FORM 10-Q
| For the quarterly period ended February 28, | Commission File No. 000-19860 |
| Delaware | |
| (State or other jurisdiction of | |
| incorporation or organization) | |
| 557 Broadway, New York, New York | |
| (Address of principal executive offices) | |
Registrant's telephone number, including area code (212) 343-6100
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.
YesX No _
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerX Accelerated filer _ Non-accelerated filer _
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _ NoX No _
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Title | Number of shares outstanding | ||
| of each class | as of March 31, | ||
2006 | |||
| Common Stock, $.01 par value | |||
| Class A Stock, $.01 par value | 1,656,200 | ||
| SCHOLASTIC CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2006 INDEX |
| Part I - Financial Information | Page | |||
| Item 1. | Financial Statements | |||
| Condensed Consolidated Statements of Operations - Unaudited for the | ||||
| Three and Nine Months Ended February 28, | 1 | |||
| Condensed Consolidated Balance Sheets - February 28, | ||||
| | 2005 - Unaudited; and May 31, | 2 | ||
| Consolidated Statements of Cash Flows - Unaudited for the Nine | ||||
| Months Ended February 28, | 3 | |||
| Notes to Condensed Consolidated Financial Statements - Unaudited | 4 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition | |||
| and Results of Operations | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||
| Item 4. | Controls and Procedures | |||
| Part II – Other Information | ||||
| Item 6. | Exhibits | |||
Signatures | 31 | |||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying notes 1 CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions, except per share data)
See accompanying notes 2 CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED (Amounts in millions)
See accompanying notes 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) 1. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended | Nine months ended | |||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Revenues | $ | 480.8 | $ | 472.0 | $ | 1,487.8 | $ | 1,646.4 | ||||
| Operating costs and expenses: | ||||||||||||
| Cost of goods sold | 233.9 | 229.7 | 711.4 | 816.6 | ||||||||
| Selling, general and administrative expenses | 213.1 | 214.1 | 627.8 | 639.4 | ||||||||
| Selling, general and administrative expenses - | ||||||||||||
| Continuity charges | - | - | 3.6 | - | ||||||||
| Bad debt expense | 14.9 | 17.0 | 50.7 | 66.1 | ||||||||
| Depreciation and amortization | 13.1 | 13.5 | 39.1 | 39.8 | ||||||||
| Special severance charges | - | - | - | 3.2 | ||||||||
| Total operating costs and expenses | 475.0 | 474.3 | 1,432.6 | 1,565.1 | ||||||||
| Operating income (loss) | 5.8 | (2.3 | ) | 55.2 | 81.3 | |||||||
| Interest expense, net | 6.9 | 7.1 | 21.6 | 25.2 | ||||||||
| Earnings (loss) before income taxes | (1.1 | ) | (9.4 | ) | 33.6 | 56.1 | ||||||
| Provision (benefit) for income taxes | (0.4 | ) | (3.4 | ) | 11.9 | 20.2 | ||||||
| Net income (loss) | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | ||
| Earnings (loss) per Share of Class A and | ||||||||||||
| Common Stock: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.55 | $ | 0.91 | ||
| Diluted | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.54 | $ | 0.90 | ||
| See accompanying notes | ||||||||||||
| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||
| (Unaudited) | (Unaudited) | ||||||||
| ASSETS | |||||||||
| Current Assets: | |||||||||
| Cash and cash equivalents | $ | 22.1 | $ | 17.8 | $ | 20.9 | |||
| Accounts receivable, net | 249.1 | 265.7 | 261.4 | ||||||
| Inventories | 468.0 | 402.6 | 484.0 | ||||||
| Deferred promotion costs | 42.7 | 40.6 | 62.8 | ||||||
| Deferred income taxes | 75.9 | 73.4 | 74.7 | ||||||
| Prepaid and other current assets | 48.0 | 42.6 | 45.5 | ||||||
| Total current assets | 905.8 | 842.7 | 949.3 | ||||||
| Property, plant and equipment, net | 328.5 | 334.6 | 333.5 | ||||||
| Prepublication costs, net | 115.5 | 116.7 | 119.7 | ||||||
| Installment receivables, net | 10.2 | 13.1 | 12.4 | ||||||
| Production costs, net | 9.9 | 5.5 | 5.2 | ||||||
| Goodwill | 251.5 | 250.3 | 252.3 | ||||||
| Other intangibles, net | 78.7 | 78.9 | 79.0 | ||||||
| Other assets and deferred charges | 125.5 | 121.7 | 123.4 | ||||||
| Total assets | $ | 1,825.6 | $ | 1,763.5 | $ | 1,874.8 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| Current Liabilities: | |||||||||
| Lines of credit and short-term debt | $ | 21.3 | $ | 24.1 | $ | 95.8 | |||
| Accounts payable | 127.6 | 150.1 | 180.0 | ||||||
| Accrued royalties | 57.1 | 38.4 | 74.0 | ||||||
| Deferred revenue | 43.4 | 22.7 | 35.4 | ||||||
| Other accrued expenses | 128.4 | 129.8 | 123.7 | ||||||
| Total current liabilities | 377.8 | 365.1 | 508.9 | ||||||
| Noncurrent Liabilities: | |||||||||
| Long-term debt | 489.0 | 492.5 | 478.7 | ||||||
| Other noncurrent liabilities | 58.2 | 49.9 | 67.2 | ||||||
| Total noncurrent liabilities | 547.2 | 542.4 | 545.9 | ||||||
| Commitments and Contingencies | - | - | - | ||||||
| Stockholders’ Equity: | |||||||||
| Preferred Stock, $1.00 par value | - | - | - | ||||||
| Class A Stock, $.01 par value | 0.0 | 0.0 | 0.0 | ||||||
| Common Stock, $.01 par value | 0.4 | 0.4 | 0.4 | ||||||
| Additional paid-in capital | 405.3 | 388.1 | 386.0 | ||||||
| Deferred compensation | (1.5 | ) | (0.6 | ) | (0.7 | ) | |||
| Accumulated other comprehensive loss | (14.9 | ) | (21.5 | ) | (32.8 | ) | |||
| Retained earnings | 511.3 | 489.6 | 467.1 | ||||||
| Total stockholders’ equity | 900.6 | 856.0 | 820.0 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,825.6 | $ | 1,763.5 | $ | 1,874.8 | |||
| See accompanying notes | |||||||||
| Nine months ended | ||||||
| February 28, | February 29, | |||||
| 2005 | 2004 | |||||
| Cash flows provided by operating activities: | ||||||
| Net income | $ | 21.7 | $ | 35.9 | ||
| Adjustments to reconcile net income to net cash provided by operating | ||||||
| activities: | ||||||
| Provision for losses on accounts receivable | 50.7 | 66.1 | ||||
| Amortization of prepublication and production costs | 49.3 | 60.2 | ||||
| Depreciation and amortization | 39.1 | 39.8 | ||||
| Royalty advances expensed | 21.3 | 15.5 | ||||
| Deferred income taxes | (3.3 | ) | (0.1 | ) | ||
| Changes in assets and liabilities: | ||||||
| Accounts receivable, net | (27.1 | ) | (68.5 | ) | ||
| Inventories | (56.9 | ) | (95.8 | ) | ||
| Prepaid and other current assets | (4.0 | ) | 3.0 | |||
| Deferred promotion costs | (0.9 | ) | (7.9 | ) | ||
| Accounts payable and other accrued expenses | (26.2 | ) | 23.8 | |||
| Accrued royalties and deferred revenue | 37.8 | 56.9 | ||||
| Income tax benefit realized from stock option exercises | 1.5 | 0.4 | ||||
| Other, net | 2.0 | (10.9 | ) | |||
| Total adjustments | 83.3 | 82.5 | ||||
| Net cash provided by operating activities | 105.0 | 118.4 | ||||
| Cash flows used in investing activities: | ||||||
| Prepublication expenditures | (40.9 | ) | (38.9 | ) | ||
| Additions to property, plant and equipment | (31.4 | ) | (26.5 | ) | ||
| Royalty advances | (24.7 | ) | (18.4 | ) | ||
| Production expenditures | (12.8 | ) | (12.6 | ) | ||
| Acquisition-related payments | - | (8.8 | ) | |||
| Other | - | (0.5 | ) | |||
| Net cash used in investing activities | (109.8 | ) | (105.7 | ) | ||
| Cash flows provided by (used in) financing activities: | ||||||
| Borrowings under Credit Agreement, Loan Agreement and Revolver | 342.4 | 452.5 | ||||
| Repayments of Credit Agreement, Loan Agreement and Revolver | (344.6 | ) | (383.8 | ) | ||
| Borrowings under lines of credit | 169.0 | 204.2 | ||||
| Repayments of lines of credit | (172.4 | ) | (208.8 | ) | ||
| Repayment of 7% Notes | - | (125.0 | ) | |||
| Proceeds pursuant to employee stock plans | 14.2 | 6.1 | ||||
| Proceeds from swap termination | - | 3.8 | ||||
| Net cash provided by (used in) financing activities | 8.6 | (51.0 | ) | |||
| Effect of exchange rate changes on cash | 0.5 | 0.6 | ||||
| Net increase (decrease) in cash and cash equivalents | 4.3 | (37.7 | ) | |||
| Cash and cash equivalents at beginning of period | 17.8 | 58.6 | ||||
| Cash and cash equivalents at end of period | $ | 22.1 | $ | 20.9 | ||
| See accompanying notes | ||||||
1. Basis of Presentation
The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all wholly-ownedmajority-owned subsidiaries (collectively, “Scholastic” or the “Company”). These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that 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 Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004.2005.
The Company’s business is closely correlated to the school year. Consequently, the results of operations for the three and nine months ended February 28, 20052006 and February 29, 20042005 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the February 29, 200428, 2005 condensed consolidated balance sheet is included for comparative purposes.
