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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999 Commission File No. 0-19860
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. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title Number of shares outstanding
of each class as of September 30, 1999
------------- ------------------------
<S> <C>
Common Stock, $.01 par value 15,711,814
Class A Stock, $.01 par value 828,100
</TABLE>
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SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999
INDEX
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations for the
Three Months Ended August 31, 1999 and 1998 1
Condensed Consolidated Balance Sheet at August 31, 1999
and 1998 and May 31, 1999 2
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended August 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
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<S> <C> <C>
Revenues $ 180.0 $ 150.2
Operating costs and expenses:
Cost of goods sold 108.3 85.2
Selling, general and administrative expenses 99.8 83.4
Depreciation 4.6 4.0
Goodwill and trademark amortization 0.9 1.4
- --------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 213.6 174.0
Operating loss (33.6) (23.8)
Interest expense, net 4.4 4.4
- --------------------------------------------------------------------------------
Loss before benefit for income taxes (38.0) (28.2)
Benefit for income taxes 14.4 10.7
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NET LOSS $ (23.6) $ (17.5)
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Net loss per Class A and Common Share:
Basic $ (1.43) $ (1.08)
Diluted $ (1.43) $ (1.08)
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</TABLE>
SEE ACCOMPANYING NOTES
1
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SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
August 31, 1999 May 31, 1999 August 31, 1998
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(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2.9 $ 5.9 $ 1.1
Accounts receivable less allowance for
doubtful accounts 142.2 136.4 110.7
Inventories 315.1 227.4 259.0
Deferred taxes 55.5 41.8 50.3
Prepaid and other deferred expenses 35.6 22.7 31.6
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TOTAL CURRENT ASSETS 551.3 434.2 452.7
Property, plant and equipment, net 153.7 152.2 142.4
Prepublication costs 95.4 95.3 84.4
Other assets and deferred charges 163.1 160.6 168.9
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TOTAL ASSETS $ 963.5 $ 842.3 $ 848.4
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LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 22.0 $ 18.0 $ 14.1
Accounts payable 151.4 97.0 110.0
Accrued royalties 32.8 23.7 25.2
Deferred revenue 14.8 6.7 19.0
Other accrued expenses 53.2 66.4 52.3
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TOTAL CURRENT LIABILITIES 274.2 211.8 220.6
NONCURRENT LIABILITIES:
Long-term debt 329.0 248.0 306.8
Other noncurrent liabilities 22.0 21.1 19.2
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TOTAL NONCURRENT LIABILITIES 351.0 269.1 326.0
STOCKHOLDERS' EQUITY:
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.2 0.2 0.2
Additional paid-in capital 213.1 212.3 206.5
Retained earnings 167.9 191.4 137.1
Accumulated other comprehensive income:
Foreign currency translation adjustment (6.1) (5.7) (5.2)
Less shares held in treasury (36.8) (36.8) (36.8)
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TOTAL STOCKHOLDERS' EQUITY $ 338.3 $ 361.4 $ 301.8
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963.5 $ 842.3 $ 848.4
</TABLE>
2
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SEE ACCOMPANYING NOTES
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED
AUGUST 31,
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1999 1998
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<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES ...................................... $ (62.3) $(37.3)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Prepublication costs .................................................... (10.3) (6.7)
Additions to property, plant and equipment .............................. (6.2) (5.4)
Royalty advances ........................................................ (5.6) (4.2)
Production costs ........................................................ (3.7) (6.6)
Other ................................................................... (0.2) (1.8)
Business and trademark acquisition-related payments ..................... -- (11.7)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................... (26.0) (36.4)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings under Loan Agreement and Revolver ............................ 120.8 120.5
Repayments of Loan Agreement and Revolver ............................... (39.8) (57.4)
Borrowings under lines of credit ........................................ 10.7 22.4
Repayments of lines of credit ........................................... (6.7) (17.2)
Other ................................................................... 0.3 1.4
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Net cash provided by financing activities ............................... 85.3 69.7
Effect of exchange rate changes on cash .................................... 0.0 0.0
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Net decrease in cash and cash equivalents .................................. (3.0) (4.0)
Cash and cash equivalents at beginning of period ........................... 5.9 5.1
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 2.9 $ 1.1
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</TABLE>
SEE ACCOMPANYING NOTES
3
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have not been
audited, but reflect those adjustments consisting of normal recurring items
which management considers necessary for a fair presentation of financial
position, results of operations and cash flow. These financial statements should
be read in conjunction with the consolidated financial statements and related
notes in the 1998/1999 Annual Report to Stockholders.
The Company's business is closely correlated to the school year. Consequently,
the results of operations for the three months ended August 31, 1999 and 1998
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the August 31, 1998 consolidated balance
sheet is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying condensed
consolidated financial statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication and film production costs and recoverability of other long-lived
assets.
2. RECENT ACCOUNTING PRINCIPLES
Effective May 31, 1999, the Company adopted 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 shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The required
disclosures are presented in Note 3 included herein.
The Financial Accounting Standards Board issued, in June 1998, Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments (fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item recognized in earnings or in
accumulated comprehensive income in the same period. Changes in the fair value
of derivatives that do not meet the criteria of one of these three categories of
4
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hedges are included in income. The Company is required to adopt the provisions
of SFAS 133 in the first quarter of fiscal 2002.
5
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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3. SEGMENT INFORMATION
The Company is a global children's publishing and media company with operations
in the United States, the United Kingdom, Canada, Australia, New Zealand,
Mexico, Hong Kong and India and distributes its products and services through a
variety of channels, including book clubs, book fairs and trade.
The Company's operations are categorized in the four segments: CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION, EDUCATIONAL PUBLISHING, MEDIA, LICENSING AND
ADVERTISING and INTERNATIONAL. Such segment classification reflects the nature
of products and services consistent with the method by which the chief operating
decision maker assesses operating performance and allocates resources.
