UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2003 Commission File No. 000-19860
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 March 31, 2003
------------- --------------------
Common Stock, $.01 par value 37,567,200
Class A Stock, $.01 par value 1,656,200
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2003
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended February 28, 2003 and 2002 1
Condensed Consolidated Balance Sheets at February 28, 2003
and 2002, and May 31, 2002 2
Consolidated Statements of Cash Flows for the Nine Months
Ended February 28, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 433.7 $ 432.7 $ 1,400.9 $ 1,376.0
Operating costs and expenses:
Cost of goods sold 198.3 199.6 640.3 634.1
Selling, general and administrative expenses 203.0 185.8 607.0 567.1
Bad debt expense 16.9 11.0 53.6 51.6
Depreciation and amortization 11.6 9.7 32.9 26.0
Litigation and related charges - - 1.9 -
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 429.8 406.1 1,335.7 1,278.8
OPERATING INCOME 3.9 26.6 65.2 97.2
Gain on sale of investment (2.9) - (2.9) -
Interest expense, net 7.5 7.9 23.3 24.3
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative effect of
accounting change (0.7) 18.7 44.8 72.9
Provision (benefit) for income taxes (0.2) 6.8 14.9 26.2
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (0.5) 11.9 29.9 46.7
Cumulative effect of accounting change (net of income taxes of $2.9) - - - (5.2)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.5) $ 11.9 $ 29.9 $ 41.5
=================================================================================================================================
EARNINGS (LOSS) PER SHARE OF CLASS A AND COMMON STOCK:
Earnings (loss) before cumulative effect of accounting change:
Basic $ (0.01) $ 0.32 $ 0.76 $ 1.30
Diluted $ (0.01) $ 0.31 $ 0.74 $ 1.22
Cumulative effect of accounting change (net of income taxes):
Basic - - - $ (0.15)
Diluted - - - $ (0.13)
Net income (loss):
Basic $ (0.01) $ 0.32 $ 0.76 $ 1.15
Diluted $ (0.01) $ 0.31 $ 0.74 $ 1.09
=================================================================================================================================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
FEBRUARY 28, 2003 MAY 31, 2002 FEBRUARY 28, 2002
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7.8 $ 10.7 $ 12.6
Accounts receivable, net 267.4 243.8 233.9
Inventories 444.2 359.5 408.2
Deferred promotion costs 54.3 44.6 42.8
Deferred income taxes 80.8 81.3 87.6
Prepaid and other current assets 60.9 58.6 68.7
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 915.4 798.5 853.8
Property, plant and equipment, net 333.3 301.4 278.3
Prepublication costs 111.9 113.6 109.5
Production costs 9.8 9.1 9.0
Goodwill 248.6 256.2 235.3
Other intangibles 74.3 63.8 63.6
Other assets and deferred charges 131.2 87.0 81.1
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,824.5 $ 1,629.6 $ 1,630.6
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit and short-term debt $ 185.2 $ 23.5 $ 77.9
Accounts payable 146.7 134.3 136.1
Accrued royalties 56.1 38.5 69.5
Deferred revenue 34.9 16.2 34.4
Other accrued expenses 104.4 119.2 125.4
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 527.3 331.7 443.3
NONCURRENT LIABILITIES:
Long-term debt 494.8 525.8 471.2
Other noncurrent liabilities 47.3 53.2 48.1
- ------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 542.1 579.0 519.3
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value - - -
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.4 0.4 0.4
Additional paid-in capital 379.1 373.7 365.3
Deferred compensation (1.2) (0.4) (0.5)
Accumulated other comprehensive loss (25.7) (27.4) (17.8)
Retained earnings 402.5 372.6 320.6
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 755.1 718.9 668.0
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,824.5 $ 1,629.6 $ 1,630.6
==================================================================================================================
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
NINE MONTHS ENDED
FEBRUARY 28,
- --------------------------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 29.9 $ 41.5
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of prepublication and production costs 44.5 36.6
Depreciation and amortization 32.9 26.0
Royalty advances expensed 18.6 15.0
Deferred income taxes 0.6 1.3
Tax benefit realized from stock option transactions 0.4 6.4
Non-cash portion of accounting change - 8.1
Gain on sale of investment (2.9) -
Changes in assets and liabilities:
Accounts receivable, net (21.7) (14.2)
Inventories (81.7) (69.2)
Prepaid and other current assets (1.5) 18.6
Deferred promotion costs (10.0) (24.2)
Accounts payable and other accrued expenses (3.6) (30.0)
Accrued royalties 18.1 24.7
Deferred revenue 18.0 24.4
Other, net (10.2) 0.5
- --------------------------------------------------------------------------------------------------------------
Total adjustments 1.5 24.0
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31.4 65.5
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (62.9) (46.5)
Prepublication costs (34.3) (39.4)
Royalty advances (25.0) (23.7)
Equity investment (23.3) -
Production costs (10.0) (10.5)
Acquisition related payments (9.7) (13.1)
Proceeds from sale of investment 5.2 -
Other (0.9) 0.2
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (160.9) (133.0)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver 462.5 666.8
Repayments of Loan Agreement and Revolver (325.6) (620.6)
Borrowings under Grolier Facility 132.0 -
Repayments of Grolier Facility (152.0) (300.0)
Proceeds received from issuance of 5.75% Notes, net of related costs - 296.7
Borrowings under lines of credit 95.9 110.2
Repayments of lines of credit (90.3) (103.5)
Proceeds pursuant to employee stock plans 4.1 17.1
Other - (0.4)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 126.6 66.3
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2.9) (1.2)
Cash and cash equivalents at beginning of period 10.7 13.8
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7.8 $ 12.6
==============================================================================================================
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 of its 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 nine months ended February 28, 2003
and 2002 are not necessarily indicative of the results expected for the full
year. Due to the seasonal fluctuations that occur, the February 28, 2002
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 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 products 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 $9.1 and
$31.3 in the three and nine months ended February 28, 2002, 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 the liability is 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 effective for exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a material impact on the
Company's 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 prominent disclosures about 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.
