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, 2005 | 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, 2005 | ||
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| Common Stock, $.01 par value | 38,632,404 | ||
| Class A Stock, $.01 par value | 1,656,200 | ||
| SCHOLASTIC CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2005 INDEX |
| Part I - Financial Information | Page | ||
| Item 1. | Financial Statements | ||
| Condensed Consolidated Statements of Operations - Unaudited for the | |||
| Three and Nine Months Ended February 28, 2005 and February 29, 2004 | 1 | ||
| Condensed Consolidated Balance Sheets - February 28, 2005 and | |||
| February 29, 2004 – Unaudited; and May 31, 2004 | 2 | ||
| Consolidated Statements of Cash Flows - Unaudited for the Nine Months | |||
| Ended February 28, 2005 and February 29, 2004 | 3 | ||
| Notes to Condensed Consolidated Financial Statements - Unaudited | 4 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition | ||
| and Results of Operations | 16 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 24 | |
| Item 4. | Controls and Procedures | 25 | |
| Part II – Other Information | |||
| Item 6. | Exhibits | 26 | |
| Signatures | 27 | ||
PART I - FINANCIAL INFORMATION
| Item 1. Financial Statements | |
| SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (Amounts in millions, except per share data) |
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| February 28, | February 29, | February 28, | February 29, | |||||||||
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| 2005 | 2004 | 2005 | 2004 | |||||||||
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| Revenues | $ | 480.8 | $ | 472.0 | $ | 1,487.8 | $ | 1,646.4 | ||||
| Operating costs and expenses: | ||||||||||||
| Cost of goods sold | 233.9 | 229.7 | 711.4 | 816.6 | ||||||||
| Selling, general and administrative expenses | 213.1 | 214.1 | 627.8 | 639.4 | ||||||||
| Selling, general and administrative expenses - | ||||||||||||
| Continuity charges | - | - | 3.6 | - | ||||||||
| Bad debt expense | 14.9 | 17.0 | 50.7 | 66.1 | ||||||||
| Depreciation and amortization | 13.1 | 13.5 | 39.1 | 39.8 | ||||||||
| Special severance charges | - | - | - | 3.2 | ||||||||
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| Total operating costs and expenses | 475.0 | 474.3 | 1,432.6 | 1,565.1 | ||||||||
| Operating income (loss) | 5.8 | (2.3 | ) | 55.2 | 81.3 | |||||||
| Interest expense, net | 6.9 | 7.1 | 21.6 | 25.2 | ||||||||
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| Earnings (loss) before income taxes | (1.1 | ) | (9.4 | ) | 33.6 | 56.1 | ||||||
| Provision (benefit) for income taxes | (0.4 | ) | (3.4 | ) | 11.9 | 20.2 | ||||||
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| Net income (loss) | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | ||
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| Earnings (loss) per Share of Class A and | ||||||||||||
| Common Stock: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.55 | $ | 0.91 | ||
| Diluted | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.54 | $ | 0.90 | ||
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| See accompanying notes | ||||||||||||
1
| SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions, except per share data) |
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| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||
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| (Unaudited) | (Unaudited) | ||||||||
| ASSETS | |||||||||
| Current Assets: | |||||||||
| Cash and cash equivalents | $ | 22.1 | $ | 17.8 | $ | 20.9 | |||
| Accounts receivable, net | 249.1 | 265.7 | 261.4 | ||||||
| Inventories | 468.0 | 402.6 | 484.0 | ||||||
| Deferred promotion costs | 42.7 | 40.6 | 62.8 | ||||||
| Deferred income taxes | 75.9 | 73.4 | 74.7 | ||||||
| Prepaid and other current assets | 48.0 | 42.6 | 45.5 | ||||||
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| Total current assets | 905.8 | 842.7 | 949.3 | ||||||
| Property, plant and equipment, net | 328.5 | 334.6 | 333.5 | ||||||
| Prepublication costs, net | 115.5 | 116.7 | 119.7 | ||||||
| Installment receivables, net | 10.2 | 13.1 | 12.4 | ||||||
| Production costs, net | 9.9 | 5.5 | 5.2 | ||||||
| Goodwill | 251.5 | 250.3 | 252.3 | ||||||
| Other intangibles, net | 78.7 | 78.9 | 79.0 | ||||||
| Other assets and deferred charges | 125.5 | 121.7 | 123.4 | ||||||
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| Total assets | $ | 1,825.6 | $ | 1,763.5 | $ | 1,874.8 | |||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| Current Liabilities: | |||||||||
| Lines of credit and short-term debt | $ | 21.3 | $ | 24.1 | $ | 95.8 | |||
| Accounts payable | 127.6 | 150.1 | 180.0 | ||||||
| Accrued royalties | 57.1 | 38.4 | 74.0 | ||||||
