FORM 10-Q
| For the quarterly period ended | Commission File No. 000-19860 |
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | |
| (State or other jurisdiction of | |
| incorporation or organization) | |
| 557 Broadway, New York, New York | |
| (Address of principal executive offices) |
Registrant's telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesXNo _
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerX Accelerated filer _ Non-accelerated filer _
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _ NoXNo _
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 | |
| 40,215,377 | ||
| 1,656,200 |
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2005FEBRUARY 28, 2006
INDEX
| Part I - Financial Information | Page | ||||
Item 1. | Financial Statements | ||||
| Condensed Consolidated Statements of Operations - Unaudited for the | |||||
| Three and Nine Months Ended | 1 | ||||
| Condensed Consolidated Balance Sheets | |||||
| 2 | |||||
| Consolidated Statements of Cash Flows - Unaudited for the | |||||
| Months Ended | 3 | ||||
| Notes to Condensed Consolidated Financial Statements - Unaudited | 4 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition | ||||
| and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | ||||
Item 4. | Controls and Procedures | ||||
| Part II | |||||
Item 6. | Exhibits | ||||
Signatures | 31 | ||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Amounts in millions, except per share data)
| August 31, | |||||||
| 2005 | 2004 | ||||||
| Restated | |||||||
| Revenues | $ | 498.4 | $ | 323.7 | |||
| Operating costs and expenses: | |||||||
| Cost of goods sold | 293.0 | 176.4 | |||||
| Selling, general and administrative expenses | 202.4 | 181.2 | |||||
| Selling, general and administrative expenses – Continuity | |||||||
| charges | - | 3.6 | |||||
| Bad debt expense | 12.6 | 16.2 | |||||
| Depreciation and amortization | 15.6 | 15.7 | |||||
| Total operating costs and expenses | 523.6 | 393.1 | |||||
| Operating loss | (25.2 | ) | (69.4 | ) | |||
| Interest expense, net | 8.5 | 8.8 | |||||
| Loss before income taxes | (33.7 | ) | (78.2 | ) | |||
| Benefit from income taxes | 12.5 | 27.7 | |||||
| Net loss | $ | (21.2 | ) | $ | (50.5 | ) | |
| Basic and diluted loss per Share of Class A and Common Stock | $ | (0.52 | ) | $ | (1.28 | ) | |
| See accompanying notes | |||||||
| Revenues | $ | 487.7 | $ | 480.8 | $ | 1,682.8 | $ | 1,487.8 | |||||||
| Operating costs and expenses: | |||||||||||||||
| Cost of goods sold | 242.2 | 233.9 | 833.5 | 711.4 | |||||||||||
Selling, general and administrative expenses | 230.9 | 208.4 | 684.5 | 618.8 | |||||||||||
| Bad debt expense | 15.7 | 14.9 | 43.4 | 50.7 | |||||||||||
| Depreciation and amortization | 16.7 | 15.7 | 49.1 | 46.5 | |||||||||||
| Total operating costs and expenses | 505.5 | 472.9 | 1,610.5 | 1,427.4 | |||||||||||
| Operating income (loss) | (17.8 | ) | 7.9 | 72.3 | 60.4 | ||||||||||
| Interest expense, net | 6.8 | 9.1 | 24.4 | 27.4 | |||||||||||
| Earnings (loss) before income taxes | (24.6 | ) | (1.2 | ) | 47.9 | 33.0 | |||||||||
| Provision (benefit) for income taxes | (9.1 | ) | (0.4 | ) | 17.7 | 11.8 | |||||||||
| Net income (loss) | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||
| Earnings (loss) per Share of Class A and | |||||||||||||||
| Common Stock: | |||||||||||||||
| Basic | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.74 | $ | 0.53 | |||||
| Diluted | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.73 | $ | 0.52 | |||||
1
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 18.4 | $ | 110.6 | $ | 13.3 | ||||||
| Accounts receivable, net | 411.7 | 269.6 | 242.0 | |||||||||
| Inventories | 509.2 | 404.9 | 533.7 | |||||||||
| Deferred promotion costs | 41.8 | 38.6 | 41.9 | |||||||||
| Deferred income taxes | 84.5 | 71.7 | 104.0 | |||||||||
| Prepaid expenses and other current assets | 53.3 | 43.9 | 49.6 | |||||||||
| Total current assets | 1,118.9 | 939.3 | 984.5 | |||||||||
| Property, plant and equipment, net | 398.3 | 392.7 | 392.2 | |||||||||
| Prepublication costs | 119.4 | 120.2 | 114.1 | |||||||||
| Installment receivables, net | 11.2 | 10.6 | 13.0 | |||||||||
| Royalty advances | 56.8 | 54.4 | 56.9 | |||||||||
| Production costs | 9.3 | 9.7 | 8.1 | |||||||||
| Goodwill | 254.1 | 254.2 | 250.3 | |||||||||
| Other intangibles | 78.6 | 78.7 | 78.8 | |||||||||
| Other assets and deferred charges | 64.5 | 71.6 | 70.6 | |||||||||
| Total assets | $ | 2,111.1 | $ | 1,931.4 | $ | 1,968.5 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Lines of credit and short-term debt | $ | 33.8 | $ | 24.9 | $ | 30.5 | ||||||
| Capital lease obligations | 10.3 | 11.0 | 10.9 | |||||||||
| Accounts payable | 179.3 | 141.4 | 216.9 | |||||||||
| Accrued royalties | 127.2 | 40.1 | 50.7 | |||||||||
| Deferred revenue | 29.7 | 22.9 | 35.8 | |||||||||
| Other accrued expenses | 115.9 | 134.5 | 117.8 | |||||||||
| Total current liabilities | 496.2 | 374.8 | 462.6 | |||||||||
| Noncurrent Liabilities: | ||||||||||||
| Long-term debt | 546.0 | 476.5 | 587.9 | |||||||||
| Capital lease obligations | 67.7 | 63.4 | 63.1 | |||||||||
| Other noncurrent liabilities | 75.2 | 79.6 | 58.8 | |||||||||
| Total noncurrent liabilities | 688.9 | 619.5 | 709.8 | |||||||||
| 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 | 440.2 | 424.0 | 389.5 | |||||||||
| Deferred compensation | (1.9 | ) | (2.1 | ) | (0.5) | |||||||
| Accumulated other comprehensive loss | (34.8 | ) | (28.5 | ) | (21.8) | |||||||
| Retained earnings | 522.1 | 543.3 | 428.5 | |||||||||
| Total stockholders’ equity | 926.0 | 937.1 | 796.1 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,111.1 | $ | 1,931.4 | $ | 1,968.5 | ||||||
| See accompanying notes | ||||||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 219.5 | $ | 110.6 | $ | 22.1 | ||||||
| Accounts receivable, net | 241.9 | 269.6 | 249.1 | |||||||||
| Inventories | 480.7 | 404.9 | 468.0 | |||||||||
| Deferred promotion costs | 47.3 | 38.6 | 42.7 | |||||||||
| Deferred income taxes | 71.3 | 71.7 | 75.9 | |||||||||
| Prepaid expenses and other current assets | 78.9 | 43.9 | 48.0 | |||||||||
| Total current assets | 1,139.6 | 939.3 | 905.8 | |||||||||
| Property, plant and equipment, net | 395.5 | 392.7 | 390.7 | |||||||||
| Prepublication costs | 116.2 | 120.2 | 115.5 | |||||||||
| Installment receivables, net | 10.4 | 10.6 | 10.2 | |||||||||
| Royalty advances | 55.4 | 54.4 | 59.2 | |||||||||
| Production costs | 6.4 | 9.7 | 9.9 | |||||||||
| Goodwill | 253.6 | 254.2 | 251.5 | |||||||||
| Other intangibles | 78.5 | 78.7 | 78.7 | |||||||||
| Other assets and deferred charges | 69.0 | 71.6 | 72.8 | |||||||||
| Total assets | $ | 2,124.6 | $ | 1,931.4 | $ | 1,894.3 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Current portion of long-term debt, lines | ||||||||||||
| of credit and short-term debt | $ | 326.8 | $ | 24.9 | $ | 21.3 | ||||||
| Capital lease obligations | 9.2 | 11.0 | 11.6 | |||||||||
| Accounts payable | 150.1 | 141.4 | 127.6 | |||||||||
| Accrued royalties | 129.3 | 40.1 | 57.1 | |||||||||
| Deferred revenue | 35.9 | 22.9 | 43.4 | |||||||||
| Other accrued expenses | 154.1 | 134.5 | 128.4 | |||||||||
| Total current liabilities | 805.4 | 374.8 | 389.4 | |||||||||
| Noncurrent Liabilities: | ||||||||||||
| Long-term debt, excluding current portion | 173.2 | 476.5 | 489.0 | |||||||||
| Capital lease obligations | 63.1 | 63.4 | 63.7 | |||||||||
| Other noncurrent liabilities | 87.8 | 79.6 | 62.7 | |||||||||
| Total noncurrent liabilities | 324.1 | 619.5 | 615.4 | |||||||||
| 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 | 455.5 | 424.0 | 405.3 | |||||||||
| Deferred compensation | (1.7 | ) | (2.1 | ) | (1.5 | ) | ||||||
| Accumulated other comprehensive loss | (32.6 | ) | (28.5 | ) | (14.9 | ) | ||||||
| Retained earnings | 573.5 | 543.3 | 500.2 | |||||||||
| Total stockholders’ equity | 995.1 | 937.1 | 889.5 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,124.6 | $ | 1,931.4 | $ | 1,894.3 | ||||||
2
| 2005 | 2004 | |||||||
| Restated | ||||||||
| Cash flows used in operating activities: | ||||||||
| Net loss | $ | (21.2 | ) | $ | (50.5 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Provision for losses on accounts receivable | 12.6 | 16.2 | ||||||
| Amortization of prepublication and production costs | 18.4 | 14.3 | ||||||
| Depreciation and amortization | 15.6 | 15.7 | ||||||
| Royalty advances expensed | 4.7 | 5.7 | ||||||
| Deferred income taxes | (12.5 | ) | (31.1 | ) | ||||
| Non cash interest expense | 0.4 | 0.3 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net | (154.5 | ) | 7.7 | |||||
| Inventories | (102.3 | ) | (129.9 | ) | ||||
| Prepaid expenses and other current assets | (8.4 | ) | (6.2 | ) | ||||
| Deferred promotion costs | (2.2 | ) | (0.8 | ) | ||||
| Accounts payable and other accrued expenses | 28.2 | 57.4 | ||||||
| Accrued royalties | 87.1 | 12.6 | ||||||
| Deferred revenue | 6.0 | 12.0 | ||||||
| Tax benefit realized from stock option transactions | 2.8 | - | ||||||
| Other, net | (13.5 | ) | 0.1 | |||||
| Total adjustments | (117.6 | ) | (26.0 | ) | ||||
| Net cash used in operating activities | (138.8 | ) | (76.5 | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Prepublication expenditures | (12.3 | ) | (11.5 | ) | ||||
| Additions to property, plant and equipment | (15.4 | ) | (9.7 | ) | ||||
| Royalty advances | (7.2 | ) | (7.1 | ) | ||||
| Production expenditures | (4.6 | ) | (3.4 | ) | ||||
| Acquisition-related payments | (3.3 | ) | - | |||||
