<Page>
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, 2002 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
557 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
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.
<Table>
<Caption>
Title Number of shares outstanding
of each class as of March 29, 2002
------------- --------------------
Common Stock, $.01 par value 37,251,690
Class A Stock, $.01 par value 1,656,200
</Table>
<Page>
<Table>
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2002
INDEX
- -------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended February 28, 2002 and 2001 1
Condensed Consolidated Balance Sheets at February 28, 2002
and 2001, and May 31, 2001 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended February 28, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
- -------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
============================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
============================================================================================================
2002 2001 2002 2001
============================================================================================================
REVENUES $ 432.7 $ 433.0 $ 1,376.0 $ 1,463.4
Operating costs and expenses:
Cost of goods sold 190.5 199.7 602.8 669.5
Selling, general and administrative expenses 194.9 187.3 598.4 600.6
Bad debt expense 11.0 19.9 51.6 52.3
Depreciation 9.5 6.3 25.4 19.6
Goodwill and other intangibles amortization 0.2 3.5 0.6 10.5
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 406.1 416.7 1,278.8 1,352.5
Operating income 26.6 16.3 97.2 110.9
Interest expense, net 7.9 10.5 24.3 33.7
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 18.7 5.8 72.9 77.2
Provision for income taxes 6.8 2.1 26.2 27.8
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 11.9 3.7 46.7 49.4
Cumulative effect of accounting change
(net of income taxes) -- -- (5.2) --
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 11.9 $ 3.7 $ 41.5 $ 49.4
============================================================================================================
Net income per Class A and Common Share:
Basic $ 0.32 $ 0.11 $ 1.15 $ 1.43
Diluted $ 0.31 $ 0.10 $ 1.09 $ 1.34
============================================================================================================
============================================================================================================
</Table>
SEE ACCOMPANYING NOTES
1
<Page>
<Table>
<Caption>
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
==================================================================================================================
FEBRUARY 28, 2002 MAY 31, 2001 FEBRUARY 28, 2001
==================================================================================================================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12.6 $ 13.8 $ 11.9
Accounts receivable, net 233.9 220.7 242.8
Inventories 408.2 340.3 406.3
Deferred promotion costs 42.8 44.0 46.7
Deferred income taxes 87.6 89.3 58.4
Prepaid and other current assets 68.7 61.4 63.6
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 853.8 769.5 829.7
Property, plant and equipment, net 278.3 257.3 223.6
Prepublication costs 109.5 103.3 138.6
Production costs 11.6 13.8 13.2
Goodwill 235.3 221.9 213.9
Other intangibles 61.3 61.9 62.9
Other assets and deferred charges 82.5 74.1 86.8
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,632.3 $ 1,501.8 $ 1,568.7
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and current portion of
long-term debt $ 77.9 $ 23.3 $ 22.4
Accounts payable 136.1 157.3 136.3
Accrued royalties 69.5 45.7 97.3
Deferred revenue 34.4 12.1 29.6
Other accrued expenses 127.1 136.5 132.0
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 445.0 374.9 417.6
NONCURRENT LIABILITIES:
Long-term debt 471.2 585.3 596.7
Other noncurrent liabilities 48.1 47.9 48.1
- ------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 519.3 633.2 644.8
COMMITMENTS AND CONTINGENCIES -- -- --
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 0.3 0.3
Additional paid-in capital 365.3 233.7 236.7
Deferred compensation (0.5) (0.2) (0.2)
Accumulated other comprehensive loss (17.8) (16.4) (13.6)
Retained earnings 320.6 279.1 292.2
Less shares of Common Stock held in treasury -- (2.8) (9.1)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 668.0 493.7 506.3
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,632.3 $ 1,501.8 $ 1,568.7
==================================================================================================================
==================================================================================================================
SEE ACCOMPANYING NOTES
</Table>
2
<Page>
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
<Table>
<Caption>
====================================================================================================================
NINE MONTHS ENDED
FEBRUARY 28,
====================================================================================================================
2002 2001
====================================================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 65.5 $ 135.4
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (46.5) (49.6)
Prepublication costs (39.4) (36.6)
Royalty advances (23.7) (19.3)
Acquisition-related payments (13.1) (396.4)
Production costs (10.5) (10.2)
Other 0.2 (4.4)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (133.0) (516.5)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 666.8 454.4
Repayments of Loan Agreement and Revolver (620.6) (448.8)
Borrowings under Grolier Facility -- 350.0
Repayment of Grolier Facility (300.0) --
Proceeds received from issuance of 5.75% Notes, net of related costs 296.7 --
Borrowings under lines of credit 110.2 78.0
Repayments of lines of credit (103.5) (70.1)
Proceeds pursuant to employee stock plans 17.1 21.8
Other (0.4) (1.3)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 66.3 384.0
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1.2) 2.9
Cash and cash equivalents at beginning of period 13.8 9.0
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12.6 $ 11.9
====================================================================================================================
====================================================================================================================
</Table>
SEE ACCOMPANYING NOTES
3
<Page>
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"), which include the consolidated accounts of Grolier Incorporated
("Grolier") and its subsidiaries as of the date of acquisition on June 22, 2000
(See Note 2). 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, 2001, as well as the
Current Reports on Form 8-K dated July 7, 2000, as amended on September 5, 2000,
February 8, 2001 and January 22, 2002, filed in connection with the acquisition
of Grolier.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the nine months ended February 28, 2002 and 2001
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the February 28, 2001 condensed
consolidated balance sheet is included for comparative purposes.
The preparation of the financial statements, in accordance with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The Company bases its
estimates on historical experience, current business factors, and various other
assumptions believed to be reasonable under the circumstances, which are
necessary in order to form a basis for making judgments about the carrying
values of assets and liabilities. Actual results could differ from those
estimates and assumptions. On an on-going basis, the Company evaluates its
estimates which include, but are not limited to: collectability of accounts
receivable; book returns; amortization periods; and recovery of inventories,
deferred promotion costs, prepublication costs, royalty advances, production
costs and long-lived assets.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting
model, based upon the framework established in SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
for long-lived assets to be disposed of by sale and to address significant
implementation issues. The Company is required to adopt this statement by the
first quarter of fiscal 2003. The Company does not expect that the adoption of
SFAS No. 144 will have a material impact on its financial position, results of
operations or cash flows.
4
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
2. ACQUISITION OF GROLIER
On June 22, 2000, Scholastic Inc., a subsidiary of the Company, acquired all of
the issued and outstanding capital stock of Grolier, a Delaware corporation, for
$400.0 in cash. The acquisition was financed by the Company using bank debt, of
which $350.0 was borrowed under a new facility and $50.0 was borrowed under the
Company's existing credit facility. (See Note 4)
Through the purchase of Grolier, the Company acquired the leading operator in
the United States of direct-to-home continuity book clubs serving children
primarily age five and under and the leading print and on-line publisher of
children's non-fiction and reference products sold primarily to school libraries
in the United States. The acquisition also expanded the Company's operations in
the United Kingdom, Canada and Southeast Asia. In accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
Company has analyzed economic characteristics, similarity of nature of products,
similarity of the nature of production, class of customer and method of
distribution of products of the acquired Grolier businesses. Accordingly, the
Grolier businesses have been included in the following business segments: the
domestic direct-to-home continuity and trade operations have been included in
the Children's Book Publishing and Distribution segment; the children's
reference and non-fiction operations have been included in the Educational
Publishing segment; software operations have been included in the Media,
Licensing and Advertising segment; and all international operations have been
included in the International segment.
The Grolier acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Grolier have been included
in the Company's condensed consolidated results of operations since the date of
acquisition. The assets and liabilities at the acquisition date were adjusted to
their fair values, based upon an independent valuation, with the excess purchase
price over the fair value assigned to goodwill. The valuation was finalized as
of the end of fiscal 2001. With regard to any possible future adjustments to
established liabilities, such adjustments will be included in the determination
of net income.
