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 August 31, 1999 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 September 30, 1999
------------- ------------------------
Common Stock, $.01 par value 15,711,814
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28,AUGUST 31, 1999
INDEX
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PART I - FINANCIAL INFORMATION PagePAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations for the
Three and Nine Months Ended February 28,August 31, 1999 and 1998 1
Condensed Consolidated Balance Sheet at February 28,August 31, 1999
and 1998 and May 31, 19981999 2
Condensed Consolidated Statement of Cash Flows for the
NineThree Months Ended February 28,August 31, 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 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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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)
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THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,AUGUST 31,
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1999 1998
1999 1998
---- ---- ---- ----- --------------------------------------------------------------------------------
Revenues $ 267.3180.0 $ 239.0 $ 820.7 $ 760.5150.2
Operating costs and expenses:
Cost of goods sold 133.5 121.8 406.6 394.5108.3 85.2
Selling, general and administrative expenses 123.6 110.8 360.1 317.699.8 83.4
Depreciation 4.2 3.6 12.4 10.84.6 4.0
Goodwill and trademark amortization 1.1 1.6 3.9 5.0
Impairment of assets -- 11.4 -- 11.4
---------- --------- ---------- ----------
Total operating costs and
expenses 262.4 249.2 783.0 739.30.9 1.4
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TOTAL OPERATING COSTS AND EXPENSES 213.6 174.0
Operating income/(loss) 4.9 (10.2) 37.7 21.2loss (33.6) (23.8)
Interest expense, net (4.6) (4.8) (14.5) (15.5)
Gain on sale of SOHO Group -- 10.0 -- 10.0
---------- --------- ---------- ----------
Income/(loss)4.4 4.4
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Loss before provision/(benefit)benefit for income taxes 0.3 (5.0) 23.2 15.7
Provision/(benefit)(38.0) (28.2)
Benefit for income taxes 0.1 (1.9) 8.8 6.0
---------- --------- ---------- ----------14.4 10.7
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NET LOSS $ (23.6) $ (17.5)
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Net income/(loss) $ 0.2 $ (3.1) $ 14.4 $ 9.7
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income/(loss)loss per Class A and Common share:Share:
Basic $ 0.01(1.43) $ (0.19) $ 0.88 $ 0.60(1.08)
Diluted $ 0.01(1.43) $ (0.19) $ 0.86 $ 0.60(1.08)
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SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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February 28,August 31, 1999 May 31, 1999 August 31, 1998
February 28, 1998
------------------------- ------------------ ------------------------ -----------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.62.9 $ 5.15.9 $ 0.91.1
Accounts receivable less allowance for
doubtful accounts 129.2 116.7 116.3142.2 136.4 110.7
Inventories 267.6 199.3 244.2315.1 227.4 259.0
Deferred taxes 48.155.5 41.8 29.950.3
Prepaid and other deferred expenses 24.2 19.8 27.8
--------- --------- ---------
Total current assets 470.7 382.7 419.135.6 22.7 31.6
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TOTAL CURRENT ASSETS 551.3 434.2 452.7
Property, plant and equipment, net 143.0 136.8 132.9153.7 152.2 142.4
Prepublication costs 88.2 86.3 88.895.4 95.3 84.4
Other assets and deferred charges 170.1 157.8 161.6
--------- -------- --------
Total assets163.1 160.6 168.9
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TOTAL ASSETS $ 872.0963.5 $ 763.6842.3 $ 802.4
--------- --------- ---------
--------- --------- ---------848.4
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LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 15.722.0 $ 9.818.0 $ 3.314.1
Accounts payable 105.5 76.9 82.3151.4 97.0 110.0
Accrued royalties 35.6 19.4 31.432.8 23.7 25.2
Deferred revenue 21.8 10.5 21.614.8 6.7 19.0
Other accrued expenses 55.7 65.1 51.2
--------- --------- ---------
Total current liabilities 234.3 181.7 189.853.2 66.4 52.3
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TOTAL CURRENT LIABILITIES 274.2 211.8 220.6
NONCURRENT LIABILITIES:
Long-term debt 277.9 243.5 287.9329.0 248.0 306.8
Other noncurrent liabilities 22.0 20.3 18.7
--------- --------- ---------
Total noncurrent liabilities 299.9 263.8 306.621.1 19.2
