UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29,November 30, 2000 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWAREDelaware 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORKBroadway, New York, New York 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X|X| No _|_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE NUMBER OF SHARES OUTSTANDING
OF EACH CLASS AS OF MARCH 31, 2000
Common Stock, $.01 par value 16,164,307Title Number of shares outstanding
of each class as of December 31, 2000
------------- -----------------------
Common Stock, $.01 par value 16,604,857
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29,NOVEMBER 30, 2000
INDEX
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PARTPart I - FINANCIAL INFORMATION PAGEFinancial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three and
NineSix Months Ended February 29,November 30, 2000 and February 28, 1999 1
Condensed Consolidated Balance Sheet at February 29,November 30, 2000
February 28,and 1999, and May 31, 19992000 2
Condensed Consolidated Statement of Cash Flows for the NineSix Months
Ended February 29,November 30, 2000 and February 28, 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1112
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PARTPart II - OTHER INFORMATIONOther Information
Item 4. Legal ProceedingsSubmission of Matters to Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURESSignatures 21
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- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEMItem 1. FINANCIAL STATEMENTSFinancial Statements
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in millions, except per share data)
=================================================== ================================== ================= ================
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
=================================================== ================ ================= ================= =========================================================================================================================================
Three months ended Six months ended
November 30, November 30, November 30, November 30,
=========================================================================================================================
2000 1999 2000 1999
=================================================== ================ ================= ================= =========================================================================================================================================
REVENUESRevenues $ 312.8668.3 $ 267.3511.3 $ 1,000.61,030.4 $ 820.7693.8
Operating costs and expenses:
Cost of goods sold 155.6 133.5 500.7 406.6284.9 240.3 469.8 351.1
Selling, general and administrative expenses 143.1 123.6 427.9 360.1270.5 185.0 445.8 284.8
Depreciation 5.1 4.2 14.4 12.47.1 4.7 13.3 9.3
Goodwill and trademarkother intangible amortization 4.4 1.3 1.1 3.5 3.96.9 2.2
Non-recurring charge - --- 8.5 -- 8.5
- - --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
TOTAL OPERATING COSTS AND EXPENSES 305.1 262.4 955.0 783.0-------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 566.9 439.8 935.8 655.9
Operating income 7.7 4.9 45.6 37.7101.4 71.5 94.6 37.9
Interest expense, net (4.5) (4.6) (14.6) (14.5)13.5 5.7 23.2 10.1
- --------------------------------------------------- ---------------- ----------------- ----------------- -----------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3.2 0.3 31.0 23.287.9 65.8 71.4 27.8
Provision for income taxes 1.2 0.1 11.3 8.831.6 24.5 25.7 10.1
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
NET INCOME-------------------------------------------------------------------------------------------------------------------------
Net income $ 2.056.3 $ 0.241.3 $ 19.745.7 $ 14.4
=================================================== ================ ================= ================= ================17.7
=========================================================================================================================
Net income per Class A and Common Share:
Basic (pre split - see footnote 10) $ 0.123.26 $ 0.012.49 $ 1.182.66 $ 0.881.07
Diluted (pre split - see footnote 10) $ 0.112.95 $ 0.012.30 $ 1.162.47 $ 0.86
=================================================== ================ ================= ================= ================1.05
=========================================================================================================================
SEE ACCOMPANYING NOTESSee accompanying notes
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in millions, except per share data)
================================================= ====================== ====================== =======================
FEBRUARY 29,=================================================================================================================
November 30, 2000 MAYMay 31, 2000 November 30, 1999
FEBRUARY 28, 1999
================================================= ====================== ====================== =======================
(UNAUDITED) (UNAUDITED)=================================================================================================================
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:Current Assets:
Cash and cash equivalents $ 5.612.7 $ 5.99.0 $ 1.67.8
Accounts receivable less allowance for
doubtful accounts 183.8 136.4 129.2307.8 153.7 246.3
Installment sale receivables less
allowance for doubtful accounts 66.8 -- --
Inventories, net 319.5 227.4 267.6401.4 290.7 301.8
Deferred income taxes 60.7 57.2 41.9 41.8 48.1
Prepaid and other deferred expenses 29.6 22.7 24.2current assets 83.4 29.1 36.5
- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT ASSETS 580.4 434.2 470.7-----------------------------------------------------------------------------------------------------------------
Total current assets 932.8 539.7 634.3
Property, plant and equipment, net 166.0 152.2 143.0212.0 176.4 159.1
Prepublication costs 99.7 95.3 88.2137.3 116.1 98.7
Goodwill and other intangibles 278.9 66.4 69.2
Other assets and deferred charges 154.3 160.6 170.1103.9 84.6 84.8
- -------------------------------------------------- ---------- -------- --------
TOTAL ASSETS-----------------------------------------------------------------------------------------------------------------
Total assets $ 1,000.41,664.9 $ 842.3983.2 $ 872.0
================================================== ========== ======== =========1,046.1
=================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:Current Liabilities:
Lines of credit and current portion of
long term debt $ 21.226.2 $ 18.08.7 $ 15.719.6
Accounts payable 131.7 97.0 105.5168.8 129.7 155.4
Accrued royalties 56.8 23.7 35.683.6 32.8 39.6
Deferred revenue 23.6 6.7 21.835.0 10.3 35.6
Other accrued expenses 61.5 66.4 55.7165.9 104.3 77.6
- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT LIABILITIES 294.8 211.8 234.3
NONCURRENT LIABILITIES:-----------------------------------------------------------------------------------------------------------------
Total current liabilities 479.5 285.8 327.8
Noncurrent Liabilities:
Long-term debt 281.2 248.0 277.9649.6 241.1 312.9
Other noncurrent liabilities 23.7 21.1 22.043.5 26.3 22.9
- -------------------------------------------------- ---------- -------- --------
TOTAL NONCURRENT LIABILITIES 304.9 269.1 299.9
STOCKHOLDERS' EQUITY:-----------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 693.1 267.4 335.8
Stockholders' Equity:
Preferred Stock, $1.00 par value -- -- --
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.2 0.2 0.2
Deferred Compensation (0.2) -- --
Additional paid-in capital 223.0 212.3 211.5232.3 222.7 216.9
Accumulated other comprehensive loss:
Foreignforeign currency translation adjustment (7.6) (5.7) (6.1)(15.1) (11.1) (6.2)
Retained earnings 211.1 191.4 169.0288.5 242.8 209.2
Less shares of Common Stock
held in treasury (26.0) (36.8) (36.8)(13.4) (24.6) (37.6)
- -------------------------------------------------- ---------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 400.7 361.4 337.8-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 492.3 430.0 382.5
- -------------------------------------------------- ---------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY-----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,000.41,664.9 $ 842.3983.2 $ 872.0
================================================== ========== ======== ========1,046.1
=================================================================================================================
SEE ACCOMPANYING NOTESSee accompanying notes
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)(amounts in millions)
================================================================================================================
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
============================================================================ =================== =================================================================================================================================
Six Months ended
November 30, November 30,
==================================================================================================================
2000 1999
============================================================================ =================== =================================================================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIESNet cash provided by / (used in) operating activities $ 42.744.2 $ 45.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs (35.3) (28.8)(10.4)
Cash flows used in investing activities:
Business and trademark acquisition-related payments (396.4) --
Additions to property, plant and equipment (28.8) (18.1)(31.2) (16.4)
Prepublication costs (20.6) (23.8)
Royalty advances (17.1) (18.1)(13.2) (12.0)
Other (10.0) (0.4)
Production costs (8.1) (11.9)
Business and trademark acquisition-related payments (0.2) (15.7)
Other (1.4) (3.1)(7.9) (5.1)
- ---------------------------------------------------------------------------- ------------------- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (90.9) (95.7)
CASH FLOWS PROVIDED BY/(479.3) (57.7)
- ------------------------------------------------------------------------------------------------------------------
Cash flows provided by/(USED IN) FINANCING ACTIVITIES:used in) financing activities:
Borrowings under the Grolier facility 350.0 --
Borrowings under Loan Agreement and Revolver 282.4 213.1339.2 192.2
Repayments of Loan Agreement and Revolver (249.3) (178.9)(280.9) (127.4)
Borrowings under lines of credit 48.3 49.345.6 32.3
Repayments of lines of credit (49.9) (42.9)(34.7) (30.3)
Proceeds from the exercise of stock options and related tax benefits 17.0 0.020.5 3.9
Other (0.6) 6.5(0.9) (0.7)
- ---------------------------------------------------------------------------- ------------------- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 47.9 47.1438.8 70.0
- ---------------------------------------------------------------------------- ------------------- ---------------------------------------------------------------------------------------------------------------------------------
Net decreaseincrease in cash and cash equivalents (0.3) (3.5)3.7 1.9
Cash and cash equivalents at beginning of period 9.0 5.9
5.1
- ---------------------------------------------------------------------------- ------------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5.612.7 $ 1.6
============================================================================ =================== ===============7.8
==================================================================================================================
SEE ACCOMPANYING NOTESSee accompanying notes
3
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in millions, except per share data)
================================================================================
1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying condensed consolidated financial statements which includeconsist of the
accounts of Scholastic Corporation and all wholly ownedits wholly-owned subsidiaries (the
"Company"), including the consolidated accounts of Grolier Incorporated and its
subsidiaries since its acquisition on June 22, 2000, (see Note 3). These
financial statements have not been audited, but reflect those adjustments
consisting of normal recurring items which management considers necessary for a
fair presentation of financial position, results of operations and cash flow.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes in the Report on Form 10-K for the fiscal
1999 Annual Report to
Stockholders.year ended May 31, 2000 as well as the Form 8-K filed in connection with the
acquisition of Grolier Incorporated, (See Note 3.)
