UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the
Securities Exchange Act ofOF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000 Commission File Number:No. 0-19860
February 28, 1999
SCHOLASTIC CORPORATION
(Exact name of registrantRegistrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212-343-6100)(212) 343-6100
Indicate by check mark whether the registrantRegistrant (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 registrantRegistrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]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, 1999
------------- --------------------
Common Stock, $.01 par value 15,628,739
TITLE NUMBER OF SHARES OUTSTANDING
OF EACH CLASS AS OF MARCH 31, 2000
Common Stock, $.01 par value 16,164,307
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 199929, 2000
INDEX
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PART I - FINANCIAL INFORMATION Page
----PAGE
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three and
Nine Months Ended February 29, 2000 and February 28, 1999 and 1998 1
Condensed Consolidated Balance Sheet at February 29, 2000,
February 28, 1999 and 1998 and May 31, 19981999 2
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended February 29, 2000 and February 28, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 911
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1.4. Legal Proceedings 1519
Item 6. Exhibits and Reports on Form 8-K 1620
SIGNATURES 1721
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN- UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------=================================================== ================================== ================= ================
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
=================================================== ================ ================= ================= ================
2000 1999 19982000 1999
1998
---- ---- ---- ----=================================================== ================ ================= ================= ================
RevenuesREVENUES $ 312.8 $ 267.3 $ 239.01,000.6 $ 820.7 $ 760.5
Operating costs and expenses:
Cost of goods sold 155.6 133.5 121.8500.7 406.6 394.5
Selling, general and administrative expenses 143.1 123.6 110.8427.9 360.1
317.6
Depreciation 5.1 4.2 3.614.4 12.4 10.8
Goodwill and trademark amortization 1.3 1.1 1.63.5 3.9
5.0
Impairment of assets -- 11.4 -- 11.4
---------- --------- ---------- ----------
Total operating costs and
expensesNon-recurring charge - - 8.5 -
- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
TOTAL OPERATING COSTS AND EXPENSES 305.1 262.4 249.2955.0 783.0
739.3
Operating income/(loss)income 7.7 4.9 (10.2)45.6 37.7 21.2
Interest expense, net (4.5) (4.6) (4.8)(14.6) (14.5)
(15.5)
Gain on sale of SOHO Group -- 10.0 -- 10.0
---------- --------- ---------- ----------
Income/(loss)- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Income before provision/(benefit)income taxes 3.2 0.3 31.0 23.2
Provision for income taxes 0.3 (5.0) 23.2 15.7
Provision/(benefit) for income
taxes1.2 0.1 (1.9)11.3 8.8
6.0
---------- --------- ---------- ----------
Net income/(loss)- --------------------------------------------------- ---------------- ----------------- ----------------- ----------------
NET INCOME $ 2.0 $ 0.2 $ (3.1)19.7 $ 14.4
$ 9.7
---------- --------- ---------- ----------
---------- --------- ---------- ----------=================================================== ================ ================= ================= ================
Net income/(loss)income per Class A and Common share:Share:
Basic $ 0.12 $ 0.01 $ (0.19)1.18 $ 0.88
Diluted $ 0.60
Diluted0.11 $ 0.01 $ (0.19)1.16 $ 0.86
$ 0.60
- -------------------------------------------------------------------------------------------------------------------=================================================== ================ ================= ================= ================
SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------
February================================================= ====================== ====================== =======================
FEBRUARY 29, 2000 MAY 31, 1999 FEBRUARY 28, 1999
May 31, 1998 February 28, 1998
------------------------- ------------------ -----------------------================================================= ====================== ====================== =======================
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.65.6 $ 5.15.9 $ 0.91.6
Accounts receivable less allowance for
doubtful accounts 183.8 136.4 129.2
116.7 116.3
Inventories, net 319.5 227.4 267.6 199.3 244.2
Deferred taxes 48.141.9 41.8 29.948.1
Prepaid and other deferred expenses 29.6 22.7 24.2
19.8 27.8
--------- --------- ---------
Total current assets- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT ASSETS 580.4 434.2 470.7 382.7 419.1
Property, plant and equipment, net 166.0 152.2 143.0 136.8 132.9
Prepublication costs 99.7 95.3 88.2 86.3 88.8
Other assets and deferred charges 154.3 160.6 170.1
157.8 161.6
---------- -------------------------------------------------- ---------- -------- --------
Total assetsTOTAL ASSETS $ 1,000.4 $ 842.3 $ 872.0
$ 763.6 $ 802.4
--------- --------- ---------
--------- --------- ---------================================================== ========== ======== =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 15.721.2 $ 9.818.0 $ 3.315.7
Accounts payable 131.7 97.0 105.5 76.9 82.3
Accrued royalties 56.8 23.7 35.6 19.4 31.4
Deferred revenue 23.6 6.7 21.8 10.5 21.6
Other accrued expenses 61.5 66.4 55.7
65.1 51.2
--------- --------- ---------
Total current liabilities- -------------------------------------------------- ---------- -------- --------
TOTAL CURRENT LIABILITIES 294.8 211.8 234.3 181.7 189.8
NONCURRENT LIABILITIES:
Long-term debt 281.2 248.0 277.9 243.5 287.9
Other noncurrent liabilities 23.7 21.1 22.0
20.3 18.7
--------- --------- ---------
Total noncurrent liabilities- -------------------------------------------------- ---------- -------- --------
TOTAL NONCURRENT LIABILITIES 304.9 269.1 299.9 263.8 306.6
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value -- -- --
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.2 0.2 0.2
Additional paid-in capital 223.0 212.3 211.5 205.1 204.8
Accumulated earnings 169.0 154.6 140.7
Accumulated other comprehensive income:loss:
Foreign currency translation adjustment (7.6) (5.7) (6.1)
(5.0) (2.9)Retained earnings 211.1 191.4 169.0
Less shares of Common Stock
held in treasury (26.0) (36.8) (36.8)
(36.8)- -------------------------------------------------- ---------- ------------------- --------
TOTAL STOCKHOLDERS' EQUITY 400.7 361.4 337.8
- -------------------------------------------------- ---------- Total stockholders' equity 337.8 318.1 306.0
--------- --------- ----------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,000.4 $ 842.3 $ 872.0
$ 763.6 $ 802.4
--------- --------- ---------
--------- --------- ---------
- ------------------------------------------------------------------------------------------------------------------------------================================================== ========== ======== ========
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN- UNAUDITED
(AMOUNTS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------================================================================================================================
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
============================================================================ =================== ===============
2000 1999
1998
------ ------============================================================================ =================== ===============
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 45.142.7 $ 43.545.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs (35.3) (28.8) (18.3)
Additions to property, plant and equipment (28.8) (18.1) (11.3)
Royalty advances (17.1) (18.1)
(23.4)Production costs (8.1) (11.9)
Business and trademark acquisition-related payments (0.2) (15.7)
(0.4)
Production costs (11.9) (8.9)
Proceeds from the sale of the SOHO Group -- 19.2
Other (1.4) (3.1)
(3.5)
--------- ----------- ---------------------------------------------------------------------------- ------------------- ---------------
Net cash used in investing activities (90.9) (95.7) (46.6)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under loan agreementLoan Agreement and revolverRevolver 282.4 213.1 210.3
Repayments of loan agreementLoan Agreement and revolverRevolver (249.3) (178.9) (210.6)
Borrowings under lines of credit 48.3 49.3 39.9
Repayments of lines of credit (49.9) (42.9)
(41.4)Proceeds from the exercise of stock options and related tax
benefits 17.0 0.0
Other (0.6) 6.5
0.9
--------- ----------- ---------------------------------------------------------------------------- ------------------- ---------------
Net cash provided by/(used in)by financing activities 47.9 47.1
(0.9)
--------- ----------- ---------------------------------------------------------------------------- ------------------- ---------------
Net decrease in cash and cash equivalents (0.3) (3.5) (4.0)
Cash and cash equivalents at beginning of period 5.9 5.1
4.9
--------- ----------
Cash and cash equivalents at end of period- ---------------------------------------------------------------------------- ------------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5.6 $ 1.6
$ 0.9
--------- ----------
--------- ----------
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 20.2 $ 11.4
Interest paid $ 17.2 $ 18.7
- --------------------------------------------------------------------------------------------------------------------============================================================================ =================== ===============
SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN- UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------================================================================================
1. COMPANY
Scholastic Corporation (together with its subsidiaries, the "Company" or
"Scholastic") is a global children's publishing and media company producing and
distributing material for children, teachers and parents. Scholastic is among
the leading publishers and distributors of children's books, classroom and
professional magazines and other educational materials, with operations in the
United States, the United Kingdom, Canada, Australia, New Zealand, Mexico, Hong
Kong and India. Scholastic distributes most of its products directly to children
and teachers in elementary and secondary schools. During its seventy-nine years
of serving schools, Scholastic has developed strong name recognition associated
with quality and dedication to learning and has achieved a leading market
position in the school-based distribution of children's books and magazines. The
Company has also used its proven system to develop successful children's books
and then build these brands into multimedia assets.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, which include the
accounts of Scholastic Corporation and all wholly owned subsidiaries (the
"Company"), 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 1997/1998fiscal 1999 Annual Report to
Stockholders.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the three and nine months ended February 29, 2000 and
February 28, 1999
and 1998 are not necessarily indicative of the results expected for the
full year. Due to the seasonal fluctuations that occur, the prior year's February 28, 1999
condensed consolidated balance sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the condensed consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates and assumptions. Significant estimates that affect the financial
statements include, but are not limited to,to: book returns,returns; recoverability of
inventory,inventory; recoverability of advances to authors,authors; amortization periodsperiods;
recoverability of prepublication and film production costs; and
recoverability of prepublication costs.