The following table sets forth the final allocation of the Grolier purchase
price, based on the independent valuation, and includes the related transaction
and financing costs:
<Table>
<Caption>
==================================================================
VALUE
==================================================================
Accounts receivable $ 95.3
Inventory 45.5
Other current assets 58.5
Property, plant and equipment, net 18.9
Goodwill and other intangibles 231.8
Other assets 44.2
Current liabilities (85.6)
Non-current liabilities (12.2)
-----------------------------------------------------------------
CASH PAID FOR ACQUISITION, NET OF CASH RECEIVED $ 396.4
================================================================
</Table>
5
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
The following table sets forth the allocation of Goodwill and Other Intangibles
resulting from the acquisition of Grolier:
<Table>
<Caption>
===================================================================
VALUE
===================================================================
Goodwill $ 170.2
----------------------------------------------------------------
Titles 29.8
Licenses 17.8
Major sets 11.8
Customer lists 2.2
----------------------------------------------------------------
Total other intangibles 61.6
----------------------------------------------------------------
TOTAL GOODWILL AND OTHER INTANGIBLES $ 231.8
================================================================
</Table>
In connection with the Grolier acquisition, the Company established a plan
for integrating Grolier's operations. Accordingly, the Company established
liabilities of $17.7 relating primarily to severance, fringe benefits and
related salary continuance, as well as certain exit costs associated with the
integration and relocation of certain of Grolier's operational and
administrative functions. This amount, originally estimated at $12.4, was
increased at May 31, 2001 as the Company refined its estimate of the costs of
the integration plan. As of February 28, 2002, $10.4 of these liabilities
remained unpaid. Payment of these liabilities, which result from actions
already taken, will be made over the next three years.
A summary of the fiscal 2002 activity in the established reserves is detailed in
the following table:
<Table>
<Caption>
============================================================================================================
SEVERANCE AND
RELATED COSTS OTHER EXIT COSTS TOTAL
============================================================================================================
Liability balance at May 31, 2001 $ 11.5 $ 3.2 $ 14.7
Fiscal year 2002 payments to date (3.9) (0.4) (4.3)
- ------------------------------------------------------------------------------------------------------------
Liability at February 28, 2002 $ 7.6 $ 2.8 $ 10.4
============================================================================================================
</Table>
6
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
The following table reflects the unaudited pro forma results of operations 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, including the effect of increased interest expense on debt related to the
acquisition. Additionally, the nine-month period ended February 28, 2001
reflects the adoption of SFAS No. 142 ("Goodwill and Other Intangible Assets"),
which resulted in a pro forma reduction of amortization expense. This
information does not necessarily reflect the actual results of operations that
would have occurred had the purchase been made at the beginning of the period
presented, nor is it necessarily indicative of future results of operations of
the combined companies.
<Table>
<Caption>
NINE MONTHS ENDED FEBRUARY 28,
===================================================================================================
2002 2001
===================================================================================================
Revenues $ 1,376.0 $ 1,499.0
Net income before cumulative effect of accounting change $ 46.7 $ 57.5
Net income $ 41.5 $ 57.5
Net income per Class A and Common Share:
Basic before cumulative effect of
accounting change $ 1.30 $ 1.66
Diluted before cumulative effect of
accounting change $ 1.22 $ 1.55
Basic net income $ 1.15 $ 1.66
Diluted net income $ 1.09 $ 1.55
</Table>
7
<Page>
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, Ireland, Argentina and Southeast Asia, and distributes
its products and services through a variety of channels, including school-based
book clubs, school-based book fairs, school-based and direct-to-home continuity
programs, 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.
o CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION includes the publication and
distribution of children's books in the United States through school-based book
clubs and book fairs, school-based and direct-to-home continuity programs and
the trade channel. The direct-to-home continuity and trade businesses formerly
operated by Grolier are incorporated in this segment from June 22, 2000, the
date on which Grolier was acquired.
o EDUCATIONAL PUBLISHING includes the publication and distribution to schools
and libraries of supplemental and core materials, classroom magazines and print
and on-line reference and non-fiction products for grades K to 12 in the United
States. The reference and non-fiction business formerly operated by Grolier is
included in this segment from June 22, 2000, the date on which Grolier was
acquired.
o MEDIA, LICENSING AND ADVERTISING includes the production and/or distribution
in the United States of software, Internet services and the production and/or
distribution by and through the Company's subsidiary, Scholastic Entertainment
Inc. ("SEI"), of programming and consumer products (including children's
television programming, videos, software, feature films, promotional activities
and non-book merchandise). The software business formerly operated by Grolier is
included in this segment from June 22, 2000, the date on which Grolier was
acquired.
o INTERNATIONAL includes the publication and distribution of products and
services outside the United States by the Company's international operations and
its domestic export and foreign rights businesses. The international businesses
formerly operated by Grolier are included in this segment from June 22, 2000,
the date on which Grolier was acquired.
8
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
The following table sets forth the Company's segment information for the periods
indicated. Certain prior year amounts have been reclassified to conform with the
current year presentation.
<Table>
<Caption>
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING OVERHEAD(1) DOMESTIC INTERNATIONAL CONSOLIDATED
====================================================================================================================
THREE MONTHS ENDED
FEBRUARY 28, 2002
====================================================================================================================
Revenues $ 268.9 $ 60.9 $ 32.4 $ 0.0 $ 362.2 $ 70.5 $ 432.7
Bad debt (3) 7.9 0.3 0.5 0.0 8.7 2.3 11.0
Depreciation 1.7 0.5 1.4 4.8 8.4 1.1 9.5
Amortization (2) 4.7 4.8 2.7 0.0 12.2 0.0 12.2
Royalty advances
expensed 5.0 0.2 0.0 0.0 5.2 0.0 5.2
Segment profit/(loss)(3) 43.1 (1.6) (3.3) (14.6) 23.6 3.0 26.6
Expenditures for
long-lived assets (4) 9.8 16.5 7.9 11.5 45.7 0.9 46.6
====================================================================================================================
THREE MONTHS ENDED
FEBRUARY 28, 2001
====================================================================================================================
Revenues $ 266.4 $ 59.4 $ 35.6 $ 0.0 $ 361.4 $ 71.6 $ 433.0
Bad debt 17.0 0.4 0.7 0.0 18.1 1.8 19.9
Depreciation 1.1 0.5 0.2 3.4 5.2 1.1 6.3
Amortization (2) 4.9 12.4 6.7 0.1 24.1 1.0 25.1
Royalty advances
expensed 4.0 0.3 0.3 0.0 4.6 0.0 4.6
Segment profit/(loss)(3) 39.3 (7.8) (3.3) (14.2) 14.0 2.3 16.3
Expenditures for
long-lived assets (4) 10.8 10.6 4.8 15.6 41.8 1.0 42.8
====================================================================================================================
NINE MONTHS ENDED
FEBRUARY 28, 2002
====================================================================================================================
Revenues $ 836.9 $ 225.9 $ 98.3 $ 0.0 $ 1,161.1 $ 214.9 $ 1,376.0
Bad debt (3) 43.2 0.9 1.9 0.0 46.0 5.6 51.6
Depreciation 4.4 1.3 3.3 13.1 22.1 3.3 25.4
Amortization (2) 12.7 17.1 14.9 0.0 44.7 0.6 45.3
Royalty advances
expensed 13.4 1.0 0.6 0.0 15.0 0.0 15.0
Segment profit/(loss)(3) 118.0 25.3 (11.8) (42.6) 88.9 8.3 97.2
Segment assets 725.8 262.2 76.7 353.6 1,418.3 214.0 1,632.3
Goodwill 110.9 77.4 9.4 4.6 202.3 33.0 235.3
Long-lived assets (5) 258.1 173.6 44.7 213.8 690.2 60.0 750.2
Expenditures for
long-lived assets (4) 48.0 32.0 23.9 24.6 128.5 4.7 133.2
====================================================================================================================
NINE MONTHS ENDED
FEBRUARY 28, 2001
====================================================================================================================
Revenues $ 918.5 $ 226.2 $ 101.4 $ 0.0 $ 1,246.1 $ 217.3 $ 1,463.4
Bad debt 43.7 0.7 1.7 0.0 46.1 6.2 52.3
Depreciation 3.2 1.3 2.4 9.6 16.5 3.1 19.6
Amortization (2) 13.3 38.1 13.6 0.1 65.1 2.1 67.2
Royalty advances
expensed 15.5 1.3 1.4 0.0 18.2 0.3 18.5
Segment profit/(loss)(3) 157.5 (1.4) (13.6) (43.4) 99.1 11.8 110.9
Segment assets 699.2 286.3 72.4 285.0 1,342.9 225.8 1,568.7
Goodwill 101.7 65.9 8.6 4.3 180.1 33.4 213.9
Long-lived assets (5) 236.6 190.3 40.0 177.5 644.4 59.7 704.1
Expenditures for
long-lived assets (4) 251.0 169.5 15.7 50.1 486.3 25.8 512.1
</Table>
9
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
(1) OVERHEAD INCLUDES ALL DOMESTIC CORPORATE-RELATED ITEMS NOT ALLOCATED TO
REPORTABLE SEGMENTS WHICH INCLUDES UNALLOCATED EXPENSES AND COSTS RELATED
TO THE MANAGEMENT OF CORPORATE ASSETS. 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 AN INDUSTRIAL/OFFICE
BUILDING COMPLEX IN CONNECTICUT.
