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 28, 2001 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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, 2001
------------- --------------------
Common Stock, $.01 par value 33,484,656
Class A Stock, $.01 par value 1,656,200
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
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 28, 2001 and February 29, 1
2000
Condensed Consolidated Balance Sheet at February 28,
2001,
May 31, 2000 and February 29, 2000 2
Condensed Consolidated Statement of Cash Flows for the
Nine Months
Ended February 28, 2001 and February 29, 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
- --------------------------------------------------------------------------------
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
EBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
=======================================================================================
2001 2000 2001 2000
=======================================================================================
REVENUES $ 433.0 $ 315.0 $ 1,463.4 $ 1,008.8
Operating costs and expenses:
Cost of goods sold 199.7 157.8 669.5 508.9
Selling, general and
administrative expenses 207.2 143.1 652.9 427.9
Depreciation 6.3 5.1 19.6 14.4
Goodwill and other intangible 3.5 1.3 10.5 3.5
amortization
Non-recurring charge - - - 8.5
- ---------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 416.7 307.3 1,352.5 963.2
Operating income 16.3 7.7 110.9 45.6
Interest expense, net (10.5) (4.5) (33.7) (14.6)
- ---------------------------------------------------------------------------------------
Income before income taxes 5.8 3.2 77.2 31.0
Provision for income taxes 2.1 1.2 27.8 11.3
- ---------------------------------------------------------------------------------------
NET INCOME $ 3.7 $ 2.0 $ 49.4 $ 19.7
=======================================================================================
Net income per Class A and Common Share:
Basic $ 0.11 $ 0.06 $ 1.43 $ 0.59
Diluted $ 0.10 $ 0.06 $ 1.34 $ 0.58
=======================================================================================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
=========================================================================================
FEBRUARY MAY 31, FEBRUARY 29,
28, 2001 2000 2000
=========================================================================================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11.9 $ 9.0 $ 5.6
Trade accounts receivable less allowance
for doubtful accounts 174.9 153.7 179.1
Installment sale receivables less
allowance for doubtful accounts 67.9 - -
Inventories, net 406.3 290.7 319.5
Deferred income taxes 75.8 57.2 41.9
Prepaid and other current assets 92.9 29.1 34.3
- ----------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 829.7 539.7 580.4
Property, plant and equipment, net 223.6 176.4 166.0
Prepublication costs 138.6 116.1 101.2
Goodwill and other intangibles 275.7 66.4 68.8
Other assets and deferred charges 101.1 84.6 84.0
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,568.7 $ 983.2 $ 1,000.4
========================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and current portion of $ $ $ 21.2
long term debt 22.4 8.7
Accounts payable 136.3 129.7 131.7
Accrued royalties 97.3 32.8 56.8
Deferred revenue 29.6 10.3 23.6
Other accrued expenses 132.0 104.3 61.5
- ----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 417.6 285.8 294.8
Long-term debt 596.7 241.1 281.2
Other noncurrent liabilities 48.1 26.3 23.7
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 0.4 0.2 0.2
Additional paid-in capital 236.6 222.7 223.0
Deferred compensation (0.2) - -
Accumulated other comprehensive loss:
Foreign currency translation adjustment (13.6) (11.1) (7.6)
Retained earnings 292.2 242.8 211.1
Less shares of Common Stock held in
treasury (9.1) (24.6) (26.0)
- ----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 506.3 430.0 400.7
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,568.7 $ 983.2 $ 1,000.4
========================================================================================
========================================================================================
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
================================================================================
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
================================================================================
2001 2000
================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 135.4 $ 43.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business and trademark acquisition-related (396.4) (0.2)
payments
Prepublication costs (36.6) (35.7)
Additions to property, plant and equipment (49.6) (28.8)
Royalty advances (19.3) (17.1)
Production costs (10.2) (8.1)
Other (4.4) (1.4)
- --------------------------------------------------------------------------------
Net cash used in investing activities (516.5) (91.3)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING
ACTIVITIES:
Borrowings under the Grolier Facility 350.0 -
Borrowings under Loan Agreement and Revolver 454.4 282.4
Repayments of Loan Agreement and Revolver (448.8) (249.3)
Borrowings under lines of credit 78.0 48.3
Repayments of lines of credit (70.1) (49.9)
Proceeds from the exercise of stock options 21.8 17.0
Other (1.3) (0.6)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 384.0 47.9
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2.9 (0.3)
Cash and cash equivalents at beginning of period 9.0 5.9
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11.9 $ 5.6
================================================================================
================================================================================
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 consist of the
accounts of Scholastic Corporation and its wholly-owned subsidiaries (the
"Company"), including the consolidated accounts of Grolier Incorporated
("Grolier") and its subsidiaries since its acquisition on June 22, 2000, (Note
3.) These financial statements have not been audited, but reflect those
adjustments consisting of normal recurring items which management considers
necessary for a fair presentation of financial position, results of operations
and cash flow. These financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Report on Form 10-K
for the fiscal year ended May 31, 2000 as well as the Current Reports on Form
8-K dated July 7, 2000, amended on September 5, 2000, and February 8, 2001 in
connection with the acquisition of Grolier. (Note 3.)
