UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended | Commission File No. 000-19860 |
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | ||
| (IRS Employer Identification No.) | ||
| 10012 | ||
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.
YesXNo _
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
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 | |
| 1,656,200 | ||
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2005AUGUST 31, 2006
INDEX
| Part I - Financial Information | Page | ||||
| Item 1. | Financial Statements | ||||
| Condensed Consolidated Statements of Operations - Unaudited for the | |||||
| Three | 1 | ||||
| Condensed Consolidated Balance Sheets - | |||||
| 2005 | 2 | ||||
| Consolidated Statements of Cash Flows - Unaudited for the | |||||
| Months Ended | 3 | ||||
| Notes to Condensed Consolidated Financial Statements - Unaudited | 4 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition | ||||
| and Results of Operations | 16 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 23 | |||
| Item 4. | Controls and Procedures | 24 | |||
| Part II | |||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 25 | |||
| Item 6. | Exhibits | 26 | |||
Signatures | 27 | ||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| Six months ended | ||||||||||||
| November 30, | November 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Restated | Restated | |||||||||||
| Revenues | $ | 696.7 | $ | 683.3 | $ | 1,195.1 | $ | 1,007.0 | ||||
| Operating costs and expenses: | ||||||||||||
| Cost of goods sold | 298.3 | 301.1 | 591.3 | 477.5 | ||||||||
| Selling, general and administrative expenses | 251.2 | 225.6 | 453.6 | 410.4 | ||||||||
| Bad debt expense | 15.1 | 19.6 | 27.7 | 35.8 | ||||||||
| Depreciation and amortization | 16.8 | 15.1 | 32.4 | 30.8 | ||||||||
| Total operating costs and expenses | 581.4 | 561.4 | 1,105.0 | 954.5 | ||||||||
| Operating income | 115.3 | 121.9 | 90.1 | 52.5 | ||||||||
| Interest expense, net | 9.1 | 9.5 | 17.6 | 18.3 | ||||||||
| Earnings before income taxes | 106.2 | 112.4 | 72.5 | 34.2 | ||||||||
| Provision for income taxes | 39.3 | 39.9 | 26.8 | 12.2 | ||||||||
| Net income | $ | 66.9 | $ | 72.5 | $ | 45.7 | $ | 22.0 | ||||
| Basic and diluted earnings per Share of Class A and | ||||||||||||
| Common Stock: | ||||||||||||
| Basic | $ | 1.62 | $ | 1.83 | $ | 1.12 | $ | 0.56 | ||||
| Diluted | $ | 1.59 | $ | 1.80 | $ | 1.10 | $ | 0.55 | ||||
| See accompanying notes | ||||||||||||
| Revenues | $ | 334.9 | $ | 498.4 | ||||
| Operating costs and expenses: | ||||||||
| Cost of goods sold | 171.8 | 293.0 | ||||||
| Selling, general and administrative expenses | 196.6 | 202.4 | ||||||
| Bad debt expense | 15.7 | 12.6 | ||||||
| Depreciation and amortization | 16.9 | 15.6 | ||||||
| Total operating costs and expenses | 401.0 | 523.6 | ||||||
| Operating loss | (66.1 | ) | (25.2 | ) | ||||
| Interest expense, net | 7.4 | 8.5 | ||||||
| Loss before income taxes | (73.5 | ) | (33.7 | ) | ||||
| Benefit from income taxes | 26.6 | 12.5 | ||||||
| Net loss | $ | (46.9 | ) | $ | (21.2 | ) | ||
| Basic and diluted loss per Share of Class A and | ||||||||
Common Stock | $ | (1.12 | ) | $ | (0.52 | ) | ||
See accompanying notes | ||||||||
| SCHOLASTIC CORPORATION | |||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||
| (Amounts in millions, except per share data) | |||||||||
| November 30, 2005 | November 30, 2004 | ||||||||
| (Unaudited) | (Unaudited) | ||||||||
| ASSETS | Restated | ||||||||
| Current Assets: | |||||||||
| Cash and cash equivalents | $ | 249.3 | $ | 110.6 | $ | 27.1 | |||
| Accounts receivable, net | 308.3 | 269.6 | 321.0 | ||||||
| Inventories | 472.3 | 404.9 | 472.7 | ||||||
| Deferred promotion costs | 41.9 | 38.6 | 40.7 | ||||||
| Deferred income taxes | 75.0 | 71.7 | 74.6 | ||||||
| Prepaid expenses and other current assets | 54.8 | 43.9 | 45.8 | ||||||
| Total current assets | 1,201.6 | 939.3 | 981.9 | ||||||
| Property, plant and equipment, net | 396.0 | 392.7 | 394.6 | ||||||
| Prepublication costs | 117.6 | 120.2 | 115.0 | ||||||
| Installment receivables, net | 11.1 | 10.6 | 12.2 | ||||||
| Royalty advances | 55.9 | 54.4 | 55.8 | ||||||
| Production costs | 7.4 | 9.7 | 8.2 | ||||||
| Goodwill | 253.4 | 254.2 | 251.4 | ||||||
| Other intangibles | 78.5 | 78.7 | 78.8 | ||||||
| Other assets and deferred charges | 64.8 | 71.6 | 68.4 | ||||||
| Total assets | $ | 2,186.3 | $ | 1,931.4 | $ | 1,966.3 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| Current Liabilities: | |||||||||
| Lines of credit and short-term debt | 41.4 | 24.9 | 34.2 | ||||||
| Capital lease obligations | 10.5 | 11.0 | 11.4 | ||||||
| Accounts payable | 164.4 | 141.4 | 151.0 | ||||||
| Accrued royalties | 114.0 | 40.1 | 40.4 | ||||||
| Deferred revenue | 49.9 | 22.9 | 57.4 | ||||||
| Other accrued expenses | 175.3 | 134.5 | 137.8 | ||||||
| Total current liabilities | 555.5 | 374.8 | 432.2 | ||||||
| Noncurrent Liabilities: | |||||||||
| Long-term debt | 473.5 | 476.5 | 528.5 | ||||||
| Capital lease obligations | 64.4 | 63.4 | 63.6 | ||||||
| Other noncurrent liabilities | 84.9 | 79.6 | 60.8 | ||||||
| Total noncurrent liabilities | 622.8 | 619.5 | 652.9 | ||||||
| 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 | 453.8 | 424.0 | 392.7 | ||||||
| Deferred compensation | (1.9 | ) | (2.1 | ) | (0.4 | ) | |||
| Accumulated other comprehensive loss | (33.3 | ) | (28.5 | ) | (12.5 | ) | |||
| Retained earnings | 589.0 | 543.3 | 501.0 | ||||||
| Total stockholders’ equity | 1,008.0 | 937.1 | 881.2 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,186.3 | $ | 1,931.4 | $ | 1,966.3 | |||
| See accompanying notes | |||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 19.7 | $ | 205.3 | $ | 18.4 | ||||||
| Accounts receivable, net | 249.8 | 266.8 | 411.7 | |||||||||
| Inventories | 548.0 | 431.5 | 509.2 | |||||||||
| Deferred promotion costs | 57.0 | 49.8 | 41.8 | |||||||||
| Deferred income taxes | 100.7 | 73.1 | 84.5 | |||||||||
| Prepaid expenses and other current assets | 66.6 | 52.4 | 53.3 | |||||||||
| Total current assets | 1,041.8 | 1,078.9 | 1,118.9 | |||||||||
| Property, plant and equipment, net | 387.7 | 397.0 | 398.3 | |||||||||
| Prepublication costs | 111.7 | 115.9 | 119.4 | |||||||||
| Installment receivables, net | 10.8 | 11.2 | 11.2 | |||||||||
| Royalty advances | 46.7 | 46.0 | 56.8 | |||||||||
| Production costs | 5.1 | 5.9 | 9.3 | |||||||||
| Goodwill | 253.5 | 253.1 | 254.1 | |||||||||
| Other intangibles | 78.3 | 78.4 | 78.6 | |||||||||
| Other assets and deferred charges | 69.4 | 65.8 | 64.5 | |||||||||
| Total assets | $ | 2,005.0 | $ | 2,052.2 | $ | 2,111.1 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Lines of credit, short-term debt and | ||||||||||||
| current portion of long-term debt | $ | 301.5 | $ | 329.2 | $ | 33.8 | ||||||
| Capital lease obligations | 6.7 | 7.5 | 10.3 | |||||||||
| Accounts payable | 164.3 | 141.7 | 179.3 | |||||||||
| Accrued royalties | 47.7 | 36.6 | 127.2 | |||||||||
| Deferred revenue | 33.6 | 19.3 | 29.7 | |||||||||
| Other accrued expenses | 136.0 | 154.7 | 115.9 | |||||||||
| Total current liabilities | 689.8 | 689.0 | 496.2 | |||||||||
| Noncurrent Liabilities: | ||||||||||||
| Long-term debt | 174.3 | 173.2 | 546.0 | |||||||||
| Capital lease obligations | 61.0 | 61.4 | 67.7 | |||||||||
| Other noncurrent liabilities | 80.0 | 79.3 | 75.2 | |||||||||
| Total noncurrent liabilities | 315.3 | 313.9 | 688.9 | |||||||||
| 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 | 461.6 | 458.7 | 440.2 | |||||||||
| Deferred compensation | - | (1.6 | ) | (1.9 | ) | |||||||
| Accumulated other comprehensive loss | (27.1 | ) | (20.1 | ) | (34.8 | ) | ||||||
| Retained earnings | 565.0 | 611.9 | 522.1 | |||||||||
Total stockholders’ equity | 999.9 | 1,049.3 | 926.0 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,005.0 | $ | 2,052.2 | $ | 2,111.1 | ||||||
2
| SCHOLASTIC CORPORATION | ||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED | ||||||
| (Amounts in millions) | ||||||
| November 30, | ||||||
| Cash flows provided by operating activities: | ||||||
| Net income | $ | 45.7 | $ | 22.0 | ||
| Adjustments to reconcile net income to net cash | ||||||
| provided by operating activities: | ||||||
| Provision for losses on accounts receivable | 27.7 | 35.8 | ||||
| Amortization of prepublication and production costs | 37.5 | 32.4 | ||||
| Depreciation and amortization | 32.4 | 30.8 | ||||
| Royalty advances expensed | 13.2 | 6.2 | ||||
| Deferred income taxes | (1.3 | ) | (1.9 | ) | ||
| Non-cash interest expense | 0.8 | 0.6 | ||||
| Changes in assets and liabilities: | ||||||
| Accounts receivable, net | (66.9 | ) | (86.4 | ) | ||
| Inventories | (66.2 | ) | (62.7 | ) | ||
| Prepaid expenses and other current assets | (10.0 | ) | (1.8 | ) | ||
| Deferred promotion costs | (2.5 | ) | 1.1 | |||
| Accounts payable and other accrued expenses | 73.3 | 7.2 | ||||
| Accrued royalties | 73.9 | 9.6 | ||||
| Deferred revenue | 26.4 | 33.4 | ||||
| Tax benefit realized from employee stock-based plans | 4.7 | 0.3 | ||||
| Other, net | (2.8 | ) | 5.1 | |||
| Total adjustments | 140.2 | 9.7 | ||||
| Net cash provided by operating activities | 185.9 | 31.7 | ||||
| Cash flows used in investing activities: | ||||||
| Prepublication expenditures | (24.1 | ) | (26.0 | ) | ||
| Additions to property, plant and equipment | (30.7 | ) | (21.4 | ) | ||
| Royalty advances | (14.8 | ) | (14.0 | ) | ||
| Production expenditures | (8.4 | ) | (7.8 | ) | ||
| Acquisition-related payments | (3.3 | ) | - | |||
| Net cash used in investing activities | (81.3 | ) | (69.2 | ) | ||
| Cash flows provided by financing activities: | ||||||
| Borrowings under Credit Agreement and Revolver | 210.8 | 305.0 | ||||
| Repayments of Credit Agreement and Revolver | (210.8 | ) | (268.2 | ) | ||
| Repurchase of 5.75% Notes | (2.0 | ) | - | |||
| Borrowings under lines of credit | 106.3 | 115.5 | ||||
| Repayments of lines of credit | (89.2 | ) | (105.9 | ) | ||
| Payments on capital lease obligations | (5.9 | ) | (4.5 | ) | ||
| Proceeds pursuant to employee stock-based plans | 24.8 | 4.3 | ||||
| Other | - | 0.2 | ||||
| Net cash provided by financing activities | 34.0 | 46.4 | ||||
| Effect of exchange rate changes on cash | 0.1 | 0.4 | ||||
| Net increase in cash and cash equivalents | 138.7 | 9.3 | ||||
| Cash and cash equivalents at beginning of period | 110.6 | 17.8 | ||||
| Cash and cash equivalents at end of period | $ | 249.3 | $ | 27.1 | ||
| See accompanying notes | ||||||
| Cash flows used in operating activities: | |||||||
| Net loss | $ | (46.9 | ) | $ | (21.2 | ) | |
| Adjustments to reconcile net loss to net cash used in | |||||||
| operating activities: | |||||||
| Provision for losses on accounts receivable | 15.7 | 12.6 | |||||
| Amortization of prepublication and production costs | 15.5 | 18.4 | |||||
| Depreciation and amortization | 16.9 | 15.6 | |||||