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the ninesix months ended February 29,November 30, 2000 and
February 28, 1999
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the February 28,November 30, 1999 condensed
consolidated balance sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
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 condensed consolidated financial statements
and accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to: book returns; recoverability of inventory;
recoverability of advances to authors; amortization periods; recoverability of
prepublication and film production costs; purchase price allocations; and
recoverability of other long-lived assets.
2. RECENT ACCOUNTING PRINCIPLES
Effective May 31, 1999,Recent Accounting Pronouncements
The Company has adopted the Company adopted Statementprovisions of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an EnterpriseEITF Issue 00-10, "Accounting for
Shipping and Related Information.Handling Fees and Costs." This statement requiresConsensus states that public business enterprises
report certain information about operating segmentsall shipping
and handling billed to a customer in financial statementsa sale transaction represent fees
earned for the goods provided and, accordingly, amounts billed related to
shipping and handling should be classified as revenue. Shipping and handling
costs are classified in cost of goods sold. Certain prior year amounts have been
reclassified in accordance with the enterprise issued to shareholders. It also requires that public business
enterprises report certain information about their products and services,Consensus.
In June 1998, the
geographic areas in which they operate, and their major customers. The required
disclosures are presented in Note 3 included herein.
The Financial Accounting Standards Board issued in June 1998, Statement of
Financial Accounting Standards No. 133 (SFAS 133)("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires the Company to recognize
all derivatives to be
recordedas either assets or liabilities on the balance sheet and to
measure them at fair value and establishes special accounting
forvalue. Under SFAS 133, the following three different typesCompany is required to adopt the
provisions of hedges: hedges of changesthis standard in the fair
valuefirst quarter of assets, liabilities, or firm commitments (fair value hedges); hedgesfiscal 2002. The Company
does not expect that the adoption of the variable cash flowsSFAS 133 will have a material impact on its
financial position, results of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair valuesoperations or cash flows of bothflows.
In December 1999, the hedgeSecurities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides the hedged item recognizedSEC's views in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
4
hedges are included in income.applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to adopt the provisions of SFAS 133SAB 101 no later than the fourth quarter of
fiscal 2001. The Company does not expect that the adoption of SAB 101 will have
a material impact on its financial position, results of operations or cash
flows.
4
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
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." SOP 00-2 replaces the Statement of Financial Accounting Standards 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
in multiple films, accounting for exploitation costs, and impairment assessment.
The Company is required to adopt the provisions of SOP 00-2 by the first quarter
of fiscal 2002. The Company does not expect that the adoption of SOP 00-2 will
have a material impact on its financial position, results of operations or cash
flows.
3. Acquisition of Grolier
On June 22, 2000, Scholastic Inc., a wholly-owned subsidiary of the Company,
acquired all of the issued and outstanding capital stock of Grolier Incorporated
("Grolier"), a Delaware corporation, for $400.0 in cash. The Company is
accounting for the acquisition under the purchase method of accounting.
The acquisition was financed by the Company using bank debt. Of the $400.0
Grolier purchase price, $350.0 was borrowed under a new credit facility (the
"Grolier Facility") entered into to finance the acquisition and $50.0 was
borrowed under the Company's existing Loan Agreement and Revolver, (See Note 5.)
The unaudited pro forma results of the Company, giving effect to the acquisition
of Grolier as if it was consummated as of the first day of the six-month period
ended November 30, 2000 and 1999 are as follows:
Six months ended November 30,
================================================================================
2000 1999
================================================================================
Revenues $ 1,066.0 $ 924.5
Net income $ 46.9 $ 12.6
- --------------------------------------------------------------------------------
Net income per Class A and Common Share:
Basic (pre-split--See Note 10.) $ 2.73 $ 0.76
Diluted (pre-split--See Note 10.) $ 2.54 $ 0.74
The following summarizes the preliminary allocation of the $396.4 purchase price
allocation, which includes the related transaction and financing costs, to the
net assets of Grolier acquired based upon a preliminary allocation as follows:
Accounts receivable, net $105.5
Inventory 52.4
Other current assets 55.0
Property, plant and equipment, net 18.9
Goodwill and other intangibles 219.8
Other assets 54.4
Current liabilities (86.7)
Non-current liabilities (17.3)
Cash received upon acquisition of Grolier (5.6)
------
Total purchase price $396.4
======
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in
millions, except per share data)
================================================================================
3. SEGMENT INFORMATIONThis allocation of the purchase price is based on a preliminary valuation of
Grolier's assets and liabilities and is subject to change. The final allocation
of the purchase price will be based upon a comprehensive evaluation of the fair
value of Grolier's tangible and identifiable intangible assets acquired and
liabilities assumed.
4. Segment Information
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong, India, Ireland, Argentina and Argentina,Southeast Asia, and distributes
its products and services through a variety of channels, including school book
clubs, school book fairs, direct-to-home and trade.
The Company's operations are categorized in the following four segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING;Children's Book Publishing and INTERNATIONAL.Distribution; Educational Publishing; Media,
Licensing and Advertising; and International. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision-maker assesses operating performance and
allocates resources. Revenues derived from Grolier's operations are reported in
the Company's Children's Book Publishing and Distribution, Educational
Publishing and International segments.