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes and tax reserves, prepublication costs, royalty advances, goodwill and other intangibles.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Stock-Based Compensation
Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),Compensation,” the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock optionstock-based benefit plans. In accordance with APB No. 25, no compensation expense was recognized with respect to the Company’s stock optionstock-based benefit plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and within respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED | |
| Three months ended | Nine months ended | |||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Net income (loss) – as reported | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | ||
| Add: Stock-based employee compensation | ||||||||||||
| included in reported net income, net of tax | 0.1 | 0.1 | 0.2 | 0.3 | ||||||||
| Deduct: Total stock-based employee | ||||||||||||
| compensation expense determined under | ||||||||||||
| fair value based method, net of tax | (3.0 | ) | (2.7 | ) | (9.1 | ) | (9.2 | ) | ||||
| Net income (loss) – pro forma | $ | (3.6 | ) | $ | (8.6 | ) | $ | 12.8 | $ | 27.0 | ||
| Earnings (loss) per share – as reported: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.55 | $ | 0.91 | ||
| Diluted | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.54 | $ | 0.90 | ||
| Earnings (loss) per share – pro forma: | ||||||||||||
| Basic | $ | (0.09 | ) | $ | (0.22 | ) | $ | 0.32 | $ | 0.69 | ||
| Diluted | $ | (0.09 | ) | $ | (0.22 | ) | $ | 0.32 | $ | 0.68 | ||
| Net income (loss) – as reported | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||
| Add: Stock-based employee compensation | |||||||||||||||
| included in reported net income (loss), net of tax | 0.3 | 0.1 | 0.6 | 0.3 | |||||||||||
| Deduct: Total stock-based employee | |||||||||||||||
| compensation expense determined under | |||||||||||||||
| fair value-based method, net of tax | 2.5 | 3.0 | 7.9 | 9.0 | |||||||||||
| Net income (loss) – pro forma | $ | (17.7 | ) | $ | (3.7 | ) | $ | 22.9 | $ | 12.5 | |||||
| Earnings (loss) per share - as reported: | |||||||||||||||
| Basic | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.74 | $ | 0.53 | |||||
| Diluted | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.73 | $ | 0.52 | |||||
| �� | |||||||||||||||
| Earnings (loss) per share – pro forma: | |||||||||||||||
| Basic | $ | (0.42 | ) | $ | (0.09 | ) | $ | 0.56 | $ | 0.31 | |||||
| Diluted | $ | (0.42 | ) | $ | (0.09 | ) | $ | 0.55 | $ | 0.31 | |||||
New Accounting Pronouncements
OnIn December 16, 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting StandardsSFAS No. 123 (revised 2004),“Share-Based “Share-Based Payment” (“SFAS No. 123R”), which requires companies to measure compensation cost forexpense the fair value of all share-based payments (including employee stock options) at fair value, as currently permitted, but not required, under SFAS No. 123. SFAS No. 123R iswill be effective for the Company commencing SeptemberJune 1, 2005. However, retroactive2006. Retroactive application of the fair value recognition provisions of SFAS No. 123 to either June 1, 2005,is permitted, but not required. Alternatively, a company may use the beginning of the fiscal year that includes the effective datemodified prospective transition method for application of SFAS No. 123R,123R. Under this method, compensation expense is recognized for all share-based payments granted, modified or settled after the date of adoption based on their grant-date fair value. For awards granted prior to all prior years for whichthe adoption date, the compensation expense of any unvested portion is recognized over the remaining requisite service period. The Company intends to use the modified prospective transition method to adopt SFAS No. 123 was effective, is permitted, but is not required. The Company123R and is currently evaluating the impact that the adoption of SFAS No. 123R will have on its financial position, results of operations and cash flows. The cumulative effect of adoption, if any, will be measured and recognized in the statement of operations on the date of adoption.
2. Restatement of Previously Issued Consolidated Financial Statements
As a result of a comprehensive review of its lease accounting in the fourth quarter of fiscal 2005, the Company determined that it was appropriate to restate its previously issued annual and interim consolidated financial statements. The restatement was principally attributable to the treatment of certain leases previously classified as operating leases that should have been classified as capital leases and certain other operating leases that previously did not reflect future payment escalation clauses in determining rent expense. The classification of certain capital leases as operating leases principally had the effect of excluding assets subject to capital leases and the related capital lease obligations from the Company’s Consolidated Balance Sheet and treating rental payments as rent expense, rather than as interest expense and principal payments on capital lease obligations. Also, not considering future payment escalation clauses in determining rent expense for certain operating leases principallyhad theeffect of understating rent expense in the early periods of the lease agreements and overstating rent expense in the later periods of the lease agreements.
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED
(Amounts in millions, except per share data)
The Company has revised its accounting for these leasing transactions and restated its previously issued annual and interim Consolidated Financial Statements in its Annual Report on Form 10-K for the fiscal year ended May 31, 2005 to appropriately classify its leases and to appropriately reflect future payment escalation clauses in determining rent expense.
The following is a summary of the impact of the restatement on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2005:
Condensed Consolidated Statement of Operations | ||||||||||||
Three Months Ended February 28, 2005 | ||||||||||||
| Selling, general and administrative expenses | $ | 213.1 | $ | (4.7 | ) | $ | 208.4 | |||||
| Depreciation and amortization | 13.1 | 2.6 | 15.7 | |||||||||
| Operating income | 5.8 | 2.1 | 7.9 | |||||||||
| Interest expense, net | 6.9 | 2.2 | 9.1 | |||||||||
| Loss before income taxes | (1.1 | ) | (0.1 | ) | (1.2 | ) | ||||||
| Benefit for income taxes | (0.4 | ) | - | (0.4 | ) | |||||||
| Net loss | (0.7 | ) | (0.1 | ) | (0.8 | ) | ||||||
| Loss per share of Class A and Common Stock: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | 0.00 | $ | (0.02 | ) | ||||
| Diluted | (0.02 | ) | 0.00 | (0.02 | ) | |||||||
Condensed Consolidated Statement of Operations | ||||||||||||
Nine Months Ended February 28, 2005 | ||||||||||||
| Selling, general and administrative expenses | $ | 631.4 | $ | (12.6 | ) | $ | 618.8 | |||||
| Depreciation and amortization | 39.1 | 7.4 | 46.5 | |||||||||
| Operating income | 55.2 | 5.2 | 60.4 | |||||||||
| Interest expense, net | 21.6 | 5.8 | 27.4 | |||||||||
| Earnings before income taxes | 33.6 | (0.6 | ) | 33.0 | ||||||||
| Provision for income taxes | 11.9 | (0.1 | ) | 11.8 | ||||||||
| Net income | 21.7 | (0.5 | ) | 21.2 | ||||||||
| Earnings per share of Class A and Common Stock: | ||||||||||||
| Basic | $ | 0.55 | (0.02 | ) | $ | 0.53 | ||||||
| Diluted | 0.54 | (0.02 | ) | 0.52 | ||||||||
6
Condensed Consolidated Balance Sheet as of | |||||||||
| February 28, 2005 | |||||||||
| Property, plant and equipment, net | $ | 328.5 | $ | 62.2 | $ | 390.7 | |||
| Other assets and deferred charges | 66.3 | 6.5 | 72.8 | ||||||
| Total assets | 1,825.6 | 68.7 | 1,894.3 | ||||||
| Capital lease obligations - current | - | 11.6 | 11.6 | ||||||
| Total current liabilities | 377.8 | 11.6 | 389.4 | ||||||
| Capital lease obligations – noncurrent | - | 63.7 | 63.7 | ||||||
| Other noncurrent liabilities | 58.2 | 4.5 | 62.7 | ||||||
| Total noncurrent liabilities | 547.2 | 68.2 | 615.4 | ||||||
| Retained earnings | 511.3 | (11.1 | ) | 500.2 | |||||
| Total stockholders’ equity | 900.6 | (11.1 | ) | 889.5 | |||||
| Total liabilities and stockholders’ equity | $ | 1,825.6 | $ | 68.7 | $ | 1,894.3 | |||
| Consolidated Statement of Cash Flows – | |||||||||
| Nine Months Ended February 28, 2005 | |||||||||
| Net cash provided by operating activities | $ | 105.0 | $ | 7.1 | $ | 112.1 | |||
| Net cash provided by financing activities | 8.6 | (7.1 | ) | 1.5 | |||||
7
Scholastic is a global children’s publishing and media company. The Company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries, the internet and television networks. The Company categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution;Educational Publishing;Media, Licensing and Advertising(which collectively represent the Company’s domestic operations); andInternational. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources. Revenues and gross margin related to a segment’s products sold or services rendered through another segment’s distribution channel are reallocated to the segment originating the products or services.
•Children’s Book Publishing and Distribution includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
•Educational Publishing includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States.
•Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Corporation’sCompany’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
•Internationalincludes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
8
The following table sets forth information for the Company’s segments for the periods indicated. Certainindicated.In the fourth quarter of fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by theMedia, Licensing and Advertisingsegment that are sold through channels included in theChildren’s Book Publishing and Distributionsegment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the prior period inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in theMedia, Licensing and Advertisingsegment with an offsetting decrease in gross margin and profits in theChildren’s Book Publishing and Distributionsegment. Prior year amountssegment results have been reclassified to conform with the present year presentation.reflect this reallocation. Three months ended February 28, 2006 Revenues $ 270.9 $ 73.5 $ 46.4 $ 0.0 $ 390.8 $ 96.9 $ 487.7 Bad debt 11.4 1.5 0.1 0.0 13.0 2.7 15.7 Depreciation and amortization 3.4 0.6 0.0 11.7 15.7 1.0 16.7 Amortization(2) 4.2 6.9 4.8 0.0 15.9 0.5 16.4 Royalty advances expensed 6.2 0.3 0.2 0.0 6.7 1.0 7.7 Segment profit (loss)(3) (3.2 ) (3.5 ) 6.3 (19.7 ) (20.1 ) 2.3 (17.8 ) Expenditures for 14.0 7.3 2.4 9.7 33.4 3.7 37.1 Three months ended February 28, 2005 - Restated Revenues $ 272.3 $ 79.3 $ 37.2 $ 0.0 $ 388.8 $ 92.0 $ 480.8 Bad debt 11.8 0.6 0.1 0.0 12.5 2.4 14.9 Depreciation and amortization 4.2 0.8 0.3 8.7 14.0 1.7 15.7 Amortization(2) 4.4 8.2 4.2 0.0 16.8 0.1 16.9 Royalty advances expensed 14.0 0.6 (0.2 ) 0.0 14.4 0.7 15.1 Segment profit (loss)(3) 14.7 4.9 4.4 (19.1 ) 4.9 3.0 7.9 Expenditures for long-lived assets(4) 18.3 11.0 5.6 5.0 39.9 0.7 40.6 Nine months ended February 28, 2006 Revenues $ 970.4 $ 301.0 $ 116.4 $ 0.0 $ 1,387.8 $ 295.0 $ 1,682.8 Bad debt 33.0 2.9 0.3 0.0 36.2 7.2 43.4 Depreciation and amortization 12.7 2.7 1.1 28.3 44.8 4.3 49.1 Amortization(2) 12.4 22.8 17.2 0.0 52.4 1.5 53.9 Royalty advances expensed 17.3 1.3 0.6 0.0 19.2 1.7 20.9 Segment profit (loss)(3) 65.7 45.6 8.3 (56.9 ) 62.7 9.6 72.3 Segment assets 1,026.3 301.4 68.4 420.3 1,816.4 308.2 2,124.6 Goodwill 130.6 82.5 9.8 0.0 222.9 30.7 253.6 Expenditures for 51.9 22.0 10.9 23.4 108.2 10.2 118.4 Long-lived assets(5) 332.4 182.6 31.9 291.5 838.4 104.0 942.4
9
| Children’s | Media, | ||||||||||||||||||||
| Book | Licensing | ||||||||||||||||||||
| Publishing and | Educational | and | Total | ||||||||||||||||||
| Distribution | Publishing | Advertising | Overhead(1) | Domestic | International | Consolidated | |||||||||||||||
| Three months endedFebruary 28, 2005 | |||||||||||||||||||||
| Revenues | $ | 272.3 | $ | 79.3 | $ | 37.2 | $ | 0.0 | $ | 388.8 | $ | 92.0 | $ | 480.8 | |||||||
| Bad debt | 11.8 | 0.6 | 0.1 | 0.0 | 12.5 | 2.4 | 14.9 | ||||||||||||||
| Depreciation | 4.1 | 0.8 | 0.3 | 6.1 | 11.3 | 1.7 | 13.0 | ||||||||||||||
| Amortization(2) | 4.5 | 8.2 | 4.2 | 0.0 | 16.9 | 0.1 | 17.0 | ||||||||||||||
| Royalty advances | |||||||||||||||||||||
| expensed | 6.3 | 0.6 | (0.2 | ) | 0.0 | 6.7 | 0.7 | 7.4 | |||||||||||||
| Segment profit (loss)(3) | 16.5 | 4.0 | 1.3 | (19.4 | ) | 2.4 | 3.4 | 5.8 | |||||||||||||
| Expenditures for | |||||||||||||||||||||
| long-lived assets(4) | 18.3 | 11.0 | 5.6 | 5.0 | 39.9 | 0.7 | 40.6 | ||||||||||||||
| Three months ended February 29, 2004 | |||||||||||||||||||||
| Revenues | $ | 271.5 | $ | 69.4 | $ | 43.5 | $ | 0.0 | $ | 384.4 | $ | 87.6 | $ | 472.0 | |||||||
| Bad debt | 14.5 | 0.2 | 0.2 | 0.0 | 14.9 | 2.1 | 17.0 | ||||||||||||||
| Depreciation | 4.2 | 0.8 | 0.4 | 6.3 | 11.7 | 1.7 | 13.4 | ||||||||||||||
| Amortization(2) | 4.6 | 8.7 | 13.0 | 0.0 | 26.3 | 0.2 | 26.5 | ||||||||||||||
| Royalty advances | |||||||||||||||||||||
| expensed | 5.1 | 0.1 | 0.0 | 0.0 | 5.2 | 0.8 | 6.0 | ||||||||||||||
| Segment profit (loss)(3) | 10.6 | 3.2 | 0.3 | (17.2 | ) | (3.1 | ) | 0.8 | (2.3 | ) | |||||||||||
| Expenditures for | |||||||||||||||||||||
| long-lived assets(4) | 11.9 | 8.4 | 3.2 | 4.2 | 27.7 | 1.9 | 29.6 | ||||||||||||||
| Nine months endedFebruary 28, 2005 | |||||||||||||||||||||
| Revenues | $ | 819.1 | $ | 292.0 | $ | 96.7 | $ | 0.0 | $ | 1,207.8 | $ | 280.0 | $ | 1,487.8 | |||||||
| Bad debt | 42.1 | 1.2 | 0.5 | 0.0 | 43.8 | 6.9 | 50.7 | ||||||||||||||
| Depreciation | 10.8 | 2.4 | 1.2 | 19.8 | 34.2 | 4.7 | 38.9 | ||||||||||||||
| Amortization(2) | 12.7 | 25.1 | 11.1 | 0.0 | 48.9 | 0.6 | 49.5 | ||||||||||||||
| Royalty advances | |||||||||||||||||||||
| expensed | 18.6 | 0.9 | 0.1 | 0.0 | 19.6 | 1.7 | 21.3 | ||||||||||||||
| Segment profit (loss)(3) | 47.2 | 46.8 | (2.2 | ) | (56.2 | ) | 35.6 | 19.6 | 55.2 | ||||||||||||
| Segment assets | 796.6 | 304.3 | 63.7 | 347.7 | 1,512.3 | 313.3 | 1,825.6 | ||||||||||||||
| Goodwill | 127.9 | 82.5 | 10.7 | 0.0 | 221.1 | 30.4 | 251.5 | ||||||||||||||
| Expenditures for | |||||||||||||||||||||
| long-lived assets(4) | 49.9 | 27.9 | 14.2 | 13.0 | 105.0 | 4.8 | 109.8 | ||||||||||||||
| Long-lived assets(5) | 320.5 | 185.5 | 37.4 | 232.1 | 775.5 | 105.4 | 880.9 | ||||||||||||||
| Nine months ended February 29, 2004 | |||||||||||||||||||||
| Revenues | $ | 1,010.1 | $ | 262.5 | $ | 106.3 | $ | 0.0 | $ | 1,378.9 | $ | 267.5 | $ | 1,646.4 | |||||||
| Bad debt | 58.8 | 0.6 | 0.8 | 0.0 | 60.2 | 5.9 | 66.1 | ||||||||||||||
| Depreciation | 9.9 | 2.4 | 1.4 | 21.0 | 34.7 | 4.9 | 39.6 | ||||||||||||||
| Amortization(2) | 13.2 | 25.9 | 20.7 | 0.0 | 59.8 | 0.6 | 60.4 | ||||||||||||||
| Royalty advances | |||||||||||||||||||||
| expensed | 12.1 | 0.9 | 0.6 | 0.0 | 13.6 | 1.9 | 15.5 | ||||||||||||||
| Segment profit (loss)(3) | 87.7 | 32.0 | (1.6 | ) | (55.0 | ) | 63.1 | 18.2 | 81.3 | ||||||||||||
| Segment assets | 828.1 | 298.2 | 65.1 | 369.0 | 1,560.4 | 314.4 | 1,874.8 | ||||||||||||||
| Goodwill | 129.4 | 82.5 | 11.0 | 0.0 | 222.9 | 29.4 | 252.3 | ||||||||||||||
| Expenditures for | |||||||||||||||||||||
| long-lived assets(4) | 41.8 | 25.3 | 22.4 | 10.4 | 99.9 | 5.3 | 105.2 | ||||||||||||||
| Long-lived assets(5) | 310.6 | 189.2 | 34.6 | 237.9 | 772.3 | 105.1 | 877.4 |
| Nine months ended | ||||||||||||||
| February 28, 2005 - Restated | ||||||||||||||
| Revenues | $ 819.1 | $ 292.0 | $ 96.7 | $ 0.0 | $ 1,207.8 | $ 280.0 | $ 1,487.8 | |||||||
| Bad debt | 42.1 | 1.2 | 0.5 | 0.0 | 43.8 | 6.9 | 50.7 | |||||||
| Depreciation and | ||||||||||||||
| amortization | 11.0 | 2.4 | 1.2 | 27.2 | 41.8 | 4.7 | 46.5 | |||||||
| Amortization(2) | 12.5 | 25.1 | 11.1 | 0.0 | 48.7 | 0.6 | 49.3 | |||||||
| Royalty advances | ||||||||||||||
| expensed | 18.6 | 0.9 | 0.1 | 0.0 | 19.6 | 1.7 | 21.3 | |||||||
| Segment profit (loss)(3) | 41.6 | 48.7 | 6.7 | (55.8 | ) | 41.2 | 19.2 | 60.4 | ||||||
| Segment assets | 795.6 | 304.9 | 64.0 | 416.4 | 1,580.9 | 313.4 | 1,894.3 | |||||||
| Goodwill | 127.9 | 82.5 | 10.7 | 0.0 | 221.1 | 30.4 | 251.5 | |||||||
| Expenditures for | ||||||||||||||
| long-lived assets(4) | 49.9 | 27.9 | 14.2 | 13.0 | 105.0 | 4.8 | 109.8 | |||||||
| Long-lived assets(5) | 320.5 | 185.5 | 37.4 | 294.3 | 837.7 | 105.4 | 943.1 | |||||||
| (1) | Overhead includes all domestic corporate amounts not allocated to reportable segments, |
| (2) | Includes amortization of prepublication costs and production costs |
| (3) | Segment profit (loss) represents |
| (4) | Includes expenditures for property, plant and equipment, investments in prepublication and production costs, royalty advances and acquisitions of, and investments in, businesses. |
| (5) | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles, royalty advances, production costs and long-term investments. |
10
| Three months ended February 28, 2005 andFebruary 29, 2004 | ||||||||||||||||||
| Direct-to-home | All Other | Total | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Revenues | $ | 32.8 | $ | 45.5 | $ | 239.5 | $ | 226.0 | $ | 272.3�� | $ | 271.5 | ||||||
| Bad debt | 7.2 | 9.9 | 4.6 | 4.6 | 11.8 | 14.5 | ||||||||||||
| Depreciation | 0.1 | 0.1 | 4.0 | 4.1 | 4.1 | 4.2 | ||||||||||||
| Amortization(1) | 0.3 | 0.5 | 4.2 | 4.1 | 4.5 | 4.6 | ||||||||||||
| Royalty advances expensed | 1.2 | 1.4 | 5.1 | 3.7 | 6.3 | 5.1 | ||||||||||||
| Business profit(2) | 0.4 | 0.2 | 16.1 | 10.4 | 16.5 | 10.6 | ||||||||||||
| Expenditures for long-lived assets(3) | 2.2 | 1.7 | 16.1 | 10.2 | 18.3 | 11.9 | ||||||||||||
| Nine months ended February 28, 2005 and February 29, 2004 | ||||||||||||||||||
| Direct-to-home | All Other | Total | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Revenues | $ | 113.4 | $ | 150.8 | $ | 705.7 | $ | 859.3 | $ | 819.1 | $ | 1,010.1 | ||||||
| Bad debt | 28.0 | 36.5 | 14.1 | 22.3 | 42.1 | 58.8 | ||||||||||||
| Depreciation | 0.4 | 0.3 | 10.4 | 9.6 | 10.8 | 9.9 | ||||||||||||
| Amortization(1) | 0.9 | 1.0 | 11.8 | 12.2 | 12.7 | 13.2 | ||||||||||||
| Royalty advances expensed | 2.1 | 2.5 | 16.5 | 9.6 | 18.6 | 12.1 | ||||||||||||
| Business profit (loss)(2) | (4.2 | ) | 2.2 | 51.4 | 85.5 | 47.2 | 87.7 | |||||||||||
| Business assets | 232.9 | 275.3 | 563.7 | 552.8 | 796.6 | 828.1 | ||||||||||||
| Goodwill | 92.4 | 92.5 | 35.5 | 36.9 | 127.9 | 129.4 | ||||||||||||
| Expenditures for long-lived assets(3) | 6.4 | 3.9 | 43.5 | 37.9 | 49.9 | 41.8 | ||||||||||||
| Long-lived assets(4) | 145.7 | 143.9 | 174.8 | 166.7 | 320.5 | 310.6 | ||||||||||||
| Three months ended | |||||||||||||||||||||||
| February 28, | |||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
| Restated | Restated | Restated | |||||||||||||||||||||
| Revenues | $ | 34.6 | $ | 32.8 | $ | 236.3 | $ | 239.5 | $ | 270.9 | $ | 272.3 | |||||||||||
| Bad debt | 7.5 | 7.2 | 3.9 | 4.6 | 11.4 | 11.8 | |||||||||||||||||
| Depreciation and amortization | 0.0 | 0.1 | 3.4 | 4.1 | 3.4 | 4.2 | |||||||||||||||||
| Amortization(1) | 0.6 | 0.3 | 3.6 | 4.1 | 4.2 | 4.4 | |||||||||||||||||
| Royalty advances expensed | 1.8 | 1.2 | 4.4 | 12.8 | 6.2 | 14.0 | |||||||||||||||||
