- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2001 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
557 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------
Common Stock, $.01 par value The NASDAQ Stock Market
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, par value $0.01, held by
non-affiliates as of August 10, 2001, was approximately $1,125,585,000. As of
such date, non-affiliates held no shares of the Class A Stock, $0.01 par value.
There is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant's voting stock
as of August 10, 2001 was as follows: 33,577,492 shares of Common Stock and
1,656,200 shares of Class A Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders to be held
September 20, 2001.
- --------------------------------------------------------------------------------
PART I
ITEM 1 o BUSINESS
OVERVIEW
Scholastic Corporation (together with its subsidiaries, "Scholastic" or the
"Company") is a global children's publishing and media company. The Company
believes that it is the world's largest publisher and distributor of children's
books. Scholastic creates quality educational and entertaining materials and
products for use in school and at home, including children's books, textbooks,
magazines, technology-based products, teacher materials, television programming,
videos and toys. The Company's Website, Scholastic.com, is a leading site for
teachers, classrooms and parents and an award-winning destination for children.
With the June 2000 acquisition of Grolier Incorporated ("Grolier") for $400
million in cash, the Company became the leading operator in the United States of
direct-to-home book clubs primarily serving children age five and under, and the
leading print and on-line publisher of children's non-fiction and reference
products sold primarily to United States school libraries. Internationally,
Scholastic has long-established operations in Canada, the United Kingdom,
Australia and New Zealand, and newer operations in Argentina, Hong Kong, India,
Ireland and Mexico. The Grolier acquisition expanded the Company's international
operations in Canada, the United Kingdom and Southeast Asia.
During its 81 years of operation, Scholastic has emphasized quality products and
a dedication to learning. Scholastic Corporation was incorporated under the laws
of Delaware in 1986 and, through predecessor entities, has been in business
since 1920. Grolier, through its predecessor entities, has been in business
since 1895.
OPERATING SEGMENTS
The Company's businesses are categorized into four operating segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING (which collectively represent the Company's domestic
operations); and INTERNATIONAL. During the three-year period ended May 31, 2001,
Scholastic's revenues have grown at an average annual compounded rate of 30.1%,
including the Grolier acquisition, and 16.6%, excluding the Grolier acquisition.
The following table sets forth revenues by operating segment for the three
fiscal years ended May 31:
(AMOUNTS IN MILLIONS)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION $ 1,221.9 $ 857.9 $ 656.9
EDUCATIONAL PUBLISHING 309.7 212.5 196.9
MEDIA, LICENSING
AND ADVERTISING 134.0 108.1 105.8
INTERNATIONAL 296.7 224.0 205.9
- --------------------------------------------------------------------------------
TOTAL $ 1,962.3 $ 1,402.5 $ 1,165.5
================================================================================
Reported revenues for fiscal 2001 include Grolier's operations since the date of
acquisition. Reported revenues for fiscal 2000 and 1999 do not include Grolier's
operations. Selected pro forma information for Grolier is included in Part II,
Item 8, Consolidated Financial Statements and Supplementary Data. The addition
of Grolier's revenues in fiscal 2001 did not significantly change the Company's
sales mix by operating segment.
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
(62.3% OF FISCAL 2001 REVENUES)
GENERAL
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
school-based book clubs, school-based and direct-to-home continuity programs,
school-based book fairs and the trade channel.
The Company believes it is the largest publisher and distributor of children's
books and is the largest operator of school-based book clubs and school-based
book fairs in the United States. The Company is also a leading publisher of
children's books distributed through the trade channel and the leading
distributor in the United States of children's books through the direct-to-home
channel, primarily for children ages five and younger. In fiscal 2001, the
Company distributed in excess of 325 million children's books in the United
States through this business segment.
Scholastic offers a broad range of quality children's literature. Many of the
Company's books have received awards for excellence in children's literature,
including the Caldecott and Newbery awards.
The Company obtains titles for sale in its distribution channels from various
sources. The Company's first source for titles is the Company's publication of
books written under exclusive publication agreements with authors, book
packagers or other media companies. Scholastic generally owns the rights to sell
these titles in all United States channels of distribution. Scholastic's second
source of titles is licenses to publish books exclusively in specified channels
of distribution, including reprints of books originally published by other
publishers for which the Company acquires rights to sell in the school market,
and licenses to publish books for exclusive sale in the direct-to-home channel.
The third source of titles is the Company's purchase of finished books from
other publishers to be sold in the school market. At May 31, 2001, the Company's
backlist (a list of titles published as new titles in prior years) included more
than 5,000 titles.
[LOGO] [GRAPHIC]1
SCHOOL BOOK CLUBS
Scholastic founded its first school book club in 1948. The Company operates ten
school-based book clubs: FIREFLY(R), serving pre-kindergarten ("pre-K") and
kindergarten ("K") students; SEESAW(R), serving students grades K to 1; two
CARNIVAL(R) clubs, one serving students grades K to 2, and the other serving
students grades 3 to 6; LUCKY BOOK CLUB(R), serving students grades 2 to 3;
ARROW BOOK CLUB(R), serving students grade 4 to 6; TAB BOOK CLUB(R), serving
students grades 6 to 8; and three TRUMPET(R) clubs, serving pre-K to grade 6
students. In addition to its regular periodic offerings, the Company creates
special theme-based offers targeted to the different grade levels during the
year, such as holiday offers, science offers, curriculum offers and Spanish
language offers.
The Company estimates that over 80% of all elementary school teachers in the
United States participate in school book clubs, with substantially all of these
teachers using Scholastic book clubs at least once during the school year. The
Company believes that teachers participate in school book clubs because it is
their opinion that quality books at affordable prices will be of interest to
students and improve students' reading skills. The Company also believes that
teachers participate because the school 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 to grade 8 classrooms in the United States.
Participation in any offer does not create an obligation to participate in any
subsequent offer, nor does it preclude participation in other book clubs.
Teachers who wish to participate in a school book club distribute the order
forms to their students, who may choose from generally 80 or more selections at
substantial reductions from list prices. The teacher consolidates the students'
orders and forwards them to the Company. Orders are then shipped to the teacher
for distribution to the students. Teachers who participate in the book clubs
receive bonus points for use by their school, which may be redeemed for the
purchase of additional books and other items for their classrooms.
In its school book club business, the Company competes on the basis of book
selection, price, promotion and customer service. The Company believes that its
broad offerings of titles, many of which are distributed in this channel
exclusively by Scholastic, combined with low costs and its efficient use of
promotional mailings, enable the Company to compete effectively.
CONTINUITY PROGRAMS
The Company operates continuity programs, in which children and their families
generally place a single order and receive more than one shipment of books.
Continuity programs are promoted through (i) direct-to-home clubs offers
primarily through direct mail, telemarketing and print and on-line
advertisements, and (ii) offers primarily in school-based book clubs. The
Company's direct-to-home business, acquired as part of the Grolier acquisition,
is the leading direct-to-home seller of children's books primarily serving
children age five and under. Beginning in fiscal 2002, the Company's
direct-to-home continuity business will include Scholastic publishing
properties, such as CLIFFORD & COMPANY, HELLO KITTY(TM), MAGIC UNIVERSITY(TM)
and BARNEY(TM), as well as the licensed programs previously operated by Grolier,
such as DISNEY BOOK CLUB(TM), BARBIE(TM) and DR. SEUSS(TM) BEGINNING READERS
PROGRAM. Continuity programs offered primarily through Scholastic's school book
clubs include I SPY(TM), CLIFFORD THE BIG RED DOG(TM), DEAR AMERICA(TM),
DINOFOURS(TM), FRANKLIN, BARNEY, POWERPUFF GIRLS(TM), and QUESTIONS KIDS ASK(R).
SCHOOL BOOK FAIRS
Scholastic entered the school-based book fair business in 1981. The Company has
grown this business by expanding into new markets, including through selected
acquisitions, and by increasing its business in existing markets by reaching new
school customers, holding more fairs per year at its existing school customers
and growing revenue on a per fair basis. The Company is the leading operator of
school book fairs in the United States. In July 2001, the Company acquired
certain assets of Troll Book Fairs Inc.
Book fairs are generally week-long events conducted on school premises, operated
by school librarians and/or parent-teacher organizations. School book fair
events provide children with access to hundreds of different titles and allow
them to purchase books and other select products of their choice at the school.
Although the Company provides the school with the books and book display cases,
the school itself conducts the book fair. The Company believes that the primary
motivation for schools sponsoring fairs is to make quality books available to
their students at reasonable prices in order to stimulate reading interests. In
addition, the school retains a portion of the book fair revenues, which can then
be used to purchase books, supplies and equipment for the school.