| Royalty advances expensed | 5.5 | 4.7 | |||||
| Deferred income taxes | (26.9 | ) | (12.5 | ) | |||
| Non-cash interest expense | 0.4 | 0.4 | |||||
| Changes in assets and liabilities: | |||||||
| Accounts receivable, net | 2.7 | (154.5 | ) | ||||
| Inventories | (115.9 | ) | (102.3 | ) | |||
| Prepaid expenses and other current assets | (14.2 | ) | (8.4 | ) | |||
| Deferred promotion costs | (7.1 | ) | (2.2 | ) | |||
| Accounts payable and other accrued expenses | 4.2 | 28.2 | |||||
| Accrued royalties | 11.1 | 87.1 | |||||
| Deferred revenue | 14.2 | 6.0 | |||||
| Tax benefit realized from employee stock-based plans | 0.3 | 2.8 | |||||
| Other, net | (13.6 | ) | (13.5 | ) | |||
| Total adjustments | (91.2 | ) | (117.6 | ) | |||
| Net cash used in operating activities | (138.1 | ) | (138.8 | ) | |||
| Cash flows used in investing activities: | |||||||
| Prepublication expenditures | (9.2 | ) | (12.3 | ) | |||
| Additions to property, plant and equipment | (6.2 | ) | (15.4 | ) | |||
| Royalty advances | (6.1 | ) | (7.2 | ) | |||
| Production expenditures | (1.3 | ) | (4.6 | ) | |||
| Acquisition-related payments | - | (3.3 | ) | ||||
| Other | (1.2 | ) | - | ||||
| Net cash used in investing activities | (24.0 | ) | (42.8 | ) | |||
| Cash flows (used in) provided by financing activities: | |||||||
| Borrowings under Credit Agreement and Revolver | 13.0 | 104.0 | |||||
| Repayments of Credit Agreement and Revolver | (12.0 | ) | (32.0 | ) | |||
| Repurchase of 5.75% Notes | (35.4 | ) | (2.0 | ) | |||
| Borrowings under lines of credit | 39.7 | 42.2 | |||||
| Repayments of lines of credit | (30.5 | ) | (33.8 | ) | |||
| Repayment of capital lease obligations | (2.6 | ) | (2.4 | ) | |||
| Proceeds pursuant to employee stock-based plans | 4.1 | 13.3 | |||||
| Net cash (used in) provided by financing activities | (23.7 | ) | 89.3 | ||||
| Effect of exchange rate changes on cash and cash equivalents | 0.2 | 0.1 | |||||
| Net decrease in cash and cash equivalents | (185.6 | ) | (92.2 | ) | |||
| Cash and cash equivalents at beginning of period | 205.3 | 110.6 | |||||
| Cash and cash equivalents at end of period | $ | 19.7 | $ | 18.4 | |||
3
1.Basis of Presentation
The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned and majority-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 Annual Report on Form 10-K for the fiscal year ended May 31, 2005.2006.
The Company’s business is closely correlated to the school year. Consequently, the results of operations for the three and six months ended November 30,August 31, 2006 and 2005 and 2004 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the November 30, 2004August 31, 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 and other post-retirement 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,”Prior to June 1, 2006, the Company appliesapplied the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”Employees” (“APB No. 25”), and related interpretations in accounting for its stock-based benefit plans. In accordance with APB No. 25,Under this method, no compensation expense was recognized with respect to options granted under the Company’s stock-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
In May 2006, the CompanyHuman Resources and Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of the Corporation, which consists entirely of independent directors, approved the acceleration of the vesting of all unvested options to purchase the Corporation’s Class A Stock, par value $.01 per share (the “Class A Stock”), and the Corporation’s common stock, par value $.01 per share (the “Common Stock”), outstanding as of May 30, 2006 granted to employees (including executive officers) and outside directors of the Corporation (the “Acceleration”). Except for the Acceleration, all other terms and conditions applicable to such stock options were unchanged. Substantially all of these options had elected to recognize compensation expense based onexercise prices in excess of the fairmarket value of the options granted atunderlying Common Stock on May 30, 2006. The primary purpose of the date of grant andAcceleration was to mitigate the future compensation expense that the Company would have otherwise recognized in its financial statements with respect to shares issuable underthese options as a result of the Company’s equity compensation plans as prescribedadoption by SFAS No. 123, net income and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated in the following table:
In December 2004, the Financial Accounting Standards Board (the “FASB”(“SFAS”) issued SFAS No.123 (revised 2004), “Share-BasedNo. 123R, “Share Based Payment” (“SFAS No. 123R”), which requires companies to expense the fair value effective as of all share-based payments as currently permitted, but not required, under SFAS No. 123. SFAS No. 123R will be effective for the Company commencing June 1, 2006. Retroactive application of
The Company adopted the fair value recognition provisions of SFAS 123R, which revises SFAS No. 123, is permitted, but not required. Alternatively, a company may use“Accounting for Stock-Based Compensation,” using the modified prospective transition methodmethod. SFAS 123R requires the Company to recognize the cost of employee and director services received in exchange for applicationany stock-based awards. Under SFAS 123R, the Company recognizes compensation expense on a straight-line basis over an award’s requisite service period, which is generally the vesting period, based on the award’s fair value at the date of grant.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of share-based payment awards using this option-pricing model is affected by the price of the Common Stock as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by employees or directors who receive these awards.
SFAS No. 123R. Under this method, compensation cost is recognized123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for all share-based paymentsstock-based awards, the Company periodically conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical experience. The estimate of stock awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised. In the Company’s pro forma information required under SFAS 123 for the periods prior to June 1, 2006, the Company accounted for forfeitures as they occurred.
The following table provides the estimated weighted average fair value, under the Black-Scholes option-pricing model, for options granted modified or settledduring the three months ended August 31, 2006 and 2005 and the significant weighted average assumptions used in their determination. The expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant corresponding to the expected life. The volatility was estimated based on historical volatility corresponding to the expected life. The dividend yield was zero based on the fact that the Corporation has not paid any cash dividends since its initial public offering in February 1992 and has no current plans to pay any dividends.
| Dividend yield | 0 | % | 0 | % | |||
| Expected volatility | 40.3 | % | 49.7 | % | |||
| Risk free interest rate | 5.1 | % | 4.0 | % | |||
| Expected life (years) of stock option grant | 5.6 | 5.0 | |||||
| Per share fair value of options granted | $ | 12.68 | $ | 17.88 | |||
At August 31, 2006, the Company maintained three stockholder-approved employee stock-based benefit plans with regard to the Common Stock: the Scholastic Corporation 1992 Stock Option Plan (the “1992 Plan”), under which no further awards can be made; the Scholastic Corporation 1995 Stock Option Plan (the “1995 Plan”), under which no further awards can be made; and the Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”). The 2001 Plan provides for the issuance of incentive stock options, which qualify for favorable treatment under the Internal Revenue Code, and options that are not so qualified, called non-qualified options, restricted stock and other stock-based awards.
The Company also maintains the 1997 Outside Directors’ Stock Option Plan (the “1997 Directors’ Plan”), a stockholder-approved stock option plan for outside directors. The 1997 Directors’ Plan, as amended, provides for the automatic grant to each non-employee director on the date of each annual stockholders’ meeting of non-qualified stock options to purchase 6,000 shares of Common Stock. At August 31, 2006, options to purchase 376,000 shares of Common Stock were outstanding under the 1997 Directors’ Plan and 144,000 shares of Common Stock were available for additional awards under the 1997 Directors’ Plan.
The Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”) provides for the grant to Richard Robinson, the Chief Executive Officer of the Corporation as of the effective date of the Class A Plan, of options (“Class A Options”) to purchase shares of Class A Stock. At August 31, 2006, there were 666,000 Class A Options outstanding, and 84,000 shares of Class A Stock were available for additional awards, under the Class A Plan.
Generally, options granted under the various plans may not be exercised for a minimum of one year after the date of adoption basedgrant and expire approximately ten years after the date of grant. As a result of the Acceleration, all unvested stock options outstanding as of May 30, 2006 became vested and immediately exercisable.
The following table sets forth the stock option activity for the Class A Stock and Common Stock plans for the three months ended August 31, 2006:
| Weighted Average | Aggregate | ||||||||
| Weighted | Remaining | ||||||||
| Average | Contractual Term | Value | |||||||
| Stock Options | (In thousands) | Exercise Price | (In years) | (In millions) | |||||
| Outstanding at May 31, 2006 | 6,885 | ||||||||
| Granted | 33 | ||||||||
| Exercised | (170 | ) | |||||||
| Expired or forfeited | (219 | ) | |||||||
| Outstanding at August 31, 2006 | 6,529 | 5.69 | |||||||
| Vested and expected to vest | |||||||||
| at August 31, 2006 | 6,529 | 5.69 | |||||||
| Exercisable at August 31, 2006 | 6,496 | 5.67 | |||||||
In addition to stock options, the Company hasissued restricted stock units (“RSUs”) to certain officers and key executives under the 2001 Plan. RSUs automatically convert to shares of Common Stock on their grant-date fair value. For awards granted prior toa one-for-one basis as the adoption date, the compensation cost of any unvested portionaward vests, which is recognizedtypically over the remaining servicea four-year period. The Company intendsmeasures the value of RSUs at fair value based on the number of shares granted and the price of the Common Stock at the date of grant. The Company amortizes the fair value as stock-based compensation expense over the vesting term on a straight-line basis. Upon settlement of RSUs, the total compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on the price of the Common Stock on the settlement date.