3.other long-lived assets.
2. RECENT ACCOUNTING PRINCIPLES
Effective June 1, 1998,May 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This statement
establishes the standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. The
components of comprehensive income are described in Note 6.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
4
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
3. RECENT ACCOUNTING PRINCIPLES (CONTINUED)
Related Information." This statement requires that public business enterprises
report certain information about operating segments in financial statements of
the enterprise issued to stockholders.shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
is required
to adopt the provisions of SFAS 131 for the fiscal year ending May
31, 1999.disclosures are presented in Note 3 included herein.
The Company expects to disclose additional information about the
segments of the enterprise as required by SFAS 131.
In February 1998, the Financial Accounting Standards Board issued, in June 1998, Statement of
Financial Accounting Standards No. 132133 (SFAS 132)133), "Employer's Disclosures about
Pensions"Accounting for Derivative
Instruments and Other Post-Retirement Benefits.Hedging Activities." This statement revises employer's
disclosures about pensionSFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and other post-retirement benefit plans. It
standardizesestablishes special accounting
for the disclosure requirements for pensions and other post-retirement
benefits, requires additional information onfollowing three different types of hedges: hedges of changes in the benefit obligationsfair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of plan assetsboth the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that will facilitate financial analysis, and
eliminates certain disclosures required under prior standards.do not meet the criteria of one of these three categories of
4
hedges are included in income. The Company is required to adopt the provisions
of SFAS 132133 in the first quarter of fiscal 2002.
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
3. 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 and Argentina, and distributes its products and
services through a variety of channels, including book clubs, book fairs and
trade.
The Company's operations are categorized in the following four segments:
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION; EDUCATIONAL PUBLISHING; MEDIA,
LICENSING AND ADVERTISING; and INTERNATIONAL. Such segment classification
reflects the nature of products and services consistent with the method by which
the Company's chief operating decision-maker assesses operating performance and
allocates resources.
The following tables set forth the Company's segment information for the
fiscal year ending May 31,
1999.periods indicated:
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 29, 2000
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 200.5 $ 40.0 $ 24.2 $ 264.7 $ 48.1 $ 0.0 $ 312.8
Depreciation 0.9 0.3 0.4 1.6 0.9 2.6 5.1
Amortization (2) 3.4 7.2 2.4 13.0 0.5 0.0 13.5
Royalty advance expense 4.1 0.2 0.2 4.5 0.0 0.0 4.5
Segment profit/(loss)(3) 35.4 (10.5) (2.6) 22.3 0.7 (15.3) 7.7
Expenditures for
long-lived assets (4) 8.5 7.6 6.0 22.1 1.0 8.9 32.0
========================== ============== ============ ============= ============ ============= ============ =============
THREE MONTHS ENDED
FEBRUARY 28, 1999
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 162.5 $ 32.9 $ 30.7 $ 226.1 $ 41.2 $ 0.0 $ 267.3
Depreciation 0.7 0.3 0.1 1.1 1.0 2.1 4.2
Amortization (2) 3.1 6.3 5.4 14.8 0.4 0.0 15.2
Royalty advance expense 2.8 0.2 0.6 3.6 0.0 0.0 3.6
Segment profit/(loss)(3) 25.8 (10.8) 1.1 16.1 (1.4) (9.8) 4.9
Expenditures for
long-lived assets (4) 8.7 10.4 2.9 22.0 0.1 4.9 27.0
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ -------------
TABLES AND NOTES CONTINUED ON THE FOLLOWING PAGE
6
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
3. SEGMENT INFORMATION (continued)
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
========================== ============== ============ ============= ============ ============= ============ =============
AS OF AND FOR THE NINE
MONTHS ENDED FEBRUARY
29, 2000
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 632.7 $ 147.2 $ 73.7 $ 853.6 $ 147.0 $ 0.0 $ 1,000.6
Depreciation 2.7 0.8 0.9 4.4 2.7 7.3 14.4
Amortization (2) 10.1 21.1 7.6 38.8 1.4 0.0 40.2
Royalty advance expense 17.2 0.7 1.0 18.9 1.2 0.0 20.1
Segment profit/(loss) (3) 115.5 (16.2) (11.3) 88.0 1.4 (43.8) 45.6
Segment assets 435.7 191.1 49.4 676.2 147.2 177.0 1,000.4
Long-lived assets (5) 94.6 98.1 30.0 222.7 54.6 118.2 395.5
Expenditures for
long-lived assets (4) 27.4 25.2 15.4 68.0 3.4 17.9 89.3
========================== ============== ============ ============= ============ ============= ============ =============
AS OF AND FOR THE NINE
MONTHS ENDED FEBRUARY
28, 1999
========================== ============== ============ ============= ============ ============= ============ =============
Revenues $ 470.1 $ 143.0 $ 72.1 $ 685.2 $ 135.5 $ 0.0 $ 820.7
Depreciation 2.3 0.7 0.5 3.5 2.6 6.3 12.4
Amortization (2) 9.3 18.2 12.9 40.4 1.6 0.0 42.0
Royalty advance expense 10.9 0.2 2.2 13.3 0.0 0.0 13.3
Segment profit/(loss) (3) 70.8 0.4 (4.5) 66.7 (1.7) (27.3) 37.7
Segment assets 352.8 159.2 50.3 562.3 147.7 162.0 872.0
Long-lived assets (5) 96.9 89.6 25.2 211.7 56.1 102.3 370.1
Expenditures for
long-lived assets (4) 26.9 21.5 15.1 63.5 5.5 7.9 76.9
- ------------------------- -------------- ------------ ------------- ----------- -------------- ------------ -------------
(1) OVERHEAD INCLUDES UNALLOCATED DOMESTIC CORPORATE-RELATED ITEMS AND AS IT
RELATES TO THE SEGMENT PROFIT/(LOSS), EXPENSES NOT ALLOCATED TO REPORTABLE
SEGMENTS INCLUDING COSTS RELATED TO THE MANAGEMENT OF CORPORATE ASSETS, NET
INTEREST EXPENSE, PROVISION FOR INCOME TAXES, AND A PRE-TAX $8.5 MILLION
NON-RECURRING CHARGE PRIMARILY RELATED TO THE ESTABLISHMENT OF A LITIGATION
RESERVE. 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 AND ITS NATIONAL SERVICE
OPERATION LOCATED IN MISSOURI.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND TAXES.
