FORM 10-Q
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PART I - FINANCIAL INFORMATION
Item 1. Financial StatementsSCHOLASTIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED(Amounts in millions, except per share data)
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The accompanying condensed consolidated financial statements consist of the accounts of Scholastic Corporation (the “Corporation”) and all majority-owned subsidiaries (collectively, “Scholastic” or the “Company”). These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flow. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 2005.
The Company’s business is closely correlated to the school year. Consequently, the results of operations for the three and nine months ended February 28, 2006 and 2005 are not necessarily indicative of the results expected for the full year. Due to the seasonal fluctuations that occur, the February 28, 2005 condensed consolidated balance sheet is included for comparative purposes.
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable and installment receivables; sales returns; amortization periods; pension obligations; and recoverability of inventories, deferred promotion costs, deferred income taxes and tax reserves, prepublication costs, royalty advances, goodwill and other intangibles.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based benefit plans. In accordance with APB No. 25, no compensation expense was recognized with respect to the Company’s stock-based benefit plans, as the exercise price of each stock option issued was equal to the market price of the underlying stock on the date of grant and the exercise price and number of shares subject to grant were fixed. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the date of grant and in respect to shares issuable under the Company’s equity compensation plans as prescribed by SFAS No. 123, net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:
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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 expense the fair value of all share-based payments as currently permitted, but not required, under SFAS No. 123. SFAS No. 123R will be effective for the Company commencing June 1, 2006. Retroactive application of the fair value recognition provisions of SFAS No. 123 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 expense 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 expense of any unvested portion is recognized over the remaining requisite service period. The Company intends to use the modified prospective transition method to adopt SFAS No. 123R and is currently evaluating the impact that the adoption of SFAS No. 123R will have on its financial position, results of operations and cash flows.
2. Restatement of Previously Issued Consolidated Financial Statements
As a result of a comprehensive review of its lease accounting in the fourth quarter of fiscal 2005, the Company determined that it was appropriate to restate its previously issued annual and interim consolidated financial statements. The restatement was principally attributable to the treatment of certain leases previously classified as operating leases that should have been classified as capital leases and certain other operating leases that previously did not reflect future payment escalation clauses in determining rent expense. The classification of certain capital leases as operating leases principally had the effect of excluding assets subject to capital leases and the related capital lease obligations from the Company’s Consolidated Balance Sheet and treating rental payments as rent expense, rather than as interest expense and principal payments on capital lease obligations. Also, not considering future payment escalation clauses in determining rent expense for certain operating leases principally had the effect of understating rent expense in the early periods of the lease agreements and overstating rent expense in the later periods of the lease agreements.
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SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Amounts in millions, except per share data)
The Company has revised its accounting for these leasing transactions and restated its previously issued annual and interim Consolidated Financial Statements in its Annual Report on Form 10-K for the fiscal year ended May 31, 2005 to appropriately classify its leases and to appropriately reflect future payment escalation clauses in determining rent expense.
The following is a summary of the impact of the restatement on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2005:
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Scholastic is a global children’s publishing and media company. The Company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries, the internet and television networks. The Company categorizes its businesses into four operating segments: Children’s Book Publishing and Distribution; Educational Publishing; Media, Licensing and Advertising (which collectively represent the Company’s domestic operations); 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 gross margin related to a segment’s products sold or services rendered through another segment’s distribution channel are reallocated to the segment originating the products or services.
• Children’s Book Publishing and Distribution includes the publication and distribution of children’s books in the United States through school-based book clubs and book fairs, school-based and direct-to-home continuity programs and the trade channel.
• Educational Publishing includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States.
• Media, Licensing and Advertising includes the production and/or distribution of software in the United States; the production and/or distribution, primarily by and through the Company’s subsidiary, Scholastic Entertainment Inc., of programming and consumer products (including children’s television programming, videos, software, feature films, promotional activities and non-book merchandise); and advertising revenue, including sponsorship programs.