The Company’s Management Stock Purchase Plan (“MSPP”) allows certain members of senior management to usedefer up to 100% of their annual cash bonus payment in the modified prospective transitionform of restricted stock units (the “MSPP RSUs”). The MSPP RSUs are purchased by the employee at a 25% discount from the lowest closing price of the Common Stock during the fiscal quarter in which such bonuses are payable and are automatically converted into shares of Common Stock on a one-for-one basis at the end of the applicable deferral period. The Company measures the value of MSPP RSUs at fair value based on the number of shares granted and the price of the Common Stock at the date of grant, giving effect to the 25% discount. The Company amortizes the fair value as stock-based compensation expense over the vesting term on a straight-line basis.
The Company also maintains an Employee Stock Purchase Plan (the “ESPP”), which is offered to eligible United States employees. As amended, the ESPP permits participating employees to purchase Common Stock, with after-tax payroll deductions, on a quarterly basis at a 15% discount from the closing price of the Common Stock on the last business day of each fiscal quarter. The Company measures the value of ESPP stock issuances at fair value based on the number of shares granted and the price of the Common Stock at the date of grant, giving effect to the 15% discount. Prior to June 1, 2006, no compensation expense was recognized with respect to the ESPP under APB No. 25. Upon adoption of SFAS 123R by the Company effective as of June 1, 2006, the Company began recognizing the fair value as stock-based compensation expense for the ESPP in the quarter in which the employees participated in the plan.
If SFAS 123R had been applicable to the Company during the three-month period ended August 31, 2005 and compensation cost for the Company’s stock-based plans had been accounted for in accordance with SFAS 123R, the Company’s net loss and basic and diluted loss per share for the three-month period ended August 31, 2005 would have been changed to the pro forma amounts in the following table:
| Net loss – as reported | $ | (21.2 | ) |
| Add: Stock-based employee compensation | |||
| included in reported net loss, net of tax | 0.1 | ||
| Deduct: Total stock-based employee compensation | |||
| expense determined under fair value-based method, net of tax | 2.7 | ||
| Net loss – pro forma | $ | (23.8 | ) |
| Basic and diluted loss per share – as reported | $ | (0.52 | ) |
| Basic and diluted loss per share – pro forma | $ | (0.58 | ) |
As a result of the adoption of SFAS 123R, the Company incurred compensation expense of $0.3 in the aggregate for the three months ended August 31, 2006, which is significantly lower than the amount that would have been recorded in that period if the Acceleration had not been implemented.
The total intrinsic value of stock options exercised during the three months ended August 31, 2006 was $1.0. As of August 31, 2006, the total pre-tax compensation cost not yet recognized by the Company with regard to outstanding unvested stock-based awards was $1.9. The weighted average period over which this compensation cost is expected to be recognized is 2.6 years.
On November 10, 2005, the FASB issued Staff Position No. 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards,” which provides an alternative (and simplified) method to adoptcalculate the pool of excess income tax benefits upon the adoption of SFAS 123R. Among other things, Staff Position No. 123(R)-3 provides a specific method for the presentation of excess tax benefits within the statement of cash flows when the alternative pool calculation is used. Although Staff Position No. 123(R)-3 became effective upon its issuance, companies may take up to one year from initial adoption of SFAS 123R to evaluate the available transition alternatives and make a one-time election. The Company is currently in the process of evaluating these alternative methods.
New Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 123R154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). Under the previous guidance, most voluntary changes in accounting principle were required to be recognized as the cumulative effect of a change in accounting principle within the net income of the period in which the change was made. SFAS 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 by the Company effective as of June 1, 2006 had no material immediate effect on the Company’s consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 provides guidance on recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that a company has taken or expects to file in a tax return. FIN 48 will become effective for the Company's fiscal year beginning June 1, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 123RFIN 48 will have on its consolidated financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 will become effective for the Company’s fiscal year beginning June 1, 2008. The Company is currently evaluating the impact, if any, that SFAS 157 will have on its consolidated financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions). Under SFAS 158, the Company will be required to recognize the funded status of its defined benefit postretirement plan and to provide the required disclosures commencing as of May 31, 2007. The Company is currently evaluating the impact, if any, that SFAS 158 will have on its consolidated financial position, results of operations and cash flows.
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 principally had the effect of understating rent expense in the early periods of the lease agreements and overstating rent expense in the later periods of the lease agreements.
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 six months ended November 30, 2004:
Condensed Consolidated Statement of Operations | ||||||
Three Months Ended November 30, 2004 | ||||||
| Selling, general and administrative expenses | $ 229.6 | $ (4.0 | ) | $ 225.6 | ||
| Depreciation and amortization | 12.6 | 2.5 | 15.1 | |||
| Operating income | 120.4 | 1.5 | 121.9 | |||
| Interest expense, net | 7.7 | 1.8 | 9.5 | |||
| Earnings before income taxes | 112.7 | (0.3 | ) | 112.4 | ||
| Provision for income taxes | 40.0 | (0.1 | ) | 39.9 | ||
| Net income | 72.7 | (0.2 | ) | 72.5 | ||
| Earnings per share of Class A and Common Stock: | ||||||
| Basic | 1.83 | 0.00 | 1.83 | |||
| Diluted | 1.80 | 0.00 | 1.80 | |||
Condensed Consolidated Statement of Operations | ||||||
Six Months Ended November 30, 2004 | ||||||
| Selling, general and administrative expenses | $ 418.3 | $ (7.9 | ) | $ 410.4 | ||
| Depreciation and amortization | 26.0 | 4.8 | 30.8 | |||
| Operating income | 49.4 | 3.1 | 52.5 | |||
| Interest expense, net | 14.7 | 3.6 | 18.3 | |||
| Earnings before income taxes | 34.7 | (0.5 | ) | 34.2 | ||
| Provision for income taxes | 12.3 | (0.1 | ) | 12.2 | ||
| Net income | 22.4 | (0.4 | ) | 22.0 | ||
| Earnings per share of Class A and Common Stock: | ||||||
| Basic | 0.56 | 0.00 | 0.56 | |||
| Diluted | 0.56 | (0.01 | ) | 0.55 | ||
(1) Certain prior year amounts have been reclassified to conform to the current year presentation. | ||||||
The following is a summary of the impact of the restatement on the Company’s Condensed Consolidated Balance Sheet at November 30, 2004 and the Consolidated Statement of Cash Flows for the six months ended November 30, 2004:
| As Previously Reported(1) | As Restated | ||||||||
Condensed Consolidated Balance Sheet as of | |||||||||
| November 30, 2004 | |||||||||
| Property, plant and equipment, net | $ | 332.4 | $ | 62.2 | $ | 394.6 | |||
| Other assets and deferred charges | 61.9 | 6.5 | 68.4 | ||||||
| Total assets | 1,897.6 | 68.7 | 1,966.3 | ||||||
| Capital lease obligations - current | - | 11.4 | 11.4 | ||||||
| Total current liabilities | 420.8 | 11.4 | 432.2 | ||||||
| Capital lease obligations – non-current | - | 63.6 | 63.6 | ||||||
| Other noncurrent liabilities | 56.1 | 4.7 | 60.8 | ||||||
| Total noncurrent liabilities | 584.6 | 68.3 | 652.9 | ||||||
| Retained earnings | 512.0 | (11.0 | ) | 501.0 | |||||
| Total stockholders’ equity | 892.2 | (11.0 | ) | 881.2 | |||||
| Total liabilities and stockholders’ equity | $ | 1,897.6 | $ | 68.7 | $ | 1,966.3 | |||
| Consolidated Statement of Cash Flows – | |||||||||
| Six Months Ended November 30, 2004 | |||||||||
| Net cash provided by operating activities | $ | 27.2 | $ | 4.5 | $ | 31.7 | |||
| Net cash provided by financing activities | 50.9 | (4.5 | ) | 46.4 | |||||
(1) Certain prior year amounts have been reclassified to conform to the current year presentation. | |||||||||
3. Segment Information
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 grossoperating 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.
•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.
•
•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.
The following table sets forth information for the Company’s segments for the periods indicated. 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, theindicated.Certain 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 segment resultsamounts have been reclassified to reflect this reallocation.
conform with the present year presentation.
| Children’s | ||||||||||||||
| Book | Media, | |||||||||||||
| Publishing | Licensing | |||||||||||||
| and | Educational | and | ||||||||||||
| Distribution | Publishing | Advertising | Overhead(1) | International | Consolidated | |||||||||
| Three months ended | ||||||||||||||
| November 30, 2005 | ||||||||||||||
| Revenues | $ 424.2 | $ 99.2 | $ 51.9 | $ 0.0 | $ 575.3 | 121.4 | $ 696.7 | |||||||
| Bad debt | 11.7 | 0.8 | 0.1 | 0.0 | 12.6 | 2.5 | 15.1 | |||||||
| Depreciation and | ||||||||||||||
| amortization | 5.8 | 1.3 | 0.7 | 7.3 | 15.1 | 1.7 | 16.8 | |||||||
| Amortization(2) | 4.1 | 8.0 | 6.5 | 0.0 | 18.6 | 0.5 | 19.1 | |||||||
| Royalty advances | ||||||||||||||
| expensed | 7.3 | 0.6 | 0.3 | 0.0 | 8.2 | 0.3 | 8.5 | |||||||
| Segment profit (loss)(3) | 88.6 | 21.6 | 7.7 | (15.4 | ) | 102.5 | 12.8 | 115.3 | ||||||
| Expenditures for | ||||||||||||||
| long-lived assets(4) | 16.4 | 7.4 | 2.4 | 8.6 | 34.8 | 3.7 | 38.5 | |||||||
| Three months ended | ||||||||||||||
| November 30, 2004 | ||||||||||||||
| Restated | ||||||||||||||
| Revenues | $ 425.0 | $ 94.5 | $ 47.6 | $ 0.0 | $ 567.1 | $ 116.2 | $ 683.3 | |||||||
| Bad debt | 16.6 | 0.3 | 0.3 | 0.0 | 17.2 | 2.4 | 19.6 | |||||||
| Depreciation and | ||||||||||||||
| amortization | 3.3 | 0.8 | 0.4 | 9.1 | 13.6 | 1.5 | 15.1 | |||||||
| Amortization(2) | 4.0 | 8.6 | 5.2 | 0.0 | 17.8 | 0.3 | 18.1 | |||||||
| Royalty advances | ||||||||||||||
| expensed | 0.1 | 0.0 | 0.1 | 0.0 | 0.2 | 0.3 | 0.5 | |||||||