(2) IN FISCAL 2002, INCLUDES AMORTIZATION OF OTHER INTANGIBLES WITH DEFINITE
LIVES, PREPUBLICATION AND PRODUCTION COSTS. IN FISCAL 2001, INCLUDES
AMORTIZATION OF GOODWILL, OTHER INTANGIBLES, PREPUBLICATION AND PRODUCTION
COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
IN THE NINE MONTHS ENDED FEBRUARY 28, 2002, IT EXCLUDES THE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE OF $5.2 ($0.13 PER DILUTED SHARE) RELATED TO
THE MEDIA, LICENSING AND ADVERTISING SEGMENT ). IN THE THREE- AND
NINE-MONTH PERIODS ENDED FEBRUARY 28, 2002, CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION INCLUDES THE NET EFFECT OF THE REDUCTION IN BAD DEBT
EXPENSE OF $3.9 ($0.10 PER DILUTED SHARE), RESULTING FROM THE
REFINEMENT OF THE BAD DEBT RESERVE. IN THE THREE-MONTH PERIOD ENDED
FEBRUARY 28, 2001, CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION 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).
(4) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, ROYALTY ADVANCES AND ACQUISITIONS OF
BUSINESSES.
(5) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES, ROYALTY ADVANCES AND PRODUCTION COSTS.
The following table separately sets forth information for the U.S.
direct-to-home continuity business formerly operated by Grolier, which,
effective June 22, 2000, is included in the Children's Book Publishing and
Distribution segment, and for all other businesses included in the segment:
<Table>
<Caption>
=============================================================
THREE MONTHS ENDED FEBRUARY 28,
=============================================================
Direct-to-home All Other Total
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Revenues $ 47.1 $ 58.0 $ 221.8 $ 208.4 $ 268.9 $ 266.4
Bad debt (2) 3.3 11.4 4.6 5.6 7.9 17.0
Depreciation 0.1 0.0 1.6 1.1 1.7 1.1
Amortization (1) 0.4 2.6 4.3 2.3 4.7 4.9
Royalty advances expensed 0.0 0.2 5.0 3.8 5.0 4.0
Business profit (2) 10.7 5.3 32.4 34.0 43.1 39.3
Expenditures for long-lived assets (3) 1.1 0.5 8.7 10.3 9.8 10.8
<Caption>
=============================================================
NINE MONTHS ENDED FEBRUARY 28,
=============================================================
Direct-to-home All Other Total
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Revenues $ 157.6 $ 161.9 $ 679.3 $ 756.6 $ 836.9 $ 918.5
Bad debt (2) 27.6 30.8 15.6 12.9 43.2 43.7
Depreciation 0.2 0.2 4.2 3.0 4.4 3.2
Amortization (1) 1.1 3.6 11.6 9.7 12.7 13.3
Royalty advances expensed 1.2 0.6 12.2 14.9 13.4 15.5
Business profit (2) 21.0 11.5 97.0 146.0 118.0 157.5
Business assets 245.6 247.4 480.2 451.8 725.8 699.2
Goodwill 86.1 80.6 24.8 20.7 110.9 101.7
Long-lived assets (4) 135.9 132.0 122.2 104.6 258.1 236.6
Expenditures for long-lived assets (3) 3.3 210.1 44.7 40.9 48.0 251.0
</Table>
(1) IN FISCAL 2002, INCLUDES AMORTIZATION OF OTHER INTANGIBLES WITH DEFINITE
LIVES AND PREPUBLICATION COSTS. IN FISCAL 2001, INCLUDES AMORTIZATION OF
GOODWILL, OTHER INTANGIBLES, AND PREPUBLICATION COSTS.
(2) BUSINESS PROFIT REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
IN THE THREE- AND NINE-MONTH PERIODS ENDED FEBRUARY 28, 2002, DIRECT-TO-
HOME INCLUDES THE NET EFFECT OF THE REDUCTION IN BAD DEBT EXPENSE OF
$3.9 ($0.10 PRE DILUTED SHARES), RESULTING FROM THE COMPANY'S REFINEMENT
OF THE BAD DEBT RESERVE. IN THE THREE-MONTH PERIOD ENDED FEBRUARY 28,
2001, "ALL OTHER" 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).
(3) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION COSTS, ROYALTY ADVANCES AND ACQUISITIONS OF BUSINESSES.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES AND ROYALTY ADVANCES.
10
<Page>
<Table>
<Caption>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
===================================================================================================================
4. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
=================================================================================================================
FEBRUARY 28, 2002 MAY 31, 2001 FEBRUARY 28, 2001
=================================================================================================================
Lines of Credit $ 27.9 $ 23.1 $ 22.4
Grolier Facility 50.0 350.0 350.0
Loan Agreement and Revolver 46.3 -- 11.2
7% Notes due 2003, net of discount 124.9 124.9 124.9
5.75% Notes due 2007, net of discount 299.6 -- --
Convertible Subordinated Debentures -- 110.0 110.0
Other debt 0.4 0.6 0.6
- -----------------------------------------------------------------------------------------------------------------
TOTAL DEBT 549.1 608.6 619.1
Less current portion of long-term debt
and lines of credit (77.9) (23.3) (22.4)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 471.2 $ 585.3 $ 596.7
=================================================================================================================
</Table>
The following table sets forth the maturities of the Company's debt obligations
for the remainder of fiscal 2002 and the next five fiscal years:
<Table>
<Caption>
================================================================================
MAY 31,
================================================================================
Three-month period ending: 2002 $ 27.9
Fiscal years ending: 2003 50.0
2004 125.3
2005 46.3
2006 --
THEREAFTER 299.6
-------------------------------
Total $ 549.1
===============================
</Table>
GROLIER FACILITY. On June 22, 2000, the Company established a new credit
facility (the "Grolier Facility") to finance $350.0 of the $400.0 Grolier
purchase price. The Grolier Facility expires on June 21, 2002. Scholastic Inc.
is the borrower, and the Company is the guarantor. 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%, based on the
Company's credit rating. Based on the Company's current credit rating, the
interest rate and facility fee as of February 28, 2002 were 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. At February 28, 2002, $50.0 was outstanding
under the Grolier Facility and no additional borrowings were available. The net
proceeds from the issuance of the 5.75% Notes in January 2002 were used to repay
a portion of the Grolier Facility (see 5.75% Notes due 2007 below).
11
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
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, of which none was outstanding at February 28, 2002. 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 (when applicable) as of February 28, 2002
were 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. At February
28, 2002, $40.0 was outstanding under the Loan Agreement.
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers under
a Revolving Loan Agreement with a bank, effective November 10, 1999 and amended
June 22, 2000 (the "Revolver"). It provides for unsecured revolving credit loans
of up to $40.0 and expires on August 11, 2004. Interest under this facility is
at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as defined). There is
a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon
the Company's credit rating. Based on the Company's current credit rating, the
interest rate and facility fee as of February 28, 2002 were 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. At February 28, 2002, $6.3 was outstanding under the Revolver.
7% NOTES DUE 2003. On December 23, 1996, the Company issued $125.0 of 7% Notes
(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.
5.75% NOTES DUE 2007. On January 23, 2002, the Company issued $300.0 of 5.75%
Notes (the "5.75% Notes"). The 5.75% Notes are unsecured and unsubordinated
obligations of the Company and will mature on January 15, 2007. Interest on the
5.75% Notes is payable semi-annually on July 15 and January 15 of each year. The
Company may, at any time, redeem all or a portion of the 5.75% Notes at a
redemption price (plus accrued interest to the date of redemption), equal to the
greater of a) 100% of the principal amount, or b) the sum of the present values
of the remaining scheduled payments of principal and interest discounted to the
date of redemption on a semiannual basis. The net proceeds were used to
permanently repay a portion of the $350.0 Grolier Facility.