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the nine months ended February 28, 2001 and
February 29, 2000 are not necessarily indicative of the results expected for the
full year. Due to the seasonal fluctuations that occur, the February 29, 2000
condensed consolidated balance sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to: book returns; recoverability of inventory;
recoverability of advances to authors; amortization periods; recoverability of
prepublication and film production costs; purchase price allocations; and
recoverability of other long-lived assets.
2. RECENT ACCOUNTING PRINCIPLES
The Company has adopted the provisions of EITF Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs." This Consensus states that all shipping
and handling billed to a customer in a sale transaction represent fees earned
for the goods provided and, accordingly, amounts billed related to shipping and
handling should be classified as revenue. Shipping and handling costs are
classified in cost of goods sold. Certain prior year amounts have been
reclassified in accordance with the Consensus.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires the Company to recognize
all derivatives as either assets or liabilities on the balance sheet and to
measure them at fair value. Under SFAS 133, the Company is required to adopt the
provisions of this standard in the first quarter of fiscal 2002. The Company
does not expect that the adoption of SFAS 133 will have a material impact on its
financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101
provides the SEC's views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company is required to adopt the
provisions of SAB 101 no later than the fourth quarter of fiscal 2001. The
Company does not expect that the adoption of SAB 101 will have a material impact
on its financial position, results of operations or cash flows.
4
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
In June 2000, the Accounting Standards Executive Committee issued Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers or Distributors of
Films." SOP 00-2 replaces the Statement of Financial Accounting Standards No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films."
SOP 00-2 concludes that film costs should be accounted for under an inventory
model and discusses various topics such as revenue recognition, fee allocation
in multiple films, accounting for exploitation costs, and impairment assessment.
The Company is required to adopt the provisions of SOP 00-2 by the first quarter
of fiscal 2002. The Company does not expect that the adoption of SOP 00-2 will
have a material impact on its financial position or cash flows.
3. ACQUISITION OF GROLIER
On June 22, 2000, Scholastic Inc., a wholly-owned subsidiary of the Company,
acquired all of the issued and outstanding capital stock of Grolier, a Delaware
corporation, for $400.0 in cash. The Company is accounting for the acquisition
under the purchase method of accounting.
The acquisition was financed by the Company using bank debt. Of the $400.0
Grolier purchase price, $350.0 was borrowed under a new credit facility (the
"Grolier Facility") entered into to finance the acquisition, and $50.0 was
borrowed under the Company's existing Loan Agreement and Revolver. (Note 5.)
The unaudited pro forma results of the Company, giving effect to the acquisition
of Grolier as if it was consummated as of the first day of the nine-month period
ended February 28, 2001 and February 29, 2000 are as follows:
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
=========================================================================
2001 2000
=========================================================================
Revenues $1,499.0 $1,346.9
NET INCOME $ 50.6 $ 14.0
- -----------------------------------------------------------------------
Net income per Class A and Common Share:
Basic $ 1.46 $ 0.42
Diluted $ 1.37 $ 0.41
The following summarizes the preliminary allocation of the $396.4 purchase price
allocation, which includes the related transaction and financing costs, to the
net assets of Grolier acquired based upon a preliminary allocation as follows:
Accounts receivable, net $ 105.5
Inventory 52.4
Other current assets 55.0
Property, plant and equipment, net 18.9
Goodwill and other intangibles 219.8
Other assets 54.4
Current liabilities (86.7)
Non-current liabilities (17.3)
Cash received upon acquisition of Grolier (5.6)
-------
Total purchase price $ 396.4
=======
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
This allocation of the purchase price is based on a preliminary valuation of
Grolier's assets and liabilities and may be subject to change. The final
allocation of the purchase price will be based upon a comprehensive evaluation
of the fair value of Grolier's tangible and identifiable intangible assets
acquired and liabilities assumed.
4. SEGMENT INFORMATION
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong, India, Ireland, Argentina and Southeast Asia, and distributes
its products and services through a variety of channels, including school book
clubs, school book fairs, direct-to-home and trade.
The Company's operations are categorized in the following four segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING; and INTERNATIONAL. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision-maker assesses operating performance and
allocates resources. Revenues derived from Grolier's operations are reported in
all four of the Company's segments.