| Segment profit (loss)(3) | 90.9 | 21.5 | 8.5 | (18.2 | ) | 102.7 | 19.2 | 121.9 | ||||||
| Expenditures for | ||||||||||||||
| long-lived assets(4) | 14.7 | 10.2 | 4.8 | 5.8 | 35.5 | 2.0 | 37.5 | |||||||
| | ||||||||||||||||||||||||||||
| | | |||||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||
| August 31, 2006 | ||||||||||||||||||||||||||||
| Revenues | $ | 112.6 | $ | 127.4 | $ | 15.7 | $ | 0.0 | $ | 255.7 | $ | 79.2 | $ | 334.9 | ||||||||||||||
| Bad debt | 13.5 | 0.0 | 0.1 | 0.0 | 13.6 | 2.1 | 15.7 | |||||||||||||||||||||
| Depreciation and | ||||||||||||||||||||||||||||
| amortization | 4.3 | 1.0 | 0.4 | 9.7 | 15.4 | 1.5 | 16.9 | |||||||||||||||||||||
| Amortization(2) | 4.4 | 7.3 | 3.1 | 0.0 | 14.8 | 0.7 | 15.5 | |||||||||||||||||||||
| Royalty advances | ||||||||||||||||||||||||||||
| expensed | 4.3 | 0.3 | 0.2 | 0.0 | 4.8 | 0.7 | 5.5 | |||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||||
| (loss)(3) | (67.3 | ) | 32.7 | (6.1 | ) | (19.9 | ) | (60.6 | ) | (5.5 | ) | (66.1 | ) | |||||||||||||||
| Segment assets | 814.3 | 363.4 | 84.0 | 417.3 | 1,679.0 | 326.0 | 2,005.0 | |||||||||||||||||||||
| Goodwill | 130.6 | 82.5 | 9.8 | 0.0 | 222.9 | 30.6 | 253.5 | |||||||||||||||||||||
| Expenditures for | ||||||||||||||||||||||||||||
| long-lived assets(4) | 12.5 | 3.7 | 3.4 | 1.9 | 21.5 | 2.5 | 24.0 | |||||||||||||||||||||
| Long-lived assets(5) | 286.8 | 199.8 | 40.5 | 285.2 | 812.3 | 111.8 | 924.1 | |||||||||||||||||||||
| | ||||||||||||||||||||||||||||
| | | |||||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||
| August 31, 2005 | ||||||||||||||||||||||||||||
| Revenues | $ | 275.3 | $ | 128.3 | $ | 18.1 | $ | 0.0 | $ | 421.7 | $ | 76.7 | $ | 498.4 | ||||||||||||||
| Bad debt | 9.9 | 0.6 | 0.1 | 0.0 | 10.6 | 2.0 | 12.6 | |||||||||||||||||||||
| Depreciation and | ||||||||||||||||||||||||||||
| amortization | 3.2 | 0.8 | 0.4 | 9.6 | 14.0 | 1.6 | 15.6 | |||||||||||||||||||||
| Amortization(2) | 4.1 | 7.9 | 5.9 | 0.0 | 17.9 | 0.5 | 18.4 | |||||||||||||||||||||
| Royalty advances | ||||||||||||||||||||||||||||
| expensed | 3.8 | 0.4 | 0.1 | 0.0 | 4.3 | 0.4 | 4.7 | |||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||||
| (loss)(3) | (19.7 | ) | 27.5 | (5.7 | ) | (21.8 | ) | (19.7 | ) | (5.5 | ) | (25.2 | ) | |||||||||||||||
| Segment assets | 953.1 | 366.4 | 66.7 | 409.5 | 1,795.7 | 315.4 | 2,111.1 | |||||||||||||||||||||
| Goodwill | 130.6 | 82.5 | 9.8 | 0.0 | 222.9 | 31.2 | 254.1 | |||||||||||||||||||||
| Expenditures for | ||||||||||||||||||||||||||||
| long-lived assets(4) | 21.4 | 7.3 | 6.1 | 5.2 | 40.0 | 2.8 | 42.8 | |||||||||||||||||||||
| Long-lived assets(5) | 296.8 | 214.1 | 37.1 | 299.2 | 847.2 | 107.0 | 954.2 | |||||||||||||||||||||
| Children’s | ||||||||||||||
| Book | Media, | |||||||||||||
| Publishing | Licensing | |||||||||||||
| and | Educational | and | ||||||||||||
| Distribution | Publishing | Advertising | Overhead(1) | International | Consolidated | |||||||||
| Six months ended | ||||||||||||||
| November 30, 2005 | ||||||||||||||
| Revenues | $ 699.5 | $ 227.5 | $ 70.0 | $ 0.0 | $ 997.0 | $ 198.1 | $ 1,195.1 | |||||||
| Bad debt | 21.6 | 1.4 | 0.2 | 0.0 | 23.2 | 4.5 | 27.7 | |||||||
| Depreciation and amortization | 9.3 | 2.1 | 1.1 | 16.6 | 29.1 | 3.3 | 32.4 | |||||||
| Amortization(2) | 8.2 | 15.9 | 12.4 | 0.0 | 36.5 | 1.0 | 37.5 | |||||||
| Royalty advances expensed | 11.1 | 1.0 | 0.4 | 0.0 | 12.5 | 0.7 | 13.2 | |||||||
| Segment profit (loss)(3) | 68.9 | 49.1 | 2.0 | (37.2 | ) | 82.8 | 7.3 | 90.1 | ||||||
| Segment assets | 840.4 | 316.6 | 76.7 | 630.9 | 1,864.6 | 321.7 | 2,186.3 | |||||||
| Goodwill | 130.6 | 82.5 | 9.8 | 0.0 | 222.9 | 30.5 | 253.4 | |||||||
Expenditures for long-lived assets(4) | 37.9 | 14.7 | 8.5 | 13.7 | 74.8 | 6.5 | 81.3 | |||||||
| Long-lived assets(5) | 330.0 | 183.2 | 34.9 | 291.3 | 839.4 | 106.9 | 946.3 | |||||||
| Six months ended | ||||||||||||||
| November 30, 2004 | ||||||||||||||
| Restated | ||||||||||||||
| Revenues | $ 546.8 | $ 212.7 | $ 59.5 | $ 0.0 | $ 819.0 | $ 188.0 | $ 1,007.0 | |||||||
| Bad debt | 30.3 | 0.6 | 0.4 | 0.0 | 31.3 | 4.5 | 35.8 | |||||||
| Depreciation and amortization | 6.8 | 1.6 | 0.9 | 18.5 | 27.8 | 3.0 | 30.8 | |||||||
| Amortization(2) | 8.1 | 16.9 | 6.9 | 0.0 | 31.9 | 0.5 | 32.4 | |||||||
| Royalty advances expensed | 4.6 | 0.3 | 0.3 | 0.0 | 5.2 | 1.0 | 6.2 | |||||||
| Segment profit (loss)(3) | 26.9 | 43.8 | 2.3 | (36.7 | ) | 36.3 | 16.2 | 52.5 | ||||||
| Segment assets | 830.4 | 318.7 | 70.9 | 415.9 | 1,635.9 | 330.4 | 1,966.3 | |||||||
| Goodwill | 127.9 | 82.5 | 10.7 | 0.0 | 221.1 | 30.3 | 251.4 | |||||||
| Expenditures for long-lived assets(4) | 31.6 | 16.9 | 8.6 | 8.0 | 65.1 | 4.1 | 69.2 | |||||||
| Long-lived assets(5) | 316.3 | 184.1 | 36.2 | 297.3 | 833.9 | 107.4 | 941.3 | |||||||
| (1) | Overhead includes all domestic corporate amounts not allocated to reportable segments, |
| (2) | Includes amortization of prepublication costs and production |
| (3) |
|
| (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
The following table separately sets forth information for the periods indicated for the United States direct-to-home portion of the Company’s continuity programs, which consist primarily of the business formerly operated by Grolier Incorporated (“Grolier”) and are included in theChildren’s Book Publishing and Distribution segment, and for all other businesses included in the segment:
| Three months ended | |||||||||||||||||
| November 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
| Restated | Restated | Restated | |||||||||||||||
| Revenues | $30.0 | $ 39.4 | $394.2 | $385.6 | $ 424.2 | $ 425.0 | |||||||||||
| Bad debt | 7.9 | 10.7 | 3.8 | 5.9 | 11.7 | 16.6 | |||||||||||
| Depreciation and amortization | 0.6 | 0.3 | 5.2 | 3.0 | 5.8 | 3.3 | |||||||||||
| Amortization(1) | 0.3 | 0.2 | 3.8 | 3.8 | 4.1 | 4.0 | |||||||||||
| Royalty advances expensed | 0.8 | 0.4 | 6.5 | (0.3 | ) | 7.3 | 0.1 | ||||||||||
| Business profit (loss)(2) | (4.6 | ) | (0.3 | ) | 93.2 | 91.2 | 88.6 | 90.9 | |||||||||
| Expenditures for long-lived assets(3) | 1.6 | 1.7 | 14.8 | 13.0 | 16.4 | 14.7 | |||||||||||
| Six months ended | |||||||||||||||||
| November 30, | |||||||||||||||||
| All Other | |||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||
| Restated | Restated | Restated | |||||||||||||||
| Revenues | $ 58.4 | $ 80.6 | $641.1 | $ 466.2 | $ 699.5 | $ 546.8 | |||||||||||
| Bad debt | 14.5 | 20.8 | 7.1 | 9.5 | 21.6 | 30.3 | |||||||||||
| Depreciation and amortization | 0.8 | 0.4 | 8.5 | 6.4 | 9.3 | 6.8 | |||||||||||
| Amortization(1) | 0.6 | 0.6 | 7.6 | 7.5 | 8.2 | 8.1 | |||||||||||
| Royalty advances expensed | 0.4 | 0.9 | 10.7 | 3.7 | 11.1 | 4.6 | |||||||||||
| Business profit (loss)(2) | (10.8 | ) | (4.9 | ) | 79.7 | 31.8 | 68.9 | 26.9 | |||||||||
| Business assets | 238.1 | 236.7 | 602.3 | 593.7 | 840.4 | 830.4 | |||||||||||
| Goodwill | 92.4 | 92.4 | 38.2 | 35.5 | 130.6 | 127.9 | |||||||||||
| Expenditures for long-lived assets(3) | 3.0 | 4.2 | 34.9 | 27.4 | 37.9 | 31.6 | |||||||||||
| Long-lived assets(4) | 144.4 | 145.8 | 185.6 | 170.5 | 330.0 | 316.3 | |||||||||||
| Three months ended | |||||||||||||||||||||
| August 31, | |||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
| Revenues | $ | 36.3 | $ | 28.4 | $ | 76.3 | $ | 246.9 | $ | 112.6 | $ | 275.3 | |||||||||
| Bad debt | 10.7 | 6.6 | 2.8 | 3.3 | 13.5 | 9.9 | |||||||||||||||
| Depreciation and amortization | 0.3 | 0.2 | 4.0 | 3.0 | 4.3 | 3.2 | |||||||||||||||
| Amortization(1) | 0.3 | 0.3 | 4.1 | 3.8 | 4.4 | 4.1 | |||||||||||||||
| Royalty advances expensed | 0.2 | (0.4 | ) | 4.1 | 4.2 | 4.3 | 3.8 | ||||||||||||||
| Business loss(2) | (6.5 | ) | (6.2 | ) | (60.8 | ) | (13.5 | ) | (67.3 | ) | (19.7 | ) | |||||||||
| Business assets | 220.9 | 207.1 | 593.4 | 746.0 | 814.3 | 953.1 | |||||||||||||||
| Goodwill | 92.4 | 92.4 | 38.2 | 38.2 | 130.6 | 130.6 | |||||||||||||||
| Expenditures for long-lived assets(3) | 1.7 | 1.4 | 10.8 | 20.0 | 12.5 | 21.4 | |||||||||||||||
| Long-lived assets(4) | 117.5 | 116.7 | 169.3 | 180.1 | 286.8 | 296.8 | |||||||||||||||
| (1) | Includes amortization of prepublication |
| (2) | Business |
| (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. |
3. Debt
The following table summarizes debt as of the dates indicated:
| Lines of Credit | $ | 42.2 | $ | 33.8 | $ | 33.7 | ||||||
| Credit Agreement and Revolver | 1.0 | - | 72.0 | |||||||||
| 5.75% Notes due 2007, net of premium/discount | 259.3 | 295.3 | 301.0 | |||||||||
| 5% Notes due 2013, net of discount | 173.3 | 173.2 | 173.0 | |||||||||
| Other debt | - | 0.1 | 0.1 | |||||||||
| Total debt | 475.8 | 502.4 | 579.8 | |||||||||
| Less lines of credit, short-term debt and | ||||||||||||
| current portion of long-term debt | (301.5 | ) | (329.2 | ) | (33.8 | ) | ||||||
| Total long-term debt | $ | 174.3 | $ | 173.2 | $ | 546.0 | ||||||
11
| 4. Debt | ||||||||||||
| The following summarizes debt at the dates indicated: | ||||||||||||
| Lines of Credit | $ | 41.3 | $ | 24.7 | $ | 33.6 | ||||||
| Credit Agreement and Revolver | - | - | 51.1 | |||||||||
| 5.75% Notes due 2007, net of premium | 300.4 | 303.5 | 304.5 | |||||||||
| 5.00% Notes due 2013, net of discount | 173.1 | 173.0 | 172.9 | |||||||||
| Other debt | 0.1 | 0.2 | 0.6 | |||||||||
| Total debt | 514.9 | 501.4 | 562.7 | |||||||||
| Less lines of credit and short-term debt | (41.4 | ) | (24.9 | ) | (34.2 | ) | ||||||
| Total long-term debt | $ | 473.5 | $ | 476.5 | $ | 528.5 | ||||||
The following table sets forth the maturities of the Company’s debt obligations as of November 30, 2005August 31, 2006 for the remainder of fiscal 20062007 and thereafter:
| Nine-month period ending May 31: | |||||
| 2007 | $ | 301.5 | |||
| Fiscal years ending May 31: | |||||
| 2008 | - | ||||
| 2009 | 1.0 | ||||
| 2010 | - | ||||
| 2011 | - | ||||
| Thereafter | 173.3 | ||||
| Total debt | $ | 475.8 | |||
| Six-month period ending May 31: | ||
| 2006 | $ | 20.7 |
| Fiscal years ending May 31: | ||
| 2007 | 321.1 | |
| 2008 | - | |
| 2009 | - | |
| 2010 | - | |
| Thereafter | 173.1 | |
| Total debt | $ | 514.9 |
Lines of Credit
Certain of Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $76.4,$79.3 in the aggregate at November 30, 2005,August 31, 2006, as compared to $64.8$59.1 at November 30, 2004August 31, 2005 and $61.8$67.9 at May 31, 2005.2006. There were borrowings outstanding under these lines of credit equivalent to $41.3$42.2 at November 30, 2005,August 31, 2006, as compared to $33.6$33.7 at November 30, 2004August 31, 2005 and $24.7$33.8 at May 31, 2005.2006. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 6.0% and 5.5% at August 31, 2006 and 5.6% at November 30, 2005, and 2004, respectively, and 5.4%6.0% at May 31, 2005.2006.