The Company has adopted the disclosure provisions of SFAS No. 148.
Accordingly, under the provisions of SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for its
stock option plans. In accordance with APB 25, no compensation expense was
recognized as the exercise price of the Company's stock options was equal to
the market price of the underlying stock on the date of grant and the
exercise price and number of shares subject to grant were fixed. If the
Company had elected to recognize compensation expense based on the fair value
of the options granted at the date of grant and in respect to shares issuable
under the Company's equity compensation plans as prescribed by SFAS No. 123,
net income and diluted earnings per share using the Black-Scholes
option-pricing model would have been reduced to the pro forma amounts
indicated in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - as reported $ (0.5) $ 11.9 $ 29.9 $ 41.5
Add: Stock-based employee compensation
included in reported net income, net of tax 0.1 0.1 0.3 0.2
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of tax (2.0) (1.4) (5.9) (4.2)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME - PRO FORMA $ (2.4) $ 10.6 $ 24.3 $ 37.5
=================================================================================================================================
Diluted earnings per share - as reported $ (0.01) $ 0.31 $ 0.74 $ 1.09
Diluted earnings per share - pro forma $ (0.06) $ 0.28 $ 0.62 $ 1.02
- ---------------------------------------------------------------------------------------------------------------------------------
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
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 $35.5. 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.
The following summarizes the allocation of the 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 35.5
Noncurrent deferred taxes 18.6
Other assets 0.4
Current liabilities (12.0)
--------------------------------------------------------------------
CASH PAID FOR ACQUISITIONS, NET OF CASH RECEIVED $ 66.7
====================================================================
The allocation of the aggregate purchase price will be finalized during fiscal
2003 and any resulting adjustments 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 established
liabilities of $3.2 at May 31, 2002, relating primarily to severance and other
exit costs. As of February 28, 2003, $1.6 of these liabilities remain unpaid.
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
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 February 28, 2003, $2.4
of these liabilities remain 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:
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 (1.8) (0.4) (2.2)
- ----------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 2003 $ 1.2 $ 1.2 $ 2.4
==========================================================================================================
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, $9.3 relating to Red House has been recorded as
an investment in the joint venture (See Note 8). The Company also acquired a 15%
equity interest in The Book People Group, Ltd. for 12.0 GBP (equivalent to $17.9
as of the date of the transaction) with a possible additional payment of 3.0 GBP
based on operating results and contingent on repayment of all borrowings under a
3.0 GBP 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 February 28, 2003, 3.0 GBP (equivalent to $4.9) was
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., 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 the Company's segment information for the periods
indicated. 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
FEBRUARY 28, 2003
Revenues $ 269.2 $ 64.3 $ 30.1 $ 0.0 $ 363.6 $ 70.1 $ 433.7
Bad debt 14.4 0.6 0.3 0.0 15.3 1.6 16.9
Depreciation 2.2 0.3 1.5 6.3 10.3 1.2 11.5
Amortization (2) 4.4 7.1 2.3 0.0 13.8 0.1 13.9
Royalty advances
expensed 8.5 0.3 0.1 0.0 8.9 0.7 9.6
Segment profit/(loss) (3) 27.2 (0.8) (5.2) (18.1) 3.1 0.8 3.9
Expenditures for
long-lived assets (4) 23.0 7.8 12.8 5.7 49.3 3.4 52.7
THREE MONTHS ENDED
FEBRUARY 28, 2002
Revenues $ 269.0 $ 61.1 $ 32.2 $ 0.0 $ 362.3 $ 70.4 $ 432.7
Bad debt (3) 7.9 0.4 0.5 0.0 8.8 2.2 11.0
Depreciation 1.7 0.5 1.4 4.8 8.4 1.1 9.5
Amortization (2) 4.7 4.8 2.7 0.0 12.2 0.0 12.2
Royalty advances
expensed 5.0 0.2 0.0 0.0 5.2 0.0 5.2
Segment profit/(loss) (3) 42.6 (1.8) (3.3) (14.8) 22.7 3.9 26.6
Expenditures for
long-lived assets (4) 9.7 16.2 8.0 11.5 45.4 0.9 46.3
NINE MONTHS ENDED
FEBRUARY 28, 2003
Revenues $ 847.6 $ 228.9 $ 94.0 $ 0.0 $ 1,170.5 $ 230.4 $ 1,400.9
Bad debt 46.5 1.1 0.8 0.0 48.4 5.2 53.6
Depreciation 6.0 1.1 4.6 17.4 29.1 3.5 32.6
Amortization (2) 13.1 20.2 11.3 0.0 44.6 0.2 44.8
Royalty advances
expensed 16.0 1.1 0.2 0.0 17.3 1.3 18.6
Segment profit/(loss) (3) 98.6 28.0 (15.4) (58.1) 53.1 12.1 65.2
Segment assets 799.9 270.2 94.7 391.2 1,556.0 268.5 1,824.5
Goodwill 129.8 82.1 10.2 0.0 222.1 26.5 248.6
Expenditures for
long-lived assets (4) 52.7 18.8 24.5 37.3 133.3 27.0 160.3
Long-lived assets (5) 294.5 178.5 53.8 247.4 774.2 96.7 870.9
NINE MONTHS ENDED
FEBRUARY 28, 2002
Revenues $ 836.9 $ 226.9 $ 97.3 $ 0.0 $ 1,161.1 $ 214.9 $ 1,376.0
Bad debt (3) 43.2 0.9 1.9 0.0 46.0 5.6 51.6
Depreciation 4.4 1.3 3.3 13.1 22.1 3.3 25.4
Amortization (2) 12.7 17.1 6.8 0.0 36.6 0.6 37.2
Royalty advances
expensed 13.4 1.0 0.6 0.0 15.0 0.0 15.0
Segment profit/(loss) (3) 116.5 25.1 (12.1) (43.4) 86.1 11.1 97.2
Segment assets 713.0 269.7 74.0 350.0 1,406.7 223.9 1,630.6
Goodwill 113.5 79.1 9.4 0.0 202.0 33.3 235.3
Expenditures for
long-lived assets (4) 48.0 32.0 23.9 24.6 128.5 4.7 133.2
Long-lived assets (5) 263.0 177.3 42.0 209.2 691.5 69.9 761.4
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 NINE MONTHS ENDED FEBRUARY 28,
2003 INCLUDE $1.9 FOR THE SETTLEMENT OF A SECURITIES LAWSUIT INITIATED IN
1997. UNALLOCATED ASSETS ARE PRINCIPALLY COMPRISED OF DEFERRED INCOME TAXES
AND PROPERTY, PLANT AND EQUIPMENT RELATED TO THE COMPANY'S HEADQUARTERS IN
THE METROPOLITAN NEW YORK AREA, 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 NINE MONTHS ENDED FEBRUARY 28, 2002 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. IN THE THREE- AND NINE-MONTH
PERIODS ENDED FEBRUARY 28, 2002, CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION INCLUDES THE AFTER-TAX EFFECT OF THE REDUCTION IN BAD DEBT
EXPENSE OF $3.9 ($0.10 PER DILUTED SHARE), RESULTING FROM THE COMPANY'S
REFINEMENT OF THE BAD DEBT RESERVE.