| Net cash used in investing activities | (42.8 | ) | (31.7 | ) | ||||
| Cash flows provided by financing activities: | ||||||||
| Borrowings under Credit Agreement and Revolver | 104.0 | 153.4 | ||||||
| Repayments of Credit Agreement and Revolver | (32.0 | ) | (57.6 | ) | ||||
| Repurchase of 5.75% Notes | (2.0 | ) | - | |||||
| Borrowings under lines of credit | 42.2 | 69.6 | ||||||
| Repayments of lines of credit | (33.8 | ) | (61.0 | ) | ||||
| Payments on capital lease obligations | (2.4 | ) | (2.3 | ) | ||||
| Proceeds pursuant to employee stock plans | 13.3 | 1.6 | ||||||
| Net cash provided by financing activities | 89.3 | 103.7 | ||||||
| Effect of exchange rate changes on cash | 0.1 | - | ||||||
| Net decrease in cash and cash equivalents | (92.2 | ) | (4.5 | ) | ||||
| Cash and cash equivalents at beginning of period | 110.6 | 17.8 | ||||||
| Cash and cash equivalents at end of period | $ | 18.4 | $ | 13.3 | ||||
| See accompanying notes | ||||||||
| Cash flows provided by operating activities: | ||||||||
| Net income | $ | 30.2 | $ | 21.2 | ||||
| Adjustments to reconcile net income to net cash provided by operating | ||||||||
| activities: | ||||||||
| Provision for losses on accounts receivable | 43.4 | 50.7 | ||||||
| Amortization of prepublication and production costs | 53.9 | 49.3 | ||||||
| Depreciation and amortization | 49.1 | 46.5 | ||||||
| Royalty advances expensed | 20.9 | 21.3 | ||||||
| Deferred income taxes | 2.2 | (3.3 | ) | |||||
| Non-cash interest expense | 1.1 | 0.9 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net | (14.1 | ) | (27.1 | ) | ||||
| Inventories | (73.3 | ) | (56.9 | ) | ||||
| Prepaid expenses and other current assets | (33.9 | ) | (4.0 | ) | ||||
| Deferred promotion costs | (7.7 | ) | (0.9 | ) | ||||
| Accounts payable and other accrued expenses | 38.1 | (26.2 | ) | |||||
| Accrued royalties | 89.2 | 18.5 | ||||||
| Deferred revenue | 12.3 | 19.3 | ||||||
| Tax benefit realized from employee stock-based plans | 5.1 | 1.5 | ||||||
| Other, net | (6.2 | ) | 1.3 | |||||
| Total adjustments | 180.1 | 90.9 | ||||||
| Net cash provided by operating activities | 210.3 | 112.1 | ||||||
| Cash flows used in investing activities: | ||||||||
| Prepublication expenditures | (35.4 | ) | (40.9 | ) | ||||
| Additions to property, plant and equipment | (46.6 | ) | (31.4 | ) | ||||
| Royalty advances | (22.1 | ) | (24.7 | ) | ||||
| Production expenditures | (11.0 | ) | (12.8 | ) | ||||
| Acquisition-related payments | (3.3 | ) | - | |||||
| Net cash used in investing activities | (118.4 | ) | (109.8 | ) | ||||
| Cash flows provided by financing activities: | ||||||||
| Borrowings under Credit Agreement and Revolver | 170.3 | 342.4 | ||||||
| Repayments of Credit Agreement and Revolver | (170.3 | ) | (344.6 | ) | ||||
| Repurchase of 5.75% Notes | (6.0 | ) | - | |||||
| Borrowings under lines of credit | 182.4 | 169.0 | ||||||
| Repayments of lines of credit | (176.7 | ) | (172.4 | ) | ||||
| Repayment of capital lease obligations | (8.9 | ) | (7.1 | ) | ||||
| Proceeds pursuant to employee stock-based plans | 26.0 | 14.2 | ||||||
| Net cash provided by financing activities | 16.8 | 1.5 | ||||||
| Effect of exchange rate changes on cash | 0.2 | 0.5 | ||||||
| Net increase in cash and cash equivalents | 108.9 | 4.3 | ||||||
| Cash and cash equivalents at beginning of period | 110.6 | 17.8 | ||||||
| Cash and cash equivalents at end of period | $ | 219.5 | $ | 22.1 | ||||
3
1.Basis of Presentation
The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all wholly-ownedmajority-owned subsidiaries (collectively, “Scholastic” or the “Company”). These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flow. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 2005.
The Company’s business is closely correlated to the school year. Consequently, the results of operations for the three and nine months ended August 31,February 28, 2006 and 2005 and 2004 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the August 31, 2004February 28, 2005 condensed consolidated balance sheet is included for comparative purposes.
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes and tax reserves, prepublication costs, royalty advances, goodwill and other intangibles.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Stock-Based Compensation
Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based benefit plans. In accordance with APB No. 25, no compensation expense was recognized with respect to the Company’s stock-based benefit plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and in respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net lossincome (loss) and basic and diluted lossearnings (loss) per share would have changedbeen reduced to the pro forma amounts indicated in the following table:
4
| 2005 | 2004 | ||||||
| Restated | |||||||
| Net loss – as reported | $ | (21.2 | ) | $ | (50.5 | ) | |
| Add: Stock-based employee compensation included in | |||||||
| reported net loss, net of tax | 0.1 | 0.1 | |||||
| Deduct: Total stock-based employee compensation expense | |||||||
| determined under fair value-based method, net of tax | 2.7 | 3.1 | |||||
| Net loss – pro forma | $ | (23.8 | ) | $ | (53.5 | ) | |
| Basic and diluted loss per share – as reported | $ | (0.52 | ) | $ | (1.28 | ) | |
| Basic and diluted loss per share – pro forma | (0.58 | ) | (1.35 | ) | |||
| Net income (loss) – as reported | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||
| Add: Stock-based employee compensation | |||||||||||||||
| included in reported net income (loss), net of tax | 0.3 | 0.1 | 0.6 | 0.3 | |||||||||||
| Deduct: Total stock-based employee | |||||||||||||||
| compensation expense determined under | |||||||||||||||
| fair value-based method, net of tax | 2.5 | 3.0 | 7.9 | 9.0 | |||||||||||
| Net income (loss) – pro forma | $ | (17.7 | ) | $ | (3.7 | ) | $ | 22.9 | $ | 12.5 | |||||
| Earnings (loss) per share - as reported: | |||||||||||||||
| Basic | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.74 | $ | 0.53 | |||||
| Diluted | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.73 | $ | 0.52 | |||||
| �� | |||||||||||||||
| Earnings (loss) per share – pro forma: | |||||||||||||||
| Basic | $ | (0.42 | ) | $ | (0.09 | ) | $ | 0.56 | $ | 0.31 | |||||
| Diluted | $ | (0.42 | ) | $ | (0.09 | ) | $ | 0.55 | $ | 0.31 | |||||
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No.123No. 123 (revised 2004), “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. As a result, the pro forma disclosures previously permitted under SFAS No. 123, described under “Stock-Based Compensation” above,123R will no longer be an alternative to financial statement recognition, effective for the Company commencing June 1, 2006. Retroactive application of the fair value recognition provisions of SFAS No. 123 to all prior years for which SFAS No. 123 was effective is permitted, but not required. Alternatively, a company may use the modified prospective transition method for application of SFAS No. 123R. Under this method, compensation costexpense 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 the adoption date, the compensation costexpense of any unvested portion is recognized over the remaining requisite service period, based on the grant-date fair value utilized in the SFAS 123 pro forma disclosure.period. The Company intends to use the modified prospective transition method to adopt SFAS No. 123R 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.
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if the liability’s fair value can be reasonably estimated. The Company is required to adopt FIN 47 no later than May 31, 2006 and is currently evaluating the impact that the adoption of FIN 47 will have on its financial position, results of operations and cash flows.
5
2. Restatement of Previously Issued Consolidated Financial Statements
As a result of a comprehensive review of its lease accounting in the fourth quarter of fiscal 2005, the Company determined that it was appropriate to restate its previously issued annual and interim consolidated financial statements. The restatement was principally attributable to the treatment of certain leases previously classified as operating leases that should have been classified as capital leases and certain other operating leases that previously did not reflect future payment escalation clauses in determining rent expense. The classification of certain capital leases as operating leases principally had the effect of excluding assets subject to capital leases and the related capital lease obligations from the Company’s Consolidated Balance Sheet and treating rental payments as rent expense, rather than as interest expense and principal payments on capital lease obligations. Also, not considering future payment escalation clauses in determining rent expense for certain operating leases principallyhad theeffect of understating rent expense in the early periods of the lease agreements and overstating rent expense in the later periods of the lease agreements.
5
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -UNAUDITED
(Amounts in millions, except per share data)
The Company has revised its accounting for these leasing transactions and restated its previously issued annual and interim Consolidated Financial Statements in its Annual Report on Form 10-K for the fiscal year ended May 31, 2005 to appropriately classify its leases and to appropriately reflect future payment escalation clauses in determining rent expense.