The following tables settable sets forth the Company's segment information for the periods
indicated:
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 29,Children's
Book Media,
Publishing Licensing
and Educational and Total
Distribution Publishing Advertising Domestic International Overhead (1) Consolidated
==========================================================================================================================
Three months ended
November 30, 2000
========================== ============== ============ ============= ============ ============= ============ =======================================================================================================================================
Revenues $ 200.5445.5 $ 40.073.9 $ 24.254.9 $ 264.7574.3 $ 48.194.0 $ 0.0 $ 312.8668.3
Depreciation 0.9 0.31.0 0.4 1.6 0.9 2.6 5.11.4 2.8 1.0 3.3 7.1
Amortization (2) 3.4 7.2 2.4 13.0 0.54.1 14.4 3.6 22.1 0.4 0.0 13.522.5
Royalty advance expense 4.1 0.2 0.2 4.57.0 0.7 0.9 8.6 0.3 0.0 0.0 4.58.9
Segment profit/(loss)(3) 35.4 (10.5) (2.6) 22.3 0.7 (15.3) 7.7111.8 (8.0) 0.3 104.1 12.2 (14.9) 101.4
Expenditures for
long-lived assets (4) 8.5 7.6 6.0 22.1 1.0 8.9 32.0
========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 28,(5) 12.4 8.1 4.0 24.5 2.2 14.9 41.6
==========================================================================================================================
Three months ended
November 30, 1999
========================== ============== ============ ============= ============ ============= ============ =======================================================================================================================================
Revenues $ 162.5350.2 $ 32.952.8 $ 30.739.9 $ 226.1442.9 $ 41.268.4 $ 0.0 $ 267.3511.3
Depreciation 0.70.8 0.3 0.1 1.1 1.0 2.1 4.20.4 1.5 0.8 2.4 4.7
Amortization (2) 3.1 6.3 5.4 14.8 0.43.4 6.8 3.7 13.9 0.5 0.0 15.214.4
Royalty advance expense 2.8 0.28.9 0.4 0.6 3.69.9 0.7 0.0 0.0 3.610.6
Segment profit/(loss)(3) 25.8 (10.8) 1.1 16.1 (1.4) (9.8) 4.993.7 (7.7) (2.6) 83.4 6.2 (18.1) 71.5
Expenditures for
long-lived assets (4) 8.7 10.4 2.9 22.0 0.1 4.9 27.0(5) 10.9 10.0 4.2 25.1 1.1 5.3 31.5
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ --------------------------------------------------------------------------------------------------------------------------------------
TABLES AND NOTES CONTINUED ON THE FOLLOWING PAGETables and notes continued on the following page
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in millions, except per share data)
================================================================================
3. SEGMENT INFORMATION4. Segment Information (continued)
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
========================== ============== ============ ============= ============ ============= ============ =============
AS OF AND FOR THE NINE
MONTHS ENDED FEBRUARY
29,Children's
Book Media,
Publishing Licensing
and Educational and Total
Distribution Publishing Advertising Domestic International Overhead (1) Consolidated
==========================================================================================================================
Six months ended
November 30, 2000
========================== ============== ============ ============= ============ ============= ============ =======================================================================================================================================
Revenues $ 632.7652.1 $ 147.2167.0 $ 73.765.7 $ 853.6884.8 $ 147.0145.6 $ 0.0 $ 1,000.61,030.4
Depreciation 2.72.1 0.8 0.9 4.4 2.7 7.3 14.42.2 5.1 2.0 6.2 13.3
Amortization (2) 10.1 21.1 7.6 38.8 1.48.4 25.7 6.9 41.0 1.1 0.0 40.242.1
Royalty advance expense 17.2 0.711.5 1.0 18.9 1.21.1 13.6 0.3 0.0 20.113.9
Segment profit/(loss) (3) 115.5 (16.2) (11.3) 88.0 1.4 (43.8) 45.6118.4 6.3 (10.5) 114.2 9.5 (29.1) 94.6
Segment assets 435.7 191.1 49.4 676.2 147.2 177.0 1,000.4701.4 429.9 64.5 1,195.8 233.4 235.7 1,664.9
Long-lived assets (5) 94.6 98.1 30.0 222.7 54.6 118.2 395.5(4) 149.6 290.0 42.4 482.0 51.4 161.9 695.3
Expenditures for
long-lived assets (4) 27.4 25.2 15.4 68.0 3.4 17.9 89.3
========================== ============== ============ ============= ============ ============= ============ =============
AS OF AND FOR THE NINE
MONTHS ENDED FEBRUARY
28,(5) 21.4 14.1 10.9 46.4 3.0 23.5 72.9
==========================================================================================================================
Six months ended
November 30, 1999
========================== ============== ============ ============= ============ ============= ============ =======================================================================================================================================
Revenues $ 470.1428.0 $ 143.0109.2 $ 72.149.3 $ 685.2586.5 $ 135.5107.3 $ 0.0 $ 820.7693.8
Depreciation 2.3 0.71.7 0.5 3.5 2.6 6.3 12.40.6 2.8 1.7 4.8 9.3
Amortization (2) 9.3 18.2 12.9 40.4 1.66.8 13.8 5.3 25.9 0.8 0.0 42.026.7
Royalty advance expense 10.9 0.2 2.2 13.313.1 0.5 0.8 14.4 1.2 0.0 0.0 13.315.6
Segment profit/(loss) (3) 70.8 0.4 (4.5) 66.7 (1.7) (27.3) 37.778.7 (7.3) (9.9) 61.5 2.3 (25.9) 37.9
Segment assets 352.8 159.2 50.3 562.3 147.7 162.0 872.0470.7 190.5 56.1 717.3 162.2 166.6 1,046.1
Long-lived assets (5) 96.9 89.6 25.2 211.7 56.1 102.3 370.1(4) 94.5 93.1 32.3 219.9 55.8 111.9 387.6
Expenditures for
long-lived assets (4) 26.9 21.5 15.1 63.5 5.5 7.9 76.9(5) 19.0 17.6 9.5 46.1 2.2 9.0 57.3
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ --------------------------------------------------------------------------------------------------------------------------------------
(1) OVERHEAD INCLUDES UNALLOCATED DOMESTIC CORPORATE-RELATED ITEMS AND AS IT
RELATES TO THE SEGMENT PROFIT/(LOSS)Overhead includes all domestic corporate-related items not allocated to
reportable segments. As it relates to the segment profit/(loss),
EXPENSES NOT ALLOCATED TO REPORTABLE
SEGMENTS INCLUDING COSTS RELATED TO THE MANAGEMENT OF CORPORATE ASSETS, NET
INTEREST EXPENSE, PROVISION FOR INCOME TAXES, AND A PRE-TAXunallocated expenses include costs related to the management of corporate
assets. In fiscal 2000, overhead segment profit/(loss) included a
non-recurring charge of $8.5 MILLION
NON-RECURRING CHARGE PRIMARILY RELATED TO THE ESTABLISHMENT OF A LITIGATION
RESERVE. UNALLOCATED ASSETS ARE PRINCIPALLY COMPRISED OF DEFERRED INCOME
TAXES AND PROPERTY, PLANT AND EQUIPMENT RELATED TO THE COMPANY'S
HEADQUARTERS IN THE METROPOLITAN NEW YORK AREA AND ITS NATIONAL SERVICE
OPERATION LOCATED IN MISSOURI.primarily related to the establishment of a
litigation reserve following an adverse decision in a lawsuit. Unallocated
assets are principally comprised of deferred income taxes and property,
plant and equipment related to the Company's headquarters in the
metropolitan New York area, its National Service Operation located in
Missouri and the Grolier facilities located in Connecticut.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.Includes amortization of goodwill and other intangible assets, and
prepublication and production costs.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND TAXES.Segment profit/(loss) represents earnings before interest and income
taxes. Includes the net effect of the changes in sales returns estimates
which resulted in an increase to net income of $5.2 ($0.27 per share) in
the Fiscal 2001 second quarter.
(4) INCLUDES PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.Includes property, plant and equipment, prepublication costs, goodwill and
other intangible assets, royalty advances and production costs.
(5) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.Includes purchases of property, plant and equipment, prepublication and
production costs and royalty advances. This amount excludes the
expenditures for long-lived assets as part of the Grolier acquisition.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)(amounts in millions, except per share data)
================================================================================
4. DEBT
Long-term5. Debt
The following table sets forth the Company's debt consistedbalances as of the following:dates
indicated:
============================================== ======================== ======================== =====================
FEBRUARY 29,===============================================================================================================
November 30, 2000 MAYMay 31, 2000 November 30, 1999
FEBRUARY 28, 1999
============================================== ======================== ======================== ====================================================================================================================================
Lines of Credit $ 26.2 $ 8.5 $ 19.5
Grolier Facility 350.0 -- --
Loan Agreement and Revolver $ 43.0 $ 10.0 $ 39.564.0 5.6 74.8
7% Notes due 2003, net of discount 124.8124.9 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 0.7 0.9 3.4
3.4 3.6
- ---------------------------------------------- ------------------------ ------------------------ ---------------------
TOTAL DEBT 281.2 248.2 277.9---------------------------------------------------------------------------------------------------------------
Total debt 675.8 249.8 332.5
Less current portion 0.0 (0.2) 0.0
============================================== ======================== ======================== =====================
TOTAL LONG-TERM DEBTof long-term debt
and lines of credit (26.2) (8.7) (19.6)
- ---------------------------------------------------------------------------------------------------------------
Total long-term debt $ 281.2649.6 $ 248.0241.1 $ 277.9
============================================== ======================== ======================== =====================312.9
===============================================================================================================
LOAN AGREEMENT.Grolier Facility. The acquisition of Grolier for $400.0 was financed by the
Company using bank debt; of which $350.0 was borrowed under the Grolier
Facility, and the remaining $50.0 was borrowed under the Company's existing Loan
Agreement and Revolver (as discussed below). Scholastic Inc. is the borrower and
the Company is the guarantor under the $350.0 Grolier Facility, effective June
22, 2000. The Grolier Facility is a one year facility, which may be extended at
the Company's discretion for an additional year. Borrowings bear interest at the
prime rate or 0.39% to 1.10% over LIBOR (as defined). The Grolier Facility also
provides for a facility fee ranging from 0.085% to 0.25%. The amounts charged
vary based on the Company's credit rating. Based on the Company's current credit
rating, the interest rate and facility fee charged are 0.475% over LIBOR and
0.125%, respectively. The Grolier Facility contains certain financial covenants
related to debt and interest coverage ratios (as defined) and limits dividends
and other distributions.