Credit Agreement
On March 31, 2004, Scholastic Corporation and its principal operating subsidiary, Scholastic Inc. entered into, are parties to an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire in August 2004. 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 November 30, 2005August 31, 2006 were 0.675%0.975% over LIBOR, 0.20%0.30% and 0.125%0.25%, respectively. The Credit Agreement 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 Credit Agreement at November 30, 2005 andAugust 31, 2006 or May 31, 2005.2006. At November 30, 2004, $45.0August 31, 2005, $35.0 was outstanding under the Credit Agreement at a weighted average interest rate of 2.5% 4.3%.
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 November 30, 2005August 31, 2006 were 0.725%1.025% over LIBOR and 0.20%0.30%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. ThereAt August 31, 2006 and 2005, $1.0 and $37.0, respectively, were no borrowings outstanding under the Revolver at November 30, 2005 and May 31, 2005. At November 30, 2004, $6.1 was outstanding under the Revolver at a weighted average interest rate of 2.4% .7.3% and 5.0%, respectively. There were no borrowings outstanding under the Revolver at May 31, 2006.
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.year through maturity. 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 November 30, 2005,In fiscal 2006, the Company had repurchased $2.0$6.0 of the 5.75% Notes on the open market. In the quarter ended August 31, 2006, the Company repurchased $35.4 of the 5.75% Notes on the open market. After giving effect to these repurchases, the outstanding 5.75% Notes, net of premium/discount, totaled $259.3.
5% Notes due 2013
In April 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 all 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.
4. Comprehensive Loss
The following table sets forth comprehensive loss for the periods indicated:
| Net loss | $ | (46.9 | ) | $ | (21.2 | ) | ||
| Other comprehensive loss - | ||||||||
| foreign currency translation adjustment | (7.0 | ) | (6.3 | ) | ||||
| Comprehensive loss | $ | (53.9 | ) | $ | (27.5 | ) | ||
5. Investment
In the quarter ended August 31, 2006, the Company participated in the organization of a new entity, the Children’s Network Venture LLC (“Children’s Network”), that will produce and distribute educational children’s television programming under the name “Qubo.” The Company has contributed a total of $2.4 in cash and certain rights to existing television programming to the Children’s Network. The Company’s investment, which consists of a 12.25% equity interest, is accounted for using the equity method of accounting and is included in the Other assets and deferred charges section of the Company’s consolidated balance sheets.
13
5.6. Loss Per ShareComprehensive Income
The following table sets forth comprehensive income for the periods indicated:
| 2005 | 2004 | 2005 | 2004 | ||||||
| Restated | Restated | ||||||||
| Net income | $ 66.9 | $ 72.5 | $ 45.7 | $ 22.0 | |||||
| Other comprehensive income / (loss) - foreign | |||||||||
| currency translation adjustment | 1.5 | 9.3 | (4.8 | ) | 9.0 | ||||
| Comprehensive income | $ 68.4 | $ 81.8 | $ 40.9 | $ 31.0 | |||||
| 6. Earnings Per Share | |||||||||
Basic earningsloss per share is computed by dividing net incomeloss by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted earningsloss per share is calculated to give effect to potentially dilutive options to purchase Class A and Common Stock issuedgranted pursuant to the Company’s stock-based benefit plans that were outstanding during the period. The following table summarizesdiluted loss per share was equal to the reconciliationbasic loss per share for each of the numeratorsthree month periods ended August 31, 2006 and denominators2005 because such options were antidilutive in those periods. The weighted average shares of Class A Stock and Common Stock outstanding for the basic and diluted earningsloss per share computation for the periods indicated:three months ended August 31, 2006 and 2005 were 42.0 and 41.0, respectively.
| 2005 | 2004 | 2005 | 2004 | |||||
| Restated | Restated | |||||||
| Net income for basic and diluted earnings | ||||||||
| per share | $ 66.9 | $ 72.5 | $ 45.7 | $ 22.0 | ||||
| Weighted average Shares of Class A Stock and | ||||||||
| Common Stock outstanding for basic earnings | ||||||||
| per share | 41.3 | 39.7 | 40.8 | 39.7 | ||||
| Dilutive effect of Class A Stock and Common Stock | ||||||||
| potentially issued pursuant to stock-based benefit plans | 0.7 | 0.7 | 0.8 | 0.5 | ||||
| Adjusted weighted average Shares of Class A Stock | ||||||||
| and Common Stock outstanding for diluted | ||||||||
| earnings per share | 42.0 | 40.4 | 41.6 | 40.2 | ||||
| Earnings per share of Class A Stock and | ||||||||
| Common Stock: | ||||||||
| Basic | $ 1.62 | $ 1.83 | $ 1.12 | $ 0.56 | ||||
| Diluted | $ 1.59 | $ 1.80 | $ 1.10 | $ 0.55 | ||||
SCHOLASTIC CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
7. Goodwill and Other Intangibles
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:
| Beginning balance | $ 254.2 | $ 249.7 | $ 249.7 | |||||||||
| Additions due to acquisitions | - | 6.0 | - | |||||||||
| Other adjustments | (0.8 | ) | (1.5 | ) | 1.7 | |||||||
| Ending balance | $ 253.4 | $ 254.2 | $ 251.4 | |||||||||
| Beginning balance | $ | 253.1 | $ | 254.2 | $ | 254.2 | ||||
| Translation adjustments | 0.4 | (1.1 | ) | (0.1 | ) | |||||
| Total | $ | 253.5 | $ | 253.1 | $ | 254.1 | ||||
In the twelve months ended May 31, 2005, Additions due to acquisitions includes the purchase price for the acquisition of Chicken House Publishing Ltd. and the accrual of a final payment related to the fiscal 2002 acquisition of Klutz.
The following table summarizes Other intangibles subject to amortization at the dates indicated:
| 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 | ) | (2.5 | ) | |||
| Net other intangibles | 1.2 | 1.4 | 1.5 | ||||||
| Total | $ 1.4 | $ 1.6 | $ 1.7 | ||||||
| Customer lists | $ | 3.0 | $ | 3.0 | $ | 3.0 | ||||||
| Accumulated amortization | (2.9 | ) | (2.9 | ) | (2.8 | ) | ||||||
| Net customer lists | 0.1 | 0.1 | 0.2 | |||||||||
| Other intangibles | 4.0 | 4.0 | 4.0 | |||||||||
| Accumulated amortization | (2.9 | ) | (2.8 | ) | (2.7 | ) | ||||||
| Net other intangibles | 1.1 | 1.2 | 1.3 | |||||||||
| Total | $ | 1.2 | $ | 1.3 | $ | 1.5 | ||||||
Amortization expense for Other intangibles totaled $0.1 and $0.2 for the three and six months ended November 30,August 31, 2006 and August 31, 2005, respectively, $0.1 for each of the three and six months ended November 30, 2004, and $0.3 for the twelve months ended May 31, 2005.2006. Amortization expense for these assets is currently estimated to total $0.3 for the fiscal year ending May 31, 2006, and $0.2 for each of the fiscal years ending May 31, 2007 through 2010.2010, and $0.1 for the fiscal year ending May 31, 2011. The weighted average amortization periods for these assets by major asset class are two years and twelve years for customer lists and other intangibles, respectively.
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
| 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 | ||||
8.
8.Pension and Other Post-Retirement Benefits
The following table setstables 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 Corporation located in the United Kingdom (the “U.K. Pension Plan”), the defined benefit pension plan of Grolier Ltd., an indirect subsidiary of Scholastic 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:
| 2005 | 2004 | 2005 | 2004 | |||||
| Components of Net Periodic Benefit Cost: | ||||||||
| Service cost | $ 2.0 | $ 2.0 | $ 4.1 | $ 3.9 | ||||
| Interest cost | 2.1 | 2.1 | 4.1 | 4.2 | ||||
| Expected return on assets | (2.2 | ) | (2.4 | ) | (4.4 | ) | (4.8 | ) |
| Net amortization and deferrals | 1.0 | 0.6 | 1.9 | 1.2 | ||||
| Net periodic benefit cost | $ 2.9 | $ 2.3 | $ 5.7 | $ 4.5 | ||||
| 2005 | 2004 | 2005 | 2004 | |||||
| Components of Net Periodic Benefit Cost: | ||||||||
| Service cost | $ 0.1 | $ 0.1 | $ 0.3 | $ 0.2 | ||||
| Interest cost | 0.5 | 0.6 | 0.9 | 1.1 | ||||
| Amortization of prior service cost | (0.2 | ) | (0.2 | ) | (0.4 | ) | (0.4 | ) |
| Recognized gain or loss | 0.5 | 0.4 | 0.9 | 0.8 | ||||
| Net periodic benefit cost | $ 0.9 | $ 0.9 | $ 1.7 | $ 1.7 | ||||
| Components of Net Periodic Benefit Cost: | ||||||||||||||||
| Service cost | $ | 2.0 | $ | 2.0 | $ | 0.0 | $ | 0.1 | ||||||||
| Interest cost | 2.3 | 2.1 | 0.5 | 0.5 | ||||||||||||
| Expected return on assets | (2.3 | ) | (2.2 | ) | - | - | ||||||||||
| Net amortization and deferrals | 0.6 | 1.0 | 0.1 | 0.3 | ||||||||||||
| Net periodic benefit cost | $ | 2.6 | $ | 2.9 | $ | 0.6 | $ | 0.9 | ||||||||
The Company currently estimates that it will contribute $12.3 to the U.S. Pension Plan in the fiscal year ending May 31, 2007. For the three months ended August 31, 2006, the Company contributed $4.9 to the U.S. Pension Plan. The Company currently estimates that Scholastic Ltd. will contribute the equivalent of $1.1 to the U.K. Pension Plan in the fiscal year ending May 31, 2006.2007. For the sixthree months ended November 30, 2005,August 31, 2006, Scholastic Ltd. contributed the equivalent of $0.6$0.3 to the U.K. Pension Plan.
