<PAGE>
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 November 30, 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.
Title Number of shares outstanding
of each class as of December 31, 1998
----------------------------- ----------------------------
Common Stock, $.01 par value 15,585,530
Class A Stock, $.01 par value 828,100
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998 INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended November 30, 1998 and 1997 1
Condensed Consolidated Balance Sheet at November 30, 1998
and 1997 and May 31, 1998 2
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended November 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Securities Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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i
<PAGE>
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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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ............................ $ 403.2 $ 354.8 $ 553.4 $ 521.4
Operating costs and expenses:
Cost of goods sold ............... 187.3 176.6 273.0 272.7
Selling, general and
administrative expenses ......... 153.6 125.0 236.5 206.8
Depreciation ..................... 4.2 3.7 8.2 7.1
Goodwill and trademark
amortization .................... 1.5 1.9 2.9 3.4
-------- -------- -------- --------
Total operating costs and
expenses ......................... 346.6 307.2 520.6 490.0
Operating income .................... 56.6 47.6 32.8 31.4
Interest expense, net ............... 5.4 5.6 9.9 10.7
-------- -------- -------- --------
Income before provision
for income taxes ................. 51.2 42.0 22.9 20.7
Provision for income taxes .......... 19.5 16.0 8.7 7.9
-------- -------- -------- --------
Net income .......................... $ 31.7 $ 26.0 $ 14.2 $ 12.8
-------- -------- -------- --------
-------- -------- -------- --------
Net income per Class A and Common share:
Basic ........................... $ 1.94 $ 1.61 $ 0.87 $ 0.79
Diluted ......................... $ 1.81 $ 1.51 $ 0.86 $ 0.79
</TABLE>
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SEE ACCOMPANYING NOTES
1
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SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 30, 1998 May 31, 1998 November 30, 1997
------------------------- ------------------ -----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................... $ 3.6 $ 5.1 $ 4.3
Accounts receivable less allowance for
doubtful accounts ......................... 191.4 116.7 168.3
Inventories ................................. 236.1 199.3 250.9
Deferred taxes .............................. 41.9 41.8 29.9
Prepaid and other deferred expenses ......... 26.5 19.8 28.2
--------- --------- ---------
Total current assets ...................... 499.5 382.7 481.6
Property, plant and equipment, net .......... 141.3 136.8 134.3
Prepublication costs ........................ 85.1 86.3 97.5
Other assets and deferred charges ........... 171.6 159.5 160.1
--------- --------- ---------
Total assets .............................. $ 897.5 $ 765.3 $ 873.5
--------- --------- ---------
--------- --------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ............................. $ 19.4 $ 9.8 $ 8.5
Accounts payable ............................ 103.1 76.9 87.0
Accrued royalties ........................... 24.2 19.4 23.0
Deferred revenue ............................ 36.9 10.5 34.9
Other accrued expenses ...................... 68.0 65.1 69.7
--------- --------- ---------
Total current liabilities ................. 251.6 181.7 223.1
NONCURRENT LIABILITIES:
Long-term debt .............................. 286.8 243.5 322.2
Other noncurrent liabilities ................ 24.1 22.0 18.4
--------- --------- ---------
Total noncurrent liabilities .............. 310.9 265.5 340.6
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 .................. 207.5 205.1 204.2
Accumulated earnings ........................ 168.8 154.6 143.8
Accumulated other comprehensive income:
Foreign currency translation adjustment .... (4.7) (5.0) (1.6)
Less shares held in treasury ................ (36.8) (36.8) (36.8)
--------- --------- ---------
Total stockholders' equity ................ 335.0 318.1 309.8
--------- --------- ---------
$ 897.5 $ 765.3 $ 873.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
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SEE ACCOMPANYING NOTES
2
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SCHOLASTIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30,
1998 1997
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ $ 3.2 $ 5.1
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs .......................................... (16.3) (11.6)
Business and trademark acquisition-related payments ........... (11.7) (0.4)
Additions to property, plant and equipment .................... (11.4) (8.5)
Royalty advances .............................................. (11.3) (13.4)
Production costs .............................................. (10.9) (7.7)
Other ......................................................... (1.5) (1.7)
-------- -----------
Net cash used in investing activities ......................... (63.1) (43.3)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver .................. 158.2 165.9
Repayments of loan agreement and revolver ..................... (112.1) (131.8)
Borrowings under lines of credit .............................. 34.9 24.2
Repayments of lines of credit ................................. (25.0) (20.8)
Other ......................................................... 2.4 0.1
-------- -----------
Net cash provided by financing activities ..................... 58.4 37.6
-------- -----------
Net decrease in cash and cash equivalents ........................ (1.5) (0.6)
Cash and cash equivalents at beginning of period ................. 5.1 4.9
-------- -----------
Cash and cash equivalents at end of period ....................... $ 3.6 $ 4.3
-------- -----------
-------- -----------
SUPPLEMENTAL INFORMATION:
Income taxes paid ............................................. $ 1.4 $ 1.4
Interest paid ................................................. $ 9.3 $ 10.0
</TABLE>
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SEE ACCOMPANYING NOTES
3
<PAGE>
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-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 and six months ended November 30, 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 November 30
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 and recoverability
of prepublication costs.
