United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

Annual Report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal year ended May 31, 2005   |   Commission File No. 000-19860

Scholastic Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

 

13-3385513

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

557 Broadway, New York, New York

 

10012

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
NONE

Securities Registered Pursuant to Section 12(g) of the Act:

 

 

 

Title of class

 

Name of Each Exchange on Which Registered




Common Stock, $0.01 par value

 

The NASDAQ Stock Market




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. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as November 30, 2004, was approximately $1,001,610,000. As of such date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There is no active market for the Class A Stock.

The number of shares outstanding of each class of the Registrant’s voting stock as of July 22, 2005 was as follows: 39,194,645 shares of Common Stock and 1,656,200 shares of Class A Stock.

Documents Incorporated By Reference

Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 21, 2005.


Table of Contents

 

 

 

 

 

Page

Part I

 

 




Item 1.

Business

1

Item 2.

Properties

12

Item 3.

Legal Proceedings

12

Item 4.

Submission of Matters to a Vote of Security Holders

12

 

 

 

Part II

 

 




Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

Item 6.

Selected Financial Data

14

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 8.

Consolidated Financial Statements and Supplementary Data

30

 

Consolidated Statements of Income

31

 

Consolidated Balance Sheets

32

 

Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income

.34

 

Consolidated Statements of Cash Flows

36

 

Notes to Consolidated Financial Statements

37

 

Reports of Independent Registered Public Accounting Firm

60

 

Supplementary Financial Information

62

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

62

Item 9A.

Controls and Procedures

63

Item 9B.

Other Information

63

 

 

 

Part III

 

 




Item 10.

Directors and Executive Officers of the Registrant

64

Item 11.

Executive Compensation

64

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

64

Item 13.

Certain Relationships and Related Transactions

64

Item 14.

Principal Accountant Fees and Services

64

 

 

 

Part IV

 

 




Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

65

 

Signatures

68

 

Power of Attorney

68

 

Schedule II: Valuation and Qualifying Accounts and Reserves

S-2

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Part I


 

 

Item 1   |

Business


 

Overview



Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is a global children’s publishing and media company. The Company is the world’s largest publisher and distributor of children’s books. Scholastic creates quality educational and entertaining materials and products for use in school and at home, including children’s books, textbooks, magazines, technology-based products, teacher materials, television programming, film, videos and toys. 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’s website, scholastic.com, is a leading site for teachers, classrooms and parents, and an award-winning destination for children. The Company is the leading operator in the United States of direct-to-home book clubs primarily serving children age five and under, and the leading print and on-line publisher of children’s reference and non-fiction products sold primarily to United States school libraries. Internationally, Scholastic has long-established operations in Canada, the United Kingdom, Australia, New Zealand and, through its wholly owned subsidiary, Grolier Incorporated (“Grolier”), Southeast Asia and also has newer operations in Argentina, China, India, Ireland and Mexico.

During its 85 years of operation, Scholastic has emphasized quality products and a dedication to learning. Scholastic Corporation was incorporated under the laws of Delaware in 1986 and, through predecessor entities, has been in business since 1920. Grolier, through its predecessor entities, has been in business since 1895.

 

Operating Segments


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); and International. 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 operating 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. During the three-year period ended May 31, 2005, Scholastic’s revenues have grown at an average annual compounded rate of 2.8%. The following table sets forth revenues by operating segment for the three fiscal years ended May 31:

 

 

 

 

 

 

(Amounts in millions)

 









 

 

2005

 

2004

 

2003

 









Children’s Book Publishing and Distribution

 

$

1,152.5

 

$

1,358.6

 

$

1,189.9

 

Educational Publishing

 

 

404.6

 

 

369.1

 

 

325.9

 

Media, Licensing and Advertising

 

 

133.1

 

 

136.4

 

 

123.5

 

International

 

 

389.7

 

 

369.7

 

 

319.0

 












 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,079.9

 

$

2,233.8

 

$

1,958.3

 












Additional financial information covering the Company’s operating segments is included in Note 2 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is incorporated herein by reference.

C H I L D R E N S   B O O K    P U B L I S H I N G   A N D   D I S T R I B U T I O N
(55.4% of fiscal 2005 revenues)

General
The Company’s Children’s Book Publishing and Distribution segment includes the publication and distribution of children’s books in the United States

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through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.

The Company is the largest publisher and distributor of children’s books and is the largest operator of school-based book clubs and school-based book fairs in the United States. The Company is also a leading publisher of children’s books distributed through the trade channel and the leading distributor in the United States of children’s books through direct-to-home continuity programs primarily for children ages five and younger. In fiscal 2005, the Company distributed in excess of 350 million children’s books in the United States.

Scholastic offers a broad range of quality children’s literature. Many of the Company’s books have received awards for excellence in children’s literature, including the Caldecott and Newbery Awards.

The Company obtains titles for sale through its distribution channels from three principal sources. The first source for titles is the Company’s publication of books written under exclusive publication agreements with authors, book packagers or other media companies. Scholastic generally owns the rights to sell these titles in all United States channels of distribution. Scholastic’s second source of titles is licenses to publish books exclusively in specified channels of distribution, including reprints of books originally published by other publishers, for which the Company acquires rights to sell in the school market, and licenses to publish books for exclusive sale in direct-to-home continuity programs. The third source of titles is the Company’s purchase of finished books from other publishers to be sold in the school market.

School-Based Book Clubs
Scholastic founded its first school-based book club in 1948. The Company’s school-based book clubs include: Firefly®, serving pre-kindergarten (“pre-K”) and kindergarten (“K”) students; SeeSaw®, serving students grades K to 1; Lucky®, serving students grades 2 to 3; Arrow®, serving students grades 4 to 6; TAB®, serving students grades 7 to 12; three Trumpet® clubs, serving students pre-K to grade 6; three Troll®/Carnival® clubs, serving students K to grade 6; Honeybee®, serving children ages 11/2 to 4; and Club Leo™, which provides Spanish language offers to students pre-K to grade 8. In addition to its regular offers, the Company creates special theme-based offers targeted to different grade levels during the year, such as holiday offers, science offers, curriculum offers and teen offers.

The Company mails promotional materials containing order forms to teachers in the vast majority of the pre-K to grade 8 classrooms in the United States. Teachers who wish to participate in a school-based book club distribute the order forms to their students, who may choose from generally 75 or more selections at substantial reductions from list prices. The teacher consolidates the students’ orders and forwards them to the Company by phone, fax, mail or the internet. In fiscal 2005, orders through the internet accounted for approximately 40% of total book club orders. The orders are then shipped to the teacher for distribution to the students. Teachers who participate in the book clubs receive bonus points for use by their school, which may be redeemed for the purchase of additional books and other items for their classrooms.

School-Based Book Fairs
Scholastic entered the school-based book fair business in 1981. Since that date, the Company has grown this business by expanding into new markets, including through selected acquisitions, and by increasing its business in existing markets by reaching new school customers, holding more fairs per year at its existing school customers and growing revenue on a per fair basis. The Company is the leading operator of school-based book fairs in the United States.

Book fairs are generally week-long events conducted on school premises, operated by school librarians and/or parent-teacher organizations. Book fair events provide children with access to hundreds of titles and allow them to

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purchase books and other select products at the school. Although the Company provides the school with the books and book display cases, the school itself conducts the book fair. The Company believes that the primary motivation for schools sponsoring fairs is to make quality books available to their students at reasonable prices in order to stimulate interest in reading. In addition, the school retains a portion of the book fair revenues, which can then be used to purchase books, supplies and equipment for the school.

The Company operates school-based book fairs in all 50 states under the name Scholastic Book Fairs ®. Books and display cases are delivered to schools from the Company’s warehouses principally by a fleet of leased vehicles. Sales and customer service functions are performed from regional sales offices, supported by field representatives. The Company believes that its competitive advantages in the book fair business include the strength of the relationship between its sales representatives and schools, broad geographic coverage, quality customer service and breadth of product selection. Over 90% of the schools that sponsored a Scholastic book fair in fiscal 2004 sponsored a Scholastic book fair again in fiscal 2005.

Continuity Programs
The Company operates continuity programs whereby children and their families generally place a single order and receive more than one shipment of books. Continuity programs are promoted through (i) direct-to-home offers, primarily through direct mail, print, telemarketing and on-line advertisements, and (ii) offers in school-based book clubs. The Company’s direct-to-home continuity business is the leading direct-to-home seller of children’s books primarily serving children age five and under. In fiscal 2005, the Company’s direct-to-home continuity business included Scholastic publishing properties, such as Clifford & Company™, Nick Jr., Scooby Doo, Scholastic At Home Phonics and The New Book of Knowledge® encyclopedia, as well as licensed programs, such as Disney Book Club™ and Dr. Seuss™ Beginning Readers Program. Continuity programs offered primarily through Scholastic’s school-based book clubs include Spy University™, Clifford The Big Red Dog®, Nick Zone, Scooby Doo, Spy Fiction® and How to Survive®.

Trade
Scholastic is one of the leading sellers of children’s books through bookstores and mass merchandisers in the United States. The Company maintains over 6,000 titles for trade distribution. Scholastic’s original publications include Harry Potter®, Captain Underpants®, Clifford The Big Red Dog®, Geronimo Stilton®, Goosebumps®, I Spy™, and Maya and Miguel and licensed properties such as Care Bears®, Star Wars® and Shrek 2®. In addition, the Company’s Klutz imprint is a publisher and creator of “books plus” products for children.

The Company’s trade sales organization focuses on marketing and selling Scholastic’s publishing properties to book stores, mass merchandisers, specialty sales outlets and other book retailers. Scholastic bestsellers during fiscal 2005 included books from the Harry Potter, Clifford The Big Red Dog, I Spy, Goosebumps and Captain Underpants series and individual titles, such as Dragon Rider and Chasing Vermeer.

E D U C A T I O N A L  P U B L I S H I N G
(19.5% of fiscal 2005 revenues)

General
The Company’s Educational Publishing segment includes the publication and distribution to schools and libraries of educational technology products, curriculum materials, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.

The Company is a leading provider of educational technology products and reading materials for schools and libraries. Scholastic has been providing quality innovative educational materials to schools and libraries since it began publishing classroom magazines in the 1920’s. The Company added supplementary books and texts to its product line in the 1960’s, professional books for

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teachers in the 1980’s and early childhood products and core curriculum materials in the 1990’s. In 1996, the Company strengthened its Spanish language offerings through the acquisition of Lectorum Publications, Inc., the largest Spanish language book distributor to schools and libraries in the United States. As a result of the acquisition of Grolier in June 2000, the Company is the leading print and on-line publisher of children’s reference and non-fiction products sold primarily to school libraries in the United States. The Company markets and sells its Educational Publishing products through a combination of field representatives, direct mail, telemarketing and the internet.

Curriculum Publishing and Teaching Resources
Scholastic’s curriculum publishing and teaching resources operations develop and distribute instructional materials directly to schools in the United States, primarily purchased through school and district budgets. These operations include reading improvement programs, individual paperbacks and collections and professional books designed for, and generally purchased by, teachers. The Company’s subsidiary, Tom Snyder Productions, Inc., is a leading developer and publisher of interactive educational software.

The Company focuses its supplemental and core curriculum publishing efforts on reading improvement materials and the effective use of technology to support learning. Scholastic’s reading improvement programs are led by READ 180®, a technology-based reading intervention program for students in grades 4 to 12 reading at least two years below grade level, and other technology-based products such as Wiggleworks®, which assists in teaching reading to students, and Scholastic Reading Counts!™, which encourages reading through a school-managed incentive program. New products to be released in fiscal 2006 include Scholastic ZIP ZOOM™ for grades K-3, which supports beginning reading skills for English language learners, and FASTT Math™, a technology-based program to improve math fluency developed with the creator of READ 180.

The teaching resources group publishes professional books designed for and generally purchased by teachers and distributes individual paperbacks and collections to schools and school districts. In addition, the Company provides paperbacks and collections to literacy organizations. The Company operates an on-line Teacher Store, which provides professional books and other educational materials to schools and teachers. Scholastic.com is a leading website for teachers and classrooms, offering multimedia teaching units, lesson plans, teaching tools and on-line activities.

Classroom Magazines
Scholastic is a leading publisher of classroom magazines. Teachers in grades K to 12 use these magazines as supplementary educational materials. The Company’s 32 classroom magazines supplement a school’s formal learning program by bringing subjects of current interest into the classroom. The magazines are designed to encourage students to read and also to cover diverse subjects, including English, reading, literature, math, science, current events, social studies and foreign languages. The most well known of the Company’s domestic magazines are Scholastic News® and Junior Scholastic®.

Scholastic’s classroom magazine circulation in the United States in fiscal 2005 was more than 8.3 million, with approximately two-thirds of the circulation in grades K to 6. In fiscal 2005, teachers in approximately 60% of the elementary schools and in approximately 70% of the secondary schools in the United States used the Company’s classroom magazines. The various classroom magazines are distributed either on a weekly, biweekly or monthly basis during the school year and are supplemented by timely materials featured on scholastic.com.

The majority of the magazines purchased are paid for with school or district funds, with teachers or students paying for the balance. Circulation revenue accounted for substantially all of the classroom magazine revenues in fiscal 2005.

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Library Publishing
Scholastic is a leading publisher of quality children’s reference and non-fiction products and encyclopedias sold primarily to schools and libraries in the United States. Products include Encyclopedia Americana®, The New Book of Knowledge® and Cumbre™, a Spanish language encyclopedia, as well as reference materials published under the Grolier® name. Grolier Online® provides subscriptions to reference databases for schools and libraries. The Company’s products also include non-fiction books published in the United States under the imprints Children’s Press® and Franklin Watts®.

M E D I A ,  L I C E N S I N G  A N D  A D V E R T I S I N G
(6.4% of fiscal 2005 revenues)

General
The Company’s Media, 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 Company’s subsidiary, Scholastic Entertainment Inc. (“SEI”), of programming (including children’s television programming, videos, DVD’s and feature films) and consumer products (including promotional activities and non-book merchandise), and advertising revenue, including sponsorship programs.

Production and Distribution
Through SEI, Soup2Nuts Inc. (“S2N”) and the Weston Woods Studio, the Company creates and produces television programming, videos, DVD’s, feature films, and branded websites. SEI builds consumer awareness and value for the Company’s publishing franchises by creating family-focused programming that form the basis for global branding campaigns. SEI generates revenue by exploiting programming assets globally across multiple media formats and by developing and executing brand-marketing campaigns.

