<PAGE>
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 November 30, 1996
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 December 31, 1996
------------------- -----------------------
Common Stock, $.01 par value 15,244,899
Class A Stock, $.01 par value 828,100
<PAGE>
SCHOLASTIC CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Part I - Financial Information Page
------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Statement of Income for the Three
Months Ended November 30, 1996 and November 30, 1995
and for the Six Months ended November 30, 1996 and 1995 1
Consolidated Condensed Balance Sheet at November 30, 1996,
May 31, 1996 and November 30, 1995 2
Consolidated Condensed Statement of Cash Flows for the Six
Months Ended November 30, 1996 and November 30, 1995 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
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Amounts in thousands except shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 342,174 $ 294,610 $ 500,763 $ 429,801
Operating costs and expenses:
Cost of goods sold 165,799 139,315 259,534 221,055
Selling, general and administrative expenses 106,683 98,943 187,244 163,132
Intangible amortization and depreciation 4,125 3,142 7,613 5,664
----------- ----------- ----------- -----------
Total operating costs and expenses 276,607 241,400 454,391 389,851
Operating income 65,567 53,210 46,372 39,950
Interest expense, net 4,211 3,014 7,582 5,365
----------- ----------- ----------- -----------
Income before provision for income taxes 61,356 50,196 38,790 34,585
Provision for income taxes 22,886 19,074 14,311 13,255
----------- ----------- ----------- -----------
Net income $ 38,470 $ 31,122 $ 24,479 $ 21,330
=========== =========== =========== ===========
Primary earnings per share $ 2.36 $ 1.92 $ 1.51 $ 1.32
Fully diluted earnings per share $ 2.21 $ 1.81 $ 1.47 $ 1.31
Weighted average Class A, Common and
Class A Share and Common Share
Equivalents:
Primary 16,322,474 16,180,250 16,254,388 16,100,166
Fully diluted 17,780,788 17,660,765 17,763,006 17,008,669
</TABLE>
SEE ACCOMPANYING NOTES
-1-
<PAGE>
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
November 30, 1996 May 31, 1996 November 30, 1995
----------------- ------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,212 $ 4,300 $ 567
Accounts receivable less allowance for
doubtful accounts 184,907 118,390 157,966
Inventories:
Paper 16,616 9,041 14,778
Books and other 222,603 180,937 203,303
Prepaid and other deferred expenses 17,296 15,118 17,531
Deferred taxes current 23,605 22,694 17,715
--------- --------- ---------
Total current assets 467,239 350,480 411,860
Property, plant and equipment, net 122,111 114,137 101,001
Prepublication costs 104,185 105,016 95,233
Other assets and deferred charges 117,758 103,533 59,790
--------- --------- ---------
$ 811,293 $ 673,166 $ 667,884
========= ========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 64,609 63,148 60,181
Deferred revenue 34,064 9,216 35,059
Other accrued expenses 65,096 60,756 67,575
Other current liabilities 48,659 40,278 29,852
--------- --------- ---------
Total current liabilities 212,428 173,398 192,667
Noncurrent liabilities:
Long-term debt 252,350 186,810 178,151
Other noncurrent liabilities 23,983 24,311 22,130
--------- --------- ---------
Total noncurrent liabilities 276,333 211,121 200,281
Stockholders' equity:
Class A Stock, $.01 par value 8 8 8
Common Stock, $.01 par value 165 163 163
Additional paid-in capital 202,349 194,785 192,947
Accumulated earnings 155,122 130,643 120,076
Less shares held in treasury (36,812) (36,812) (36,812)
Foreign currency translation adjustment 1,700 (140) (1,446)
--------- --------- ---------
Total stockholders' equity 322,532 288,647 274,936
--------- --------- ---------
811,293 673,166 $ 667,884
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
-2-
<PAGE>
SCHOLASTIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
November 30, November 30,
1996 1995
------------ ------------
<S> <C> <C>
Net cash used in operating activities $ (26,706) $ (36,955)
Cash flows from investing activities:
Additions to property, plant and equipment (12,977) (12,003)
Prepublication cost expenditures (12,765) (26,735)
Business acquisition-related payments (10,829) (1,068)
Royalty advances paid (7,988) (9,965)
Preproduction cost expenditures (6,244) (6,989)
--------- ---------
Net cash used in investing activities (50,803) (56,760)
Cash flows from financing activities:
Borrowings under lines of credit 152,183 115,250
Principal paydowns on lines of credit (86,757) (138,708)
Proceeds received from issuance of convertible debt 0 107,250
Proceeds received from notes payable 17,760 27,612
Principal paydowns on notes payable (15,282) (23,900)
Tax benefit realized from stock option transactions 3,622 2,228
Other, net 3,914 826
--------- ---------
Net cash provided by financing activities 75,440 90,558
Effects of exchange rate changes on cash (19) 16
--------- ---------
Net decrease in cash and cash equivalents (2,088) (3,141)
Cash and cash equivalents at beginning of period 4,300 3,708
--------- ---------
Cash and cash equivalents at end of period $ 2,212 $ 567
========= =========
Supplemental information:
Income taxes paid $ 9,672 $ 1,288
Interest paid $ 6,844 $ 4,139
</TABLE>
SEE ACCOMPANYING NOTES
-3-
<PAGE>
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 six months ended November 30, 1996 and November 30, 1995 are not
indicative of the results expected for the full year. Due to the seasonal
fluctuations that occur, the prior year's November 30 balance sheet is included
for comparative purposes.