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TOTAL NONCURRENT LIABILITIES 351.0 269.1 326.0
STOCKHOLDERS' EQUITY:
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 211.5 205.1 204.8
Accumulated213.1 212.3 206.5
Retained earnings 169.0 154.6 140.7167.9 191.4 137.1
Accumulated other comprehensive income:
Foreign currency translation adjustment (6.1) (5.0) (2.9)(5.7) (5.2)
Less shares held in treasury (36.8) (36.8) (36.8)
---------- ----------- ----------
Total stockholders' equity 337.8 318.1 306.0
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TOTAL STOCKHOLDERS' EQUITY $ 872.0338.3 $ 763.6361.4 $ 802.4
--------- --------- ---------
--------- --------- ---------301.8
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963.5 $ 842.3 $ 848.4
2
SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN- UNAUDITED
(AMOUNTS IN MILLIONS)
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NINETHREE MONTHS ENDED
FEBRUARY 28,AUGUST 31,
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1999 1998
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NET CASH PROVIDED BYUSED IN OPERATING ACTIVITIES ...................................... $ 45.1 $ 43.5(62.3) $(37.3)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs (28.8) (18.3).................................................... (10.3) (6.7)
Additions to property, plant and equipment (18.1) (11.3).............................. (6.2) (5.4)
Royalty advances (18.1) (23.4)........................................................ (5.6) (4.2)
Production costs ........................................................ (3.7) (6.6)
Other ................................................................... (0.2) (1.8)
Business and trademark acquisition-related payments (15.7) (0.4)
Production costs (11.9) (8.9)
Proceeds from the sale of the SOHO Group..................... -- 19.2
Other (3.1) (3.5)
--------- ----------(11.7)
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Net cash used in investing activities (95.7) (46.6)................................... (26.0) (36.4)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under loan agreementLoan Agreement and revolver 213.1 210.3Revolver ............................ 120.8 120.5
Repayments of loan agreementLoan Agreement and revolver (178.9) (210.6)Revolver ............................... (39.8) (57.4)
Borrowings under lines of credit 49.3 39.9........................................ 10.7 22.4
Repayments of lines of credit (42.9) (41.4)........................................... (6.7) (17.2)
Other 6.5 0.9
--------- ----------................................................................... 0.3 1.4
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Net cash provided by/(used in)by financing activities 47.1 (0.9)
--------- ----------............................... 85.3 69.7
Effect of exchange rate changes on cash .................................... 0.0 0.0
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Net decrease in cash and cash equivalents (3.5).................................. (3.0) (4.0)
Cash and cash equivalents at beginning of period ........................... 5.9 5.1
4.9
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Cash and cash equivalents at end of period- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 1.62.9 $ 0.9
--------- ----------
--------- ----------
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 20.2 $ 11.4
Interest paid $ 17.2 $ 18.71.1
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SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN- UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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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 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 1997/19981998/1999 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 28,August 31, 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 28August 31, 1998 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 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, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, 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)
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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)
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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 and India 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 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 chief operating
decision maker assesses operating performance and allocates resources.