SEI has built a television library of over 350 half-hour productions, including: Clifford The Big Red Dog®, Clifford’s Puppy Days, Maya & Miguel, The Magic School Bus®, I Spy™, Goosebumps®, Animorphs®, Dear America® and The Baby-sitters Club®. These series have been sold in the United States and internationally in various media formats. SEI has produced 25 episodes of Clifford’s Puppy Days, an animated spin-off of the award-winning Clifford The Big Red Dog series, and in fiscal 2005 commenced production of 14 additional episodes. In fiscal 2005, SEI also produced 35 episodes of a new original animated series, Maya & Miguel, and commenced production of 30 additional episodes. In fiscal 2004, SEI produced Clifford’s Really Big Movie, a feature length film.

S2N, an award-winning producer of animated television and web programming, has produced over 80 half-hour episodes of television programming, including animated shows, such as O’Grady™ and Time Warp Trio.

Weston Woods Studios creates audiovisual adaptations of classic children’s picture books, such as Where the Wild Things Are, Chrysanthemum and Make Way for Ducklings, that are initially produced for the school and library market as a supplemental educational resource. SEI has repackaged 27 titles for sale to the consumer market under the Scholastic Video Collection banner. Weston Woods Studios has received numerous awards, including five Andrew Carnegie Medals for Excellence in Children’s Video and an Academy Award nomination.

Brand Marketing and Consumer Products
SEI creates and develops award-winning global branding campaigns for Scholastic properties in order to extend and strengthen Scholastic’s consumer connection with parents, children and teachers. In fiscal 2005, SEI launched a comprehensive brand marketing campaign in conjunction with the premiere of Maya & Miguel, including consumer products and publishing extensions, such as television tie-in books.

In addition to licensing rights for consumer products, SEI designs, manufactures and distributes consumer products primarily based on Scholastic’s literary properties, such as a line of upscale plush toys and wooden puzzles based on

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Clifford The Big Red Dog®, The Magic School Bus®, The Real Mother Goose™, No David! and Dear Mrs. LaRue. The products are available through independent toy/gift stores, specialty chains, department stores, mail order catalogs and bookstores, as well as through Scholastic’s school-based book clubs, school-based book fairs and continuity programs.

Consumer Software
Scholastic distributes original and licensed consumer software, handheld and console products and accessories and DVD’s for grades K to 8 through its school-based software clubs, school-based book clubs, school-based book fairs and continuity programs, as well as the school-based library/teacher market and the trade market. The Company acquires software and multi-media products for distribution in all of these channels through a combination of licensing, purchases of product from software publishers and internal development. Scholastic’s school-based software clubs are marketed in the same manner as its school-based book clubs. The Company’s CD-ROM titles include the award-winning series I Spy™, Clifford® and Math Missions. The Company and Fisher-Price are developing interactive educational products to be launched in the fall of 2005, including the Read with Me DVD! learning system.

Advertising
Certain of the Company’s magazine properties generate advertising revenues as their primary source of revenue, including Instructor®, Scholastic Administrator™, Instructor New Teacher, Scholastic Early Childhood Today™ and Coach and Athletic Director™, which are directed to teachers and education professionals and are distributed during the academic year. Total circulation for these magazines was approximately 500,000 in fiscal 2005. Subscriptions for these magazines are solicited primarily by direct mail. Scholastic Parent and Child® magazine, which is directed at parents and distributed through schools and childcare programs, had circulation of approximately 1.2 million in fiscal 2005. These magazines carry paid advertising, advertising for Scholastic’s other products and paid advertising for clients that sponsor customized programs.

Other
Also included in this segment are: Scholastic In-School Marketing, which develops sponsored educational materials and supplementary classroom programs in partnership with corporations, government agencies and nonprofit organizations; Back to Basics Toys®, acquired in fiscal 2004, a direct-to-home catalog business specializing in children’s toys; and Quality Education Data, which develops and markets databases and provides research and analysis focused on teachers, schools and education.

I N T E R N A T I O N A L
(18.7% of fiscal 2005 revenues)

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

Scholastic has long-established operations in Canada, the United Kingdom, Australia, New Zealand and Southeast Asia and also has newer operations in Argentina, China, India, Ireland and Mexico. Scholastic’s operations in Canada, the United Kingdom and Australia generally mirror its United States business model. Each of these international operations has original trade and educational publishing programs, distributes children’s books, software and other materials through school-based book clubs, school-based book fairs, trade channels and direct-to-home continuity programs, distributes magazines and offers on-line services. Each of these operations has established its own export and foreign rights licensing programs and is a licensee of book tie-ins for major media properties. Original books published by each of these operations have received awards of excellence in children’s literature. In Southeast Asia, the Company primarily publishes and distributes reference products and provides services, generally under the Grolier name.

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Canada
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books, is the largest school-based book club and school-based book fair operator in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has produced quality Canadian-authored books and educational materials. Grolier Canada is a leading operator of direct-to-home continuity programs in Canada.

United Kingdom
Scholastic UK, founded in 1964, is the largest school-based book club and school-based book fair operator and a leading children’s publisher in the United Kingdom. Scholastic UK also publishes magazines for teachers and supplemental educational materials, including professional books. Grolier UK is a leading operator of direct-to-home continuity programs in the United Kingdom.

In fiscal 2003, the Company entered into a joint venture with The Book People Ltd. (together with its affiliates, “The Book People”), a direct marketer of books in the United Kingdom, to distribute books to the home under the Red House® name and through schools under the School Link™ name.

Australia
Scholastic Australia, founded in 1968, is the leading publisher and distributor of children’s educational materials in Australia and has the largest school-based book club and book fair operation in the country, reaching approximately 90% of the country’s primary schools.

New Zealand
Scholastic New Zealand, founded in 1964, is the largest children’s book publisher and the leading book distributor to schools in New Zealand. Through its school-based book clubs and book fairs, Scholastic New Zealand reaches approximately 90% of the country’s primary schools.

Asia
The Company’s Asia operations primarily sell English language reference materials and local language product through a network of over 1,500 independent door-to-door sales representatives in India, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand. In India, the Company also operates school-based book clubs and book fairs and publishes original titles in the English and Hindi languages. In the Philippines, the Company also operates school-based book fairs, and in Malaysia, the Company operates school-based book clubs and continuity programs.

Latin America
In Latin America, the Company has operations in Mexico, Argentina and Puerto Rico. These businesses principally distribute books and educational material published by Scholastic, as well as merchandise from other publishers, through school-based book clubs and book fairs. In Puerto Rico, Scholastic distributes Spanish language reference materials through a network of independent door-to-door sales representatives.

Foreign Rights and Export
The Company licenses the foreign-language rights to selected Scholastic titles to other publishing companies around the world in over 40 languages. The Company’s export business sells Scholastic books and products in regions of the world not otherwise serviced by Scholastic subsidiaries.

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M A N U F A C T U R I N G  A N D  D I S T R I B U T I O N
The Company’s books, magazines, software and other materials and products are manufactured by third parties under contracts entered into through arm’s-length negotiations or competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volume in exchange for favorable pricing terms. Paper is purchased from third party sources. The Company does not anticipate any difficulty in continuing to satisfy its manufacturing and paper requirements.

In the United States, the Company mainly processes and fulfills school-based book club, trade, curriculum publishing, reference and non-fiction products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. Magazine orders are processed at the Jefferson City facility and are shipped directly from printers. In fiscal 2003, the Company acquired a distribution facility in Maumelle, Arkansas (the “Maumelle Facility”), which serves as the Company’s primary packaging and fulfillment center for its continuity programs. In connection with its trade business, the Company generally outsources certain services, including invoicing, billing, returns processing and collection services, and also ships product directly from printers to customers. School-based book fair orders are fulfilled through a network of warehouses across the country. The Company’s international school-based book club, school-based book fair, trade, continuity businesses and educational operations use similar distribution systems.

S E A S O N A L I T Y
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 the highest in the first quarter. The Company experiences a substantial loss from operations in the first quarter of each fiscal year.

C O M P E T I T I O N
The markets for children’s educational and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion, customer service and distribution channels. Competitors include numerous other book, textbook, library, reference material and supplementary text publishers, distributors and other resellers (including over the Internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, numerous producers of television, video and film programming (many of which are substantially larger than the Company), television networks and cable networks, publishers of computer software and distributors of products and services on the Internet. In the United States, competitors also include regional and local school-based book fair operators, including bookstores. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels.

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C O P Y R I G H T  A N D  T R A D E M A R K S
SCHOLASTIC is a registered trademark in the United States and in a number of countries where the Company conducts business. Scholastic Inc., the Corporation’s principal operating subsidiary in the United States, has registered and/or has pending applications to register in the United States its trademarks for the names of each of its domestic book clubs, the titles of its magazines and the names of all its core curriculum programs. The Corporation’s international subsidiaries have also registered trademarks in the name of Scholastic Inc. for the names of their respective book clubs and magazines in their respective countries. Although individual book titles are not subject to trademark protection, Scholastic Inc. has registered and/or has pending applications to register trademarks in the United States and in a number of countries for the names of certain series of books and consumer products, such as The Magic School Bus and Clifford The Big Red Dog. GROLIER is a registered trademark in the United States and a number of countries where the Company conducts business. All of the Company’s publications, including books, magazines and software, are subject to copyright protection. Where applicable, the Company consistently files copyright registrations for its magazines, books and software in the name of Scholastic Inc. or one of its subsidiaries. Copyrights and trademarks are vigorously defended by the Company, and as necessary, outside counsel may be retained to assist in such protection.

E M P L O Y E E S
At May 31, 2005, the Company employed approximately 7,300 people in full-time jobs and 1,000 people in part-time jobs in the United States and approximately 2,500 additional people internationally. The number of part-time employees fluctuates during the year because significant portions of the Company’s business are closely correlated with the school year. The Company believes that relations with its employees are good.

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Executive Officers
Each of the following individuals serves as an executive officer of Scholastic until the first meeting of the Corporation’s Board of Directors following the Annual Meeting of Stockholders of Scholastic Corporation in September 2005 and until their successors have been elected or appointed and qualified or until such officer’s earlier resignation or removal.

 

 

 

 

 






Name

Age

 

Employed by
Registrant Since

Position(s) for Past Five Years






Richard Robinson

68

 

1962

Chairman of the Board (since 1982), President (since1974) and Chief Executive Officer (since 1975).






Mary A. Winston

43

 

2004

Executive Vice President and Chief Financial Officer (since 2004). Prior to joining the Company, Vice President and Controller (2003–2004) and Vice President and Treasurer (2002–2003) of Visteon Corporation, a global automotive supplier; and between 1995 and 2002, various senior financial management roles at Pfizer and Warner-Lambert, which merged in June 2000, including Vice President, Global Financial Operations for the pharmaceutical business (2000–2002) and Vice President, Finance and Administration (1998–2000).






Deborah A. Forte

51

 

1983

Executive Vice President (since 1996), President, Scholastic Entertainment Inc. (since 2001) and Division Head, Scholastic Entertainment Inc. (1995–2001).






Lisa Holton

43

 

2005

Executive Vice President and President, Book Fairs and Trade (since 2005). Prior to joining the Company, Senior Vice President, Publisher, Global Disney Children’s Books (2001–2005) and Vice President and Group Publisher of Disney Children’s Books(1999–2001).






Linda B. Keene

53

 

2004

Executive Vice President, Marketing (since 2004); and prior to joining the Company, a director of Scholastic Corporation (1999–2004), principal of Waterford Marketing Group, an independent consulting agency for marketing and organizational issues(2001–2004), and Vice President of Market Development for American Express Financial Advisors (1994–2001).






Margery W. Mayer

53

 

1990

Executive Vice President (since 1990), President, Scholastic Education (since 2002) and Executive Vice President, Learning Ventures (1998–2002).






(SCHOLASTIC LOGO)

10


 

 

 

 

 






Name

Age

 

Employed by
Registrant Since

Position(s) for Past Five Years






Judith A. Newman

47

 

1993

Executive Vice President (since 2005) and President, Book Clubs and Scholastic At Home (since 2004), and Senior Vice President (1997–2005), Book Clubs (1997–2004).






Seth Radwell

42

 

2005

Executive Vice President and President, e-Scholastic (since 2005). Prior to joining the Company, President, Marketing & Editorial Group, Bookspan (2002–2005); and Chief Executive Officer and President, Doubleday Interactive (1999–2001).






Hugh Roome

53

 

1991

Executive Vice President (since 1996), President, International Group (since 2001), Executive Vice President, International (2000-2001) and Executive Vice President, Magazine Group (1996-2000).






Charles B. Deull

45

 

1995

Senior Vice President (since 1995), General Counsel (since 1999), Senior Vice President, Legal and Business Affairs (1995–1999) and Corporate Secretary (since 1996).






Ernest B. Fleishman

68

 

1989

Senior Vice President, Education and Corporate Relations (since 1989).






Beth Ford

41

 

2000

Senior Vice President, Global Operations and Information Technology (since 2002), Senior Vice President, Global Operations (2000–2002); and prior to joining the Company, Director, Supply Chain at Pepsi Bottling Group/Pepsico (1997–2000).






Karen A. Maloney

48

 

1997

Senior Vice President, Corporate Finance and Chief Accounting Officer (since 2004); Vice President and Corporate Controller (1998-2004).






Heather J. Myers

40

 

2003

Senior Vice President, Strategic Planning & Business Development (since 2003). Prior to joining the Company, Independent Media & Entertainment Consultant (2002–2003); and from 1995–2001, various positions at Vivendi Universal (formerly Seagram Company Ltd.), including Executive Vice President/ General Manager, Universal Global e, Universal Music Group (1999–2001).






(SCHOLASTIC LOGO)

11


 

Available Information


The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are accessible at the Investor Relations portion of its website, www.scholastic.com, by clicking on the “SEC Filings” tab and are available, without charge, as soon as reasonably practicable after such reports are electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The Company also posts on the “Calendar and Presentations” portion of its website the dates of its upcoming financial press releases, telephonic investor calls and investor presentations at least five days prior to the event. The Company’s investor calls are open to the public and remain available through the Company’s website for at least one year thereafter.

 

 

Item 2   |

Properties

The Company maintains its principal offices in the metropolitan New York area, where it leases approximately 600,000 square feet of space. The Company also owns or leases approximately 1.6 million square feet of office and warehouse space for its primary warehouse and distribution facility located in the Jefferson City, Missouri area. In addition, the Company owns or leases approximately 2.7 million square feet of office and warehouse space in over 80 facilities in the United States, principally for Scholastic Book Fairs.

In fiscal 2003, the Company acquired the Maumelle Facility consisting of a 500,000 square foot main floor and a 246,000 square foot mezzanine. This facility serves as the Company’s primary packaging and fulfillment center for its continuity programs.

