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, 2000 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, 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 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 16,164,307
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three and
Nine Months Ended February 29, 2000 and February 28, 1999 1
Condensed Consolidated Balance Sheet at February 29, 2000,
February 28, 1999 and May 31, 1999 2
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended February 29, 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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 4. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
- ------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
=================================================== ================================== ================= ================
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
=================================================== ================ ================= ================= ================
2000 1999 2000 1999
=================================================== ================ ================= ================= ================
REVENUES $ 312.8 $ 267.3 $ 1,000.6 $ 820.7
Operating costs and expenses:
Cost of goods sold 155.6 133.5 500.7 406.6
Selling, general and administrative expenses 143.1 123.6 427.9 360.1
Depreciation 5.1 4.2 14.4 12.4
Goodwill and trademark amortization 1.3 1.1 3.5 3.9
Non-recurring charge - - 8.5 -
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
TOTAL OPERATING COSTS AND EXPENSES 305.1 262.4 955.0 783.0
Operating income 7.7 4.9 45.6 37.7
Interest expense, net (4.5) (4.6) (14.6) (14.5)
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Income before income taxes 3.2 0.3 31.0 23.2
Provision for income taxes 1.2 0.1 11.3 8.8
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
NET INCOME $ 2.0 $ 0.2 $ 19.7 $ 14.4
=================================================== ================ ================= ================= ================
Net income per Class A and Common Share:
Basic $ 0.12 $ 0.01 $ 1.18 $ 0.88
Diluted $ 0.11 $ 0.01 $ 1.16 $ 0.86
=================================================== ================ ================= ================= ================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================= ====================== ====================== =======================
FEBRUARY 29, 2000 MAY 31, 1999 FEBRUARY 28, 1999
================================================= ====================== ====================== =======================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5.6 $ 5.9 $ 1.6
Accounts receivable less allowance for
doubtful accounts 183.8 136.4 129.2
Inventories, net 319.5 227.4 267.6
Deferred taxes 41.9 41.8 48.1
Prepaid and other deferred expenses 29.6 22.7 24.2
- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT ASSETS 580.4 434.2 470.7
Property, plant and equipment, net 166.0 152.2 143.0
Prepublication costs 99.7 95.3 88.2
Other assets and deferred charges 154.3 160.6 170.1
- -------------------------------------------------- ---------- -------- --------
TOTAL ASSETS $ 1,000.4 $ 842.3 $ 872.0
================================================== ========== ======== =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 21.2 $ 18.0 $ 15.7
Accounts payable 131.7 97.0 105.5
Accrued royalties 56.8 23.7 35.6
Deferred revenue 23.6 6.7 21.8
Other accrued expenses 61.5 66.4 55.7
- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT LIABILITIES 294.8 211.8 234.3
NONCURRENT LIABILITIES:
Long-term debt 281.2 248.0 277.9
Other noncurrent liabilities 23.7 21.1 22.0
- -------------------------------------------------- ---------- -------- --------
TOTAL NONCURRENT LIABILITIES 304.9 269.1 299.9
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
Additional paid-in capital 223.0 212.3 211.5
Accumulated other comprehensive loss:
Foreign currency translation adjustment (7.6) (5.7) (6.1)
Retained earnings 211.1 191.4 169.0
Less shares of Common Stock
held in treasury (26.0) (36.8) (36.8)
- -------------------------------------------------- ---------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 400.7 361.4 337.8
- -------------------------------------------------- ---------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,000.4 $ 842.3 $ 872.0
================================================== ========== ======== ========
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
================================================================================================================
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
============================================================================ =================== ===============
2000 1999
============================================================================ =================== ===============
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 42.7 $ 45.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs (35.3) (28.8)
Additions to property, plant and equipment (28.8) (18.1)
Royalty advances (17.1) (18.1)
Production costs (8.1) (11.9)
Business and trademark acquisition-related payments (0.2) (15.7)
Other (1.4) (3.1)
- ---------------------------------------------------------------------------- ------------------- ---------------
Net cash used in investing activities (90.9) (95.7)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 282.4 213.1
Repayments of Loan Agreement and Revolver (249.3) (178.9)
Borrowings under lines of credit 48.3 49.3
Repayments of lines of credit (49.9) (42.9)
Proceeds from the exercise of stock options and related tax
benefits 17.0 0.0
Other (0.6) 6.5
- ---------------------------------------------------------------------------- ------------------- ---------------
Net cash provided by financing activities 47.9 47.1
- ---------------------------------------------------------------------------- ------------------- ---------------
Net decrease in cash and cash equivalents (0.3) (3.5)
Cash and cash equivalents at beginning of period 5.9 5.1
- ---------------------------------------------------------------------------- ------------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5.6 $ 1.6
============================================================================ =================== ===============
SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, which include the
accounts of Scholastic Corporation and all wholly owned subsidiaries (the
"Company"), 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 fiscal 1999 Annual Report to
Stockholders.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the nine months ended February 29, 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, 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; and
recoverability of other long-lived assets.