The following table sets forth information for the fiscal quarters ended August
31, 1999 and 1998 about the Company's segments:
<TABLE>
<CAPTION>
CHILDREN'S
BOOK MEDIA,
PUBLISHING LICENSING
AND EDUCATIONAL AND TOTAL
DISTRIBUTION PUBLISHING ADVERTISING DOMESTIC INTERNATIONAL OVERHEAD(1) CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
1999
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<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 79.2 $ 55.8 $8.9 $143.9 $ 36.1 $ 0.0 $180.0
Depreciation 0.9 0.2 0.2 1.3 0.9 2.4 4.6
Amortization (2) 3.4 7.0 1.6 12.0 0.3 0.0 12.3
Royalty advance expense 4.2 0.1 0.2 4.5 0.5 0.0 5.0
Segment profit/(loss) (3) (14.4) 1.1 (7.1) (20.4) (4.7) (8.5) (33.6)
Segment assets 399.8 184.7 58.4 642.9 141.2 179.4 963.5
Long-lived assets (4) 97.0 95.7 27.3 220.0 56.8 109.0 385.8
Expenditures for
long-lived assets (5) 8.1 7.6 5.3 21.0 1.1 3.7 25.8
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1998
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Revenues $ 47.8 $ 63.5 $ 6.0 $117.3 $32.9 $ 0.0 $150.2
Depreciation 0.7 0.2 0.2 1.1 0.8 2.1 4.0
Amortization (2) 3.1 6.1 1.5 10.7 0.6 0.0 11.3
Royalty advance expense 3.1 0.1 0.0 3.2 0.0 0.0 3.2
Segment profit/
(loss)(3) (18.4) 13.5 (6.2) (11.1) (4.8) (7.9) (23.8)
Segment assets 322.4 169.1 48.5 540.0 141.0 167.4 848.4
Long-lived assets (4) . 93.9 85.8 26.2 205.9 57.0 100.1 363.0
Expenditures for long-
lived assets (5) 6.5 4.1 7.6 18.2 2.9 1.8 22.9
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</TABLE>
(1) OVERHEAD INCLUDES UNALLOCATED CORPORATE-RELATED ITEMS AND AS IT RELATES TO
THE SEGMENT PROFIT/(LOSS), EXPENSES NOT ALLOCATED TO REPORTABLE SEGMENTS
INCLUDING COSTS RELATED TO THE MANAGEMENT OF CORPORATE ASSETS, NET INTEREST
EXPENSE AND PROVISION FOR INCOME TAXES. UNALLOCATED ASSETS ARE PRINCIPALLY
COMPRISED OF DEFERRED INCOME TAXES AND PROPERTY, PLANT AND EQUIPMENT AS IT
RELATES TO THE COMPANY'S HEADQUARTERS IN THE METROPOLITAN NEW YORK AREA AND
ITS NATIONAL SERVICE OPERATION LOCATED IN THE JEFFERSON CITY, MISSOURI AREA.
(2) INCLUDES AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS, AND PREPUBLICATION AND
PRODUCTION COSTS.
(3) SEGMENT PROFIT/(LOSS) REPRESENTS EARNINGS BEFORE INTEREST AND TAXES.
(4) INCLUDES PROPERTY, PLANT AND EQUIPMENT, PREPUBLICATION COSTS, GOODWILL AND
TRADEMARKS, ROYALTY ADVANCES AND PRODUCTION COSTS.
6
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(5) INCLUDES PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, INVESTMENTS IN
PREPUBLICATION AND PRODUCTION COSTS, AND ROYALTY ADVANCES.
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
4. DEBT
LOAN AGREEMENT. The Company and Scholastic Inc. (a wholly-owned subsidiary) are
joint and several borrowers under a loan agreement with certain banks which was
amended and restated effective August 11, 1999 (the "Loan Agreement"). The Loan
Agreement expires August 11, 2004, provides for aggregate borrowings of up to
$170.0 (with a right in certain circumstances to increase it to $200.0)
including the issuance of up to $10.0 in letters of credit. Interest under this
facility is either at the prime rate or 0.325% to 0.90% over LIBOR (as defined).
There is a commitment fee ranging from 0.10% to 0.30% on the facility and a
utilization fee ranging from 0.05% to 0.15% if borrowings exceed 33.0% of the
total facility. The amounts charged vary based upon the Company's credit
ratings. At the Company's current credit ratings, the spread over LIBOR,
commitment fee and utilization fee are 0.475%, 0.150% and 0.075%, respectively.
The Loan Agreement contains certain financial covenants related to debt and
interest coverage ratios (as defined) and limits dividends and other
distributions. An aggregate of $0.0 and $58.0 of borrowings and $1.0 of letters
of credit were outstanding under the Loan Agreement at May 31, 1999 and August
31, 1999.
REVOLVER. The Company and Scholastic Inc. are joint and several borrowers under
a Revolving Loan Agreement (the "Revolver") with Sun Bank, N. A., which provides
for revolving credit loans of up to $35.0 and expires on May 31, 2000. The
Revolver has certain financial covenants related to debt and interest coverage
ratios (as defined) and limits dividends and other distributions. The aggregate
amount of borrowings under the Revolver at May 31, 1999 and August 31, 1999 were
$10.0 and $32.5, respectively.
The Company has agreed in principle to amend and restate the Revolver during the
second quarter of fiscal year 2000 to, among other things, extend the maturity
to 2004 and expand the facility to $40.0, subject to required approvals and
documentation.
7% NOTES DUE 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will 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.
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. 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 LINES OF CREDIT -- SHORT TERM. The Company's international subsidiaries
had lines of credit available of $37.9 at May 31, 1999 and $36.5 at August 31,
1999. The amounts outstanding under these credit
7
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lines were $18.0 and $22.0 at May 31, 1999 and August 31, 1999, respectively.
The weighted-average interest rate on the outstanding amounts was 7.2% and 6.3%
at May 31, 1999 and August 31, 1999, respectively.
8
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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5. CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. On December 14, 1998, an
order was entered granting the Company's motion to dismiss plaintiffs'
complaint. In dismissing the complaint, the court held that plaintiffs failed to
state a claim upon which relief can be granted and granted plaintiffs leave to
amend the complaint. Pursuant to that order, plaintiffs filed a Second Amended
Consolidated Complaint, on or about February 16, 1999, alleging substantially
similar claims against the Company and one of its officers. The Company
continues to believe that the litigation is without merit and will continue to
vigorously defend against it.
