10(1) 1.97
- - ------------------------------- (1) The fourth quarter of fiscal year 1996 includes a non-cash charge relatingof $14.9 net of tax ($0.84 per share) which relates to the impairmentwrite off of certain assets of $24.3 million pre-taxunamortized prepublication costs and $14.9 million after-tax.related inventory provisions. A significant portion of thisthe charge was determined in connection withrelates to the Company's early adoption of SFASStatement of Financial Accounting Standards No. 121 (SFAS 121) which requires an evaluation of the realization of long-lived asset carrying values. This charge consists of the unamortized prepublication ($10.8 million) and inventory ($13.5 million) costs of the Company's K-2 math program, several older supplemental instructional publishing programs and other selected titles. The fully diluted earnings per share impact for the year was $0.88. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to regulationRegulation 14A under the Securities Exchange Act of 1934. Executive Officers (as of AugustEXECUTIVE OFFICERS (AS OF AUGUST 1, 1996)1997)
NAME AGE POSITION - - ---------------------------- --- ---------------------------------------------------------------------------- -------- Richard Robinson........ 59Robinson.................................. 60 Chairman of the Board, President and Chief Executive Officer Kevin J. McEnery.................................. 49 Executive Vice President and Chief Financial Officer Deborah A. Forte.................................. 43 Executive Vice President; Division Head, Scholastic Productions Barbara A. Marcus....... 45Marcus................................. 46 Executive Vice President, Children's Book Publishing Margery W. Mayer........ 44Mayer.................................. 45 Executive Vice President, Instructional Publishing, Kevin J. McEnery........Scholastic School Group Ruth Otte......................................... 48 Executive Vice President, and Chief Financial Officer Ruth Otte............... 47New Media Hugh Roome........................................ 45 Executive Vice President, MediaPromotion and Sales, Scholastic School Group Richard M. Spaulding.... 59Spaulding.............................. 60 Director, Executive Vice President Charles B. Deull........ 36Deull.................................. 37 Senior Vice President, Legal and Business Affairs, Secretary Jean L. Feiwel.......... 43Feiwel.................................... 44 Senior Vice President, Associate Publisher, -- Children's Book Publishing Ernest B. Fleishman..... 59Fleishman............................... 60 Senior Vice President, Education and Corporate Relations Deborah A. Forte........ 42 Senior Vice President, Division Head, Scholastic Productions Frank Grohowski......... 55Grohowski................................... 56 Senior Vice President, Operations Hugh Roome.............. 44 Senior Vice President, Magazine Group David J. Walsh.......... 60Walsh.................................... 61 Senior Vice President, International Operations Lynette E. Allison...... 39 Vice President, General Counsel and Secretary Helen V. Benham......... 46Benham................................... 47 Director, Corporate Vice President, Early Childhood Advisor Claudia H. Cohl......... 56Cohl................................... 57 Vice President, Professional PublishingEditorial Planning and Development, Scholastic School Group Larry V. Holland........ 37Holland.................................. 38 Vice President, Corporate Human Resources and Employee Services Raymond Marchuk......... 45Marchuk................................... 46 Vice President, Finance & Investor Relations David D. Yun............ 48Yun...................................... 49 President, Scholastic Book Fairs, Inc. Karen A. Maloney.................................. 40 Director, Accounting and Financial Operations Leslie G. Lista......... 37Lista................................... 38 Corporate Controller Vincent M. Marzano...... 33Marzano................................ 34 Treasurer
