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 February 28,November 30, 2005 Commission File No. 000-19860 

SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)

SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter) 
Delaware 
13-3385513 
(State or other jurisdiction of
 (IRS Employer Identification No.) 
incorporation or organization)
  
 
557 Broadway, New York, New York 
10012 
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (212) 343-6100

Registrant's telephone number, including area code (212) 343-6100

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesX   No _

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerX   Accelerated filer _   Non-accelerated filer _

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _   NoX  No _

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title  Number of shares outstanding 
of each class  as of March 31,December 30, 2005
 
Common Stock, $.01 par value
 38,632,40440,149,763 
Class A Stock, $.01 par value
 1,656,200 

SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28,SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2005
INDEX

Part I - Financial Information Page 
   
Item 1.  Financial Statements
   
  Condensed Consolidated Statements of Operations - Unaudited for the  
  Three and NineSix Months Ended February 28,November 30, 2005 and February 29, 2004 1 
    
  Condensed Consolidated Balance Sheets - February 28, 2005 and November 30,  
  February 29,2005 and 2004 –- Unaudited; and May 31, 2004 2005 2 
    
  Consolidated Statements of Cash Flows - Unaudited for the Nine Months Six  
  Months Ended February 28,November 30, 2005 and February 29, 2004 3 
    
  Notes to Condensed Consolidated Financial Statements - Unaudited 4 
    
Item 2.  Management’s Discussion and Analysis of Financial Condition  
  and Results of Operations 1617 
    
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 2425 
    
Item 4.  Controls and Procedures 2526 
  
Part II –- Other Information  
Item 4. Submission of Matters to a Vote of Security Holders 27 
    
Item 6.  Exhibits 2628 
   
Signatures 
 2729 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Amounts in millions, except per share data)

 
   Three months ended
    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         


 SCHOLASTIC CORPORATION    
 CONDENSED CONSOLIDATED BALANCE SHEETS   
 (Amounts in millions, except per share data)    
 November 30, 2005
May 31, 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    

SCHOLASTIC CORPORATION 
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED 
(Amounts in millions)  
 
Six months ended
 
 November 30, 
 
2005
 
2004
 
  
Restated
 
 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   


Item 1. Financial Statements
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF OPERATIONS - UNAUDITED
(Amounts in millions, except per share data)

 Three months ended Nine months ended 
 February 28, February 29, February 28,  February 29,  
 
 2005 2004 2005  2004  
 
 
 Revenues $480.8 $472.0 $1,487.8  $1,646.4  
 
 Operating costs and expenses:       
       Cost of goods sold 233.9 229.7 711.4  816.6  
       Selling, general and administrative expenses 213.1 214.1 627.8  639.4  
       Selling, general and administrative expenses -       
           Continuity charges - - 3.6  -  
       Bad debt expense 14.9 17.0 50.7  66.1  
       Depreciation and amortization 13.1 13.5 39.1  39.8  
       Special severance charges - - -  3.2  
 
 
 Total operating costs and expenses 475.0 474.3 1,432.6  1,565.1  
 
 Operating income (loss) 5.8 (2.3) 55.2  81.3  
 
 Interest expense, net 6.9 7.1 21.6  25.2  
 
 
 Earnings (loss) before income taxes (1.1) (9.4) 33.6  56.1  
 
 Provision (benefit) for income taxes (0.4) (3.4) 11.9  20.2  
 
 
 Net income (loss) $(0.7) $(6.0) $21.7  $35.9  
 
 
 Earnings (loss) per Share of Class A and       
       Common Stock:       
           Basic $(0.02) $(0.15) $0.55  $0.91  
           Diluted $(0.02) $(0.15) $0.54  $0.90  
 
See accompanying notes 



SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share data)
  February 28, 2005  May 31, 2004  February 29, 2004 
  (Unaudited)    (Unaudited) 
 ASSETS       
       Current Assets:       
           Cash and cash equivalents$ 22.1 $ 17.8 $ 20.9 
           Accounts receivable, net  249.1  265.7  261.4 
           Inventories  468.0  402.6  484.0 
           Deferred promotion costs  42.7  40.6  62.8 
           Deferred income taxes  75.9  73.4  74.7 
           Prepaid and other current assets  48.0  42.6  45.5 
                 Total current assets  905.8  842.7  949.3 
 
           Property, plant and equipment, net  328.5  334.6  333.5 
           Prepublication costs, net  115.5  116.7  119.7 
           Installment receivables, net  10.2  13.1  12.4 
           Production costs, net  9.9  5.5  5.2 
           Goodwill  251.5  250.3  252.3 
           Other intangibles, net  78.7  78.9  79.0 
           Other assets and deferred charges  125.5  121.7  123.4 
Total assets$ 1,825.6 $ 1,763.5 $ 1,874.8 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY       
       Current Liabilities:       
           Lines of credit and short-term debt$ 21.3 $ 24.1 $ 95.8 
           Accounts payable  127.6  150.1  180.0 
           Accrued royalties  57.1  38.4  74.0 
           Deferred revenue  43.4  22.7  35.4 
           Other accrued expenses  128.4  129.8  123.7 
                 Total current liabilities  377.8  365.1  508.9 
 
       Noncurrent Liabilities:       
           Long-term debt  489.0  492.5  478.7 
           Other noncurrent liabilities  58.2  49.9  67.2 
                 Total noncurrent liabilities  547.2  542.4  545.9 
 
       Commitments and Contingencies  -  -  - 
 
       Stockholders’ Equity:       
           Preferred Stock, $1.00 par value  -  -  - 
           Class A Stock, $.01 par value  0.0  0.0  0.0 
           Common Stock, $.01 par value  0.4  0.4  0.4 
           Additional paid-in capital  405.3  388.1  386.0 
           Deferred compensation  (1.5)  (0.6)  (0.7) 
           Accumulated other comprehensive loss  (14.9)  (21.5)  (32.8) 
           Retained earnings  511.3  489.6  467.1 
               Total stockholders’ equity  900.6  856.0  820.0 
 Total liabilities and stockholders’ equity $ 1,825.6 $ 1,763.5 $ 1,874.8 
 
See accompanying notes  


SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Amounts in millions)
 Nine months ended 
 February 28, February 29, 
 2005 2004 
 Cash flows provided by operating activities:   
       Net income $21.7 $35.9 
       Adjustments to reconcile net income to net cash provided by operating   
           activities:   
             Provision for losses on accounts receivable 50.7 66.1 
             Amortization of prepublication and production costs 49.3 60.2 
             Depreciation and amortization 39.1 39.8 
             Royalty advances expensed 21.3 15.5 
             Deferred income taxes (3.3) (0.1) 
             Changes in assets and liabilities:   
                     Accounts receivable, net (27.1) (68.5) 
                     Inventories (56.9) (95.8) 
                     Prepaid and other current assets (4.0) 3.0 
                     Deferred promotion costs (0.9) (7.9) 
                     Accounts payable and other accrued expenses (26.2) 23.8 
                     Accrued royalties and deferred revenue 37.8 56.9 
                     Income tax benefit realized from stock option exercises 1.5 0.4 
       Other, net 2.0 (10.9) 
 Total adjustments 83.3 82.5 
       Net cash provided by operating activities 105.0 118.4 
 Cash flows used in investing activities:   
       Prepublication expenditures (40.9) (38.9) 
       Additions to property, plant and equipment (31.4) (26.5) 
       Royalty advances (24.7) (18.4) 
       Production expenditures (12.8) (12.6) 
       Acquisition-related payments - (8.8) 
       Other - (0.5) 
       Net cash used in investing activities (109.8) (105.7) 
 Cash flows provided by (used in) financing activities:   
       Borrowings under Credit Agreement, Loan Agreement and Revolver 342.4 452.5 
       Repayments of Credit Agreement, Loan Agreement and Revolver (344.6) (383.8) 
       Borrowings under lines of credit 169.0 204.2 
       Repayments of lines of credit (172.4) (208.8) 
       Repayment of 7% Notes - (125.0) 
       Proceeds pursuant to employee stock plans 14.2 6.1 
       Proceeds from swap termination - 3.8 
       Net cash provided by (used in) financing activities 8.6 (51.0) 
     Effect of exchange rate changes on cash 0.5 0.6 
     Net increase (decrease) in cash and cash equivalents 4.3 (37.7) 
     Cash and cash equivalents at beginning of period 17.8 58.6 
 Cash and cash equivalents at end of period $22.1 $20.9 
 
See accompanying notes   


SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)

1.  Basis of Presentation

The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned subsidiaries (collectively “Scholastic” or the “Company”). These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flow. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004.2005.