The following table sets forth information for the fiscal year ending Mayquarters ended August
31, 1999.1999 and 1998 about the Company's segments:
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
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1999
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Revenues $ 79.2 $ 55.8 $8.9 $143.9 $ 36.1 $ 0.0 $180.0
Depreciation 0.9 0.2 0.2 1.3 0.9 2.4 4.6
Amortization (2) 3.4 7.0 1.6 12.0 0.3 0.0 12.3
Royalty advance expense 4.2 0.1 0.2 4.5 0.5 0.0 5.0
Segment profit/(loss) (3) (14.4) 1.1 (7.1) (20.4) (4.7) (8.5) (33.6)
Segment assets 399.8 184.7 58.4 642.9 141.2 179.4 963.5
Long-lived assets (4) 97.0 95.7 27.3 220.0 56.8 109.0 385.8
Expenditures for
long-lived assets (5) 8.1 7.6 5.3 21.0 1.1 3.7 25.8
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1998
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Revenues $ 47.8 $ 63.5 $ 6.0 $117.3 $32.9 $ 0.0 $150.2
Depreciation 0.7 0.2 0.2 1.1 0.8 2.1 4.0
Amortization (2) 3.1 6.1 1.5 10.7 0.6 0.0 11.3
Royalty advance expense 3.1 0.1 0.0 3.2 0.0 0.0 3.2
Segment profit/
(loss)(3) (18.4) 13.5 (6.2) (11.1) (4.8) (7.9) (23.8)
Segment assets 322.4 169.1 48.5 540.0 141.0 167.4 848.4
Long-lived assets (4) . 93.9 85.8 26.2 205.9 57.0 100.1 363.0
Expenditures for long-
lived assets (5) 6.5 4.1 7.6 18.2 2.9 1.8 22.9
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(1) OVERHEAD INCLUDES UNALLOCATED 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 AND PROVISION FOR INCOME TAXES. UNALLOCATED ASSETS ARE PRINCIPALLY
COMPRISED OF DEFERRED INCOME TAXES AND PROPERTY, PLANT AND EQUIPMENT AS IT
RELATES TO THE COMPANY'S HEADQUARTERS IN THE METROPOLITAN NEW YORK AREA AND
ITS NATIONAL SERVICE OPERATION LOCATED IN THE JEFFERSON CITY, MISSOURI AREA.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND TAXES.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.
6
(5) INCLUDES PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
4. DEBT
LOAN AGREEMENT. The Company and Scholastic Inc. (a wholly-owned subsidiary) are
joint and several borrowers under a Loan Agreement (the "Loan Agreement")loan agreement with certain banks which provides
for revolving credit loans and letters of credit. On April 11, 1995, the Companywas
amended and restated theeffective August 11, 1999 (the "Loan Agreement"). The Loan
Agreement extending the expiration dateexpires August 11, 2004, provides for aggregate borrowings of up to
May
31, 2000 and expanding the facility to $135.0, with$170.0 (with a right in certain circumstances to increase it to $160.0. The Loan Agreement was last amended on
November 28, 1997.$200.0)
including the issuance of up to $10.0 in letters of credit. Interest charged under this
facility is either at the prime rate or .325%0.325% to .90%0.90% over LIBOR (as defined).
There is a commitment fee charged
which rangesranging from .10%0.10% to .3625%0.30% on the unused portion.facility and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33.0% of the
total facility. The amounts charged vary based upon certain financial measurements.the Company's credit
ratings. At the Company's current credit ratings, the spread over LIBOR,
commitment fee and utilization fee are 0.475%, 0.150% and 0.075%, respectively.
The Loan Agreement contains certain financial covenants related to debt to overall capital and
interest coverage ratios (as defined), and limits dividends and other
distributions. At February
28, 1999, anAn aggregate of $8.0$0.0 and $58.0 of borrowings and $1.0 of letters
of credit were outstanding under the Loan Agreement.Agreement at May 31, 1999 and August
31, 1999.
REVOLVER. The Company and Scholastic Inc. have entered intoare joint and several borrowers under
a Revolving Loan Agreement (the "Revolver") with Sun Bank, N. A., which provides
for revolving credit loans of up to $35.0 and expires on May 31, 2000. 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, theThe aggregate
amount of borrowings under the Revolver was $31.5.at May 31, 1999 and August 31, 1999 were
$10.0 and $32.5, respectively.
The Company has agreed in principle to amend and restate the Revolver during the
second quarter of fiscal year 2000 to, among other things, extend the maturity
to 2004 and expand the facility to $40.0, subject to required approvals and
documentation.
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)
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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 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, theCREDIT -- SHORT TERM. The Company's international subsidiaries
had available aggregate lines of credit available of $36.9.
There was $15.7$37.9 at May 31, 1999 and $36.5 at August 31,
1999. The amounts outstanding under these credit
7
lines were $18.0 and $22.0 at February 28, 1999.May 31, 1999 and August 31, 1999, respectively.
The weighted-average interest rate on the outstanding amounts was 7.2% and 6.3%
at May 31, 1999 and August 31, 1999, respectively.