The following is a summary of the impact of the restatement on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2005:
Condensed Consolidated Statement of Operations | ||||||||||||
Three Months Ended February 28, 2005 | ||||||||||||
| Selling, general and administrative expenses | $ | 213.1 | $ | (4.7 | ) | $ | 208.4 | |||||
| Depreciation and amortization | 13.1 | 2.6 | 15.7 | |||||||||
| Operating income | 5.8 | 2.1 | 7.9 | |||||||||
| Interest expense, net | 6.9 | 2.2 | 9.1 | |||||||||
| Loss before income taxes | (1.1 | ) | (0.1 | ) | (1.2 | ) | ||||||
| Benefit for income taxes | (0.4 | ) | - | (0.4 | ) | |||||||
| Net loss | (0.7 | ) | (0.1 | ) | (0.8 | ) | ||||||
| Loss per share of Class A and Common Stock: | ||||||||||||
| Basic | $ | (0.02 | ) | $ | 0.00 | $ | (0.02 | ) | ||||
| Diluted | (0.02 | ) | 0.00 | (0.02 | ) | |||||||
Condensed Consolidated Statement of Operations | ||||||||||||
Nine Months Ended February 28, 2005 | ||||||||||||
| Selling, general and administrative expenses | $ | 631.4 | $ | (12.6 | ) | $ | 618.8 | |||||
| Depreciation and amortization | 39.1 | 7.4 | 46.5 | |||||||||
| Operating income | 55.2 | 5.2 | 60.4 | |||||||||
| Interest expense, net | 21.6 | 5.8 | 27.4 | |||||||||
| Earnings before income taxes | 33.6 | (0.6 | ) | 33.0 | ||||||||
| Provision for income taxes | 11.9 | (0.1 | ) | 11.8 | ||||||||
| Net income | 21.7 | (0.5 | ) | 21.2 | ||||||||
| Earnings per share of Class A and Common Stock: | ||||||||||||
| Basic | $ | 0.55 | (0.02 | ) | $ | 0.53 | ||||||
| Diluted | 0.54 | (0.02 | ) | 0.52 | ||||||||
6
The following is a summary of the impact of the restatement on the Company’s Condensed Consolidated Statement of OperationsBalance Sheet at February 28, 2005 and the Consolidated Statement of Cash Flows for the quarternine months ended August 31, 2004 and Condensed Consolidated Balance Sheet at August 31, 2004:
Condensed Consolidated Statement of | ||||||||||
| Operations | ||||||||||
| Selling, general and administrative expenses | $ | 188.7 | $ | (3.9 | ) | $ | 184.8 | |||
| Depreciation and amortization | 13.4 | 2.3 | 15.7 | |||||||
| Operating loss | (71.0 | ) | 1.6 | (69.4 | ) | |||||
| Interest expense, net | 7.0 | 1.8 | 8.8 | |||||||
| Loss before income taxes | (78.0 | ) | (0.2 | ) | (78.2 | ) | ||||
| Net loss | (50.3 | ) | (0.2 | ) | (50.5 | ) | ||||
| Basic and diluted loss per share of Class A | ||||||||||
| and Common Stock | $ | (1.27 | ) | $ | (0.01 | ) | $ | (1.28 | ) | |
Condensed Consolidated Balance Sheet | ||||||||||
| Property, plant and equipment, net | $ | 331.2 | $ | 61.0 | $ | 392.2 | ||||
| Other assets and deferred charges | 64.1 | 6.5 | 70.6 | |||||||
| Total assets | 1,901.0 | 67.5 | 1,968.5 | |||||||
| Lines of credit and short-term debt | 31.0 | (0.5 | ) | 30.5 | ||||||
| Capital lease obligations - current | - | 10.9 | 10.9 | |||||||
| Total current liabilities | 452.2 | 10.4 | 462.6 | |||||||
| Capital lease obligations – non-current | - | 63.1 | 63.1 | |||||||
| Other noncurrent liabilities | 54.0 | 4.8 | 58.8 | |||||||
| Total noncurrent liabilities | 641.9 | 67.9 | 709.8 | |||||||
| Retained earnings | 439.3 | (10.8 | ) | 428.5 | ||||||
| Total stockholders’ equity | 806.9 | (10.8 | ) | 796.1 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,901.0 | $ | 67.5 | $ | 1,968.5 | ||||
Consolidated Statement of Cash Flows | ||||||||||
| Net cash used in operating activities | $ | (78.8 | ) | $ | 2.3 | $ | (76.5 | ) | ||
| Net cash provided by financing activities | 106.0 | (2.3 | ) | 103.7 | ||||||
Condensed Consolidated Balance Sheet as of | |||||||||
| February 28, 2005 | |||||||||
| Property, plant and equipment, net | $ | 328.5 | $ | 62.2 | $ | 390.7 | |||
| Other assets and deferred charges | 66.3 | 6.5 | 72.8 | ||||||
| Total assets | 1,825.6 | 68.7 | 1,894.3 | ||||||
| Capital lease obligations - current | - | 11.6 | 11.6 | ||||||
| Total current liabilities | 377.8 | 11.6 | 389.4 | ||||||
| Capital lease obligations – noncurrent | - | 63.7 | 63.7 | ||||||
| Other noncurrent liabilities | 58.2 | 4.5 | 62.7 | ||||||
| Total noncurrent liabilities | 547.2 | 68.2 | 615.4 | ||||||
| Retained earnings | 511.3 | (11.1 | ) | 500.2 | |||||
| Total stockholders’ equity | 900.6 | (11.1 | ) | 889.5 | |||||
| Total liabilities and stockholders’ equity | $ | 1,825.6 | $ | 68.7 | $ | 1,894.3 | |||
| Consolidated Statement of Cash Flows – | |||||||||
| Nine Months Ended February 28, 2005 | |||||||||
| Net cash provided by operating activities | $ | 105.0 | $ | 7.1 | $ | 112.1 | |||
| Net cash provided by financing activities | 8.6 | (7.1 | ) | 1.5 | |||||
7
Scholastic is a global children’s publishing and media company. The Company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries, the internet and television networks. The Company categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution;Educational Publishing;Media, Licensing and Advertising(which collectively represent the Company’s domestic operations); andInternational. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources. Revenues and gross margin related to a segment’s products sold or services rendered through another segment’s distribution channel are reallocated to the segment originating the products or services.
•Children’s Book Publishing and Distribution includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
•Educational Publishing includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States.
•Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Company’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
•Internationalincludes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
8
| Three months ended | Three months ended | ||||||||||||||||||||||||||||||||||||||||
| August 31, 2005 | |||||||||||||||||||||||||||||||||||||||||
| February 28, 2006 | |||||||||||||||||||||||||||||||||||||||||
| Revenues | $ 270.9 | $ 73.5 | $ 46.4 | $ 0.0 | $ 390.8 | $ 96.9 | $ 487.7 | ||||||||||||||||||||||||||||||||||
| Bad debt | 11.4 | 1.5 | 0.1 | 0.0 | 13.0 | 2.7 | 15.7 | ||||||||||||||||||||||||||||||||||
| Depreciation and | |||||||||||||||||||||||||||||||||||||||||
| amortization | 3.4 | 0.6 | 0.0 | 11.7 | 15.7 | 1.0 | 16.7 | ||||||||||||||||||||||||||||||||||
| Amortization(2) | 4.2 | 6.9 | 4.8 | 0.0 | 15.9 | 0.5 | 16.4 | ||||||||||||||||||||||||||||||||||
| Royalty advances | |||||||||||||||||||||||||||||||||||||||||
| expensed | 6.2 | 0.3 | 0.2 | 0.0 | 6.7 | 1.0 | 7.7 | ||||||||||||||||||||||||||||||||||
| Segment profit (loss)(3) | (3.2 | ) | (3.5 | ) | 6.3 | (19.7 | ) | (20.1 | ) | 2.3 | (17.8 | ) | |||||||||||||||||||||||||||||
| Expenditures for | |||||||||||||||||||||||||||||||||||||||||
long-lived assets(4) | 14.0 | 7.3 | 2.4 | 9.7 | 33.4 | 3.7 | 37.1 | ||||||||||||||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||||||||||||||||||||
| February 28, 2005 - Restated | February 28, 2005 - Restated | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ 272.3 | $ 79.3 | $ 37.2 | $ 0.0 | $ 388.8 | $ 92.0 | $ 480.8 | ||||||||||||||||||||||||||||||||||
| Bad debt | 11.8 | 0.6 | 0.1 | 0.0 | 12.5 | 2.4 | 14.9 | ||||||||||||||||||||||||||||||||||
| Depreciation and | |||||||||||||||||||||||||||||||||||||||||
| amortization | 4.2 | 0.8 | 0.3 | 8.7 | 14.0 | 1.7 | 15.7 | ||||||||||||||||||||||||||||||||||
| Amortization(2) | 4.4 | 8.2 | 4.2 | 0.0 | 16.8 | 0.1 | 16.9 | ||||||||||||||||||||||||||||||||||
| Royalty advances | |||||||||||||||||||||||||||||||||||||||||
| expensed | 14.0 | 0.6 | (0.2 | ) | 0.0 | 14.4 | 0.7 | 15.1 | |||||||||||||||||||||||||||||||||
| Segment profit (loss)(3) | 14.7 | 4.9 | 4.4 | (19.1 | ) | 4.9 | 3.0 | 7.9 | |||||||||||||||||||||||||||||||||
| Expenditures for | |||||||||||||||||||||||||||||||||||||||||
| long-lived assets(4) | 18.3 | 11.0 | 5.6 | 5.0 | 39.9 | 0.7 | 40.6 | ||||||||||||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||||||||
| February 28, 2006 | |||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 275.3 | $ | 128.3 | $ | 18.1 | $ | 0.0 | $ | 421.7 | $ | 76.7 | $ | 498.4 | $ 970.4 | $ 301.0 | $ 116.4 | $ 0.0 | $ 1,387.8 | $ 295.0 | $ 1,682.8 | ||||||||||||||||||||
