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

 











 

 

2005

 

2004

 















Lines of Credit

 

$

24.7

 

$

24.7

 

$

23.0

 

$

23.0

 

Credit Agreement and Revolver

 

 

 

 

 

 

14.2

 

 

14.2

 

5.75% Notes due 2007, net of premium/discount

 

 

303.5

 

 

306.6

 

 

305.5

 

 

313.5

 

5% Notes due 2013, net of discount

 

 

173.0

 

 

173.5

 

 

172.8

 

 

163.1

 

Other debt

 

 

0.2

 

 

0.2

 

 

1.1

 

 

1.1

 















Total debt

 

 

501.4

 

 

505.0

 

 

516.6

 

 

514.9

 

Less lines of credit and short-term debt

 

 

(24.9

)

 

(24.9

)

 

(24.1

)

 

(24.1

)















Total long-term debt

 

$

476.5

 

$

480.1

 

$

492.5

 

$

490.8

 















Short-term debt is carried at cost which approximates fair value. Fair values were estimated based on market quotes, where available, or dealer quotes.

(SCHOLASTIC LOGO)

47


The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of May 31, 2005 for fiscal years ending May 31:

 

 

 

 

 






2006

 

$

24.9

 

2007

 

 

303.5

 

2008

 

 

 

2009

 

 

 

2010

 

 

 

Thereafter

 

 

173.0

 






Total debt

 

$

501.4

 






Lines of Credit
Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $61.8 and $62.1 at May 31, 2005 and 2004, respectively. There were borrowings equivalent to $24.7 and $23.0 outstanding under these credit lines at May 31, 2005 and 2004, respectively. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.4% and 5.5% at May 31, 2005 and 2004, respectively.

Credit Agreement
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 “Loan Agreement”). The Credit Agreement, which expires on March 31, 2009, provides for aggregate borrowings of up to $190.0 (with a right in certain circumstances to increase borrowings to $250.0), including the issuance of up to $10.0 in letters of credit. Interest under this facility is either at the prime rate or at a rate 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 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 under the Credit Agreement as of May 31, 2005. On May 31, 2004, $12.0 was outstanding under the Credit Agreement at a weighted average interest rate of 1.7%.

Revolver
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). As amended effective April 30, 2004, the Revolver provides for unsecured revolving credit of up to $40.0 and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate 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. On May 31, 2004, $2.2 was outstanding under the Revolver at a weighted average interest rate of 3.0%.

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

(SCHOLASTIC LOGO)

48


5% Notes due 2013
On April 4, 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption.

 

4. COMMITMENTS AND CONTINGENCIES


Lease Obligations
The Company leases warehouse space, office space and equipment under various capital and operating leases over periods ranging from one to forty years. Certain of these leases provide for scheduled rent increases based on price-level factors. The Company generally does not enter into leases that call for contingent rent. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced.

Net rent expense relating to the Company’s non- cancelable operating leases for the three fiscal years ended May 31, 2005, 2004 and 2003 was $36.6, $36.4 and $35.1, respectively.

The Company was obligated under capital leases covering land, buildings and equipment in the amount of $74.4 and $74.0 at May 31, 2005 and 2004, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.

The composition of capital leases reflected as Property, Plant and Equipment in the consolidated balance sheets is as follows:

 

 

 

 

 

 

 

 







 

 

2005

 

2004

 





 

 

Restated

 

Land

 

$

3.5

 

$

3.5

 

Buildings

 

 

39.0

 

 

39.0

 

Equipment

 

 

45.6

 

 

39.4

 









 

 

 

88.1

 

 

81.9

 

Accumulated amortization

 

 

(28.1

)

 

(20.0

)









Total

 

$

60.0

 

$

61.9

 









The aggregate minimum future annual rental commitments at May 31, 2005 under all non-cancelable leases are payable as follows:

 

 

 

 

 

 

 

 







 

 

Operating Leases

 

 

Capital Leases

 

 









2006

 

 

$

27.4

 

 

 

$

16.5

 

 

2007

 

 

 

20.1

 

 

 

 

11.6

 

 

2008

 

 

 

15.0

 

 

 

 

9.4

 

 

2009

 

 

 

9.5

 

 

 

 

7.9

 

 

2010

 

 

 

7.6

 

 

 

 

6.6

 

 

Thereafter

 

 

 

51.9

 

 

 

 

224.1

 

 













Total minimum lease payments

 

 

$

131.5

 

 

 

 

276.1

 

 

 

 

 



 

 

 

 

 

 

 

Less amount representing interest

 

 

 

 

 

 

 

 

201.7

 

 

 

 

 

 

 

 

 

 





Present value of net minimum capital lease payments

 

 

 

 

 

 

 

 

74.4

 

 

Less current maturities of capital lease obligations

 

 

 

 

 

 

 

 

11.0

 

 

 

 

 

 

 

 

 

 





Long-term capital lease obligations

 

 

 

 

 

 

 

$

63.4

 

 

 

 

 

 

 

 

 

 





Other Commitments
The Company had contractual commitments relating to royalty advances at May 31, 2005 totaling $8.9. The aggregate annual commitments for royalty advances are as follows: 2006 – $7.5; 2007 – $1.0; 2008 – $0.2; 2009 – $0.2.

Other commitments at May 31, 2005 total $1.7 for fiscal year 2006.

Contingencies
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.

(SCHOLASTIC LOGO)

49


 

5. INVESTMENT


In fiscal 2003, the Company entered into a joint venture with The Book People, Ltd., 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. As part of the transaction, the Company established a £3.0 revolving credit facility in favor of The Book People Group, Ltd., which is available to fund the expansion of The Book People Group, Ltd. and for working capital purposes. As of May 31, 2005, £3.0 (equivalent to $5.7 at that date) was outstanding under the revolving credit facility. The equity investment in The Book People Group, Ltd. is included in Other within the Other Assets and Deferred Charges section of the Consolidated Balance Sheets.

 

6. GOODWILL AND OTHER INTANGIBLES


Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise.

The following table summarizes the activity in Goodwill for the years ended of May 31:

 

 

 

 

 

 

 

 







 

 

2005

 

2004

 







Beginning balance

 

$

249.7

 

$

246.0

 

Additions due to acquisitions

 

 

6.0

 

 

3.0

 

Other adjustments

 

 

(1.5

)

 

0.7

 









Ending Balance

 

$

254.2

 

$

249.7

 









In fiscal 2005, Additions due to acquisitions includes the purchase price for the acquisition of Chicken House Publishing Ltd. and the accrual of a final payment related to the fiscal 2002 acquisition of Klutz.

 

 

 

 

 

 

 

 

The following table summarizes Other intangibles subject to amortization as of May 31:  








 

 

2005

 

2004

 







Customer lists

 

$

3.0

 

$

2.9

 

Accumulated amortization

 

 

(2.8

)

 

(2.7

)









Net customer lists

 

 

0.2

 

 

0.2

 









Other intangibles

 

 

4.0

 

 

4.0

 

Accumulated amortization

 

 

(2.6

)

 

(2.4

)









Net other intangibles

 

 

1.4

 

 

1.6

 









Total

 

$

1.6

 

$

1.8

 









Amortization expense for Other intangibles totaled $0.3 for each of the fiscal years ended May 31, 2005 and 2004 and $0.5 for the fiscal year ended May 31, 2003. Amortization expense for these assets is currently estimated to total $0.3 for the fiscal year ending May 31, 2006 and $0.2 for each of the fiscal years ending May 31, 2007 through 2010. The weighted average amortization periods for these assets by major asset class are two years and twelve years for customer lists and other intangibles, respectively.

 

 

 

 

 

 

 

 

The following table summarizes Other intangibles not subject to amortization as of May 31:  






 

 

2005

 

2004

 







Net carrying value by major class:

 

 

 

 

 

 

 

Titles

 

$

31.0

 

$

31.0

 

Licenses

 

 

17.2

 

 

17.2

 

Major sets

 

 

11.4

 

 

11.4

 

Trademarks and other

 

 

17.5

 

 

17.5

 









Total

 

$

77.1

 

$

77.1

 










 

7. INCOME TAXES


The provisions for income taxes for the fiscal years ended May 31, 2005, 2004 and 2003 are based on earnings before taxes as follows:












 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

United States

 

$

91.3

 

$

89.1

 

$

82.3

 

Non-United States

 

 

8.4

 

 

0.5

 

 

8.2

 












Total

 

$

99.7

 

$

89.6

 

$

90.5

 












(SCHOLASTIC LOGO)

50


The provisions for income taxes attributable to earnings for the fiscal years ended May 31, 2005, 2004 and 2003 consist of the following components:

 

 

 

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Federal

 

 

 

 

 

 

 

 

 

 

Current

 

$

5.7

 

$

19.0

 

$

11.6

 

Deferred

 

 

19.0

 

 

5.9

 

 

13.5

 












 

 

$

24.7

 

$

24.9

 

$

25.1

 












State and local

 

 

 

 

 

 

 

 

 

 

Current

 

$

4.2

 

$

4.7

 

$

3.4

 

Deferred

 

 

0.4

 

 

0.8

 

 

0.9

 












 

 

$

4.6

 

$

5.5

 

$

4.3

 












International

 

 

 

 

 

 

 

 

 

 

Current

 

$

5.1

 

$

5.5

 

$

4.3

 

Deferred

 

 

1.0

 

 

(4.1

)

 

(2.0

)












 

 

$

6.1

 

$

1.4

 

$

2.3

 












Total

 

 

 

 

 

 

 

 

 

 

Current

 

$

15.0

 

$

29.2

 

$

19.3

 

Deferred

 

 

20.4

 

 

2.6

 

 

12.4

 












 

 

$

35.4

 

$

31.8

 

$

31.7

 












 

 

 

 

 

 

 

 

 

 

 

The provisions for income taxes for the fiscal years ended May 31, 2005, 2004 and 2003 differ from the amount of tax determined by applying the federal statutory rate as follows:








 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Computed federal statutory provision

 

$

34.9

 

$

31.4

 

$

31.7

 

State income tax provision, net of federal income tax benefit

 

 

3.0

 

 

3.6

 

 

2.8

 

Difference in effective tax rates on earnings of foreign subsidiaries

 

 

(0.4

)

 

(3.0

)

 

(1.4

)

Charitable contributions

 

 

(1.4

)

 

0.0

 

 

(1.4

)

Other – net

 

 

(0.7

)

 

(0.2

)

 

0.0

 












Total provision for income taxes

 

$

35.4

 

$

31.8

 

$

31.7

 












Effective tax rates

 

 

35.5

%

 

35.5

%

 

35.0

%












The undistributed earnings of foreign subsidiaries at May 31, 2005 were $18.7. Any remittance of foreign earnings would not result in any significant additional tax.

 

 

 

 

 

 

 

 

The tax effects of items that give rise to deferred tax assets and liabilities at May 31, 2005 and 2004 are as follows:  






 

 

2005

 

2004

 







Net deferred tax assets:

 

 

 

 

 

 

 

Tax uniform capitalization

 

$

23.7

 

$

25.6

 

Inventory reserves

 

 

18.4

 

 

19.6

 

Allowance for doubtful accounts

 

 

10.7

 

 

21.6

 

Other accounting reserves

 

 

12.4

 

 

13.9

 

Post-retirement, post-employment and pension obligations

 

 

20.5

 

 

13.2

 

Tax carryforwards

 

 

17.6

 

 

11.9

 

Leases

 

 

6.5

 

 

6.4

 

Prepaid expenses

 

 

(11.4

)

 

(11.0

)

Depreciation and amortization

 

 

(35.1

)

 

(24.8

)

Other – net

 

 

7.3

 

 

(1.0

)









 

 

 

70.6

 

 

75.4

 









Valuation allowance

 

 

8.8

 

 

8.4

 









Total net deferred tax assets

 

$

61.8

 

$

67.0

 









Net deferred tax assets of $61.8 at May 31, 2005 and $67.0 at May 31, 2004 include $4.1 and $3.9 in Other accrued expenses at May 31, 2005 and 2004, respectively, and $17.2 and $13.9 in Other noncurrent liabilities at May 31, 2005 and 2004, respectively.