2. RECENT ACCOUNTING PRINCIPLES
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information." This statement requires that public business enterprises
report certain information about operating segments in financial statements of
the enterprise issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, 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), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows 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 values or cash
flows of both the hedge and the hedged item recognized 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. The Company is required to adopt the provisions
of SFAS 133 in the first quarter of fiscal 2002.
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
3. 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 and Argentina, and distributes its products and
services through a variety of channels, including book clubs, book fairs 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; 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.
The following tables set 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, 2000
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 200.5 $ 40.0 $ 24.2 $ 264.7 $ 48.1 $ 0.0 $ 312.8
Depreciation 0.9 0.3 0.4 1.6 0.9 2.6 5.1
Amortization (2) 3.4 7.2 2.4 13.0 0.5 0.0 13.5
Royalty advance expense 4.1 0.2 0.2 4.5 0.0 0.0 4.5
Segment profit/(loss)(3) 35.4 (10.5) (2.6) 22.3 0.7 (15.3) 7.7
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, 1999
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 162.5 $ 32.9 $ 30.7 $ 226.1 $ 41.2 $ 0.0 $ 267.3
Depreciation 0.7 0.3 0.1 1.1 1.0 2.1 4.2
Amortization (2) 3.1 6.3 5.4 14.8 0.4 0.0 15.2
Royalty advance expense 2.8 0.2 0.6 3.6 0.0 0.0 3.6
Segment profit/(loss)(3) 25.8 (10.8) 1.1 16.1 (1.4) (9.8) 4.9
Expenditures for
long-lived assets (4) 8.7 10.4 2.9 22.0 0.1 4.9 27.0
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ -------------
TABLES AND NOTES CONTINUED ON THE FOLLOWING PAGE
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
3. 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, 2000
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 632.7 $ 147.2 $ 73.7 $ 853.6 $ 147.0 $ 0.0 $ 1,000.6
Depreciation 2.7 0.8 0.9 4.4 2.7 7.3 14.4
Amortization (2) 10.1 21.1 7.6 38.8 1.4 0.0 40.2
Royalty advance expense 17.2 0.7 1.0 18.9 1.2 0.0 20.1
Segment profit/(loss) (3) 115.5 (16.2) (11.3) 88.0 1.4 (43.8) 45.6
Segment assets 435.7 191.1 49.4 676.2 147.2 177.0 1,000.4
Long-lived assets (5) 94.6 98.1 30.0 222.7 54.6 118.2 395.5
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, 1999
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 470.1 $ 143.0 $ 72.1 $ 685.2 $ 135.5 $ 0.0 $ 820.7
Depreciation 2.3 0.7 0.5 3.5 2.6 6.3 12.4
Amortization (2) 9.3 18.2 12.9 40.4 1.6 0.0 42.0
Royalty advance expense 10.9 0.2 2.2 13.3 0.0 0.0 13.3
Segment profit/(loss) (3) 70.8 0.4 (4.5) 66.7 (1.7) (27.3) 37.7
Segment assets 352.8 159.2 50.3 562.3 147.7 162.0 872.0
Long-lived assets (5) 96.9 89.6 25.2 211.7 56.1 102.3 370.1
Expenditures for
long-lived assets (4) 26.9 21.5 15.1 63.5 5.5 7.9 76.9
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ -------------
(1) OVERHEAD INCLUDES UNALLOCATED DOMESTIC CORPORATE-RELATED ITEMS AND 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-TAX $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.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND TAXES.