Richard Robinson has held his position with the Company or Scholastic Inc., for more than five years and has been a Director of Scholastic Inc. since 1971. Barbara A. Marcus became Executive Vice President -- Children's Book Publishing in October 1991. Ms. Marcus joined Scholastic Inc. in July 1983 as Vice President of Marketing and in October 1984, Ms. Marcus was also appointed to the position of Associate Publisher. Margery W. Mayer joined Scholastic Inc. in April 1990 as Executive Vice President -- Instructional Publishing. From 1987 until 1990, she was associated with the Ginn Division of Silver Burdett & Ginn Inc., as General Manager until August 1988 and as President, thereafter. Kevin J. McEnery became Executive Vice President and Chief Financial Officer in August 1995. Mr. McEnery joined the Company in September 1993 as Vice President of Strategic Planning and Operations of the Magazine and Technology groups. From April 1992 through September 1993 he was associated with the ITC Group, a telecommunications consulting group based in Westport, ConnecticutCT as a Senior Consultant. Prior to that he was a Senior Vice President and Chief Financial Officer of a privately held consumer and medical products company. Deborah A. Forte has been with Scholastic since 1984 serving as a Vice President of Scholastic Productions, Inc., until 1994 when she was appointed Executive Vice President, Scholastic Productions, Inc. Ms. Forte was appointed Senior Vice President; Division Head, Scholastic Productions in January 1995 and Executive Vice President; Division Head - Scholastic Productions in December 1996. 38 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Barbara A. Marcus became Executive Vice President, Children's Book Publishing in October 1991. Ms. Marcus joined Scholastic Inc. in July 1983 as Vice President of Marketing and in October 1984, Ms. Marcus was also appointed to the position of Associate Publisher. Margery W. Mayer joined Scholastic Inc. in April 1990 as Executive Vice President - Instructional Publishing and was appointed Executive Vice President, Instructional Publishing, Scholastic School Group in June 1997. From 1987 until 1990, she was associated with the Ginn Division of Silver Burdett & Ginn Inc., as General Manager until August 1988 and as President, thereafter. Ruth Otte became Executive Vice President, ofNew Media in 1996. From 1986 to 1994 she served as President and Chief Operating Officer of Discovery Networks and from 1994 until September 1995, she was President of Knowledge Adventure. Richard M. Spaulding has held his position with the Company or Scholastic Inc. for more than five years and has been a Director of Scholastic Inc. since 1974. Charles B. Deull joined the Company in January 1995 as Senior Vice President -- Legal and Business Affairs. Mr. Deull was associated with the law firm of Cleary, Gottlieb, Steen and Hamilton from 1986 until joining Scholastic. 37 Jean L. Feiwel was appointed Senior Vice President -- Associate Publisher of Childrens Book Publishing in December 1993. Ms. Feiwel joined Scholastic Inc. in July 1983 and has served as Vice President -- Editor-in-Chief of Book Group since 1990. Ernest B. Fleishman joined Scholastic Inc. in June 1989 as Senior Vice President -- Education and Corporate Relations. Mr. Fleishman was the Superintendent for the Greenwich, Connecticut Public School System from 1976 until joining Scholastic Inc. Deborah A. Forte was appointed Senior Vice President: Division Head -- Scholastic Productions in January 1995. Ms. Forte has been with Scholastic since 1984 serving as a Vice President of Scholastic Productions, Inc. until 1994 when Ms. Forte was appointed Executive Vice President, Scholastic Productions, Inc. Frank Grohowski was appointed Senior Vice President -- Operations of the Company in August 1995. Mr. Grohowski was Vice President of Manufacturing for Scholastic Inc. since 1985. Hugh Roome joined the Company in September 1991 as Vice President, -- Home Office Computing and in May 1993, he was appointed to the position of Senior Vice President, -- Magazine Group. He was appointed Executive Vice President in September 1996 and Executive Vice President, Promotions and Sales, Scholastic School Group in June 1997. He was Vice President of MCI from 1989 until joining the Company. From 1979 to 1989, Mr. Roome was the Director of Marketing and Associate Publisher at Newsweek, Inc. Richard M. Spaulding has held his position with the Company or Scholastic Inc., for more than five years and has been a Director of Scholastic Inc. since 1974. Charles B. Deull joined the Company in January 1995 as Senior Vice President, Legal and Business Affairs. Mr. Deull was associated with the law firm of Cleary, Gottlieb, Steen and Hamilton from 1986 until joining Scholastic. He was appointed Secretary in July 1997. Jean L. Feiwel was appointed Senior Vice President, Publisher - Children's Book Publishing in December 1993 and was appointed Publisher in April 1997. Ms. Feiwel joined