At May 31, 2005, the Company had a charitable deduction carryforward of $19.8, which expires in various amounts during the fiscal years ending 2007 through 2010, and federal and state operating loss carryforwards of $2.9 and $16.4, respectively, which expire annually in varying amounts if not utilized. The Company also had foreign operating loss carryforwards of $18.6 at May 31, 2005, which either expire at various dates or do not expire.

For the year ended May 31, 2005, the valuation allowance increased by $0.4.

The Company had tax reserves totaling $7.2 and $8.3 at May 31, 2005 and 2004, respectively.

(SCHOLASTIC LOGO)
51


 

8. CAPITAL STOCK AND STOCK OPTIONS


Scholastic Corporation has authorized capital stock of 2,500,000 shares of Class A Stock, par value $0.01 per share (the “Class A Stock”); 70,000,000 shares of Common Stock, par value $0.01 per share (the “Common Stock”); and 2,000,000 shares of Preferred Stock, par value $1.00 per share (the “Preferred Stock”).

Class A and Common Stock
At May 31, 2005, 1,656,200 shares of Class A Stock and 39,076,544 shares of Common Stock were outstanding. At May 31, 2005, Scholastic Corporation had reserved for issuance 11,951,829 shares of Common Stock. Of this amount, 9,655,874 shares were reserved for issuance under the Company’s stock-based plans (including shares available for grant and stock options currently outstanding), 1,656,200 shares were reserved for issuance upon conversion of the Class A Stock and 639,755 shares were reserved for future issuances under the Company’s employee stock purchase plan.

The only voting rights vested in the holders of Common Stock, except as required by law, are the election of such number of directors as shall equal at least one-fifth of the members of the Board of Directors. The holders of Class A Stock are entitled to elect all other directors and to vote on all other matters. Holders of Class A Stock and Common Stock are entitled to one vote per share on matters on which they are entitled to vote. The holders of Class A Stock have the right, at their option, to convert shares of Class A Stock into shares of Common Stock on a share-for-share basis.

With the exception of voting rights and conversion rights, and as to the rights of holders of Preferred Stock if issued, the Class A Stock and the Common Stock are equal in rank and are entitled to dividends and distributions, when and if declared by the Board of Directors. Scholastic Corporation has not paid any cash dividends since its public offering in 1992 and has no current plans to pay any dividends on its Class A Stock or Common Stock.

Preferred Stock
The Preferred Stock may be issued in one or more series, with the rights of each series, including voting rights, to be determined by the Board of Directors before each issuance. To date, no shares of Preferred Stock have been issued.

Stock-Based Awards
At May 31, 2005, the Company maintained three stockholder-approved employee stock-based benefit plans with regard to the Common Stock: the Scholastic Corporation 1992 Stock Option Plan (the “1992 Plan”), under which no further awards can be made; the Scholastic Corporation 1995 Stock Option Plan (the “1995 Plan”); and the Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”). The 1995 Plan provides for the issuance of two types of options to purchase Company stock: incentive stock options, which qualify for special treatment under the Internal Revenue Code, and options that are not so qualified, called non-qualified stock options. The 2001 Plan provides for the issuance of non-qualified stock options, incentive stock options, restricted stock and other stock-based awards. At May 31, 2005, non- qualified stock options to purchase 230,000 shares, 3,499,549 shares and 3,102,968 shares of Common Stock were outstanding under the 1992 Plan, 1995 Plan and 2001 Plan, respectively, and 233,200 shares and 719,891 shares of Common Stock were available for additional awards under the 1995 Plan and 2001 Plan, respectively.

The Company also maintains two stockholder-approved stock option plans for outside directors: the 1992 Outside Directors’ Stock Option Plan (the “1992 Directors’ Plan”), under which no further awards can be made; and the 1997 Outside Directors’ Stock Option Plan (the “1997 Directors’ Plan”). The 1997 Directors’ Plan, as amended, provides for the automatic grant to each non-employee director on the date of each annual stockholders’ meeting of non-qualified stock options to purchase 6,000 shares of Common Stock. At May 31, 2005, options to purchase

 

(SCHOLASTIC LOGO)

52


357,500 shares and 12,000 shares of Common Stock were outstanding under the 1997 Directors’ Plan and the 1992 Directors’ Plan, respectively, and 192,000 shares of Common Stock were available for additional awards under the 1997 Directors’ Plan. In September 2004, options were awarded under the 1997 Directors’ Plan at an exercise price of $29.49.

In fiscal 2005, the Corporation’s Board of Directors (the “Board”) adopted, and the Class A Stockholders approved, the Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”), which provides for the grant to Richard Robinson, the Chief Executive Officer of the Corporation as of the effective date of the Class A Plan, of options (“Class A Options”) to purchase up to an aggregate of 750,000 shares of Class A Stock. In September 2004, the Board approved a grant to Mr. Robinson of 333,000 Class A Options, which vest in four equal annual installments beginning one year from the date of grant.

Generally, options granted under the various plans may not be exercised for a minimum of one year after the date of grant and expire approximately ten years after the date of grant.

The following table sets forth the stock option activity for the Class A Stock and Common Stock plans for the three fiscal years ended May 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








 

 

 

2005

 

2004

 

2003

 








 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 














 

Outstanding – beginning of year

 

 

8,032,587

 

$

28.52

 

 

6,852,258

 

$

28.65

 

 

5,539,712

 

$

27.58

 

Granted

 

 

912,901

 

 

28.32

 

 

1,599,000

 

 

27.90

 

 

1,392,240

 

 

32.69

 

Exercised

 

 

(1,038,828

)

 

26.10

 

 

(197,296

)

 

23.23

 

 

(59,694

)

 

21.49

 

Cancelled

 

 

(437,010

)

 

33.36

 

 

(221,375

)

 

32.89

 

 

(20,000

)

 

34.31

 




















 

Outstanding – end of year

 

 

7,469,650

 

$

28.57

 

 

8,032,587

 

$

28.52

 

 

6,852,258

 

$

28.65

 




















 

Exercisable – end of year

 

 

5,106,057

 

$

28.18

 

 

5,279,912

 

$

27.43

 

 

4,669,518

 

$

26.05

 




















 

The following table sets forth information as of May 31, 2005 regarding weighted average exercise prices and weighted average remaining contractual lives for the remaining outstanding stock options, sorted by range of exercise price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 

 

 

Options Outstanding

 

Options Exercisable

 






 

       Options
Price Range

 

Number

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Contractual
Life

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 












 

$15.73 — $20.97

 

 

1,429,962

 

$

18.39

 

 

2.6

 

 

1,429,962

 

$

18.39

 

$20.97 — $26.21

 

 

1,079,550

 

 

25.34

 

 

5.3

 

 

915,300

 

 

25.44

 

$26.21 — $31.45

 

 

2,382,718

 

 

28.69

 

 

7.7

 

 

743,625

 

 

29.12

 

$31.45 — $36.69

 

 

1,803,420

 

 

33.68

 

 

6.0

 

 

1,451,670

 

 

33.26

 

$36.69 — $41.94

 

 

214,750

 

 

38.01

 

 

7.4

 

 

84,250

 

 

38.37

 

$41.94 — $47.18

 

 

487,250

 

 

43.04

 

 

6.3

 

 

412,750

 

 

43.08

 

$47.18 — $52.42

 

 

72,000

 

 

49.95

 

 

6.6

 

 

68,500

 

 

49.89

 

















 

(SCHOLASTIC LOGO)

53


Restricted Stock
The Company may grant restricted stock units under the 2001 Plan (“Stock Units”). During fiscal 2005, the Company granted 71,731 Stock Units, with a weighted average grant date fair value of $30.81 per unit, to certain officers and key executives. The Stock Units are scheduled to vest in four equal annual installments beginning one year from the grant date. Upon vesting, Stock Units are converted automatically on a one-for-one basis into shares of Common Stock. In fiscal 2005, the Company amortized $0.3 in connection with the outstanding Stock Units, recorded as a component of Selling, general and administrative expenses.

Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (“ESPP”), which is offered to eligible United States employees. The ESPP permits participating employees to purchase Common Stock, through after-tax payroll deductions, on a quarterly basis at a 15% discount from the lower of the closing price of the Common Stock on NASDAQ on the first or last business day of each fiscal quarter. During fiscal 2005, 2004 and 2003, the Company issued 98,286 shares, 121,256 shares and 131,417 shares of Common Stock under the ESPP at a weighted average price of $26.38, $25.01and $25.54 per share, respectively. At May 31, 2005, there were 351,320 shares of Common Stock authorized to be issued under the ESPP.

Management Stock Purchase Plan
The Company maintains a Management Stock Purchase Plan (“MSPP”), which allows certain members of senior management to defer up to 100% of their annual cash bonus payment in the form of restricted stock units (“RSUs”). The RSUs are purchased by the employee at a 25% discount (or in some instances, a 10% discount) from the lowest closing price of the Common Stock on NASDAQ during the fiscal quarter in which such bonuses are payable and are converted into shares of Common Stock on a one-for-one basis at the end of the applicable deferral period. During fiscal 2005, 2004 and 2003, the Company allocated 13,171 RSUs, 0 RSUs and 62,071 RSUs to participants under the MSPP at a weighted average price of $19.76, $0 and $25.22 per RSU, resulting in an expense of $0.5, $0.4 and $0.5, respectively. At May 31, 2005 there were 288,435 shares of Common Stock authorized for issuance under the MSPP.

 

9.  EMPLOYEE BENEFIT PLANS


Pension Plans
The Company has a cash balance retirement plan (the “Pension Plan”), which covers the majority of United States employees who meet certain eligibility requirements. The Company funds all of the contributions for the Pension Plan. Benefits generally are based on the Company’s contributions and interest credits allocated to participants accounts based on years of benefit service and annual pensionable earnings. It is the Company’s policy to fund the minimum amount required by the Employee Retirement Income Security Act (“ERISA”) of 1974, as amended.

Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom, has a defined benefit pension plan (the “U.K. Pension Plan”) that covers its employees who meet various eligibility requirements. Benefits are based on years of service and on a percentage of compensation near retirement. The U.K. Pension Plan is funded by contributions from Scholastic Ltd. and its employees.

Grolier Ltd., an indirect subsidiary of Scholastic Corporation located in Canada, provides a defined benefit pension plan (the “Grolier Canada Pension Plan”) that covers its employees who meet certain eligibility requirements. All full time employees are eligible to participate in the plan after two years of employment. Grolier Ltd.’s contributions to the fund have been suspended due to an actuarial surplus. Employees are not required to contribute to the fund.

The Company’s pension plans have different measurement dates, as follows: for the Pension Plan-May 31, 2005; for the U.K. Pension Plan and the Grolier Canada Pension Plan – March 31, 2005.

(SCHOLASTIC LOGO)

54


Post-Retirement Benefits
The Company provides post-retirement benefits to retired United States-based employees (the “Post-Retirement Benefits”) consisting of certain healthcare and life insurance benefits. A majority of these employees may become eligible for these benefits if they reach normal retirement age while working for the Company. At May 31, 2005, the unrecognized prior service cost remaining was $9.2.

In fiscal 2004, the “Medicare Prescription Drug, Improvement and Modernization Act” (the “Medicare Act”) was signed into law for employers that sponsor post-retirement health care plans that provide prescription drug benefits. The Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy of 28% to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In response to the Medicare Act, the FASB issued Staff Position 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” to provide additional disclosure and guidance in implementing the federal subsidy provided by the Medicare Act. Based on this guidance, the Company has determined that the Post-Retirement Benefits provided to the portion of its post-65 retiree population that have retained 100% Company sponsored drug coverage are the actuarial equivalent of the benefits under Medicare. As a result, in fiscal 2005, the Company recognized a reduction of its accumulated post-retirement benefit obligation of $0.5 due to the federal subsidy under the Medicare Act.