| Business profit (loss)(2) | (2.5 | ) | 0.7 | (0.7 | ) | 14.0 | (3.2 | ) | 14.7 | ||||||||||||||
| Expenditures for long-lived assets(3) | 1.7 | 2.2 | 12.3 | 16.1 | 14.0 | 18.3 | |||||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| February 28, | |||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
| Restated | Restated | Restated | |||||||||||||||||||||
| Revenues | $ | 93.0 | $ | 113.4 | $ | 877.4 | $ | 705.7 | $ | 970.4 | $ | 819.1 | |||||||||||
| Bad debt | 22.0 | 28.0 | 11.0 | 14.1 | 33.0 | 42.1 | |||||||||||||||||
| Depreciation and amortization | 0.8 | 0.5 | 11.9 | 10.5 | 12.7 | 11.0 | |||||||||||||||||
| Amortization(1) | 1.2 | 0.9 | 11.2 | 11.6 | 12.4 | 12.5 | |||||||||||||||||
| Royalty advances expensed | 2.2 | 2.1 | 15.1 | 16.5 | 17.3 | 18.6 | |||||||||||||||||
| Business profit (loss)(2) | (13.3 | ) | (4.2 | ) | 79.0 | 45.8 | 65.7 | 41.6 | |||||||||||||||
| Business assets | 241.1 | 232.9 | 785.2 | 562.7 | 1,026.3 | 795.6 | |||||||||||||||||
| Goodwill | 92.4 | 92.4 | 38.2 | 35.5 | 130.6 | 127.9 | |||||||||||||||||
| Expenditures for long-lived assets(3) | 4.7 | 6.4 | 47.2 | 43.5 | 51.9 | 49.9 | |||||||||||||||||
| Long-lived assets(4) | 143.6 | 145.7 | 188.8 | 174.8 | 332.4 | 320.5 | |||||||||||||||||
| (1) | Includes amortization of prepublication |
| (2) | Business profit (loss) represents |
| (3) | Includes expenditures for property, plant and equipment, investments in prepublication costs, royalty advances and acquisitions of businesses. |
| (4) | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles and royalty advances. |
11
3.SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)
The following table summarizes debt as of the dates indicated:
| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||
| Lines of Credit | $ | 20.8 | $ | 23.0 | $ | 26.8 | |||
| Credit Agreement, Loan Agreement and Revolver | 12.0 | 14.2 | 68.7 | ||||||
| 5.75% Notes due 2007, net of premium/discount | 304.0 | 305.5 | 305.9 | ||||||
| 5% Notes due 2013, net of discount | 173.0 | 172.8 | 172.8 | ||||||
| Other debt | 0.5 | 1.1 | 0.3 | ||||||
| Total debt | 510.3 | 516.6 | 574.5 | ||||||
| Less lines of credit and short-term debt | (21.3 | ) | (24.1 | ) | (95.8 | ) | |||
| Total long-term debt | $ | 489.0 | $ | 492.5 | $ | 478.7 | |||
| Lines of Credit | $ | 30.6 | $ | 24.7 | $ | 20.8 | ||||||
| Credit Agreement and Revolver | - | - | 12.0 | |||||||||
| 5.75% Notes due 2007, net of premium | 295.9 | 303.5 | 304.0 | |||||||||
| 5% Notes due 2013, net of discount | 173.2 | 173.0 | 173.0 | |||||||||
| Other debt | 0.3 | 0.2 | 0.5 | |||||||||
| Total debt | 500.0 | 501.4 | 510.3 | |||||||||
| Less current portion of long-term debt, lines | ||||||||||||
| of credit and short-term debt | (326.8 | ) | (24.9 | ) | (21.3 | ) | ||||||
| Total long-term debt, excluding current portion | $ | 173.2 | $ | 476.5 | $ | 489.0 | ||||||
The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of February 28, 20052006 for the remainder of fiscal 20052006 and thereafter:
| May 31, | ||||
| Three-month period ending: | 2005 | $ | 21.3 | |
| Fiscal years ending: | 2006 | - | ||
| 2007 | 304.0 | |||
| 2008 | - | |||
| 2009 | 12.0 | |||
| Thereafter | 173.0 | |||
| Total debt | $ | 510.3 | ||
| Three-month period ending May 31: | |||
| 2006 | $ | 18.7 | |
| Fiscal years ending May 31: | |||
| 2007 | 308.1 | ||
| 2008 | - | ||
| 2009 | - | ||
| 2010 | - | ||
| Thereafter | 173.2 | ||
| Total debt | $ | 500.0 | |
Lines of Credit
Certain of Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $65.4 in the aggregate at February 28, 2006, as compared to $64.6 at February 28, 2005 as compared to $66.8 at February 29, 2004 and $62.1$61.8 at May 31, 2004.2005. There were borrowings outstanding under these lines of credit equivalent to $30.6 at February 28, 2006, as compared to $20.8 at February 28, 2005 as compared to $26.8 at February 29, 2004 and $23.0$24.7 at May 31, 2004.2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.7% and 6.1% at both February 28, 2006 and 2005, respectively, and February 29, 2004 and 5.5%5.4% at May 31, 2004.2005.
12
On March 31, 2004, Scholastic Corporation and its principal operating subsidiary, Scholastic Inc., entered intoare parties to an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire on August 11, 2004 (the “Loan Agreement”). The Credit Agreement, which expires on March 31, 2009,2009. The Credit Agreement provides for aggregate borrowings of up to $190.0 (with a right in certain circumstances to increase borrowings to $250.0), including the issuance of up to $10.0 in letters of credit. Interest under this facility is either at the prime rate or at a rate equal to 0.325% to 0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.25% if borrowings
exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of February 28, 20052006 were 0.55%0.675% over LIBOR, 0.15%0.20% and 0.10%0.125%, respectively. The Credit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At bothThere were no borrowings outstanding under the Credit Agreement at February 28, 2005 and2006 or May 31, 2004,2005. At February 28, 2005, $12.0 was outstanding under the Credit Agreement at a weighted average interest rate of 3.1% and 1.7%, respectively. At February 29, 2004, $45.0 was outstanding under the Loan Agreement at a weighted average interest rate of 1.5% .
Revolver
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, theThe Revolver provides for unsecured revolving credit of up to $40.0 and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28, 20052006 were 0.60%0.725% over LIBOR and 0.15%0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2005. At February 29, 2004 and2006, May 31, 2004, $23.7 and $2.2, respectively, were outstanding under the Revolver at a weighted average interest rate of 1.7% and 3.0%, respectively.
5% Notes due 2013
On April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year. The Company may at any time redeem all2005 or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of the redemption.February 28, 2005.
5.75% Notes due 2007
In January 2002, Scholastic Corporation issued $300.0 of 5.75% Notes (the “5.75% Notes”). The 5.75% Notes are senior unsecured obligations that mature on January 15, 2007. Interest on the 5.75% Notes is payable semi-annually on July 15 and January 15 of each year. The Company may, at any time, redeem all or a portion of the 5.75% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of the redemption. Through February 28, 2006, the Company had repurchased $6.0 of the 5.75% Notes on the open market.
5% Notes due 2013
13
4.SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)
The following table sets forth comprehensive income (loss) for the periods indicated:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | ||||||||||||||||||||||||||
| Net income (loss) | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||||||
| Other comprehensive income (loss) - | |||||||||||||||||||||||||||||
| foreign currency translation adjustment | (2.4 | ) | 1.8 | 6.6 | 5.0 | 0.7 | (2.4 | ) | (4.1 | ) | 6.6 | ||||||||||||||||||
| Comprehensive income (loss) | $ | (3.1 | ) | $ | (4.2 | ) | $ | 28.3 | $ | 40.9 | $ | (14.8 | ) | $ | (3.2 | ) | $ | 26.1 | $ | 27.8 | |||||||||
14
5.SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted earnings (loss) per share is calculated to give effect to potentially dilutive options to purchase Class A Stock and Common Stock issuedgranted pursuant to the Company’s stock-based benefit plans that were outstanding during the period. The diluted loss per share was equal to the basic loss per share for the three months ended February 28, 20052006 and February 29, 20042005 because such options outstanding werewould have been antidilutive. The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings (loss) per share computations for the periods indicated:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | ||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
| Net income (loss) for basic and diluted | |||||||||||||||||||||||||||
| earnings per share | $ | (0.7 | ) | $ | (6.0 | ) | $ | 21.7 | $ | 35.9 | |||||||||||||||||
| earnings (loss) per share | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||||||||||||||
| Weighted average Shares of Class A Stock and | |||||||||||||||||||||||||||
| Weighted average Shares of Class A and | |||||||||||||||||||||||||||
| Common Stock outstanding for basic | |||||||||||||||||||||||||||
| earnings per share | 40.0 | 39.4 | 39.8 | 39.4 | |||||||||||||||||||||||
| Dilutive effect of Class A Stock and | |||||||||||||||||||||||||||
| earnings (loss) per share | 41.8 | 40.0 | 40.8 | 39.8 | |||||||||||||||||||||||
| Dilutive effect of Class A and | |||||||||||||||||||||||||||
| Common Stock issued pursuant to | |||||||||||||||||||||||||||
| stock-based benefit plans | - | - | 0.7 | 0.7 | - | - | 0.7 | 0.7 | |||||||||||||||||||
| Adjusted weighted average Shares of | |||||||||||||||||||||||||||
| Class A Stock and Common Stock | |||||||||||||||||||||||||||
| outstanding for diluted earnings per share | 40.0 | 39.4 | 40.5 | 40.1 | |||||||||||||||||||||||
| Class A and Common Stock outstanding | |||||||||||||||||||||||||||
| for diluted earnings (loss) per share | 41.8 | 40.0 | 41.5 | 40.5 | |||||||||||||||||||||||
| Earnings (loss) per share of Class A Stock | |||||||||||||||||||||||||||
| Earnings (loss) per share of Class A | |||||||||||||||||||||||||||
| and Common Stock: | |||||||||||||||||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.55 | $ | 0.91 | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.74 | $ | 0.53 | |||||||
| Diluted | $ | (0.02 | ) | $ | (0.15 | ) | $ | 0.54 | $ | 0.90 | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.73 | $ | 0.52 | |||||||
15
6.SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)
Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise.
