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 November 30, 1999 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 Broadway, New York, New York 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Number of shares outstanding
of each class as of December 31, 1999
------------- -----------------------
Common Stock, $.01 par value 15,829,079
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
INDEX
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Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended November 30, 1999 and 1998 1
Condensed Consolidated Balance Sheet at November 30, 1999
and 1998 and May 31, 1999 2
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended November 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
Three months ended Six months ended
November 30, November 30,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
Revenues $ 507.8 $ 403.2 $ 687.8 $ 553.4
Operating costs and expenses:
Cost of goods sold 236.8 187.3 345.1 273.0
Selling, general and administrative expenses 185.0 153.6 284.8 236.5
Depreciation 4.7 4.2 9.3 8.2
Goodwill and trademark amortization 1.3 1.5 2.2 2.9
Non-recurring charge 8.5 -- 8.5 --
- ---------------------------------------------------------------------------------------------------------
Total operating costs and expenses 436.3 346.6 649.9 520.6
Operating income 71.5 56.6 37.9 32.8
Interest expense, net 5.7 5.4 10.1 9.9
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 65.8 51.2 27.8 22.9
Provision for income taxes 24.5 19.5 10.1 8.7
- ---------------------------------------------------------------------------------------------------------
Net income $ 41.3 $ 31.7 $ 17.7 $ 14.2
=========================================================================================================
Net income per Class A and Common Share:
Basic $ 2.49 $ 1.94 $ 1.07 $ 0.87
Diluted $ 2.30 $ 1.81 $ 1.06 $ 0.86
================================================================================
See accompanying notes
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in millions, except per share data)
================================================================================
- ----------------------------------------------------------------------------------------------------------------
November 30, 1999 May 31, 1999 November 30, 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 7.8 $ 5.9 $ 3.6
Accounts receivable less allowance for
doubtful accounts 250.7 136.4 191.4
Inventories 301.8 227.4 236.1
Deferred taxes 41.9 41.8 41.9
Prepaid and other deferred expenses 32.1 22.7 26.5
- ----------------------------------------------------------------------------------------------------------------
Total current assets 634.3 434.2 499.5
Property, plant and equipment, net 159.1 149.1 141.3
Prepublication costs 98.7 95.3 85.1
Other assets and deferred charges 154.0 163.7 171.6
- ----------------------------------------------------------------------------------------------------------------
Total assets $1,046.1 $ 842.3 $ 897.5
================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 19.5 $ 18.0 $ 19.4
Accounts payable 155.4 97.0 103.1
Accrued royalties 39.6 23.7 24.2
Deferred revenue 35.6 6.7 36.9
Other accrued expenses 77.7 66.4 68.0
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 327.8 211.8 251.6
Noncurrent Liabilities:
Long-term debt 312.9 248.0 286.8
Other noncurrent liabilities 22.9 21.1 24.1
- ----------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 335.8 269.1 310.9
Stockholders' Equity:
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.2 0.2 0.2
Additional paid-in capital 216.9 212.3 207.5
Accumulated other comprehensive loss:
Foreign currency translation adjustment (6.2) (5.7) (4.7)
Retained earnings 209.2 191.4 168.8
Less shares of Common Stock
held in treasury (37.6) (36.8) (36.8)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 382.5 361.4 335.0
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,046.1 $ 842.3 $ 897.5
================================================================================
See accompanying notes
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(amounts in millions)
================================================================================
Six months ended
November 30,
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
Net cash (used in) / provided by operating activities $ (10.4) $ 3.2
Cash flows used in investing activities:
Prepublication costs (23.8) (16.3)
Additions to property, plant and equipment (16.4) (11.4)
Royalty advances (12.0) (11.3)
Production costs (5.1) (10.9)
Business and trademark acquisition-related payments 0.0 (11.7)
Other (0.4) (1.5)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (57.7) (63.1)
Cash flows provided by/(used in) financing activities:
Borrowings under Loan Agreement and Revolver 192.2 158.2
Repayments of Loan Agreement and Revolver (127.4) (112.1)
Borrowings under lines of credit 32.3 34.9
Repayments of lines of credit (30.3) (25.0)
Other 3.2 2.4
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70.0 58.4
Net increase/(decrease) in cash and cash equivalents 1.9 (1.5)
Cash and cash equivalents at beginning of period 5.9 5.1
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7.8 $ 3.6
====================================================================================================
================================================================================
See accompanying notes
3
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
1. Basis of Presentation
The accompanying condensed consolidated financial statements have not been
audited, but reflect those adjustments consisting of normal recurring items
which management considers necessary for a fair presentation of financial
position, results of operations and cash flow. These financial statements should
be read in conjunction with the consolidated financial statements and related
notes in the 1998/1999 Annual Report to Stockholders.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the six months ended November 30, 1999 and 1998
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the November 30, 1998 consolidated balance
sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication and film production costs and recoverability of other long-lived
assets.
