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 Commission File Number: 0-19860
ended August 31, 1998
SCHOLASTIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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.
Number of shares outstanding
Title of Each Class as of September 30, 1998
------------------- ----------------------------
Common Stock, $.01 par value 15,493,204
Class A Stock, $.01 par value 828,100
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SCHOLASTIC CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Condensed Statements of Operations for
the Three Months Ended August 31, 1998 and 1997 1
Consolidated Condensed Balance Sheet at August 31, 1998 and
1997 and May 31, 1998 2
Consolidated Condensed Statement of Cash Flows for the Three
Months Ended August 31, 1998 and 1997 3
Notes to Consolidated Condensed 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 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED AUGUST 31
1998 1997
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Revenues $ 150.2 $ 166.6
Operating costs and expenses:
Cost of goods sold 85.2 96.1
Selling, general and administrative expenses 83.4 81.7
Depreciation 4.0 3.5
Goodwill and trademark amortization 1.4 1.5
--------- ---------
Total operating costs and expenses 174.0 182.8
Operating loss (23.8) (16.2)
Interest expense, net 4.4 5.1
--------- ---------
Loss before benefit for income taxes (28.2) (21.3)
Benefit for income taxes 10.7 8.1
--------- ---------
Net loss $ (17.5) $ (13.2)
========= =========
Net loss per Class A and Common share:
Basic $ (1.08) $ (0.81)
Diluted $ (1.08) $ (0.81)
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SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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August 31, 1998 May 31, 1998 August 31, 1997
--------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
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Cash and cash equivalents $ 1.1 $ 5.1 $ 1.4
Accounts receivable less allowance for
doubtful accounts 110.7 116.7 117.1
Inventories 259.0 199.3 263.2
Deferred taxes 50.3 41.8 36.5
Prepaid and other deferred expenses 31.6 19.8 34.3
-------- -------- --------
Total current assets 452.7 382.7 452.5
Property, plant and equipment, net 139.5 136.8 132.2
Prepublication costs 84.4 86.3 99.7
Other assets and deferred charges 174.0 159.5 157.2
-------- -------- --------
Total assets $ 850.6 $ 765.3 $ 841.6
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 14.1 $ 9.8 $ 10.6
Accounts payable 110.0 76.9 97.9
Accrued royalties 25.2 19.4 19.4
Deferred revenue 19.0 10.5 15.7
Other accrued expenses 52.3 65.1 56.5
-------- -------- --------
Total current liabilities 220.6 181.7 200.1
NONCURRENT LIABILITIES:
Long-term debt 306.8 243.5 341.0
Other noncurrent liabilities 21.4 22.0 18.0
-------- -------- --------
Total noncurrent liabilities 328.2 265.5 359.0
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 206.5 205.1 203.8
Accumulated earnings 137.1 154.6 117.8
Accumulated other comprehensive income:
Foreign currency translation adjustment (5.2) (5.0) (2.5)
Less shares held in treasury (36.8) (36.8) (36.8)
-------- -------- --------
Total stockholders' equity 301.8 318.1 282.5
-------- -------- --------
$ 850.6 $ 765.3 $ 841.6
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SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED, AMOUNTS IN MILLIONS)
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THREE MONTHS ENDED AUGUST 31,
1998 1997
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NET CASH USED IN OPERATING ACTIVITIES $ (37.3) $ (42.9)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business and trademark acquisition-related payments (11.7) (0.4)
Prepublication costs (6.7) (5.5)
Production costs (6.6) (3.5)
Additions to property, plant and equipment (5.4) (2.5)
Royalty advances (4.2) (6.7)
Other (1.8) (0.8)
-------- --------
Net cash used in investing activities (36.4) (19.4)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver 120.5 100.3
Repayments of loan agreement and revolver (57.4) (47.3)
Borrowings under lines of credit 22.4 12.5
Repayments of lines of credit (17.2) (6.6)
Other 1.4 (0.1)
-------- --------
Net cash provided by financing activities 9.7 58.8
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Net decrease in cash and cash equivalents (4.0) (3.5)
Cash and cash equivalents at beginning of period 5.1 4.9
-------- --------
Cash and cash equivalents at end of period $ 1.1 $ 1.4
======== ========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 0.2 $ 0.7
Interest paid $ 7.5 $ 8.1
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SEE ACCOMPANYING NOTES
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SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN MILLIONS EXCEPT 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-eight years
of serving schools, Scholastic has developed strong name recognition associated
with quality and dedication to learning, has achieved a leading market position
in the school-based distribution of children's books and magazines and has
developed the leading internet-based subscription service for schools. 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 consolidated condensed 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 months ended August 31, 1998 and 1997
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the prior year's August 31 balance sheet
is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying
consolidated condensed 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 costs and litigation reserves.
3. RECENT ACCOUNTING PRINCIPLES
Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share." Earnings per
share amounts for all periods have been restated to conform with SFAS 128. The
calculations of basic and diluted earnings per share are presented in Note 6.
4
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SCHOLASTIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED, AMOUNTS IN MILLIONS)
================================================================================
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 loss are described in Note 7.
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 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 ended May 31, 1999.
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 ended 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 and interest coverage ratios (as defined)
and limits dividends and other distributions. At August 31, 1998, an aggregate
of $50.0 of borrowings and $10.0 of letters of credit were outstanding under the
Loan Agreement.
REVOLVER. The Company and Scholastic Inc. (the "Borrowers") 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 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 August 31, 1998, the aggregate amount of
borrowings under the Revolver was $18.3.
5
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SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED INCOME STATEMENTS CONTINUED
(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT SHARE DATA)
================================================================================
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 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 August 31, 1998, the Company's
international subsidiaries had lines of credit available of $40.5. There was
$14.1 outstanding under these credit lines at August 31, 1998.
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. The litigation is in the
early stages and the Company believes that such litigation is without merit and
plans to vigorously defend against it.
Two subsidiaries of the Company are also defendants and counterclaim plaintiffs
in litigation with Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and non-publication rights to the GOOSEBUMPS(R) series. The action
was 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. Parachute alleges that the exercise of such remedies was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract, copyright infringement 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 litigation began. The Company
6
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SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED:
================================================================================
seeks declaratory relief and damages for, among other claims, breaches of
contract and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid at the
time the litigation began. The litigation is still in the preliminary stages and
discovery has begun. The Company has filed a motion to dismiss and Parachute has
filed a motion for partial summary judgement. The Company believes that
Parachute's claims are without merit. The Company intends to vigorously defend
the lawsuit and pursue its counterclaims. 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. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three month period ended August 31:
1998 1997
-------- --------
CLASS A AND COMMON SHARES IN MILLIONS
Net loss $(17.5) $(13.2)
Weighted average Class A and
Common shares outstanding
for basic and diluted
earnings per share 16.3 16.2
Net loss per Class A
and Common shares:
Basic $(1.08) $(0.81)
Diluted $(1.08) $(0.81)
For the three months ended August 31, 1998 and 1997, the effect of the
Debentures and the employee stock options on the weighted average Class A and
Common Shares for diluted earnings per share was anti-dilutive and, therefore,
is not included in the calculation.
7
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SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED:
(UNAUDITED, DOLLARS IN MILLIONS EXCEPT SHARE DATA)
================================================================================
7. COMPREHENSIVE LOSS
The Company's comprehensive loss for the three month periods ended August 31,
1998 and 1997 are set forth in the following table:
1998 1997
---- ----
Net loss $ (17.5) $ (13.2)
Other comprehensive loss:
Foreign currency translation adjustment
net of benefit for income taxes (0.1) (1.1)
------- -------
Comprehensive loss $ (17.6) $ (14.3)
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SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Of FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
================================================================================
RESULTS OF OPERATIONS
Revenues for the quarter ended August 31, 1998 decreased 10% to $150.2 from
$166.6 in the comparable quarter of the prior fiscal year. This decrease is
related to a $10.2, or 9%, decrease in domestic book publishing, resulting
primarily from lower trade sales combined with the effect of the change in
timing of the placement of California orders for SCHOLASTIC LITERACY PLACE
causing sales to be recognized in April through August 1998 versus June through
August 1997. Revenues also decreased reflecting the effect of the January 1998
sale of the SOHO Group, a non-core magazine asset, which had revenues of
approximately $4.5 in the first quarter of fiscal 1998. Further, while
international revenues increased modestly as measured in local currency,
international sales generally were adversely impacted by foreign currency
translation due to the stronger US dollar.
As a percentage of revenue, cost of goods sold decreased from 57.7% in the prior
year first quarter to 56.7%. The decrease in cost of goods sold as a percentage
of revenue is due to a change in product mix, improved purchasing terms, as well
as modifying specifications to lower product costs. Selling, general, and
administrative expenses as a percentage of revenue increased 6.5% over the prior
year, reflecting additional operating expenses related to the June 1998
acquisition of certain assets of Pages Book Fairs, Inc. and Year 2000 computer
system compliance costs, as well as other planned increases in spending due to
higher book club and book fair activity.
The operating loss for the quarter ended August 31, 1998 increased 47% to $23.8
from a loss of $16.2 in the comparable quarter of the prior fiscal year. The net
loss for the quarter ended August 31, 1998 was $17.5, or $1.08 per share, versus
$13.2, or $0.81 per share, in the comparable quarter of the prior year. The
Company's first quarter is traditionally a loss period due to significantly
lower revenues from the Company's school-based book club, book fair and
classroom magazine businesses, which operate at a substantially lower level
during the summer months when most schools are not in session and, therefore,
incur a higher level of operating expenses as a percentage of revenue.
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,
9
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SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
================================================================================
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 $ 4.0 for the first quarter
of fiscal 1999, which is comparable to the decrease in the first quarter of the
prior fiscal year. During the first quarter of each of these fiscal years, cash
provided by financing activities funded net cash used in operating and investing
activities.
For the first quarter of fiscal 1999 and 1998, net cash provided by financing
activities was $69.7 and $58.8, respectively. Financing activities primarily
consisted of borrowings and paydowns under the Company's Loan Agreement and the
Revolver. Borrowings under these facilities have been a primary source of the
Company's liquidity. During the three months ended August 31, the Company
experiences negative cash flows due to the seasonality of certain of its
businesses, and as a consequence, its borrowings increase during these months.
Cash used in investing activities was $36.4 versus $19.4 for the first quarter
of fiscal 1999 and 1998, respectively. Investing activities consist primarily of
business and trademark acquisition-related payments, prepublication and
production cost expenditures, capital expenditures and royalty advances.
Business and trademark acquisition-related payments were $11.7 for the first
quarter of fiscal 1999 and consist primarily of the June 1998 acquisition of
certain assets of Pages Book Fairs, Inc. Production cost expenditures increased
$3.1 to $6.6 in the first quarter of fiscal 1999 versus $3.5 in the first
quarter of fiscal 1998 resulting primarily from increased production costs
associated with the first season of the ANIMORPHS television series.
Capital expenditures increased $2.9 from $2.5 in the first quarter of fiscal
1998 to $5.4 for the first quarter of fiscal year 1999 largely due to the
equipping of a new office and distribution facility for the Company's Canadian
subsidiary. Royalty advances decreased $2.5 from fiscal 1998 to $4.2 in the
first quarter of fiscal 1999 reflecting the cessation of monthly advance
payments related to the GOOSEBUMPS contract extension. Prepublication cost
expenditures increased $1.2 to $6.7 in the first quarter of fiscal 1999
principally as the result of the planned revision to SCHOLASTIC LITERACY PLACE.
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 assets of Pages Book Fairs,
Inc. for approximately $10.5.
10
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SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
================================================================================
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
letter of credit. The Company uses these facilities to fund seasonal cash flow
needs and other working capital requirements. At August 31, 1998, the Company
had $68.3 in borrowings outstanding under these facilities at a weighted average
interest rate of 6.07%. These two facilities expire May 31, 2000. The Company
anticipates extending or replacing these facilities during fiscal 1999. 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 $40.5 at August 31, 1998.
These lines are used primarily to fund working capital needs. At August 31,
1998, $14.1 in borrowings were outstanding under these lines at a weighted
average interest rate of 6.22%.
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 UPDATE
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 and 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 the actions related thereto and (iii) third party suppliers and
customers with which the Company has material relationships which could
adversely affect 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
11
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SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
================================================================================
equipment to verify the Year 2000 readiness); (4) CONTINGENCY PLANNING
(designing 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 phase with respect to its principal IT
systems and applications and has begun remediation. In addition, a test plan is
in place. The Company anticipates that the Remediation phase related to these
principal systems and applications should be completed by the end of March 1999
and that the Testing, Contingency Planning and Implementation phases should be
substantially completed by the end of May 1999. 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 $9.0 to $11.5 through fiscal 2000, of which an aggregate
of $3.0 had been incurred to date. Total conversion and testing costs through
fiscal 1999 are estimated at $8.5.
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 and computers and
distribution systems. The Company has completed the Assessment of its principal
non-IT software and applications and has begun remediation. The Company
anticipates the Remediation phase related to these principal systems should be
substantially completed by the end of March 1999 and that 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 that 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 $0.05 has been incurred to date. Total modification and replacement
costs through fiscal 1999 are estimated at $0.45.
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier relationships
affected by Year 2000 issues relate primarily to printing, paper and paper
supplies, distribution, fulfillment, licensing and financial services. No single
customer or small group of customers are material to the Company's financial
condition. The Assessment and Remediation phases for determining the Year 2000
readiness of the Company's principal suppliers is an ongoing process.
Substantially
12
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
================================================================================
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.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program will be $10.0 to $12.0, of which
total program costs to date have been $3.0. Total program costs through fiscal
1999 are estimated at $9.0. 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 to be substantially completed by
August 31, 1999. As a result of the Company's Year 2000 program, it is expected
that there will be delays in other new and continuing IT projects. However, no
material adverse affect 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 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
13
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN MILLIONS)
================================================================================
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.
- - - --------------------------------------------------------------------------------
14
<PAGE>
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
================================================================================
ITEM 1. LEGAL PROCEEDINGS
As previously reported, two subsidiaries of the Company are defendants and
counterclaim plaintiffs in litigation with Parachute Press, Inc. ("Parachute"),
the licensor of certain publication and nonpublication rights to the Goosebumps
series. The action was 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 action, PARACHUTE PRESS, INC. V.
SCHOLASTIC INC., SCHOLASTIC PRODUCTIONS, INC. AND SCHOLASTIC ENTERTAINMENT, INC.
(97 Cir. 8510 (JFK), was commenced on November 14, 1997 in the United States
District Court for the Southern District of New York. Parachute amended its
complaint on December 9, 1997 and on April 1, 1998. In its amended complaint,
Parachute alleges that the exercise of such remedies was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract, copyright infringement and acts of unfair competition.
Damages sought by Parachute included 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 litigation began. The Company seeks declaratory
relief and damages for, among other claims, breaches of contract and acts of
unfair competition. Damages sought by the Company included repayment by
Parachute of a portion of the $15.3 advance already paid at the time the
litigation began. The litigation is still in the preliminary stages and
discovery has begun. The Company has filed a motion to dismiss the matter. On
October 13, 1998, Parachute filed a motion for partial summary judgment. The
Company intends to vigorously defend the lawsuit and pursue its counterclaims.
The Company does not believe that this dispute will have a material adverse
effect on its financial condition.
ITEM 5. OTHER INFORMATION
On September 16, 1998, the Board of Directors of the Company approved, subject
to approval of the holders of the Company's Class A Stock, two new employee
benefit programs - the Scholastic Corporation 1998 Employee Stock Purchase Plan
and the Scholastic Corporation Management Stock Purchase Plan (collectively, the
"Plans"). The Plans are designed to encourage broad-based employee stock
ownership by enabling eligible employees of the Company to acquire the Company's
Common Stock, $.01 par value (the "Common Stock"). An aggregate 350,000 shares
of Common Stock have been reserved for issuance under the Plans.
As reported in the Company's Proxy Statement, dated August 26, 1998, for its
1998 annual meeting of stockholders, a description of the proposed Plans will be
provided to the holders of Common Stock for their information, prior to seeking
the approval of the holders of Class A Stock. The Company will seek approval of
the Plans by unanimous written consent of the holders of the Class A Stock prior
to December 1, 1998.
15
<PAGE>
SCHOLASTIC CORPORATION
================================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
10.13 Amendment No. 1 to the Scholastic Corporation
1995 Stock Option Plan, dated September 16, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K.
- No current report on form 8-K was filed during the first quarter
ended August 31, 1998.
- - - --------------------------------------------------------------------------------
16
<PAGE>
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: October 15, 1998 /s/ RICHARD ROBINSON
------------------------------
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: October 15, 1998 /s/ KEVIN J. MCENERY
----------------------------
Executive Vice President and
Chief Financial Officer
17
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED AUGUST 31, 1998
EXHIBIT INDEX
================================================================================
Exhibit Number Description of Document Page Number in Sequentially
- - - -------------- ----------------------- ---------------------------
Numbered Copy
-------------
Exhibit 10.13 Form of Stock Option E-1
Agreement for Scholastic
Corporation 1995
Stock Option Plan.
Exhibit 27 Financial Data Schedule. E-2
EXHIBIT 10.13
AMENDMENT NO. 1 TO THE
SCHOLASTIC CORPORATION 1995 STOCK OPTION PLAN
DATED SEPTEMBER 16, 1998
WHEREAS, the Scholastic Corporation (the "Company") 1995 Stock Option
Plan (the "Plan") was approved by the holders of Class A Stock at the 1995
Annual Meeting of Stockholders and became effective on September 21, 1995; and
WHEREAS, pursuant to Section 6 of the Plan, the Board of Directors
retained the right to amend the Plan;
NOW, THEREFORE, subject to the approval of this Amendment No. 1 by
holders of the Company at the 1998 Annual Meeting of Stockholders, the Plan is
amended as follows:
1. Section 5 of the Plan is amended to delete the first paragraph and to
insert in lieu thereof a new first paragraph, to read as follows:
The aggregate number of shares of Common Stock reserved for
issuance pursuant to the Plan shall be 3,500,000, or the
number and kind of shares of stock or other securities which
shall be substituted for such shares or to which such shares
shall be adjusted as provided in Section 8(i) hereof.
2. This Amendment No. 1 to the Plan shall be effective, if at all, upon its
approval by the holders of Class A Stock at the Company's 1998 Annual
Meeting of Stockholders.
E-1
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
"RESTATED"
<ARTICLE> 5 5
<MULTIPLIER> 1,000 1,000
<PERIOD-TYPE> 3-MONTHS 3-MONTHS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1998
<PERIOD-END> AUG-31-1998 AUG-31-1997
<CASH> 1,070 1,384
<SECURITIES> 0 0
<RECEIVABLES> 120,245 125,995
<ALLOWANCES> 9,573 8,903
<INVENTORY> 259,051 263,228
<CURRENT-ASSETS> 452,709 452,509
<PP&E> 196,150 178,602
<DEPRECIATION> 56,684 46,435
<TOTAL-ASSETS> 850,561 841,551
<CURRENT-LIABILITIES> 220,599 200,137
<BONDS> 234,757 234,712
<COMMON> 176 175
0 0
0 0
<OTHER-SE> 301,605 282,290
<TOTAL-LIABILITY-AND-EQUITY> 850,561 841,551
<SALES> 150,192 166,602
<TOTAL-REVENUES> 150,192 166,602
<COST OF GOODS SOLD> 85,230 96,043
<TOTAL-COSTS> 168,661 177,828
<OTHER-EXPENSES> 5,325 5,006
<LOSS-PROVISION> 2,837 2,883
<INTEREST-EXPENSE> 4,465 5,049
<INCOME-PRETAX> 28,259 21,281
<INCOME-TAX> 10,738 8,087
<INCOME-CONTINUING> 17,521 13,194
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,521 13,194
<EPS-PRIMARY> 1.08 0.81
<EPS-DILUTED> 1.08 0.81
E-2
</TABLE>