The following tables set forth the Company's segment information for the periods
indicated:
CHILDREN'S MEDIA,
BOOK LICENSING
PUBLISHING AND EDUCATION AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
================================================================================================================
THREE MONTHS
ENDED FEBRUARY 28, 2001
================================================================================================================
Revenues $ 266.4 $ 59.5 $ 35.4 $ 361.3 $ 71.7 $ 0.0 $ 433.0
Depreciation 1.1 0.5 0.2 1.8 1.1 3.4 6.3
Amortization (2) 4.9 12.4 6.7 24.0 1.0 0.1 25.1
Royalty advance expense 4.0 0.3 0.3 4.6 0.0 0.0 4.6
Segment profit/(loss)(3) 39.3 (7.8) (3.3) 28.2 2.3 (14.2) 16.3
Expenditures for
Long-lived assets(5) 10.8 10.6 4.8 26.2 1.0 15.6 42.8
================================================================================================================
THREE MONTHS
ENDED FEBRUARY 29, 2000
================================================================================================================
Revenues $ 196.5 $ 40.7 $ 26.2 $ 263.4 $ 51.6 $ 0.0 $ 315.0
Depreciation 1.0 0.2 0.4 1.6 1.0 2.5 5.1
Amortization(2) 3.3 7.3 2.3 12.9 0.6 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) 35.1 (11.0) (2.8) 21.3 0.5 (14.1) 7.7
Expenditures for
long-lived assets(5) 8.4 7.5 6.5 22.4 1.1 8.9 32.4
- ----------------------------------------------------------------------------------------------------------------
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)
================================================================================
4. SEGMENT INFORMATION (continued)
CHILDREN'S BOOK MEDIA,
PUBLISHING AND EDUCATIONAL LICENSING AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD (1) CONSOLIDATED
====================================================================================================================================
NINE MONTHS ENDED
FEBRUARY 28, 2001
====================================================================================================================================
Revenues $ 918.5 $ 226.5 $ 101.1 $ 1,246.1 $ 217.3 $ 0.0 $ 1,463.4
Depreciation 3.2 1.3 2.4 6.9 3.1 9.6 19.6
Amortization (2) 13.3 38.1 13.6 65.0 2.1 0.1 67.2
Royalty advance expense 15.5 1.3 1.4 18.2 0.3 0.0 18.5
Segment profit/(loss) (3) 158.0 (1.5) (14.0) 142.5 11.8 (43.4) 110.9
Segment assets 613.7 384.2 72.6 1,070.5 217.5 280.7 1,568.7
Long-lived assets (4) 150.5 288.1 40.0 478.6 51.2 173.2 703.0
Expenditures for
long-lived assets (5) 32.2 24.7 15.7 72.6 4.0 39.1 115.7
====================================================================================================================================
NINE MONTHS ENDED
FEBRUARY 29, 2000
====================================================================================================================================
Revenues $ 624.5 $ 149.9 $ 75.5 $ 849.9 $ 158.9 $ 0.0 $ 1,008.8
Depreciation 2.7 0.7 1.0 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) 114.0 (18.3) (13.0) 82.7 2.9 (40.0) 45.6
Segment assets 438.4 184.4 53.4 676.2 147.1 177.1 1,000.4
Long-lived assets (4) 95.8 92.1 36.4 224.3 54.5 118.2 397.0
Expenditures for
long-lived assets (5) 27.4 25.1 16.0 68.5 3.3 17.9 89.7
- ------------------------------------------------------------------------------------------------------------------------------------
(1) OVERHEAD INCLUDES ALL DOMESTIC CORPORATE-RELATED ITEMS NOT ALLOCATED TO
REPORTABLE SEGMENTS. AS IT RELATES TO THE SEGMENT PROFIT/(LOSS),
UNALLOCATED EXPENSES INCLUDE COSTS RELATED TO THE MANAGEMENT OF CORPORATE
ASSETS. IN FISCAL 2000, THE YEAR-TO-DATE OVERHEAD SEGMENT PROFIT/(LOSS)
INCLUDED A NON-RECURRING CHARGE OF $8.5 PRIMARILY RELATED TO THE
ESTABLISHMENT OF A LITIGATION RESERVE FOLLOWING AN ADVERSE DECISION IN A
LAWSUIT. UNALLOCATED ASSETS ARE PRINCIPALLY COMPRISED OF DEFERRED INCOME
TAXES AND PROPERTY, PLANT AND EQUIPMENT RELATED TO THE COMPANY'S
HEADQUARTERS IN THE METROPOLITAN NEW YORK AREA, ITS NATIONAL SERVICE
OPERATION LOCATED IN MISSOURI AND THE GROLIER FACILITIES LOCATED IN
CONNECTICUT.
(2) INCLUDES AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS, AND
PREPUBLICATION AND PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND INCOME
TAXES. INCLUDES THE NET EFFECT OF THE CHANGES IN SALES RETURNS ESTIMATES
WHICH RESULTED IN AN INCREASE TO NET INCOME OF $3.6 ($0.10 PER DILUTED
SHARE) IN THE FISCAL 2001 THIRD QUARTER.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
OTHER INTANGIBLE ASSETS, ROYALTY ADVANCES AND PRODUCTION COSTS.