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
4
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SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
3. RECENT ACCOUNTING PRINCIPLES (CONTINUED)
been restated to conform with SFAS 128. The calculations of basic and diluted
earnings per share are presented in Note 6.
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 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 ending 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 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
5
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SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
4. DEBT (CONTINUED)
distributions. At November 30, 1998, an aggregate of $20.0 of borrowings and
$1.0 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 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 November 30, 1998, the
aggregate amount of borrowings under the Revolver was $28.4.
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 November 30, 1998, the Company's
international subsidiaries had lines of credit available of $33.1. There was
$19.4 outstanding under these credit lines at November 30, 1998.
5. CONTINGENCIES
In connection with the previously reported case, IN RE SCHOLASTIC SECURITIES
LITIGATION, 97 Civ. 2447 (JFK) (S.D.N.Y.) filed against the Company and certain
officers, the United States District Court for the Southern District of New York
issued an order, dated December 14, 1998, granting
6
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SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
5. CONTINGENCIES (CONTINUED)
the Company's motion to dismiss the Consolidated Amended Complaint (the
"Complaint"). The Complaint was filed on August 13, 1997 and alleged, among
other things, violations of Section 10(b) and 20(a) of the Securities and
Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from purportedly false
and misleading statements to the investing public concerning the financial
condition of the Company. 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 and re-file the Complaint. The Company continues to
believe that the litigation is without merit. Should the Plaintiffs amend the
Complaint or appeal the decision, the Company plans to continue to vigorously
defend against it.
As previously reported, 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-Registered Trademark- 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 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.
7
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SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
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6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income ........................................... $ 31.7 $ 26.0 $ 14.2 $ 12.8
Effect of debentures (1) ............................. 0.9 0.9 -- --
----- ----- ----- -----
Net income for diluted earnings per share ............ $ 32.6 $ 26.9 $ 14.2 $ 12.8
----- ----- ----- -----
----- ----- ----- -----
Weighted average Class A and Common shares
outstanding for basic earnings per share ........... 16.3 16.2 16.3 16.2
Effect of debentures (1) ............................. 1.4 1.4 -- --
Effect of employee stock options ..................... 0.3 0.2 0.3 0.1
----- ----- ----- -----
Weighted average Class A and Common shares
outstanding for diluted earnings per share ......... 18.0 17.8 16.6 16.3
----- ----- ----- -----
----- ----- ----- -----
Net income per Class A and Common share:
Basic .............................................. $ 1.94 $ 1.61 $ 0.87 $ 0.79
Diluted ............................................ $ 1.81 $ 1.51 $ 0.86 $ 0.79
</TABLE>
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(1) For the six months ended November 30, 1998 and 1997, 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.
8
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SCHOLASTIC CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
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7. COMPREHENSIVE INCOME
The Company's comprehensive income is set forth in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 31.7 $ 26.0 $ 14.2 $ 12.8
Other comprehensive income/(loss):
Foreign currency translation adjustment
net of provision or benefit for income taxes
0.3 0.6 0.1 (0.5)
------- ------- ------- --------
Comprehensive income $ 32.0 $ 26.6 $ 14.3 $ 12.3
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
9
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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 November 30, 1998 increased 14% to $403.2 from
$354.8 in the comparable quarter of the prior fiscal year primarily due to a
$55.2, or 23%, increase in domestic book publishing revenues. Book club and
book fair revenues increased by approximately 20% over the comparable quarter
of the prior fiscal year. Book club revenues benefited from increased orders
and higher revenue per order. Book fairs held a greater number of fairs due
in part to the acquisition of the assets of Pages Book Fairs in the first
quarter of this fiscal year (the "Pages Acquisition"). Fairs also benefited
from higher revenue from the continued growth of fairs that feature a
broader product selection. Trade revenues increased by more than 30% due to
the continued success of Scholastic branded properties, such as ANIMORPHS-TM-,
DEAR AMERICA-Registered Trademark-, I SPY, CLIFFORD THE BIG RED DOG-Registered
Trademark- and SCHOLASTIC REFERENCE-TM- books, combined with the successful
launch of licensed TELETUBBIES-TM- titles, based on the media property.
