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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Number of shares outstanding
of each class as of September 30, 2002
------------- ------------------------
Common Stock, $.01 par value 37,459,860
Class A Stock, $.01 par value 1,656,200
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2002
INDEX
- --------------------------------------------------------------------------------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three Months Ended August 31, 2002 and 2001 1
Condensed Consolidated Balance Sheets at August 31, 2002
and 2001, and May 31, 2002 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended August 31, 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 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
CERTIFICATIONS 30
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
AUGUST 31,
- ---------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
REVENUES $306.9 $306.1
Operating costs and expenses:
Cost of goods sold 160.2 159.5
Selling, general and administrative expenses 178.0 161.0
Bad debt expense 18.3 19.5
Depreciation and amortization 10.6 7.8
Litigation and related charges 1.9 -
- ---------------------------------------------------------------------------------------------------
Total operating costs and expenses 369.0 347.8
OPERATING LOSS (62.1) (41.7)
Interest expense, net 7.6 8.0
- ---------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of accounting change (69.7) (49.7)
Benefit from income taxes 25.1 17.9
- ---------------------------------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (44.6) (31.8)
Cumulative effect of accounting change (net of income taxes of $2.9) - (5.2)
- ---------------------------------------------------------------------------------------------------
NET LOSS $(44.6) $(37.0)
===================================================================================================
BASIC AND DILUTED LOSS PER SHARE OF CLASS A STOCK AND COMMON STOCK:
Loss before cumulative effect of accounting change $(1.14) $(0.90)
Cumulative effect of accounting change $ - $(0.15)
------------------------------------------------------------------------------------------------
Net loss $(1.14) $(1.05)
===================================================================================================
===================================================================================================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------
AUGUST 31, 2002 MAY 31, 2002 AUGUST 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7.6 $10.7 $9.5
Accounts receivable, net 236.3 243.8 228.5
Inventories 445.3 359.5 427.3
Deferred promotion costs 45.1 44.6 43.7
Deferred income taxes 105.7 81.3 110.6
Prepaid and other current assets 64.1 58.4 61.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 904.1 798.3 880.8
Property, plant and equipment, net 323.3 301.4 267.3
Prepublication costs 110.0 113.6 104.2
Production costs 12.4 9.1 7.8
Goodwill 257.6 256.2 227.1
Other intangibles 63.8 63.8 64.0
Other assets and deferred charges 121.8 94.3 70.8
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,793.0 $1,636.7 $1,622.0
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and short-term debt $74.2 $23.5 $381.1
Accounts payable 185.0 134.3 207.5
Accrued royalties 54.3 38.5 58.3
Deferred revenue 24.1 16.2 23.5
Other accrued expenses 94.7 117.7 102.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 432.3 330.2 772.6
NONCURRENT LIABILITIES:
Long-term debt 625.2 525.8 339.4
Other noncurrent liabilities 60.3 61.8 49.1
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 685.5 587.6 388.5
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 0.4 0.3
Additional paid-in capital 376.2 373.7 232.8
Deferred compensation (1.5) (0.4) (0.5)
Accumulated other comprehensive loss (27.9) (27.4) (13.7)
Retained earnings 328.0 372.6 242.1
Less shares of Common Stock in treasury - - (0.1)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 675.2 718.9 460.9
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,793.0 $1,636.7 $1,622.0
======================================================================================================================
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
================================================================================
THREE MONTHS ENDED
AUGUST 31,
- ---------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (75.3) $(73.2)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (34.6) (17.2)
Equity investment and advance (22.5) -
Prepublication costs (8.4) (11.4)
Royalty advances (7.2) (7.0)
Production costs (2.0) (2.9)
Acquisition related payments - (4.1)
Other 0.0 (5.6)
- ---------------------------------------------------------------------------------
Net cash used in investing activities (74.7) (48.2)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 267.9 191.8
Repayments of Loan Agreement and Revolver (122.7) (87.9)
Borrowings under Grolier Facility 50.0 -
Repayment of Grolier Facility (50.0) -
Borrowings under lines of credit 20.7 41.6
Repayments of lines of credit (20.2) (30.8)
Proceeds pursuant to employee stock plans 1.2 1.3
Other - 1.1
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 146.9 117.1
- ---------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3.1) (4.3)
Cash and cash equivalents at beginning of period 10.7 13.8
- ---------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7.6 $9.5
=================================================================================
=================================================================================
SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
================================================================================
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements consist of the
accounts of Scholastic Corporation and all wholly-owned subsidiaries
("Scholastic" or the "Company"). 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 Annual Report on Form 10-K for the fiscal year ended May
31, 2002.
The Company's business is closely correlated to the school year.
Consequently, the results of operations for the three months ended August 31,
2002 and 2001 are not necessarily indicative of the results expected for the
full year. Due to the seasonal fluctuations that occur, the August 31, 2001
condensed consolidated balance sheet is included for comparative purposes.
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 involves the use of
estimates and assumptions by management which 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, all of which are necessary in order to form a basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from those estimates and assumptions. On an on-going basis, the
Company evaluates the adequacy of its reserves and the estimates used in
their calculations including, but not limited to: collectability of accounts
receivable; sales returns; amortization periods; and recoverability of
inventories, deferred promotion costs, prepublication costs, royalty
advances, goodwill and other intangibles.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation. Additionally, in November 2001, the Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products." The issue addresses
the recognition, measurement and income statement classification of sales
incentives or other consideration, free or discounted product or services and
cash given by a vendor to a customer. The Company adopted the provisions of
EITF Issue No. 01-9 for fiscal 2002. This adoption resulted in a
reclassification of Selling, general and administrative expenses to Cost of
goods sold totaling $6.8 in the three months ended August 31, 2001, with no
change to reported net income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to adopt this
statement by the first quarter of fiscal 2004. The Company does not expect
that the adoption of SFAS No. 143 will have a material impact on its
financial position, results of operations or cash flows.
