SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2002 Commission File No. 0-19860
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
557 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Number of shares outstanding
of each class as of December 31, 2002
------------- ----------------------------
Common Stock, $.01 par value 37,516,262
Class A Stock, $.01 par value 1,656,200
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended November 30, 2002 and 2001 1
Condensed Consolidated Balance Sheets at November 30, 2002
and 2001, and May 31, 2002 2
Consolidated Statements of Cash Flows for the Six Months
Ended November 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
CERTIFICATIONS 33
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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
REVENUES $ 660.3 $ 637.2 $ 967.2 $ 943.3
Operating costs and expenses:
Cost of goods sold 281.8 275.1 442.0 434.6
Selling, general and administrative expenses 226.0 220.3 404.0 381.3
Bad debt expense 18.4 21.1 36.7 40.6
Depreciation and amortization 10.7 8.5 21.3 16.3
Litigation and related charges - - 1.9 -
- ----------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 536.9 525.0 905.9 872.8
OPERATING INCOME 123.4 112.2 61.3 70.5
Interest expense, net 8.2 8.2 15.8 16.3
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative effect of
accounting change 115.2 104.0 45.5 54.2
Provision for income taxes 40.2 37.5 15.1 19.5
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 75.0 66.5 30.4 34.7
Cumulative effect of accounting change (net of income taxes of $2.9) - - - (5.2)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 75.0 $ 66.5 $ 30.4 $ 29.5
======================================================================================================================
EARNINGS PER SHARE OF CLASS A AND COMMON STOCK:
Earnings before cumulative effect of accounting change:
Basic $ 1.92 $ 1.88 $ 0.78 $ 0.98
Diluted $ 1.85 $ 1.69 $ 0.75 $ 0.92
Cumulative effect of accounting change (net of income taxes):
Basic - - - $ (0.14)
Diluted - - - $ (0.13)
Net income:
Basic $ 1.92 $ 1.88 $ 0.78 $ 0.84
Diluted $ 1.85 $ 1.69 $ 0.75 $ 0.79
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOVEMBER 30, MAY 31, NOVEMBER 30,
2002 2002 2001
- -------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8.1 $ 10.7 $ 11.4
Accounts receivable, net 335.8 243.8 314.6
Inventories 423.6 359.5 390.1
Deferred promotion costs 48.9 44.6 42.9
Deferred income taxes 82.0 81.3 87.5
Prepaid and other current assets 65.1 58.6 49.2
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 963.5 798.5 895.7
Property, plant and equipment, net 327.4 301.4 274.8
Prepublication costs 111.2 113.6 106.8
Production costs 6.9 9.1 7.0
Goodwill 248.9 256.2 226.4
Other intangibles 63.6 63.8 63.8
Other assets and deferred charges 135.7 95.6 79.6
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,857.2 $ 1,638.2 $ 1,654.1
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and short-term debt $ 28.1 $ 23.5 $ 382.4
Accounts payable 177.0 134.3 163.5
Accrued royalties 46.5 38.5 53.3
Deferred revenue 44.1 16.2 46.9
Other accrued expenses 132.2 119.2 136.0
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 427.9 331.7 782.1
NONCURRENT LIABILITIES:
Long-term debt 622.1 525.8 291.2
Other noncurrent liabilities 55.3 61.8 46.6
- -------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 677.4 587.6 337.8
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value - - -
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.4 0.4 0.3
Additional paid-in capital 378.1 373.7 241.5
Deferred compensation (1.3) (0.4) (0.6)
Accumulated other comprehensive loss (28.3) (27.4) (15.6)
Retained earnings 403.0 372.6 308.6
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 751.9 718.9 534.2
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,857.2 $ 1,638.2 $ 1,654.1
===========================================================================================
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
SIX MONTHS ENDED
NOVEMBER 30,
- ---------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 30.4 $ 29.5
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of prepublication and production costs 30.7 24.6
Depreciation and amortization 21.3 16.3
Royalty advances expensed 9.0 9.8
Tax benefit realized from stock option transactions 0.5 2.3
Deferred income taxes (0.5) 1.5
Non-cash portion of accounting change - 8.1
Changes in assets and liabilities:
Accounts receivable, net (91.6) (94.6)
Inventories (64.1) (50.2)
Prepaid and other current assets (5.7) 12.3
Deferred promotion costs (4.3) 1.2
Accounts payable and other accrued expenses 55.6 8.9
Accrued royalties 8.8 8.5
Deferred revenue 27.4 34.8
Other, net (12.2) (4.9)
- ---------------------------------------------------------------------------------------------------------------
Total adjustments (25.1) (21.4)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5.3 8.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (46.4) (32.6)
Prepublication costs (21.4) (25.2)
Equity investment (18.3) -
Royalty advances (16.1) (18.3)
Production costs (5.4) (6.7)
Acquisition related payments - (4.1)
Other 0.1 0.2
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (107.5) (86.7)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 366.4 364.8
Repayments of Loan Agreement and Revolver (225.1) (308.8)
Borrowings under Grolier Facility 102.0 -
Repayments of Grolier Facility (152.0) -
Borrowings under lines of credit 53.8 73.3
Repayments of lines of credit (48.5) (63.2)
Proceeds pursuant to employee stock plans 3.0 8.0
Other - 2.1
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 99.6 76.2
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2.6) (2.4)
Cash and cash equivalents at beginning of period 10.7 13.8
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8.1 $ 11.4
===============================================================================================================
SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements consist of the
accounts of Scholastic Corporation and all wholly-owned subsidiaries
("Scholastic" or the "Company"). These financial statements have not been
audited, but reflect those adjustments consisting of normal recurring items
which management considers necessary for a fair presentation of financial
position, results of operations and cash flow. These financial statements should
be read in conjunction with the consolidated financial statements and related
notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 2002.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the three and six months ended November 30, 2002
and 2001 are not necessarily indicative of the results expected for the full
year. Due to the seasonal fluctuations that occur, the November 30, 2001
condensed consolidated balance sheet is included for comparative purposes.
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements involves the use of estimates and
assumptions by management which affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The Company bases its
estimates on historical experience, current business factors, and various other
assumptions believed to be reasonable under the circumstances, all of which are
necessary in order to form a basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from those estimates
and assumptions. On an on-going basis, the Company evaluates the adequacy of its
reserves and the estimates used in their calculations including, but not limited
to: collectability of accounts receivable; sales returns; amortization periods;
and recoverability of inventories, deferred promotion costs, prepublication
costs, royalty advances, goodwill and other intangibles.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation. Additionally, in November 2001, the Financial Accounting Standards
Board ("FASB") Emerging Issues Task Force ("EITF") reached a consensus on Issue
No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." The issue addresses the recognition,
measurement and income statement classification of sales incentives or other
consideration, free or discounted product or services and cash given by a vendor
to a customer. The Company adopted the provisions of EITF Issue No. 01-9 for
fiscal 2002. This adoption resulted in a reclassification of Selling, general
and administrative expenses to Cost of goods sold totaling $15.4 and $22.2 in
the three and six months ended November 30, 2001, respectively, with no change
to reported net income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company is required to adopt this statement by the first quarter of
fiscal 2004. The Company does not expect that the adoption of SFAS No. 143 will
have a material impact on its financial position, results of operations or cash
flows.
4
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
supercedes the guidance provided by the EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect that the adoption of SFAS No. 146
will have a material impact on its financial position, results of operations or
cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of
SFAS No. 123 to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. SFAS No. 148 is effective
for fiscal years ending after December 15, 2002, with earlier application
permitted for entities with fiscal years ending prior to December 15, 2002
under certain circumstances. The disclosure requirements for interim
financial statements containing condensed consolidated financial statements
are effective for interim periods beginning after December 15, 2002. The
Company is assessing the impact of adoption of the transition guidelines
provided by SFAS No. 148.
2. ACQUISITIONS
FISCAL 2002 ACQUISITIONS
During fiscal 2002, the Company completed the acquisitions of the stock or
assets of the following companies: Troll Book Fairs LLC, a national school-based
book fair operator; Tom Snyder Productions, Inc., a developer and publisher of
interactive educational software and producer of television programming; Sandvik
Publishing Ltd., d/b/a Baby's First Book Club(R), a direct marketer of
age-appropriate books and toys for young children; Klutz, a publisher and
creator of "books plus" products for children; Teacher's Friend Publications,
Inc., a producer and marketer of materials that teachers use to decorate their
classrooms; and Nelson B. Heller & Associates, a publisher of
business-to-business newsletters. The aggregate purchase price for these
acquisitions, net of cash received, was $66.7, and the related goodwill and
other intangibles was $35.9. In addition to the initial purchase price paid for
Klutz of $42.8, additional payments of up to $31.3 may be made to the seller in
2004 and 2005, contingent upon the achievement of certain revenue thresholds.
The assets and liabilities of each business acquired were adjusted to their fair
values as of the date of acquisition, with the purchase price in excess of the
fair market value assigned to goodwill.
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
The following summarizes the allocation of the initial purchase price of the
fiscal 2002 acquisitions:
VALUE
------------------------------------------------------------
Accounts receivable $ 8.0
Inventory 8.6
Other current assets 6.4
Property, plant and equipment 1.2
Goodwill and other intangibles 35.9
Noncurrent deferred taxes 18.6
Other assets 0.4
Current liabilities (12.4)
------------------------------------------------------------
CASH PAID FOR ACQUISITIONS, NET OF CASH RECEIVED $ 66.7
============================================================
The allocation of the aggregate purchase price is preliminary and will be
finalized during fiscal 2003. Future adjustments to the purchase price
allocation are not expected to be material. The operating results of each fiscal
2002 acquisition have been included in the Company's consolidated results of
operations since the respective dates of acquisition. The effect on operating
results of including the acquired business operations on a pro forma basis would
not be material.
In connection with the fiscal 2002 acquisitions, the Company has established
liabilities of $3.2 at May 31, 2002, relating primarily to severance and other
exit costs. As of November 30, 2002, $2.4 of these liabilities remain unpaid.
FISCAL 2001 ACQUISITION - GROLIER
On June 22, 2000, Scholastic Inc., a subsidiary of Scholastic Corporation,
acquired all of the issued and outstanding capital stock of Grolier Incorporated
("Grolier"), a Delaware corporation. In connection with the Grolier acquisition,
the Company established a plan for integrating Grolier's operations.
Accordingly, the Company established liabilities of approximately $17.7 relating
primarily to severance, fringe benefits and related salary continuance, as well
as certain exit costs associated with the integration of certain of Grolier's
operational and administrative functions. This amount, originally established at
$12.4, was increased at May 31, 2001 by $5.3 as the Company refined its estimate
of the costs of the integration plan. At May 31, 2002, the established
liabilities for integration costs were in excess of the expected costs related
to severance and other exit costs by $2.1, resulting in a decrease in the
recorded liabilities and a reduction of Selling, general and administrative
expenses, which are reflected in the table below. As of November 30, 2002, $2.9
of these liabilities remained unpaid and are expected to be paid over the next
three years. A summary of the activity in the established liabilities is
detailed in the following table:
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
SEVERANCE AND OTHER EXIT
RELATED COSTS COSTS TOTAL
- --------------------------------------------------------------------------------
Liabilities established at acquisition $ 13.3 $ 4.4 $ 17.7
Fiscal 2001 payments (1.8) (1.2) (3.0)
- --------------------------------------------------------------------------------
BALANCE AT MAY 31, 2001 11.5 3.2 14.7
Fiscal 2002 payments (7.3) (0.7) (8.0)
Fiscal 2002 adjustment (1.2) (0.9) (2.1)
- --------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 3.0 1.6 4.6
Fiscal 2003 payments to date (1.4) (0.3) (1.7)
- --------------------------------------------------------------------------------
BALANCE AT NOVEMBER 30, 2002 $ 1.6 $ 1.3 $ 2.9
================================================================================
3. INVESTMENT
On June 24, 2002, the Company entered into a joint venture with The Book
People, Ltd., a direct marketer of books in the United Kingdom, to distribute
books to the home under the Red House name and through schools under the
Scholastic School Link name. Accordingly, $9.1 relating to Red House has been
recorded as an investment in the joint venture (See Note 9). The Company
also acquired a 15% equity interest in The Book People Group, Ltd. for 12.0
Pounds Sterling (equivalent to $17.9 as of the date of the transaction) with a
possible additional payment of 3.0 Pounds Sterling based on operating results
and contingent on repayment of all borrowings under a 3.0 Pounds Sterling
revolving credit facility established at the date of the transaction by the
Company in favor of The Book People Group, Ltd. The revolving credit facility
is available to fund the expansion of The Book People and for working capital
purposes. As of November 30, 2002, there were no borrowings outstanding under
the revolving credit facility.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
4. SEGMENT INFORMATION
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong, India, Ireland, Argentina and Southeast Asia and distributes
its products and services through a variety of channels, including school-based
book clubs, school-based book fairs, school-based and direct-to-home continuity
programs, retail stores, schools, libraries, television networks and the
Internet.