| Bad debt | 9.9 | 0.6 | 0.1 | 0.0 | 10.6 | 2.0 | 12.6 | 33.0 | 2.9 | 0.3 | 0.0 | 36.2 | 7.2 | 43.4 | |||||||||||||||||||||||||||
| Depreciation and | |||||||||||||||||||||||||||||||||||||||||
| amortization | 3.5 | 0.8 | 0.4 | 9.3 | 14.0 | 1.6 | 15.6 | 12.7 | 2.7 | 1.1 | 28.3 | 44.8 | 4.3 | 49.1 | |||||||||||||||||||||||||||
| Amortization(2) | 4.1 | 7.9 | 5.9 | 0.0 | 17.9 | 0.5 | 18.4 | 12.4 | 22.8 | 17.2 | 0.0 | 52.4 | 1.5 | 53.9 | |||||||||||||||||||||||||||
| Royalty advances | |||||||||||||||||||||||||||||||||||||||||
| expensed | 3.8 | 0.4 | 0.1 | 0.0 | 4.3 | 0.4 | 4.7 | 17.3 | 1.3 | 0.6 | 0.0 | 19.2 | 1.7 | 20.9 | |||||||||||||||||||||||||||
| Segment profit (loss)(3) | (19.7 | ) | 27.5 | (5.7 | ) | (21.8 | ) | (19.7 | ) | (5.5 | ) | (25.2 | ) | 65.7 | 45.6 | 8.3 | (56.9 | ) | 62.7 | 9.6 | 72.3 | ||||||||||||||||||||
| Segment assets | 984.2 | 338.7 | 65.7 | 407.1 | 1,795.7 | 315.4 | 2,111.1 | 1,026.3 | 301.4 | 68.4 | 420.3 | 1,816.4 | 308.2 | 2,124.6 | |||||||||||||||||||||||||||
| Goodwill | 130.6 | 82.5 | 9.8 | 0.0 | 222.9 | 31.2 | 254.1 | 130.6 | 82.5 | 9.8 | 0.0 | 222.9 | 30.7 | 253.6 | |||||||||||||||||||||||||||
| Expenditures for | |||||||||||||||||||||||||||||||||||||||||
long-lived assets(4) | 21.5 | 7.3 | 6.1 | 5.1 | 40.0 | 2.8 | 42.8 | 51.9 | 22.0 | 10.9 | 23.4 | 108.2 | 10.2 | 118.4 | |||||||||||||||||||||||||||
| Long-lived assets(5) | 328.0 | 185.4 | 37.1 | 296.7 | 847.2 | 107.0 | 954.2 | 332.4 | 182.6 | 31.9 | 291.5 | 838.4 | 104.0 | 942.4 | |||||||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||||||||||||||||||||
| August 31, 2004 Restated | |||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 121.8 | $ | 118.2 | $ | 11.9 | $ | 0.0 | $ | 251.9 | $ | 71.8 | $ | 323.7 | |||||||||||||||||||||||||||
| Bad debt | 13.7 | 0.3 | 0.1 | 0.0 | 14.1 | 2.1 | 16.2 | ||||||||||||||||||||||||||||||||||
| Depreciation and | |||||||||||||||||||||||||||||||||||||||||
| amortization | 3.5 | 0.8 | 0.5 | 9.4 | 14.2 | 1.5 | 15.7 | ||||||||||||||||||||||||||||||||||
| Amortization(2) | 4.1 | 8.3 | 1.7 | 0.0 | 14.1 | 0.2 | 14.3 | ||||||||||||||||||||||||||||||||||
| Royalty advances | |||||||||||||||||||||||||||||||||||||||||
| expensed | 4.5 | 0.3 | 0.2 | 0.0 | 5.0 | 0.7 | 5.7 | ||||||||||||||||||||||||||||||||||
| Segment profit (loss)(3) | (64.0 | ) | 22.3 | (6.2 | ) | (18.5 | ) | (66.4 | ) | (3.0 | ) | (69.4 | ) | ||||||||||||||||||||||||||||
| Segment assets | 841.4 | 322.1 | 64.0 | 446.9 | 1,674.4 | 294.1 | 1,968.5 | ||||||||||||||||||||||||||||||||||
| Goodwill | 127.9 | 82.5 | 10.7 | 0.0 | 221.1 | 29.2 | 250.3 | ||||||||||||||||||||||||||||||||||
| Expenditures for | |||||||||||||||||||||||||||||||||||||||||
| long-lived assets(4) | 16.9 | 6.7 | 3.8 | 2.2 | 29.6 | 2.1 | 31.7 | ||||||||||||||||||||||||||||||||||
| Long-lived assets(5) | 316.7 | 183.1 | 37.2 | 297.0 | 834.0 | 102.0 | 936.0 | ||||||||||||||||||||||||||||||||||
9
| Nine months ended | ||||||||||||||
| February 28, 2005 - Restated | ||||||||||||||
| Revenues | $ 819.1 | $ 292.0 | $ 96.7 | $ 0.0 | $ 1,207.8 | $ 280.0 | $ 1,487.8 | |||||||
| Bad debt | 42.1 | 1.2 | 0.5 | 0.0 | 43.8 | 6.9 | 50.7 | |||||||
| Depreciation and | ||||||||||||||
| amortization | 11.0 | 2.4 | 1.2 | 27.2 | 41.8 | 4.7 | 46.5 | |||||||
| Amortization(2) | 12.5 | 25.1 | 11.1 | 0.0 | 48.7 | 0.6 | 49.3 | |||||||
| Royalty advances | ||||||||||||||
| expensed | 18.6 | 0.9 | 0.1 | 0.0 | 19.6 | 1.7 | 21.3 | |||||||
| Segment profit (loss)(3) | 41.6 | 48.7 | 6.7 | (55.8 | ) | 41.2 | 19.2 | 60.4 | ||||||
| Segment assets | 795.6 | 304.9 | 64.0 | 416.4 | 1,580.9 | 313.4 | 1,894.3 | |||||||
| Goodwill | 127.9 | 82.5 | 10.7 | 0.0 | 221.1 | 30.4 | 251.5 | |||||||
| Expenditures for | ||||||||||||||
| long-lived assets(4) | 49.9 | 27.9 | 14.2 | 13.0 | 105.0 | 4.8 | 109.8 | |||||||
| Long-lived assets(5) | 320.5 | 185.5 | 37.4 | 294.3 | 837.7 | 105.4 | 943.1 | |||||||
| (1) | Overhead includes all domestic corporate amounts not allocated to reportable segments, |
| (2) | Includes amortization of prepublication costs and production costs. |
9
| (3) | Segment profit (loss) represents |
| (4) | Includes expenditures for property, plant and equipment, investments in prepublication and production costs, royalty advances and acquisitions of, and investments in, businesses. |
| (5) | Includes property, plant and equipment, prepublication costs, goodwill, other intangibles, royalty advances, production costs and long-term investments. |
10
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
| Restated | Restated | Restated | ||||||||||||||||||||||
| Revenues | $ | 28.4 | $ | 41.2 | $ | 246.9 | $ | 80.6 | $ | 275.3 | $ | 121.8 | ||||||||||||
| Bad debt | 6.6 | 10.1 | 3.3 | 3.6 | 9.9 | 13.7 | ||||||||||||||||||
| Depreciation and amortization | 0.2 | 0.1 | 3.3 | 3.4 | 3.5 | 3.5 | ||||||||||||||||||
| Amortization(1) | 0.3 | 0.4 | 3.8 | 3.7 | 4.1 | 4.1 | ||||||||||||||||||
| Royalty advances expensed | (0.4 | ) | 0.5 | 4.2 | 4.0 | 3.8 | 4.5 | |||||||||||||||||
| Business loss(2) | (6.2 | ) | (4.6 | ) | (13.5 | ) | (59.4 | ) | (19.7 | ) | (64.0 | ) | ||||||||||||
| Business assets | 235.8 | 242.0 | 748.4 | 599.4 | 984.2 | 841.4 | ||||||||||||||||||
| Goodwill | 92.4 | 92.4 | 38.2 | 35.5 | 130.6 | 127.9 | ||||||||||||||||||
| Expenditures for long-lived assets(3) | 1.4 | 2.5 | 20.1 | 14.4 | 21.5 | 16.9 | ||||||||||||||||||
| Long-lived assets(4) | 145.4 | 144.2 | 182.6 | 172.5 | 328.0 | 316.7 | ||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| February 28, | |||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
| Restated | Restated | Restated | |||||||||||||||||||||
| Revenues | $ | 34.6 | $ | 32.8 | $ | 236.3 | $ | 239.5 | $ | 270.9 | $ | 272.3 | |||||||||||
| Bad debt | 7.5 | 7.2 | 3.9 | 4.6 | 11.4 | 11.8 | |||||||||||||||||
| Depreciation and amortization | 0.0 | 0.1 | 3.4 | 4.1 | 3.4 | 4.2 | |||||||||||||||||
| Amortization(1) | 0.6 | 0.3 | 3.6 | 4.1 | 4.2 | 4.4 | |||||||||||||||||
| Royalty advances expensed | 1.8 | 1.2 | 4.4 | 12.8 | 6.2 | 14.0 | |||||||||||||||||
| Business profit (loss)(2) | (2.5 | ) | 0.7 | (0.7 | ) | 14.0 | (3.2 | ) | 14.7 | ||||||||||||||
| Expenditures for long-lived assets(3) | 1.7 | 2.2 | 12.3 | 16.1 | 14.0 | 18.3 | |||||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| February 28, | |||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
| Restated | Restated | Restated | |||||||||||||||||||||
| Revenues | $ | 93.0 | $ | 113.4 | $ | 877.4 | $ | 705.7 | $ | 970.4 | $ | 819.1 | |||||||||||
| Bad debt | 22.0 | 28.0 | 11.0 | 14.1 | 33.0 | 42.1 | |||||||||||||||||
| Depreciation and amortization | 0.8 | 0.5 | 11.9 | 10.5 | 12.7 | 11.0 | |||||||||||||||||
| Amortization(1) | 1.2 | 0.9 | 11.2 | 11.6 | 12.4 | 12.5 | |||||||||||||||||
| Royalty advances expensed | 2.2 | 2.1 | 15.1 | 16.5 | 17.3 | 18.6 | |||||||||||||||||
| Business profit (loss)(2) | (13.3 | ) | (4.2 | ) | 79.0 | 45.8 | 65.7 | 41.6 | |||||||||||||||
| Business assets | 241.1 | 232.9 | 785.2 | 562.7 | 1,026.3 | 795.6 | |||||||||||||||||
| Goodwill | 92.4 | 92.4 | 38.2 | 35.5 | 130.6 | 127.9 | |||||||||||||||||
| Expenditures for long-lived assets(3) | 4.7 | 6.4 | 47.2 | 43.5 | 51.9 | 49.9 | |||||||||||||||||
| Long-lived assets(4) | 143.6 | 145.7 | 188.8 | 174.8 | 332.4 | 320.5 | |||||||||||||||||
| (1) | Includes amortization of prepublication |
| (2) | Business |
| (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. |
1011
The following table summarizes debt atas of the dates indicated:
| Lines of Credit | $ | 33.7 | $ | 24.7 | $ | 30.2 | ||||||
| Credit Agreement and Revolver | 72.0 | - | 110.0 | |||||||||
| 5.75% Notes due 2007, net of premium | 301.0 | 303.5 | 305.0 | |||||||||
| 5.00% Notes due 2013, net of discount | 173.0 | 173.0 | 172.9 | |||||||||
| Other debt | 0.1 | 0.2 | 0.3 | |||||||||
| Total debt | 579.8 | 501.4 | 618.4 | |||||||||
| Less lines of credit and short-term debt | (33.8 | ) | (24.9 | ) | (30.5 | ) | ||||||
