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1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is a global children’s publishing, education and media company. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading and learning. The Company is the world’s largest publisher and distributor of children’s books and a leading developer of educational technology products. Scholastic also creates quality educational and entertainment materials and products for use in school and at home, including magazines, children’s reference and non-fiction materials, teacher materials, television programming, film, ebooks and toys. The Company is a leading operator of school-based book clubs and book fairs in the United States. It distributes its products and services through these proprietary channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. In addition to its operations in the United States, Scholastic has operations in Canada, the United Kingdom, Australia, New Zealand, Ireland, India, China, Singapore and other parts of Asia, and, through its export business, sells products in over 140 countries.
Basis of presentation
Principles of consolidation
The consolidated financial statements include the accounts of the Corporation and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation.
Discontinued Operations
The Company closed or sold several operations during fiscal 2008, 2009 and 2010 and presently holds for sale one operation. All of these businesses are classified as discontinued operations in the Company’s financial statements.
During the first quarter of fiscal 2011, the Company determined that its distribution facility in Danbury, Connecticut (the “Danbury Facility”) was no longer “held for sale.” Accordingly, the assets, liabilities and results of operations of the Danbury Facility are included in continuing operations for all periods presented.
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 affects 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.
The Company’s significant estimates include those developed for:
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Accounts receivable, returns and allowances |
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Pension and post-retirement obligations |
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Uncertain tax positions |
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Inventory reserves |
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Sales taxes |
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Royalty advance reserves |
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Customer reward programs |
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Impairment testing for goodwill, intangibles and other long-lived assets |
Summary of Significant Accounting Policies
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 – Revenues associated with school-based book fairs are related to sales of product. Book fairs are typically run by schools and/or parent teacher organizations over a five business-day period. At the end of reporting periods, the Company defers revenue for those fairs that have not been completed as of the period end based on the number of fair days occurring after period end on a straight-line calculation of the full fair’s revenue.
Trade – Revenue from the sale of children’s books for distribution in the retail channel is primarily recognized when risks and benefits transfer to the customer, which generally is at the time of shipment, or when the product is on sale and available to the public. For newly published titles, the Company, on occasion, contractually agrees with its customers when the publication may be first offered for sale to the public, or an agreed upon “Strict Laydown Date.” For such titles, the risks and benefits of the publication are not deemed to be transferred to the customer until such time that the publication can contractually be sold to the public, and the Company defers revenue on sales of such titles until such time as the customer is permitted to sell the product to the public.
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. Actual returns could differ from the Company’s estimate. A reserve for estimated bad debts is established at the time of sale and is based on the aging of accounts receivable held by the Company’s third party administrator. While the Company uses a third party to invoice and collect for the majority of shipments made, the Company bears the majority of the responsibility in the case of uncollectible accounts.
Educational Publishing – For shipments to schools, revenue is recognized when risks and benefits transfer to the customer. Shipments to depositories are on consignment and 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 with the products and, in such cases, revenue is deferred and recognized as services are delivered over the life of the contract.
Toy Catalog – Revenue from the sale of children’s toys to the home through catalogs is recognized when risks and benefits transfer to the customer, which generally is at the time of shipment. 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 over the allowable return period.
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 - Advertising revenue is recognized when the magazine is for 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. Certain revenues may be deferred pending future deliverables.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of three months or less.
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. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectable, the balance is then written off.
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 and specifically identified obsolete inventory.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are recorded on a straight-line basis, over estimated useful lives. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Capitalized software, net of accumulated amortization, was $59.2 and $61.2 at May 31, 2011 and 2010, respectively. Capitalized software is depreciated over a period of three to seven years. Amortization expense for capitalized software was $25.8, $25.0 and $25.2 for the fiscal years ended May 31, 2011, 2010 and 2009, respectively. 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. Included in Depreciation and amortization is $1.2 related to capitalized leases for the year ended May 31, 2011. The Company evaluates the depreciation periods of property, plant and equipment to determine whether events or circumstances warrant revised estimates of useful lives.