(4) INCLUDES PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.
(5) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.
7
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
4. DEBT
Long-term debt consisted of the following:
============================================== ======================== ======================== =====================
FEBRUARY 29, 2000 MAY 31, 1999 FEBRUARY 28, 1999
============================================== ======================== ======================== =====================
Loan Agreement and Revolver $ 43.0 $ 10.0 $ 39.5
7% Notes due 2003, net of discount 124.8 124.8 124.8
Convertible Subordinated Debentures 110.0 110.0 110.0
Other debt 3.4 3.4 3.6
- ---------------------------------------------- ------------------------ ------------------------ ---------------------
TOTAL DEBT 281.2 248.2 277.9
Less current portion 0.0 (0.2) 0.0
============================================== ======================== ======================== =====================
TOTAL LONG-TERM DEBT $ 281.2 $ 248.0 $ 277.9
============================================== ======================== ======================== =====================
LOAN AGREEMENT. The Company and Scholastic Inc. (a wholly owned subsidiary)
are joint and several borrowers under a loan agreement with certain banks
which was amended and restated effective August 11, 1999 (the "Loan
Agreement"). The Loan Agreement, which expires August 11, 2004, provides for
aggregate borrowings of up to $170.0 (with a right in certain circumstances
to increase it to $200.0) including the issuance of up to $10.0 in letters of
credit (of which $1.0 was outstanding at February 29, 2000). 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
ratings. Based on the Company's current credit ratings, the interest rate,
facility fee and utilization fee are 0.475% over LIBOR, 0.150%, and 0.075%,
respectively. The Loan Agreement contains certain financial covenants related
to debt and interest coverage ratios (as defined) and limits dividends and
other distributions.
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers
under a Revolving Loan Agreement with SunTrust Bank, which was amended and
restated effective November 10, 1999 (the "Loan Agreement""Revolver") with certain banks whichand provides for
revolving credit loans of up to $40.0 and letters of credit. On Aprilexpires on August 11, 1995, the Company
amended and restated the Loan Agreement, extending the expiration date to May
31, 2000 and expanding the facility to $135.0, with a right, in certain
circumstances, to increase it to $160.0. The Loan Agreement was last amended on
November 28, 1997.2004.
Interest charged under this facility is either at the prime rate minus 1% or .325%0.325% to .90%0.90%
over LIBOR (as defined). There is a commitmentfacility fee charged
which rangesranging from .10%0.10% to .3625% on the unused portion.0.30%.
The amounts charged vary based upon certain financial measurements. The Loan Agreement contains certain
financial covenants related to debt to overall capitalthe Company's credit ratings. Based on
the Company's current credit ratings, the interest rate and interest coverage
ratios (as defined)facility fee are
0.475% over LIBOR and 0.150%, and limits dividends and other distributions. At February
28, 1999, an aggregate of $8.0 of borrowings and $1.0 of letters of credit were
outstanding under the Loan Agreement.
REVOLVER. The Company and Scholastic Inc. have entered into a Revolving Loan
Agreement (the "Revolver") with Sun Bank, N. A., which provides for revolving
credit loans and expires on May 31, 2000.respectively. The Revolver has certain
financial covenants related to debt to overall capital and interest coverage ratios (as defined)
and limits dividends and other distributions. On August 14, 1996, the
Revolver was amended to increase the aggregate principal amount to $35.0 and was
last amended on November 28, 1997. At February 28, 1999, the aggregate amount of
borrowings under the Revolver was $31.5.
7% NOTES DUE 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will 5
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
4. DEBT (CONTINUED)
mature on December 15, 2003. The Notes are not redeemable
prior to maturity. Interest on the Notes is payable semi-annually on December 15
and June 15 of each year.
The net proceeds (including accrued interest) from the issuance of
the Notes were $123.9 after deducting an underwriting discount and other related
offering costs. The Company utilized the net proceeds primarily to repay amounts
outstanding under the Loan Agreement and the Revolver.
CONVERTIBLE SUBORDINATED DEBENTURES. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures")
under Regulation S and Rule 144A of the Securities Act of 1933. The Debentures
are listed on the Luxembourg Stock Exchange and the portion sold under Rule 144A
is designated for trading in the Portal system of the National Association of
Securities Dealers, Inc..
Interest on the Debentures is payable semi-annually on August 15 and February 15
of each year. The Debentures are redeemable at the option of the Company, in
whole, but not in part, at any time on or after August 15, 1998 at 100% of the
8
principal amount plus accrued interest. Each Debenture is convertible, at the
holder's option, any time prior to maturity, into Common Stock of the Company at
a conversion price of $76.86 per share.
OTHER -- SHORT-TERM LINES OF CREDIT. At February 28, 1999, the Company's
international subsidiaries had available aggregate lines of credit of $36.9.
There was $15.7 outstanding under these credit lines at February 28, 1999.9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
5. CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On January 26, 2000, an order
was entered granting the Company's motion to dismiss plaintiffs' Second Amended
Consolidated Complaint without leave to further amend the complaint. Previously,
on December 14, 1998, an order was entered granting the Company's motion to
dismiss plaintiffs' First Amendment Consolidated Complaint and granting
plaintiffs leave to amend the complaint. In dismissing the complaint,both complaints, which
alleged substantially similar claims, the court held that plaintiffs failed to
state a claim upon which relief can be granted and granted plaintiffs leave to
amend the complaint. Pursuant to that order,granted. On February 25, 2000, plaintiffs
filed a Second
Consolidated Amended Complaint, on or about February 16, 1999, alleging
substantially similar claims againstNotice of Appeal in connection with the Company and one of its officers.most recent dismissal. The
Company continues to believe that the litigation is without merit and will
continue to vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court oFof the State Court of New York County ofin New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS-Registered Mark-Trademark- series, certain
affiliated Parachute companies and R.L. Stine, individually, alleging material
breach of contract and fraud in connection with the agreements under which such
GOOSEBUMPS rights are licensed to the Company. The issues in the case isare also,
in part, the subject of two litigations commenced by Parachute following
repeated notices from the Company to Parachute of material breaches by Parachute
of the agreements under which such rights are licensed and the exercise by the
Company of its contractual remedies under the agreements. The previously reported first Parachute
action, in which two subsidiaries of the Company are defendants and counterclaim
plaintiffs, was commenced in the federal court for the Southern 6
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
5. CONTINGENCIES (CONTINUED)
District of New
York on November 14, 1997 and was dismissed for lack of subject matter
jurisdiction on January 29, 1999. Parachute has filed an appeal of the dismissal.
The second Parachute action was filed contemporaneously with the filing of the
Company's complaint on February 1, 1999 in the Supreme Court of the State Court of New
York County ofin New York.York County. In its two complaints, and in its counterclaims,
Parachute alleges that the exercise of contractual remedies by the Company was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract and acts of unfair competition. Damages
sought by Parachute include the payment of a total of approximately $36.1 of
advances over the term of the contract of(of which approximately $15.3 had been
paid at the time the first Parachute litigation began.began) and payments of royalties
set-off by Scholastic against amounts claimed by the Company. The Company is
seeking declaratory relief and damages for, among other claims, breaches of
contract, fraud and acts of unfair competition. Damages sought by the Company
include repaymentlost profits and disgorgement of certain payments received by Parachute of a portion ofParachute.