(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 FEBRUARY 28,
----------------------------------------------------------
Direct-to-home All Other Total
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- --------
Revenues $ 50.8 $ 47.2 $ 218.4 $ 221.8 $ 269.2 $ 269.0
Bad debt (1) 10.1 3.9 4.3 4.0 14.4 7.9
Depreciation 0.0 0.1 2.2 1.6 2.2 1.7
Amortization (2) 0.6 0.4 3.8 4.3 4.4 4.7
Royalty advances expensed 3.4 1.1 5.1 3.9 8.5 5.0
Business profit (1) 6.4 10.7 20.8 31.9 27.2 42.6
Expenditures for long-lived assets (3) 3.7 1.1 19.3 8.6 23.0 9.7
NINE MONTHS ENDED FEBRUARY 28,
----------------------------------------------------------
Direct-to-home All Other Total
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- --------
Revenues $ 154.1 $ 157.6 $ 693.5 $ 679.3 $ 847.6 $ 836.9
Bad debt (1) 31.8 28.8 14.7 14.4 46.5 43.2
Depreciation 0.3 0.2 5.7 4.2 6.0 4.4
Amortization (2) 1.3 1.1 11.8 11.6 13.1 12.7
Royalty advances expensed 3.4 1.2 12.6 12.2 16.0 13.4
Business profit (1) 14.3 21.0 84.3 95.5 98.6 116.5
Business assets 257.6 249.0 542.3 464.0 799.9 713.0
Goodwill 93.2 88.6 36.6 24.9 129.8 113.5
Expenditures for long-lived assets (3) 6.3 3.3 46.4 44.7 52.7 48.0
Long-lived assets (4) 143.7 138.4 150.8 124.6 294.5 263.0
(1) BUSINESS PROFIT REPRESENTS EARNINGS BEFORE INTEREST AND INCOME TAXES. IN
THE THREE- AND NINE-MONTH PERIODS ENDED FEBRUARY 28, 2002, DIRECT-TO-HOME
INCLUDES THE AFTER-TAX EFFECT OF THE REDUCTION IN BAD DEBT EXPENSE OF $3.9
($0.10 PER DILUTED SHARE), RESULTING FROM THE COMPANY'S REFINEMENT OF THE
BAD DEBT RESERVE.
(2) INCLUDES AMORTIZATION OF PREPUBLICATION COSTS AND OTHER INTANGIBLES WITH
DEFINITE LIVES.
(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:
FEBRUARY 28, 2003 MAY 31, 2002 FEBRUARY 28, 2002
- -------------------------------------------------------------------------------------------------------
Lines of Credit $ 30.1 $ 23.3 $ 27.9
Grolier Facility 30.0 50.0 50.0
Loan Agreement and Revolver 186.9 50.0 46.3
7% Notes due 2003, net of discount 125.0 124.9 124.9
5.75% Notes due 2007, net of discount 307.5 300.7 299.6
Other debt 0.5 0.4 0.4
- -------------------------------------------------------------------------------------------------------
TOTAL DEBT 680.0 549.3 549.1
Less lines of credit and short-term debt (185.2) (23.5) (77.9)
- -------------------------------------------------------------------------------------------------------
Total long-term debt $ 494.8 $ 525.8 $ 471.2
=======================================================================================================
The following table sets forth the maturities and carrying values of the
Company's debt obligations as of February 28, 2003 for the remainder of fiscal
2003 and the next four fiscal years:
MAY 31,
- ---------------------------------------------------------------------
Three-month period ending: 2003 $ 30.2
Fiscal years ending: 2004 155.1
2005 186.9
2006 -
2007 307.8
---------------
TOTAL $ 680.0
===============
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 February 28, 2003, 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 February 28, 2003
and 2002, $30.0 and $50.0, respectively, were outstanding under the Grolier
Facility at a weighted average interest rate of 2.0% and 2.5%, respectively.
At May 31, 2002, $50.0 was outstanding under the Grolier Facility at a
weighted average interest rate of 2.4%. As described under Note 13
"Subsequent Event", effective April 10, 2003, the Grolier Facility was
cancelled.