(4) INCLUDES PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.
(5) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
4. DEBT
Long-term debt consisted of the following:
============================================== ======================== ======================== =====================
FEBRUARY 29, 2000 MAY 31, 1999 FEBRUARY 28, 1999
============================================== ======================== ======================== =====================
Loan Agreement and Revolver $ 43.0 $ 10.0 $ 39.5
7% Notes due 2003, net of discount 124.8 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 3.4 3.4 3.6
- ---------------------------------------------- ------------------------ ------------------------ ---------------------
TOTAL DEBT 281.2 248.2 277.9
Less current portion 0.0 (0.2) 0.0
============================================== ======================== ======================== =====================
TOTAL LONG-TERM DEBT $ 281.2 $ 248.0 $ 277.9
============================================== ======================== ======================== =====================
LOAN AGREEMENT. The Company and Scholastic Inc. (a wholly owned subsidiary)
are joint and several borrowers under a loan agreement with certain banks
which was amended and restated effective August 11, 1999 (the "Loan
Agreement"). The Loan Agreement, which expires August 11, 2004, provides for
aggregate borrowings of up to $170.0 (with a right in certain circumstances
to increase it 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). 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. Based on the Company's current credit ratings, 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. The Company and Scholastic Inc. are joint and several borrowers
under a Revolving Loan Agreement with SunTrust Bank, which was amended and
restated effective November 10, 1999 (the "Revolver") and provides for
revolving credit loans of up to $40.0 and expires on August 11, 2004.
Interest under this facility is at the prime rate minus 1% or 0.325% to 0.90%
over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%.
The amounts charged vary based upon the Company's credit ratings. Based on
the Company's current credit ratings, the interest rate and facility fee are
0.475% over LIBOR and 0.150%, respectively. The Revolver has certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions.
7% NOTES 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. 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. 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
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.
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- series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
GOOSEBUMPS rights are licensed to the Company. The issues in the case 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 an appeal of the dismissal.
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 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 consolidated for the litigations, is continuing. 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. 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
material to the consolidated financial position of the Company.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
6. COMPREHENSIVE INCOME/(LOSS)
The following table sets forth comprehensive income/(loss) for the periods
indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
===================================================== ================= ================ ================= =================
2000 1999 2000 1999
===================================================== ================= ================ ================= =================
Net income $ 2.0 $ 0.2 $ 19.7 $ 14.4
Other comprehensive loss:
Foreign currency translation adjustment
net of provision for income taxes (0.9) (0.9) (1.1) (0.8)
- ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
COMPREHENSIVE INCOME/(LOSS) $ 1.1 $ (0.7) $ 18.6 $ 13.6
===================================================== ================= ================ ================= =================
7. 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 summarizes the reconciliation of the numerators and
denominators for the Basic and Diluted earnings per share ("EPS")
computations:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
====================================================== ================= ================ ================= ================
2000 1999 2000 1999
====================================================== ================= ================ ================= ================
Net income for EPS $ 2.0 $ 0.2 $ 19.7 $ 14.4
Weighted-average shares for basic EPS 16.8 16.4 16.6 16.3
Effect of stock options 0.6 0.5 0.4 0.4
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
WEIGHTED-AVERAGE SHARES FOR DILUTED EPS 17.4 16.9 17.0 16.7
====================================================== ================= ================ ================= ================
Net income per Class A and Common Share:
Basic $ 0.12 $ 0.01 $ 1.18 $ 0.88
Diluted $ 0.11 $ 0.01 $ 1.16 $ 0.86
Note: The effect of the 5.0% Convertible Subordinated Debentures on the
weighted-average shares outstanding for diluted EPS 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 CHARGE
The operating results for the nine months ended February 29, 2000 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 $6.7 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 EVENT
On April 13, 2000, the Company entered into a definitive agreement with
Lagardere S.C.A. of France 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.