Discovery, which has been consolidated for the $15.3 advance already paid.litigations, is continuing. The
Company intends to vigorously pursue its claims against Parachute and the other
named defendants and to vigorously defend its position against the new lawsuit
and the appeal. The Company does not believe that this dispute will have a
material adverse effect on its financial condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
6. COMPREHENSIVE INCOME/(LOSS)
The following table sets forth comprehensive income/(loss) for the periods
indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
===================================================== ================= ================ ================= =================
2000 1999 19982000 1999
1998
------------ ------------ ----------- -------------===================================================== ================= ================ ================= =================
Net income/(loss)income $ 2.0 $ 0.2 $ (3.1)19.7 $ 14.4
$ 9.7
Other comprehensive income/(loss):loss:
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.9) (0.9) (1.1) (0.8)
(0.8) (1.4)
------- ------- ------- -------
Comprehensive income/(loss)- ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
COMPREHENSIVE INCOME/(LOSS) $ 1.1 $ (0.7) $ (3.9)18.6 $ 13.6
$ 8.3
------- ------- ------- -------
------- ------- ------- -------===================================================== ================= ================ ================= =================
7
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share is calculated to give effect to potentially dilutive stock
options and convertible debentures that were outstanding during the period.
The following table sets forthsummarizes the computationreconciliation of basicthe numerators and
diluteddenominators for the Basic and Diluted earnings per share:share ("EPS")
computations:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
====================================================== ================= ================ ================= ================
2000 1999 19982000 1999
1998
------------- ------------ ------------- -----------====================================================== ================= ================ ================= ================
Net income/(loss)income for EPS $ 2.0 $ 0.2 $ (3.1)19.7 $ 14.4
$ 9.7Weighted-average shares for basic EPS 16.8 16.4 16.6 16.3
Effect of debentures (1)stock options 0.6 0.5 0.4 0.4
- - - -
-------- ------- -------- -------------------------------------------------------------- ----------------- ---------------- ----------------- ----------------
WEIGHTED-AVERAGE SHARES FOR DILUTED EPS 17.4 16.9 17.0 16.7
====================================================== ================= ================ ================= ================
Net income/(loss) for diluted earnings per share $ 0.2 $ (3.1) $ 14.4 $ 9.7
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average Class A and Common shares
outstanding for basic earnings per share 16.4 16.2 16.3 16.2
Effect of debentures (1) - - - -
Effect of employee stock options(2) 0.5 - 0.4 0.1
-------- ------- -------- --------
Weighted average Class A and Common shares
outstanding for diluted earnings per share 16.9 16.2 16.7 16.3
-------- ------- -------- --------
-------- ------- -------- --------
Net income/(loss)income per Class A and Common share:Share:
Basic $ 0.12 $ 0.01 $ (0.19)1.18 $ 0.88
Diluted $ 0.60
Diluted0.11 $ 0.01 $ (0.19) $ 0.861.16 $ 0.60
-----------------------------------------------------------------------------------------------------------------------0.86
(1) For the three and nine months ended February 28, 1999 and 1998, theNote: The effect of the 5.0% Convertible Subordinated Debentures on the
weighted average Class A and Commonweighted-average shares outstanding for diluted earnings per shareEPS was anti-dilutive and
therefore, is not
included in the calculation.
(2) For11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
8. NON-RECURRING CHARGE
The operating results for the threenine months ended February 28, 1998,29, 2000 include a
$8.5 non-recurring charge primarily related to the effectestablishment of a
litigation reserve following an adverse decision in a lawsuit, which was
received on December 10, 1999. The case, SCHOLASTIC INC. AND SCHOLASTIC
PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., involves
stock appreciation rights allegedly granted to Mr. Harris in 1990 in
connection with a joint venture formed primarily to produce motion pictures.
Although the employeeCompany disagrees with the judge's decision and is appealing the
ruling, the Company has recorded $6.7 to fully reserve with respect to the
case. The $8.5 charge also includes an unrelated non-recurring expense of
$1.8 relating to the liquidation of certain stock options onoptions.
9. SUBSEQUENT EVENT
On April 13, 2000, the weighted average Class ACompany entered into a definitive agreement with
Lagardere S.C.A. of France to acquire Grolier, Inc. ("Grolier") for $400
million in cash. Grolier is the leading provider of U.S. direct mail-to-home
and Common shares outstandinge-commerce book clubs for diluted earnings per share was anti-dilutivechildren through age 5, the leading on-line and
therefore, is not
includedprint publisher of children's reference products (including major
encyclopedias) sold primarily to U.S. school libraries and has international
operations in the calculation.
8United Kingdom, Canada and Southeast Asia. Grolier also
publishes trade books under the Orchard Books, Children's Press and Franklin
Watts imprints, sold both to libraries and the trade. Grolier's fiscal 1999
revenues were approximately $450 million and earnings before interest, taxes,
depreciation and amortization were approximately $45 million. The
transaction, which is subject to certain regulatory approvals, is expected to
close by early June 2000. The Company plans to finance the acquisition
initially through bank debt, under a committed facility, and subsequently
through an offering of debt or a combination of debt and equity. The Company
intends to account for the acquisition under the purchase method of
accounting.
12
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
("MD&A")
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------================================================================================
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended February 28, 199929, 2000 increased 12%approximately 17% to
$312.8 million from $267.3 from
$239.0million in the comparable quarter of the prior fiscal
year, primarily due to a
$20.3, or 12%, increase in domestic book publishing revenues. Book club and
book fair revenues increased by approximately 12% over the comparable quarter
of the prior fiscal year. Book club revenues benefited from increased orders
and higher revenue per order, reflecting expanded promotion efforts and
strong product selection. Book fairs held a greater number of fairs due in
part to the acquisition of assets of Pages Book Fairs, Inc. (the "Pages
Acquisition") in the first quarter of the current fiscal year. Book fairs
also benefited from higher revenue per fair from premium fairs which feature
a broader product selection. Trade revenues increased by more than 15% due to
the continued success of the Company's branded properties, such as
ANIMORPHS(R), DEAR AMERICA(R), I SPY AND CLIFFORD THE BIG RED DOG(R),
combined with the success of other properties such as TELETUBBIES(TM) and
HARRY POTTER AND THE SORCERER'S STONE by J.K. Rowling. Media, TV/movie
production and licensing revenues increased 41% to $25.9 in the quarter ended
February 28, 1999 from $18.4 in the comparable quarter of the prior fiscal
year, due to the strength of CD-ROM and media properties sales. International
revenues remained level at $41.0, although slightly higher in local
currencies compared to the corresponding quarter of the prior fiscal year.
Total revenues forFor the nine months ended February 28, 199929, 2000, revenues increased
8%approximately 22% to $1,000.6 million from $820.7 from $760.5million in the comparable period of the prior fiscal
year.year period. The increases in revenue for the three and nine-month periods were
driven primarily by the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
segment, which was up 23% over the prior year quarter and 35% over the prior
year-to-date period. This segment accounted for 64% and 63% of the Company's
revenues for the three and nine-month periods ended February 29, 2000,
respectively, as compared to 61% and 57%, respectively, in the corresponding
prior fiscal year periods.