The following table summarizes the activity in Goodwill for the periods indicated:
| The following table summarizes the activity in Goodwill for the periods indicated: | The following table summarizes the activity in Goodwill for the periods indicated: | ||||||||||||||||||||
| Nine months ended | Twelve months ended | Nine months ended | |||||||||||||||||||
| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||||||||||||||
| Beginning balance | $ | 250.3 | $ | 246.0 | $ | 246.0 | $ | 254.2 | $ | 249.7 | $ | 249.7 | |||||||||
| Additions due to acquisitions | - | 3.0 | 3.0 | - | 6.0 | - | |||||||||||||||
| Other adjustments | 1.2 | 1.3 | 3.3 | (0.6 | ) | (1.5 | ) | 1.8 | |||||||||||||
| Total | $ | 251.5 | $ | 250.3 | $ | 252.3 | $ | 253.6 | $ | 254.2 | $ | 251.5 | |||||||||
In the first quartertwelve months ended May 31, 2005, Additions due to acquisitions includes the purchase price for the acquisition of fiscal 2004, the Company acquired certain assets of Troll Holdings, Inc., formerly a national school-based book club operator and publisher, for $4.0 in cashChicken House Publishing Ltd. and the assumptionaccrual for a final payment related to the fiscal 2002 acquisition of certain ordinary course liabilities, and the stock of BTBCAT, Inc., which operates Back to Basics Toys, a direct-to-home catalog business specializing in children’s toys, for $4.8 in cash.Klutz.
The following table summarizes Other intangibles subject to amortization at the dates indicated:
| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||
| Customer lists | $ | 2.9 | $ | 2.9 | $ | 2.9 | |||
| Accumulated amortization | (2.7 | ) | (2.7 | ) | (2.6 | ) | |||
| Net customer lists | 0.2 | 0.2 | 0.3 | ||||||
| Other intangibles | 4.0 | 4.0 | 4.0 | ||||||
| Accumulated amortization | (2.6 | ) | (2.4 | ) | (2.4 | ) | |||
| Net other intangibles | 1.4 | 1.6 | 1.6 | ||||||
| Total | $ | 1.6 | $ | 1.8 | $ | 1.9 | |||
| Customer lists | $ | 3.0 | $ | 3.0 | $ | 2.9 | ||||||
| Accumulated amortization | (2.8 | ) | (2.8 | ) | (2.7 | ) | ||||||
| Net customer lists | 0.2 | 0.2 | 0.2 | |||||||||
| Other intangibles | 4.0 | 4.0 | 4.0 | |||||||||
| Accumulated amortization | (2.8 | ) | (2.6 | ) | (2.6 | ) | ||||||
| Net other intangibles | 1.2 | 1.4 | 1.4 | |||||||||
| Total | $ | 1.4 | $ | 1.6 | $ | 1.6 | ||||||
Amortization expense for Other intangibles totaled $0.0 and $0.2 for the three and nine months ended February 28, 2006, respectively, $0.1 and $0.2 for the three and nine months ended February 28, 2005, respectively, and $0.1 and $0.2 for the three and nine months ended February 29, 2004, respectively. Amortization expense was $0.3 for the twelve months ended May 31, 2004.2005. Amortization expense for these assets is currently estimated to total $0.3 for each of the fiscal yearsyear ending May 31, 2005 and 2006 and $0.2 for each of the fiscal years ending May 31, 2007 through 2009.2010. The weighted average amortization periods for these assets by major asset class are two years and 13 years for customer lists and twelve years for other intangibles, respectively.intangibles.
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
| February 28, 2005 | May 31, 2004 | February 29, 2004 | |||||||
| Net carrying value by major class: | |||||||||
| Titles | $ | 31.0 | $ | 31.0 | $ | 31.0 | |||
| Licenses | 17.2 | 17.2 | 17.2 | ||||||
| Major sets | 11.4 | 11.4 | 11.4 | ||||||
| Trademarks and Other | 17.5 | 17.5 | 17.5 | ||||||
| Total | $ | 77.1 | $ | 77.1 | $ | 77.1 | |||
| Net carrying value by major class: | ||||||||||
| Titles | $ | 31.0 | $ | 31.0 | $ | 31.0 | ||||
| Licenses | 17.2 | 17.2 | 17.2 | |||||||
| Major sets | 11.4 | 11.4 | 11.4 | |||||||
| Trademarks and Other | 17.5 | 17.5 | 17.5 | |||||||
| Total | $ | 77.1 | $ | 77.1 | $ | 77.1 | ||||
16
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data) 8. | |
7. Pension and Other Post-Retirement Benefits
The following tables set forth components of the net periodic benefit costs under the Company’s cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”), the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Inc.Corporation located in the United Kingdom (the “U.K. Pension Plan”), the defined benefit pension plan of Grolier Ltd., an indirect subsidiary of Scholastic Inc.Corporation located in Canada, (collectively, the “Pension Plans”), and the post-retirement benefits provided by the Company to its retired United States-based employees, consisting of certain healthcare and life insurance benefits (the “Post-Retirement Benefits”), for the periods indicated:
| Pension Plans | ||||||||||||||||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| February 28 | February 29 | February 28 | February 29 | |||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost: | ||||||||||||||||||||||||||||
| Service cost | $ | 2.0 | $ | 1.8 | $ | 5.9 | $ | 5.3 | $ | 2.0 | $ | 2.0 | $ | 6.1 | $ | 5.9 | ||||||||||||
| Interest cost | 2.1 | 1.9 | 6.2 | 5.8 | 2.1 | 2.1 | 6.2 | 6.2 | ||||||||||||||||||||
| Expected return on assets | (2.4 | ) | (2.0 | ) | (7.2 | ) | (6.0 | ) | (2.2 | ) | (2.4 | ) | (6.6 | ) | (7.2 | ) | ||||||||||||
| Net amortization and deferrals | 0.6 | 0.7 | 1.9 | 2.1 | 1.0 | 0.6 | 2.9 | 1.9 | ||||||||||||||||||||
| Decrease in valuation allowance | - | (0.3 | ) | - | (1.0 | ) | ||||||||||||||||||||||
| Net periodic benefit cost | $ | 2.3 | $ | 2.1 | $ | 6.8 | $ | 6.2 | $ | 2.9 | $ | 2.3 | $ | 8.6 | $ | 6.8 | ||||||||||||
| Post-Retirement Benefits | ||||||||||||||||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| February 28 | February 29 | February 28 | February 29 | |||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost: | ||||||||||||||||||||||||||||
| Service cost | $ | 0.1 | $ | 0.1 | $ | 0.3 | $ | 0.3 | $ | 0.1 | $ | 0.1 | $ | 0.4 | $ | 0.3 | ||||||||||||
| Interest cost | 0.5 | 0.5 | 1.6 | 1.5 | 0.5 | 0.5 | 1.4 | 1.6 | ||||||||||||||||||||
| Amortization of prior service cost | (0.2 | ) | (0.2 | ) | (0.6 | ) | (0.6 | ) | (0.2 | ) | (0.2 | ) | (0.6 | ) | (0.6 | ) | ||||||||||||
| Recognized gain or loss | 0.5 | 0.5 | 1.3 | 1.5 | 0.5 | 0.5 | 1.4 | 1.3 | ||||||||||||||||||||
| Net periodic benefit cost | $ | 0.9 | $ | 0.9 | $ | 2.6 | $ | 2.7 | $ | 0.9 | $ | 0.9 | $ | 2.6 | $ | 2.6 | ||||||||||||
In fiscal 2005,The Company currently estimates that it will contribute $0.6 to the U.S. Pension Plan in the year ending May 31, 2006. For the nine months ended February 28, 2006, the Company did not make any contributions to the U.S. Pension Plan. The Company currently estimates that Scholastic Ltd. will contribute the equivalent of $0.8$1.1 to the U.K. Pension Plan and Scholastic Inc. will contribute $2.5 towardin the Post-Retirement Benefits.fiscal year ending May 31, 2006. For the nine months ended February 28, 2005,2006, Scholastic Ltd. contributed the equivalent of $0.6$0.9 to the U.K. Pension PlanPlan.
17
Analysis of Financial Condition and Results of Operations
On May 28, 2003, the Company announced a reduction inScholastic’s third fiscal quarter is its global work force, and the Company has established liabilities for severance and other related costs with respect to employees notified in certain periods. These charges are reflected in the Company’s income statements as the Special severance charges and totaled $3.2 for the nine months ended February 29, 2004 and $10.9 and $3.3 for the twelve months ended May 31, 2003 and 2004, respectively.
A summary of the activity in the related liabilities is detailed in the following table:
| Amount | |||
| Fiscal2003 liabilities | $ | 10.9 | |
| Fiscal2003 payments | (1.2 | ) | |
| Balance at May 31, 2003 | 9.7 | ||
| Fiscal 2004 additional liabilities | 3.3 | ||
| Fiscal2004 payments | (10.9 | ) | |
| Balance at May 31, 2004 | 2.1 | ||
| Fiscal2005 payments | (1.2 | ) | |
| Balance at February 28, 2005 | $ | 0.9 | |
The remaining liability of $0.9 is expected to be paid over the current and next fiscal year under severance arrangements with certain affected employees.
9. Continuity Charges
In the fourth quarter of fiscal 2004, the Company recorded charges of $25.4 related to its continuity business. During the nine months ended February 28, 2005, the Company recorded additional charges of $3.6, relating primarily to severance costs in its continuity business, as Selling, general and administrative expenses. Substantially all such severance payments are to be made prior to May 31, 2005. The impact of these charges on earnings per diluted share in the nine months ended February 28, 2005 was $0.06.
10. Contingent Purchase Payment
In fiscal 2002, the Company completed the acquisition of Klutz, a publisher and creator of “books plus” products for children. In addition to the initial purchase price paid for Klutz of $42.8, the purchase agreement provided for additional payments of up to $31.3 in 2004 and 2005, contingent upon the achievement of certainsecond smallest revenue thresholds. The Company did not make any such payments in 2004.
Outlook and Overview
Results forperiod. For the quarter ended February 28, 2005 were consistent with2006, revenue increased slightly compared to the Company’s goal forprior fiscal 2005 of achieving higher profits and margins, as operating margins and profits improved in all segments.
In Scholastic’s second smallest revenue period, revenues were up 1.9%,year quarter, reflecting increases in theEducational Publishing, InternationalMedia, Licensing and Advertising andChildren’s Book Publishing and DistributionInternational segments, partially offset by a revenue decrease inMedia, Licensing and Advertising.