Leases
Lease agreements are evaluated to determine whether they are capital or operating leases. When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in the current authoritative guidance, the lease is recognized 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 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, digital conversion 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 based on expected future revenues.
Royalty advances
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. The royalties earned are applied first against the remaining unearned portion of the advance. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
Goodwill and intangible assets
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually or more frequently if impairment indicators arise. With regard to goodwill, the Company compares the estimated fair value of its identified reporting units to the carrying value of the net assets. 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, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment. A component is present if discrete financial information is available, and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes. Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes. The Company has identified twelve separate reporting units for goodwill impairment testing purposes. For each reporting unit with a goodwill asset, impairment testing is conducted at the reporting unit level.
With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset. Intangible assets with definite lives consist principally of customer lists, covenants not to compete, and certain other intellectual property assets and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over a five-year period, while covenants not to compete are amortized on a straight-line basis over their contractual term. Other intellectual property assets are amortized over their remaining useful lives which range primarily from three to five years.
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 earnings indicates 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 on-going 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.
The Company accounts for uncertain tax positions using a two step method. Recognition occurs when an entity concludes that a tax position, based solely on technical merits, is more likely than not to be sustained upon examination. If a tax position is more likely than not to be sustained upon examination, the amount recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon settlement. The Company assesses all income tax positions and adjusts its reserves against these positions periodically based upon these criteria. The Company also assesses potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense.
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known. The Company’s effective tax rate is based on expected income and statutory tax rates and permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates.
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested.
Unredeemed incentive credits
The Company employs incentive programs to encourage sponsor participation in its book clubs and book fairs. These programs allow the sponsors to accumulate credits which can then be redeemed for Company products or other items offered by the Company. The Company recognizes a liability for these credits at the time of the recognition of revenue for the underlying purchases of Company product that resulted in the granting of the credits, based on the estimated cost to provide the free products. As the credits are redeemed, such liability is reduced.
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, discount rates and actuarial information. 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’s pension plans and other post-retirement benefits are accounted for using actuarial valuations.
The Company’s pension 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 interest cost component 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 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 periods.
Other post-retirement benefits – Scholastic Corporation provides post-retirement benefits, consisting of healthcare and life insurance benefits, to eligible retired United States-based employees. 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 current authoritative guidance 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 projected and accumulated benefit obligations and the interest cost component 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.
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 until such time as the operations are substantially liquidated or sold. The Company considers its investments in foreign subsidiaries to be indefinitely reinvested, and accordingly, has not provided taxes for the repatriation of these investments. Therefore, the Company has not provided for taxes on cumulative translation adjustments within stockholders’ equity. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested.
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.
Advertising Costs
The Company incurs costs for both direct-response and non direct-response advertising. The Company capitalizes direct-response advertising costs for expenditures, primarily in its Classroom Magazines division. The asset is amortized on a cost-pool-by-cost-pool basis over the period during which the future benefits are expected to be received. Included in Prepaid expenses and other current assets on the balance sheet is $4.8 of capitalized advertising costs as of May 31, 2011 and 2010. The Company expenses non-direct response advertising costs as incurred.
Discontinued Operations
Long-lived assets classified within discontinued operations are recognized at the estimated fair value less cost to sell those long-lived assets for assets held for sale. The calculation of estimated fair value less cost to sell includes significant estimates and assumptions, including, but not limited to: operating projections; excess working capital levels; real estate values; and the anticipated costs involved in the selling process. The Company recognizes operations as discontinued when the operations have either ceased or are expected to be disposed of in a sale transaction in the near term; the operations and cash flows of all discontinued operations have been eliminated, or will be eliminated upon consummation of the expected sale transaction and the Company will not have any significant continuing involvement in the discontinued operations subsequent to the expected sale transaction.
