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 August 31, 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
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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 September 30, 1997
------------------- -----------------------------
Common Stock, $.01 par value 15,379,032
Class A Stock, $.01 par value 828,100
SCHOLASTIC CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1997
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Condensed Statement of Operations for the Three
Months Ended August 31, 1997 and 1996 1
Consolidated Condensed Balance Sheet at August 31, 1997,
May 31, 1997 and August 31, 1996 2
Consolidated Condensed Statement of Cash Flows for the Three
Months Ended August 31, 1997 and 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 - 9
SIGNATURES 10
PART I - FINANCIAL INFORMATION
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in millions except per share data)
Three Months Ended
----------------------------
August 31, August 31,
1997 1996
---------- ----------
Revenues $ 166.6 $ 158.6
Operating costs and expenses:
Cost of goods sold 95.5 93.7
Selling, general and administrative expenses 82.3 80.6
Intangible amortization and depreciation 5.0 3.5
-------- -------
Total operating costs and expenses 182.8 177.8
Operating loss (16.2) (19.2)
Interest expense, net 5.1 3.4
-------- -------
Loss before benefit for income taxes (21.3) (22.6)
Benefit for income taxes 8.1 8.6
-------- -------
Net loss $ (13.2) $ (14.0)
======== =======
Net loss per share $ (0.81) $ (0.88)
Weighted average shares outstanding 16.2 15.9
SEE ACCOMPANYING NOTES
-1-
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in millions)
August 31, 1997 May 31, 1997 August 31, 1996
---------------- ------------- --------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1.4 $ 4.9 $ 1.1
Accounts receivable less allowance for
doubtful accounts 117.1 100.5 123.3
Inventories:
Paper 10.7 8.1 17.1
Books and other 252.5 213.9 225.9
Deferred taxes 36.5 30.2 30.8
Prepaid and other deferred expenses 34.3 38.7 18.4
-------- ------- -------
Total current assets 452.5 396.3 416.6
Property, plant and equipment, net 132.2 134.0 116.0
Prepublication costs 99.7 102.1 103.1
Goodwill and trademarks 66.5 67.8 41.2
Royalty advances 47.6 43.4 26.1
Other assets and deferred charges 43.1 40.8 39.3
-------- ------- -------
$ 841.6 $ 784.4 $ 742.3
======== ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 10.6 $ 5.0 $ 24.8
Accounts payable 97.9 74.2 70.2
Accrued royalties 19.4 12.2 28.5
Deferred revenue 15.7 9.0 13.8
Other current liabilities 56.5 80.2 56.8
-------- ------- -------
Total current liabilities 200.1 180.6 194.1
Noncurrent liabilities:
Long-term debt 341.0 287.9 248.8
Other noncurrent liabilities 18.0 18.4 23.8
-------- ------- -------
Total noncurrent liabilities 359.0 306.3 272.6
Commitments and Contingencies -- -- --
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 203.8 203.8 195.9
Accumulated earnings 117.8 131.0 116.5
Less shares held in treasury (36.8) (36.8) (36.8)
Foreign currency translation adjustment (2.5) (0.7) (0.2)
-------- ------- -------
Total stockholders' equity 282.5 297.5 275.6
-------- ------- -------
$ 841.6 $ 784.4 $ 742.3
======== ======= =======
SEE ACCOMPANYING NOTES
-2-
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended
------------------------------
August 31, August 31,
1997 1996
------------ ---------
Net cash used in operating activities $(42.9) $(52.1)
Cash flows from investing activities:
Royalty advances paid (6.7) (3.9)
Prepublication cost expenditures (5.5) (4.8)
Production cost expenditures (3.5) (3.6)
Additions to property, plant and equipment (2.5) (4.7)
Other, net (1.2) (0.8)
------ ------
Net cash used in investing activities (19.4) (17.8)
Cash flows from financing activities:
Borrowings under loan agreement and revolver 100.2 112.1
Principal paydowns on loan agreement and revolver (47.3) (50.2)
Borrowings under lines of credit 12.5 9.2
Principal paydowns on lines of credit (6.6) (5.5)
Other, net 0.0 1.1
------ ------
Net cash provided by financing activities 58.8 66.7
Effects of exchange rate changes on cash 0.0 0.0
------ ------
Decrease in cash and cash equivalents (3.5) (3.2)
Cash and cash equivalents at beginning of period 4.9 4.3
------ ------
Cash and cash equivalents at end of period $ 1.4 $ 1.1
====== ======
Supplemental information:
Income taxes paid $ 0.7 $ 0.9
Interest paid $ 8.1 $ 4.1
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 1997 Annual Report to shareholders.