| Deferred revenue | 43.4 | 22.7 | 35.4 | ||||||
| Other accrued expenses | 128.4 | 129.8 | 123.7 | ||||||
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| Total current liabilities | 377.8 | 365.1 | 508.9 | ||||||
| Noncurrent Liabilities: | |||||||||
| Long-term debt | 489.0 | 492.5 | 478.7 | ||||||
| Other noncurrent liabilities | 58.2 | 49.9 | 67.2 | ||||||
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| Total noncurrent liabilities | 547.2 | 542.4 | 545.9 | ||||||
| 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 | 405.3 | 388.1 | 386.0 | ||||||
| Deferred compensation | (1.5 | ) | (0.6 | ) | (0.7 | ) | |||
| Accumulated other comprehensive loss | (14.9 | ) | (21.5 | ) | (32.8 | ) | |||
| Retained earnings | 511.3 | 489.6 | 467.1 | ||||||
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| Total stockholders’ equity | 900.6 | 856.0 | 820.0 | ||||||
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| Total liabilities and stockholders’ equity | $ | 1,825.6 | $ | 1,763.5 | $ | 1,874.8 | |||
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| See accompanying notes | |||||||||
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| SCHOLASTIC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED (Amounts in millions) |
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| February 28, | February 29, | |||||
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| Cash flows provided by operating activities: | ||||||
| Net income | $ | 21.7 | $ | 35.9 | ||
| Adjustments to reconcile net income to net cash provided by operating | ||||||
| activities: | ||||||
| Provision for losses on accounts receivable | 50.7 | 66.1 | ||||
| Amortization of prepublication and production costs | 49.3 | 60.2 | ||||
| Depreciation and amortization | 39.1 | 39.8 | ||||
| Royalty advances expensed | 21.3 | 15.5 | ||||
| Deferred income taxes | (3.3 | ) | (0.1 | ) | ||
| Changes in assets and liabilities: | ||||||
| Accounts receivable, net | (27.1 | ) | (68.5 | ) | ||
| Inventories | (56.9 | ) | (95.8 | ) | ||
| Prepaid and other current assets | (4.0 | ) | 3.0 | |||
| Deferred promotion costs | (0.9 | ) | (7.9 | ) | ||
| Accounts payable and other accrued expenses | (26.2 | ) | 23.8 | |||
| Accrued royalties and deferred revenue | 37.8 | 56.9 | ||||
| Income tax benefit realized from stock option exercises | 1.5 | 0.4 | ||||
| Other, net | 2.0 | (10.9 | ) | |||
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| Total adjustments | 83.3 | 82.5 | ||||
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| Net cash provided by operating activities | 105.0 | 118.4 | ||||
| Cash flows used in investing activities: | ||||||
| Prepublication expenditures | (40.9 | ) | (38.9 | ) | ||
| Additions to property, plant and equipment | (31.4 | ) | (26.5 | ) | ||
| Royalty advances | (24.7 | ) | (18.4 | ) | ||
| Production expenditures | (12.8 | ) | (12.6 | ) | ||
| Acquisition-related payments | - | (8.8 | ) | |||
| Other | - | (0.5 | ) | |||
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| Net cash used in investing activities | (109.8 | ) | (105.7 | ) | ||
| Cash flows provided by (used in) financing activities: | ||||||
| Borrowings under Credit Agreement, Loan Agreement and Revolver | 342.4 | 452.5 | ||||
| Repayments of Credit Agreement, Loan Agreement and Revolver | (344.6 | ) | (383.8 | ) | ||
| Borrowings under lines of credit | 169.0 | 204.2 | ||||
| Repayments of lines of credit | (172.4 | ) | (208.8 | ) | ||
| Repayment of 7% Notes | - | (125.0 | ) | |||
| Proceeds pursuant to employee stock plans | 14.2 | 6.1 | ||||
| Proceeds from swap termination | - | 3.8 | ||||
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| Net cash provided by (used in) financing activities | 8.6 | (51.0 | ) | |||
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| Effect of exchange rate changes on cash | 0.5 | 0.6 | ||||
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| Net increase (decrease) in cash and cash equivalents | 4.3 | (37.7 | ) | |||
| Cash and cash equivalents at beginning of period | 17.8 | 58.6 | ||||
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| Cash and cash equivalents at end of period | $ | 22.1 | $ | 20.9 | ||
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| See accompanying notes | ||||||
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| SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) |
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1. Basis of Presentation
The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned subsidiaries (collectively “Scholastic” or the “Company”). These financial statements have not been audited, but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flow. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004.
