SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period Commission File Number: 0-19860
ended August 31, 1998
SCHOLASTIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3385513
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
555 BROADWAY, NEW YORK, NEW YORK 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 343-6100
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
=============================================================================================
THREE MONTHS ENDED AUGUST 31
1998 1997
--------------- ----------------
Revenues $ 150.2 $ 166.6
Operating costs and expenses:
Cost of goods sold 85.2 96.1
Selling, general and administrative expenses 83.4 81.7
Depreciation 4.0 3.5
Goodwill and trademark amortization 1.4 1.5
--------- ---------
Total operating costs and expenses 174.0 182.8
Operating loss (23.8) (16.2)
Interest expense, net 4.4 5.1
--------- ---------
Loss before benefit for income taxes (28.2) (21.3)
Benefit for income taxes 10.7 8.1
--------- ---------
Net loss $ (17.5) $ (13.2)
========= =========
Net loss per Class A and Common share:
Basic $ (1.08) $ (0.81)
Diluted $ (1.08) $ (0.81)
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SEE ACCOMPANYING NOTES
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SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
================================================================================================================================
August 31, 1998 May 31, 1998 August 31, 1997
--------------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.1 $ 5.1 $ 1.4
Accounts receivable less allowance for
doubtful accounts 110.7 116.7 117.1
Inventories 259.0 199.3 263.2
Deferred taxes 50.3 41.8 36.5
Prepaid and other deferred expenses 31.6 19.8 34.3
-------- -------- --------
Total current assets 452.7 382.7 452.5
Property, plant and equipment, net 139.5 136.8 132.2
Prepublication costs 84.4 86.3 99.7
Other assets and deferred charges 174.0 159.5 157.2
-------- -------- --------
Total assets $ 850.6 $ 765.3 $ 841.6
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 14.1 $ 9.8 $ 10.6
Accounts payable 110.0 76.9 97.9
Accrued royalties 25.2 19.4 19.4
Deferred revenue 19.0 10.5 15.7
Other accrued expenses 52.3 65.1 56.5
-------- -------- --------
Total current liabilities 220.6 181.7 200.1
NONCURRENT LIABILITIES:
Long-term debt 306.8 243.5 341.0
Other noncurrent liabilities 21.4 22.0 18.0
-------- -------- --------
Total noncurrent liabilities 328.2 265.5 359.0
STOCKHOLDERS' EQUITY:
Class A Stock, $.01 par value 0.0 0.0 0.0
Common Stock, $.01 par value 0.2 0.2 0.2
Additional paid-in capital 206.5 205.1 203.8
Accumulated earnings 137.1 154.6 117.8
Accumulated other comprehensive income:
Foreign currency translation adjustment (5.2) (5.0) (2.5)
Less shares held in treasury (36.8) (36.8) (36.8)
-------- -------- --------
Total stockholders' equity 301.8 318.1 282.5
-------- -------- --------
$ 850.6 $ 765.3 $ 841.6
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SEE ACCOMPANYING NOTES
2
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED, AMOUNTS IN MILLIONS)
==========================================================================================
THREE MONTHS ENDED AUGUST 31,
1998 1997
---- ----
NET CASH USED IN OPERATING ACTIVITIES $ (37.3) $ (42.9)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business and trademark acquisition-related payments (11.7) (0.4)
Prepublication costs (6.7) (5.5)
Production costs (6.6) (3.5)
Additions to property, plant and equipment (5.4) (2.5)
Royalty advances (4.2) (6.7)
Other (1.8) (0.8)
-------- --------
Net cash used in investing activities (36.4) (19.4)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under loan agreement and revolver 120.5 100.3
Repayments of loan agreement and revolver (57.4) (47.3)
Borrowings under lines of credit 22.4 12.5
Repayments of lines of credit (17.2) (6.6)
Other 1.4 (0.1)
-------- --------
Net cash provided by financing activities 69.7 58.8
-------- --------
Net decrease in cash and cash equivalents (4.0) (3.5)
Cash and cash equivalents at beginning of period 5.1 4.9
-------- --------
Cash and cash equivalents at end of period $ 1.1 $ 1.4
======== ========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 0.2 $ 0.7
Interest paid $ 7.5 $ 8.1
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SEE ACCOMPANYING NOTES
3
SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN MILLIONS EXCEPT SHARE DATA)
================================================================================
1. COMPANY
Scholastic Corporation (together with its subsidiaries, the "Company" or
"Scholastic") is a global children's publishing and media company producing and
distributing material for children, teachers and parents. Scholastic is among
the leading publishers and distributors of children's books, classroom and
professional magazines and other educational materials, with operations in the
United States, the United Kingdom, Canada, Australia, New Zealand, Mexico, Hong
Kong and India. Scholastic distributes most of its products directly to children
and teachers in elementary and secondary schools. During its seventy-eight years
of serving schools, Scholastic has developed strong name recognition associated
with quality and dedication to learning, has achieved a leading market position
in the school-based distribution of children's books and magazines and has
developed the leading internet-based subscription service for schools. The
Company has also used its proven system to develop successful children's books
and then build these brands into multimedia assets.