On February 1, 1999, two subsidiaries of the Company commenced an action in the
Supreme Court of the State of New York in New York County against Parachute
Press, Inc. ("Parachute"), the licensor of certain publication and
nonpublication rights to the GOOSEBUMPS(R) series, certain affiliated Parachute
companies and R.L. Stine, individually, alleging material breach of contract and
fraud in connection with the agreements under which such GOOSEBUMPS rights are
licensed to the Company. The issues in the case are also, in part, the subject
of two litigations commenced by Parachute following repeated notices from the
Company to Parachute of material breaches by Parachute of the agreements under
which such rights are licensed and the exercise by the Company of its
contractual remedies under the agreements. The first Parachute action, in which
two subsidiaries of the Company are defendants and counterclaim plaintiffs, was
commenced in the federal court for the Southern District of New York on November
14, 1997 and was dismissed for lack of subject matter jurisdiction on January
29, 1999. Parachute filed an appeal of the dismissal. The second Parachute
action was filed contemporaneously with the filing of the Company's complaint on
February 1, 1999 in the Supreme Court of the State of New York in New York
County. In its two complaints, and in its counterclaims, Parachute alleges that
the exercise of contractual remedies by the Company was improper and seeks
declaratory relief and unspecified damages for, among other claims, alleged
breaches of contract and acts of unfair competition. Damages sought by Parachute
include the payment of a total of approximately $36.1 of advances over the term
of the contract (of which approximately $15.3 had been paid at the time the
first Parachute litigation began) and payments of royalties set-off by
Scholastic against amounts claimed by the Company. The Company is seeking
declaratory relief and damages for, among other claims, breaches of contract,
fraud and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid.
Discovery, which has been consolidated for the litigations, has commenced. The
Company intends to vigorously pursue its claims against Parachute and the other
named defendants and to vigorously defend its position against the new lawsuit
and the appeal. The Company does not believe that this dispute will have a
material adverse effect on its financial condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
9
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
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6. COMPREHENSIVE LOSS
The following table sets forth comprehensive loss for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
NET LOSS $ (23.6) $ (17.5)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment
net of provision or benefit for income taxes (0.2) (0.1)
COMPREHENSIVE LOSS $ (23.8) $ (17.6)
</TABLE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net loss $ (23.6) $ (17.5)
Weighted-average Class A and Common Shares
outstanding for basic earnings per share 16.5 16.3
Net loss per Class A and Common Share:
Basic $ (1.43) $ (1.08)
Diluted $ (1.43) $ (1.08)
- --------------------------------------------------------------------------------
</TABLE>
For the three months ended August 31, 1999 and 1998, the effect of the
Convertible Subordinated Debentures, employee stock options, and for the three
months ended August 31, 1999, warrants, on the weighted-average Class A and
Common Shares outstanding for diluted earnings per share was anti-dilutive and
therefore is not included in the calculation.
10
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SCHOLASTIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - CONSOLIDATED
Revenues for the quarter ended August 31, 1999 increased approximately 20% to
$180.0 million from $150.2 million in the comparable quarter of the prior fiscal
year. This increase in revenue was driven primarily by the Company's CHILDREN'S
BOOK PUBLISHING AND DISTRIBUTION segment, which was up 66% over the prior year
quarter and which accounted for 44% of the Company's revenues for the quarter
ended August 31, 1999, as compared to 32% of the corresponding period of the
prior fiscal year.
As a percentage of revenue, variable cost of goods sold increased by
approximately 3.5% for the first quarter ended August 31, 1999 when compared to
the same period of the prior fiscal year. This increase reflects the impact of
product mix in the Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment
due to higher Trade sales, including the impact of higher sales levels of
hardcover product. Selling, general and administrative expenses as a
percentage of revenue were flat for the three months ended August 31, 1999
when compared to the corresponding prior year period.
The operating loss for the quarter ended August 31, 1999 increased 41% to $33.6
million from a loss of $23.8 million in the same quarter of the prior fiscal
year. This increase reflects the impact of improved sales in CHILDREN'S BOOK
PUBLISHING AND DISTRIBUTION due to strong Trade sales, led by the HARRY
POTTER(TM) books and a variety of successful series published by the Company.
These sales were more than offset by increased losses in EDUCATIONAL PUBLISHING
due to the anticipated absence of California SCHOLASTIC LITERACY PLACE(R) sales
as well as increased Internet spending.
The net loss for the quarter ended August 31, 1999 was $23.6 million, or $1.43
per share, versus a net loss of $17.5 million, or $1.08 per share, in the
comparable quarter of the prior year.
RESULTS OF OPERATIONS - SEGMENTS
CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION
The Company's CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment includes the
publication and distribution in the United States of children's books through
its school-based book club (including home continuity programs), book fair and
trade channels.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 79.2 $ 47.8
Operating loss (14.4) (18.4)
</TABLE>
Revenues in the CHILDREN'S BOOK PUBLISHING AND DISTRIBUTION segment were up 66%
to $79.2 million from $47.8 million in the comparable quarter of the prior
fiscal year. As a result, operating results improved 22% to a seasonal loss of
$14.4 million when compared to the same period in the prior fiscal year. The
increased revenue reflects the impact of strong sales in the Trade business of
properties including three HARRY POTTER books and the ANIMORPHS(R), DEAR
AMERICa(TM), I SPY(TM), CLIFFORD THE BIG ReD DOG(R), PokEMON(TM) And
EverWoRLD(TM) series.