As a percentage of revenue,sales, cost of goods sold decreased by approximately 1.%
for the three monthsand nine-month
periods ended February 28, 1999 and approximately 2% for the nine
months ended February 28, 1999, over29, 2000, remained a constant percentage from the
comparable periods of the prior fiscal year. The decrease in cost of goods soldSelling, general and administrative
expenses also remained constant for the three-month period and decreased 1% as a
percentage of revenue is due to a change
in product mix, improved purchasing terms and lower paper costs, as well as
modifying specifications in an effort to lower product costs. Selling, general
and administrative expenses as a percentage of revenue were flat for the three
monthsnine-month period ended February 28, 1999 and increased by approximately 2.%29, 2000.
Operating expenses for the nine months ended February 28, 1999, compared to the corresponding periodsincluded a non-recurring charge of the
prior year, in the case of the nine month period, reflecting additional
operating expenses$8.5
million primarily related to the Pages Acquisition and Year 2000 computer
readiness costs, as well as other increasesestablishment of a litigation reserve following
an adverse decision in spending duea lawsuit. The case, which the Company is appealing,
involves stock appreciation rights allegedly granted in 1990 in connection with
a joint venture formed primarily to higher book club
and book fair activity.
Operating incomeproduce motion pictures. The charge also
includes an unrelated non-recurring expense of $1.8 million relating to the
liquidation of certain stock options.
The operating profit for the quarter ended February 28, 1999 was29, 2000 increased 57% to
$7.7 million from a profit of $4.9 compared to an
operating loss of $10.2million in the same quarter of the prior
fiscal year. Operating incomeprofit for the nine monthsnine-month period ended February 28, 199929, 2000,
excluding the non-recurring charge, was up 44% to $54.1 million when compared to
the same period in the prior year. Inclusive of the charge, the year-to-date
operating profit was up approximately 21% to $45.6 million from $37.7 million in
the prior year period. These increases reflect increased by $16.5, or 78%,
versus the nine months ended February 28, 1998. The operating results for the
quarter and nine months ended February 28, 1998 were negatively impactedrevenues in CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION primarily due to strong trade sales, led by the
$11.4 non-cash charge relating toHARRY POTTER-TM- AND POKEMON-TM- books, strong results in book clubs and fairs,
and the impairmenteffect of assets.implementing cost-cutting/margin improvement plans across the
Company.
Net income for the quarter ended February 28, 1999 was $0.2,29, 2000, increased $1.8 million to
$2.0 million, or $0.01$.11 per diluted share, versus acompared to net lossincome of $3.1,$0.2 million,
or $0.19$.01 per diluted share, in the comparable quarter of the prior year. Net
income for the nine months ended February 28, 1999 was $14.4,29, 2000, increased 37% to $19.7
million or $0.86$1.16 per diluted share versus $9.7,compared to the same nine-month period in the
prior fiscal year. Excluding the non-recurring charge (and the related
tax-effect), net income increased 74% to $25.1 million or $0.60$1.47 per diluted
share for the nine months ended February 28, 1998.
9when compared to the same period in the prior fiscal
year.
SUBSEQUENT EVENT
On April 13, 2000, the Company entered into a definitive agreement with
Lagardere S.C.A. of France to acquire Grolier, Inc. ("Grolier") for $400
million in cash. Grolier is the leading provider of U.S. direct mail-to-home
and e-commerce book clubs for children through age 5, the leading on-line and
print publisher of children's reference products (including major
encyclopedias) sold primarily to U.S. school libraries and has international
operations in the United Kingdom, Canada and Southeast Asia. Grolier also
publishes trade books under the Orchard Books, Children's Press and Franklin
Watts imprints, sold both to libraries and the trade. Grolier's fiscal 1999
revenues were approximately $450 million and earnings before interest, taxes,
depreciation and amortization were approximately $45 million. The
transaction, which is subject to certain regulatory approvals, is expected to
close by early June 2000. The Company plans to finance the acquisition
initially through bank debt, under a committed facility, and subsequently
through an offering of debt or a combination of debt and equity. The Company
intends to account for the acquisition under the purchase method of
accounting.
13
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)================================================================================
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 in the United States of children's books through
its school-based book club (including home continuity programs), book fair and
trade channels.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 200.5 $ 162.5 $ 632.7 $ 470.1
Operating Profit 35.4 25.8 115.5 70.8
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 17.7% 15.9% 18.3% 15.1%
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment for the
third quarter of fiscal 2000 were up 23% to $200.5 million from $162.5
million in the comparable quarter of the prior fiscal year. Year-to-date
revenues were up 35% at $632.7 million compared to the same period of the
prior year. As a result, operating results improved approximately 37% to
$35.4 million for the quarter and approximately 63% for the nine months ended
February 29, 2000 when compared to the same period in the prior fiscal year.
The increased revenue reflects the impact of continued strong trade sales
volume of Scholastic properties including HARRY POTTER, DEAR
AMERICA-Registered Trademark-, I SPY-TM-, ROYAL DIARIES, CAPTAIN
UNDERPANTS-TM-, POKEMON AND EVERWORLD-TM-. Additionally, revenues in the
Company's book clubs and book fair were up approximately 12% over the prior
year quarter. Book club and book fair revenues benefited from continuing
improvements in product marketing and selection. These improvements resulted
in a higher level of book club orders, increased fair count and higher
revenue per book club order and per book fair.
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazines and instructional technology for core and
supplemental use in schools and libraries in the United States.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 40.0 $ 32.9 $ 147.2 $ 143.0
Operating Profit (Loss) (10.5) (10.8) (16.2) 0.4
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * * * 0.3%
* - NOT MEANINGFUL
Revenues in the EDUCATIONAL PUBLISHING segment for the quarter increased
approximately 22% to $40.0 million with an operating loss of $10.5 million as
compared to revenues of $32.9 million and an operating loss of $10.8 million in
the comparable quarter of the prior fiscal year. The increase in revenue is due
to
14
growth from READ 180!-TM-, SCHOLASTIC READING COUNTS!-TM-, Paperback and
professional publishing, and supplemental teaching products.
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
The operating loss for the fiscal 2000 quarter reflects the impact of
increased marketing and promotional costs related to the Texas reading
adoption to be delivered in the summer of 2000. On a year-to-date basis,
revenues for the period ended February 29, 2000 increased approximately 3% to
$147.2 million, from $143.0 million for the comparable period of the prior
fiscal year reflecting the growth of READ 180!, SCHOLASTIC READING COUNTS!,
and paperback and professional publishing, partially offset by lower order
levels for SCHOLASTIC LITERACY PLACE-Registered Trademark-. The year-to-date
operating loss for the period ended February 29, 2000 reflects the increased
costs related to the Texas reading adoption and certain costs related to the
rollout of the Company's READ 180! software.
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and distribution in the United States of entertainment products (including
television programming, videos and motion pictures), Internet services,
CD-ROM-based products and Scholastic-branded licensed properties, as well as
advertising and promotional activities.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 24.2 $ 30.7 $ 73.7 $ 72.1
Operating Profit (Loss) (2.6) 1.1 (11.3) (4.5)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN * 3.6% * *
* - NOT MEANINGFUL
MEDIA, LICENSING AND ADVERTISING revenues decreased 21% to $24.2 million in the
third quarter of fiscal 2000 as compared to the prior year quarter. For the nine
months ended February 29, 2000, revenues increased approximately 2% to $73.7
million from $72.1 million for the same period of the prior fiscal year. For the
quarter ended February 29, 2000, the segment recognized an operating loss of
$2.6 million as compared to a profit of $1.1 million in the same period of the
prior fiscal year. On a year-to-date basis, the operating loss grew to $11.3
million from an operating loss of $4.5 million in the same period of the prior
fiscal year. These results reflect increased promotional, editorial and other
operating costs associated with Scholastic internet development and reduced TV
production revenues.