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have not been
audited, but reflect those adjustments consisting of normal recurring items
which management considers necessary for a fair presentation of financial
position, results of operations and cash flow. These financial statements should
be read in conjunction with the consolidated financial statements and related
notes in the 1997/1998 Annual Report to Stockholders.
The results of operations for the three months ended August 31, 1998 and 1997
are not necessarily indicative of the results expected for the full year. Due to
the seasonal fluctuations that occur, the prior year's August 31 balance sheet
is included for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying
consolidated condensed financial statements to conform to the current year
presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions. Significant estimates that affect the financial statements include,
but are not limited to, book returns, recoverability of inventory,
recoverability of advances to authors, amortization periods, recoverability of
prepublication costs and litigation reserves.
3. RECENT ACCOUNTING PRINCIPLES
Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share." Earnings per
share amounts for all periods have been restated to conform with SFAS 128. The
calculations of basic and diluted earnings per share are presented in Note 6.
4
SCHOLASTIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED, AMOUNTS IN MILLIONS)
================================================================================
Effective June 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This statement
establishes the standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. The
components of comprehensive loss are described in Note 7.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments
of an Enterprise and Related Information." This statement requires that public
business enterprises report certain information about operating segments in
financial statements of the enterprise issued to stockholders. It also requires
that public business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. The Company is required to adopt the provisions of SFAS 131 for the
fiscal year ended May 31, 1999.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (SFAS 132), "Employer's Disclosures about
Pensions and Other Post-Retirement Benefits." This statement revises employer's
disclosures about pension and other post-retirement benefit plans. It
standardizes the disclosure requirements for pensions and other post-retirement
benefits, requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures required under prior standards. The Company is
required to adopt the provisions of SFAS 132 for the fiscal year ended May 31,
1999.
4. DEBT
LOAN AGREEMENT. The Company and Scholastic Inc. are joint and several borrowers
under a Loan Agreement (the "Loan Agreement") with certain banks which provides
for revolving credit loans and letters of credit. On April 11, 1995, the Company
amended and restated the Loan Agreement, extending the expiration date to May
31, 2000 and expanding the facility to $135.0, with a right, in certain
circumstances, to increase it to $160.0. The Loan Agreement was last amended on
November 28, 1997. Interest charged under this facility is either at the prime
rate or .325% to .90% over LIBOR (as defined). There is a commitment fee charged
which ranges from .10% to .3625% on the unused portion. The amounts charged vary
based upon certain financial measurements. The Loan Agreement contains certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions. At August 31, 1998, an aggregate
of $50.0 of borrowings and $10.0 of letters of credit were outstanding under the
Loan Agreement.
REVOLVER. The Company and Scholastic Inc. (the "Borrowers") have entered into a
Revolving Loan Agreement (the "Revolver") with Sun Bank, N. A., which provides
for revolving credit loans and expires on May 31, 2000. The Revolver has certain
financial covenants related to debt and interest coverage ratios (as defined)
and limits dividends and other distributions. On August 14, 1996, the Revolver
was amended to increase the aggregate principal amount to $35.0 and was last
amended on November 28, 1997. At August 31, 1998, the aggregate amount of
borrowings under the Revolver was $18.3.
5
SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED INCOME STATEMENTS CONTINUED
(UNAUDITED, AMOUNTS IN MILLIONS EXCEPT SHARE DATA)
================================================================================
7% NOTES DUE 2003. In December 1996, the Company issued $125.0 of 7% Notes due
2003 (the "Notes"). The Notes are unsecured and unsubordinated obligations of
the Company and will mature on December 15, 2003. The Notes are not redeemable
prior to maturity. Interest on the Notes is payable semi-annually on December 15
and June 15 of each year. The net proceeds (including accrued interest) from the
issuance of the Notes were $123.9 after deducting an underwriting discount and
other related offering costs. The Company utilized the net proceeds primarily to
repay amounts outstanding under the Loan Agreement and the Revolver.