15
Overview and Outlook
Revenue forThe Company’s first quarter is generally its smallest revenue period as most schools are not in session, resulting in a seasonal loss. The net loss in the quarter ended November 30, 2005 increased 2.0%August 31, 2006 was $46.9 million, compared to approximately $697a $21.2 million as compared tonet loss in the quarter ended August 31, 2005. The net loss in the prior fiscal year quarter reflecting revenue increaseswas unusually low due to the benefit of approximately $185 million of revenues related to the release ofHarry Potter and the Half-Blood Prince, the sixth book in theInternational,Educational Publishingand Media, Licensing and Advertising segments. Operating income for planned seven book series, in July 2005.
In the quarter decreased 5.4% as compared to the priorended August, 31, 2006, Scholastic made solid initial progress toward achieving its goals for fiscal year quarter, and operating margin decreased to 16.5% in the current fiscal year quarter as compared to 17.8% a year ago. These decreases were principally due to lower operating results in the Internationalsegment.
2007. Key factors in the quarter ended November 30, 2005 included growth in revenues inoperating profit from the Company’s school-based book fair and trade businesses and theEducational Publishing segment, led by salesprimarily as a result of a 9% increase in educational technology products. These increases were offset by a decreaserevenues, as well as growth in non-Harry Potter trade revenues, in the Company’s continuity and school-based book club businesses. The Company’s domestic operations were also adversely affected during the quarter by hurricane-related school disruptions and resulting higher fuel costs.
For the six months ended November 30, 2005, revenues and operating incomewhich increased over the prior fiscal year period by $188.1 million and $37.6 million, respectively. Operating margin increased to 7.5% in the current fiscal year period as compared to 5.2% in the prior fiscal year period. These improvements were primarily due to better operating resultssales of new releases, including the eighth title in theChildren’s Book Publishing and DistributionCaptain Underpants andEducational Publishing segments. Theseries. In addition, the Company remainsis on track to achievemeet its goals for fiscal 2006 of expanding margins while growing revenues.previously announced cost savings targets.
Results of Operations - Consolidated
Revenues for the quarter ended November 30, 2005 increased $13.4August 31, 2006 decreased $163.5 million, or 2.0%32.8%, to $696.7$334.9 million, compared to $683.3$498.4 million in the prior fiscal year quarter. The increase was principally dueThis decrease related primarily to higher revenues in theInternational, Educational Publishing andMedia, Licensing and Advertising segments of $5.2 million, $4.7 million and $4.3 million, respectively. For the six months ended November 30, 2005, revenues increased $188.1 million, or 18.7%, to $1,195.1 million, compared to $1,007.0$162.7 million in the prior fiscal year period due to increases in each of the Company’s four operating segments, led by $152.7 million in higherlower revenues from theChildren’s Book Publishing and Distribution segment as a result ofcompared to the prior fiscal year quarter, which reflected the July 2005 release ofHarry Potter and the Half-Blood Prince. Revenues increased $2.5 million, or 3.3%, the sixth book in the series.Internationalsegment and declined by $2.4 million, or 13.3%, in theMedia, Licensing and Advertising segment.
Cost of goods sold as a percentage of revenues decreased to 42.8% for$171.8 million in the quarter ended November 30, 2005, asAugust 31, 2006, or 51.3% of revenues, compared to 44.1%$293.0 million, or 58.8% of revenues, in the quarter ended August 31, 2005, primarily due to higher costs related to theHarry Potter release in the prior fiscal year quarter. For the six months ended November 30, 2005, cost of goods sold as a percentage of revenues increased to 49.5%, as compared to 47.4% in the prior fiscal year period, primarily due to costs related to the release ofHarry Potter and the Half-Blood Prince.
Selling, general and administrative expenses as a percentage of revenues for the quarter ended November 30, 2005 increasedAugust 31, 2006 decreased $5.8 million to 36.1% from 33.0%$196.6 million, compared to $202.4 million in the prior fiscal year quarter, which included approximately $11 million of costs related to the Harry Potter release in that period. This benefit was partially offset by a $3.1 million increase in promotional expenses primarily in the Company’s continuity businesses and a $1.9 million increase in severance costs related to the Company’s cost savings initiatives.
Bad debt expense totaled $15.7 million for the quarter ended August 31, 2006, compared to $12.6 million in the prior fiscal year quarter, primarily due to an increase in employee and related expenses. For the six months ended November 30, 2005, Selling, general and administrative expenses as a percentage of revenues decreased to 38.0% from 40.8% in the prior fiscal year period, primarily due to the revenue benefit fromHarry Potter and the Half-Blood Prince without a corresponding increase in expense. For the six months ended November 30, 2004, Selling, general and administrative expenses included a charge of $3.6 million, primarily related to severance costs, recorded in connection with the fiscal 2004 review by the Company of its continuity business (the “Continuity Charges”).
Bad debt expense decreased to $15.1 million, or 2.2% of revenues, for the quarter ended November 30, 2005, compared to $19.6 million, or 2.9% of revenues, in the prior fiscal year quarter. For the six months ended November 30, 2005, bad debt expense decreased to $27.7 million, or 2.3% of revenues, compared to $35.8 million, or 3.6% of revenues, in the prior fiscal year period. The lower levels of bad debt expense in the three- and six-month periods related primarily to lowerhigher 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.businesses.
Depreciation and amortization expenseThe resulting operating loss for the quarter ended November 30, 2005 increased to $16.8August 31, 2006 was $66.1 million, or 2.4% of revenues, compared to $15.1an operating loss of $25.2 million or 2.2% of revenues, in the prior fiscal year quarter. For the six months ended November 30, 2005, Depreciation and amortization expense increasedquarter, primarily due to $32.4a $47.6 million or 2.7% of revenues, compared to $30.8 million, or 3.1% of revenues,operating loss in the prior fiscal year period. These increases were principally due to higher depreciation of information technology equipment.
The resultingChildren’s Book Publishing and Distributionsegment, partially offset by a $5.2 million increase in operating income for the quarter ended November 30, 2005 decreased by $6.6 million to $115.3 million, or 16.5% of revenues, compared to $121.9 million, or 17.8% of revenues, in the prior fiscal year quarter. For the six months ended November 30, 2005, the resulting operating income increased to $90.1 million, or 7.5% of revenues, compared to $52.5 million, or 5.2% of revenues, in the prior fiscal year period.Educational Publishing segment.
The effective income tax rate for each of the three and six monthsquarter ended November 30, 2005 increasedAugust 31, 2006 decreased to 37.0%,36.2% compared to 35.5%37.1% in each of the prior fiscal year periods,quarter, primarily due to a higher effectiveanticipated tax-exempt interest income. The tax rate on foreign earnings and a higher statefor the quarter ended August 31, 2006 approximated the effective income tax provision.rate for the fiscal year ended May 31, 2006.
Net incomeloss was $66.9$46.9 million, or $1.59$1.12 per diluted share, for the quarter ended November 30, 2005,August 31, 2006, compared to a net incomeloss of $72.5$21.2 million, or $1.80$0.52 per diluted share, in the prior fiscal year quarter. For the six months ended November 30, 2005, net income was $45.7 million, or $1.10 per diluted share, compared to net income of $22.0 million, or $0.55 per diluted share, in the prior fiscal year period.
Results of Operations - Segments
In the fourth quarter of fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by theMedia, Licensing and Advertisingsegment that are sold through channels included in theChildren’s Book Publishing and Distributionsegment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the prior fiscal year quarter inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in theMedia, Licensing and Advertisingsegment with an offsetting decrease in gross margin and profits in theChildren’s Book Publishing and Distributionsegment.
Children’s Book Publishing and Distribution
| ($ amounts in millions) | |||||||
| Revenue | $ | 112.6 | $ | 275.3 | |||
| Operating loss | (67.3 | ) | (19.7 | ) | |||
| Operating margin | * | * | |||||
* not meaningful
The Company’sRevenues in theChildren’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 | Six months ended | ||||||||||||||
| $ amounts in millions) | November 30, | November 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||||
| Restated | Restated | ||||||||||||||
| Revenue | $ 424.2 | $ 425.0 | $ 699.5 | $ 546.8 | |||||||||||
| Operating profit | 88.6 | 90.9 | (1) | 68.9 | 26.9 | (1) 2) | |||||||||
| Operating margin | 20.9 | % | 21.4 | % (1) | 9.8 | % | 4.9 | %(1) | |||||||
Revenues in theChildren’s Book Publishing and Distribution segment for the quarter ended November 30, 2005 were nearly flat at $424.2August 31, 2006 decreased by $162.7 million to $112.6 million, compared to $425.0$275.3 million in the prior fiscal year quarter. WithinThis decrease was substantially due to lowerHarry Potter revenues in the segment, revenues from school-based book fairs increased $10.4current fiscal year quarter, which decreased by approximately $180 million due to higher revenue per fair,the release of Harry Potter and the Half-Blood Prince in the prior fiscal year quarter, partially offset by a $9.6 million increase in non-Harry Potter trade revenues increased $5.2and a $6.8 million primarily due to a higher level ofHarry Potter back list revenues. Revenuesincrease in revenues from the Company’s continuity businesses. School-based book clubs and book fairs have minimal activity in the Company’s continuity business decreased by $10.9 million, principallyfirst fiscal quarter, as a result of the Company’s previously announced plan to focus on its more productive customers, and school-based book club revenues decreased by $5.5 million, primarily due to a lower number of orders.most schools are not in session.
Segment operating profitloss for the quarter ended November 30, 2005 decreased by $2.3 million, or 2.5%, to $88.6August 31, 2006 was $67.3 million, compared to $90.9$19.7 million in the prior fiscal year quarter, principally due to a decrease in operating profits in the Company’s school-based book club business as a result of lower revenues and increased promotional costs, partially offset by an operating profit increase in the balance of the segment, primarily from school-based book fairs.
Revenues for the six months ended November 30, 2005 increased $152.7 million, or 27.9%, to $699.5 million, compared to $546.8 million in the prior fiscal year period. This increase was principally due toHarry Potter revenues of approximately $195 million, as compared to approximately $15 million ofHarry Potterrevenues in the prior fiscal year period. In addition, revenues for the Company’s school-based book fair business increased $13.4 million due to an increase in revenue per fair. These revenue increases were partially offset by a decline in revenue from the Company’s continuity business of $28.1 million.
Segment operating profit for the six months ended November 30, 2005 improved by $42.0 million, to $68.9 million, compared to $26.9 million in the prior fiscal year period. This improvement was primarily due to increasedthe lower operating profitsresults for the Company’s trade business resulting from the higherHarry Potter revenues.business.