Loan Agreement. The Company and Scholastic Inc. (a wholly owned subsidiary) are joint and several borrowers
under aan amended and restated loan agreement with certain banks, which was amended and restated effective
August 11, 1999 and amended June 22, 2000 (the "Loan Agreement"). The Loan
Agreement, which expires on August 11, 2004, provides for aggregate borrowings
of up to $170.0 (with a right in certain circumstances to increase itborrowings to
$200.0), including the issuance of up to $10.0 in letters of credit (of which $1.0 was outstanding at February 29, 2000).credit. Interest
under this facility is either at the prime rate or 0.325% to 0.90% over LIBOR
(as defined). There is a facility fee ranging from 0.10% to 0.30% and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the
total facility. The amounts charged vary based upon the Company's credit ratings.rating.
Based on the Company's current credit ratings,rating, the interest rate, facility fee
and utilization fee are 0.475% over LIBOR 0.150%, and 0.075%, respectively. The
Loan Agreement contains certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions.
REVOLVER.Revolver. The Company and Scholastic Inc. are joint and several borrowers under
a Revolving Loan Agreementrevolving loan agreement with SunTrust Bank, which was amended and
restateda bank, effective November 10, 1999 and amended
June 22, 2000 (the "Revolver") and. The Revolver, which expires on August 11,
2004, provides for revolving credit loans of up to $40.0 and expires on August 11, 2004.$40.0. Interest under this
facility is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as
defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts
charged vary based upon the Company's credit ratings.rating. Based on the Company's
current credit ratings,rating, the interest rate and facility fee are 0.475% over LIBOR
and 0.150%, respectively. The Revolver hascontains certain financial covenants
related to debt and interest coverage ratios (as defined) and limits dividends
and other distributions.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
7% NOTES DUENotes due 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will mature on December 15, 2003. The Notes are not redeemable
prior to maturity. Interest on the Notes is payable semi-annually on December 15
and June 15 of each year.
CONVERTIBLE SUBORDINATED DEBENTURES.Convertible Subordinated Debentures. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures").
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
8
principal amount plus accrued interest. Each Debenture is convertible, at the
holder's option, any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
5. CONTINGENCIESshare, subject to adjustment in certain events.
(See Note 10.)
6. Contingencies
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities 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. 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 Amendment Consolidated Complaint and granting
plaintiffswith leave to amend
the complaint. In dismissing both complaints, which alleged substantially
similar claims, the court held that plaintiffs failed to state a claim upon
which relief can be granted. On February 25, 2000, plaintiffs
filed a Notice of Appeal in connection withPlaintiffs have appealed the most recent dismissal.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS-Registered Trademark-Goosebumps(R) 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 GOOSEBUMPSGoosebumps rights are
licensed to the Company. The issues in the case 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 first Parachute action, 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. Parachute filed anOn appeal, the Court of Appeals for the dismissal.Second Circuit vacated the
dismissal and remanded the case for further proceedings. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State of New York in New York
County. In its two complaints, and in 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 a total of approximately $36.1 of advances over the term
of the contract (of which approximately $15.3 had been paid at the time the
first Parachute litigation began) and payments of
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
royalties set-off by Scholastic against amounts claimed by the Company. 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 lost profits and disgorgement of certain payments received
by Parachute. Discovery, which has been consolidatedOn July 21, 2000, the Company and Parachute each filed motions for
partial summary judgement in the litigations, is continuing.state court cases. The Company intends to
vigorously pursue its claims against Parachute and the other named defendants
and to vigorously defend its position against the new lawsuit
and the appeal.in these proceedings. The Company does not
believe that this dispute will have a material adverse effect on its financial
condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
materialaddition 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 the Company.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
6. COMPREHENSIVE INCOME/(LOSS)operations.
7. Comprehensive Income
The following table sets forth comprehensive income/(loss)income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
===================================================== ================= ================ ================= =================Three months ended Six months ended
November 30, November 30, November 30, November 30,
================================================================================================================================
2000 1999 2000 1999
===================================================== ================= ================ ================= =================================================================================================================================================
Net income $ 2.056.3 $ 0.241.3 $ 19.745.7 $ 14.417.7
Other comprehensive loss:
Foreign currency translation adjustment
net of provision for income taxes (0.9) (0.9) (1.1) (0.8)(2.2) (0.1) (4.0) (0.3)
- ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
COMPREHENSIVE INCOME/(LOSS)--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 1.154.1 $ (0.7)41.2 $ 18.641.7 $ 13.6
===================================================== ================= ================ ================= =================17.4
================================================================================================================================
7. EARNINGS PER SHARE10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share is calculated to give effect to potentially dilutive stock
options and convertible debentures that were outstanding during the period. The
following table, which does not include the impact of the Company's announced
stock split, effective January 16, 2001 (see Footnote 10), summarizes the
reconciliation of the numerators and denominators for the Basic and Diluted
earnings per share ("EPS") computations:computations for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
====================================================== ================= ================ ================= ================Three months ended Six months ended
November 30, November 30, November 30, November 30,
=================================================================================================================================
2000 1999 2000 1999
====================================================== ================= ================ ================= =================================================================================================================================================
Net income for Basic EPS $ 2.056.3 $ 0.241.3 $ 19.745.7 $ 14.417.7
Effect of convertible debt 0.9 0.8 1.8 --(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income for Diluted EPS $ 57.2 $ 42.1 47.5 $ 17.7
=================================================================================================================================
Weighted-average shares for basicBasic EPS 16.8 16.4 16.6 16.317.3 16.5 17.2 16.5
Effect of stock options 0.7 0.4 0.6 0.5 0.4
0.4Effect of convertible debt 1.4 1.4 1.4 --(a)
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
WEIGHTED-AVERAGE SHARES FOR DILUTED---------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares for Diluted EPS 17.419.4 18.3 19.2 16.9
17.0 16.7
====================================================== ================= ================ ================= =================================================================================================================================================
Net income per Class A and Common Share:
Basic $ 0.123.26 $ 0.012.49 $ 1.182.66 $ 0.881.07
Diluted $ 0.112.95 $ 0.012.30 $ 1.162.47 $ 0.861.05
Note:(a) The effect of the 5.0% Convertible Subordinated Debentures on the
weighted-average shares outstanding for diluted EPSconvertible debt was anti-dilutive and not
included in the calculation.
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
8. NON-RECURRING CHARGEexcluded because it was anti-dilutive.
9. Non-Recurring Charge
The operating results for the ninesix months ended February 29, 2000November 30, 1999 include a $8.5
non-recurring charge primarily related to the establishment of a litigation
reserve following an adverse decision in a lawsuit, which was received on
December 10, 1999. The case SCHOLASTIC INC. AND SCHOLASTIC
PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., involves stock appreciation rights allegedly granted to Mr. Harris
in 1990 in connection with a joint venture formed primarily to produce motion
pictures. Although the Company disagrees with the judge's decision and is
appealing the ruling, the Company has recorded a $6.7 charge to fully reserve
with respect to the case. The $8.5 charge also includes an unrelated non-recurring expense of
$1.8 relating to the liquidation of certain stock options.