11
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SCHOLASTIC CORPORATION
ITEM 2. MD&A
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- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
EDUCATIONAL PUBLISHING
The Company's EDUCATIONAL PUBLISHING segment includes the publication and
distribution of K-12 textbooks, supplemental materials (including professional
books), classroom magazines and instructional technology for core and
supplemental use in schools and libraries in the United States.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 55.8 $ 63.5
Operating profit 1.1 13.5
- --------------------------------------------------------------------------------
</TABLE>
Revenues for the quarter declined 12% to $55.8 million with an operating profit
of $1.1 million compared to revenues of $63.5 million and operating profit of
$13.5 million in the comparable quarter of the prior fiscal year. This decline
in revenues is directly related to the adoption cycle for reading textbooks. In
the prior fiscal year, the Company recognized the benefit of high order levels
for SCHOLASTIC LITERACY PLACE(R) related to the California reading adoption. The
next major state adoption is in Texas, with shipments of product expected in the
summer of 2000. The decline in SCHOLASTIC LITERACY PLACE sales was partially
offset by the sales of the Company's new product, READ 180!(TM).
MEDIA, LICENSING AND ADVERTISING
The Company's MEDIA, LICENSING AND ADVERTISING segment includes the production
and the distribution by the Company's United States-based operations of
entertainment products (including television programming, videos and motion
pictures), Internet services and CD-ROM-based products and Scholastic-branded
licensed properties, as well as advertising and promotional activities.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $8.9 $6.0
Operating loss (7.1) (6.2)
- --------------------------------------------------------------------------------
</TABLE>
Revenues increased 48% to $8.9 million in the first quarter of fiscal 2000 as
compared to the same period in the prior fiscal year. The operating loss for the
quarter ended August 31, 1999 increased by 15% from a loss of $6.2 million in
the same period of the prior fiscal year. These results reflect the benefit of
increased magazine advertising sales which were more than offset by higher
Internet-related costs.
INTERNATIONAL
The INTERNATIONAL segment consists of the distribution of products and services
outside the United States by the Company's operations located in the United
Kingdom, Canada, Australia, New Zealand, Mexico, Hong Kong and India.
<TABLE>
<CAPTION>
(IN MILLIONS) THREE MONTHS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 36.1 $ 32.9
Operating loss (4.7) (4.8)
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENTS (CONTINUED)
INTERNATIONAL revenues for the quarter ended August 31, 1999 increased 10% to
$36.1 million compared to $32.9 million for the same period in the prior fiscal
year. Operating losses for the quarter ended August 31, 1999 were comparable to
the same period in the prior fiscal year at approximately $4.7 million.
SEASONALITY
The Company's book clubs, book fairs and most of its magazines operate on a
school-year basis; therefore, the Company's business is highly seasonal. As a
consequence, the Company's revenues in the first and third quarters of the
fiscal year are lower than its revenues in the other two fiscal quarters, and
the Company generally experiences a substantial loss from operations in the
first quarter. Typically, book club and book fair revenues are proportionately
larger in the second quarter of the fiscal year, while revenues from the sale of
instructional materials are larger in the first quarter.
For the June through October time period, the Company experiences negative cash
flow due to the seasonality of its business. Historically, as a result of the
Company's business cycle, borrowings have increased during June, July and August
and generally have peaked in September or October, and have been at the lowest
point in May.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $3.0 million during the
quarter ended August 31, 1999, compared to a decrease of $4.0 million during the
comparable period in the prior fiscal year.
Cash used in investing activities was $26.0 million and $36.4 million for the
three months ended August 31, 1999 and 1998, respectively. Investing activities
consisted primarily of prepublication cost expenditures, capital expenditures,
royalty advances and production cost expenditures. Business and trademark
acquisition-related payments for the prior year quarter were related to the
acquisition of certain assets of Pages Book Fairs, Inc. Prepublication cost
expenditures increased $3.6 million to $10.3 million for the three months ended
August 31, 1999 over the comparable period of the prior year largely due to the
planned revision to SCHOLASTIC LITERACY PLACE and the initial spending on the
Company's new READ 180! program. Capital expenditures increased to $6.2 million
in the current year reflecting the construction of a new office facility.
Royalty advances increased $1.4 million for the quarter ended August 31, 1999
over the same period in the prior fiscal year to $5.6 million. Production cost
expenditures decreased $2.9 million to $3.7 million for the first quarter ended
August 31, 1999 when compared to the same period in the prior fiscal year, due
to a reduction in the number of shows being produced.
FINANCING
The Company maintains two unsecured credit facilities, the Loan Agreement and
the Revolver, which provide for aggregate borrowings of up to $205.0 million
(with a right, in certain circumstances, to increase to $235.0 million),
including the issuance of up to $10.0 million in letters of credit. The Company
uses these facilities for various purposes including the funding of seasonal
cash flow needs and other working capital requirements. At August 31, 1999, the
Company had $90.5 million in borrowings outstanding under these facilities at a
weighted-average interest rate of 5.8%.
13
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCING (CONTINUED)
The Loan Agreement was amended and restated on August 11, 1999, principally to
extend the expiration date of the facility to August 11, 2004 and expand the
facility from $135.0 million to $170.0 million (with a right, in certain
circumstances, to increase to $200.0 million). The Company anticipates amending
and restating the Revolver in the second quarter of fiscal 2000 to increase the
amount available thereunder to $40.0 million and extend its expiration to 2004.
The Company does not anticipate any difficulty in negotiating satisfactory
credit arrangements.
In addition, unsecured lines of credit available to the Company's United
Kingdom, Canadian and Australian operations totaled $36.5 million at August 31,
1999. These lines are used primarily to fund working capital needs in those
countries. At August 31, 1999, $22.0 million in borrowings were outstanding
under these lines at a weighted-average interest rate of 6.3%.
The Company believes its existing cash position, combined with funds generated
from operations and funds available under the Loan Agreement and the Revolver,
will be sufficient to finance its ongoing working capital requirements for the
remainder of the fiscal year.
ACQUISITIONS
In the ordinary course of business, the Company explores domestic and
international expansion opportunities, including potential niche and strategic
acquisitions. As part of this process, the Company engages with interested
parties in discussions concerning possible transactions. The Company will
continue to evaluate such opportunities and prospects.
