<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2000 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Number of shares outstanding
OF EACH CLASS AS OF SEPTEMBER 30, 2000
------------- ------------------------
Common Stock, $.01 par value 16,339,996
Class A Stock, $.01 par value 828,100
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
INDEX
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
<S> <C>
PART I - FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three
Months Ended August 31, 2000 and 1999 1
Condensed Consolidated Balance Sheet at August 31, 2000,
and 1999 and May 31, 2000 2
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended August 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
================================================================================
THREE MONTHS ENDED AUGUST 31,
================================================================================
2000 1999
================================================================================
<S> <C> <C>
REVENUES $ 362.1 $ 182.5
Operating costs and expenses:
Cost of goods sold 184.9 110.8
Selling, general and administrative expenses 175.3 99.8
Depreciation 6.2 4.6
Goodwill and trademark amortization 2.5 0.9
-----------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 368.9 216.1
Operating loss (6.8) (33.6)
Interest expense, net 9.7 4.4
--------------------------------------------------------------------------------
Loss before income taxes (16.5) (38.0)
Benefit from income taxes 5.9 14.4
--------------------------------------------------------------------------------
NET LOSS $ (10.6) $ (23.6)
================================================================================
Net loss per Class A and Common Share:
Basic $ (0.62) $ (1.43)
Diluted $ (0.62) $ (1.43)
================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
==================================================================================================================
AUGUST 31, 2000 MAY 31, 2000 AUGUST 31, 1999
==================================================================================================================
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8.2 $ 9.0 $ 2.9
Trade accounts receivable less allowance for
doubtful accounts 296.3 153.7 142.2
Installment sale receivables less allowance for
doubtful accounts 64.5 - -
Inventories, net 423.6 290.7 315.1
Deferred income taxes 63.1 57.2 55.5
Prepaid and other current assets 88.0 29.1 35.6
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 943.7 539.7 551.3
Property, plant and equipment, net 200.1 176.4 153.7
Prepublication costs 137.9 116.1 95.4
Goodwill and trademarks 294.9 66.4 70.4
Other assets and deferred charges 107.5 84.6 92.7
-----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,684.1 $ 983.2 $ 963.5
=================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and current portion of long term debt $ 23.1 $ 8.7 $ 22.0
Accounts payable 227.6 129.7 151.4
Accrued royalties 79.6 32.8 32.8
Deferred revenue 18.3 10.3 14.8
Other accrued expenses 141.4 104.3 53.2
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 490.0 285.8 274.2
NONCURRENT LIABILITIES:
Long-term debt 740.2 241.1 329.0
Other noncurrent liabilities 31.1 26.3 22.0
-----------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 771.3 267.4 351.0
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 0.2 0.2 0.2
Additional paid-in capital 224.8 222.7 213.1
Accumulated other comprehensive loss:
Foreign currency translation adjustment (12.9) (11.1) (6.1)
Retained earnings 232.2 242.8 167.9
Less shares of Common Stock
held in treasury (21.5) (24.6) (36.8)
-----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 422.8 430.0 338.3
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,684.1 $ 983.2 $ 963.5
=================================================================================================================
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
===============================================================================================
THREE MONTHS ENDED AUGUST 31,
===============================================================================================
2000 1999
===============================================================================================
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (88.9) $ (62.3)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business acquisition-related payments,
net of cash acquired (396.4) -
Additions to property, plant and equipment (11.8) (6.2)
Prepublication costs (8.5) (10.3)
Royalty advances (5.9) (5.6)
Production costs (5.1) (3.7)
Other (2.8) (0.2)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (430.5) (26.0)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under Grolier Facility 350.0 -
Borrowings under Loan Agreement and Revolver 213.9 120.8
Repayments of Loan Agreement and Revolver (64.8) (39.8)
Borrowings under lines of credit 30.5 10.7
Repayments of lines of credit (15.2) (6.7)
Proceeds from the exercise of stock options and
related tax benefits 5.2 0.8
Other (1.0) (0.5)
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities 518.6 85.3
-----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (0.8) (3.0)
Cash and cash equivalents at beginning of period 9.0 5.9
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8.2 $ 2.9
===============================================================================================
===============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, include the
accounts of Scholastic Corporation and its wholly-owned subsidiaries (the
"Company"), including the consolidated accounts of Grolier Incorporated and its
subsidiaries since its acquisition on June 22, 2000 (see Note 3). These
financial statements have not been audited, but reflect those adjustments
consisting of normal recurring items which management considers necessary for a
fair presentation of financial position, results of operations and cash flow.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes in the Report on Form 10-K for the fiscal
year ended May 31, 2000 as well as the Form 8-K filed in connection with
the acquisition of Grolier Incorporated (See Note 3).
