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 August 31, 1999February 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 September 30, 1999
------------- ------------------------TITLE NUMBER OF SHARES OUTSTANDING
OF EACH CLASS AS OF MARCH 31, 2000
Common Stock, $.01 par value 15,711,81416,164,307
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999FEBRUARY 29, 2000
INDEX
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PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations for the Three and
Nine Months Ended August 31,February 29, 2000 and February 28, 1999 and 1998 1
Condensed Consolidated Balance Sheet at August 31,February 29, 2000,
February 28, 1999
and 1998 and May 31, 1999 2
Condensed Consolidated Statement of Cash Flows for the ThreeNine Months
Ended August 31,February 29, 2000 and February 28, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 911
Item 3. Quantitative and Qualitative Disclosures about Market Risk 1518
PART II - OTHER INFORMATION
Item 4. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 1620
SIGNATURES 1721
- ------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
=================================================== ================ ================= ================= ================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
=================================================== ================ ================= ================= ================
Revenues
REVENUES $ 180.0312.8 $ 150.2267.3 $ 1,000.6 $ 820.7
Operating costs and expenses:
Cost of goods sold 108.3 85.2155.6 133.5 500.7 406.6
Selling, general and administrative expenses 99.8 83.4143.1 123.6 427.9 360.1
Depreciation 4.6 4.05.1 4.2 14.4 12.4
Goodwill and trademark amortization 0.9 1.41.3 1.1 3.5 3.9
Non-recurring charge - --------------------------------------------------------------------------------- 8.5 -
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
TOTAL OPERATING COSTS AND EXPENSES 213.6 174.0305.1 262.4 955.0 783.0
Operating loss (33.6) (23.8)income 7.7 4.9 45.6 37.7
Interest expense, net 4.4 4.4(4.5) (4.6) (14.6) (14.5)
- --------------------------------------------------------------------------------
Loss--------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Income before benefitincome taxes 3.2 0.3 31.0 23.2
Provision for income taxes (38.0) (28.2)
Benefit for1.2 0.1 11.3 8.8
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
NET INCOME $ 2.0 $ 0.2 $ 19.7 $ 14.4
=================================================== ================ ================= ================= ================
Net income taxes 14.4 10.7
- --------------------------------------------------------------------------------
NET LOSS $ (23.6) $ (17.5)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net loss per Class A and Common Share:
Basic $ (1.43)0.12 $ (1.08)0.01 $ 1.18 $ 0.88
Diluted $ (1.43)0.11 $ (1.08)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------0.01 $ 1.16 $ 0.86
=================================================== ================ ================= ================= ================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
August================================================= ====================== ====================== =======================
FEBRUARY 29, 2000 MAY 31, 1999 May 31,FEBRUARY 28, 1999
August 31, 1998
- -----------------------------------------------------------------------------------------------------================================================= ====================== ====================== =======================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2.95.6 $ 5.9 $ 1.11.6
Accounts receivable less allowance for
doubtful accounts 142.2183.8 136.4 110.7129.2
Inventories, 315.1net 319.5 227.4 259.0267.6
Deferred taxes 55.541.9 41.8 50.348.1
Prepaid and other deferred expenses 35.629.6 22.7 31.624.2
- ------------------------------------------------------------------------------------------------------------------------------------------------------ ---------- -------- --------
TOTAL CURRENT ASSETS 551.3580.4 434.2 452.7470.7
Property, plant and equipment, net 153.7166.0 152.2 142.4143.0
Prepublication costs 95.499.7 95.3 84.488.2
Other assets and deferred charges 163.1154.3 160.6 168.9170.1
- ------------------------------------------------------------------------------------------------------------------------------------------------------- ---------- -------- --------
TOTAL ASSETS $ 963.51,000.4 $ 842.3 $ 848.4
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------872.0
================================================== ========== ======== =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 22.021.2 $ 18.0 $ 14.115.7
Accounts payable 151.4131.7 97.0 110.0105.5
Accrued royalties 32.856.8 23.7 25.235.6
Deferred revenue 14.823.6 6.7 19.021.8
Other accrued expenses 53.261.5 66.4 52.355.7
- ------------------------------------------------------------------------------------------------------------------------------------------------------- ---------- -------- --------
TOTAL CURRENT LIABILITIES 274.2294.8 211.8 220.6234.3