| Total long-term debt | $ | 546.0 | $ | 476.5 | $ | 587.9 | ||||||
| Lines of Credit | $ | 30.6 | $ | 24.7 | $ | 20.8 | ||||||
| Credit Agreement and Revolver | - | - | 12.0 | |||||||||
| 5.75% Notes due 2007, net of premium | 295.9 | 303.5 | 304.0 | |||||||||
| 5% Notes due 2013, net of discount | 173.2 | 173.0 | 173.0 | |||||||||
| Other debt | 0.3 | 0.2 | 0.5 | |||||||||
| Total debt | 500.0 | 501.4 | 510.3 | |||||||||
| Less current portion of long-term debt, lines | ||||||||||||
| of credit and short-term debt | (326.8 | ) | (24.9 | ) | (21.3 | ) | ||||||
| Total long-term debt, excluding current portion | $ | 173.2 | $ | 476.5 | $ | 489.0 | ||||||
The following table sets forth the maturities of the Company’s debt obligations as of August 31, 2005February 28, 2006 for the remainder of fiscal 2006 and thereafter:
| Nine-month period ending May 31: | ||||||
| Three-month period ending May 31: | ||||||
| 2006 | $ | 33.8 | $ | 18.7 | ||
| Fiscal years ending May 31: | ||||||
| 2007 | 301.0 | 308.1 | ||||
| 2008 | - | - | ||||
| 2009 | 72.0 | - | ||||
| 2010 | - | - | ||||
| Thereafter | 173.0 | 173.2 | ||||
| Total debt | $ | 579.8 | $ | 500.0 | ||
Lines of Credit
Certain of Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $59.1$65.4 in the aggregate at August 31, 2005,February 28, 2006, as compared to $62.1$64.6 at August 31, 2004February 28, 2005 and $61.8 at May 31, 2005. There were borrowings outstanding under these lines of credit equivalent to $33.7$30.6 at August 31, 2005,February 28, 2006, as compared to $30.2$20.8 at August 31, 2004February 28, 2005 and $24.7 at May 31, 2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.5%5.7% and 5.9%6.1% at August 31,February 28, 2006 and 2005, and 2004, respectively, and 5.4% at May 31, 2005.
12
11
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 August 31, 2005February 28, 2006 were 0.675% over LIBOR, 0.20% and 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. There were no borrowings outstanding under the Credit Agreement at February 28, 2006 or May 31, 2005. At August 31,February 28, 2005, and 2004, $35.0 and $87.5, respectively, were$12.0 was outstanding under the Credit Agreement at a weighted average interest rate of 4.32% and 2.32%, respectively. There were no borrowings outstanding under the Credit Agreement at May 31, 2005.
Revolver
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, theThe Revolver provides for unsecured revolving credit of up to $40.0 and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30%. The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of August 31, 2005February 28, 2006 were 0.725% over LIBOR and 0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At August 31, 2005 and 2004, $37.0 and $22.5, respectively, were outstanding under the Revolver at a weighted average interest rate of 5.02% and 2.19%, respectively. There were no borrowings outstanding under the Revolver at February 28, 2006, May 31, 2005 or February 28, 2005.
5.75% Notes due 2007.2007
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. In June 2005,Through February 28, 2006, the Company had repurchased $2.0$6.0 of the 5.75% Notes on the open market.
5% Notes due 2013.2013OnIn 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.
1213
The following table sets forth comprehensive lossincome (loss) for the periods indicated:
| 2005 | 2004 | |||||||
| Restated | ||||||||
| Net loss | $ | (21.2 | ) | $ | (50.5 | ) | ||
| Other comprehensive loss - foreign currency translation adjustment | (6.3 | ) | (0.3 | ) | ||||
| Comprehensive loss | $ | (27.5 | ) | $ | (50.8 | ) | ||
| Net income (loss) | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | ||||||
| Other comprehensive income (loss) - | ||||||||||||||||
| foreign currency translation adjustment | 0.7 | (2.4 | ) | (4.1 | ) | 6.6 | ||||||||||
| Comprehensive income (loss) | $ | (14.8 | ) | $ | (3.2 | ) | $ | 26.1 | $ | 27.8 | ||||||
14
Basic lossearnings (loss) per share is computed by dividing net lossincome (loss) by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted lossearnings (loss) per share is calculated to give effect to potentially dilutive options to purchase Class A and Common Stock issuedgranted pursuant to the Company’s stock-based benefit plans that were outstanding during the period. The diluted loss per share was equal to the basic loss per share for the three months ended August 31,February 28, 2006 and 2005 and 2004 because such options outstanding werewould have been antidilutive. The weighted average sharesfollowing table summarizes the reconciliation of Class A Stockthe numerators and Common Stock outstandingdenominators for the basic and diluted lossearnings (loss) per share computations for the three months ended August 31, 2005 and 2004 were 41.0 and 39.6, respectively.periods indicated:
Net income (loss) for basic and diluted | |||||||||||||||
| earnings (loss) per share | $ | (15.5 | ) | $ | (0.8 | ) | $ | 30.2 | $ | 21.2 | |||||
| Weighted average Shares of Class A and | |||||||||||||||
| Common Stock outstanding for basic | |||||||||||||||
| earnings (loss) per share | 41.8 | 40.0 | 40.8 | 39.8 | |||||||||||
| Dilutive effect of Class A and | |||||||||||||||
| Common Stock issued pursuant to | |||||||||||||||
| stock-based benefit plans | - | - | 0.7 | 0.7 | |||||||||||
| Adjusted weighted average Shares of | |||||||||||||||
| Class A and Common Stock outstanding | |||||||||||||||
| for diluted earnings (loss) per share | 41.8 | 40.0 | 41.5 | 40.5 | |||||||||||
| Earnings (loss) per share of Class A | |||||||||||||||
| and Common Stock: | |||||||||||||||
| Basic | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.74 | $ | 0.53 | |||||
| Diluted | $ | (0.37 | ) | $ | (0.02 | ) | $ | 0.73 | $ | 0.52 | |||||
15
Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise.
The following table summarizes the activity in Goodwill for the periods indicated:
| The following table summarizes the activity in Goodwill for the periods indicated: | The following table summarizes the activity in Goodwill for the periods indicated: | |||||||||||||||||||||||
| Beginning balance | $ | 254.2 | $ | 249.7 | $ | 249.7 | $ | 254.2 | $ | 249.7 | $ | 249.7 | ||||||||||||
| Additions due to acquisitions | - | 6.0 | - | - | 6.0 | - | ||||||||||||||||||
| Other adjustments | (0.1 | ) | (1.5 | ) | 0.6 | (0.6 | ) | (1.5 | ) | 1.8 | ||||||||||||||
| Ending balance | $ | 254.1 | $ | 254.2 | $ | 250.3 | ||||||||||||||||||
| Total | $ | 253.6 | $ | 254.2 | $ | 251.5 | ||||||||||||||||||
In the twelve months ended May 31, 2005, Additions due to acquisitions includes the purchase price for the acquisition of Chicken House Publishing Ltd. and the accrual offor a final payment related to the fiscal 2002 acquisition of Klutz.
13
| 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 | (2.7 | ) | (2.6 | ) | (2.5 | ) | ||||||
| Net other intangibles | 1.3 | 1.4 | 1.5 | |||||||||
| Total | $ | 1.5 | $ | 1.6 | $ | 1.7 | ||||||
| Customer lists | $ | 3.0 | $ | 3.0 | $ | 2.9 | ||||||
| Accumulated amortization | (2.8 | ) | (2.8 | ) | (2.7 | ) | ||||||
| Net customer lists | 0.2 | 0.2 | 0.2 | |||||||||
| Other intangibles | 4.0 | 4.0 | 4.0 | |||||||||
| Accumulated amortization | (2.8 | ) | (2.6 | ) | (2.6 | ) | ||||||
| Net other intangibles | 1.2 | 1.4 | 1.4 | |||||||||
| Total | $ | 1.4 | $ | 1.6 | $ | 1.6 | ||||||
Amortization expense for Other intangibles totaled $0.1$0.0 and $0.2 for each of the three and nine months ended August 31,February 28, 2006, respectively, $0.1 and $0.2 for the three and nine months ended February 28, 2005, and 2004respectively, and $0.3 for the twelve months ended May 31, 2005. Amortization expense for these assets is currently estimated to total $0.3 for the fiscal year ending May 31, 2006 and $0.2 for each of the fiscal years ending May 31, 2007 through 2010. The weighted average amortization periods for these assets by major asset class are two years for customer lists and twelve years for customer lists and other intangibles, respectively.intangibles.