2. Recent Accounting Principles
Effective May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information." This statement requires that public business enterprises
report certain information about operating segments in financial statements of
the enterprise issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The required
disclosures are presented in Note 3 included herein.
The Financial Accounting Standards Board issued, in June 1998, Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
hedges are included in income. The Company is required to adopt the provisions
of SFAS 133 in the first quarter of fiscal 2002.
4
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 and India and distributes its products and services through a
variety of channels, including book clubs, book fairs and trade.
The Company's operations are categorized in the following four segments:
Children's Book Publishing and Distribution; Educational Publishing; Media,
Licensing and Advertising and International. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision-maker assesses operating performance and
allocates resources.
The following tables set forth the Company's segment information for the quarter
and six-month periods ended November 30, 1999 and 1998:
Children's
Book Media,
Publishing Licensing
and Educational and Total
Distribution Publishing Advertising Domestic International Overhead (1) Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
November 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 353.1 $ 51.4 $ 40.6 $ 445.1 $ 62.7 $ 0.0 $ 507.8
Depreciation 0.9 0.3 0.3 1.5 0.8 2.4 4.7
Amortization (2) 3.4 6.9 3.6 13.9 0.5 0.0 14.4
Royalty advance expense 4.9 0.5 0.8 6.2 0.3 0.0 6.5
Segment profit/(loss) (3) 94.8 (4.5) (1.6) 88.7 5.4 (22.6) 71.5
Expenditures for
long-lived assets (5) 8.0 2.8 3.4 14.2 1.2 5.3 20.7
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
November 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 259.8 $ 46.6 $ 35.3 $ 341.7 $ 61.5 $ 0.0 $ 403.2
Depreciation 0.9 0.2 0.2 1.3 0.8 2.1 4.2
Amortization (2) 3.1 5.8 6.0 14.9 0.6 0.0 15.5
Royalty advance expense 6.3 0.4 0.5 7.2 0.6 0.0 7.8
Segment profit/(loss) (3) 64.3 (3.4) 0.7 61.6 4.5 (9.5) 56.6
Expenditures for
long-lived assets (5) 5.7 6.7 4.7 17.1 1.9 1.3 20.3
- -----------------------------------------------------------------------------------------------------------------------------------
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
3. Segment Information (continued)
Children's
Book Media,
Publishing Licensing
and Educational and Total
Distribution Publishing Advertising Domestic International Overhead (1) Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended
November 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 432.3 $ 107.2 $ 49.5 $ 589.0 $ 98.8 $ 0.0 $ 687.8
Depreciation 1.8 0.5 0.5 2.8 1.7 4.8 9.3
Amortization (2) 6.8 13.9 5.2 25.9 0.8 0.0 26.7
Royalty advance expense 9.1 0.6 1.0 10.7 0.8 0.0 11.5
Segment profit/(loss) (3) 80.1 (5.7) (8.7) 65.7 0.7 (28.5) 37.9
Segment assets 470.5 196.0 77.5 744.0 135.5 166.6 1,046.1
Long-lived assets (4) 94.7 98.2 27.1 220.0 55.8 111.8 387.6
Expenditures for
long-lived assets (5) 19.0 17.6 9.4 46.0 2.3 9.0 57.3
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended
November 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 307.6 $ 110.1 $ 41.4 $ 459.1 $ 94.3 $ 0.0 $ 553.4
Depreciation 1.6 0.4 0.4 2.4 1.6 4.2 8.2
Amortization (2) 6.2 11.9 7.5 25.6 1.2 0.0 26.8
Royalty advance expense 9.4 0.5 0.5 10.4 0.6 0.0 11.0
Segment profit/(loss) (3) 45.0 11.2 (5.6) 50.6 (0.3) (17.5) 32.8
Segment assets 367.0 171.2 48.6 586.8 157.8 152.9 897.5
Long-lived assets (4) 97.9 86.3 25.2 209.4 58.5 96.0 363.9
Expenditures for
long-lived assets (5) 18.2 11.1 12.2 41.5 5.4 3.0 49.9
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Overhead includes unallocated domestic corporate-related items and as it
relates to the segment profit/(loss), expenses not allocated to reportable
segments including costs related to the management of corporate assets,
net interest expense and provision for income taxes. Unallocated assets
are principally comprised of deferred income taxes and property, plant and
equipment related to the Company's headquarters in the metropolitan New
York area and its National Service Operation located in the Jefferson
City, Missouri area.