12
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
("MD&A")
================================================================================
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended February 29, 2000 increased approximately 17% to
$312.8 million from $267.3 million in the comparable quarter of the prior fiscal
year. For the nine months ended February 29, 2000, revenues increased
approximately 22% to $1,000.6 million from $820.7 million in the prior fiscal
year period. The increases in revenue for the three and nine-month periods were
driven primarily by the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
segment, which was up 23% over the prior year quarter and 35% over the prior
year-to-date period. This segment accounted for 64% and 63% of the Company's
revenues for the three and nine-month periods ended February 29, 2000,
respectively, as compared to 61% and 57%, respectively, in the corresponding
prior fiscal year periods.
As a percentage of sales, cost of goods sold for the three and nine-month
periods ended February 29, 2000, remained a constant percentage from the
comparable periods of the prior fiscal year. Selling, general and administrative
expenses also remained constant for the three-month period and decreased 1% as a
percentage of revenue for the nine-month period ended February 29, 2000.
Operating expenses for the nine months included a non-recurring charge of $8.5
million primarily related to the establishment of a litigation reserve following
an adverse decision in a lawsuit. The case, which the Company is appealing,
involves stock appreciation rights allegedly granted in 1990 in connection with
a joint venture formed primarily to produce motion pictures. The charge also
includes an unrelated non-recurring expense of $1.8 million relating to the
liquidation of certain stock options.
The operating profit for the quarter ended February 29, 2000 increased 57% to
$7.7 million from a profit of $4.9 million in the same quarter of the prior
fiscal year. 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 to the same period in the prior fiscal
year.
SUBSEQUENT EVENT
On April 13, 2000, the Company entered into a definitive agreement with
Lagardere S.C.A. of France 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 million from $162.5
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, operating results improved approximately 37% to
$35.4 million for the quarter and approximately 63% for the nine months ended
February 29, 2000 when compared to the same period in the prior fiscal year.
The increased revenue reflects the impact of continued strong trade sales
volume of Scholastic properties including HARRY POTTER, DEAR
AMERICA-Registered Trademark-, I SPY-TM-, ROYAL DIARIES, CAPTAIN
UNDERPANTS-TM-, POKEMON AND EVERWORLD-TM-. Additionally, revenues in the
Company's book clubs 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 PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazines and instructional technology for core and
supplemental use in schools and libraries in the United States.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 40.0 $ 32.9 $ 147.2 $ 143.0
Operating Profit (Loss) (10.5) (10.8) (16.2) 0.4
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * * * 0.3%
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter increased
approximately 22% to $40.0 million with an operating loss of $10.5 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 reflecting the growth of READ 180!, SCHOLASTIC READING COUNTS!,
and paperback and professional publishing, partially offset by lower order
levels 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 to the
rollout of the Company's READ 180! software.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution in the United States of entertainment products (including
television programming, videos and motion pictures), 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,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 24.2 $ 30.7 $ 73.7 $ 72.1
Operating Profit (Loss) (2.6) 1.1 (11.3) (4.5)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * 3.6% * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased 21% to $24.2 million in the
third quarter of fiscal 2000 as compared to the prior year quarter. For the nine
months ended February 29, 2000, revenues increased approximately 2% to $73.7
million from $72.1 million for the same period of the prior fiscal year. For the
quarter ended February 29, 2000, the segment recognized an operating loss of
$2.6 million as compared to a profit of $1.1 million in the same period of the
prior fiscal year. On a year-to-date basis, the operating loss grew to $11.3
million from an operating loss of $4.5 million in the same period of the prior
fiscal year. These results reflect increased promotional, editorial and other
operating costs associated with Scholastic internet development and reduced TV
production revenues.
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
INTERNATIONAL
The INTERNATIONAL segment consists of the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong, India, and
Argentina.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 48.1 $ 41.2 $ 147.0 $ 135.5
Operating Profit (Loss) 0.7 (1.4) 1.4 (1.7)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 1.5% * 1.0% *
* - NOT MEANINGFUL
INTERNATIONAL revenues for the quarter ended February 29, 2000 increased 17% to
$48.1 million compared to $41.2 million in 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 million compared to $135.5 million in the prior fiscal year period.
This improvement reflects strong performance in Canada's book club and trade
businesses, and in Australia's book club and software businesses, 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 improvements 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 million for the prior year fiscal period,
reflecting primarily the net impact of revenue improvements and cost reductions.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are 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 club and book fair revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from the sale of
instructional materials are larger in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
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, borrowings have increased during June, July and August
and generally have peaked in September or October, and have been at the lowest
point in May.