INTEREST RATE SWAP AGREEMENT. On February 5, 2002, the Company entered into an
interest rate swap agreement, designated as a fair value hedge as defined under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
with a notional amount totaling $100.0 and a variable interest rate which is
reset semi-annually based on six-month LIBOR (as defined). This agreement was
entered into to exchange the fixed interest rate on a portion of the Company's
5.75% Notes for a variable interest rate. In accordance with SFAS No. 133, the
value of the Company's 5.75% Notes was increased by $0.9 to reflect an increase
in the fair value as of February 28, 2002 and the corresponding swap asset of
$0.9 was recorded in Other assets. Changes in the fair value of the interest
rate swap offset changes in the fair value of the fixed rate debt due to changes
in market interest rates. As such, there was no ineffective portion to the hedge
recognized in earnings during the period.
12
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
CONVERTIBLE SUBORDINATED DEBENTURES. On August 18, 1995, the Company sold $110.0
of its 5.0% Convertible Subordinated Debentures due August 15, 2005 (the
"Debentures"). Effective January 11, 2002, pursuant to a Notice of Redemption
issued by the Company on November 29, 2001, $109.8 of the Debentures were
converted into 2.9 shares of common stock and $0.2 was redeemed for cash.
5. CONTINGENCIES
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(R) book series prior to the Company's interim earnings announcement
on February 20, 1997. On January 26, 2000, an order was entered granting the
Company's motion to dismiss plaintiffs' Second Amended Consolidated Complaint
without leave to further amend the complaint. Previously, on December 14, 1998,
an order was entered granting the Company's motion to dismiss plaintiffs' First
Amended Consolidated Complaint, with leave to amend the complaint. On June 1,
2001, the Court of Appeals for the Second Circuit reversed the dismissal of the
Second Amended Consolidated Complaint and remanded the case for further
proceedings. On December 10, 2001, the Supreme Court of the United States denied
the Company's Petition for a Writ of Certiorari to review the Second Circuit's
decision. The Company continues to believe that the litigation is without merit
and will continue to vigorously defend against it.
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State of New York, New York
County, against Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and nonpublication rights to the Goosebumps series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
Goosebumps rights are licensed to the Company. The issues in the case, captioned
Scholastic Inc. and Scholastic Entertainment Inc. v. Parachute Press, Inc.,
Parachute Publishing, LLC, Parachute Consumer Products, LLC, and R.L. Stine
(Index No. 99/600512), are also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to Parachute
of material breaches by Parachute of the agreements under which such rights are
licensed, and the exercise by the Company of its contractual remedies under the
agreements. The previously reported first Parachute action, Parachute Press,
Inc. v.
13
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
Scholastic Inc., Scholastic Productions, Inc. and Scholastic Entertainment
Inc., 97 Civ. 8510 (JFK), in which two subsidiaries of the Company are
defendants and counterclaim plaintiffs, was commenced in the federal court
for the Southern District of New York on November 14, 1997 and was dismissed
for lack of subject matter jurisdiction on January 29, 1999. In August 2000,
the Court of Appeals for the Second Circuit vacated the dismissal and
remanded the case for further proceedings. The second action, captioned
Parachute Press, Inc. v. Scholastic Inc., Scholastic Productions, Inc. and
Scholastic Entertainment Inc. (Index No. 99/600507), was filed
contemporaneously with the filing of the Company's complaint on February 1,
1999 in the Supreme Court of the State of New York, New York County. In its
two complaints and its counterclaims, Parachute alleges that the exercise of
contractual remedies by the Company was improper and seeks declaratory relief
and unspecified damages for, among other claims, alleged breaches of contract
and acts of unfair competition. Damages sought by Parachute include the
payment of the total of approximately $36.1 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 payment of royalties set-off by Scholastic
against amounts claimed by the Company. On July 21, 2000, the Company and
Parachute each filed motions for partial summary judgment in the pending
state court cases, which on April 4, 2002 were denied in all material
respects. On May 18, 2001, each party filed motions for summary judgment in
the federal court case. The Company is seeking declaratory relief and damages
for, among other claims, breaches of contract, fraud and acts of unfair
competition. Damages sought by the Company include repayment by Parachute of
a portion of the $15.3 advance already paid. The Company intends to
vigorously defend its position in these proceedings. The Company does not
believe that this dispute will have a material adverse effect on its
financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations
6. COMPREHENSIVE INCOME
The following table sets forth comprehensive income for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
===========================================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
===========================================================================================================================
Net income $ 11.9 $ 3.7 $ 41.5 $ 49.4
Other comprehensive (loss)/income:
Foreign currency translation adjustment
net of provision for income taxes (2.2) 1.5 (1.4) (2.5)
- ---------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 9.7 $ 5.2 $ 40.1 $ 46.9
===========================================================================================================================
</Table>
14
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
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
Debentures that were outstanding during the period. The following table
summarizes the reconciliation of the numerators and denominators for the basic
and diluted earnings per share ("EPS") computations for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
=============================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
=============================================================================================================
Net income for basic EPS $ 11.9 $ 3.7 $ 41.5 $ 49.4
Dilutive effect of Debentures 0.4 -- (1) 2.1 2.6
- -------------------------------------------------------------------------------------------------------------
Adjusted net income for diluted EPS $ 12.3 $ 3.7 $ 43.6 $ 52.0
=============================================================================================================
Weighted average Class A and Common
Shares outstanding for basic EPS 37.3 35.0 36.0 34.5
Dilutive effect of shares issued pursuant to
employee stock plans 1.7 1.7 1.5 1.4
Dilutive effect of Debentures 1.3 -- (1) 2.4 2.9
- -------------------------------------------------------------------------------------------------------------
Adjusted weighted average Class A and
Common Shares for diluted EPS
outstanding 40.3 36.7 39.9 38.8
=============================================================================================================
Earnings per Class A and Common Share:
Earnings before cumulative effect of
accounting change
Basic $ 0.32 $ 0.11 $ 1.30 $ 1.43
Diluted $ 0.31 $ 0.10 $ 1.22 $ 1.34
Cumulative effect of accounting change
(net of income taxes)
Basic -- -- $ (0.15) --
Diluted -- -- $ (0.13) --
Net income
Basic $ 0.32 $ 0.11 $ 1.15 $ 1.43
Diluted $ 0.31 $ 0.10 $ 1.09 $ 1.34
=============================================================================================================
</Table>
(1) THE EFFECT OF THE DEBENTURES ON THE WEIGHTED AVERAGE SHARES OUTSTANDING FOR
DILUTED EPS WAS ANTI-DILUTIVE AND NOT INCLUDED IN THE CALCULATION.
15
<Page>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
8. GOODWILL AND OTHER INTANGIBLES
Effective as of June 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized but are reviewed annually,
or more frequently if impairment indicators arise. During the quarter ended
November 30, 2001, the Company completed the required transitional impairment
review of goodwill. This review required the Company to estimate the fair value
of its identified reporting units as of June 1, 2001. For each of the reporting
units, the estimated fair value was determined utilizing the expected present
value of the future cash flows of the units. In all instances, the estimated
fair value of the reporting units exceeded their book values and therefore no
write-down of goodwill was required as of June 1, 2001.