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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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 December 14, 1998, an
order was entered granting the Company's motion to dismiss plaintiffs'
complaint. In dismissing the complaint, 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, plaintiffs filed a Second Amended
Consolidated Amended Complaint, on or about February 16, 1999, alleging substantially
similar claims against the Company and one of its officers. 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-GOOSEBUMPS(R) 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
repayment by Parachute of a portion of the $15.3 advance already paid.
Discovery, which has been consolidated for the litigations, has commenced. 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.
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. COMPREHENSIVE INCOME/(LOSS)LOSS
The following table sets forth comprehensive income/(loss)loss for the periods indicated:
THREE MONTHS ENDED
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
1999 1998
------------ ------------ ----------- -------------- --------------------------------------------------------------------------------
Net income/(loss)NET LOSS $ 0.2(23.6) $ (3.1) $ 14.4 $ 9.7
Other comprehensive income/(loss):(17.5)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.9) (0.8) (0.8) (1.4)
------- ------- ------- -------
Comprehensive income/(loss)(0.2) (0.1)
COMPREHENSIVE LOSS $ (0.7)(23.8) $ (3.9) $ 13.6 $ 8.3
------- ------- ------- -------
------- ------- ------- -------(17.6)
7
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
1999 1998
------------- ------------ ------------- ------------ --------------------------------------------------------------------------------
Net income/(loss)loss $ 0.2(23.6) $ (3.1) $ 14.4 $ 9.7
Effect of debentures (1) - - - -
-------- ------- -------- --------
Net income/(loss) for diluted earnings per share $ 0.2 $ (3.1) $ 14.4 $ 9.7
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average(17.5)
Weighted-average Class A and Common sharesShares
outstanding for basic earnings per share 16.4 16.216.5 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)loss per Class A and Common share:Share:
Basic $ 0.01(1.43) $ (0.19) $ 0.88 $ 0.60(1.08)
Diluted $ 0.01(1.43) $ (0.19) $ 0.86 $ 0.60
-----------------------------------------------------------------------------------------------------------------------(1.08)
- --------------------------------------------------------------------------------
(1)
For the three and nine months ended February 28,August 31, 1999 and 1998, the effect of the
Convertible Subordinated Debentures, employee stock options, and for the three
months ended August 31, 1999, warrants, on the weighted averageweighted-average Class A and
Common sharesShares outstanding for diluted earnings per share was anti-dilutive and
therefore is not included in the calculation.
(2) For the three months ended February 28, 1998, the effect of the employee
stock options on the weighted average Class A and Common shares outstanding
for diluted earnings per share was anti-dilutive and, therefore, is not
included in the calculation.
810
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,August 31, 1999 increased 12%approximately 20% to
$267.3$180.0 million from $239.0$150.2 million in the comparable quarter of the prior fiscal
year, primarily due to a
$20.3, or 12%,year. This increase in domestic book publishing revenues. Book club and
book fair revenues increasedrevenue was driven primarily by approximately 12%the Company's CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION segment, which was up 66% over the comparableprior year
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 successaccounted for 44% 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 infor the quarter
ended February 28,August 31, 1999, from $18.4 in the comparable quarteras compared to 32% 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 for the nine months ended February 28, 1999 increased 8% to
$820.7 from $760.5 in the comparable period of the
prior fiscal year.
As a percentage of revenue, variable cost of goods sold decreasedincreased by
approximately 1.%3.5% for the three monthsfirst quarter ended February 28,August 31, 1999 and approximately 2% forwhen compared to
the nine
months ended February 28, 1999, over the comparable periodssame period of the prior fiscal year. The decreaseThis increase reflects the impact of
product mix in cost of goods sold as a percentage of revenue isthe Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment
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.higher Trade sales, including the impact of higher sales levels of
hardcover product. Selling, general and administrative expenses as a
percentage of revenue were flat for the three months ended February 28,August 31, 1999
and increased by approximately 2.% for the nine
months ended February 28, 1999,when compared to the corresponding periods of the
prior year in the case of the nine month period, reflecting additionalperiod.
The operating expenses related to the Pages Acquisition and Year 2000 computer
readiness costs, as well as other increases in spending due to higher book club
and book fair activity.