(2) Includes amortization of goodwill, intangible assets, and prepublication
and production costs.
(3) Segment profit/(loss) represents earnings before interest and taxes.
(4) Includes property, plant and equipment, prepublication costs, goodwill and
trademarks, royalty advances and production costs.
(5) Includes purchases of property, plant and equipment, investments in
prepublication and production costs, and royalty advances.
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
4. Debt
Long-term debt consisted of the following:
- ---------------------------------------------------------------------------------------------------------
November 30, 1999 May 31, 1999 November 30, 1998
- ---------------------------------------------------------------------------------------------------------
Loan Agreement and Revolver $ 74.8 $ 10.0 $ 48.4
7% Notes due 2003, net of discount 124.8 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 3.4 3.4 3.7
- ---------------------------------------------------------------------------------------------------------
Total debt 313.0 248.2 286.9
Less current portion (0.1) (0.2) (0.1)
- ---------------------------------------------------------------------------------------------------------
Total long-term debt $ 312.9 $ 248.0 $ 286.8
=========================================================================================================
Loan Agreement. The Company and Scholastic Inc. (a wholly-owned subsidiary) are
joint and several borrowers under a loan agreement with certain banks which was
amended and restated effective August 11, 1999 (the "Loan Agreement"). The Loan
Agreement, which expires August 11, 2004, provides for aggregate borrowings of
up to $170.0 (with a right in certain circumstances to increase it to $200.0)
including the issuance of up to $10.0 in letters of credit with $1.0 outstanding
for the three and six-month periods ended November 30, 1999. Interest under this
facility is either at the prime rate or 0.325% to 0.90% over LIBOR (as defined).
There is a commitment fee ranging from 0.10% to 0.30% on the facility and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33.0% of the
total facility. The amounts charged vary based upon the Company's credit
ratings. At the Company's current credit ratings, the spread over LIBOR,
commitment fee and utilization fee are 0.475%, 0.150% and 0.075%, respectively.
The Loan Agreement contains certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions.
Revolver. The Company and Scholastic Inc. are joint and several borrowers under
a Revolving Loan Agreement (the "Revolver") with SunTrust Bank, which was
amended and restated effective November 10, 1999 and provides for revolving
credit loans of up to $40.0 and expires on August 11, 2004. The Revolver has
certain financial covenants related to debt and interest coverage ratios (as
defined) and limits dividends and other distributions.
7% Notes due 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will mature on December 15, 2003. The Notes are not redeemable
prior to maturity. Interest on the Notes is payable semi-annually on December 15
and June 15 of each year.
Convertible Subordinated Debentures. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures")
under Regulation S and Rule 144A of the Securities Act of 1933. Interest on the
Debentures is payable semi-annually on August 15 and February 15 of each year.
The Debentures are redeemable at the option of the Company, in whole, but not in
part, at any time on or after August 15, 1998 at 100% of the principal amount
plus accrued interest. Each Debenture is convertible, at the holder's option,
any time prior to maturity, into Common Stock of the Company at a conversion
price of $76.86 per share.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
5. Contingencies
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On December 14, 1998, an
order was entered granting the Company's motion to dismiss plaintiffs'
complaint. In dismissing the complaint, the court held that plaintiffs failed to
state a claim upon which relief can be granted and granted plaintiffs leave to
amend the complaint. Pursuant to that order, plaintiffs filed a Second Amended
Consolidated Complaint, on or about February 16, 1999, alleging substantially
similar claims against the Company and one of its officers. The Company filed a
motion to dismiss the complaint on April 16, 1999. The Company continues to
believe that the litigation is without merit and will continue to vigorously
defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the Goosebumps(R) series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such Goosebumps rights are
licensed to the Company. The issues in the case are also, in part, the subject
of two litigations commenced by Parachute following repeated notices from the
Company to Parachute of material breaches by Parachute of the agreements under
which such rights are licensed and the exercise by the Company of its
contractual remedies under the agreements. The first Parachute action, in which
two subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on November
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. Parachute filed an appeal of the dismissal. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State of New York in New York
County. In its two complaints, and in its counterclaims, Parachute alleges that
the exercise of contractual remedies by the Company was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract and acts of unfair competition. Damages sought by Parachute
include the payment of a total of approximately $36.1 of advances over the term
of the contract (of which approximately $15.3 had been paid at the time the
first Parachute litigation began) and payments of royalties set-off by
Scholastic against amounts claimed by the Company. The Company is seeking
declaratory relief and damages for, among other claims, breaches of contract,
fraud and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid.