(5) INCLUDES PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION AND
PRODUCTION COSTS AND ROYALTY ADVANCES. THIS AMOUNT EXCLUDES THE
EXPENDITURES FOR LONG-LIVED ASSETS AS PART OF THE GROLIER ACQUISITION.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
5. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
===========================================================================================
FEBRUARY 28, 2001 MAY 31, 2000 FEBRUARY 29, 2000
===========================================================================================
Lines of Credit $ 22.4 $ 8.5 $ 21.2
Grolier Facility 350.0 - -
Loan Agreement and Revolver 11.2 5.6 43.0
7% Notes due 2003, net of discount 124.9 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 0.6 0.9 3.4
- -------------------------------------------------------------------------------------------
TOTAL DEBT 619.1 249.8 302.4
Less current portion of long-term debt
and lines of credit (22.4) (8.7) (21.2)
- -------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 596.7 $ 241.1 $ 281.2
===========================================================================================
GROLIER FACILITY. The acquisition of Grolier for $400.0 was financed by the
Company using bank debt, of which $350.0 was borrowed under the Grolier Facility
and the remaining $50.0 was borrowed under the Company's existing Loan Agreement
and Revolver (as discussed below). The Grolier Facility, effective June 22,
2000, is with certain banks and Scholastic Inc., as borrower, and the Company,
as guarantor. The Grolier Facility is a one year facility, which may be extended
for an additional year. Borrowings bear interest at the prime rate or 0.39% to
1.10% over LIBOR (as defined). The Grolier Facility also provides for a facility
fee ranging from 0.085% to 0.25%. The amounts charged vary based on the
Company's credit rating. Based on the Company's current credit rating, the
interest rate and facility fee charged are 0.575% over LIBOR and 0.125%,
respectively. The Grolier Facility contains certain financial covenants related
to debt and interest coverage ratios (as defined) and limits dividends and other
distributions.
LOAN AGREEMENT. The Company and Scholastic Inc. are joint and several borrowers
under an amended and restated loan agreement with certain banks, effective
August 11, 1999 and amended June 22, 2000 (the "Loan Agreement"). The Loan
Agreement, which expires on August 11, 2004, provides for aggregate borrowings
of up to $170.0 (with a right in certain circumstances to increase borrowings to
$200.0), including the issuance of up to $10.0 in letters of credit. Interest
under this facility is either at the prime rate or 0.325% to 0.90% over LIBOR
(as defined). There is a facility fee ranging from 0.10% to 0.30% and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the
total facility. The amounts charged vary based upon the Company's credit rating.
Based on the Company's current credit rating, the interest rate, facility fee
and utilization fee are 0.475% over LIBOR, 0.150%, and 0.075%, respectively. The
Loan Agreement contains certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions.
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers under
a revolving loan agreement with a bank, effective August 10, 1999 and amended
June 22, 2000 (the "Revolver"). The Revolver, which expires on August 11, 2004,
provides for revolving credit loans of up to $40.0. Interest under this facility
is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as defined). There
is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based
upon the Company's credit rating. Based on the Company's current credit rating,
the interest rates and facility fee are at the prime rate minus 1%, 0.475% over
LIBOR and 0.150%, respectively. The Revolver contains certain financial
covenants related to debt and interest coverage ratios (as defined) and limits
dividends and other distributions.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
7% NOTES 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 issued $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 at 100% of the principal amount
plus accrued interest. Each Debenture is convertible, at the holder's option,
any time prior to maturity, into Common Stock of the Company at a conversion
price of $38.43 per share, as adjusted for the Company's stock split, (see Note
10), subject to other adjustments in certain events.
6. CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On January 26, 2000, an order
was entered granting the Company's motion to dismiss plaintiffs' Second Amended
Consolidated Complaint without leave to further amend the complaint. Previously,
on December 14, 1998, an order was entered granting the Company's motion to
dismiss plaintiffs' First Amendment Consolidated Complaint with 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. Plaintiffs have appealed the most recent dismissal.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS(R) series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such 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 February
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. On appeal, the Court of Appeals for the Second Circuit vacated the
dismissal and remanded the case for further proceedings. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State of New York in New York
County. In its two complaints, and in its counterclaims, Parachute alleges that
the exercise of contractual remedies by the Company was improper and seeks
declaratory relief and unspecified damages for, among other claims,
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
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. On July 21,
2000, the Company and Parachute each filed motions for partial summary judgement
in the state court cases. The Company intends to vigorously pursue its claims
against Parachute and the other named defendants and to vigorously defend its
position in these proceedings. The Company does not believe that this dispute
will have a material adverse effect on its financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
7. COMPREHENSIVE INCOME
The following table sets forth comprehensive income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
=======================================================================================
2001 2000 2001 2000
=======================================================================================
Net income $ 3.7 $ 2.0 $ 49.4 $ 19.7
Other comprehensive income (loss):
Foreign currency translation
adjustment
net of provision for (benefit
from)
income taxes 1.5 (0.9) (2.5) (1.1)
--------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 5.2 $ 1.1 $ 46.9 $ 18.6
======================================================================================
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
8. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share is calculated to give effect to potentially dilutive stock
options and convertible debentures that were outstanding during the period. The
following table, which includes the impact of the Company's stock dividend in
the form of a 2-for-1 stock split, effective January 16, 2001 (Note 10),
summarizes the reconciliation of the numerators and denominators for the Basic
and Diluted earnings per share ("EPS") computations for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
=========================================================================================
2001 2000 2001 2000
=========================================================================================
Net income for Basic EPS $ 3.7 $ 2.0 $ 49.4 $ 19.7
Effect of convertible debt -(1) -(1) 2.6 -(1)
- -----------------------------------------------------------------------------------------
Net income for Diluted EPS $ 3.7 $ 2.0 $ 52.0 $ 19.7
=========================================================================================
Weighted-average shares for Basic 35.0 33.7 34.5 33.2
EPS
Effect of stock options 1.7 1.0 1.4 0.8
Effect of convertible debt -(1) -(1) 2.9 -(1)
- -------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES FOR DILUTED EPS 36.7 34.7 38.8 34.0
=====================================================================================
Net income per Class A and Common Share:
Basic $ 0.11 $ 0.06 $ 1.43 $ 0.59
Diluted $ 0.10 $ 0.06 $ 1.34 $ 0.58
(1) The effect of the 5.0% Convertible Subordinated Debentures on the
weighted-average shares outstanding was anti-dilutive and therefore not
included in the calculation.