9. SUBSEQUENT EVENT10. Subsequent Event
On April 13,December 14, 2000, Scholastic's Board of Directors approved a 2-for-1 stock
split in the Company entered intoform of a definitive agreement with
Lagardere S.C.A.100% stock dividend on its Common Stock and Class A
Stock, payable January 16, 2001 to stockholders of Francerecord as of December 29,
2000. Stockholders will receive one additional share of Common Stock or Class A
Stock for each share held on the record date. All outstanding rights under stock
options to acquire Grolier, Inc. ("Grolier") for $400
million in cash. Grolier isScholastic's Common Stock and under Scholastic's convertible
debt will also be adjusted to give effect to the leading provider of U.S. direct mail-to-home
and e-commerce book clubs for children through age 5, the leading on-line and
print publisher of children's reference products (including major
encyclopedias) sold primarily to U.S. school libraries and has international
operations in the United Kingdom, Canada and Southeast Asia. Grolier also
publishes trade books under the Orchard Books, Children's Press and Franklin
Watts imprints, sold both to libraries and the trade. Grolier's fiscal 1999
revenues were approximately $450 million and earnings before interest, taxes,
depreciation and amortization were approximately $45 million. The
transaction, which is subject to certain regulatory approvals, is expected to
close by early June 2000. The Company plans to finance the acquisition
initially through bank debt, under a committed facility, and subsequently
through an offering of debt or a combination of debt and equity. The Company
intends to account for the acquisition under the purchase method of
accounting.
12stock split.
11
SCHOLASTIC CORPORATION
ITEMItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONSManagement's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A")
================================================================================
RESULTS OF OPERATIONSResults of Operations - CONSOLIDATEDConsolidated
Revenues for the quarter ended February 29,November 30, 2000 increased approximately 17%31% to $312.8$668.3 million
from $267.3compared to $511.3 million in the comparable quarter of the prior fiscal
year.year ago quarter. For the ninesix months ended
February 29,November 30, 2000, revenues increased approximately 22%49% to $1,000.6$1,030.4 million from $820.7$693.8
million in the prior fiscal
year period. The increasesincrease in revenuerevenues for both the three
and nine-monthsix month periods were
drivenreflects revenue growth across all segments of the
Company's business, primarily led by the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTIONChildren's Book Publishing and
Distribution segment, which was up 23%27% over the prior year quarter and 35%52% over
the prior year-to-date period. This segment accounted for 64%67% and 63%
respectively, of the Company's revenues for the three and nine-monthsix-month periods
ended February 29,November 30, 2000
respectively, as compared to 61%69% and 57%62%, respectively, in the corresponding
prior
fiscal year periods. AsThis revenue increase also reflects the results of Grolier
Incorporated ("Grolier") for the period subsequent to the June 22, 2000
acquisition by the Company.
Cost of goods sold as a percentage of sales cost of goods solddecreased from 47.0% to 42.6% for
the threequarter ended November 30, 2000 and nine-month
periods ended February 29, 2000, remained a constant percentagefrom 50.6% to 45.6% for the six-month
period compared to the prior year periods. This improvement resulted primarily
from the comparable periodsaddition of Grolier sales in Fiscal 2001 and the prior fiscal year.significant increase
in higher margin Trade sales due in part to better than expected sell-through in
the Children's Book Publishing & Distribution segment which lowered reserve for
returns requirements. Selling, general and administrative expenses also remained constant for the three-month period and decreased 1% as a
percentage of revenuesales increased from 36.2% to 40.5% for the nine-monthquarter ended November
30, 2000 when compared to the prior year quarter. This increase relates
primarily to increased goodwill amortization related to the Grolier acquisition,
increased promotional spending and increased amortization of prepublication
costs. For the year-to-date period, ended February 29, 2000.selling, general and administrative expenses
as a percentage of sales increased from 41.1% to 43.3% when compared to the same
period in the prior fiscal year.
Operating expenses for the nine months includedprior year quarter include a non-recurring charge of
$8.5 million primarily relateddue to the establishment of a $6.7 million litigation reserve
following an adverse decision in a lawsuit. The case, which the Company is appealing,has
appealed, involves stock appreciation rights allegedly granted in 1990 in connection
with a joint venture formed primarily to produce motion pictures. The
non-recurring charge also includes an unrelated non-recurring expense of $1.8 million relatingrelated
to the liquidation of certain stock options.
TheExcluding the impact of the prior-year non-recurring charge, operating profit
for the quarter ended February 29,November 30, 2000 increased 57%improved 27% to $7.7$101.4 million from
a profit of $4.9$80.0 million in the same quarter of the prior fiscal year. OperatingIncluding the
prior-year non-recurring charge, operating profit for the nine-month period ended February 29, 2000,
excluding the non-recurring charge, was up 44% to $54.1 million when compared to
the same period in the prior year. Inclusive of the charge, the year-to-date
operating profit was up approximately 21% to $45.6 million from $37.7 million in
the prior year period. These increases reflect increased revenues in CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION primarily due to strong trade sales, led by the
HARRY POTTER-TM- AND POKEMON-TM- books, strong results in book clubs and fairs,
and the effect of implementing cost-cutting/margin improvement plans across the
Company.
Net income for the quarter ended February 29, 2000, increased $1.8 million to
$2.0 million, or $.11 per diluted share, compared to net income of $0.2 million,
or $.01 per diluted share, in the comparable quarter of the prior year. Net
income for the nine months ended February 29, 2000, increased 37% to $19.7
million or $1.16 per diluted share compared to the same nine-month period in the
prior fiscal year. Excluding the non-recurring charge (and the related
tax-effect), net income increased 74% to $25.1 million or $1.47 per diluted
share for the nine months when compared toimproved 42%
over the same period in the prior fiscal year. SUBSEQUENT EVENT
On April 13, 2000,For the Company entered into a definitive agreement with
Lagardere S.C.A.six-month period,
operating profit, excluding the impact of Francethe prior-year non-recurring charge,
improved 104% to acquire Grolier, Inc. ("Grolier") for $400
million in cash. Grolier is the leading provider of U.S. direct mail-to-home
and e-commerce book clubs for children through age 5, the leading on-line and
print publisher of children's reference products (including major
encyclopedias) sold primarily to U.S. school libraries and has international
operations in the United Kingdom, Canada and Southeast Asia. Grolier also
publishes trade books under the Orchard Books, Children's Press and Franklin
Watts imprints, sold both to libraries and the trade. Grolier's fiscal 1999
revenues were approximately $450 million and earnings before interest, taxes,
depreciation and amortization were approximately $45 million. The
transaction, which is subject to certain regulatory approvals, is expected to
close by early June 2000. The Company plans to finance the acquisition
initially through bank debt, under a committed facility, and subsequently
through an offering of debt or a combination of debt and equity. The Company
intends to account for the acquisition under the purchase method of
accounting.
13
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
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 in the United States of children's books through
its school-based book club (including home continuity programs), book fair and
trade channels.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 200.5 $ 162.5 $ 632.7 $ 470.1
Operating Profit 35.4 25.8 115.5 70.8
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 17.7% 15.9% 18.3% 15.1%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
third quarter of fiscal 2000 were up 23% to $200.5$94.6 million from $162.5$46.4 million in the comparable quarter of the prior fiscal year. Year-to-date
revenues were up 35% at $632.7 million compared to the same period of the
prior year. As a result,Including
the prior-year non-recurring charge, operating results improved approximately 37% to
$35.4 millionprofit for the quarter and approximately 63% for the nine months ended
February 29, 2000 when compared tosix-month period
improved 150% over the same period in the prior fiscal year. The increased revenue reflectsThese increases
reflect the impact of continued strong trade sales volumeacross all segments combined with the
integration of Scholastic properties including HARRY POTTER, DEAR
AMERICA-Registered Trademark-, I SPY-TM-, ROYAL DIARIES, CAPTAIN
UNDERPANTS-TM-, POKEMON AND EVERWORLD-TM-. Additionally,Grolier's revenues in the Company's book clubsresults.