4
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement supercedes the guidance provided by the EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect that the adoption of SFAS No. 146 will have a material impact on its
financial position, results of operations or cash flows.
2. ACQUISITIONS
FISCAL 2002 ACQUISITIONS
During fiscal 2002, the Company completed the acquisitions of the stock or
assets of the following companies: Troll Book Fairs Inc., a national
school-based book fair operator; Tom Snyder Productions, Inc., a developer
and publisher of interactive educational software and producer of television
programming; Sandvik Publishing Ltd., d/b/a Baby's First Book Club-Registered
Trademark-, a direct marketer of age-appropriate books and toys for young
children; Klutz, a publisher and creator of "books plus" products for
children; Teacher's Friend Publications, Inc., a producer and marketer of
materials that teachers use to decorate their classrooms; and Nelson B.
Heller & Associates, a publisher of business-to-business newsletters. The
aggregate purchase price for these acquisitions, net of cash received, was
$66.7 and the related goodwill and other intangibles was $35.9. In addition
to the initial purchase price paid for Klutz of $42.8, additional payments of
up to $31.3 may be made to the seller in 2004 and 2005, contingent upon the
achievement of certain revenue thresholds. The assets and liabilities of each
business acquired as of the date of acquisition were adjusted to their fair
values, with the excess purchase price over the fair market value assigned to
goodwill.
The following summarizes the allocation of the initial purchase price of the
fiscal 2002 acquisitions:
========================================================
VALUE
========================================================
Accounts receivable $ 8.0
Inventory 8.6
Other current assets 6.4
Property, plant and equipment 1.2
Goodwill and other intangibles 35.9
Noncurrent deferred taxes 18.6
Other assets 0.4
Current liabilities (12.4)
--------------------------------------------------------
CASH PAID FOR ACQUISITIONS, NET OF CASH RECEIVED $ 66.7
========================================================
The allocation of the aggregate purchase price is preliminary and will be
finalized during fiscal 2003. Future adjustments to the purchase price
allocation are not expected to be material. The operating results of each
fiscal 2002 acquisition have been included in the Company's consolidated
results of operations since the respective dates of acquisition. The effect on
operating results of including the acquired business operations on a pro forma
basis would not be material.
5
In connection with the fiscal 2002 acquisitions, the Company has established
liabilities of $3.2 at May 31, 2002, relating primarily to severance and
other exit costs. As of August 31, 2002, $2.5 of these liabilities remain
unpaid. Payment of these liabilities will be made principally in fiscal 2003.
FISCAL 2001 ACQUISITION - GROLIER
On June 22, 2000, Scholastic Inc., a subsidiary of Scholastic Corporation,
acquired all of the issued and outstanding capital stock of Grolier Incorporated
("Grolier"), a Delaware corporation. In connection with the Grolier acquisition,
the Company established a plan for integrating Grolier's operations.
Accordingly, the Company established liabilities of approximately $17.7 relating
primarily to severance, fringe benefits and related salary continuance, as well
as certain exit costs associated with the integration of certain of Grolier's
operational and administrative functions. This amount, originally established at
$12.4, was increased at May 31, 2001 by $5.3 as the Company refined its estimate
of the costs of the integration plan. At May 31, 2002, the established
liabilities for integration costs were in excess of the expected costs related
to severance and other exit costs by $2.1, resulting in a decrease in the
recorded liabilities and a reduction of Selling, general and administrative
expenses, which are reflected in the table below. As of August 31, 2002, $3.5 of
these liabilities remained unpaid and will be settled over the next three years.
A summary of the activity in the established liabilities is detailed in the
following table:
========================================================================================
SEVERANCE AND OTHER EXIT
RELATED COSTS COSTS TOTAL
========================================================================================
Liabilities established at acquisition $13.3 $4.4 $17.7
Fiscal 2001 payments (1.8) (1.2) (3.0)
- ----------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2001 11.5 3.2 14.7
Fiscal 2002 payments (7.3) (0.7) (8.0)
Fiscal 2002 adjustment (1.2) (0.9) (2.1)
- ----------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 3.0 1.6 4.6
Fiscal 2003 payments (1.0) (0.1) (1.1)
- ----------------------------------------------------------------------------------------
BALANCE AT AUGUST 31, 2002 $2.0 $1.5 $ 3.5
========================================================================================
3. INVESTMENT AND ADVANCE
On June 24, 2002, the Company entered into a joint venture with The Book
People, Ltd., a direct marketer of books in the United Kingdom, to distribute
books to the home under the Red House name and through schools under the
Scholastic School Link name. The Company also acquired a 15% equity interest
in The Book People Group, Ltd. for 12.0 Pounds Sterling (equivalent to $17.9
as of the date of the transaction) with a possible additional payment of 3.0
Pounds Sterling based on operating results and contingent on repayment of all
borrowings under a 3.0 Pounds Sterling revolving credit facility established
at the date of the transaction by the Company in favor of The Book People
Group, Ltd. The revolving credit facility will be used to fund the expansion
of The Book People and for working capital purposes. As of August 31, 2002,
3.0 Pounds Sterling (equivalent to $4.6) was outstanding under the revolving
credit facility.
6
4. SEGMENT INFORMATION
The Company is a global children's publishing and media company with
operations in the United States, the United Kingdom, Canada, Australia, New
Zealand, Mexico, Hong Kong, India, Ireland, Argentina and Southeast Asia and
distributes its products and services through a variety of channels,
including school-based book clubs, school-based book fairs, school-based and
direct-to-home continuity programs, retail stores, schools, libraries,
television networks and the Internet.
The Company categorizes its businesses into four operating segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING (which collectively represent the Company's
domestic operations); and INTERNATIONAL. This 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.
- - 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.
- - EDUCATIONAL PUBLISHING includes the publication and distribution to schools
and libraries of curriculum materials, classroom magazines and print and
on-line reference and non-fiction products for Kindergarten through grade 12
in the United States.
- - MEDIA, LICENSING AND ADVERTISING includes the production and/or
distribution in the United States of software and 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).