9. 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 involves stock appreciation rights
allegedly granted in 1990 in connection with a joint venture formed primarily
to produce motion pictures. Although the Company disagrees with the decision
and is appealing the ruling, the Company has recorded a $6.7 charge to fully
reserve with respect to the case. The $8.5 charge also includes an unrelated
expense of $1.8 relating to the liquidation of certain stock options.
10. COMMON AND CLASS A STOCK
On December 14, 2000, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a 100% stock dividend on its Common Stock and Class A
Stock, effective January 16, 2001 to stockholders of record as of December 29,
2000. Stockholders of record received one additional share of Common Stock or
Class A Stock for each share held on the record date. All outstanding rights
under stock options and stock purchase plans to acquire the Company's Common
Stock and under the Company's 5% Convertible Subordinated Debentures due 2005
were adjusted to give effect to the stock split.
11. SUBSEQUENT EVENT
On April 16, 2001 the Company announced a strategic decision to focus its
educational publishing efforts on its fast-growing research-based reading
improvement instructional materials consisting of intervention, technology,
phonics, early childhood, extended learning and summer school programs, which
help students overcome reading problems and achieve higher test scores. As part
of this new focus, the Company announced that it will not update SCHOLASTIC
LITERACY PLACE(R) for future state adoptions.
The decision will result in an estimated one-time pre-tax charge ranging
between $65.0 and $70.0, or $1.05 - $1.15 per share after tax for the fourth
quarter ending May 31, 2001. The charge includes previously capitalized
prepublication costs with respect to SCHOLASTIC LITERACY PLACE, as well as
inventory, severance and other related costs.
11
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 28, 2001 increased 37% to $433.0 million
compared to $315.0 million in the year ago quarter. For the nine months ended
February 28, 2001, revenues increased 45% to $1,463.4 million from $1,008.8
million in the prior year period. Revenues for the three and nine month periods
reflect growth across all segments of the Company's business, benefiting from
the inclusion of the results of Grolier Incorporated ("Grolier") following the
closing of the acquisition on June 22, 2000. The inclusion of the results of
Grolier provided $100.0 million and $276.4 million of the revenues for the three
and nine-month periods, respectively. The Company's CHILDREN'S BOOK PUBLISHING
AND DISTRIBUTION segment, including components of Grolier, grew by 36% over the
prior year quarter and by 47% over the prior year-to-date period. This segment
accounted for approximately 62% of the Company's revenues for the three and
nine-month periods in both the current and prior year periods.
Cost of goods sold as a percentage of sales decreased from 50.1% to 46.1% for
the quarter ended February 28, 2001 and from 50.4% to 45.8% for the nine-month
period compared to the prior year periods. This improvement resulted primarily
from the addition of Grolier sales in Fiscal 2001 and the significant increase
in higher margin Trade sales due in part to better than expected sell-through in
the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment partially offset by
higher cost of product on the Harry Potter companion books. Selling, general and
administrative expenses as a percentage of sales increased from 45.4% to 47.9%
for the quarter ended February 28, 2001 when compared to the prior year quarter.
This increase relates primarily to increased promotional spending, Grolier
integration costs and the timing of certain compensation related expenses. For
the year-to-date period, selling, general and administrative expenses as a
percentage of sales increased from 42.4% to 44.6% when compared to the same
period in the prior fiscal year.
Operating profit for the quarter ended February 28, 2001 more than doubled to
$16.3 million compared to $7.7 million in the same quarter of the prior fiscal
year. For the nine-month period, operating expenses for the prior year include a
non-recurring charge of $8.5 million primarily due to the establishment of a
$6.7 million litigation reserve following an adverse decision in a lawsuit. The
case, which the Company has appealed, involves stock appreciation rights
allegedly granted in connection with a joint venture formed primarily to produce
motion pictures. The non-recurring charge also includes an unrelated expense of
$1.8 million due to the liquidation of certain stock options. Excluding the
impact of the prior-year non-recurring charge, operating profit improved 105% to
$110.9 million from $54.1 million in the prior year. Including the prior-year
non-recurring charge, operating profit for the nine-month period improved 143%
over the same period in the prior fiscal year. These increases reflect the
impact of the inclusion of Grolier's revenues in the Company's results combined
with strong sales across all business segments.