The Company operates school book fairs in all 50 states under the name
SCHOLASTIC BOOK FAIRS(R). The Company also markets fairs branded as SCHOLASTIC
SHOWCASE BOOK FAIRS, SCHOLASTIC EXPLORASTORY BOOK FAIRS(TM) and READ STREET BOOK
FAIRS(R). In addition, the Company offers premium book fairs under the names
SCHOLASTIC LITERACY FESTIVAL(TM) and SCHOLASTIC BOOKS ON TOUR(R), which feature
an expanded list of titles supported by merchandise displays and costumed book
characters.
Books and display cases are delivered to schools from the Company's warehouses
by a fleet of leased vehicles. Sales and customer service functions are
performed from regional sales offices, supported by field representatives. The
Company believes that its competitive advantages in the book fair business
include the strength of the relationship between its sales representatives and
schools, broad geographic coverage, quality customer service and breadth of
product selection. Over 90% of the schools that sponsored a Scholastic book fair
in fiscal 2000 sponsored a Scholastic book fair again in fiscal 2001.
TRADE
Scholastic is one of the leading sellers of children's books through trade
bookstores and mass merchandisers in the United States. The Company maintains
over 3,600 titles for trade distribution, approximately 500 of which were added
through the Grolier acquisition. Scholastic's original
[GRAPHIC]2 [LOGO]
publications include HARRY POTTER, I SPY(TM), CLIFFORD THE BIG RED DOG(R),
ANIMORPHS(R), DEAR AMERICA(R), THE BABY-SITTERS CLUB(R), THE MAGIC SCHOOL
BUS(R), CAPTAIN UNDERPANTS(TM) and MISS SPIDER(R) and licensed properties such
as BARNEY(R), STAR WARS(R) and SCOOBY DOO(TM). The Company's trade sales
organization focuses on marketing and selling Scholastic's publishing properties
to book store accounts and mass merchandisers.
The Company's fiscal 2001 sales in the trade market were led by the HARRY POTTER
books. Other Scholastic bestsellers during fiscal 2001 included books from the
DEAR AMERICA, I SPY, CLIFFORD THE BIG RED DOG and CAPTAIN UNDERPANTS series.
EDUCATIONAL PUBLISHING
(15.8% OF FISCAL 2001 REVENUES)
GENERAL
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of supplemental and core materials,
classroom magazines and print and on-line non-fiction and reference products for
grades K to 12 in the United States.
Scholastic has been providing quality innovative educational materials to
schools and libraries since it began publishing classroom magazines in the
1920's. The Company added supplementary books and texts to its product line in
the 1940's, professional books for teachers in the 1980's and early childhood
products and core curriculum materials in the 1990's. In 1996, the Company
strengthened its Spanish language offerings through the acquisition of Lectorum
Publications, Inc., the largest Spanish language book distributor to schools and
libraries in the United States. Through the acquisition of Grolier in June 2000,
the Company became the leading print and on-line publisher of children's
non-fiction and reference products sold primarily to school libraries in the
United States. The Company markets and sells its EDUCATIONAL PUBLISHING products
through a combination of field representatives, direct mail and telemarketing.
SUPPLEMENTAL AND CORE PUBLISHING
The Company's supplemental and core publishing operations develop and distribute
instructional materials directly to schools in the United States, primarily
purchased through school and district budgets. The Company's supplemental
publishing includes reading improvement programs, individual paperbacks and
collections and professional books designed for, and generally purchased by
teachers. The Company's primary core product has been SCHOLASTIC LITERACY
PLACE(R), its K to 6 basal textbook reading program.
In April 2001, the Company announced its decision to focus its supplemental and
core publishing efforts on reading improvement materials. As part of this focus
on reading improvement programs, the Company also announced in April 2001 its
decision not to update SCHOLASTIC LITERACY PLACE for any future state adoptions.
Scholastic's reading improvement programs include technology-based products such
as READ 180(R), a reading intervention program for students in grades 4 to 8
reading at least two years below grade level; WIGGLEWORKS(R), which assists in
teaching reading to students; and SCHOLASTIC READING COUNTS!(TM), which
encourages reading through a school-managed incentive program.
Other reading improvement products include READ XL(TM), a reading improvement
program for students in grades 6 to 8, which provides high-interest and
increasingly demanding text to assist students reading one to three years below
grade level; BUILDING LANGUAGE FOR LITERACY(TM), a program of books and audio
tapes to guide children through the critical pre-K to K stages of literacy
development; and SCHOLASTIC PHONICS READING PROGRAM(TM), which is a beginning
phonics instruction program for grades K to 1.
The teaching resources group publishes professional books designed for and
generally purchased by teachers and distributes individual paperbacks and
collections to schools. The Company also distributes a successful line of
supplemental phonics products.
CLASSROOM MAGAZINES
Scholastic is a leading publisher of classroom magazines. Teachers in grades K
to 12 use these magazines as supplementary educational materials. The Company's
classroom magazines carry the Scholastic name, which reinforces the Company's
educational reputation with students, teachers and school administrators. The
Company believes that its reputation for publishing quality magazines,
maintaining an extensive magazine mailing list and having a large customer base
of teachers helps generate customers for its school book clubs and other
Scholastic products as well as for its magazines. At the same time, the Company
uses its school book club mailings to help secure additional circulation for its
classroom magazines.
The Company's 33 classroom magazines are designed to encourage students to read
and to supplement the school's formal learning program by bringing subjects of
current interest into the classroom. The subjects covered include English,
reading, literature, math, science, current events, social studies and foreign
languages. The most well known of the Company's domestic magazines are
SCHOLASTIC NEWS(R) and JUNIOR SCHOLASTIC(R).
Scholastic's classroom magazine circulation in the United States in fiscal 2001
was more than 7 million. Approximately two-thirds of the circulation was in
grades K to 6, with the balance in grades 7 to 12. In fiscal 2001, teachers in
over 60% of the elementary schools and in over 70% of the secondary schools in
the United States used the Company's classroom magazines. The various classroom
magazines are distributed either on a weekly, bi-weekly or monthly basis during
the school year.
The majority of the magazines purchased are paid for with school funds with
teachers or students paying for the balance. Circulation revenue accounted for
substantially all of the Company's classroom magazine revenues in fiscal 2001.
NON-FICTION AND REFERENCE PUBLISHING
Scholastic is a leading publisher of quality children's non-fiction and
reference products and encyclopedias sold primarily to schools and libraries in
the United States under the Grolier name. Products include print and on-line
versions of ENCYCLOPEDIA AMERICANA(R), THE NEW BOOK OF KNOWLEDGE(R) and
CUMBRE(TM), a Spanish language encyclopedia, and quality non-fiction books
published in the United States under the imprints Children's Press and Franklin
Watts.
[LOGO] [GRAPHIC]3
MEDIA, LICENSING AND ADVERTISING
(6.8% OF FISCAL 2001 REVENUES)
GENERAL
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software, Internet services and the
production and/or distribution by and through the Company's subsidiary,
Scholastic Entertainment Inc. ("SEI"), of programming and consumer products
(including children's television programming, videos, software, feature films,
promotional activities and non-book merchandise).
PRODUCTION AND DISTRIBUTION
SEI extends the Company's franchises by creating programming and managing global
brands based on Scholastic's strong publishing properties. SEI develops and
produces children's television programming, videos, software, feature films and
non-book products. SEI's multimedia programming also generates extensive
awareness for brand building and consumer product activities worldwide.
SEI has built a television media library of over 200 half-hours including:
CLIFFORD THE BIG RED DOG(TM), SCHOLASTIC'S THE MAGIC SCHOOL BUS(R),
GOOSEBUMPS(R), ANIMORPHS(R) and DEAR AMERICA(R). These television series
initially aired on PBS Kids, PBS, Fox Kid's NETWORK, Nickelodeon and HBO,
respectively, and collectively have been licensed for broadcast in more than 50
countries. In fall 2000, SEI launched CLIFFORD THE BIG RED DOG, a new animated
television series based on the Company's best-selling literary classics by
Norman Bridwell which were first published in 1963. Since its launch, this award
winning series, nominated for five Emmys, has become a top rated show on PBS
Kids. In addition to the original 40 episodes, PBS Kids has ordered 25 new
episodes and CLIFFORD THE BIG RED DOG will begin airing in markets outside of
North America in fiscal 2002. Other SEI programming initiatives for fiscal 2002
include the launch of 26 episodes of I SPY(TM) on HBO, based on the Company's
best-selling book series, and the launch in the international market of 26
episodes of HORRIBLE HISTORIES(TM), an animated adaptation of Scholastic UK's
best-selling book series.