The following table reflects unaudited pro forma results of operations of the
Company, giving effect to SFAS No. 142 as if it were adopted on June 1, 2000:
<Table>
<Caption>
NINE MONTHS ENDED FEBRUARY 28,
============================================================================================================
2002 2001
============================================================================================================
Net income, as reported $ 41.5 $ 49.4
Add back: amortization expense, net of tax - 6.1
- -------------------------------------------------------------------- -------------------- --------------------
Pro forma net income $ 41.5 $ 55.5
Basic net income per Class A and Common Share:
As reported $ 1.15 $ 1.43
Pro forma $ 1.15 $ 1.60
Diluted net income per Class A and Common Share:
As reported $ 1.09 $ 1.34
Pro forma $ 1.09 $ 1.50
============================================================================================================
</Table>
<Table>
<Caption>
The following table summarizes the activity in Goodwill for the periods indicated:
=====================================================================================================================
NINE MONTHS ENDED TWELVE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, 2002 MAY 31, 2001 FEBRUARY 28, 2001
=====================================================================================================================
Beginning balance $ 221.9 $ 63.5 $ 63.5
Additions due to acquisitions 13.1 169.9 158.6
Amortization - (10.3) (7.3)
Other, principally translation adjustments 0.3 (1.2) (0.9)
---------------------------------------------------------------------------------------------------------------------
TOTAL $ 235.3 $ 221.9 $ 213.9
=====================================================================================================================
</Table>
<Table>
<Caption>
The following table summarizes Other intangibles subject to amortization at the dates indicated:
=====================================================================================================================
FEBRUARY 28, 2002 MAY 31, 2001 FEBRUARY 28, 2001
=====================================================================================================================
Customer lists $ 2.2 $ 2.2 $ 2.2
Accumulated amortization (1.8) (1.3) (0.9)
---------------------------------------------------------------------------------------------------------------------
Net customer lists $ 0.4 $ 0.9 $ 1.3
Other intangibles 3.9 3.9 3.9
Accumulated amortization (2.1) (2.0) (1.9)
---------------------------------------------------------------------------------------------------------------------
Net other intangibles $ 1.8 $ 1.9 $ 2.0
---------------------------------------------------------------------------------------------------------------------
TOTAL $ 2.2 $ 2.8 $ 3.3
=====================================================================================================================
</Table>
16
<Page>
<Table>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
===================================================================================================================
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
==============================================================================================================
FEBRUARY 28, 2002 MAY 31, 2001 FEBRUARY 28, 2001
==============================================================================================================
Net carrying value by major class:
Titles $ 28.7 $ 28.7 $ 29.0
Licenses 17.2 17.2 17.3
Major sets 11.4 11.4 11.5
Trademarks and Other 1.8 1.8 1.8
--------------------------------------------------------------------------------------------------------------
TOTAL $ 59.1 $ 59.1 $ 59.6
==============================================================================================================
</Table>
Amortization expense for Other intangibles totaled $0.2 and $0.6 for the three
and nine months ended February 28, 2002, respectively, and $1.1 and $3.2 for the
three and nine months ended February 28, 2001, respectively. Amortization
expense for the twelve months ended May 31, 2001 totaled $3.9.
9. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On June 1, 2001, the Company adopted Statement of Position No. 00-2 ("SOP
00-2"), "Accounting by Producers and Distributors of Films," which replaced SFAS
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films." SOP 00-2 provides that film costs should be accounted for under an
inventory model and discusses various topics such as revenue recognition and
accounting for exploitation costs and impairment assessment. In addition, SOP
00-2 establishes criteria for which revenues should be included in the Company's
ultimate revenue projections.
The Company recognizes revenue from its film licensing arrangements when the
film is complete and delivered, the license period has begun, the fee is fixed
or determinable and collection is reasonably assured. Costs of producing film
and acquiring film distribution rights are capitalized and amortized using the
individual-film-forecast method. This method amortizes such residual costs in
the same ratio that current period revenue bears to estimated remaining
unrecognized revenue as of the beginning of the fiscal year. All exploitation
costs are expensed as incurred. As a result of the adoption of SOP 00-2, the
Company recorded a charge of $5.2, net of tax, in the first quarter of fiscal
2002, to reduce the carrying value of its film production costs. This charge is
reflected in the Company's condensed consolidated statements of operations as a
cumulative effect of accounting change and is attributed entirely to the Media,
Licensing and Advertising segment. Management estimates that 100% of the costs
of its unamortized films will be amortized over the next three years.
10. SUBSEQUENT EVENT
On April 8, 2002, the Company acquired the shares of Klutz, a publisher and
creator of "books plus" products for children, from Corus Entertainment, Inc.
The Company's initial payment was $42.8 in cash. The agreement provides for
additional payments of up to $31.3 to be made to the seller in 2004 and 2005,
contingent upon the achievement of certain revenue thresholds for Klutz.
17
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
================================================================================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL:
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The Company bases its
estimates on historical experience, current business factors, and various other
assumptions believed to be reasonable under the circumstances, which are
necessary in order to form a basis for making judgments about the carrying
values of assets and liabilities. Actual results could differ from those
estimates and assumptions. On an on-going basis, the Company evaluates its
estimates which include, but are not limited to: collectability of accounts
receivable; book returns; amortization periods; and recovery of inventories,
deferred promotion costs, prepublication costs, royalty advances, production
costs and long-lived assets.
The Company has identified the following policies as critical to its business
operations and the understanding of its results of operations:
REVENUE RECOGNITION:
The Company's revenue recognition policies for its principal businesses are as
follows:
TRADE - Revenue from the sale of children's books to bookstores and mass
merchandisers primarily is recognized at the time of shipment, which
generally is when title transfers to the customer. A reserve for estimated
returns is established at the time of sale, based on historical experience,
and recorded as a reduction to revenue. Actual returns are charged to the
reserve as received. Actual returns could differ materially from the
Company's estimate, and may result in a revision to net revenue.
CONTINUITIES - The Company operates continuity programs in which customers
generally place a single order and receive more than one shipment of books over
a period of time. Revenue from continuities is recognized at the time of
shipment or upon customer acceptance. Reserves for estimated returns are
established at the time of sale, based on historical experience, and recorded as
a reduction to revenue. Actual returns are charged to the reserve as received.
Actual returns could differ materially from the Company's estimate, and may
result in a revision to net revenue.
SCHOOL-BASED BOOK CLUBS - Revenue from school-based book clubs is recognized
upon shipment of the products.
SCHOOL-BASED BOOK FAIRS - Revenue from school-based book fairs is recognized
ratably as the book fair occurs.
18
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
FILM PRODUCTION AND LICENSING - Revenue from the sale of film rights,
principally for the home video and domestic and foreign syndicated television
markets, is recognized when the film has been delivered and is available for
showing or exploitation. Licensing revenue is recorded in accordance with
royalty agreements, at the time characters are available to the licensee and
collections are reasonably assured. These policies are compliant with Statement
of Position 00-2, "Accounting by Producers and Distributors of Films" ("SOP
00-2"), issued in June 2000, which the Company adopted in June 2001. (See Note 9
in the Notes to Condensed Consolidated Financial Statements.)
ACCOUNTS RECEIVABLE, NET:
Accounts receivable are shown net of allowance for doubtful accounts and reserve
for returns. In the normal course of business, the Company extends credit to
customers that satisfy predefined credit criteria. The Company is required to
estimate the collectability of its receivables. Judgment is required in
determining the ultimate realization of these receivables, including the current
credit-worthiness of each customer. Significant revisions to bad debt expense
and the related allowance for doubtful accounts have been recorded and may occur
in the future.
INVENTORIES:
Inventories, consisting principally of books, are stated at the lower of cost,
using the first-in, first-out method, or market. The Company records a reserve
for excess and obsolete inventory based primarily upon historical and forecasted
demand for its products. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
DEFERRED PROMOTION COSTS:
Deferred promotion costs represent direct mail and telemarketing promotion
costs incurred to acquire customers in the Company's continuity businesses
and classroom magazine subscriptions. Promotional costs are deferred when
incurred, and amortized in the proportion that current revenues bear to
estimated total revenues. The Company regularly evaluates the operating
performance of the promotions over their life cycle based on historical and
forecasted demand. Based on this evaluation, adjustments may be required to
promotional expense.
PREPUBLICATION COSTS:
The Company capitalizes prepublication costs, consisting primarily of art,
prepress and editorial expenses incurred in the creation of the master copy of a
book or other media. Prepublication costs are amortized over the product life
cycle on a straight-line basis over a three- to seven-year period, commencing
with publication. The Company regularly evaluates the profitability of the
products over their life cycle based on historical and forecasted demand. Based
on this evaluation, adjustments may be required to amortization expense.
19
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
GOODWILL AND OTHER INTANGIBLES:
In accordance with Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"), goodwill and other intangible assets
with indefinite lives are no longer amortized. The Company reviews its goodwill
and non-amortizable intangibles on an annual basis for impairment, or more
frequently if impairment indicators arise. The impairment review process entails
determining the future cash flows for the Company's identified reporting units
and comparing those cash flows to the reporting units' carrying values. The
determination of cash flows requires management to make significant estimates
and assumptions about its reporting units' future operating performance. Actual
operating results could differ materially from those estimates and assumptions.
The Company's judgment regarding the existence of impairment indicators is based
on legal factors, market conditions and operational performance of the acquired
businesses. Future events could cause the Company to conclude that impairment
indicators exist and result in an impairment charge to goodwill and/or
non-amortizable intangibles. (See Note 8 in the Notes to Condensed Consolidated
Financial Statements.)