YEAR 2000 READINESS DISCLOSURE
As previously reported, management has initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the Year 2000, as
well as to identify and address any other Year 2000 operational issues which may
affect the Company. Progress reports on the Company's Year 2000 program are
presented regularly to the Company's Board of Directors and senior management.
The Company's Year 2000 program, which was commenced in July 1997 and is
administered by internal staff, assisted by outside consultants, consists of the
following three components relating to the Company's operations: (i) information
technology ("IT") computer systems and applications which may be impacted by the
Year 2000 problem and the actions related thereto, (ii) non-IT systems and
equipment which include embedded technology which may be impacted by the Year
2000 problem and actions related thereto and (iii) third party suppliers and
customers with which the Company has material relationships and which could
adversely affect the Company if such parties fail to be Year 2000
14
<PAGE>
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
upon assessment, including repair, modification or replacement of items that are
determined not to be Year 2000 compliant); (3) TESTING (testing of the new or
modified information systems, other systems and equipment to verify Year 2000
readiness); (4) CONTINGENCY PLANNING (designing appropriate contingency and
business continuation plans for each Company business unit and location); and
(5) IMPLEMENTATION (actual operation of such systems and equipment and, if
necessary, the actual implementation of any
15
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
contingency plans in the event Year 2000 problems occur, notwithstanding the
Company's remediation program).
The progress to date of the three components of the Company's Year 2000 program
for principal systems, applications or issues affected by the Year 2000 is as
follows:
IT SYSTEMS AND APPLICATIONS. The principal IT systems and applications of the
Company affected by Year 2000 issues include order entry, purchasing,
distribution and financial reporting. Issues related to vendor supplied software
include financial reporting and certain infrastructure and operating system
software. The Company has substantially completed the Assessment, Remediation,
Testing, Contingency Planning and Implementation phases with respect to its
principal IT systems and applications. 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 $11.8 million through
fiscal 2000, of which $9.3 million has been incurred through August 31, 1999.
NON-IT SYSTEMS AND EQUIPMENT. The principal non-IT systems and equipment of the
Company incorporating embedded technology affected by Year 2000 issues include
security systems, phone systems, business machines, computers and distribution
systems. The Company has substantially completed the Assessment, Remediation,
Testing, Contingency Planning and Implementation phases with respect to its
principal non-IT systems and equipment. In addition to the foregoing, based on
current assessments, the Company expects to implement the remainder of Year 2000
remediated non-IT systems and equipment by the end of October 1999. The Company
estimates the total costs for modifying or replacing new systems and equipment
in this area will be approximately $0.20 million through fiscal 2000, of which
$0.1 million has been incurred through August 31, 1999.
MATERIAL THIRD PARTY RELATIONSHIPS. Material third party supplier
relationships affected by Year 2000 issues relate primarily to printing,
paper supplies, distribution, fulfillment, licensing and financial services.
The Assessment and Remediation phases for determining the Year 2000 readiness
of the Company's principal suppliers is an ongoing process. Substantially all
of the Company's principal suppliers have reported that they have initiated
Year 2000 programs and such suppliers have not brought to the Company's
attention any problems anticipated to materially and adversely impact the
Company's operations taken as a whole. The Company will continue to seek
updates from these parties to attempt to ascertain the adequacy of their
programs as they relate to the Company. Testing of critical systems or
services will be done on an as needed basis. The Company anticipates that it
will develop contingency plans with respect to its principal third party
suppliers by the end of October 1999. There can be no assurance, however,
that the Company will be able to predict adequately Year 2000 problems
experienced by its suppliers or to develop adequate contingency plans related
thereto. The costs to the Company in implementing its Year 2000 program in
this area, excluding costs due to unanticipated third party Year 2000
problems, will principally consist of internal staff costs, which are not
expected to be material. No single customer or small group of customers are
material to the Company's financial condition.
Including the costs set forth above, the Company estimates that total program
costs for implementing its Year 2000 program, which includes total costs noted
above for IT systems and applications, will be approximately $12.0 million, of
which total program costs through August 31, 1999 have been $9.3
16
<PAGE>
million. These costs include costs related to the matters described above, as
well as consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the Company for the
17
<PAGE>
SCHOLASTIC CORPORATION
ITEM 2. MD&A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
Year 2000. The costs also include expenses related to internal staff incurred in
connection with the implementation of the program. The Year 2000 costs for
fiscal 2000 comprise approximately 11% of the Company's IT expense budget for
the period. Based on the current progress of the Company's Year 2000 program,
the Company anticipates its Year 2000 program will be substantially completed by
November 30, 1999. As a result of the Company's Year 2000 program, delays in
other new and continuing IT projects have occurred. However, no material adverse
effect is anticipated from such delays as the Company has procedures in place in
an effort to ensure that critical projects are 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. However,
due to the general uncertainty inherent in the Year 2000 problem 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 financial, power,
communication, postal or other transportation systems) necessary for the
ordinary conduct of business. The Company is currently assessing those scenarios
in which unexpected failures would have a material adverse effect on the Company
and will attempt to develop contingency plans designed to respond to anticipated
scenarios. However, there can be no assurance that successful contingency plans
can, in fact, be developed or implemented.
All statements regarding Year 2000 Readiness are "Year 2000 Readiness
Disclosures" as defined by the Year 2000 Information and Readiness Disclosure
Act of October 19, 1998.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, which are subject
to various risks and uncertainties, including the conditions of the children's
book and instructional materials markets and acceptance of the Company's
products within those markets and other risks and factors identified in the
Company's Report on Form 10-K for the fiscal year ended May 31, 1999.
18
<PAGE>
SCHOLASTIC CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company has operations in various foreign countries. In the normal course of
business, these operations are exposed to fluctuations in currency values.
Management does not consider the impact of currency fluctuations to represent a
significant risk. The Company does not generally enter into derivative financial
instruments for material amounts, nor are such instruments used for speculative
purposes.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The majority of the Company's long-term debt bears interest
at a fixed rate. However, the fair market value of the fixed rate debt is
sensitive to changes in interest rates. The Company is subject to the risk that
market interest rates will decline and the interest rates under the fixed rate
debt will exceed the then prevailing market rates. The Company does not
generally utilize interest rate derivative instruments to manage its exposure to
interest rate changes.