BRAND MARKETING AND CONSUMER PRODUCTS
SEI creates and develops branding campaigns for Scholastic properties. For
example, the successful launch of CLIFFORD THE BIG RED Dog on PBS was coupled
with a comprehensive licensing program to support the property, making Clifford
a leading pre-school brand and generating additional sales of Scholastic's
Clifford books, toys, videos, CD-ROMs and consumer products. In connection with
its branding campaigns, SEI has received numerous marketing and licensing awards
and has partnered with industry leaders in consumer promotions. In addition, SEI
creates, manufactures and distributes high-quality consumer products primarily
based on Scholastic's literary properties, such as a line of upscale plush toys
and wooden puzzles based on CLIFFORD THE BIG RED DOG(TM), SCHOLASTIC'S THE MAGIC
SCHOOL BUS(R), THE REAL MOTHER GOOSE(TM) and STELLALUNA(TM). The products are
available through independent toy/gift stores, specialty chains, department
stores, mail order catalogs and bookstores, as well as through Scholastic's
school book clubs, school book fairs and continuity programs. Scholastic also
produces and markets videos to the school market through Weston Woods, a
producer of videos based on high quality children's books.
CONSUMER SOFTWARE
Scholastic sells original and licensed consumer software for grades K to 8
through school-based software clubs, school book clubs and school book fairs.
The Company acquires software for distribution in all of these channels through
a combination of licensing, purchases of product from software publishers and
internal development. Scholastic's school software clubs are marketed on the
same basis as the Company's school book clubs. The Company's internally
developed CD-ROM titles, including the award-winning series of I SPY(TM)
CD-ROMs, are also sold through trade channels.
SCHOLASTIC.COM
Scholastic.com is a leading website for teachers and classrooms and an
award-winning destination for children. For teachers, Scholastic.com offers
multimedia teaching units, lesson plans, teaching tools and on-line activities.
For children, Scholastic.com offers sites with favorite characters, such as
HARRY POTTER(TM), CLIFFORD THE BIG RED DOG(TM), I Spy(TM) and ANIMORPHS(TM).
Scholastic.com was the winner of the 2000 Webby Award for "Best Kid's Website".
In fiscal 2002, the Company will expand the use of its Internet platform to
generate e-commerce sales to both teachers and parents with the introduction of
book club on-line ordering and two new on-line stores dedicated to serving
teachers in the school and parents/families at home.
ADVERTISING
Certain of the Company's magazine properties generate advertising revenues as
their primary source of revenue, including INSTRUCTOR(TM), SCHOLASTIC EARLY
CHILDHOOD TODAY(TM) and COACH AND ATHLETIC DIRECTOR(TM), which are directed to
teachers and education professionals and are distributed during the academic
year. Total circulation for these magazines was approximately 315,000 in fiscal
2001. Subscriptions for these magazines are solicited primarily by direct mail.
SCHOLASTIC PARENT AND CHILD(R) magazine, which is directed at parents and
distributed through schools and child care programs, had a paid circulation of
approximately 1.2 million in fiscal 2001. These magazines carry paid
advertising, advertising for Scholastic's other products and advertising for
clients that sponsor customized programs.
Also included in this group are: Scholastic Marketing Partners, which develops
sponsored educational materials and supplementary classroom programs in
partnership with corporations, government agencies and nonprofit organizations;
and Quality Education Data, which develops and markets databases focused on
teachers, schools and education.
INTERNATIONAL
(15.1% OF FISCAL 2001 REVENUES)
GENERAL
The INTERNATIONAL segment includes the publication and distribution of
products and services outside the United States
[GRAPHIC]4 [LOGO]
by the Company's international operations and its domestic export and foreign
rights businesses.
Internationally, Scholastic has long-established operations in Canada, the
United Kingdom, Australia and New Zealand and newer operations in Argentina,
Hong Kong, India, Ireland and Mexico. With the acquisition of Grolier, the
Company expanded into the direct-to-home book club business primarily serving
children age five and under in Canada, the United Kingdom and Australia, and
added the publication and distribution of reference products and services
outside the United States, principally in Southeast Asia.
Scholastic's operations in Canada, the United Kingdom, Australia and New Zealand
generally mirror Scholastic's United States business model. Each of these
international operations have original trade and educational publishing
programs, distribute children's books, software and other materials through
school-based book clubs, school-based book fairs and trade channels, distribute
magazines and offer on-line services. Each of these operations has established
export and foreign rights licensing programs and is a licensee of book tie-ins
for major media properties. Original books published by each of these operations
have received awards of excellence in children's literature both domestically
and internationally.
CANADA
Scholastic Canada, founded in 1957, is a leading publisher and distributor of
English and French language children's books, is the largest school-based book
club and school-based book fair operator in Canada and is one of the leading
suppliers of original or licensed children's books to the Canadian trade market.
Since 1965, Scholastic Canada has produced quality Canadian-authored books and
educational materials. Grolier Canada is a leading operator of direct-to-home
book clubs in Canada.
UNITED KINGDOM
Scholastic UK, founded in 1964, is a leading children's publisher in the United
Kingdom where its trade books appear frequently on children's bestseller lists.
Scholastic UK is the largest school book club and school book fair operator in
the United Kingdom. Scholastic UK's best selling original book series, HORRIBLE
HISTORIES(TM), is being adapted for television by SEI. Scholastic UK also
publishes five monthly magazines for teachers and supplemental educational
materials, including professional books. Grolier UK is a leading operator of
direct-to-home book clubs in the United Kingdom.
AUSTRALIA
Scholastic Australia, founded in 1968, is the leading publisher and distributor
of children's educational materials in Australia and has the largest school book
club and book fair operation in the country, reaching 90% of the primary
schools. Scholastic Australia's imprints include: Scholastic Press, Omnibus
Books and Margaret Hamilton Books. Grolier Australia is a leading operator of
direct-to-home book clubs in Australia.
NEW ZEALAND
Scholastic New Zealand, founded in 1964, is the largest children's book
publisher and the leading book distributor to schools in New Zealand. Through
its school book clubs and school book fairs, Scholastic New Zealand reaches 90%
of the country's schools.
SOUTHEAST ASIA
Grolier's Southeast Asian operations sell English language Grolier reference
materials and local language product through a network of approximately 2,500
independent door-to-door sales representatives in India, Indonesia, Malaysia,
Philippines, Singapore, Taiwan and Thailand. Commencing in fiscal 2002, this
network will also test market books and software from Scholastic's other
operations.
OTHER INTERNATIONAL OPERATIONS
The Company has launched operations in Mexico (1994), India (1997), Ireland
(1998) and Argentina (1999). These businesses principally distribute, through
school book fairs and/or school book clubs, books and educational materials
published by Scholastic's other operations as well as merchandise from other
publishers. In fiscal 1999, Scholastic India began its own Hindi and English
language original publishing program.
FOREIGN RIGHTS AND EXPORT
The Company licenses the foreign-language rights to selected Scholastic titles
to other publishing companies around the world in over 25 languages. The
Company's export business sells Scholastic books and products in regions of the
world not otherwise serviced by Scholastic subsidiaries. In 1998, the Company
established Scholastic Hong Kong Ltd. to handle export sales in the Asia-Pacific
region.
MANUFACTURING AND DISTRIBUTION
The Company's books, magazines, software and other materials and products are
manufactured by third parties through arm's length negotiation or competitive
bidding. As appropriate, the Company enters into multi-year agreements that
guarantee specified volume in exchange for favorable pricing terms. Paper is
purchased from third party sources. The Company does not anticipate any
difficulty in continuing to satisfy its manufacturing and paper requirements.
In the United States, the Company processes and fulfills school book club,
trade, supplemental and core, and export orders primarily from its primary
warehouse and distribution facility in Jefferson City, Missouri. Magazine orders
are processed at the Jefferson City, Missouri facility and are shipped directly
from printers. The Company ships school-based book club originated continuity
orders primarily from its warehouse and distribution facility in Des Plaines,
Illinois and direct-to-home originated continuity orders through a third party
arrangement. Grolier non-fiction and reference orders are processed and
fulfilled at the Company's Danbury facility. In connection with its trade
business, the Company generally outsources certain services, including
invoicing, billing, returns processing and collection services and may also ship
product directly from printers to customers. School book fair orders are
fulfilled through a
[LOGO] [GRAPHIC]5
network of warehouses across the country. The Company's international school
book club, book fair, trade and educational operations use similar distribution
systems.
SEASONALITY
The Company's school-based book clubs, school-based book fairs and most of its
magazines operate on a school-year basis. Therefore, the Company's business is
highly seasonal.
As a consequence, the Company's revenues in the first and third quarters of the
fiscal year are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are
proportionately larger in the second quarter of the fiscal year, while revenues
from the sale of instructional materials are the highest in the first quarter.
In the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. As a result of the Company's
business cycle, seasonal borrowings have historically increased during June,
July and August, have generally peaked in September or October, and have been at
their lowest point in May.