• 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.
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The following table summarizes debt as of the dates indicated:
The following table sets forth the maturities of the Company’s debt obligations as of February 28, 2006 for the remainder of fiscal 2006 and thereafter:
Lines of Credit Certain of Scholastic Corporation’s international subsidiaries had unsecured lines of credit available in local currencies equivalent to $65.4 in the aggregate at February 28, 2006, as compared to $64.6 at February 28, 2005 and $61.8 at May 31, 2005. There were borrowings outstanding under these lines of credit equivalent to $30.6 at February 28, 2006, as compared to $20.8 at February 28, 2005 and $24.7 at May 31, 2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.7% and 6.1% at February 28, 2006 and 2005, respectively, and 5.4% at May 31, 2005.
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Revolver Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). The Revolver provides for unsecured revolving credit of up to $40.0 and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28, 2006 were 0.725% over LIBOR and 0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2006, May 31, 2005 or February 28, 2005.
5.75% Notes due 2007 In January 2002, Scholastic Corporation issued $300.0 of 5.75% Notes (the “5.75% Notes”). The 5.75% Notes are senior unsecured obligations that mature on January 15, 2007. Interest on the 5.75% Notes is payable semi-annually on July 15 and January 15 of each year. The Company may, at any time, redeem all or a portion of the 5.75% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of the redemption. Through February 28, 2006, the Company had repurchased $6.0 of the 5.75% Notes on the open market.
5% Notes due 2013In April 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of the redemption.
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The following table sets forth comprehensive income (loss) for the periods indicated:
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Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average Shares of Class A Stock and Common Stock outstanding during the period. Diluted earnings (loss) per share is calculated to give effect to potentially dilutive options to purchase Class A and Common Stock granted pursuant to the Company’s stock-based benefit plans that were outstanding during the period. The diluted loss per share was equal to the basic loss per share for the three months ended February 28, 2006 and 2005 because such options would have been antidilutive. The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings (loss) per share computations for the periods indicated:
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Goodwill and other intangible assets with indefinite lives are reviewed for impairment annually, or more frequently if impairment indicators arise.
In the twelve months ended May 31, 2005, Additions due to acquisitions includes the purchase price for the acquisition of Chicken House Publishing Ltd. and the accrual for a final payment related to the fiscal 2002 acquisition of Klutz.
The following table summarizes Other intangibles subject to amortization at the dates indicated:
Amortization expense for Other intangibles totaled $0.0 and $0.2 for the three and nine months ended February 28, 2006, respectively, $0.1 and $0.2 for the three and nine months ended February 28, 2005, respectively, and $0.3 for the twelve months ended May 31, 2005. Amortization expense for these assets is currently estimated to total $0.3 for the fiscal year ending May 31, 2006 and $0.2 for each of the fiscal years ending May 31, 2007 through 2010. The weighted average amortization periods for these assets by major asset class are two years for customer lists and twelve years for other intangibles.
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
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The following tables set forth components of the net periodic benefit costs under the Company’s cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”), the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “U.K. Pension Plan”), the defined benefit pension plan of Grolier Ltd., an indirect subsidiary of Scholastic Corporation located in Canada, and the post-retirement benefits provided by the Company to its retired United States-based employees, consisting of certain healthcare and life insurance benefits for the periods indicated:
The Company currently estimates that it will contribute $0.6 to the U.S. Pension Plan in the year ending May 31, 2006. For the nine months ended February 28, 2006, the Company did not make any contributions to the U.S. Pension Plan. The Company currently estimates that Scholastic Ltd. will contribute the equivalent of $1.1 to the U.K. Pension Plan in the fiscal year ending May 31, 2006. For the nine months ended February 28, 2006, Scholastic Ltd. contributed the equivalent of $0.9 to the U.K. Pension Plan.