The Company categorizes its businesses into four operating segments: CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA, LICENSING AND
ADVERTISING (which collectively represent the Company's domestic operations);
and INTERNATIONAL. This classification reflects the nature of products and
services consistent with the method by which the Company's chief operating
decision-maker assesses operating performance and allocates resources.
- - CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION includes the publication and
distribution of children's books in the United States through school-based book
clubs and book fairs, school-based and direct-to-home continuity programs and
the trade channel.
- - EDUCATIONAL PUBLISHING includes the publication and distribution to schools
and libraries of curriculum materials, classroom magazines and print and on-line
reference and non-fiction products for Kindergarten through grade 12 in the
United States.
- - MEDIA, LICENSING AND ADVERTISING includes the production and/or distribution
in the United States of software and Internet services and the production and/or
distribution by and through the Company's subsidiary, Scholastic Entertainment
Inc. ("SEI"), of programming and consumer products (including children's
television programming, videos, software, feature films, promotional activities
and non-book merchandise).
- - INTERNATIONAL includes the publication and distribution of products and
services outside the United States by the Company's international operations,
and its export and foreign rights businesses.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth information for the periods indicated for the
Company's segments. Certain prior year amounts have been reclassified to conform
with the current year presentation.
CHILDREN'S MEDIA,
BOOK LICENSING
PUBLISHING AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING OVERHEAD(1) DOMESTIC INTERNATIONAL CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
NOVEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 438.2 $ 76.6 $ 46.8 $ 0.0 $ 561.6 $ 98.7 $ 660.3
Bad debt 16.3 0.3 0.2 0.0 16.8 1.6 18.4
Depreciation 2.0 0.4 1.5 5.6 9.5 1.1 10.6
Amortization(2) 4.4 6.4 6.6 0.0 17.4 0.1 17.5
Royalty advances expensed 4.1 0.5 0.1 0.0 4.7 0.6 5.3
Segment profit/(loss)(3) 110.6 16.1 0.2 (18.0) 108.9 14.5 123.4
Expenditures for
long-lived assets(4) 14.6 7.6 6.9 5.1 34.2 3.3 37.5
THREE MONTHS ENDED
NOVEMBER 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 426.8 $ 74.1 $ 46.8 $ 0.0 $ 547.7 $ 89.5 $ 637.2
Bad debt 18.3 0.3 0.6 0.0 19.2 1.9 21.1
Depreciation 1.4 0.4 1.0 4.4 7.2 1.1 8.3
Amortization(2) 3.8 6.0 2.8 0.0 12.6 0.6 13.2
Royalty advances expensed 4.4 0.4 0.6 0.0 5.4 0.0 5.4
Segment profit/(loss)(3) 102.2 11.4 0.0 (11.2) 102.4 9.8 112.2
Expenditures for
long-lived assets(4) 17.9 9.1 9.4 5.7 42.1 2.3 44.4
SIX MONTHS ENDED
NOVEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 578.4 $ 164.6 $ 63.9 $ 0.0 $ 806.9 $ 160.3 $ 967.2
Bad debt 32.1 0.5 0.5 0.0 33.1 3.6 36.7
Depreciation 3.8 0.8 3.1 11.1 18.8 2.3 21.1
Amortization(2) 8.7 13.1 9.0 0.0 30.8 0.1 30.9
Royalty advances expensed 7.5 0.8 0.1 0.0 8.4 0.6 9.0
Segment profit/(loss)(3) 71.4 28.8 (10.2) (40.0) 50.0 11.3 61.3
Segment assets 821.1 283.9 83.8 395.8 1,584.6 272.6 1,857.2
Goodwill 129.8 82.9 10.0 0.0 222.7 26.2 248.9
Expenditures for
long-lived assets(4) 29.7 11.0 11.7 31.6 84.0 23.6 107.6
Long-lived assets(5) 286.4 179.0 44.0 248.1 757.5 96.4 853.9
SIX MONTHS ENDED
NOVEMBER 30, 2001
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 567.9 $ 165.8 $ 65.1 $ 0.0 $ 798.8 $ 144.5 $ 943.3
Bad debt 35.3 0.5 1.4 0.0 37.2 3.4 40.6
Depreciation 2.7 0.8 1.9 8.3 13.7 2.2 15.9
Amortization(2) 8.0 12.3 4.1 0.0 24.4 0.6 25.0
Royalty advances
expensed 8.4 0.7 0.7 0.0 9.8 0.0 9.8
Segment profit/(loss)(3) 73.9 26.9 (8.8) (28.7) 63.3 7.2 70.5
Segment assets 750.6 273.9 69.0 326.3 1,419.8 234.3 1,654.1
Goodwill 113.5 71.1 8.4 0.0 193.0 33.4 226.4
Expenditures for
long-lived assets(4) 38.3 15.8 15.9 13.1 83.1 3.8 86.9
Long-lived assets(5) 264.5 168.1 40.7 203.3 676.6 70.6 747.2
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(1) OVERHEAD INCLUDES ALL DOMESTIC CORPORATE AMOUNTS NOT ALLOCATED TO
REPORTABLE SEGMENTS, WHICH INCLUDES UNALLOCATED EXPENSES AND COSTS RELATED
TO THE MANAGEMENT OF CORPORATE ASSETS. THE SIX MONTHS ENDED NOVEMBER 30,
2002 INCLUDES $1.9 FOR THE SETTLEMENT OF A SECURITIES LAWSUIT INITIATED IN
1997. UNALLOCATED ASSETS ARE PRINCIPALLY COMPRISED OF DEFERRED INCOME TAXES
AND PROPERTY, PLANT AND EQUIPMENT RELATED TO THE COMPANY'S HEADQUARTERS IN
THE METROPOLITAN NEW YORK AREA, ITS NATIONAL SERVICE OPERATION LOCATED IN
MISSOURI AND ARKANSAS, AND AN INDUSTRIAL/OFFICE BUILDING COMPLEX IN
CONNECTICUT.
(2) INCLUDES AMORTIZATION OF PREPUBLICATION COSTS, PRODUCTION COSTS AND OTHER
INTANGIBLES WITH DEFINITE LIVES.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
THE SIX MONTHS ENDED NOVEMBER 30, 2001 EXCLUDES THE CUMULATIVE AFTER-TAX
EFFECT OF ACCOUNTING CHANGE OF $5.2 ($0.13 PER DILUTED SHARE) RELATED TO
THE MEDIA, LICENSING AND ADVERTISING SEGMENT.
(4) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, ROYALTY ADVANCES AND ACQUISITIONS OF,
AND INVESTMENTS IN, BUSINESSES.
(5) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES, ROYALTY ADVANCES, PRODUCTION COSTS AND LONG-TERM
INVESTMENTS.
The following table separately sets forth information for the periods indicated
for the U.S. direct-to-home continuity business formerly operated by Grolier,
which is included in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment,
and for all other businesses included in the segment:
THREE MONTHS ENDED NOVEMBER 30,
---------------------------------------------------------------
Direct-to-home All Other Total
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Revenues $ 52.8 $ 53.6 $ 385.4 $ 373.2 $ 438.2 $ 426.8
Bad debt 10.4 11.9 5.9 6.4 16.3 18.3
Depreciation 0.1 0.1 1.9 1.3 2.0 1.4
Amortization(1) 0.4 0.5 4.0 3.3 4.4 3.8
Royalty advances expensed 0.0 0.1 4.1 4.3 4.1 4.4
Business profit(2) 6.1 5.8 104.5 96.4 110.6 102.2
Expenditures for long-lived assets(3) 2.0 1.8 12.6 16.1 14.6 17.9
SIX MONTHS ENDED NOVEMBER 30,
---------------------------------------------------------------
Direct-to-home All Other Total
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Revenues $ 103.3 $ 110.4 $ 475.1 $ 457.5 $ 578.4 $ 567.9
Bad debt 21.7 24.9 10.4 10.4 32.1 35.3
Depreciation 0.3 0.1 3.5 2.6 3.8 2.7
Amortization(1) 0.7 0.7 8.0 7.3 8.7 8.0
Royalty advances expensed 0.0 0.1 7.5 8.3 7.5 8.4
Business profit(2) 7.9 10.3 63.5 63.6 71.4 73.9
Business assets 252.6 244.8 568.5 505.8 821.1 750.6
Goodwill 93.2 88.6 36.6 24.9 129.8 113.5
Expenditures for long-lived assets(3) 2.6 2.2 27.1 36.1 29.7 38.3
Long-lived assets(4) 144.1 139.0 142.3 125.5 286.4 264.5
(1) INCLUDES AMORTIZATION OF PREPUBLICATION COSTS AND OTHER INTANGIBLES WITH
DEFINITE LIVES.
(2) BUSINESS PROFIT REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES.
(3) INCLUDES EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION COSTS, ROYALTY ADVANCES AND ACQUISITIONS OF BUSINESSES.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL,
OTHER INTANGIBLES AND ROYALTY ADVANCES.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
5. DEBT
The following table sets forth the Company's debt balances as of the dates
indicated:
NOVEMBER 30, 2002 MAY 31, 2002 NOVEMBER 30, 2001
- --------------------------------------------------------------------------------------------------
Lines of Credit $ 28.0 $ 23.3 $ 31.1
Grolier Facility - 50.0 350.0
Loan Agreement and Revolver 191.3 50.0 56.0
7% Notes due 2003, net of discount 124.9 124.9 124.9
5.75% Notes due 2007, net of discount 305.6 300.7 -
Convertible Subordinated Debentures - - 110.0
Other debt 0.4 0.4 1.6
- --------------------------------------------------------------------------------------------------
TOTAL DEBT 650.2 549.3 673.6
Less lines of credit and short-term debt (28.1) (23.5) (382.4)
- --------------------------------------------------------------------------------------------------
Total long-term debt $ 622.1 $ 525.8 $ 291.2
==================================================================================================
The following table sets forth the maturities and carrying values of the
Company's debt obligations as of November 30, 2002 for the remainder of fiscal
2003 and the next four fiscal years:
MAY 31,
- ----------------------------------------------------
Six-month period ending: 2003 $ 28.1
Fiscal years ending: 2004 125.2
2005 191.3
2006 -
2007 305.6
-----------------------
TOTAL $ 650.2
=======================
GROLIER FACILITY. On June 22, 2000, Scholastic Inc. established a credit
facility to finance $350.0 of the $400.0 Grolier purchase price (the "Grolier
Facility"). The net proceeds from the issuance of the 5.75% Notes in January
2002 were used to repay a majority of the Grolier Facility (see "5.75% Notes due
2007" below). On June 21, 2002, the Grolier Facility was amended into a
revolving credit agreement, which provides for aggregate borrowings of up to
$100.0 and expires on June 20, 2003. Under these amended terms, Scholastic Inc.
is the borrower, and Scholastic Corporation is the guarantor. Borrowings bear
interest at the prime rate or 0.39% to 1.10% over LIBOR (as defined). As
amended, the Grolier Facility also provides for a facility fee ranging from
0.085% to 0.25%. The amounts charged vary based upon the Company's credit
rating. As of November 30, 2002, the interest rate and facility fee were 0.650%
over LIBOR and 0.150%, respectively. The Grolier Facility contains certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions. At November 30, 2002 and 2001, $0
and $350.0, respectively, were outstanding under the Grolier Facility. The
weighted average interest rate as of November 30, 2001 was 3.1%. At May 31,
2002, $50.0 was outstanding under the Grolier Facility at a weighted average
interest rate of 2.4%.