COMPETITION
The markets for children's educational and entertainment materials are highly
competitive. Competition is based on the quality and range of educational
materials made available, price, promotion, customer service and distribution
channels. Competitors include numerous other book, textbook and supplementary
text publishers, distributors and other resellers (including over the Internet)
of children's books and other educational materials, national publishers of
classroom and professional magazines with substantial circulation, numerous
producers of television, video and film programming (many of which are
substantially larger than the Company), television networks and cable networks,
publishers of computer software and distributors of products and services on the
Internet. In the United States, competitors include another national school book
club operator as well as regional and local school book fair operators,
including bookstores. Competition may increase further to the extent that other
entities enter the market and to the extent that current competitors or new
competitors develop and introduce new materials that compete directly with the
products distributed by the Company or develop or expand competitive sales
channels.
EMPLOYEES
At May 31, 2001, the Company employed approximately 6,700 people in full-time
jobs and 1,000 people in hourly or part-time jobs in the United States and
approximately 2,500 people internationally. The number of part-time employees
fluctuates during the year because significant portions of the Company's
business are closely correlated with the school year. The Company believes that
relations with its employees are good.
COPYRIGHT AND TRADEMARKS
SCHOLASTIC is a registered trademark in the United States and in a number of
countries where the Company conducts business. Scholastic Inc., the Company's
principal U.S. operating subsidiary, has registered and/or has pending
applications to register its trademarks in the United States for the names of
each of its domestic book clubs, the titles of its magazines and the names of
all its core curriculum programs. The Company's international subsidiaries have
also registered trademarks in the name of Scholastic Inc. for the names of their
respective book clubs and magazines. Although individual book titles are not
subject to trademark protection, Scholastic Inc. has registered and/or has
pending applications to register trademarks in the United States and in a number
of countries for the names of certain series of books and consumer products,
such as THE MAGIC SCHOOL BUS, ANIMORPHS, CLIFFORD THE BIG RED DOG and HORRIBLE
HISTORIES. GROLIER is a registered trademark in the United States and a number
of countries where it conducts business. All of the Company's publications,
including books, magazines and software, are subject to copyright protection.
Where applicable, the Company consistently copyrights its magazines, books and
software in the name of Scholastic Inc., except for Grolier's publications,
which currently continue to be copyrighted under the name of Grolier
Incorporated or its wholly-owned subsidiaries. Copyrights and trademarks are
vigorously defended by the Company and, as necessary, outside counsel may be
retained to assist in such protection.
ITEM 2 o PROPERTIES
The Company maintains its principal offices in the metropolitan New York area,
where it owns or leases approximately 600,000 square feet of space. The Company
also owns or leases approximately 1.7 million square feet of office and
warehouse space for its National Service Operation located in the Jefferson
City, Missouri area and approximately 400,000 square feet of office and
warehouse space related to its Grolier operations in Danbury, Connecticut and
other United States locations. In addition, the Company owns or leases
approximately 2.4 million square feet of office and warehouse space in over 80
facilities in the United States for Scholastic Book Fairs.
Additionally, the Company owns or leases approximately 1.3 million square feet
of office and warehouse space in over 90 facilities in Canada, the United
Kingdom, Australia, New Zealand, Southeast Asia and elsewhere around the world
for its international businesses.
The Company considers its properties adequate for its present needs. With
respect to the Company's leased properties, no difficulties are anticipated in
negotiating renewals as leases expire or in finding other satisfactory space, if
current premises become unavailable. For further information concerning the
Company's obligations under its leases, see Note 4 of Notes to Consolidated
Financial Statements.
ITEM 3 o LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was
[GRAPHIC]6 [LOGO]
served and filed on August 13, 1997. The Complaint was styled as a class action,
In re Scholastic Corporation Securities Litigation, 97 Civ.II 2447 (JFK), on
behalf of all persons who purchased Company common stock from December 10, 1996
through February 20, 1997. The Complaint alleged, among other things, violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder, resulting from purportedly materially false and misleading
statements to the investing public concerning the financial condition of the
Company. Specifically, the Complaint alleged misstatements and omissions by the
Company pertaining to adverse sales and returns of its popular Goosebumps book
series prior to the Company's interim earnings announcement on February 20,
1997. On January 26, 2000, an order was entered granting the Company's motion to
dismiss plaintiffs' Second Amended Consolidated Complaint without leave to
further amend the complaint. Previously, on December 14, 1998, an order was
entered granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001, the
Court of Appeals for the Second Circuit reversed the dismissal of the Second
Amended Consolidated Complaint and remanded the case for further proceedings.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court of New York County
of New York against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic
Entertainment Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company
are defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed for
lack of subject matter jurisdiction on January 29, 1999. In August 2000, the
Court of Appeals for the Second Circuit vacated the dismissal and remanded the
case for further proceedings. The second action, captioned Parachute Press, Inc.
v. Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc. (Index No. 99/600507), was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court
of New York County of New York. In its two complaints and its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of the total of approximately $36.1
million of advances over the term of the contract, of which approximately $15.3
million had been paid at the time the first Parachute litigation began, and
payment of royalties set-off by Scholastic against amounts claimed by the
Company. On July 21, 2000, the Company and Parachute each filed motions for
partial summary judgement in the pending state court cases and on May 18, 2001,
each party filed motions for summary judgement in the federal court case. The
Company is seeking declaratory relief and damages for, among other claims,
breaches of contract, fraud and acts of unfair competition. Damages sought by
the Company include repayment by Parachute of a portion of the $15.3 million
advance already paid. The Company intends to vigorously defend its position in
these proceedings. The Company does not believe that this dispute will have a
material adverse effect on its financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4 o SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to the vote of security holders, through the solicitation of
proxies or otherwise.
[LOGO] [GRAPHIC]7
PART II
ITEM 5 o MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under
the symbol SCHL. The Class A Stock is convertible into Common Stock on a
share-for-share basis. There is no established public trading market for the
Class A Stock. The table below sets forth, for the periods indicated, the
quarterly and one-year high and low selling prices on the NASDAQ National Market
System for the Company's Common Stock. On December 14, 2000, the Company's Board
of Directors authorized a 2-for-1 Stock Split (the "2-for-1 Stock Split") in the
form of a 100% stock dividend on its Common Stock and Class A Stock, payable
January 16, 2001 to holders of record as of December 29, 2000. Common Stock
prices prior to the effective date of the 2-for-1 Stock Split have been adjusted
in the following table to give retroactive effect to the stock split.
FOR FISCAL YEARS ENDED MAY 31,
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
FIRST QUARTER $ 32.98 $ 26.59 $ 26.88 $ 19.81
- -------------------------------------------------------------------------------
SECOND QUARTER 40.31 31.45 27.81 19.50
- -------------------------------------------------------------------------------
THIRD QUARTER 48.56 35.38 35.38 24.00
- -------------------------------------------------------------------------------
FOURTH QUARTER 45.00 35.13 28.50 21.75
- -------------------------------------------------------------------------------
YEAR 48.56 26.59 35.38 19.50
- -------------------------------------------------------------------------------
The Company has not paid any cash dividends since its initial public offering in
February 1992 and has no current plans to pay any dividends on its Class A or
Common Stock. In addition, certain of the Company's credit facilities restrict
the payment of dividends. See Note 3 of Notes to Consolidated Financial
Statements for further information.
The number of holders of record of Class A and Common Stock as of August 10,
2001 were 3 and approximately 9,200, respectively.
ITEM 6 o SELECTED FINANCIAL DATA
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
FOR FISCAL YEARS ENDED MAY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Total revenues $ 1,962.3 $ 1,402.5 $ 1,165.5 $ 1,069.8 $ 972.5
Cost of goods sold 865.2 678.3 571.9 548.2 536.9
Cost of goods sold - Special Literacy Place and
other charges (1) 72.9 - - - -
Selling, general and administrative expenses 883.1 592.6 493.3 440.3 399.6
Other operating costs:
Goodwill and other intangibles amortization
and depreciation 42.4 24.1 22.4 21.7 18.3
Non-recurring charges - 8.5 - 11.4 -
Operating income 98.7 99.0 77.9 48.2 17.7
Gain on sale of the SOHO Group - - - 10.0 -
Interest expense, net (41.6) (18.6) (19.0) (20.1) (16.7)
Net income 36.3 (1) 51.4 (2) 36.8 23.6 (3) 0.4
Earnings per share-basic $ 1.05 $ 1.54 $ 1.13 $ 0.73 $ 0.01
Earnings per share-diluted $ 1.01 (1) $ 1.48 (2) $ 1.10 $ 0.72 (3) $ 0.01
Weighted average shares outstanding-basic 34.7 33.4 32.8 32.4 32.0
Weighted average shares outstanding-diluted 36.1 37.1 33.4 32.8 32.6
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 394.6 $ 253.9 $ 222.4 $ 201.0 $ 215.7
Total assets 1,501.8 983.2 842.3 763.6 784.4
Long-term debt 585.3 241.1 248.0 243.5 287.9
Total stockholders' equity 493.7 430.0 361.4 318.1 297.5
- -----------------------------------------------------------------------------------------------------------------------------------
Certain prior year amounts have been reclassified to conform with the present
year presentation, and share amounts have been adjusted for the 2-for-1 Stock
Split.