Scholastic Corporation, together with its subsidiaries and affiliates (the
"Company") is among the leading publishers and distributors of children's books,
classroom and professional magazines and other educational materials. The
Company distributes most of its products directly to children and teachers in
elementary and secondary schools and as a result its business cycle is closely
correlated to the normal school year. The results of operations for the three
months ended August 31, 1997 and 1996 are not 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.
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 the amount of
$135.0 million, with a right, in certain circumstances, to increase such amount
to $160.0 million. The Loan Agreement expires on May 31, 2000. At August 31,
1997, the amount available of $135.0 million was reduced by letters of credit
outstanding in the amount of $1.0 million, and the aggregate amount of
borrowings was $85.0 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 August 31, 1997, the aggregate
amount of borrowings was $17.5 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 is payable semi-annually on December 15 and
June 15 of each year. The 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.
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
-4-
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.
3. 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.
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.
-5-
SCHOLASTIC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the quarter ended August 31, 1997 increased from $158.6 million to
$166.6 million, or 5%, versus the comparable quarter of the prior year. Revenues
improved primarily due to a $6.8 million, or 6%, increase in domestic book
publishing, resulting from strong sales of Scholastic's instructional publishing
reading program, SCHOLASTIC LITERACY PLACE(R), combined with increased sales of
new trade publishing properties, including ANIMORPHS(TM), DEAR AMERICA(TM), and
SCHOLASTIC CHILDREN'S DICTIONARY(TM), which offset a decrease in domestic
GOOSEBUMPS(R) sales. International revenues increased by 11% versus the
comparable quarter last year. This increase is attributed to strong growth in
the United Kingdom, including improved trade sales and additional revenues from
the Red House acquisition in January 1997.
As a percentage of revenue, cost of goods sold decreased from 59.1% to 57.3%
compared to the prior year first quarter. The decrease in cost of goods sold as
a percentage of revenue is due to a change in product mix, lower paper, printing
and binding costs due to market conditions and improved purchasing terms as well
as modifying product specifications to lower costs. Selling, general and
administrative expenses as a percentage of revenue decreased modestly versus the
prior year.
The operating loss for the quarter ended August 31, 1997 decreased 16% from a
loss of $19.2 million in the prior fiscal year to a loss of $16.2 million in
this fiscal year. The net loss for the quarter ended August 31, 1997 was $13.2
million, or $0.81 net loss per share, versus $14.0 million, or $0.88 net loss
per share, in the comparable quarter in the prior year. Scholastic's first
quarter is traditionally a loss period due to significantly lower revenues from
the Company's school-based book club, book fair and classroom magazine
businesses, which operate at a substantially lower level during the summer
months and incur a higher level of operating expenses as a percentage of
revenue.
LIQUIDITY AND CAPITAL RESOURCES
The decreases in the Company's cash and cash equivalents were comparable during
the first quarter of fiscal 1998 and 1997. During the first quarter of each of
these fiscal years, cash provided by financing activities funded operating and
investing activities.
For the first quarter of fiscal 1998 and 1997, net cash provided by financing
activities was $58.8 million and $66.7 million, respectively. Financing
activities primarily consisted of borrowings and paydowns under the Loan
Agreement and the Revolver. Borrowings under the Loan Agreement and the
Revolver, as well as the issuance of the Notes and the Debentures have been a
primary source of the Company's liquidity. In the three months of June, July and
August, the Company experiences negative cash flows due to the seasonality of
the business, and as a consequence its borrowings increase during these months.