The following highlights the results of the direct-to-home portion of the Company’s continuity programs, which consists primarily of the business formerly operated by Grolier and is included in theChildren’s Book Publishing and Distribution segment.
| Direct-to-home continuity | Three months ended | Six months ended | |||||||||||||||||||||
| ($ amounts in millions) | November 30, | November 30, | |||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||
| Restated | Restated | ||||||||||||||||||||||
| Revenue | $ 30.0 | $ 39.4 | $ 58.4 | $ 80.6 | $ | 36.3 | $ | 28.4 | |||||||||||||||
| Operating loss | (4.6 | ) | (0.3 | ) | (10.8 | ) | (4.9 | )(1) | (6.5 | ) | (6.2 | ) | |||||||||||
| Operating margin | * | * | * | * | * | * | |||||||||||||||||
* not meaningful
Revenues from the direct-to-home portion of the Company’s continuity business decreased by $9.4 million, or 23.9%, to $30.0 million for the quarter ended November 30, 2005, asAugust 31, 2006 increased to $36.3 million, compared to $39.4$28.4 million in the prior fiscal year quarter,quarter. This increase was primarily attributable to new customers acquired through new product offerings and decreased by $22.2 million, or 27.5%, to $58.4 million for the six months ended November 30, 2005, as compared to $80.6web-based sales initiatives. The business operating loss was $6.5 million in the priorcurrent fiscal year period.
The operating loss for the direct-to-home portion of the continuity business was $4.6 million in the quarter, ended November 30, 2005, as compared to a $0.3$6.2 million operating loss in the prior fiscal year quarter, and $10.8 million for the six months ended November 30, 2005, comparedquarter. The higher operating loss was due to a $4.9$4.1 million operating lossincrease in bad debt expense, as well as a $3.1 million increase in promotional expense, associated with the prior fiscal year period, which included $3.6 millionCompany’s effort to acquire new customers as part of Continuity Charges.its strategy to increase revenues in this business.
17
Excluding the direct-to-home portion of the continuity business, segment revenues increased by $8.6 million, or 2.2%, to $394.2 million for the quarter ended November 30, 2005,August 31, 2006 decreased by $170.6 million to $76.3 million, compared to $385.6$246.9 million in the prior fiscal year quarter, and segment operating loss in the quarter ended August 31, 2006 increased by $174.9to $60.8 million, or 37.5%, to $641.1 million for the six months ended November 30, 2005, compared to $466.2$13.5 million in the prior fiscal year period.
Excluding the direct-to-home portion of the continuity business, segment operating profit was $93.2 million in the quarter ended November 30, 2005, compared to $91.2 million in the prior fiscal year quarter, and was $79.7 million in the six months ended November 30, 2005, compared to $31.8 million in the prior fiscal year period.quarter.
Educational Publishing
The Company’sEducational Publishing segment includes the publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.
| ($ amounts in millions) | ||||||||
| Revenue | $ | 127.4 | $ | 128.3 | ||||
| Operating income | 32.7 | 27.5 | ||||||
| Operating margin | 25.7 | % | 21.4 | % | ||||
| Three months ended | Six months ended | |||||||||||
| ($ amounts in millions) | November 30, | November 30, | ||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Restated | Restated | |||||||||||
| Revenue | $ 99.2 | $ 94.5 | $ 227.5 | $ 212.7 | ||||||||
| Operating profit | 21.6 | 21.5 | 49.1 | 43.8 | ||||||||
| Operating margin | 21.8 | % | 22.8 | % | 21.6 | % | 20.6 | % | ||||
Revenues in theEducational Publishing segment for the quarter ended November 30, 2005 increased $4.7 million, or 5.0%,August 31, 2006 decreased slightly to $99.2$127.4 million, compared to $94.5$128.3 million in the prior fiscal year quarter. Segment revenues for the six months ended November 30, 2005 increased $14.8 million, or 7.0%, to $227.5 million, compared to $212.7 million in the prior fiscal year period. The increases related primarily to higherHigher revenues from sales of educational technology products, led by the Company’sREAD 180® reading intervention program, partiallywhich increased by $5.4 million, were offset by an expected decline in classroom magazinelower revenues due to prior year sales of election-related materials.from paperback collections and library publishing, which decreased by $3.5 million and $2.5 million, respectively.
Segment operating profit for the quarter ended November 30, 2005 increased slightlyAugust 31, 2006 improved by $5.2 million, or 18.9%, to $21.6$32.7 million, compared to $21.5$27.5 million in the prior fiscal year quarter, as higher profits from sales of educational technology products were largely offset by lower results in the balance of the segment, taken together. Segment operating profit for the six months ended November 30, 2005 increased by $5.3 million, or 12.1%, to $49.1 million, compared to $43.8 million in the prior fiscal year period,quarter. This improvement was primarily due to the revenue growth from sales of educational technology products.products, which have higher gross margins.
Media, Licensing and Advertising
| ($ amounts in millions) | ||||||||
| Revenue | $ | 15.7 | $ | 18.1 | ||||
| Operating loss | (6.1 | ) | (5.7 | ) | ||||
| Operating margin | * | * | ||||||
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 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.not meaningful
| Three months ended | Six months ended | |||||||||||
| ($ amounts in millions) | November 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Restated | Restated | |||||||||||
| Revenue | $ 51.9 | $ 47.6 | $ 70.0 | $ 59.5 | ||||||||
| Operating profit | 7.7 | 8.5 | (1) | 2.0 | 2.3 | (1) | ||||||
| Operating margin | 14.8 | % | 17.9 | % (1) | 2.9 | % | 3.9 | % (1) | ||||
(1) Reflects the Segment Reallocation.
Revenues in the Media, Licensing and Advertising segment for the quarter ended November 30, 2005 increased $4.3August 31, 2006 decreased by $2.4 million, or 9.0%13.3%, to $51.9$15.7 million, compared to $47.6 million in the prior fiscal year quarter, due to an increase in each of the businesses in the segment, led by an increase in revenues from Back to Basic Toys®, the Company’s direct-to-home toy catalog. Segment revenues for the six months ended November 30, 2005 increased $10.5 million, or 17.6%, to $70.0 million, compared to $59.5 million in the prior fiscal year period, primarily due to an increase in television programming revenues.
Segment operating profit for the quarter ended November 30, 2005 decreased $0.8 million, or 9.4%, to $7.7 million, compared to $8.5$18.1 million in the prior fiscal year quarter. This decrease was primarily due to lower television programming revenues caused by the delivery of fewer episodes compared to the prior fiscal year quarter.
Segment operating profitloss for the six monthsquarter ended November 30, 2005 decreasedAugust 31, 2006 increased slightly to $2.0$6.1 million, compared to $2.3$5.7 million in the prior fiscal year period.quarter.
18
International
| ($ amounts in millions) | ||||||||
| Revenue | $ | 79.2 | $ | 76.7 | ||||
| Operating loss | (5.5 | ) | (5.5 | ) | ||||
| Operating margin | * | * | ||||||
TheInternational*segment 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.not meaningful
| Three months ended | Six months ended | |||||||||||
| ($ amounts in millions) | November 30, | November 30, | ||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
| Restated | Restated | |||||||||||
| Revenue | $ 121.4 | $ 116.2 | $ 198.1 | $ 188.0 | ||||||||
| Operating profit | 12.8 | 19.2 | 7.3 | 16.2 | ||||||||
| Operating margin | 10.5 | % | 16.5 | % | 3.7 | % | 8.6 | % | ||||
Revenues in theInternational segment for the quarter ended November 30, 2005August 31, 2006 increased $5.2$2.5 million, or 4.5%3.3%, to $121.4$79.2 million, compared to $116.2$76.7 million in the prior fiscal year quarter. This increase was primarilyquarter, due to the favorable impact of foreign currency exchange rates. Segment revenues for the six months ended November 30, 2005 increased $10.1 million, or 5.4%, to $198.1 million, as compared to $188.0 million in the prior fiscal year period. This increase was primarily due to revenue growth in the Company’s export business of $6.9 million and the favorable impact of foreign currency exchange rates of $6.7 million, partially offset by lower local currency revenues in the United Kingdom.
Segment operating profit for the quarter ended November 30, 2005 decreased $6.4 million, or 33.3%, to $12.8 million, as compared to $19.2 million in the prior fiscal year quarter, most significantly due to lower local currency operating profits in the United Kingdom. Segment operating profit for the six months ended November 30, 2005 decreased $8.9 million, or 54.9%, to $7.3 million, compared to $16.2 million in the prior fiscal year period, primarily due to lower local currency operating profits in the United Kingdom.
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,result, 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 quarterand third quarters of each fiscal year.
Liquidity and Capital Resources
The Company’s cash and cash equivalents were $249.3$19.7 million at November 30, 2005,August 31, 2006, compared to $27.1$18.4 million at November 30, 2004August 31, 2005 and $110.6$205.3 million at May 31, 2005.2006.
Cash provided byused in operating activities was $185.9$138.1 million for the sixthree months ended November 30, 2005, compared to $31.7August 31, 2006 and approximated cash used in operating activities of $138.8 million in the prior fiscal year period. The increase fromperiod, as the prior fiscal year period was primarily due to higher Net income and favorable changes in working capitalnet loss in the current fiscal year period.period was offset by favorable net changes in working capital accounts between the two periods. The most significant working capital account change that had a positive impact on cash flows occurred in Accounts receivable, net increasedwhich decreased by $66.9$2.7 million in the sixthree months ended November 30, 2005,August 31, 2006, compared to an increase of $86.4$154.5 million in the prior fiscal year period, primarily due to lowerthe higherHarry Potter revenues in the Company’s continuity programs.prior fiscal year period. Working capital account changes that had a negative impact on cash flows included: Accrued royalties, which increased by $11.1 million in the three months ended August 31, 2006 compared to an increase of $87.1 million in the prior year fiscal period, and Accounts payable and other accrued expenses, which increased by $73.3$4.2 million duringin the sixthree months ended November 30, 2005,August 31, 2006 compared to ana $28.2 million increase of $7.2 million in the prior fiscal year period, duewith the changes in both accounts related primarily to accrued expenses associated withHarry Potter.Accrued royaltiesthe lower trade revenues in the current fiscal year period; and Inventories, which increased by $73.9$115.9 million infor the sixthree months ended November 30, 2005,August 31, 2006 compared to an increase of $9.6$102.3 million in the prior fiscal year period, primarily due to royalties associatedhigher purchases made in connection with higherHarry Potter revenues that will be paid later in fiscal 2006.new product offerings.
19
Cash used in investing activities was $81.3$24.0 million forin the sixthree months ended November 30, 2005,August 31, 2006, compared to $69.2$42.8 million in the prior fiscal year period. This $18.8 million decrease was due primarily to a $9.2 million decrease in Additions to property, plant and equipment, which totaled $30.7$6.2 million for the sixthree months ended November 30, 2005, an increase of $9.3August 31, 2006 compared to $15.4 million overin the prior fiscal year period, principally due to increaseddecreased information technology spending. Acquisition-related payments totaled $3.3 million in the sixthree months ended November 30,August 31, 2005 due to a contingent payment related to the acquisition of Klutz in fiscal 2002.
Cash used in financing activities was $23.7 million in the three months ended August 31, 2006, compared to cash provided by financing activities was $34.0 million in the six months ended November 30, 2005, compared to $46.4of $89.3 million in the prior fiscal year period,period. This change was due to the effect of a higher cash position at the beginning of the current fiscal year asthree months ended August 31, 2006 compared to the beginning of the prior fiscal year as well asperiod, along with the increase in current year cash provided by operating activities. Proceeds pursuant to employee stock-based plans totaled $24.8open market repurchase of $35.4 million inof the Company’s 5.75% Notes due January 15, 2007 (the “5.75% Notes”) during the current fiscal year period, an increase of $20.5 million compared to $4.3 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 in the June through October time period. As a result of the Company’s business cycle, seasonal borrowings have historically increased during June, July and November,August, have generally peaked in September or October, and have been at their lowest point in May.