CONVERTIBLE SUBORDINATED DEBENTURES. In August 1995, the Company sold $110.0 of
5.0% Convertible Subordinated Debentures due August 15, 2005 (the "Debentures")
under Regulation S and Rule 144A of the Securities Act of 1933. The Debentures
are listed on the Luxembourg Stock Exchange and the portion sold under Rule 144A
is designated for trading in the Portal system of the National Association of
Securities Dealers, Inc. Interest on the Debentures is payable semi-annually on
August 15 and February 15 of each year. The Debentures are redeemable at the
option of the Company, in whole, but not in part, at any time on or after August
15, 1998 at 100% of the principal amount plus accrued interest. Each Debenture
is convertible, at the holder's option, any time prior to maturity, into Common
Stock of the Company at a conversion price of $76.86 per share.
OTHER - SHORT TERM LINES OF CREDIT. At August 31, 1998, the Company's
international subsidiaries had lines of credit available of $40.5. There was
$14.1 outstanding under these credit lines at August 31, 1998.
5. CONTINGENCIES
The Company and certain officers have been named as defendants in litigation
which alleges, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, resulting from
purportedly materially false and misleading statements to the investing public
concerning the financial condition of the Company. The litigation is in the
early stages and the Company believes that such litigation is without merit and
plans to vigorously defend against it.
Two subsidiaries of the Company are also defendants and counterclaim plaintiffs
in litigation with Parachute Press, Inc. ("Parachute"), the licensor of certain
publication and non-publication rights to the GOOSEBUMPS(R) series. The action
was commenced by Parachute following repeated notices from the Company to
Parachute of material breaches by Parachute of the agreements under which such
rights are licensed and the exercise by the Company of its contractual remedies
under the agreements. Parachute alleges that the exercise of such remedies was
improper and seeks declaratory relief and unspecified damages for, among other
claims, alleged breaches of contract, copyright infringement and acts of unfair
competition. Damages sought by Parachute include the payment of a total of
approximately $36.1 of advances over the term of the contract, of which
approximately $15.3 had been paid at the time the litigation began. The Company
6
SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED:
================================================================================
seeks declaratory relief and damages for, among other claims, breaches of
contract and acts of unfair competition. Damages sought by the Company include
repayment by Parachute of a portion of the $15.3 advance already paid at the
time the litigation began. The litigation is still in the preliminary stages and
discovery has begun. The Company has filed a motion to dismiss and Parachute has
filed a motion for partial summary judgement. The Company believes that
Parachute's claims are without merit. The Company intends to vigorously defend
the lawsuit and pursue its counterclaims. The Company does not believe that this
dispute will have a material adverse effect on its financial condition.
The Company is also engaged in various legal proceedings incident to its normal
business activities. In the opinion of the Company, none of such proceedings is
material to the consolidated financial position of the Company.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three month period ended August 31:
1998 1997
-------- --------
CLASS A AND COMMON SHARES IN MILLIONS
Net loss $(17.5) $(13.2)
Weighted average Class A and
Common shares outstanding
for basic and diluted
earnings per share 16.3 16.2
Net loss per Class A
and Common shares:
Basic $(1.08) $(0.81)
Diluted $(1.08) $(0.81)
For the three months ended August 31, 1998 and 1997, the effect of the
Debentures and the employee stock options on the weighted average Class A and
Common Shares for diluted earnings per share was anti-dilutive and, therefore,
is not included in the calculation.
7
SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED:
(UNAUDITED, DOLLARS IN MILLIONS EXCEPT SHARE DATA)
================================================================================
7. COMPREHENSIVE LOSS
The Company's comprehensive loss for the three month periods ended August 31,
1998 and 1997 are set forth in the following table:
1998 1997
---- ----
Net loss $ (17.5) $ (13.2)
Other comprehensive loss:
Foreign currency translation adjustment
net of benefit for income taxes (0.1) (1.1)
------- -------
Comprehensive loss $ (17.6) $ (14.3)
======= =======
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8
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 27, 1998 /s/ RICHARD ROBINSON
------------------------------
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: October 27, 1998 /s/ KEVIN J. MCENERY
----------------------------
Executive Vice President and
Chief Financial Officer
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