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the three months ended August 31, 2000 and 1999
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the August 31, 1999 condensed consolidated
balance sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to: book returns; recoverability of inventory;
recoverability of advances to authors; amortization periods; recoverability of
prepublication and film production costs; and recoverability of other long-lived
assets.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of EITF Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs". This consensus states that all shipping
and handling billings to a customer in a sale transaction represent the fees
earned for the goods provided and, accordingly, amounts billed related to
shipping and handling should be classified as revenue. Shipping and handling
costs are classified in cost of goods sold. Certain prior year amounts have
been reclassified in accordance with the consensus.
In June 1998, the Financial Accounting Standards Board issued, Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires the Company
to recognize all derivatives as either assets or liabilities on the balance
sheet and measuring them at fair value. Under SFAS 133, the Company is
required to adopt the provisions of this standard in the first quarter of
fiscal 2002. The Company does not expect, based upon its current assessment,
that the adoption of SFAS 133 will have a material impact on its financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to adopt the provisions of SAB 101 no later than the fourth quarter of
fiscal 2001. The Company does not expect that the adoption of SAB 101 will have
a material impact on its financial position, results of operations or cash
flows.
4
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
In June 2000, the Accounting Standards Executive Committee issued Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers or Distributors of
Films." SOP 00-2 replaces the Statement of Financial Accounting Standards No.
53, "Financial Reporting by Producers and Distributors of Motion Picture Films."
SOP 00-2 concluded that film costs should be accounted for under an inventory
model and discusses various topics such as revenue recognition, fee allocation
in multiple films, accounting for exploitation costs, and impairment assessment.
The Company is required to adopt the provisions of SOP 00-2 by the first quarter
of fiscal 2002. The Company does not expect that the adoption of SOP 00-2 will
have a material impact on its financial position, results of operations or cash
flows.
3. ACQUISITION OF GROLIER
On June 22, 2000, pursuant to a Stock Purchase Agreement dated as of April 13,
2000 and as amended, Scholastic Inc., a wholly-owned subsidiary of the Company,
acquired all of the issued and outstanding capital stock of Grolier Incorporated
("Grolier"), a Delaware corporation, for $400.0 in cash. The Company is
accounting for the acquisition under the purchase method of accounting.
The acquisition was financed by the Company using bank debt. Of the $400.0
Grolier purchase price, $350.0 was borrowed under a new credit facility (the
"Grolier Facility") entered into to finance the acquisition and $50.0 was
borrowed under the Company's existing Loan Agreement and Revolver. (See Note 5).
The unaudited pro forma results of the Company, giving effect to the acquisition
of Grolier assuming it was consummated at the beginning of the three-month
periods ended August 31, 2000 and August 31, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
=============================================================================
2000 1999
=============================================================================
<S> <C> <C>
Revenues $ 397.7 $ 292.3
NET LOSS $ (7.3) $ (21.4)
----------------------------------------------------------------------
Net loss per Class A and Common Share:
Basic $ (0.43) $ (1.30)
Diluted $ (0.43) $ (1.30)
</TABLE>
The following summarizes the preliminary allocation of the $396.4 purchase
price allocation, which includes the related transaction and financing costs,
to the net assets of Grolier acquired based upon a preliminary allocation as
follows:
Accounts receivable, net $104.9
Inventory 53.1
Other current assets 57.9
Property, plant and equipment, net 27.4
Goodwill / Other intangibles 231.8
Other assets 31.9
Current liabilities (98.7)
Long term liabilities ( 6.3)
Cash received upon acquisition of Grolier ( 5.6)
-------
Total purchase price $396.4
=======
5
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
This allocation of the purchase price is based on a preliminary valuation of
Grolier's assets and liabilities and is subject to change. The final
allocation of the purchase price will be based upon a comprehensive
evaluation of the fair value of Grolier's tangible and identifiable
intangible assets acquired and liabilities assumed.
4. SEGMENT INFORMATION
The Company is a global children's publishing and media company with
operations in the United States, the United Kingdom, Canada, Australia, New
Zealand, Mexico, Hong Kong, India, Ireland, Argentina and Southeast Asia, and
distributes its products and services through a variety of channels,
including school book clubs, school book fairs, direct-to-home and trade.
The Company's operations are categorized in the following four segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING; and INTERNATIONAL. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision-maker assesses operating performance and
allocates resources.
The following table sets forth the Company's segment information for the periods
indicated:
<TABLE>
<CAPTION>
CHILDREN'S MEDIA,
BOOK LICENSING
PUBLISHING EDUCATIONAL AND TOTAL
AND PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD CONSOLIDATED
DISTRIBUTION (1)
=======================================================================================================================
THREE MONTHS ENDED
AUGUST 31, 2000
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 206.6 $ 93.7 $ 10.2 $ 310.5 $ 51.6 $ 0.0 $ 362.1
Depreciation 1.1 0.4 0.8 2.3 1.0 2.9 6.2
Amortization (2) 4.3 11.3 3.3 18.9 0.7 0.0 19.6
Royalty advance expense 4.5 0.3 0.2 5.0 0.0 0.0 5.0
Segment profit/(loss) 7.5 14.8 (9.8) 12.5 (1.8) (17.5) (6.8)
(3)
Segment assets 787.3 369.6 59.9 1,216.8 240.1 227.2 1,684.1
Long-lived assets (4) 245.8 198.9 37.8 482.5 70.6 149.6 702.7
Expenditures for
long-lived assets (5) 9.0 6.0 6.9 21.9 0.8 8.6 31.3
=======================================================================================================================
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, 1999
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 77.8 $ 56.9 $ 8.9 $ 143.6 $ 38.9 $ 0.0 $ 182.5
Depreciation 0.9 0.2 0.2 1.3 0.9 2.4 4.6
Amortization (2) 3.4 7.0 1.6 12.0 0.3 0.0 12.3
Royalty advance expense 4.2 0.1 0.2 4.5 0.5 0.0 5.0
Segment profit/(loss) (14.7) 0.5 (7.2) (21.4) (3.7) (8.5) (33.6)
(3)
Segment assets 399.8 184.7 58.4 642.9 141.2 179.4 963.5
Long-lived assets (4) 97.0 95.7 27.3 220.0 56.8 109.0 385.8
Expenditures for
long-lived assets (5) 8.1 7.6 5.3 21.0 1.1 3.7 25.8
</TABLE>
(1) OVERHEAD INCLUDES ALL DOMESTIC CORPORATE-RELATED ITEMS NOT ALLOCATED TO
REPORTABLE SEGMENTS. AS IT RELATES TO THE SEGMENT PROFIT/(LOSS), UNALLOCATED
EXPENSES INCLUDE COSTS RELATED TO THE MANAGEMENT OF CORPORATE ASSETS.
UNALLOCATED ASSETS ARE PRINCIPALLY COMPRISED OF DEFERRED INCOME TAXES AND
PROPERTY, PLANT AND EQUIPMENT RELATED TO THE COMPANY'S HEADQUARTERS IN THE
METROPOLITAN NEW YORK AREA, ITS NATIONAL SERVICE OPERATION LOCATED IN
MISSOURI AND THE GROLIER FACILITIES LOCATED IN CONNECTICUT.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.
(5) INCLUDES PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION AND
PRODUCTION COSTS, AND ROYALTY ADVANCES. THIS AMOUNT EXCLUDES THE
EXPENDITURES FOR LONG-LIVED ASSETS AS PART OF THE GROLIER ACQUISITION.
6
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
5. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
<TABLE>
<CAPTION>
================================================================================================
AUGUST 31, 2000 MAY 31, 2000 AUGUST 31, 1999
================================================================================================
<S> <C> <C> <C>
Lines of Credit $ 23.1 $ 8.5 $ 22.0
Grolier Facility 350.0 - -
Loan Agreement and Revolver 154.7 5.6 90.5
7% Notes due 2003, net of discount 124.8 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 0.7 0.9 3.7
------------------------------------------------------------------------------------------------
TOTAL DEBT 763.3 249.8 351.0
Less current portion of long-term debt
and lines of credit (23.1) (8.7) (22.0)
================================================================================================
TOTAL LONG-TERM DEBT $ 740.2 $ 241.1 $ 329.0
================================================================================================
</TABLE>
GROLIER FACILITY. The June 22, 2000 acquisition of Grolier for $400.0 was
financed by the Company using bank debt. To finance the Grolier acquisition,
$350.0 was borrowed under the Grolier Facility, and the remaining $50.0 was
borrowed under the Company's existing Loan Agreement and Revolver (as discussed
below). Scholastic Inc. is the borrower and the Company is the guarantor under
the $350.0 Grolier Facility, dated June 22, 2000. The Grolier Facility is a one
year facility, which may be extended at the Company's discretion for an
additional year. Borrowings bear interest at the prime rate, or 0.39% to 1.10%
over LIBOR (as defined). The Grolier Facility also provides for a facility fee
ranging from 0.085% to 0.25%. The amounts charged vary based on the Company's
credit rating. Based on the Company's current credit rating, the interest rate
and facility fee charged are 0.575% over LIBOR and 0.125%, respectively. The
Grolier Facility contains certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions.
LOAN AGREEMENT. The Company and Scholastic Inc. are joint and several borrowers
under an amended and restated loan agreement with certain banks, effective
August 11, 1999 and amended June 22, 2000 (the "Loan Agreement"). The Loan
Agreement, which expires on August 11, 2004, provides for aggregate borrowings
of up to $170.0 (with a right in certain circumstances to increase it to
$200.0). Interest under this facility is either at the prime rate or 0.325% to
0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to
0.30% and a utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33%
of the total facility. The amounts charged vary based upon the Company's credit
rating. Based on the Company's current credit rating, the interest rate,
facility fee and utilization fee are 0.475% over LIBOR, 0.150%, and 0.075%,
respectively. The Loan Agreement contains certain financial covenants related to
debt and interest coverage ratios (as defined) and limits dividends and other
distributions.
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers under
a revolving loan agreement with a bank, effective November 10, 1999 and amended
June 22, 2000 (the "Revolver"). The Revolver, which expires on August 11, 2004,
provides for revolving credit loans of up to $40.0. Interest under this facility
is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as defined). There
is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based
upon the Company's credit rating. Based on the Company's current credit rating,
the interest rate and facility fee are 0.475% over LIBOR and 0.150%,
respectively. The Revolver contains certain financial covenants related to debt
and interest coverage ratios (as defined) and limits dividends and other
distributions.
7
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
7% NOTES DUE 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will mature on December 15, 2003. The Notes are not redeemable
prior to maturity. Interest on the Notes is payable semi-annually on December 15
and June 15 of each year.
CONVERTIBLE SUBORDINATED DEBENTURES. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures").
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
principal amount plus accrued interest. Each Debenture is convertible, at the
holder's option, any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
6. CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On January 26, 2000, an order
was entered granting the Company's motion to dismiss plaintiffs' Second Amended
Consolidated Complaint without leave to further amend the complaint. Previously,
on December 14, 1998, an order was entered granting the Company's motion to
dismiss plaintiffs' First Amendment Consolidated Complaint with leave to amend
the complaint. In dismissing both complaints, which alleged substantially
similar claims, the court held that plaintiffs failed to state a claim upon
which relief can be granted. Plaintiffs have appealed the most recent dismissal.
The Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS(R) series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such GOOSEBUMPS rights are
licensed to the Company. The issues in the case are also, in part, the subject
of two litigations commenced by Parachute following repeated notices from the
Company to Parachute of material breaches by Parachute of the agreements under
which such rights are licensed and the exercise by the Company of its
contractual remedies under the agreements. The first Parachute action, in which
two subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on November
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. On appeal, the Court of Appeals for the Second Circuit vacated the
dismissal and remanded the case for further proceedings. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State of New York in New York
County. In its two complaints, and in its counterclaims, Parachute alleges that
the exercise of contractual remedies by the Company was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract and acts of unfair competition. Damages sought by Parachute
include the payment of a total of approximately $36.1 of advances over the term
of the contract (of which approximately $15.3 had been paid at the time the
first Parachute litigation began) and payments of royalties set-off by
Scholastic against amounts claimed by the Company. The Company is seeking
declaratory relief and damages for, among other claims, breaches of contract,
fraud and acts of unfair competition. Damages sought by the Company include lost
profits and disgorgement of certain payments
8
<PAGE>
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
received by Parachute. On July 21, 2000, the Company and Parachute each filed
motions for partial summary judgement in the state court cases. The Company
intends to vigorously pursue its claims against Parachute and the other named
defendants and to vigorously defend its position in these proceedings. The
Company does not believe that this dispute will have a material adverse effect
on its financial condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
7. COMPREHENSIVE LOSS
The following table sets forth the comprehensive loss for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
==========================================================================================
2000 1999
==========================================================================================
<S> <C> <C>
Net loss $ (10.6) $ (23.6)
Comprehensive loss:
Foreign currency translation adjustment
net of provision for income taxes (1.8) (0.2)
------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS $ (12.4) $ (23.8)
==========================================================================================
</TABLE>
8. LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted-average
number of shares outstanding during the period. Diluted loss per share is
calculated to give effect to potentially dilutive stock options and convertible
debentures that were outstanding during the period. The following table
summarizes the reconciliation of the numerators and denominators for the Basic
and Diluted loss per share ("EPS") computations for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
================================================================================ ===================
2000 1999
================================================================================ ===================
<S> <C> <C>
Net loss $ (10.6) $ (23.6)
Weighted-average shares Class A and Common
shares outstanding for basic loss per share 17.0 16.5
================================================================================ ===================
Net loss per Class A and Common Share:
Basic $ (0.62) $ (1.43)
Diluted $ (0.62) $ (1.43)
</TABLE>
The effect of the 5.0% Convertible Subordinated Debentures, the shares issuable
pursuant to employee stock plans and warrants on the weighted-average shares
outstanding for diluted EPS was anti-dilutive and not included in the
calculation.
9
<PAGE>
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, 2000 nearly doubled to $362.1 million
from $182.5 million in the comparable quarter of the prior fiscal year. This
increase in revenue over the prior year period was primarily due to the
Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION and EDUCATIONAL PUBLISHING
segments, which were up 165.6% and 64.7%, respectively. This revenue increase
also reflected the results of Grolier Incorporated ("Grolier") for the period
subsequent to its acquisition by the Company on June 22, 2000 of $65.9 million
in total revenues.
As a percentage of sales, cost of goods sold for the three-month period ended
August 31, 2000, decreased from 60.7% in the year ago period to 51.1% due to
the mix of products sold and lower postage and fulfillment costs. Selling,
general and administrative expenses as a percentage of sales decreased from
54.7% to 48.4% due primarily to the rate of revenue increase for the quarter
significantly exceeding the non-variable increase in selling, general and
administrative expenses.
The operating loss for the quarter ended August 31, 2000 decreased to $6.8
million compared to $33.6 million in the year ago period. These improvements
primarily reflect the success of the HARRY POTTER(TM) hardcover and paperback
releases, higher educational sales and the inclusion of Grolier results.
These improvements were partially offset by an increase in unallocated
corporate overhead charges of $9.2 million primarily due to the inclusion of
Grolier in the current period results and the impact of the timing of the
recognition of certain overhead expenses.
Net loss for the quarter ended August 31, 2000 decreased 55.1% to $10.6
million ($0.62 per share) from $23.6 million ($1.43 per share) in the prior
year period. During Scholastic's first quarter, which runs from June through
August and during which most schools are not in session the Company generally
records its lowest quarterly revenues and incurs a seasonal loss.
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 and from the United States
through its school book clubs, continuity programs, school book fairs and the
trade channel. This segment includes Grolier's direct-to-home book clubs and
trade sales in the United States in the current fiscal period.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=================================================================
2000 1999
=================================================================
<S> <C> <C>
Revenue $ 206.6 $ 77.8
Operating Profit (Loss) 7.1 (14.7)
-----------------------------------------------------------------
OPERATING MARGIN 3.4% *
* - NOT MEANINGFUL
</TABLE>
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
first quarter of fiscal 2000 more than doubled to $206.6 million from $77.8
million in the comparable quarter of the prior fiscal year. The increase was
primarily due to strong trade sales of the new HARRY POTTER hardcover and
paperback releases, strong HARRY POTTER backlist sales and sales of other
Scholastic properties including I SPY(TM), DEAR AMERIca(R), ROYAL DIARIES,
CAPTAIN UNDERPANTS(TM) anD CLIFFOrd(R). Harry Potter trade revenues exceeded
$90.0 million in the first quarter of fiscal 2000 as compared to $15.0 million
in the prior year period. Also contributing to the increase was $39.9 million
from Grolier's direct-to-home book clubs.
10
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Operating margin for Children's Book Publishing and Distribution improved by
$21.8 million to an operating profit of $7.1 million for the quarter as
compared to an operating loss $14.7 million for the same prior year period.
This improvement primarily results from the strong trade revenues attributed
to the HARRY POTTER titles and the benefit of lower postage and fulfillment
costs.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of grades K to 12 textbooks, supplemental materials, classroom
magazines, teaching resources and instructional technology in and from the
United States to schools and libraries. This segment includes Grolier
Publishing, which includes print and on-line children's non-fiction and
reference products in the current fiscal period.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
===================================================================
2000 1999
===================================================================
<S> <C> <C>
Revenue $ 93.7 $ 56.9
Operating Profit 14.8 0.5
-------------------------------------------------------------------
OPERATING MARGIN 15.8% 0.9%
</TABLE>
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter increased 64.6%
to $93.7 million with an operating profit of $14.8 million as compared to
revenues of $56.9 million and an operating profit of $0.5 million in the
comparable quarter of the prior fiscal year. The revenue improvement is due
principally to increased core curriculum revenues related to SCHOLASTIC LITERACY
PLACE(R) 2000 sales in the Texas reading adoption and in open territories.
Increased sales of READ 180(TM), SCHOLASTIC READING COUNTS!(TM) and supplemental
teaching products, as well as approximately $12.0 million in additional revenues
from Grolier print and on-line reference sales to libraries also contributed to
increased revenues.
Operating profit for the quarter improved by $14.3 million over the prior year
period, primarily reflecting the impact of product shipments to fulfill orders
from the Texas Reading adoption and open market sales of SCHOLASTIC LITERACY
PLACE 2000. The benefits of the revenue increases were partially offset by
increased amortization related to certain capitalized prepublication costs
along with increased sampling expenses.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution of programming and consumer products (including children's
television programming, videos, CD-ROM's, feature films and non-book products)
and internet services, as well as advertising and promotional activities.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
===================================================================
2000 1999
===================================================================
<S> <C> <C>
Revenue $ 10.2 $ 8.9
Operating Loss (9.8) (7.2)
-------------------------------------------------------------------
OPERATING MARGIN * *
* - NOT MEANINGFUL
</TABLE>
11
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
MEDIA, LICENSING AND ADVERTISING revenues increased 14.6% to $10.2 million in
the first quarter of fiscal 2001 as compared to the prior year quarter,
principally due to the launch of the new animated series CLIFFORD THE BIG RED
DOG(TM) and the delivery of thrEE ROYAL DIARies specials. For the quarter ended
August 31, 2000, this segment recognized an operating loss of $9.8 million as
compared to $7.2 million in the same period of the prior fiscal year. These
results reflect the impact of planned increases in promotional, editorial and
other operating costs associated with the continued development of
Scholastic.com.
The INTERNATIONAL segment includes the publication and distribution of
products and services outside the United States by the Company's operations
in the United Kingdom, Canada, Australia, New Zealand and Southeast Asia and
its newer businesses in Mexico, India, Ireland and Argentina. In the current
fiscal period, the segment includes Grolier's direct-to-home operations in
the United Kingdom, Canada and Australia and the publication and distribution
of Grolier's reference products and services outside the United States,
principally in Southeast Asia.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=====================================================================
2000 1999
=====================================================================
<S> <C> <C>
Revenue $51.6 $ 38.9
Operating Loss (1.8) (3.7)
---------------------------------------------------------------------
OPERATING MARGIN * *
* - NOT MEANINGFUL
</TABLE>
INTERNATIONAL revenues for the quarter ended August 31, 2000 increased 32.6%
to $51.6 million from $38.9 million in the prior year quarter. Revenues
benefited from an 11% increase in Canadian sales primarily in school book
clubs, and $13.9 million in Grolier reference and direct-to-home book club
sales. Operating loss for the quarter improved $1.9 million over the prior
year period reflecting improved revenues, which were partially offset by the
impact of foreign exchange fluctuations.
SEASONALITY
The Company's school book clubs, school book fairs and most of its magazines
operate on a school-year basis; therefore, the Company's business is highly
seasonal. As a consequence, generally, the Company's revenues in the first and
third quarters of the fiscal year are lower than its revenues in the other two
fiscal quarters, and the Company experiences a loss from operations in the first
quarter. Typically, school book clubs and school book fairs experience the
largest revenues in the second quarter of the fiscal year, while revenues from
the sale of instructional materials are higher in the first quarter. The
acquisition of Grolier will not substantially change the Company's historic
seasonality.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, seasonal borrowings have increased during June, July
and August, have generally peaked in September or October, and have been at
their lowest point in May.
12
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $0.8 million during the
quarter ended August 31, 2000, compared to a decrease of $3.0 million during the
comparable period in the prior fiscal year.
Cash flow used in operations was $90.9 million for the first quarter as a result
of working capital increases to support business growth. Within working capital,
inventory levels increased reflecting a management decision in the fourth
quarter of fiscal 2000 to accelerate paper purchases.
Cash outflows for investing activities were $428.5 million for the quarter,
largely as a result of the $400.0 million acquisition of Grolier
Incorporated. Additional spending principally consisted of capital
expenditures, production cost expenditures, royalty advances and
pre-publication expenditures. Capital expenditures, including capitalized
interest, totaled $11.8 million for the first quarter of fiscal 2001,
increasing $5.6 million over the same period in fiscal 2000 largely as a
result of the expansion of the Company's corporate headquarters and the
continued investment in the development of the Company's e-commerce strategy.
Production costs increased $1.4 million over the same period of the prior
fiscal year as a result of the new CLIFFORD and ROYAL DIARIES television
shows. Payments for royalty advances increased slightly to $5.9 million from
$5.6 million. Prepublication expenditures decreased $1.8 million to $8.5
million in the current fiscal year.
The Company believes its existing cash position, combined with funds generated
from operations and available under the amended Loan Agreement and the Revolver
will be sufficient to finance its ongoing working capital requirements for the
remainder of the fiscal year.
FINANCING
To finance the June 22, 2000 acquisition of Grolier, the Company borrowed $350.0
million under a new credit facility (the "Grolier Facility") and borrowed the
remaining $50.0 million under the Company's existing Loan Agreement and
Revolver. The Grolier Facility is a one year facility, which may be extended at
the Company's discretion for an additional year. The weighted-average interest
rate under the Grolier Facility for the period June 22, 2000 through August 31,
2000 was 7.4%.
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $210.0 million
(with a right, in certain circumstances, to increase to $240.0 million),
including the issuance of up to $10.0 million in letters of credit. Both the
Loan Agreement and the Revolver expire on August 11, 2004. The Company uses
these facilities to fund seasonal cash flow needs and other working capital
requirements. At August 31, 2000, the Company had $154.7 million in borrowings
outstanding under these facilities at a weighted average interest rate of 7.3%.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian, Southeast Asian and Australian operations totaled $50.7
million at August 31, 2000. These lines are used primarily to fund local working
capital needs. At August 31, 2000, $23.1 million in borrowings were outstanding
under these lines of credit at a weighted-average interest of 9.3%.
13
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and
strategic acquisitions. As part of this process, the Company engages with
interested parties in discussions concerning possible transactions. The
Company will continue to evaluate such opportunities and prospects.
Consistent with this strategy. On June 22, 2000 the Company consummated the
acquisition of Grolier for $400.0 million in cash.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 2000.
14
<PAGE>
SCHOLASTIC CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management believes that the impact of currency fluctuations do not represent a
significant risk in the context of the Company's current international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business for material amounts, nor are such
instruments used for speculative purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. As a result of the financing related to the Grolier
acquisition, 69.2% of the Company's long-term debt bears interest at a variable
rate and is sensitive to changes in interest rates. The Company is subject to
the risk that market interest rates will increase and thereby increase the
interest rates currently being charged under the variable rate debt. Under its
current policies, the Company does not utilize any interest rate derivative
instruments to manage its exposure to interest rate changes.
As of August 31, 2000, the balance outstanding under its variable rate
facilities was $528.5 million. The three-month weighted-average interest rate
was 7.3%. A 15% increase or decrease in the average cost of the Company's
variable rate debt under the various facilities at August 31, 2000 would impact
the Company's results of operations by approximately $5.9 million annually on a
pre-tax basis.
15
<PAGE>
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
================================================================================
On August 14, 2000, the holders of the 828,100 shares of Class A Stock, $.01 par
value, (comprising all outstanding shares of Class A Stock) unanimously approved
by written consent, fixing the number of directors constituting the full Board
of Directors at 12. There were no abstentions or broker non-votes in connection
with this matter. 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.
16
<PAGE>
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.3 Certificate of Amendment, effective as of September 19,
2000, to the Company's Amended and Restated Certificate
of Incorporation.
27.1 Financial Data Schedule as of and for the three months
ended August 31, 2000
(b) Reports on Form 8-K filed during the quarter:
Amended Current Report on Forms 8-K filed on July 7, 2000 regarding
the consummation of the acquisition of Grolier Incorporated by
Scholastic Inc. on June 22, 2000.
--------------------------------------------------------------------------------
17
<PAGE>
SCHOLASTIC CORPORATION
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOLASTIC CORPORATION
(Registrant)
Date: October 16, 2000 /s/ Richard Robinson
-----------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: October 16, 2000 /s/ Kevin J. McEnery
-----------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
18
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED AUGUST 31, 2000
EXHIBIT INDEX
================================================================================
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
3.3 Certificate of Amendment, effective as of September 19, 2000,
to the Company's Amended and Restated Certificate of
Incorporation.
27.1 Financial Data Schedule as of and for the three months ended
August 31, 2000
--------------------------------------------------------------------------------
