SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended February 28, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission File Number: 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)
212-343-6100
(Registrant's telephone number, including area code)
____________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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] Yes [ ] No
APPLICABLE ONLY TO USERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Title of each class as of March 31, 1997
------------------- ----------------------------
Common Stock, $.01 par value 15,363,332
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 1997
Part I - Financial Information Page
----
Item 1. Financial Statements
Consolidated Condensed Statement of Operations for the
Three Months Ended February 28, 1997 and February 29, 1996
and for the Nine Months ended February 28, 1997 and
February 29, 1996 1
Consolidated Condensed Balance Sheet at February 28, 1997,
May 31, 1996 and February 29, 1996 2
Consolidated Condensed Statement of Cash Flows for the
Nine Months Ended February 28, 1997 and February 29, 1996 3
Notes to Consolidated Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
Part II - Other Information
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
PART I - FINANCIAL INFORMATION
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in thousands except shares and per share data)
Three Months Ended Nine Months Ended
--------------------------- --------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues $ 210,728 $ 216,085 $ 711,491 $ 645,886
Operating costs and expenses:
Cost of goods sold 118,827 109,159 378,361 330,214
Selling, general and administrative expenses 103,599 86,488 290,843 249,620
Intangible amortization and depreciation 4,080 3,301 11,693 8,965
---------- ---------- ---------- ----------
Total operating costs and expenses 226,506 198,948 680,897 588,799
Operating income (loss) (15,778) 17,137 30,594 57,087
Interest expense, net 4,445 2,799 12,027 8,164
---------- ---------- ---------- ----------
Income (loss) before income taxes (20,223) 14,338 18,567 48,923
Provision (benefit) for income taxes (7,685) 5,449 6,626 18,704
---------- ---------- ---------- ----------
Net income (loss) $ (12,538) $ 8,889 $ 11,941 $ 30,219
========== ========== ========== ==========
Primary earnings (loss) per share $ (0.78) $ 0.55 $ 0.72 $ 1.87
Fully diluted earnings (loss) per share $ (0.78) $ 0.55 $ 0.72 $ 1.86
Weighted average Class A, Common and Class A
Share and Common Share Equivalents:
Primary 16,088,377 16,270,963 16,486,505 16,142,500
Fully diluted 16,088,377 17,702,137 17,938,550 17,223,484
SEE ACCOMPANYING NOTES
-1-
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in thousands)
February 28, May 31, February 29,
1997 1996 1996
------------ --------- ------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,270 $ 4,300 $ 1,148
Accounts receivable less allowance for
doubtful accounts 104,435 118,390 106,980
Inventories:
Paper 12,681 9,041 16,310
Books and other 230,084 180,937 223,584
Prepaid and other deferred expenses 23,419 15,118 24,290
Deferred taxes current 27,103 22,694 17,730
--------- --------- ---------
Total current assets 399,992 350,480 390,042
Property, plant and equipment, net 129,024 114,137 107,143
Prepublication costs 106,061 105,016 101,711
Other assets and deferred charges 154,008 103,533 76,358
--------- --------- ---------
$ 789,085 $ 673,166 $ 675,254
========= ========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 64,706 $ 63,148 $ 68,843
Deferred revenue 21,654 9,216 20,873
Other accrued expenses 50,945 60,756 55,309
Other current liabilities 34,739 40,278 36,484
--------- --------- ---------
Total current liabilities 172,044 173,398 181,509
Noncurrent liabilities:
Long-term debt 281,820 186,810 186,563
Other noncurrent liabilities 24,733 24,311 21,578
--------- --------- ---------
Total noncurrent liabilities 306,553 211,121 208,141
Stockholders' equity:
Class A Stock, $.01 par value 8 8 8
Common Stock, $.01 par value 166 163 163
Additional paid-in capital 204,780 194,785 194,321
Accumulated earnings 142,584 130,643 128,965
Less shares held in treasury (36,812) (36,812) (36,812)
Foreign currency translation adjustment (238) (140) (1,041)
--------- --------- ---------
Total stockholders' equity 310,488 288,647 285,604
--------- --------- ---------
$ 789,085 $ 673,166 $ 675,254
========= ========= =========
SEE ACCOMPANYING NOTES
-2-
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
--------------------------
February 28, February 29,
1997 1996
------------ ------------
Net cash provided by/(used) in operating activities $ 19,094 $ (3,021)
Cash flows from investing activities:
Business acquisition-related payments (32,190) (19,790)
Royalty advances paid (25,581) (14,615)
Prepublication cost expenditures (21,619) (37,359)
Additions to property, plant and equipment (20,613) (20,028)
Preproduction cost expenditures (7,904) (4,403)
--------- ---------
Net cash used in investing activities (107,907) (96,195)
Cash flows from financing activities:
Borrowings under loan agreement and revolver 233,472 162,474
Principal paydowns on loan agreement and revolver (264,416) (177,572)
Proceeds received from issuance of notes payable 123,903 0
Proceeds received from issuance of convertible debt 0 107,250
Borrowings under lines of credit 27,753 36,737
Principal paydowns on lines of credit (43,468) (36,533)
Tax benefit realized from stock option transactions 5,254 2,776
Other, net 4,342 1,467
--------- ---------
Net cash provided by financing activities 86,840 96,599
Effects of exchange rate changes on cash (57) 57
--------- ---------
Net decrease in cash and cash equivalents (2,030) (2,560)
Cash and cash equivalents at beginning of period 4,300 3,708
--------- ---------
Cash and cash equivalents at end of period $ 2,270 $ 1,148
========= =========
Supplemental information:
Income taxes paid $ 25,445 $ 15,294
Interest paid $ 11,682 $ 7,912
SEE ACCOMPANYING NOTES
-3-
SCHOLASTIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. 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 1996 Annual Report to shareholders.
The business of Scholastic Corporation including its subsidiaries (the
"Company") is the publication and sale of educational materials and its business
cycle is closely correlated to the normal school year. The results of operations
for the nine months ended February 28, 1997 and February 29, 1996 are not
indicative of the results expected for the full year. Due to the seasonal
fluctuations that occur, the prior year's February 29 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.
2. Long Term Debt
The Company has a loan agreement (the "Loan Agreement") with certain banks which
provides for revolving credit loans and letters of credit in an aggregate amount
of up to $135.0 million, with a right, in certain circumstances, to increase
such amount up to $160.0 million. The Loan Agreement expires on May 31, 2000. At
February 28, 1997, the amount available of $135.0 million was reduced by letters
of credit outstanding in the amount of $1.3 million, and the aggregate amount of
borrowings outstanding was $34.0 million.
The Company has a Revolving Loan Agreement (the "Revolver") with Sun Bank,
National Association, which provides for revolving credit loans in an aggregate
principal amount of up to $35.0 million. At February 28, 1997, the aggregate
amount of borrowings outstanding was $9.1 million.
On December 23, 1996, the Company issued $125.0 million 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 will be payable semi-annually on December 15
and June 15 of each year, commencing on June 15, 1997. The net proceeds
(including accrued interest) from the issuance of the Notes were $123.9 million
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.
-4-
On August 18, 1995, the Company sold $110.0 million 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.
-5-
SCHOLASTIC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the quarter ended February 28, 1997 decreased from $216.1 million
to $210.7 million, or 2%, versus the comparable quarter of the prior year.
Domestic book publishing revenues decreased $11.2 million, or 8%, principally
due to (i) a decline in the retail trade channel sales of older Goosebumps(R)
titles, the greatest portion of which affected January and February results,
(ii) a reduction in revenues of $11.8 million (included in the special charge
described below) reflecting increased reserves for anticipated book returns and
(iii) a book club sales decrease as a result of a modest decrease in orders and
revenue per order. These results were partially offset by increases in book fair
revenues and trade sales of non-Goosebumps titles. International revenues
increased by 18% versus the comparable quarter last year due to strong trade
sales combined with the benefit of recent book distribution acquisitions by the
United Kingdom subsidiary. Revenues for the nine months ended February 28, 1997
totaled $711.5 million, a 10% increase over revenue reported for the nine months
ended February 29, 1996.
As a percentage of revenue, cost of goods sold increased from 50.5% to 56.4% for
the quarter and from 51.1% to 53.2% for the nine months ended February 28, 1997
versus the comparable periods in the prior year. For the quarter and the nine
months ended February 28, 1997, 2.0% and 0.6%, respectively, of the increase is
a result of a special charge recorded in the third quarter to increase the
reserve for anticipated book returns. The remainder of the increase is a result
of the Company's sales mix and increased prepublication cost amortization
largely due to the Scholastic Literacy Place(R) program. Selling, general and
administrative expense as a percentage of revenue increased from 40.0% to 49.2%
for the quarter and from 38.6% to 40.9% for the nine months ended February 28,
1997 versus the comparable periods in the prior year. Of the increase for the
quarter and the nine months ended February 28, 1997, 3.9% and 1.1%,
respectively, was due to the special charge recorded in the third quarter. The
remaining increase is largely a result of lower than anticipated revenues
combined with planned increases in selling, general and administrative expenses.