12
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Net income for the quarter ended February 28, 2001 increased to $3.7 million, or
$0.10 per diluted share, compared to $2.0 million, or $0.06 per share, in the
prior year quarter. For the nine-month period, net income increased 97% to $49.4
million, or $1.34 per diluted share, compared to $25.1 million, or $0.74 per
diluted share (excluding the $0.16 per share non-recurring charge). All per
share amounts have been adjusted to reflect the 2-for-1 stock split effective
January 16, 2001. (Note 10 to Notes to Condensed Consolidated Financial
Statements and "Common and Class A Stock" below.)
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
its school book clubs, continuity programs, school book fairs and the trade
channel. This segment also includes Grolier's direct-to-home book clubs and
trade sales in the United States in the current fiscal year.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
===============================================================================
2001 2000 2001 2000
===============================================================================
Revenue $ 266.4 $ 196.5 $ 918.5 $ 624.5
Operating Profit 39.3 35.1 158.0 114.0
- -------------------------------------------------------------------------------
OPERATING MARGIN 14.8% 17.9% 17.2% 18.3%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
quarter ended February 28, 2001 increased 36% to $266.4 million compared to
$196.5 million in the year ago quarter. Grolier Home Book Clubs and Trade
revenues added $58.2 million. For the quarter ended February 28, 2001, revenues
in the School Book Fairs increased 22% and revenues in the Scholastic Trade
channel increased 10% over the prior year period while School Book Clubs matched
last year's levels. In the quarter, the Company recorded approximately $12.0
million in trade revenues related to two new Harry Potter companion books
written by J.K. Rowling. Per the author's request, all net proceeds are being
donated to Comic Relief, UK and thus these books diluted segment margin. For the
nine-month period, revenues increased 47% to $918.5 million compared to $624.5
million in the year ago period. This increase reflects the addition of $165.6
million in revenue from Grolier's operations and increased revenues in the
Company's Trade and School Book Fair operations. Trade revenues continued to
benefit from better than expected sell-through of HARRY POTTER and other
Scholastic titles. In addition to Harry Potter, other top selling trade titles
for the quarter ended February 28, 2001 included I SPY(TM), DEAR AMERICA(R),
ROYAL DIARIES, CLIFFORD THE BIG RED DOG(R), CAPTAIN UNDERPANTS(TM), SCOOBY DOO
and POWERPUFF GIRLS.
Segment operating profit for the quarter increased 12% to $39.3 million as
compared to $35.1 million in the prior year. This improvement primarily resulted
from the addition of Grolier Home Book Clubs and the impact of better than
expected sell-through in Trade, which lowered reserve requirements and increased
net income by $3.6 million, or $0.10 per share, in the quarter. The Company
monitors sales information from retailers related to the sales of its Trade
titles and adjusts its estimates for sales returns when results warrant. For the
nine-month period, operating profit improved by 39% to $158.0 million, as
compared to an operating profit of $114.0 million for the prior year period.
This growth reflects the continuing strength of the Trade business and the
benefit of the addition of the Grolier business.
13
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of grades K to 12 textbooks, supplemental materials, classroom
magazines, teaching resources and instructional technology in and from the
United States to schools and libraries. This segment includes Grolier
Publishing, which includes print and on-line children's non-fiction and
reference products, in the current fiscal year.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
===============================================================================
2001 2000 2001 2000
===============================================================================
Revenue $ 59.5 $ 40.7 $ 226.5 $ 149.9
Operating Loss (7.8) (11.0) (1.5) (18.3)
- -------------------------------------------------------------------------------
OPERATING MARGIN * * * *
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter ended February
28, 2001 increased 46% to $59.5 million compared to $40.7 million in the year
ago quarter. For the nine months, revenues increased 51% to $226.5 million,
compared to $149.9 million in the year ago period. Revenues for both the quarter
and year-to-date period ($17.0 million and $44.1 million, respectively),
benefited from the addition of Grolier's print and on-line non-fiction and
reference sales combined with increases in Scholastic's core and supplemental
curriculum sales.
