SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended Commission File Number: 0-19860
February 28, 1999
SCHOLASTIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
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
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
INDEX
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the
Three and Nine Months Ended February 28, 1999 and 1998 1
Condensed Consolidated Balance Sheet at February 28, 1999
and 1998 and May 31, 1998 2
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended February 28, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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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i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $ 267.3 $ 239.0 $ 820.7 $ 760.5
Operating costs and expenses:
Cost of goods sold 133.5 121.8 406.6 394.5
Selling, general and
administrative expenses 123.6 110.8 360.1 317.6
Depreciation 4.2 3.6 12.4 10.8
Goodwill and trademark
amortization 1.1 1.6 3.9 5.0
Impairment of assets -- 11.4 -- 11.4
---------- --------- ---------- ----------
Total operating costs and
expenses 262.4 249.2 783.0 739.3
Operating income/(loss) 4.9 (10.2) 37.7 21.2
Interest expense, net (4.6) (4.8) (14.5) (15.5)
Gain on sale of SOHO Group -- 10.0 -- 10.0
---------- --------- ---------- ----------
Income/(loss) before
provision/(benefit) for
income taxes 0.3 (5.0) 23.2 15.7
Provision/(benefit) for income
taxes 0.1 (1.9) 8.8 6.0
---------- --------- ---------- ----------
Net income/(loss) $ 0.2 $ (3.1) $ 14.4 $ 9.7
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income/(loss) per Class A and Common share:
Basic $ 0.01 $ (0.19) $ 0.88 $ 0.60
Diluted $ 0.01 $ (0.19) $ 0.86 $ 0.60
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SEE ACCOMPANYING NOTES
1
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------
February 28, 1999 May 31, 1998 February 28, 1998
------------------------- ------------------ -----------------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.6 $ 5.1 $ 0.9
Accounts receivable less allowance for
doubtful accounts 129.2 116.7 116.3
Inventories 267.6 199.3 244.2
Deferred taxes 48.1 41.8 29.9
Prepaid and other deferred expenses 24.2 19.8 27.8
--------- --------- ---------
Total current assets 470.7 382.7 419.1
Property, plant and equipment, net 143.0 136.8 132.9
Prepublication costs 88.2 86.3 88.8
Other assets and deferred charges 170.1 157.8 161.6
--------- -------- --------
Total assets $ 872.0 $ 763.6 $ 802.4
--------- --------- ---------
--------- --------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 15.7 $ 9.8 $ 3.3
Accounts payable 105.5 76.9 82.3
Accrued royalties 35.6 19.4 31.4
Deferred revenue 21.8 10.5 21.6
Other accrued expenses 55.7 65.1 51.2
--------- --------- ---------
Total current liabilities 234.3 181.7 189.8
NONCURRENT LIABILITIES:
Long-term debt 277.9 243.5 287.9
Other noncurrent liabilities 22.0 20.3 18.7
--------- --------- ---------
Total noncurrent liabilities 299.9 263.8 306.6
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
Accumulated earnings 169.0 154.6 140.7
Accumulated other comprehensive income:
Foreign currency translation adjustment (6.1) (5.0) (2.9)
Less shares held in treasury (36.8) (36.8) (36.8)
---------- ----------- ----------
Total stockholders' equity 337.8 318.1 306.0
--------- --------- ---------
$ 872.0 $ 763.6 $ 802.4
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--------- --------- ---------
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SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
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NINE MONTHS ENDED FEBRUARY 28,
1999 1998
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 45.1 $ 43.5
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs (28.8) (18.3)
Additions to property, plant and equipment (18.1) (11.3)
Royalty advances (18.1) (23.4)
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)
--------- ----------
Net cash used in investing activities (95.7) (46.6)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver 213.1 210.3
Repayments of loan agreement and revolver (178.9) (210.6)
Borrowings under lines of credit 49.3 39.9
Repayments of lines of credit (42.9) (41.4)
Other 6.5 0.9
--------- ----------
Net cash provided by/(used in) financing activities 47.1 (0.9)
--------- ----------
Net decrease in cash and cash equivalents (3.5) (4.0)
Cash and cash equivalents at beginning of period 5.1 4.9
--------- ----------
Cash and cash equivalents at end of period $ 1.6 $ 0.9
--------- ----------
--------- ----------
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 20.2 $ 11.4
Interest paid $ 17.2 $ 18.7
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SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 1997/1998 Annual Report to Stockholders.