The Company’s business is closely correlated to the school year. Consequently, the results of operations for the three and ninesix months ended February 28,November 30, 2005 and February 29, 2004 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the February 29,November 30, 2004 condensed consolidated balance sheet is included for comparative purposes.

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes and tax reserves, prepublication costs, royalty advances, goodwill and other intangibles.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Stock-Based Compensation

Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),Compensation,” the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock optionstock-based benefit plans. In accordance with APB No. 25, no compensation expense was recognized with respect to the Company’s stock optionstock-based benefit plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and within respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:


SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -UNAUDITED
(Amounts in millions, except per share data)

 Three months ended Nine months ended 
 February 28, February 29, February 28, February 29, 
 2005 2004 2005 2004 
 
Net income (loss) – as reported $(0.7) $(6.0) $21.7 $35.9 
Add: Stock-based employee compensation     
 included in reported net income, net of tax 0.1 0.1 0.2 0.3 
Deduct: Total stock-based employee     
 compensation expense determined under     
 fair value based method, net of tax (3.0) (2.7) (9.1) (9.2) 
Net income (loss) – pro forma $(3.6) $(8.6) $12.8 $27.0 
Earnings (loss) per share – as reported:     
   Basic $(0.02) $(0.15) $0.55 $0.91 
   Diluted $(0.02) $(0.15) $0.54 $0.90 
 
Earnings (loss) per share – pro forma:     
   Basic $(0.09) $(0.22) $0.32 $0.69 
   Diluted $(0.09) $(0.22) $0.32 $0.68 
Three months ended
Six months ended
November 30,November 30,
2005
2004
2005
2004
Restated
Restated
Net income – as reported 
$ 66.9
$ 72.5
$ 45.7
$ 22.0
Add: Stock-based employee compensation included in 
   reported net income, net of tax 
      0.1
      0.1
      0.3
      0.2
Deduct: Total stock-based employee compensation expense 
   determined under fair value-based method, net of tax 
      2.7
      2.9
      5.4
      6.0
Net income – pro forma
$ 64.3
$ 69.7
$ 40.6
$ 16.2
Earnings per share – as reported: 
   Basic 
$ 1.62
$ 1.83
$  1.12
$ 0.56
   Diluted 
$ 1.59
$ 1.80
$  1.10
$ 0.55
Earnings per share – pro forma: 
   Basic 
$ 1.56
$1.76
$ 1.00
$ 0.41
   Diluted 
$ 1.53
$ 1.73
$ 0.98
$ 0.40
New Accounting Pronouncements

New Accounting Pronouncements

OnIn December 16, 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 123SFAS No.123 (revised 2004),“Share-Based “Share-Based Payment” (“SFAS No. 123R”), which requires companies to measure compensation cost forexpense the fair value of all share-based payments (including employee stock options) at fair value, as currently permitted, but not required, under SFAS No. 123. SFAS No. 123R iswill be effective for the Company commencing SeptemberJune 1, 2005. However, retroactive2006. Retroactive application of the fair value recognition provisions of SFAS No. 123 to either June 1, 2005,is permitted, but not required. Alternatively, a company may use the beginning of the fiscal year that includes the effective datemodified prospective transition method for application of SFAS No. 123R,123R. Under this method, compensation cost is recognized for all share-based payments granted, modified or settled after the date of adoption based on their grant-date fair value. For awards granted prior to all prior years for whichthe adoption date, the compensation cost of any unvested portion is recognized over the remaining service period. The Company intends to use the modified prospective transition method to adopt SFAS No. 123 was effective, is permitted, but is not required. The Company123R and is currently evaluating the impact that the adoption of SFAS No. 123R will have on its financial position, results of operations and cash flows.


SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)

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 cumulativerestatement 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 adoption, if any, will be measuredexcluding assets subject to capital leases and recognizedthe 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 statementearly periods of operationsthe 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 dateCompany’s Condensed Consolidated Statements of adoption.Operations for the three and six months ended November 30, 2004:

 
As Previously Reported(1) 
Adjustments
As Restated 
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. 

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)

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) 
Adjustments
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.
 


SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Amounts in millions, except per share data)

2.3.   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 gross margin related to a segment’s products sold or services rendered through another segment’s distribution channel are reallocated to the segment originating the products or services.

•

  • Children’s Book Publishing and Distribution includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.


    • SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED
    (Amounts in millions, except per share data)

    •

  • Educational Publishing 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-kindergarten to 12 in the United States.

    • •

  • Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Corporation’sCompany’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.



  • •InternationalInternationalincludes 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.


    • SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    -UNAUDITED
    (Amounts in millions, except per share data)

    The following table sets forth information for the Company’s segments for the periods indicated. CertainIn the fourth quarter of fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by theMedia, Licensing and Advertisingsegment that are sold through channels included in theChildren’s Book Publishing and Distributionsegment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the prior period inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in theMedia, Licensing and Advertisingsegment with an offsetting decrease in gross margin and profits in theChildren’s Book Publishing and Distributionsegment. Prior year amountssegment results have been reclassified to conform with the present year presentation.reflect this reallocation.

     Children’s    Media,      
     Book    Licensing      
     Publishing and  Educational  and  Total    
     Distribution  Publishing  Advertising Overhead(1) Domestic International  Consolidated 
    Three months endedFebruary 28, 2005            
     Revenues $272.3  $79.3  $37.2 $0.0 $388.8 $92.0  $480.8 
     Bad debt 11.8  0.6  0.1 0.0 12.5 2.4  14.9 
     Depreciation 4.1  0.8  0.3 6.1 11.3 1.7  13.0 
     Amortization(2) 4.5  8.2  4.2 0.0 16.9 0.1  17.0 
     Royalty advances           
       expensed 6.3  0.6  (0.2) 0.0 6.7 0.7  7.4 
     Segment profit (loss)(3) 16.5  4.0  1.3 (19.4) 2.4 3.4  5.8 
     Expenditures for           
         long-lived assets(4) 18.3  11.0  5.6 5.0 39.9 0.7  40.6 
     Three months ended  February 29, 2004            
     Revenues $271.5  $69.4  $43.5 $0.0 $384.4 $87.6  $472.0 
     Bad debt 14.5  0.2  0.2 0.0 14.9 2.1  17.0 
     Depreciation 4.2  0.8  0.4 6.3 11.7 1.7  13.4 
     Amortization(2) 4.6  8.7  13.0 0.0 26.3 0.2  26.5 
     Royalty advances           
       expensed 5.1  0.1  0.0 0.0 5.2 0.8  6.0 
     Segment profit (loss)(3) 10.6  3.2  0.3 (17.2) (3.1) 0.8  (2.3) 
     Expenditures for           
       long-lived assets(4) 11.9  8.4  3.2 4.2 27.7 1.9  29.6 
    Nine months endedFebruary 28, 2005            
     Revenues $819.1  $292.0  $96.7 $0.0 $1,207.8 $280.0  $1,487.8 
     Bad debt 42.1  1.2  0.5 0.0 43.8 6.9  50.7 
     Depreciation 10.8  2.4  1.2 19.8 34.2 4.7  38.9 
     Amortization(2) 12.7  25.1  11.1 0.0 48.9 0.6  49.5 
     Royalty advances           
       expensed 18.6  0.9  0.1 0.0 19.6 1.7  21.3 
     Segment profit (loss)(3) 47.2  46.8  (2.2) (56.2) 35.6 19.6  55.2 
     Segment assets 796.6  304.3  63.7 347.7 1,512.3 313.3  1,825.6 
     Goodwill 127.9  82.5  10.7 0.0 221.1 30.4  251.5 
     Expenditures for           
         long-lived assets(4) 49.9  27.9  14.2 13.0 105.0 4.8  109.8 
     Long-lived assets(5) 320.5  185.5  37.4 232.1 775.5 105.4  880.9 
     Nine months ended  February 29, 2004            
     Revenues $1,010.1  $262.5  $106.3 $0.0 $1,378.9 $267.5  $1,646.4 
     Bad debt 58.8  0.6  0.8 0.0 60.2 5.9  66.1 
     Depreciation 9.9  2.4  1.4 21.0 34.7 4.9  39.6 
     Amortization(2) 13.2  25.9  20.7 0.0 59.8 0.6  60.4 
     Royalty advances           
       expensed 12.1  0.9  0.6 0.0 13.6 1.9  15.5 
     Segment profit (loss)(3) 87.7  32.0  (1.6) (55.0) 63.1 18.2  81.3 
     Segment assets 828.1  298.2  65.1 369.0 1,560.4 314.4  1,874.8 
     Goodwill 129.4  82.5  11.0 0.0 222.9 29.4  252.3 
     Expenditures for           
       long-lived assets(4) 41.8  25.3  22.4 10.4 99.9 5.3  105.2 
     Long-lived assets(5) 310.6  189.2  34.6 237.9 772.3 105.1  877.4 
     Children’s            
     Book    Media,        
     Publishing    Licensing        
     and  Educational  and   
    Total 
    		    