Stock-based compensation
The Company recognizes the cost of employee and director services received in exchange for any stock-based awards. The Company recognizes compensation expense on a straight-line basis over an award’s requisite service period, which is generally the vesting period, based on the award’s fair value at the date of grant.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of stock-based payment awards using this option-pricing model is affected by the price of the Common Stock as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by employees or directors who receive these awards.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for stock-based awards, the Company periodically conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical experience. The estimate of stock-based awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised.
The table set forth below provides the estimated fair value of options granted during fiscal years 2011, 2010 and 2009 and the significant weighted average assumptions used in determining the fair value for options granted by the Company under the Black-Scholes option pricing model. The expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve corresponding to the expected life in effect at the time of the grant. The volatility was estimated based on historical volatility corresponding to the expected life.
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2011 |
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2010 |
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2009 |
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Estimated fair value of stock options granted |
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$ |
8.15 |
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$ |
8.34 |
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$ |
9.51 |
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Assumptions: |
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Expected dividend yield |
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1.3 |
% |
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1.4 |
% |
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0.7 |
% |
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Expected stock price volatility |
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37.3 |
% |
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37.6 |
% |
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34.3 |
% |
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Risk-free interest rate |
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2.0 |
% |
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3.3 |
% |
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3.4 |
% |
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Expected life of options |
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6 years |
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7 years |
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6 years |
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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued authoritative accounting guidance that changes the consolidation model for variable interest entities (“VIE”s). The guidance requires companies to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the company (1) has the power to direct matters that most significantly impact the VIE’s economic performance, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The guidance is effective for fiscal years beginning after November 15, 2009. The adoption of this standard had no impact on the Company’s consolidated financial position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued an update to authoritative guidance on the revenue recognition related to multiple deliverable revenue arrangements. The guidance addresses the accounting for multiple deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Vendors often provide multiple products or services to their customers. Those deliverables often are provided at different points in time or over different time periods. The current authoritative guidance establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. Specifically, this guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. This guidance will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not chosen early adoption and is evaluating the impact on the Company’s consolidated financial position, results of operations and cash flows.
In October 2009, the FASB issued an update to authoritative guidance related to certain revenue arrangements that include software elements. The accounting guidance update addresses the accounting revenue arrangements that contain tangible products and software and it affects vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. The update clarifies what guidance should be used in allocating and measuring revenue. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software recognition guidance “Software – Revenue Recognition.” The amendment requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. This guidance will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not chosen early adoption and is evaluating the impact on the Company’s consolidated financial position, results of operations and cash flows.
In December 2010, the FASB issued an update to the authoritative guidance on the two-step testing required for impairment of goodwill and other intangible assets. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value. If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment. The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that an impairment of goodwill exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2010. Early adoption is not permitted. The Company is evaluating the impact on its consolidated financial position, results of operations and cash flows.
In December 2010, the FASB issued an update to the authoritative guidance related to business combinations. The amendments in this update specify that, for material business combinations, on an individual or aggregate basis, when comparative financial statements are presented, revenue and earnings of the combined entity should be disclosed as though the business combination had occurred as of the beginning of the comparable prior annual reporting period. The amendments in this update also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company has not chosen early adoption and is evaluating the impact on its consolidated financial position, results of operations and cash flows.
In May 2011, the FASB issued an update to the authoritative guidance related to fair value measurements as a result of the FASB and the IASB working together to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments will add new disclosures, with a particular focus on Level 3 measurements. The objective of these amendments is to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company is evaluating the impact on its consolidated financial position, results of operations and cash flows.
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2. ACQUISITION AND LAND PURCHASE
On September 9, 2010, the Company acquired Math Solutions, an education resources and professional development company focusing on K-12 math instruction, for $8.2, net of cash acquired. The Company has integrated this business with its existing educational technology businesses. As a result of this transaction, the Company recognized $0.8 of goodwill and $5.6 of amortizable intangible assets.