Scholastic Inc. in July 1983 and has served as Vice President, Editor-in-Chief of the Book Group since 1990. Ernest B. Fleishman joined Scholastic Inc. in June 1989 as Senior Vice President, Education and Corporate Relations. Mr. Fleishman was the Superintendent for the Greenwich, Connecticut Public School System from 1976 until joining Scholastic Inc. Frank Grohowski was appointed Senior Vice President, Operations of the Company in August 1995. Mr. Grohowski was Vice President of Manufacturing for Scholastic Inc. since 1985. David J. Walsh was elected Senior Vice President in charge of International Operations for Scholastic Inc. in November 1983. Lynette E. Allison has held her current position as Vice President, General Counsel and Secretary with the Company since May 1988. Helen V. Benham joined Scholastic Inc. in 1974. In 1996, she was named Corporate Vice President, Early Childhood Advisor. In June 1990 she was named Vice President and Publisher of the Early Childhood Division.Division and in 1996 was named Corporate Vice President, Early Childhood Advisor. She became a directorDirector of the Company in September 1992. Claudia H. Cohl has been associated with Scholastic Inc. since 1975 and has been a Vice President of Scholastic Inc. for more than five years. She is currently Vice President -- Professional Publishing.- Editorial Planning and Development - Scholastic School Group. She has served in many capacities, including Editor-in-Chief of Home Office Computing'r'HOME OFFICE COMPUTING(R). Larry V. Holland joined the Companycompany in August 1994 as Vice President, -- Human Resources.Resources and in fiscal 1997 was appointed Vice President, Corporate Human Resources and Employee Service. Prior to joining the Company, Mr. Holland held various positions with MCI since 1990 and left MCI as Senior Director of Human Resources. Raymond Marchuk has been associated with Scholastic Inc. since November 1983 and has been Vice President for more than five years. He is currently Vice President-FinancePresident of Finance and Investor Relations. David D. Yun became President of Scholastic Book Fairs, Inc. ('SBF,("SBF, Inc.'") in January 1992. Mr. Yun joined the Company in June 1988 as Vice President of Marketing for SBF, Inc. In July 1990, he was also appointed to the position of Executive Vice President of SBF, Inc. 39 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Karen A. Maloney joined Scholastic in July 1997 as Director of Accounting and Financial Operations. From July 1996 through January 1997, she was employed by Calvin Klein as Vice President, Corporate Controller and subsequently worked as an independent consultant. From July 1995 through June 1996, she was employed by Bernard Chaus, Inc. as Vice President, Corporate Controller. From December 1990 through July 1995, she was employed by Bidermann Industries Corp., and from June 1992 served as Vice President, Controller. Leslie G. Lista has been associated with Scholastic Inc. since April 1984 and has served in many capacities. She became Corporate Controller in April 1987. Vincent M. Marzano has been associated with Scholastic Inc. since August 1987. He became Treasurer of the Company in December 1993. Previously, he served the Company in many capacities, including Manager of Planning and Analysis. Helen V. Benham is the wife of Richard Robinson. There are no other family relationships among any of the executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934. 38 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are included in Item 8: --- Consolidated Statement of Income for the years ended May 31, 1997, 1996 and 1995 and 1994. --- Consolidated Balance Sheet at May 31, 1997 and 1996 and 1995. --- Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 1997, 1996 1995 and 1994. --1995. - Consolidated Statement of Cash Flows for the years ended May 31, 1997, 1996 1995 and 1994. --1995. - Notes to Consolidated Financial Statements.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.Reserves All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto. (a) 3. Exhibits:
EXHIBIT NUMBER ------ 3(a) -- Amended and Restated Certificate of Incorporation of the Registrant.(1) (b) -- By-Laws of the Registrant.(2) 4(a) -- Amended and Restated Loan Agreement dated April 11, 1995 between the Registrant and Citibank, N.A., as agent, Marine Midland Bank, Chase Manhattan Bank, N.A.,The First National Bank of Boston and United Jersey Bank.(9) (b) -- Amendment to the Amended and Restated Loan Agreement dated May 1, 1996. (c) -- Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National Association.(4) (d) -- Amendment to the Revolving Loan Agreement dated August 14, 1996.(4) (e) -- Overdraft Facility dated June 1, 1992, as amended on October 30, 1995 between Scholastic Canada Ltd. and CIBC.(4) (f) -- Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Citibank, N.A.(4) (g) -- Overdraft Facility dated May 14, 1992 as amended on June 30, 1995, between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Midland Bank.(4) (h) -- Overdraft Facility dated February 12, 1993, as amended on January 31, 1995 between Scholastic Australia Pty. Ltd. (formerly known as Ashton Scholastic Pty. Ltd.) and National Australia Bank Ltd.(4) (i) -- Indenture dated August 15, 1995 relating to $110.0 million of 5% Convertible Subordinated Debentures due August 15, 2005 issued by the Registrant.(10) 10 Material Contracts: (a) -- Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1, 1992.(10) (b) -- Amended and Restated Retirement Income Plan for Employees of Scholastic Inc. effective as of July 1, 1989.(10) (c) -- 1992 Stock Option Plan.(6) (d) -- 1995 Stock Option Plan.(11) (e) -- Non-qualified Stock Option Agreement dated July 16, 1987 between the Registrant and Joseph W. Oliver.(3) (f) -- Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc.EXHIBIT NUMBER ------- 3 (a) - Amended and Restated Certificate of Incorporation of the Registrant. (1) (b) - By-Laws of the Registrant. (2) 4 (a) - Amended and Restated Loan Agreement dated April 11, 1995 between the Registrant and Citibank, N.A., as agent, Marine Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of Boston and United Jersey Bank. (3) (b) - Amendment to the Amended and Restated Loan Agreement dated May 1, 1996. (4) (c) - Amendment to the Amended and Restated Loan Agreement dated May 28, 1997. (d) - Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National Association, as amended August 14, 1996 and May 30, 1997. (5)
39(e) - Overdraft Facility dated June 1, 1992, as amended on October 30, 1995 between Scholastic Canada Ltd. and CIBC. (5) (f) - Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Citibank, N.A. (5) (g) - Overdraft Facility dated May 14, 1992 as amended on June 30, 1995, between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Midland Bank. (5) (h) - Overdraft Facility dated February 12, 1993, as amended on January 31, 1995 between Scholastic Australia Pty. Ltd. (formerly known as Ashton Scholastic Pty. Ltd.) and National Australia Bank Ltd. (5) (i) - Overdraft facility dated April 20, 1993 between Scholastic New Zealand Ltd. (formerly Ashton Scholastic Ltd.) and ANZ Banking Group Ltd. (5) (j) - Indenture dated August 15, 1995 relating to $110 million of 5% Convertible Subordinated Debentures due August 15, 2005 issued by the Registrant. (6) (k) - Indenture dated December 15, 1996, relating to $125 million of 7% Notes due December 15, 2003 issued by the Registrant. (7) 10 Material Contracts: (a) - Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1, 1992. (6) (b) - Amended and Restated Retirement Income Plan for Employees of Scholastic Inc. effective as of July 1, 1989. (6) (c) - 1992 Stock Option Plan. (8) 41
EXHIBIT NUMBER ------ (g) -- Amendment agreement dated as of April 1, 1993 between Ise Hiyoko, Inc. and Scholastic Inc.(8) (h) -- Outside Directors' Stock Option Plan.(6) (i) -- Non-Employee Director Stock-For-Retainer Plan.(7) (j) -- Industrial Development Agency of the City of New York documents: (1) Lease agreement dated December 1, 1993.(8) (2) Indenture of Trust agreement dated December 1, 1993.(8) (3) Project agreement dated December 1, 1993.(8) (4) Sales Tax letter dated December 3, 1993.ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (d) - 1995 Stock Option Plan (9) (e) - Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc. (10) (f) - Amendment dated as of April 1, 1993 to the lease agreement between Ise Hiyoko, Inc. and Scholastic Inc. (11) (g) - Outside Directors' Stock Option Plan. (8) (h) - 1997 Outside Director's Stock Option Plan. (i) - Non-Employee Director Stock-For-Retainer Plan (12) (j) - Industrial Development Agency of the City of New York documents: 1) Lease Agreement dated December 1, 1993. (11) 2) Indenture of Trust Agreement dated December 1, 1993. (11) 3) Project Agreement dated December 1, 1993. (11) 4) Sales Tax Letter dated December 3, 1993. (11) 11 Computation of Net Income per Class A, Common and Class A Share and Common Share Equivalents. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors.