17
The Company's cash and cash equivalents decreased by $0.3 million during the
nine-month period ended February 29, 2000, compared to a decrease of $3.5
million during the comparable period in the prior fiscal year.
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company generated $42.7 million of cash from operating activities during the
nine-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 increased as a result of higher sales volumes and accelerated
purchasing to better ensure high levels of customer service.
Cash used in investing activities was $90.9 million and $95.7 million for the
nine months February 29, 2000 and February 28, 1999, respectively. Investing
activities consisted primarily of prepublication cost expenditures, capital
expenditures, royalty advances and production cost expenditures. Prepublication
cost expenditures increased $6.5 million to $35.3 million for the nine months
ended February 29, 2000 over the comparable 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 $10.7 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 the prior fiscal year to $17.1 million. Production costs decreased
$3.8 million to $8.1 million for the nine months ended February 29, 2000, as
compared to the same period in the prior fiscal year, due to a reduction in the
number of shows being produced. Business and trademark acquisition-related
payments for the prior fiscal year were primarily related to the acquisition of
certain assets of Pages Book Fairs, Inc. and Quality Education Data.
FINANCING
The Company maintains two unsecured credit facilities which provide for
aggregate borrowings of up to $210.0 million (with a right, in certain
circumstances, to increase to $240.0 million), including the issuance of up to
$10.0 million in letters of credit. The Company uses these facilities for
various purposes including the funding of seasonal cash flow needs and other
working capital requirements. At February 29, 2000, the Company had $43.0
million in borrowings outstanding. The weighted-average interest rate 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 date 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). 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 and Australian operations totaled $39.5 million at February
29, 2000. These lines are used primarily to fund
18
working capital needs in those countries. At February 29, 2000, $21.2 million in
borrowings were outstanding. Under these lines the weighted-average interest
rate for the nine months ended was 6.1%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under 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 acquisition of Grolier, Inc., (See Item 2-MD&A-Results
of Operations-Subsequent Event), the Company plans to primarily finance the
$400 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.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects.
YEAR 2000 READINESS DISCLOSURE
Commencing in July 1997, the Company initiated its Year 2000 program, which
consisted of the following three components relating 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 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.
21
SCHOLASTIC CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management does not consider the impact of such currency fluctuations to
represent a significant risk to the Company's results of operations. The Company
does not generally enter into derivative financial instruments 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 majority of the Company's long-term debt bears interest
at a fixed rate. However, the fair market value of the fixed rate debt is
sensitive to changes in interest rates. The Company is subject to the risk that
market interest rates will decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. The Company does not
generally utilize interest rate derivative instruments to manage its exposure to
interest rate changes.
As of February 29, 2000, the balance outstanding under its revolving credit
facilities was $64.2 million. The nine-month weighted-average interest rate
was 6.5%. A 15% increase or decrease in the average cost of the Company's
variable rate debt under the facility 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.
22
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 4. LEGAL PROCEEDINGS
================================================================================
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, IN RE SCHOLASTIC CORPORATION SECURITIES LITIGATION, 97 Civ.
II 2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20 (a) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, resulting from purportedly materially false
and misleading statements to the investing public concerning the financial
condition of the Company. Specifically, the Complaint alleged misstatements and
omissions by the Company pertaining to adverse sales and returns of its popular
GOOSEBUMPS book series prior to the Company's interim earnings announcement on
February 20, 1997. On January 26, 2000, an order was entered granting the
Company's motion to dismiss plaintiffs' Second Amended Consolidated Complaint
without leave to further amend the complaint. Previously, on December 14, 1998,
an order was entered granting the Company's motion to dismiss plaintiffs' First
Amended Consolidated Complaint 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.
23
SCHOLASTIC CORPORATION
================================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 nine months ended
February 29, 2000
(b) Reports on Form 8-K filed during the quarter: none.
- --------------------------------------------------------------------------------
24
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, 2000 /s/ RICHARD ROBINSON
-----------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: April 14, 2000 /s/ KEVIN J. MCENERY
-----------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
25
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
EXHIBIT INDEX
- ----------------- --------------------------------------------------------------
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 nine months ended
February 29, 2000