Certain prior year amounts have been reclassified in the accompanying
consolidated condensed financial statements to conform to the current year
presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions.
2. Long Term Debt
The Company has a loan agreement (the "Loan Agreement") with certain banks which
provide for revolving credit loans and letters of credit in the amount of $135.0
million, with a right, in certain circumstances, to increase it up to $160.0
million. The Loan Agreement expires on May 31, 2000. At November 30, 1996, 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 was $115.0
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 November 30, 1996, the aggregate
amount of borrowings was $24.6 million.
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.
-4-
<PAGE>
3. Stockholder's Equity
During the six months ended November 30, 1996, options to purchase a total of
192,225 shares of Common Stock were exercised at per share prices ranging from
$1.17 to $57.56. The exercise of these options resulted in a tax deduction of
$3.6 million, which was credited directly to additional paid-in capital.
4. Subsequent Event
On December 23, 1996, the Company issued $125.0 million of 7% Notes due December
15, 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 underwriting discount and other
related offering costs. The Company utilized the net proceeds to repay amounts
outstanding under the Loan Agreement.
-5-
<PAGE>
SCHOLASTIC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the quarter ended November 30, 1996 increased from $294.6 million
to $342.2 million, or 16%, versus the comparable quarter of the prior year.
Revenues improved due to a $22.6 million, or 11%, increase in domestic book
publishing, resulting from an increase in Book Fairs sales and an increase in
book club sales due to the addition of the Trumpet book clubs that were acquired
in January 1996. Media, TV/Movie Productions and Licensing revenues increased
129% from $9.1 million to $21.0 million due to increased merchandising and
licensing revenues primarily from Goosebumps merchandise licensing royalties.
International revenues also increased by 27% versus the comparable quarter last
year due to strong trade and book fair sales in the Canadian and United Kingdom
subsidiaries, with the United Kingdom revenue benefiting from the Pages book
fairs purchased in March 1996. Revenues for the six months ended November 30,
1996 totaled $500.8 million, a 17% increase over revenue reported for the six
months ended November 30, 1995.
As a percentage of revenue, cost of goods sold increased 1.2% for the quarter
and 0.4% for the six months ended November 30, 1996 versus the comparable
periods in the prior year. For the quarter the increase is a result of the
Company's sales mix and increased prepublication cost amortization due to
Scholastic's Literacy Place program, partly offset by the sales growth in
merchandise licensing. Selling, general and administrative expense as a
percentage of revenue decreased 2.4% for the quarter and 0.6% for the six months
ended November 30, 1996 versus the comparable periods in the prior year, largely
as a result of selling expenses growing slower than sales.
Operating income for the quarter ended November 30, 1996 increased from $53.2
million in the corresponding quarter of the prior fiscal year to $65.6 million.
This increase in operating income results reflects the increase in high margin
license royalties combined with improved international and children's book
publishing margins. Operating income for the six months ended November 30, 1996,
increased $6.4 million or 16% over the six months ended November 30, 1995.
Net income for the quarter ended November 30, 1996 was $38.5 million versus
$31.1 million in the comparable quarter in the prior year. Primary earnings per
share increased to $2.36 from $1.92 and fully diluted earnings per share
increased to $2.21 from $1.81 in the comparable quarter last year. Net income
for the six months ended November 30, 1996 was $24.5 million versus $21.3
million in the comparable period last year. Primary earnings per share increased
to $1.51 from $1.32 and fully diluted earnings per share increased to $1.47 from
$1.31 in the comparable six month period in the prior year.
-6-
<PAGE>
Liquidity and Capital Resources
The Company had a net decrease in cash and cash equivalents for the six months
ended November 30, 1996 of $2.1 million, compared to a net decrease for the
comparable period in the prior year of $3.1 million. Cash provided by financing
activities funded the net cash used in operating and investing activities during
the six months ended November 30, 1996 and 1995.
For the six months ended November 30, 1996 and 1995, net cash provided by
financing activities was $75.4 million and $90.6 million, respectively.
Financing activities consisted primarily of borrowings and paydowns under the
Loan Agreement and Revolver and, in the prior year, also of the sale of
Debentures. Proceeds from the sale of Debentures and borrowings under the Loan
Agreement have been the primary source of the Company's liquidity.
Cash used in investing activities was $50.8 million and $56.8 million for the
first six months of fiscal 1997 and 1996, respectively. Investing activities
primarily consist of prepublication and production cost expenditures, payments
for capital expenditures, payments for business and trademark acquisitions, and
royalty advances. Prepublication cost expenditures totaled $12.8 million and
$26.7 million for the first six months of fiscal 1997 and 1996, respectively.
