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 - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------
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 28, FEBRUARY 28,AUGUST 31, - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- NET LOSS $ (23.6) $ (17.5) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES 1 SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (IN(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------ 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 - ---------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 872.0963.5 $ 763.6842.3 $ 802.4 --------- --------- --------- --------- --------- ---------848.4 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- 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 --------- --------- ---------- ----------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 872.0338.3 $ 763.6361.4 $ 802.4 --------- --------- --------- --------- --------- ---------301.8 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 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)
- ------------------------------------------------------------------------------------------------------------------- NINETHREE MONTHS ENDED FEBRUARY 28,AUGUST 31, - ------------------------------------------------------------------------------------------------------------------- 1999 1998 ------ ------- ------------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------- 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 --------- ---------- 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 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
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 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) - -------------------------------------------------------------------------------- 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 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 - -------------------------------------------------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------
(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) - -------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------- 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-------------------------------------------------------------------------------- - ------------------------------------------------------------------------------ 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 - -------------------------------------------------------------------------------------------------------------------
16(b) Reports on Form 8-K filed during the quarter: none. - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- 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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