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
LOAN AGREEMENT. Scholastic Corporation and Scholastic Inc. are joint and several
borrowers under an amended and restated loan agreement with certain banks,
effective August 11, 1999 and amended June 22, 2000 (the "Loan Agreement"). The
Loan Agreement, which expires on August 11, 2004, provides for aggregate
borrowings of up to $170.0 (with a right in certain circumstances to increase
borrowings to $200.0), including the issuance of up to $10.0 in letters of
credit. Interest under this facility is either at the prime rate or 0.325% to
0.90% over LIBOR (as defined). There is a facility fee ranging from 0.10% to
0.30% and a utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33%
of the total facility. The amounts charged vary based upon the Company's credit
rating. The interest rate, facility fee and utilization fee (when applicable) as
of November 30, 2002 were 0.475% over LIBOR, 0.150% and 0.075%, respectively.
The Loan Agreement contains certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At November 30, 2002 and 2001, $166.0 and $50.0, respectively,
were outstanding under the Loan Agreement at a weighted average interest rate of
2.3% and 3.6%, respectively. At May 31, 2002, $50.0 was outstanding under the
Loan Agreement at a weighted average interest rate of 2.7%.
REVOLVER. Scholastic Corporation and Scholastic Inc. are joint and several
borrowers under a Revolving Loan Agreement with a bank, effective November 10,
1999 and amended June 22, 2000 (the "Revolver"). The Revolver provides for
unsecured revolving credit of up to $40.0 and expires on August 11, 2004.
Interest under this facility is at the prime rate minus 1% or 0.325% to 0.90%
over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%.
The amounts charged vary based upon the Company's credit rating. The interest
rate and facility fee as of November 30, 2002 were 0.475% over LIBOR and 0.150%,
respectively. The Revolver has certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At November 30, 2002 and 2001, $25.3 and $6.0, respectively, were
outstanding under the Revolver at a weighted average interest rate of 2.8% and
2.9%, respectively. At May 31, 2002, there were no borrowings outstanding under
the Revolver.
7% NOTES DUE 2003. On December 23, 1996, Scholastic Corporation issued $125.0 of
7% Notes (the "7% Notes"). The 7% Notes are unsecured and unsubordinated
obligations of the Company and will mature on December 15, 2003. The 7% Notes
are not redeemable prior to maturity. Interest on the 7% Notes is payable
semi-annually on December 15 and June 15 of each year.
5.75% NOTES DUE 2007. On January 23, 2002, Scholastic Corporation issued $300.0
of 5.75% Notes (the "5.75% Notes"). The 5.75% Notes are unsecured and
unsubordinated obligations of the Company and mature on January 15, 2007.
Interest on the 5.75% Notes is payable semi-annually on July 15 and January 15
of each year. The Company may, at any time, redeem all or a portion of the 5.75%
Notes at a redemption price (plus accrued interest to the date of redemption)
equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the
present values of the remaining scheduled payments of principal and interest
discounted to the date of redemption on a semiannual basis. The net proceeds
were used to repay the majority of the $350.0 Grolier Facility.
12
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
INTEREST RATE SWAP AGREEMENT. On February 5, 2002, Scholastic Corporation
entered into an interest rate swap agreement, designated as a fair value hedge
as defined under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," whereby the Company receives a fixed interest rate payment
based on a notional amount totaling $100.0 and pays a variable interest rate to
the counterparty, which is reset semi-annually based on six-month LIBOR (as
defined). This agreement was entered into to exchange the fixed interest rate
payments on a portion of the 5.75% Notes for variable interest rate payments. In
accordance with SFAS No. 133, the value of the 5.75% Notes was increased by $6.6
to reflect an increase in their fair value as of November 30, 2002 and a
corresponding swap asset of $6.6 was recorded in Other assets. Under SFAS No.
133, changes in the fair value of the interest rate swap offset changes in the
fair value of the fixed rate debt due to changes in market interest rates. As
such, there was no ineffective portion to the hedge recognized in earnings
during the six months ended November 30, 2002.
CONVERTIBLE SUBORDINATED DEBENTURES. On August 18, 1995, Scholastic Corporation
sold $110.0 of 5.0% Convertible Subordinated Debentures due August 15, 2005 (the
"Debentures"). On January 11, 2002, pursuant to the exercise of Scholastic
Corporation's optional redemption rights, $109.8 of the Debentures were
converted at the option of the holders into 2.9 million shares of Common Stock
and $0.2 were redeemed for cash.
6. CONTINGENCIES
On January 14, 2003, Scholastic and its affiliates and Parachute Press, Inc.
and its affiliates and R.L. Stine each agreed to dismiss with prejudice the
previously disclosed lawsuits, 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);
PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS, INC. AND
SCHOLASTIC ENTERTAINMENT INC. (Index No. 99/600507); and PARACHUTE PRESS,
INC. V. SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS, INC. AND SCHOLASTIC
ENTERTAINMENT INC., 97 Civ. 8510 (JFK), and to release the other parties from
all claims regarding the disputes.
7. COMPREHENSIVE INCOME
The following table sets forth comprehensive income for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
- -------------------------------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------
Net income $ 75.0 $ 66.5 $ 30.4 $ 29.5
Other comprehensive (loss)/income:
Foreign currency translation adjustment (0.3) (1.9) 0.6 0.8
Minimum pension liability - - (1.5) -
- -------------------------------------------------------------------------------------------------
Total other comprehensive (loss)/income (0.3) (1.9) (0.9) 0.8
- -------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 74.7 $ 64.6 $ 29.5 $ 30.3
=================================================================================================
13
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
8. EARNINGS PER SHARE ("EPS")
Basic EPS is computed by dividing net income by the weighted average Shares
of Class A Stock and Common Stock outstanding during the period. Diluted EPS
is calculated to give effect to potentially dilutive stock options and
Debentures that were outstanding during the period. The following table
summarizes the reconciliation of the numerators and denominators for the
basic and diluted EPS computations for the periods indicated:
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
- -------------------------------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------
Net income for basic EPS $ 75.0 $ 66.5 $ 30.4 $ 29.5
Dilutive effect of Debentures - 0.9 - 1.8
- -------------------------------------------------------------------------------------------------
Adjusted net income for diluted EPS $ 75.0 $ 67.4 $ 30.4 $ 31.3
=================================================================================================
Weighted average Shares of Class A Stock
and Common Stock outstanding for basic EPS 39.1 35.4 39.1 35.3
Dilutive effect of Common Stock issued pursuant
to employee stock plans 1.5 1.6 1.3 1.5
Dilutive effect of Debentures - 2.9 - 2.9
- -------------------------------------------------------------------------------------------------
Adjusted weighted average Shares of Class A Stock
and Common Stock outstanding for diluted EPS 40.6 39.9 40.4 39.7
=================================================================================================
EARNINGS PER SHARE OF CLASS A STOCK AND
COMMON STOCK:
- --------------------------------------------------
Earnings before cumulative effect of
accounting change:
Basic $ 1.92 $ 1.88 $ 0.78 $ 0.98
Diluted $ 1.85 $ 1.69 $ 0.75 $ 0.92
Cumulative effect of accounting change
(net of income taxes):
Basic - - - $ (0.14)
Diluted - - - $ (0.13)
Net income:
Basic $ 1.92 $ 1.88 $ 0.78 $ 0.84
Diluted $ 1.85 $ 1.69 $ 0.75 $ 0.79
=================================================================================================
14
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
9. GOODWILL AND OTHER INTANGIBLES
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective as of June 1, 2001. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized but are reviewed for
impairment annually, or more frequently if impairment indicators arise. In
fiscal 2002, the Company completed the required transitional and annual
impairment reviews of goodwill. These reviews required the Company to estimate
the fair value of its identified reporting units. For each of the reporting
units, the estimated fair value was determined utilizing the expected present
value of the projected future cash flows of the units. In all instances, the
estimated fair value of the reporting units exceeded their book values and
therefore no write-down of goodwill was required.
The following table summarizes the activity in Goodwill for the periods
indicated:
SIX MONTHS ENDED TWELVE MONTHS SIX MONTHS ENDED
NOVEMBER 30, 2002 ENDED MAY 31, 2002 NOVEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------
Beginning balance $ 256.2 $ 221.9 $ 221.9
Additions due to acquisitions - 35.4 4.1
Initial investment in joint venture (9.1) - -
Other adjustments 1.8 (1.1) 0.4
- ---------------------------------------------------------------------------------------------------
TOTAL $ 248.9 $ 256.2 $ 226.4
===================================================================================================
The following table summarizes Other intangibles subject to amortization at the
dates indicated:
NOVEMBER 30, 2002 MAY 31, 2002 NOVEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------
Customer lists $ 2.8 $ 2.8 $ 2.2
Accumulated amortization (2.3) (2.2) (1.6)
- ---------------------------------------------------------------------------------------------------
Net customer lists 0.5 0.6 0.6
Other intangibles 3.9 3.9 3.9
Accumulated amortization (2.2) (2.1) (2.1)
- ---------------------------------------------------------------------------------------------------
Net other intangibles 1.7 1.8 1.8
- ---------------------------------------------------------------------------------------------------
TOTAL $ 2.2 $ 2.4 $ 2.4
===================================================================================================
The following table summarizes Other intangibles not subject to amortization at
the dates indicated:
NOVEMBER 30, 2002 MAY 31, 2002 NOVEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------
Net carrying value by major class:
Titles $ 31.0 $ 31.0 $ 31.0
Licenses 17.2 17.2 17.2
Major sets 11.4 11.4 11.4
Trademarks and Other 1.8 1.8 1.8
- ---------------------------------------------------------------------------------------------------
TOTAL $ 61.4 $ 61.4 $ 61.4
===================================================================================================
Amortization expense for Other intangibles subject to amortization totaled $0.1
and $0.2 for the three and six months ended November 30, 2002, respectively, and
$0.2 and $0.4 for the three and six months ended November 30, 2001,
respectively. Amortization expense for the twelve months ended May 31, 2002
totaled $1.0. Amortization expense for these assets is currently estimated to
total $0.5 for the fiscal year ending May 31, 2003, $0.3 for each of the fiscal
years ending May 31, 2004 through 2006, and $0.2 for the fiscal year ending May
31, 2007. The weighted average amortization periods for these assets by major
asset class are 3 years and 14 years for customer lists and other intangibles,
respectively.
15
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
10. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On June 1, 2001, the Company adopted Statement of Position No. 00-2 ("SOP
00-2"), "Accounting by Producers and Distributors of Films," which replaced SFAS
No. 53, "Financial Reporting by Producers and Distributors of Motion Picture
Films." SOP 00-2 provides that film costs should be accounted for under an
inventory model and discusses various topics such as revenue recognition and
accounting for exploitation costs and impairment assessment. In addition, SOP
00-2 establishes criteria for which revenues should be included in the Company's
ultimate revenue projections.