Media, TV/movie productions and licensing revenues increased 15% to $24.4 in
the quarter ended November 30, 1998 from $21.2 in the comparable quarter of
the prior fiscal year. This increase resulted largely from a more than 25%
increase in software revenues related to the success of school-based Software
Clubs and retail sales of the Scholastic branded CD-ROM, I SPY. 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, lower revenue in the United
Kingdom and delays in the effective implementation of a new Canadian
distribution system. Total revenues for the six months ended November 30,
1998 increased 6% to $553.4 from $521.4 in the comparable period of the prior
fiscal year.
As a percentage of revenue, cost of goods sold decreased by approximately 3.0%
for both the three months and six months ended November 30, 1998, 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 and improved purchasing
terms, as well as modifying specifications in an effort to lower product costs.
Selling, general, and administrative expenses as a percentage of revenue
increased by approximately 3.0% for both the three months and six months ended
November 30, 1998, over the comparable periods of the prior year, 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. In addition, international operating costs
reflect the additional costs incurred by the Canadian subsidiary due to delays
in the effective implementation of a new distribution system.
Operating income for the quarter ended November 30, 1998 increased by 19% to
$56.6 from $47.6 in the comparable quarter of the prior fiscal year. Operating
income for the six months ended November 30, 1998 increased by $1.4, or 5%,
versus the six months ended November 30, 1997.
10
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SCHOLASTIC CORPORATION
ITEM 2. MD&A (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Net income for the quarter ended November 30, 1998 was $31.7, or $1.81 per
diluted share, versus $26.0, or $1.51 per diluted share, in the comparable
quarter of the prior year. Net income for the six months ended November 30, 1998
was $14.2, or $0.86 per diluted share, versus $12.8, or $0.79 per diluted share
for the six months ended November 30, 1997.
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 $1.5 during the six month
period ended November 30, 1998, compared to a decrease of $0.6 during the
comparable period in the prior fiscal year.
For the six months ended November 30, 1998 and 1997, net cash provided by
financing activities was $58.4 and $37.6, respectively. 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 $63.1 and $43.3 for the first six
months of fiscal 1999 and 1998, respectively. Investing activities consist
primarily of prepublication costs, business and trademark acquisition-related
payments, capital expenditures, royalty advances and production cost
expenditures. Business and trademark acquisition-related payments were $11.7
for the six months ended November 30, 1998 and consist primarily of the Pages
Acquisition. Prepublication cost expenditures increased $4.7 to $16.3 during
the first six months of fiscal 1999 over the comparable period in the prior
fiscal year largely due to the planned revision to SCHOLASTIC LITERACY
PLACE-Registered Trademark-. Production cost expenditures increased $3.2 to
$10.9 for the first six months of fiscal 1999 versus $7.7 in the comparable
period of the prior fiscal year, resulting primarily from increased
production costs associated with the first season of the ANIMORPHS-TM-.
11
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
and DEAR AMERICA-TM- television series partially offset by decreased costs
associated with the GOOSEBUMPS-Registered Trademark- series.
Capital expenditures increased $2.9 to $11.4 for the six months ended November
30, 1998 versus $8.5 in the comparable 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 $2.1 from fiscal 1998 to $11.3
in the first six months of fiscal 1999 reflecting the cessation of monthly
advance payments related to the GOOSEBUMPS contract extension.
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.
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 November 30, 1998, the Company
had $48.4 in borrowings outstanding under these facilities at a weighted average
interest rate of 6.31%. These two facilities expire May 31, 2000. The Company
anticipates extending or replacing these facilities during calendar 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 $33.1 at November 30, 1998.
These lines are used primarily to fund working capital needs. At November 30,
1998, $19.4 in borrowings were outstanding under these lines at a weighted
average interest rate of 6.98%.
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.
12
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 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 actions related thereto and (iii) third party suppliers and
customers with which the Company has material relationships and 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 equipment to verify the 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 substantially completed the Assessment phase with respect to its
principal IT systems and applications. In addition, the Company anticipates that
the Remediation phase related to these principal systems and applications should
be substantially completed by the end of February 1999 and 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
13
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 $4.3
has 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, computers and distribution
systems. The Company has substantially 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 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.
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. 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 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, which includes total costs noted
above for IT systems and applications, will be $10.0 to $12.0, of which total
program costs to date have been $4.3. 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 appropriated fiscal years. Projected Year 2000 costs for fiscal
14
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 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 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.
- --------------------------------------------------------------------------------
15
<PAGE>
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 have now been consolidated. The Consolidated Amended
Class Action Complaint (the "Complaint") was served and filed on August 13,
1997. The Complaint is 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 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 purported materially false and misleading statements to the investing
public concerning the financial condition of the Company. Specifically, the
Complaint alleges misstatements and omissions by the Company pertaining to
adverse sales and returns of its popular GOOSEBUMPS-Registered Trademark-
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 failed to state a claim upon which relief can be granted and granted
Plaintiffs leave to amend and re-file the Complaint. The Company continues to
believe that the litigation is without merit. Should the Plaintiffs amend the
Complaint or appeal the decision, the Company plans to vigorously defend
against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on September 16, 1998
(the "Meeting"). The following sets forth the results of the proposals presented
at the Meeting voted upon by the stockholders of the Company entitled to vote
thereon:
Holders of the 828,100 shares of Class A Stock (comprising all outstanding
shares of Class A Stock) unanimously voted in favor of:
- - Setting the number of directors constituting the Board of Directors
at fifteen until the next annual meeting of the stockholders.