16
SCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
INTERNATIONAL
The INTERNATIONAL segment consists of the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong, India, and
Argentina.
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
============================== ===================== ===================== ==================== ====================
2000 1999 2000 1999
============================== ===================== ===================== ==================== ====================
Revenue $ 48.1 $ 41.2 $ 147.0 $ 135.5
Operating Profit (Loss) 0.7 (1.4) 1.4 (1.7)
- ------------------------------ --------------------- --------------------- -------------------- --------------------
OPERATING MARGIN 1.5% * 1.0% *
* - NOT MEANINGFUL
INTERNATIONAL revenues for the quarter ended February 29, 2000 increased 17% to
$48.1 million compared to $41.2 million in the prior year quarter, benefiting
from improved sales and operating margins in the Company's Australian and
Canadian operations. On a year-to-date basis, revenues increased approximately
9% to $147.0 million compared to $135.5 million in the prior fiscal year period.
This improvement reflects strong performance in Canada's book club and trade
businesses, and in Australia's book club and software businesses, which was
partially offset by weak sales in the United Kingdom. Operating profit for the
quarter improved $2.1 million over the prior year period to $0.7 million,
reflecting the impact of revenue improvements and cost containment efforts. For
the nine months ended February 29, 2000, operating profit improved $3.1 million
to $1.4 million from a loss of $1.7 million for the prior year fiscal period,
reflecting primarily the net impact of revenue improvements and cost reductions.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company generally experiences a substantial loss from operations in the
first quarter. Typically, book club and book fair revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from the sale of
instructional materials are larger in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
For the June through SeptemberOctober time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, borrowings have increased during June, July and August
and generally have peaked in September or October, and have been at the lowest
point in May.
LIQUIDITY AND CAPITAL RESOURCES17
The Company's cash and cash equivalents decreased by $3.5$0.3 million during the
nine monthnine-month period ended February 28, 1999,29, 2000, compared to a decrease of $4.0$3.5
million during the comparable period in the prior fiscal year.
ForSCHOLASTIC CORPORATION
ITEM 2. MD&A
================================================================================
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company generated $42.7 million of cash from operating activities during the
nine monthsnine-month period ended February 28, 1999, net cash provided by financing
activities was $47.1 compared to net cash used29, 2000 versus $45.1 million in financing activities of $0.9
for the nine months ended February 28, 1998. Financing activities primarily
consisted of borrowings and repayments under the Company's Loan Agreement and
the Revolver. Borrowings under these facilities have been a primary sourcecomparable
period of the Company's liquidity.prior fiscal year. Improvements in operating results were more
than offset by increased inventory and accounts receivable requirements.
Inventory levels increased as a result of higher sales volumes and accelerated
purchasing to better ensure high levels of customer service.
Cash used in investing activities was $90.9 million and $95.7 and $46.6million for the
nine months endedFebruary 29, 2000 and February 28, 1999, and 1998, respectively. Investing
activities consisted primarily of prepublication cost expenditures, capital
expenditures, royalty advances business and trademark acquisition-related
payments and production cost expenditures. Prepublication
cost expenditures increased $10.5$6.5 million to $28.8$35.3 million for the nine months
ended February 28, 199929, 2000 over the comparable period inof the prior fiscal year largely due
to the planned revision toof SCHOLASTIC LITERACY PLACE(R).PLACE and the spending on the
Company's new READ 180! program.
Capital expenditures increased $6.8$10.7 million to $18.1$28.8 million in the current
year reflecting the construction of a new office facility. Royalty advances
decreased $1.0 million for the nine months ended February 28, 1999 compared to29, 2000 over the correspondingsame
period ofin the prior fiscal year largely due to the equipping
of a new office and distribution facility$17.1 million. Production costs decreased
$3.8 million to $8.1 million for the Company's Canadian
subsidiary. Royalty advances decreased $5.3 from fiscal 1998 to $18.1 in
fiscal 1999, reflecting reduced advance payments in connection with the
GOOSEBUMPS contract extension and a royalty advance made in the third quarter
of fiscal 1998 for the rights to the new STAR WARS(R) trilogy. For the nine months ended February 28, 1999, business29, 2000, as
compared to the same period in the prior fiscal year, due to a reduction in the
number of shows being produced. Business and trademark acquisition-related
payments were $15.7, primarily related to business asset purchases referred
to below. Production cost expenditures increased $3.0 to $11.9 in fiscal 1999
compared to the corresponding period offor the prior fiscal year resultingwere primarily related to the acquisition of
certain assets of Pages Book Fairs, Inc. and Quality Education Data.
FINANCING
The Company maintains two unsecured credit facilities which provide for
aggregate borrowings of up to $210.0 million (with a right, in certain
circumstances, to increase to $240.0 million), including the issuance of up to
$10.0 million in letters of credit. The Company uses these facilities for
various purposes including the funding of seasonal cash flow needs and other
working capital requirements. At February 29, 2000, the Company had $43.0
million in borrowings outstanding. The weighted-average interest rate under
these facilities for the nine-month period was 6.6%.
The Loan Agreement was amended and restated on August 11, 1999, principally
to extend the expiration date of the facility to August 11, 2004 and expand
the facility from increased production costs associated$135.0 million to $170.0 million (with a right, in certain
circumstances, to increase to $200.0 million). In addition, on November 10,
1999, the Company amended and restated the Revolver to increase the amount
available thereunder to $40.0 million and extend its expiration date to be
concurrent with the first seasonLoan Agreement.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $39.5 million at February
29, 2000. These lines are used primarily to fund
18
working capital needs in those countries. At February 29, 2000, $21.2 million in
borrowings were outstanding. Under these lines the weighted-average interest
rate for the nine months ended was 6.1%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under the two credit facilities and other
lines of credit will be sufficient to finance its ongoing working capital
requirements for the remainder of the ANIMORPHS(R) and DEAR AMERICA(TM) television series partially offset by
decreased costs associated with the GOOSEBUMPS(R) series.
10fiscal year.
19
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------================================================================================
In connection with the acquisition of Grolier, Inc., (See Item 2-MD&A-Results
of Operations-Subsequent Event), the Company plans to primarily finance the
$400 million purchase price initially through bank debt under a committed
facility and subsequently through an offering of debt or a combination of
debt and equity. The Company does not anticipate any difficulties in
obtaining permanent financing.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects.
Consistent with this
strategy, in June 1998 the Company acquired certain book fair assets of Pages
Book Fairs, Inc. and in January 1999 the Company acquired from International
Thomson Publishing Inc., certain assets of Quality Education Data, which
provides K-12 education data in the United States and Canada.
FINANCING
The Company currently maintains two unsecured credit facilities which provide
for aggregate borrowings of up to $170.0 (with a right, in certain
circumstances, to increase to $195.0), including the issuance of up to $10.0 of
letters of credit. The Company uses these facilities to fund seasonal cash flow
needs and other working capital requirements. At February 28, 1999, the Company
had $39.5 in borrowings outstanding under these facilities at a weighted average
interest rate of 6.03%. These two facilities expire May 31, 2000. The Company
anticipates extending or replacing these facilities during calendar 1999 and
does not anticipate any difficulty in negotiating satisfactory arrangements.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $36.9 at February 28, 1999.
These lines are used primarily to fund working capital needs. At February 28,
1999, an aggregate of $15.7 in borrowings were outstanding under these lines at
a weighted average interest rate of 6.35%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under the Loan Agreement and the Revolver,
will be sufficient to finance its ongoing working capital requirements for the
remainder of the fiscal year.