As of August 31, 1999, the balance outstanding under the facilities which have
variable rates was $90.5 million, at an average interest rate of 5.84%. A 15%
increase or decrease in the average cost of the Company's variable rate debt
under the facility would not have a significant impact on the Company's results
of operations.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.
19
<PAGE>
PART II - OTHER INFORMATION
SCHOLASTIC CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
10.18 Scholastic Corporation Executive Incentive Performance Plan,
effective as of June 1, 1999
27.1 Financial Data Schedule for the quarter ended August 31, 1999
27.2 Financial Data Schedule for the quarter ended August 31, 1998
</TABLE>
(b) Reports on Form 8-K filed during the quarter: none.
- --------------------------------------------------------------------------------
20
<PAGE>
SCHOLASTIC CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOLASTIC CORPORATION
(Registrant)
Date: October 15, 1999 ________________________
Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: October 15, 1999 ________________________
Kevin J. McEnery
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<PAGE>
SCHOLASTIC CORPORATION
FORM 10-Q FOR QUARTERLY PERIOD ENDED AUGUST 31, 1999
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
10.18 Scholastic Corporation Executive Performance Incentive Plan,
effective as of June 1, 1999
27.1 Financial Data Schedule for the quarter ended August 31, 1999
27.2 Financial Data Schedule for the quarter ended August 31, 1998
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.18
SCHOLASTIC CORPORATION
EXECUTIVE PERFORMANCE INCENTIVE PLAN
1. PURPOSE
The purpose of this Plan is to attract, retain and motivate key employees
by providing annual cash performance awards to designated key employees of the
Company, its Parent and its Subsidiaries. This Plan is intended to establish a
clear link between performance and the level of awards paid to such designated
key employees with a focus on overall corporate growth and performance as well
as on divisional or unit growth and performance. This Plan is effective as of
June 1, 1999, subject to approval by the stockholders of the Company entitled to
vote thereon in accordance with the laws of the State of Delaware.
2. DEFINITIONS
Unless the context otherwise requires, the words which follow shall have
the following meaning:
(a) "Award"--shall mean the total annual Performance Award as determined
under the Plan.
(b) "Board"--shall mean the Board of Directors of the Company.
(c) "Change in Control of the Company"--shall have the meaning set forth
in the Participant's employment agreement (if any) or other written
agreement approved by the Committee (if any).
(d) "Code"--shall mean the Internal Revenue Code of 1986, as amended and
any successor thereto.
(e) "Code Section 162(m)"--shall mean the exception for performance-based
compensation under Section 162(m) of the Code or any successor
section and the Treasury regulations promulgated thereunder.
(f) "Company"--shall mean Scholastic Corporation and any successor by
merger, consolidation or otherwise.
(g) "Committee"--shall mean the Human Resources and Compensation
Committee of the Board (or subcommittee thereof) or such other
Committee of the Board that is appointed by the Board all of whose
members shall be "outside directors," as defined under Code Section
162(m).
(h) "Individual Target Award"--shall mean the targeted performance award
for a Plan Year specified by the Committee as provided in Section 5
hereof.
1
<PAGE>
(i) "Parent"--shall mean, other than the Company, (i) any corporation in
an unbroken chain of corporations ending with the Company which
owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain or (ii) any corporation or trade or
business (including, without limitation, a partnership or limited
liability company) which controls fifty percent (50%) or more
(whether by ownership of stock, assets or an equivalent ownership
interest) of the Company.
(j) "Participant"--shall mean an employee of the Company, the Parent or
a Subsidiary selected, in accordance with Section 4 hereof, to be
eligible to receive an Award in accordance with this Plan.
(k) "Performance Award"--shall mean the amount paid or payable under
Section 6 hereof.
(l) "Plan"--shall mean this Scholastic Corporation Executive Performance
Incentive Plan.
(m) "Plan Year"--shall mean the fiscal year of the Company.
(n) "Subsidiary"--shall mean, other than the Company, (i) any corporation
in an unbroken chain of corporations beginning with the Company
which owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the
other corporations in such chain; (ii) any corporation or trade or
business (including, without limitation, a partnership or limited
liability company) which is controlled fifty percent (50%) or more
(whether by ownership of stock, assets or an equivalent ownership
interest or voting interest) by the Company or one of its
Subsidiaries; or (iii) any other entity in which the Company or any
of its Subsidiaries has a material equity interest and which is
designated as a "Subsidiary" by resolution of the Committee.
3. ADMINISTRATION AND INTERPRETATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall have
the exclusive authority and responsibility to: (i) interpret the Plan; (ii)
approve the designation of eligible Participants; (iii) set the performance
criteria for Awards within the Plan guidelines; (iv) certify attainment of
performance goals and other material terms; (v) reduce Awards as provided
herein; (vi) authorize the payment of all benefits and expenses of the Plan as
they become payable under the Plan; (vii) adopt, amend and rescind rules and
regulations relating to the Plan; and (viii) make all other determinations and
take all other actions necessary or desirable for the Plan's administration,
including, without limitation, correcting any defect, supplying any omission or
reconciling any inconsistency in this Plan in
2
<PAGE>
the manner and to the extent it shall deem necessary to carry this Plan into
effect, but only to the extent any such action would be permitted under Code
Section 162(m).
Decisions of the Committee shall be made by a majority of its members.
All decisions of the Committee on any question concerning the selection of
Participants and the interpretation and administration of the Plan shall be
final, conclusive and binding upon all parties. The Committee may rely on
information, and consider recommendations, provided by the Board or the senior
management of the Company. The Plan is intended to comply with Code Section
162(m), and all provisions contained herein shall be limited, construed and
interpreted in a manner to so comply.
4. ELIGIBILITY AND PARTICIPATION
(a) For each Plan Year, the Committee shall select the employees of the
Company, its Parent and Subsidiaries who are to participate in the
Plan from among the key employees of the Company, its Parent and
Subsidiaries.