(b) Reports on form 8-K: -- Report on Form 8-K (Item 5) dated June 24, 1996. (c) The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Exhibits in Exhibit Volume I. (d) The response to this portion of Item 14 is submitted as a separate section of this report. - - ---------------------- FOOTNOTES: (1) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-46338) as filed with the Commission on March 12, 1992. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-45022) as filed with the Commission on January 10, 1992 (the '1992"1992 Registration Statement'Statement"). (3) Incorporated by reference to the Company's Registration StatementForm 10-Q for the quarter ended February 28, 1995 as filed with the Commission on April 13, 1995 (File No. 0-19860). (4) Incorporated by reference to the Company's Annual Report on Form S-1 (Registration No. 33-36300)10-K as filed with the Commission on August 6, 1990 (the '1990 Registration Statement')28, 1996 (File No. 0-19860). (4)(5) Such long-term debt does not individually amount to more than 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such instrument is not filed herewith. The Registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. (5)(6) Incorporated by reference to Amendment No. 1 to the 1992 Registration StatementCompany's Annual Report on Form 10-K as filed with the Commission on February 21, 1992. (6)August 28, 1995 (File No. 19860). (7) 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. (8) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 27, 1992 (File No. 0-19860). (7)(9) Incorporated by reference to the Company's Registration Statement Form S-8 (Registration No.33-98186) as filed with the Commission on October 16, 1995. (10) Incorporated by reference to Amendment No. 1 to the 1992 Registration Statement as filed with the Commission on February 21, 1992. (11) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 26, 1994 (File No. 0-19860). (12) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-74064) as filed with the Commission on January 11, 1994. (8) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 26, 1994 (File No. 0-19860). (9) Incorporated by reference to the Company's Form 10-Q for the quarter ended February 28, 1995 as filed with the Commission on April 13, 1995 (File No. 0-19860). (10) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 28, 1995 (File No. 0-19860). (11) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-98186) as filed with the Commission on October 16, 1995. 40 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 23, 199626, 1997 SCHOLASTIC CORPORATION By /s/RICHARD ROBINSON .........................................------------------- RICHARD ROBINSON, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - - ------------------------------------------ -------------------------------------------- ---------------------------- ------ ----- /S/ /s/ RICHARD ROBINSON Chairman of the Board, President, Chief August 23, 1996 .........................................26, 1997 - ------------------------------------- Chief Executive Officer and RICHARD ROBINSON Director (Principal RICHARD ROBINSON Executive Officer) /S//s/ RICHARD M. SPAULDING Executive Vice President and Director August 23, 1996 .........................................26, 1997 - ------------------------------------- RICHARD M. SPAULDING /S/ KEVIN/s/ Kevin J. MCENERYMcEnery Executive Vice President, Chief Financial August 23, 1996 .........................................26, 1997 - ------------------------------------- Financial Officer (Principal KEVIN J. MCENERY Financial & Accounting KEVIN J. MCENERY Officer) /S//s/ REBECA MARIAM. BARRERA Director August 23, 1996 .........................................26, 1997 - ------------------------------------- REBECA MARIAM. BARRERA Director August 23, 1996 ........................................./s/ HELEN V. BENHAM /S/Director August 26, 1997 - ------------------------------------- HELEN V. BENHAM /s/ FREDERIC J. BISCHOFF Director August 23, 1996 .........................................26, 1997 - ------------------------------------- FREDERIC