The $13.9 million decrease in prepublication costs for the six months ended
November 30, 1996 over the comparable period in the prior year was largely due
to the reduction of costs associated with the Company's investment in its
instructional publishing and technology based activities, primarily the
development of a literacy program. Business and trademark acquisition payments
totaled $10.8 million and $1.1 million for the first six months of fiscal 1997
and 1996, respectively, was due largely to the Company's acquisition of Lectorum
Publications, Inc. on September 4, 1996, and the Company's investment in
Gallimard S.A. Cash used in other investing activities such as production cost
expenditures, payments for capital expenditures and royalty advances changed
modestly from the first six months of fiscal 1996.
The Company believes its existing cash position, combined with funds generated
from operations, the proceeds from the issuance of the $125.0 million of Notes
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-
<PAGE>
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) Revolving Loan Agreement dated June 19, 1995 between the
Registrant, Scholastic Inc. and Sun Bank, National
Association. (3)
(c) Overdraft Facility dated June 1, 1992, as amended on
September 12, 1994 between Scholastic Canada Ltd. and
CIBC. (3)
(d) Overdraft Facility dated June 24, 1993 between Scholastic
Ltd. (formerly known as Scholastic Publications Ltd.) and
Citibank, N.A. (3)
(e) 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)
(f) Overdraft Facility dated April 20, 1993 between Ashton
Scholastic Ltd. and ANZ Banking Group Ltd. (3)
(g) 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)
(h) Indenture dated August 15, 1995, relating to $110 million
of 5% Convertible Subordinated Debentures due August 15,
2005 issued by the Registrant. (5)
(i) Indenture dated December 15, 1996, relating to $125
million of 7% Notes due December 15, 2003 issued by the
Registrant. (6)
11 Computation of Net Income per Class A, Common and Class A
Share and Common Share Equivalents.
(b) Reports on Form 8-K.
- Current Report filed on Form 8-K with the Commission on
December 12, 1996
- -----------
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 Registration Statement on
Form S-3 (Registration No. 333-17365) as filed with the Commission on
December 11, 1996.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Scholastic Corporation
----------------------------
(Registrant)
Date: January 14, 1997 /s/ Richard Robinson
----------------------------
Chairman of the Board,
President, Chief Executive
Officer & Director
Date: January 14, 1997 /s/ Kevin J. McEnery
----------------------------
Executive Vice President and
Chief Financial Officer
-9-
<PAGE>
EXHIBIT 11
SCHOLASTIC CORPORATION
COMPUTATION OF NET INCOME PER CLASS A, COMMON AND CLASS A
SHARE AND COMMON SHARE EQUIVALENTS
(Amounts in thousands except shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
----------- ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income used for primary earnings per
share $ 38,470 $ 31,122 $ 24,479 $ 21,330
Net interest savings from assumed conversion
of Convertible Subordinated Debentures 853 853 1,705 995
----------- ------------ ----------- ------------
Net income used for fully diluted earnings
per share $ 39,323 $ 31,975 $ 26,184 $ 22,325
=========== ============ =========== ============
Primary:
Weighted average Class A and Common
Shares outstanding 15,946,780 15,761,145 15,915,111 15,733,686
Common Share equivalents arising from
outstanding options computed on the
treasury stock method 375,694 419,105 339,277 366,480
----------- ------------ ----------- ------------
Primary Class A, Common and Class A
Share and Common Share Equivalents
outstanding 16,322,474 16,180,250 16,254,388 16,100,166
Fully Diluted:
Additional dilutive effect of outstanding
options computed on the treasury stock
method 24,159 46,360 56,573 73,652
Assumed conversion of Convertible
Subordinated Debentures 1,434,155 1,434,155 1,452,045 834,851
----------- ------------ ----------- ------------
Fully diluted Class A, Common and Class
A Share and Common Share Equivalents
outstanding 17,780,788 17,660,765 17,763,006 17,008,669
=========== ============ =========== ============
Primary earnings per share $ 2.36 $ 1.92 $ 1.51 $ 1.32
Fully diluted earnings per share $ 2.21 $ 1.81 $ 1.47 $ 1.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 2,212
<SECURITIES> 0
<RECEIVABLES> 199,349
<ALLOWANCES> 14,442
<INVENTORY> 239,219
<CURRENT-ASSETS> 467,239
<PP&E> 159,560
<DEPRECIATION> 37,449
<TOTAL-ASSETS> 811,293
<CURRENT-LIABILITIES> 212,428
<BONDS> 110,000
0
0
<COMMON> 165
<OTHER-SE> 322,367
<TOTAL-LIABILITY-AND-EQUITY> 811,293
<SALES> 500,763
<TOTAL-REVENUES> 500,763
<CGS> 259,534
<TOTAL-COSTS> 446,778
<OTHER-EXPENSES> 7,613
<LOSS-PROVISION> 5,228
<INTEREST-EXPENSE> 7,582
<INCOME-PRETAX> 38,790
<INCOME-TAX> 14,311
<INCOME-CONTINUING> 24,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,479
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.47
</TABLE>