Discovery, which has been consolidated for the litigations, has commenced. The
Company intends to vigorously pursue its claims against Parachute and the other
named defendants and to vigorously defend its position against the new lawsuit
and the appeal. The Company does not believe that this dispute will have a
material adverse effect on its financial condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
6. Comprehensive Income
The following table sets forth comprehensive income for the periods indicated:
Three months ended Six months ended
November 30, November 30,
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net income $ 41.3 $ 31.7 $ 17.7 $ 14.2
Other comprehensive income/(loss):
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.1) 0.3 (0.3) 0.1
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 41.2 $ 32.0 $ 17.4 $ 14.3
==================================================================================================================
7. Earnings Per Share
Basic earnings per share are computed by dividing net earnings by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share are calculated to give effect to potentially dilutive stock
options and convertible debentures that were outstanding during the period. The
following table summarizes the reconciliation of the numerators and denominators
for the Basic and Diluted earnings per share ("EPS") computations:
Three months ended Six months ended
November 30, November 30,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net income for Basic EPS $ 41.3 $ 31.7 $ 17.7 $ 14.2
Effect of convertible debt 0.8 0.9 1.7 --(1)
- --------------------------------------------------------------------------------------------------------------------
Net income for Diluted EPS $ 42.1 $ 32.6 $ 19.4 $ 14.2
====================================================================================================================
Weighted-average shares for Basic EPS 16.5 16.3 16.5 16.3
Effect of stock options 0.4 0.3 0.4 0.3
Effect of convertible debt 1.4 1.4 1.4 --(1)
- --------------------------------------------------------------------------------------------------------------------
Weighted-average shares for Diluted EPS 18.3 18.0 18.3 16.6
====================================================================================================================
Net income per Class A and Common Share:
Basic $ 2.49 $ 1.94 $ 1.07 $ 0.87
Diluted $ 2.30 $ 1.81 $ 1.06 $ 0.86
(1) For the six months ended November 30, 1998, the effect of the 5.0%
Convertible Subordinated Debentures on the weighted-average shares outstanding
for diluted EPS was anti-dilutive and not included in the calculation.
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(amounts in millions, except per share data)
================================================================================
8. Non-Recurring Charge
The operating results for the quarter included a non-recurring charge primarily
related to the establishment of a litigation reserve following an adverse
decision in a lawsuit which was received on December 10, 1999. The case,
Scholastic Inc. and Scholastic Productions, Inc. v. Robert Harris and Harris
Entertainment, Inc., involves stock appreciation rights allegedly granted to Mr.
Harris in 1990 in connection with a joint venture formed primarily to produce
motion pictures. Although the Company disagrees with the judge's decision and
intends to appeal, the Company has recorded $6.7 million to fully reserve with
respect to the case. The $8.5 million charge also includes an unrelated
non-recurring expense of $1.8 million relating to the liquidation of certain
stock options.
10
SCHOLASTIC CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
================================================================================
Results of Operations - Consolidated
Revenues for the quarter ended November 30, 1999 increased approximately 26% to
$507.8 million from $403.2 million in the comparable quarter of the prior fiscal
year. For the six months ended November 30, 1999, revenues increased
approximately 24% to $687.8 million from $553.4 million in the prior fiscal year
period. This increase in revenue for both the three and six month periods was
driven primarily by the Company's Children's Book Publishing and Distribution
segment, which was up 36% over the prior year quarter and 41% over the prior
year-to-date period. This segment accounted for 69% and 63% of the Company's
revenues for the three and six-month periods ended November 30, 1999,
respectively, as compared to 65% and 56%, respectively, in the corresponding
prior fiscal year periods.
As a percentage of sales, cost of goods sold remained a constant percentage for
the three and six-month periods ended November 30, 1999 relative to the
comparable periods of the prior fiscal year. Selling, general and administrative
expenses as a percentage of revenue were down approximately 1% for the three and
six-month periods ended November 30, 1999 to 37% and 41%, respectively, as
compared to the same periods in the prior fiscal year. This decrease reflects
the impact of lower promotional spending levels in the Children's Book
Publishing and Distribution segment, where revenue growth outpaced promotional
spending needs combined with the Company's cost-cutting/margin improvement plan.