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
| Net carrying value by major class: | |||||||||
| Titles | $ | 31.0 | $ | 31.0 | $ | 31.0 | |||
| Licenses | 17.2 | 17.2 | 17.2 | ||||||
| Major sets | 11.4 | 11.4 | 11.4 | ||||||
| Trademarks and other | 17.5 | 17.5 | 17.5 | ||||||
| Total | $ | 77.1 | $ | 77.1 | $ | 77.1 | |||
| Net carrying value by major class: | ||||||||||
| Titles | $ | 31.0 | $ | 31.0 | $ | 31.0 | ||||
| Licenses | 17.2 | 17.2 | 17.2 | |||||||
| Major sets | 11.4 | 11.4 | 11.4 | |||||||
| Trademarks and Other | 17.5 | 17.5 | 17.5 | |||||||
| Total | $ | 77.1 | $ | 77.1 | $ | 77.1 | ||||
1416
The following table setstables set forth components of the net periodic benefit costs under the Company’s cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”), the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “U.K. Pension Plan”), the defined benefit pension plan of Grolier Ltd., an indirect subsidiary of Scholastic Corporation located in Canada, (collectively, the “Pension Plans”), and the post-retirement benefits provided by the Company to its retired United States-based employees, consisting of certain healthcare and life insurance benefits (the “Post-Retirement Benefits”), for the periods indicated:
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost: | ||||||||||||||||||||||||||||||||
| Service cost | $ | 2.0 | $ | 2.0 | $ | 0.1 | $ | 0.1 | $ | 2.0 | $ | 2.0 | $ | 6.1 | $ | 5.9 | ||||||||||||||||
| Interest cost | 2.1 | 2.0 | 0.5 | 0.6 | 2.1 | 2.1 | 6.2 | 6.2 | ||||||||||||||||||||||||
| Expected return on assets | (2.2 | ) | (2.4 | ) | - | - | (2.2 | ) | (2.4 | ) | (6.6 | ) | (7.2 | ) | ||||||||||||||||||
| Net amortization and deferrals | 1.0 | 0.6 | (0.2 | ) | (0.2 | ) | 1.0 | 0.6 | 2.9 | 1.9 | ||||||||||||||||||||||
| Recognized net actuarial loss | - | - | 0.5 | 0.4 | ||||||||||||||||||||||||||||
| Net periodic benefit cost | $ | 2.9 | $ | 2.2 | $ | 0.9 | $ | 0.9 | $ | 2.9 | $ | 2.3 | $ | 8.6 | $ | 6.8 | ||||||||||||||||
| Components of Net Periodic Benefit Cost: | ||||||||||||||||||||||||||||||||
| Service cost | $ | 0.1 | $ | 0.1 | $ | 0.4 | $ | 0.3 | ||||||||||||||||||||||||
| Interest cost | 0.5 | 0.5 | 1.4 | 1.6 | ||||||||||||||||||||||||||||
| Amortization of prior service cost | (0.2 | ) | (0.2 | ) | (0.6 | ) | (0.6 | ) | ||||||||||||||||||||||||
| Recognized gain or loss | 0.5 | 0.5 | 1.4 | 1.3 | ||||||||||||||||||||||||||||
| Net periodic benefit cost | $ | 0.9 | $ | 0.9 | $ | 2.6 | $ | 2.6 | ||||||||||||||||||||||||
The Company currently estimates that it will contribute $0.6 to the U.S. Pension Plan in the year ending May 31, 2006. For the nine months ended February 28, 2006, the Company did not make any contributions to the U.S. Pension Plan. The Company currently estimates that Scholastic Ltd. will contribute the equivalent of $1.1 to the U.K. Pension Plan in the fiscal year ending May 31, 2006. For the threenine months ended August 31, 2005,February 28, 2006, Scholastic Ltd. contributed the equivalent of $0.3$0.9 to the U.K. Pension Plan.
9. Continuity Charges
In the three months ended August 31, 2004, the Company recorded charges of $3.6, primarily due to severance costs related to the Company’s fiscal 2004 review of its continuity business, which are reflected as Selling, general and administrative expenses. The impact of these charges on loss per diluted share in the quarter ended August 31, 2004 was $0.06.
1517
RevenueScholastic’s third fiscal quarter is its second smallest revenue period. For the quarter ended February 28, 2006, revenue increased slightly compared to the prior fiscal year quarter, reflecting increases in theMedia, Licensing and Advertising andInternational segments, partially offset by declines in theChildren’s Book Publishing and DistributionandEducational Publishing segments. Higher expenses in theChildren’s Book Publishing and Distribution segment, primarily in the Company’s school-based book club business, and lower educational technology revenues in theEducational Publishing segment resulted in a higher net loss for the first quarter compared to the prior year period.
For the nine months ended February 28, 2006, revenues and net income increased over the prior fiscal year period by $195.0 million and $9.0 million, respectively, primarily due to higherHarry Potterrevenues and profits in theChildren’s Book Publishing and Distributionsegment.
Based on the results for the quarter and their impact on the remainder of the fiscal year ending May 31, 2006, improvedthe Company lowered its forecasts for profitability for the year.
Scholastic is taking a number of actions intended to improve future profitability, including:
Revenues for the quarter ended February 28, 2006 increased $6.9 million, or 1.4%, to $487.7 million, compared to $480.8 million in the prior fiscal year quarter. The increase was due to higher revenues in theMedia, Licensing and Advertisingand Internationalsegments of $9.2 million and $4.9 million, respectively,partially offset by lower revenues in the Educational Publishing andChildren’s Book Publishing and Distributionsegments of $5.8 million and $1.4 million, respectively. For the nine months ended February 28, 2006, revenues increased $195.0 million, or 13.1%, to $1,682.8 million, compared to $1,487.8 million in the prior fiscal year period, due to increases in each of the Company’s four operating segments, led by $151.3 million in higher revenues from theChildren’s Book Publishing and Distribution segment as a result of the July 2005 release ofHarry Potter and the Half-Blood Prince, the sixth book in the series, on July 16, 2005. The Company’s first quarter is generally its smallest revenue period as most schools are not in session, resulting in a seasonal loss. The $21.2 million net loss in the quarter ended August 31, 2005 was unusually low primarily as a result of approximately $185 million inHarry Potter® revenue and growth in revenue and profits in theEducational Publishing segment, led by sales of educational technology products. These results were consistent with the Company’s goal for fiscal 2006 of expanding margins while growing revenues.
Results of Operations - Consolidated
Revenues for the quarter ended August 31, 2005 increased $174.7 million, or 54.0%, to $498.4 million, compared to $323.7 million in the prior fiscal year quarter, based on revenue increases in each of the Company’s four operating segments. This increase related primarily to $153.5 million in higher revenues from theChildren’s Book Publishing and Distribution segment as compared to the prior fiscal year quarter, where growth in the Company’s trade business, due to the July 2005 release ofHarry Potter and the Half-Blood Prince, was partially offset by a revenue decline in the Company’s continuity business. Revenues grew in theEducational Publishing, Media, Licensing and Advertising andInternational segments by $10.1 million, $6.2 million and $4.9 million, respectively.series.
Cost of goods sold as a percentage of revenues increased to 58.8%49.7% for the quarter ended August 31, 2005,February 28, 2006, as compared to 54.5%48.6% in the prior fiscal year quarter, primarily due to the impact of higher sales of lower margin products. For the nine months ended February 28, 2006, Cost of goods sold as a percentage of revenue increased to 49.5%, as compared to 47.8% in the prior fiscal year period, primarily due to costs related to the release ofHarry Potter and the Half-Blood PrincePrince..
18
Bad debt expense was $12.6increased to $15.7 million, or 3.2% of revenues, for the quarter ended August 31, 2005,February 28, 2006, compared to $16.2$14.9 million, or 3.1% of revenues, in the prior fiscal year quarter,quarter. The higher level of bad debt expense was associated with a large educational services provider in theEducational Publishing segment. For the nine months ended February 28, 2006, Bad debt expense decreased to $43.4 million, or 2.6% of revenues, compared to $50.7 million, or 3.4% of revenues, in the prior fiscal year period. The lower level of bad debt expense related primarily due to lower bad debt in the Company’s continuity business.business as a result of the Company’s previously announced plan for this business to focus on its more productive customers.
Depreciation and amortization expense for the quarter ended February 28, 2006 increased to $16.7 million, or 3.4% of revenues, compared to $15.7 million, or 3.3% of revenues, in the prior fiscal year quarter. For the nine months ended February 28, 2006, Depreciation and amortization expense increased to $49.1 million, or 2.9% of revenues, compared to $46.5 million, or 3.1% of revenues, in the prior fiscal year period. The increases in expense were principally associated with the depreciation of information technology equipment.
The resulting operating loss for the quarter ended August 31, 2005February 28, 2006 was $25.2$17.8 million, an improvement of $44.2 million as compared to an operating lossincome of $69.4$7.9 million in the prior fiscal year quarter. This improvement wasFor the nine months ended February 28, 2006, the resulting operating income increased $11.9 million, or 19.7%, to $72.3 million, or 4.3% of revenues, compared to $60.4 million, or 4.1% of revenues, in the prior fiscal year period.
The effective income tax rate for the quarter ended February 28, 2006 increased to 37.0%, compared to 33.3% in the prior fiscal year quarter. For the nine months ended February 28, 2006, the effective income tax rate increased to 37.0%, compared to 35.8% in the prior fiscal year period. These increases were primarily due to better operating results in theChildren’s Book Publishinga higher effective tax rate on foreign earnings and DistributionandEducational Publishing segments.a higher state tax provision.
Net loss was $21.2$15.5 million, or $0.52$0.37 per diluted share, for the quarter ended August 31, 2005,February 28, 2006, compared to a net loss of $50.5$0.8 million, or $1.28$0.02 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2006, net income was $30.2 million, or $0.73 per diluted share, compared to net income of $21.2 million, or $0.52 per diluted share, in the prior fiscal year period.