Net income increased 21% to $56.3 million, or $2.95 per diluted share, compared
to $46.6 million, or $2.59 per diluted share (excluding the $0.29 per share
non-recurring charge recorded last year). For the six-month period, net income
increased 98% to $45.7 million, or $2.47 per diluted share, compared to $23.1
million, or $1.35 per diluted share (excluding the $0.29 per share non-recurring
charge). All net income per diluted share amounts are before the 2-for-1 stock
split effective January 16, 2001. (See Note 10 to Notes to Condensed
Consolidated Financial Statements).
12
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Results of Operations - Segments
Children's Book Publishing and book fair were up approximately 12% over the prior
year quarter. Book club and book fair revenues benefited from continuing
improvements in product marketing and selection. These improvements resulted
in a higher level of book club orders, increased fair count and higher
revenue per book club order and per book fair.
EDUCATIONAL PUBLISHINGDistribution
The Company's EDUCATIONAL PUBLISHINGChildren's Book Publishing and Distribution segment includes the
publication and distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazineschildren's books in and instructional technology for corefrom the United States
through its school book clubs, continuity programs, school book fairs and supplemental use in schoolsthe
trade channel. This segment also includes Grolier's direct-to-home book clubs
and librariestrade sales in the United States.States in the current fiscal year.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================Three months ended Six months ended
(in millions) November 30, November 30, November 30, November 30,
====================================================================================================================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ========================================================================================================================================
Revenue $ 40.0445.5 $ 32.9350.2 $ 147.2652.1 $ 143.0428.0
Operating Profit (Loss) (10.5) (10.8) (16.2) 0.4111.8 93.7 118.4 78.7
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * * * 0.3%--------------------------------------------------------------------------------------------------------------------
Operating margin 25.1% 26.8% 18.2% 18.4%
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHINGChildren's Book Publishing and Distribution segment for the
quarter ended November 30, 2000 increased approximately 22%27% to $40.0$445.5 million compared to
$350.2 million in the year ago quarter. Grolier Home Book Clubs and Trade
revenues added $67.4 million, with Scholastic Trade revenues increasing 17% from
the year ago quarter. Revenue for School Book Fairs and School Book Clubs
increased 10% and 3%, respectively, compared to the prior year quarter, which
included peak Fiscal 2000 sales of Pokemon(TM) and Harry Potter(TM) books. For
the six-month period, revenues increased 52% to $652.1 million compared to
$428.0 million in the year ago period. This increase reflects the addition of
$107.3 million in revenue from Grolier's operations and increased revenue in the
Company's Trade, School Book Fair and School Book Club operations. Trade
revenues continued to benefit from better than expected sell-through of Harry
Potter and other Scholastic titles. In addition to Harry Potter, other top
selling trade titles for the quarter ended November 30, 2000 included I Spy(TM),
Dear America(R), Royal Diaries, Clifford the Big Red Dog(R), Captain
Underpants(TM) How Do Dinosaurs say Goodnight, Scooby Doo and Powerpuff Girls.
Segment operating profit for the quarter increased 19% to $111.8 million as
compared to $93.7 million in the prior year. This improvement primarily resulted
from the addition of Grolier Home Book Clubs and the impact of better than
expected sell-through in Trade, which lowered reserve requirements and increased
net income by $5.2 million, or $0.27 per share, in the quarter. The Company will
continue to monitor sales information from the retailers related to the Holiday
sales of its Trade titles. Based on such information the Company may adjust its
estimate for sales returns. For the six-month period, operating profit improved
by 50% to $118.4 million, as compared to an operating profit of $78.7 million
for the prior year period. This growth reflects the benefit of the addition of
the Grolier business and the strength of the Trade business.
13
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Results of Operations - Segments (continued)
Educational Publishing
The Company's Educational Publishing segment includes the publication and
distribution of grades K to 12 textbooks, supplemental materials, classroom
magazines, teaching resources and instructional technology in and from the
United States to schools and libraries. This segment includes Grolier
Publishing, which includes print and on-line children's non-fiction and
reference products, in the current fiscal year.
Three months ended Six months ended
(in millions) November 30, November 30, November 30, November 30,
====================================================================================================================
2000 1999 2000 1999
====================================================================================================================
Revenue $ 73.9 $ 52.8 $ 167.0 $ 109.2
Operating (Loss) Profit (8.0) (7.7) 6.3 (7.3)
- --------------------------------------------------------------------------------------------------------------------
Operating margin * * 3.8% *
* - not meaningful
Revenues in the Educational Publishing segment for the quarter ended November
30, 2000 increased 40% to $73.9 million compared to $52.8 million in the year
ago quarter. For the six months, revenues increased 53% to $167.0 million,
compared to $109.2 million in the year ago period. Revenues for both the quarter
and year-to-date period benefited from the addition of Grolier's print and
on-line non-fiction and reference sales (of $15.0 million and $27.0 million,
respectively), combined with increases in Scholastic's core and supplemental
curriculum sales.
The segment's operating loss for the second quarter was $8.0 million, compared
to an operating loss of $10.5$7.7 million as
compared to revenues of $32.9 million and an operating loss of $10.8 million in
the comparable quarter of the prior fiscal year. The increase in revenue is due
to
14
growth from READ 180!-TM-, SCHOLASTIC READING COUNTS!-TM-, Paperback and
professional publishing, and supplemental teaching products.
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
The operating loss for the fiscal 2000 quarter reflects the impact of
increased marketing and promotional costs related to the Texas reading
adoption to be delivered in the summer of 2000. On a year-to-date basis,
revenues for the period ended February 29, 2000 increased approximately 3% to
$147.2 million, from $143.0 million for the comparable period of the prior fiscal year quarter.
Offsetting the increases in segment revenue were increases in obsolescence
provisions and increased amortization related to certain capitalized
prepublication costs. For the six month period, operating profit improved by
$13.6 million over the prior year period, primarily reflecting the growthbenefit of
READ 180!, SCHOLASTIC READING COUNTS!,
and paperback and professional publishing, partially offset by lower order
levelsproduct shipments for SCHOLASTIC LITERACY PLACE-Registered Trademark-. The year-to-date
operating loss for the period ended February 29, 2000 reflects the increased
costs related to the Texas reading adoption and certain costs related toopen market sales of
Scholastic Literacy Place(R) 2000, strong sales of supplemental curriculum and
the rolloutaddition of the Company's READ 180! software.
MEDIA, LICENSING AND ADVERTISINGGrolier's reference division.
Media, Licensing and Advertising
The Company's MEDIA, LICENSING AND ADVERTISINGMedia, Licensing and Advertising
segment includes the production and distribution in the United States of entertainmentprogramming and consumer
products (including children's television programming, videos, CD-ROM's, feature
films and motion pictures), Internetnon-book products) and internet services,
CD-ROM-based products and Scholastic-branded licensed properties, as well as advertising and
promotional activities.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================Three months ended Six months ended
(in millions) November 30, November 30, November 30, November 30,
====================================================================================================================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ========================================================================================================================================
Revenue $ 24.254.9 $ 30.739.9 $ 73.765.7 $ 72.149.3
Operating Profit (Loss) 0.3 (2.6) 1.1 (11.3) (4.5)(10.5) (9.9)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN--------------------------------------------------------------------------------------------------------------------
Operating margin 0.5% * 3.6% * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISINGnot meaningful
14
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Results of Operations - Segments (continued)
Media, Licensing and Advertising revenues decreased 21%increased 38% to $24.2$54.9 million in the
thirdsecond quarter of fiscal 2000 as2001 compared to $39.9 million in the prior year
quarter. For the nine
months ended February 29, 2000,six month period, the segment's revenues increased approximately 2%33% to $73.7$65.7
million versus $49.3 million in the prior year. This improvement reflects the
impact of increases in advertising revenues for the Company's professional
magazines, production revenues from $72.1the new animated series Clifford the Big Red
Dog(TM), fees from the syndication of Scholastic's The Magic School Bus(R)
television show, as well as the inclusion of Grolier in the segment results
($5.4 million for the same period of the prior fiscal year.quarter and six-month periods).
For the quarter ended February 29,November 30, 2000, the segment recognized an operating loss of
$2.6 million as compared to a profit of $1.1$0.3 million
in the same period of the
prior fiscal year. On a year-to-date basis, the operating loss grew to $11.3
millionimproved from an operating loss of $4.5$2.6 million in the same period of the prior
fiscal year. These results reflect increasedthe impact of revenue increases, partially
offset by planned increases in promotional, editorial and other operating costs
associated with Scholastic internetthe continued development and reduced TV
production revenues.