Operating loss for this segment for the third quarter was $7.8 million, compared
to an operating loss of $11.0 million in the prior fiscal year quarter. For the
nine month period, operating loss improved by $16.8 million over the prior year
period, primarily due to an increase in sales of SCHOLASTIC LITERACY PLACE(R)
2000, and READ 180(TM), combINED with strong sales of supplemental curriculum.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution of programming and consumer products (including children's
television programming, videos, CD-ROM's, feature films and non-book products)
and internet services, as well as advertising and promotional activities.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
===============================================================================
2001 2000 2001 2000
===============================================================================
Revenue $ 35.4 $ 26.2 $ 101.1 $ 75.5
Operating Loss (3.3) (2.8) (14.0) (13.0)
- -------------------------------------------------------------------------------
OPERATING MARGIN * * * *
* - NOT MEANINGFUL
14
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
MEDIA, LICENSING AND ADVERTISING revenues increased approximately 35% to $35.4
million in the third quarter of fiscal 2001 from the prior year quarter. For the
nine months ended February 28, 2001, revenues increased approximately 34% to
$101.1 million from $75.5 million for the same period of the prior fiscal year.
The improvement in both the quarter and nine-month period reflect the impact of
production revenues from the new animated series CLIFFORD THE BIG RED DOG(TM)
and increased advertising revenues from the Company's professional magazines.
For the quarter ended February 28, 2001, this segment recognized an operating
loss of $3.3 million as compared to an operating loss of $2.8 million in the
same period of the prior fiscal year. On a year-to-date basis, the operating
loss was to $14.0 million as compared to an operating loss of $13.0 million in
the same period of the prior fiscal year. These results reflect the impact of
increased editorial and other operating costs associated with Scholastic's
internet activities.
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's domestic export and
foreign rights businesses and the Company's operations in the United Kingdom,
Canada, Australia, New Zealand and Southeast Asia and its emerging businesses in
Mexico, India, Ireland and Argentina.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
===============================================================================
2001 2000 2001 2000
===============================================================================
Revenue $ 71.7 $ 51.6 $ 217.3 $ 158.9
Operating Profit 2.3 0.5 11.8 2.9
- -------------------------------------------------------------------------------
OPERATING MARGIN 3.2% 1.0% 5.4% 1.8%
* - NOT MEANINGFUL
INTERNATIONAL revenues increased by approximately 38% for both the quarter and
year-to-date periods ended February 28, 2001 when compared to the corresponding
prior year periods. The increase reflects the inclusion of Grolier ($22.4
million and $59.0 million, for the respective periods) in the Company's results
as well as an increase in the results of the Canadian operations led by the
School Book Club operations. Operating profit improved $1.8 million from the
prior year quarter and $8.9 million from the prior year nine-month period. This
increase is attributed to the inclusion of Grolier in segment results combined
with strong Canadian and export results, all of which were partially offset by
the adverse impact of foreign exchange fluctuations and lower revenues for the
Australia and United Kingdom operations.
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
SEASONALITY
The Company's school book clubs, school book fairs and most of its magazines
operate on a school-year basis; therefore, the Company's business is highly
seasonal. As a consequence, generally, the Company's revenues in the first and
third quarters of the fiscal year are lower than its revenues in the other two
fiscal quarters, and the Company experiences a loss from operations in the first
quarter. Typically, School Book Clubs and School Book Fairs experience the
largest revenues in the second quarter of the fiscal year, while revenues from
the sale of instructional materials are higher in the first quarter. The
acquisition of Grolier is not expected to substantially change the Company's
historic seasonality.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August, have generally peaked in September or October, and have been at
their lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $2.9 million during the
nine-month period ended February 28, 2001, compared to an decrease of $0.3
million during the comparable period in the prior fiscal year.
Net cash flow provided by operations was $135.4 million for the nine-month
period primarily as a result of improved operating performance.
Cash outflows for investing activities were $516.5 million for the nine-month
period, largely as a result of the acquisition of Grolier and increased spending
for capital expenditures. Capital expenditures totaled $49.6 million for the
nine-month period of fiscal 2001, increasing $20.8 million over the same period
in fiscal 2000 largely as a result of the expansion of the Company's corporate
headquarters and continuing investment in systems development.
The Company believes its existing cash position, combined with funds generated
from operations and available under the amended Loan Agreement and the Revolver,
will be sufficient to finance its ongoing working capital requirements through
the next fiscal year.
FINANCING
To finance the June 22, 2000 acquisition of Grolier, the Company borrowed $350.0
million under a new credit facility (the "Grolier Facility") and borrowed the
remaining $50.0 million under the Company's existing Loan Agreement and
Revolver. The Grolier Facility is a one year facility, which may be extended for
an additional year. The weighted-average interest rate under the Grolier
Facility for the period June 22, 2000 through February 28, 2001 was 7%.
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $210.0 million
(with a right, in certain circumstances, to increase borrowings to $240.0
million), including the issuance of up to $10.0 million in letters of credit.
Both the Loan Agreement and the Revolver expire on August 11, 2004. The Company
primarily uses these facilities to fund seasonal cash flow needs and other
working capital requirements. At February 28, 2001, the Company had $11.2
million in borrowings outstanding under these facilities at a weighted average
interest rate of 7%.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian, Australian, New Zealand and Southeast Asian operations
totaled $50.7 million at February 28, 2001. These lines are used primarily to
fund local working capital needs. At February 28, 2001, $22.4 million in
borrowings were outstanding under these lines of credit at a weighted-average
interest rate of 8%.