NONCURRENT LIABILITIES:
Long-term debt 329.0281.2 248.0 306.8277.9
Other noncurrent liabilities 23.7 21.1 22.0
21.1 19.2
- ------------------------------------------------------------------------------------------------------------------------------------------------------- ---------- -------- --------
TOTAL NONCURRENT LIABILITIES 351.0304.9 269.1 326.0299.9
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 213.1223.0 212.3 206.5
Retained earnings 167.9 191.4 137.1211.5
Accumulated other comprehensive income:loss:
Foreign currency translation adjustment (7.6) (5.7) (6.1)
(5.7) (5.2)Retained earnings 211.1 191.4 169.0
Less shares of Common Stock
held in treasury (36.8)(26.0) (36.8) (36.8)
- ------------------------------------------------------------------------------------------------------------------------------------------------------- ---------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 338.3 $400.7 361.4 $ 301.8337.8
- ------------------------------------------------------------------------------------------------------------------------------------------------------- ---------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963.51,000.4 $ 842.3 $ 848.4872.0
================================================== ========== ======== ========
2
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
THREE================================================================================================================
NINE MONTHS ENDED
AUGUST 31,
- -------------------------------------------------------------------------------------------------------------------FEBRUARY 29, FEBRUARY 28,
============================================================================ =================== ===============
2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------============================================================================ =================== ===============
NET CASH USED INPROVIDED BY OPERATING ACTIVITIES ...................................... $ (62.3) $(37.3)42.7 $ 45.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs .................................................... (10.3) (6.7)(35.3) (28.8)
Additions to property, plant and equipment .............................. (6.2) (5.4)(28.8) (18.1)
Royalty advances ........................................................ (5.6) (4.2)(17.1) (18.1)
Production costs ........................................................ (3.7) (6.6)
Other ................................................................... (0.2) (1.8)(8.1) (11.9)
Business and trademark acquisition-related payments ..................... -- (11.7)(0.2) (15.7)
Other (1.4) (3.1)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------- ---------------
Net cash used in investing activities ................................... (26.0) (36.4)(90.9) (95.7)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver ............................ 120.8 120.5282.4 213.1
Repayments of Loan Agreement and Revolver ............................... (39.8) (57.4)(249.3) (178.9)
Borrowings under lines of credit ........................................ 10.7 22.448.3 49.3
Repayments of lines of credit ........................................... (6.7) (17.2)(49.9) (42.9)
Proceeds from the exercise of stock options and related tax
benefits 17.0 0.0
Other ................................................................... 0.3 1.4(0.6) 6.5
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------- ---------------
Net cash provided by financing activities ............................... 85.3 69.7
Effect of exchange rate changes on cash .................................... 0.0 0.047.9 47.1
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------- ---------------
Net decrease in cash and cash equivalents .................................. (3.0) (4.0)(0.3) (3.5)
Cash and cash equivalents at beginning of period ........................... 5.9 5.1
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 2.95.6 $ 1.1
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------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 1998/fiscal 1999 Annual Report to
Stockholders.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the threenine months ended August 31,February 29, 2000 and
February 28, 1999 and 1998 are not necessarily indicative of the results expected for the
full year. Due to the seasonal fluctuations that occur, the August 31, 1998February 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,to: book returns,returns; recoverability of
inventory,inventory; recoverability of advances to authors,authors; amortization periods,periods;
recoverability of prepublication and film production costscosts; 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 IndiaArgentina, 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,DISTRIBUTION; EDUCATIONAL PUBLISHING,PUBLISHING; MEDIA,
LICENSING AND ADVERTISINGADVERTISING; and INTERNATIONAL. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision makerdecision-maker assesses operating performance and
allocates resources.