YEAR 2000 READINESS DISCLOSURE
As previously reported, management hasCommencing in July 1997, the Company initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the Year 2000, as
well as to identify and address any other Year 2000 operational issues which may
affect the Company. Progress reports on the Company's Year 2000 program are
presented regularly to the Company's Board of Directors and senior management.
The Company'sits Year 2000 program, which
was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consistsconsisted of the following three components relating to the Company's
operations: (i) information technology ("IT") computer systems and applications
which maywere judged to be potentially impacted by the Year 2000 problem and the
actions related thereto, (ii) non-IT systems and equipment which include
embedded technology which may bealso could have been impacted by the Year 2000 problem
and actions related thereto and (iii) third party suppliers and customers with
which the Company has material relationships and which could adversely affect
11the Company if such parties failed to be Year 2000 complaint and the actions
related thereto.
The Company completed its Year 2000 Readiness Program on a timely basis and
experienced no significant Year 2000 related problems to date with either its
internal operations or its material third party vendors. Similarly, there have
been no material Year 2000 impacts reported with respect to the Company's
products that we classified as Year 2000 ready. The Company estimates the total
cost of the Year 2000 program, including consulting fees, infrastructure and
facilities enhancements, and expenses related to internal staff, was
approximately $12.0 million, of which $4.0 million was incurred during the
current fiscal year. No additional material Year 2000 program costs are
anticipated.
All statements regarding Year 2000 Readiness are "Year 2000 Readiness
Disclosures" as defined by the Year 2000 Information and Readiness Disclosure
Act of October 19, 1998.
NON-RECURRING CHARGE
The year-to-date operating results include an $8.5 million non-recurring charge
primarily related to the establishment of a litigation reserve following an
adverse decision in a lawsuit originally filed in January, 1995. The case,
SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS, INC. V. ROBERT HARRIS AND HARRIS
ENTERTAINMENT, INC., involves stock appreciation rights allegedly granted to Mr.
Harris in 1990 in connection with a joint venture formed primarily to produce
motion pictures. Although the Company disagrees with the judge's decision and is
appealing, the Company has recorded $6.7 million to fully
20
reserve with respect to the case. The $8.5 million charge also includes an
unrelated non-recurring expense of $1.8 million relating to the liquidation of
certain stock options.
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)================================================================================
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the Company if such parties fail to be Year 2000 compliantconditions of the children's
book and the actions
related thereto. The general phases common to all three componentsinstructional materials markets and acceptance of the Company's
Year 2000 program are: (1) ASSESSMENT (the identification, assessmentproducts within those markets and prioritization of the Year 2000 issues facing the Company in each of the
above areasother risks and the actions to be taken in respect of such issues or items); (2)
REMEDIATION (implementation of the specific actions determined upon assessment,
including repair, modification or replacement of items that are determined not
to be Year 2000 compliant); (3) TESTING (testing of the new or modified
information systems, other systems and equipment to verify Year 2000 readiness);
(4) CONTINGENCY PLANNING (designing appropriate contingency and business
continuation plans for each Company business unit and location); and (5)
IMPLEMENTATION (actual operation of such systems and equipment and, if
necessary, the actual implementation of any contingency plansfactors identified in the
event Year
2000 problems occur, notwithstandingCompany's Report on Form 10-K for the Company's remediation program).
The progress to date of the three components of the Company's Year 2000 program
for principal systems, applications or issues affected by the Year 2000 is as
follows:
IT SYSTEMS AND APPLICATIONS. The principal IT systems and applications of the
Company affected by Year 2000 issues are: order entry, purchasing, distribution
and financial reporting. Issues related to vendor supplied software include
financial reporting and certain infrastructure and operating system software.
The Company has completed the Assessment and Remediation phases with respect to
its principal IT systems and applications. In addition, the Company anticipates
that the Testing, Contingency Planning and Implementation phases should be
substantially completed by the end offiscal year ended May 1999. A test plan is in place. In
addition to the foregoing, the Company expects to implement the remainder of
Year 2000 remediated IT systems and applications based on current assessments
prior to August 31, 1999.
Excluding normal system upgrades, the Company
estimates that total costs for conversion and testing of new or modified IT
systems and applications will aggregate approximately $13.3 through fiscal 2000,
of which an aggregate of $5.8 has been incurred to date. Total conversion and
testing costs through fiscal 1999 are estimated at $8.3.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected by Year 2000 issues include:
security systems, phone systems, business machines, computers and distribution
systems. The Company has substantially completed the Assessment of its principal
non-IT software and applications, and the Remediation phase related to these
principal systems was also substantially completed by the end of March 1999. The
Testing, Contingency Planning and Implementation phases should be substantially
completed by the end of May 1999. In addition to the foregoing, based on current
assessments, the Company expects to implement the remainder of Year 2000
remediated non-IT systems and applications prior to August 31, 1999. The Company
estimates the total costs for modifying or replacing new systems and equipment
in this area will be approximately $0.5 through fiscal 2000, of which an
aggregate of $0.1 has been incurred to date. Total modification and replacement
costs through fiscal 1999 are estimated at $0.4.
1221
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier relationships
affected by Year 2000 issues relate3. 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 does not consider the impact of such currency fluctuations to
represent a significant risk to the Company's results of operations. The Company
does not generally enter into derivative financial instruments for material
amounts, nor are such instruments used for speculative purposes.
Market risks relating to the Company's operations result primarily to printing, paper supplies,
distribution, fulfillment, licensing and financial services.from changes
in interest rates. The Assessment and
Remediation phases for determining the Year 2000 readinessmajority of the Company's principal suppliers is an ongoing process. Substantially alllong-term debt bears interest
at a fixed rate. However, the fair market value of the Company's
principal suppliers have reported that they have initiated Year 2000 programs.fixed rate debt is
sensitive to changes in interest rates. The Company will seek updates from these parties to attempt to ascertain the
adequacy of their programs as it relatesis subject to the Company. Testing of critical
systems or servicesrisk that
market interest rates will be done on an as needed basis.decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. The Company anticipates
that it will develop contingency plans with respectdoes not
generally utilize interest rate derivative instruments to manage its principal third party
suppliers byexposure to
interest rate changes.
As of February 29, 2000, the end of May 1999. There can be no assurance, however, that the
Company will be able to predict adequately Year 2000 problems experienced by its
suppliers or to develop adequate contingency plans related thereto. The costs to
the Company in implementing its Year 2000 program in this area, excluding costs
due to unanticipated third party Year 2000 problems, will principally consist of
internal staff costs, which are not expected to be material. No single customer
or small group of customers are material to the Company's financial condition.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program, which includes total costs noted
above for IT systems and applications, will be approximately $13.8, of which
total program costs to date have been $5.9. Total program costs through fiscal
1999 are estimated at $8.7. These costs include costs related to the matters
described above, as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the Company for
the Year 2000. The costs do not include internal staff costs incurred or to be
incurred in connection with the implementation of the program. Costs are
generally expected to be expensed as incurred, and it is expected that such
costs will be funded by cash generated from the Company's operations or
borrowingsbalance outstanding under its revolving credit
agreements.facilities was $64.2 million. The above-stated amounts have been
budgeted fornine-month weighted-average interest rate
was 6.5%. A 15% increase or decrease in the appropriate fiscal years. Projected Year 2000 costs for fiscal
1999 comprise approximately 25% to 30% of the Company's IT budget for that
period. Based on the current progress of the Company's Year 2000 program, the
Company anticipates its Year 2000 program will be substantially completed by
August 31, 1999. As a result of the Company's Year 2000 program, delays in other
new and continuing IT projects have occurred. However, no material adverse
effect is anticipated from such delays as the Company has procedures in place in
an effort to ensure that critical projects will be handled in a timely manner.