The following table sets forth the weighted average actuarial assumptions utilized to determine the benefit obligations for the Pension Plan, the U.K. Pension Plan and the Grolier Canada Pension Plan (collectively, the “Pension Plans”) at May 31:

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

 

Post-Retirement
Benefits










 

 

2005

 

2004

 

2005

 

2004

 










Weighted average assumptions used to determine benefit obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

5.3

%

 

6.5

%

 

5.3

%

 

6.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate of compensation increase

 

 

4.0

%

 

4.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average assumptions used to determine net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

6.5

%

 

6.0

%

 

6.7

%

 

6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected long-term return on plan assets

 

 

8.8

%

 

8.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate of compensation

 

 

4.0

%

 

4.0

%

 

 

 

 















To develop the expected long-term rate of return on assets assumption for the Pension Plans, the Company, with the assistance of its actuaries, considers historical returns and future expectations. Over the 15-20 year periods ending May 31, 2005, the returns on the portfolio, assuming it was invested at the current target asset allocation in the prior periods, would have been a compounded annual average of 10%-12%. Considering this information and the potential for lower future returns due to a generally lower interest rate environment, the Company selected an assumed weighted average long-term rate of return of 8.8% for all plans.

(SCHOLASTIC LOGO)

55


The following table sets forth changes in benefit obligation and plan assets, the reconciliation of funded status and the (decrease) increase in the minimum pension liability included in accumulated other comprehensive loss for the Pension Plans and the Post-Retirement Benefits for the two fiscal years ended May 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

Pension Benefits

 

Post-Retirement
Benefits

 







 

 

2005

 

2004

 

2005

 

2004

 















Change in benefit obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

 

$

131.2

 

$

131.2

 

$

31.4

 

$

28.8

 

Service cost

 

 

7.0

 

 

7.0

 

 

0.4

 

 

0.5

 

Interest cost

 

 

8.3

 

 

7.7

 

 

2.0

 

 

2.0

 

Plan participants’ contributions

 

 

0.4

 

 

0.5

 

 

0.2

 

 

 

Amendments

 

 

 

 

 

 

 

 

(2.8

)

Actuarial (gains) losses

 

 

18.6

 

 

(7.2

)

 

4.9

 

 

5.5

 

Foreign currency exchange rate changes

 

 

1.9

 

 

3.2

 

 

 

 

 

Benefits paid

 

 

(9.4

)

 

(11.2

)

 

(2.7

)

 

(2.6

)















Benefit obligation at end of year

 

$

158.0

 

$

131.2

 

$

36.2

 

$

31.4

 















Change in plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

$

114.7

 

$

88.9

 

$

 

$

 

Actual gain (loss) on plan assets

 

 

10.6

 

 

15.8

 

 

 

 

 

 

Company contributions

 

 

3.7

 

 

19.4

 

 

2.5

 

 

2.6

 

Plan participants’ contributions

 

 

0.4

 

 

0.5

 

 

0.2

 

 

0.1

 

Administrative expenses

 

 

(1.0

)

 

(0.9

)

 

 

 

 

Foreign currency exchange rate changes

 

 

1.6

 

 

2.2

 

 

 

 

 

Benefits paid

 

 

(9.4

)

 

(11.2

)

 

(2.7

)

 

(2.7

)















Fair value of plan assets at end of year

 

$

120.6

 

$

114.7

 

$

 

$

 















Funded status

 

 

 

 

 

 

 

 

 

 

 

 

 

Underfunded status of the plans

 

$

(37.4

)

$

(16.5

)

$

(36.2

)

$

(31.4

)

Unrecognized net actuarial loss

 

 

53.4

 

 

37.7

 

 

25.6

 

 

22.4

 

Unrecognized prior service cost

 

 

(1.6

)

 

(1.8

)

 

(9.2

)

 

(10.1

)

Unrecognized net asset obligation

 

 

0.1

 

 

0.2

 

 

 

 

 















Accrued benefit asset (liability)

 

$

14.5

 

$

19.6

 

$

(19.8

)

$

(19.1

)















Amounts recognized in the Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid benefit cost

 

$

14.5

 

$

19.6

 

$

 

$

 

Accrued benefit liability

 

 

(40.7

)

 

(26.1

)

 

(19.8

)

 

(19.1

)

Intangible asset

 

 

0.1

 

 

0.1

 

 

 

 

 

Accumulated other comprehensive loss

 

 

40.6

 

 

26.0

 

 

 

 

 















Net amount recognized

 

$

14.5

 

$

19.6

 

$

(19.8

)

$

(19.1

)















(Increase) decrease in minimum liability included in other comprehensive income (loss)

 

$

(14.6

)

$

17.2

 

$

 

$

 















(SCHOLASTIC LOGO)

56


The accumulated benefit obligation for the Pension Plans was $148.4 and $123.3 at May 31, 2005 and 2004, respectively. Information with respect to the Pension Plans with accumulated benefit obligations in excess of plan assets is as follows for the fiscal years ended May 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



















 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 



















Projected benefit obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

$

150.1

 

$

124.0

 

Accumulated benefit obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

141.6

 

 

117.0

 

Fair value of plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

112.1

 

 

106.6

 





















The following table sets forth the components of the net periodic benefit costs under the Pension Plans and the Post-Retirement Benefits for the three fiscal years ended May 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





















 

 

Pension Benefits

 

Post-Retirement Benefits

 















 

 

2005

 

2004

 

2003

 

2005

 

2004

 

2003

 















Components of Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

7.0

 

$

7.0

 

$

5.9

 

$

0.4

 

$

0.4

 

$

0.5

 

Interest cost

 

 

8.3

 

 

7.7

 

 

7.7

 

 

2.0

 

 

2.0

 

 

1.8

 

Expected return on assets

 

 

(8.7

)

 

(8.0

)

 

(8.6

)

 

 

 

 

 

 

Net amortization and deferrals

 

 

0.2

 

 

0.3

 

 

0.1

 

 

(0.8

)

 

(0.8

)

 

(0.6

)

Decrease in valuation allowance

 

 

 

 

(1.2

)

 

 

 

 

 

 

 

 

Recognized net actuarial loss

 

 

2.3

 

 

2.5

 

 

1.2

 

 

1.6

 

 

2.0

 

 

1.0

 

Net periodic benefit cost

 

$

9.1

 

$

8.3

 

$

6.3

 

$

3.2

 

$

3.6

 

$

2.7

 





















Plan Assets

The Company’s investment policy is to actively manage, within acceptable risk parameters, certain asset classes where the potential exists to outperform the broader market.

The total weighted average asset allocations for the Pension Plans at May 31 by asset category are as follows:

 

 

 

 

 

 

 

 

 










 

 

 

 

 

2005

 

2004

 










Small cap equities

 

 

 

 

 

16.6

%

 

17.0

%

International equities

 

 

 

 

 

9.8

 

 

9.2

 

Index fund equities

 

 

 

 

 

44.0

 

 

44.5

 

Bonds and fixed interest products

 

 

 

 

 

29.0

 

 

27.0

 

Real estate

 

 

 

 

 

0.5

 

 

0.1

 

Other

 

 

 

 

 

0.1

 

 

2.2

 












 

 

 

 

 

 

100.0

%

 

100.0

%












The Company’s investments include weighted average target asset allocations as follows:

 

 

 

 

 

 

 

 

 

 

 












 

 

Pension
Plan

 

U.K.
Pension
Plan

 

Grolier
Canada
Pension
Plan

 









Equity

 

 

70.0

%

 

68.0

%

 

35.0

%

Debt and Cash Equivalents

 

 

30.0

 

 

25.0

 

 

65.0

 

Real Estate

 

 

 

 

7.0

 

 

 












 

 

 

100.0

%

 

100.0

%

 

100.0

%












(SCHOLASTIC LOGO)

57


Contributions
Scholastic Ltd. expects to contribute $0.7 to the U.K. Pension Plan.

Estimated Future Benefit Payments
The following table sets forth the expected future benefit payments under the Pension Plans and the Post-Retirement Benefits by fiscal year:

 

 

 

 

 

 

 

 

 

 

 











 

 

 

 

 

 

Post-Retirement

 

 

 

 

 

 


 

 

 

Pension
Benefits

 

Benefit
Payments

 

Medicare
Subsidy
Receipts

 








 

2006

 

$

8.5

 

$

2.5

 

$

0.1

 

2007

 

 

9.6

 

 

2.6

 

 

0.3

 

2008

 

 

10.4

 

 

2.7

 

 

0.3

 

2009

 

 

12.1

 

 

2.8

 

 

0.3

 

2010

 

 

12.1

 

 

2.9

 

 

0.3

 

2011-2015

 

 

66.4

 

 

14.8

 

 

1.7

 











 

Assumed health care cost trend rates at May 31:

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 







Health care cost trend rate assumed for the next fiscal year

 

 

10.0

%

 

11.0

%

Rate to which the cost trend is assumed to decline (the ultimate trend rate)

 

 

5.0

%

 

5.0

%

Year that the rate reaches the ultimate trend rate

 

 

2012

 

 

2013

 









Assumed health care cost trend rates have a significant effect on the amounts reported for the Company’s health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:

 

 

 

 

 

 

 

 









 

 

2005

 

2004

 







Total service and interest cost

 

$

0.2

 

$

0.2

 

Post-retirement benefit obligation

 

 

3.1

 

 

2.3

 









The Company also provides defined contribution plans for certain eligible employees. In the United States, the Company sponsors a 401(k) retirement plan and has contributed $6.2, $5.9 and $5.8 for fiscal 2005, 2004 and 2003, respectively. For its internationally-based employees, the expenses under these plans totaled $4.6, $2.3 and $1.9 for fiscal 2005, 2004 and 2003, respectively.

 

10. EARNINGS PER SHARE


The following table sets forth the computation of basic and diluted earnings per share for the three years ended May 31:

 

 

 

 

 

 

 

 

(Amounts in millions, except per share data)

 






 

 

2005

 

2004

 

2003

 









 

 

 

 

 

Restated

 

Restated

 

Net income for basic and diluted earnings per share

 

$

64.3

 

$

57.8

 

$

58.8

 

Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings per share

 

 

40.0

 

 

39.4

 

 

39.1

 












Dilutive effect of Common Stock issued pursuant to stock-based benefit plans

 

 

0.8

 

 

0.7

 

 

1.0

 












Adjusted weighted average Shares of Class A Stock and Common

 

 

 

 

 

 

 

 

 

 

Stock outstanding for diluted earnings per share

 

 

40.8

 

 

40.1

 

 

40.1

 












Earnings per share of Class A Stock and Common Stock:

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.61

 

$

1.47

 

$

1.50

 

Diluted

 

 

1.58

 

 

1.44

 

 

1.46

 













 

11. SPECIAL SEVERANCE CHARGES


On May 28, 2003, the Company announced a reduction in its global work force. The majority of the affected employees were notified in the fiscal year ended May 31, 2003, and accordingly the Company established liabilities for severance and other related costs of $10.9 for that fiscal year. In the fiscal year ended May 31, 2004, the Company established additional liabilities of $3.3 for severance and other related costs with respect to the affected employees notified in that fiscal year. These charges are reflected in the Company’s income statement as the Special severance charges for the years ended May 31, 2004 and May 31, 2003.

(SCHOLASTIC LOGO)

58


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

 

 

 

 

 






 

 

 

Amount

 






Fiscal 2003 liabilities

 

$

10.9

 

Fiscal 2003 payments

 

 

(1.2

)






Balance at May 31, 2003

 

 

9.7

 






Fiscal 2004 additional liabilities

 

 

3.3

 

Fiscal 2004 payments

 

 

(10.9

)






Balance at May 31, 2004

 

 

2.1

 






Fiscal 2005 payments

 

 

(1.6

)






Balance at May 31, 2005

 

$

0.5

 






The remaining liability of $0.5 is expected to be paid over the next fiscal year under salary continuance arrangements with certain affected employees.

 

12. LITIGATION AND OTHER CHARGES


In fiscal 2003, the Company recorded a pre-tax charge of $1.9 for the settlement of a class action securities lawsuit initiated in 1997, which represented the portion of the total settlement amount of $7.5 that was not paid by the insurance carrier.

 

13. OTHER INCOME


In fiscal 2004, the Company received a payment of $10.0 in connection with the early termination of a sublease by one of its tenants. This transaction resulted in a pre-tax net gain of $8.0. The impact of this gain on earnings per diluted share was $0.13.

In fiscal 2003, the Company sold a portion of its interest in a French publishing company for $5.2, resulting in a pre-tax gain of $2.9. The impact of this gain on earnings per diluted share was $0.05.