The following table setstables set forth the Company's segment information for the
fiscal quarters ended August
31, 1999 and 1998 about the Company's segments:periods indicated:
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------------------------------------========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 29, 2000
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 79.2200.5 $ 55.8 $8.9 $143.940.0 $ 36.124.2 $ 264.7 $ 48.1 $ 0.0 $180.0$ 312.8
Depreciation 0.9 0.2 0.2 1.30.3 0.4 1.6 0.9 2.4 4.62.6 5.1
Amortization (2) 3.4 7.0 1.6 12.0 0.37.2 2.4 13.0 0.5 0.0 12.313.5
Royalty advance expense 4.2 0.14.1 0.2 0.2 4.5 0.5 0.0 5.00.0 4.5
Segment profit/(loss)(3) (14.4) 1.1 (7.1) (20.4) (4.7) (8.5) (33.6)
Segment assets 399.8 184.7 58.4 642.9 141.2 179.4 963.5
Long-lived assets (4) 97.0 95.7 27.3 220.0 56.8 109.0 385.835.4 (10.5) (2.6) 22.3 0.7 (15.3) 7.7
Expenditures for
long-lived assets (5) 8.1(4) 8.5 7.6 5.3 21.0 1.1 3.7 25.8
- --------------------------------------------------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------------------------------------------------6.0 22.1 1.0 8.9 32.0
========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 28, 1999
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 47.8162.5 $ 63.532.9 $ 6.0 $117.3 $32.930.7 $ 226.1 $ 41.2 $ 0.0 $150.2$ 267.3
Depreciation 0.7 0.2 0.20.3 0.1 1.1 0.81.0 2.1 4.04.2
Amortization (2) 3.1 6.1 1.5 10.7 0.66.3 5.4 14.8 0.4 0.0 11.315.2
Royalty advance expense 3.1 0.1 0.0 3.22.8 0.2 0.6 3.6 0.0 0.0 3.23.6
Segment profit/(loss)(3) (18.4) 13.5 (6.2) (11.1) (4.8) (7.9) (23.8)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 322.4 169.1 48.5 540.0 141.0 167.4 848.4435.7 191.1 49.4 676.2 147.2 177.0 1,000.4
Long-lived assets (4) . 93.9 85.8 26.2 205.9 57.0 100.1 363.0(5) 94.6 98.1 30.0 222.7 54.6 118.2 395.5
Expenditures for
long-
livedlong-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) 6.5 4.1 7.6 18.2 2.9 1.8 22.996.9 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, AND PROVISION FOR INCOME TAXES.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 AS IT
RELATESRELATED TO THE COMPANY'S
HEADQUARTERS IN THE METROPOLITAN NEW YORK AREA AND ITS NATIONAL SERVICE
OPERATION LOCATED IN THE JEFFERSON CITY, MISSOURI AREA.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.
67
(5) INCLUDES PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.
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-ownedwholly 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.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 commitmentfacility fee ranging from 0.10% to 0.30% on the facility and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33.0%33% of the
total facility. The amounts charged vary based upon the Company's credit
ratings. AtBased on the Company's current credit ratings, the spread over LIBOR,
commitmentinterest rate,
facility fee and utilization fee are 0.475% over LIBOR, 0.150%, 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.
An aggregate of $0.0 and $58.0 of borrowings and $1.0 of letters
of credit were outstanding under the Loan Agreement at May 31, 1999 and August
31, 1999.
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") with Sun Bank, N. A., whichand provides for
revolving credit loans of up to $35.0$40.0 and expires on May 31, 2000.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. The aggregate
amount of borrowings under the Revolver at May 31, 1999 and August 31, 1999 were
$10.0 and $32.5, respectively.
The Company has agreed in principle to amend and restate the Revolver during the
second quarter of fiscal year 2000 to, among other things, extend the maturity
to 2004 and expand the facility to $40.0, subject to required approvals and
documentation.
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")
under Regulation S and Rule 144A of the Securities Act of 1933..
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.
OTHER LINES OF CREDIT -- SHORT TERM. The Company's international subsidiaries
had lines of credit available of $37.9 at May 31, 1999 and $36.5 at August 31,
1999. The amounts outstanding under these credit
7
lines were $18.0 and $22.0 at May 31, 1999 and August 31, 1999, respectively.
The weighted-average interest rate on the outstanding amounts was 7.2% and 6.3%
at May 31, 1999 and August 31, 1999, respectively.
89
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 the complaint,both complaints, which
alleged substantially similar claims, the court held that plaintiffs failed to
state a claim upon which relief can be granted and granted plaintiffs leave to
amend the complaint. Pursuant to that order,granted. On February 25, 2000, plaintiffs
filed a Second Amended
Consolidated Complaint, on or about February 16, 1999, alleging substantially
similar claims againstNotice of Appeal in connection with the Company and one of its officers.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(R)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 repaymentlost profits and disgorgement of certain payments received by Parachute of a portion of the $15.3 advance already paid.Parachute.
Discovery, which has been consolidated for the litigations, has commenced.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.