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, 2005 and February 29, 2004 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the February 29, 2004 condensed consolidated balance sheet is included for comparative purposes.
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes, prepublication costs, royalty advances, goodwill and other intangibles.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Stock-Based Compensation
Under the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. In accordance with APB 25, no compensation expense was recognized with respect to the Company’s stock option plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and with respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:
4
| SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) |
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| Net income (loss) – as reported | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | ||
| Add: Stock-based employee compensation | ||||||||||||
| included in reported net income, net of tax | 0.1 | 0.1 | 0.2 | 0.3 | ||||||||
| Deduct: Total stock-based employee | ||||||||||||
| compensation expense determined under | ||||||||||||
| fair value based method, net of tax | (3.0 | ) | (2.7 | ) | (9.1 | ) | (9.2 | ) | ||||
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| Net income (loss) – pro forma | $ | (3.6 | ) | $ | (8.6 | ) | $ | 12.8 | $ | 27.0 | ||
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| Earnings (loss) per share – as reported: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.55 | $ | 0.91 | ||
| Diluted | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.54 | $ | 0.90 | ||
| Earnings (loss) per share – pro forma: | ||||||||||||
| Basic | $ | (0.09 | ) | $ | (0.22 | ) | $ | 0.32 | $ | 0.69 | ||
| Diluted | $ | (0.09 | ) | $ | (0.22 | ) | $ | 0.32 | $ | 0.68 | ||
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New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, as currently permitted but not required under SFAS No. 123. SFAS No. 123R is effective for the Company commencing September 1, 2005. However, retroactive application of the fair value recognition provisions of SFAS No. 123 to either June 1, 2005, the beginning of the fiscal year that includes the effective date of SFAS No. 123R, or to all prior years for which SFAS No. 123 was effective, is permitted, but is not required. The Company is currently evaluating the impact that the adoption of SFAS No. 123R will have on its financial position, results of operations and cash flows. The cumulative effect of adoption, if any, will be measured and recognized in the statement of operations on the date of adoption.
2. Segment Information
Scholastic is a global children’s publishing and media company. The Company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries and television networks. The Company categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the Company’s domestic operations); and International. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources.
• 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.
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| SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) |
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• Educational Publishing includes the publication and distribution to schools and libraries of educational technology, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States.
• Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Corporation’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
• International includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
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| SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) |
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The following table sets forth information for the Company’s segments for the periods indicated. Certain prior year amounts have been reclassified to conform with the present year presentation.
| Children’s | Media, | ||||||||||||||||||||
| Book | Licensing | ||||||||||||||||||||
| Publishing and | Educational | and | Total | ||||||||||||||||||
| Distribution | Publishing | Advertising | Overhead (1) | Domestic | International | Consolidated | |||||||||||||||
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| Three months ended February 28, 2005 | |||||||||||||||||||||
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| Revenues | $ | 272.3 | $ | 79.3 | $ | 37.2 | $ | 0.0 | $ | 388.8 | $ | 92.0 | $ | 480.8 | |||||||
| Bad debt | 11.8 | 0.6 | 0.1 | 0.0 | 12.5 | 2.4 | 14.9 | ||||||||||||||
| Depreciation | 4.1 | 0.8 | 0.3 | 6.1 | 11.3 | 1.7 | 13.0 | ||||||||||||||
| Amortization (2) | 4.5 | 8.2 | 4.2 | 0.0 | 16.9 | 0.1 | 17.0 | ||||||||||||||
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| expensed | 6.3 | 0.6 | (0.2 | ) | 0.0 | 6.7 | 0.7 | 7.4 | |||||||||||||
| Segment profit (loss) (3) | 16.5 | 4.0 | 1.3 | (19.4 | ) | 2.4 | 3.4 | 5.8 | |||||||||||||
| Expenditures for | |||||||||||||||||||||
| long-lived assets (4) | 18.3 | 11.0 | 5.6 | 5.0 | 39.9 | 0.7 | 40.6 | ||||||||||||||
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| Three months ended February 29, 2004 | |||||||||||||||||||||
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| Revenues | $ | 271.5 | $ | 69.4 | $ | 43.5 | $ | 0.0 | $ | 384.4 | $ | 87.6 | $ | 472.0 | |||||||
| Bad debt | 14.5 | 0.2 | 0.2 | 0.0 | 14.9 | 2.1 | 17.0 | ||||||||||||||
| Depreciation | 4.2 | 0.8 | 0.4 | 6.3 | 11.7 | 1.7 | 13.4 | ||||||||||||||
| Amortization (2) | 4.6 | 8.7 | 13.0 | 0.0 | 26.3 | 0.2 | 26.5 | ||||||||||||||
| Royalty advances |