Cash used in investing activities was $19.4 million and $17.8 million for the
first quarter of fiscal 1998 and 1997, respectively. Investing activities
primarily consist of royalty advances, prepublication and production cost
expenditures, and payments for capital expenditures. Royalty advances increased
$2.8 million to $6.7 million in the first quarter of fiscal 1998 versus $3.9
million in the first quarter of fiscal 1997. This increase reflects primarily
the impact of an extension of the agreement to publish GOOSEBUMPS. Capital
expenditures decreased $2.2 million from $4.7 million to $2.5 million for the
first quarter of fiscal 1998. Cash used in prepublication expenditures increased
modestly from the first quarter of fiscal 1997.
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.
-6-
RECENT ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. The Company is required to adopt the provisions of SFAS 128 for
the quarter ended February 28, 1998. The principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are related to
the exclusion of common stock equivalents in the determination of basic earnings
per share and the market price at which common stock equivalents are calculated
in the determination of diluted earnings per share. In accordance with the
provisions of SFAS 128, both basic and diluted earnings per share are $(0.81) at
August 31, 1997 and $(0.88) at August 31, 1996.
In June 1997, the Financial Accounting Standards Board issued 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 Company is required to adopt the provisions of SFAS
130 for fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of
an Enterprise and Related Information." This statement requires that public
business enterprises report certain information about operating segments, 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 128 for
the quarter ended February 28, 1998 and does not expect the adoption of SFAS 131
to have a material effect on its Results of Operations.
-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 and Citibank, N.A., as agent,
Marine Midland Bank, Chase Manhattan Bank, N.A., The
First National Bank of Boston and United Jersey Bank.
(3)
(b) Amendment to the Amended and Restated Loan
Agreement dated May 1, 1996. (4)
(c) Amendment to the Amended and Restated Loan
Agreement dated May 28, 1997. (5)
(d) Revolving Loan Agreement dated June 19, 1995
between the Registrant and Sun Bank, National
Association, as amended August 14, 1996 and May 30,
1997. (6)
(e) Overdraft Facility dated June 1, 1992, as amended
on October 30, 1995 between Scholastic Canada Ltd. and
CIBC. (6)
(f) Overdraft Facility dated June 24, 1993 between
Scholastic Ltd. (formerly known as Scholastic
Publications Ltd.) and Citibank, N.A. (6)
(g) Overdraft Facility dated May 14, 1992 as amended on
June 30 1995, between Scholastic Ltd. (formerly known
as Scholastic Publications Ltd.) and Midland Bank. (6)
(h) 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.
(6)
(i) Overdraft Facility dated April 20, 1993 between
Scholastic New Zealand Ltd., (formerly Ashton
Scholastic Ltd.) and ANZ Banking Group Ltd. (6)
(j) Indenture dated August 15, 1995, relating to $110
million of 5% Convertible Subordinated Debentures due
August 15, 2005 issued by the Registrant. (7)
(k) Indenture dated December 15, 1996, relating to $125
million of 7% Notes due December 15, 2003 issued by the
Registrant. (8)
(b) Reports on Form 8-K.
- None.
-8-
- -------
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) 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).
(4) 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).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K as
filed with the Commission on August 26, 1997 (File No. 0-19860).
(6) 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.
(7) Incorporated by reference to the Company's Form 10-Q as filed with the
Commission on August 28, 1995 (File No. 0-19860).
(8) 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.
-9-
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, 1997 /s/ Richard Robinson
---------------- --------------------
Chairman of the Board,
President, Chief Executive
Officer and Director
Date: October 15, 1997 /s/ Kevin J. McEnery
---------------- --------------------
Executive Vice President and
Chief Financial Officer
-10-
5
1,000
3-MOS
May-31-1998
Aug-31-1997
1,384
0
125,995
8,903
263,228
452,509
178,602
46,435
841,551
200,137
234,712
175
0
0
282,290
841,551
166,602
166,602
95,494
177,828
5,006
2,883
5,049
(21,281)
(8,087)
(13,194)
0
0
0
(13,194)
(0.81)
(0.81)