Transaction costs of $0.4 were expensed in fiscal 2011 and are included in “Other (expense) income” on the Company’s consolidated statements of operations. The results of operations of this acquisition subsequent to the acquisition date are included in the Educational Publishing segment.
In the second quarter of fiscal 2011, the Company purchased the land on which its corporate headquarters are located for $24.3 and also satisfied capital lease obligations on this property of $1.3.
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3. DISCONTINUED OPERATIONS
The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly. The Company continuously evaluates its portfolio of businesses for both impairment and economic viability. The Company did not cease any additional operations or classify any additional operations as “held for sale” during the fiscal year ended May 31, 2011. During the first quarter of fiscal 2011, the Company determined that the Danbury Facility was no longer “held for sale.” Accordingly, the assets, liabilities and results of operations of the Danbury Facility are included in continuing operations for all periods presented.
During the fiscal year ended May 31, 2011, the Company completed the settlement of the pension plan of Grolier Limited, a Canadian entity in the continuities business. Losses related to the recognition of prior service costs are reflected in the table below. See Note 12, “Employee Benefit Plans,” for further details pertaining to the settlement.
The following table summarizes the operating results of the discontinued operations for the fiscal years ended May 31:
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2011 |
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2010 |
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2009 |
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Revenues |
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$ |
— |
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$ |
2.4 |
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$ |
74.2 |
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Gain (loss) on sale |
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0.3 |
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(0.9 |
) |
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32.0 |
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Non-cash impairment charge and loss on operations |
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4.9 |
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2.1 |
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52.6 |
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Loss before income taxes |
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4.6 |
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3.0 |
|
|
20.6 |
|
|
Income tax benefit (provision) |
|
|
0.4 |
|
|
0.4 |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
4.2 |
|
$ |
2.6 |
|
$ |
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the assets and liabilities of the discontinued operations included in the Consolidated Balance Sheets of the Company as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
0.1 |
|
$ |
3.7 |
|
|
Other assets |
|
|
9.2 |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
$ |
9.3 |
|
$ |
12.9 |
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
|
0.6 |
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
0.6 |
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|||
4. SEGMENT INFORMATION
The Company categorizes its businesses into four reportable 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.