(b) No person shall be entitled to any Award under this Plan for any Plan
Year unless he or she is so designated as a Participant for that
Plan Year. The Committee may add to or delete individuals from the
list of designated Participants at any time and from time to time,
in its sole discretion, subject to any limitations required to
comply with Code Section 162(m).
5. INDIVIDUAL TARGET AWARD
For each Participant for each Plan Year, the Committee may specify a
targeted performance award. The Individual Target Award may be expressed, at the
Committee's discretion, as a fixed dollar amount, a percentage of base pay or
total pay (excluding payments made under this Plan), or an amount determined
pursuant to an objective formula or standard. Establishment of an Individual
Target Award for an employee for a Plan Year shall not imply or require that the
same level Individual Target Award (if any such award is established by the
Committee for the relevant employee) be set for any subsequent Plan Year. At the
time the Performance Goals are established (as provided in subsection 6.2
below), the Committee shall prescribe a formula to determine the percentages
(which may be greater than one-hundred percent (100%)) of the Individual Target
Award which may be payable based upon the degree of attainment of the
Performance Goals during the Plan Year. Notwithstanding anything else herein,
the Committee may, in its sole discretion, elect to pay a Participant an amount
that is less than the Participant's Individual Target Award (or attained
percentage thereof) regardless of the degree of attainment of the Performance
Goals; provided that no such discretion to reduce an Award earned based on
achievement of the applicable Performance Goals shall be permitted for the Plan
Year in which a Change in Control of the Company occurs, or during such Plan
Year with regard to the prior Plan
3
<PAGE>
Year if the Awards for the prior Plan Year have not been made by the time of the
Change in Control of the Company, with regard to individuals who were
Participants at the time of the Change in Control of the Company. If a
Participant does not have an employment agreement or other written agreement
approved by the Committee which defines Change in Control, the foregoing
provision and any other provision of this Plan relating to Change in Control
shall not apply to such Participant.
6. PERFORMANCE AWARD PROGRAM
6.1 PERFORMANCE AWARDS. Subject to Section 7 herein, each Participant is
eligible to receive up to the achieved percentage of their Individual Target
Award for such Plan Year (or, subject to the last sentence of Section 5, such
lesser amount as determined by the Committee in its sole discretion) based upon
the attainment of the objective Performance Goals established pursuant to
subsection 6.2 and the formula established pursuant to Section 5. Except as
specifically provided in Section 7, no Performance Award shall be made to a
Participant for a Plan Year unless the minimum Performance Goals for such Plan
Year are attained.
6.2 OBJECTIVE PERFORMANCE GOALS, FORMULAE OR STANDARDS (THE "PERFORMANCE
GOALS"). The Committee shall establish the objective performance goals, formulae
or standards and the Individual Target Award (if any) applicable to each
Participant or class of Participants for a Plan Year in writing prior to the
beginning of such Plan Year or at such later date as permitted under Code
Section 162(m) and while the outcome of the Performance Goals are substantially
uncertain. Such Performance Goals may incorporate, if and only to the extent
permitted under Code Section 162(m), provisions for disregarding (or adjusting
for) changes in accounting methods, corporate transactions (including, without
limitation, dispositions and acquisitions) and other similar type events or
circumstances. To the extent any such provision would create impermissible
discretion under Code Section 162(m) or otherwise violate Code Section 162(m),
such provision shall be of no force or effect. These Performance Goals shall be
based on one or more of the following criteria with regard to the Company (or a
Subsidiary, Parent, division, operational unit or administrative department of
the Company, Subsidiary or Parent): (i) earnings per share or the attainment of
a specified percentage increase in earnings per share or earnings per share from
continuing operations; (ii) the performance of any Subsidiary, Parent, division,
operational unit or administrative department of the Company, a Subsidiary or a
Parent whether measured by revenues, net profit, net income, operating income or
any combination of any or all of the foregoing (any or all of which may be
measured without regard to extraordinary items); (iii) the attainment of a
certain level of, reduction of, or other specified objectives with regard to
limiting the level of or increase in, all or a portion of controllable expenses
or costs or other expenses or costs of the Company, Subsidiary, Parent,
division, operational unit or administrative department; (iv) the attainment of
certain target levels of, or a specified percentage increase in, revenues,
income before income taxes and extraordinary items, net income, earnings before
income tax, earnings before interest, taxes, depreciation
4
<PAGE>
and amortization, or a combination of any or all of the foregoing; (v) the
attainment of certain target levels of, or a percentage increase in, after-tax
or pre-tax profits including, without limitation, that attributable to
continuing and/or other operations; (vi) the attainment of certain target levels
in the fair market value of the shares of the Company's common stock; (vii) the
growth in the value of an investment in the Company's common stock assuming the
reinvestment of dividends; (viii) the attainment of certain target levels of, or
a specified increase in, return on capital employed or return on invested
capital; (ix) the attainment of certain target levels of, or a percentage
increase in, after-tax or pre-tax return on stockholders' equity; (x) the
attainment of certain target levels of, or a specified increase in, economic
value added targets based on a cash flow return on investment formula; (xi) the
attainment of certain target levels of, or a specified increase in, operational
cash flow; and (xii) the achievement of a certain level of, reduction of, or
other specified objectives with regard to limiting the level of increase in, all
or a portion of, the Company's bank debt or other long-term or short-term public
or private debt or other similar financial obligations of the Company, which may
be calculated net of such cash balances and/or other offsets and adjustments as
may be established by the Committee. For purposes of items (ii) and (iv) above,
"extraordinary items" shall mean all items of gain, loss or expense for the Plan
Year determined to be extraordinary or unusual in nature or infrequent in
occurrence or related to a corporate transaction (including, without limitation,
a disposition or acquisition) or related to a change in accounting principle,
all as determined in accordance with standards established by Opinion No. 30 of
the Accounting Principles Board.
In addition, such Performance Goals may be based upon the attainment of
specified levels of Company (or Subsidiary, Parent, division, operational unit
or administrative department of the Company, Subsidiary or Parent) performance
under one or more of the measures described above relative to the performance of
other corporations. To the extent permitted under Code Section 162(m), but only
to the extent permitted under Code Section 162(m) (including, without
limitation, compliance with any requirements for stockholder approval), the
Committee may: (i) designate additional business criteria on which the
Performance Goals may be based or (ii) adjust, modify or amend the
aforementioned business criteria.