Additionally, the Company owns or leases approximately 1.7 million square feet of office and warehouse space in over 100 facilities in Canada, the United Kingdom, Australia, New Zealand, Southeast Asia and elsewhere around the world for its international businesses.

The Company considers its properties adequate for its current needs. With respect to the Company’s leased properties, no difficulties are anticipated in negotiating renewals as leases expire or in finding other satisfactory space, if current premises become unavailable. For further information concerning the Company’s obligations under its leases, see Notes 1 and 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”

 

 

Item 3   |

Legal Proceedings

Various claims and lawsuits arising in the normal course of business are pending against the Company. The results of these proceedings are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

 

Item 4   |

Submission of Matters to a Vote of Security Holders

During the fourth quarter of the fiscal year covered by this report, no matter was submitted to the vote of security holders, through the solicitation of proxies or otherwise.

(SCHOLASTIC LOGO)

12


 

Part II



 

 

Item 5   |

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Scholastic Corporation’s common stock, par value $0.01 per share (the “Common Stock”), is traded on the NASDAQ National Market System under the symbol SCHL. Scholastic Corporation’s Class A Stock, par value $0.01 per share (the “Class A Stock”), is convertible into Common Stock on a share-for-share basis. There is no public trading market for the Class A Stock. The table below sets forth, for the periods indicated, the quarterly high and low selling prices on the NASDAQ National Market System for the Common Stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For fiscal years ended May 31,

 





 

 

2005

 

2004

 







 

 

High

 

 

Low

 

 

High

 

 

Low

 

 











First Quarter

 

 

$

30.38

 

 

 

$

25.90

 

 

 

$

32.68

 

 

 

$

26.00

 

 

Second Quarter

 

 

 

32.98

 

 

 

 

28.34

 

 

 

 

35.16

 

 

 

 

28.00

 

 

Third Quarter

 

 

 

37.75

 

 

 

 

31.71

 

 

 

 

35.74

 

 

 

 

30.64

 

 

Fourth Quarter

 

 

 

40.04

 

 

 

 

33.08

 

 

 

 

32.73

 

 

 

 

26.07

 

 























Scholastic Corporation has not paid any cash dividends since its initial public offering in February 1992 and has no current plans to pay any dividends on the Class A Stock or the Common Stock. In addition, certain of the Company’s credit facilities restrict the payment of dividends. See Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” for further information.

The number of holders of record of Class A Stock and Common Stock as of July 22, 2005 were 3 and approximately 14,000, respectively.

(SCHOLASTIC LOGO)

13


 

 

Item 6   |

Selected Financial Data


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

For fiscal years ended May 31,

 


















 

 

2005

 

2004

 

2003

 

2002

 

2001

 













 

 

 

 

 

Restated

(1)

Restated

(1)

Restated

(1)

Restated

(1)














Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

2,079.9

 

$

2,233.8

 

$

1,958.3

 

$

1,917.0

 

$

1,962.3

 

Cost of goods sold(2)(3)

 

 

970.5

 

 

1,086.8

 

 

882.1

 

 

852.1

 

 

972.6

 

Selling, general and administrative expenses(2)

 

 

849.2

 

 

870.1

 

 

813.1

 

 

765.1

 

 

766.8

 

Bad debt expense(2)

 

 

62.2

 

 

90.3

 

 

72.3

 

 

68.7

 

 

75.5

 

Other operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

63.1

 

 

62.1

 

 

52.1

 

 

41.4

 

 

46.5

 

Special severance charges(4)

 

 

 

 

3.3

 

 

10.9

 

 

 

 

 

Litigation and other charges(5)

 

 

 

 

 

 

1.9

 

 

1.2

 

 

 

Operating income

 

 

134.9

 

 

121.2

 

 

125.9

 

 

188.5

 

 

100.9

 

Other income (expense)(6)

 

 

 

 

8.0

 

 

2.9

 

 

(2.0

)

 

 

Interest income

 

 

1.0

 

 

0.4

 

 

0.3

 

 

0.3

 

 

0.7

 

Interest expense

 

 

36.2

 

 

40.0

 

 

38.6

 

 

38.3

 

 

48.6

 

Earnings before Cumulative effect of accounting change

 

 

64.3

 

 

57.8

 

 

58.8

 

 

95.7

 

 

33.7

 

Cumulative effect of accounting change (net of income taxes)(7)

 

 

 

 

 

 

 

 

(5.2

)

 

 

Net income

 

 

64.3

 

 

57.8

 

 

58.8

 

 

90.5

 

 

33.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share before Cumulative effect of accounting change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

$

1.47

 

$

1.50

 

$

2.60

 

$

0.97

 

Diluted

 

$

1.58

 

$

1.44

 

$

1.46

 

$

2.44

 

$

0.94

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

$

1.47

 

$

1.50

 

$

2.46

 

$

0.97

 

Diluted

 

$

1.58

 

$

1.44

 

$

1.46

 

$

2.31

 

$

0.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

40.0

 

 

39.4

 

 

39.1

 

 

36.7

 

 

34.7

 

Weighted average shares outstanding – diluted

 

 

40.8

 

 

40.1

 

 

40.1

 

 

40.1

 

 

36.1

 


















Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

564.5

 

$

467.4

 

$

381.9

 

$

449.6

 

$

378.0

 

Cash and cash equivalents

 

 

110.6

 

 

17.8

 

 

58.6

 

 

10.7

 

 

13.8

 

Total assets

 

 

1,931.4

 

 

1,831.8

 

 

1,863.0

 

 

1,694.9

 

 

1,559.8

 

Long-term debt (excluding capital leases)

 

 

476.5

 

 

492.5

 

 

482.2

 

 

525.8

 

 

585.3

 

Long-term capital lease obligations

 

 

63.4

 

 

63.8

 

 

58.2

 

 

56.8

 

 

55.9

 

Total capital lease obligations

 

 

74.4

 

 

74.0

 

 

66.8

 

 

61.7

 

 

60.2

 

Total stockholders’ equity

 

 

937.1

 

 

845.4

 

 

762.6

 

 

708.8

 

 

486.6

 


















 

 

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


(1)

In connection with a comprehensive review of its lease accounting practices, the Company revised its accounting for certain leases to appropriately classify certain leases as capital leases and to reflect future payment escalation clauses in determining rent expense. As a result, stockholders’ equity as of May 31, 2000 was reduced by $4.7, the cumulative effect of the after-tax impact of these changes. In addition, net income for the fiscal years ended May 31, 2004, 2003, 2002 and 2001 increased (decreased) by $(0.6), $0.2, $(3.0), and $(2.5), respectively; and diluted earnings per share for the fiscal years ended May 31, 2004, 2003, 2002 and 2001 increased (decreased) by $(0.02), $0.01, $(0.07), and $(0.07), respectively.

 

 

(2)

In fiscal 2004, the Company recorded pre-tax charges of $25.4, or $0.41 per diluted share, in connection with a review of its continuity business. These charges have been recorded primarily as components of Cost of goods sold of $6.8; Selling, general and administrative expenses of $15.2; and Bad debt expense of $2.0. In fiscal 2005, the Company recorded additional pre-tax charges of $3.8, or $0.06 per diluted share, primarily related to severance costs due to the review of its continuity business, which have been recorded as a component of Selling, general and administrative expenses.

 

 

(3)

In fiscal 2001, the Company decided not to update Scholastic Literacy Place®, which resulted in a pre-tax special charge of $72.9, or $1.20 per diluted share, recorded in Cost of goods sold.

 

 

(4)

In fiscal 2004 and 2003, the Company recorded pre-tax Special severance charges of $3.3, or $0.05 per diluted share, and $10.9, or $0.18 per diluted share, respectively, relating to a reduction in its work force announced in May 2003 but implemented in those periods.

 

 

(5)

The fiscal 2003 pre-tax charge of $1.9, or $0.03 per diluted share, relates to the settlement of a securities lawsuit initiated in 1997. The fiscal 2002 pre-tax charge of $1.2, or $0.02 per diluted share, relates to the settlement of a lawsuit initiated in 1995.

 

 

(6)

In fiscal 2004, the Company recorded a pre-tax net gain of $8.0, or $0.13 per diluted share, in connection with the early termination of a sublease by one of its tenants. In fiscal 2003, the Company sold a portion of an equity investment, resulting in a pre-tax gain of $2.9, or $0.05 per diluted share. In fiscal 2002, the Company wrote off an equity investment, resulting in a pre-tax loss of $2.0, or $0.03 per diluted share.

 

 

(7)

In fiscal 2002, the Company adopted Statement of Position No. 00-2, “Accounting by Producers and Distributors of Films,” which resulted in an after-tax charge of $5.2, or $0.13 per diluted share, recorded as a Cumulative effect of accounting change.

(SCHOLASTIC LOGO)

14



 

 

Item 7   |

Management’s Discussion and Analysis of Financial Condition and Results of Operations


 

General


Scholastic is the world’s largest publisher and distributor of children’s books and a leader in educational technology. 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); and International. 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.

The following discussion and analysis of the Company’s financial position should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.”

 

Overview and Outlook


Fiscal 2005 revenues decreased 6.9% from fiscal 2004 to approximately $2.1 billion. Lower fiscal 2005 revenues in the Company’s Children’s Book Publishing and Distribution segment, primarily due to the prior year release of Harry Potter and the Order of the Phoenix and lower revenues in the continuity business, were partially offset by revenue growth in the Educational Publishing segment, led by strong sales of educational technology products, including the Company’s READ 180 reading intervention program, and revenue growth in the International segment.

Operating income increased by 11.3% to $134.9 million in fiscal 2005, principally due to higher profits in the Educational Publishing, International and Media, Licensing and Advertising segments. These increases were partially offset by lower profits in the Children’s Book Publishing and Distribution segment.

The Company’s focus is on expanding margins, while growing revenues. For fiscal 2006, the Company’s goals are based on: (1) revenue and profit growth in the Children’s Book Publishing and Distribution segment, built on: revenue and profit growth in the Company’s trade business driven principally by the release of Harry Potter and the Half-Blood Prince; revenue growth in school-based book clubs and book fairs; and profit growth on relatively flat revenue in the continuity business; (2) growth in revenue and profit in the Educational Publishing segment, led by sales of educational technology products; (3) strengthening the Media, Licensing and Advertising and International segments for future growth; and (4) achieving operating improvements and efficiencies, with a continued focus on generating free cash flow.

(SCHOLASTIC LOGO)

15



 

Critical Accounting Policies and Estimates


In connection with a comprehensive review of its lease accounting practices, the Company determined that certain leases previously classified as operating leases should have been classified as capital leases and that the calculation of rent expense from certain other operating leases did not properly reflect future payment escalation clauses. As a result, the Company has revised its accounting for these leasing transactions and restated its previously issued annual and interim consolidated financial statements. Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” provides a comprehensive description of the adjustments recorded in connection with the restatement.

General:
The Company’s discussion and analysis of its financial condition and results of operations is based upon the Company’s consolidated financial statements, which 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 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 ongoing 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.

The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:

Revenue recognition:
The Company’s revenue recognition policies for its principal businesses are as follows:

School - Based Book Clubs Revenue from school-based book clubs is recognized upon shipment of the products.

School - Based Book Fairs Revenue from school-based book fairs is recognized ratably as each book fair occurs.

Continuity Programs The Company operates continuity programs whereby customers generally place a single order and receive multiple shipments of books and other products over a period of time. Revenue from continuity programs is recognized at the time of shipment or, in applicable cases, upon customer acceptance. Reserves for estimated returns are established at that time and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns. Actual returns could differ from the Company’s estimate. A one percentage point change in the estimated reserve for returns rate by product and media would result in an increase or decrease in operating income of approximately $0.3 million.

Trade Revenue from the sale of children’s books for distribution in the retail channel primarily is recognized at the time of shipment, which generally is when title transfers to the customer or when the product is on sale and available to the public. A reserve for estimated returns is established at that time and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.

(SCHOLASTIC LOGO)

16


Actual returns could differ from the Company’s estimate. A one percentage point change in the estimated reserve for returns rate would result in an increase or decrease in operating income of approximately $1.0 million.

Educational Publishing For shipments to schools, revenue is recognized on passage of title, which generally occurs upon receipt by the customer. Shipments to depositories are on consignment. Revenue is recognized based on actual shipments from the depositories to the schools. For certain software-based products, the Company offers new customers installation and training. In such cases, revenue is recognized when installation and training are complete.

Toy Catalog Revenue from the sale of children’s toys to the home through catalogs is recognized at the time of shipment, which is generally when title transfers to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.

Film Production and Licensing Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.

Magazines Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.

Magazine Advertising Revenue is recognized when the magazine is on sale and available to the subscribers.

Scholastic In-School Marketing Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service.

For the fiscal years ended May 31, 2005, 2004 and 2003, no significant changes have been made to the underlying assumptions related to the revenue recognition policy or the methodology applied.

Accounts receivable:
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for returns are based on historical return rates and sales patterns.
Allowances for doubtful accounts are established through the evaluation of accounts receivable agings and prior collection experience to estimate the ultimate collectability of these receivables. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable agings, would result in an increase or decrease in operating income of approximately $0.7 million.

Inventories:
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage rates and sales patterns of its products.

Deferred promotion costs:
Deferred promotion costs represent direct mail and telemarketing promotion costs incurred to acquire customers in the Company’s continuity and magazine businesses. Promotional costs are deferred when incurred and amortized in the proportion that current revenues bear to estimated total revenues. The Company regularly evaluates the operating performance of the promotions over their life cycle based on historical and forecasted demand and adjusts the carrying value accordingly. Except as discussed above, all other advertising costs are expensed as incurred. A one

(SCHOLASTIC LOGO)

17


percentage point change in estimated direct mail and telemarketing revenues would not materially affect operating performance.

Leases:
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting For Leases,” as amended (“SFAS No. 13”). When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in SFAS No. 13, the lease then qualifies as a capital lease.

Capital leases are capitalized at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Prepublication costs:
The Company capitalizes the art, prepress, editorial and other costs incurred in the creation of the master copy of a book or other media (the “prepublication costs”). Prepublication costs are amortized on a straight-line basis over a three to seven year period based on expected future revenues. The Company regularly reviews the recoverability of the capitalized costs.

Royalty advances:
The Company records a reserve for the recoverability of its outstanding advances to authors based primarily upon historical earndown experience. Royalty advances are expensed as related revenues are earned or when future recovery appears doubtful.

Goodwill and other intangibles:
Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise. With regard to goodwill, these reviews require the Company to estimate the fair value of its identified reporting units. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the units, which is compared to the carrying value of the net assets of the reporting units. With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value.