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 February 28, 2003 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 February 28, 2003 and 2002, $156.0 and $40.0, respectively,
were outstanding under the Loan Agreement at a weighted average interest rate of
1.9% and 2.3%, 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 February 28, 2003 were 0.475% over LIBOR and 0.150%,
respectively. The Revolver has certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At February 28, 2003 and 2002, $30.9 and $6.3 respectively, were
outstanding under the Revolver at a weighted average interest rate of 2.3% and
3.9%, 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. 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 $8.5
to reflect an increase in their fair value as of February 28, 2003 and a
corresponding swap asset of $8.5 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 nine months ended February 28, 2003.
6. COMPREHENSIVE INCOME
The following table sets forth comprehensive income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
- -------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------
Net income (loss) $ (0.5) $ 11.9 $ 29.9 $ 41.5
Other comprehensive income (loss):
Foreign currency translation adjustment 2.6 (2.2) 3.2 (1.4)
Minimum pension liability - - (1.5) -
- -------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 2.6 (2.2) 1.7 (1.4)
- -------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 2.1 $ 9.7 $ 31.6 $ 40.1
===========================================================================================
13
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
7. EARNINGS (LOSS) PER SHARE ("EPS")
Basic EPS is computed by dividing net income by the weighted average Shares
of Class A Stock and Common Stock outstanding during the period. Diluted EPS
is calculated to give effect to potentially dilutive stock options and, for
the periods ended February 28, 2002, Scholastic Corporation's 5.0%
Convertible Subordinated Debentures due August 15, 2005 (the "Debentures")
that were outstanding during the period. 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. 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 NINE MONTHS ENDED
- -------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Net income (loss) for basic EPS $ (0.5) $ 11.9 $ 29.9 $ 41.5
Dilutive effect of Debentures - 0.4 - 2.1
- -------------------------------------------------------------------------------------------------------
Adjusted net income (loss) for diluted EPS $ (0.5) $ 12.3 $ 29.9 $ 43.6
=======================================================================================================
Weighted average Shares of Class A Stock and
Common Stock outstanding for basic EPS 39.2 37.3 39.1 36.0
Dilutive effect of Common Stock issued
pursuant to employee stock plans 0.8 1.7 1.2 1.5
Dilutive effect of Debentures - 1.3 - 2.4
- -------------------------------------------------------------------------------------------------------
Adjusted weighted average Shares of Class A
Stock and Common Stock outstanding
for diluted EPS 40.0 40.3 40.3 39.9
=======================================================================================================
EARNINGS (LOSS) PER SHARE OF CLASS A STOCK
AND COMMON STOCK:
Earnings (loss) before cumulative effect of
accounting change:
Basic $ (0.01) $ 0.32 $ 0.76 $ 1.30
Diluted $ (0.01) $ 0.31 $ 0.74 $ 1.22
Cumulative effect of accounting change
(net of income taxes):
Basic - - - $ (0.15)
Diluted - - - $ (0.13)
Net income (loss):
Basic $ (0.01) $ 0.32 $ 0.76 $ 1.15
Diluted $ (0.01) $ 0.31 $ 0.74 $ 1.09
=======================================================================================================
14
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
8. 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 the
third quarter of fiscal 2003, 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:
NINE MONTHS ENDED TWELVE MONTHS NINE MONTHS ENDED
FEBRUARY 28, 2003 ENDED MAY 31, 2002 FEBRUARY 28, 2002
- -----------------------------------------------------------------------------------------------------------------
Beginning balance $ 256.2 $ 221.9 $ 221.9
Additions due to acquisitions - 35.4 13.1
Initial investment in joint venture (9.3) - -
Other adjustments 1.7 (1.1) 0.3
- -----------------------------------------------------------------------------------------------------------------
TOTAL $ 248.6 $ 256.2 $ 235.3
=================================================================================================================
The following table summarizes Other intangibles subject to amortization at the
dates indicated:
FEBRUARY 28, 2003 MAY 31, 2002 FEBRUARY 28, 2002
- ----------------------------------------------------------------------------------------------------------------
Customer lists $ 2.8 $ 2.8 $ 2.2
Accumulated amortization (2.4) (2.2) (1.8)
- ----------------------------------------------------------------------------------------------------------------
Net customer lists 0.4 0.6 0.4
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 $ 2.1 $ 2.4 $ 2.2
================================================================================================================
The following table summarizes Other intangibles not subject to amortization at
the dates indicated:
FEBRUARY 28, 2003 MAY 31, 2002 FEBRUARY 28, 2002
- ----------------------------------------------------------------------------------------------------------------
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 12.6 1.8 1.8
- ----------------------------------------------------------------------------------------------------------------
TOTAL $ 72.2 $ 61.4 $ 61.4
================================================================================================================
15
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Amortization expense for Other intangibles subject to amortization totaled $0.1
and $0.3 for the three and nine months ended February 28, 2003, respectively,
and $0.2 and $0.6 for the three and nine months ended February 28, 2002,
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.
9. 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.
10. 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
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.
11. SALE OF INVESTMENT
On December 30, 2002, the Company sold a portion of its approximately 3%
investment in the French publishing company, Editions Gallimard ("Gallimard"),
for $5.2, resulting in a pre-tax gain of $2.9. The impact of this gain on
earnings per diluted share was $0.05 for the quarter and nine months ended
February 28, 2003. The Company originally acquired its interest in Gallimard in
October 1996 for $3.4. Subsequent to the December 30, 2002 sale, the Company
retained an approximately 1% indirect ownership interest in Gallimard.
16
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
12. ACQUISITION OF GOOSEBUMPS RIGHTS
On January 17, 2003, the Company announced that it had acquired all worldwide
rights to the Goosebumps(TM) property from Parachute Press, Inc. and that all
outstanding disputes between the parties had been settled. Under the
agreement, the Company paid $9.7 to acquire the Goosebumps trademark and all
rights to publish existing and future Goosebumps books and to develop and
exploit the property on a worldwide basis in all media on a royalty-free
basis.