6.3 MAXIMUM NONDISCRETIONARY AWARD. The maximum Performance Award payable
to a Participant for any Plan Year is $2,000,000.
6.4 PAYMENT DATE; COMMITTEE CERTIFICATION. The Performance Awards will be
paid as soon as administratively feasible after the Plan Year in which they are
earned, but not before the Committee certifies in writing that the Performance
Goals specified (except to the extent permitted under Code Section 162(m) and
provided in Section 7 with regard to death, disability or Change in Control of
the Company or certain other termination situations) pursuant to subsection 6.2
were, in fact, satisfied, except as may otherwise be agreed by a Participant and
the Company in a written agreement executed prior to the
5
<PAGE>
beginning of the Plan Year to which the Performance Award relates in accordance
with any deferred compensation program in effect applicable to such Participant.
The Committee shall use its best efforts to make a determination with regard to
satisfaction of the Performance Goals within two and one-half (2 1/2) months
after the end of each Plan Year. Any Performance Award deferred by a Participant
shall not increase (between the date on which the Performance Award is credited
to any deferred compensation program applicable to such Participant and the
payment date) by a measuring factor for each Plan Year greater than the interest
rate on thirty (30) year Treasury Bonds on the first business day of such Plan
Year compounded annually, as elected by the Participant in the deferral
agreement. The Participant shall have no right to receive payment of any
deferred amount until he or she has a right to receive such amount under the
terms of the applicable deferred compensation program.
7. EMPLOYMENT ON AWARD DATE GENERALLY REQUIRED FOR AWARD
No Award shall be made to any Participant who is not an active employee
of the Company, its Parent or one of its Subsidiaries or affiliates on the date
Awards for the Plan Year are generally paid to Participants; PROVIDED, HOWEVER,
that the Committee, in its sole and absolute discretion, may make Awards to
Participants for a Plan Year in circumstances that the Committee deems
appropriate including, but not limited to, a Participant's death, disability,
retirement or other termination of employment during such Plan Year and the
Committee shall be required to make at least a pro-rata Award through the date
of a Change in Control of the Company to each Participant who is a Participant
at the time of such Change in Control of the Company. All such Awards shall be
based on achievement of the Performance Goals for the Plan Year, except that, to
the extent permitted under Code Section 162(m), in the case of death, disability
or Change in Control of the Company during the Plan Year (or such other
termination situations as permitted under Code Section 162(m)) an amount equal
to or less than the Individual Target Awards may be made by the Committee either
during or after the Plan Year without regard to actual achievement of the
Performance Goals. Furthermore, upon a Change in Control of the Company the
Committee may, in its sole discretion but only to the extent permitted under
Code Section 162(m), make an award (payable immediately) equal to a pro-rata
portion (through the date of the Change in Control of the Company) of the
Individual Target Award payable upon achieving, but not surpassing, the
Performance Goals for the relevant Plan Year. Any such immediate pro-rata
payment shall reduce any other Award made for such Plan Year under this Plan by
the amount of the pro-rata payment.
8. NON-ASSIGNABILITY
No Award under this Plan nor any right or benefit under this Plan shall
be subject to anticipation, alienation, sale, assignment, pledge, encumbrance,
garnishment, execution or levy of any kind or charge, and any attempt to
anticipate, alienate, sell, assign, pledge,
6
<PAGE>
encumber and to the extent permitted by applicable law, charge, garnish, execute
upon or levy upon the same shall be void and shall not be recognized or given
effect by the Company.
9. NO RIGHT TO EMPLOYMENT
Nothing in the Plan or in any notice of award pursuant to the Plan shall
confer upon any person the right to continue in the employment of the Company,
its Parent, or one of its Subsidiaries or affiliates nor affect the right of the
Company, its Parent or any of its Subsidiaries or affiliates to terminate the
employment of any Participant.
10. AMENDMENT OR TERMINATION
The Board (or a duly authorized committee thereof) may, in its sole and
absolute discretion, amend, suspend or terminate the Plan or to adopt a new plan
in place of this Plan at any time; provided, that no such amendment shall,
without the prior approval of the stockholders of the Company entitled to vote
thereon in accordance with the laws of the State of Delaware to the extent
required under Code Section 162(m): (i) materially alter the Performance Goals
as set forth in subsection 6.2; (ii) increase the maximum amount set forth in
subsection 6.3 and the interest factor under subsection 6.4, except to the
extent permitted under Code Section 162(m) to substitute an approximately
equivalent rate in the event that the thirty (30) year Treasury Bond rate ceases
to exist; (iii) change the class of eligible employees set forth in Section
4(a); or (iv) implement any change to a provision of the Plan requiring
stockholder approval in order for the Plan to continue to comply with the
requirements of Code Section 162(m). Furthermore, no amendment, suspension or
termination shall, without the consent of the Participant, alter or impair a
Participant's right to receive payment of an Award for a Plan Year otherwise
payable hereunder.
11. SEVERABILITY
In the event that any one or more of the provisions contained in the Plan
shall, for any reason, be held to be invalid, illegal or unenforceable, in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of the Plan and the Plan shall be construed as if such invalid,
illegal or unenforceable provisions had never been contained therein.
7
<PAGE>
12. WITHHOLDING
The Company shall have the right to make such provisions as it deems
necessary or appropriate to satisfy any obligations it may have to withhold
federal, state or local income or other taxes incurred by reason of payments
pursuant to the Plan.
13. GOVERNING LAW
This Plan and any amendments thereto shall be construed, administered,
and governed in all respects in accordance with the laws of the State of
Delaware (regardless of the law that might otherwise govern under applicable
principles of conflict of laws).
8
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<PAGE>
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<NAME> SCHOLASTIC CORPORATION
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<CIK> 0000866729
<NAME> SCHOLASTIC CORPORATION
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
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0
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