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Scholastic’s third fiscal quarter is its second smallest revenue period. For the quarter ended February 28, 2006, revenue increased slightly compared to the prior fiscal year quarter, reflecting increases in the Media, Licensing and Advertising and International segments, partially offset by declines in the Children’s Book Publishing and Distribution and Educational Publishingsegments. Higher expenses in the Children’s Book Publishing and Distribution segment, primarily in the Company’s school-based book club business, and lower educational technology revenues in the Educational Publishing segment resulted in a higher net loss for the quarter compared to the prior year period.
For the nine months ended February 28, 2006, revenues and net income increased over the prior fiscal year period by $195.0 million and $9.0 million, respectively, primarily due to higher Harry Potter revenues and profits in the Children’s Book Publishing and Distribution segment.
Based on the results for the quarter and their impact on the remainder of the fiscal year ending May 31, 2006, the Company lowered its forecasts for profitability for the year.
Scholastic is taking a number of actions intended to improve future profitability, including:
Revenues for the quarter ended February 28, 2006 increased $6.9 million, or 1.4%, to $487.7 million, compared to $480.8 million in the prior fiscal year quarter. The increase was due to higher revenues in theMedia, Licensing and Advertising and International segments of $9.2 million and $4.9 million, respectively, partially offset by lower revenues in the Educational Publishing and Children’s Book Publishing and Distribution segments of $5.8 million and $1.4 million, respectively. For the nine months ended February 28, 2006, revenues increased $195.0 million, or 13.1%, to $1,682.8 million, compared to $1,487.8 million in the prior fiscal year period, due to increases in each of the Company’s four operating segments, led by $151.3 million in higher revenues from theChildren’s Book Publishing and Distribution segment as a result of the July 2005 release of Harry Potter and the Half-Blood Prince, the sixth book in the series.
Cost of goods sold as a percentage of revenues increased to 49.7% for the quarter ended February 28, 2006, as compared to 48.6% in the prior fiscal year quarter, primarily due to the impact of higher sales of lower margin products. For the nine months ended February 28, 2006, Cost of goods sold as a percentage of revenue increased to 49.5%, as compared to 47.8% in the prior fiscal year period, primarily due to costs related to the release of Harry Potter and the Half-Blood Prince.
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Bad debt expense increased to $15.7 million, or 3.2% of revenues, for the quarter ended February 28, 2006, compared to $14.9 million, or 3.1% of revenues, in the prior fiscal year quarter. The higher level of bad debt expense was associated with a large educational services provider in the Educational Publishing segment. For the nine months ended February 28, 2006, Bad debt expense decreased to $43.4 million, or 2.6% of revenues, compared to $50.7 million, or 3.4% of revenues, in the prior fiscal year period. The lower level of bad debt expense related primarily to lower bad debt in the Company’s continuity business as a result of the Company’s previously announced plan for this business to focus on its more productive customers.
Depreciation and amortization expense for the quarter ended February 28, 2006 increased to $16.7 million, or 3.4% of revenues, compared to $15.7 million, or 3.3% of revenues, in the prior fiscal year quarter. For the nine months ended February 28, 2006, Depreciation and amortization expense increased to $49.1 million, or 2.9% of revenues, compared to $46.5 million, or 3.1% of revenues, in the prior fiscal year period. The increases in expense were principally associated with the depreciation of information technology equipment.
The resulting operating loss for the quarter ended February 28, 2006 was $17.8 million, compared to operating income of $7.9 million in the prior fiscal year quarter. For the nine months ended February 28, 2006, the resulting operating income increased $11.9 million, or 19.7%, to $72.3 million, or 4.3% of revenues, compared to $60.4 million, or 4.1% of revenues, in the prior fiscal year period.
The effective income tax rate for the quarter ended February 28, 2006 increased to 37.0%, compared to 33.3% in the prior fiscal year quarter. For the nine months ended February 28, 2006, the effective income tax rate increased to 37.0%, compared to 35.8% in the prior fiscal year period. These increases were primarily due to a higher effective tax rate on foreign earnings and a higher state tax provision.