13. SUBSEQUENT EVENT
On April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the "5%
Notes"), in a private offering. The 5% Notes are senior, unsecured
obligations of the Company and mature on April 15, 2013. Interest on the 5%
Notes is payable on April 15 and October 15 of each year, beginning October
15, 2003. The Company may at any time redeem all or a portion of the 5% Notes
at a redemption price (plus accrued interest to the date of the redemption)
equal to the greater of (i) 100% of the principal amount, or (ii) the sum of
the present values of the remaining scheduled payments of principal and
interest discounted to the date of the redemption. Net proceeds from the
sale, after deducting discounts, commissions and estimated expenses, were
used to retire all outstanding indebtedness under the Grolier Facility; and
to reduce indebtedness outstanding under the Loan Agreement and Revolver.
17
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 February 28, 2003 were up slightly at $433.7
million as compared with revenues of $432.7 million in the third quarter of the
prior fiscal year. Increased revenues in the EDUCATIONAL PUBLISHING segment of
$3.2 million were partially offset by decreases in the MEDIA, LICENSING AND
ADVERTISING segment of $2.1 million. In the current year quarter, businesses
acquired in fiscal 2002 contributed approximately $13 million of incremental
revenues to the Company. For the nine months ended February 28, 2003, revenues
increased $24.9 million, or 1.8%, to $1,400.9 million compared to $1,376.0
million in the prior year period, primarily due to increases in the
INTERNATIONAL segment of $15.5 million and the CHILDREN'S BOOK PUBLISHING AND
DISTRIBUTION segment of $10.7 million. Businesses acquired in fiscal 2002
contributed approximately $50 million of additional revenues to the Company for
the nine months ended February 28, 2003.
Cost of goods sold as a percentage of revenues improved to 45.7% from 46.1% for
both the quarter and nine months ended February 28, 2003 as compared to the
prior year quarter and nine months. The quarter and nine-month improvements were
primarily due to favorable vendor pricing as a result of the Company's cost
savings initiative of approximately 1%, partially offset by unfavorable changes
to the sales mix.
Selling, general and administrative expenses as a percentage of revenues
increased to 46.8% for the quarter ended February 28, 2003 from 42.9% in the
prior year quarter. The 3.9% increase was primarily due to approximately 1%
increases (as a percentage of revenue) in each of health care and other
employee benefit costs; marketing and promotional costs (principally
reflective of decreased trade revenues); and systems and facilities costs.
For the nine months ended February 28, 2003, selling, general and
administrative expenses as a percentage of revenues increased to 43.3% from
41.2% in the prior fiscal year. The 2.1% increase was primarily due to higher
health care and other employee benefit costs of approximately 1% of revenues,
and higher systems and facilities costs of approximately 1% of revenues.
Bad debt expense increased to $16.9 million, or 3.9% of revenues, for the
quarter ended February 28, 2003, compared to $11.0 million, or 2.5% of
revenues, in the prior year quarter. The increase of 1.4% of revenues in the
quarter was due to the impact of a $6.1 million benefit in the prior
year quarter, resulting from a refinement of the calculation of the bad debt
requirement for the Company's direct-to-home continuity business to reflect
better than previously anticipated payment performance. For the nine months
ended February 28, 2003, bad debt expense totaled $53.6 million, compared to
$51.6 million in the prior year period. As a percentage of revenues, bad debt
expense was 3.8% for the current and prior nine-month periods.
Depreciation and amortization for the quarter ended February 28, 2003 increased
to $11.6 million from $9.7 million in the prior year quarter. For the nine
months ended February 28, 2003, depreciation and amortization increased to $32.9
million from $26.0 million in the prior year period. These increases were
primarily due to incremental depreciation of $1.3 million for the quarter and
$5.0 million for the nine months ended February 28, 2003 related to the
completion of capital projects, including information technology projects and
expansion of facilities.
18
SCHOLASTIC CORPORATION
ITEM 2. MD&A
The nine-month period ended February 28, 2003 included a $1.9 million pre-tax
charge recorded in the first quarter, 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
nine months ended February 28, 2003. (See Note 10 in the Notes to Condensed
Consolidated Financial Statements.)
Operating income for the quarter ended February 28, 2003 declined to $3.9
million, or 0.9% of revenues, compared to $26.6 million, or 6.1% of revenues,
in the year ago period. The lower operating profit was primarily due to a
change in revenue mix, as a decrease in higher margin trade revenues was
offset by increased lower margin revenues, and the prior year's $6.1 million
benefit related to the refinement of bad debt requirements described above.
For the nine months ended February 28, 2003, operating income decreased to
$65.2 million, or 4.7% of revenues, from $97.2 million, or 7.1% of revenues,
in the prior fiscal year.
In the third quarter of the current fiscal year, the Company recorded a gain of
$2.9 million from a sale of a portion of its approximately 3% interest in the
French publishing company, Editions Gallimard ("Gallimard"). The after-tax
impact on earnings per diluted share of this gain was $0.05 for the quarter and
nine months ended February 28, 2003. The Company retains an approximately 1%
indirect ownership interest in Gallimard. (See Note 11 in the Notes to Condensed
Consolidated Financial Statements.)
Net interest expense decreased to $7.5 million in the quarter ended February 28,
2003, compared to $7.9 million in the prior year period, primarily due to the
benefit of the January 2002 conversion of the 5.0% Convertible Subordinated
Debentures (the "Debentures"). For the nine months ended February 28, 2003, net
interest expense decreased $1.0 million to $23.3 million from $24.3 million in
the year ago period. The nine-month decrease was primarily due to the $3.4
million benefit resulting from the conversion of the Debentures, partially
offset by interest expense capitalized on construction projects in the prior
year of $1.8 million.
The Company's effective tax rate was 33.2% for the nine-month period ended
February 28, 2003, as compared to an effective tax rate of 36.0% for the prior
fiscal year period. The decrease in the effective tax rate as compared to the
year ago period was 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 nine months ending February 28, 2002, which
was reflected as a Cumulative effect of accounting change. (See Note 9 in the
Notes to Condensed Consolidated Financial Statements.)