On February 20, 2001, the Company's Registration Statement on Form S-3 (the
"Registration Statement") became effective with the Securities and Exchange
Commission to register and sell up to $400 million of any combination of debt
and equity securities from time to time or in one or more offerings depending on
favorable market conditions. The Company currently anticipates that proceeds
from any offering will be used primarily to refinance the Grolier acquisition
costs. Any offers under the Registration Statement will be made solely by means
of a prospectus or prospectus supplement that is issued in respect of any such
offering.
ACQUISITIONS
On June 22, 2000, the Company acquired the capital stock of Grolier for $400.0
million in cash. 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.
COMMON AND CLASS A STOCK
The Company's Board of Directors approved a 2-for-1 stock split in the form of a
100% stock dividend on its Common Stock and Class A Stock, payable January 16,
2001 to stockholders of record as of December 29, 2000. Stockholders of record
received one additional share of Common Stock or Class A Stock for each share
held on the record date. The additional shares were mailed or delivered on or
about January 16, 2001 by the Company's transfer agent, ChaseMellon Shareholder
Services L.L.C. All outstanding rights under stock options and stock purchase
plans to acquire the Company's Common Stock and under the Company's 5%
Convertible Subordinated Debentures due 2005 were adjusted to give effect to the
stock split.
SUBSEQUENT EVENT
On April 16, 2001 the Company announced a strategic decision to focus its
educational publishing efforts on its fast-growing research-based reading
improvement instructional materials consisting of intervention, technology,
phonics, early childhood, extended learning and summer school programs, which
help students overcome reading problems and achieve higher test scores. As part
of this new focus, the Company announced that it will not update SCHOLASTIC
LITERACY PLACE(R) for future state adoptions.
The decision will result in an estimated one-time pre-tax charge ranging between
$65 million and $70 million, or $1.05 - $1.15 per share after tax for the fourth
quarter ending May 31, 2001. The charge includes previously capitalized
prepublication costs with respect to SCHOLASTIC LITERACY PLACE, as well as
inventory, severance and other related costs. This is expected to improve cash
flow in fiscal 2002 due to lower capital spending and inventory requirements,
modestly improve fiscal 2002 overall operating margins, be earnings neutral in
fiscal 2002 and have a favorable impact on earnings and margins thereafter.
17
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, 2000.
The Company posts on its website,
www.scholastic.com/aboutscholastic/investor/index/htm, the date of its upcoming
financial press releases and telephonic analyst call at least five days prior to
the dissemination of its financial press releases. The Company's analyst calls
are open to the public and remain available to the public through the Company's
website for at least five days after the date of call.
18
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 believes that the impact of currency fluctuations do not represent a
significant risk in the context of the Company's current international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business 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. As a result of the financing related to the Grolier
acquisition, approximately 62% of the Company's total debt bears interest at a
variable rate and is sensitive to changes in interest rates. The Company is
subject to the risk that market interest rates will increase and thereby
increase the interest rates currently being charged under the variable rate
debt. Under its current policies, the Company does not utilize any interest rate
derivative instruments to manage its exposure to interest rate changes.
As of February 28, 2001, the balance outstanding under its variable rate
facilities was $384.2 million. The nine-month weighted-average interest rate
under its variable rate facilities was 7%. A 15% increase or decrease in the
average cost of the Company's variable rate debt under the various facilities at
February 28, 2001 would impact the Company's results of operations by
approximately $4.3 million annually on a pre-tax basis.
19
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
================================================================================
In accordance with the terms of the Amended and Restated Certificate of
Incorporation of the Company, by written consent dated October 3, 2000, the
holders of the all of the outstanding shares of Class A Stock unanimously
approved to increase the number of members constituting the full Board of
Directors of the Company from twelve to thirteen. There were no abstentions or
broker non-votes in connection with this matter. In conjunction with this
action, by written consent dated November 27, 2000, the Board of Directors of
the Company unanimously elected Jack Davies, founder of AOL International, as a
member of the board.
ITEM 5. OTHER INFORMATION
================================================================================
The Company expects to discuss Footnote 11. Subsequent Event to the Notes to
Condensed Consolidated Financial Statements in a conference call at 9:00 a.m.
(Eastern time) on April 17, 2001. To participate, call 1-800-621-7762 with
the password "SCHOLASTIC." The meeting leader is Richard Robinson. An audio
replay of the call will also be available from at 9:00 a.m. to 5:00 p.m.
(Eastern time) April 17, 2001 to April 24, 2001 by calling 1-888-566-0418.
20
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(b) Reports on Form 8-K filed during the quarter:
Current Report on Form 8-K filed on February 8, 2001 regarding the Unaudited Pro
Forma Condensed Consolidated Statement of Income for the six months ended
November 30, 2000 and related notes giving effect to the acquisition of Grolier
Incorporated by Scholastic Inc. on June 22, 2000.
- --------------------------------------------------------------------------------
21
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 16, 2001 /s/ Richard Robinson
------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: April 16, 2001 /s/ Kevin J. McEnery
------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
22