The third quarter ended February 28, 1997 resulted in an operating loss of $15.8
million compared to operating income in the corresponding quarter of the prior
fiscal year of $17.1 million. The operating results for the quarter included the
$13.0 million impact of special charges, primarily for an increase in the
reserve for anticipated book returns based principally on a significant increase
in returns during January and February. In addition, lower revenue combined with
planned increases in selling, general and administrative expenses adversely
affected margins and contributed to this operating loss. Operating income for
the nine months ended February 28, 1997 decreased $26.5 million or 46% over the
nine months ended February 29, 1996.
The quarter ended February 28, 1997 resulted in a net loss of $12.5 million
versus net income of $8.9 million in the comparable quarter in the prior year.
Primary and fully diluted earnings per share decreased from $0.55 in the
comparable quarter last year to a net loss per share of $0.78 (including a $0.50
per share impact for the third quarter special charge ). Net income for the nine
months ended February 28, 1997 was $11.9 million versus $30.2 million in the
comparable period last year. Primary and fully diluted earnings per share
decreased to $0.72 from $1.87 primary and $1.86 fully diluted in the comparable
nine month period in the prior year.
-6-
Liquidity and Capital Resources
The Company had a net decrease in cash and cash equivalents for the nine months
ended February 28, 1997 of $2.0 million, compared to a net decrease for the
comparable period in the prior year of $2.6 million. Cash provided by financing
and operating activities funded the net cash used in investing activities during
the nine months ended February 28, 1997.
For the nine months ended February 28, 1997 and February 29, 1996, net cash
provided by financing activities was $86.8 million and $96.6 million,
respectively. Financing activities consisted primarily of borrowings and
paydowns under the Loan Agreement and Revolver, the issuance of the Notes in
fiscal 1997 and the sale of the Debentures in fiscal 1996. Proceeds from the
sale of Debentures, the issuance of the Notes and borrowings under the Loan
Agreement as well as cash provided by operating activities have been the primary
source of the Company's liquidity.
Cash used in investing activities was $107.9 million and $96.2 million for the
first nine months of fiscal 1997 and 1996, respectively. Investing activities
primarily consisted of payments for business and trademark acquisitions, royalty
advances, prepublication and preproduction cost expenditures, and payments for
capital expenditures. Business and trademark acquisition payments totaled $32.2
million and $19.8 million for the first nine months of fiscal 1997 and 1996,
respectively. Fiscal 1997 acquisitions include Lectorum Publications, Inc. on
September 4, 1996, the United Kingdom subsidiary's acquisition of Red House Ltd.
on January 22, 1997 and the Company's investment in Gallimard S. A. on October
16, 1996. Payments for royalty advances totaled $25.6 million and $14.6 million
for the first nine months of fiscal 1997 and 1996, respectively. The $11.0
million increase in advance payments over the comparable period in the prior
year was largely the result of an extended agreement entered into by the Company
to publish Goosebumps. Prepublication cost expenditures totaled $21.6 million
and $37.4 million for the first nine months of fiscal 1997 and 1996,
respectively. The $15.8 million decrease in prepublication costs for the nine
months ended February 28, 1997 over the comparable period in the prior year was
largely due to higher investments by the Company during the prior period in its
instructional publishing and technology based activities, primarily in the
development of a literacy program. Cash used in other investing activities such
as preproduction cost expenditures and payments for capital expenditures changed
modestly from the first nine months of fiscal 1996.
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
foreseeable future.
-7-
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5
These items, which would be answered in the negative, have been omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
3(a) Amended and Restated Certificate of Incorporation of the
Registrant.(1)
(b) By-Laws of the Registrant.(2)
4(a) Amended and Restated Loan Agreement dated April 11, 1995 among the
Registrant, Scholastic Inc., Citibank, N.A., as agent, Marine
Midland Bank, Chase Manhattan Bank, N.A., The First National Bank of
Boston and United Jersey Bank.(4)
(b) Amendment to the Amended and Restated Loan Agreement dated May 1,
1996.(6)
(c) Revolving Loan Agreement dated June 19, 1995 between the Registrant,
Scholastic Inc. and Sun Bank, National Association.(3)
(d) Amendment to the Revolving Loan Agreement dated August 14, 1996.(3)
(e) Overdraft Facility dated June 1, 1992, as amended on September 12,
1994 between Scholastic Canada Ltd. and CIBC.(3)
(f) Overdraft Facility dated June 24, 1993 between Scholastic Ltd.