Operating incomeloss for the quarter ended February 28,August 31, 1999 was $4.9 comparedincreased 41% to an
operating$33.6
million from a loss of $10.2$23.8 million in the same quarter of the prior fiscal
year. Operating
income forThis increase reflects the nine months ended February 28, 1999 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 impactedimpact of improved sales in CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION due to strong Trade sales, led by the $11.4 non-cash charge relatingHARRY
POTTER(TM) books and a variety of successful series published by the Company.
These sales were more than offset by increased losses in EDUCATIONAL PUBLISHING
due to the impairmentanticipated absence of assets.
Net incomeCalifornia SCHOLASTIC LITERACY PLACE(R) sales
as well as increased Internet spending.
The net loss for the quarter ended February 28,August 31, 1999 was $0.2,$23.6 million, or $0.01$1.43
per
diluted share, versus a net loss of $3.1,$17.5 million, or $0.19$1.08 per diluted share, in the
comparable quarter of the prior year.
Net income forRESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
nine months ended
February 28, 1999 waspublication 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.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Revenue $ 79.2 $ 47.8
Operating loss (14.4) (18.4)
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment were up 66%
to $79.2 million from $47.8 million in the comparable quarter of the prior
fiscal year. As a result, operating results improved 22% to a seasonal loss of
$14.4 or $0.86 per diluted share, versus $9.7, or $0.60
per diluted share, formillion when compared to the nine months ended February 28, 1998.
9same period in the prior fiscal year. The
increased revenue reflects the impact of strong sales in the Trade business of
properties including three HARRY POTTER books and the ANIMORPHS(R), DEAR
AMERICa(TM), I SPY(TM), CLIFFORD THE BIG ReD DOG(R), PokEMON(TM) And
EverWoRLD(TM) series.
11
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
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.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Revenue $ 55.8 $ 63.5
Operating profit 1.1 13.5
- --------------------------------------------------------------------------------
Revenues for the quarter declined 12% to $55.8 million with an operating profit
of $1.1 million compared to revenues of $63.5 million and operating profit of
$13.5 million in the comparable quarter of the prior fiscal year. This decline
in revenues is directly related to the adoption cycle for reading textbooks. In
the prior fiscal year, the Company recognized the benefit of high order levels
for SCHOLASTIC LITERACY PLACE(R) related to the California reading adoption. The
next major state adoption is in Texas, with shipments of product expected in the
summer of 2000. The decline in SCHOLASTIC LITERACY PLACE sales was partially
offset by the sales of the Company's new product, READ 180!(TM).
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and the distribution by the Company's United States-based operations of
entertainment products (including television programming, videos and motion
pictures), Internet services and CD-ROM-based products and Scholastic-branded
licensed properties, as well as advertising and promotional activities.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Revenue $8.9 $6.0
Operating loss (7.1) (6.2)
- --------------------------------------------------------------------------------
Revenues increased 48% to $8.9 million in the first quarter of fiscal 2000 as
compared to the same period in the prior fiscal year. The operating loss for the
quarter ended August 31, 1999 increased by 15% from a loss of $6.2 million in
the same period of the prior fiscal year. These results reflect the benefit of
increased magazine advertising sales which were more than offset by higher
Internet-related costs.
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 and India.
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Revenue $ 36.1 $ 32.9
Operating loss (4.7) (4.8)
- --------------------------------------------------------------------------------
12
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
INTERNATIONAL revenues for the quarter ended August 31, 1999 increased 10% to
$36.1 million compared to $32.9 million for the same period in the prior fiscal
year. Operating losses for the quarter ended August 31, 1999 were comparable to
the same period in the prior fiscal year at approximately $4.7 million.
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.
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 RESOURCES
The Company's cash and cash equivalents decreased by $3.5$3.0 million during the
nine month
periodquarter ended February 28,August 31, 1999, compared to a decrease of $4.0 million during the
comparable period in the prior fiscal year.
For the nine months ended February 28, 1999, net cash provided by financing
activities was $47.1 compared to net cash used 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 source of
the Company's liquidity.