Net loss was $15.5 million, or $0.37 per diluted share, for the quarter ended February 28, 2006, compared to a net loss of $0.8 million, or $0.02 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2006, net income was $30.2 million, or $0.73 per diluted share, compared to net income of $21.2 million, or $0.52 per diluted share, in the prior fiscal year period.
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In the fourth quarter of 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 prior fiscal year quarter 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.
Children’s Book Publishing and Distribution
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.
Revenues in the Children’s Book Publishing and Distribution segment for the quarter ended February 28, 2006 were down slightly at $270.9 million, compared to $272.3 million in the prior fiscal year quarter. For the current fiscal year quarter, school-based book club revenues were $105.9 million, a decrease of $4.0 million, compared to the prior fiscal year quarter, due to lower order levels primarily in the Troll/Carnival and Trumpet clubs, and school-based book fair revenues decreased by $1.2 million to $70.6 million. Revenues from the Company’s trade business were $43.7 million in the quarter ended February 28, 2006, an increase of $2.4 million compared to the prior fiscal year quarter, primarily due to higher back list revenues, and revenues from the Company’s continuity business increased by $1.4 million to $50.7 million.
Segment operating loss for the quarter ended February 28, 2006 was $3.2 million, compared to an operating profit of $14.7 million in the prior fiscal year quarter, principally related to higher promotion expense in the Company’s school-based book club business.
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Segment operating profit for the nine months ended February 28, 2006 improved by $24.1 million to $65.7 million, compared to $41.6 million in the prior fiscal year period. This improvement was primarily due to increased operating profits for the Company’s trade business resulting from the higher Harry Potter revenues, partially offset by lower operating profits in the Company’s school-based book club business as a result of lower revenues and increased promotion expense.
The following highlights the results of the direct-to-home portion of the Company’s continuity programs, which consists primarily of the business formerly operated by Grolier and is included in the Children’s Book Publishing and Distribution segment.
Revenues from the direct-to-home portion of the Company’s continuity business increased by $1.8 million, or 5.5%, to $34.6 million for the quarter ended February 28, 2006, as compared to $32.8 million in the prior fiscal year quarter, and decreased by $20.4 million, or 18.0%, to $93.0 million for the nine months ended February 28, 2006, as compared to $113.4 million in the prior fiscal year period.
Operating losses for the direct-to-home portion of the continuity business were $2.5 million and $13.3 million in the quarter and nine months ended February 28, 2006, respectively, compared to an operating profit of $0.7 million in the prior fiscal year quarter and an operating loss of $4.2 million in the nine months ended February 28, 2005, which included $3.6 million of Continuity Charges.
Excluding the direct-to-home portion of the continuity business, segment revenues decreased by $3.2 million, or 1.3%, to $236.3 million for the quarter ended February 28, 2006, compared to $239.5 million in the prior fiscal year quarter, and increased by $171.7 million, or 24.3%, to $877.4 million for the nine months ended February 28, 2006, compared to $705.7 million in the prior fiscal year period.
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Educational Publishing
The Company’s Educational Publishing segment includes the production and/or publication and distribution to schools and libraries of educational technology products, curriculum materials, children’s books, classroom magazines and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States.
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For the quarter ended February 28, 2006, revenues in the Educational Publishing segment decreased $5.8 million, or 7.3%, to $73.5 million, compared to $79.3 million in the prior fiscal year quarter, primarily due to lower revenues from educational technology products, including the Company’s READ 180® reading intervention program, which the Company believes reflects a shift to a more seasonal selling pattern for this business. Segment revenues for the nine months ended February 28, 2006 increased $9.0 million, or 3.1%, to $301.0 million, compared to $292.0 million in the prior fiscal year period. The increase was related primarily to higher revenues from educational technology products.