- - INTERNATIONAL includes the publication and distribution of products and
services outside the United States by the Company's international operations,
and its export and foreign rights businesses.
7
The following table sets forth information for the periods indicated for the
Company's segments. Certain prior year amounts have been reclassified to
conform with the current year presentation, including certain segment
classifications.
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING OVERHEAD (1) DOMESTIC INTERNATIONAL CONSOLIDATED
==================================================================================================================================
THREE MONTHS ENDED
AUGUST 31, 2002
==================================================================================================================================
Revenues $140.2 $ 88.0 $ 17.1 $ 0.0 $ 245.3 $ 61.6 $ 306.9
Bad debt 15.8 0.2 0.3 0.0 16.3 2.0 18.3
Depreciation 1.8 0.4 1.6 5.5 9.3 1.2 10.5
Amortization (2) 4.3 6.7 2.4 0.0 13.4 0.0 13.4
Royalty advances expensed 3.4 0.3 0.0 0.0 3.7 0.0 3.7
Segment profit/(loss) (3) (39.2) 12.7 (10.4) (22.0) (58.9) (3.2) (62.1)
Segment assets 753.0 296.2 72.8 424.0 1,546.0 247.0 1,793.0
Goodwill 129.7 82.9 10.0 0.0 222.6 35.0 257.6
Long-lived assets (4) 282.5 178.9 45.3 245.8 752.5 94.1 846.6
Expenditures for
long-lived assets (5) 15.1 3.4 4.8 26.5 49.8 20.3 70.1
==================================================================================================================================
THREE MONTHS ENDED
AUGUST 31, 2001
==================================================================================================================================
Revenues $141.1 $ 91.7 $ 18.3 $ 0.0 $ 251.1 $ 55.0 $ 306.1
Bad debt 17.0 0.2 0.8 0.0 18.0 1.5 19.5
Depreciation 1.3 0.4 0.9 3.9 6.5 1.1 7.6
Amortization (2) 4.2 6.3 1.3 0.0 11.8 0.0 11.8
Royalty advances expensed 4.0 0.3 0.1 0.0 4.4 0.0 4.4
Segment profit/(loss) (3) (28.3) 15.5 (8.8) (17.5) (39.1) (2.6) (41.7)
Segment assets 709.5 284.1 65.1 344.4 1,403.1 218.9 1,622.0
Goodwill 113.5 71.3 8.4 0.0 193.2 33.9 227.1
Long-lived assets (4) 252.3 165.6 35.6 201.9 655.4 72.2 727.6
Expenditures for
long-lived assets (5) 20.5 6.7 6.5 7.4 41.1 1.5 42.6
(1) OVERHEAD INCLUDES ALL DOMESTIC CORPORATE AMOUNTS NOT ALLOCATED TO REPORTABLE
SEGMENTS, WHICH INCLUDES UNALLOCATED EXPENSES AND COSTS RELATED TO THE
MANAGEMENT OF CORPORATE ASSETS. THE THREE MONTHS ENDED AUGUST 31, 2002
INCLUDES $1.9 FOR THE SETTLEMENT OF A SECURITIES LAWSUIT INITIATED IN
1997. 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 ARKANSAS, AND AN INDUSTRIAL/OFFICE
BUILDING COMPLEX IN CONNECTICUT.
(2) INCLUDES AMORTIZATION OF PREPUBLICATION COSTS, PRODUCTION COSTS AND OTHER
INTANGIBLES WITH DEFINITE LIVES.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND INCOME
TAXES. THE THREE MONTHS ENDED AUGUST 31, 2001 EXCLUDES THE CUMULATIVE
AFTER-TAX EFFECT OF ACCOUNTING CHANGE OF $5.2 ($0.15 PER DILUTED SHARE)
RELATED TO THE MEDIA, LICENSING AND ADVERTISING SEGMENT.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES, ROYALTY ADVANCES, PRODUCTION COSTS AND LONG-TERM
INVESTMENTS.
(5) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, ROYALTY ADVANCES AND ACQUISITIONS
OF, AND INVESTMENTS IN, BUSINESSES.
8
The following table separately sets forth information for the periods
indicated for the U.S. direct-to-home continuity business formerly operated
by Grolier, which is included in the CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION segment, and for all other businesses included in the segment:
============================================================
THREE MONTHS ENDED AUGUST 31,
============================================================
Direct-to-home All Other Total
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Revenues $50.5 $56.8 $89.7 $84.3 $140.2 $141.1
Bad debt 11.3 13.3 4.5 3.7 15.8 17.0
Depreciation 0.2 0.1 1.6 1.2 1.8 1.3
Amortization (1) 0.3 0.2 4.0 4.0 4.3 4.2
Royalty advances expensed 0.0 0.0 3.4 4.0 3.4 4.0
Business profit (2) 1.8 4.5 (41.0) (32.8) (39.2) (28.3)
Business assets 243.5 245.5 509.5 464.0 753.0 709.5
Goodwill 93.2 88.3 36.5 25.2 129.7 113.5
Long-lived assets (3) 142.5 137.7 140.0 114.6 282.5 252.3
Expenditures for long-lived assets (4) 0.6 0.4 14.5 20.1 15.1 20.5
(1) INCLUDES AMORTIZATION OF PREPUBLICATION COSTS AND OTHER INTANGIBLES WITH
DEFINITE LIVES.
(2) BUSINESS PROFIT REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
(3) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES AND ROYALTY ADVANCES.
(4) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION COSTS, ROYALTY ADVANCES AND ACQUISITIONS OF BUSINESSES.
5. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
=================================================================================================
AUGUST 31, 2002 MAY 31, 2002 AUGUST 31, 2001
=================================================================================================
Lines of Credit $ 24.1 $ 23.3 $ 30.0
Grolier Facility 50.0 50.0 350.0
Loan Agreement and Revolver 195.2 50.0 103.9
7% Notes due 2003, net of discount 124.9 124.9 124.9
5.75% Notes due 2007, net of discount 304.8 300.7 -
Convertible Subordinated Debentures - - 110.0
Other debt 0.4 0.4 1.7
- -------------------------------------------------------------------------------------------------
TOTAL DEBT 699.4 549.3 720.5
Less lines of credit and short-term debt (74.2) (23.5) (381.1)
- -------------------------------------------------------------------------------------------------
Total long-term debt $ 625.2 $ 525.8 $ 339.4
=================================================================================================
9
The following table sets forth the maturities and carrying values of the
Company's debt obligations as of August 31, 2002 for the remainder of fiscal
2003 and the next four fiscal years:
======================================================
MAY 31,
======================================================
Nine-month period ending: 2003 $ 24.2
Fiscal years ending: 2004 175.2
2005 195.2
2006 -
2007 304.8
----------------------
Total $ 699.4
----------------------
GROLIER FACILITY. On June 22, 2000, Scholastic, Inc. established a credit
facility to finance $350.0 of the $400.0 Grolier purchase price (the "Grolier
Facility"). The net proceeds from the issuance of the 5.75% Notes in January
2002 were used to repay a majority of the Grolier Facility (see 5.75% Notes due
2007 below). On June 21, 2002, the Grolier Facility was amended into a
revolving credit agreement, which provides for aggregate borrowings of up to
$100.0 and expires on June 20, 2003. Under these amended terms, Scholastic
Inc. is the borrower, and Scholastic Corporation is the guarantor. Borrowings
bear interest at the prime rate or 0.39% to 1.10% over LIBOR (as defined). As
amended, the Grolier Facility also provides for a facility fee ranging from
0.085% to 0.25%. The amounts charged vary based upon the Company's credit
rating. As of August 31, 2002, the interest rate and facility fee were 0.650%
over LIBOR and 0.150%, respectively. The Grolier Facility contains certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions. At August 31, 2002 and 2001,
$50.0 and $350.0, respectively, were outstanding under the Grolier Facility
at a weighted average interest rate of 2.5% and 4.6%, respectively. At May
31, 2002, $50.0 was outstanding under the Grolier Facility at a weighted
average interest rate of 2.4%.
LOAN AGREEMENT. Scholastic Corporation and Scholastic Inc. are joint and
several borrowers under an amended and restated loan agreement with certain
banks, effective August 11, 1999 and amended June 22, 2000 (the "Loan
Agreement"). The Loan Agreement, which expires on August 11, 2004, provides
for aggregate borrowings of up to $170.0 (with a right in certain
circumstances to increase borrowings to $200.0), including the issuance of up
to $10.0 in letters of credit. Interest under this facility is either at the
prime rate or 0.325% to 0.90% over LIBOR (as defined). There is a facility
fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to
0.15% if borrowings exceed 33% of the total facility. The amounts charged
vary based upon the Company's credit rating. The interest rate, facility fee
and utilization fee (when applicable) as of August 31, 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 August 31, 2002 and 2001,
$165.0 and $77.0, respectively, were outstanding under the Loan Agreement at
a weighted average interest rate of 2.5% and 4.2%, respectively. At May 31,
2002, $50.0 was outstanding under the Loan Agreement at a weighted average
interest rate of 2.7%.
10
REVOLVER. Scholastic Corporation 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"). The Revolver provides
for unsecured revolving credit 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. The interest
rate and facility fee as of August 31, 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 August 31, 2002 and 2001, $30.2 and $26.9, respectively,
were outstanding under the Revolver at a weighted average interest rate of
2.4% and 4.2%, respectively. At May 31, 2002, there were no borrowings
outstanding under the Revolver.
7% NOTES DUE 2003. On December 23, 1996, Scholastic Corporation issued $125.0
of 7% Notes (the "7% Notes"). The 7% Notes are unsecured and unsubordinated
obligations of the Company and will mature on December 15, 2003. The 7% Notes
are not redeemable prior to maturity. Interest on the 7% Notes is payable
semi-annually on December 15 and June 15 of each year.
5.75% NOTES DUE 2007. On January 23, 2002, Scholastic Corporation issued
$300.0 of 5.75% Notes (the "5.75% Notes"). The 5.75% Notes are unsecured and
unsubordinated obligations of the Company and 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 (i) 100% of the principal amount, or (ii)
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 repay the majority of the $350.0 Grolier
Facility.
INTEREST RATE SWAP AGREEMENT. On February 5, 2002, Scholastic Corporation
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," whereby the Company receives a fixed interest rate
payment based on a notional amount totaling $100.0 and pays a variable
interest rate to the counterparty, which is reset semi-annually based on
six-month LIBOR (as defined). This agreement was entered into to exchange the
fixed interest rate payments on a portion of the 5.75% Notes for variable
interest rate payments. In accordance with SFAS No. 133, the value of the
5.75% Notes was increased by $5.9 to reflect an increase in their fair value
as of August 31, 2002 and a corresponding swap asset of $5.9 was recorded in
Other assets. Under SFAS No. 133, 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 three months ended August 31,
2002.
CONVERTIBLE SUBORDINATED DEBENTURES. On August 18, 1995, Scholastic
Corporation sold $110.0 of 5.0% Convertible Subordinated Debentures due
August 15, 2005 (the "Debentures"). On January 11, 2002, pursuant to the
exercise of Scholastic Corporation's optional redemption rights, $109.8 of
the Debentures were converted at the option of the holders into 2.9 million
shares of Common Stock and $0.2 were redeemed for cash.
11
6. CONTINGENCIES
As previously reported, on February 1, 1999, two subsidiaries of the Company
commenced an action in the Supreme Court of the State Court 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. 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. Although management is unable to determine the outcome of this
case at this time, the Company does not believe that this dispute will have a
material adverse effect on its financial condition or liquidity. However, an
adverse decision in this case could result in a charge against earnings
affecting operating results.
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.