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended February 28, 2002 of $432.7 million were
nearly level with revenues of $433.0 million in the third quarter of the
prior fiscal year. School-based book club and school-based book fair revenues
for the quarter increased by $15.8 million and $11.4 million, respectively,
over the prior year quarter. The school-based book club revenue increase
primarily reflected the impact of higher order volume. The school-based book
fair revenue increase was due to increased revenue per fair as well as a
higher number of fairs. The elimination of less profitable programs in the
direct-to-home continuity business resulted in a decrease in revenues of
$10.9 million to $47.1 million for the quarter ended February 28, 2002, as
compared to revenues of $58.0 million in the prior year quarter. Also, lower
enrollments from the school-based continuity programs contributed to a
decrease of $7.0 million in revenues for the current year quarter as compared
to the prior year quarter. The year ago quarter benefited from strong sales
of HARRY POTTER(R) titles, which provided approximately $25 million in
revenues (including approximately $12 million from the launch of the HARRY
POTTER companion books, the net proceeds of which were donated to a charity
at the request of author J.K. Rowling), as compared to approximately $17
million in the current year quarter.
For the nine months ended February 28, 2002, revenues decreased 6.0% to
$1,376.0 million from $1,463.4 million in the prior year period. In the year
ago period, the Company benefited from strong sales of HARRY POTTER books,
fueled by the successful domestic trade release of HARRY POTTER AND THE
GOBLET OF FIRE, totaling approximately $190 million as compared to
approximately $70 million in the current fiscal period. Also contributing to
the revenue decrease was the Company's decision not to update SCHOLASTIC
LITERACY PLACE(R), which resulted in a decrease of $12.8 million to $38.3
million in the current fiscal period, from $51.1 million in the prior year.
These anticipated declines were partially offset by strong growth in
school-based book fairs and school-based book clubs of $24.2 million and
$23.1 million, respectively.
20
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Cost of goods sold as a percentage of revenues improved to 44.0% in the
quarter ended February 28, 2002 from 46.1% in the prior year quarter. This
improvement was primarily attributable to the Company's ongoing cost savings
program, which produced approximately $6 million of savings, or 1.4% of
revenues in the current year quarter. Also contributing to the improvement
was the Company's April 2001 decision not to update SCHOLASTIC LITERACY
PLACE, thereby reducing amortization expense of prepublication costs included
in cost of product in the current quarter by $4.4 million, or 1.0% of
revenues. For the nine months ended February 28, 2002, cost of goods as a
percentage of revenues improved to 43.8% from 45.7% in the prior year period,
primarily as a result of the Company's cost savings program.
As a percentage of revenues, selling, general and administrative expenses
increased to 45.0% for the quarter ended February 28, 2002 compared to 43.2%
in the year ago quarter. This increase was primarily the result of the prior
year's strong sales of HARRY POTTER titles without the incurrence of
proportionate marketing and promotional expenses. For the nine-month period
ended February 28, 2002, selling, general and administrative expenses as a
percentage of revenues increased to 43.5% from 41.0% in the prior fiscal year
period. This increase reflected the impact of the decrease in HARRY POTTER
revenues of approximately $120 million from the prior fiscal year, partially
offset by the benefit of the Company's ongoing cost savings program of
approximately $16 million.
Bad debt expense decreased to $11.0 million, or 2.5% of revenues, for the
quarter ended February 28, 2002, as compared to $19.9 million, or 4.6% of
revenues, in the prior year quarter. In the current fiscal quarter, the
Company refined its estimation of the bad debt reserve for the direct-to-home
continuity business to reflect better than previously anticipated credit
performance. These refinements resulted in a decrease in bad debt expense of
$6.1 million. The after-tax effect of the bad debt reduction on net income
was $3.9 million, or $0.10 per diluted share. For the nine months ended
February 28, 2002, bad debt expense increased to 3.8% of revenue, as compared
3.6% of revenue, in the prior year period. This increase was due primarily to
the inclusion in the current period of three additional weeks of the
direct-to-home continuity business, which has lower collection rates than the
Company's other businesses.
Depreciation for the quarter ended February 28, 2002 increased to $9.5 million
from $6.3 million in the prior year quarter. For the nine months ended February
28, 2002, depreciation increased to $25.4 million from $19.6 million in the
prior year period. These increases are a result of depreciation on projects
recently placed in service, including information technology initiatives.
Goodwill and other intangibles amortization reflected reductions of $3.3 million
and $9.9 million in the quarter and the nine-month periods ended February 28,
2002, respectively, related to the Company's adoption of SFAS 142. Under this
pronouncement, the Company is required to take an impairment-only approach to
amortizing goodwill and other intangible assets with indefinite lives, which
accordingly reduced amortization expense. (See Note 8 in the Notes to Condensed
Consolidated Financial Statements.)
21
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
The resulting operating income for the quarter ended February 28, 2002 grew over
the prior year quarter by $10.3 million to $26.6 million, or 6.1% of revenue, as
compared to $16.3 million, or 3.8% of revenue, in the prior year quarter. For
the nine months ended February 28, 2002, operating income decreased to $97.2
million, or 7.1% of revenue, compared to $110.9 million, or 7.6% of revenue, in
the prior fiscal year.
Net interest expense decreased to $7.9 million and $24.3 million from $10.5
million and $33.7 million in the three- and nine-month periods ended February
28, 2002, respectively, primarily due to lower interest rates.
In the first quarter of fiscal 2002, the Company adopted SOP 00-2. As a result,
the Company recorded an after-tax charge of $5.2 million, which was reflected as
a cumulative effect of accounting change. (See Note 9 in the Notes to Condensed
Consolidated Financial Statements.)
Net income for the third fiscal quarter increased to $11.9 million, or $0.31 per
diluted share, compared to $3.7 million, or $0.10 per diluted share, in the
prior year quarter. For the nine months ended February 28, 2002, net income
decreased to $41.5 million, or $1.09 per diluted share, from $49.4 million, or
$1.34 per diluted share, in the prior year. Included in the current year's net
income was the effect of the SOP 00-2 charge of $5.2 million, or $0.13 per
diluted share.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
school-based book clubs and book fairs, school-based and direct-to-home
continuity programs and the trade channel. The direct-to-home continuity and
trade businesses formerly operated by Grolier are incorporated in this segment
from June 22, 2000, the date on which Grolier was acquired.
<Table>
<Caption>
(IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
====================================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
====================================================================================================================
Revenue $ 268.9 $ 266.4 $ 836.9 $ 918.5
Operating profit 43.1 39.3 118.0 157.5
- --------------------------------------------------------------------------------------------------------------------
OPERATING MARGIN 16.0% 14.8% 14.1% 17.1%
</Table>
The following table highlights the results of the direct-to-home continuity
business included in the Children's Book Publishing and Distribution segment,
formerly operated by Grolier, from June 22, 2000, the date on which Grolier was
acquired.
<Table>
<Caption>
(IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
=============================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
=============================================================================================================
Revenue $ 47.1 $ 58.0 $ 157.6 $ 161.9
Operating profit 10.7 5.3 21.0 11.5
-------------------------------------------------------------------------------------------------------------
OPERATING MARGIN 22.7% 9.1% 13.3% 7.1%
</Table>
22
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
quarter ended February 28, 2002 increased slightly to $268.9 million compared
to $266.4 million in the prior fiscal year quarter. This increase in revenues
related principally to higher school-based book clubs and school-based book
fairs revenues of $15.8 million and $11.4 million, respectively, over the
prior fiscal year quarter. Sales growth for school-based book clubs primarily
reflected the impact of higher order volume. Sales growth for school-based
book fairs reflected continued growth in revenue per fair and fair count,
which benefited from the July 2001 acquisition of assets of Troll Book Fairs.
Revenue increases were partially offset by lower trade sales of $7.1 million
due to the effect of the strong prior year sales of HARRY POTTER titles and a
decrease of $7.0 million in the school-based continuity programs reflecting
lower customer enrollments. Additionally, in the quarter ended February 28,
2002, revenues for the Company's direct-to-home continuity business decreased
18.8%, or $10.9 million, to $47.1 million when compared to the prior year,
reflecting the planned elimination of less profitable programs. Excluding the
direct-to-home continuity business, segment revenues for the quarter
increased by $13.4 million to $221.8 million compared to the prior year
quarter.