- -------------------------------------------------------------------------------
(1) In fiscal 2001, the Company announced its decision not to update SCHOLASTIC
LITERACY PLACE(R), which resulted in a $72.9 special charge recorded in
cost of goods sold. Net income and earnings per diluted share excluding the
$72.9 pre-tax cost of goods sold-Special Literacy Place and other charges
would have been $82.9 and $2.22, respectively.
(2) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $1.63,
respectively.
(3) Fiscal 1998 net income and earnings per share excluding the $11.4 pre-tax
non-recurring charges and the non-operating gain of $10.0 would have been
$24.5 and $0.75, respectively.
[GRAPHIC]8 [LOGO]
ITEM 7 o MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Scholastic is a global children's publishing and media company. The Company has
four operating segments: Children's Book Publishing and Distribution;
Educational Publishing; Media, Licensing and Advertising (which collectively
represent the Company's domestic operations); and International. Such segment
classification reflects the nature of the Company's products and services
consistent with how the chief operating decision maker assesses operating
performance and allocates resources.
On December 14, 2000, the Company's Board of Directors authorized a 2-for-1
Stock Split in the form of a 100% stock dividend on its Common Stock and Class A
Stock, effective January 16, 2001 to shareholders of record as of December 29,
2000. Stockholders of record received one additional share of Common Stock or
Class A Stock for each share held on the record date. All outstanding rights
under stock options and stock purchase plans to acquire the Company Common Stock
and under the Company's 5% Convertible Subordinated Debentures due 2005 were
adjusted to give effect to the 2-for-1 Stock Split.
All amounts reported regarding the Company's capital stock prior to the 2-for-1
Stock Split have been adjusted to give effect to the 2-for-1 Stock Split except
for the share information reported on the Consolidated Balance Sheets and the
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income financial statements. Certain other prior year amounts have been
reclassified to conform with the current year presentation, including segment
classifications. The following discussion and analysis of the Company's
financial position should be read in conjunction with the Company's Consolidated
Financial Statements, the related Notes and Selected Financial Data included in
this report.
RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
FOR FISCAL YEARS ENDED MAY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
$ % (1) $ % (1) $ % (1)
Revenue:
Children's Book Publishing and Distribution 1,221.9 62.3 857.9 61.2 656.9 56.3
Educational Publishing 309.7 15.8 212.5 15.2 196.9 16.9
Media, Licensing and Advertising 134.0 6.8 108.1 7.7 105.8 9.1
International 296.7 15.1 224.0 15.9 205.9 17.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,962.3 100.0 1,402.5 100.0 1,165.5 100.0
Cost of goods sold 865.2 44.1 678.3 48.4 571.9 49.1
Cost of goods sold - Special Literacy Place and
other charges(2) 72.9 3.7 - - - -
Gross profit 1,024.2 52.2 724.2 51.6 593.6 50.9
Selling, general and administrative expenses 883.1 45.0 592.6 42.3 493.3 42.3
Depreciation and amortization 42.4 2.2 24.1 1.7 22.4 1.9
Non-recurring charges - - 8.5 0.6 - -
Operating income 98.7 5.0 99.0 7.1 77.9 6.7
Interest expense, net (41.6) 2.1 (18.6) 1.3 (19.0) 1.6
Earnings before income taxes 57.1 2.9 80.4 5.7 58.9 5.1
Net income 36.3(2) 1.8 51.4 (3) 3.7 36.8 3.2
Earnings per share:
Basic 1.05 1.54 1.13
Diluted 1.01(2) 1.48 (3) 1.10
- -----------------------------------------------------------------------------------------------------------------------------------
Certain prior year amounts have been reclassified to conform with the present
year presentation, including certain segment classifications, and share amounts
have been adjusted for the 2-for-1 Stock Split.
- -------------------------------------------------------------------------------
(1) Represents percentage of total revenue.
(2) In fiscal 2001, the Company announced its decision not to update SCHOLASTIC
LITERACY PLACE, which resulted in a $72.9 special charge recorded in cost
of goods sold. Net income and earnings per diluted share excluding the
$72.9 pre-tax cost of goods sold-Special Literacy Place and other charges
would have been $82.9 and $2.22, respectively.
(3) Fiscal 2000 net income and earnings per diluted share excluding the $8.5
pre-tax non-recurring charges would have been $56.8 and $1.63,
respectively.
[LOGO] [GRAPHIC]9
OVERVIEW
During the three-year period ended May 31, 2001, the Company reported revenue
growth of $796.8 million substantially due to internal growth, led by the
Children's Book Publishing and Distribution segment, and revenues from the
operations of Grolier Incorporated ("Grolier"), which was acquired for $400.0
million in cash on June 22, 2000.
During fiscal 2002, the Company plans to maintain its overall strategic
objective of strengthening and developing its businesses while continuing to
improve overall profitability, despite anticipated modest reductions in overall
revenues due to lower Harry Potter(TM) and Scholastic Literacy Place(R) sales.
In the future, the Company will seek to build shareholder value through revenue
growth coupled with improved margins.
RESULTS OF OPERATIONS - CONSOLIDATED
Revenue in fiscal 2001 grew significantly, increasing $559.8 million or 39.9%,
from fiscal 2000. Revenue growth in fiscal 2000 was $237.0 million or 20.3%,
when compared to fiscal 1999. The revenue growth in fiscal 2001 was driven by
the addition of $378.0 million in Grolier revenues coupled with the Company's
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment growth (excluding Grolier)
of $142.3 million or 16.6%. This segment accounted for 62.3% of the Company's
revenues in fiscal 2001, versus 61.2% and 56.3% in fiscal 2000 and 1999,
respectively.
Gross profit margin improved to 52.2% for fiscal 2001, up approximately one half
of a percentage point from fiscal 2000, and up over one percentage point from
fiscal 1999. This trend reflects improved sales mix in the Company's CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION segment combined with the Company's continued
focus on cost containment in the manufacturing and distribution process and the
acquisition of Grolier, partially offset by the $72.9 million cost of goods
sold-Special Literacy Place and other charges (the "Special Charge") recorded in
the fourth quarter of fiscal 2001. This Special Charge is primarily related to
the decision not to update SCHOLASTIC LITERACY PLACE.
Selling, general and administrative costs increased as a percentage of sales to
45.0% in fiscal 2001 versus 42.3% in fiscal 2000 and 42.3% in fiscal 1999 due
primarily to the inclusion of Grolier costs, increases in information systems
costs, and consulting costs incurred as a result of the Grolier integration
effort. Depreciation and amortization increased from $24.1 million in fiscal
2000 to $42.4 million in fiscal 2001, primarily due to the amortization of
goodwill and intangibles related to the acquisition of Grolier. Depreciation and
amortization is expected to decline in fiscal 2002 due to the adoption of
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets."
Operating income for fiscal 2001 was adversely affected by the $72.9 million
Special Charge and decreased from fiscal 2000 by $0.3 million. Fiscal 2000
operating income increased over fiscal 1999 by $21.1 million, despite the second
quarter fiscal 2000 non-recurring charges of $8.5 million, primarily related to
the establishment of a litigation reserve. Excluding these non-recurring charges
and the Special Charge, operating income in fiscal 2001 would have increased to
$171.6 million from $107.5 million in fiscal 2000 and $77.9 million in fiscal
1999, representing 8.7%, 7.7% and 6.7% of total revenues in fiscal 2001, 2000
and 1999, respectively.
Operating margins have benefitted from favorable sales mix, the Company's cost
containment program and lower manufacturing costs.
Net interest expense increased to $41.6 million in fiscal 2001 from $18.6
million in fiscal 2000 due primarily to the Grolier acquisition. Fiscal 2000
interest expense was $0.4 million lower than in fiscal 1999 as a result of lower
average debt levels.
The Company's effective tax rates were 36.5%, 36.1% and 37.5% of earnings before
taxes, for fiscal years 2001, 2000 and 1999, respectively. The decrease from
fiscal 1999 reflects the impact of lower relative state and local tax burdens.
Net income was $36.3 million in fiscal 2001, $51.4 million in fiscal 2000 and
$36.8 million in fiscal 1999. The basic and diluted earnings per Class A and
Common Share were $1.05 and $1.01, respectively, in fiscal 2001, $1.54 and
$1.48, respectively, in fiscal 2000 and $1.13 and $1.10, respectively, in fiscal
1999. Diluted net income per share, excluding the non-recurring charges and the
Special Charge, would have been $2.22 in fiscal 2001, $1.63 in fiscal 2000, and
$1.10 in fiscal 1999.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
school-based book clubs, school-based and direct-to-home continuity programs,
school-based book fairs and the trade channel.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 1,221.9 $ 857.9 $ 656.9
OPERATING PROFIT 217.0 170.6 109.6
- -------------------------------------------------------------------------------
OPERATING MARGIN 17.8% 19.9% 16.7%
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION revenues accounted for 62.3% of the
Company's revenues in fiscal 2001, 61.2% in fiscal 2000 and 56.3% in fiscal
1999. These revenues increased 42.4% from $857.9 million in fiscal 2000 to
$1,221.9 million in fiscal 2001, which included $221.7 million primarily from
the Grolier direct-to-home continuity business.