Net loss for the quarter ended February 28, 2005 improved to $0.7 million from $6.0 million in the prior fiscal year quarter. Key factors included higher operating margins in all segments; lower return levels, bad debt and promotional costsdeclines in theChildren’s Book Publishing and Distribution segment; continued growthandEducational Publishing segments. Higher expenses in revenuestheChildren’s Book Publishing and profitsDistribution segment, primarily in the Company’s school-based book club business, and lower educational technology revenues in theEducational Publishing segment ledresulted in a higher net loss for the quarter compared to the prior year period.
For the nine months ended February 28, 2006, revenues and net income increased over the prior fiscal year period by sales of educational technology products;$195.0 million and improved performance$9.0 million, respectively, primarily due to higherHarry Potterrevenues and profits in theInternationalChildren’s Book Publishing and Distributionsegment.
Based on the results for the quarter and their impact on the remainder of the fiscal year ending May 31, 2006, the Company lowered its forecasts for profitability for the year.
Scholastic is taking a number of actions intended to improve future profitability, including:
Revenues for the quarter ended February 28, 20052006 increased by $8.8$6.9 million, or 1.9%1.4%, to $480.8$487.7 million, compared to $472.0$480.8 million in the prior fiscal year quarter. The increase was due to higher revenues fromin theEducational Publishing, InternationalMedia, Licensing and Advertisingand Internationalsegments of $9.2 million and $4.9 million, respectively,partially offset by lower revenues in the Educational Publishing andChildren’s Book Publishing and Distributionsegments of $9.9 million, $4.4$5.8 million and $0.8$1.4 million, respectively, partially offset by a decrease in theMedia, Licensing & Advertisingsegmentof $6.3 million.respectively. For the nine months ended February 28, 2005,2006, revenues decreased by $158.6increased $195.0 million, or 9.6%13.1%, to $1,487.8$1,682.8 million, from $1,646.4compared to $1,487.8 million in the prior fiscal year period. This revenue decrease related primarilyperiod, due to $191.0increases in each of the Company’s four operating segments, led by $151.3 million in lowerhigher revenues from theChildren’s Book Publishing and Distribution segment as compared toa result of the prior fiscal year period, which reflected theJuly 2005 release ofHarry Potter and the Order ofHalf-Blood Prince, the Phoenix, the fifthsixth book in theHarry Potter series.
Cost of goods sold as a percentage of revenues remained relatively flat at 48.6%increased to 49.7% for the quarter ended February 28, 2005,2006, as compared to 48.7%48.6% in the prior fiscal year quarter.quarter, primarily due to the impact of higher sales of lower margin products. For the nine-month periodnine months ended February 28, 2005, cost2006, Cost of goods sold as a percentage of revenue improvedincreased to 47.8%49.5%, as compared to 49.6%47.8% in the prior fiscal year period, primarily due to higher costs related to the release ofHarry Potter and the Half-Blood Prince.
18
Children’s Book Publishing and Distribution segment. For the nine months ended February 28, 2006, Selling, general and administrative expenses as a percentage of revenues improveddecreased to 44.3% for the quarter ended February 28, 2005, as compared to 45.4%40.7% from 41.5% in the prior fiscal year quarter. This decrease wasperiod, primarily due to the revenue benefit fromHarry Potter and the Half-Blood Prince without a $13.6 million reduction in promotional costs, principally in the continuity business, partially offset by an $11.5 millioncorresponding increase in employee and related costs.expense. For the nine-month periodnine months ended February 28, 2005, Selling, general and administrative expenses included a charge of $3.6 million, inprimarily related to severance costs, and related employee expenses (the “Continuity Charges”) recorded in connection with changes to the Company’sfiscal 2004 review by the Company of its continuity business announced in fiscal 2004. As a percentage of revenues, Selling, general and administrative expenses for the nine-month period ended February 28, 2005 increased to 42.4% from 38.8% in the prior fiscal year period, primarily due to lower(the “Continuity Charges”).
Harry Potter revenues in the current fiscal year period without a corresponding decrease in expenses.
Bad debt expense decreasedincreased to $14.9$15.7 million, or 3.1%3.2% of revenues, for the quarter ended February 28, 2005,2006, compared to $17.0$14.9 million, or 3.6%3.1% of revenues, in the prior fiscal year quarter. The higher level of bad debt expense was associated with a large educational services provider in theEducational Publishing segment. For the nine months ended February 28, 2006, Bad debt expense decreased to $43.4 million, or 2.6% of revenues, compared to $50.7 million, or 3.4% of revenues, in the prior fiscal year period. The lower level of bad debt expense related primarily to lower bad debt in the Company’s continuity business as a result of the Company’s previously announced plan for this business to focus on its more productive customers.
Depreciation and amortization expense for the quarter ended February 28, 2006 increased to $16.7 million, or 3.4% of revenues, compared to $15.7 million, or 3.3% of revenues, in the prior fiscal year quarter. For the nine-month periodnine months ended February 28, 2005, bad debt2006, Depreciation and amortization expense decreasedincreased to $50.7$49.1 million, or 3.4%2.9% of revenues, compared to $66.1$46.5 million, or 4.0%3.1% of revenues, in the prior fiscal year period. These decreases related primarily to lower bad debtThe increases in the Company’s continuity business.
In connectionexpense were principally associated with the Company’s May 2003 announcementdepreciation of a reduction in its global work force, Special severance charges of $3.2 million were recorded in the nine-month period ended February 29, 2004 for employees notified in that period.information technology equipment.
The resulting operating incomeloss for the quarter ended February 28, 20052006 was $5.8$17.8 million, or 1.2% of revenues, compared to an operating lossincome of $2.3$7.9 million in the prior fiscal year quarter. For the nine months ended February 28, 2005,2006, the resulting operating income decreased to $55.2increased $11.9 million, or 3.7%19.7%, to $72.3 million, or 4.3% of revenues, compared to $81.3$60.4 million, or 4.9%4.1% of revenues, in the prior fiscal year period.
Net interest expense decreased slightly to $6.9 million inThe effective income tax rate for the quarter ended February 28, 2005,2006 increased to 37.0%, compared to $7.1 million33.3% in the prior fiscal year quarter. For the nine-month periodnine months ended February 28, 2005, net interest expense decreased $3.6 million2006, the effective income tax rate increased to $21.6 million as37.0%, compared to $25.2 million35.8% in the prior fiscal year period. The decreases in the three- and nine-month periodsThese increases were primarily due to lower debt levels.a higher effective tax rate on foreign earnings and a higher state tax provision.
Net loss was $0.7$15.5 million, or $0.02$0.37 per diluted share, for the quarter ended February 28, 2005,2006, compared to a net loss of $6.0$0.8 million, or $0.15$0.02 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2005,2006, net income was $21.7$30.2 million, or $0.54$0.73 per diluted share, compared to net income of $35.9$21.2 million, or $0.90$0.52 per diluted share, in the prior fiscal year period.
19
In the fourth quarter of fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by theMedia, Licensing and Advertisingsegment that are sold through channels included in theChildren’s Book Publishing and Distributionsegment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the prior fiscal year quarter inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in theMedia, Licensing and Advertisingsegment with an offsetting decrease in gross margin and profits in theChildren’s Book Publishing and Distributionsegment.
Children’s Book Publishing and Distribution
The Company’sChildren’s Book Publishing and Distribution segment includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| ($ amounts in millions) | ||||||||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
| Restated | Restated | |||||||||||||||||||||||||||
| Revenue | $ | 272.3 | $ | 271.5 | $ | 819.1 | $ | 1,010.1 | $ | 270.9 | $ | 272.3 | $ | 970.4 | $ | 819.1 | ||||||||||||
| Operating profit | 16.5 | 10.6 | 47.2 | * | 87.7 | |||||||||||||||||||||||
| Operating profit (loss) | (3.2 | ) | 14.7 | (1) | 65.7 | 41.6 | (1)(2) | |||||||||||||||||||||
| Operating margin | 6.1 | % | 3.9 | % | 5.8 | % | 8.7 | % | * | 5.4 | %(1) | 6.8 | % | 5.1 | %(1) | |||||||||||||
| *inclusive of $3.6 million of Continuity Charges | ||||||||||||||||||||||||||||
(1) | Reflects the Segment Reallocation. |
| (2) | Includes Continuity Charges related to this segment of $3.6. |
Revenues in theChildren’s Book Publishing and Distribution segment for the quarter ended February 28, 2005 increased $0.8 million to $272.32006 were down slightly at $270.9 million, compared to $271.5$272.3 million in the prior fiscal year quarter. Revenues inFor the Company’s trade and school-based book fairs businesses increased $15.8 million and $5.4 million, respectively, offset by revenue decreases in the Company’s continuity andcurrent fiscal year quarter, school-based book club businessesrevenues were $105.9 million, a decrease of $19.3$4.0 million, and $1.1 million, respectively. Revenue growthcompared to the prior fiscal year quarter, due to lower order levels primarily in the trade business was helped by lower returns in the quarter. The increase inTroll/Carnival and Trumpet clubs, and school-based book fair revenues wasdecreased by $1.2 million to $70.6 million. Revenues from the Company’s trade business were $43.7 million in the quarter ended February 28, 2006, an increase of $2.4 million compared to the prior fiscal year quarter, primarily due to an increase in revenue per fair. The revenue decrease inhigher back list revenues, and revenues from the Company’s continuity business was a result of the Company’s strategy of focusing on its more productive continuity customers. Excluding the direct-to-home continuity business described in the table below, segment revenuesincreased by $1.4 million to $50.7 million.
Segment operating loss for the quarter ended February 28, 2005 increased $13.52006 was $3.2 million, to $239.5 million, as compared to $226.0an operating profit of $14.7 million in the prior fiscal year quarter.quarter, principally related to higher promotion expense in the Company’s school-based book club business.
20
Revenues for the nine months ended February 28, 2005 decreased $191.0 million, or 18.9%, to $819.1 million, compared to $1,010.1 million in the prior fiscal year period. This decreasetrade revenues was primarily related to lower revenues from the Company’s trade business of $146.0 millionprincipally due to lowerHarry Potterrevenues of approximately $160$195 million, partially offset by increased non-as compared to approximately $15 million ofHarry Potterrevenues of approximately $14 million. Continuity business revenues decreased $49.6 million to $160.8 million, as compared to $210.4 million in the prior fiscal year period, as a result of the Company’s previously announced plan for this business. Excluding the direct-to-home continuity business described in the table below, segment revenues for the nine months ended February 28, 2005 decreased $153.6 million to $705.7 million, as compared to $859.3 million in the prior fiscal year period.
Segment operating profit for the nine months ended February 28, 2005 decreased $40.52006 improved by $24.1 million to $47.2$65.7 million, compared to $87.7$41.6 million in the prior fiscal year period. The decreaseThis improvement was principallyprimarily due to lowerincreased operating resultsprofits for the Company’s trade business of $32.3 million, resulting primarily due to lowerfrom the higherHarry Potterrevenues. Operating results for revenues, partially offset by lower operating profits in the Company’s continuityschool-based book club business decreased $2.9 million, which reflects the impactas a result of $3.6 million in Continuity Charges. Excluding the direct-to-home continuity business described in the table below, segment operating profit for the nine months ended February 28, 2005 decreased $34.1 million to $51.4 million, as compared to $85.5 million in the prior fiscal year period.lower revenues and increased promotion expense.