Net loss for the quarter ended February 28, 2003 was $0.5 million, or $0.01 per
diluted share, compared to net income of $11.9 million, or $0.31 per diluted
share, in the prior year quarter. For the nine months ended February 28, 2003,
net income was $29.9 million, or $0.74 per diluted share, compared to $41.5
million, or $1.09 per diluted share, in the year ago period.
19
SCHOLASTIC CORPORATION
ITEM 2. MD&A
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 NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 269.2 $ 269.0 $ 847.6 $ 836.9
Operating profit 27.2 42.6 98.6 116.5
- ----------------------------------------------------------------------------------------------------------------
OPERATING MARGIN 10.1% 15.8% 11.6% 13.9%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
quarter ended February 28, 2003 increased slightly to $269.2 million compared
to $269.0 million in the prior fiscal year quarter. Within the segment,
continuity program revenues increased by $10.3 million and school-based book
fair revenues increased by $4.7 million, offset by decreases in trade
revenues of $10.8 million and school-based book club revenues of $4.2
million. Continuity revenues increased by $6.7 million from the school-based
continuity business primarily related to increased enrollments during prior
quarters, and $3.6 million from the direct-to-home continuity business (see
table below), largely due to the April 2002 acquisition of Baby's First Book
Club. The higher school-based book fairs revenue was primarily due to an
increased number of fairs. The $10.8 million decrease in trade revenues for
the quarter was due to a decrease in sales of HARRY POTTER backlist titles of
approximately $14 million, as well as a decrease in sales of other trade
titles of approximately $4 million reflecting the impact of a weak holiday
season for booksellers. In the prior fiscal year quarter, sales of HARRY
POTTER books benefited from the release of the first HARRY POTTER movie in
November 2001. These declines were partially offset by $7.6 million of
revenues from Klutz, which was acquired in April 2002. The $4.2 million
revenue decrease in school-based book clubs was primarily due to weakness in
some of the Company's core offerings in January. Excluding the direct-to-home
continuity business, segment revenues for the quarter decreased by $3.4
million to $218.4 million compared to the prior year quarter.
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 are also
entitled to defer payment for HARRY POTTER titles purchased between September 1,
2002 and December 31, 2002 until May 2003.
Businesses acquired in fiscal 2002 contributed revenues of approximately $11
million to this segment for the quarter ended February 28, 2003.
20
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Segment operating profit for the quarter decreased $15.4 million to $27.2
million from $42.6 million in the prior year quarter, primarily due to the
decrease in higher margin HARRY POTTER and other trade revenues, which was
partially offset by an increase in lower margin revenues from acquired
businesses, and a decrease in third quarter operating profit for
the direct-to-home continuity business from the prior year quarter of $4.3
million to $6.4 million, due to the prior year's $6.1 million benefit related
to the Company's refinement of the bad debt reserve to reflect better than
anticipated credit performance. These decreases were partially offset by a
reduction in cost of goods sold of $2.2 million. Excluding the direct-to-home
continuity business, the operating profit for the quarter decreased to $20.8
million from $31.9 million in the prior year period.
Segment revenues for the nine months ended February 28, 2003 increased to $847.6
million compared to $836.9 million in the prior fiscal year period. Segment
revenues, compared to the prior year period, benefited from a $15.1 million
increase in school-based book fairs related to an increased number of fairs
combined with a $7.8 million revenue increase in the continuity businesses,
reflecting growth in school-based continuities. These revenue increases were
offset by a decline of $8.5 million in school-based book clubs. Revenues also
decreased in trade by $4.2 million primarily due to a decrease in sales of HARRY
POTTER backlist titles of approximately $33 million, partially offset by $28.8
million of revenues from the April 2002 Klutz acquisition. For the nine months
ended February 28, 2003, segment revenues excluding the direct-to-home
continuity business increased $14.2 million over the prior year period to $693.5
million.
Segment operating profit decreased $17.9 million to $98.6 million for the nine
months ended February 28, 2003 compared to the prior year period. This decrease
was related primarily to trade results. A $6.7 million decrease compared to the
prior year period in direct-to-home continuities profits was partially offset by
the operating profit increase of $2.6 million in school-based continuities.
Excluding the direct-to-home continuity business, operating profit for the
year-to-date period decreased $11.2 million to $84.3 million.
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 NINE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Revenue $ 50.8 $ 47.2 $ 154.1 $ 157.6
Operating profit 6.4 10.7 14.3 21.0
---------------------------------------------------------------------------------------------------------
OPERATING MARGIN 12.6% 22.7% 9.3% 13.3%
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 NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 64.3 $ 61.1 $ 228.9 $ 226.9
Operating profit (loss) (0.8) (1.8) 28.0 25.1
- ----------------------------------------------------------------------------------------------------------------
OPERATING MARGIN * * 12.2% 11.1%
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter ended February
28, 2003 increased by $3.2 million, or 5.2%, to $64.3 million, compared to $61.1
million in the prior fiscal year quarter. This $3.2 million increase in revenues
was primarily due to growth of the READ 180(R) reading intervention program. For
the nine-month period ended February 28, 2003, revenues increased $2.0 million
to $228.9 million compared to $226.9 million in the prior fiscal year period.
The $2.0 million increase was due to increased revenues of $16.1 million from
READ 180, partially offset by a decrease in SCHOLASTIC LITERACY PLACE(R)
revenues of $12.5 million and decreased revenues from supplemental curriculum
products of $1.9 million.