910
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------================================================================================
6. COMPREHENSIVE LOSSINCOME/(LOSS)
The following table sets forth comprehensive lossincome/(loss) for the periods
indicated:
THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
===================================================== ================= ================ ================= =================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
===================================================== ================= ================ ================= =================
NET LOSS
Net income $ (23.6)2.0 $ (17.5)
OTHER COMPREHENSIVE LOSS:0.2 $ 19.7 $ 14.4
Other comprehensive loss:
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.2) (0.1)(0.9) (0.9) (1.1) (0.8)
- ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
COMPREHENSIVE LOSSINCOME/(LOSS) $ (23.8)1.1 $ (17.6)(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 sets forthsummarizes the computationreconciliation of basicthe numerators and
diluteddenominators for the Basic and Diluted earnings per share:share ("EPS")
computations:
THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
====================================================== ================= ================ ================= ================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
====================================================== ================= ================ ================= ================
Net lossincome for EPS $ (23.6)2.0 $ (17.5)0.2 $ 19.7 $ 14.4
Weighted-average Class A and Common Shares
outstandingshares for basic earnings per share 16.5EPS 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 lossincome per Class A and Common Share:
Basic $ (1.43)0.12 $ (1.08)0.01 $ 1.18 $ 0.88
Diluted $ (1.43)0.11 $ (1.08)
- --------------------------------------------------------------------------------0.01 $ 1.16 $ 0.86
For the three months ended August 31, 1999 and 1998, theNote: The effect of the 5.0% Convertible Subordinated Debentures employee stock options, and for the three
months ended August 31, 1999, warrants, on the
weighted-average Class A and
Common Sharesshares outstanding for diluted earnings per shareEPS was anti-dilutive and
therefore is 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 August 31, 1999February 29, 2000 increased approximately 20%17% to
$180.0$312.8 million from $150.2$267.3 million in the comparable quarter of the prior fiscal
year. This increaseFor 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 wasfor the three and nine-month periods were
driven primarily by the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
segment, which was up 66%23% over the prior year quarter and which35% over the prior
year-to-date period. This segment accounted for 44%64% and 63% of the Company's
revenues for the quarterthree and nine-month periods ended August 31, 1999,February 29, 2000,
respectively, as compared to 32% of61% and 57%, respectively, in the corresponding
periodprior 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. As a percentage of revenue, variable cost of goods sold increased by
approximately 3.5% for the first quarter ended August 31, 1999 when compared to
the same period of the prior fiscal year. This increase reflects the impact of
product mix in the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment
due to higher Trade sales, including the impact of higher sales levels of
hardcover product. Selling, general and administrative
expenses also remained constant for the three-month period and decreased 1% as a
percentage of revenue were flat for the threenine-month period ended February 29, 2000.
Operating expenses for the nine months ended August 31, 1999
when comparedincluded a non-recurring charge of $8.5
million primarily related to the corresponding prior year period.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 lossprofit for the quarter ended August 31, 1999February 29, 2000 increased 41%57% to
$33.6$7.7 million from a lossprofit of $23.8$4.9 million in the same quarter of the prior
fiscal year. This increase reflectsOperating profit for the impactnine-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 improved salesthe 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 Tradetrade sales, led by the
HARRY POTTER(TM)POTTER-TM- AND POKEMON-TM- books, strong results in book clubs and a varietyfairs,
and the effect of successful series published byimplementing cost-cutting/margin improvement plans across the
Company.
These sales were more than offset by increased losses in EDUCATIONAL PUBLISHING
due to the anticipated absence of California SCHOLASTIC LITERACY PLACE(R) sales
as well as increased Internet spending.
The net lossNet income for the quarter ended August 31, 1999 was $23.6February 29, 2000, increased $1.8 million to
$2.0 million, or $1.43$.11 per diluted share, versus acompared to net lossincome of $17.5$0.2 million,
or $1.08$.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.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 79.2200.5 $ 47.8162.5 $ 632.7 $ 470.1
Operating loss (14.4) (18.4)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 66%23% to $79.2$200.5 million from $47.8$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 22%approximately 37% to
a seasonal loss of
$14.4$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
Trade businessCompany'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 properties including three HARRY POTTER booksbook club orders, increased fair count and the ANIMORPHS(R), DEAR
AMERICa(TM), I SPY(TM), CLIFFORD THE BIG ReD DOG(R), PokEMON(TM) And
EverWoRLD(TM) series.