The Company recognizes revenue from its film licensing arrangements when the
film is complete and delivered, the license period has begun, the fee is fixed
or determinable and collection is reasonably assured. The costs of producing a
film and acquiring film distribution rights are capitalized and amortized using
the individual-film-forecast method. This method amortizes such residual costs
in the same ratio that current period revenue bears to estimated remaining
unrecognized revenue as of the beginning of the fiscal year. All exploitation
costs are expensed as incurred. As a result of the adoption of SOP 00-2, the
Company recorded a net of tax charge of $5.2 in the first quarter of fiscal 2002
to reduce the carrying value of its film production costs. This charge is
reflected in the Company's condensed consolidated statements of operations as a
Cumulative effect of accounting change and is attributed entirely to the MEDIA,
LICENSING AND ADVERTISING segment. Management estimates that 100% of the costs
of its unamortized films will be amortized over the next three years.
11. LITIGATION AND RELATED CHARGES
On September 23, 2002, the Company announced that it had agreed in principle to
settle a class action lawsuit initiated in 1997, captioned IN RE SCHOLASTIC
CORPORATION SECURITIES LITIGATION, 97 Civ. 2447 (JFK). The settlement agreement,
which is subject to court approval, resulted in a pre-tax charge of $1.9 in the
quarter ended August 31, 2002, which represents the portion of the total
settlement amount of $7.5 that is not being paid by the insurance carrier.
16
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended November 30, 2002 increased $23.1 million or 3.6%
to $660.3 million as compared with revenues of $637.2 million in the second
quarter of the prior fiscal year. The revenue increase was due to increased
sales in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION, INTERNATIONAL and
EDUCATIONAL PUBLISHING segments of $11.4 million, $9.2 million and $2.5 million,
respectively. In the current year quarter, businesses acquired in fiscal 2002
contributed approximately $17 million of revenues to the Company. For the six
months ended November 30, 2002, revenues increased $23.9 million, or 2.5%, to
$967.2 million, primarily due to increases in the INTERNATIONAL segment of $15.8
million and the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment of $10.5
million. Businesses acquired in fiscal 2002 contributed approximately $37
million in revenues to the Company for the six months ended November 30, 2002.
Cost of goods sold as a percentage of revenues improved to 42.7% in the
quarter ended November 30, 2002 from 43.2% in the prior year quarter. For the
six months ended November 30, 2002, cost of goods sold as a percentage of
revenues improved to 45.7% from 46.1% in the prior year period. The quarter
and six-month improvements were primarily due to favorable vendor pricing as
a result of the Company's cost savings initiative.
Selling, general and administrative expenses as a percentage of revenues
decreased slightly to 34.2% for the quarter ended November 30, 2002 from
34.6% in the prior year quarter, primarily due to reduced marketing costs
resulting from the Company's costs savings program. For the six months ended
November 30, 2002, selling, general and administrative expenses as a
percentage of revenues increased to 41.8% from 40.4% in the prior fiscal
year. The increase was primarily due to higher employee health care and other
benefit costs of approximately 1% of revenues, and higher systems and
facilities costs of approximately 1% of revenues. Those increases were
partially offset by the benefit from the cost savings program of
approximately 1% of revenues.
Bad debt expense decreased to $18.4 million, or 2.8% of revenues, for the
quarter ended November 30, 2002, compared to $21.1 million, or 3.3% of
revenues, in the prior year quarter. For the six months ended November 30,
2002, bad debt expense decreased to $36.7 million, or 3.8% of revenues,
compared to $40.6 million, or 4.3% of revenues, in the prior year period. The
quarter and six-month improvements were primarily attributable to better
credit performance in the direct-to-home continuity business.
Depreciation and amortization for the quarter ended November 30, 2002 increased
to $10.7 million from $8.5 million in the prior year quarter. For the six months
ended November 30, 2002, depreciation and amortization increased to $21.3
million from $16.3 million in the prior year period. These increases were
primarily due to incremental depreciation of $1.7 million for the quarter and
$3.7 million for the six months ended November 30, 2002 related to the
completion of capital projects, including information technology projects and
expansion of facilities.
In the first quarter of the current fiscal year, the Company recorded a $1.9
million pre-tax charge, reflected in Litigation and related charges, due to the
settlement of a securities lawsuit initiated in 1997. The after-tax impact on
earnings per diluted share of this charge was $0.03 for the six months ended
November 30, 2002. (See Note 11 in the Notes to Condensed Consolidated Financial
Statements.)
17
SCHOLASTIC CORPORATION
ITEM 2. MD&A
The resulting operating income for the quarter ended November 30, 2002 increased
to $123.4 million, or 18.7% of revenues, compared to $112.2 million, or 17.6% of
revenues, in the year ago \period. For the six months ended November 30, 2002,
operating income decreased to $61.3 million, or 6.3% of revenues, from $70.5
million, or 7.5% of revenues, in the prior fiscal year.
Net interest expense was flat at $8.2 million in the quarter as compared to the
prior year period and decreased to $15.8 million for the six months ended
November 30, 2002 from $16.3 million in the year ago period.
The Company's effective tax rates were 34.9% and 33.2% for the quarter and year
to date period ended November 30, 2002, respectively, as compared to an
effective tax rate of 36.0% for the quarter and year-to-date period ended
November 30, 2001. The decreases in the effective tax rates as compared to the
year ago quarter and six-month period were due to the recognition of net
deferred tax assets in certain of the Company's international operations.
In the first quarter of the prior fiscal year, the Company adopted Statement of
Position No. 00-2 ("SOP 00-2"), "Accounting by Producers and Distributors of
Films." As a result, the Company recorded an after-tax charge of $5.2 million,
or $0.13 per diluted share, for the six months ending November 30, 2001, which
was reflected as a Cumulative effect of accounting change. (See Note 10 in the
Notes to Condensed Consolidated Financial Statements.)
Net income for the quarter ended November 30, 2002 increased to $75.0 million,
or $1.85 per diluted share, compared to $66.5 million, or $1.69 per diluted
share, in the prior year quarter. For the six months ended November 30, 2002,
net income was $30.4 million, or $0.75 per diluted share, compared to $29.5
million, or $0.79 per diluted share, in the year ago period.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution of children's books in the United States through
school-based book clubs and book fairs, school-based and direct-to-home
continuity programs and the trade channel.
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
- ------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------
Revenue $ 438.2 $ 426.8 $ 578.4 $ 567.9
Operating profit 110.6 102.2 71.4 73.9
- ------------------------------------------------------------------------
OPERATING MARGIN 25.2% 23.9% 12.3% 13.0%
18
SCHOLASTIC CORPORATION
ITEM 2. MD&A
The following table highlights the results of the direct-to-home continuity
business formerly operated by Grolier, which is included in the CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION segment.
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
- ------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------
Revenue $ 52.8 $ 53.6 $ 103.3 $ 110.4
Operating profit 6.1 5.8 7.9 10.3
- ------------------------------------------------------------------------
OPERATING MARGIN 11.6% 10.8% 7.6% 9.3%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
quarter ended November 30, 2002 increased to $438.2 million compared to $426.8
million in the prior fiscal year quarter. The $11.4 million increase in segment
revenues over the prior fiscal year quarter relates primarily to the Company's
school-based book fairs and school-based continuity businesses. Higher
school-based book fairs revenues of $11.7 million primarily reflected increased
revenue per fair. Revenues for the school-based continuity businesses increased
$6.8 million, primarily due to higher enrollments. These increases were
partially offset by lower trade revenues of $3.8 million and lower school-based
book club revenues of $2.6 million. The school-based book clubs decrease of $2.6
million was primarily due to the shift of orders to school-based continuity
enrollments, which are sold through school-based book clubs and reflected as
continuity sales. Businesses acquired in fiscal 2002 contributed revenues of
approximately $13 million to this segment for the quarter ended November 30,
2002. Excluding the direct-to-home continuity business, segment revenues for the
quarter increased by $12.2 million to $385.4 million compared to the prior year
quarter. Revenues for the direct-to-home continuity business decreased by 1.5%
to $52.8 million compared to the prior year quarter, reflecting the planned
elimination of less profitable marketing programs.
The $3.8 million decrease in trade revenues for the quarter was due to net
sales of HARRY POTTER titles of approximately $25 million, compared to
approximately $45 million in the year ago quarter, partially offset by $10.1
million of revenues from Klutz, which was acquired in April 2002, and an
increase in sales of other trade titles of approximately $6 million. The
Company and its trade customers had anticipated greater positive impact from
the release of the second HARRY POTTER movie on November 15, 2002 than the
benefit to retail sales that occurred. Accordingly, the Company increased the
allowance for returns (as a percentage of shipments) on current period
shipments for the quarter ended November 30, 2002 compared to the
prior year quarter, thereby reducing net HARRY POTTER trade revenue by
approximately $9 million. The Company and certain of its trade customers have
agreed to a program (offered to all its retail accounts) to support retail
sales of HARRY POTTER during the Company's third and fourth quarters, that
provides for an additional discount equal to 3% of list price for HARRY
POTTER titles on hand as of December 31, 2002 that remain in stock as of
May, 2003. Participating trade accounts will also be entitled to defer
payment for HARRY POTTER titles purchased between September 1, 2002 and
December 31, 2002 until May, 2003.
Segment operating profit for the quarter increased $8.4 million to $110.6
million from $102.2 million in the prior year quarter. This increase was
related mainly to higher operating results for the school-based book fairs
and school-based continuity businesses of $4.8 million and $2.8 million,
respectively, in the current year quarter compared to the prior year.
Excluding the direct-to-home continuity business, the operating profit for
the quarter increased to $104.5 million from $96.4 million in the prior year
period. Operating profit for the direct-to-home continuity business increased
from the prior year quarter by $0.3 million to $6.1 million in the current
year quarter.
19
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Segment revenues for the six months ended November 30, 2002 increased to
$578.4 million compared to $567.9 million in the prior fiscal year period.
The $10.5 million increase in segment revenues benefited from revenue
increases in school-based book fairs, trade, and school-based continuities of
$10.4 million, $6.7 million and $4.7 million, respectively. The school-based
book fairs increase of $10.4 million was primarily due to increased revenue
per fair compared to the prior fiscal year period. The $6.7 million increase
in trade revenues was primarily due to the addition of $21.2 million from the
acquisition of Klutz, and approximately $6 million in higher revenues of
non-HARRY POTTER trade titles, partially offset by approximately $20 million
of lower HARRY POTTER net sales. The increase of $4.7 million in the
school-based continuity business reflects increased enrollments during the
current fiscal year. These revenue increases were partially offset by
declines in direct-to-home continuities and school-based book clubs of $7.1
million and $4.2 million, respectively. The revenue decrease of $7.1 million
in the direct-to-home continuity business primarily reflects the planned
elimination of less profitable marketing programs. Excluding the
direct-to-home continuity business, segment revenues for the six months ended
November 30, 2002 increased $17.6 million over the prior year period to
$475.1 million. Revenues for the direct-to-home continuity business decreased
by 6.4% to $103.3 million compared to the prior year period.
Segment operating profit decreased $2.5 million to $71.4 million for the six
months ended November 30, 2002 compared to the prior year period. This
decrease is related mainly to decreases in the direct-to-home continuity
business and school-based book fairs of $2.4 million and $1.3 million,
respectively. These decreases were partially offset by operating profit
increases of $1.4 million and $0.7 million in school-based book clubs and
school-based continuities, respectively. Excluding the direct-to-home
continuity business, operating profit remained relatively flat at $63.5
million. Operating profit for the direct-to-home continuity business
decreased by $2.4 million from the prior year.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution to schools and libraries of curriculum materials, classroom
magazines and print and on-line reference and non-fiction products for
Kindergarten through grade 12 in the United States.