- - Electing Richard Robinson, Rebeca M. Barrera, Helen V. Benham,
Frederic J. Bischoff, John Brademas, John C. Burton, Charles T.
Harris III, Andrew S. Hedden, Mae C. Jemison, Richard Krinsley,
Augustus K. Oliver and Richard M. Spaulding as directors to serve
until the next annual meeting of stockholders.
- - Electing Ernst & Young as independent auditors for the fiscal year
ending May 31, 1999.
- - Amending the Company's 1995 Stock Option Plan to increase, by an
additional 1,500,000 shares, the number of shares of the Company's
Common Stock, $.01 par value, to be issued upon exercise of stock
options granted thereunder.
16
<PAGE>
SCHOLASTIC CORPORATION
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
With respect to all matters voted on by the holders of the Class A Stock at the
meeting, there were no abstentions or broker non-votes.
Holders of the Common Stock elected the following three nominees as directors to
serve until the next annual meeting of stockholders. Votes cast by holders of
the Common Stock were as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Ramon C. Cortines ......... 11,769,678 21,251
Alonzo A. Crim ............ 11,769,602 21,327
John G. McDonald .......... 11,769,340 21,589
</TABLE>
There were no abstentions or broker non-votes with respect to this matter.
On November 30, 1998, the holders of the 828,100 shares of Class A Stock
(comprising all outstanding shares of Class A Stock) unanimously approved by
written consent, the Scholastic Corporation 1998 Employee Stock Purchase Plan
and the Scholastic Corporation Management Stock Purchase Plan. There were no
abstentions or broker non-votes in connection with this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
27.1 Financial Data Schedule - November 30, 1998
27.2 Financial Data Schedule - Restated November 30, 1997
</TABLE>
(b) Reports on Form 8-K.
- A Current report on Form 8-K was filed on November 18, 1998,
describing two stock-based employee plans to be submitted for
approval by the holders of the Company's Class A Stock.
- --------------------------------------------------------------------------------
17
<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: January 14, 1999 /S/ RICHARD ROBINSON
-------------------------------------
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: January 14, 1999 /S/ KEVIN J. MCENERY
----------------------------------
Executive Vice President and
Chief Financial Officer
18
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
Exhibit 27.1 Financial Data Schedule
November 30, 1998
Exhibit 27.2 Financial Data Schedule
Restated November 30, 1997
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000866729
<NAME> SCHOLASTIC CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,591
<SECURITIES> 0
<RECEIVABLES> 201,233
<ALLOWANCES> 9,863
<INVENTORY> 236,089
<CURRENT-ASSETS> 499,506
<PP&E> 199,371
<DEPRECIATION> 58,105
<TOTAL-ASSETS> 897,533
<CURRENT-LIABILITIES> 251,630
<BONDS> 234,772
0
0
<COMMON> 176
<OTHER-SE> 334,822
<TOTAL-LIABILITY-AND-EQUITY> 897,533
<SALES> 553,354
<TOTAL-REVENUES> 553,354
<CGS> 272,986
<TOTAL-COSTS> 509,469
<OTHER-EXPENSES> 11,032
<LOSS-PROVISION> 7,045
<INTEREST-EXPENSE> 9,890
<INCOME-PRETAX> 22,963
<INCOME-TAX> 8,725
<INCOME-CONTINUING> 14,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,238
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000866729
<NAME> SCHOLASTIC CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,346
<SECURITIES> 0
<RECEIVABLES> 176,685
<ALLOWANCES> 8,375
<INVENTORY> 250,835
<CURRENT-ASSETS> 481,600
<PP&E> 183,230
<DEPRECIATION> 48,895
<TOTAL-ASSETS> 873,464
<CURRENT-LIABILITIES> 223,088
<BONDS> 234,727
0
0
<COMMON> 175
<OTHER-SE> 309,611
<TOTAL-LIABILITY-AND-EQUITY> 873,464
<SALES> 521,436
<TOTAL-REVENUES> 521,436
<CGS> 272,687
<TOTAL-COSTS> 479,475
<OTHER-EXPENSES> 10,578
<LOSS-PROVISION> 6,354
<INTEREST-EXPENSE> 10,697
<INCOME-PRETAX> 20,686
<INCOME-TAX> 7,860
<INCOME-CONTINUING> 12,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,826
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