Operating profit for the quarter increased $3.8 million to $43.1 million
compared to $39.3 million in the prior year. Increases in the operating profits
of the direct-to-home continuity business, school-based book fairs and
school-based book clubs of $5.4 million, $5.3 million and $3.4 million,
respectively, were offset by operating profit decreases in trade and
school-based continuity programs results of $6.6 million and $3.7 million,
respectively. Operating profit for the Company's direct-to-home continuity
business increased in the current year quarter to $10.7 million from $5.3
million in the prior year quarter, reflecting planned lower revenues which were
more than offset by higher operating margins and the $6.1 million impact of the
Company's refinement of the bad debt reserve to reflect better than previously
anticipated credit performance. The after-tax effect of the bad debt reduction
on net income was $3.9 million, or $0.10 per diluted share. Segment operating
margins for the quarter increased to 16.0% from 14.8% in the prior year period,
primarily reflecting reduced promotional costs related to the elimination of
less profitable programs in the direct-to-home continuity business. Excluding
the direct-to-home continuity business, segment operating profit for the quarter
decreased to $32.4 million (14.6% of revenue) from $34.0 million (16.3% of
revenue) in the prior year period.
Revenues for the nine-month period ended February 28, 2002 decreased $81.6
million to $836.9 million compared to $918.5 million in the year ago period.
This decrease was primarily due to a decline in trade sales of $118.3 million
reflecting strong prior year sales of HARRY POTTER titles, including the release
in the summer of 2000 of HARRY POTTER AND THE GOBLET OF FIRE, of approximately
$190 million compared to approximately $70 million of sales in the current
period. This decrease was partially offset by revenue increases of $24.2 million
and $23.1 million in school-based book fairs and school-based book clubs,
respectively, as compared to the prior year period. Revenues from the
direct-to-home continuity business decreased $4.3 million to $157.6 million from
$161.9 million in the prior period. This decrease reflected the elimination of
less profitable programs partially offset by the impact of three weeks of
additional direct-to-home revenues in the current year of $17.8 million from
Grolier's direct-to-home continuity business. Excluding the direct-to-home
continuity business, segment revenues decreased by $77.3 million to $679.3
million from $756.6 million in the prior year period.
23
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Segment operating profit for the nine-month period ended February 28, 2002
decreased $39.5 million to $118.0 million, as compared to $157.5 million for the
prior year period. This decrease reflected the impact of the reduced HARRY
POTTER sales discussed above. Segment operating margins for the nine-month
period decreased to 14.1% from 17.1% in the prior year period, also primarily
due to the decrease in HARRY POTTER sales. Operating profit for the
direct-to-home continuity business for the nine-month period increased to $21.0
million (13.3% of revenue), from $11.5 million (7.1% of revenue) in the prior
year period, primarily as a result of the decrease in the bad debt reserve.
Excluding the direct-to-home continuity business, segment operating profit for
the nine-month period decreased to $97.0 million (14.3% of revenue) from $146.0
million (19.3% of revenue) in the prior year period.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of supplemental and core materials,
classroom magazines and print and on-line reference and non-fiction products for
grades K to 12 in the United States. The reference and non-fiction business
formerly operated by Grolier is included in this segment from June 22, 2000, the
date on which Grolier was acquired.
<Table>
<Caption>
(IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
====================================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
====================================================================================================================
Revenue $ 60.9 $ 59.4 $ 225.9 $ 226.2
Operating (loss) profit (1.6) (7.8) 25.3 (1.4)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * * 11.2% *
</Table>
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter ended February
28, 2002 increased modestly to $60.9 million, compared to $59.4 million in the
comparable quarter of the prior year. The slight increase in revenue for the
quarter is due to increases in revenues of paperback reading collections of $2.4
million, the inclusion of $1.6 million of revenues related to the December 2001
acquisition of Tom Snyder Productions Inc. and increases in other core products
of $1.1 million. These increases were partially offset by lower sales of Grolier
reference and non-fiction products of $2.3 million combined with lower sales of
SCHOLASTIC LITERACY PLACE of $1.1 million related to the Company's strategic
decision not to update the program. For the nine-month period ended February 28,
2002, revenues decreased slightly to $225.9 million, compared to $226.2 million
in the comparable prior year period, reflecting the anticipated decrease of
SCHOLASTIC LITERACY PLACE sales of $12.8 million. This decrease was offset by
increased sales of paperback reading collections of $9.1 million and the impact
of three additional weeks of Grolier reference and non-fiction products in the
current year of $4.1 million.
Operating loss for this segment for the third quarter improved by $6.2
million over the comparable quarter of the prior year, primarily due to
reduced prepublication amortization of $4.0 million, principally related to
the Company's April 2001 decision not to update SCHOLASTIC LITERACY PLACE,
and reduced goodwill and other intangibles amortization of $1.7 million,
resulting from the adoption of SFAS 142 in the current year. For the
nine-month period ended February 28, 2002, operating profit improved by $26.7
million over the comparable prior year period, primarily due to reductions in
prepublication costs of $17.0 million, in marketing, promotion and editorial
costs of $5.5 million and in goodwill and other intangibles amortization of
$4.5 million.
24
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software, Internet services and the
production and/or distribution by and through the Company's subsidiary,
Scholastic Entertainment Inc. ("SEI"), of programming and consumer products
(including children's television programming, videos, software, feature films,
promotional activities and non-book merchandise). The software business formerly
operated by Grolier is included in this segment from June 22, 2000, the date on
which Grolier was acquired.
<Table>
<Caption>
(IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
====================================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
====================================================================================================================
Revenue $ 32.4 $ 35.6 $ 98.3 $ 101.4
Operating loss (3.3) (3.3) (11.8) (13.6)
- --------------------------------------------------------------------------------------------------------------------
OPERATING MARGIN * * * *
</Table>
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased $3.2 million to $32.4
million for the quarter ended February 28, 2002 compared to $35.6 million in
the prior year quarter. The revenue decrease is primarily attributable to
reduced SEI film production revenue of $4.3 million, principally due to fewer
new shows delivered for the TV series, CLIFFORD THE BIG RED DOG(TM),
partially offset by increased licensing royalty revenue from the CLIFFORD
property of $3.4 million. For the nine-month period, segment revenues for the
current fiscal year amounted to $98.3 million versus $101.4 million in the
prior year. The decrease is principally due to the decline in film revenue of
$12.1 million due to fewer new CLIFFORD series episodes delivered this year
and the benefit of last year's $3.9 million license renewal from FOX TV of
THE MAGIC SCHOOL BUS(R) series, partially offset by increased licensing and
merchandising revenue of $8.7 million from the CLIFFORD property.
For the quarter ended February 28, 2002 and the comparable prior year quarter,
segment operating loss was flat at $3.3 million. For the nine-month period,
operating loss improved $1.8 million to $11.8 million, primarily reflecting a
reduction of $3.6 million in Internet development expenses, partially offset by
a decrease in other segment operating results.
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's international operations
and its domestic export and foreign rights businesses. The international
businesses formerly operated by Grolier are included in this segment from June
22, 2000, the date on which Grolier was acquired.
<Table>
<Caption>
(IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
====================================================================================================================
FEBRUARY 28, 2002 2001 2002 2001
====================================================================================================================
Revenue $ 70.5 $ 71.6 $ 214.9 $ 217.3
Operating profit 3.0 2.3 8.3 11.8
- --------------------------------------------------------------------------------------------------------------------
OPERATING MARGIN 4.3% 3.2% 3.9% 5.4%
</Table>
25
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
INTERNATIONAL revenues decreased by $1.1 million to $70.5 million for the
quarter ended February 28, 2002 from $71.6 million in the year ago quarter. This
decrease is due primarily to the adverse impact of foreign currency exchange
rates of $2.3 million, as well as lower revenues in the United Kingdom of $2.1
million. These decreases were partially offset by increases of $2.4 million in
Canadian revenues and $1.0 million in Australian revenues. International
revenues for the nine months ended February 28, 2002 decreased $2.4 million to
$214.9 million, as compared to $217.3 million in the prior year period. This
decrease is primarily due to the adverse impact of foreign currency exchange
rates of $8.1 million, in addition to lower revenues in the United Kingdom and
Export operations of $2.9 million and $1.9 million, respectively. These declines
were partially offset by three additional weeks of Grolier business revenues of
$6.2 million in the current year, along with increases in revenues in Australia
and Canada of $2.8 million and $1.7 million, respectively.