|
|
|
|
• |
Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books in the United States through school-based book clubs, book fairs, ecommerce and the trade channel. This segment is comprised of three operating segments. |
|
|
|
|
• |
Educational Publishing includes the production and/or publication and distribution to schools and libraries of educational technology products and services, curriculum materials, children’s books and collections, classroom magazines and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of three operating segments. |
|
|
|
|
• |
Media, Licensing and Advertising includes the production and/or distribution of media, merchandising and advertising revenue, including sponsorship programs and consumer promotions. This segment is comprised of three operating segments. |
|
|
|
|
• |
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. This segment is comprised of two operating segments. |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Children’s |
|
Educational |
|
Media, |
|
Overhead (1) (3) |
|
Total |
|
International (1) |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
922.0 |
|
$ |
428.0 |
|
$ |
111.2 |
|
$ |
— |
|
$ |
1,461.2 |
|
$ |
444.9 |
|
$ |
1,906.1 |
|
|
Bad debts |
|
|
8.7 |
|
|
1.9 |
|
|
0.2 |
|
|
— |
|
|
10.8 |
|
|
2.8 |
|
|
13.6 |
|
|
Depreciation and amortization (4) |
|
|
15.6 |
|
|
2.6 |
|
|
0.7 |
|
|
35.6 |
|
|
54.5 |
|
|
5.6 |
|
|
60.1 |
|
|
Amortization (5) |
|
|
12.6 |
|
|
27.8 |
|
|
8.0 |
|
|
— |
|
|
48.4 |
|
|
2.7 |
|
|
51.1 |
|
|
Asset Impairments |
|
|
— |
|
|
3.4 |
|
|
— |
|
|
— |
|
|
3.4 |
|
|
— |
|
|
3.4 |
|
|
Royalty advances expensed |
|
|
19.1 |
|
|
0.7 |
|
|
0.4 |
|
|
— |
|
|
20.2 |
|
|
3.5 |
|
|
23.7 |
|
|
Segment operating income/(loss) |
|
|
78.1 |
|
|
51.6 |
|
|
(1.2 |
) |
|
(66.1 |
) |
|
62.4 |
|
|
38.3 |
|
|
100.7 |
|
|
Segment assets at May 31, 2011 |
|
|
427.1 |
|
|
311.9 |
|
|
46.1 |
|
|
405.1 |
|
|
1,190.2 |
|
|
287.5 |
|
|
1,477.7 |
|
|
Goodwill at May 31, 2011 |
|
|
54.3 |
|
|
85.8 |
|
|
5.4 |
|
|
— |
|
|
145.5 |
|
|
8.7 |
|
|
154.2 |
|
|
Expenditures for long-lived assets |
|
|
40.4 |
|
|
44.8 |
|
|
9.4 |
|
|
56.3 |
|
|
150.9 |
|
|
11.8 |
|
|
162.7 |
|
|
Long-lived assets at May 31, 2011 |
|
|
175.9 |
|
|
177.8 |
|
|
20.1 |
|
|
249.0 |
|
|
622.8 |
|
|
71.2 |
|
|
694.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
910.6 |
|
$ |
476.5 |
|
$ |
113.8 |
|
$ |
— |
|
$ |
1,500.9 |
|
$ |
412.0 |
|
$ |
1,912.9 |
|
|
Bad debts |
|
|
3.9 |
|
|
1.7 |
|
|
0.1 |
|
|
— |
|
|
5.7 |
|
|
3.8 |
|
|
9.5 |
|
|
Depreciation and amortization (4) |
|
|
14.2 |
|
|
3.0 |
|
|
0.7 |
|
|
35.6 |
|
|
53.5 |
|
|
6.0 |
|
|
59.5 |
|
|
Amortization (5) |
|
|
12.0 |
|
|
25.9 |
|
|
10.2 |
|
|
— |
|
|
48.1 |
|
|
2.9 |
|
|
51.0 |
|
|
Asset Impairments |
|
|
— |
|
|
36.3 |
|
|
3.0 |
|
|
— |
|
|
39.3 |
|
|
3.8 |
|
|
43.1 |
|
|
Royalty advances expensed |
|
|
20.3 |
|
|
0.7 |
|
|
0.9 |
|
|
— |
|
|
21.9 |
|
|
4.1 |
|
|
26.0 |
|
|
Segment operating income/(loss) |
|
|
117.9 |
|
|
67.2 |
|
|
(4.2 |
) |
|
(82.5 |
) |
|
98.4 |
|
|
30.0 |
|
|
128.4 |
|
|
Segment assets at May 31, 2010 |
|
|
516.3 |
|
|
344.3 |
|
|
59.2 |
|
|
377.0 |
|
|
1,296.8 |
|
|
290.7 |
|
|
1,587.5 |
|
|
Goodwill at May 31, 2010 |
|
|
54.3 |
|
|
88.4 |
|
|
5.4 |
|
|
— |
|
|
148.1 |
|
|
8.5 |
|
|
156.6 |
|
|
Expenditures for long-lived assets |
|
|
43.7 |
|
|
31.8 |
|
|
6.9 |
|
|
28.9 |
|
|
111.3 |
|
|
11.2 |
|
|
122.5 |
|
|
Long-lived assets at May 31, 2010 |
|
|
176.8 |
|
|
169.8 |
|
|
19.2 |
|
|
232.2 |
|
|
598.0 |
|
|
67.1 |
|
|