This benefit was partially offset by increased spending in the Educational
Publishing and Media, Licensing and Advertising segments related to sampling
expense for the Texas reading adoption and the Company's continued investment in
Internet initiatives, respectively. Operating expenses for the quarter included
a non-recurring charge of $8.5 million primarily related to the establishment of
a litigation reserve following an adverse decision in a lawsuit. The case, which
the Company intends to appeal, involves stock appreciation rights allegedly
granted in connection with a joint venture formed primarily to produce motion
pictures. The special charge also includes an unrelated non-recurring expense of
$1.8 million relating to the liquidation of certain stock options.
The operating profit for the quarter ended November 30, 1999, excluding the
non-recurring charge, increased 41% to $80.0 million from a profit of $56.6
million in the same quarter of the prior fiscal year. Including the
non-recurring charge, operating profit improved 26% in the current quarter
compared to the same period in the prior year. Operating profit for the
six-month period ended November 30, 1999, excluding the non-recurring charge,
was up 41% to $46.4 million when compared to the same period in the prior year.
After the charge, year-to-date operating profit was up approximately 16% to
$37.9 million from $32.8 million in the prior year period. These increases
reflect the benefit of increased sales in Children's Book Publishing and
Distribution primarily due to strong trade sales, led by the Harry Potter(TM)
and Pokemon(TM) books and a variety of successful series published by the
Company, strong results in book clubs and fairs and the impact of
cost-cutting/margin improvement plans across the Company.
Net income for the quarter ended November 30, 1999, including the non-recurring
charge, increased 30% to $41.3 million, or $2.30 per diluted share, compared to
net income of $31.7 million, or $1.81 per diluted share, in the comparable
quarter of the prior year. Net income, excluding the non-recurring charge,
increased 47% to $46.6 million or $2.59 per diluted share for the quarter when
compared to the same period in the prior fiscal year.
11
SCHOLASTIC CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
================================================================================
Results of Operations - Segments
Children's Book Publishing and Distribution
The Company's Children's Book Publishing and Distribution segment includes the
publication and distribution in the United States of children's books through
its school-based book club (including home continuity programs), book fair and
trade channels.
(in millions) Three months ended November 30, Six months ended November 30,
- ----------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
Revenue $ 353.1 $ 259.8 $ 432.3 $ 307.6
Operating profit 94.8 64.3 80.1 45.0
- ----------------------------------------------------------------------------------------
Operating margin 26.8% 24.7% 18.5% 14.6%
Revenues in the Children's Book Publishing and Distribution segment for the
second quarter of fiscal 2000 were up 36% to $353.1 million from $259.8 million
in the comparable quarter of the prior fiscal year. Year-to-date revenues were
up 41% at $432.3 million compared to the same period of the prior year. As a
result, operating results improved approximately 47% to $94.8 million for the
quarter and improved approximately 78% for the six months ended November 30,
1999 when compared to the same period in the prior fiscal year. The increased
revenue reflects the impact of continued strong trade sales volume of Scholastic
properties including three Harry Potter books and the Animorphs(R), Dear
America(TM), Royal Diaries, Pokemon(TM) and EverWorld(TM) series. Additionally,
revenues in both the Company's book clubs and book fairs were up approximately
17% over the prior year quarter. Results in both book clubs and book fairs
benefited from continuing improvements in marketing, infrastructure and product
selection. This resulted in a higher level of book club orders, increased fair
count and higher revenue per book club order and per book fair.
Educational Publishing
The Company's Educational Publishing segment includes the publication and
distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazines and instructional technology for core and
supplemental use in schools and libraries in the United States.