J. BISCHOFF /S//s/ JOHN BRADEMAS Director August 23, 1996 .........................................26, 1997 - ------------------------------------- JOHN BRADEMAS /S//s/ JOHN C. BURTON Director August 23, 1996 .........................................26, 1997 - ------------------------------------- JOHN C. BURTON /S//s/ RAMON C. CORTINES Director August 23, 1996 .........................................26, 1997 - ------------------------------------- RAMON C. CORTINES /S//s/ ALONZO A. CRIM Director August 23, 1996 .........................................26, 1997 - ------------------------------------- ALONZO A. CRIM 43
41
SIGNATURE TITLE DATE - - ------------------------------------------ -------------------------------------------- ------------------- --------- ------ ----- /s/ CHARLES T. HARRIS, III Director August 23, 1996 .........................................26, 1997 - ------------------------------------- CHARLES T. HARRIS, III /s/ ANDREW S. HEDDEN /S/Director August 26, 1997 - ------------------------------------- ANDREW S. HEDDEN /s/ MAE C. JEMISON Director August 23, 1996 .........................................26, 1997 - ------------------------------------- MAE C. JEMISON /S//s/ RICHARD A. KRINSLEY Director August 23, 1996 .........................................26, 1997 - ------------------------------------- RICHARD A. KRINSLEY /S/ JOAN D. MANLEY Director August 23, 1996 ......................................... JOAN D. MANLEY /S//s/ JOHN G. MCDONALD Director August 23, 1996 .........................................26, 1997 - ------------------------------------- JOHN G. MCDONALD /S//s/ AUGUSTUS K. OLIVER, II Director August 23, 1996 .........................................26, 1997 - ------------------------------------- AUGUSTUS K. OLIVER II
42 44 SCHOLASTIC CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED MAY 31, 19961997 ITEM 14(D) FINANCIAL STATEMENT SCHEDULE This page left blank intentionally SCHEDULE II SCHOLASTIC CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED MAY 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
SCHEDULE II SCHOLASTIC CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED MAY 31, 1997, 1996 AND 1995 (AMOUNTS IN MILLIONS) ADDITIONS ------------------------ BALANCE AT ADDITIONS BALANCE AT BEGINNING CHARGED TO CHARGED TO END OF DESCRIPTION OF YEAR TO INCOME GOODWILL WRITE OFFS YEAR - - --------------------------------------------------------------------------------------------------- ---------- ------------------- ---------- ---------- ---------- May 31, 1997: Reserve for royalty advances........ $24.9 $ 2.3 -- $ 2.1 $25.1 ===== ===== ===== ===== ===== Reserve for obsolescence............ $27.1 $21.1 $ 2.2 $16.4 $34.0 ===== ===== ===== ===== ===== Reserve for returns................. $27.6 $68.7 -- $66.1(1) $30.2 ===== ===== ===== ===== ===== May 31, 1996: Reserve for royalty advances.............................advances........ $16.6 $ 16,5911.9 $ 1,8926.5 $ 120 $ 18,363 --------- -------- --------- --------- --------- -------- --------- ---------0.1 $24.9 ===== ===== ===== ===== ===== Reserve for obsolescence.................................obsolescence............ $18.2 $11.4 $ 18,186 $15,544 $ 10,007 $ 23,723 --------- -------- --------- --------- --------- -------- --------- ---------7.5 $10.0 $27.1 ===== ===== ===== ===== ===== Reserve for returns...................................... $ 19,839 $47,714 $ 39,899(1) $ 27,654 --------- -------- --------- --------- --------- -------- --------- ---------returns................. $19.8 $47.7 -- $39.9(1) $27.6 ===== ===== ===== ===== ===== May 31, 1995: Reserve for royalty advances.............................advances........ $14.8 $ 14,7772.0 -- $ 1,993 $ 179 $ 16,591 --------- -------- --------- --------- --------- -------- --------- ---------0.2 $16.6 ===== ===== ===== ===== ===== Reserve for obsolescence.................................obsolescence............ $15.6 $ 15,6047.0 -- $ 7,034 $ 4,452 $ 18,186 --------- -------- --------- --------- --------- -------- --------- ---------4.4 $18.2 ===== ===== ===== ===== ===== Reserve for returns...................................... $ 14,887 $30,460 $ 25,508(1) $ 19,839 --------- -------- --------- --------- --------- -------- --------- --------- May 31, 1994: Reserve for royalty advances............................. $ 13,186 $ 2,486 $ 895 $ 14,777 --------- -------- --------- --------- --------- -------- --------- --------- Reserve for obsolescence................................. $ 12,887 $ 6,609 $ 3,892 $ 15,604 --------- -------- --------- --------- --------- -------- --------- --------- Reserve for returns...................................... $ 9,964 $25,239 $ 20,316(1) $ 14,887 --------- -------- --------- --------- --------- -------- --------- ---------
- - ------------returns................. $14.9 $30.4 -- $25.5(1) $19.8 ===== ===== ===== ===== ===== - ------------------- (1) Represents actual returns charged to reserve. S-1 This page left blank intentionally EXHIBIT INDEX
EXHIBIT INDEX PAGE NO.EXHIBIT DESCRIPTION NUMBER - - ------- ------------------------------------------------------------------------------------------------- ----------------- -------- 3(a) --3 (a) - Amended and Restated Certificate of Incorporation of the Registrant.(1)....................... (b) --- By-Laws of the Registrant.(2)................................................................. 4(a) -- 4 (a) - Amended and Restated Loan Agreement dated April 11, 1995 between the Registrant and Citibank, N.A., as agent, Marine Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of Boston and United Jersey Bank.(10)............................................................ (3) (b) --- Amendment to the Amended and restatedRestated Loan Agreement dated May 1, 1996........................1996. (4) (c) --- Amendment to the Amended and Restated Loan Agreement dated as of May 28, 1997. (d) - Revolving Loan Agreement dated June 19, 1995 between the Registrant and Sun Bank, National Association.(4)............................................................................... (d) -- Amendment to the Revolving Loan Agreement datedAssociation, as amended August 14, 1996.(4)...........................1996 and May 30, 1997. (5) (e) --- Overdraft Facility dated June 1, 1992, as amended on October 30, 1995 between Scholastic Canada Ltd. and CIBC.(4)...................................................................... (5) (f) --- Overdraft Facility dated June 24, 1993 between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Citibank, N.A.(4)...................................................... (5) (g) --- Overdraft Facility dated May 14, 1992 as amended on June 30, 1995, between Scholastic Ltd. (formerly known as Scholastic Publications Ltd.) and Midland Bank.(4)......................... (5) (h) --- Overdraft Facility dated February 12, 1993, as amended on January 31, 1995 between Scholastic Australia Pty. Ltd. (formerly known as Ashton Scholastic Pty. Ltd.) and National Australia Bank Ltd.(4)....................................................................................... (5) (i) --- Overdraft Facility dated April 20, 1993 between Scholastic New Zealand Ltd. (formerly Ashton Scholastic Ltd.) and ANZ Banking Group Ltd. (5) (j) - Indenture dated August 15, 1995 relating to $110.0$110 million of 5% Convertible Subordinated Debentures due August 15, 2005 issued by the Registrant.(11).................................. (6) (k) - Indenture dated December 15, 1996, relating to $125 million of 7% Notes due December 15, 2003 issued by the Registrant. (7) 10 Material Contracts: (a) --- Scholastic Inc. 401(k) Savings and Retirement Plan, as amended and restated as of June 1, 1992.(11)..................................................................................... (6) (b) --- Amended and Restatedrestated Retirement Income Plan for Employees of Scholastic Inc. effective as of July 1, 1989.(11)............................................................................. (6) (c) --- 1992 Stock Option Plan.(7).................................................................... (8) (d) --- 1995 Stock Option Plan.