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
- ------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------
Revenue $ 76.6 $ 74.1 $ 164.6 $ 165.8
Operating profit 16.1 11.4 28.8 26.9
- ------------------------------------------------------------------------
OPERATING MARGIN 21.0% 15.4% 17.5% 16.2%
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter ended November
30, 2002 increased by $2.5 million, or 3.4%, to $76.6 million, compared to $74.1
million in the comparable quarter of the prior year. This increase was due to
increased revenues of $4.2 million from the READ 180(R) intervention program,
$1.1 million from paperbacks and collections, and $1.7 million from Tom Snyder
Productions, which was acquired in December 2001. These revenue increases were
partially offset by the anticipated revenue decrease related to SCHOLASTIC
LITERACY PLACE(R) of $4.8 million. For the six-month period ended November 30,
2002, revenues decreased slightly to $164.6 million as compared to $165.8
million in the comparable prior year period, reflecting the anticipated decrease
in SCHOLASTIC LITERACY PLACE revenues of $14.6 million. This decrease in revenue
was largely offset by increased revenues of $13.3 million from READ 180.
20
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Second quarter operating profit for this segment increased by $4.7 million over
the comparable prior year period, primarily due to higher gross margins of $2.3
million, reflecting the sale of more profitable products, and decreased
inventory obsolescence costs of $1.7 million. Operating profit for this segment
for the six months ended November 30, 2002 improved by $1.9 million over the
comparable period of the prior year, due to higher gross margins of $6.2 million
primarily from the sale of more profitable products, partially offset by
increased marketing and administrative expenses of $4.3 million.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and/or distribution in the United States of software and Internet services and
the production and/or distribution by and through the Company's subsidiary,
Scholastic Entertainment Inc. ("SEI"), of programming and consumer products
(including children's television programming, videos, software, feature films,
promotional activities and non-book merchandise).
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
- ------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------
Revenue $ 46.8 $ 46.8 $ 63.9 $ 65.1
Operating profit (loss) 0.2 0.0 (10.2) (8.8)
- ------------------------------------------------------------------------
OPERATING MARGIN 0.4% 0.0% * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues were flat at $46.8 million for the
quarter ended November 30, 2002 compared to the prior year quarter. Increased
current quarter SEI film revenues of $5.2 million, primarily relating to
programming revenues from the animated TV series CLIFFORD THE BIG RED DOG(TM),
were offset by lower software revenues of $5.1 million. For the current year
six-month period, increased film revenues of $5.4 million, primarily relating
to CLIFFORD programming revenue, were more than offset by a decrease in
software revenues of $6.4 million.
For the quarter ended November 30, 2002, segment operating profit improved to
$0.2 million from break-even in the prior year quarter. For the six-month
period ended November 30, 2002, operating loss increased by $1.4 million,
primarily due to increased spending related to Scholastic.com to facilitate
the launch of e-commerce initiatives.
INTERNATIONAL
The Company's INTERNATIONAL segment includes the publication and distribution of
products and services outside the United States by the Company's international
operations, and its export and foreign rights businesses.
(IN MILLIONS) THREE MONTHS ENDED SIX MONTHS ENDED
- ------------------------------------------------------------------------
NOVEMBER 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------
Revenue $ 98.7 $ 89.5 $ 160.3 $ 144.5
Operating profit 14.5 9.8 11.3 7.2
- ------------------------------------------------------------------------
OPERATING MARGIN 14.7% 10.9% 7.0% 5.0%
21
SCHOLASTIC CORPORATION
ITEM 2. MD&A
INTERNATIONAL revenues increased by $9.2 million, or 10.3%, to $98.7 million for
the quarter ended November 30, 2002 from $89.5 million in the year ago quarter.
This increase was due primarily to higher revenues in Canada of $1.9 million,
Mexico of $1.4 million, Australia of $0.9 million and Southeast Asia of $0.9
million, as well as the favorable impact of foreign currency exchange rates of
approximately $3.2 million. Revenues for the six months ended November 30, 2002
increased to $160.3 million as compared to $144.5 million in the prior year
period. This increase of $15.8 million was due primarily to revenue improvements
in Canada, Southeast Asia, Australia and Mexico of $3.9 million, $2.2 million,
$1.8 million and $1.5 million, respectively, combined with a favorable foreign
exchange impact of approximately $5.2 million for the current year to date
period.
For the quarter ended November 30, 2002, operating profit increased by $4.7
million, or 48.0%, to $14.5 million from $9.8 million in the year ago quarter.
This increase was due to higher operating profits in Canada of $1.1 million, the
United Kingdom of $0.9 million and the Export business of $0.7 million. In
addition, foreign currency exchange rates had a favorable impact of
approximately $1.4 million in the current quarter. Operating profit for the six
months ended November 30, 2002 increased by $4.1 million, or 56.9%, to $11.3
million from $7.2 million in the prior year. This increase was due to higher
operating profits in Canada, Australia and the United Kingdom of $1.8 million,
$0.7 million, and $0.7 million, respectively, as well as the favorable impact of
foreign currency exchange rates of approximately $1.0 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 generally are lower than its revenues in the other
two fiscal quarters. The Company experiences a substantial loss from operations
in the first quarter. Typically, school-based book club and book fair revenues
are greatest in the second quarter of the fiscal year, while revenues from the
sale of instructional materials are highest in the first quarter.
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 $2.6 million during the
six-month period ended November 30, 2002, compared to a decrease of $2.4 million
during the comparable period in the prior year.
Cash flow provided from operations was $5.3 million for the six-month period
ended November 30, 2002, resulting from net income, adjusted for non-cash
charges, of $90.9 million, partially offset by net working capital decreases of
$85.6 million.
22
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Cash outflows for investing activities was $107.5 million for the six-month
period ended November 30, 2002. The spending principally consisted of capital
expenditures, an investment in The Book People Group, Ltd., prepublication
costs and royalty advances. Capital expenditures totaled $46.4 million for
the six-month period ended November 30, 2002, an increase of $13.8 million
over the same period in fiscal 2002 largely as result of the acquisition of a
warehouse facility in Maumelle, Arkansas in June 2002. Investment
expenditures totaled $18.3 million due to the Company's 15% equity investment
in The Book People Group, Ltd. in June 2002 of 12.0 million Pounds Sterling
(equivalent to $17.9 million as of the date of the transaction), and related
expenditures of $0.4 million. Expenditures for prepublication and royalty
advances of $21.4 million and $16.1 million, respectively, were relatively
consistent with the prior year expenditure levels.
The Company believes its existing cash position, combined with funds generated
from operations and available under the Loan Agreement, the Revolver and the
amended Grolier Facility, each as defined below, will be sufficient to finance
its ongoing working capital requirements. The Company anticipates refinancing
its debt obligations prior to their respective maturity dates, to the extent not
paid through free cash flow.
FINANCING
On January 11, 2002, pursuant to the exercise of Scholastic Corporation's
optional redemption rights, $109.8 million of the Company's 5.0% Convertible
Subordinated Debentures were converted at the option of the holders into 2.9
million shares of Common Stock and $0.2 million were redeemed for cash.
On January 23, 2002, Scholastic Corporation issued $300.0 million of 5.75% Notes
(the "5.75% Notes"). The 5.75% Notes are unsecured and unsubordinated
obligations of the Company and mature on January 15, 2007. Interest on the 5.75%
Notes is payable semi-annually on July 15 and January 15 of each year. The
Company may, at any time, redeem all or a portion of the 5.75% Notes at a
redemption price (plus accrued interest to the date of redemption) equal to the
greater of (i) 100% of the principal amount, or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest discounted
to the date of redemption on a semiannual basis. The net proceeds were used to
repay the majority of the $350.0 million facility established in connection with
the acquisition of Grolier (the "Grolier Facility").
On February 5, 2002, Scholastic Corporation entered into an interest rate swap
agreement, designated as a fair value hedge as defined under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," whereby the Company receives a fixed
interest rate payment based on a notional amount totaling $100.0 million and
pays a variable interest rate to the counterparty, which is reset semi-annually
based on six-month LIBOR (as defined). This agreement was entered into to
exchange the fixed interest rate payments on a portion of the 5.75% Notes for
variable interest rate payments. Under SFAS No. 133, changes in the fair value
of the interest rate swap offset changes in the fair value of the fixed rate
debt due to changes in market interest rates. As such, there was no ineffective
portion to the hedge recognized in earnings during the six months ended
November 30, 2002.
23
SCHOLASTIC CORPORATION
ITEM 2. MD&A
On June 21, 2002, the Grolier Facility was amended into a revolving credit
agreement, providing for aggregate borrowings of up to $100.0 million and
expiring June 20, 2003. Under these amended terms, Scholastic Inc., a subsidiary
of Scholastic Corporation, is the borrower and Scholastic Corporation is the
guarantor. Borrowings bear interest at the prime rate or 0.39% to 1.10% over
LIBOR (as defined). As amended, the Grolier Facility also provides for a
facility fee ranging from 0.085% to 0.25%. The amounts charged vary based upon
the Company's credit rating. As of November 30, 2002, the interest rate and
facility fee were 0.650% over LIBOR and 0.150%, respectively. The Grolier
Facility contains certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions. At
November 30, 2002 and 2001, $0 and $350.0 million, respectively, were
outstanding under the Grolier Facility. The weighted average interest rate as of
November 30, 2001 was 3.1%. At May 31, 2002, $50.0 million was outstanding under
the Grolier Facility at a weighted average interest rate of 2.4%.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under
an amended and restated loan agreement with certain banks, effective August 11,
1999 and amended June 22, 2000 (the "Loan Agreement"). The Loan Agreement, which
expires on August 11, 2004, provides for aggregate borrowings of up to $170.0
million (with a right in certain circumstances to increase borrowings to $200.0
million), including the issuance of up to $10.0 million in letters of credit.
Interest under this facility is either at the prime rate or 0.325% to 0.90% over
LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33% of the
total facility. The amounts charged vary based upon the Company's credit rating.
The interest rate, facility fee and utilization fee (when applicable) as of
November 30, 2002 were 0.475% over LIBOR, 0.150% and 0.075%, respectively. The
Loan Agreement contains certain financial covenants related to debt and interest
coverage ratios (as defined) and limits dividends and other distributions. At
November 30, 2002 and 2001, $166.0 million and $50.0 million, respectively, were
outstanding under the Loan Agreement at a weighted average interest rate of 2.3%
and 3.6%, respectively. At May 31, 2002, $50.0 million was outstanding under the
Loan Agreement at a weighted average interest rate of 2.7%.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under
a Revolving Loan Agreement with a bank, effective November 10, 1999 and amended
June 22, 2000 (the "Revolver"). The Revolver provides for unsecured revolving
credit of up to $40.0 million and expires on August 11, 2004. Interest under
this facility is at the prime rate minus 1% or 0.325% to 0.90% over LIBOR (as
defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts
charged vary based upon the Company's credit rating. The interest rate and
facility fee as of November 30, 2002 were 0.475% over LIBOR and 0.150%,
respectively. The Revolver has certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At November 30, 2002 and 2001, $25.3 million and $6.0 million,
respectively, were outstanding under the Revolver at a weighted average interest
rate of 2.8% and 2.9%, respectively. At May 31, 2002, there were no borrowings
outstanding under the Revolver.
On December 23, 1996, Scholastic Corporation issued $125.0 million of 7% Notes
(the "7% Notes"). The 7% Notes are unsecured and unsubordinated obligations of
the Company and will mature on December 15, 2003. The 7% Notes are not
redeemable prior to maturity. Interest on the 7% Notes is payable semi-annually
on December 15 and June 15 of each year.