The Company's trade distribution channel accounted for 26.6% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION sales in fiscal 2001, as compared to 26.0% in fiscal
2000 and 16.5% in fiscal 1999. Net trade sales increased $97.8 million to $320.8
million, or 43.8% over fiscal 2000, due to the success of HARRY POTTER, CLIFFORD
THE BIG RED DOG(R), and other book series including CAPTAIN UNDERPANTS(TM), DEAR
AMERICA(R) and I SPY(TM). Trade sales for fiscal 2000 increased by 105.7% due to
the success of HARRY POTTER, POKEMON(TM) and other series including DEAR
AMERICA, I SPY, and CAPTAIN
[GRAPHIC] 10 [LOGO]
UNDERPANTS. HARRY POTTER accounted for approximately $190.0 million, $90.0
million and $5.0 million of trade revenues in fiscal years 2001, 2000, and 1999,
respectively.
School book club revenues accounted for 26.9% of CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION sales in fiscal 2001, compared to 37.4% in fiscal 2000 and 42.0% in
fiscal 1999. Fiscal 2001 school-based book club revenues grew by 2.4% over
fiscal 2000, reflecting higher order volume, partially offset by lower revenue
per order, due in part to lower POKEMON sales. Fiscal 2000 school-based book
club growth of 16.5% over fiscal 1999 reflected higher revenue per order and
more orders, helped by strong POKEMON sales.
Continuity revenues accounted for 24.7% of segment sales in fiscal 2001
comprised of 17.8% from the Grolier direct-to-home business and 6.9% from
school-based continuity programs. Revenues from school-based continuity programs
accounted for 9.4% and 11.2% of segment revenues in fiscal years 2000 and 1999,
respectively.
Revenues from school-based book fairs accounted for 21.8% of CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION sales in fiscal 2001, compared to 27.2% in fiscal
2000 and 30.3% in fiscal 1999. Sales growth for school-based book fairs of 14.3%
in fiscal 2001 was due to the continued growth in fair count and revenue per
fair, plus the introduction of the Reading Jamboree subscription program.
Operating income for CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION increased
significantly during the past three fiscal years to $217.0 million or 17.8% of
sales in fiscal 2001, compared to $170.6 million or 19.9% of sales for fiscal
2000 and $109.6 million or 16.7% of sales for fiscal 1999. Operating margin
decreased to 17.8% in fiscal 2001, due to the inclusion of the lower margin
direct-to-home sales, partially offset by improved sales mix and cost
reductions. Operating margins improved in fiscal 2000 largely as a result of
sales mix and the benefit of cost reductions in manufacturing and fulfillment
activities. Selling, general and administrative costs as a percentage of revenue
increased from 35.2% in fiscal 2000 to 41.4% in fiscal 2001, due primarily to
the acquisition of the Grolier direct-to-home continuity business, partially
offset by improved sales mix and planned cost reductions.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of supplemental and core materials,
classroom magazines and print and on-line non-fiction and reference products for
grades K to 12 in the United States.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
REVENUE $ 309.7 $ 212.5 $ 196.9
OPERATING LOSS (57.0)(1) (13.3) 0.0
- -------------------------------------------------------------------------------
OPERATING MARGIN * * *
* not meaningful
(1) The fiscal 2001 operating loss included the Special Charge of $72.9. The
segment's operating profit excluding the Special Charge would have been
$15.9.
Educational Publishing revenues accounted for 15.8% of the Company's revenues in
fiscal 2001, compared to 15.2% in fiscal 2000 and 16.9% in fiscal 1999. In
fiscal 2001, Educational Publishing revenues increased 45.7% to $309.7 million
from $212.5 million in fiscal 2000 and $196.9 in fiscal 1999. Segment revenues
in fiscal 2001 related to sales of supplemental and core instructional materials
to schools represented 58.2%, while sales by Grolier accounted for 21.1%. The
revenue increase in fiscal 2001 was primarily due to the inclusion of sales by
Grolier of print and on-line children's non-fiction and reference products, an
increase in sales of SCHOLASTIC LITERACY PLACE, higher sales of supplemental and
core materials including the Company's reading intervention program (READ
180(R)), and paperbacks and collections products. In fiscal 2000, Educational
Publishing revenues increased 7.9% over fiscal 1999, primarily due to increased
sales of SCHOLASTIC READING COUNTS(TM) and SCHOLASTIC READING INVENTORY(TM).
Segment operating results, excluding the Special Charge of $72.9 million, would
have resulted in a profit of $15.9 million as compared to a loss of $13.3
million in fiscal 2000. The impact of the Special Charge was partially offset by
the benefit of the integration of Grolier, lower cost of product and reduced
promotion costs. The fiscal 2000 operating loss of $13.3 million, compared to
the breakeven level of fiscal 1999, was primarily the result of higher promotion
and selling and administrative costs associated with the Texas reading adoption
program and the launch costs related to READ 180.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software, Internet services and the
production and/or distribution by and through the Company's subsidiary,
Scholastic Entertainment Inc. ("SEI"), of programming and consumer products
(including children's television programming, videos, software, feature films,
promotional activities and non-book merchandise).
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 134.0 $ 108.1 $ 105.8
OPERATING LOSS (23.0) (11.9) (4.3)
- -------------------------------------------------------------------------------
OPERATING MARGIN * * *
* not meaningful
MEDIA, LICENSING AND ADVERTISING revenues accounted for 6.8% of the Company's
revenue in fiscal 2001, compared to 7.7% in fiscal 2000 and 9.1% in fiscal 1999.
In fiscal 2001, entertainment revenue more than doubled, reflecting the impact
of production fees for CLIFFORD THE BIG RED DOG(TM), the animated TV series
launched on PBS Kids in the fall of 2000, and increased advertising revenues
from consumer magazines such as COACH AND ATHLETIC DIRECTOR(TM), SCHOLASTIC
EARLY CHILDHOOD TODAY(TM) and SCHOLASTIC PARENT & CHILD(R). In fiscal 2000,
increased revenues from consumer magazines
[LOGO] [GRAPHIC]11
and software were partially offset by declines in entertainment revenues and
multimedia product sales.
Operating losses for the MEDIA, LICENSING AND ADVERTISING segment in fiscal 2001
were $23.0 million, compared to $11.9 million in fiscal 2000 and $4.3 million in
fiscal 1999. These results reflect the planned increase in expenses related to
Scholastic.com, as well as modestly increased marketing and promotional costs.
Excluding the Scholastic.com operating expenses, the operating profit/(loss) for
the segment for fiscal 2001, 2000 and 1999 would be approximately breakeven.
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's international operations
and its domestic export and foreign rights businesses.
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUE $ 296.7 $ 224.0 $ 205.9
OPERATING PROFIT 19.0 9.9 7.9
- -------------------------------------------------------------------------------
OPERATING MARGIN 6.4% 4.4% 3.8%
INTERNATIONAL sales accounted for 15.1% of the Company's revenues in fiscal
2001, 15.9% in fiscal 2000 and 17.7% in fiscal 1999. INTERNATIONAL revenues
increased 32.5% to $296.7 million, including $80.9 million from the Grolier
international businesses, in fiscal 2001 from $224.0 million in fiscal 2000.
Excluding Grolier, fiscal 2001 revenue in local currencies increased slightly
over fiscal 2000, primarily due to increased revenue from Scholastic's Canadian
and export operations, but declined 4% in U.S. dollars. The Canadian revenue
increase reflected growth in school-based book club, continuities and book fair
channels. This increase was partially offset by sales declines in the United
Kingdom and Australia, principally in their school-based book club and trade
channels. In fiscal 2001, revenues in the United Kingdom, Australia and Canada
were also adversely impacted by the strengthening of the U.S. dollar. In fiscal
2000, INTERNATIONAL revenues increased 8.8% from $205.9 million in fiscal 1999,
due to the growth in the Company's Canadian and Australian trade, school-based
book club and school-based book fair channels. Revenues in fiscal 2000 for the
United Kingdom and New Zealand were adversely impacted by the strengthening U.S.
dollar.
INTERNATIONAL operating income increased $9.1 million to $19.0 million (6.4% of
sales) in fiscal 2001 from $9.9 million in fiscal 2000 (4.4% of sales). This
increase is attributed to strong Canadian and export results combined with $8.4
million of profit from the Grolier businesses, partially offset by the impact of
foreign exchange fluctuations and lower Australian and United Kingdom revenues.