 

14. CONTINUITY CHARGES


In fiscal 2004, the Company recorded charges of $25.4 in connection with a review of its continuity business. These charges represent write-downs of deferred promotion costs of $12.7 and inventory from discontinued programs of $6.8, and an increase in bad debts of $2.0, as well as modest increases in returns provisions and related severance costs. These charges are primarily reflected as Cost of goods sold; Selling, general and administrative expenses; and Bad debt expense. In fiscal 2004, the impact of these charges on earnings per diluted share was $0.41. In fiscal 2005, the Company recorded additional charges of $3.8, or $0.06 per diluted share, primarily for severance costs, which are reflected as Selling, general and administrative expenses.

 

15. OTHER FINANCIAL DATA


Deferred promotion costs were $38.6 and $40.6 at May 31, 2005 and 2004, respectively. Promotion costs expensed were $81.1, $119.2 and $109.1 for the fiscal years ended May 31, 2005, 2004 and 2003, respectively. Promotional expense consists of $73.9, $111.1 and $99.9 for continuity program promotions and $7.2, $8.1 and $9.2 for magazine advertising for fiscal 2005, 2004 and 2003, respectively.

Other advertising expenses were $156.5, $160.1 and $161.4 for the fiscal years ended May 31, 2005, 2004 and 2003, respectively.

Accumulated amortization of prepublication costs was $80.0 and $77.8 at May 31, 2005 and 2004, respectively. The Company amortized $53.9, $57.8 and $47.5 for the fiscal years ended May 31, 2005, 2004 and 2003, respectively.

Other accrued expenses include a reserve for unredeemed credits issued in conjunction with the Company’s school-based book club and book fair operations of $11.6 and $12.5 at May 31, 2005 and 2004, respectively.

(SCHOLASTIC LOGO)

59


 

Report of Independent Registered Public Accounting Firm


 

THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SCHOLASTIC CORPORATION

We have audited the accompanying consolidated balance sheets of Scholastic Corporation as of May 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended May 31, 2005. Our audits also included the financial statement schedule included in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scholastic Corporation at May 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statements schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Scholastic Corporation’s internal control over financial reporting as of May 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 5, 2005 expressed an unqualified opinion thereon.

As described in Note 1 to the consolidated financial statements, Scholastic Corporation has restated its financial statements for the years ended May 31, 2004 and 2003 to correct its accounting for leases.

/s/ Ernst & Young LLP         

(ERNST & YOUNG LLP)

New York, New York
August 5, 2005

(SCHOLASTIC LOGO)

60


 

Report of Independent Registered Public Accounting Firm


 

THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SCHOLASTIC CORPORATION

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Scholastic Corporation maintained effective internal control over financial reporting as of May 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Scholastic Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Scholastic Corporation maintained effective internal control over financial reporting as of May 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Scholastic Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Scholastic Corporation as of May 31, 2005 and 2004 and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended May 31, 2005 and our report dated August 5, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP         

(ERNST & YOUNG LLP)

New York, New York
August 5, 2005

(SCHOLASTIC LOGO)

61


 

Supplementary Financial Information

 

 

Summary of Quarterly Results of Operations

(Unaudited, amounts in millions except per share data)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

(2)

Second Quarter

 

Third Quarter

 

Fourth Quarter

(3)

Fiscal
Year
Ended
May 31,

 












 

2005(1)

 

Restated

 

Restated

 

Restated

 

 

 

 

 












 

Revenues

 

$

323.7

 

$

683.3

 

$

480.8

 

$

592.1

 

$

2,079.9

 

Cost of goods sold

 

 

176.4

 

 

301.1

 

 

233.9

 

 

259.1

 

 

970.5

 

Net income (loss)

 

 

(50.5

)

 

72.5

 

 

(0.8

)

 

43.1

 

 

64.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share of Class A and Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.28

)

$

1.83

 

$

(0.02

)

$

1.06

 

$

1.61

 

Diluted

 

$

(1.28

)

$

1.80

 

$

(0.02

)

$

1.03

 

$

1.58

 


















2004(1)

 

 

Restated

 

 

Restated

 

 

Restated

 

 

Restated

 

 

Restated

 


















Revenues

 

$

475.4

 

$

699.0

 

$

472.0

 

$

587.4

 

$

2,233.8

 

Cost of goods sold

 

 

281.4

 

 

305.5

 

 

229.7

 

 

270.2

 

 

1,086.8

 

Net income (loss)

 

 

(25.0

)

 

66.5

 

 

(6.1

)

 

22.4

 

 

57.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share of Class A and Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.64

)

$

1.69

 

$

(0.16

)

$

0.57

 

$

1.47

 

Diluted

 

$

(0.64

)

$

1.66

 

$

(0.16

)

$

0.56

 

$

1.44

 


 

 

 

(1)

The Company has restated its previously issued annual and interim consolidated financial statements to appropriately classify certain leases as capital leases and to reflect future payment escalation clauses in determining rent expense for certain operating leases. The restatement for the first, second and third quarters of fiscal 2005 resulted in an increase (decrease) in Net income (loss) of $(0.2), $0.2 and $(0.1) and in diluted earnings (loss) per share of $(0.01), $0.00 and $0.00, respectively. The restatement for the first, second, third and fourth quarters of fiscal 2004 resulted in an increase (decrease) in Net income (loss) of $(0.2), $(0.2), $(0.1) and $(0.1) and in diluted earnings (loss) per share of $(0.01), $(0.01), $(0.01) and $0.00, respectively.

 

 

(2)

The first quarter of fiscal 2005 includes additional pre-tax charges of $3.6, or $0.06 per diluted share, in connection with the Company’s review of its continuity business.

 

 

(3)

The fourth quarter of fiscal 2005 includes additional pre-tax charges of $0.2 in connection with the Company’s review of its continuity business. The fourth quarter of fiscal 2004 includes pre-tax charges of $25.4, or $0.41 per diluted share, in connection with the Company’s review of its continuity business, and 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

 

 

Item 9   |

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

(SCHOLASTIC LOGO)

62


 

 

Item 9A  |

Controls and Procedures

The Chief Executive Officer and Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of May 31, 2005, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Corporation’s Chief Executive Officer and Chief Financial Officer, after conducting an evaluation, together with other members of Scholastic management, of the effectiveness of the Corporation’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, concluded that the Corporation’s internal control over financial reporting was effective as of May 31, 2005.

In coming to the conclusion that Scholastic’s internal control over financial reporting was effective as of May 31, 2005, the Company’s management considered, among other things, the control deficiency related to the periodic review of the application of generally accepted accounting principles to certain leasing transactions, which resulted in the need to restate its previously issued financial statements, as disclosed in Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The Company took steps to remediate the deficiency by implementing new internal controls relating to leasing transactions, which were put into place and were operating effectively prior to May 31, 2005. Based on this review and analysis, management concluded that the control deficiency that resulted in the restatement of the prior period financial statements was not in itself a material weakness and, when aggregated with other deficiencies, did not constitute a material weakness.

Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on this assessment of the effectiveness of the Corporation’s internal control over financial reporting as of May 31, 2005, which is included herein. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended May 31, 2005 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

 

Item 9B  |

Other Information

None.

(SCHOLASTIC LOGO)

63


 

Part III


 

 

 

Item 10  |

Directors and Executive Officers of the Registrant

Information required by this item is incorporated herein by reference from the Corporation’s definitive proxy statement to be filed with the SEC pursuant to Regulation 14A under the Exchange Act. Certain information regarding the Corporation’s Executive Officers is set forth in Part I – Item 1 – Business.

 

 

Item 11  |

Executive Compensation

Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

 

 

Item 12  |

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

Equity Compensation Plans

The following table presents information regarding the Company’s equity compensation plans at May 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan Category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

 

Weighted Average
exercise price
per share of
outstanding options,
warrants and rights

 

Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))

 








 

 

 

 

(a)

 

 

 

(b)

 

 

 

(c)

 

Equity Compensation plans approved by security holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

7,136,650

 

 

$

28.82

 

 

 

1,784,846

(1)

Class A Stock

 

 

 

333,000

 

 

 

29.49

 

 

 

417,000

 

Equity Compensation plans not approved by security holders:

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Stock

 

 

 

 

 

 

 

 

 

 















Total

 

 

 

7,469,650

 

 

 

 

 

 

2,201,846

(1)















 

 

(1)

Includes 351,320 shares of Common Stock under the ESPP; 288,435 shares of Common Stock under the MSPP; and 719,891 shares of Common Stock under the 2001 Plan, which may be issued pursuant to the exercise of stock options or as restricted stock or other stock-based awards.

The additional information required by this item is incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

 

 

Item 13  |

Certain Relationships and Related Transactions

Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

 

 

Item 14  |

Principal Accountant Fees and Services

Incorporated herein by reference from the Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.

(SCHOLASTIC LOGO)

64


 

Part IV



 

 

Item 15  |

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


 

 

(a)(1)

Financial Statements:

 

The following consolidated financial statements are included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data”:

 

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

 

Consolidated Balance Sheets at May 31, 2005 and 2004

 

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

 

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

 

Notes to Consolidated Financial Statements

 

 

(a)(2) and (c)

 

 

 

Financial Statement Schedule:

 

The following consolidated financial statement schedule is included with this report: Schedule II- Valuation and Qualifying Accounts and Reserves

 

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.

 

 

(a)(3) and (b)

 

 

 

Exhibits:

 

 

3.1

Amended and Restated Certificate of Incorporation of the Corporation, as amended to date (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 2, 2004).

 

 

3.2

Bylaws of the Corporation, amended and restated as of March 16, 2000 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on April 14, 2000, SEC File No. 000-19860).

 

 

4.1*

Credit Agreement, dated as of March 31, 2004, among the Corporation and Scholastic Inc., as borrowers, the Initial Lenders named therein, Citibank, N.A., as administrative agent, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers, and JPMorgan Chase Bank, N.A. and Fleet Bank, N.A., as syndication agents.

 

 

4.2*

Amended and Restated Revolving Loan Agreement, dated November 10, 1999, among the Corporation, Scholastic Inc. and Sun Bank, National Association, together with Amendment No. 1, dated June 22, 2000, and Amendment No. 2, dated as of April 30, 2004.

 

 

4.3

Indenture dated January 23, 2002 for 5.75% Notes due January 15, 2007 issued by the Corporation (incorporated by reference to the Corporation’s Registration Statement on Form S-3 (Registration No. 333-55238) as filed with the SEC on February 8, 2001).

 

 

4.4*

Indenture dated April 4, 2003 for 5% Notes due 2013 issued by the Corporation.

(SCHOLASTIC LOGO)

65


 

 

10.1**

Scholastic Corporation 1992 Stock Option Plan (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 27, 1992, SEC File No. 000-19860 (the “1992 10-K”)), together with Amendment No. 1 to the Scholastic Corporation 1992 Stock Option Plan, effective as of July 18, 2001 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 24, 2001 (the “2001 10-K”)).

 

 

10.2**

Scholastic Corporation 1995 Stock Option Plan, effective as of September 21, 1995 (incorporated by reference to the Corporation’s Registration Statement on Form S-8 (Registration No. 33-98186) as filed with the SEC on October 16, 1995), together with Amendment No. 1 to the Scholastic Corporation 1995 Stock Option Plan, effective September 16, 1998 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 15, 1998, SEC File No. 000-19860), and Amendment No. 2 to the Scholastic Corporation 1995 Stock Option Plan, effective as of July 18, 2001 (incorporated by reference to the 2001 10-K).

 

 

10.3**

Scholastic Corporation 1992 Outside Directors’ Stock Option Plan (incorporated by reference to the 1992 10-K).

 

 

10.4**

Scholastic Corporation Management Stock Purchase Plan, amended and restated effective as of December 18, 2002 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 14, 2003).

 

 

10.5**

Scholastic Corporation 1997 Outside Directors’ Stock Option Plan, amended and restated as of May 25, 1999 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999, SEC File No. 000-19860 (the “1999 10-K”)), together with Amendment No. 1 dated September 20, 2001 to the Scholastic Corporation 1997 Outside Directors’ Stock Option Plan (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 14, 2002) and Amendment No. 2 to the Scholastic Corporation 1997 Outside Directors’ Stock Option Plan (incorporated by reference to Appendix B to the Corporation’s definitive Proxy Statement as filed with the SEC on August 19, 2003).