1619
In the fourth quarter of fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by theMedia, Licensing and Advertisingsegment that are sold through channels included in theChildren’s Book Publishing and Distributionsegment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the prior fiscal year quarter inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in theMedia, Licensing and Advertisingsegment with an offsetting decrease in gross margin and profits in theChildren’s Book Publishing and Distributionsegment.
Children’s Book Publishing and Distribution
The Company’sChildren’s Book Publishing and Distribution segment includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
| ($ amounts in millions) | |||||||||||||||||||||||
| 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
| Restated | Restated | Restated | |||||||||||||||||||||
| Revenue | $ | 275.3 | $ | 121.8 | $ | 270.9 | $ | 272.3 | $ | 970.4 | $ | 819.1 | |||||||||||
| Operating loss | (19.7 | ) | (64.0 | )(1)(2) | |||||||||||||||||||
| Operating profit (loss) | (3.2 | ) | 14.7 | (1) | 65.7 | 41.6 | (1)(2) | ||||||||||||||||
| Operating margin | * | * | * | 5.4 | %(1) | 6.8 | % | 5.1 | %(1) | ||||||||||||||
| * not meaningful | |
| (1) | Reflects the Segment Reallocation. |
| (2) | Includes Continuity |
Revenues in theChildren’s Book Publishing and Distribution segment for the quarter ended August 31, 2005 increased $153.5 million to $275.3February 28, 2006 were down slightly at $270.9 million, compared to $121.8$272.3 million in the prior fiscal year quarter. This increase wasFor the current fiscal year quarter, school-based book club revenues were $105.9 million, a decrease of $4.0 million, compared to the prior fiscal year quarter, due to lower order levels primarily in the Troll/Carnival and Trumpet clubs, and school-based book fair revenues decreased by $1.2 million to $70.6 million. Revenues from the Company’s trade business were $43.7 million in the quarter ended February 28, 2006, an increase of $2.4 million compared to the prior fiscal year quarter, primarily due to higher back list revenues, and revenues from the Company’s continuity business increased by $1.4 million to $50.7 million.
Segment operating loss for the quarter ended February 28, 2006 was $3.2 million, compared to an operating profit of $14.7 million in the prior fiscal year quarter, principally related to higher promotion expense in the Company’s school-based book club business.
20
Segment operating lossprofit for the quarternine months ended August 31, 2005February 28, 2006 improved by $44.3$24.1 million or 69.2%, to $19.7$65.7 million, compared to $64.0$41.6 million in the prior fiscal year quarter.period. This improvement was primarily due to increased operating profits for the Company’s trade business resulting from the higherHarry Potter revenues. revenues, partially offset by lower operating profits in the Company’s school-based book club business as a result of lower revenues and increased promotion expense.
The following highlights the results of the direct-to-home portion of the Company’s continuity programs, which consists primarily of the business formerly operated by Grolier and is included in theChildren’s Book Publishing and Distribution segment.
| Direct-to-home continuity | ||||||||||||||||
| ($ amounts in millions) | ||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| Restated | Restated | |||||||||||||||
| Revenue | $ | 34.6 | $ 32.8 | $ | 93.0 | $ 113.4 | ||||||||||
| Operating profit (loss) | (2.5 | ) | 0.7 | (13.3 | ) | (4.2 | )(1) | |||||||||
| Operating margin | * | 2.1 | % | * | * | |||||||||||
| *not meaningful | |
| (1) | Includes Continuity Charges related to this business of $3.6. |
17Revenues from the direct-to-home portion of the Company’s continuity business increased by $1.8 million, or 5.5%, to $34.6 million for the quarter ended February 28, 2006, as compared to $32.8 million in the prior fiscal year quarter, and decreased by $20.4 million, or 18.0%, to $93.0 million for the nine months ended February 28, 2006, as compared to $113.4 million in the prior fiscal year period.
Operating losses for the direct-to-home portion of the continuity business were $2.5 million and $13.3 million in the quarter and nine months ended February 28, 2006, respectively, compared to an operating profit of $0.7 million in the prior fiscal year quarter and an operating loss of $4.2 million in the nine months ended February 28, 2005, which included $3.6 million of Continuity Charges.
Excluding the direct-to-home portion of the continuity business, segment revenues decreased by $3.2 million, or 1.3%, to $236.3 million for the quarter ended February 28, 2006, compared to $239.5 million in the prior fiscal year quarter, and increased by $171.7 million, or 24.3%, to $877.4 million for the nine months ended February 28, 2006, compared to $705.7 million in the prior fiscal year period.
21
| Direct-to-home continuity | ||||||||
| ($ amounts in millions) | ||||||||
| 2005 | 2004 | |||||||
| Restated | ||||||||
| Revenue | $ | 28.4 | $ | 41.2 | ||||
| Operating loss | (6.2 | ) | (4.6 | )(1) | ||||
| Operating margin | * | * | ||||||
Revenues from the direct-to-home continuity portion of the Company’s continuity business for the quarter ended August 31, 2005 decreased to $28.4 million, compared to $41.2 million in the prior fiscal year quarter. The direct-to-home continuity business operating loss was $6.2 million in the current fiscal year quarter, compared to a $4.6 million operating loss in the prior fiscal year quarter, which included $3.6 million of Continuity charges.
Excluding the direct-to-home continuity portion of the continuity business, segment revenues foroperating loss was $0.7 million in the quarter ended August 31, 2005 increased by $166.3February 28, 2006, compared to an operating profit of $14.0 million to $246.9 million, as compared toin the prior fiscal year quarter, and segment operating lossprofit was $79.0 million in the quarternine months ended August 31, 2005 was $13.5 million,February 28, 2006, compared to $59.4an operating profit of $45.8 million in the prior fiscal year quarter.
Educational Publishing
The Company’sEducational Publishing segment includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.
| ($ amounts in millions) | ||||||||||||||||||||||||
| 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
| Restated | Restated | Restated | ||||||||||||||||||||||
| Revenue | $ | 128.3 | $ | 118.2 | $ 73.5 | $ 79.3 | $ 301.0 | $ 292.0 | ||||||||||||||||
| Operating profit | 27.5 | 22.3 | ||||||||||||||||||||||
| Operating profit (loss) | (3.5 | ) | 4.9 | 45.6 | 48.7 | |||||||||||||||||||
| Operating margin | 21.4 | % | 18.9 | % | * | 6.2 | % | 15.1 | % | 16.7 | % | |||||||||||||
* not meaningful
Revenues in theEducational Publishing segment forFor the quarter ended August 31, 2005 increased $10.1February 28, 2006, revenues in theEducational Publishing segment decreased $5.8 million, or 8.5%7.3%, to $128.3$73.5 million, compared to $118.2$79.3 million in the prior fiscal year quarter. Thisquarter, primarily due to lower revenues from educational technology products, including the Company’sREAD 180® reading intervention program, which the Company believes reflects a shift to a more seasonal selling pattern for this business. Segment revenues for the nine months ended February 28, 2006 increased $9.0 million, or 3.1%, to $301.0 million, compared to $292.0 million in the prior fiscal year period. The increase was related primarily to higher revenues from sales of educational technology products, led by the Company’sREAD 180® reading intervention program.products.
Segment operating profitloss for the quarter ended August 31, 2005 improved by $5.2 million, or 23.3%, to $27.5February 28, 2006 was $3.5 million, compared to $22.3segment operating profit of $4.9 million in the prior fiscal year quarter. This improvement wasquarter, primarily due to revenue growththe lower revenues from sales of educational technology products. Segment operating profit for the nine months ended February 28, 2006 decreased by $3.1 million, or 6.4%, to $45.6 million, compared to $48.7 million in the prior fiscal year period, as higher profits from education technology products which have higher gross margins.were more than offset by the lower results in the balance of the segment.
1822
The Company’sMedia, Licensing and Advertising segment includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
| ($ amounts in millions) | ||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| Restated | Restated | |||||||||||||||
| Revenue | $ 46.4 | $ 37.2 | $ 116.4 | $ 96.7 | ||||||||||||
| Operating profit | 6.3 | 4.4 | (1) | 8.3 | 6.7 | (1) | ||||||||||
| Operating margin | 13.6 | % | 11.8 | %(1) | 7.1 | % | 6.9 | %(1) | ||||||||
| ($ amounts in millions) | ||||||||
| 2005 | 2004 | |||||||
| Restated | ||||||||
| Revenue | $ | 18.1 | $ | 11.9 | ||||
| Operating loss | (5.7 | ) | (6.2 | )(1) | ||||
| Operating margin | * | * | ||||||
* not meaningful
(1) Reflects the Segment Reallocation.
Revenues in the Media, Licensing and Advertising segment for the quarter ended August 31, 2005February 28, 2006 increased $6.2$9.2 million, or 52.1%24.7%, to $18.1$46.4 million, compared to $11.9$37.2 million in the prior fiscal year quarter, primarily as a resultreflecting higher revenues in each of additional television programming revenues.
the businesses in the segment, led by an increase in revenues from software and multimedia products. Segment operating lossrevenues for the quarternine months ended August 31, 2005 improved by $0.5February 28, 2006 increased $19.7 million, or 8.1%20.4%, to $5.7$116.4 million, compared to $6.2$96.7 million in the prior fiscal year period, reflecting higher revenues in each of the businesses in the segment, led by increases in revenues of $6.7 million from software and multimedia products and $6.4 million from television programming.
Segment operating profit for the quarter ended February 28, 2006 increased $1.9 million to $6.3 million, compared to $4.4 million in the prior fiscal year quarter. Segment operating profit for the nine months ended February 28, 2006 increased $1.6 million to $8.3 million, compared to $6.7 million in the prior fiscal year period. These segment operating profit increases were primarily due to higher revenues.