Cash used in investing activities was $95.7$26.0 million and $46.6$36.4 million for the
ninethree months ended February 28,August 31, 1999 and 1998, respectively. Investing activities
consisted primarily of prepublication cost expenditures, capital expenditures,
royalty advances businessand production cost expenditures. Business and trademark
acquisition-related payments and production cost expenditures.for the prior year quarter were related to the
acquisition of certain assets of Pages Book Fairs, Inc. Prepublication cost
expenditures increased $10.5$3.6 million to $28.8$10.3 million for the ninethree months ended
February 28,August 31, 1999 over the comparable period inof the prior fiscal year largely due to the
planned revision to SCHOLASTIC LITERACY PLACE(R).PLACE and the initial spending on the
Company's new READ 180! program. Capital expenditures increased $6.8
to $18.1$6.2 million
in the current year reflecting the construction of a new office facility.
Royalty advances increased $1.4 million for the nine monthsquarter ended February 28,August 31, 1999
compared toover the correspondingsame period ofin the prior fiscal year largely due to the equipping
of a new office and distribution facility 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, business and trademark acquisition-related
payments were $15.7, primarily related to business asset purchases referred
to below.$5.6 million. Production cost
expenditures increased $3.0decreased $2.9 million to $11.9 in fiscal$3.7 million for the first quarter ended
August 31, 1999 when compared to the correspondingsame period ofin the prior fiscal year, resulting
primarily from increased production costs associated withdue
to a reduction in the first seasonnumber of shows being produced.
FINANCING
The Company maintains two unsecured credit facilities, the ANIMORPHS(R)Loan Agreement and
DEAR AMERICA(TM) television series partially offset by
decreased costs associated with the GOOSEBUMPS(R) series.
10Revolver, which provide for aggregate borrowings of up to $205.0 million
(with a right, in certain circumstances, to increase to $235.0 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 August 31, 1999, the
Company had $90.5 million in borrowings outstanding under these facilities at a
weighted-average interest rate of 5.8%.
13
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCING (CONTINUED)
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 $135.0 million to $170.0 million (with a right, in certain
circumstances, to increase to $200.0 million). The Company anticipates amending
and restating the Revolver in the second quarter of fiscal 2000 to increase the
amount available thereunder to $40.0 million and extend its expiration to 2004.
The Company does not anticipate any difficulty in negotiating satisfactory
credit arrangements.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $36.5 million at August 31,
1999. These lines are used primarily to fund working capital needs in those
countries. At August 31, 1999, $22.0 million in borrowings were outstanding
under these lines at a weighted-average interest rate of 6.3%.
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.
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 has 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's Year 2000 program, which was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consists of the
following three components relating to the Company's operations: (i) information
technology ("IT") computer systems and applications which may be impacted by the
Year 2000 problem and the actions related thereto, (ii) non-IT systems and
equipment which include embedded technology which may be 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 11
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
the Company if such parties fail to be Year 2000
14
compliant and the actions related thereto. The general phases common to all
three components of the Company's Year 2000 program are: (1) ASSESSMENT (the
identification, assessment and prioritization of the Year 2000 issues facing the
Company in each of the above areas 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
15
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
contingency plans in the event Year 2000 problems occur, notwithstanding 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:include 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 substantially completed the Assessment, Remediation,
Testing, Contingency Planning and RemediationImplementation 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 of 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$11.8 million through
fiscal 2000, of which an aggregate of $5.8$9.3 million has been incurred to date. Total conversion and
testing costs through fiscal 1999 are estimated at $8.3.August 31, 1999.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected by Year 2000 issues include: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.with respect to its
principal non-IT systems and equipment. 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,equipment by the end of October 1999. The Company
estimates the total costs for modifying or replacing new systems and equipment
in this area will be approximately $0.5$0.20 million through fiscal 2000, of which
an
aggregate of $0.1 million has been incurred to date. Total modification and replacement
costs through fiscal 1999 are estimated at $0.4.
12
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)August 31, 1999.
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier
relationships affected by Year 2000 issues relate primarily to printing,
paper supplies, distribution, fulfillment, licensing and financial services.