11
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)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.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 55.840.0 $ 63.532.9 $ 147.2 $ 143.0
Operating profit 1.1 13.5Profit (Loss) (10.5) (10.8) (16.2) 0.4
- -------------------------------------------------------------------------------------------------------------- --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * * * 0.3%
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter declined 12%increased
approximately 22% to $55.8$40.0 million with an operating profitloss of $1.1$10.5 million as
compared to revenues of $63.5$32.9 million and an operating profitloss of $13.5$10.8 million in
the comparable quarter of the prior fiscal year. This declineThe increase in revenuesrevenue is directlydue
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 cycleto be delivered in the summer of 2000. On a year-to-date basis,
revenues for reading textbooks. Inthe 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 Company recognized the benefitgrowth of highREAD 180!, SCHOLASTIC READING COUNTS!,
and paperback and professional publishing, partially offset by lower order
levels for SCHOLASTIC LITERACY PLACE(R)PLACE-Registered Trademark-. The year-to-date
operating loss for the period ended February 29, 2000 reflects the increased
costs related to the CaliforniaTexas reading adoption. The
next major state adoption is in Texas, with shipments of product expected inand certain costs related to the
summer of 2000. The decline in SCHOLASTIC LITERACY PLACE sales was partially
offset by the salesrollout of the Company's new product, READ 180!(TM). software.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution in the distribution by the Company's United States-based operationsStates of entertainment products (including
television programming, videos and motion pictures), Internet services, and
CD-ROM-based products and Scholastic-branded licensed properties, as well as
advertising and promotional activities.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $8.9 $6.0$ 24.2 $ 30.7 $ 73.7 $ 72.1
Operating loss (7.1) (6.2)Profit (Loss) (2.6) 1.1 (11.3) (4.5)
- -------------------------------------------------------------------------------------------------------------- --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * 3.6% * *
Revenues increased 48%* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased 21% to $8.9$24.2 million in the
firstthird 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 inof the prior fiscal year. The operating loss forFor the
quarter ended August 31, 1999 increased by 15% from aFebruary 29, 2000, the segment recognized an operating loss of
$6.2$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 the benefit of
increased magazine advertising sales which were more than offset by higher
Internet-related costs.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
India.Argentina.
(IN MILLIONS)
THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 1998
- --------------------------------------------------------------------------------2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 36.148.1 $ 32.941.2 $ 147.0 $ 135.5
Operating loss (4.7) (4.8)Profit (Loss) 0.7 (1.4) 1.4 (1.7)
- -------------------------------------------------------------------------------------------------------------- --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 1.5% * 1.0% *
12
SCHOLASTIC CORPORATION
ITEM 2. MD&A* - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)NOT MEANINGFUL
INTERNATIONAL revenues for the quarter ended August 31, 1999February 29, 2000 increased 10%17% to
$36.1$48.1 million compared to $32.9$41.2 million for the same period in the prior fiscal
year. Operating losses foryear quarter, benefiting
from improved sales and operating margins in the quarter ended August 31, 1999 were comparableCompany's Australian and
Canadian operations. On a year-to-date basis, revenues increased approximately
9% to the same period$147.0 million compared to $135.5 million in the prior fiscal year at approximately $4.7 million.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.
LIQUIDITY AND CAPITAL RESOURCES17
The Company's cash and cash equivalents decreased by $3.0$0.3 million during the
quarternine-month period ended August 31, 1999,February 29, 2000, compared to a decrease of $4.0$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 $26.0$90.9 million and $36.4$95.7 million for the
threenine months ended August 31,February 29, 2000 and February 28, 1999, and 1998, respectively. Investing
activities consisted primarily of prepublication cost expenditures, capital
expenditures, royalty advances and production cost expenditures. Business and trademark
acquisition-related payments for the prior year quarter were related to the
acquisition of certain assets of Pages Book Fairs, Inc. Prepublication
cost expenditures increased $3.6$6.5 million to $10.3$35.3 million for the threenine months
ended August 31, 1999February 29, 2000 over the comparable period of the prior year largely due
to the planned revision toof SCHOLASTIC LITERACY PLACE and the initial spending on the
Company's new READ 180! program.