(12)................................................................... (9) (e) -- Non-qualified Stock Option Agreement dated July 16, 1987 between the Registrant and Joseph W. Oliver.(3).................................................................................... (f) --- Lease dated as of January 28, 1992 between Ise Hiyoko, Inc. and Scholastic Inc.(6)............ (g) -- (10) (f) - Amendment agreement dated as of April 1, 1993 between Ise Hiyoko, Inc. and Scholastic Inc.(9)....................................................................................... (h) -- (11) (g) - Outside Directors' Stock Option Plan.(7)...................................................... (8) (h) - 1997 Outside Directors' Stock Option Plan. (i) --- Non-Employee Director Stock-For-Retainer Plan.(8)............................................. (12) (j) --- Industrial Development Agency of the City of New York documents: (1)1) Lease agreementAgreement dated December 1, 1993.(9)................................................. (2) (11) 2) Indenture of Trust agreementAgreement dated December 1, 1993.(9).................................... (3) (11) 3) Project agreementAgreement dated December 1, 1993.(9)............................................... (4) (11) 4) Sales Tax letterLetter dated December 3, 1993.(9)................................................ (11) 11 Computation of Net Income per Class A, Common and Class A Share and Common Share Equivalents.....Equivalents. 21 Subsidiaries of the Registrant...................................................................Registrant. 23 Consent of Independent Auditors..................................................................Auditors.
FOOTNOTES: (1) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-46338) as filed with the Commission on March 12, 1992. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-45022) as filed with the Commission on January 10, 1992 (the '1992"1992 Registration Statement'Statement"). (3) Incorporated by reference to the Company's Registration StatementForm 10-Q for the quarter ended February 28, 1995 as filed with the Commission on April 13, 1995 (File No. 0-19860). (4) Incorporated by reference to the Company's Annual Report on Form S-1 (Registration No. 33-36300)10-K as filed with the Commission on August 6, 1990 (the '1990 Registration Statement')28,1996 (File No. 0-19860). (4)(5) Such long-term debt does not individually amount to more than 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such instrument is not filed herewith. The Registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. (5)(6) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 28, 1995 (File No. 0-19860). (7) Incorporated by reference to the Company's Registration Statement on Form S-8S-3 (Registration No. 33-48655)333-17365) as filed with the Commission on June 22, 1992. (6) Incorporated by reference to Amendment No. 1 to the 1992 Registration Statement as filed with the Commission on February 21, 1992. (7)December 11, 1996. (8) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 27, 1992 (File No. 0-19860). (8)(9) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-74064)No.33-98186) as filed with the Commission on January 11, 1994. (9)October 16,1995. (10) Incorporated by reference to Amendment No. 1 to the 1992 Registration Statement as filed with the Commission on February 21, 1992. (11) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 26, 1994 (File No. 0-19860). (10) Incorporated by reference to the Company's Form 10-Q for the quarter ended February 28, 1995 as filed with the Commission on April 13, 1995 (File No. 0-19860). (11) Incorporated by reference to the Company's Annual Report on Form 10-K as filed with the Commission on August 28, 1995 (file No. 0-19860). (12) Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-98186)33-74064) as filed with the Commission on October 16, 1995. STATEMENT OF DIFFERENCES ------------------------ The service mark symbol shall be expressed as 'sm' The trademark symbol shall be expressed as 'tm' The registered trademark symbol shall be expressed as 'r' January 11, 1994.