The Assessment and Remediation phases for determining the Year 2000 readiness
of the Company's principal suppliers is an ongoing process. Substantially all
of the Company's principal suppliers have reported that they have initiated
Year 2000 programs.programs and such suppliers have not brought to the Company's
attention any problems anticipated to materially and adversely impact the
Company's operations taken as a whole. The Company will continue to seek
updates from these parties to attempt to ascertain the adequacy of their
programs as it relatesthey relate to the Company. Testing of critical systems or
services will be done on an as needed basis. The Company anticipates that it
will develop contingency plans with respect to its principal third party
suppliers by the end of MayOctober 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,$12.0 million, of
which total program costs to datethrough August 31, 1999 have been $5.9. Total program costs through fiscal
1999 are estimated at $8.7.$9.3
16
million. 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
17
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
Year 2000. The costs do notalso include expenses related to 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
borrowings under its credit agreements. The above-stated amounts have been
budgeted for the appropriate fiscal years. Projected Year 2000 costs for
fiscal 19992000 comprise approximately 25% to 30%11% of the Company's IT expense budget for
thatthe 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,November 30, 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 beare handled in a timely manner. The
cost of the Company's Year 2000 program and 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 does not expect that the Year 2000
issue will have a material adverse impact on the Company as a whole. DueHowever,
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 disruption to the
Company's business or operations will occur. Further, the 13
SCHOLASTIC CORPORATION
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 failure of external
local, national or international systems (including financial, 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 suchrespond to anticipated
scenarios. ThereHowever, there can be no assurance however, that successful contingency plans
can, in fact, be developed or implemented.
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.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 1999.
18
SCHOLASTIC CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------------
14--------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 currency fluctuations to represent a
significant risk. 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 from changes
in interest rates. The majority of the Company's long-term debt bears interest
at a fixed rate. However, the fair market value of the fixed rate debt is
sensitive to changes in interest rates. The Company is subject to the risk that
market interest rates will decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. The Company does not
generally utilize interest rate derivative instruments to manage its exposure to
interest rate changes.
As of August 31, 1999, the balance outstanding under the facilities which have
variable rates was $90.5 million, at an average interest rate of 5.84%. A 15%
increase or decrease in the average cost of the Company's variable rate debt
under the facility would not have a significant impact on the Company's results
of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.
19
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
As previously reported, three purported class action complaints were filed in
the United States District 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 SECURITIES LITIGATION, 97 Civ. 2447
(JFK), on behalf of all persons who purchased Company common stock from December
10, 1996 through February 20, 1997. The Complaint alleged, among other things,
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder, resulting from purported materially false and
misleading statements to the investing public concerning the financial condition
of the Company. Specifically, the Complaint alleged misstatements and omissions
by the Company pertaining to adverse sales and returns of its popular
GOOSEBUMPS(R) book series prior to the Company's interim earnings announcement
on February 20, 1997. In an order dated December 14, 1998, the United States
District Court for the Southern District of New York granted the Company's
motion to dismiss the Complaint. In dismissing the Complaint, the Court held
that plaintiffs had failed to state a claim upon which relief could be granted
and granted plaintiffs leave to amend and re-file the Complaint. Pursuant to
that order, plaintiffs filed a second Consolidated Amended Class Action
Complaint, on or about February 16, 1999, alleging substantially similar claims
against the Company and one of its officers. The Company continues to believe
that the litigation is without merit and shall 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),
15
SCHOLASTIC CORPORATION--------------------------------------------------------------------------------
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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
------ -----------------------
10.1410.18 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
RetirementExecutive Incentive Performance Plan,
effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of
JanuaryJune 1, 1999
27.1 Financial Data Schedule for the Nine Months Ended February 28,quarter ended August 31, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal yearquarter ended MayAugust 31, 1998
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16(b) Reports on Form 8-K filed during the quarter: none.
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20
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,October 15, 1999 /s/ Richard Robinson
---------------------------------________________________
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: April 14,October 15, 1999 /s/________________________
Kevin J. McEnery
---------------------------------
Kevin J. McEnery
Executive Vice President and
Chief Financial OfficerEXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED FEBRUARY 28,AUGUST 31, 1999
EXHIBIT INDEX
- --------------------------------------------------------------------------------
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Exhibit
Number Description of Document
------------- -----------------------
10.1410.18 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 RetirementExecutive Performance Incentive Plan,
effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of JanuaryJune 1, 1999
27.1 Financial Data Schedule for the Nine Months Ended February 28,quarter ended August 31, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal yearquarter ended MayAugust 31, 1998
- -------------------------------------------------------------------------------------------------------------------
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