 

 

10.6**

Scholastic Corporation 1995 Director’s Deferred Compensation Plan, amended and restated as of May 25, 1999 (incorporated by reference to the 1999 10-K).

 

 

10.7**

Scholastic Corporation Executive Performance Incentive Plan, effective as of June 1, 1999 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 15, 1999, SEC File No. 19860).

 

 

10.8**

Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”) (incorporated by reference to Appendix A of the Corporation’s definitive Proxy Statement as filed with the SEC on August 24, 2001).

 

 

10.9**

Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”) (incorporated by reference to Appendix A to Scholastic Corporation’s definitive Proxy Statement as filed with the SEC on August 2, 2004).

 

 

10.10

Amended and Restated Lease, effective as of August 1, 1999, between ISE 555 Broadway, LLC, landlord, and Scholastic Inc., tenant, for the building known as 555 Broadway, NY, NY (incorporated by reference to 1999 10-K).

 

 

10.11

Amended and Restated Sublease, effective as of October 9, 1996, between Kalodop Corp., as sublandlord, and Scholastic Inc., as subtenant, for the premises known as 557 Broadway, NY, NY (incorporated by reference to the 1999 10-K).

(SCHOLASTIC LOGO)

66


 

 

10.12**

Agreement between Barbara A. Marcus and Scholastic Inc., effective July 16, 2005, with regard to changes relating to her employment (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K as filed with SEC on July 21, 2005).

 

 

10.13**

Agreement between Mary A. Winston and Scholastic Inc. dated August 5, 2005, with regard to certain severance arrangements.

 

 

10.14**

Form of Class A Option Agreement under the Class A Plan.

 

 

10.15**

Form of Stock Unit Agreement under the 2001 Plan.

 

 

10.16**

Guidelines for Stock Units adopted under the 2001 Plan.

 

 

10.17**

Deferred Compensation Agreement between Scholastic Inc. and Ernest Fleishman dated July 31, 1989.

 

 

21

Subsidiaries of the Corporation.

 

 

23

Consent of Ernst & Young LLP.

 

 

31.1

Certification of the Chief Executive Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of the Chief Financial Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certifications of the Chief Executive Officer and the Chief Financial Officer of the Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 

 

*

Such long-term debt does not individually amount to more than 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such instrument is not filed herewith. The Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon request.

 

 

**

The referenced exhibit is a management contract or compensation plan or arrangement described in Item 601(b) (10) (iii) of Regulation S-K.

(SCHOLASTIC LOGO)

67


 

Signatures


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Dated: August 8, 2005

SCHOLASTIC CORPORATION

 

 

By: /s/ Richard Robinson

 

 


 

 

Richard Robinson, Chairman of the Board,

 

 

President and Chief Executive Officer

 


 

Power of Attorney


KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Robinson his or her true and lawful attorney-in-fact and agent, with power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary and requisite to be done, as fully and to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 

 

 

Signature

 

Title

 

Date






 

 

 

 

 

/s/ Richard Robinson

 

Chairman of the Board, President,

 

August 8, 2005


 

Chief Executive Officer and

 

 

Richard Robinson

 

Director (Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Mary A. Winston

 

Executive Vice President and Chief

 

August 8, 2005


 

Financial Officer (Principal Financial Officer)

 

 

Mary A. Winston

 

 

 

 

 

 

 

 

 

/s/ Karen A. Maloney

 

Senior Vice President, Corporate Finance and

 

August 8, 2005


 

Chief Accounting Officer (Principal Accounting Officer)

 

 

Karen A. Maloney

 

 

 

 

 

 

 

 

 

/s/ Rebeca M. Barrera

 

Director

 

August 8, 2005


 

 

 

 

Rebeca M. Barrera

 

 

 

 

 

 

 

 

 

/s/ Ramon C. Cortines

 

Director

 

August 8, 2005


 

 

 

 

Ramon C. Cortines

 

 

 

 

 

 

 

 

 

/s/ John L. Davies

 

Director

 

August 8, 2005


 

 

 

 

John L. Davies

 

 

 

 

(SCHOLASTIC LOGO)

68


 

 

 

 

 

Signature

 

Title

 

Date






 

 

 

 

 

/s/ Charles T. Harris III

 

Director

 

August 8, 2005


 

 

 

 

Charles T. Harris III

 

 

 

 

 

 

 

 

 

/s/ Andrew S. Hedden

 

Director

 

August 8, 2005


 

 

 

 

Andrew S. Hedden

 

 

 

 

 

 

 

 

 

/s/ Mae C. Jemison

 

Director

 

August 8, 2005


 

 

 

 

Mae C. Jemison

 

 

 

 

 

 

 

 

 

/s/ Peter M. Mayer

 

Director

 

August 8, 2005


 

 

 

 

Peter M. Mayer

 

 

 

 

 

 

 

 

 

/s/ John G. McDonald

 

Director

 

August 8, 2005


 

 

 

 

John G. McDonald

 

 

 

 

 

 

 

 

 

/s/ Augustus K. Oliver

 

Director

 

August 8, 2005


 

 

 

 

Augustus K. Oliver

 

 

 

 

 

 

 

 

 

/s/ Richard M. Spaulding

 

Director

 

August 8, 2005


 

 

 

 

Richard M. Spaulding

 

 

 

 

(SCHOLASTIC LOGO)

69


Scholastic Corporation

Financial Statement Schedule

ANNUAL REPORT ON FORM 10-K
YEAR ENDED MAY 31, 2005
ITEM 15(c)

(SCHOLASTIC LOGO)

S-1


 

Schedule II


 

Valuation and Qualifying Accounts and Reserves


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in millions)
Years Ended May 31,

 















 

 

Balance at
Beginning
of Year

 

Expensed

 

Write-Offs
and Other

 

Balance at
End of Year

 















2005

 

 

 

 

 

 

 

 

 

 

 

 

 















Allowance for doubtful accounts

 

$

68.3

 

$

62.2

 

$

83.2

 

$

47.3

 

Reserve for returns

 

 

52.6

 

 

130.8

 

 

141.4

(1)

 

42.0

 

Reserve for obsolescence

 

 

59.2

 

 

38.7

 

 

39.4

 

 

58.5

 

Reserve for royalty advances

 

 

49.8

 

 

3.0

 

 

0.7

 

 

52.1

 















2004

 

 

 

 

 

 

 

 

 

 

 

 

 















Allowance for doubtful accounts

 

$

60.5

 

$

90.3

 

$

82.5

 

$

68.3

 

Reserve for returns

 

 

58.2

 

 

193.5

 

 

199.1

(1)

 

52.6

 

Reserve for obsolescence

 

 

54.4

 

 

29.9

 

 

25.1

 

 

59.2

 

Reserve for royalty advances

 

 

45.8

 

 

4.3

 

 

0.3

 

 

49.8

 















2003

 

 

 

 

 

 

 

 

 

 

 

 

 















Allowance for doubtful accounts

 

$

62.6

 

$

72.3

 

$

74.4

 

$

60.5

 

Reserve for returns

 

 

61.3

 

 

164.1

 

 

167.2

(1)

 

58.2

 

Reserve for obsolescence

 

 

55.1

 

 

26.7

 

 

27.4

 

 

54.4

 

Reserve for royalty advances

 

 

44.6

 

 

5.0

 

 

3.8

 

 

45.8

 
















 

 

(1)

Represents actual returns charged to the reserve.

(SCHOLASTIC LOGO)

S-2


[This Page Intentionally Left Blank]

(SCHOLASTIC LOGO)


                                                                   Exhibit 10.13


                                    AGREEMENT

         Agreement by and between Mary Winston ("Employee" or "you") and
Scholastic Inc. (the "Company"). This Agreement shall be effective as of the
last date of signing below.

         1. This Agreement confirms our understanding that in the event the
Company terminates your employment other than for cause, you shall receive a
lump sum payment, in lieu of severance, equivalent to twelve (12) months of
salary, at your then current base salary.

         2. You understand that this Agreement constitutes the complete
understanding between the Company and you, and supersedes any and all
agreements, understandings, and discussions, whether written or oral, between
you and the Company with regard to the subject hereof. No other promises or
agreements shall be binding unless in writing and signed by both the Company and
you after the Effective Date of this Agreement.


Print Name: Mary A. Winston                                Date: August 5, 2005
            -------------------                                 ----------------



Signature:  /s/ Mary A. Winston
            ------------------------


SCHOLASTIC INC.

By:  /s/ Richard Robinson                                  Date: August 5, 2005
     --------------------------------------                     ----------------


                                                                   Exhibit 10.14

            SCHOLASTIC CORPORATION 2004 CLASS A STOCK INCENTIVE PLAN
                      NON-QUALIFIED STOCK OPTION AGREEMENT

         Effective  as of  ____________________ (the "Grant  Date"),  SCHOLASTIC
CORPORATION,  a Delaware  corporation (the "Company"),  hereby grants to RICHARD
ROBINSON (the  "Optionee")  a  non-qualified  option (the  "Option") to purchase
________________________________________________  shares of Class A Stock of the
Company (the " Class A Stock"),  at the price and on the terms set forth herein,
and in all  respects  subject  to the terms  and  provisions  of the  SCHOLASTIC
CORPORATION  2004 CLASS A STOCK  INCENTIVE  PLAN (the  "Plan"),  which terms and
provisions  are  incorporated  by reference  herein.  Unless the context  herein
otherwise  requires,  the terms defined in the Plan shall have the same meanings
in this Agreement.

         1.       TERMS OF OPTION GRANT AND EXERCISE. Subject to the provisions
of the Plan and this  Agreement,  the Option shall not be exercised prior to the
first  anniversary  date of this Agreement and  thereafter,  the Option shall be
exercisable, cumulatively, as follows:

           ---------------------------------------------------------------------
           VESTING DATE    NUMBER OF SHARES   EXERCISE PRICE    EXPIRATION DATE
           ---------------------------------------------------------------------
            --                 --             $   --                    --
           ---------------------------------------------------------------------
            --                 --             $   --                    --
           ---------------------------------------------------------------------
            --                 --             $   --                    --
           ---------------------------------------------------------------------
            --                 --             $   --                    --
           ---------------------------------------------------------------------

         Once  exercisable,  subject  to the  provisions  of the  Plan  and this
Agreement,  the Option may be  exercised,  in whole or in part,  pursuant to the
notice and payment  procedures then in effect as established by the Company,  in
its sole  discretion.  Any  written  notice of  exercise  by  Optionee  shall be
irrevocable.  The Option may not be  exercised  if the  issuance  of the Class A
Stock would constitute a violation of any applicable  federal,  state or foreign
securities laws or regulations.  The Option may not be exercised with respect to
a fractional share of Class A Stock.

The Option  shall cease to be  exercisable  upon the  expiration  date set forth
above (the "Expiration  Date"),  unless earlier  terminated or extended,  as the
case  may be,  pursuant  to the  provisions  of the  Plan  and  this  Agreement,
including, but not limited to, the provisions of Section 3 hereof.

         2.       TERMINATION OF EMPLOYMENT OF AN OPTIONEE.

                  (a)      DEATH OR  DISABILITY.  In the event of the Optionee's
death or Disability while the Option is outstanding,  the unexercised portion of
the Option shall become  immediately  vested on the date of death or  Disability
and may be exercised  in full by the  Optionee,  or his or her estate,  personal
representative or other legally appointed representative,  at any time until the
first  anniversary  of the  date of such  death or  Disability,  but in no event
beyond the Expiration Date of the Option, if earlier.

                  (b)      RETIREMENT. In the event of the Optionee's retirement
on or  after  age 55,  the  Option,  to the  extent  vested  on the date of such
retirement,  may be exercised  by the Optionee  within three (3) years after the
date of such  retirement,  but in no event  beyond  the  Expiration  Date of the
Option, if earlier.

                  (c)      INVOLUNTARY     TERMINATION     OTHER     THAN    FOR
CAUSE/RETIREMENT.  In the  event an  Optionee's  Termination  of  Employment  is
involuntary  by the  Company  (or an  Affiliate)  other  than a  Termination  of
Employment  for Cause,  the  Option,  to the  extent  vested on the date of such
Termination of Employment,  may be exercised by the Optionee  within ninety days
after the date of such  Termination  of  Employment,  but in no event beyond the
Expiration Date of the Option, if earlier.