Other noncurrent liabilities:
All of the rate assumptions discussed below impact the Company’s calculations of its pension and post-retirement obligations. The rates applied by the Company are based on the portfolios’ past average rates of return and discussions with actuaries. Any change in market performance, interest rate performance, assumed health care costs trend rate, or compensation rates could result in significant changes in the pension and post-retirement obligations.

Pension obligations Scholastic Corporation and certain of its subsidiaries have defined benefit pension plans covering the majority of their employees who meet certain eligibility requirements. The Company follows SFAS No. 87, “Employers’ Accounting for Pensions,” in calculating the existing benefit obligations and net cost under the plans. These calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets, and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings

(SCHOLASTIC LOGO)

18


from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. A one percentage point change in the discount rate and expected long-term return on plan assets would result in an increase or decrease in operating income of approximately $0.1 million and $1.2 million, respectively. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment period.

Other post-retirement benefits Scholastic Corporation provides post-retirement benefits, consisting of healthcare and life insurance benefits, to retired United States-based employees. A majority of these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. The post-retirement medical plan benefits are funded on a pay-as-you-go basis, with the Company paying a portion of the premium and the employee paying the remainder. The Company follows SFAS No. 106, “Employers’ Accounting for Post-Retirement Benefits Other than Pensions,” in calculating the existing benefit obligation, which is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the expected and accumulated benefit obligations and the service and interest cost components of net periodic post-retirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long term expected increase in medical claims. A one percentage point change in the discount rate and the medical trend rate would result in an increase or decrease in operating income of approximately $0.1 million and $0.2 million, respectively.

Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Corporation’s Board of Directors. The Audit Committee has reviewed the Company’s disclosure relating to the policies described in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(SCHOLASTIC LOGO)

19



 

Results of Operations



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ amounts in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For fiscal years ended May 31,




 

 

2005

 

2004

 

2003

 









 

 

 

 

 

 

 

 

Restated(1)

 

Restated(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

%(2)

 

$

 

%(2)

 

$

 

%(2)

 















Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Children’s Book Publishing and Distribution

 

 

1,152.5

 

 

55.4

 

 

1,358.6

 

 

60.8

 

 

1,189.9

 

 

60.8

 

Educational Publishing

 

 

404.6

 

 

19.5

 

 

369.1

 

 

16.5

 

 

325.9

 

 

16.6

 

Media, Licensing and Advertising

 

 

133.1

 

 

6.4

 

 

136.4

 

 

6.1

 

 

123.5

 

 

6.3

 

International

 

 

389.7

 

 

18.7

 

 

369.7

 

 

16.6

 

 

319.0

 

 

16.3

 





















Total revenues

 

 

2,079.9

 

 

100.0

 

 

2,233.8

 

 

100.0

 

 

1,958.3

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (exclusive of depreciation)

 

 

970.5

 

 

46.7

 

 

1,080.0

 

 

48.3

 

 

882.1

 

 

45.0

 

Cost of goods sold – Continuity charges(3)

 

 

 

 

 

 

6.8

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

845.4

 

 

40.6

 

 

854.9

 

 

38.3

 

 

813.1

 

 

41.5

 

Selling, general and administrative expenses – Continuity charges(3)

 

 

3.8

 

 

0.2

 

 

15.2

 

 

0.7

 

 

 

 

 

Bad debt expense

 

 

62.2

 

 

3.0

 

 

88.3

 

 

4.0

 

 

72.3

 

 

3.7

 

Bad debt expense – Continuity charges(3)

 

 

 

 

 

 

2.0

 

 

0.1

 

 

 

 

 

Depreciation and amortization

 

 

63.1

 

 

3.0

 

 

62.1

 

 

2.8

 

 

52.1

 

 

2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special severance charges(4)

 

 

 

 

 

 

3.3

 

 

0.1

 

 

10.9

 

 

0.6

 

Litigation and other charges(5)

 

 

 

 

 

 

 

 

 

 

1.9

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

134.9

 

 

6.5

 

 

121.2

 

 

5.4

 

 

125.9

 

 

6.4

 

Other income(6)

 

 

 

 

 

 

8.0

 

 

0.4

 

 

2.9

 

 

0.2

 

Interest income

 

 

1.0

 

 

 

 

0.4

 

 

 

 

0.3

 

 

 

Interest expense

 

 

36.2

 

 

1.7

 

 

40.0

 

 

1.8

 

 

38.6

 

 

2.0

 

Earnings before income taxes

 

 

99.7

 

 

4.8

 

 

89.6

 

 

4.0

 

 

90.5

 

 

4.6

 

Net income

 

 

64.3

 

 

3.1

 

 

57.8

 

 

2.6

 

 

58.8

 

 

3.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1.61

 

 

 

 

 

1.47

 

 

 

 

 

1.50

 

 

 

 

Diluted

 

 

1.58

 

 

 

 

 

1.44

 

 

 

 

 

1.46

 

 

 

 


 

 


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


(1)

The Company has restated its previously issued annual and interim consolidated financial statements to appropriately classify certain leases as capital leases and reflect future payment escalation clauses in determining rent expense for certain operating leases. See “Critical Accounting Policies and Estimates” and Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” for a comprehensive description of the adjustments recorded in connection with the restatement.

 

 

(2)

Represents percentage of total revenues.

 

 

(3)

In fiscal 2004, the Company recorded pre-tax charges of $25.4, or $0.41 per diluted share, in connection with a review of its continuity business. These charges have been recorded primarily as components of: Cost of goods sold; Selling, general and administrative expenses; and Bad debt expense. In fiscal 2005, the Company recorded additional pre-tax charges of $3.8, or $0.06 per diluted share, primarily related to severance costs due to the review of its continuity business, which have been recorded as a component of Selling, general and administrative expenses.

 

 

(4)

In fiscal 2004 and 2003, the Company recorded pre-tax Special severance charges of $3.3, or $0.05 per diluted share, and $10.9, or $0.18 per diluted share, respectively, relating to a reduction in its work force announced in May 2003 but implemented in those periods.

 

 

(5)

The fiscal 2003 pre-tax charge of $1.9, or $0.03 per diluted share, relates to the settlement of a securities lawsuit initiated in 1997.

 

 

(6)

In fiscal 2004, the Company recorded a pre-tax net gain of $8.0, or $0.13 per diluted share, in connection with the early termination of a sublease by one of its tenants. In fiscal 2003, the Company sold a portion of an equity investment, resulting in a pre-tax gain of $2.9, or $0.05 per diluted share.

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20



 

Results of Operations – Consolidated


Revenues for fiscal 2005 decreased 6.9%, or $153.9 million, to $2,079.9 million, as compared to $2,233.8 million in fiscal 2004. This decrease related primarily to $206.1 million in lower revenues from the Children’s Book Publishing and Distribution segment as compared to fiscal 2004, principally due to the fiscal 2004 release of Harry Potter and the Order of the Phoenix, the fifth book in the series. The decrease was partially offset by higher revenues from the Educational Publishing and International segments of $35.5 million and $20.0 million, respectively. Revenues for fiscal 2004 increased 14.1%, or $275.5 million, as compared to $1,958.3 million in fiscal 2003, due to revenue growth in each of the Company’s four operating segments, led by the Children’s Book Publishing and Distribution segment, which grew by $168.7 million, primarily from higher Harry Potter revenues.

Cost of goods sold as a percentage of revenues decreased to 46.7% in fiscal 2005, from 48.6% in the prior year. This decrease was primarily due to higher costs in fiscal 2004 related to the Harry Potter release. In fiscal 2004, Cost of goods sold as a percentage of revenues increased as compared to 45.0% in fiscal 2003, primarily due to the Harry Potter release. In fiscal 2004, Cost of goods sold included Continuity charges of $6.8 million, or 0.3% of revenues.

Selling, general and administrative expenses as a percentage of revenue in fiscal 2005 increased to 40.8% from 39.0% in the prior fiscal year, primarily due to the revenue benefit of the fiscal 2004 Harry Potter release without a corresponding increase in expense. In fiscal 2004, Selling, general and administrative expenses as a percentage of revenues decreased from 41.5% in fiscal 2003, primarily due to the Harry Potter release in fiscal 2004. In fiscal 2005 and fiscal 2004, Selling, general and administrative expenses included Continuity charges of $3.8 million, or 0.2% of revenues, and $15.2 million, or 0.7% of revenues, respectively.

Bad debt expense for fiscal 2005 decreased to $62.2 million, or 3.0% of revenues, compared to $90.3 million, or 4.1% of revenues, in the prior fiscal year, primarily related to lower bad debt in the Company’s continuity programs, which are included in the Children’s Book Publishing and Distribution segment. In fiscal 2004, Bad debt expense increased by $18.0 million, compared to $72.3 million, or 3.7% of revenues, in fiscal 2003. This increase was primarily attributable to higher bad debt expense from the Company’s continuity business in fiscal 2004. Bad debt expense in fiscal 2004 included Continuity charges of $2.0 million.

Depreciation and amortization expense for fiscal 2005 increased to $63.1 million, compared to $62.1 million in fiscal 2004. Depreciation and amortization expense for fiscal 2004 increased by $10.0 million, as compared to $52.1 million in fiscal 2003, primarily due to the completion of various information technology projects in fiscal 2003.

On May 28, 2003, the Company announced a reduction in its global work force of approximately 400 positions. This decision resulted in a Special severance charge of $10.9 million in fiscal 2003. In connection with that announcement, Special severance charges totalling $3.3 million were recorded in fiscal 2004 for employees notified in that fiscal year.

The resulting operating income for fiscal 2005 increased $13.7 million, or 11.3%, to $134.9 million, or 6.5% of revenues, compared to $121.2 million, or 5.4% of revenues, in the prior fiscal year. Fiscal 2005 and fiscal 2004 results included the Continuity charges of approximately $4 million and $25 million, respectively. Improved operating income for fiscal 2005 resulted primarily from $22.4 million in higher profits from the Educational Publishing segment, partially offset by a decrease of $11.1 million in the Children’s Book Publishing and Distribution segment as compared to the prior fiscal year, which reflected the release of Harry Potter and the Order of the Phoenix. In fiscal 2004, operating income decreased by $4.7 million, or 3.7%, including the Continuity charges of

(SCHOLASTIC LOGO)

21


approximately $25 million, from $125.9 million, or 6.4% of revenues, in fiscal 2003.

In fiscal 2004, the Company recorded $8.0 million in Other income, representing the net gain on the early termination of a sublease by one of its tenants. Other income was $2.9 million in fiscal 2003, representing a gain from the sale of a portion of an interest in a French publishing company.

Interest expense for fiscal 2005 decreased $3.8 million to $36.2 million, as compared to $40.0 million in fiscal 2004. This decrease was primarily due to lower debt levels. Interest expense for fiscal 2004 increased $1.4 million, as compared to $38.6 million in fiscal 2003.

The Company’s effective tax rates were 35.5%, 35.5% and 35.0% of earnings before taxes for fiscal 2005, 2004 and 2003, respectively.

Net income increased 11.2% to $64.3 million, or 3.1% of revenues, in fiscal 2005, from $57.8 million, or 2.6% of revenues, in fiscal 2004. Net income decreased modestly in fiscal 2004 from $58.8 million, or 3.0% of revenues, in fiscal 2003. The basic and diluted earnings per share of Class A Stock and Common Stock were $1.61 and $1.58, respectively, in fiscal 2005, $1.47 and $1.44, respectively, in fiscal 2004, and $1.50 and $1.46, respectively, in fiscal 2003.

 

Results of Operations – Segments


In fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by the Media, Licensing and Advertising segment that are sold through channels included in the Children’s Book Publishing and Distribution segment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the current and prior year inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in the Media, Licensing and Advertising segment with an offsetting decrease in gross margin and profits in the Children’s Book Publishing and Distribution segment.

C H I L D R E N S   B O O K  P U B L I S H I N G  A N D   D I S T R I B U T I O N
The Company’s Children’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

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Revenue

 

$

1,152.5

 

$

1,358.6

 

$

1,189.9

 

Operating profit(1)

 

 

93.5

(2)

 

104.6

(2)

 

123.7

 












Operating margin(1)

 

 

8.1

%

 

7.7

%

 

10.4

%


 

 

(1)

Reflects the Segment Reallocation.

(2)

Operating profit includes the portion of the Continuity charges related to this segment of approximately $4 in fiscal 2005 and approximately $22 in fiscal 2004.

Children’s Book Publishing and Distribution revenues accounted for 55.4% of the Company’s revenues in fiscal 2005 and 60.8% in both fiscal 2004 and fiscal 2003. In fiscal 2005, segment revenues decreased 15.2%, or $206.1 million, to $1,152.5 million from $1,358.6 million in fiscal 2004. This decrease relates primarily to a decline in the Company’s trade business of $142.2 million. Continuity program revenues decreased $73.8 million, as compared to the prior fiscal year, consistent with the Company’s previously announced plan to focus on its more productive continuity customers. These revenue decreases were partially offset by an increase of $17.0 million in revenues from the school-based book fairs business, as compared to the prior fiscal year.

In fiscal 2004, segment revenues increased 14.2%, or $168.7 million, from $1,189.9 million in fiscal 2003. This increase was primarily due to higher trade revenues of approximately $110 million driven by the release of the fifth Harry Potter book, Harry Potter and the Order of the Phoenix, as well as higher revenues from school-based book club and school-based book fairs, which increased $53.5 million and $18.0 million, respectively. These increases were partially offset by a decline in

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continuity program revenues of $15.5 million as compared to the prior fiscal year.

School-based book club revenues accounted for 34.4% of Children’s Book Publishing and Distribution revenues in fiscal 2005, compared to 29.7% in fiscal 2004 and 29.5% in fiscal 2003. In fiscal 2005, school-based book club revenues decreased by 1.8%, or $7.1 million, to $396.9 million, as compared to fiscal 2004, primarily due to lower revenue per order. In fiscal 2004, school-based book club revenues improved by 15.3%, or $53.5 million, to $404.0 million, as compared to fiscal 2003, primarily due to an increase in the number of orders aided by the July 2003 acquisition of selected assets of Troll Holdings, Inc., formerly a national school-based book club operator and publisher (“Troll”).

Revenues from school-based book fairs accounted for 31.5% of segment revenues in fiscal 2005, compared to 25.4% in fiscal 2004 and 27.5% in fiscal 2003. In fiscal 2005, school-based book fair revenues increased by 4.9%, or $17.0 million, to $362.6 million, over fiscal 2004, which had increased 5.5%, or $18.0 million, to $345.6 million versus fiscal 2003. These increases were primarily due to growth in revenue per fair.