The results of operations for the three and nine months ended February 28, 1999
and 1998 are not necessarily indicative of the results expected for the full
year. Due to the seasonal fluctuations that occur, the prior year's February 28
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 and recoverability
of prepublication costs.
3. RECENT ACCOUNTING PRINCIPLES
Effective June 1, 1998, 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. 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. 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 Statement of
Financial Accounting Standards No. 132 (SFAS 132), "Employer's Disclosures about
Pensions and Other Post-Retirement Benefits." This statement revises employer's
disclosures about pension and other post-retirement benefit plans. It
standardizes the disclosure requirements for pensions and other post-retirement
benefits, requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures required under prior standards. The Company is
required to adopt the provisions of SFAS 132 for the fiscal year ending May 31,
1999.
4. DEBT
LOAN AGREEMENT. The Company and Scholastic Inc. are joint and several borrowers
under a Loan Agreement (the "Loan Agreement") with certain banks which provides
for revolving credit loans and letters of credit. On April 11, 1995, the Company
amended and restated the Loan Agreement, extending the expiration date to May
31, 2000 and expanding the facility to $135.0, with a right, in certain
circumstances, to increase it to $160.0. The Loan Agreement was last amended on
November 28, 1997. Interest charged under this facility is either at the prime
rate or .325% to .90% over LIBOR (as defined). There is a commitment fee charged
which ranges from .10% to .3625% on the unused portion. The amounts charged vary
based upon certain financial measurements. 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, an aggregate of $8.0 of borrowings and $1.0 of letters of credit were
outstanding under the Loan Agreement.
REVOLVER. The Company and Scholastic Inc. have entered into a Revolving Loan
Agreement (the "Revolver") with Sun Bank, N. A., which provides for revolving
credit loans and expires on May 31, 2000. The Revolver has certain financial
covenants related to debt to overall capital and interest coverage ratios (as
defined) and limits dividends and other distributions. On August 14, 1996, the
Revolver was amended to increase the aggregate principal amount to $35.0 and was
last amended on November 28, 1997. At February 28, 1999, the aggregate amount of
borrowings under the Revolver was $31.5.
7% NOTES DUE 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will
5
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
4. DEBT (CONTINUED)
mature on December 15, 2003. The Notes are not redeemable prior to maturity.
Interest on the Notes is payable semi-annually on December 15 and June 15 of
each year. The net proceeds (including accrued interest) from the issuance of
the Notes were $123.9 after deducting an underwriting discount and other related
offering costs. The Company utilized the net proceeds primarily to repay amounts
outstanding under the Loan Agreement and the Revolver.
CONVERTIBLE SUBORDINATED DEBENTURES. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures")
under Regulation S and Rule 144A of the Securities Act of 1933. The Debentures
are listed on the Luxembourg Stock Exchange and the portion sold under Rule 144A
is designated for trading in the Portal system of the National Association of
Securities Dealers, Inc. Interest on the Debentures is payable semi-annually on
August 15 and February 15 of each year. The Debentures are redeemable at the
option of the Company, in whole, but not in part, at any time on or after August
15, 1998 at 100% of the principal amount plus accrued interest. Each Debenture
is convertible, at the holder's option, any time prior to maturity, into Common
Stock of the Company at a conversion price of $76.86 per share.
OTHER -- SHORT-TERM LINES OF CREDIT. At February 28, 1999, the Company's
international subsidiaries had available aggregate lines of credit of $36.9.
There was $15.7 outstanding under these credit lines at February 28, 1999.
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
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 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 Mark- 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, 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, 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)
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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 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.
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.
6. COMPREHENSIVE INCOME/(LOSS)
The following table sets forth comprehensive income/(loss) for the periods
indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
------------ ------------ ----------- -------------
Net income/(loss) $ 0.2 $ (3.1) $ 14.4 $ 9.7
Other comprehensive income/(loss):
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.9) (0.8) (0.8) (1.4)
------- ------- ------- -------
Comprehensive income/(loss) $ (0.7) $ (3.9) $ 13.6 $ 8.3
------- ------- ------- -------
------- ------- ------- -------
7
SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
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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,
1999 1998 1999 1998
------------- ------------ ------------- -----------
Net income/(loss) $ 0.2 $ (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 Class A and Common shares
outstanding for basic earnings per share 16.4 16.2 16.3 16.2
Effect of debentures (1) - - - -
Effect of employee stock options(2) 0.5 - 0.4 0.1
-------- ------- -------- --------
Weighted average Class A and Common shares
outstanding for diluted earnings per share 16.9 16.2 16.7 16.3
-------- ------- -------- --------
-------- ------- -------- --------
Net income/(loss) per Class A and Common share:
Basic $ 0.01 $ (0.19) $ 0.88 $ 0.60
Diluted $ 0.01 $ (0.19) $ 0.86 $ 0.60
-----------------------------------------------------------------------------------------------------------------------
(1) For the three and nine months ended February 28, 1999 and 1998, the effect
of the Debentures 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.
(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.
8
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
(IN MILLIONS, EXCEPT PER SHARE DATA)
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RESULTS OF OPERATIONS
Revenues for the quarter ended February 28, 1999 increased 12% to $267.3 from
$239.0 in the comparable quarter of the prior fiscal year, primarily due to a
$20.3, or 12%, increase in domestic book publishing revenues. Book club and
book fair revenues increased by approximately 12% over the comparable quarter
of the prior fiscal year. Book club revenues benefited from increased orders
and higher revenue per order, reflecting expanded promotion efforts and
strong product selection. Book fairs held a greater number of fairs due in
part to the acquisition of assets of Pages Book Fairs, Inc. (the "Pages
Acquisition") in the first quarter of the current fiscal year. Book fairs
also benefited from higher revenue per fair from premium fairs which feature
a broader product selection. Trade revenues increased by more than 15% due to
the continued success of the Company's branded properties, such as
ANIMORPHS(R), DEAR AMERICA(R), I SPY AND CLIFFORD THE BIG RED DOG(R),
combined with the success of other properties such as TELETUBBIES(TM) and
HARRY POTTER AND THE SORCERER'S STONE by J.K. Rowling. Media, TV/movie
production and licensing revenues increased 41% to $25.9 in the quarter ended
February 28, 1999 from $18.4 in the comparable quarter of the prior fiscal
year, due to the strength of CD-ROM and media properties sales. International
revenues remained level at $41.0, although slightly higher in local
currencies compared to the corresponding quarter of the prior fiscal year.
Total revenues 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, cost of goods sold decreased by approximately 1.%
for the three months ended February 28, 1999 and approximately 2% for the nine
months ended February 28, 1999, over the comparable periods of the prior year.
The decrease in cost of goods sold as a percentage of revenue is due to a change
in product mix, improved purchasing terms and lower paper costs, as well as
modifying specifications in an effort to lower product costs. Selling, general
and administrative expenses as a percentage of revenue were flat for the three
months ended February 28, 1999 and increased by approximately 2.% for the nine
months ended February 28, 1999, compared to the corresponding periods of the
prior year, in the case of the nine month period, reflecting additional
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 income for the quarter ended February 28, 1999 was $4.9 compared to an
operating loss of $10.2 in the same quarter of the prior fiscal year. Operating
income for 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 impacted by the
$11.4 non-cash charge relating to the impairment of assets.
Net income for the quarter ended February 28, 1999 was $0.2, or $0.01 per
diluted share, versus a net loss of $3.1, or $0.19 per diluted share, in the
comparable quarter of the prior year. Net income for the nine months ended
February 28, 1999 was $14.4, or $0.86 per diluted share, versus $9.7, or $0.60
per diluted share, for the nine months ended February 28, 1998.
9
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
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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 September 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 during the nine month
period ended February 28, 1999, compared to a decrease of $4.0 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 and $46.6 for the nine months
ended February 28, 1999 and 1998, respectively. Investing activities
consisted primarily of prepublication cost expenditures, capital
expenditures, royalty advances, business and trademark acquisition-related
payments and production cost expenditures. Prepublication cost expenditures
increased $10.5 to $28.8 for the nine months ended February 28, 1999 over the
comparable period in the prior fiscal year, largely due to the planned
revision to SCHOLASTIC LITERACY PLACE(R). Capital expenditures increased $6.8
to $18.1 for the nine months ended February 28, 1999 compared to the
corresponding period of 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. Production cost expenditures increased $3.0 to $11.9 in fiscal 1999
compared to the corresponding period of the prior fiscal year, resulting
primarily from increased production costs associated with the first season of
the ANIMORPHS(R) and DEAR AMERICA(TM) television series partially offset by
decreased costs associated with the GOOSEBUMPS(R) series.
10
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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)
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YEAR 2000 READINESS DISCLOSURE (CONTINUED)
the Company if such parties fail to be Year 2000 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 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: order entry, purchasing, distribution
and financial reporting. Issues related to vendor supplied software include
financial reporting and certain infrastructure and operating system software.
The Company has completed the Assessment and Remediation phases with respect to
its principal IT systems and applications. In addition, the Company anticipates
that the Testing, Contingency Planning and Implementation phases should be
substantially completed by the end 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 through fiscal 2000,
of which an aggregate of $5.8 has been incurred to date. Total conversion and
testing costs through fiscal 1999 are estimated at $8.3.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected by Year 2000 issues include:
security systems, phone systems, business machines, computers and distribution
systems. The Company has substantially completed the Assessment of its principal
non-IT software and applications, and the Remediation phase related to these
principal systems was also substantially completed by the end of March 1999. The
Testing, Contingency Planning and Implementation phases should be substantially
completed by the end of May 1999. In addition to the foregoing, based on current
assessments, the Company expects to implement the remainder of Year 2000
remediated non-IT systems and applications prior to August 31, 1999. The Company
estimates the total costs for modifying or replacing new systems and equipment
in this area will be approximately $0.5 through fiscal 2000, of which an
aggregate of $0.1 has been incurred to date. Total modification and replacement
costs through fiscal 1999 are estimated at $0.4.
12
SCHOLASTIC CORPORATION
ITEM 2. MD&A
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier relationships
affected by Year 2000 issues 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.
The Company will seek updates from these parties to attempt to ascertain the
adequacy of their programs as it relates 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 May 1999. There can be no assurance, however, that the
Company will be able to predict adequately Year 2000 problems experienced by its
suppliers or to develop adequate contingency plans related thereto. The costs to
the Company in implementing its Year 2000 program in this area, excluding costs
due to unanticipated third party Year 2000 problems, will principally consist of
internal staff costs, which are not expected to be material. No single customer
or small group of customers are material to the Company's financial condition.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program, which includes total costs noted
above for IT systems and applications, will be approximately $13.8, of which
total program costs to date have been $5.9. Total program costs through fiscal
1999 are estimated at $8.7. These costs include costs related to the matters
described above, as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the Company for
the Year 2000. The costs do not include internal staff costs incurred or to be
incurred in connection with the implementation of the program. Costs are
generally expected to be expensed as incurred, and it is expected that such
costs will be funded by cash generated from the Company's operations or
borrowings under its credit agreements. The above-stated amounts have been
budgeted for the appropriate fiscal years. Projected Year 2000 costs for fiscal
1999 comprise approximately 25% to 30% of the Company's IT budget for that
period. Based on the current progress of the Company's Year 2000 program, the
Company anticipates its Year 2000 program will be substantially completed by
August 31, 1999. As a result of the Company's Year 2000 program, delays in other
new and continuing IT projects have occurred. However, no material adverse
effect is anticipated from such delays as the Company has procedures in place in
an effort to ensure that critical projects will be handled in a timely manner.
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. 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 power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those scenarios
in which unexpected failures would have a material adverse effect on the Company
and will attempt to develop contingency plans designed to deal with such
scenarios. There can be no assurance, however, that successful contingency plans
can, in fact, be developed or implemented.
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14
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
------ -----------------------
10.14 Scholastic Corporation 1998 Employee Stock Purchase Plan,
effective January 1, 1999
10.15 Scholastic Corporation 1998 Management Stock Purchase Plan,
effective January 1, 1999
10.16 Second Amendment to the Scholastic Inc. 401(k) Savings and
Retirement Plan, effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of
January 1, 1999
27.1 Financial Data Schedule for the Nine Months Ended February 28, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal year ended May 31, 1998
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16
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, 1999 /s/ Richard Robinson
---------------------------------
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: April 14, 1999 /s/ Kevin J. McEnery
---------------------------------
Kevin J. McEnery
Executive Vice President and
Chief Financial Officer
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
EXHIBIT INDEX
- -------------------------------------------------------------------------------------------------------------------
Exhibit
Number Description of Document
------- -----------------------
10.14 Scholastic Corporation 1998 Employee Stock Purchase Plan,
effective January 1, 1999
10.15 Scholastic Corporation 1998 Management Stock Purchase Plan,
effective January 1, 1999
10.16 Second Amendment to the Scholastic Inc. 401(k) Savings and Retirement Plan,
effective as of January 1, 1999
10.17 Fourth Amendment to the Retirement Income Plan for
Employees of Scholastic Inc., effective as of January 1,
1999
27.1 Financial Data Schedule for the Nine Months Ended February 28, 1999
27.2 Financial Data Schedule Restated for the Nine Months Ended February 28, 1998
27.3 Financial Data Schedule Restated for the fiscal year ended May 31, 1998
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