(formerly known as Scholastic Publications Ltd.) and Citibank,
N.A.(3)
(g) Overdraft Facility dated May 14, 1992 as amended on November 2,
1992, between Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Midland Bank.(3)
(h) Overdraft Facility dated April 20, 1993 between Ashton Scholastic
Ltd. and ANZ Banking Group Ltd.(3)
(i) Overdraft Facility dated February 12, 1993, as amended on January
31, 1995 between Scholastic Australia Pty. Ltd. (formerly known as
Ashton Scholastic Pty. Ltd.) and National Australia Bank Ltd.(3)
(j) Indenture dated August 15, 1995, relating to $110 million of 5%
Convertible Subordinated Debentures due August 15, 2005 issued by
the Registrant.(5)
(k) Indenture dated December 15, 1996, relating to $125 million of 7%
Notes due December 15, 2003 issued by the Registrant.(7)
11 Computation of Net Income per Class A, Common and Class A Share and
Common Share Equivalents.
(b) Reports on Form 8-K.
- None.
- ------------
Footnotes:
(1) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 33-46338) as filed with the Commission on March 12,
1992.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1(Registration No. 33-45022) as filed with the Commission on January 10,
1992 (the "1992 Registration Statement").
(3) Such long-term debt does not individually amount to more than 10% of the
total assets of the subsidiaries on a Registrant and its consolidated basis.
Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such
instrument is not filed herewith. The Registrant hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
(4) Incorporated by reference to the Company's Form 10-Q for the quarter ended
February 28, 1995 as filed with the Commission on April 13, 1995 (File No.
0-19860).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28, 1995 ( File No. 0-19860).
(6) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 28, 1996 (File No. 0-19860).
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3 (Registration No. 333-17365) as filed with the Commission on December
11, 1996.
-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: April 14, 1997 /s/ Richard Robinson
Chairman of the Board,
President, Chief Executive
Officer & Director
Date: April 14, 1997 /s/ Kevin J. McEnery
Executive Vice President and
Chief Financial Officer
-9-
EXHIBIT 11
SCHOLASTIC CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER CLASS A, COMMON AND CLASS A
SHARE AND COMMON SHARE EQUIVALENTS
(Amounts in thousands except shares and per share data)
Three Months Ended Nine Months Ended
--------------------------- --------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net income (loss) used for primary
earnings per share $ (12,538) $ 8,889 $ 11,941 $ 30,219
Net interest savings from assumed conversion
of Convertible Subordinated Debentures 0 853 2,558 1,847
---------- ---------- ---------- ----------
Net income (loss) used for fully diluted
earnings per share $ (12,538) $ 9,742 $ 14,499 $ 32,066
========== ========== ========== ==========
Primary:
Weighted average Class A and Common
Shares outstanding 16,088,377 15,830,313 15,972,576 15,765,778
Common Share equivalents arising from
outstanding options computed on the
treasury stock method 0 440,650 513,928 376,722
---------- ---------- ---------- ----------
Primary Class A, Common and Class A
Share and Common Share Equivalents
outstanding 16,088,377 16,270,963 16,486,505 16,142,500
Fully Diluted:
Additional dilutive effect of outstanding
options computed on the treasury stock
method 0 0 0 47,359
Assumed conversion of Convertible
Subordinated Debentures 0 1,431,174 1,452,045 1,033,625
---------- ---------- ---------- ----------
Fully diluted Class A, Common and Class
A Share and Common Share Equivalents
outstanding 16,088,377 17,702,137 17,938,550 17,223,484
========== ========== ========== ==========
Primary earnings (loss) per share $ (0.78) $ 0.55 $ 0.72 $ 1.87
Fully diluted earnings (loss) per share $ (0.78) $ 0.55 $ 0.72 $ 1.86
5
1,000
YEAR 9-MOS
MAY-31-1996 MAY-31-1997
MAY-31-1996 FEB-28-1997
4,300 2,270
0 0
127,553 112,971
9,163 8,536
180,937 230,084
350,480 399,992
146,155 169,296
32,018 40,272
673,166 789,085
173,398 172,044
110,000 235,000
163 166
0 0
0 0
288,484 310,322
673,166 789,085
928,599 711,491
928,599 711,491
466,030 378,361
833,406 669,204
37,358 11,693
9,565 8,810
11,170 12,027
46,665 18,567
14,768 6,626
31,897 11,941
0 0
0 0
0 0
31,897 11,941
1.97 0.72
1.97 0.72