In fiscal 2005, continuity revenues accounted for 18.4% of segment revenues, as compared to 21.0% in fiscal 2004 and 25.3% in fiscal 2003. Revenues from the continuity business in fiscal 2005 decreased 25.8%, or $73.8 million, to $212.1 million, as compared to fiscal 2004, consistent with the Company’s previously announced plan to focus on its more productive customers. Revenues from the continuity business in fiscal 2004 decreased 5.1%, or $15.5 million, to $285.9 million, as compared to fiscal 2003, principally as a result of lower net revenues generated through telemarketing, which was adversely affected by the implementation, effective October 1, 2003, of the National Do Not Call Registry legislation.

The trade distribution channel accounted for 15.7% of segment revenues in fiscal 2005, as compared to 23.9% in fiscal 2004 and 17.7% in fiscal 2003. Trade revenues decreased in fiscal 2005 by $142.2 million, or 44.0%, to $180.9 million, compared to $323.1 million in fiscal 2004, principally due to a decline in Harry Potter revenues of approximately $155 million, partially offset by increased non-Harry Potter revenues. In fiscal 2004, trade revenues increased 53.6%, or $112.7 million, from $210.4 million in fiscal 2003, substantially due to the fiscal 2004 release of Harry Potter and the Order of the Phoenix. Trade revenues for Harry Potter were approximately $20 million, $175 million and $50 million in fiscal 2005, 2004 and 2003, respectively.

Segment operating profit in fiscal 2005 declined $11.1 million, or 10.6%, to $93.5 million, or 8.1% of revenues, compared to $104.6 million, or 7.7% of revenues, in fiscal 2004.This decline was principally due to lower operating results for the Company’s trade business, which decreased by approximately $27 million, primarily due to lower Harry Potter revenues, partially offset by an increase in operating profit from continuity programs of approximately $22 million. In fiscal 2004, the Company experienced greater than anticipated challenges in its continuity business, including the effects of the National Do Not Call Registry legislation. These challenges resulted in lower net revenue generated through telemarketing, increased promotion costs and higher bad debt provisions. As a result, the Company reviewed and made changes in its continuity business in fiscal 2004, and recorded Continuity charges in fiscal 2004 and fiscal 2005 of approximately $25 million and $4 million, respectively, of which approximately $22 million and $4 million, respectively, applied to this segment.

In fiscal 2004, segment operating profit declined $19.1 million, or 15.4%, compared to $123.7 million, or 10.4% of revenues, in fiscal 2003. This decline was primarily due to lower operating results for continuity programs, which decreased by approximately $55 million in fiscal 2004, partially offset by improvements in the Company’s trade business of approximately $20 million, resulting primarily from higher Harry

(SCHOLASTIC LOGO)

23


Potter revenues, and in the school-based book club business of approximately $15 million.

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 included in the Children’s Book Publishing and Distribution segment.

 

 

 

 

 

 

 

 

 

 

 

Direct-to-home continuity

 

 

 

 

($ amounts in millions)








 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Revenue

 

$

147.5

 

$

203.8

 

$

212.3

 

Operating (loss) profit

 

 

(2.8

)(1)

 

(10.4

)(1)

 

30.9

 












Operating margin

 

 

*

 

 

*

 

 

14.6

%


 

 

*

not meaningful

 

 

(1)

Operating loss includes the direct-to-home portion of the Continuity charges related to this segment of approximately $4 in fiscal 2005 and approximately $15 in fiscal 2004.

In fiscal 2005, revenues from the direct-to-home portion of the Company’s continuity business decreased to $147.5 million, from $203.8 million in fiscal 2004, compared to $212.3 million in fiscal 2003.

The direct-to-home continuity business operating loss was $2.8 million in fiscal 2005 compared to a $10.4 million operating loss in fiscal 2004, primarily due to the approximately $15 million effect of the prior year Continuity charge attributable to the direct-to-home portion of the continuity business. In fiscal 2003, operating profit from the direct-to-home continuity business was $30.9 million.

Excluding the direct-to-home continuity business, segment revenues in fiscal 2005 were $1,005.0 million, as compared to $1,154.8 million in fiscal 2004 and $977.6 million in fiscal 2003, and segment operating profit in fiscal 2005 was $96.3 million, compared to $115.0 million in fiscal 2004 and $92.8 million in fiscal 2003.

E D U C A T I O N A L    P U B L I S H I N G
The Company’s Educational Publishing segment includes the publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ amounts in millions)








 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Revenue

 

$

404.6

 

$

369.1

 

$

325.9

 

Operating profit

 

 

78.5

 

 

56.1

 

 

43.8

 












Operating margin

 

 

19.4

%

 

15.2

%

 

13.4

%

Segment revenues accounted for 19.5% of the Company’s revenues in fiscal 2005, compared to 16.5% in fiscal 2004 and 16.6% in fiscal 2003. In fiscal 2005, Educational Publishing revenues increased to $404.6 million from $369.1 million in fiscal 2004. This $35.5 million increase was primarily due to higher revenues from sales of educational technology products, including the Company’s READ 180 reading intervention program. In fiscal 2004, the $43.2 million increase in Educational Publishing revenues as compared to fiscal 2003 was primarily due to higher sales of children’s books to public schools systems as classroom libraries and other collections, which increased $28.3 million, and educational technology products, which increased $17.4 million.

Segment operating profit in fiscal 2005 increased by $22.4 million, or 39.9%, to $78.5 million, as compared to the prior fiscal year, primarily due to revenue growth from sales of educational technology products, which have higher gross margins. In fiscal 2004, segment operating profit increased $12.3 million, or 28.1%, from $43.8 million in fiscal 2003, primarily due to the increase in revenues, as well as improved gross margins resulting from a favorable sales mix.

M E D I A ,   L I C E N S I N G   A N D   A D V E R T I S I N G
The Company’s Media, 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 SEI, 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.

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24



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ amounts in millions)








 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Revenue

 

$

133.1

 

$

136.4

 

$

123.5

 

Operating profit(1)

 

 

11.0

 

 

10.9

 

 

12.2

 












Operating margin(1)

 

 

8.3

%

 

8.0

%

 

9.9

%


 

 

(1)

Reflects the Segment Reallocation.

Media, Licensing and Advertising revenues accounted for 6.4% of the Company’s revenues in fiscal 2005, 6.1% in fiscal 2004 and 6.3% in fiscal 2003. In fiscal 2005, segment revenues decreased by $3.3 million, or 2.4%, to $133.1 million from $136.4 million in fiscal 2004. This decrease was due principally to a decline of $6.8 million in programming revenue, primarily as a result of the fiscal 2004 release of the feature film Clifford’s Really Big Movie, partially offset by increased revenues of $2.9 million from Back to Basic Toys, the Company’s direct-to-home toy catalog. In fiscal 2004, segment revenues increased by $12.9 million, or 10.4%, from $123.5 million in fiscal 2003, primarily due to $17.5 million of incremental revenues generated from Back to Basics Toys, which the Company acquired in August 2003. Additionally, programming revenues increased by $5.9 million, primarily due to the effect of Clifford’s Really Big Movie. These revenue increases were partially offset by $9.6 million in decreased revenues from software and multimedia products.

Media, Licensing and Advertising operating profit remained relatively flat at $11.0 million, or 8.3% of revenues, in fiscal 2005, compared to $10.9 million, or 8.0% of revenues, in fiscal 2004. In fiscal 2004, profit decreased $1.3 million from $12.2 million, or 9.9% of revenues, in fiscal 2003.

I N T E R N A T I O N A L

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ amounts in millions)








 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Revenue

 

$

389.7

 

$

369.7

 

$

319.0

 

Operating profit

 

 

30.3

 

 

23.5

(1)

 

19.3

 








Operating margin

 

 

7.8

%

 

6.4

%

 

6.1

%


 

 

(1)

Fiscal 2004 operating profit includes the portion of the Continuity charges related to this segment of approximately $3.

International revenues accounted for 18.7% of the Company’s revenues in fiscal 2005, 16.6% in fiscal 2004 and 16.3% in fiscal 2003. Segment revenues increased $20.0 million, or 5.4%, to $389.7 million in fiscal 2005 from $369.7 million in fiscal 2004, primarily due to the favorable impact of foreign currency exchange rates. In fiscal 2004, International revenues increased $50.7 million, or 15.9%, from $319.0 million in fiscal 2003, primarily due to the favorable impact of foreign currency exchange rates of $36.5 million and increased revenues from the Company’s export business of $12.3 million.

International operating profit increased $6.8 million to $30.3 million, or 7.8% of revenues, in fiscal 2005 from $23.5 million, or 6.4% of revenues, in fiscal 2004. This increase was primarily due to higher operating profit in Australia. In fiscal 2004, operating profit increased $4.2 million, or 21.8%, from $19.3 million, or 6.1% of revenues, in fiscal 2003, primarily due to an increase in operating profit from the export business.

 

Liquidity and Capital Resources


Cash and cash equivalents were $110.6 million at May 31, 2005, compared to $17.8 million at May 31, 2004 and $58.6 million at May 31, 2003.

Cash flow provided by operations increased $25.3 million to $246.6 million in fiscal 2005 compared to $221.3 million in fiscal 2004, on improved net income of $6.5 million, primarily as a result of changes in working capital. Inventory decreased by $3.2 million in fiscal 2005 compared to an increase of $14.7 in fiscal 2004, primarily due to growth in inventory levels in school-based book clubs and book fairs in fiscal 2004. The deferred income tax provision increased $17.8 million to $20.4 million in fiscal 2005 compared to $2.6 million in fiscal 2004,

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25


principally due to the utilization of deferred tax assets related to the allowance for doubtful accounts. Deferred promotion costs decreased $2.7 million in fiscal 2005 compared to a decrease of $12.6 million in fiscal 2004, primarily due to the prior year write-down of deferred promotion costs included in the Continuity charges. Amortization of prepublication and production costs decreased $11.4 million to $67.7 million in fiscal 2005 compared to $79.1 million in fiscal 2004, primarily due to the higher amortization of production costs in fiscal 2004 related to Clifford’s Really Big Movie. Accounts payable and other accrued expenses decreased $12.8 million in fiscal 2005 compared to an increase of $8.3 million in fiscal 2004, primarily due to the timing of payments.

Cash outflow for investing activities was $160.4 million for fiscal 2005. Prepublication expenditures totaled $58.0 million in fiscal 2005, an increase of $4.8 million from fiscal 2004, primarily due to development of a new version of READ 180. Additions to property, plant and equipment totaled $49.8 million in fiscal 2005, an increase of $6.4 million from fiscal 2004, principally due to information technology spending.

Cash flow provided by financing activities was $6.5 million in fiscal 2005, compared to a $114.9 million use of cash in fiscal 2004. In fiscal 2004, Scholastic Corporation repaid all $125.0 million of its outstanding 7% Notes at maturity.

Due to the seasonality of its businesses, as discussed in Item 1, “Business—Seasonality,” 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.

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, to the extent not paid through cash flow.

 


The following table summarizes, as of May 31, 2005, the Company’s contractual cash obligations by future period (see Notes 3 and 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 











Contractual Obligations

 

Less than
1 Year

 

1–3 Years

 

4–5 Years

 

After
5 Years

 

 

Total

 














Long-term debt(1)

 

 

$

26.0

 

 

 

$

343.5

 

 

 

$

17.5

 

 

$

192.5

 

$

579.5

 

Lines of credit and short-term debt(1)

 

 

 

26.2

 

 

 

 

 

 

 

 

 

 

 

 

 

26.2

 

Capital leases(1)

 

 

 

16.5

 

 

 

 

21.0

 

 

 

 

14.5

 

 

 

224.1

 

 

276.1

 

Operating leases

 

 

 

27.4

 

 

 

 

35.1

 

 

 

 

17.1

 

 

 

51.9

 

 

131.5

 

Royalty advances

 

 

 

7.5

 

 

 

 

1.2

 

 

 

 

0.2

 

 

 

 

 

8.9

 

Other obligations

 

 

 

1.7

 

 

 

 

 

 

 

 

 

 

 

 

 

1.7

 
























Total

 

 

$

105.3

 

 

 

$

400.8

 

 

 

$

49.3

 

 

$

468.5

 

$

1,023.9

 

























 

 

(1)

Includes principal and interest.

(SCHOLASTIC LOGO)

26


 

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 on August 11, 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 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 (where applicable) as of May 31, 2005 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 May 31, 2005, as compared to $12.0 million at May 31, 2004 at a weighted average interest rate of 1.7%.

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 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 May 31, 2005 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. There were no borrowings outstanding under the Revolver at May 31, 2005, as compared to $2.2 million at May 31, 2004, at a weighted average interest rate of 3.0%.

Unsecured lines of credit available in local currencies to Scholastic Corporation’s international subsidiaries were, in the aggregate, equivalent to $61.8 million at May 31, 2005, as compared to $62.1 million at May 31, 2004. These lines are used primarily to fund local working capital needs. At May 31, 2005, borrowings equivalent to $24.7 million were outstanding under these lines of credit, as compared to $23.0 million at May 31, 2004 at weighted average interest rates of 5.4% and 5.5% at May 31, 2005 and 2004, respectively.

The Company’s total debt obligations at May 31, 2005 and 2004 were $501.4 million and $516.6 million, respectively. For a complete description of all the Company’s debt obligations, see Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”

 

Acquisitions


In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such opportunities and prospects.

On April 27, 2005, the Company acquired all of the stock of Chicken House Publishing Ltd., a United Kingdom publisher of children’s books. During fiscal 2004, the Company acquired certain assets of Troll and the stock of BTBCAT, Inc., which operates the Back to Basics direct-to-home toy catalog business.

(SCHOLASTIC LOGO)

27


N E W   A C C O U N T I N G   P R O N O U N C E M E N T S
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires companies to measure compensation cost for 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, as disclosed in Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” 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. 123R 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 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 the adoption date, the compensation cost of any unvested portion is recognized over the remaining service period, based on the grant-date fair value utilized in the SFAS 123 disclosure. The Company 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 December 2004, the FASB issued FASB Staff Position No.109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). FSP No.109-2 provides guidance on recording and disclosing the impact on income tax expense and deferred tax liabilities of the optional foreign earnings repatriation provision of the American Jobs Creation Act of 2004. The Company has elected not to repatriate foreign earnings pursuant to these provisions, and therefore the adoption of FSP No. 109-2 has had no impact on the Company’s financial position, results of operation or 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.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No.154”). Under the previous guidance, most voluntary changes in accounting principle were required to be recognized as the cumulative effect of a change in accounting principle within the net income of the periods in which the change is made. SFAS No. 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company has elected to adopt SFAS No.154 effective June 1, 2006.