Capital expenditures increased $10.7 million to $6.2$28.8 million in the current
year reflecting the construction of a new office facility. Royalty advances
increased $1.4decreased $1.0 million for the quarternine months ended August 31, 1999February 29, 2000 over the same
period in the prior fiscal year to $5.6$17.1 million. Production cost
expenditurescosts decreased
$2.9$3.8 million to $3.7$8.1 million for the first quarternine months ended August 31, 1999 whenFebruary 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 the Loan Agreement and
the Revolver, which provide for
aggregate borrowings of up to $205.0$210.0 million (with a right, in certain
circumstances, to increase to $235.0$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 August 31, 1999,February 29, 2000, the Company had $90.5$43.0
million in borrowings outstandingoutstanding. The weighted-average interest rate under
these facilities at a
weighted-average interest rate of 5.8%for the nine-month period was 6.6%.
13
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCING (CONTINUED)
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). TheIn addition, on November 10,
1999, the Company anticipates amendingamended and restatingrestated the Revolver in the second quarter of fiscal 2000 to increase the amount
available thereunder to $40.0 million and extend its expiration date to 2004.
The Company does not anticipate any difficulty in negotiating satisfactory
credit arrangements.be
concurrent with the Loan Agreement.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $36.5$39.5 million at August 31,
1999.February
29, 2000. These lines are used primarily to fund
18
working capital needs in those countries. At August 31, 1999, $22.0February 29, 2000, $21.2 million in
borrowings were outstanding
underoutstanding. Under these lines at athe weighted-average interest
rate of 6.3%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 Loan Agreementtwo credit facilities and the Revolver,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
As previously reported, management hasCommencing in July 1997, the Company initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the Year 2000, as
well as to identify and address any other Year 2000 operational issues which may
affect the Company. Progress reports on the Company's Year 2000 program are
presented regularly to the Company's Board of Directors and senior management.
The Company'sits Year 2000 program, which
was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consistsconsisted of the following three components relating to the Company's
operations: (i) information technology ("IT") computer systems and applications
which maywere 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 may bealso 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 failfailed to be Year 2000 14
compliantcomplaint and the actions
related thereto.
The general phases common to all
three components of the Company'sCompany completed its Year 2000 program are: (1) ASSESSMENT (the
identification, assessmentReadiness Program on a timely basis and
prioritization of theexperienced no significant Year 2000 issues facing the
Company in each of the above areas and the actionsrelated problems to be taken in respect of
such issuesdate with either its
internal operations or items); (2) REMEDIATION (implementation of the specific actions
upon assessment, including repair, modification or replacement of items that are
determined not to beits material third party vendors. Similarly, there have
been no material Year 2000 compliant); (3) TESTING (testing of the new or
modified information systems, other systems and equipment to verify Year 2000
readiness); (4) CONTINGENCY PLANNING (designing appropriate contingency and
business continuation plans for each Company business unit and location); and
(5) IMPLEMENTATION (actual operation of such systems and equipment and, if
necessary, the actual implementation of any
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
contingency plans in the event Year 2000 problems occur, notwithstanding the
Company's remediation program).
The progress to date of the three components of the Company's Year 2000 program
for principal systems, applications or issues affected by the Year 2000 is as
follows:
IT SYSTEMS AND APPLICATIONS. The principal IT systems and applications of the
Company affected by Year 2000 issues include order entry, purchasing,
distribution and financial reporting. Issues related to vendor supplied software
include financial reporting and certain infrastructure and operating system
software. The Company has substantially completed the Assessment, Remediation,
Testing, Contingency Planning and Implementation phasesimpacts reported with respect to its
principal IT systems and applications. Excluding normal system upgrades, the Company estimatesCompany's
products that total costs for conversion and testing of new or modified
IT systems and applications will aggregate approximately $11.8 million through
fiscal 2000, of which $9.3 million has been incurred through August 31, 1999.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected bywe classified as Year 2000 issues include
security systems, phone systems, business machines, computers and distribution
systems. The Company has substantially completed the Assessment, Remediation,
Testing, Contingency Planning and Implementation phases with respect to its
principal non-IT systems and equipment. In addition to the foregoing, based on
current assessments, the Company expects to implement the remainder of Year 2000
remediated non-IT systems and equipment by the end of October 1999.ready. The Company estimates the total
costs for modifying or replacing new systems and equipment
in this area will be approximately $0.20 million through fiscal 2000,cost of which
$0.1 million has been incurred through August 31, 1999.