     Distribution  Publishing  Advertising  Overhead(1) 
    Domestic 
    		 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 


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED
    (Amounts in millions, except per share data)
                 
     Children’s            
     Book    Media,        
     Publishing    Licensing        
     and  Educational  and   
    Total 
    		    
     Distribution  Publishing  Advertising  Overhead(1) 
    Domestic 
    		 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 

    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED
    (Amounts in millions, except per share data)

    (1)     Overhead includes all domestic corporate amounts not allocated to reportable segments, which includes unallocated expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, the fulfillment and distribution facilities located in Missouri and Arkansas, and an industrial/office building complex in Connecticut.
    (2)     Includes amortization of prepublication costs, production costs and other intangibles with definite lives.
     
    (3)     (2)Includes amortization of prepublication and production costs.
    (3)Segment profit (loss) represents earnings (loss) before interest expense, net and income taxes. The impact on segment profit (loss) of the Segment Reallocation for the three and six months ended November 30, 2004 was a decrease in Children’s Book Publishing and Distribution segment profit of $5.0 and an increase in Media, Licensing and Advertising segment profit of $5.0. For the six months ended November 30, 2004, the Children’s Book Publishing and Distribution segment’s operating profit reflects a charge of $3.6, primarily due to severance costs related to the Company’s fiscal 2004 review of its continuity business.
     
    (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.
     


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)
    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 Distributionsegment, and for all other businesses included in thatthe segment:

     Three months ended February 28, 2005 andFebruary 29, 2004 
     
    		 
     Direct-to-home  All Other  Total  
     
    		 
    		 
    		 
     2005 2004 2005  2004 2005 2004 
      
    		  
    		  
    		  
    		  
    		  
    		 
    Revenues $32.8  $45.5  $239.5  $226.0  $272.3�� $271.5  
    Bad debt 7.2  9.9  4.6  4.6  11.8  14.5  
    Depreciation 0.1  0.1  4.0  4.1  4.1  4.2  
    Amortization(1) 0.3  0.5  4.2  4.1  4.5  4.6  
    Royalty advances expensed 1.2  1.4  5.1  3.7  6.3  5.1  
    Business profit(2) 0.4  0.2  16.1  10.4  16.5  10.6  
    Expenditures for long-lived assets(3) 2.2  1.7  16.1  10.2  18.3  11.9  
                       
     Nine months ended February 28, 2005 and February 29, 2004 
     
    		 
     Direct-to-home  All Other  Total  
     
    		 
    		 
    		 
     2005 2004 2005  2004 2005 2004 
      
    		  
    		  
    		  
    		  
    		  
    		 
    Revenues $113.4 $150.8  $705.7  $859.3  $819.1  $1,010.1  
    Bad debt 28.0 36.5  14.1  22.3  42.1  58.8  
    Depreciation 0.4 0.3  10.4  9.6  10.8  9.9  
    Amortization(1) 0.9 1.0  11.8  12.2  12.7  13.2  
    Royalty advances expensed 2.1 2.5  16.5  9.6  18.6  12.1  
    Business profit (loss)(2) (4.2) 2.2  51.4  85.5  47.2  87.7  
    Business assets 232.9 275.3  563.7  552.8  796.6  828.1  
    Goodwill 92.4 92.5  35.5  36.9  127.9  129.4  
    Expenditures for long-lived assets(3) 6.4 3.9  43.5  37.9  49.9  41.8  
    Long-lived assets(4) 145.7 143.9  174.8  166.7  320.5  310.6  
    Three months ended          
    November 30,          
      
    Direct-to-home
    All Other
    Total 
      
    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,          
      
    Direct-to-home
    		 All Other 
    Total 
      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 

    (1)     Includes amortization of prepublication costs and other intangibles with definite lives.production costs.
     
    (2)Business profit (loss) represents earningsprofit (loss) before interest expense, net and income taxes. For the ninesix months ended February 28, 2005,November 30, 2004, Direct-to-home includes a charge of $3.6, primarily due to severance costs related to the Direct-to-homeCompany’s fiscal 2004 review of its continuity business results include $3.6 recorded as Selling, general and administrative expenses – Continuity charges.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.
     

    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)
    4. Debt        
     
    The following summarizes debt at the dates indicated:      
           
      
    November 30, 2005
    May 31, 2005
    November 30, 2004
     
    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 

    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    3.   Debt

    The following table summarizes debt as of the dates indicated:

     February 28, 2005 May 31, 2004 February 29, 2004 
     
    Lines of Credit $20.8 $23.0 $26.8 
    Credit Agreement, Loan Agreement and Revolver 12.0 14.2 68.7 
    5.75% Notes due 2007, net of premium/discount 304.0 305.5 305.9 
    5% Notes due 2013, net of discount 173.0 172.8 172.8 
    Other debt 0.5 1.1 0.3 
       Total debt 510.3 516.6 574.5 
    Less lines of credit and short-term debt (21.3) (24.1) (95.8) 
    Total long-term debt $489.0 $492.5 $478.7 

    The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of February 28,November 30, 2005 for the remainder of fiscal 20052006 and thereafter:

     May 31,   
     
    Three-month period ending:  2005 $21.3  
    Fiscal years ending:  2006 -  
      2007 304.0  
      2008 -  
      2009 12.0  
      Thereafter 173.0  
    		 
     
      Total debt $510.3  
    		 
    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

    Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $64.6$76.4, in the aggregate, at February 28,November 30, 2005, as compared to $66.8$64.8 at February 29,November 30, 2004 and $62.1$61.8 at May 31, 2004.2005. There were borrowings outstanding under these lines of credit equivalent to $20.8$41.3 at February 28,November 30, 2005, as compared to $26.8$33.6 at February 29,November 30, 2004 and $23.0$24.7 at May 31, 2004.2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 6.1%5.5% and 5.6% at both February 28,November 30, 2005 and February 29, 2004, respectively, and 5.5%5.4% at May 31, 2004.2005.

    Credit Agreement

    On March 31, 2004, Scholastic Corporation and its principal operating subsidiary, Scholastic Inc., entered into an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire onin August 11, 2004 (the “Loan Agreement”).2004. The Credit Agreement, which expires on March 31, 2009, 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


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    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


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of February 28,November 30, 2005 were 0.55%0.675% over LIBOR, 0.15%0.20% and 0.10%0.125%, respectively. The Credit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At both February 28,There were no borrowings outstanding under the Credit Agreement at November 30, 2005 and May 31, 2005. At November 30, 2004, $12.0$45.0 was outstanding under the Credit Agreement at a weighted average interest rate of 3.1% and 1.7%, respectively. At February 29, 2004, $45.0 was outstanding under the Loan Agreement at a weighted average interest rate of 1.5%2.5% .

    Revolver

    Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, the Revolver provides for unsecured revolving credit of up to $40.0 and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28,November 30, 2005 were 0.60%0.725% over LIBOR and 0.15%0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2005. At February 29, 2004November 30, 2005 and May 31, 2005. At November 30, 2004, $23.7 and $2.2, respectively, were$6.1 was outstanding under the Revolver at a weighted average interest rate of 1.7%2.4% .