F A C T O R S  T H A T  M A Y  A F F E C T  F U T U R E   R E S U L T S   A N D   F I N A N C I A L  
C O N D I T I O N

This Annual Report on Form 10-K contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, operating margins, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including the following and other risks and factors identified from time to time in the Company’s filings with the SEC:

(SCHOLASTIC LOGO)

28


 

 

The Company’s ability to continue to produce successful educational, trade, entertainment and software products;

The ability of the Company’s school-based book clubs and book fairs to successfully meet market needs;

The ability of the Company to successfully execute its plan with regard to its continuity business;

The Company’s ability to maintain relationships with its creative talent;

Changes in purchasing patterns in and the strength of educational, trade, entertainment and software markets;

Competition from other educational and trade publishers and media, entertainment and internet companies;

Significant changes in the publishing industry, especially relating to the distribution and sale of books;

The effect on the Company of volatility in the price of paper and periodic increases in postage rates through traditional and emerging channels;

The Company’s ability to effectively use the Internet to support its existing businesses and to launch successful new Internet initiatives;

The impact of governmental initiatives, including the expansion of restrictions on communications with actual and potential customers;

The general risks attendant to the conduct of business in foreign countries;

The general risks inherent in the market impact of rising interest rates with regard to its variable-rate debt facilities.

The foregoing list of factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the date hereof. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

Item 7A  | 

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 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 5% of the Company’s debt at May 31, 2005 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 7% at May 31, 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 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table sets forth information about the Company’s debt instruments as of May 31, 2005 (see Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ amounts in millions)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value
as of
May 31,
2005

 

 

 

Fiscal Year Maturity

 

 

 

 


 

 

 

 

2006

 

2007

 

2008

 

2009

(1)

2010

 

Thereafter

 

 

Total

 

 































Debt Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lines of credit

 

$

24.7

 

$

 

$

 

$

 

$

 

 

$

 

 

$

24.7

 

 

$

24.7

 

Average interest rate

 

 

5.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

0.2

 

$

300.0

 

$

 

$

 

$

 

 

$

175.0

 

 

$

475.2

 

 

$

480.3

 

Average interest rate

 

 

13.0

%

 

5.75

%

 

 

 

 

 

 

 

 

 

 

 

5.0

%

 

 

 

 

 

 

 

 

 
































 

 

(1)

The Credit Agreement and Revolver, with credit lines totalling $230.0, expire in fiscal 2009.

(SCHOLASTIC LOGO)

29


 

 

Item 8   |

Consolidated Financial Statements and Supplementary Data

 

 

 

Index to Consolidated Financial Statements and Financial Statements Schedule

Page (s)

 

 

Consolidated Statements of Income for the years ended May 31, 2005, 2004 and 2003

31

 

 

Consolidated Balance Sheets at May 31, 2005 and 2004

32-33

 

 

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended May 31, 2005, 2004 and 2003

34-35

 

 

Consolidated Statements of Cash Flows for the years ended May 31, 2005, 2004 and 2003

36

 

 

Notes to Consolidated Financial Statements

37-59

 

 

Reports of Independent Registered Public Accounting Firm

60-61

 

 

Supplementary Financial Information – Summary of Quarterly Results of Operations (unaudited)

62

 

 

The following consolidated financial statement schedule for the years ended May 31, 2005, 2004 and 2003 is filed with this annual report on Form 10-K:

 

 

 

Schedule II – Valuation and Qualifying Accounts and Reserves

S-2

All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.

(SCHOLASTIC LOGO)

30


Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in millions, except per share data)

 

 

 

Years ended May 31,

 









 

 

2005

 

2004

 

2003

 









 

 

 

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,079.9

 

$

2,233.8

 

$

1,958.3

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (exclusive of depreciation)

 

 

970.5

 

 

1,080.0

 

 

882.1

 

Cost of goods sold – Continuity charges

 

 

 

 

6.8

 

 

 

Selling, general and administrative expenses

 

 

845.4

 

 

854.9

 

 

813.1

 

Selling, general and administrative expenses – Continuity charges

 

 

3.8

 

 

15.2

 

 

 

Bad debt expense

 

 

62.2

 

 

88.3

 

 

72.3

 

Bad debt expense – Continuity charges

 

 

 

 

2.0

 

 

 

Other operating costs:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

63.1

 

 

62.1

 

 

52.1

 

Special severance charges

 

 

 

 

3.3

 

 

10.9

 

Litigation and other charges

 

 

 

 

 

 

1.9

 












Total operating costs and expenses

 

 

1,945.0

 

 

2,112.6

 

 

1,832.4

 












 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

134.9

 

 

121.2

 

 

125.9

 

Other income

 

 

 

 

8.0

 

 

2.9

 

Interest income

 

 

1.0

 

 

0.4

 

 

0.3

 

Interest expense

 

 

36.2

 

 

40.0

 

 

38.6

 












 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

99.7

 

 

89.6

 

 

90.5

 

Provision for income taxes

 

 

35.4

 

 

31.8

 

 

31.7

 












Net income

 

$

64.3

 

$

57.8

 

$

58.8

 












 

 

 

 

 

 

 

 

 

 

 

Earnings per Share of Class A and Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

$

1.47

 

$

1.50

 

Diluted

 

$

1.58

 

$

1.44

 

$

1.46

 












See accompanying notes

(SCHOLASTIC LOGO)

31


Consolidated Balance Sheets

 

 

 

 

 

 

 

 







ASSETS

 

2005

 

2004

 







 

 

 

 

 

Restated

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110.6

 

$

17.8

 

Accounts receivable (less allowance for doubtful accounts of $43.2 at May 31, 2005 and $63.2 at May 31, 2004)

 

 

269.6

 

 

265.7

 

Inventories

 

 

404.9

 

 

402.6

 

Deferred promotion costs

 

 

38.6

 

 

40.6

 

Deferred income taxes

 

 

71.7

 

 

73.4

 

Prepaid expenses and other current assets

 

 

43.9

 

 

42.6

 









Total current assets

 

 

939.3

 

 

842.7

 









 

 

 

 

 

 

 

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

Land

 

 

13.3

 

 

13.4

 

Buildings

 

 

120.2

 

 

119.9

 

Furniture, fixtures and equipment

 

 

414.1

 

 

365.1

 

Leasehold improvements

 

 

161.9

 

 

157.5

 









 

 

 

709.5

 

 

655.9

 









Less accumulated depreciation and amortization

 

 

(316.8

)

 

(259.4

)









Net property, plant and equipment

 

 

392.7

 

 

396.5

 









 

 

 

 

 

 

 

 

Other Assets and Deferred Charges:

 

 

 

 

 

 

 

Prepublication costs

 

 

120.2

 

 

116.7

 

Installment receivables (less allowance for doubtful accounts of $4.1 at May 31, 2005 and $5.1 at May 31, 2004)

 

 

10.6

 

 

13.1

 

Royalty advances

 

 

54.4

 

 

55.5

 

Production costs

 

 

9.7

 

 

5.5

 

Goodwill

 

 

254.2

 

 

249.7

 

Other intangibles

 

 

78.7

 

 

78.9

 

Noncurrent deferred income taxes

 

 

11.4

 

 

11.4

 

Other

 

 

60.2

 

 

61.8

 









Total other assets and deferred charges

 

 

599.4

 

 

592.6

 









Total assets

 

$

1,931.4

 

$

1,831.8

 









See accompanying notes

(SCHOLASTIC LOGO)

32


(Amounts in millions, except share data)
Balances at May 31,

 

 

 

 

 

 

 

 







LIABILITIES AND STOCKHOLDERS’ EQUITY

 

2005

 

2004

 







 

 

 

 

 

Restated

 

Current Liabilities:

 

 

 

 

 

 

 

Lines of credit and short-term debt

 

$

24.9

 

$

24.1

 

Capital lease obligations

 

 

11.0

 

 

10.2

 

Accounts payable

 

 

141.4

 

 

150.1

 

Accrued royalties

 

 

40.1

 

 

38.4

 

Deferred revenue

 

 

22.9

 

 

22.7

 

Other accrued expenses

 

 

134.5

 

 

129.8

 









Total current liabilities

 

 

374.8

 

 

375.3

 









Noncurrent Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

476.5

 

 

492.5

 

Capital lease obligations

 

 

63.4

 

 

63.8

 

Other noncurrent liabilities

 

 

79.6

 

 

54.8

 









Total noncurrent liabilities

 

 

619.5

 

 

611.1

 









 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred Stock, $1.00 par value Authorized – 2,000,000 shares; Issued – None

 

 

 

 

 

Class A Stock, $.01 par value Authorized – 2,500,000 shares; Issued and outstanding – 1,656,200 shares

 

 

0.0

 

 

0.0

 

Common Stock, $.01 par value Authorized – 70,000,000 shares; Issued and outstanding – 39,076,544 shares (37,930,986 shares at May 31, 2004)

 

 

0.4

 

 

0.4

 

Additional paid-in capital

 

 

424.0

 

 

388.1

 

Deferred compensation

 

 

(2.1

)

 

(0.6

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(2.2

)

 

(4.5

)

Minimum pension liability adjustment

 

 

(26.3

)

 

(17.0

)

Retained earnings

 

 

543.3

 

 

479.0

 









Total stockholders’ equity

 

 

937.1

 

 

845.4

 









Total liabilities and stockholders’ equity

 

$

1,931.4

 

$

1,831.8

 









(SCHOLASTIC LOGO)

33


Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













 

 

Class A Stock

 

Common Stock

 

 

Additional
Paid-in
Capital

 

 


 


 

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

 













Balance at May 31, 2002, as Previously Reported

 

 

1,656,200

 

 

$

0.0

 

 

 

37,417,222

 

 

$

0.4

 

 

 

$

373.7

 

 

Cumulative effect of restatement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
























Balance at May 31, 2002, as restated

 

 

1,656,200

 

 

 

0.0

 

 

 

37,417,222

 

 

 

0.4

 

 

 

 

373.7

 

 

Comprehensive income, as restated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustment, net of tax of $7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation, net of amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.2

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

191,111

 

 

 

0.0

 

 

 

 

4.7

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

 
























Balance at May 31, 2003, as restated

 

 

1,656,200

 

 

 

0.0

 

 

 

37,608,333

 

 

 

0.4

 

 

 

 

379.9

 

 

Comprehensive income, as restated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustment, net of tax of $6.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation, net of amortization

 

 

 

 

 

 

 

 

 

 

4,102

 

 

 

0.0

 

 

 

 

0.0

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

318,551

 

 

 

0.0

 

 

 

 

7.6

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

 
























Balance at May 31, 2004, as restated

 

 

1,656,200

 

 

 

0.0

 

 

 

37,930,986

 

 

 

0.4

 

 

 

 

388.1

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustment, net of tax of $5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation, net of amortization

 

 

 

 

 

 

 

 

 

 

8,993

 

 

 

0.0

 

 

 

 

2.2

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

1,136,565

 

 

 

0.0

 

 

 

 

29.9

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.8

 

 
























Balance at May 31, 2005

 

 

1,656,200

 

 

$

0.0

 

 

 

39,076,544

 

 

$

0.4

 

 

 

$

424.0

 

 
























See accompanying notes

(SCHOLASTIC LOGO)

34


(Amounts in millions, except share data)
Years ended May 31, 2005, 2004 and 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













 

 

Deferred
Compensation

 

Foreign
Currency
Translation

 

Minimum
Pension
Liability

 


Retained
Earnings

 

Total
Stockholders’
Equity

 













Balance at May 31, 2002, as Previously Reported

 

 

$

(0.4)

 

 

 

$

(13.5

)

 

 

$

(13.9

)

 

 

$

372.6

 

 

 

$

718.9

 

 

Cumulative effect of restatement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10.2

)

 

 

 

(10.2

)

 




























Balance at May 31, 2002, as restated

 

 

 

(0.4)

 

 

 

 

(13.5

)

 

 

 

(13.9

)

 

 

 

362.4

 

 

 

 

708.7

 

 

Comprehensive income, as restated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58.8

 

 

 

 

58.8

 

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

3.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.7

 

 

Minimum pension liability adjustment, net of tax of $7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

(14.1

)

 

 

 

 

 

 

 

 

(14.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total comprehensive income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48.4

 

 

Deferred compensation, net of amortization

 

 

 

(0.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.7

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

 




























Balance at May 31, 2003, as restated

 

 

 

(1.1)

 

 

 

 

(9.8

)

 

 

 

(28.0

)

 

 

 

421.2

 

 

 

 

762.6

 

 

Comprehensive income, as restated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57.8

 

 

 

 

57.8

 

 

Other comprehensive income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.3

 

 

Minimum pension liability adjustment, net of tax of $6.2

 

 

 

 

 

 

 

 

 

 

 

 

 

11.0

 

 

 

 

 

 

 

 

 

11.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total comprehensive income, as restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74.1

 

 

Deferred compensation, net of amortization

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.6

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

 




























Balance at May 31, 2004, as restated

 

 

 

(0.6)

 

 

 

 

(4.5

)

 

 

 

(17.0

)

 

 

 

479.0

 

 

 

 

845.4

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64.3

 

 

 

 

64.3

 

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

2.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.3

 

 

Minimum pension liability adjustment, net of tax of $5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.3

)

 

 

 

 

 

 

 

 

(9.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57.3

 

 

Deferred compensation, net of amortization

 

 

 

(1.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.7

 

 

Proceeds from issuance of common stock pursuant to employee stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29.9

 

 

Tax benefit realized from stock option transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.8

 

 




























Balance at May 31, 2005

 

 

$

(2.1)

 

 

 

$

(2.2

)

 

 

$

(26.3

)

 

 

$

543.3

 

 

 

$

937.1

 

 




























(SCHOLASTIC LOGO)

35


Consolidated Statements of Cash Flows

(Amounts in millions)
Years ended May 31,

 

 

 

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Cash flows provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

64.3

 

$

57.8

 

$

58.8

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Provision for losses on accounts receivable

 

 

62.2

 

 

90.3

 

 

72.3

 

Amortization of prepublication and production costs

 

 

67.7

 

 

79.1

 

 

61.0

 

Depreciation and amortization

 

 

63.1

 

 

62.1

 

 

52.1

 

Royalty advances expensed

 

 

32.8

 

 

20.8

 

 

31.6

 

Deferred income taxes

 

 

20.4

 

 

2.6

 

 

12.4

 

Non cash interest expense

 

 

1.3

 

 

1.2

 

 

1.2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(61.6

)

 

(99.3

)

 

(90.2

)

Inventories

 

 

3.2

 

 