665.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
940.4 |
|
$ |
384.2 |
|
$ |
125.7 |
|
$ |
— |
|
$ |
1,450.3 |
|
$ |
399.0 |
|
$ |
1,849.3 |
|
|
Bad debts |
|
|
10.0 |
|
|
1.6 |
|
|
0.3 |
|
|
— |
|
|
11.9 |
|
|
3.9 |
|
|
15.8 |
|
|
Depreciation and amortization (4) |
|
|
16.3 |
|
|
3.8 |
|
|
1.0 |
|
|
34.3 |
|
|
55.4 |
|
|
5.8 |
|
|
61.2 |
|
|
Amortization (5) |
|
|
12.3 |
|
|
22.5 |
|
|
7.9 |
|
|
— |
|
|
42.7 |
|
|
2.1 |
|
|
44.8 |
|
|
Asset Impairments |
|
|
— |
|
|
— |
|
|
— |
|
|
9.3 |
|
|
9.3 |
|
|
17.0 |
|
|
26.3 |
|
|
Royalty advances expensed |
|
|
26.3 |
|
|
1.7 |
|
|
0.6 |
|
|
— |
|
|
28.6 |
|
|
3.6 |
|
|
32.2 |
|
|
Segment operating income/(loss) |
|
|
101.8 |
|
|
55.8 |
|
|
— |
|
|
(104.3 |
) |
|
53.3 |
|
|
7.3 |
|
|
60.6 |
|
|
Segment assets at May 31, 2009 |
|
|
560.7 |
|
|
331.2 |
|
|
59.4 |
|
|
381.1 |
|
|
1,332.4 |
|
|
252.9 |
|
|
1,585.3 |
|
|
Goodwill at May 31, 2009 |
|
|
54.3 |
|
|
88.4 |
|
|
5.8 |
|
|
— |
|
|
148.5 |
|
|
8.5 |
|
|
157.0 |
|
|
Expenditures for long-lived assets |
|
|
48.5 |
|
|
37.7 |
|
|
12.3 |
|
|
25.0 |
|
|
123.5 |
|
|
10.0 |
|
|
133.5 |
|
|
Long-lived assets at May 31, 2009 |
|
|
186.9 |
|
|
206.3 |
|
|
27.2 |
|
|
229.4 |
|
|
649.8 |
|
|
73.0 |
|
|
722.8 |
|
|
|
|
|
(1) |
As discussed in Note 3, “Discontinued Operations,” the Company closed or sold several operations during fiscal 2008, 2009 and 2010 and presently holds for sale one operation. All of these businesses are classified as discontinued operations in the Company’s financial statements and, as such, are not reflected in this table. During the first quarter of fiscal 2011, the Company determined that its Danbury Facility was no longer “held for sale.” Accordingly, the assets, liabilities and results of operations of the Danbury Facility are included in continuing operations for all periods presented. |
|
|
|
|
(2) |
Includes assets and results of operations acquired in a business acquisition as of September 9, 2010. |
|
|
|
|
(3) |
Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Jefferson City, Missouri and the Danbury Facility. |
|
|
|
|
(4) |
Includes depreciation of property, plant and equipment and amortization of intangible assets. |
|
|
|
|
(5) |
Includes amortization of prepublication and production costs. |
|
|||
The following table summarizes debt as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
2011 |
|
2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
|
Lines of Credit (weighted average interest rates of 6.7% and 3.9%, respectively) |
|
$ |
0.7 |
|
$ |
0.7 |
|
$ |
7.5 |
|
$ |
7.5 |
|
|
Loan Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Loan |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Term Loan (interest rates of 1.0% and 1.1%, respectively) |
|
|
50.2 |
|
|
50.2 |
|
|
93.0 |
|
|
93.0 |
|
|
5% Notes due 2013, net of discount |
|
|
152.5 |
|
|
156.6 |
|
|
152.3 |
|
|
151.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
203.4 |
|
|
207.5 |
|
|
252.8 |
|
|
251.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less lines of credit and current portion of long-term debt |
|
|
(43.5 |
) |
|
(43.5 |
) |
|
(50.3 |
) |
|
(50.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
159.9 |
|
$ |
164.0 |
|
$ |
202.5 |
|
$ |
201.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The short-term debt’s carrying value approximates its fair value. The fair value of the Loan Agreement approximates its carrying value due to its variable interest rate and the Company’s stable credit rating. The fair values of the Notes were estimated based on market quotes, where available, or dealer quotes.