The Company’s operating philosophy is to use cash provided from operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, by making acquisitions that will complement its portfolio of businesses. The Company believes that cash generated by its operations and amounts available under its existing cash position, combined with funds generated from operations and available under the Credit Agreement and the Revolver, described in “Financing” below,credit facilities will be sufficient to finance its ongoing workingshort- and long-term capital requirements. The Company anticipates refinancingalso believes it has adequate access to capital to finance its ongoing operating needs and to repay its debt obligations prior to their respective maturity dates,as they become due, including its outstanding 5.75% Notes, due in January 2007,as discussed under “Financing” below.
During the first quarter, the credit rating of the Company’s senior unsecured debt was downgraded from BB+ to BB by Standard & Poor’s and from Baa3 to Ba1 by Moody’s Investor Service. Under prevailing market conditions, the Company believes that these ratings afford it adequate access to the extent not paid through cash flow.public and private markets for debt.
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 in August 2004. 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 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 November 30, 2005August 31, 2006 were 0.675%0.975% over LIBOR, 0.20%0.30% and 0.125%0.25%, respectively. The Credit Agreement 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 Credit Agreement at November 30, 2005 andAugust 31, 2006 or May 31, 2005.2006. At November 30, 2004, $45.0August 31, 2005, $35.0 million was outstanding under the Credit Agreement at a weighted average interest rate of 2.5% 4.3%.
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 November 30, 2005August 31, 2006 were 0.725%1.025% over LIBOR and 0.20%0.30%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. ThereAt August 31, 2006 and 2005, $1.0 million and $37.0 million were no borrowings outstanding under the Revolver at November 30, 2005 and May 31, 2005. At November 30, 2004, $6.1 million was outstanding under the Revolver at a weighted average interest rate of 2.4% .7.3% and 5.0%, respectively, with the increase in the weighted average interest rate principally due to higher market interest rates. There were no borrowings outstanding under the Revolver at May 31, 2006.
The Credit Agreement and Revolver allow the Company to borrow, repay or, to the extent permitted by the agreements, prepay and re-borrow at any time prior to the stated maturity dates and subject to the terms and conditions of the facilities. The $71 million decrease in aggregate borrowings under these facilities at August 31, 2006 compared to August 31, 2005 was primarily due to the higher cash position at the start of the current fiscal year period compared to the start of the prior fiscal year period. At August 31, 2006, the Company was in compliance with its debt covenants under each of these facilities.
Unsecured lines of credit available in local currencies to certain of Scholastic Corporation’s international subsidiaries were, in the aggregate, equivalent to $76.4$79.3 million at November 30, 2005,August 31, 2006, as compared to $64.8$59.1 million at November 30, 2004August 31, 2005 and $61.8$67.9 million at May 31, 2005.2006. These lines are used primarily to fund local working capital needs. There were borrowings outstanding under these lines of credit equivalent to $41.3$42.2 million at November 30, 2005,August 31, 2006, as compared to $33.6$33.7 million at November 30, 2004August 31, 2005 and $24.7$33.8 million at May 31, 2005.2006. These lines of credit are considered short-term in nature. The weighted average interest ratesrate on the outstanding amounts wereborrowings was 6.0% and 5.5% at August 31, 2006 and 5.6% at November 30, 2005, and 2004, respectively, and 5.4%6.0% at May 31, 2005.2006.
The Company’s total debt obligations at November 30,August 31, 2006 and August 31, 2005 and 2004 were $514.9$475.8 million and $562.7$579.8 million, respectively. The Company’s total debt obligations at May 31, 20052006 were $501.4$502.4 million. Through November 30, 2005,In the quarter ended August 31, 2006, the Company had repurchased $2.0$35.4 million of its 5.75% Notes due 2007 on the open market. As of August 31, 2006, the outstanding balance of the 5.75% Notes, net of premium, totaled $259.3 million. For a more complete description of the Company’s debt obligations, see Note 43 of Notes to Condensed Consolidated Financial Statements -– Unaudited in Item 1, “Financial Statements.”
Critical Accounting Policies and Estimates
Prior to June 1, 2006, the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for its stock-based benefit plans. Under this method, no compensation expense was recognized with respect to options granted under the Company’s stock-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.
In May 2006, the Human Resources and Compensation Committee of the Board of Directors of the Corporation, which consists entirely of independent directors, approved the acceleration of the vesting of all of the Company’s unvested options to purchase Class A Stock and Common Stock outstanding as of May 30, 2006 granted to employees (including executive officers) and outside directors of the Corporation (the “Acceleration”). Except for the Acceleration, all other terms and conditions applicable to such stock options were unchanged. Substantially all of these options had exercise prices in excess of the market value of the underlying Common Stock on May 30, 2006. The primary purpose of the Acceleration was to mitigate the future compensation expense that the Company would have otherwise recognized in its financial statements with respect to these options as a result of the June 1, 2006 adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment” (“SFAS 123R”).
Effective June 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” using the modified prospective method. SFAS 123R requires the Company to recognize the cost of employee and director services received in exchange for any stock-based awards. Under SFAS 123R, the Company is required to recognize compensation expense over an award’s vesting period, based on the award’s fair value at the date of grant, on a straight-line basis.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of share-based payment awards using this option-pricing model is affected by the price of common stock, par value $.01 per share (the “Common Stock”), of Scholastic Corporation (the “Corporation”), as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by employees or directors who receive these awards.
For a more complete description of the Company’s stock-based compensation plans, see Note 1 of Notes to Condensed Consolidated Financial Statements – 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 conditions 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, 2005,2006, and from time to time in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). Actual results could differ materially from those currently anticipated.
SCHOLASTIC CORPORATION Item 3. Quantitative and Qualitative Disclosures about Market Risk |
The Company has operationsconducts its business in various foreign countries. In the normal course of business, these operationscountries, and as such, its cash flows and earnings are exposedsubject to fluctuations from changes in foreign currency values.exchange rates. Management believes that the impact of currency fluctuations does not represent a significant risk into the contextCompany given the size and scope of the Company’sits current international operations. InThe Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the normal courseuse of business, the Company’s operations outside the United States periodicallyshort-term forward exchange contracts. All foreign exchange hedging transactions are supported by an identifiable commitment or a forecasted transaction. The Company does not enter into short-term forward contracts (generally not exceeding $20.0 million) to match selected purchases not denominated in their respective local currencies.derivative transactions or use other financial instruments for trading or speculative purposes.
Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed through the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 8%9% of the Company’s debt at November 30, 2005August 31, 2006 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 5%7% at May 31, 20052006 and approximately 15%18% at November 30, 2004.August 31, 2005. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.debt, as well as the risk that variable-rate borrowings will represent a larger portion of total debt in the future.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Financing.Operations.”
The following table sets forth information about the Company’s debt instruments as of November 30, 2005August 31, 2006 (see Note 43 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):
| ($ amounts in millions) | Fiscal Year Maturity | |||||||||||||||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | (1) | 2010 | Thereafter | Total | 2007 | 2008 | 2009 | (1) | 2010 | 2011 | |||||||||||||||||||||||||||||||||
| Debt Obligations | ||||||||||||||||||||||||||||||||||||||||||||||
| Lines of credit | $ 20.6 | $ 20.7 | $ - | $ - | $ - | $ - | $ 41.3 | $ | 42.2 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 42.2 | |||||||||||||||||||||||||
| Weighted average interest rate | 6.2 | % | 4.8 | % | ||||||||||||||||||||||||||||||||||||||||||
| Average interest rate | 6.0 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt including | ||||||||||||||||||||||||||||||||||||||||||||||
| current portion: | ||||||||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt | $ 0.1 | $ 298.0 | $ - | $ - | $ - | $ 175.0 | $ 473.1 | $ | 258.6 | $ | - | $ | - | $ | - | $ | - | $ | 175.0 | $ | 433.6 | |||||||||||||||||||||||||
| Weighted average interest rate | 13.0 | % | 5.75 | % | 5.0 | % | ||||||||||||||||||||||||||||||||||||||||
| Average interest rate | 5.75 | % | 5.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| Variable-rate debt | $ | - | $ | - | $ | 1.0 | (1) | $ | - | $ | - | $ | - | $ | 1.0 | |||||||||||||||||||||||||||||||
| Average interest rate | 7.25 | % | ||||||||||||||||||||||||||||||||||||||||||||
| (1) | Represents amount drawn on the Revolver. The Revolver and Credit Agreement, |
SCHOLASTIC CORPORATION Item 4. Controls and Procedures |
The Chief Executive Officer and the Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company's management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of November 30, 2005,August 31, 2006, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended November 30, 2005August 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
SCHOLASTIC CORPORATION Item 4. Submission |
The Annual Meeting of StockholdersMatters to a Vote of Security Holders
On July 18, 2006, the Corporation was held on September 21, 2005 (the “Annual Meeting”). The following sets forth the results of the proposals presented at the Annual Meeting voted upon by the stockholders of the Corporation entitled to vote thereon:
Holdersholders of the 1,656,200 outstanding shares of the Corporation’s Class A Stock, voted in favor$0.01 par value (the “Class A Stock”), approved by written consent an action to fix the number of electing Richard Robinson, Rebeca M. Barrera, Ramon C. Cortines, Charles T. Harris III, Andrew S. Hedden, Mae C. Jemison, Augustus K. Oliver and Richard M. Spaulding as directors to serve untilconstituting the next annual meetingfull Board of Directors of the Corporation (the “Board”) at ten. The Corporation’s stockholdersAmended and until their respective successors are duly elected and qualified.
HoldersRestated Certificate of Incorporation provides that the holders of shares of Class A Stock, voting as a class, have the right to fix the size of the Corporation’s Common Stock elected the followingBoard so long as it does not consist of less than three nominees as directors to serve until the next annual meeting of the Corporation’s stockholders and until their respective successors are duly elected and qualified. Votes cast by holders of the Common Stock were:nor more than 15 directors.
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Amended and Restated Certificate of Incorporation of the Corporation, as amended to date. | |||||
Amendment No. 2 to the Scholastic Corporation 2004 Class A Stock Incentive Plan (incorporated by reference to Appendix C to the Corporation’s definitive Proxy Statement as filed with the SEC on August 21, 2006 (the “2006 Proxy Statement”)). | ||
| 10.2 | Amended and Restated Guidelines for Stock Units granted under the Scholastic Corporation 2001 Stock Incentive Plan. | |
| 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. | |
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SCHOLASTIC CORPORATION
| 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: | /s/ Richard Robinson |
| Richard Robinson | |
| Chairman of the Board, | |
| President, and Chief | |
| Executive Officer | |
| Date: | |
| Mary A. Winston | |
| Executive Vice President and | |
| Chief Financial Officer | |
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| Exhibit | ||
| Number | Description of Document | |
| 3.1 | Amended and Restated Certificate of Incorporation of the Corporation, | |
| as amended to date. | ||
| 10.1 | Amendment No. 2 to the Scholastic Corporation 2004 Class A Stock Incentive Plan | |
| (incorporated by reference to the 2006 Proxy Statement). | ||
| 10.2 | Amended and Restated Guidelines for Stock Units granted under the | |
| Scholastic Corporation 2001 Stock Incentive Plan. | ||
| 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. | ||
| 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. | ||
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