12
7. COMPREHENSIVE LOSS
The following table sets forth comprehensive loss for the periods indicated:
THREE MONTHS ENDED AUGUST 31,
===================================================================================================
2002 2001
===================================================================================================
Net loss $(44.6) $(37.0)
Other comprehensive (loss)/income (net of
provision for income taxes):
Foreign currency translation adjustment 0.9 2.7
Minimum pension liability (1.5) -
- ---------------------------------------------------------------------------------------------------
Total other comprehensive (loss)/income (0.6) 2.7
- ---------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $(45.2) $(34.3)
===================================================================================================
8. LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
Shares of Class A Stock and Common Stock outstanding during the period. The
diluted loss per share was equal to the basic loss per share for the three
months ended August 31, 2002 and 2001 because the Debentures and stock
options were antidilutive. The following table summarizes the reconciliation
of the numerators and denominators for the basic and diluted loss per share
computations for the periods indicated:
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED AUGUST 31,
====================================================================================================
2002 2001
====================================================================================================
NET LOSS $(44.6) $(37.0)
- ----------------------------------------------------------------------------------------------------
Weighted average Shares of Class A Stock and Common Stock
outstanding for basic and diluted loss per share 39.1 35.2
LOSS PER SHARE OF CLASS A STOCK AND COMMON STOCK:
Loss before cumulative effect of accounting change:
Basic and Diluted $(1.14) $(0.90)
Cumulative effect of accounting change (net of income taxes):
Basic and Diluted - (0.15)
------ ------
Net loss:
Basic and Diluted $(1.14) $(1.05)
====================================================================================================
THE EFFECT OF THE DEBENTURES FOR THE PERIOD ENDED AUGUST 31, 2001 AND THE
EFFECT OF THE SHARES ISSUABLE PURSUANT TO EMPLOYEE STOCK PLANS ON THE
WEIGHTED AVERAGE SHARES OUTSTANDING FOR DILUTED LOSS PER SHARE WERE
ANTI-DILUTIVE AND NOT INCLUDED IN THE CALCULATION.
13
9. GOODWILL AND OTHER INTANGIBLES
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective as of June 1, 2001. 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. In
fiscal 2002, the Company completed the required transitional and annual
impairment reviews of goodwill. These reviews required the Company to
estimate the fair value of its identified reporting units. For each of the
reporting units, the estimated fair value was determined utilizing the
expected present value of the projected 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.
The following table summarizes the activity in Goodwill for the periods
indicated:
======================================================================================================================
THREE MONTHS ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, 2002 MAY 31, 2002 AUGUST 31, 2001
======================================================================================================================
Beginning balance $256.2 $221.9 $221.9
Additions due to acquisitions - 35.4 4.1
Other adjustments 1.4 (1.1) 1.1
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $257.6 $256.2 $227.1
======================================================================================================================
The following table summarizes Other intangibles subject to amortization at the dates indicated:
======================================================================================================================
AUGUST 31, 2002 MAY 31, 2002 AUGUST 31, 2001
======================================================================================================================
Customer lists $2.8 $2.8 $2.2
Accumulated amortization (2.3) (2.2) (1.5)
- ----------------------------------------------------------------------------------------------------------------------
Net customer lists $0.5 $0.6 $0.7
Other intangibles 3.9 3.9 2.2
Accumulated amortization (2.1) (2.1) (1.3)
- ----------------------------------------------------------------------------------------------------------------------
Net other intangibles $1.8 $1.8 $0.9
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $2.3 $2.4 $1.6
======================================================================================================================
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
======================================================================================================================
AUGUST 31, 2002 MAY 31, 2002 AUGUST 31, 2001
======================================================================================================================
Net carrying value by major class:
Titles $31.0 $31.0 $31.0
Licenses 17.2 17.2 17.2
Major sets 11.4 11.4 11.4
Trademarks and Other 1.9 1.8 2.8
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $61.5 $61.4 $62.4
======================================================================================================================
Amortization expense for Other intangibles subject to amortization totaled $0.1
and $0.2 for the three months ended August 31, 2002 and 2001, respectively, and
$1.0 for the twelve months ended May 31, 2002. Amortization expense for these
assets is currently estimated to total $0.5 for the fiscal year ending May 31,
2003, $0.3 for each of the fiscal years ending May 31, 2004 through 2006, and
$0.2 for the fiscal year ending May 31, 2007. The weighted average amortization
periods for these assets by major asset class are 3 years and 14 years for
customer lists and other intangibles, respectively.
14
10. 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. The costs of producing a
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 net of tax charge of $5.2 in the first quarter of the prior
fiscal year 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.
11. LITIGATION AND RELATED CHARGES
On September 23, 2002, the Company announced that it had agreed in principle to
settle a class action lawsuit initiated in 1997, captioned In re Scholastic
Corporation Securities Litigation, 97 Civ. 2447 (JFK). The settlement agreement,
which is subject to court approval, resulted in a pre-tax charge of $1.9, which
represents the portion of the total settlement amount of $7.5 that is not being
paid by the insurance carrier.
15
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("MD&A")
================================================================================
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended August 31, 2002 of $306.9 million increased
slightly as compared with revenues of $306.1 million in the first quarter of the
prior fiscal year. In the first quarter of fiscal 2003, INTERNATIONAL segment
revenues increased $6.6 million to $61.6 million. This increase was partially
offset by an anticipated decrease in revenues from the EDUCATIONAL PUBLISHING
segment of $3.7 million to $88.0 million, a decrease in revenues from the MEDIA,
LICENSING AND ADVERTISING segment of $1.2 million to $17.1 million and a
decrease in revenues from the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
segment of $0.9 million to $140.2 million. In the current year quarter,
businesses acquired in fiscal 2002 contributed $20.3 million of revenues to the
Company.
Cost of goods sold as a percentage of revenues increased slightly to 52.2% in
the quarter ended August 31, 2002 from 52.1% in the prior year quarter.