Segment operating loss for the quarter ended February 28, 2006 was $3.5 million, compared to segment operating profit of $4.9 million in the prior fiscal year quarter, primarily due to the lower revenues from educational technology products. Segment operating profit for the nine months ended February 28, 2006 decreased by $3.1 million, or 6.4%, to $45.6 million, compared to $48.7 million in the prior fiscal year period, as higher profits from education technology products were more than offset by the lower results in the balance of the segment.
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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 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.
Revenues in the Media, Licensing and Advertising segment for the quarter ended February 28, 2006 increased $9.2 million, or 24.7%, to $46.4 million, compared to $37.2 million in the prior fiscal year quarter, reflecting higher revenues in each of the businesses in the segment, led by an increase in revenues from software and multimedia products. Segment revenues for the nine months ended February 28, 2006 increased $19.7 million, or 20.4%, to $116.4 million, compared to $96.7 million in the prior fiscal year period, reflecting higher revenues in each of the businesses in the segment, led by increases in revenues of $6.7 million from software and multimedia products and $6.4 million from television programming.
Segment operating profit for the quarter ended February 28, 2006 increased $1.9 million to $6.3 million, compared to $4.4 million in the prior fiscal year quarter. Segment operating profit for the nine months ended February 28, 2006 increased $1.6 million to $8.3 million, compared to $6.7 million in the prior fiscal year period. These segment operating profit increases were primarily due to higher revenues.
International
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.
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Segment operating profit for the quarter ended February 28, 2006 decreased $0.7 million to $2.3 million, as compared to $3.0 million in the prior fiscal year quarter. This decrease was primarily due to lower local currency operating profits in the United Kingdom equivalent to $2.8 million, partially offset by the favorable impact of foreign currency exchange rates of $1.2 million. Segment operating profit for the nine months ended February 28, 2006 was $9.6 million, a decrease of $9.6 million from $19.2 million in the prior fiscal year period, primarily due to lower local currency operating profits in the United Kingdom, where the Company is implementing a turn-around plan, and in Canada, equivalent to $9.1 million and $1.6 million, respectively.
The Company’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis. Therefore, the Company’s business is highly seasonal. As a consequence, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second quarter of the fiscal year, while revenues from the sale of instructional materials are highest in the first quarter. The Company experiences a substantial loss from operations in the first quarter of each fiscal year.
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The Company’s cash and cash equivalents were $219.5 million at February 28, 2006, compared to $22.1 million at February 28, 2005 and $110.6 million at May 31, 2005.
Cash provided by operating activities was $210.3 million for the nine months ended February 28, 2006, compared to $112.1 million in the prior fiscal year period. This increase was due to favorable changes in working capital accounts in the current fiscal year period and a higher level of net income. Working capital account changes that had a positive impact on cash flows included: Accrued royalties, which increased by $89.2 million in the nine months ended February 28, 2006, compared to an increase of $18.5 million in the prior fiscal year period, primarily due to royalties associated with higher Harry Potter revenues that will be paid in the fourth quarter of fiscal 2006; and Accounts payable and other accrued expenses, which increased by $38.1 million during the nine months ended February 28, 2006, compared to a decrease of $26.2 million in the prior fiscal year period, primarily due to accrued expenses associated withHarry Potter. Working capital account changes that had a negative impact on cash flows included: Prepaid expenses and other current assets, which increased $33.9 million for the nine months ended February 28, 2006, compared to an increase of $4.0 million in the prior year fiscal period, primarily due to higher income tax payments; and Inventories, which increased $73.3 million during the nine months ended February 28, 2006, compared to an increase of $56.9 million in the prior year fiscal period, primarily due to earlier product purchasing in the Company’s school-based book fairs business.
Cash used in investing activities was $118.4 million for the nine months ended February 28, 2006, compared to $109.8 million in the prior fiscal year period. This increase was due primarily to Additions to property, plant and equipment totaling $46.6 million for the nine months ended February 28, 2006, an increase of $15.2 million over the prior fiscal year period, principally due to increased information technology spending. Acquisition-related payments totaled $3.3 million in the nine months ended February 28, 2006 due to a contingent payment related to the acquisition of Klutz in fiscal 2002.