(in millions) Three months ended November 30, Six months ended November 30,
- ----------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
Revenue $ 51.4 $ 46.6 $ 107.2 $ 110.1
Operating profit/(loss) (4.5) (3.4) (5.7) 11.2
- ----------------------------------------------------------------------------------------------
Operating margin * * * 10.2%
* not meaningful
Revenues in the Educational Publishing segment for the quarter increased
approximately 10% to $51.4 million with an operating loss of $4.5 million as
compared to revenues of $46.6 million and operating loss of $3.4 million in the
comparable quarter of the prior fiscal year. Revenues for the quarter reflect
the impact of continued sales of Scholastic Literacy Place(R) combined with
initial sales of the new Read 180!(TM) reading intervention software. The
operating loss for the quarter reflects the impact of increased sampling costs
in the fiscal 2000 quarter related to the Texas reading adoption combined with
certain expenses related to the rollout of the Read 180! software. On a
year-to-date basis, revenues for the
12
SCHOLASTIC CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
================================================================================
Results of Operations - Segments (continued)
period ended November 30, 1999 declined approximately 3% to $107.2 million, from
$110.1 million for the comparable period of the prior fiscal year reflecting the
impact of higher order levels for Scholastic Literacy Place in the first quarter
of fiscal 1999, related to the California reading adoption. The next major state
adoption is in Texas, with product shipments expected in the summer of 2000. The
year-to-date operating loss for the period ended November 30, 1999 reflects the
impact of the decreased sales levels combined with increased costs of sampling
for the Texas reading adoption in the summer of 2000 and certain costs related
to the rollout of the company's Read 180! software
Media, Licensing and Advertising
The Company's Media, Licensing and Advertising segment includes the production
and the distribution by the Company's United States-based operations of
entertainment products (including television programming, videos and motion
pictures), Internet services and CD-ROM-based products and Scholastic-branded
licensed properties, as well as advertising and promotional activities.
(in millions) Three months ended November 30, Six months ended November 30,
- -------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
Revenue $ 40.6 $ 35.3 $ 49.5 $ 41.4
Operating (loss)/profit (1.6) 0.7 (8.7) (5.6)
- -------------------------------------------------------------------------------------------------
Operating margin * 2.0% * *
* not meaningful
Media, Licensing and Advertising revenues increased 15% to $40.6 million in the
second quarter of fiscal 2000 as compared to the prior year quarter. For the six
months ended November 30, 1999, revenues increased approximately 20% to $49.5
million from $41.4 million for the same period of the prior fiscal year. For the
quarter ended November 30, 1999, the segment recognized an operating loss of
$1.6 million as compared to a profit of $0.7 million in the same period of the
prior fiscal year. On a year-to-date basis, operating losses grew 55% to $8.7
million from an operating loss of $5.6 million in the same period of the prior
fiscal year. These results reflect the benefit of increased magazine advertising
sales which were more than offset by the Company's increased Internet-related
expenditures.
International
The International segment consists of the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong and India.
(in millions) Three months ended November 30, Six months ended November 30,
- ----------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
Revenue $ 62.7 $ 61.5 $ 98.8 $ 94.3
Operating profit/(loss) 5.4 4.5 0.7 (0.3)
- ----------------------------------------------------------------------------------------------
Operating margin 8.6% 7.3% 0.7% *
* not meaningful
13
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Results of Operations - Segments (continued)
International revenues for the quarter ended November 30, 1999 increased
approximately 2% to $62.7 million compared to $61.5 million for the same period
in the prior fiscal year. Revenue improvements in Australia and Canada in the
book club and trade businesses were offset by continued weakness in the United
Kingdom book club, trade and book fair businesses. On a year-to-date basis,
revenues increased approximately 5% to $98.8 million compared to $94.3 million
in the prior fiscal year period. This improvement reflects strong performance in
the Canadian operation in the book club and trade businesses and in Australia in
the book club and software businesses, which were offset by weak sales in the
United Kingdom. Operating profit improved 20% over the prior year period to $5.4
million for the quarter, reflecting the impact of revenue improvements and cost
containment efforts. For the six months ended November 30, 1999, operating
profit improved $1.0 million to $0.7 million from a loss of $0.3 million,
reflecting primarily the net impact of revenue improvements when compared to the
same period in the prior fiscal year.
Seasonality
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company generally experiences a substantial loss from operations in the
first quarter. Typically, book club and book fair revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from the sale of
instructional materials are larger in the first quarter.
Liquidity and Capital Resources
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, borrowings have increased during June, July and August
and generally have peaked in September or October, and have been at the lowest
point in May.
The Company's cash and cash equivalents increased by $1.9 million during the
six-month period ended November 30, 1999, compared to a decrease of $1.5 million
during the comparable period in the prior fiscal year.
The Company used $10.4 million of cash from operating activities during the
six-month period ended November 30, 1999 versus generating $3.2 million in the
comparable period of the prior fiscal year. Improvements in operating results
were more than offset by increased inventory and accounts receivable
requirements. Inventory levels increased to support higher revenues and
accelerated purchasing in order to enhance customer service and to reduce Year
2000 risks.
Cash used in investing activities was $57.7 million and $63.1 million for the
six months ended November 30, 1999 and 1998, respectively. Investing activities
consisted primarily of prepublication cost expenditures, capital expenditures,
royalty advances and production cost expenditures. Business and trademark
acquisition-related payments for the prior fiscal year were related to the
acquisition of certain assets of Pages Book Fairs, Inc. Prepublication cost
expenditures increased $7.5 million to $23.8 million for the six months ended
November 30, 1999 over the comparable period of the prior year largely due to
the planned revision to Scholastic Literacy Place and the initial spending on
the Company's new
14
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Liquidity and Capital Resources (continued)
Read 180! program. Capital expenditures increased $5.0 to $16.4 million in the
current year reflecting the construction of a new office facility. Royalty
advances increased $0.7 million for the six months ended November 30, 1999 over
the same period in the prior fiscal year to $12.0 million. Production cost
expenditures decreased $5.8 million to $5.1 million for the six months ended
November 30, 1999 when compared to the same period in the prior fiscal year, due
to a reduction in the number of shows being produced.
Financing
The Company maintains two unsecured credit facilities which provide for
aggregate borrowings of up to $210.0 million (with a right, in certain
circumstances, to increase to $240.0 million), including the issuance of up to
$10.0 million in letters of credit. The Company uses these facilities for
various purposes including the funding of seasonal cash flow needs and other
working capital requirements. At November 30, 1999, the Company had $74.8
million in borrowings outstanding under these facilities at a weighted-average
interest rate of 6.2%.
The Loan Agreement was amended and restated on August 11, 1999, principally to
extend the expiration date of the facility to August 11, 2004 and expand the
facility from $135.0 million to $170.0 million (with a right, in certain
circumstances, to increase to $200.0 million). In addition, on November 10,
1999, the Company amended and restated the Revolver to increase the amount
available thereunder to $40.0 million and extend its expiration to be concurrent
with the Loan Agreement.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $39.7 million at November
30, 1999. These lines are used primarily to fund working capital needs in those
countries. At November 30, 1999, $19.5 million in borrowings were outstanding
under these lines at a weighted-average interest rate of 6.0%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under the two credit facilities and other
lines of credit will be sufficient to finance its ongoing working capital
requirements for the remainder of the fiscal year.
Acquisitions
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects.
Year 2000 Readiness Disclosure
The Company's Year 2000 program, which was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consists of the
following three components relating to the Company's operations: (i) information
technology ("IT") computer systems and applications which may be impacted by the
Year 2000 problem and the actions related thereto, (ii) non-IT systems and
equipment which include embedded technology which may be impacted by the Year
2000 problem and actions related thereto and (iii) third party suppliers and
customers with which the Company has material
15
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Year 2000 Readiness Disclosure (continued)
relationships and which could adversely affect the Company if such parties fail
to be Year 2000 compliant and the actions related thereto. The general phases
common to all three components of the Company's Year 2000 program are:
Assessment, Remediation, Testing, Contingency Planning, and Implementation.
The progress and historical costs to date of the three components of the
Company's Year 2000 program for principal systems, applications or issues
affected by the Year 2000 is as follows:
The Company completed its Year 2000 Readiness Program on a timely basis and has
experienced no significant problems to date in its internal operations or with
its material third party vendors with the date change to the Year 2000. The
Company does not anticipate any significant problems in its internal operations
or with its material third party vendors in connection with its Year 2000
readiness.
IT Systems and Applications. The principal IT systems and applications of the
Company affected by Year 2000 issues included order entry, purchasing,
distribution and financial reporting. Issues related to vendor supplied software
include financial reporting and certain infrastructure and operating system
software. Excluding normal system upgrades, the Company estimates that total
costs for conversion and testing of new or modified IT systems and applications
will aggregate approximately $12.0 million through fiscal 2000, of which $9.2
million was incurred through November 30, 1999.
Non-IT Systems and Equipment. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected by Year 2000 issues included
security systems, phone systems, business machines, computers and distribution
systems. The Company estimates the total costs for modifying or replacing new
systems and equipment in this area will be approximately $0.2 million through
fiscal 2000, of which $0.1 million was incurred through November 30, 1999.
Material Third Party Relationships. Material third party supplier relationships
affected by Year 2000 issues relate primarily to printing, paper supplies,
distribution, fulfillment, licensing and financial services. Substantially all
of the Company's principal suppliers have reported that they have initiated Year
2000 programs and such suppliers have not brought to the Company's attention nor
has the Company experienced any problems which would materially and adversely
impact the Company's operations taken as a whole. The Company developed
contingency plans with respect to its principal third party suppliers. No single
customer or small group of customers are material to the Company's financial
condition.
