Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2004                        Commission File No. 000-19860

SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)

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 ý  No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý  No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

SCHOLASTIC CORPORATION

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2004

INDEX

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

SCHOLASTIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED

(Amounts in millions, except per share data)

See accompanying notes

1

SCHOLASTIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share data)

See accompanying notes

2

SCHOLASTIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED

(Amounts in millions)

See accompanying notes

3

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED
(Amounts in millions, except per share data)

1.     Basis of Presentation

        The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation and all wholly-owned subsidiaries ("Scholastic" or the "Company"). These financial statements have not been audited, but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2003.

        The Company's business is closely correlated to the school year. Consequently, the results of operations for the three and nine months ended February 29, 2004 and February 28, 2003, respectively, are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the February 28, 2003 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 determining 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 calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes, prepublication costs, royalty advances, goodwill and other intangibles.

        Certain prior year amounts have been reclassified to conform to the current year presentation.

Stock-Based Compensation

        Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. In accordance with APB 25, no compensation expense was recognized with respect to the Company's stock option plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and in respect to shares issuable under the Company's equity compensation plans as prescribed by SFAS

4

No. 123, net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:

New Accounting Pronouncements

        In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires variable interest entities to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 is effective immediately for all new variable interest entities created after January 31, 2003. For variable interest entities created or acquired before February 1, 2003, the provisions of FIN 46 became effective for the Company during the fourth quarter of the current fiscal year. The Company does not expect that the adoption of FIN 46 will have an impact on its financial position, results of operations or cash flows.

        In December 2003, the FASB issued SFAS No. 132(R), "Employers' Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132(R) retains the disclosure requirements promulgated in the original SFAS No. 132, but requires additional disclosures about the plan assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) became effective for the Company in the fourth quarter of the current fiscal year and will not have an impact on the Company's financial position, results of operations or cash flows since it does not change the measurement or recognition of the Company's pensions and other postretirement benefits.

        In March 2004, the FASB issued Staff Position 106-b ("FSP 106-b"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP 106-b applies only to single-employer defined benefit postretirement health care plans for which an employer has concluded that prescription drug benefits available under the plan are "actuarially equivalent" and thus qualify for the subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). FSP 106-b will become effective for the Company during the quarter ending November 30, 2004. The Company is currently evaluating whether the adoption of FSP 106-b will have an impact on its financial position, results of operations or cash flows.

5

2.     Investment

        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. Accordingly, £5.9 (equivalent to $9.1 as of the date of the transaction) relating to Red House was recorded as an investment in the joint venture in the first quarter of fiscal 2003 (see Note 7). The Company also acquired a 15% equity interest in The Book People Group, Ltd. for £12.0 (equivalent to $17.9 as of the date of the transaction) with a possible additional payment of £3.0 based on operating results and contingent on repayment of all borrowings under a £3.0 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 is available to fund the expansion of The Book People Group, Ltd. and for working capital purposes. As of February 29, 2004, £3.0 (equivalent to $5.5 at that date) was outstanding under the revolving credit facility. The equity investment in The Book People Group, Ltd. is included in Other assets and deferred charges in the Condensed Consolidated Balance Sheets.

3.     Segment Information

        Scholastic is a global children's publishing and media company. The Company 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 and television networks. 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.

        Certain revenues and expenses related to the Company's Internet activities have been reallocated to reflect the transition from a developing platform previously included in the Media, Licensing and Advertising segment to operational systems included in the Children's Book Publishing and Distribution and Educational Publishing segments. Prior year segment results have been restated to reflect this reclassification.

•

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, children's books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States.



•

Media, Licensing and Advertising includes the production and/or distribution of software in the United States, the production and/or distribution primarily by and through the Company's subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children's television programming, videos, software, feature films, promotional activities and non-book merchandise), and advertising revenue, including sponsorship programs.



•

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.

6

        The following table sets forth the Company's segment information for the periods indicated. As previously reported, certain prior year amounts have been reclassified to conform with the current year presentation.

7

(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 nine months ended February 28, 2003 include $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, fulfillment and distribution facilities 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 impact on segment profit/(loss) of the reclassification of Internet revenues and expenses for the three and nine months ended February 28, 2003 was: a decrease in Children's Book Publishing and Distribution segment profit of $2.7 and $8.3, respectively; an increase in Educational Publishing segment loss of $1.5 and a decrease in Educational Publishing segment profit of $4.4, respectively; offset by a decrease in the Media, Licensing and Advertising segment loss of $4.2 and $12.7, respectively.

(4)

Includes expenditures for property, plant and equipment, investments in prepublication and production costs, royalty advances and acquisitions of, and investments in, businesses.

(5)

Includes property, plant and equipment, prepublication costs, goodwill, other intangibles, royalty advances, production costs and long-term investments.

        The following table separately sets forth information for the periods indicated for the U.S. direct-to-home continuity programs, which consist primarily of the business formerly operated by Grolier Incorporated ("Grolier") and are included in the Children's Book Publishing and Distribution segment, and for all other businesses included in that segment:

(1)

Includes amortization of prepublication costs and other intangibles with definite lives.