Selling, general and administrative expenses increased $17.0 million to $178.0
million for the quarter ended August 31, 2002 from the prior year quarter. This
increase principally related to: expenses resulting from the fiscal 2002
acquisitions of $7.3 million, payroll related increases of $4.1 million to
support anticipated business growth, and marketing increases of approximately
$3 million.
Bad debt expense decreased to $18.3 million or 6.0% of revenues for the quarter
ended August 31, 2002, compared to $19.5 million or 6.4% of revenues in the
prior year quarter. This decrease was primarily attributable to better credit
performance in the direct-to-home continuity business.
Depreciation and amortization for the quarter ended August 31, 2002 increased to
$10.6 million from $7.8 million in the prior year quarter. This increase was due
to incremental depreciation of $1.2 million relating to information technology
projects, including Internet sites placed into service in fiscal 2002, and
incremental depreciation of $0.8 million due to the expansion of the Company's
facilities in metropolitan New York in fiscal 2002.
In the quarter ended August 31, 2002, the Company recorded a $1.9 million
pre-tax charge, reflected in Litigation and related charges, due to the
settlement of a securities lawsuit initiated in 1997. The after-tax impact on
loss per diluted share of this charge was $0.03.
The resulting operating loss for the quarter ended August 31, 2002 increased to
$62.1 million compared to an operating loss of $41.7 million in the year ago
period.
Net interest expense decreased to $7.6 million in the first quarter of fiscal
2003 from $8.0 million in the year ago quarter, primarily due to lower interest
rates in the current year period.
In the first quarter of the prior fiscal year, the Company adopted Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers and Distributors of
Films." As a result, the Company recorded an after-tax charge of $5.2 million or
$0.15 per share in the quarter ending August 31, 2001, which was reflected as a
Cumulative effect of accounting change. (See Note 10 in the Notes to Condensed
Consolidated Financial Statements.)
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Net loss for the quarter ended August 31, 2002 was $44.6 million, or $1.14 per
diluted share, compared to $37.0 million, or $1.05 per diluted share, in the
prior year quarter.
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.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2002 2001
=======================================================================
Revenue $140.2 $141.1
Operating loss (39.2) (28.3)
- -----------------------------------------------------------------------
OPERATING MARGIN * *
* NOT MEANINGFUL
The following table highlights the results of the direct-to-home continuity
business formerly operated by Grolier, which is included in the CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION segment.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2002 2001
=======================================================================
Revenue $50.5 $56.8
Operating profit 1.8 4.5
- -----------------------------------------------------------------------
OPERATING MARGIN 3.6% 7.9%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
quarter ended August 31, 2002 decreased slightly to $140.2 million compared to
$141.1 million in the prior fiscal year quarter. The $0.9 million decrease in
segment revenues over the prior fiscal year quarter relates mainly to lower
revenues for the Company's continuity businesses of $8.5 million, primarily due
to the direct-to-home business, and decreases in school-based book clubs and
book fairs of $1.6 million and $1.3 million, respectively, during the period in
which schools generally are not in session. These decreases were largely offset
by higher trade sales of $10.4 million, reflecting the inclusion of $11.1
million of revenues from the acquisition of Klutz in April 2002. Businesses
acquired in fiscal 2002 contributed revenues of $14.6 million to this segment
for the quarter ended August 31, 2002. Excluding the direct-to-home continuity
business, segment revenues for the quarter increased by $5.4 million to $89.7
million compared to the prior year quarter. Revenues for the direct-to-home
continuity business decreased 11.1% to $50.5 million compared to the prior year
quarter, reflecting the planned elimination of less profitable marketing
programs.
17
Segment operating loss for the quarter increased $10.9 million to $39.2 million
from the prior year quarter. This increase was related mainly to lower operating
results for the school-based book fairs and continuity businesses of $6.1
million and $4.8 million, respectively, in the current year quarter compared to
the prior year. The higher school-based book fairs operating loss was
substantially due to a planned increase in operating costs to support business
growth during the upcoming school year. Operating profit for the school-based
continuity programs decreased by $2.1 million, reflecting expected decreased
sales resulting from lower prior year enrollments. Excluding the direct-to-home
continuity business, the operating loss for the quarter increased to $41.0
million from $32.8 million in the prior year period. Operating profit for the
direct-to-home continuity business decreased by $2.7 million in the current year
quarter to $1.8 million from the prior year quarter, reflecting planned lower
revenues. Direct-to-home continuity operating margins declined due to lower
sales from prior period enrollments, partially offset by savings in promotion
and bad debt expense.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of curriculum materials, classroom
magazines and print and on-line reference and non-fiction products for
Kindergarten through grade 12 in the United States.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2002 2001
=======================================================================
Revenue $88.0 $91.7
Operating profit 12.7 15.5
- -----------------------------------------------------------------------
OPERATING MARGIN 14.4% 16.9%
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter ended August 31,
2002 decreased by $3.7 million or 4.0% to $88.0 million, compared to $91.7
million in the comparable quarter of the prior year. This decrease was due to
anticipated lower revenues from SCHOLASTIC LITERACY PLACE-REGISTERED TRADEMARK-
of $8.2 million as a result of the Company's previously announced decision not
to update this product and the prior year revenue of $5.0 million from a sale of
educational materials to the New York City schools. These decreases were
partially offset by increased revenues from READ 180-REGISTERED TRADEMARK- of
$9.1 million.
Operating profit for this segment for the first quarter decreased by $2.8
million over the comparable prior year period, primarily due to increased
marketing and administrative expenses of $4.2 million, of which $2.4 million
related to the prior year acquisitions of Tom Snyder Productions, Inc. and
Teacher's Friend Publications, Inc. This increase was partially offset by higher
gross margins of $1.5 million, due to an improved sales mix.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software and 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).