In addition, unsecured lines of credit available in local currencies to the
Company's international subsidiaries were equivalent to $52.7 million at
November 30, 2002. These lines are used primarily to fund local working capital
needs. At November 30, 2002, borrowings equivalent to $28.0 million were
outstanding under these lines of credit at a weighted average interest rate of
5.8%.
24
SCHOLASTIC CORPORATION
ITEM 2. MD&A
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements. These
forward-looking statements are subject to various risks and uncertainties,
including the conditions of the children's book and instructional materials
markets and acceptance of the Company's products within those markets and other
risks and factors identified in this Report, in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2002, and from time to time in the
Company's other filings with the Securities and Exchange Commission. Actual
results could differ materially from those currently anticipated.
25
SCHOLASTIC CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management believes that the impact of currency fluctuations does not represent
a significant risk in the context of the Company's current international
operations. In the normal course of business, the Company's non-U.S. operations
enter into short-term forward contracts (generally not exceeding $15.0 million)
to match purchases not denominated in their respective local currencies.
Market risks relating to the Company's operations result primarily from changes
in interest rates, which are managed by balancing the mix of variable- versus
fixed-rate borrowings. Additionally, financial instruments, including swap
agreements, are used to manage interest rate exposures. Approximately 49% of the
Company's debt at November 30, 2002 bore interest at a variable rate and was
sensitive to changes in interest rates compared to approximately 40% at May 31,
2002, with the increase due to seasonal borrowings. The Company is subject to
the risk that market interest rates will increase and thereby increase the
interest rates currently being charged under the variable-rate debt.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following table sets forth information about the Company's debt and other
interest rate sensitive instruments as of November 30, 2002 (see also Note 5 in
the Notes to Condensed Consolidated Financial Statements):
($ amounts in millions) FISCAL YEAR MATURITY
- -----------------------------------------------------------------------------------------------------------
DEBT OBLIGATIONS 2003 2004 2005 2006 2007 TOTAL
- -----------------------------------------------------------------------------------------------------------
Lines of credit $ 28.0 $ - $ - $ - $ - $ 28.0
Average interest rate 5.83%
Long-term debt including
current portion:
Fixed rate debt $ - $ 125.0 $ - $ - $ 300.0 $ 425.0
Average interest rate 7.00% 5.75%
Variable rate debt $ 0.1 $ 0.3 $ 191.3 $ - $ - $ 191.7
Average Interest Rate 5.00% 5.00% 2.38%
- -----------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest rate swaps:
Notional amount $ - $ - $ - $ - $ 100.0 $ 100.0
Average variable pay rate 2.70%
Average fixed receive rate 5.75%
- -----------------------------------------------------------------------------------------------------------
26
SCHOLASTIC CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Company, after
conducting an evaluation, together with other members of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days of the filing of
this report, have concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in its reports filed or submitted under the Securities Exchange Act
of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission (the "SEC"). There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to that evaluation, and there were no significant
deficiencies or material weaknesses in such controls requiring corrective
actions.
27
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
ITEM 1. LEGAL PROCEEDINGS
For information concerning the settlement of a previously reported action
entitled IN RE SCHOLASTIC CORPORATION SECURITIES LITIGATION, see "Part II -
Other Information - Item 1. Legal Proceedings" in the Company's Quarterly Report
on Form 10-Q for the period ended August 31, 2002.
On January 14, 2003, Scholastic Inc. acquired all worldwide rights to the
"Goosebumps(R)" property, including trademark, copyright, publication and
media rights, for an aggregate of $9.65 million in cash from Parachute Press,
Inc. and affiliated entities (collectively, "Parachute"). The acquisition is
expected to be earnings neutral in fiscal 2003.
In connection with this transaction, Scholastic and its affiliates and Parachute
and R.L. Stine each agreed to dismiss with prejudice the previously disclosed
lawsuits, 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); PARACHUTE PRESS, INC. V. SCHOLASTIC
INC., SCHOLASTIC PRODUCTIONS, INC. AND SCHOLASTIC ENTERTAINMENT INC. (Index No.
99/600507); and PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC
PRODUCTIONS, INC. AND SCHOLASTIC ENTERTAINMENT INC., 97 Civ. 8510 (JFK), and to
release the other parties from all claims regarding the disputes.
28
SCHOLASTIC CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on September 24,
2002. The following sets forth the results of the proposals presented at the
Annual Meeting voted upon by the stockholders of the Company entitled to vote
thereon:
Holders of the 1,656,200 shares of Class A Stock (comprising all outstanding
shares of Class A Stock) voted in favor of electing Richard Robinson, Rebeca
M. Barrera, Ramon Cortines, Charles T. Harris III, Andrew S. Hedden, Mae C.
Jemison, Peter M. Mayer, Augustus K. Oliver and Richard M. Spaulding as
directors to serve until the next annual meeting of stockholders and until
their successors are duly elected and qualified.
Holders of the Common Stock elected the following three nominees as directors to
serve until the next Annual Meeting of Stockholders or until their successors
are duly elected and qualified. Votes cast by holders of the Common Stock were
as follows:
NOMINEE FOR WITHHELD
------- --- --------
John L. Davies 28,882,605 962,463
Linda B. Keene 28,881,079 963,949
John G. McDonald 28,995,395 849,633
29
SCHOLASTIC CORPORATION
ITEM 5. OTHER INFORMATION
PRE-APPROVAL OF NON-AUDIT SERVICES
In accordance with Section 10A(i) of the Exchange Act, the Audit Committee of
the Board of Directors of the Company has pre-approved the provision of certain
tax advice to the Company by its independent auditors, Ernst & Young, LLP, as
permitted by Section 10A.
INVESTOR RELATIONS
The Company posts on its Web site,
www.scholastic.com/aboutscholastic/investor/index.htm, the date of its upcoming
financial press releases and telephone analyst calls at least five days prior to
dissemination. The Company's analyst calls are open to the public and remain
available to the public through the Company's Web site for at least five days
thereafter.
GALLIMARD
On December 30, 2002, the Company sold a portion of its approximately 3.0%
interest in the French publishing company, Editions Gallimard ("Gallimard"),
for $5.2 million, representing a pre-tax gain of $2.9 million (approximately
$0.04 per diluted share) to be recorded in the third quarter of fiscal 2003.
The Company originally acquired its interest in Gallimard in October, 1996
for $3.4 million. The Company retains an approximately 1% indirect ownership
interest in Gallimard.
30
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------
10.21 Scholastic Corporation Management Stock Purchase Plan,
Amended and Restated effective as of December 18, 2002
(b) Reports on Form 8-K:
None
31
SCHOLASTIC CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOLASTIC CORPORATION
(Registrant)
Date: January 14, 2003 /s/ Richard Robinson
-----------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER
Date: January 14, 2003 /s/ Kevin J. McEnery
-----------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
32
SCHOLASTIC CORPORATION
CERTIFICATIONS
I, Richard Robinson, the principal executive officer of Scholastic Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scholastic Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
33
SCHOLASTIC CORPORATION
CERTIFICATIONS
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 /s/ Richard Robinson
----------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER
34
SCHOLASTIC CORPORATION
CERTIFICATIONS
I, Kevin J. McEnery, the principle financial officer of Scholastic Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scholastic Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
35
SCHOLASTIC CORPORATION
CERTIFICATIONS
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 /s/ Kevin J. McEnery
----------------------------
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
36
SCHOLASTIC CORPORATION
CURRENT REPORT ON FORM 10-Q, DATED NOVEMBER 30, 2002
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.21 Scholastic Corporation Management Stock Purchase Plan, Amended
and Restated as of December 18, 2002 (a management compensation
plan as described in Item 601 (b)(10)(iii) of Regulation S-K of
the SEC).
37
EXHIBIT 10.21
- --------------------------------------------------------------------------------
SCHOLASTIC CORPORATION
MANAGEMENT STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
Effective January 1, 1999
Amended and Restated Effective December 18, 2002
SCHOLASTIC CORPORATION
MANAGEMENT STOCK PURCHASE PLAN
(Amended and Restated Effective December 18, 2002)
Table Of Contents
Article 1 - Introduction........................................................1
Article 2 - Definitions.........................................................1
Article 3 - Shares Reserved.....................................................4
Article 4 - Administration......................................................4
Article 5 - Eligibility.........................................................5
Article 6 - Purchases and Award of RSUs.........................................5
Article 7 - Vesting and Payment of RSUs.........................................6
Article 8 - Dividend Equivalent Amounts.........................................8
Article 9 - Designation of Beneficiary..........................................8
Article 10 - Adjustments........................................................8
Article 11 - Amendment or Termination of Plan...................................9
Article 12 - Miscellaneous Provisions...........................................9
i
SCHOLASTIC CORPORATION
MANAGEMENT STOCK PURCHASE PLAN
(AMENDED AND RESTATED EFFECTIVE DECEMBER 18, 2002)
ARTICLE 1 - INTRODUCTION
The purpose of the Scholastic Corporation Management Stock Purchase Plan
(the "Plan") is to provide equity incentive compensation to selected management
employees of Scholastic Corporation and its Affiliates. Participants in the Plan
receive restricted stock units ("RSUs") at a discount in lieu of a portion or
all of their bonus awards under the Company's annual incentive plan. Under
certain circumstances, the RSUs convert into shares of Common Stock. The Company
believes that the Plan creates a means to provide deferred compensation to such
selected management employees and to raise the level of stock ownership in the
Company by such employees thereby strengthening the mutuality of interests
between such employees and the Company's stockholders.
ARTICLE 2 - DEFINITIONS
2.1 AFFILIATE - (i) any corporation, partnership, limited liability company
or other entity as to which the Company possesses a direct or indirect
ownership interest of at least fifty (50) percent or which possesses a
direct or indirect ownership interest of at least 50% in the Company
including, without limitation, any subsidiary corporation (as defined in
Section 424(f) of the Code) and parent corporation (as defined in Section
424(e) of the Code) and (ii) any other entity in which the Company or any
of its Affiliates has a material equity interest, as determined by the
Committee.
2.2 AWARD DATE - the first business day after the end of the fiscal quarter
in which a Bonus for a year is paid or otherwise would have been paid.
2.3 AWARD VALUE - the Fair Market Value of a share of Common Stock on the
Award Date.
2.4 BENEFICIARY - a Beneficiary or Beneficiaries designated by the
Participant under Article 9.
2.5 BONUS - a Participant's annual award for a Fiscal Year under any annual
incentive plan of the Company or its Affiliates that has been designated
by the Committee as eligible for deferral under the Plan pursuant to a
Subscription Agreement.
2.6 BOARD OF DIRECTORS - the Board of Directors of the Company or the
Executive Committee of such Board of Directors.
2.7 CAUSE - any of the following: (i) any act or acts by the Participant
constituting a felony under the laws of the United States, any state
thereof, or any political subdivision thereof, (ii) the Participant's
willful and continued failure to perform the duties assigned to him or
her as an employee of the Company or Affiliate; (iii) any material breach
by the
Participant of any employment agreement with the Company or Affiliate;
(iv) dishonesty, gross negligence or malfeasance by the Participant in
the performance of his or her duties as an employee of the Company or any
Affiliate or any conduct by the Participant which involves a material
conflict of interest with any business of the Company or its Affiliates;
or (v) taking or knowingly omitting to take any other action or actions
in the performance of the Participant's duties as an employee of the
Company or its Affiliates without informing appropriate members of
management to whom such Participant reports, which in the determination
of the Committee have caused or substantially contributed to the material
deterioration in the business of the Company and its Affiliates, taken as
a whole.
2.8 CODE - the Internal Revenue Code of 1986, as amended from time to time.
2.9 COMMITTEE - the committee of the Board of Directors authorized to
administer the Plan. To the extent that no Committee exists which has the
authority to administer the Plan, the functions of the Committee shall be
exercised by the Board of Directors. The Committee shall consist of two
or more non-employee directors, each of whom is intended to be, to the
extent required by Rule 16b-3, a "non-employee director" as defined in
Rule 16b-3. If for any reason the appointed Committee does not meet the
requirements of Rule 16b-3, such noncompliance shall not affect the
validity of any grants of RSUs hereunder, interpretations or other
actions of the Committee.