    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 3.0%, respectively.January 15 of each year. The Company may, at any time, redeem all or a portion of the 5.75% Notes at a redemption price (plus accrued interest to the date of 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 redemption. Through November 30, 2005, the Company had repurchased $2.0 of the 5.75% Notes on the open market.

    5% Notes due 2013

    OnIn April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year. The Company may at any time redeem 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.

    5.75% Notes due 2007

    In January 2002, Scholastic Corporation issued $300.0 of 5.75% Notes (the “5.75% Notes”). The 5.75% Notes are senior unsecured obligations that mature on January 15, 2007. Interest on the 5.75% Notes is payable semi-annually on July 15 and January 15 of each year. The Company may, at any time, redeem all or a portion of the 5.75% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of the redemption.


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    5.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    4.   Comprehensive Income (Loss)

    The following table sets forth comprehensive income (loss) for the periods indicated:

      Three months ended Nine months ended  
      February 28, February 29,February 28,February 29,
      
    2005
    		 
    2004
    2005 
    2004 
     
    Net income (loss) $(0.7)  $(6.0) $21.7  $35.9  
     
    Other comprehensive income (loss) -         
          foreign currency translation adjustment  (2.4)  1.8 6.6  5.0  
     
    Comprehensive income (loss) $(3.1)  $(4.2) $28.3  $40.9  
     
    Three months ended 
    Six months ended 
     
    November 30, 
    November 30, 
     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        


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    5.   Earnings Per Share

    Basic earnings per share is computed by dividing net income by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted earnings per share is calculated to give effect to potentially dilutive options to purchase Class A Stock and Common Stock issued pursuant to the Company’s stock-based benefit plans that were outstanding during the period. The diluted loss per share was equal to the basic loss per share for the three months ended February 28, 2005 and February 29, 2004 because such options outstanding were antidilutive. The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings per share computationscomputation for the periods indicated:

     Three months ended Nine months ended  
     February 28, February 29, February 28, February 29, 
     2005 2004 2005  2004  
     
    Net income (loss) for basic and diluted       
         earnings per share $(0.7) $(6.0) $21.7  $35.9  
     
    Weighted average Shares of Class A Stock and       
       Common Stock outstanding for basic       
           earnings per share 40.0 39.4 39.8  39.4  
    Dilutive effect of Class A Stock and       
       Common Stock issued pursuant to       
          stock-based benefit plans- - 0.7  0.7  
     
    Adjusted weighted average Shares of       
       Class A Stock and Common Stock       
           outstanding for diluted earnings per share 40.0 39.4 40.5  40.1  
     
    Earnings (loss) per share of Class A Stock       
       and Common Stock:       
     
       Basic $(0.02) $(0.15) $0.55  $0.91  
       Diluted $(0.02) $(0.15) $0.54  $0.90  
      
    Three months ended 
    Six months ended 
      
    November 30, 
    November 30, 
      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 CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)
    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    6.7. 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:

     Nine months ended  Twelve months ended Nine months ended
     February 28, 2005  May 31, 2004  February 29, 2004 
    Beginning balance $250.3  $246.0  $246.0  
    Additions due to acquisitions -  3.0  3.0  
    Other adjustments 1.2  1.3  3.3  
    Total $251.5  $250.3  $252.3  
      
    Six months ended
    Twelve months ended
    Six months ended 
      
    November 30, 2005
    May 31, 2005
    November 30, 2004 
    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  

    In the first quartertwelve months ended May 31, 2005, Additions due to acquisitions includes the purchase price for the acquisition of fiscal 2004, the Company acquired certain assets of Troll Holdings, Inc., formerly a national school-based book club operator and publisher, for $4.0 in cashChicken House Publishing Ltd. and the assumptionaccrual of certain ordinary course liabilities, anda final payment related to the stockfiscal 2002 acquisition of BTBCAT, Inc., which operates Back to Basics Toys, a direct-to-home catalog business specializing in children’s toys, for $4.8 in cash.Klutz.

    The following table summarizes Other intangibles subject to amortization at the dates indicated:

     February 28, 2005 May 31, 2004 February 29, 2004 
    Customer lists $2.9 $2.9 $2.9 
    Accumulated amortization (2.7) (2.7) (2.6) 
     Net customer lists 0.2 0.2 0.3 
    Other intangibles 4.0 4.0 4.0 
    Accumulated amortization (2.6) (2.4) (2.4) 
     Net other intangibles 1.4 1.6 1.6 
    Total $1.6 $1.8 $1.9 
     
    November 30, 2005
    May 31, 2005
    November 30, 2004
    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 

    Amortization expense for Other intangibles totaled $0.1 and $0.2 for the three and ninesix months ended February 28,November 30, 2005, respectively, and $0.1 and $0.2 for each of the three and ninesix months ended February 29,November 30, 2004, respectively. Amortization expense wasand $0.3 for the twelve months ended May 31, 2004.2005. Amortization expense for these assets is currently estimated to total $0.3 for each of the fiscal yearsyear ending May 31, 2005 and 2006, and $0.2 for each of the fiscal years ending May 31, 2007 through 2009.2010. The weighted average amortization periods for these assets by major asset class are two years and 13twelve years for customer lists and other intangibles, respectively.

    The following table summarizes Other intangibles not subject to amortization at the dates indicated:

     February 28, 2005 May 31, 2004 February 29, 2004 
    Net carrying value by major class:       
         Titles $31.0  $31.0  $31.0  
         Licenses 17.2  17.2  17.2  
         Major sets 11.4  11.4  11.4  
         Trademarks and Other 17.5  17.5  17.5  
    Total $77.1  $77.1  $
    77.1 
    		 
     
    November 30, 2005 
    May 31, 2005 
    November 30, 2004 
    Net carrying value by major class:       
         Titles  $ 31.0  $$ 31.0   $ 31.0  
         Licenses 17.2  17.2  17.2  
         Major sets 11.4  11.4  11.4  
         Trademarks and other 17.5  17.5  17.5  
    Total  $ 77.1   $ 77.1   
    $ 77.1 
    		 


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    8.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    7.   Pension and Other Post-Retirement Benefits

    The following tables settable sets 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 defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Inc.Corporation located in the United Kingdom (the “U.K. Pension Plan”), the defined benefit pension plan of Grolier Ltd., an indirect subsidiary of Scholastic Inc.Corporation located in Canada (collectively, the “Pension Plans”), and the post-retirement benefits provided by the Company to its retired United States-based employees, consisting of certain healthcare and life insurance benefits (the “Post-Retirement Benefits”), for the periods indicated:

      Pension Plans  
     Three months ended Nine months ended 
     February 28 February 29 February 28 February 29 
     2005 2004 2005 2004 
    Components of Net Periodic Benefit Cost:     
         Service cost $2.0 $1.8 $5.9 $5.3 
         Interest cost 2.1 1.9 6.2 5.8 
         Expected return on assets (2.4) (2.0) (7.2) (6.0) 
         Net amortization and deferrals 0.6 0.7 1.9 2.1 
         Decrease in valuation allowance - (0.3) - (1.0) 
    Net periodic benefit cost $2.3 $2.1 $6.8 $6.2 
     
      Post-Retirement Benefits  
     Three months ended Nine months ended 
     February 28 February 29 February 28 February 29 
     2005 2004 2005 2004 
    Components of Net Periodic Benefit Cost:     
         Service cost $0.1 $0.1 $0.3 $0.3 
         Interest cost 0.5 0.5 1.6 1.5 
         Amortization of prior service cost (0.2) (0.2) (0.6) (0.6) 
         Recognized gain or loss 0.5 0.5 1.3 1.5 
    Net periodic benefit cost $0.9 $0.9 $2.6 $2.7 
     
    Pension Plans
     
     
    Three months ended
    Six months ended
     
    November 30,
    November 30,
     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 
         
     
    Post-Retirement Benefits
     
     
    Three months ended
    Six months ended
     
    November 30,
    November 30,
     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 

    In fiscal 2005, theThe Company currently estimates that Scholastic Ltd. will contribute the equivalent of $0.8$1.1 to the U.K. Pension Plan and Scholastic Inc. will contribute $2.5 towardin the Post-Retirement Benefits.fiscal year ending May 31, 2006. For the ninesix months ended February 28,November 30, 2005, Scholastic Ltd. contributed the equivalent of $0.6 to the U.K. Pension Plan and Scholastic Inc. contributed $1.8 toward the Post-Retirement Benefits.