                  (d)      OTHER  TERMINATION.  In the  event of the  Optionee's
Termination  of  Employment  for Cause or for any other reason other than as the
result  of  death,  Disability,  retirement  on or after  age 55 or  involuntary
Termination  of Employment  (as set forth in Sections 2(a), (b) and (c) hereof),
the Option shall be cancelled as of the date of such  Termination  of Employment
and shall not be  exercisable  to the extent not exercised  prior to the date of
the Optionee's Termination of Employment.

         3.       TAX MATTERS AND WITHHOLDING TAX LIABILITY. The Option shall be
a non qualified  Stock Option as that term is defined in the Plan. In connection
with the  exercise  of the  Option,  the  Company  and the  Optionee  may  incur
liability  for income or  withholding  tax.  The Company  will have the right to
withhold  from any exercise of the Option,  transfer of Class A Stock or payment
made to the Optionee or to any person hereunder, whether such



payment  is to be made in cash or in  Class A  Stock,  all  applicable  federal,
state,  city or other taxes as shall be required,  in the  determination  of the
Company, pursuant to any statute or governmental regulation or ruling.

         4.       NONTRANSFERABILITY  OF STOCK  OPTION.  The  Option  may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either  voluntarily  or  involuntarily  by operation of law,  whether for
value or no value and whether  voluntary or involuntary  (including by operation
of law) other than by will or by the laws of descent and distribution and may be
exercised  during the lifetime of the Optionee only by the Optionee.  Subject to
the foregoing and the terms of the Plan,  the terms of this  Agreement  shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.

         5.       NO ENLARGEMENT  OF RIGHTS.  This Agreement is not an agreement
of  employment.  Neither  the Plan  nor this  Agreement  shall  confer  upon the
Optionee  any right to  continue as an officer,  employee or  consultant  of the
Company or any Affiliate.  Nothing contained in the Plan or this Agreement shall
interfere  in any way  with  the  rights  of the  Company  or any  Affiliate  to
terminate the employment (or consulting arrangement) of the Optionee at any time
or to modify the Optionee's employment or compensation.  The Optionee shall have
only such  rights and  interests  with  respect  to the Option as are  expressly
provided in this Agreement and the Plan.

         6.       NO SHAREHOLDER RIGHTS BEFORE EXERCISE AND ISSUANCE.  No rights
as a  stockholder  shall exist with respect to the Class A Stock  subject to the
Option as a result of the grant of the Option,  and no adjustments shall be made
for  dividends  in cash or other  property,  distributions  or other  rights  in
respect of any such shares, except as otherwise specifically provided for in the
Plan.  Such  rights  shall  exist only after  issuance  of stock  following  the
exercise of the Option as provided in the Plan.

         7.       EFFECT OF THE PLAN ON OPTION.  The  Option is subject  to, and
the  Company  and the  Optionee  agree  to be bound  by,  all of the  terms  and
conditions  of the Plan,  as such may be amended from time to time in accordance
with the terms  thereof.  Without the consent of the  Optionee,  the Company may
amend or modify this  Agreement  in any manner not  inconsistent  with the Plan,
including without  limitation,  to change the date or dates as of which a Option
becomes exercisable, or to cure any ambiguity, defect or inconsistency, provided
such amendment,  modification or change does not adversely  affect the rights of
the Optionee.

         8.       ENTIRE  AGREEMENT.  The terms of this  Agreement  and the Plan
constitute  the entire  agreement  between  the Company  and the  Optionee  with
respect  to the  subject  matter  hereof  and  supersede  any and  all  previous
agreements between the Company and the Optionee. This Agreement may be signed in
counterparts.

         9.       SEVERABILITY.  If any  provision  of  this  Agreement,  or the
application of such provision to any person or  circumstances,  is held valid or
unenforceable,  the  remainder of this  Agreement,  or the  application  of such
provision  to persons or  circumstances  other than those as to which it is held
valid or unenforceable, shall not be affected thereby.

         10.      NOTICES.  Any notice or communication given hereunder shall be
in writing and shall be deemed to have been duly given when delivered in person,
or by United  States  mail,  to the  appropriate  party at the address set forth
below (or such other address as the party shall from time to time  specify):  If
to the Company,  to: Scholastic  Corporation,  557 Broadway,  New York, New York
10012,  Attention:  Corporate  Secretary.  If to the  Optionee,  to the  address
indicated after the Optionee's signature at the end of this Agreement.

IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of
the date first written above.

OPTIONEE                                 SCHOLASTIC CORPORATION




- -----------------------------            --------------------
RICHARD ROBINSON                         (Name)
PRESIDENT AND CHIEF EXECUTIVE OFFICER    (Title)
                                                                   EXHIBIT 10.15

                              STOCK UNIT AGREEMENT
                                    UNDER THE
                SCHOLASTIC CORPORATION 2001 STOCK INCENTIVE PLAN

         This Agreement (the  "Agreement")  is entered into as of the ___ day of
____________,  20__, by and between  Scholastic  Corporation (the "Company") and
_______________ (the "Participant").

                              W I T N E S S E T H:

         WHEREAS, the Company has adopted the Scholastic  Corporation 2001 Stock
Incentive Plan (the "Plan"),  which is administered by a Committee  appointed by
the Company's Board of Directors (the "Committee"); and

         WHEREAS,  pursuant  to  Section  3.3 of the Plan,  the  Committee  also
adopted   guidelines   for  the  grant  of  Stock  Units  under  the  Plan  (the
"Guidelines"), which constitute an Other Stock-Based Award under the Plan.

         NOW, THEREFORE,  for and in consideration of the mutual promises herein
contained,  and for other  good and  valuable  consideration,  the  receipt  and
sufficiency of which are hereby acknowledged, the parties agree as follows:

         1.       GRANT OF STOCK UNITS.

         Subject to the restrictions and other conditions set forth herein,  the
Committee has authorized this grant of __________ Stock Units on  _____________,
20__ (the "Grant Date").

         2.       VESTING AND PAYMENT.

                  (a)      Except as provided in Section 2(c) of this Agreement,
25% of the Award of Stock Units shall vest on the first anniversary of the Grant
Date and an  additional  25% of such  Award of Stock  Units  shall  vest on each
succeeding  anniversary  of the Grant Date,  provided  that the  Participant  is
continuously  employed by the Company or any of its  Affiliates  (including  any
period during which the Participant is on leave of absence or any other break in
employment in accordance  with the Company's  policies and  procedures)  on each
applicable vesting date.

                  (b)      Except as provided in Section 2(c) of this Agreement,
a share of Common Stock shall be  distributed  with respect to each vested Stock
Unit as soon as practicable following the applicable vesting date.

                  (c)      Upon a Termination  of Employment or  Termination  of
Consultancy (as  applicable) by the Participant for Good Reason,  by the Company
without  Cause  or  as a  result  of  the  Participant's  death,  Disability  or
Retirement,  all outstanding  unvested Stock Units shall  immediately vest and a
share of Common  Stock with respect to each Stock Unit shall be  distributed  as
soon as practicable  following such termination.  Notwithstanding the foregoing,
upon a Termination of Employment (other than as a result of death or Disability)
of a Key  Employee,  distributions  shall be  delayed  until  six  months  after
Termination of Employment.

                  (d)      Except as otherwise  provided in Section 2(c) of this
Agreement,  Stock Units that are not vested as of the date of the  Participant's
Termination of Employment or  Termination  of  Consultancy  for any reason shall
terminate and be forfeited in their entirety as of the date of such termination.

         3.       WITHHOLDING.

         Participant  shall  pay,  or  make  arrangements  to pay,  in a  manner
satisfactory  to the Company,  an amount  equal to the amount of all  applicable
federal,  state and local or foreign  taxes  that the  Company  is  required  to
withhold at any time. In the absence of such arrangements, the Company or one of
its   Affiliates   shall  have  the  right  to  withhold  such  taxes  from  the
Participant's  normal  pay or  other  amounts  payable  to the  Participant.  In
addition, any statutorily required withholding  obligation may be satisfied,  in
whole  or in  part,  at the  Participant's  election,  in the  form  and  manner
prescribed by the  Committee,  by delivery of shares of Common Stock  (including
shares issuable under this Agreement).

                                       1


         4.       PLAN AND GUIDELINES.

         In addition to the terms and  conditions  set forth  herein,  the Stock
Units are subject to and governed by the terms and  conditions  set forth in the
Plan and the  Guidelines,  which are hereby  incorporated  by reference.  Unless
otherwise indicated, any capitalized term used but not defined herein shall have
the meaning ascribed to such term in the Plan and the Guidelines.

         5.       RESTRICTIONS ON SALE.

         Affiliates  may resell  Common  Stock  only  pursuant  to an  effective
registration  statement under the Securities Act, pursuant to Rule 144 under the
Securities  Act, or pursuant to another  exemption from  registration  under the
Securities Act.

         6.       AMENDMENT.

         To the extent  applicable,  the Board or the  Committee may at any time
and from time to time amend,  in whole or in part,  any or all of the provisions
of this  Agreement to comply with  Section 409A of the Code and the  regulations
thereunder or any other applicable law and may also amend,  suspend or terminate
this Agreement subject to the terms of the Plan.

         7.       NOTICES.

         Any notice given  hereunder  shall be in writing and shall be deemed to
have been duly  given:  (i) when  delivered  in person;  (ii) two (2) days after
being sent by United States mail;  or (iii) on the first  business day following
the date of deposit if delivered by a nationally  recognized  overnight delivery
service,  to the appropriate party at the address set forth below (or such other
address as the party shall from time to time specify):If to the Company, to:

                  Scholastic Corporation
                  557 Broadway
                  New York, New York 10012
                  Attention: Corporate Secretary Department

         If to the  Participant,  to the most  recent  address  on file with the
Company.


         IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as
of the day and year first set forth above.


                                          SCHOLASTIC CORPORATION


                                          By:_______________________________

                                          Title:____________________________


                                          PARTICIPANT


                                          ____________________________________
                                                                   Exhibit 10.16

                             SCHOLASTIC CORPORATION

                           GUIDELINES FOR STOCK UNITS
                                GRANTED UNDER THE
                SCHOLASTIC CORPORATION 2001 STOCK INCENTIVE PLAN


         Grants of Stock Units (as defined below) under the Scholastic
Corporation 2001 Stock Incentive Plan (the "Plan") shall be subject to, and
governed by, the provisions set forth in these guidelines, the Plan (including,
without limitation, Article VIII) and the applicable Award Agreement. An Award
of Stock Units shall constitute an Other Stock-Based Award under the Plan.
Unless otherwise indicated, any capitalized term used but not defined in these
guidelines shall have the meaning ascribed to such term in the Plan.

         To the extent applicable, these guidelines are intended to comply with
the applicable requirements of Section 409A of the Code (and the regulations
thereunder) and shall be limited, construed and interpreted in a manner so as to
comply therewith. Notwithstanding anything herein to the contrary, any provision
in these guidelines or any award agreement that is inconsistent with Section
409A of the Code (and the regulations thereunder) shall be deemed to be amended
to comply with Section 409A (and the regulations thereunder) and to the extent
such provision cannot be amended to comply therewith, such provision shall be
null and void.

         These guidelines are effective as of September 20, 2004, and shall
expire in accordance with Article XIV of the Plan.

1.       DEFINITIONS. For purposes of these guidelines, the following
definitions shall apply:

         1.1.     "Cause" means, solely for purposes of the grant of Stock Units
and notwithstanding the definition of Cause in the Plan: (a) in the case where
there is no employment agreement, consulting agreement, change in control
agreement or similar agreement in effect between the Company or an Affiliate and
the Participant at the time of the grant of the Stock Unit (or where there is
such an agreement but it does not define "cause" (or words of like import)) any
of the following as determined by the Committee in its good faith discretion:
(i) willful misconduct of the Participant with regard to the Company; (ii)
willful refusal of the Participant to follow the proper direction of the Board
or any individual to whom the Participant reports; (iii) the Participant's fraud
or dishonesty with regard to the Company (other than good faith expense account
disputes); or (iv) the Participant's conviction of, or plea of guilty or nolo
contendere to, a felony or other crime involving moral turpitude; or (b) in the
case where there is an employment agreement, consulting agreement, change in
control agreement or similar agreement in effect between the Company or an
Affiliate and the Participant at the time of the grant of a Stock Unit that
defines "cause" (or words of like import), "cause" as defined under such
agreement; provided, however, that with regard to any agreement under which the
definition of "cause" only applies on occurrence of a change in control, such
definition of "cause" shall not apply until a change in control actually takes
place and then only with regard to a termination thereafter.