Theaverage cost of the Company's
Year 2000 program andvariable rate debt under the dates on which the Company
plans to complete the components of the Year 2000 program are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, many of which are beyond the Company's control.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company. Such failures could materially and adversely
affect the Company's financial condition, results of operations and cash
flows. Based on current plans and assumptions, the Company doesfacility would not expect
that the Year 2000 issue will have a material adversesignificant impact on
the Company
as a whole. Due to the general uncertainty inherent in the Year 2000 problem,
however, there can be no assurance that all Year 2000 problems will be
foreseen and corrected, or if foreseen, corrected on a timely basis, or that
no material disruptionCompany's results of operations.
Additional information relating to the Company's business or operations will occur.
Further, the
13
SCHOLASTIC CORPORATION
ITEM 2.outstanding financial
instruments is included in Item 2 - MD&A (IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
Company's expectations are based on the assumption that there will be no general
failureResults of external local, national or international systems (including power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those scenarios
in which unexpected failures would have a material adverse effect on the Company
and will attempt to develop contingency plans designed to deal with such
scenarios. There can be no assurance, however, that successful contingency plans
can, in fact, be developed or implemented.Operations - ------------------------------------------------------------------------------
14Subsequent
Event.
22
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
- ------------------------------------------------------------------------------
ITEM 1.4. LEGAL PROCEEDINGS
================================================================================
As previously reported, three purported class action complaints were filed in
the United States District Court for the Southern District of New York against the
Company and certain officers seeking, among other remedies, damages resulting
from defendants' alleged violations of federal securities laws. The complaints
were consolidated. The Consolidated Amended Class Action Complaint (the
"Complaint") was served and filed on August 13, 1997. The Complaint was styled
as a class action, IN RE SCHOLASTIC CORPORATION SECURITIES LITIGATION, 97 Civ.
II 2447 (JFK), on behalf of all persons who purchased Company common stock from
December 10, 1996 through February 20, 1997. The Complaint alleged, among other
things, violations of Sections 10(b) and 20(a)20 (a) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, resulting from purportedpurportedly materially false
and misleading statements to the investing public concerning the financial
condition of the Company. Specifically, the Complaint alleged misstatements and
omissions by the Company pertaining to adverse sales and returns of its popular
GOOSEBUMPS(R)GOOSEBUMPS book series prior to the Company's interim earnings announcement on
February 20, 1997. InOn January 26, 2000, an order dated December 14, 1998, the United States
District Court for the Southern District of New York grantedwas entered granting the
Company's motion to dismiss plaintiffs' Second Amended Consolidated Complaint
without leave to further amend the Complaint.complaint. Previously, on December 14, 1998,
an order was entered granting the Company's motion to dismiss plaintiffs' First
Amended Consolidated Complaint and granted plaintiffs leave to amend the
complaint. In dismissing both complaints, which alleged substantially similar
claims, the Complaint, the Courtcourt held that plaintiffs had failed to state a claim upon which relief
couldcan be granted
and granted plaintiffs leave to amend and re-file the Complaint. Pursuant to
that order,granted. On February 25, 2000, plaintiffs filed a second Consolidated Amended Class Action
Complaint, on or about February 16, 1999, alleging substantially similar claims
againstNotice of Appeal in
connection with the Company and one of its officers.most recent dismissal. The Company continues to believe that
the litigation is without merit and shallwill continue to vigorously defend against
it.
On February 1, 1999, two subsidiaries of the Company commenced an action in
the Supreme Court of the State Court of New York County of New York against
Parachute Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS -registered trademark- series,
certain affiliated Parachute companies and R.L. Stine, individually, alleging
material breach of contract and fraud in connection with the agreements under
which such GOOSEBUMPS rights are licensed to the Company. The case, captioned
SCHOLASTIC INC. AND SCHOLASTIC ENTERTAINMENT, INC. V. PARACHUTE PRESS, INC.,
PARACHUTE PUBLISHING, LLC, PARACHUTE CONSUMER PRODUCTS, LLC, AND R.L. STINE
(Index No. 99/600512), is also, in part, the subject of two litigations
commenced by Parachute following repeated notices from the Company to
Parachute of material breaches by Parachute of the agreements under which
such rights are licensed and the exercise by the Company of its contractual
remedies under the agreements. The previously reported first Parachute
action, PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS,
INC. AND SCHOLASTIC ENTERTAINMENT INC., 97 Cir. 8510 (JFK), in which two
subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on
November 14, 1997 and was dismissed for lack of subject matter jurisdiction on
January 29, 1999. Parachute has filed an appeal of the dismissal. The second
action, captioned PARACHUTE PRESS, INC. V. SCHOLASTIC INC., SCHOLASTIC
PRODUCTIONS, INC. AND SCHOLASTIC ENTERTAINMENT INC. (Index No. 600507/99),
1523
SCHOLASTIC CORPORATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State Court of New York County
of New York. In its two complaints and in its counterclaims, Parachute alleges
that the exercise of contractual remedies by the Company was improper and
seeks declaratory relief and unspecified damages for, among other claims,
alleged breaches of contract and acts of unfair competition. Damages sought
by Parachute include the payment of a total of approximately $36.1 of
advances over the term of the contract, of which approximately $15.3 had been
paid at the time the first Parachute litigation began. The Company is seeking
declaratory relief and damages for, among other claims, breaches of contract,
fraud and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid. The
Company intends to vigorously pursue its claims against Parachute and the
other named defendants and to vigorously defend the new lawsuit and the
appeal. The Company does not believe that this dispute will have a material
adverse effect on its financial condition.================================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
10.14 Scholastic Corporation 1998 Employee Stock Purchase Plan,
effective January 1, 1999
10.15 Scholastic Corporation 1998 Management Stock Purchase Plan,
effective January 1, 1999
10.16 Second Amendment to the Scholastic Inc. 401(k) Savings and
Retirement Plan, effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of
January 1, 1999
27.1 Financial Data Schedule for the Nine Months Ended February 28, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal year ended May 31, 1998
- -------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.2 Bylaws of the Company, Amended and Restated as of March 16,
2000
10.6 Scholastic Corporation Employee Stock Purchase Plan, amended
and restated effective as of March 1, 2000
27.1 Financial Data Schedule as of and for the nine months ended
February 29, 2000
(b) Reports on Form 8-K filed during the quarter: none.
- --------------------------------------------------------------------------------
24
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 14, 19992000 /s/ RICHARD ROBINSON
-----------------------------------
Richard Robinson
---------------------------------
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and DirectorCHAIRMAN OF THE BOARD,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Date: April 14, 19992000 /s/ KEVIN J. MCENERY
-----------------------------------
Kevin J. McEnery
---------------------------------
Kevin J. McEnery
Executive Vice President and
Chief Financial OfficerEXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
25
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED FEBRUARY 28, 199929, 2000
EXHIBIT INDEX
- -------------------------------------------------------------------------------------------------------------------
Exhibit
Number Description of Document
------- -----------------------
10.14 Scholastic Corporation 1998 Employee Stock Purchase Plan,
effective January 1, 1999
10.15 Scholastic Corporation 1998 Management Stock Purchase Plan,
effective January 1, 1999
10.16 Second Amendment to the Scholastic Inc. 401(k) Savings and Retirement Plan,
effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of January 1,
1999
27.1 Financial Data Schedule for the Nine Months Ended February 28, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal year ended May 31, 1998
- -------------------------------------------------------------------------------------------------------------------
- ----------------- --------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.2 Bylaws of the Company, Amended and Restated as of March 16,
2000
10.6 Scholastic Corporation Employee Stock Purchase Plan, amended
and restated effective as of March 1, 2000
27.1 Financial Data Schedule as of and for the nine months ended
February 29, 2000