    8.   Special Severance Charges

    On May 28, 2003, the Company announced a reduction in its global work force, and the Company has established liabilities for severance and other related costs with respect to employees notified in certain periods. These charges are reflected in the Company’s income statements as the Special severance charges and totaled $3.2 for the nine months ended February 29, 2004 and $10.9 and $3.3 for the twelve months ended May 31, 2003 and 2004, respectively.Plan.


    SCHOLASTIC CORPORATION
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
    (Amounts in millions, except per share data)

    A summary of the activity in the related liabilities is detailed in the following table:

     Amount 
    Fiscal2003 liabilities$10.9 
    Fiscal2003 payments(1.2) 
    Balance at May 31, 2003 9.7 
    Fiscal 2004 additional liabilities3.3 
    Fiscal2004 payments(10.9) 
    Balance at May 31, 2004 2.1 
    Fiscal2005 payments(1.2) 
    Balance at February 28, 2005 $0.9 

    The remaining liability of $0.9 is expected to be paid over the current and next fiscal year under severance arrangements with certain affected employees.

    9.   Continuity Charges

    In the fourth quarter of fiscal 2004, the Company recorded charges of $25.4 related to its continuity business. During the nine months ended February 28, 2005, the Company recorded additional charges of $3.6, relating primarily to severance costs in its continuity business, as Selling, general and administrative expenses. Substantially all such severance payments are to be made prior to May 31, 2005. The impact of these charges on earnings per diluted share in the nine months ended February 28, 2005 was $0.06.

    10.   Contingent Purchase Payment

    In fiscal 2002, the Company completed the acquisition of Klutz, a publisher and creator of “books plus” products for children. In addition to the initial purchase price paid for Klutz of $42.8, the purchase agreement provided for additional payments of up to $31.3 in 2004 and 2005, contingent upon the achievement of certain revenue thresholds. The Company did not make any such payments in 2004.


    SCHOLASTIC CORPORATION
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

    OutlookOverview and OverviewOutlook

    ResultsRevenue for the quarter ended February 28,November 30, 2005 were consistent withincreased 2.0% to approximately $697 million, as compared to the Company’s goal forprior fiscal 2005 of achieving higher profits and margins, as operating margins and profits improved in all segments.

    In Scholastic’s second smallestyear quarter, reflecting revenue period, revenues were up 1.9%, reflecting increases in theInternational,Educational Publishing InternationalandChildren’s Book Publishing and Distribution segments, partially offset by a revenue decrease inMedia, Licensing and Advertising.

    Net loss segments. Operating income for the quarter ended February 28, 2005 improveddecreased 5.4% as compared to $0.7 million from $6.0 million in the prior fiscal year quarter. 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.

    Key factors included higher operating margins in all segments; lower return levels, bad debt and promotional costs in theChildren’s Book Publishing and Distribution segment; continued quarter ended November 30, 2005 included growth in revenues in the Company’s school-based book fair and profits intrade businesses and theEducational Publishing segment, led by sales of educational technology products;products. These increases were offset by a decrease in revenues in the Company’s continuity and improved performanceschool-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 income 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 results in theInternationalChildren’s Book Publishing and Distributionsegment. andEducational Publishing segments. The Company remains on track to achieve its goals for fiscal 2006 of expanding margins while growing revenues.

    Results of Operations –- Consolidated

    Revenues for the quarter ended February 28,November 30, 2005 increased by $8.8$13.4 million, or 1.9%2.0%, to $480.8$696.7 million, compared to $472.0$683.3 million in the prior fiscal year quarter. The increase was principally due to higher revenues fromin theInternational, Educational Publishing Internationaland Children’s Book PublishingMedia, Licensing and DistributionAdvertising segments of $9.9$5.2 million, $4.4$4.7 million and $0.8$4.3 million, respectively, partially offset by a decrease in theMedia, Licensing & Advertisingsegmentof $6.3 million.respectively. For the ninesix months ended February 28,November 30, 2005, revenues decreased by $158.6increased $188.1 million, or 9.6%18.7%, to $1,487.8$1,195.1 million, from $1,646.4compared to $1,007.0 million in the prior fiscal year period. This revenue decrease related primarilyperiod due to $191.0increases in each of the Company’s four operating segments, led by $152.7 million in lowerhigher revenues from theChildren’s Book Publishing and Distribution segment as compared toa result of the prior fiscal year period, which reflected theJuly 2005 release ofHarry Potter and the Order ofHalf-Blood Prince, the Phoenix, the fifthsixth book in theHarry Potter series.

    Cost of goods sold as a percentage of revenues remained relatively flat at 48.6%decreased to 42.8% for the quarter ended February 28,November 30, 2005, as compared to 48.7%44.1% in the prior fiscal year quarter. For the nine-month periodsix months ended February 28,November 30, 2005, cost of goods sold as a percentage of revenue improvedrevenues increased to 47.8%49.5%, as compared to 49.6%47.4% in the prior fiscal year period, primarily due to higher costs related to the release ofHarry Potter and the Half-Blood Prince. release in the prior fiscal year.

    Selling, general and administrative expenses as a percentage of revenues improved to 44.3% for the quarter ended February 28,November 30, 2005 as comparedincreased to 45.4%36.1% from 33.0% in the prior fiscal year quarter. This decrease wasquarter, primarily due to a $13.6 million reduction in promotional costs, principally in the continuity business, partially offset by an $11.5 million increase in employee and related costs.expenses. For the nine-month periodsix months ended February 28,November 30, 2005, Selling, general and administrative expenses included $3.6 million in severance costs and related employee expenses (the “Continuity Charges”) recorded in connection with changes to the Company’s continuity business announced in fiscal 2004. Asas a percentage of revenues Selling, general and administrative expenses for the nine-month period ended February 28, 2005 increaseddecreased to 42.4%38.0% from 38.8%40.8% in the prior fiscal year period, primarily due to lowerthe revenue benefit fromHarry Potter and the Half-Blood Prince revenues in the current fiscal year period without a corresponding decreaseincrease in expenses.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”).


    SCHOLASTIC CORPORATION
    Item 2. MD&A

    Bad debt expense decreased to $14.9$15.1 million, or 3.1%2.2% of revenues, for the quarter ended February 28,November 30, 2005, compared to $17.0$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 quarter. For the nine-month period ended February 28, 2005,period. The lower levels of bad debt expense decreased to $50.7 million, or 3.4% of revenues, compared to $66.1 million, or 4.0% of revenues, in the prior fiscal year period. These decreasesthree- and six-month periods related primarily to lower bad debt in the Company’s continuity business.

    In connection withbusiness as a result of the Company’s May 2003 announcementpreviously announced plan for this business to focus on its more productive customers.

    Depreciation and amortization expense for the quarter ended November 30, 2005 increased to $16.8 million, or 2.4% of a reduction in its global work force, Special severance chargesrevenues, compared to $15.1 million, or 2.2% of $3.2 million were recordedrevenues, in the nine-month periodprior fiscal year quarter. For the six months ended February 29, 2004 for employees notifiedNovember 30, 2005, Depreciation and amortization expense increased to $32.4 million, or 2.7% of revenues, compared to $30.8 million, or 3.1% of revenues, in thatthe prior fiscal year period. These increases were principally due to higher depreciation of information technology equipment.

    The resulting operating income for the quarter ended February 28,November 30, 2005 was $5.8decreased by $6.6 million to $115.3 million, or 1.2%16.5% of revenues, compared to an operating loss$121.9 million, or 17.8% of $2.3 millionrevenues, in the prior fiscal year quarter. For the ninesix months ended February 28,November 30, 2005, the resulting operating income decreasedincreased to $55.2$90.1 million, or 3.7%7.5% of revenues, compared to $81.3$52.5 million, or 4.9%5.2% of revenues, in the prior fiscal year period.