Including the costs set forth above for IT systems and applications, the Company
estimates that total program costs for implementing its Year 2000 program will
be approximately $12.2 million, of which total program costs through November
30, 1999 have been $9.3 million. These costs include costs related to the
matters described above, as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the Company for
the Year 2000. The costs also include expenses related to internal staff.
All statements regarding Year 2000 Readiness are "Year 2000 Readiness
Disclosures" as defined by the Year 2000 Information and Readiness Disclosure
Act of October 19, 1998.
SCHOLASTIC CORPORATION
Item 2. MD&A
================================================================================
Non-Recurring Charge
The quarter included a non-recurring charge primarily related to the
establishment of a litigation reserve following an adverse decision in a lawsuit
originally filed in January, 1995. The case, Scholastic Inc. and Scholastic
Productions, Inc. v. Robert Harris and Harris Entertainment, Inc., involves
stock appreciation rights allegedly granted to Mr. Harris in 1990 in connection
with a joint venture formed primarily to produce motion pictures. Although the
Company disagrees with the judge's decision and intends to appeal, the Company
has recorded $6.7 million to fully reserve with respect to the case. The $8.5
million charge also includes an unrelated non-recurring expense of $1.8 million
relating to the liquidation of certain stock options.
Forward Looking Statements
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 1999.
16
SCHOLASTIC CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
================================================================================
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management does not consider the impact of currency fluctuations to represent a
significant risk. The Company does not generally enter into derivative financial
instruments for material amounts, nor are such instruments used for speculative
purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The majority of the Company's long-term debt bears interest
at a fixed rate. However, the fair market value of the fixed rate debt is
sensitive to changes in interest rates. The Company is subject to the risk that
market interest rates will decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. The Company does not
generally utilize interest rate derivative instruments to manage its exposure to
interest rate changes.
As of November 30, 1999, the balance outstanding under the facilities which have
variable rates was $94.3 million, at a weighted-average interest rate of 6.2%. A
15% increase or decrease in the average cost of the Company's variable rate debt
under the facility would not have a significant impact on the Company's results
of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
17
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
================================================================================
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on September 15, 1999
(the "Meeting"). The following sets forth the results of the proposals presented
at the Meeting voted upon by the stockholders of the Company entitled to vote
thereon:
Holders of the 828,100 shares of Class A Stock (comprising all outstanding
shares of Class A Stock) unanimously voted in favor of:
o Setting the number of directors constituting the Board of Directors
at thirteen until the next annual meeting of the stockholders;
o Electing Richard Robinson, Rebeca M. Barrera, Helen V. Benham,
Charles T. Harris III, Andrew S. Hedden, Mae C. Jemison, Linda B.
Keene, Olaf Olafsson, Augustus K. Oliver and Richard M. Spaulding as
directors to serve until the next annual meeting of stockholders and
until their successors are duly elected and qualified;
o Ratifying the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending May 31, 2000; and
o Approving the Scholastic Corporation Executive Performance Incentive
Plan.
With respect to all matters voted on by the holders of the Class A Stock at the
meeting, broker non-votes were not applicable since no shares are held by
brokers.
Holders of the Common Stock elected the following three nominees as directors to
serve until the next annual meeting of stockholders and until their successors
are duly elected and qualified. Votes cast by holders of the Common Stock were
as follows:
Nominee For Withheld
Ramon C. Cortines 13,125,227 16,239
Peter Mayer 13,125,532 15,934
John G. McDonald 13,125,352 16,114
With respect to the matter voted on by the holders of the Common Stock,
abstentions or broker non-votes were not applicable.
18
SCHOLASTIC CORPORATION
================================================================================
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
10.7 Scholastic Corporation Management Stock Purchase Plan, Amended and
Restated, effective as of December 15, 1999
27.1 Financial Data Schedule for the six months ended November 30, 1999
(b) Reports on Form 8-K filed during the quarter: none.
- --------------------------------------------------------------------------------
19
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: January 14, 2000 /s/ Richard Robinson
-------------------------------
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: January 14, 2000 /s/ Kevin J. McEnery
-------------------------------
Kevin J. McEnery
Executive Vice President and
Chief Financial Officer
20
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
Number Description of Document
------ -----------------------
10.7 Scholastic Corporation Management Stock Purchase Plan, Amended and
Restated, effective as of December 15, 1999
27.1 Financial Data Schedule for the quarter ended November 30, 1999
- --------------------------------------------------------------------------------