The following table highlights the results of the direct-to-home portion of the Company’s continuity programs, which consistconsists primarily of the business formerly operated by Grolier Incorporated (“Grolier”) and areis included in theChildren’s Book Publishing and Distribution segment.
| Direct-to-home continuity | ||||||||||||||||||||||||||||
| ($ amounts in millions) | ||||||||||||||||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| ($ amounts in millions) | February 28 | February 29 | February 28 | February 29 | ||||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
| Restated | Restated | |||||||||||||||||||||||||||
| Revenue | $ | 32.8 | $ | 45.5 | $ | 113.4 | $ | 150.8 | $ | 34.6 | $ 32.8 | $ | 93.0 | $ 113.4 | ||||||||||||||
| Operating profit (loss) | 0.4 | 0.2 | (4.2 | ) * | 2.2 | (2.5 | ) | 0.7 | (13.3 | ) | (4.2 | )(1) | ||||||||||||||||
| Operating margin | 1.2 | % | ** | ** | 1.5 | % | * | 2.1 | % | * | * | |||||||||||||||||
| *not meaningful | |
| (1) | Includes Continuity Charges related to this business of $3.6. |
* inclusiveRevenues from the direct-to-home portion of the Company’s continuity business increased by $1.8 million, or 5.5%, to $34.6 million for the quarter ended February 28, 2006, as compared to $32.8 million in the prior fiscal year quarter, and decreased by $20.4 million, or 18.0%, to $93.0 million for the nine months ended February 28, 2006, as compared to $113.4 million in the prior fiscal year period.
Operating losses for the direct-to-home portion of the continuity business were $2.5 million and $13.3 million in the quarter and nine months ended February 28, 2006, respectively, compared to an operating profit of $0.7 million in the prior fiscal year quarter and an operating loss of $4.2 million in the nine months ended February 28, 2005, which included $3.6 million of Continuity ChargesCharges.
Excluding the direct-to-home portion of the continuity business, segment revenues decreased by $3.2 million, or 1.3%, to $236.3 million for the quarter ended February 28, 2006, compared to $239.5 million in the prior fiscal year quarter, and increased by $171.7 million, or 24.3%, to $877.4 million for the nine months ended February 28, 2006, compared to $705.7 million in the prior fiscal year period.
21
Educational Publishing
The Company’sEducational Publishing segment includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergartenpre-K to 12 in the United States.
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| ($ amounts in millions) | February 28 | February 29 | February 28 | February 29 | ||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
| Restated | Restated | |||||||||||||||||||||||||||
| Revenue | $ | 79.3 | $ | 69.4 | $ | 292.0 | $ | 262.5 | $ 73.5 | $ 79.3 | $ 301.0 | $ 292.0 | ||||||||||||||||
| Operating profit | 4.0 | 3.2 | 46.8 | 32.0 | ||||||||||||||||||||||||
| Operating profit (loss) | (3.5 | ) | 4.9 | 45.6 | 48.7 | |||||||||||||||||||||||
| Operating margin | 5.0 | % | 4.6 | % | 16.0 | % | 12.2 | % | * | 6.2 | % | 15.1 | % | 16.7 | % | |||||||||||||
* not meaningful
RevenuesFor the quarter ended February 28, 2006, revenues in theEducational Publishing segment for the quarter ended February 28, 2005 increased $9.9decreased $5.8 million, or 14.3%7.3%, to $79.3$73.5 million, compared to $69.4$79.3 million in the prior fiscal year quarter. This increase wasquarter, primarily due to higherlower revenues from sales of educational technology products, including the Company’sReadREAD 180® reading intervention program.program, which the Company believes reflects a shift to a more seasonal selling pattern for this business. Segment revenues for the nine months ended February 28, 20052006 increased $29.5$9.0 million, or 11.2%3.1%, to $292.0$301.0 million, compared to $262.5$292.0 million in the prior fiscal year period,period. The increase was related primarily due to increasedhigher revenues from educational technology revenues.products.
Segment operating profitloss for the quarter ended February 28, 2005 increased $0.82006 was $3.5 million, to $4.0 million, as compared to $3.2segment operating profit of $4.9 million in the prior fiscal year quarter.quarter, primarily due to the lower revenues from educational technology products. Segment operating profit for the nine months ended February 28, 2005 increased $14.82006 decreased by $3.1 million, or 46.3%6.4%, to $46.8$45.6 million, compared to $32.0$48.7 million in the prior fiscal year period. The operating profit improvements forperiod, as higher profits from education technology products were more than offset by the three- and nine-month periods were primarily due to increased educational technology revenues.lower results in the balance of the segment.
22
SCHOLASTIC CORPORATION
Item 2. MD&A
The Company’sMedia, Licensing and Advertising segment includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Corporation’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| ($ amounts in millions) | February 28 | February 29 | February 28 | February 29 | ||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
| Restated | Restated | |||||||||||||||||||||||||||
| Revenue | $ | 37.2 | $ | 43.5 | $ | 96.7 | $ | 106.3 | $ 46.4 | $ 37.2 | $ 116.4 | $ 96.7 | ||||||||||||||||
| Operating profit (loss) | 1.3 | 0.3 | (2.2 | ) | (1.6 | ) | ||||||||||||||||||||||
| Operating profit | 6.3 | 4.4 | (1) | 8.3 | 6.7 | (1) | ||||||||||||||||||||||
| Operating margin | 3.5 | % | 0.7 | % | ** | ** | 13.6 | % | 11.8 | %(1) | 7.1 | % | 6.9 | %(1) | ||||||||||||||
* not meaningful(1) Reflects the Segment Reallocation.
Revenues in theMedia, Licensing and Advertising segment for the quarter ended February 28, 2005 decreased $6.32006 increased $9.2 million, or 14.5%24.7%, to $37.2$46.4 million, compared to $43.5$37.2 million in the prior fiscal year quarter. This decrease primarily resulted from lower programmingquarter, reflecting higher revenues of $8.5 million, largely due to the prior year releasein each of the feature filmClifford’s Really Big MovieTM, partially offsetbusinesses in the segment, led by increasedan increase in revenues from software revenues of $1.7 million.and multimedia products. Segment revenues for the nine months ended February 28, 2005 decreased $9.62006 increased $19.7 million, or 9.0%20.4%, to $96.7$116.4 million, compared to $106.3$96.7 million in the prior fiscal year period, primarily due to lower programmingreflecting higher revenues in each of the businesses in the segment, led by increases in revenues of $10.5 million.$6.7 million from software and multimedia products and $6.4 million from television programming.
Segment operating profit for the quarter ended February 28, 20052006 increased $1.0$1.9 million to $1.3$6.3 million, as compared to $0.3$4.4 million in the prior fiscal year quarter, primarily due to higher software revenues.quarter. Segment operating lossprofit for the nine months ended February 28, 20052006 increased modestly on lower$1.6 million to $8.3 million, compared to $6.7 million in the prior fiscal year period. These segment operating profit increases were primarily due to higher revenues.
International
TheInternationalsegment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
| Three months ended | Nine months ended | |||||||||||||||||||||||||||
| ($ amounts in millions) | February 28 | February 29 | February 28 | February 29 | ||||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
| Restated | Restated | |||||||||||||||||||||||||||
| Revenue | $ | 92.0 | $ | 87.6 | $ | 280.0 | $ | 267.5 | $ | 96.9 | $ 92.0 | $ 295.0 | $ 280.0 | |||||||||||||||
| Operating profit | 3.4 | 0.8 | 19.6 | 18.2 | 2.3 | 3.0 | 9.6 | 19.2 | ||||||||||||||||||||
| Operating margin | 3.7 | % | 0.9 | % | 7.0 | % | 6.8 | % | 2.4 | % | 3.3 | % | 3.3 | % | 6.9 | % | ||||||||||||
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Revenues in theInternational segment for the quarter ended February 28, 20052006 increased $4.4$4.9 million, or 5.0%5.3%, to $92.0$96.9 million, compared to $87.6$92.0 million in the prior fiscal year quarter, primarily duequarter. This increase reflected higher local currency revenue growth in Canada and Australia, equivalent to $3.0 million and $1.9 million, respectively, partially offset by lower local currency revenue in the United Kingdom equivalent to $1.3 million. Segment revenues for the nine months ended February 28, 2006 increased $15.0 million, or 5.4%, to $295.0 million, as compared to $280.0 million in the prior fiscal year period. This increase reflected revenue growth in the Company’s export business of $5.8 million and local currency revenue growth in Australia and Canada, equivalent to $4.7 million and $1.5 million, respectively, as well as the favorable impact of foreign currency exchange rates of $3.8 million, partially offset by lower local currency revenues in the United Kingdom equivalent to $7.9 million.
Segment revenuesoperating profit for the nine monthsquarter ended February 28, 2005 increased $12.52006 decreased $0.7 million or 4.7%, to $280.0$2.3 million, as compared to $267.5$3.0 million in the prior fiscal year period.quarter. This increasedecrease was primarily due to lower local currency operating profits in the United Kingdom equivalent to $2.8 million, partially offset by the favorable impact of foreign currency exchange rates of $14.3 million and local currency revenue growth in Australia equivalent to $4.3 million, partially offset by lower revenues in the export business of $6.5 million, principally due to a higher level of Department of Defense orders for educational materials in the prior fiscal year period.
Segment operating profit for the quarter ended February 28, 2005 increased $2.6 million to $3.4 million, compared to $0.8 million in the prior fiscal year quarter, primarily due to a lower local currency operating loss in Australia.$1.2 million. Segment operating profit for the nine months ended February 28, 2005 increased $1.42006 was $9.6 million, or 7.7%, to $19.6a decrease of $9.6 million compared to $18.2from $19.2 million in the prior fiscal year period. This increase wasperiod, primarily due to increasedlower local currency operating profitprofits in Australiathe United Kingdom, where the Company is implementing a turn-around plan, and in Canada, equivalent to $3.8$9.1 million and the favorable impact of foreign currency exchanges rates of $1.2$1.6 million, partially offset by decreased operating profit in the export business of $3.6 million.respectively.
Seasonality
The Company’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company’s business is highly seasonal. As a consequence, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second quarter of the fiscal year, while revenues from the sale of instructional materials are highest in the first quarter. The Company experiences a substantial loss from operations in the first quarter of each fiscal year.
In24
The Company’s cash and cash equivalents were $219.5 million at February 28, 2006, compared to $22.1 million at February 28, 2005 and $110.6 million at May 31, 2005.