2.10 COMMON STOCK OR STOCK - common stock of the Company, par value $.01 per
share.
2.11 COMPANY - Scholastic Corporation, a corporation organized under the laws
of the State of Delaware (or any successor).
2.12 COST - the cost of purchasing an RSU under the Plan as of an Award Date,
as determined by the Committee in its sole discretion, but in no event
less than seventy-five (75%) percent of the lowest Fair Market Value of a
share of Common Stock during the fiscal quarter immediately preceding the
Award Date. The cost shall be established as of the applicable Award Date
and shall remain in effect unless modified by the Committee at least
thirty (30) days prior to the applicable Award Date.
2.13 DEFERRAL PERIOD - a period of time (expressed in whole years) not less
than three years beginning on an Award Date as specified by the
Participant in his or her Subscription Agreement (as may be modified by
the Participant from time to time in accordance with procedures
established by or on behalf of the Committee) with respect to RSUs
awarded on that Award Date; provided, however, that the Committee may
establish, in its sole discretion, a fixed date as the end of the
Deferral Period or fixed period specified with respect to RSUs awarded on
that Award Date.
2.14 DISABILITY - complete and permanent inability by reason of illness or
accident to perform the duties of the occupation at which the Participant
was employed when such disability commenced, as determined by the
Committee based on medical evidence available to it.
2
2.15 EXCHANGE ACT - the Securities Exchange Act of 1934, as amended.
2.16 FAIR MARKET VALUE - unless otherwise required by any applicable provision
of the Code or any regulations issued thereunder, as of any date, the
last sales price reported for the Common Stock on the applicable date:
(i) as reported on the principal national securities exchange on which it
is then traded or the NASDAQ Stock Market, Inc. or (ii) if not traded on
any such national securities exchange or the NASDAQ Stock Market, Inc. as
quoted on an automated quotation system sponsored by the National
Association of Securities Dealers, Inc. If the Common Stock is not
readily tradable on a national securities exchange, the NASDAQ Stock
Market, Inc. or any automated quotation system sponsored by the National
Association of Securities Dealers, Inc., its Fair Market Value shall be
set in good faith by the Committee.
2.17 FISCAL YEAR - the fiscal year of the Company.
2.18 FOREIGN JURISDICTION - any jurisdiction outside of the United States
including, without limitation, countries, states, provinces and
localities.
2.19 PARTICIPANT - a management employee of the Company or any Affiliate who
satisfies the eligibility requirements under Article 5 of the Plan and
elects to participate in the Plan in accordance with its terms.
2.20 PLAN - the Scholastic Corporation Management Stock Purchase Plan, as
amended from time to time.
2.21 PLAN YEAR - the Fiscal Year, except that the first Plan Year shall be the
short year beginning on the effective date of the Plan and ending on May
31, 1999.
2.22 RETIREMENT - termination of employment with the Company and all
Affiliates on or after age fifty-five (55); provided that, with respect
to any Deferral Period commencing on or after January 1, 2003,
"Retirement" shall mean a termination of employment with the Company and
all Affiliates on or after age fifty-five (55) in accordance with the
Company's standard retirement policies.
2.23 RULE 16b-3 - means Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act or any successor provision.
2.24 RSU - a unit of measurement equivalent to one share of Common Stock but
with none of the attendant rights of a stockholder of a share of Common
Stock, including the right to vote (if any); except that an RSU shall
have the dividend right described in Article 8. The fair market value of
an RSU on any date shall be deemed to be the Fair Market Value of a share
of Common Stock on that date.
2.25 SUBSCRIPTION AGREEMENT - an agreement executed by a Participant setting
forth his or her election to defer receipt of a portion or all of his or
her Bonus for the Deferral Period and
3
to authorize the Company to credit such amount to the Plan in order to
purchase an award of RSU. A Subscription Agreement shall contain such
provisions, consistent with the provisions of the Plan, as may be
established from time to time by the Company or Committee.
Notwithstanding the foregoing, a Participant may amend a Subscription
Agreement to extend a Deferral Period, in such manner prescribed by or on
behalf of the Committee; provided that no such amendment shall be
effective unless made at least (i) one (1) year prior to his or her
termination of employment or (ii) one (1) year prior to the end of the
Deferral Period specified in a current Subscription Agreement.
ARTICLE 3 - SHARES RESERVED
The aggregate number of shares of Common Stock reserved for issuance
pursuant to the Plan or with respect to which RSUs may be granted shall be
150,000, subject to adjustment as provided in Article 10 hereof.
Such number of shares may be set aside out of the authorized but unissued
shares of Common Stock not reserved for any other purpose, or out of issued
shares of Common Stock acquired for and held in the treasury of the Company. If
any RSU awarded under the Plan is forfeited, terminated or canceled for any
reason, the share of Common Stock relating to such RSU shall again be available
under the Plan. If Common Stock has been exchanged by a Participant as full or
partial payment to the Company for withholding taxes or otherwise or if the
number of shares of Common Stock otherwise deliverable has been reduced for
withholding, the number of shares exchanged or reduced shall again be available
under the Plan.
ARTICLE 4 - ADMINISTRATION
4.1 The Plan shall be administered by the Committee. The Committee may select
an administrator or any other person to whom its duties and
responsibilities hereunder may be delegated. The Committee shall have
full power and authority, subject to the provisions of the Plan, to
promulgate such rules and regulations as it deems necessary for the
proper administration of the Plan, to interpret the provisions and
supervise the administration of the Plan, and to take all actions in
connection therewith or in relation thereto as it deems necessary or
advisable. The Committee may adopt special guidelines and provisions for
persons who are residing in, or subject to the laws of, Foreign
Jurisdictions to comply with applicable tax and securities laws. All
interpretations and determinations of the Committee shall be made in its
sole and absolute discretion based on the Plan document and shall be
final, conclusive and binding on all parties with respect to all matters
relating to the Plan.
4.2 The Committee may employ such legal counsel, consultants, brokers and
agents as it may deem desirable for the administration of the Plan and
may rely upon any opinion received from any such counsel or consultant
and any computation received from any such consultant, broker or agent.
The Committee may, in its sole discretion, designate an agent to
administer the Plan, keep records, send statements of account to
Participants and to perform other duties relating to the Plan, as the
Committee may request from time to
4
time. The Committee may adopt, amend or repeal any guidelines or
requirements necessary for the delivery of the Common Stock.
4.3 The Company shall, to the fullest extent permitted by law and the
Certificate of Incorporation and By-laws of the Company, to the extent
not covered by insurance, indemnify each director, officer or employee of
the Company and its Affiliates (including the respective heirs,
executors, administrators and other personal representatives of such
persons) and each member of the Committee against all expenses, costs,
liabilities and losses (including attorneys' fees, judgments, fines,
excise taxes or penalties, and amounts paid or to be paid in settlement)
actually and reasonably incurred by such person in connection with any
threatened, pending or actual suit, action or proceeding (whether civil,
criminal, administrative or investigative in nature or otherwise) in
which such person may be involved by reason of the fact that he or she is
or was serving this Plan in any capacity at the request of the Company,
except in instances where any such person engages in willful neglect or
fraud. Such right of indemnification shall include the right to be paid
by the Company for expenses incurred or reasonably anticipated to be
incurred in defending any such suit, action or proceeding in advance of
its disposition; provided, however, that the payment of expenses in
advance of the settlement or final disposition of a suit, action or
proceeding shall be made only upon delivery to the Company of an
undertaking by or on behalf of such person to repay all amounts so
advanced if it is ultimately determined that such person is not entitled
to be indemnified hereunder. Such indemnification shall be in addition to
any rights of indemnification the person may have as a director, officer
or employee or under the Certificate of Incorporation of the Company or
the By-Laws of the Company. Expenses incurred by the Committee or the
Board in the engagement of any such counsel, consultant or agent shall be
paid by the Company.
ARTICLE 5 - ELIGIBILITY
Management employees of the Company and its Affiliates as designated by
the Committee shall be eligible to participate in the Plan. Eligibility for
participation in the Plan shall be determined by the Committee in its sole
discretion. The Committee may, in its sole discretion, designate, on a
prospective basis, any Participant in the Plan as ineligible to receive awards
of RSUs pursuant to Article 6 of the Plan.
ARTICLE 6 - PURCHASES
6.1 GENERAL.
Each Participant shall be entitled to elect to receive up to one hundred
(100%) percent of his or her Bonus as an award of RSU. As of the
applicable Award Date, RSUs shall be awarded to Participants and credited
to accounts held under the Plan on behalf of Participants on a book-entry
basis calculated in the manner provided under Section 6.3.
6.2 VOLUNTARY PURCHASES.
No later than the last day of the first quarter of each Fiscal Year, each
Participant may elect to receive up to one hundred (100%) percent of his
or her Bonus for that Fiscal Year
5
as an award of RSUs by completing a Subscription Agreement.
Notwithstanding the foregoing, for the first Plan Year of any
Participant, a Participant may elect to participate in the Plan for that
Plan Year no later than the date set by the Committee in its sole
discretion pursuant to procedures set by the Committee. If an employee of
the Company or an Affiliate first becomes eligible to participate
hereunder during a Plan Year, such employee may elect to participate in
the Plan for that Plan Year pursuant to procedures established by the
Committee (solely with respect to the PRO RATA portion of the Bonus
earned after the Subscription Agreement is executed and delivered to the
Company). The Subscription Agreement shall provide that the Participant
elects to receive RSUs in lieu of a specified portion of his or her
Bonus. Such portion may be expressed as:
(a) a specified percentage of up to one hundred (100%) percent (in
whole percentages) of the Participant's actual Bonus amount;
(b) a specified dollar amount, up to one hundred (100%) percent of the
Participant's actual Bonus amount; or
(c) the lesser of the amount specified in Section 6.2(a) or (b).
Amounts specified pursuant to any of the methods set forth herein
are entirely contingent on, and are limited to, the cash amount of Bonus
actually awarded. Each Subscription Agreement, in addition, shall specify
a Deferral Period with respect to the RSUs to which it pertains. The
Committee may, in its sole discretion, permit the Deferral Period with
respect to the RSUs to which it pertains to be changed upon one year's
notice to the Committee. Other than with respect to the first Plan Year
or with respect to an employee of the Company or an Affiliate who first
becomes eligible to participate hereunder during a Plan Year,
Subscription Agreements must be received by the Company no later than the
last day of the first quarter of the Fiscal Year for which such Bonus
amount will be determined. With respect to any Plan Year, an election to
receive RSUs in lieu of a portion or all of a Bonus hereunder pursuant to
a Subscription Agreement is irrevocable on and after the date the
Subscription Agreement must be submitted to the Company and is valid
solely for the Plan Year to which the election relates. If no new
Subscription Agreement is timely made with respect to any subsequent Plan
Year, the Bonus earned in such Plan Year shall not be deferred under the
Plan.
6.3 AWARDS OF RSUs.
The Company shall award RSUs to each Participant's account under the Plan
on the Award Date. Each Participant's account shall be credited with a
number of RSUs (in whole and fractional RSUs) determined by dividing (a)
the amount of the Participant's Bonus to be received as an award of RSUs
in accordance with the Participant's Subscription Agreement and the
methodology under Section 6.2 by (b) the Cost of an RSU on the Award
Date.