21
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Third quarter operating loss for this segment improved by $1.0 million over
the prior fiscal year quarter, primarily due to higher gross margins of $3.6
million, reflecting a more favorable product mix, partially offset by
increased general and administrative expenses of $2.1 million. Operating
profit for this segment for the nine months ended February 28, 2003 improved
by $2.9 million over the prior year, due to higher gross margins of $8.8
million primarily from the sale of more profitable products, partially offset
by increased marketing, general and administrative expenses of $5.9 million,
primarily due to the incremental expenses from the acquisitions of Tom Snyder
Productions Inc. and Teacher's Friend Publications, Inc.
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., 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 NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 30.1 $ 32.2 $ 94.0 $ 97.3
Operating loss (5.2) (3.3) (15.4) (12.1)
- ----------------------------------------------------------------------------------------------------------------
OPERATING MARGIN * * * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased by $2.1 million, or 6.5%,
to $30.1 million for the quarter ended February 28, 2003, compared to the
prior year quarter of $32.2 million. For the current year nine-month period,
revenues decreased by $3.3 million to $94.0 million, due to lower software
revenues of $8.3 million, partially offset by higher film revenues of $3.5
million, relating to CLIFFORD(TM) programming revenue, and higher on-line
Teacher Store revenues of $1.3 million.
For the quarter ended February 28, 2003, segment operating loss was $5.2 million
compared to the prior year quarter loss of $3.3 million primarily due to
lower licensing revenues. For the nine-month period ended February 28, 2003, the
operating loss increased by $3.3 million, primarily due to lower revenues.
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 NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 70.1 $ 70.4 $ 230.4 $ 214.9
Operating profit 0.8 3.9 12.1 11.1
- ----------------------------------------------------------------------------------------------------------------
OPERATING MARGIN 1.1% 5.5% 5.3% 5.2%
22
SCHOLASTIC CORPORATION
ITEM 2. MD&A
INTERNATIONAL revenues decreased modestly to $70.1 million for the quarter
ended February 28, 2003 from $70.4 million in the prior fiscal year quarter.
Lower reveues of $4.6 million, including the planned phase-out of certain
unprofitable businesses, were largely offset by the favorable impact of
foreign currency exchange rates of approximately $4.3 million. Revenues for
the nine months ended February 28, 2003 increased by $15.5 million, or 7.2%,
to $230.4 million, primarily due to a favorable foreign exchange impact of
approximately $10 million.
For the quarter ended February 28, 2003, operating profit decreased to $0.8
million from $3.9 million in the year ago quarter. Operating profit for the
nine months ended February 28, 2003 increased by $1.0 million, or 9.0%, to
$12.1 million from $11.1 million in the prior year.
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 $2.9 million during the
nine-month period ended February 28, 2003, compared to a decrease of $1.2
million during the comparable period in the prior year.
Cash flow provided from operations was $31.4 million for the nine-month period
ended February 28, 2003, resulting from net income, adjusted for non-cash items,
of $123.6 million, offset by net working capital increases of $92.2 million,
which included the impact of $7.5 million in payments related to the settlement
of certain litigation.
23
SCHOLASTIC CORPORATION
ITEM 2. MD&A
Cash outflow for investing activities was $160.9 million for the nine-month
period ended February 28, 2003. The spending principally consisted of capital
expenditures, prepublication costs, royalty advances, an investment in The
Book People Group, Ltd., a direct marketer of books in the United Kingdom,
and acquisition related payments. Capital expenditures totaled $62.9 million
for the nine-month period ended February 28, 2003, an increase of $16.4
million over the same period in fiscal 2002, largely as a result of the
acquisition of a warehouse facility and equipment in Maumelle, Arkansas in
June 2002. Prepublication expenditures totaled $34.3 million in the nine
months ended February 28, 2003, as compared to $39.4 million over the same
period in fiscal 2002. Royalty advances were $25.0 million and $23.7 million
for the nine-month periods ended February 28, 2003 and February 28, 2002,
respectively. Investment expenditures totaled $23.3 million primarily due to
the Company's 15% equity investment in The Book People Group, Ltd. in June
2002 of 12.0 million GBP (equivalent to $17.9 million as of the date of the
transaction), and a related credit facility of 3.0 million GBP, which was
fully drawn down at February 28, 2003 (equivalent to $4.9 million).
Acquisition related payments of $9.7 million in the current nine-month period
relate to the purchase of worldwide rights to the Goosebumps(TM) property.
As more fully described in "Financing" below, on April 4, 2003, the Company
issued $175.0 million of 5% Notes due 2013 (the "5% Notes"). Net proceeds of
$171.2 million were used to retire all outstanding indebtedness of $36.0
million under the Grolier Facility, and to cancel that facility; and to
reduce $135 million of indebtedness outstanding under the Loan Agreement and
Revolver. The Company expects to repay $125.0 million of 7% Notes, due 2003,
in December 2003, principally using available borrowings under the Loan
Agreement and Revolver, made possible by the issuance of the 5% Notes.
Consequently, the Company expects to have increased cash and increased debt
levels at May 31, 2003.
The Company believes its existing cash position, combined with funds generated
from operations and available under the Loan Agreement and the Revolver, 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 April 4, 2003, Scholastic Corporation issued in a private offering the 5%
Notes, which are senior, unsecured obligations of the Company and mature on
April 15, 2013. Interest on the 5% Notes is payable on April 15 and October 15
of each year, beginning October 15, 2003. The Company may at any time redeem all
or a portion of the 5% Notes at a redemption price (plus accrued interest to the
date of the redemption) equal to the greater of (i) 100% of the principal
amount, or (ii) the sum of the present values of the remaining scheduled
payments of principal and interest discounted to the date of the redemption.
For a description of the use of proceeds from the sale of the 5% Notes, see
"Liquidity and Capital Resources."