Cash provided by operating activities was $210.3 million for the June through October timenine months ended February 28, 2006, compared to $112.1 million in the prior fiscal year period. This increase was due to favorable changes in working capital accounts in the current fiscal year period and a higher level of net income. Working capital account changes that had a positive impact on cash flows included: Accrued royalties, which increased by $89.2 million in the nine months ended February 28, 2006, compared to an increase of $18.5 million in the prior fiscal year period, primarily due to royalties associated with higherHarry Potter revenues that will be paid in the fourth quarter of fiscal 2006; and Accounts payable and other accrued expenses, which increased by $38.1 million during the nine months ended February 28, 2006, compared to a decrease of $26.2 million in the prior fiscal year period, primarily due to accrued expenses associated withHarry Potter. Working capital account changes that had a negative impact on cash flows included: Prepaid expenses and other current assets, which increased $33.9 million for the nine months ended February 28, 2006, compared to an increase of $4.0 million in the prior year fiscal period, primarily due to higher income tax payments; and Inventories, which increased $73.3 million during the nine months ended February 28, 2006, compared to an increase of $56.9 million in the prior year fiscal period, primarily due to earlier product purchasing in the Company’s school-based book fairs business.
Cash used in investing activities was $118.4 million for the nine months ended February 28, 2006, compared to $109.8 million in the prior fiscal year period. This increase was due primarily to Additions to property, plant and equipment totaling $46.6 million for the nine months ended February 28, 2006, an increase of $15.2 million over the prior fiscal year period, principally due to increased information technology spending. Acquisition-related payments totaled $3.3 million in the nine months ended February 28, 2006 due to a contingent payment related to the acquisition of Klutz in fiscal 2002.
Cash provided by financing activities was $16.8 million in the nine months ended February 28, 2006, compared to $1.5 million in the prior fiscal year period, an increase of $15.3 million. This increase was due primarily to proceeds received by the Company under its employee stock-based benefit plans totaling $26.0 million in the current fiscal year period, an increase of $11.8 million from $14.2 million in the prior fiscal year period.
Due to the seasonality of its business as discussed under “Seasonality” above, the Company experiences negative cash flow due toin the seasonality of its business.June through October time period. As a result of the Company’s business cycle, seasonal borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.
25
Liquidity and Capital Resources
The Company’s cash and cash equivalents were $22.1 million at February 28, 2005, compared to $20.9 million at February 29, 2004 and $17.8 million at May 31, 2004.
Net cash provided by operating activities was $105.0 million for the nine-month period ended February 28, 2005, compared to $118.4 million in the prior fiscal year period. The decline from the prior fiscal year period was principally due to lower Net income in the current fiscal year period.
Net cash used in investing activities was $109.8 million for the nine-month period ended February 28, 2005, compared to $105.7 million in the prior fiscal year period. The increase was principally due to increases in Royalty advances and Additions to property, plant and equipment of $6.3 million and $4.9 million, respectively, in the current fiscal year period as compared to the prior fiscal year period, as well as the impact $8.8 million in Acquisition-related payments in the prior fiscal year period.
Net cash provided by financing activities was $8.6 million for the nine-month period ended February 28, 2005, compared to net cash used in financing activities of $51.0 million in the prior fiscal year period, substantially due to the repayment at maturity of all $125.0 million of the Company’s 7% Notes (the “7% Notes”) on December 15, 2003.
The Company believes its existing cash position, combined with funds generated from operations and available under the Credit Agreement and the Revolver, described in “Financing” below, will be sufficient to finance its ongoing working capital requirements. The Company anticipates refinancing its debt obligations prior to their respective maturity dates, including its outstanding 5.75% Notes due in January 2007, to the extent not paid through cash flow.
Financing
On March 31, 2004, Scholastic Corporation and Scholastic Inc. entered intoare parties to an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire on August 11, 2004 (the “Loan Agreement”). The Credit Agreement, which expires on March 31, 2009,2009. The Credit Agreement provides for aggregate borrowings of up to $190.0 million (with a right in certain circumstances to increase borrowings to $250.0 million), including the issuance of up to $10.0 million in letters of credit. Interest under this facility is either at the prime rate or a rate equal to 0.325% to 0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.25% if borrowings exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of February 28, 20052006 were 0.55%0.675% over LIBOR, 0.15%0.20% and 0.10%0.125%, respectively. The Credit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At bothThere were no borrowings outstanding under the Credit Agreement at February 28, 2005 and2006 or May 31, 2004,2005. At February 28, 2005, $12.0 million was outstanding under the Credit Agreement at a weighted average interest rate of 3.1% and 1.7%, respectively. At February 29, 2004, $45.0 million was outstanding under the Loan Agreement at a weighted average interest rate of 1.5% . The decrease in borrowings outstanding under the Credit Agreement at both February 28, 2005 and May 31, 2004 as compared to borrowings outstanding under the Loan Agreement as of February 29, 2004 was principally due to the repayment of the 7% Notes at maturity on December 15, 2003.
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, theThe Revolver provides for unsecured revolving credit of up to $40.0 million and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28, 20052006 were 0.60%0.725% over LIBOR and 0.15%0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2005. At February 29, 2004 and2006, May 31, 2004, $23.7 million and $2.2 million, respectively, were outstanding under the Revolver at a weighted average interest rate of 1.7% and 3.0%, respectively. The decrease in borrowings outstanding under the Revolver at both2005 or February 28, 2005 and May 31, 2004 as compared to borrowings outstanding as of February 29, 2004 was principally due to the repayment of the 7% Notes at maturity on December 15, 2003.2005.
Unsecured lines of credit available in local currencies to certain of Scholastic Corporation’s international subsidiaries for local working capital needs were, in the aggregate, equivalent to $65.4 million at February 28, 2006, as compared to $64.6 million at February 28, 2005 as compared to $66.8 million at February 29, 2004 and $62.1$61.8 million at May 31, 2004.2005. These lines are used primarily to fund local working capital needs. There were borrowings outstanding under these lines of credit equivalent to $30.6 million at February 28, 2006, as compared to $20.8 million at February 28, 2005 as compared to $26.8 million at February 29, 2004 and $23.0$24.7 million at May 31, 2004.2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.7% and 6.1% at both February 28, 2006 and 2005, respectively, and February 29, 2004 and 5.5%5.4% at May 31, 2004.2005.
26
The Company’s total debt obligations at February 28, 2006 and February 28, 2005 February 29, 2004were $500.0 million and $510.3 million, respectively. The Company’s total debt obligations at May 31, 20042005 were $510.3$501.4 million. Through February 28, 2006, the Company had repurchased $6.0 million $574.5 million and $516.6 million, respectively, withof its 5.75% Notes due 2007 on the higher level of borrowings at February 29, 2004 principally due to increased borrowings under revolving credit agreements.open market. For a more complete description of the Company’s debt obligations, see Note 34 of Notes to Condensed Consolidated Financial Statements –Unaudited– Unaudited in Item 1, “Financial Statements.”
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including the conditionconditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified in this Report, in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004,2005, and from time to time in the Company’s other filings with the Securities and Exchange Commission (“SEC”(the “SEC”). Actual results could differ materially from those currently anticipated.
27
| |
The Company has operations in various foreign countries. In the normal course of business, these operations are exposed to fluctuations in currency values. Management believes that the impact of currency fluctuations does not represent a significant risk in the context of the Company’s current international operations. In the normal course of business, the Company’s operations outside the United States periodically enter into short-term forward contracts (generally not exceeding an amount equivalent to $20.0 million)million in the aggregate) to match selected purchases not denominated in their respective local currencies.
Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed by balancingthrough the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 6% of the Company’s debt at both February 28, 2006 and 2005 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 7%5% at May 31, 2004 and approximately 17% at February 29, 2004, with the decreases from February 29, 2004 due to higher levels of borrowings under revolving credit agreements at that date.2005. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.debt, as well as the risk that variable-rate borrowings will represent a larger portion of total debt in the future.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table sets forth information about the Company’s debt instruments as of February 28, 20052006 (see Note 34 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):
| ($ amounts in millions) | Fiscal Year Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||||
| Debt Obligations | |||||||||||||||||||||||||||||||||||||||||||||||||
| Lines of credit | $ | 20.8 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 20.8 | $ | 18.4 | $ | 12.2 | $ | - | $ | - | $ | - | $ | - | $ | 30.6 | |||||||||||||||||||||
| Average interest rate | 6.14 | % | 6.3 | % | 5.2 | % | |||||||||||||||||||||||||||||||||||||||||||
| Long-term debt including | |||||||||||||||||||||||||||||||||||||||||||||||||
| current portion: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt | $ | 0.5 | $ | - | $ | 300.0 | $ | - | $ | - | $ | 175.0 | $ | 475.5 | $ | 0.3 | $ | 294.0 | $ | - | $ | - | $ | - | $ | 175.0 | $ | 469.3 | |||||||||||||||||||||
| Average interest rate | 12.03 | % | 5.75 | % | 5.0 | % | 5.12 | % | 5.75 | % | 5.0 | % | |||||||||||||||||||||||||||||||||||||
| Variable-rate debt | $ | - | $ | - | $ | - | $ | - | $ | 12.0 | (1) | $ | - | $ | 12.0 | ||||||||||||||||||||||||||||||||||
| Average interest rate | 3.12 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Represents amounts drawn on the Credit Agreement, which expires in 2009.
| At February 28, 2006, no borrowings were outstanding under the Credit Agreement or the Revolver, which have credit lines totaling $230.0 million and | |
28
29
PART II – OTHER INFORMATION
SCHOLASTIC CORPORATION| Exhibits: | ||||
| 10.1 | Scholastic Corporation Directors’ Deferred Compensation Plan, as amended and | |||
| restated effective January 1, 2005. | ||||
| 10.2 | Deferred Compensation Agreement between Scholastic Inc. and Ernest Fleishman, | |||
| as amended and restated effective January 1, 2005. | ||||
| 31.1 | Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant | |||
| to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant | |||
| to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32 | Certifications of the Chief Executive Officer and Chief Financial Officer of | |||
| Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act | ||||
| of 2002. |
30
31
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 8, 20057, 2006 /s/ Richard Robinson Richard Robinson Chairman of the Board, President, and Chief Executive Officer Date: April 8, 20057, 2006 /s/ Mary A. Winston Mary A. Winston Executive Vice President and Chief Financial Officer
Exhibits IndexSCHOLASTIC CORPORATIONQUARTERLY REPORT ON FORM 10-Q, DATED FEBRUARY 28, 2005Exhibits IndexExhibit Number Description of Document 10.1 Scholastic Corporation Directors’ Deferred Compensation Plan, as amended and restated effective January 1, 2005. 10.2 Deferred Compensation Agreement between Scholastic Inc. and Ernest Fleishman, as amended and restated effective January 1, 2005. 31.1 Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Act of 2002. 2832