    Net interest expense decreased slightlyThe effective income tax rate for each of the three and six months ended November 30, 2005 increased to $6.9 million in the quarter ended February 28, 2005,37.0%, compared to $7.1 million35.5% in each of the prior fiscal year quarter. For the nine-month period ended February 28, 2005, net interest expense decreased $3.6 million to $21.6 million as compared to $25.2 million in the prior fiscal year period. The decreases in the three- and nine-month periods, were primarily due to lower debt levels.a higher effective tax rate on foreign earnings and a higher state tax provision.

    Net lossincome was $0.7$66.9 million, or $0.02$1.59 per diluted share, for the quarter ended February 28,November 30, 2005, compared to a net lossincome of $6.0$72.5 million, or $0.15$1.80 per diluted share, in the prior fiscal year quarter. For the ninesix months ended February 28,November 30, 2005, net income was $21.7$45.7 million, or $0.54$1.10 per diluted share, compared to net income of $35.9$22.0 million, or $0.90$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

    The Company’sChildren’s Book Publishing and Distribution segment includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.

     Three months endedNine months ended
     ($ amounts in millions) 
    February 28
    February 29
    February 28
    		 
    February 29
     
    2005
    2004
    2005
    2004
     Revenue $272.3 $271.5 $819.1 $1,010.1 
     Operating profit 16.5 10.6 47.2* 87.7 
     Operating margin 6.1% 3.9% 5.8% 8.7% 
     
    *inclusive of $3.6 million of Continuity Charges


    SCHOLASTIC CORPORATION
    Item 2.  MD&A

     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)

    (1)     Reflects the Segment Reallocation.
    (2)     Includes Continuity Charges related to this segment of $3.6.

    Revenues in theChildren’s Book Publishing and Distribution segment for the quarter ended February 28,November 30, 2005 increased $0.8 million to $272.3were nearly flat at $424.2 million, compared to $271.5$425.0 million in the prior fiscal year quarter. Revenues inWithin the Company’s trade andsegment, revenues from school-based book fairs businesses increased $15.8$10.4 million due to higher revenue per fair, and $5.4trade revenues increased $5.2 million, respectively, offset by revenue decreases in the Company’s continuity and school-based book club businesses of $19.3 million and $1.1 million, respectively. Revenue growth in the trade business was helped by lower returns in the quarter. The increase in school-based book fair revenues was primarily due to an increase in revenue per fair. The revenue decrease in the continuity business was a resulthigher level of the Company’s strategy of focusing on its more productive continuity customers. Excluding the direct-to-home continuity business described in the table below, segment revenues for the quarter ended February 28, 2005 increased $13.5 million to $239.5 million, as compared to $226.0 million in the prior fiscal year quarter.

    Segment operating profit for the quarter ended February 28, 2005 increased $5.9 million to $16.5 million, compared to $10.6 million in the prior fiscal year quarter. This increase was due to higher operating profits in the Company’s trade business of $10.0 million, substantially as a result of higher revenues, partially offset by operating profit decreases in the balance of the segment totaling $4.1 million. The impact of lower revenues on operating profitHarry Potter back list revenues. Revenues in the Company’s continuity business was largely offsetdecreased by lower operating expenses$10.9 million, principally as a result of the Company’s previously announced plan for this business. Excluding the direct-to-home continuity business described in the table below, segmentto 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.

    Segment operating profit for the quarter ended February 28,November 30, 2005 increased $5.7decreased by $2.3 million, or 2.5%, to $16.1$88.6 million, as compared to $10.4$90.9 million in the prior fiscal year quarter.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 ninesix months ended February 28,November 30, 2005 decreased $191.0increased $152.7 million, or 18.9%27.9%, to $819.1$699.5 million, compared to $1,010.1$546.8 million in the prior fiscal year period. This decreaseincrease was primarily related to lower revenues from the Company’s trade business of $146.0 millionprincipally due to lowerHarry Potter revenues of approximately $195 million, as compared to approximately $15 million ofHarry Potterrevenues of approximately $160 million, partially offset by increased non-Harry Potterrevenues of approximately $14 million. Continuity business revenues decreased $49.6 million to $160.8 million, as compared to $210.4 million in the prior fiscal year period, as a result of the Company’s previously announced plan for this business. Excluding the direct-to-home continuity business described in the table below, segment revenues for the nine months ended February 28, 2005 decreased $153.6 million to $705.7 million, as compared to $859.3 million in the prior fiscal year period. 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 ninesix months ended February 28,November 30, 2005 decreased $40.5improved by $42.0 million, to $47.2$68.9 million, compared to $87.7$26.9 million in the prior fiscal year period. The decreaseThis improvement was principallyprimarily due to lowerincreased operating resultsprofits for the Company’s trade business of $32.3 million, resulting primarily due to lowerfrom the higherHarry Potterrevenues. Operating results for the Company’s continuity business decreased $2.9 million, which reflects the impact of $3.6 million in Continuity Charges. Excluding the direct-to-home continuity business described in the table below, segment operating profit for the nine months ended February 28, 2005 decreased $34.1 million to $51.4 million, as compared to $85.5 million in the prior fiscal year period.


    SCHOLASTIC CORPORATION
    Item 2.  MD&A

    The following table highlights the results of the direct-to-home portion of the Company’s continuity programs, which consistconsists primarily of the business formerly operated by Grolier Incorporated (“Grolier”) and areis included in theChildren’s Book Publishing and Distribution segment.

     Three months ended  Nine months ended 
    ($ amounts in millions) February 28 February 29  February 28 February 29  
     2005 2004  2005 2004 
    Revenue $32.8 $45.5  $113.4 $150.8 
    Operating profit (loss) 0.4 0.2  (4.2) * 2.2 
    Operating margin 1.2% **  ** 1.5% 
    Direct-to-home continuity Three months ended  Six months ended 
    ($ amounts in millions) November 30,  November 30, 
     2005  
    2004
    		  2005  2004 
       Restated    Restated 
    Revenue  $ 30.0   $ 39.4   $ 58.4   $ 80.6 
    Operating loss (4.6)  (0.3)  (10.8)   (4.9)(1)
    Operating margin *   *   *   *  

    *     not meaningful
    (1)Includes Continuity Charges related to this business of $3.6.

    * inclusiveRevenues from the direct-to-home portion of the Company’s continuity business decreased by $9.4 million, or 23.9%, to $30.0 million for the quarter ended November 30, 2005, as compared to $39.4 million in the prior fiscal year quarter, and decreased by $22.2 million, or 27.5%, to $58.4 million for the six months ended November 30, 2005, as compared to $80.6 million in the prior 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 million operating loss in the prior fiscal year quarter, and $10.8 million for the six months ended November 30, 2005, compared to a $4.9 million operating loss in the prior fiscal year period, which included $3.6 million of Continuity Charges
    ** not meaningful    Charges.

    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, compared to $385.6 million in the prior fiscal year quarter, and increased by $174.9 million, or 37.5%, to $641.1 million for the six months ended November 30, 2005, compared to $466.2 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.

    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-kindergartenpre-K to 12 in the United States.

     Three months ended Nine months ended 
    ($ amounts in millions) February 28 February 29 February 28 February 29 
     2005 2004 2005 2004 
    Revenue $79.3 $69.4 $292.0 $262.5 
    Operating profit 4.0 3.2 46.8 32.0 
    Operating margin 5.0% 4.6% 16.0% 12.2% 

    SCHOLASTIC CORPORATION
    Item 2.  MD&A

         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 February 28,November 30, 2005 increased $9.9$4.7 million, or 14.3%5.0%, to $79.3$99.2 million, compared to $69.4$94.5 million in the prior fiscal year quarter. This increase wasSegment 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 due to higher revenues from sales of educational technology products, includingled by the Company’sRead 180READ 180® reading intervention program. program, partially offset by an expected decline in classroom magazine revenues due to prior year sales of election-related materials.

    Segment revenuesoperating profit for the nine monthsquarter ended February 28,November 30, 2005 increased $29.5 million, or 11.2%,slightly to $292.0$21.6 million, compared to $262.5$21.5 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, primarily due to increasedrevenue growth from sales of educational technology revenues.products.