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
INTERNATIONALof Scholastic.com. For the six months
ended November 30, 2000, the operating loss for this segment was $10.5 million
as compared to $9.9 million in the previous year.
International
The INTERNATIONALInternational segment consists ofincludes the publication and distribution of products
and services outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand and Southeast Asia and its emerging
businesses in Mexico, Hong Kong, India, Ireland and Argentina. In the current fiscal
period, the segment includes Grolier's direct-to-home operations in the United
Kingdom, Canada and Australia and the publication and distribution of Grolier's
reference products and services outside the United States, principally in
Southeast Asia.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================Three months ended Six months ended
(in millions) November 30, November 30, November 30, November 30,
====================================================================================================================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ========================================================================================================================================
Revenue $ 48.194.0 $ 41.268.4 $ 147.0145.6 $ 135.5107.3
Operating Profit (Loss) 0.7 (1.4) 1.4 (1.7)12.2 6.2 9.5 2.3
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 1.5% * 1.0% *--------------------------------------------------------------------------------------------------------------------
Operating margin 13.0% 9.1% 6.5% 2.1%
* - NOT MEANINGFUL
INTERNATIONALInternational revenues increased by approximately 36% for both the quarter and
year-to-date periods ended February 29,November 30, 2000 increased 17% to
$48.1 millionwhen compared to $41.2the comparable
prior year periods. The increase principally reflects the inclusion of Grolier
($22.7 million and $36.7 million, respectively) in the Company's results as
well as an increase in the results of the Canadian operations led by their
School Book Clubs. Operating profit improved $6.0 million over the prior year
quarter benefiting
from improved sales and operating margins in the Company's Australian and
Canadian operations. On a year-to-date basis, revenues increased approximately
9% to $147.0$7.2 million compared to $135.5 million inover the prior fiscal year period.
This improvement reflectssix-month period reflecting strong
performanceCanadian and export results combined with the inclusion of Grolier in Canada's book club and trade
businesses, and in Australia's book club and software businesses,segment
results, all of which was partially offset by weak sales in the United Kingdom. Operating profit for the
quarter improved $2.1 million over the prior year period to $0.7 million,
reflecting the impact of revenue improvementsforeign exchange
fluctuations and cost containment efforts. For
the nine months ended February 29, 2000, operating profit improved $3.1 million
to $1.4 million from a loss of $1.7 millionlower revenues for the prior year fiscal period,
reflecting primarily the net impact of revenue improvementsAustralia and cost reductions.
SEASONALITYUnited Kingdom operations.
15
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Seasonality
The Company's school book clubs, school book fairs and most of its magazines
operate on a school-year basis; therefore, the Company's business is highly
seasonal. As a consequence, generally, the Company's revenues in the first and
third quarters of the fiscal year are lower than its revenues in the other two
fiscal quarters, and the Company generally experiences a substantial loss from operations in the first
quarter. Typically, book clubSchool Book Clubs and book fairSchool Book Fairs experience the
largest revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from
the sale of instructional materials are largerhigher in the first quarter. LIQUIDITY AND CAPITAL RESOURCESThe
acquisition of Grolier is not expected to substantially change the Company's
historic seasonality.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August, andhave generally have peaked in September or October, and have been at
thetheir lowest point in May.
17
Liquidity and Capital Resources
The Company's cash and cash equivalents decreasedincreased by $0.3$3.7 million during the
nine-monthsix-month period ended February 29,November 30, 2000, compared to a decreasean increase of $3.5$1.9
million during the comparable period in the prior fiscal year.
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company generated $42.7Cash flow provided by operations was $44.2 million of cash from operating activities duringfor the nine-monthsix-month period
ended February 29, 2000 versus $45.1 million in the comparable
period of the prior fiscal year. Improvements in operating results were more
than offset by increased inventory and accounts receivable requirements.
Inventory levels increasedprimarily as a result of higher sales volumes and accelerated
purchasing to better ensure high levels of customer service.improved operating performance.
Cash used inoutflows for investing activities was $90.9 million and $95.7were $479.3 million for the nine months February 29, 2000six-month
period, largely as a result of the acquisition of Grolier and February 28, 1999, respectively. Investing
activities consisted primarily of prepublication costincreased spending
for capital expenditures. Capital expenditures, capital
expenditures, royalty advances and production cost expenditures. Prepublication
cost expenditures increased $6.5 million to $35.3including capitalized interest,
totaled $31.2 million for the nine months
ended February 29, 2000 over the comparablesix-month period of the prior year largely due
to the planned revision of SCHOLASTIC LITERACY PLACE and the spending on the
Company's new READ 180! program.
Capital expenditures increased $10.7fiscal 2001, increasing $14.8
million to $28.8 million in the current
year reflecting the construction of a new office facility. Royalty advances
decreased $1.0 million for the nine months ended February 29, 2000 over the same period in fiscal 2000 largely as a result of the prior fiscal yearexpansion
of the Company's corporate headquarters and continuing investment in systems
development.
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 $17.1 million. Production costs decreased
$3.8 million to $8.1 millionfinance its ongoing working capital requirements for the
nine months ended February 29,remainder of the fiscal year.
16
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Financing
To finance the June 22, 2000 as
compared toacquisition of Grolier, the same period inCompany borrowed $350.0
million under a new credit facility (the "Grolier Facility") and borrowed the
prior fiscalremaining $50.0 million under the Company's existing Loan Agreement and
Revolver. The Grolier Facility is a one year due to a reduction infacility, which may be extended at
the number of shows being produced. Business and trademark acquisition-related
paymentsCompany's discretion for an additional year. The weighted-average interest
rate under the Grolier Facility for the prior fiscal year were primarily related to the acquisition of
certain assets of Pages Book Fairs, Inc. and Quality Education Data.
FINANCINGperiod June 22, 2000 through November
30, 2000 was 7%.
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 borrowings to $240.0
million), including the issuance of up to $10.0 million in letters of credit.
Both the Loan Agreement and the Revolver expire on August 11, 2004. The Company
primarily uses these facilities for
various purposes including the funding ofto fund seasonal cash flow needs and other
working capital requirements. At February 29,November 30, 2000, the Company had $43.0$64.0
million in borrowings outstanding. The weighted-average interest rateoutstanding under these facilities for the nine-month period was 6.6%.
The Loan Agreement was amended and restated on August 11, 1999, principally
to extend the expiration dateat a weighted average
interest rate of the facility to August 11, 2004 and expand
the facility from $135.0 million to $170.0 million (with a right, in certain
circumstances, to increase to $200.0 million)7%. In addition, on November 10,
1999, the Company amended and restated the Revolver to increase the amount
available thereunder to $40.0 million and extend its expiration date to be
concurrent with the Loan Agreement.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian, Australian and AustralianSoutheast Asian operations totaled $39.5$49.5
million at February
29,November 30, 2000. These lines are used primarily to fund 18
local
working capital needs in those countries.needs. At February 29,November 30, 2000, $21.2$26.2 million in borrowings were
outstanding. Underoutstanding under these lines theof credit at a weighted-average interest rate forof
8%.
Acquisitions
On June 22, 2000, the nine months ended was 6.1%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available underacquired the two credit facilities and other
lines of credit will be sufficient to finance its ongoing working capital requirements for the remainder of the fiscal year.
19
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
In connection with the acquisitionstock of Grolier Inc., (See Item 2-MD&A-Results
of Operations-Subsequent Event), the Company plans to primarily finance the
$400for $400.0
million purchase price initially through bank debt under a committed
facility and subsequently through an offering of debt or a combination of
debt and equity. The Company does not anticipate any difficulties in obtaining permanent financing.
ACQUISITIONScash. 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.