         1.2.     "Disability" means, notwithstanding the definition in the
Plan, the Participant is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period
of not less than 12 months.

         1.3.     "Good Reason" means, solely for purposes of the grant of Stock
Units: (a) in the case where there is no employment agreement, consulting
agreement, change in control agreement or similar agreement in effect between
the Company or an Affiliate and the Participant at the time of the grant of the
Stock Unit (or where there is such an agreement but it does not define "good
reason" (or words of like import)) any of the following as determined by the
Committee in its good faith discretion: (i) any material adverse change in a
Participant's then positions or titles; (ii) a material diminution of a
Participant's then duties, responsibilities or authority; or (iii) a material
decrease in a Participant's annual rate of base salary



(other than an across-the-board decrease); or (b) in the case where there is an
employment agreement, consulting agreement, change in control agreement or
similar agreement in effect between the Company or an Affiliate and the
Participant at the time of the grant of a Stock Unit that defines "good reason"
(or words of like import), "good reason" as defined under such agreement;
provided, however, that with regard to any agreement under which the definition
of "good reason" only applies on occurrence of a change in control, such
definition of "good reason" shall not apply until a change in control actually
takes place and then only with regard to a termination thereafter.

         1.4.     "Key Employee" means a Participant who is a "key employee" as
defined in Section 416(i) of the Code without regard to paragraph (5) thereof.

         1.5.     "Retirement" means a Termination of Employment on or after age
55 in accordance with the Company's standard retirement policies.

         1.6.     "Stock Unit" means a restricted stock unit, which is a unit of
measurement equivalent to one share of Common Stock but with none of the
attendant rights of a holder of a share of Common Stock until a share of Common
Stock is ultimately distributed in payment of the obligation (other than the
right to receive dividend equivalent amounts in accordance with Section 4
hereof). Upon distribution, all vested Stock Units shall be paid solely in the
form of shares of Common Stock.

2.       ELIGIBILITY. Any Eligible Employee or Consultant (or prospective
employee of the Company or any of its Affiliates or prospective Consultant) who
is designated by the Committee is eligible to receive Stock Units pursuant to
these guidelines.

3.       VESTING OF STOCK UNITS AND PAYMENT.

         3.1.     Except as otherwise provided in Section 3.3 hereof and in the
Award Agreement, 25% of an Award of Stock Units shall vest on the first
anniversary of the grant date and an additional 25% of such Award of Stock Units
shall vest on each succeeding anniversary of the grant date, provided that the
Participant is continuously employed by the Company or any of its Affiliates
(including any period during which the Participant is on leave of absence or any
other break in employment in accordance with the Company's policies and
procedures) on each applicable vesting date.

         3.2.     Except as provided in Section 3.3 hereof, the Company shall
distribute one share of Common Stock with respect to each vested Stock Unit as
soon as practicable following the applicable vesting date.

         3.3.     Upon a Termination of Employment or Termination of Consultancy
(as applicable) by a Participant for Good Reason, by the Company without Cause
or as a result of a Participant's death, Disability or Retirement, all
outstanding unvested Stock Units shall immediately vest and a share of Common
Stock with respect to each Stock Unit shall be distributed as soon as
practicable following such termination. Notwithstanding the foregoing, upon a
Termination of Employment (other than as a result of death or Disability) of a
Key Employee, distributions shall be delayed until six months after Termination
of Employment.

         3.4.     Except as otherwise provided in Section 3.3 hereof, Stock
Units that are not vested as of the date of a Participant's Termination of
Employment or Termination of Consultancy for any reason shall terminate and be
forfeited in their entirety as of the date of such termination.

4.       DIVIDEND EQUIVALENT AMOUNTS. Cash dividends shall be credited to a
Stock Unit dividend book entry account on behalf of each Participant with
respect to each Stock Unit held by such Participant, provided that the right of
each Participant to actually receive such dividend shall be subject to the same
restrictions as the Stock Unit to which the dividend relates. Unless otherwise
determined by the Committee, cash dividends shall not be reinvested in Common
Stock and shall remain uninvested.

                                       2


5.       FORFEITURE. The Committee may, in its sole discretion, terminate any
outstanding Stock Units if the Committee determines that the Participant engaged
in conduct that constitutes Cause.

6.       AMENDMENT, SUSPENSION OR TERMINATION. To the extent applicable, the
Board or the Committee may at any time and from time to time amend, in whole or
in part, any or all of the provisions of these guidelines or any Award of Stock
Units to comply with Section 409A of the Code and the regulations thereunder or
any other applicable law and may also amend, suspend or terminate these
guidelines and any Award of Stock Units, subject to the terms of the Plan.

7.       SECTION 16(b). To the extent required, these guidelines are intended to
comply with Rule 16b and the Committee shall interpret and administer these
guidelines in a manner consistent therewith. If an officer (as defined in Rule
16b) is designated by the Committee to receive Stock Units, any such Award shall
be deemed approved by the Committee and shall be deemed an exempt purchase under
Rule 16b. Any provisions inconsistent with Rule 16b shall be inoperative and
shall not affect the validity of these guidelines. Notwithstanding anything
herein to the contrary, if the grant of any Award of Stock Units or the payment
of a share of Common Stock with respect to a Stock Unit or any election with
regard thereto results or would result in a violation of Section 16(b) of the
Exchange Act, any such grant, payment or election shall be deemed to be amended
to comply therewith, and to the extent such grant, payment or election cannot be
amended to comply therewith, such grant, payment or election shall be
immediately cancelled and the Participant shall not have any rights thereto.

8.       GOVERNING LAW. Except to the extent preempted by the Code, these
guidelines shall be governed by the laws of Delaware.

9.       PLAN DOCUMENT. These guidelines and an Award of Stock Units are subject
to the terms and conditions of the Plan (including, without limitation, Sections
4.1(a) and 4.2 and Articles VIII, X, XII and XIV).


                                       3
                                                                   EXHIBIT 10.17

                         DEFERRED C0MPENSATION AGREEMENT

       THIS AGREEMENT is made and entered into in the City of New York, State of
New York,  this 31st day of July,  1989, by and between  Scholastic  Inc., a New
York corporation ("Scholastic"), and Ernest Fleishman, an individual residing in
the State of Connecticut ("Employee").

       This  Agreement is being  entered into between the parties in  connection
with the  commencement  of the  employment  of the Employee by  Scholastic.  The
parties  desire to  provide  for  certain  elective  deferrals  of salary by the
Employee on the terms and conditions herein set forth.

       IN CONSIDERATION of the foregoing and the mutual agreements  herein,  the
parties agree as follows:

       1.     An amount of salary which but for this Agreement  would be payable
to the Employee for his services  performed for Scholastic on and after the date
of this  Agreement and prior to the Initial  Disbursement  Date (as such term is
defined by Paragraph 5 hereof)  shall instead be credited to an Account (as such
term is defined by Paragraph 7 hereof).

              The Account  shall be credited  with the salary so deferred at the
annual rate of $25,000 per annum in level amounts at the end of each regular pay
period of Scholastic during which the Agreement remains in effect.

              On the first day of each  year  after the date of this  Agreement,
Scholastic  shall credit to the Account as interest an additional  amount at the
rate  equal to the  average  30 year  treasury  bonds as of the last day of each
month of the preceding year as reported in THE NEW YORK TIMES  multiplied by the
average  monthly balance of the account during the preceding year. (See attached
example.)




       2.     Payment under the terms of this Agreement of salary and additional
amounts credited to the Account as interest shall not commence until the Initial
Disbursement  Date and shall be made in  quarterly  installments  over a fifteen
(15)  year  period  following  the  Initial   Disbursement   Date.  The  Initial
Disbursement  Date shall be the Employee's  retirement date, date of termination
from Scholastic, or at any other subsequent time chosen by Employee.

              The amount of each  quarterly  installment  shall be  computed  by
dividing  the  balance  of the  Account  (including  interest)  by the number of
installments remaining under the Agreement.

       3.     In the  event of the death of the  Employee  while  there  remains
unpaid any portion of the Account,  the unpaid  balance of the Account  shall be
paid  in a lump  sum to  Employee's  executors  or  administrators  as  soon  as
practicable.

       4.     No amounts  credited  to the  Account  and no  payments to be made
hereunder  may be  assigned,  sold,  transferred,  pledged,  charged,  commuted,
encumbered or otherwise  alienated by Employee,  to the extent permitted by law,
and no such amount or payment  shall in any way be subject to any legal  process
to subject the same to the payments of any claims  against the  Employee.  In no
event will Employee have the right to recover any amounts of salary  credited to
the Account otherwise than in accordance with this Agreement.

       5.     In the event that the Employee incurs a hardship,  Scholastic,  in
its sole discretion,  may revise the payment  schedule.  Such hardship must have
been caused by accident,  illness,  or event beyond the control of the Employee,
and Scholastic shall revise the payment  schedule only to the extent  reasonably
necessary to eliminate the hardship.

                                     - 2 -



              Scholastic  also reserves the right,  in its sole  discretion,  to
accelerate  payment for any other  reason,  and in such event  Scholastic  shall
revise the payment schedule as previously established.

       6.     This  Agreement  will be effective for salary payable for the 1989
calendar year and for subsequent  calendar years unless the Employee  revokes or
modifies such Agreement by written notice to Scholastic  prior to December 31 of
a calendar year, effective as of January 1 of the following year.

       7.     "Account"  means a bookkeeping  entry  maintained by Scholastic of
the  amounts of salary  deferred  hereunder,  additions  credited  thereon,  and
installments  paid under this Agreement.  The use of the word "Account" does not
contemplate  or imply  any  segregation  by  Scholastic  of any  monies or their
assets,  nor shall it be deemed to mean that any amount  credited to the Account
is the  property  of  Employee.  The right of the  Employee  to receive  amounts
deferred  under  this  Agreement  shall  be no  greater  than the  rights  of an
unsecured  general creditor against the assets of Scholastic.  Nothing contained
in this Agreement and no action taken  pursuant to its  provisions  shall in any
way be deemed to create a trust of any kind or a fiduciary  relationship between
Scholastic and the Employee and no assets of Scholastic  shall be subject to any
prior claim by the  Employee  or his  beneficiary  to assure  payment of amounts
deferred under this  Agreement.  All payments under this Agreement shall be paid
in cash from the general funds of Scholastic.

       8.     This  Agreement  shall be binding upon and inure to the benefit of
the Employee and Scholastic and their  respective  successors and assigns.  This
Agreement contains the full understanding of the parties

                                     - 3 -



with respect to its subject matter and may not be modified or amended, except by
a written agreement executed by both parties. This Agreement has been executed
and delivered in the State of New York and its validity, interpretation,
performance and enforcement shall be governed by the laws of the State of New
York.


       IN WITNESS  WHEREOF,  the parties to this Agreement have subscribed their
names.

       Executed in duplicate, this 31st day of July, 1989.

                                        SCHOLASTIC INC.