International
TheInternationalsegment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
| ($ amounts in millions) | ||||||||||||||||||||||||
| 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
| Restated | Restated | Restated | ||||||||||||||||||||||
| Revenue | $ | 76.7 | $ | 71.8 | $ | 96.9 | $ 92.0 | $ 295.0 | $ 280.0 | |||||||||||||||
| Operating loss | (5.5 | ) | (3.0 | ) | ||||||||||||||||||||
| Operating profit | 2.3 | 3.0 | 9.6 | 19.2 | ||||||||||||||||||||
| Operating margin | * | * | 2.4 | % | 3.3 | % | 3.3 | % | 6.9 | % | ||||||||||||||
* not meaningful
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Kingdom equivalent to $2.8 million, partially offset by the favorable impact of foreign currency exchange rates of $1.2 million. Segment operating profit for the nine months ended February 28, 2006 was $9.6 million, a decrease of $9.6 million from $19.2 million in the prior fiscal year period, primarily due to lower local currency operating profits in the United Kingdom, where the Company is implementing a turn-around plan, and in Canada, equivalent to $9.1 million and $1.6 million, respectively.
SeasonalityThe 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.
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The Company’s cash and cash equivalents were $18.4$219.5 million at August 31, 2005,February 28, 2006, compared to $13.3$22.1 million at August 31, 2004February 28, 2005 and $110.6 million at May 31, 2005.
Cash used inprovided by operating activities was $138.8$210.3 million for the three-month periodnine months ended August 31, 2005,February 28, 2006, compared to $76.5$112.1 million in the prior fiscal year period. This increase was due to favorable changes in working capital accounts in the current fiscal year period and a higher level of net income. Working capital account changes that had a positive impact on cash flows included: Accrued royalties, which increased by $89.2 million in the nine months ended February 28, 2006, compared to an increase of $18.5 million in the prior fiscal year period, on a lower seasonal net loss of $29.3 million, primarily as a result of changes in working capital. Accounts receivable, net and Accrued royalties increased by $154.5 million and $87.1 million, respectively, during the three-month period ended August 31, 2005, compared to a decrease of $7.7 million and an increase of $12.6 million, respectively, in the prior fiscal year quarter, primarily due to theroyalties associated with higher level ofHarry Potter revenues. Inventoriesrevenues that will be paid in the fourth quarter of fiscal 2006; and Accounts payable and other accrued expenses, which increased by $102.3$38.1 million and $28.2 million, respectively, induring the quarternine months ended August 31, 2005,February 28, 2006, compared to increasesa decrease of $129.9 million and $57.4 million, respectively, in the prior fiscal year quarter, primarily due to a lower level of inventory purchases. The benefit from Deferred income taxes decreased $18.6 million to $12.5 million in the quarter ended August 31, 2005, compared to $31.1$26.2 million in the prior fiscal year quarter, principallyperiod, primarily due to accrued expenses associated withHarry Potter. Working capital account changes that had a negative impact on cash flows included: Prepaid expenses and other current assets, which increased $33.9 million for the smaller seasonal net loss.nine months ended February 28, 2006, compared to an increase of $4.0 million in the prior year fiscal period, primarily due to higher income tax payments; and Inventories, which increased $73.3 million during the nine months ended February 28, 2006, compared to an increase of $56.9 million in the prior year fiscal period, primarily due to earlier product purchasing in the Company’s school-based book fairs business.
Cash used in investing activities was $42.8$118.4 million for the three-month periodnine months ended August 31, 2005,February 28, 2006, compared to $31.7$109.8 million in the prior fiscal year period. This increase was due primarily to Additions to property, plant and equipment totaled $15.4totaling $46.6 million for the quarternine months ended August 31, 2005,February 28, 2006, an increase of $5.7$15.2 million over the prior fiscal year period, principally due to increased information technology spending. Acquisition-related payments totaled $3.3 million in the quarternine months ended August 31, 2005February 28, 2006 due to a contingent payment related to the acquisition of Klutz in fiscal 2002.
Net cashCash provided by financing activities was $89.3$16.8 million in the three-month periodnine months ended August 31, 2005, asFebruary 28, 2006, compared to $103.7$1.5 million in the prior fiscal year period, substantiallyan increase of $15.3 million. This increase was due primarily to proceeds received by the effectCompany under its employee stock-based benefit plans totaling $26.0 million in the current fiscal year period, an increase of a higher cash position at the beginning of the quarter ended August 31, 2005, as compared to the beginning of$11.8 million from $14.2 million in the prior fiscal year period.
Due to the seasonality of its business as discussed under “Seasonality” above, the Company experiences negative cash flow in the June through October time period. As a result of the Company’s business cycle, seasonal borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.
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Financing
On March 31, 2004, Scholastic Corporation and Scholastic Inc. entered intoare parties to an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which replaced a similar loan agreement that was scheduled to expire on August 11, 2004. The Credit Agreement, which expires on March 31, 2009,2009. The Credit Agreement provides for aggregate borrowings of up to $190.0 million (with a right in certain circumstances to increase borrowings to $250.0 million), including the issuance of up to $10.0 million in letters of credit. Interest under this facility is either at the prime rate or at a rate equal to 0.325% to 0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.25% if borrowings exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of August 31, 2005February 28, 2006 were 0.675% over LIBOR, 0.20% and 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. There were no borrowings outstanding under the Credit Agreement at February 28, 2006 or May 31, 2005. At August 31,February 28, 2005, and 2004, $35.0$12.0 million and $87.5 million, respectively, werewas outstanding under the Credit Agreement at a weighted average interest rate of 4.32% and 2.32%, respectively. There were no borrowings outstanding under the Credit Agreement at May 31, 2005.3.1% .
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, theThe Revolver provides for unsecured revolving credit of up to $40.0 million and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of August 31, 2005February 28, 2006 were 0.725% over LIBOR and 0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. At August 31, 2005 and 2004, $37.0 million and $22.5 million, respectively, were outstanding under the Revolver at a weighted average interest rate of 5.02% and 2.19%, respectively. There were no borrowings outstanding under the Revolver at February 28, 2006, May 31, 2005 or February 28, 2005.
Unsecured lines of credit available in local currencies to certain of Scholastic Corporation’s international subsidiaries were, in the aggregate, equivalent to $59.1$65.4 million at August 31, 2005,February 28, 2006, as compared to $62.1$64.6 million at August 31, 2004February 28, 2005 and $61.8 million at May 31, 2005. These lines are used primarily to fund local working capital needs. There were borrowings outstanding under these lines of credit equivalent to $33.7$30.6 million at August 31, 2005,February 28, 2006, as compared to $30.2$20.8 million at August 31, 2004February 28, 2005 and $24.7 million at May 31, 2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.5%5.7% and 5.9%6.1% at August 31,February 28, 2006 and 2005, and 2004, respectively, and 5.4% at May 31, 2005.
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The Company’s total debt obligations at August 31,February 28, 2006 and February 28, 2005 and 2004 were $579.8$500.0 million and $618.4$510.3 million, respectively. The Company’s total debt obligations at May 31, 2005 were $501.4 million. In June 2005,Through February 28, 2006, the Company had repurchased $2.0$6.0 million of its 5.75% Notes due 2007 on the open market. For a more complete description of the Company’s debt obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements – Unaudited in Item 1, “Financial Statements.”
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Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified in this Report, in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, 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.
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Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed through the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 18%6% of the Company’s debt at August 31,both February 28, 2006 and 2005 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 5% at May 31, 2005 and approximately 23% at August 31, 2004, with the increase from May 31, 2005 due to seasonal borrowings.2005. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.debt, as well as the risk that variable-rate borrowings will represent a larger portion of total debt in the future.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financing.Operations.”
The following table sets forth information about the Company’s debt instruments as of August 31, 2005February 28, 2006 (see Note 4 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):
| ($ amounts in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | (1) | 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lines of credit | $ | 33.7 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 33.7 | $ | 18.4 | $ | 12.2 | $ | - | $ | - | $ | - | $ | - | $ | 30.6 | ||||||||||||||||||||||||||
| Average interest rate | 5.5 | % | 6.3 | % | 5.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt including | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| current portion: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt | $ | 0.1 | $ | 298.0 | $ | $ | - | $ | - | $ | 175.0 | $ | 473.1 | $ | 0.3 | $ | 294.0 | $ | - | $ | - | $ | - | $ | 175.0 | $ | 469.3 | |||||||||||||||||||||||||||
| Average interest rate | 13.0 | % | 5.75 | % | 5.0 | % | 5.12 | % | 5.75 | % | 5.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| Variable -rate debt | $ | - | $ | - | $ | $ | 72.0 | (1) | $ | - | $ | - | $ | 72.0 | ||||||||||||||||||||||||||||||||||||||||
| Average interest rate | 4.68 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | At February 28, 2006, no borrowings were outstanding under the Credit Agreement or the Revolver, which have credit lines totaling $230.0 million and expire in fiscal 2009. |
(1) Represents amounts drawn on the Credit Agreement and Revolver with credit lines totaling $230.0, which expire in fiscal 2009.
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PART II – OTHER INFORMATION
SCHOLASTIC CORPORATION| Exhibits: | ||||
| 10.1 | Scholastic Corporation Directors’ Deferred Compensation Plan, as amended and | |||
| restated effective January 1, 2005. | ||||
| 10.2 | Deferred Compensation Agreement between Scholastic Inc. and Ernest Fleishman, | |||
| as amended and restated effective January 1, 2005. | ||||
| 31.1 | Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant | |||
| to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant | |||
| to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32 | Certifications of the Chief Executive Officer and Chief Financial Officer of | |||
| Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act | ||||
| of 2002. | ||||
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| SCHOLASTIC CORPORATION | ||
| (Registrant) | ||
| Date: | /s/ Richard Robinson | |
| Richard Robinson | ||
| Chairman of the Board, | ||
| President, and Chief | ||
| Executive Officer | ||
| Date: | ||
| Mary A. Winston | ||
| Executive Vice President and | ||
| Chief Financial Officer |
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| Exhibit | |||
| Number | Description of Document | ||
| 10.1 | Scholastic Corporation Directors’ Deferred Compensation Plan, as amended and | ||
| restated effective January 1, 2005. | |||
| 10.2 | Deferred Compensation Agreement between Scholastic Inc. and Ernest | ||
| Fleishman, as amended and restated effective January 1, 2005. | |||
| 31.1 | Certification of the Chief Executive Officer of Scholastic Corporation filed | ||
| pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed | ||
| pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32 | Certifications of the Chief Executive Officer and Chief Financial Officer of | ||
| Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley | |||
| Act of 2002. | |||
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