YEAR 2000 READINESS DISCLOSURE
CommencingSubsequent Event
Scholastic Corporation announced that its Board of Directors approved a 2-for-1
stock split in July 1997, the Company initiatedform of a 100% stock dividend on its Year 2000 program, which
consistedCommon Stock and Class A
Stock, payable January 16, 2001 to stockholders of record as of December 29,
2000. Stockholders will receive one additional share of Common Stock or Class A
Stock for each share held on the following three components relatingrecord date. The additional shares will be
mailed or delivered on or about January 16, 2001 by the Company's transfer
agent, ChaseMellon Shareholder Services L.L.C. All outstanding rights under
stock options to acquire Scholastic's Common Stock and under Scholastic's 5%
Convertible Subordinated Debentures due 2005 will also be adjusted to give
effect to the Company's
operations: (i) information technology ("IT") computer systems and applications
which were judged to be potentially impacted by the Year 2000 problem and the
actions related thereto, (ii) non-IT systems and equipment which include
embedded technology which also could have been impacted by the Year 2000 problem
and actions related thereto and (iii) third party suppliers and customers with
which the Company has material relationships and which could adversely affect
the Company if such parties failed to be Year 2000 complaint and the actions
related thereto.
The Company completed its Year 2000 Readiness Program on a timely basis and
experienced no significant Year 2000 related problems to date with either its
internal operations or its material third party vendors. Similarly, there have
been no material Year 2000 impacts reported with respect to the Company's
products that we classified as Year 2000 ready. The Company estimates the total
cost of the Year 2000 program, including consulting fees, infrastructure and
facilities enhancements, and expenses related to internal staff, was
approximately $12.0 million, of which $4.0 million was incurred during the
current fiscal year. No additional material Year 2000 program costs are
anticipated.
All statements regarding Year 2000 Readiness are "Year 2000 Readiness
Disclosures" as defined by the Year 2000 Information and Readiness Disclosure
Act of October 19, 1998.
NON-RECURRING CHARGE
The year-to-date operating results include an $8.5 million non-recurring charge
primarily related to the establishment of a litigation reserve following an
adverse decision in a lawsuit originally filed in January, 1995. The case,
SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS
ENTERTAINMENT, INC., involves stock appreciation rights allegedly granted to Mr.
Harris in 1990 in connection with a joint venture formed primarily to produce
motion pictures. Although the Company disagrees with the judge's decision and is
appealing, the Company has recorded $6.7 million to fully
20
reserve with respect to the case. The $8.5 million charge also includes an
unrelated non-recurring expense of $1.8 million relating to the liquidation of
certain stock options.
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
FORWARD LOOKING STATEMENTSsplit.
Forward Looking Statements
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 1999.
212000.
The Company posts on its website,
www.scholastic.com/aboutscholastic/invrel/index.htm, the date of its upcoming
financial press releases and telephonic analyst call at least five days prior to
the dissemination of its financial press releases. The Company's analyst calls
are open to the public and remain available to the public through the Company's
website for at least five days after the date of call.
17
SCHOLASTIC CORPORATION
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative 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 does not considerbelieves that the impact of such currency fluctuations todo not represent a
significant risk toin the context of the Company's results ofcurrent international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business for material amounts, nor are such
instruments used for speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The majorityAs a result of the financing related to the Grolier
acquisition, approximately 65% of the Company's long-termtotal debt bears interest at a
fixed rate. However, the fair market value of the fixedvariable rate debtand is sensitive to changes in interest rates. The Company is
subject to the risk that market interest rates will declineincrease and thereby
increase the interest rates currently being charged under the fixedvariable rate
debt will exceeddebt. Under its current policies, the then prevailing market rates. The Company does not generally utilize any interest rate
derivative instruments to manage its exposure to interest rate changes.
As of February 29,November 30, 2000, the balance outstanding under its revolving creditvariable rate
facilities was $64.2$440.9 million. The nine-monthsix-month weighted-average interest rate
under its variable rate facilities was 6.5%7%. A 15% increase or decrease in the
average cost of the Company's variable rate debt under the facilityvarious facilities at
November 30, 2000 would not have a significant impact on the Company's results of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - MD&A - Results of Operations - Subsequent
Event.
22operations by
approximately $4.9 million annually on a pre-tax basis.
18
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEMItem 4. LEGAL PROCEEDINGSSubmissions of Matters to Vote of Security Holders
================================================================================
As previously reported, three purported class action complaints were filedThe Annual Meeting of Stockholders of the Company was held on September 19,
2000. The following sets forth the results of the proposals presented at the
meeting voted upon by the stockholders of the Company entitled to vote thereon.
Holders of the 828,100 shares of Class A Stock (comprising all outstanding
shares of Class A Stock) unanimously voted in favor of:
o The election of Richard Robinson, Rebeca M. Barrera, Helen V.
Benham, Charles T. Harris III, Andrew S. Hedden, Ramon Cortines, Mae
C. Jemison, Augustus K. Oliver and Richard M. Spaulding to serve as
directors of the Company, each to serve until the next Annual
Meeting of Stockholders and until their successor is duly elected
and qualified.
o The resolution authorizing an amendment to the Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock of the Company to 70,000,000.
o The resolution authorizing an amendment to the Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of Preferred Stock of the Company to 2,000,000.
o The resolution authorizing an amendment to the Amended and Restated
Certificate of Incorporation to effect the other amendments as set
forth in the United States Districtproposed Charter Amendment.
o The ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the Southern Districtfiscal year ending May
31, 2001.
With respect to all matters voted on by the holders of New York againstthe Class A Stock at the
meeting, broker non-votes were not applicable since no shares are held by
brokers.
Holders of Common Stock voted in favor of:
o The election of the following three nominees as directors to serve
until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Votes cast by holders of
the Common Stock were as follows:
Nominee For Withheld
Linda B. Keene 13,921,500 135,231
Peter Mayer 13,922,600 134,131
John G. McDonald 13,922,450 134,281
With respect to the foregoing matter voted on by the holders of the Common
Stock, abstentions or broker non-votes were not applicable.
o The approval of a resolution authorizing an amendment to the Amended
and Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock of the Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, IN RE SCHOLASTIC CORPORATION SECURITIES LITIGATION, 97 Civ.
II 2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20 (a)to 70,000,000.
Votes cast by holders 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 and granted plaintiffs leave to amend the
complaint. In dismissing both complaints, which alleged substantially similar
claims, the court held that plaintiffs failed to state a claim upon which relief
can be granted. On February 25, 2000, plaintiffs filed a Notice of Appeal in
connection with the most recent dismissal. The Company continues to believe that
the litigation is without merit and will continue to vigorously defend against
it.
23Common Stock were as follows:
For: 10,199,550 Against: 3,851,599 Abstain: 5,582 Broker non-votes: 0
19
SCHOLASTIC CORPORATION
================================================================================
ITEMItem 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K
================================================================================
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTExhibit
Number Description of Document
------ -----------------------
3.2 Bylaws of the Company, Amended and Restated as of March 16,
2000
10.6 Scholastic Corporation Employee Stock Purchase Plan, amended
and restated effective as of March 1, 2000
27.1 Financial Data Schedule as of and for the ninesix months
ended February 29,November 30, 2000
(b) Reports on Form 8-K filed during the quarter:
none.Amended Current Report on Form 8-K/A filed on September 5, 2000 regarding the
consummation of the acquisition of Grolier Incorporated by Scholastic Inc. on
June 22, 2000.
- --------------------------------------------------------------------------------
2420
SCHOLASTIC CORPORATION
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOLASTIC CORPORATION
(Registrant)
Date: April 14, 2000January 16, 2001 /s/ RICHARD ROBINSONRichard Robinson
-----------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTORChairman of the Board,
President, Chief Executive
Officer and Director
Date: April 14, 2000January 16, 2001 /s/ KEVINKevin J. MCENERYMcEnery
-----------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
25Executive Vice President and
Chief Financial Officer
21
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED FEBRUARY 29,NOVEMBER 30, 2000
EXHIBIT INDEX
- ----------------- --------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT================================================================================
Exhibit
Number Description of Document
------ -----------------------
3.2 Bylaws of the Company, Amended and Restated as of March 16,
2000
10.6 Scholastic Corporation Employee Stock Purchase Plan, amended
and restated effective as of March 1, 2000
27.1 Financial Data Schedule as of and for the ninesix months ended
February 29,November 30, 2000
- --------------------------------------------------------------------------------