18
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2002 2001
=======================================================================
Revenue $17.1 $18.3
Operating loss (10.4) (8.8)
- -----------------------------------------------------------------------
OPERATING MARGIN * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased $1.2 million or 6.6% to
$17.1 million for the quarter ended August 31, 2002 compared to $18.3 million in
the prior year quarter. The revenue decrease was primarily attributable to SEI's
lower merchandising sales of $1.8 million and lower software revenue of $1.2
million, partially offset by $1.2 million of incremental television programming
revenue due to the acquisition of Tom Snyder Productions, Inc.
For the quarter ended August 31, 2002, segment operating loss was $10.4 million,
compared to a loss of $8.8 million in the prior year quarter. The increased
operating loss in the current year quarter was principally due to the lower
merchandising revenues.
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 export and foreign rights businesses.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2002 2001
=======================================================================
Revenue $61.6 $55.0
Operating loss (3.2) (2.6)
- -----------------------------------------------------------------------
OPERATING MARGIN * *
* - NOT MEANINGFUL
INTERNATIONAL revenues increased by $6.6 million or 12.0% to $61.6 million for
the quarter ended August 31, 2002 from $55.0 million in the year ago quarter.
This increase was due primarily to higher revenues in Canada of $1.7 million and
Australia of $1.1 million, as well as the favorable impact of foreign currency
exchange rates of $1.8 million.
For the quarter ended August 31, 2002, operating loss increased to $3.2 million
from $2.6 million, primarily attributable to the impact of foreign currency
exchange rates during a loss period.
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 generally are 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 greatest in the second quarter of the fiscal year, while revenues from the
sale of instructional materials are highest in the first quarter.
19
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 $3.1 million during the
quarter ended August 31, 2002, compared to a decrease of $4.3 million during the
comparable period in the prior year.
Cash flow used in operations was $75.3 million for the quarter ended August 31,
2002, resulting from the current year fiscal quarter's net increases in working
capital requirements of $58.4 million and net loss adjusted for non-cash
items of $16.9 million.
Cash used for investing activities was $74.7 million for the quarter. The
spending principally consisted of capital expenditures and an investment in
and an advance to The Book People Group, Ltd. Capital expenditures totaled
$34.6 million for the first quarter of fiscal 2003, an increase of $17.4
million over the same period in fiscal 2002 largely as result of the
acquisition of a warehouse facility in Maumelle, Arkansas in June 2002.
Investment expenditures totaled $22.5 million due to the Company's equity
investment in The Book People Group, Ltd. in June 2002 of 12.0 million Pounds
Sterling (equivalent to $17.9 million as of the date of the transaction) and
a related credit facility of 3.0 million Pounds Sterling, which was fully
drawn down at August 31, 2002 (equivalent to $4.6 million).
The Company believes its existing cash position, combined with funds generated
from operations and available under the Loan Agreement, the Revolver and the
amended Grolier Facility, each as defined below, will be sufficient to finance
its ongoing working capital requirements. The Company anticipates refinancing
its debt obligations prior to their respective maturity dates, to the extent not
paid through free cash flow.
FINANCING
On January 11, 2002, pursuant to the exercise of Scholastic Corporation's
optional redemption rights, $109.8 million of the Company's 5.0% Convertible
Subordinated Debentures were converted at the option of the holders into 2.9
million shares of Common Stock and $0.2 million were redeemed for cash.
On January 23, 2002, Scholastic Corporation 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 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 (i) 100% of the principal amount, or (ii) 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
repay the majority of the $350.0 million facility established in connection
with the acquisition of Grolier (the "Grolier Facility").
On June 21, 2002, the Grolier Facility was amended into a revolving credit
agreement, providing for aggregate borrowings of up to $100.0 million and
expiring June 20, 2003. Under these amended terms, Scholastic Inc., a subsidiary
of Scholastic Corporation, is the borrower and Scholastic Corporation is the
guarantor. Borrowings bear interest at the prime rate or 0.39% to 1.10% over
LIBOR (as defined). As amended, the Grolier Facility also provides for a
facility fee ranging from 0.085% to 0.25%. The amounts charged vary based upon
the Company's credit rating. As of August 31, 2002, the interest rate and
facility fee were 0.650% over
20
LIBOR and 0.150%, respectively. The Grolier Facility contains certain financial
covenants related to debt and interest coverage ratios (as defined) and limits
dividends and other distributions. At August 31, 2002 and 2001, $50.0 million
and $350.0 million, respectively, were outstanding under the Grolier Facility at
a weighted average interest rate of 2.5% and 4.6%, respectively. At May 31,
2002, $50.0 million was outstanding under the Grolier Facility at a weighted
average interest rate of 2.4%.
On February 5, 2002, Scholastic Corporation entered into an interest rate swap
agreement, designated as a fair value hedge as defined under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," whereby the Company receives a fixed
interest rate payment based on a notional amount totaling $100.0 million and
pays a variable interest rate to the counterparty, which is reset semi-annually
based on six-month LIBOR (as defined). This agreement was entered into to
exchange the fixed interest rate payments on a portion of the 5.75% Notes for
variable interest rate payments. Under SFAS No. 133, 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 three months ended August
31, 2002.
Scholastic Corporation 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
million (with a right in certain circumstances to increase borrowings to $200.0
million), including the issuance of up to $10.0 million in letters of credit.
Interest under this facility is either at the prime rate or 0.325% to 0.90% over
LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the
total facility. The amounts charged vary based upon the Company's credit rating.
The interest rate, facility fee and utilization fee (when applicable) as of
August 31, 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
August 31, 2002 and 2001, $165.0 million and $77.0 million, respectively, were
outstanding under the Loan Agreement at a weighted average interest rate of 2.5%
and 4.2%, respectively. At May 31, 2002, $50.0 million was outstanding under the
Loan Agreement at a weighted average interest rate of 2.7%.
Scholastic Corporation 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"). The Revolver provides for unsecured revolving
credit of up to $40.0 million 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. The interest rate and
facility fee as of August 31, 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 August 31, 2002 and 2001, $30.2 million and $26.9 million,
respectively, were outstanding under the Revolver at a weighted average interest
rate of 2.4% and 4.2%, respectively. At May 31, 2002, there were no borrowings
outstanding under the Revolver.
