Scholastic Corp. 10-Q Summary: Quarter Ended August 31, 1998
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended August 31, 1998 (Fiscal Q1 1999). Scholastic Corporation is a global children's publishing and media company with operations in the U.S., U.K., Canada, Australia, and other regions. The company distributes books, magazines, and educational materials primarily through school-based channels. The first quarter is traditionally a loss period due to the seasonal nature of school-based book clubs and fairs during summer months.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Revenues | $150.2 million | $166.6 million |
| Operating Loss | $(23.8) million | $(16.2) million |
| Net Loss | $(17.5) million | $(13.2) million |
| Net Loss Per Share (Basic/Diluted) | $(1.08) | $(0.81) |
| Cash and Cash Equivalents | $1.1 million | $1.4 million |
| Total Debt (Current + Long-term) | $320.9 million | $351.6 million |
| Cost of Goods Sold Margin | 56.7% of Revenue | 57.7% of Revenue |
Liquidity: Net cash used in operating activities was $37.3 million. Net cash used in investing activities was $36.4 million, driven by acquisitions and production costs. Net cash provided by financing activities was $9.7 million, primarily through borrowings under credit facilities.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 10% to $150.2 million. This was driven by a 9% drop in domestic book publishing due to lower trade sales and timing shifts in California orders for "Scholastic Literacy Place." The sale of the SOHO Group magazine asset in January 1998 also reduced revenue by approximately $4.5 million.
- Widened Losses: Operating loss increased 47% to $23.8 million, and net loss increased to $17.5 million. While cost of goods sold improved as a percentage of revenue, selling, general, and administrative (SG&A) expenses rose 6.5% due to the acquisition of Pages Book Fairs, Inc., Year 2000 compliance costs, and increased spending for book club/fair activities.
- Debt Position: Total debt decreased slightly compared to the prior year due to repayments, though borrowings increased during the quarter to fund seasonal cash flow needs. Outstanding borrowings under the Loan Agreement and Revolver totaled $68.3 million.
Outlook, Risks, and Contingencies
- Seasonality: Management expects negative cash flow to continue through June to September, with borrowings typically peaking in September or October.
- Year 2000 Compliance: The company is in the remediation phase of its Y2K program. Total estimated costs are $10.0 to $12.0 million, with $3.0 million incurred to date. Completion is expected by August 31, 1999. Management anticipates no material adverse impact but notes risks regarding third-party supplier failures.
- Legal Proceedings:
- Securities Litigation: The company and certain officers are defendants in a securities class action alleging false statements regarding financial condition. The company believes the claims are without merit.
- Parachute Press Litigation: Ongoing dispute regarding the "Goosebumps" series. Parachute seeks approximately $36.1 million in advances; Scholastic seeks repayment of a portion of the $15.3 million already paid. The company does not believe this will have a material adverse effect.
- Acquisitions: In June 1998, the company acquired assets of Pages Book Fairs, Inc. for approximately $10.5 million.
Investor Verification Checklist
- Verify the impact of the timing shift in California "Scholastic Literacy Place" orders on future revenue recognition.
- Monitor the resolution of the Parachute Press litigation regarding the Goosebumps franchise and potential financial exposure.
- Track the progress and cost overruns of the Year 2000 compliance program, specifically regarding third-party supplier readiness.
- Assess the company's ability to refinance or extend its credit facilities expiring in May 2000.
- Review the integration and performance of the Pages Book Fairs, Inc. acquisition.