                                        By /s/ Richard Robinson
                                        -----------------------
                                        Name:  Richard Robinson
                                        Title: President

                                        /s/ Ernest B. Fleishman
                                        -----------------------
                                        Employee

FLEISHMN/F


                                     - 4 -
                                                                      EXHIBIT 21

                             SCHOLASTIC CORPORATION
                                 SUBSIDIARY LIST
               (SUBSIDIARIES ARE INDENTED UNDER ITS DIRECT PARENT)

                                                                                                                  
Scholastic Inc.                                                                                                      New York
         Scholastic Book Clubs, Inc.                                                                                 Missouri
               Scholastic Operations Group L.L.C.                                                                    Delaware
         Scholastic Entertainment Inc.                                                                               New York
               SE Distribution Inc.                                                                                  Delaware
               524 Films L.L.C.                                                                                      New York
         Scholastic Book Services, Inc.                                                                              Delaware
         Scholastic UK Group L.L.C.                                                                                  Delaware
         Scholastic Group Ltd.                                                                                       England
              Chicken House Publishing Ltd.                                                                          England
              Scholastic Book Clubs Ltd. (formerly Red House                                                         England
                     Books Ltd.)
               Scholastic Ltd.                                                                                       England
                     Catteshall Ltd. - (50% owned)                                                                   England
                     Scholastic Ireland Ltd.                                                                         Ireland
         Weston Woods Studios, Inc.                                                                                  Delaware
               Georgetown Studios, Inc.                                                                              Connecticut
               Children's Music Library, Inc.                                                                        New York
         Lectorum Publications, Inc.                                                                                 New York
         The Scholastic Store, Inc.                                                                                  New York
         Scholastic Interactive Xchange, Inc.                                                                        Delaware
         Tom Snyder Productions, Inc.                                                                                Delaware
         Soup2Nuts Inc.                                                                                              Delaware
         RetroRanch Inc. (formerly Science Court Inc.)                                                               Delaware
         Klutz                                                                                                       California
         Sandvik Publishing Ltd.                                                                                     Nevada
         Teacher's Friend Publications, Inc.                                                                         California
         The Book People Inc. - (80% owned)                                                                          Delaware
         Scholastic Export Inc.                                                                                      Delaware
         Scholastic Book Fairs, Inc.                                                                                 Delaware
         BTBCAT, Inc.                                                                                                Delaware
         Scholastic Australia Pty. Ltd.                                                                              Australia
                 Bookshelf Publishing Australia Pty. Ltd.                                                            Australia
                 Troll School Book Clubs and Fairs Australia Pty. Ltd.                                               Australia
                 Scholastic Australia Superannuation Pty. Ltd.                                                       Australia
                 Scholastic Executive Superannuation Pty. Ltd.                                                       Australia
                 Oldmeadow Booksellers (Aust.) Pty. Ltd.                                                             Australia
         Scholastic Canada Ltd.                                                                                      Canada
                 Scholastic Productions Canada Ltd.                                                                  Canada
                 Scholastic Bookfairs Canada Ltd.                                                                    Canada
         Scholastic Hong Kong Limited                                                                                Hong Kong
         Scholastic India Private Limited                                                                            India
         Scholastic Mexico S. de R. L. de C.V.                                                                       Mexico
         Scholastic New Zealand Ltd.                                                                                 New Zealand
         Scholastic Argentina S.A.                                                                                   Argentina
         Scholastic Consulting (Shanghai) Ltd.                                                                       China
         Grolier Incorporated                                                                                        Delaware
               Scholastic at Home Inc. (formerly Grolier Enterprises Inc.)                                           Delaware
                     Scholastic Distribution Services L.L.C.                                                         Delaware
               Grolier Interactive Inc.                                                                              Delaware
               Scholastic Library Publishing, Inc.                                                                   Delaware
               (formerly Grolier Publishing Co., Inc.)
               Grolier Reading Programs Inc.                                                                         Delaware
               Grolier Telemarketing, Inc.                                                                           Delaware
Grolier (New York) Incorporated Delaware Orchard Books, Inc. New York Publishers World Trade Corporation Delaware Federated Credit Corp. Delaware Grolier International, Inc. Delaware Grolier Direct Marketing Pty. Ltd. Australia Grolier International Finance Inc. (Philippines) (60% owned) Philippines Grolier (Malaysia) SDN BHD (62% owned) Malaysia Grolier Overseas Incorporated Delaware Grolier International Private Limited (India) India Grolier Limited (Canada) Canada Caribe Grolier, Inc. Puerto Rico Grolier International Limited (U.K.) England Grolier Credit Services (U.K.) Limited England Grolier Limited England Transtutor Limited England Just Books! Limited England Waverly House Limited England
                                                                      Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration  Statement Form
S-8 (File Nos. 33-48655,  33-69058,  and 33-91090)  pertaining to the Scholastic
Corporation 401(k) Savings and Retirement Plan;  Registration Statement Form S-8
(File No.  33-46338)  pertaining  to the 1992 Stock  Option  Plan;  Registration
Statement Form S-8 (File No. 33-50128) pertaining to the 1992 Outside Director's
Stock Option Plan;  Registration  Statement  Form S-8 (File Nos.  333-62297  and
333-110302)  pertaining to the Scholastic  Corporation  1997 Outside  Director's
Stock  Option  Plan;  Registration  Statement  Form  S-8  (File  No.  333-65757)
pertaining to the Scholastic  Corporation  1995 Stock Option Plan;  Registration
Statement  Form S-8 (File  Nos.  333-68181  and  333-110301)  pertaining  to the
Scholastic Corporation Employee Stock Purchase Plan; Registration Statement Form
S-8 (File No.  333-68185)  pertaining to the Scholastic  Corporation  Management
Stock  Purchase  Plan;  Registration  Statement  Form S-8 (File  No.  333-77010)
pertaining  to the  Scholastic  Corporation  2001  Stock  Incentive  Plan of our
reports  dated  August 5,  2005,  with  respect  to the  consolidated  financial
statements  and  schedule  of  Scholastic  Corporation,  Scholastic  Corporation
management's  assessment of  effectiveness  of internal  control over  financial
reporting, and the effectiveness of internal control over financial reporting of
Scholastic Corporation,  included in this Annual Report (Form 10-K) for the year
ended May 31, 2005.




                                       /s/ Ernst & Young LLP
                                       ---------------------

New York, New York
August 5, 2005
                                                                    EXHIBIT 31.1

I, Richard Robinson, the principal executive officer of Scholastic Corporation,
certify that:

          1.   I have reviewed this Annual Report on Form 10-K of Scholastic
               Corporation;

          2.   Based on my knowledge, this report does not contain any untrue
               statement of a material fact or omit to state a material fact
               necessary to make the statements made, in light of the
               circumstances under which such statements were made, not
               misleading with respect to the period covered by this report;

          3.   Based on my knowledge, the financial statements, and other
               financial information included in this report, fairly present in
               all material respects the financial condition, results of
               operations and cash flows of the registrant as of, and for, the
               periods presented in this report;

          4.   The registrant's other certifying officer and I are responsible
               for establishing and maintaining disclosure controls and
               procedures (as defined in Exchange Act Rules 13a-15(e) and
               15d-15(e)) and internal control over financial reporting (as
               defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
               registrant and have:

                    a)   Designed such disclosure controls and procedures, or
                         caused such disclosure controls and procedures to be
                         designed under our supervision, to ensure that material
                         information relating to the registrant, including its
                         consolidated subsidiaries, is made known to us by
                         others within those entities, particularly during the
                         period in which this report is being prepared;

                    b)   Designed such internal control over financial
                         reporting, or caused such internal control over
                         financial reporting to be designed under our
                         supervision, to provide reasonable assurance regarding
                         the reliability of financial reporting and the
                         preparation of financial statements for external
                         purposes in accordance with generally accepted
                         accounting principles;

                    c)   Evaluated the effectiveness of the registrant's
                         disclosure controls and procedures and presented in
                         this report our conclusions about the effectiveness of
                         the disclosure controls and procedures, as of the end
                         of the period covered by this report based on such
                         evaluation; and

                    d)   Disclosed in this report any change in the registrant's
                         internal control over financial reporting that occurred
                         during the registrant's most recent fiscal quarter (the
                         registrant's fourth fiscal quarter in the case of an
                         annual report) that has materially affected, or is
                         reasonably likely to materially affect, the
                         registrant's internal control over financial reporting;
                         and

          5.   The registrant's other certifying officer and I have disclosed,
               based on our most recent evaluation of internal control over
               financial reporting, to the registrant's auditors and the audit
               committee of registrant's board of directors (or persons
               performing the equivalent functions):

                    a)   All significant deficiencies and material weaknesses in
                         the design or operation of internal control over
                         financial reporting which are reasonably likely to
                         adversely affect the registrant's ability to record,
                         process, summarize and report financial information;
                         and

                    b)   Any fraud, whether or not material, that involves
                         management or other employees who have a significant
                         role in the registrant's internal control over
                         financial reporting.

Date: August 8, 2005

                                           /S/ Richard Robinson
                                           -------------------------------------
                                           Richard Robinson
                                           Chairman of the Board,
                                           President and Chief Executive Officer

                                                                    EXHIBIT 31.2

I, Mary A. Winston, the principal financial officer of Scholastic Corporation,
certify that:

          1.   I have reviewed this Annual Report on Form 10-K of Scholastic
               Corporation;

          2.   Based on my knowledge, this report does not contain any untrue
               statement of a material fact or omit to state a material fact
               necessary to make the statements made, in light of the
               circumstances under which such statements were made, not
               misleading with respect to the period covered by this report;

          3.   Based on my knowledge, the financial statements, and other
               financial information included in this report, fairly present in
               all material respects the financial condition, results of
               operations and cash flows of the registrant as of, and for, the
               periods presented in this report;

          4.   The registrant's other certifying officer and I are responsible
               for establishing and maintaining disclosure controls and
               procedures (as defined in Exchange Act Rules 13a-15(e) and
               15d-15(e)) and internal control over financial reporting (as
               defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
               registrant and have:

                    a)   Designed such disclosure controls and procedures, or
                         caused such disclosure controls and procedures to be
                         designed under our supervision, to ensure that material
                         information relating to the registrant, including its
                         consolidated subsidiaries, is made known to us by
                         others within those entities, particularly during the
                         period in which this report is being prepared;

                    b)   Designed such internal control over financial
                         reporting, or caused such internal control over
                         financial reporting to be designed under our
                         supervision, to provide reasonable assurance regarding
                         the reliability of financial reporting and the
                         preparation of financial statements for external
                         purposes in accordance with generally accepted
                         accounting principles;

                    c)   Evaluated the effectiveness of the registrant's
                         disclosure controls and procedures and presented in
                         this report our conclusions about the effectiveness of
                         the disclosure controls and procedures, as of the end
                         of the period covered by this report based on such
                         evaluation; and

                    d)   Disclosed in this report any change in the registrant's
                         internal control over financial reporting that occurred
                         during the registrant's most recent fiscal quarter (the
                         registrant's fourth fiscal quarter in the case of an
                         annual report) that has materially affected, or is
                         reasonably likely to materially affect, the
                         registrant's internal control over financial reporting;
                         and

          5.   The registrant's other certifying officer and I have disclosed,
               based on our most recent evaluation of internal control over
               financial reporting, to the registrant's auditors and the audit
               committee of registrant's board of directors (or persons
               performing the equivalent functions):

                    a)   All significant deficiencies and material weaknesses in
                         the design or operation of internal control over
                         financial reporting which are reasonably likely to
                         adversely affect the registrant's ability to record,
                         process, summarize and report financial information;
                         and

                    b)   Any fraud, whether or not material, that involves
                         management or other employees who have a significant
                         role in the registrant's internal control over
                         financial reporting.

Date: August 8, 2005

                                           /S/ Mary A. Winston
                                           -------------------------------------
                                           Mary A. Winston
                                           Executive Vice President
                                           and Chief Financial Officer

                                                                      EXHIBIT 32


                                  CERTIFICATION
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                 WITH RESPECT TO THE ANNUAL REPORT ON FORM 10-K
                         FOR THE YEAR ENDED MAY 31, 2005
                            OF SCHOLASTIC CORPORATION

         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code), each
of the undersigned officers of Scholastic Corporation, a Delaware corporation
(the "Company"), does hereby certify to the best of such officer's knowledge,
that:

         1.       The Company's Annual Report on Form 10-K for the year ended
                  May 31, 2005 (the "Form 10-K") fully complies with the
                  requirements of Section 13(a) or 15(d) of the Securities
                  Exchange Act of 1934, as amended; and

         2.       Information contained in the Form 10-K fairly presents, in all
                  material respects, the financial condition and results of
                  operations of the Company.



Dated:   August 8, 2005                               /s/Richard Robinson
                                                      -------------------
                                                      Richard Robinson
                                                      Chief Executive Officer



Dated:   August 8, 2005                               /s/ Mary A. Winston
                                                      -------------------
                                                      Mary A. Winston
                                                      Chief Financial Officer


         The certification set forth above is being furnished as an exhibit
solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not
being filed as part of the Form 10-K or as a separate disclosure document of the
Company or the certifying officers.