6
ARTICLE 7 - VESTING AND PAYMENT OF RSUs
7.1 VESTING.
A Participant shall be fully vested in each RSU three years after the
Award Date pertaining to that RSU (provided that the Participant is
continuously employed (including any period during which the Participant
is on a leave of absence, either paid or unpaid, which is approved by the
Committee, or any other break in employment which is approved by the
Committee) by the Company or any Affiliate for such years) or, if
earlier, upon death while employed, Disability while employed or
Retirement. The Committee may, in its sole discretion, accelerate (in
whole or part) the time at which any such RSUs may be vested, based on
such factors, if any, as the Committee shall determine in its sole
discretion.
7.2 PAYMENT ON OR AFTER VESTING.
With respect to each vested RSU, the Company shall issue to the
Participant one share of Common Stock and cash in lieu of any fractional
RSU as soon as practicable after the end of the Deferral Period specified
in the Participant's Subscription Agreement pertaining to such RSU, or,
if earlier, the Participant's termination of employment with the Company
and its Affiliates or the termination of the Plan.
7.3 PAYMENT PRIOR TO VESTING.
(a) VOLUNTARY TERMINATION; TERMINATION FOR CAUSE. If a Participant
voluntarily terminates his or her employment with the Company and
its Affiliates for reasons other than death or Disability or is
involuntarily terminated by the Company or an Affiliate for Cause,
the Participant's nonvested RSUs shall be canceled, and he or she
shall receive as soon as practicable after his or her termination
of employment with the Company and its Affiliates a cash payment
equal to the lesser of:
i) an amount equal to the number of those nonvested RSUs
awarded on each Award Date multiplied by the respective
Cost of those RSUs; or
ii) an amount equal to the number of those nonvested RSUs
awarded on each Award Date multiplied by the Fair
Market Value of a share of Common Stock on the date of
the Participant's termination of employment with the
Company and its Affiliates.
(b) INVOLUNTARY TERMINATION. If a Participant's employment is
terminated by the Company and its Affiliates for any reason other
than Cause, the Participant's nonvested RSUs shall be canceled and
he or she shall receive payment as soon as practicable following
his or her termination of employment with the Company and its
Affiliates as described below:
7
i) The number of nonvested RSUs awarded on each Award Date
shall be multiplied by a fraction, the numerator of
which is the number of full years that the Participant
was employed by the Company and its Affiliates after
that Award Date and the denominator of which is three;
and the Participant shall receive the resulting number
of such whole RSUs in shares of Common Stock, with any
fractional RSU paid in cash.
ii) With respect to the Participant's remaining nonvested
RSUs, the Participant shall receive cash in an amount
equal to the lesser of: (A) the number of such
nonvested RSUs awarded on each Award Date multiplied by
the respective Cost of those RSUs; or (B) the number of
those nonvested RSUs awarded on each Award Date
multiplied by the Fair Market Value of a share of
Common Stock on the date of the Participant's
termination of employment with the Company and its
Affiliates.
(c) COMMITTEE'S DISCRETION. The Committee shall have complete
discretion to determine the circumstances of a Participant's
termination of employment with the Company and its Affiliates,
including whether the same results from voluntary termination,
Disability, Retirement, death or termination by the Company for or
not for Cause, and the Committee's determination shall be final and
binding on all parties and not subject to review or challenge by
any Participant or other person.
ARTICLE 8 - DIVIDEND EQUIVALENT AMOUNTS
Whenever dividends (other than dividends payable only in shares of Common
Stock) are paid with respect to shares of Common Stock, each Participant shall
be paid an amount in cash equal to the number of his or her vested RSUs
multiplied by the dividend value per share. Dividends (other than dividends
payable only in shares of Common Stock) shall not be credited or paid with
respect to each Participant's nonvested RSUs.
ARTICLE 9 - DESIGNATION OF BENEFICIARY
A Participant may designate one or more Beneficiaries to receive payments
or shares of Common Stock in the event of his or her death. A designation of
Beneficiary shall apply to a specified percentage of a Participant's entire
interest in the Plan. Such designation, or any change therein, must be in
writing in a form acceptable to the Company and shall be effective upon receipt
by the Company. If there is no effective designation of Beneficiary, or if no
Beneficiary survives the Participant, the Participant's estate shall be deemed
to be the Beneficiary.
8
ARTICLE 10 - ADJUSTMENTS
In the event of a stock dividend, stock split, reverse stock split,
combination or reclassification of shares, recapitalization, merger,
consolidation, exchange, spin-off or other event which affects Common Stock, the
Committee shall make appropriate equitable adjustments in:
(a) the number or kind of shares of Common Stock or securities with
respect to which RSUs shall thereafter be granted;
(b) the number and kind of shares of Common Stock remaining subject to
outstanding RSUs;
(c) the number of RSUs credited to each Participant; and
(d) the method of determining the value of RSUs.
ARTICLE 11 - AMENDMENT OR TERMINATION OF PLAN
The Company reserves the right to amend, terminate or freeze the Plan at
any time, by action of its Board of Directors (or a duly authorized committee
thereof ) or the Committee, provided that no such action shall adversely affect
a Participant's rights under the Plan with respect to RSUs awarded and vested
before the date of such action. No amendment shall be effective unless approved
by the stockholders of the Company if stockholder approval of such amendment is
required to comply with any applicable law, regulation or stock exchange rule.
Upon termination of the Plan, any vested RSU shall be paid in accordance with
Section 7.2 of the Plan and any nonvested RSU shall be canceled and paid in
accordance with Section 7.3(b) of the Plan except that such amount shall be paid
as soon as administratively practicable following the Plan termination. Upon
freezing of the Plan, all vested RSUs shall continue to be held under the Plan
until the Deferral Period expires and all nonvested RSUs shall vest or become
canceled in accordance with the terms of the Plan.
ARTICLE 12 - MISCELLANEOUS PROVISIONS
12.1 NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS.
The Committee may require each person acquiring shares of Common Stock
under the Plan to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution
thereof. No shares of Common Stock shall be issued until all applicable
securities law and other legal and stock exchange requirements have been
satisfied. The Committee may require the placing of such stop-orders and
restrictive legends on certificates for Common Stock as it deems
appropriate.
12.2 WITHHOLDING.
Participation in the Plan is subject to any required tax withholding on
wages or other income of the Participant in connection with the Plan.
Each Participant agrees, by
9
entering the Plan, that the Company or the Affiliate employing the
Participant shall have the right to deduct any federal, state or local
income taxes or other taxes, in its sole discretion, from any amount
payable to the Participant under the Plan or from any payment of any kind
otherwise due to the Participant. Upon the vesting of the RSU, prior to
the issuance or delivery of shares of Common Stock or the payment of any
cash hereunder, a Participant shall pay all required withholding to the
Company and, if applicable, an Affiliate. Without limiting the generality
of the foregoing, any withholding obligation with regard to any
Participant may be satisfied by: (i) reducing the number of shares of
Common Stock otherwise deliverable to the Participant; (ii) subject to
the Committee's prior consent, any method approved by the Committee which
may include the Participant delivering shares of Common Stock already
owned for at least six months (or such other period to avoid an
accounting charge against the Company's earnings) and held free and clear
of all encumbrances to the Company; or (iii) by the Participant paying
cash directly to the Company.
12.3 NOTICES; DELIVERY OF STOCK CERTIFICATES.
Any notice required or permitted to be given by the Company or the
Committee pursuant to the Plan shall be deemed given when personally
delivered or deposited in the United States mail, registered or
certified, postage prepaid, addressed to the Participant at the last
address shown for the Participant on the records of the Company. Delivery
of stock certificates to persons entitled to receive them under the Plan
shall be deemed effected for all purposes when the Company or a share
transfer agent of the Company shall have deposited such certificates in
the United States mail, addressed to such person at his/her last known
address on file with the Company.
12.4 NONTRANSFERABILITY OF RIGHTS
During a Participant's lifetime, no payment or issuance of shares under
the Plan shall be made to anyone except the Participant otherwise than by
will or the laws of descent and distribution. No RSU or other interest
under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, garnishment,
execution, levy or charge, and any attempt by a Participant or any
Beneficiary under the Plan to do so shall be void. No interest under the
Plan shall in any manner be liable for or subject to the debts,
contracts, liabilities, engagements or torts or a Participant or
Beneficiary entitled thereto.
12.5 OBLIGATIONS UNFUNDED AND UNSECURED.
The Plan shall at all times be entirely unfunded, and no provision shall
at any time be made with respect to segregating assets of the Company
(including Common Stock) for payment of any amounts or issuance of any
shares of Common Stock hereunder. No Participant or other person shall
own any interest in any particular assets of the Company or any Affiliate
(including Common Stock) by reason of the right to receive payment under
the Plan, and any Participant or other person shall have only the rights
of a general unsecured creditor of the Company with respect to any rights
under the Plan. Nothing contained in this Plan and no action taken
pursuant to the provisions of this Plan shall create or be construed to
create a trust of any kind, or a fiduciary relationship amongst the
10
Company, any Affiliate, the Committee, and the Participants, their
designated Beneficiaries or any other person. Any funds which may be
invested under the provisions of this Plan shall continue for all
purposes to be part of the general funds of the Company and no person
other than the Company shall by virtue of the provisions of this Plan
have any interest in such funds. If the Company decides to establish any
accrued reserve on its books against the future expense of benefits
payable hereunder, or if the Company establishes a rabbi trust under this
Plan, such reserve or trust shall not under any circumstances be deemed
to be an asset of the Plan.
12.6 GOVERNING LAW.
The Plan is established in order to provide deferred compensation to a
select group of management and highly compensated employees within the
meanings of Sections 201(2) and 301(a)(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). To the extent legally
required, the Code and ERISA shall govern the Plan and, if any provision
hereof is in violation of any applicable requirement thereof, the Company
reserves the right to retroactively amend the Plan to comply therewith.
To the extent not governed by the Code and ERISA, the terms of the Plan
shall be governed, construed, administered and regulated in accordance
with the laws of Delaware. In the event any provision of this Plan shall
be determined to be illegal or invalid for any reason, the other
provisions shall continue in full force and effect as if such illegal or
invalid provision had never been included herein.
12.7 CLAIMS PROCEDURE
A Participant or Beneficiary shall make any claim (and, in the case of
the denial of such claim, any appeal) in writing to the Committee or such
other person designated by the Committee in accordance with the claims
procedure established by the Committee, which is intended to comply with
the claims procedure provided under ERISA and U.S. Department of Labor
Regulation Section 2560.503- 1.
12.8 RULE 16B-3
To the extent required, the Plan is intended to comply with Rule 16b-3
and the Committee shall interpret and administer the provisions of the
Plan in a manner consistent therewith. If a management employee is
designated by the Committee to participate hereunder, any election to
receive an award of RSUs shall be deemed approved by such Committee and
shall be deemed an exempt purchase under Rule 16b-3. Any provisions
inconsistent with Rule 16b-3 shall be inoperative and shall not affect
the validity of the Plan.
12.9 NO EMPLOYMENT RIGHTS.
The establishment and operation of this Plan shall not confer any legal
rights upon any Participant or other person for a continuation of
employment, nor shall it interfere with the rights of the Company or
Affiliate to discharge any employee and to treat him or her without
regard to the effect which that treatment might have upon him or her as a
Participant or potential Participant under the Plan.
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12.10 SEVERABILITY OF PROVISIONS.
If any provision of the Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provisions
hereof, and the Plan shall be construed and enforced as if such
provisions had not been included.
12.11 CONSTRUCTION.
The use of a masculine pronoun shall include the feminine, and the
singular form shall include the plural form, unless the context clearly
indicates otherwise. The headings and captions herein are provided for
reference and convenience only, shall not be considered part of the Plan,
and shall not be employed in the construction of the Plan.
12.12 EFFECTIVE DATE OF PLAN.
The Plan is adopted, effective upon January 1, 1999, subject to approval
of the stockholders of the Company as provided under applicable law,
regulation or stock exchange rule.
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