In fiscal 2000, INTERNATIONAL operating income increased $2.0 million from
fiscal 1999 due to revenue increases in Canada and Australia, which were
partially offset by the adverse impact of foreign currency exchange rates.
SEASONALITY
The Company's school-based book clubs, school-based book fairs and most of its
magazines operate on a school-year basis. Therefore, the Company's business is
highly seasonal.
As a consequence, the Company's revenues in the first and third quarters of the
fiscal year are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are
proportionately larger in the second quarter of the fiscal year, while revenues
from the sale of instructional materials are the highest in the first quarter.
In the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. As a result of the Company's
business cycle, seasonal borrowings have historically increased during June,
July and August, have generally peaked in September or October, and have been at
their lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $13.8 million for fiscal
year 2001, an increase of $4.8 million over fiscal 2000 and $7.9 million over
fiscal 1999.
Cash flow provided from operations was $198.7 million resulting from increased
revenue and improved operating margins, partially offset by working capital
increases to support business growth.
Cash outflows for investing activities were $577.3 million for fiscal 2001,
primarily related to acquisition related payments, capital expenditures,
prepublication costs, royalty advances and production cost expenditures.
Acquisition related expenditures totaled $396.4 million as a result of the
acquisition of Grolier. The Company's capital expenditures totaled $90.5 million
in fiscal 2001. Capital expenditures, including capitalized interest, increased
$44.5 million from fiscal 2000 primarily due to the expansion of the Company's
corporate headquarters. Prepublication expenditures totaled $54.5 million,
decreasing $6.9 million from fiscal 2000, largely due to the decision not to
update SCHOLASTIC LITERACY PLACE partially offset by investments in Grolier. For
fiscal 2001, payments for royalty advances totaled $25.5 million.
The Company believes its existing cash position, combined with funds generated
from operations and available under the amended Loan Agreement and the Revolver,
will be sufficient to finance its ongoing working capital requirements for the
next fiscal year.
FINANCING
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $210.0 million
(with a right, in certain circumstances, to increase to $240.0 million),
including the issuance of up to $10.0 million in letters of credit. Both the
Loan Agreement and Revolver expire on August 11, 2004. The Company uses these
facilities to fund seasonal cash flow needs and other working capital
requirements. At May 31, 2001, the Company had no borrowings outstand-
[GRAPHIC]12 [LOGO]
ing under these facilities. The Company borrowed $350.0 million under an
unsecured loan agreement, expiring June 21, 2002, in order to finance the
purchase of Grolier on June 22, 2000, and borrowed $50.0 million under the Loan
Agreement. At May 31, 2001, the Company had $350.0 million in borrowings
outstanding under these facilities at a weighted average interest rate of 5.1%.
In addition, unsecured lines of credit available to the Company's international
subsidiaries totaled $50.5 million at May 31, 2001. These lines are used
primarily to fund local working capital needs. At May 31, 2001, $23.1 million in
borrowings were outstanding under these lines at a weighted average interest
rate of 7.45%.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects. Consistent with this
strategy, in June 1998 the Company acquired certain assets of Pages Book Fairs,
Inc. for approximately $10.5 million, and in January 1999 acquired certain
assets of Quality Education Data. On June 22, 2000, the Company consummated the
acquisition of Grolier for $400.0 million in cash, and in July 2001, the Company
acquired certain assets of Troll Book Fairs Inc.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Staff Accounting Bulletin 101 ("SAB
101"), "Revenue Recognition in Financial Statements", issued by the Securities
and Exchange Commission (the "SEC"). SAB 101 provides the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The adoption of SAB 101 resulted in revenue reduction of
$1.9 million and a net pre-tax impact of $1.1 million, equivalent to $0.02
after-tax per diluted share, to the Company's fiscal 2001 results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the Company to
recognize all derivatives as either assets or liabilities on the balance sheet
and to measure them at fair value. The Company will adopt the provisions of this
standard in the first quarter of fiscal 2002. The Company does not expect that
the adoption of SFAS No. 133 will have a material impact on its financial
position, results of operations or cash flows.
In June 2000, the Accounting Standards Executive Committee issued Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers or Distributors of
Films", effective for fiscal years beginning after December 15, 2000. SOP 00-2
replaces SFAS No. 53, "Financial Reporting by Producers and Distributors of
Motion Picture Films." SOP 00-2 concludes that film costs should be accounted
for under an inventory model and discusses various topics such as revenue
recognition, fee allocation among multiple films, accounting for exploitation
costs and impairment assessment. The Company will adopt the provisions of SOP
00-2 in the first quarter of fiscal 2002. This adoption is expected to result in
a pre-tax charge of approximately $8.0 million and will be accounted for as a
cumulative effect of a change in accounting principle.
Effective June 2001, the FASB approved SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits
the use of the pooling-of-interests method for acquisitions completed after June
30, 2001. SFAS No. 142 institutes new requirements for identifying intangible
assets and requires that an impairment-only approach is taken in amortizing
goodwill and other intangible assets with indefinite lives. The Company will
adopt SFAS No. 142 on June 1, 2001. Adoption of SFAS No. 142 is expected to
lower the Company's annual amortization expense by approximately $13.0 million.
The Company has not yet determined the impact, if any, on its earnings and
financial position of the required impairment tests of goodwill and other
indefinite lived intangible assets.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission filings and otherwise. The Company
cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, operating margins, working capital, liquidity, capital
needs, interest costs and income, are subject to certain risks and uncertainties
that could cause actual results to differ materially from those indicated in the
forward-looking statements, due to factors including the following and other
risks and factors identified from time to time in the Company's filings with the
SEC:
o The Company's ability to continue to produce successful educational, trade,
entertainment and software products;
o The ability of the Company's book clubs and fairs to continue to
successfully meet market needs;
o The Company's ability to maintain relationships with its creative talent;
o Changes in purchasing patterns in and the strength of educational, trade,
entertainment and software markets;
o Competition from other educational and trade publishers and media,
entertainment and Internet companies;
o Significant changes in the publishing industry, especially relating to the
distribution and sale of books;
o The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
o The Company's ability to effectively use the Internet to support its
existing businesses and to launch successful new Internet initiatives;
[LOGO] [GRAPHIC]13
o The general risks attendant to the conduct of business in foreign
countries;
o The general risks inherent in the market impact of rising interest rates
with regard to its variable debt facilities.
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 7A o QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management believes that the impact of currency fluctuations does not represent
a significant risk in the context of the Company's current international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business, nor are such instruments used for
speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. At May 31, 2001, approximately 60% of the Company's long-term
debt bore interest at a variable rate. Therefore, the Company is subject to the
risk that market interest rates will increase. Under its current policies, the
Company does not utilize any interest rate derivative instruments to manage its
exposure to interest rate changes.
At May 31, 2001, the balance outstanding under the facilities which have
variable rates was $373.1 million, at a weighted average interest rate of 5.2%.
A 15% increase or decrease in the average interest rate on the Company's
variable rate debt at May 31, 2001 would not have had a significant impact on
the Company's financial position and results of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
[GRAPHIC]14 [LOGO}
ITEM 8 o CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statements Schedule PAGE(S)
Consolidated Statements of Income for the three years ended May 31, 2001, 2000 and 1999 16
Consolidated Balance Sheets at May 31, 2001 and 2000 17-18
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the three years ended May 31, 2001, 2000 and 1999 19-20
Consolidated Statements of Cash Flows for the three years ended May 31, 2001, 2000 and 1999 21
Notes to Consolidated Financial Statements 22-34
Report of Independent Auditors 35
Supplementary Financial Information - Summary of Quarterly Results of Operations (unaudited) 36
The following consolidated financial statement schedule for the three years
ended May 31, 2001, 2000 and 1999 is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts and Reserves 45
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.