(14.7

)

 

(16.7

)

Prepaid and other current assets

 

 

(0.3

)

 

7.0

 

 

12.3

 

Deferred promotion costs

 

 

2.7

 

 

12.6

 

 

(7.5

)

Accounts payable and other accrued expenses

 

 

(12.8

)

 

8.3

 

 

21.5

 

Accrued royalties and deferred revenue

 

 

0.6

 

 

8.7

 

 

(4.1

)

Tax benefit realized from stock option transactions

 

 

3.8

 

 

0.6

 

 

0.3

 

Other, net

 

 

(0.8

)

 

(15.8

)

 

(18.5

)












Total adjustments

 

 

182.3

 

 

163.5

 

 

127.7

 












Net cash provided by operating activities

 

 

246.6

 

 

221.3

 

 

186.5

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

 

 

Prepublication expenditures

 

 

(58.0

)

 

(53.2

)

 

(55.7

)

Additions to property, plant and equipment

 

 

(49.8

)

 

(43.4

)

 

(83.9

)

Royalty advances

 

 

(30.9

)

 

(26.1

)

 

(30.3

)

Equity investment and related loan

 

 

 

 

 

 

(23.3

)

Production expenditures

 

 

(18.0

)

 

(15.6

)

 

(15.5

)

Acquisition-related payments

 

 

(3.7

)

 

(8.8

)

 

(10.2

)

Proceeds from sale of investment

 

 

 

 

 

 

5.2

 

Other

 

 

 

 

(0.5

)

 

(0.3

)












Net cash used in investing activities

 

 

(160.4

)

 

(147.6

)

 

(214.0

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

 

 

Borrowings under Loan Agreement, Revolver and Credit Facility

 

 

342.4

 

 

599.4

 

 

521.1

 

Repayments of Loan Agreement, Revolver and Credit Facility

 

 

(356.6

)

 

(585.2

)

 

(571.1

)

Borrowings under Grolier Facility

 

 

 

 

 

 

138.0

 

Repayments of Grolier Facility

 

 

 

 

 

 

(188.0

)

Repayment of 7% Notes

 

 

 

 

(125.0

)

 

 

Proceeds received from issuance of 5% Notes, net of related costs

 

 

 

 

 

 

171.3

 

Borrowings under lines of credit

 

 

250.6

 

 

294.1

 

 

184.7

 

Repayments of lines of credit

 

 

(249.3

)

 

(300.7

)

 

(183.7

)

Repayment of capital lease obligations

 

 

(10.5

)

 

(9.0

)

 

(6.9

)

Proceeds pursuant to employee stock plans

 

 

29.9

 

 

7.6

 

 

4.7

 

Other

 

 

 

 

3.9

 

 

5.4

 












Net cash provided by (used in) financing activities

 

 

6.5

 

 

(114.9

)

 

75.5

 

Effect of exchange rate changes on cash

 

 

0.1

 

 

0.4

 

 

(0.1

)












Net increase (decrease) in cash and cash equivalents

 

 

92.8

 

 

(40.8

)

 

47.9

 

Cash and cash equivalents at beginning of year

 

 

17.8

 

 

58.6

 

 

10.7

 












Cash and cash equivalents at end of year

 

$

110.6

 

$

17.8

 

$

58.6

 












Supplemental information:

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

10.1

 

$

24.5

 

$

14.6

 

Interest paid

 

 

30.0

 

 

39.0

 

 

32.5

 

Non cash investing and financing activities: Capital leases

 

 

9.5

 

 

15.1

 

 

10.9

 












See accompanying notes

(SCHOLASTIC LOGO)

36


 

Notes to Consolidated Financial Statements


(Amounts in millions, except share and per share data)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of consolidation
The consolidated financial statements include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned subsidiaries (collectively “Scholastic” or the “Company”). All significant intercompany transactions are eliminated.

Restatement of previously issued consolidated financial statements
In connection with a comprehensive review of its lease accounting practices, the Company determined that it was appropriate to restate its previously issued annual and interim consolidated financial statements. The restatement was principally attributable to the treatment of certain leases previously classified as operating leases that should have been classified as capital leases and certain other operating leases that previously did not reflect future payment escalation clauses in determining rent expense. The classification of certain capital leases as operating leases principally had the effect of excluding assets subject to capital leases and the related capital lease obligations from the Company’s Consolidated Balance Sheet and treating rental payments as rent expense, rather than as interest expense and principal payments on capital lease obligations. Also, not considering future payment escalation clauses in determining rent expense for certain operating leases principally had the effect of understating rent expense in the early periods of the lease agreements and overstating rent expense in the later periods of the lease agreements.

While the Company does not consider these corrections to be material to the Consolidated Statements of Income in any one fiscal period, the cumulative impact if recorded in fiscal 2005 would be material. Therefore, the Company has revised its accounting for these leasing transactions and restated its previously issued annual and interim Consolidated Financial Statements to appropriately classify its leases and to appropriately reflect future payment escalation clauses in determining rent expense.

(SCHOLASTIC LOGO)

37


The following is a summary of the impact of the restatement on the Company’s Consolidated Statements of Income for the years ended May 31, 2004 and May 31, 2003, the Consolidated Balance Sheet at May 31, 2004 and the Consolidated Statements of Cash Flows for the years ended May 31, 2004 and May 31, 2003:

 

(Amounts in millions, except per share data)


May 31, 2004


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously
Reported(1)

 

 

Adjustments

 

 

As Restated

 

 












Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

$

869.7

 

 

 

$

(14.8

)

 

 

$

854.9

 

 

Depreciation and amortization

 

 

 

53.5

 

 

 

 

8.6

 

 

 

 

62.1

 

 

Operating income

 

 

 

115.0

 

 

 

 

6.2

 

 

 

 

121.2

 

 

Interest expense

 

 

 

32.9

 

 

 

 

7.1

 

 

 

 

40.0

 

 

Earnings before income taxes

 

 

 

90.5

 

 

 

 

(0.9

)

 

 

 

89.6

 

 

Provision for income taxes

 

 

 

32.1

 

 

 

 

(0.3

)

 

 

 

31.8

 

 

Net income

 

 

 

58.4

 

 

 

 

(0.6

)

 

 

 

57.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A and Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

1.48

 

 

 

$

(0.01

)

 

 

$

1.47

 

 

Diluted

 

 

 

1.46

 

 

 

 

(0.02

)

 

 

 

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

$

334.6

 

 

 

$

61.9

 

 

 

$

396.5

 

 

Noncurrent deferred income taxes

 

 

 

5.1

 

 

 

 

6.3

 

 

 

 

11.4

 

 

Other noncurrent assets

 

 

 

61.7

 

 

 

 

0.1

 

 

 

 

61.8

 

 

Total assets

 

 

 

1,763.5

 

 

 

 

68.3

 

 

 

 

1,831.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligations—current

 

 

 

 

 

 

 

10.2

 

 

 

 

10.2

 

 

Total current liabilities

 

 

 

365.1

 

 

 

 

10.2

 

 

 

 

375.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligations—non-current

 

 

 

 

 

 

 

63.8

 

 

 

 

63.8

 

 

Other noncurrent liabilities

 

 

 

49.9

 

 

 

 

4.9

 

 

 

 

54.8

 

 

Total noncurrent liabilities

 

 

 

542.4

 

 

 

 

68.7

 

 

 

 

611.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

489.6

 

 

 

 

(10.6

)

 

 

 

479.0

 

 

Total stockholders’ equity

 

 

 

856.0

 

 

 

 

(10.6

)

 

 

 

845.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

 

1,763.5

 

 

 

 

68.3

 

 

 

 

1,831.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

212.3

 

 

 

$

9.0

 

 

 

$

221.3

 

 

Net cash used in financing activities

 

 

 

(105.9

)

 

 

 

(9.0

)

 

 

 

(114.9

)

 


















 

 

(1)

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

(SCHOLASTIC LOGO)

38


 

(Amounts in millions, except per share data)


May 31, 2003


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously
Reported(1)

 

 

Adjustments

 

 

As Restated

 

 












Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

$

826.3

 

 

 

$

(13.2

)

 

 

$

813.1

 

 

Depreciation and amortization

 

 

 

46.1

 

 

 

 

6.0

 

 

 

 

52.1

 

 

Operating income

 

 

 

118.7

 

 

 

 

7.2

 

 

 

 

125.9

 

 

Interest expense

 

 

 

31.8

 

 

 

 

6.8

 

 

 

 

38.6

 

 

Earnings before income taxes

 

 

 

90.1

 

 

 

 

0.4

 

 

 

 

90.5

 

 

Provision for income taxes

 

 

 

31.5

 

 

 

 

0.2

 

 

 

 

31.7

 

 

Net income

 

 

 

58.6

 

 

 

 

0.2

 

 

 

 

58.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A and Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

1.50

 

 

 

$

0.0

 

 

 

$

1.50

 

 

Diluted

 

 

 

1.46

 

 

 

 

0.0

 

 

 

 

1.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

179.2

 

 

 

$

7.3

 

 

 

$

186.5

 

 

Net cash provided by financing activities

 

 

 

82.8

 

 

 

 

(7.3

)

 

 

 

75.5

 

 


















 

 

(1)

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

Use of estimates
The Company’s 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 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.

Revenue recognition
The Company’s revenue recognition policies for its principal businesses are as follows:

School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.

School-Based Book Fairs – Revenue from school-based book fairs is recognized ratably as each book fair occurs.

Continuity Programs – The Company operates continuity programs whereby customers generally place a single order and receive multiple shipments of books and other products over a period of time. Revenue from continuity programs is recognized at the time of shipment or, in applicable cases, upon customer acceptance. Reserves for estimated returns are established at that time and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.

(SCHOLASTIC LOGO)

39


Trade – Revenue from the sale of children’s books for distribution in the retail channel primarily is recognized at the time of shipment, which generally is when title transfers to the customer or when the product is on sale and available to the public. A reserve for estimated returns is established at that time and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.

Educational Publishing – For shipments to schools, revenue is recognized on passage of title, which generally occurs upon receipt by the customer. Shipments to depositories are on consignment. Revenue is recognized based on actual shipments from the depositories to the schools. For certain software-based products, the Company offers new customers installation and training. In such cases, revenue is recognized when installation and training are complete.

Toy Catalog – Revenue from the sale of children’s toys to the home through catalogs is recognized at the time of shipment, which is generally when title transfers to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates and sales patterns.

Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.

Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.

Magazine Advertising – Revenue is recognized when the magazine is on sale and available to the subscribers.

Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service.

Cash equivalents
Cash equivalents consist of short-term investments with original maturities of less than three months.

Accounts receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for returns are based on historical return rates and sales patterns. Allowances for doubtful accounts are established through the evaluation of accounts receivable agings and prior collection experience to estimate the ultimate collectability of these receivables.

Inventories
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage rates and sales patterns of its products.

Deferred promotion costs
Deferred promotion costs represent direct mail and telemarketing promotion costs incurred to acquire customers in the Company’s continuity and magazine businesses. Promotional costs are deferred when incurred and amortized in the proportion that current revenues bear to estimated total revenues. The Company regularly evaluates the operating performance of the promotions over their life cycle based on historical and forecasted demand and adjusts the carrying value accordingly. Except as discussed above, all other advertising costs are expensed as incurred.

(SCHOLASTIC LOGO)

40


Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are recorded on a straight-line basis. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Furniture, fixtures and equipment are depreciated over periods not exceeding ten years. Leasehold improvements are amortized over the life of the lease or the life of the assets, whichever is shorter. Interest is capitalized on major construction projects based on the outstanding construction-in-progress balance for the period and the average borrowing rate during the period.

Leases
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting For Leases,” as amended (“SFAS No. 13”). When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in SFAS No. 13, the lease then qualifies as a capital lease.

Capital leases are capitalized at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Prepublication costs
The Company capitalizes the art, prepress, editorial and other costs incurred in the creation of the master copy of a book or other media (the “prepublication costs”). Prepublication costs are amortized on a straight-line basis over a three to seven year period based on expected future revenues. The Company regularly reviews the recoverability of the capitalized costs.

Royalty advances
The Company records a reserve for the recoverability of its outstanding advances to authors based primarily upon historical earndown experience. Royalty advances are expensed as related revenues are earned or when future recovery appears doubtful.

Goodwill and other intangibles
Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise. With regard to goodwill, these reviews require the Company to estimate the fair value of its identified reporting units. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the units, which is compared to the carrying value of the net assets of the reporting units. With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value.

Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income.

The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable

(SCHOLASTIC LOGO)

41


earnings indicate that realization is not likely, the Company establishes a valuation allowance.

In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of ongoing tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially affect the Company’s Consolidated Financial Statements.

It is the Company’s policy to establish reserves for probable exposures as a result of an examination by tax authorities. The Company establishes the reserves based upon management’s assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve.

Other noncurrent liabilities
All of the rate assumptions discussed below impact the Company’s calculations of its pension and post-retirement obligations. The rates applied by the Company are based on the portfolios’ past average rates of return and discussions with its actuaries. Any change in market performance, interest rate performance, assumed health care costs trend rate, or compensation rates could result in significant changes in the Company’s pension and post-retirement obligations.

Pension obligations – Scholastic Corporation and certain of its subsidiaries have defined benefit pension plans covering the majority of their employees who meet certain eligibility requirements. The Company follows SFAS No. 87, “Employers’ Accounting for Pensions,” in calculating the existing benefit obligations and net cost under the plans. These calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets, and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average for one-year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment period.

Other post-retirement benefits – Scholastic Corporation provides post-retirement benefits, consisting of healthcare and life insurance benefits, to retired United States-based employees. A majority of these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. The post-retirement medical plan benefits are funded on a pay-as-you-go basis, with the Company paying a portion of the premium and the employee paying the remainder. The Company follows SFAS No. 106, “Employers’ Accounting for Post-Retirement Benefits Other than Pensions,” in calculating the existing benefit obligation, which is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the expected and accumulated benefit obligations and the service and interest cost components of net periodic post-retirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long term expected increase in medical claims.

(SCHOLASTIC LOGO)

42


Foreign currency translation
The Company’s non-United States dollar denominated assets and liabilities are translated into United States dollars at prevailing rates at the balance sheet date and the revenues, costs and expenses are translated at the average rates prevailing during each reporting period. Net gains or losses resulting from the translation of the foreign financial statements and the effect of exchange rate changes on long-term intercompany balances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders’ equity.

Shipping and Handling Costs
Amounts billed to customers for shipping and handling are classified as revenue. Costs incurred in shipping and handling are recognized in cost of goods sold.

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

Earnings per share
Basic earnings per share is based on the weighted average shares of Class A Stock and Common Stock outstanding. Diluted earnings per share is based on the weighted average shares of Class A Stock and Common Stock outstanding adjusted for the impact of potentially dilutive securities outstanding. The dilutive impact of options outstanding is calculated using the treasury stock method, which treats the options as if they were exercised at the beginning of the period, adjusted for Common Stock assumed to be repurchased with the proceeds and tax benefit realized upon exercise. Any potentially dilutive security is excluded from the computation of diluted earnings per share for any period in which it has an anti-dilutive effect. Options that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive totaled 1,485,110; 3,123,912; and 750,579 as of May 31, 2005, 2004 and 2003, respectively.

Stock-based compensation
Under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for its stock-based benefit plans. 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 income and basic and diluted earnings per share for the three fiscal years ended May 31 would have been reduced to the pro forma amounts indicated in the following table:

 

 

 

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 

2003

 









 

 

 

 

Restated

 

 

Restated

 

Net income – as reported

 

$

64.3

 

$

57.8

 

$

58.8

 

Add: Stock-based employee compensation included in reported net income, net of tax

 

 

0.8

 

 

0.4

 

 

0.5

 

Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax

 

 

13.0

 

 

13.6

 

 

14.5

 












Net income – pro forma

 

$

52.1

 

$

44.6

 

$

44.8

 












 

 

 

 

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 

2003

 









 

 

 

 

Restated

 

Restated

 

Earnings per share – as reported

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

$

1.47

 

$

1.50

 

Diluted

 

 

1.58

 

 

1.44

 

 

1.46

 

Earnings per share – pro forma

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.30

 

$

1.13

 

$

1.14

 

Diluted

 

 

1.28

 

 

1.12

 

 

1.14

 












(SCHOLASTIC LOGO)

43


The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions for the three fiscal years ended May 31 as follows:

 

 

 

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 

2003

 









Expected dividend yield

 

 

0.0

%

 

0.0

%

 

0.0

%

Expected stock price volatility

 

 

55.2

%

 

60.5

%

 

61.5

%

Risk-free interest rate

 

 

3.46

%

 

2.92

%

 

3.45

%

Expected life of options

 

 

5 years

 

 

5 years

 

 

5 years

 












The weighted average fair values of options granted during fiscal 2005, 2004 and 2003 were $16.33, $15.02 and $18.00 per share, respectively. For purposes of pro forma disclosure, the estimated fair value of the options is amortized over the options’ vesting periods.

New accounting pronouncements
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires companies to measure compensation cost for 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, 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. 123R 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 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 the adoption date, the compensation cost of any unvested portion is recognized over the remaining service period, based on the grant-date fair value utilized in the SFAS 123 pro forma disclosure. The Company 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 December 2004, the FASB issued Staff Position No.109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). FSP No.109-2 provides guidance on recording and disclosing the impact on income tax expense and deferred tax liabilities of the optional foreign earnings repatriation provision of the American Jobs Creation Act of 2004. The Company has elected not to repatriate foreign earnings pursuant to these provisions, and therefore the adoption of FSP No. 109-2 has had no impact on the Company’s financial position, results of operations or cash flows.

In March 2005, the FASB issued Interpretation 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 condition, results of operations and cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No.154”). Under the previous guidance, most voluntary changes in accounting principle were required to be recognized as the cumulative effect of a change in accounting principle within the net income of the period in which the change is made. SFAS No. 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company has elected to adopt SFAS No.154 effective June 1, 2006.

(SCHOLASTIC LOGO)

44


 

2. SEGMENT INFORMATION


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); and International. 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 operating 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 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.

 

 

International 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.

(SCHOLASTIC LOGO)

45


The following table sets forth information for the three fiscal years ended May 31 for the Company’s segments. In fiscal 2005, the Company reviewed the estimated Cost of goods sold related to products originated by the Media, Licensing and Advertising segment that are sold through channels included in the Children’s Book Publishing and Distribution segment. The Company determined that actual costs were lower and gross margins higher on these products than was previously estimated. As a result, the current and prior year inter-segment allocations were adjusted (the “Segment Reallocation”), resulting in higher gross margin and profits in the Media, Licensing and Advertising segment with an offsetting decrease in gross margin and profits in the Children’s Book Publishing and Distribution segment. Prior year segment results have been reclassified to reflect this reallocation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Children’s
Book
Publishing
and
Distribution

 

Educational
Publishing

 

Media,
Licensing
and
Advertising

 

Overhead(1)

 

Total
Domestic

 

International

 

Consolidated

 
























2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
























Revenues

 

$

1,152.5

 

 

$

404.6

 

 

$

133.1

 

 

$

0.0

 

 

$

1,690.2

 

 

$

389.7

 

 

$

2,079.9

 

Bad debt

 

 

51.1

 

 

 

1.3

 

 

 

0.3

 

 

 

0.0

 

 

 

52.7

 

 

 

9.5

 

 

 

62.2

 

Depreciation and amortization

 

 

14.6

 

 

 

3.4

 

 

 

1.7

 

 

 

37.4

 

 

 

57.1

 

 

 

6.0

 

 

 

63.1

 

Amortization(2)

 

 

16.1

 

 

 

32.3

 

 

 

17.3

 

 

 

0.0

 

 

 

65.7

 

 

 

2.0

 

 

 

67.7

 

Royalty advances expensed

 

 

27.3

 

 

 

2.4

 

 

 

1.1

 

 

 

0.0

 

 

 

30.8

 

 

 

2.0

 

 

 

32.8

 

Segment profit (loss)(3)

 

 

93.5

 

 

 

78.5

 

 

 

11.0

 

 

 

(78.4

)

 

 

104.6

 

 

 

30.3

 

 

 

134.9

 

Segment assets

 

 

765.5

 

 

 

318.0

 

 

 

63.2

 

 

 

482.0

 

 

 

1,628.7

 

 

 

302.7

 

 

 

1,931.4

 

Goodwill

 

 

130.6

 

 

 

82.5

 

 

 

9.8

 

 

 

0.0

 

 

 

222.9

 

 

 

31.3

 

 

 

254.2

 

Expenditures for long-lived assets(4)

 

 

65.2

 

 

 

38.7

 

 

 

22.1

 

 

 

22.2

 

 

 

148.2

 

 

 

12.2

 

 

 

160.4

 

Long-lived assets(5)

 

 

320.9

 

 

 

187.1

 

 

 

37.1

 

 

 

295.3

 

 

 

840.4

 

 

 

107.0

 

 

 

947.4

 






























2004 Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






























Revenues

 

$

1,358.6

 

 

$

369.1

 

 

$

136.4

 

 

$

0.0

 

 

$

1,864.1

 

 

$

369.7

 

 

$

2,233.8

 

Bad debt

 

 

78.6

 

 

 

1.0

 

 

 

1.2

 

 

 

0.0

 

 

 

80.8

 

 

 

9.5

 

 

 

90.3

 

Depreciation and amortization

 

 

13.5

 

 

 

3.2

 

 

 

1.8

 

 

 

37.1

 

 

 

55.6

 

 

 

6.5

 

 

 

62.1

 

Amortization(2)

 

 

15.7

 

 

 

36.3

 

 

 

24.6

 

 

 

0.0

 

 

 

76.6

 

 

 

2.5

 

 

 

79.1

 

Royalty advances expensed

 

 

16.3

 

 

 

1.3

 

 

 

1.0

 

 

 

0.0

 

 

 

18.6

 

 

 

2.2

 

 

 

20.8

 

Segment profit (loss)(3)

 

 

104.6

 

 

 

56.1

 

 

 

10.9

 

 

 

(73.9

)

 

 

97.7

 

 

 

23.5

 

 

 

121.2

 

Segment assets

 

 

744.9

 

 

 

309.5

 

 

 

59.6

 

 

 

415.6

 

 

 

1,529.6

 

 

 

302.2

 

 

 

1,831.8

 

Goodwill

 

 

127.9

 

 

 

82.5

 

 

 

10.7

 

 

 

0.0

 

 

 

221.1

 

 

 

28.6

 

 

 

249.7

 

Expenditures for long-lived assets(4)

 

 

53.3

 

 

 

35.5

 

 

 

27.6

 

 

 

21.5

 

 

 

137.9

 

 

 

9.2

 

 

 

147.1

 

Long-lived assets(5)

 

 

312.4

 

 

 

187.5

 

 

 

34.4

 

 

 

302.7

 

 

 

837.0

 

 

 

103.4

 

 

 

940.4

 






























2003 Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






























Revenues

 

$

1,189.9

 

 

$

325.9

 

 

$

123.5

 

 

$

0.0

 

 

$

1,639.3

 

 

$

319.0

 

 

$

1,958.3

 

Bad debt

 

 

64.1

 

 

 

0.8

 

 

 

1.0

 

 

 

0.0

 

 

 

65.9

 

 

 

6.4

 

 

 

72.3

 

Depreciation and amortization

 

 

11.4

 

 

 

3.9

 

 

 

3.1

 

 

 

30.5

 

 

 

48.9

 

 

 

3.2

 

 

 

52.1

 

Amortization(2)

 

 

16.4

 

 

 

27.8

 

 

 

16.3

 

 

 

0.0

 

 

 

60.5

 

 

 

0.5

 

 

 

61.0

 

Royalty advances expensed

 

 

25.8

 

 

 

2.5

 

 

 

0.9

 

 

 

0.0

 

 

 

29.2

 

 

 

2.4

 

 

 

31.6

 

Segment profit (loss)(3)

 

 

123.7

 

 

 

43.8

 

 

 

12.2

 

 

 

(73.1

)

 

 

106.6

 

 

 

19.3

 

 

 

125.9

 

Segment assets

 

 

749.1

 

 

 

300.2

 

 

 

66.3

 

 

 

470.2

 

 

 

1,585.8

 

 

 

277.2

 

 

 

1,863.0

 

Goodwill

 

 

126.3

 

 

 

82.3

 

 

 

10.2

 

 

 

0.0

 

 

 

218.8

 

 

 

27.2

 

 

 

246.0

 

Expenditures for long-lived assets(4)

 

 

73.8

 

 

 

38.1

 

 

 

24.9

 

 

 

48.8

 

 

 

185.6

 

 

 

33.3

 

 

 

218.9

 

Long-lived assets(5)

 

 

302.8

 

 

 

191.7

 

 

 

39.9

 

 

 

303.0

 

 

 

837.4

 

 

 

99.9

 

 

 

937.3

 































 

 

(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. For fiscal 2003, includes $1.9 for the settlement of a securities lawsuit initiated in 1997. 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, fulfillment and distribution facilities located in Missouri and Arkansas, and an industrial/office building complex in Connecticut.

 

 

(2)

Includes amortization of prepublication and production costs.

 

 

(3)

Segment profit (loss) represents earnings before other income, interest and income taxes. The impact on segment profit of the Segment Reallocation was: a decrease in Children’s Book Publishing and Distribution segment profit of $10.6, $9.4 and $14.1 in fiscal 2005, 2004 and 2003, respectively; and an increase in Media, Licensing and Advertising segment profit of $10.6, $9.4 and $14.1 in fiscal 2005, 2004 and 2003, respectively. In fiscal 2004, Children’s Book Publishing and Distribution and International include charges of $22.7 and $2.7, respectively, related to the Company’s review of its continuity business. In fiscal 2005, Children’s Book Publishing and Distribution includes additional charges of $3.8, primarily due to severence costs related to the prior year review of the 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 LOGO)

46


The following table separately sets forth information for the three fiscal years ended May 31 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 the Children’s Book Publishing and Distribution segment, and for all other businesses included in the segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








 

 

 

 

 

 

 

 

 

Direct-to-home

 

All Other

Total

 





















 

 

2005

 

2004

 

2003

 

2005

 

2004

 

2003

 

2005

 

2004

 

2003

 





















 

 

Restated

 

Restated

 

Restated

 

Restated

 

Restated

 

Restated

 

Revenues

 

$

147.5

 

$

203.8

 

$

212.3

 

$

1,005.0

 

$

1,154.8

 

$

977.6

 

$

1,152.5

 

$

1,358.6

 

$

1,189.9

 

Bad debt

 

 

31.9

 

 

49.9

 

 

41.9

 

 

19.2

 

 

28.7

 

 

22.2

 

 

51.1

 

 

78.6

 

 

64.1

 

Depreciation and amortization

 

 

0.6

 

 

0.5

 

 

0.3

 

 

14.0

 

 

13.0

 

 

11.1

 

 

14.6

 

 

13.5

 

 

11.4

 

Amortization(1)

 

 

1.4

 

 

1.3

 

 

1.5

 

 

14.7

 

 

14.4

 

 

14.9

 

 

16.1

 

 

15.7

 

 

16.4

 

Royalty advances expensed

 

 

3.8

 

 

0.8

 

 

4.5

 

 

23.5

 

 

15.5

 

 

21.3

 

 

27.3

 

 

16.3

 

 

25.8

 

Business profit (loss)(2)

 

 

(2.8

)

 

(10.4

)

 

30.9

 

 

96.3

 

 

115.0

 

 

92.8

 

 

93.5

 

 

104.6

 

 

123.7

 

Business assets

 

 

226.3

 

 

247.6

 

 

252.1

 

 

539.2

 

 

497.3

 

 

497.0

 

 

765.5

 

 

744.9

 

 

749.1

 

Goodwill

 

 

92.4

 

 

92.4

 

 

93.0

 

 

38.2

 

 

35.5

 

 

33.3

 

 

130.6

 

 

127.9

 

 

126.3

 

Expenditures for long-lived assets(3)

 

 

7.1

 

 

4.6

 

 

6.8

 

 

58.1

 

 

48.7

 

 

67.0

 

 

65.2

 

 

53.3

 

 

73.8

 

Long-lived assets(4)

 

 

143.9

 

 

143.9

 

 

142.5

 

 

177.0

 

 

168.5

 

 

160.3

 

 

320.9

 

 

312.4

 

 

302.8

 































 

 

(1)

Includes amortization of prepublication and production costs.

 

 

(2)

Business profit (loss) represents earnings (loss) before other income, interest and income taxes. In fiscal 2004, Direct-to-home and All Other include charges of $14.9 and $7.8, respectively, related to the Company’s review of its continuity business. In fiscal 2005, Direct-to-home and All Other include additional charges of $3.6 and $0.2, respectively, related to the prior year review of the continuity 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. In fiscal 2005, Direct-to-home and All Other include charges of $3.6 and $0.2, respectively, related to the Company’s review of its continuity business.


 

3. DEBT



 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following summarizes debt as of May 31:

 

 

 

 

 

 

 

 

 











 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value