24
SCHOLASTIC CORPORATION
ITEM 2. MD&A
On June 22, 2000, Scholastic Inc. established a credit facility to finance
$350.0 million of the $400.0 million 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"
below), and a portion of the proceeds from the sale of the 5% Notes in April
2003 was used to repay all outstanding amounts under this facility, which was
then cancelled. Prior to its cancellation, borrowings under the Grolier Facility
bore interest at the prime rate or 0.39% to 1.10% over LIBOR (as defined). The
Grolier Facility also provided for a facility fee ranging from 0.085% to 0.25%,
based upon the Company's credit rating. As of February 28, 2003, the interest
rate and facility fee were 0.650% over LIBOR and 0.150%, respectively. At
February 28, 2003 and 2002, $30.0 million and $50.0 million, respectively, were
outstanding under the Grolier Facility at a weighted average interest rate of
2.0% and 2.5%, respectively. At May 31, 2002, $50.0 million was outstanding
under the Grolier Facility at a weighted average interest rate of 2.4%.
On January 23, 2002, Scholastic Corporation issued $300.0 million of 5.75% Notes
due 2007 (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 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 nine months ended
February 28, 2003.
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
February 28, 2003 were 0.475% over LIBOR, 0.150% and 0.075%, respectively. The
Loan Agreement contains certain financial covenants
25
SCHOLASTIC CORPORATION
ITEM 2. MD&A
related to debt and interest coverage ratios (as defined) and limits dividends
and other distributions. At February 28, 2003 and 2002, $156.0 million and $40.0
million, respectively, were outstanding under the Loan Agreement at a weighted
average interest rate of 1.9% and 2.3%, 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 February 28, 2003 were 0.475% over LIBOR and 0.150%,
respectively. The Revolver has certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. At February 28, 2003 and 2002, $30.9 million and $6.3 million,
respectively, were outstanding under the Revolver at a weighted average interest
rate of 2.3% and 3.9%, 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 due 2003 (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.
On January 11, 2002, pursuant to the exercise of Scholastic Corporation's
optional redemption rights, $109.8 million of 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.
In addition, unsecured lines of credit available in local currencies to the
Company's international subsidiaries were equivalent to $54.9 million at
February 28, 2003. These lines are used primarily to fund local working capital
needs. At February 28, 2003, borrowings equivalent to $30.1 million were
outstanding under these lines of credit at a weighted average interest rate of
5.3%.
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,
geopolitical events 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.
26
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 $15.0 million)
to match purchases not denominated in their respective local currencies.
Market risks relating to the Company's operations result primarily from changes
in interest rates, which are managed by balancing the mix of variable- versus
fixed-rate borrowings. Additionally, financial instruments, including swap
agreements, are used to manage interest rate exposures. Approximately 51% of the
Company's debt at February 28, 2003 bore interest at a variable rate and was
sensitive to changes in interest rates, compared to approximately 40% at May 31,
2002, with the increase due to seasonal borrowings. The Company is subject to
the risk that market interest rates will increase and thereby increase the
interest rates currently being charged under the variable-rate debt.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following table sets forth information about the Company's debt and other
interest rate sensitive instruments as of February 28, 2003 (see also Note 5 in
the Notes to Condensed Consolidated Financial Statements):
($ amounts in millions) FISCAL YEAR MATURITY
- --------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Total
- --------------------------------------------------------------------------------------------------------------
DEBT OBLIGATIONS
Lines of credit $ 30.1 $ - $ - $ - $ - $ 30.1
Average interest rate 5.34%
Long-term debt including current portion:
Fixed rate debt $ - $ 125.0 $ - $ - $ 300.3 $ 425.3
Average interest rate 7.00% 5.75%
Variable rate debt $ 0.1 $ 30.1 $ 186.9 $ - $ - $ 217.1
Average interest rate 4.75% 1.99% 1.94%
- --------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVE FINANCIAL
INSTRUMENTS RELATED TO DEBT
Interest rate swaps:
Notional amount $ - $ - $ - $ - $ 100.0 $ 100.0
Average variable pay rate 2.17%
Average fixed receive rate 5.75%
- --------------------------------------------------------------------------------------------------------------
27
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.
28
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. The settlement referenced
therein was approved by the court in April 2003.
On January 14, 2003, Scholastic Inc. acquired all worldwide rights to the
Goosebumps property, including trademark, copyright, publication and media
rights, for an aggregate of $9.65 million in cash from Parachute Press, Inc.
and affiliated entities. For information concerning the agreement to dismiss
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), see "Part II - Other Information -
Item 1. Legal Proceedings" in the Company's Quarterly Report on Form 10-Q for
the period ended November 30, 2002.
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 investor calls at least five days prior
to dissemination. The Company's investor calls are open to the public and remain
available to the public through the Company's Web site for at least five days
thereafter.
30
SCHOLASTIC CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certifications of the Chief Executive Officer and Chief Financial
Officer of Scholastic Corporation furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed with the SEC on April 3, 2003
reporting under Item 5 (Other Events) a press release announcing the
sale of the 5% Notes.
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: April 11, 2003 /s/ Richard Robinson
------------------------------
Richard Robinson
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
Date: April 11, 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: April 11, 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: April 11, 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 FEBRUARY 28, 2003
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
99.1 Certifications of the Chief Executive Officer and Chief
Financial Officer of Scholastic Corporation furnished pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
37
EXHIBIT 99.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
WITH RESPECT TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2003
OF SCHOLASTIC CORPORATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Scholastic Corporation, a Delaware corporation (the
"Company"), does hereby certify to the best of such officer's knowledge, that:
1. The Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2003 (the "Form 10-Q") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
2. Information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: April 11, 2003 /s/ Richard Robinson
--------------------
Richard Robinson
Chief Executive Officer
Dated: April 11, 2003 /s/ Kevin J. McEnery
--------------------
Kevin J. McEnery
Chief Financial Officer
The certification set forth above is being furnished as an exhibit solely
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed
as part of the Form 10-Q or as a separate disclosure document of the Company or
the certifying officers.
A signed original of this written statement required by Section 906 has
been provided to Scholastic Corporation and will be retained by Scholastic
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