In addition, unsecured lines of credit available in local currencies to the
Company's international subsidiaries were equivalent to $53.9 million at August
31, 2002. These lines are used primarily to fund local working capital needs. At
August 31, 2002, borrowings equivalent to $24.1 million were outstanding under
these lines of credit at a weighted average interest rate of 5.7%.
21
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements. These
forward-looking statements 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 this Report, in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2002, and from time to time in the
Company's other filings with the Securities and Exchange Commission. Actual
results could differ materially from those currently anticipated.
22
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 does not represent
a significant risk in the context of the Company's current international
operations. In the normal course of business, the Company's non-U.S. operations
enter into short-term forward contracts (generally not exceeding $15.0 million)
to match purchases not denominated in their respective local currencies.
Market risks relating to the Company's operations result primarily from changes
in interest rates, which are managed by balancing the mix of variable- versus
fixed-rate borrowings. Additionally, financial instruments, including swap
agreements, are used to hedge exposure to changes in interest rates.
Approximately 53% of the Company's debt at August 31, 2002 bore interest at a
variable rate and was sensitive to changes in interest rates compared to
approximately 40% at May 31, 2002, with the increase due to seasonal borrowings.
The Company is subject to the risk that market interest rates will increase and
thereby increase the interest rates currently being charged under the
variable-rate debt.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following table sets forth information about the Company's debt and other
interest rate sensitive instruments as of August 31, 2002 (see Note 5 of Notes
to Condensed Consolidated Financial Statements):
($ amounts in millions) FISCAL YEAR MATURITY
--------------------------------------------------------
DEBT OBLIGATIONS 2003 2004 2005 2006 2007 TOTAL
Lines of credit $ 24.1 $ - $ - $ - $ - $ 24.1
Average interest rate 5.71%
Long-term debt including current portion:
Fixed rate debt $ - $125.0 $ - $ - $300.0 $425.0
Average interest rate 7.00% 5.75%
Variable rate debt $ 0.1 $ 50.0 $195.2 $ - $ - $245.3
Average interest rate 5.00% 2.47% 2.47%
- -----------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest rate swaps:
Notional amount $ - $ - $ - $ - $100.0 $100.0
Average variable pay rate 2.70%
Average fixed receive rate 5.75%
- -----------------------------------------------------------------------------------------------------
23
SCHOLASTIC CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
================================================================================
The Chief Executive Officer and Chief Financial Officer of the Company, after
conducting an evaluation, together with other members of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days of the filing of
this report, have concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in its reports filed or submitted under the Securities Exchange Act
of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission (the "SEC"). There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to that evaluation, and there were no significant or
material weaknesses in such controls requiring corrective actions.
24
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 1. LEGAL PROCEEDINGS
================================================================================
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, In re Scholastic Corporation Securities Litigation, 97 Civ.
2447 (JFK), on behalf of all persons who purchased 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. On September 23, 2002, the Company announced that, although it
believed that it had acted appropriately at all times, it had agreed in
principle to settle this action in order to resolve the matter, along with the
attendant legal fees and the uncertainties of litigation. The settlement
agreement, which is subject to court approval, provides for a settlement amount
of $7.5 million, approximately $1.9 million of which is to be paid by the
Company and the remainder to be paid by its insurance carrier.
25
SCHOLASTIC CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
================================================================================
On August 19, 2002, the holders of the 1,656,200 shares of Class A Stock, $.01
par value (comprising all outstanding shares of Class A Stock), unanimously
approved by written consent an action to fix the number of directors
constituting the full Board of Directors at 12, effective as of September 24,
2002, the date of the Company's Annual Meeting of Stockholders. The Amended and
Restated Certificate of Incorporation of the Company provides that the holders
of shares of Class A Stock, voting as a class, have the right to fix the size of
the Board of Directors so long as it does not consist of less than three nor
more than 15 directors.
26
SCHOLASTIC CORPORATION
ITEM 5. OTHER INFORMATION
================================================================================
PRE-APPROVAL OF NON-AUDIT SERVICES
In accordance with Section 10A(i)(2) of the Exchange Act, the Audit Committee
of the Board of Directors of the Company has pre-approved the provision of
certain tax advice to the Company by its independent auditors, Ernst & Young,
as permitted by subsection (g) of Section 10A.
INVESTOR RELATIONS
The Company posts on its Web site,
www.scholastic.com/aboutscholastic/investor/index.htm, the date of its upcoming
financial press releases and telephone analyst calls at least five days prior to
dissemination. The Company's analyst calls are open to the public and remain
available to the public through the Company's Web site for at least five days
thereafter.
27
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(b) Reports on Form 8-K
During the three month period ended August 31, 2002, the Company filed with the
SEC the following reports:
(1) Current Report on Form 8-K, filed on August 1, 2002, reporting under Item 5
(Other Events) a press release announcing an agreement in principle to
settle a previously disclosed lawsuit.
(2) Current Report on Form 8-K, filed on August 22, 2002, reporting under Item 9
(Regulation FD Disclosure) a press release announcing the filing of
certifications regarding its Annual Report on Form 10-K for the fiscal year
ended May 31, 2002 by its Chief Executive Officer and Chief Financial
Officer in compliance with the applicable certification requirements of the
SEC and the Sarbanes-Oxley Act of 2002.
28
SCHOLASTIC CORPORATION
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOLASTIC CORPORATION
(Registrant)
Date: October 15, 2002 /s/ Richard Robinson
------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE
OFFICER
Date: October 15, 2002 /s/ Kevin J. McEnery
------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
29
SCHOLASTIC CORPORATION
CERTIFICATIONS
================================================================================
I, Richard Robinson, the principal executive officer of Scholastic Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scholastic
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
30
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002 /s/ Richard Robinson
------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE
OFFICER
31
I, Kevin J. McEnery, the principle financial officer of Scholastic
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scholastic
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
32
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002 /s/ Kevin J. McEnery
------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
33