(2)

Business profit (loss) represents earnings before interest and income taxes.

(3)

Includes expenditures for property, plant and equipment, investments in prepublication costs, royalty advances and acquisitions of businesses.

(4)

Includes property, plant and equipment, prepublication costs, goodwill, other intangibles and royalty advances.

8

4.    Debt

        The following table summarizes debt as of the dates indicated:

        The following table sets forth the maturities of the carrying values of the Company's debt obligations as of February 29, 2004 for the remainder of fiscal 2004 and thereafter:

        Grolier Facility.    Scholastic Inc., a wholly-owned subsidiary of Scholastic Corporation, established a credit facility to finance a portion of the Grolier purchase price (the "Grolier Facility"). No borrowings were outstanding under the Grolier Facility as of February 29, 2004 or May 31, 2003 because the Grolier Facility was canceled effective April 10, 2003. At February 28, 2003, $30.0 was outstanding under the Grolier Facility at a weighted average interest rate of 2.0%.

        Loan Agreement.    At February 29, 2004, Scholastic Corporation and Scholastic Inc. were joint and several borrowers under an amended and restated loan agreement with certain banks (the "Loan Agreement"). As described in Note 10, "Subsequent Event," on March 31, 2004, Scholastic Corporation and Scholastic Inc. entered into a revolving credit agreement with certain banks to replace the Loan Agreement, which was canceled. The Loan Agreement, which was scheduled to expire on August 11, 2004, provided 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, with interest either at the prime rate or 0.325% to 0.90% over LIBOR (as defined). The Loan Agreement also provided for a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.15% if borrowings exceeded 33% of the total facility, based upon the Company's credit rating. The interest rate, facility fee and utilization fee (when applicable) as of February 29, 2004 were 0.475% over LIBOR, 0.150% and 0.075%, respectively. The Loan Agreement contained certain financial covenants related to debt and interest coverage ratios (as defined) and limited dividends and other distributions. At February 29, 2004 and February 28, 2003, $45.0 and $156.0, respectively, were outstanding under the Loan Agreement at a weighted average interest rate of 1.5% and 1.9%, respectively. There were no borrowings outstanding under the Loan Agreement at May 31, 2003.

9

        Revolver.    Scholastic Corporation and Scholastic Inc. are joint and several borrowers under a revolving loan agreement with a bank (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 either 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 February 29, 2004 were 0.475% over LIBOR and 0.150%, respectively. The Revolver has certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At February 29, 2004 and February 28, 2003, $23.7 and $30.9, respectively, were outstanding under the Revolver at a weighted average interest rate of 1.7% and 2.3%, respectively. There were no borrowings outstanding under the Revolver at May 31, 2003.

        7% Notes due 2003.    Scholastic Corporation repaid all $125.0 of its 7% Notes at maturity on December 15, 2003, using cash on hand and borrowings available under the Loan Agreement and the Revolver made possible by the issuance of the 5% Notes.

        5.75% Notes due 2007.    Scholastic Corporation has $300.0 of 5.75% Notes (the "5.75% Notes") outstanding. The 5.75% Notes are senior unsecured obligations that 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 the 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 the redemption.

        Interest Rate Swap Agreement.    Scholastic Corporation was a party to 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 received a fixed interest rate payment from, and paid an amount based on a variable interest rate to, the counterparty based on a notional amount. This agreement was entered into in order to exchange the fixed rate payments on a portion of the 5.75% Notes for variable rate payments. In accordance with SFAS No. 133, the swap was considered perfectly effective and all changes in fair value were recorded to Other assets and deferred charges and Long-term debt. On May 28, 2003, $50.0 of the original $100.0 notional amount was settled, and the Company received a payment of $5.4 from the counterparty. On November 3, 2003, the remaining $50.0 under the agreement was settled, and the Company received a payment of $3.8 from the counterparty. The cash received was used to fully reduce the Other asset previously established, and the corresponding credit is being amortized over the remaining term of the 5.75% Notes. The fair value of the agreement recorded as of February 28, 2003 and May 31, 2003 was $8.5 and $5.6, respectively.

        5% Notes due 2013.    On April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the "5% Notes"). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the 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 the redemption.

10

5.    Comprehensive Income (Loss)

        The following table sets forth comprehensive income (loss) for the periods indicated:

6.    Earnings (Loss) Per Share ("EPS")

        Basic EPS is computed by dividing net income by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted EPS is calculated to give effect to potentially dilutive options to purchase Common Stock issued pursuant to the Company's stock-based benefit plans that were outstanding during the period. The diluted loss per share was equal to the basic loss per share for the three months ended February 29, 2004 and February 28, 2003 because such options outstanding were antidilutive. The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations for the periods indicated:

7.    Goodwill and Other Intangibles

        Goodwill and other intangible assets with indefinite lives are not amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise.

11

        The following table summarizes the activity in Goodwill for the periods indicated: