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, 2001 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
557 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Number of shares outstanding
of each class as of September 28, 2001
------------- ------------------------
Common Stock, $.01 par value 33,630,786
Class A Stock, $.01 par value 1,656,200
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001
INDEX
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PART I - FINANCIAL INFORMATION PAGE(S)
-------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three
Months Ended August 31, 2001 and 2000 1
Condensed Consolidated Balance Sheets at August 31, 2001
and 2000 and May 31, 2001 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
August 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
--------------------------------------------------------------------------------------------------------------------
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,
=============================================================================================================
2001 2000
=============================================================================================================
REVENUES $ 306.1 $ 362.1
Operating costs and expenses:
Cost of goods sold 152.7 184.9
Selling, general and administrative expenses 187.3 175.3
Depreciation 7.6 6.2
Goodwill and other intangibles amortization 0.2 2.5
-------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 347.8 368.9
Operating loss (41.7) (6.8)
Interest expense, net 8.0 9.7
-------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of accounting change (49.7) (16.5)
Benefit from income taxes 17.9 5.9
-------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (31.8) (10.6)
Cumulative effect of accounting change (net of income taxes) (5.2) --
-------------------------------------------------------------------------------------------------------------
NET LOSS $ (37.0) $ (10.6)
=============================================================================================================
Basic and diluted loss per Class A and Common Share:
Loss before cumulative effect of accounting change $ (0.90) $ (0.31)
Cumulative effect of accounting change (0.15) --
-------------------------------------------------------------------------------------------------------------
NET LOSS $ (1.05) $ (0.31)
=============================================================================================================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
====================================================================================================================
AUGUST 31, 2001 MAY 31, 2001 AUGUST 31, 2000
====================================================================================================================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9.5 $ 13.8 $ 8.2
Accounts receivable, net 228.5 220.7 354.8
Inventories, net 427.3 340.3 423.6
Deferred promotion costs 43.7 44.0 47.3
Deferred income taxes 110.6 89.3 63.1
Prepaid and other current assets 61.2 61.4 46.7
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 880.8 769.5 943.7
Property, plant and equipment, net 267.3 257.3 200.1
Prepublication costs 104.2 103.3 137.9
Production costs 7.8 13.8 16.6
Goodwill 227.1 221.9 231.1
Other intangibles 61.7 61.9 65.1
Other assets and deferred charges 75.6 74.1 89.6
--------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,624.5 $ 1,501.8 $ 1,684.1
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and current portion of long-term debt $ 381.1 $ 23.3 $ 23.1
Accounts payable 207.5 157.3 227.6
Accrued royalties 58.3 45.7 79.6
Deferred revenue 23.5 12.1 18.3
Other accrued expenses 104.7 136.5 141.4
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 775.1 374.9 490.0
NONCURRENT LIABILITIES:
Long-term debt 339.4 585.3 740.2
Other noncurrent liabilities 49.1 47.9 31.1
--------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 388.5 633.2 771.3
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 0.3 0.3 0.2
Additional paid-in capital 232.8 233.7 224.8
Deferred compensation (0.5) (0.2) --
Accumulated other comprehensive loss (13.7) (16.4) (12.9)
Retained earnings 242.1 279.1 232.2
Less shares of Common Stock held in treasury (0.1) (2.8) (21.5)
--------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 460.9 493.7 422.8
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,624.5 $ 1,501.8 $ 1,684.1
====================================================================================================================
====================================================================================================================
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
=============================================================================================================
THREE MONTHS ENDED AUGUST 31,
=============================================================================================================
2001 2000
=============================================================================================================
NET CASH USED IN OPERATING ACTIVITIES $ (73.4) $ (88.9)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition-related payments (4.1) (396.4)
Additions to property, plant and equipment (17.2) (11.8)
Prepublication costs (11.4) (8.5)
Royalty advances (7.0) (5.9)
Production costs (2.9) (5.1)
Other (5.6) (2.8)
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (48.2) (430.5)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 191.8 213.9
Borrowings under Grolier Facility -- 350.0
Repayments of Loan Agreement and Revolver (87.9) (64.8)
Borrowings under lines of credit 41.6 30.5
Repayments of lines of credit (30.8) (15.2)
Proceeds pursuant to employee stock plans and related tax
benefits 1.5 5.2
Other 1.1 (1.0)
-------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 117.3 518.6
-------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4.3) (0.8)
Cash and cash equivalents at beginning of period 13.8 9.0
-------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9.5 $ 8.2
=============================================================================================================
=============================================================================================================
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 its wholly-owned subsidiaries (the
"Company"), which include the consolidated accounts of Grolier Incorporated
("Grolier") and its subsidiaries as of the date of acquisition on June 22, 2000
(See Note 2). These financial statements have not been audited, but reflect
those adjustments consisting of normal recurring items which management
considers necessary for a fair presentation of financial position, results of
operations and cash flow. These financial statements should be read in
conjunction with the consolidated financial statements and related notes in the
Report on Form 10-K for the fiscal year ended May 31, 2001, as well as the
Current Reports on Form 8-K dated July 7, 2000, as amended on September 5, 2000,
and February 8, 2001, filed in connection with the acquisition of Grolier.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the three months ended August 31, 2001 and 2000
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the August 31, 2000 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: collectability of accounts
receivable; book returns; amortization periods; and recovery of inventory,
advances to authors, prepublication costs, deferred promotion costs, film
production costs and other long-lived assets.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, " Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a
single accounting model, based upon the framework established in SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", for long-lived assets to be disposed of by sale
and to address significant implementation issues. The Company is required to
adopt this statement in the first quarter of fiscal 2003. The Company is in
the process of assessing the impact of the adoption of this statement on its
financial position, results of operations and cash flows.
4
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
2. ACQUISITION OF GROLIER
On June 22, 2000, Scholastic Inc., a subsidiary of the Company, acquired all of
the issued and outstanding capital stock of Grolier, a Delaware corporation, for
$400.0 in cash. The acquisition was financed by the Company using bank debt, of
which $350.0 was borrowed under a new facility and $50.0 was borrowed under the
Company's existing credit facility. (See Note 4)
Through the purchase of Grolier, the Company acquired the leading operator in
the United States of direct-to-home book clubs serving children primarily age
five and under and the leading print and on-line publisher of children's
non-fiction and reference products sold primarily to school libraries in the
United States. The acquisition also expanded the Company's operations in the
United Kingdom, Canada and Southeast Asia.
The Grolier acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Grolier have been
included in the Company's condensed consolidated results of operations since
the date of acquisition. The assets and liabilities at the acquisition date
were adjusted to their fair values, based upon an independent valuation, with
the excess purchase price over the fair value assigned to goodwill. The
valuation was finalized as of fiscal 2001. With regard to future adjustments
to established liabilities, any excess amounts would result in an adjustment
to the related goodwill value. Costs in excess of the established liabilities
will be included in the determination of net income.
The following table sets forth the final allocation of the Grolier purchase
price, based on an independent valuation, and includes the related transaction
and financing costs:
==================================================================
VALUE
==================================================================
Accounts receivable $ 95.3
Inventory 45.5
Other current assets 58.5
Property, plant and equipment, net 18.9
Goodwill and other intangibles 231.8
Other assets 44.2
Current liabilities (85.6)
Non-current liabilities (12.2)
-----------------------------------------------------------------
CASH PAID FOR ACQUISITION, NET OF CASH RECEIVED $ 396.4
================================================================
The following table sets forth the allocation of Goodwill and Other Intangibles
resulting from the acquisition of Grolier:
===================================================================
VALUE
===================================================================
Goodwill $ 170.2
----------------------------------------------------------------
Titles 29.8
Major sets 11.8
Licenses 17.8
Customer lists 2.2
----------------------------------------------------------------
Total other intangibles 61.6
TOTAL GOODWILL AND OTHER INTANGIBLES $ 231.8
================================================================
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
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 and relocation of certain of Grolier's
operational and administrative functions. This amount, originally estimated
at $12.4 million, was increased as the Company refined its estimate of the
costs of the integration plan. As of August 31, 2001, approximately $13.6 of
these liabilities remained unpaid, which are expected to be substantially
paid during the current fiscal year.
A summary of the fiscal 2002 activity in the established reserves is detailed in
the following table:
=================================================================================================
SEVERANCE AND
RELATED COST OTHER EXIT COSTS TOTAL
=================================================================================================
Liability balance at May 31, 2001 $ 11.5 $ 3.2 $ 14.7
Fiscal year 2002 payments (1.1) 0.0 (1.1)
------- ------ -------
Liability at August 31, 2001 $ 10.4 $ 3.2 $ 13.6
======= ====== =======
The following table reflects the unaudited pro forma results of operations of
the Company, giving effect to the acquisition of Grolier as if it was
consummated as of the first day of the three-month period ended August 31,
2000, including the effects of increased interest expense on debt related to
the acquisition. This information does not necessarily reflect the actual
results of operations that would have occurred had the purchase been made at
the beginning of the period represented, nor is it necessarily indicative of
future results of operations of the combined companies.
THREE MONTHS ENDED AUGUST 31,
===================================================================================================
2001 2000
===================================================================================================
Revenues $ 306.1 $ 397.7
Net loss before cumulative effect of accounting change (31.8) (7.7)
Net loss (37.0) (7.7)
Net loss per Class A and Common Share:
Basic and Diluted before cumulative effect of
accounting change $ (0.90) $ (0.23)
Basic and Diluted net loss $ (1.05) $ (0.23)
3. SEGMENT INFORMATION
Scholastic is a global children's publishing and media company. 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.
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
The following table sets forth information for the periods indicated about the
Company's segments. Certain prior year amounts have been reclassified to conform
with the present year presentation.
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING OVERHEAD(1) DOMESTIC INTERNATIONAL CONSOLIDATED
===================================================================================================================
THREE MONTHS ENDED
AUGUST 31, 2001
===================================================================================================================
Revenues $ 141.1 $ 91.3 $ 18.7 $ 0.0 $ 251.1 $ 55.0 $ 306.1
Depreciation 1.3 0.4 0.9 3.9 6.5 1.1 7.6
Amortization (2) 4.2 6.3 9.4 0.0 19.9 0.0 19.9
Royalty advances expensed 4.0 0.3 0.1 0.0 4.4 0.0 4.4
Segment profit/(loss) (3) (27.9) 15.4 (8.5) (17.0) (38.0) (3.7) (41.7)
Segment assets 712.3 282.4 67.6 349.0 1,411.3 213.2 1,624.5
Goodwill 110.9 69.6 8.4 4.6 193.5 33.6 227.1
Long-lived assets (4) 247.4 163.9 38.1 206.5 655.9 60.2 716.1
Expenditures for
long-lived assets (5) 20.5 6.7 6.5 7.4 41.1 1.5 42.6
===================================================================================================================
THREE MONTHS ENDED
AUGUST 31, 2000
===================================================================================================================
Revenues $ 206.6 $ 93.7 $ 10.2 $ 0.0 $ 310.5 $ 51.6 $ 362.1
Depreciation 1.1 0.4 0.8 2.9 5.2 1.0 6.2
Amortization (2) 4.3 11.3 3.3 0.0 18.9 0.7 19.6
Royalty advances expensed 4.5 0.3 0.2 0.0 5.0 0.0 5.0
Segment profit/(loss) (3) 7.5 14.8 (9.8) (17.5) (5.0) (1.8) (6.8)
Segment assets 775.9 362.4 64.5 231.9 1,434.7 249.4 1,684.1
Goodwill 110.3 71.9 9.0 4.7 195.9 35.2 231.1
Long-lived assets (4) 235.5 191.9 42.4 154.3 624.1 79.9 704.0
Expenditures for
long-lived assets (5) 227.8 150.8 6.9 19.6 405.1 22.6 427.7
-------------------------------------------------------------------------------------------------------------------
(1) Overhead includes all domestic corporate-related items not allocated to
reportable segments which includes unallocated expenses and the costs
related to the management of corporate assets. Unallocated assets are
principally comprised of deferred income taxes and property, plant and
equipment related to the company's headquarters in the metropolitan New
York area, its National Service Operation located in Missouri and an
industrial/office building complex in Connecticut.
(2) Includes amortization of goodwill, intangible assets and prepublication
and production costs.
(3) Segment profit/(loss) represents earnings before interest, income taxes
and cumulative effect of accounting change.
(4) Includes property, plant and equipment, prepublication costs, goodwill
and other intangibles, royalty advances and production costs.
(5) Includes expenditures for property, plant and equipment, investments in
prepublication and production costs, royalty advances and acquisitions of
businesses.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
4. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
====================================================================================================================
AUGUST 31, 2001 MAY 31, 2001 AUGUST 31, 2000
====================================================================================================================
Lines of Credit $ 30.0 $ 23.1 $ 23.1
Grolier Facility 350.0 350.0 350.0
Loan Agreement and Revolver 103.9 -- 154.7
7% Notes due 2003, net of discount 124.9 124.9 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 1.7 0.6 0.7
--------------------------------------------------------------------------------------------------------------------
Total debt 720.5 608.6 763.3
Less current portion of long-term debt and lines of credit (381.1) (23.3) (23.1)
--------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 339.4 $ 585.3 $ 740.2
====================================================================================================================
The following table sets forth the maturities of the Company's Debt
obligations for the remainder of fiscal 2002 and the next five fiscal years:
=========================================================================
MAY 31,
=========================================================================
Nine month period ending: 2002 $ 31.1
Fiscal years ending: 2003 350.6
2004 124.9
2005 103.9
2006 110.0
Thereafter --
------
Total $ 720.5
=======
GROLIER FACILITY. On June 22, 2000, the Company established a new credit
facility (the "Grolier Facility") to finance $350.0 of the $400.0 Grolier
purchase price. The Grolier Facility expires on June 21, 2002. Scholastic Inc.
is the borrower, and the Company is the guarantor. Borrowings bear interest at
the prime rate, or 0.39% to 1.10% over LIBOR (as defined). The Grolier Facility
also provides for a facility fee ranging from 0.085% to 0.25%, based on the
Company's credit rating. Based on the Company's current credit rating, the
interest rate and facility fee charged were 0.575% over LIBOR and 0.125%,
respectively. The Grolier Facility contains certain financial covenants related
to debt and interest coverage ratios (as defined) and limits dividends and other
distributions. At August 31, 2001, $350.0 was outstanding under the Grolier
Facility.
LOAN AGREEMENT. The Company and Scholastic Inc. are joint and several borrowers
under an amended and restated loan agreement with certain banks, effective
August 11, 1999 and amended June 22, 2000 (the "Loan Agreement"). The Loan
Agreement, which expires on August 11, 2004, provides for aggregate borrowings
of up to $170.0 (with a right in certain circumstances to increase borrowings to
$200.0), including the issuance of up to $10.0 in letters of credit, of which
none was outstanding at August 31, 2001. 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 as of
August 31, 2001 were 0.475% over LIBOR, 0.150%, and 0.075%, respectively. The
Loan Agreement contains certain financial covenants relating to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At August 31, 2001, $77.0 was outstanding under the Loan
Agreement.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers
under a Revolving Loan Agreement with a bank, effective November 10, 1999 and
amended June 22, 2000 (the "Revolver"). It provides for unsecured revolving
credit loans of up to $40.0 and expires on August 11, 2004. Interest under
this facility is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as
defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts
charged vary based upon the Company's credit rating. Based on the Company's
current credit rating, the interest rate and facility fee as of August 31,
2001 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, 2001,
the Company had $26.9 outstanding under the Revolver.
7% NOTES DUE 2003. On December 23, 1996, the Company issued $125.0 of 7% Notes
(the "Notes"). The Notes are unsecured and unsubordinated obligations of the
Company and will mature on December 15, 2003. The Notes are not redeemable prior
to maturity. Interest on the Notes is payable semi-annually on December 15 and
June 15 of each year.
CONVERTIBLE SUBORDINATED DEBENTURES. On August 18, 1995, the Company sold $110.0
of its 5.0% Convertible Subordinated Debentures due August 15, 2005 (the
"Debentures") under Regulation S and Rule 144A of the Securities Act of 1933.
The Debentures are listed on the Luxembourg Stock Exchange and are designated
for trading in the Portal system of the National Association of Securities
Dealers, Inc. 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 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 $38.43 per share.
5. CONTINGENCIES
As previously reported, three purported class action complaints were filed in
the United States District for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The
complaints were consolidated. The Consolidated Amended Class Action Complaint
(the "Complaint") was served and filed on August 13, 1997. The Complaint was
styled as a class action, In re Scholastic Corporation Securities Litigation,
97 Civ.II 2447 (JFK), on behalf of all persons who purchased Company common
stock from December 10, 1996 through February 20, 1997. The Complaint
alleged, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing
public concerning the financial condition of the Company. Specifically, the
Complaint alleged misstatements and omissions by the Company pertaining to
adverse sales and returns of its popular Goosebumps(R) book series prior to
the Company's interim earnings announcement on February 20, 1997. On January
26, 2000, an order was entered granting the Company's motion to dismiss
plaintiffs' Second Amended Consolidated Complaint without leave to further
amend the complaint. Previously, on December 14, 1998, an order was entered
granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001,
the Court of Appeals for the Second Circuit reversed the dismissal of the
Second Amended Consolidated Complaint and remanded the case for further
proceedings. On August 30, 2001, the Company filed a Petition for a Writ of
Certiorari with the Supreme Court of the United States to review the Second
Circuit's decision. The Company continues to believe that the litigation is
without merit and will continue to vigorously defend against it.
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
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 County
of New York 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 Court
of New York County of New York. 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 and on May 18, 2001, each party filed motions for
summary judgment in the federal court case. The Company is seeking declaratory
relief and damages for, among other claims, breaches of contract, fraud and acts
of unfair competition. Damages sought by the Company include repayment by
Parachute of a portion of the $15.3 advance already paid. The Company intends to
vigorously defend its position in these proceedings. The Company does not
believe that this dispute will have a material adverse effect on its financial
condition.
In addition to the above actions, various claims and lawsuits arising in the
normal course of business are pending against the Company. The results of these
proceedings are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
6. COMPREHENSIVE LOSS
The following table sets forth the comprehensive loss for the periods indicated:
THREE MONTHS ENDED AUGUST 31,
===============================================================================================
2001 2000
===============================================================================================
Net loss $ (37.0) $ (10.6)
Other comprehensive income/(loss):
Foreign currency translation adjustment
net of provision for (benefit from) income taxes 2.7 (1.8)
-----------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (34.3) $ (12.4)
===============================================================================================
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
7. 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, which
reflects the impact of the Company's 2-for-1 Stock Split effective January 16,
2001 (see Note 10), summarizes the reconciliation of the numerators and
denominators for the Basic and Diluted loss per share ("EPS") computations for
the periods indicated:
THREE MONTHS ENDED AUGUST 31,
================================================================================================
2001 2000
================================================================================================
Net loss $ (37.0) $ (10.6)
Weighted average shares Class A and Common
shares outstanding for basic and diluted loss per share 35.2 34.1
================================================================================================
Net loss per Class A and Common Share:
Basic and Diluted $ (1.05) $ (0.31)
The effect of the 5.0% Convertible Subordinated Debentures and the shares
issuable pursuant to employee stock plans on the weighted average shares
outstanding for diluted EPS was anti-dilutive and not included in the
calculation.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective as of June 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized but are reviewed annually,
or more frequently if impairment indicators arise, for impairment. In
accordance with the Statement, the Company has not yet determined the impact, if
any, on its earnings and financial position of the required impairment tests of
goodwill and other indefinite lived intangible assets.
The following table reflects unaudited pro forma results of operations of the
Company, giving effect to SFAS No. 142 as if it were adopted on June 1, 2000:
THREE MONTHS ENDED AUGUST 31,
===========================================================================================================
2001 2000
===========================================================================================================
Net loss, as reported $ (37.0) $ (10.6)
Add back: amortization expense, net of tax -- 1.4
Pro forma net loss $ (37.0) $ (9.2)
Basic and diluted net loss per Class A and Common Share:
As reported $ (1.05) $ (0.31)
Pro forma $ (1.05) $ (0.27)
===========================================================================================================
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
The following table summarizes the activity in Goodwill for the periods
indicated:
================================================================================================================
THREE MONTHS ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, 2001 MAY 31, 2001 AUGUST 31, 2000
================================================================================================================
Beginning balance $ 221.9 $ 63.5 $ 63.5
Additions due to acquisitions 4.1 169.9 169.9
Amortization -- (10.3) (2.0)
Other, principally translation adjustments 1.1 (1.2) (0.3)
----------------------------------------------------------------------------------------------------------------
TOTAL $ 227.1 $ 221.9 $ 231.1
================================================================================================================
The following table summarizes Other Intangibles subject to amortization at
the dates indicated:
==============================================================================================================
AUGUST 31, 2001 MAY 31, 2001 AUGUST 31, 2000
==============================================================================================================
Customer lists $ 2.2 $ 2.2 $ 2.2
Accumulated amortization (1.5) (1.3) (0.2)
--------------------------------------------------------------------------------------------------------------
Net customer lists 0.7 0.9 2.0
Other intangibles 2.2 2.2 2.2
Accumulated amortization (1.3) (1.3) (1.1)
--------------------------------------------------------------------------------------------------------------
Net other intangibles $ 0.9 $ 0.9 $ 1.1
--------------------------------------------------------------------------------------------------------------
TOTAL $ 1.6 $ 1.8 $ 3.1
==============================================================================================================
Amortization expense for Other Intangibles totaled $0.2 and $0.3 for the three
months ended August 31, 2001 and August 31, 2000, respectively, and $1.5 for the
twelve months ended May 31, 2001.
The following table summarizes Other Intangibles not subject to amortization
at the dates indicated:
==============================================================================================================
AUGUST 31, 2001 MAY 31, 2001 AUGUST 31, 2000
==============================================================================================================
Net carrying value by major class:
Titles $ 28.7 $ 28.7 $ 29.6
Major sets 11.4 11.4 11.7
Licenses 17.2 17.2 17.7
Trademarks and Other 2.8 2.8 3.0
--------------------------------------------------------------------------------------------------------------
TOTAL $ 60.1 $ 60.1 $ 62.0
==============================================================================================================
12
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
9. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
On June 1, 2001, the Company adopted Statement of Position No. 00-2 ("SOP
00-2"), "Accounting by Producers and Distributors of Films", which replaces SFAS
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films." SOP 00-2 provides that film costs should be accounted for under an
inventory model and discusses various topics such as revenue recognition and
accounting for exploitation costs and impairment assessment. In addition, SOP
00-2 establishes criteria for which revenues should be included in the Company's
ultimate revenue projections.
The Company recognizes revenue from its film licensing arrangements when the
film is complete and delivered, the license period has begun, the fee is
fixed or determinable and collection is reasonably assured. Costs of
producing film and acquiring film distribution rights are capitalized and
amortized using the individual-film-forecast method. This method amortizes
such residual costs in the same ratio that current period actual revenue
bears to estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year. All exploitation costs are expensed as
incurred. As a result of the adoption of SOP 00-2, the Company recorded a
charge of $5.2, net of tax, to reduce the carrying value of its film
production costs. This charge is reflected in the Company's condensed
consolidated statements of operations as a cumulative effect of accounting
change and is attributed entirely to the Media, Licensing and Advertising
segment. Management estimates that 100% of the costs of its unamortized films
will be amortized over the next three years.
10. COMMON AND CLASS A STOCK
On December 14, 2000, the Company's Board of Directors authorized a 2-for-1
stock split in the form of a 100% stock dividend on its Common Stock and
Class A Stock, effective January 16, 2001, to shareholders of record as of
December 29, 2000 (the "2-for-1 Stock Split"). Stockholders of record
received one additional share of Common Stock or Class A Stock for each share
held on the record date. All outstanding rights under stock options and stock
purchase plans to acquire the Company's Common Stock and under the Company's
5% Convertible Subordinated Debentures due 2005 were adjusted to give effect
to the 2-for-1 Stock Split.
13
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, 2001 decreased 15.5% to $306.1
million from $362.1 million in the first quarter of the prior fiscal year. In
the first quarter of the prior fiscal year, Scholastic benefited from the
successful release of HARRY POTTER AND THE GOBLET OF FIRE which, along with
sales from other HARRY POTTER(TM) titles, provided approximately $100 million
in revenue, compared to approximately $14 million of HARRY POTTER sales in
the current year. The current year first quarter benefited from the inclusion
of revenue from Grolier's operations for 13 weeks as compared to 10 weeks in
the prior year first quarter, which resulted in approximately $30 million of
additional revenue.
As a percentage of sales, cost of goods sold for the three-month period ended
August 31, 2001 decreased from 51.1% in the year ago period to 49.9% in the
current year first quarter. This primarily reflects the inclusion of the
three additional weeks of Grolier revenue, which historically has a lower
cost of goods sold as a percentage of sales.
In the first quarter of fiscal 2002, selling, general and administrative
expenses increased $12.0 million, or 6.9%, over the first quarter of the
prior fiscal year primarily due to the inclusion of Grolier operating costs.
Depreciation increased from $6.2 million in the first quarter of last year to
$7.6 million in the first quarter of this year, primarily due to increased
capital expenditures for information technology initiatives, including
Internet development. Amortization of goodwill and other intangibles in the
current fiscal quarter reflects a $2.3 million reduction related to the
Company's adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, the
Company is required to take an impairment-only approach to amortizing
goodwill and other intangible assets with indefinite lives. In accordance
with the Statement, the Company has not yet determined the impact, if any, on
its earnings and financial position of the required impairment tests of
goodwill and other indefinite lived intangible assets. (see Footnote 8)
The operating loss for the first quarter of fiscal 2002 increased to $41.7
million compared to $6.8 million in the year ago period. The increase in
operating loss is primarily due to decreased HARRY POTTER revenues (resulting
in approximately $43 million of decreased gross margin), offset by the
additional three weeks of Grolier revenues (resulting in approximately $21
million of increased gross margin). 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.
Net interest expense decreased from $9.7 million in the first quarter of
fiscal 2001 to $8.0 million in the current year first quarter as a result of
lower interest rates, partially offset by $1.0 million of additional expense
consisting of three additional weeks of debt related to the acquisition of
Grolier.
In the first quarter of fiscal 2002, the Company adopted Statement of Position
No. 00-2 ("SOP 00-2"), "Accounting by Producers and Distributors of Films." This
adoption resulted in an after-tax charge of $5.2 million, or $0.15 per share,
which is reflected as a cumulative effect of an accounting change.
14
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Net loss for the quarter ended August 31, 2001 increased to $37.0 million, or
$1.05 per share, from $10.6 million, or $0.31 per share, in the prior year
period. Excluding the effect of the SOP 00-2 charge, net loss would be $31.8
million, or $0.90 per share.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
school-based book clubs, school-based and direct-to-home continuity programs,
school-based book fairs and the trade channel.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
=======================================================================
2001 2000
=======================================================================
Revenue $ 141.1 $ 206.6
Operating (loss)/profit (27.9) 7.5
-----------------------------------------------------------------------
OPERATING MARGIN * 3.6%
----------
* - NOT MEANINGFUL
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
first quarter of fiscal 2002 decreased 31.7% to $141.1 million from $206.6
million in the comparable quarter of the prior fiscal year. This decrease was
primarily due to the July 2000 release of HARRY POTTER AND THE GOBLET OF
FIRE, which together with increases in the sales of all HARRY POTTER titles,
provided approximately $100 million of revenue in the year ago first quarter,
compared to approximately $14 million in revenue in the current year first
quarter. Partially offsetting this revenue decrease in the current year first
quarter was Scholastic's direct-to-home continuity business, which increased
$18.6 million over the same prior year period due primarily to the inclusion
of a full quarter of results from Grolier's operations.
Operating loss for the quarter was $27.9 million as compared to an operating
profit of $7.5 million for the prior year quarter. This adverse shift is
primarily due to a decrease in trade operating profit reflecting the lower
HARRY POTTER revenue in the current year first quarter.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of supplemental and core materials,
classroom magazines, and print and on-line non-fiction and reference products
for grades K to 12 in the United States.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
==========================================================================
2001 2000
==========================================================================
Revenue $ 91.3 $ 93.7
Operating profit 15.4 14.8
--------------------------------------------------------------------------
OPERATING MARGIN 16.9% 15.8%
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
Revenues in the EDUCATIONAL PUBLISHING segment for the current year first
quarter were $91.3 million compared to revenues of $93.7 million in the
comparable quarter of the prior fiscal year. The decrease in revenues in the
current year first quarter for SCHOLASTIC LITERACY PLACE(R) of $12.3 million,
following the Company's April 2001 announcement not to update the program,
was partially offset by $6.6 million of increased sales of paperback reading
collections, and supplementary and instructional materials and $4.1 million
of additional sales of Grolier's print and on-line children's non-fiction and
reference products.
Operating profit for the current year first quarter improved by 4.1%, or $0.6
million, to $15.4 million over the prior year period, primarily due to
reduced sales and promotion expenses and prepublication costs relating to the
Company's decision not to update LITERACY PLACE and the resulting cost of
goods sold special charge recorded as of May 31, 2001, which resulted in the
non-recoverable portion of the unamortized prepublication costs pertaining to
LITERACY PLACE being expensed.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software, Internet services and the
production and/or distribution by and through the Company's subsidiary,
Scholastic Entertainment Inc., of programming and consumer products (including
children's television programming, videos, software, feature films, promotional
activities and non-book merchandise), as well as advertising and promotional
activities.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
==========================================================================
2001 2000
==========================================================================
Revenue $ 18.7 $ 10.2
Operating loss (8.5) (9.8)
--------------------------------------------------------------------------
OPERATING MARGIN * *
----------
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues increased 83.3% to $18.7 million in
the first quarter of fiscal 2002, from $10.2 million the prior year quarter.
This improvement was principally due to increased sales of CD-ROMs of $3.6
million and an increase in advertising revenue from consumer magazines of
$3.0 million.
Operating loss for the current year first quarter was $8.5 million, compared
to a loss of $9.8 million in the prior year first quarter, due to improved
gross margins of $4.7 million from higher revenue, which was partially offset
by $3.3 million of increases in overhead, administrative and promotional
operating expenses.
INTERNATIONAL
The INTERNATIONAL segment includes the publication and distribution of products
and services outside the United States by the Company's international operations
and its domestic export and foreign rights businesses.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
==========================================================================
2001 2000
==========================================================================
Revenue $55.0 $51.6
Operating loss (3.7) (1.8)
--------------------------------------------------------------------------
OPERATING MARGIN * *
----------
* - NOT MEANINGFUL
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
INTERNATIONAL revenues for the quarter ended August 31, 2001 increased 6.6%
to $55.0 million from $51.6 million in the prior year quarter. The increase
in revenue is primarily due to the inclusion of Grolier. The increase in
operating loss of $1.9 million compared to the prior year quarter was a
result of an increased operating loss for the Company's U.K. operations of
$0.7 million and Export operations for $0.4 million.
SEASONALITY
The Company's school-based book clubs, school-based book fairs and most of its
magazines operate on a school-year basis. Therefore, the Company's business is
highly seasonal.
As a consequence, the Company's revenues in the first and third quarters of the
fiscal year are generally lower than its revenues in the other two fiscal
quarters. The Company experiences a substantial loss from operations in the
first quarter. Typically, school-based book clubs and book fairs revenues are
proportionately larger in the second quarter of the fiscal year, while revenues
from the sale of instructional materials are the highest in the first quarter.
In the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. As a result of the Company's
business cycle, seasonal borrowings have historically increased during June,
July and August, have generally peaked in September or October, and have been at
their lowest point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $4.3 million during the
quarter ended August 31, 2001.
Net cash used in operations was $73.4 million for the quarter primarily as a
result of seasonal working capital increases to support anticipated growth in
the club and fair businesses in the next quarter.
Cash used for investing activities was $48.2 million for the quarter. The
spending principally consisted of capital expenditures, prepublication costs,
royalty advances, business acquisitions and production cost expenditures.
Capital expenditures, including capitalized interest, totaled $17.2 million
for the first quarter of fiscal 2002, increasing $5.4 million over the same
period in fiscal 2001 largely as result of the expansion of the Company's
corporate headquarters and the continued investment in information technology
initiatives. Prepublication expenditures increased $2.9 million to $11.4
million in the first quarter. Payments for royalty advances increased to $7.0
million in the first quarter from $5.9 million in the prior year first
quarter. Production costs decreased $2.2 million over the same period of the
prior 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,
including the Grolier operations, for the balance of fiscal 2002.
17
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
FINANCING
In connection with the June 22, 2000 acquisition of Grolier for $400.0 million,
the Company has outstanding $350.0 million under an unsecured credit facility
established in connection with the acquisition, which expires June 21, 2002 (the
"Grolier Facility"). The weighted average interest rate under the Grolier
Facility at August 31, 2001 was 4.6%. The Company does not anticipate any
difficulty in extending the Grolier Facility or finding alternative financing
prior to the expiration of the facility.
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, 2001, the Company had $103.9 million in borrowings
outstanding under these facilities at a weighted average interest rate of 4.4%.
In addition, unsecured lines of credit available to the Company's international
subsidiaries totaled $53.3 million at August 31, 2001. These lines are used
primarily to fund local working capital needs. At August 31, 2001, $30.0 million
in borrowings were outstanding under these lines of credit at a weighted average
interest rate of 6.9%.
ACQUISITIONS
On June 22, 2000, the Company acquired the capital stock of Grolier for $400.0
million in cash, and in July 2001, the Company acquired certain assets of Troll
Book Fairs, Inc. In the ordinary course of business, the Company explores
domestic and international expansion opportunities, including potential niche
and strategic acquisitions. As part of this process, the Company engages with
interested parties in discussions concerning possible transactions. The Company
will continue to evaluate such opportunities and prospects.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 2001.
18
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. Approximately two-thirds of the Company's debt bears interest
at a variable rate and is sensitive to changes in interest rates. The Company is
subject to the risk that market interest rates will increase and thereby
increase the interest rates currently being charged under the variable rate
debt. 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, 2001, the balance outstanding under its variable rate
facilities was $485.6 million, at a weighted average interest rate of 4.4%. A
15% increase or decrease in the average cost of the Company's variable rate debt
under the various facilities at August 31, 2001 would impact the Company's
results of operations and cash flows by approximately $3.2 million annually on a
pre-tax basis.
19
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.II 2447 (JFK), on behalf of all persons who purchased Company common
stock from December 10, 1996 through February 20, 1997. The Complaint
alleged, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing
public concerning the financial condition of the Company. Specifically, the
Complaint alleged misstatements and omissions by the Company pertaining to
adverse sales and returns of its popular Goosebumps book series prior to the
Company's interim earnings announcement on February 20, 1997. On January 26,
2000, an order was entered granting the Company's motion to dismiss
plaintiffs' Second Amended Consolidated Complaint without leave to further
amend the complaint. Previously, on December 14, 1998, an order was entered
granting the Company's motion to dismiss plaintiffs' First Amended
Consolidated Complaint, with leave to amend the complaint. On June 1, 2001,
the Court of Appeals for the Second Circuit reversed the dismissal of the
Second Amended Consolidated Complaint and remanded the case for further
proceedings. On August 30, 2001, the Company filed a petition for a Writ of
Certiorari with the Supreme Court of the United States to review the Second
Circuit's decision. The Company continues to believe that the litigation is
without merit and will continue to vigorously defend against it.
20
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.19 Scholastic Corporation 2001 Stock Incentive Plan
(incorporated by reference to Appendix A of the Company's
definitive Proxy Statement as filed with the Commission
on August 24, 2001).
--------------------------------------------------------------------------------
21
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, 2001 /s/ Richard Robinson
------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: October 15, 2001 /s/ Kevin J. McEnery
------------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
22