[LOGO] [GRAPHIC]15
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED MAY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 1,962.3 $ 1,402.5 $ 1,165.5
Operating costs and expenses:
Cost of goods sold 865.2 678.3 571.9
Cost of goods sold - Special Literacy Place
and other charges (Note 10) 72.9 - -
Selling, general and administrative expenses 883.1 592.6 493.3
Other operating costs:
Depreciation 28.2 19.7 16.9
Goodwill and other intangibles amortization 14.2 4.4 5.5
Non-recurring charges - 8.5 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,863.6 1,303.5 1,087.6
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 98.7 99.0 77.9
Interest expense, net (41.6) (18.6) (19.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 57.1 80.4 58.9
Provision for income taxes 20.8 29.0 22.1
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 36.3 $ 51.4 $ 36.8
===================================================================================================================================
Earnings per Class A and Common Share:
Basic $ 1.05 $ 1.54 $ 1.13
Diluted $ 1.01 $ 1.48 $ 1.10
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes
[GRAPHIC]16 [LOGO]
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
BALANCES AT MAY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
Assets 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 13.8 $ 9.0
Accounts receivable (less allowance for doubtful accounts
of $70.1 at May 31, 2001 and $14.7 at May 31, 2000) 220.7 149.4
Inventories 340.3 290.7
Deferred promotion costs 44.0 4.8
Deferred income taxes 89.3 57.2
Prepaid and other current assets 61.4 28.6
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 769.5 539.7
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 9.0 7.0
Buildings 56.4 41.4
Furniture, fixtures and equipment 159.5 115.7
Leasehold improvements 134.7 90.8
- -----------------------------------------------------------------------------------------------------------------------------------
359.6 254.9
Less accumulated depreciation and amortization (102.3) (78.5)
- -----------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 257.3 176.4
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES:
Prepublication costs 103.3 116.1
Royalty advances 45.9 48.7
Production costs 13.8 14.2
Goodwill 221.9 63.5
Other intangibles 61.9 4.3
Other 28.2 20.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND DEFERRED CHARGES 475.0 267.1
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,501.8 $ 983.2
===================================================================================================================================
See accompanying notes
[LOGO] [GRAPHIC]17
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Lines of credit and current portion of long-term debt $ 23.3 $ 8.7
Accounts payable 157.3 129.7
Accrued royalties 45.7 32.8
Accrued taxes 12.4 23.8
Deferred revenue 12.1 10.3
Other accrued expenses 124.1 80.5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 374.9 285.8
- -----------------------------------------------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 585.3 241.1
Other noncurrent liabilities 47.9 26.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 633.2 267.4
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value
Authorized-2,000,000 shares (1,000,000 shares at
May 31, 2000); Issued-None - -
Class A Stock, $.01 par value
Authorized-2,500,000 shares; Issued-1,656,200 shares
(828,100 shares at May 31, 2000) 0.0 0.0
Common Stock, $.01 par value
Authorized-70,000,000 shares (25,000,000 shares at
May 31, 2000); Issued-33,632,047 shares
(17,027,190 shares at May 31, 2000) 0.3 0.2
Additional paid-in capital 233.7 222.7
Deferred compensation (0.2) -
Accumulated other comprehensive loss:
Foreign currency translation adjustment (12.8) (11.1)
Minimum pension liability adjustment (3.6) -
Retained earnings 279.1 242.8
Less 55,319 shares (851,006 shares at May 31, 2000)
of Common Stock in treasury, at cost (2.8) (24.6)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 493.7 430.0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,501.8 $ 983.2
===================================================================================================================================
[GRAPHIC]18 [LOGO]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(AMOUNTS IN MILLIONS, EXCEPT SHARE DATA)
YEARS ENDED MAY 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON ADDITIONAL
STOCK STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 828,100 $ 0.0 16,741,190 $ 0.2 $ 205.1
Comprehensive income:
Net income Other comprehensive loss:
Foreign currency translation
adjustment
Total comprehensive income
Proceeds from issuance of common stock
pursuant to employee stock plans 205,613 0.0 5.8
Tax benefit realized from stock
option transactions 1.4
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 828,100 0.0 16,946,803 0.2 212.3
Comprehensive income:
Net income Other comprehensive loss:
Foreign currency translation
adjustment
Total comprehensive income
Proceeds from issuance of common stock
pursuant to employee stock plans, net 80,387 0.0 6.3
Tax benefit realized from stock
option transactions 4.1
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 828,100 0.0 17,027,190 0.2 222.7
Comprehensive income:
Net income Other comprehensive loss:
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Total other comprehensive loss
Total comprehensive income
100% stock dividend 828,100 16,604,857 0.1 (0.1)
Deferred compensation, net of
amortization
Proceeds from issuance of common stock
pursuant to employee stock plans 4.2
Tax benefit realized from stock
option transactions 6.9
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2001 1,656,200 $ 0.0 33,632,047 $ 0.3 $ 233.7
===================================================================================================================================
See accompanying notes
[LOGO] [GRAPHIC]19
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN MINUMUM TREASURY
DEFERRED CURRENCY PENSION RETAINED STOCK STOCKHOLDERS'
COMPENSATION TRANSACTION LIABILITY EARNINGS SHARES AMOUNT EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
$ - $ (5.0) $ - $ 154.6 (1,301,658) $ (36.8) $ 318.1
36.8 36.8
(0.7) (0.7)
-------
36.1
5.8
1.4
- ----------------------------------------------------------------------------------------------------------------------------------
- (5.7) - 191.4 (1,301,658) (36.8) 361.4
51.4 51.4
(5.4) (5.4)
-------
46.0
450,652 12.2 18.5
4.1
- ----------------------------------------------------------------------------------------------------------------------------------
- (11.1) - 242.8 (851,006) (24.6) 430.0
36.3 36.3
(1.7) (1.7)
(3.6) (3.6)
--------
(5.3)
--------
31.0
0.0
(0.2) (0.2)
795,687 21.8 26.0
6.9
- ----------------------------------------------------------------------------------------------------------------------------------
$ (0.2) $ (12.8) $ (3.6) $ 279.1 (55,319) $ (2.8) $ 493.7
==================================================================================================================================
[GRAPHIC]20 [LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN MILLIONS)
YEARS ENDED MAY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 36.3 $ 51.4 $ 36.8
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 42.4 24.1 22.4
Amortization of prepublication and production costs 68.8 47.3 50.5
Royalty advances expensed 28.7 29.2 21.8
Provision for losses on accounts receivable 75.5 20.5 17.0
Deferred income taxes (15.1) (15.1) (2.1)
Non-cash portion of cost of goods sold-Special Literacy Place
and other charges 71.4 - -
Non-cash portion of non-recurring charges - 8.5 -
Changes in assets and liabilities:
Accounts receivable (53.0) (41.3) (31.0)
Inventories (25.7) (66.8) (23.3)
Prepaid and other current assets (22.0) (5.4) (7.4)
Deferred promotion costs (1.6) 0.9 (1.1)
Accounts payable and other accrued expenses (4.7) 50.1 29.6
Accrued royalties 4.7 9.2 6.8
Accrued taxes (13.0) 16.2 (3.1)
Deferred revenue (0.3) 3.1 (3.7)
Other, net 6.3 14.3 4.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 162.4 94.8 80.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 198.7 146.2 117.6
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition related payments (396.4) (0.2) (14.9)
Additions to property, plant and equipment (90.5) (46.0) (29.6)
Prepublication costs (54.5) (61.4) (46.8)
Royalty advances (25.5) (23.4) (27.8)
Production costs (13.7) (13.8) (13.8)
Other 3.3 (0.4) (3.9)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (577.3) (145.2) (136.8)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 552.3 342.8 269.2
Borrowings under Grolier Facility 350.0 - -
Repayments of Loan Agreement and Revolver (558.1) (347.3) (264.7)
Borrowings under lines of credit 100.1 122.2 66.9
Repayments of lines of credit (90.7) (133.1) (58.7)
Proceeds pursuant to employee stock plans, net 24.2 16.7 5.8
Tax benefit realized from stock option transactions 6.9 4.1 1.4
Other (1.3) (3.2) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 383.4 2.2 19.9
Effect of exchange rate changes on cash - (0.1) 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4.8 3.1 0.8
Cash and cash equivalents at beginning of year 9.0 5.9 5.1
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13.8 $ 9.0 $ 5.9
===================================================================================================================================
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 58.6 $ 17.5 $ 23.0
Interest paid $ 43.5 $ 20.1 $ 20.1
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes
[LOGO] [GRAPHIC]21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scholastic
Corporation and all wholly-owned subsidiaries (the "Company"). All significant
intercompany transactions are eliminated.
USE OF ESTIMATES
The 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: collectability of accounts receivable; book returns;
amortization periods; and recovery of inventory, advances to authors,
prepublication costs, deferred promotion costs, film production costs and other
long-lived assets.
CASH EQUIVALENTS
Cash equivalents consist of short-term investments with original maturities of
less than three months.
INVENTORIES
Inventories, consisting principally of books, are stated at the lower of cost,
using the first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. Buildings have an estimated useful
life, for purposes of depreciation, of forty years. Furniture, fixtures and
equipment are depreciated over periods not exceeding ten years. Leasehold
improvements are amortized over the life of the lease or the life of the assets,
whichever is shorter. Interest is capitalized on major construction projects
based on the outstanding construction-in-progress balance for the period and the
average borrowing rate during the period.
OTHER ASSETS AND DEFERRED CHARGES
Prepublication costs are amortized on the straight-line basis over a two to
seven-year period commencing with publication. Goodwill and other intangibles
acquired by the Company are amortized on the straight-line basis over the
estimated future periods, which are generally between fifteen and twenty-five
years. Royalty advances are expensed as related revenues are earned or when
future recovery appears doubtful. Production costs are stated at the lower of
cost less