    Segment operating profit for the quarter ended February 28, 2005 increased $0.8 million to $4.0 million, as compared to $3.2 million in the prior fiscal year quarter. Segment operating profit for the nine months ended February 28, 2005 increased $14.8 million, or 46.3%, to $46.8 million, compared to $32.0 million in the prior fiscal year period. The operating profit improvements for the three- and nine-month periods were primarily due to increased educational technology revenues.


    SCHOLASTIC CORPORATION
    Item 2. MD&A

    Media, Licensing and Advertising

    The Company’sMedia, Licensing and Advertising segment includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Corporation’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.

     Three months ended Nine months ended 
    ($ amounts in millions) February 28 February 29 February 28 February 29 
     2005 2004 2005 2004 
    Revenue $37.2 $43.5 $96.7 $106.3 
    Operating profit (loss) 1.3 0.3 (2.2) (1.6) 
    Operating margin 3.5% 0.7% ** ** 

         Three months ended     Six months ended 
    ($ amounts in millions) 
        November 30,
    		     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)

    * not meaningful(1) Reflects the Segment Reallocation.

    Revenues in theMedia, Licensing and Advertising segment for the quarter ended February 28,November 30, 2005 decreased $6.3increased $4.3 million, or 14.5%9.0%, to $37.2$51.9 million, compared to $43.5$47.6 million in the prior fiscal year quarter. This decrease primarily resulted from lower programming revenues of $8.5 million, largelyquarter, due to the prior year releasean increase in each of the feature filmbusinesses in the segment, led by an increase in revenues from Back to Basic ToysClifford’s Really Big MovieTM®, partially offset by increased software revenues of $1.7 million.the Company’s direct-to-home toy catalog. Segment revenues for the ninesix months ended February 28,November 30, 2005 decreased $9.6increased $10.5 million, or 9.0%17.6%, to $96.7$70.0 million, compared to $106.3$59.5 million in the prior fiscal year period, primarily due to loweran increase in television programming revenues of $10.5 million.revenues.


    SCHOLASTIC CORPORATION
    Item 2.  MD&A

    Segment operating profit for the quarter ended February 28,November 30, 2005 increased $1.0decreased $0.8 million, or 9.4%, to $1.3$7.7 million, as compared to $0.3$8.5 million in the prior fiscal year quarter, primarily due to higher software revenues.quarter. Segment operating lossprofit for the ninesix months ended February 28,November 30, 2005 increased modestly on lower revenues.decreased slightly to $2.0 million, compared to $2.3 million in the prior fiscal year period.

    International

    TheInternationalsegment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.

     Three months ended Nine months ended 
    ($ amounts in millions) February 28 February 29 February 28 February 29 
     2005 2004 2005 2004 
    Revenue $92.0 $87.6 $280.0 $267.5 
    Operating profit 3.4 0.8 19.6 18.2 
    Operating margin 3.7% 0.9% 7.0% 6.8% 


    SCHOLASTIC CORPORATION
    Item 2. MD&A
     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 February 28,November 30, 2005 increased $4.4$5.2 million, or 5.0%4.5%, to $92.0$121.4 million, compared to $87.6$116.2 million in the prior fiscal year quarter,quarter. This increase was primarily due to the favorable impact of foreign currency exchange rates of $3.8 million.rates. Segment revenues for the ninesix months ended February 28,November 30, 2005 increased $12.5$10.1 million, or 4.7%5.4%, to $280.0$198.1 million, as compared to $267.5$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 $14.3 million and local currency revenue growth in Australia equivalent to $4.3$6.7 million, partially offset by lower local currency revenues in the export business of $6.5 million, principally due to a higher level of Department of Defense orders for educational materials in the prior fiscal year period.United Kingdom.

    Segment operating profit for the quarter ended February 28,November 30, 2005 increased $2.6decreased $6.4 million, or 33.3%, to $3.4$12.8 million, as compared to $0.8$19.2 million in the prior fiscal year quarter, primarilymost significantly due to a lower local currency operating lossprofits in Australia.the United Kingdom. Segment operating profit for the ninesix months ended February 28,November 30, 2005 increased $1.4decreased $8.9 million, or 7.7%54.9%, to $19.6$7.3 million, compared to $18.2$16.2 million in the prior fiscal year period. This increase wasperiod, primarily due to increasedlower local currency operating profit in Australia equivalent to $3.8 million and the favorable impact of foreign currency exchanges rates of $1.2 million, partially offset by decreased operating profitprofits in the export business of $3.6 million.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, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second quarter of the fiscal year, while revenues from the sale of instructional materials are highest in the first quarter. The Company experiences a substantial loss from operations in the first quarter of each fiscal year.


    SCHOLASTIC CORPORATION
    Item 2.  MD&A

    InLiquidity and Capital Resources

    The Company’s cash and cash equivalents were $249.3 million at November 30, 2005, compared to $27.1 million at November 30, 2004 and $110.6 million at May 31, 2005.

    Cash provided by operating activities was $185.9 million for the June through October timesix months ended November 30, 2005, compared to $31.7 million in the prior fiscal year period. The increase from the prior fiscal year period was primarily due to higher Net income and favorable changes in working capital in the current fiscal year period. Accounts receivable, net increased by $66.9 million in the six months ended November 30, 2005, compared to an increase of $86.4 million in the prior fiscal year period, primarily due to lower revenues in the Company’s continuity programs. Accounts payable and other accrued expenses increased by $73.3 million during the six months ended November 30, 2005, compared to an increase of $7.2 million in the prior fiscal year period, due primarily to accrued expenses associated withHarry Potter.Accrued royalties increased by $73.9 million in the six months ended November 30, 2005, compared to an increase of $9.6 million in the prior fiscal year period, primarily due to royalties associated with higherHarry Potter revenues that will be paid later in fiscal 2006.

    Cash used in investing activities was $81.3 million for the six months ended November 30, 2005, compared to $69.2 million in the prior fiscal year period. Additions to property, plant and equipment totaled $30.7 million for the six months ended November 30, 2005, an increase of $9.3 million over the prior fiscal year period, principally due to increased information technology spending. Acquisition-related payments totaled $3.3 million in the six months ended November 30, 2005 due to a contingent payment related to the acquisition of Klutz in fiscal 2002.

    Cash provided by financing activities was $34.0 million in the six months ended November 30, 2005, compared to $46.4 million in the prior fiscal year period, due to the higher cash position at the beginning of the current fiscal year as compared to the beginning of the prior fiscal year, as well as the increase in current year cash provided by operating activities. Proceeds pursuant to employee stock-based plans totaled $24.8 million in 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 due toin the seasonality of its business.June through October time period. As a result of the Company’s business cycle, seasonal borrowings have historically increased during June, July and August,November, have generally peaked in September or October, and have been at their lowest point in May.


    SCHOLASTIC CORPORATION
    Item 2. MD&A

    Liquidity and Capital Resources

    The Company’s cash and cash equivalents were $22.1 million at February 28, 2005, compared to $20.9 million at February 29, 2004 and $17.8 million at May 31, 2004.

    Net cash provided by operating activities was $105.0 million for the nine-month period ended February 28, 2005, compared to $118.4 million in the prior fiscal year period. The decline from the prior fiscal year period was principally due to lower Net income in the current fiscal year period.

    Net cash used in investing activities was $109.8 million for the nine-month period ended February 28, 2005, compared to $105.7 million in the prior fiscal year period. The increase was principally due to increases in Royalty advances and Additions to property, plant and equipment of $6.3 million and $4.9 million, respectively, in the current fiscal year period as compared to the prior fiscal year period, as well as the impact $8.8 million in Acquisition-related payments in the prior fiscal year period.

    Net cash provided by financing activities was $8.6 million for the nine-month period ended February 28, 2005, compared to net cash used in financing activities of $51.0 million in the prior fiscal year period, substantially due to the repayment at maturity of all $125.0 million of the Company’s 7% Notes (the “7% Notes”) on December 15, 2003.

    The Company believes its existing cash position, combined with funds generated from operations and available under the Credit Agreement and the Revolver, described in “Financing” below, will be sufficient to finance its ongoing working capital requirements. The Company anticipates refinancing its debt obligations prior to their respective maturity dates, including its outstanding 5.75% Notes due in January 2007, to the extent not paid through cash flow.