For the quarter ended February 28, 2002, operating profit increased $0.7 million
from the prior year quarter, to $3.0 million. The increase is attributed to
higher operating profits in the United Kingdom, Canada and Australia of $0.8
million, $0.8 million and $0.5 million, respectively, partially offset by a
decrease in operating profit in Export operations of $0.9 million. For the nine
months ended February 28, 2002, operating profit decreased by $3.5 million to
$8.3 million as compared to the prior year. This decrease is primarily the
result of lower operating profits in Export operations and Canada of $1.6
million and $1.4 million, respectively.
SEASONALITY
The Company's school-based book clubs, school-based book fairs and most of its
magazines operate on a school-year basis. Therefore, the Company's business is
highly seasonal.
As a consequence, the Company's revenues in the first and third quarters of the
fiscal year are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book club and book fair revenues are
proportionately larger in the second quarter of the fiscal year, while revenues
from the sale of instructional materials are highest in the first quarter.
In the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. As a result of the Company's
business cycle, seasonal borrowings have historically increased during June,
July and August, have generally peaked in September or October, and have been at
their lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $1.2 million during the
nine-month period ended February 28, 2002, compared to an increase of $2.9
million during the comparable period in the prior year.
Cash flow provided from operations was $65.5 million for the nine-month
period ended February 28, 2002, resulting from net income adjusted for
non-cash activity of $180.3 million, partially offset by working capital
increases of $114.8 million.
26
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Cash outflows for investing activities were $133.0 million for the current
nine-month period as compared to $516.5 million in the prior year period, which
reflected the acquisition of Grolier. The spending for the nine months ended
February 28, 2002 principally consisted of capital expenditures, prepublication
costs, royalty advances, business acquisitions and production costs. Capital
expenditures, including capitalized interest, totaled $46.5 million for the nine
months ended February 28, 2002, decreasing $3.1 million from the year ago
period. Prepublication expenditures increased $2.8 million to $39.4 million in
the nine-month period. Payments for royalty advances increased to $23.7 million
in the nine-month period from $19.3 million in the prior year nine-month period.
The Company believes its existing cash position, combined with funds
generated from operations and available under the Loan Agreement and the
Revolver, will be sufficient to finance its ongoing working capital
requirements for the next fiscal year.
FINANCING
On January 11, 2002, pursuant to a Notice of Redemption issued by the Company on
November 29, 2001, $109.8 million of the Company's 5.0% Convertible Subordinated
Debentures were converted into 2.9 million shares of common stock, and $0.2
million was redeemed for cash.
On January 23, 2002, the Company issued $300.0 million of 5.75% Notes (the
"5.75% Notes"). The 5.75% Notes are unsecured and unsubordinated obligations
of the Company and will mature on January 15, 2007. The Company may, at any
time, redeem all or a portion of the 5.75% Notes at a redemption price (plus
accrued interest to the date of redemption), equal to the greater of a) 100%
of the principal amount, or b) the sum of the present values of the remaining
scheduled payments of principal and interest discounted to the date of
redemption on a semiannual basis. The net proceeds were used to permanently
repay a portion of the $350.0 million facility (the "Grolier Facility")
established in connection with the June 22, 2000 acquisition of Grolier
Incorporated. At February 28, 2002, the Company has outstanding $50.0 million
on the Grolier Facility which expires on June 21, 2002. The weighted average
interest rate under the Grolier Facility at February 28, 2002 was 2.5%.
On February 5, 2002, the Company entered into an interest rate swap agreement,
designated as a fair value hedge as defined under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," with a notional amount totaling
$100.0 million and a variable interest rate which is reset semi-annually based
on six-month LIBOR (as defined). This agreement was entered into to exchange the
fixed interest rate on a portion of the Company's 5.75% Notes for a variable
interest rate. Changes in the fair value of the interest rate swap offset
changes in the fair value of the fixed rate debt due to changes in market
interest rates. As such, there was no ineffective portion to the hedge
recognized in earnings during the period.
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $210.0 million
(with a right, in certain circumstances, to increase to $240.0 million),
including the issuance of up to $10.0 million in letters of credit. Both the
Loan Agreement and the Revolver expire on August 11, 2004. The Company uses
these facilities primarily to fund seasonal cash flow needs and other working
capital requirements. At February 28, 2002, the Company had $46.3 million in
borrowings outstanding under these facilities at a weighted average interest
rate of 2.5%.
27
<Page>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
In addition, unsecured lines of credit available to the Company's international
subsidiaries totaled $52.0 million at February 28, 2002. These lines are used
primarily to fund local working capital needs. At February 28, 2002, $27.9
million in borrowings were outstanding under these lines of credit at a weighted
average interest rate of 5.6%.
ACQUISITIONS
On June 22, 2000, the Company acquired the capital stock of Grolier for $400.0
million in cash, and in July 2001, the Company acquired certain assets of Troll
Book Fairs Inc. On December 21, 2001, the Company acquired, for $9.0 million in
cash, assets of Tom Snyder Productions Inc., a leading developer and publisher
of interactive educational software.
On April 4, 2002, the Company acquired Baby's First Book Club(TM), a direct
marketer of high quality, age-appropriate books and toys for young children,
from Norwegian publisher Sandvik AS for $7.5 million.
On April 8, 2002, the Company acquired the shares of Klutz, a publisher and
creator of "books plus" products for children, from Corus Entertainment, Inc.
The Company's initial payment was $42.8 million in cash. The agreement provides
for additional payments of up to $31.3 million to be made to the seller in 2004
and 2005, contingent upon the achievement of certain revenue thresholds for
Klutz.
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.
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 Annual Report on Form 10-K for the fiscal year ended May 31, 2001.
28
<Page>
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.
Market risks relating to the Company's operations result primarily from changes
in interest rate fluctuations, which are managed by balancing the mix of
variable- versus fixed-rate borrowings. Additionally, financial instruments,
including swap and forward contracts, are used to hedge exposure to interest
rate and foreign currency risks. Approximately forty percent of the Company's
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.
As of February 28, 2002, the balance outstanding under its variable rate
facilities, including interest rate swap agreements, was $224.2 million, at a
weighted average interest rate of 3.1%. A 15% increase or decrease in the
average cost of the Company's variable rate debt under the various facilities at
February 28, 2002 would impact the Company's pre-tax results of operations and
cash flows by approximately $1 million annually.
29
<Page>
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 1. LEGAL PROCEEDINGS
================================================================================
See Note 5 (Contingencies) of the Notes to Condensed Consolidated Financial
Statements - Unaudited appearing in Item 1 of this Report for updated
information concerning the two actions captioned SCHOLASTIC INC. AND
SCHOLASTIC ENTERTAINMENT INC. V. PARACHUTE PRESS, INC., PARACHUTE PUBLISHING,
LLC, PARACHUTE CONSUMER PRODUCTS, LLC, AND R. L. STINE (Index No. 99/600512)
and PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS, INC.
AND SCHOLASTIC ENTERTAINMENT INC. (Index No. 99/600507), which description is
incorporated herein by reference.
30
<Page>
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
4.10 Indenture dated January 23, 2002 for
5.75% Notes due January 15, 2007 issued
by the Company (incorporated by reference
to the Company's Registration Statement
on Form S-3 (Registration No. 333-55238)
as filed with the Commission on February
8, 2001).
(b) Reports on Form 8-K A current report on Form 8-K was filed on
January 22, 2002 noticing the Company's
announcement that it entered into a Terms
Agreement relating to a public offering
of $300 million aggregate principal
amount of its 5.75% Notes due January 15,
2007 (the "Notes") under its Registration
Statement on Form S-3 (no. 333-55238),
filed with the Securities and Exchange
Commission on February 8, 2001, a
prospectus dated February 28, 2001 and
the related prospectus supplement dated
January 17, 2002. The Notes bear
interest at 5.75% and will mature on
January 15, 2007.
- --------------------------------------------------------------------------------
31
<Page>
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 15, 2002 /s/ Richard Robinson
-----------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: April 15, 2002 /s/ Kevin J. McEnery
-----------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
32
<Page>
<Table>
<Caption>
SCHOLASTIC CORPORATION
CURRENT REPORT ON FORM 10-Q, DATED FEBRUARY 28, 2002
EXHIBITS INDEX
===================================================================================================================
PAGE NUMBER IN
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY
------ ----------------------- -------------
Exhibit 4.10 Indenture dated January 23, 2002 for 5.75% Notes due January 15, E-1
2007 issued by the Company (incorporated by reference to the
Company's Registration Statement on Form S-3 (Registration No.
333-55238) as filed with the Commission on February 8, 2001).
</Table>
33