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier
relationships affected by Year 2000 issues relate primarily to printing,
paper supplies, distribution, fulfillment, licensing and financial services.
The Assessment and Remediation phases for determining the Year 2000 readiness
of the Company's principal suppliers is an ongoing process. Substantially all
of the Company's principal suppliers have reported that they have initiated
Year 2000 programsprogram, including consulting fees, infrastructure and
such suppliers have not broughtfacilities enhancements, and expenses related to the Company's
attention any problems anticipated to materially and adversely impact the
Company's operations taken as a whole. The Company will continue to seek
updates from these parties to attempt to ascertain the adequacy of their
programs as they relate to the Company. Testing of critical systems or
services will be done on an as needed basis. The Company anticipates that it
will develop contingency plans with respect to its principal third party
suppliers by the end of October 1999. There can be no assurance, however,
that the Company will be able to predict adequately Year 2000 problems
experienced by its suppliers or to develop adequate contingency plans related
thereto. The costs to the Company in implementing its Year 2000 program in
this area, excluding costs due to unanticipated third party Year 2000
problems, will principally consist of internal staff, costs, which are not
expected to be material. No single customer or small group of customers are
material to the Company's financial condition.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program, which includes total costs noted
above for IT systems and applications, will bewas
approximately $12.0 million, of which total program costs through August 31, 1999 have been $9.3
16
million. These costs include costs related to the matters described above, as
well as consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the Company for the
17
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
Year 2000. The costs also include expenses related to internal staff$4.0 million was incurred in
connection with the implementation of the program. The Year 2000 costs for
fiscal 2000 comprise approximately 11% of the Company's IT expense budget for
the period. Based onduring the
current progress of the Company'sfiscal year. No additional material Year 2000 program the Company anticipates its Year 2000 program will be substantially completed by
November 30, 1999. As a result of the Company's Year 2000 program, delays in
other new and continuing IT projects have occurred. However, no material adverse
effect is anticipated from such delays as the Company has procedures in place in
an effort to ensure that critical projectscosts are
handled in a timely manner. The
cost of the Company's Year 2000 program and the dates on which the Company plans
to complete the components of the Year 2000 program are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, many of which are beyond the Company's control.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company. Such failures could materially and adversely affect
the Company's financial condition, results of operations and cash flows. Based
on current plans and assumptions, the Company does not expect that the Year 2000
issue will have a material adverse impact on the Company as a whole. However,
due to the general uncertainty inherent in the Year 2000 problem there can be no
assurance that all Year 2000 problems will be foreseen and corrected, or if
foreseen, corrected on a timely basis, or that no material disruption to the
Company's business or operations will occur. Further, the Company's expectations
are based on the assumption that there will be no general failure of external
local, national or international systems (including financial, power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those scenarios
in which unexpected failures would have a material adverse effect on the Company
and will attempt to develop contingency plans designed to respond to anticipated
scenarios. However, there can be no assurance that successful contingency plans
can, in fact, be developed or implemented.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.
FORWARD-LOOKINGNON-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.
1821
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.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 August 31, 1999,February 29, 2000, the balance outstanding under theits revolving credit
facilities which have
variable rates was $90.5 million, at an average$64.2 million. The nine-month weighted-average interest rate
of 5.84%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 Management's Discussion and Analysis of
Financial Condition and- MD&A - Results of Operations.
19Operations - 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
------ -----------------------
10.18 Scholastic Corporation Executive Incentive Performance Plan,
effective as of June 1, 1999
27.1 Financial Data Schedule for the quarter ended August 31, 1999
27.2 Financial Data Schedule for the quarter ended August 31, 1998
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.
- --------------------------------------------------------------------------------
2024
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: October 15, 1999 ________________________April 14, 2000 /s/ RICHARD ROBINSON
-----------------------------------
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and DirectorCHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: October 15, 1999 ________________________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 AUGUST 31, 1999FEBRUARY 29, 2000
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
Number Description of Document
------ -----------------------
10.18 Scholastic Corporation Executive Performance Incentive Plan,
effective as of June 1, 1999
27.1 Financial Data Schedule for the quarter ended August 31, 1999
27.2 Financial Data Schedule for the quarter ended August 31, 1998
- ------------------------------------------------------------------------------------------------- --------------------------------------------------------------
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