    SCHOLASTIC CORPORATION
    Item 2.  MD&A

    Financing

    On March 31, 2004, Scholastic Corporation and Scholastic Inc. entered into an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire onin August 11, 2004 (the “Loan Agreement”).2004. The Credit Agreement, which expires on March 31, 2009, 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 February 28,November 30, 2005 were 0.55%0.675% over LIBOR, 0.15%0.20% and 0.10%0.125%, respectively. The Credit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At both February 28,There were no borrowings outstanding under the Credit Agreement at November 30, 2005 and May 31, 2005. At November 30, 2004, $12.0$45.0 million was outstanding under the Credit Agreement at a weighted average interest rate of 3.1% and 1.7%, respectively. At February 29, 2004, $45.0 million was outstanding under the Loan Agreement at a weighted average interest rate of 1.5%2.5% . The decrease in borrowings outstanding under the Credit Agreement at both February 28, 2005 and May 31, 2004 as compared to borrowings outstanding under the Loan Agreement as of February 29, 2004 was principally due to the repayment of the 7% Notes at maturity on December 15, 2003.


    SCHOLASTIC CORPORATION
    Item 2. MD&A

    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, the Revolver provides for unsecured revolving credit of up to $40.0 million and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28,November 30, 2005 were 0.60%0.725% over LIBOR and 0.15%0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2005. At February 29, 2004November 30, 2005 and May 31, 2005. At November 30, 2004, $23.7$6.1 million and $2.2 million, respectively, werewas outstanding under the Revolver at a weighted average interest rate of 1.7% and 3.0%, respectively. The decrease in borrowings outstanding under the Revolver at both February 28, 2005 and May 31, 2004 as compared to borrowings outstanding as of February 29, 2004 was principally due to the repayment of the 7% Notes at maturity on December 15, 2003.2.4% .

    Unsecured lines of credit available in local currencies to Scholastic Corporation’s international subsidiaries for local working capital needs were, in the aggregate, equivalent to $64.6$76.4 million at February 28,November 30, 2005, as compared to $66.8$64.8 million at February 29,November 30, 2004 and $62.1$61.8 million at May 31, 2004.2005. These lines are used primarily to fund local working capital needs. There were borrowings outstanding under these lines of credit equivalent to $20.8$41.3 million at February 28,November 30, 2005, as compared to $26.8$33.6 million at February 29,November 30, 2004 and $23.0$24.7 million at May 31, 2004.2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 6.1%5.5% and 5.6% at both February 28,November 30, 2005 and February 29, 2004, respectively, and 5.5%5.4% at May 31, 2004.2005.

    The Company’s total debt obligations at February 28,November 30, 2005 February 29,and 2004 were $514.9 million and $562.7 million, respectively. The Company’s total debt obligations at May 31, 20042005 were $510.3$501.4 million. Through November 30, 2005, the Company had repurchased $2.0 million $574.5 million and $516.6 million, respectively, withof its 5.75% Notes due 2007 on the higher level of borrowings at February 29, 2004 principally due to increased borrowings under revolving credit agreements.open market. For a more complete description of the Company’s debt obligations, see Note 34 of Notes to Condensed Consolidated Financial Statements –Unaudited- Unaudited in Item 1, “Financial Statements.”

    Forward Looking Statements

    This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including the conditionconditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified in this Report, in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004,2005, and from time to time in the Company’s other filings with the Securities and Exchange Commission (“SEC”(the “SEC”). Actual results could differ materially from those currently anticipated.


    SCHOLASTIC CORPORATION

    Item 3. Quantitative and Qualitative Disclosures about Market Risk

    The Company has operations in various foreign countries. In the normal course of business, these operations are exposed to fluctuations in currency values. Management believes that the impact of currency fluctuations does not represent a significant risk in the context of the Company’s current international operations. In the normal course of business, the Company’s operations outside the United States periodically enter into short-term forward contracts (generally not exceeding $20.0 million) to match selected purchases not denominated in their respective local currencies.

    Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed by balancingthrough the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 6%8% of the Company’s debt at February 28,November 30, 2005 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 7%5% at May 31, 20042005 and approximately 17%15% at February 29, 2004, with the decreases from February 29, 2004 due to higher levels of borrowings under revolving credit agreements at that date.November 30, 2004. The Company is subject to the risk that market interest rates will increase and thereby increase the interest charged under its variable-rate debt.

    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.Operations -Financing.”

    The following table sets forth information about the Company’s debt instruments as of February 28,November 30, 2005 (see Note 34 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):

    ($ amounts in millions)  Fiscal Year Maturity  
    		 
      2005  2006   2007 2008   2009  Thereafter Total  
    		 
    Debt Obligations                 
       Lines of credit $20.8 $-   $- $-  $-  $- $ 20.8  
       Average interest rate  6.14%               
     
       Long-term debt including                 
             current portion:                 
                       Fixed-rate debt $0.5 $-   $300.0 $-  $-  $175.0 $ 475.5  
                       Average interest rate  12.03%     5.75%       5.0%   
     
                       Variable-rate debt $- $-   $- $-  $12.0(1)  $- $ 12.0  
                       Average interest rate            3.12%     
    		 
    ($ amounts in millions) Fiscal Year Maturity
     2006 2007  2008  2009(1)  2010   Thereafter Total 
       Debt Obligations               
       Lines of credit  $ 20.6  $  20.7  $ -    $ -  $ -   $       -  $  41.3 
       Weighted average interest rate 6.2% 4.8%             
     
       Long-term debt including               
             current portion:               
                       Fixed-rate debt  $  0.1  $ 298.0  $ -    $ -  $ -   $ 175.0  $ 473.1 
                       Weighted average interest rate 13.0% 5.75%           5.0%  

    (1)Represents amounts drawn on the Credit Agreement, which expires in 2009.

    (1)     At November 30, 2005, no borrowings were outstanding under the Credit Agreement or the Revolver, which have credit lines totaling $230.0 million and expire in fiscal 2009.

    SCHOLASTIC CORPORATION
    Item 4. Controls and Procedures

    The Chief Executive Officer and the Chief Financial Officer of Scholasticthe 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 the end of the period covered by this report,November 30, 2005, 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.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 controlscontrol over financial reporting that occurred during the quarter ended February 28,November 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.


    PART II – OTHER INFORMATION

    SCHOLASTIC CORPORATION
    Item 6. Exhibits4. Submission of Matters to a Vote of Security Holders

    The Annual Meeting of Stockholders of 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:

    Holders of the 1,656,200 outstanding shares of the Corporation’s Class A Stock voted in favor 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 until the next annual meeting of the Corporation’s stockholders and until their respective successors are duly elected and qualified.

    Holders of the Corporation’s Common Stock elected the following 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:

    Exhibits:
    Nominee
    		ForWithheld
     
     John L. Davies 
    32,775,312 shares
    		3,343,978 shares 
    Peter M. Mayer 
    32,879,691 shares
    		3,239,599 shares 
    John G. McDonald 
    32,809,697 shares
    		3,309,593 shares 


    SCHOLASTIC CORPORATION
    Item 6. Exhibits

    31.1Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
    31.2Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
    32Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     

     

     


    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: April 8, 2005 January 6, 2006 /s/ Richard Robinson 
     Richard Robinson 
     Chairman of the Board, 
     President, and Chief 
     Executive Officer 
     
     
     
     
    Date: April 8, 2005 January 6, 2006 /s/ Mary A. Winston 
     Mary A. Winston 
     Executive Vice President and 
     Chief Financial Officer 


    SCHOLASTIC CORPORATION

    QUARTERLYCURRENT REPORT ON FORM 10-Q, DATED FEBRUARY 28,NOVEMBER 30, 2005
    Exhibits Index


    Exhibit  
    Number Description of Document 
     
    31.1 Certification of the Chief Executive Officer of Scholastic Corporation filed 
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
     
    31.2 Certification of the Chief Financial Officer of Scholastic Corporation filed 
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
     
    32    Certifications of the Chief Executive Officer and Chief Financial Officer of 
    Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     Act of 2002. 

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