Cash provided by financing activities was $16.8 million in the nine months ended February 28, 2006, compared to $1.5 million in the prior fiscal year period, an increase of $15.3 million. This increase was due primarily to proceeds received by the Company under its employee stock-based benefit plans totaling $26.0 million in the current fiscal year period, an increase of $11.8 million from $14.2 million in the prior fiscal year period.
Due to the seasonality of its business as discussed under “Seasonality” above, the Company experiences negative cash flow in the June through October time period. As a result of the Company’s business cycle, seasonal borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.
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Financing
Scholastic Corporation and Scholastic Inc. are parties to an unsecured revolving credit agreement with certain banks (the “Credit Agreement”), which expires on March 31, 2009. The Credit Agreement provides for aggregate borrowings of up to $190.0 million (with a right in certain circumstances to increase borrowings to $250.0 million), including the issuance of up to $10.0 million in letters of credit. Interest under this facility is either at the prime rate or a rate equal to 0.325% to 0.975% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% and a utilization fee ranging from 0.05% to 0.25% if borrowings exceed 50% of the total facility. The amounts charged vary based upon the Company’s credit rating. The interest rate, facility fee and utilization fee (when applicable) as of February 28, 2006 were 0.675% over LIBOR, 0.20% and 0.125%, respectively. The Credit Agreement contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Credit Agreement at February 28, 2006 or May 31, 2005. At February 28, 2005, $12.0 million was outstanding under the Credit Agreement at a weighted average interest rate of 3.1% .
Scholastic Corporation and Scholastic Inc. are joint and several borrowers under an unsecured revolving loan agreement with a bank (the “Revolver”). The Revolver provides for unsecured revolving credit of up to $40.0 million and expires on March 31, 2009. Interest under this facility is either at the prime rate minus 1%, or at a rate equal to 0.375% to 1.025% over LIBOR (as defined). There is a facility fee ranging from 0.10% to 0.30% . The amounts charged vary based upon the Company’s credit rating. The interest rate and facility fee as of February 28, 2006 were 0.725% over LIBOR and 0.20%, respectively. The Revolver contains certain financial covenants related to debt and interest coverage ratios (as defined) and limits dividends and other distributions. There were no borrowings outstanding under the Revolver at February 28, 2006, May 31, 2005 or February 28, 2005.
Unsecured lines of credit available in local currencies to certain of Scholastic Corporation’s international subsidiaries were, in the aggregate, equivalent to $65.4 million at February 28, 2006, as compared to $64.6 million at February 28, 2005 and $61.8 million at May 31, 2005. These lines are used primarily to fund local working capital needs. There were borrowings outstanding under these lines of credit equivalent to $30.6 million at February 28, 2006, as compared to $20.8 million at February 28, 2005 and $24.7 million at May 31, 2005. These lines of credit are considered short-term in nature. The weighted average interest rates on the outstanding amounts were 5.7% and 6.1% at February 28, 2006 and 2005, respectively, and 5.4% at May 31, 2005.
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The Company’s total debt obligations at February 28, 2006 and February 28, 2005 were $500.0 million and $510.3 million, respectively. The Company’s total debt obligations at May 31, 2005 were $501.4 million. Through February 28, 2006, the Company had repurchased $6.0 million of its 5.75% Notes due 2007 on the open market. For a more complete description of the Company’s debt obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements – Unaudited in Item 1, “Financial Statements.”
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified in this Report, in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005, and from time to time in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). Actual results could differ materially from those currently anticipated.
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Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed through the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 6% of the Company’s debt at both February 28, 2006 and 2005 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 5% at May 31, 2005. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt, as well as the risk that variable-rate borrowings will represent a larger portion of total debt in the future.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table sets forth information about the Company’s debt instruments as of February 28, 2006 (see Note 4 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):
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PART II – OTHER INFORMATION
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