The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of May 31, 2011 for fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
$ |
43.5 |
|
|
2013 |
|
|
159.9 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
203.4 |
|
|
|
|
|
|
|
Loan Agreement
On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a new $525.0 credit facility with certain banks, as amended, (the “Loan Agreement”), consisting of a $325.0 revolving credit component (the “Revolving Loan”) and a $200.0 amortizing term loan component (the “Term Loan”). The Loan Agreement is a contractually committed unsecured credit facility that is scheduled to expire on June 1, 2012. The $325.0 Revolving Loan component allows the Company to borrow, repay or prepay and reborrow at any time prior to the stated maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. The Loan Agreement also provides for an increase in the aggregate Revolving Loan commitments of the lenders of up to an additional $150.0. The $200.0 Term Loan component was established in order to fund the reacquisition by the Corporation of shares of its Common Stock pursuant to an Accelerated Share Repurchase Agreement (see Note 11, “Treasury Stock”) and was fully drawn on June 28, 2007 in connection with that transaction. The Term Loan, which may be prepaid at any time without penalty, requires quarterly principal payments of $10.7, with the first payment on December 31, 2007, and a final payment of $7.4 due on June 1, 2012.
On August 16, 2010, the Borrowers entered into an amendment to the Loan Agreement, which added certain provisions related to covenants and interest. Interest on both the Term Loan and Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). At the election of the Borrower, the interest rate charged for each loan made under the Loan Agreement is based on (1) a rate equal to the higher of (a) the prime rate or (b) the prevailing Federal Funds rate plus 0.500% or (c) the Eurodollar Rate for a one month interest period plus 1%; or (2) an adjusted LIBOR rate plus an applicable margin, ranging from 0.500% to 1.250% based on the Company’s prevailing consolidated debt to total capital ratio. As of May 31, 2011 and May 31, 2010, the applicable margin on the Term Loan was 0.750% and the applicable margin on the Revolving Loan was 0.600%. The Loan Agreement also provides for a payment of a facility fee ranging from 0.125% to 0.25% per annum on the Revolving Loan only, which was 0.150% at May 31, 2011 and May 31, 2010. As of May 31, 2011, $50.2 was outstanding under the Term Loan at an interest rate of 1.0%. As of May 31, 2010, $93.0 was outstanding under the Term Loan at an interest rate of 1.1%. There were no outstanding borrowings under the Revolving Loan as of May 31, 2011 and 2010, respectively. As of May 31, 2011, standby letters of credit outstanding under the Loan Agreement totaled $1.4. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at May 31, 2011 the Company was in compliance with these covenants.
5% Notes due 2013
In 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 through maturity. 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.
The Company repurchased $5.0 of the 5% Notes on the open market in fiscal 2010. The Company did not make any additional purchases during fiscal 2011.
Lines of Credit
The Company has unsecured money market bid rate credit lines totaling $20.0. There were no outstanding borrowings under these credit lines at May 31, 2011 and 2010. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of May 31, 2011, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $30.3, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. There were borrowings outstanding under these facilities equivalent to $0.7 at May 31, 2011 at a weighted average interest rate of 6.7%, compared to the equivalent of $7.5 at May 31, 2010 at a weighted average interest rate of 3.9%. The increased interest rate in fiscal 2011 was due to higher local borrowing interest rates in Asia.
|
|||
6. 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, the Company 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, 2011, 2010 and 2009 was $47.3, $44.8 and $45.3, respectively.
The Company was obligated under capital leases covering land, buildings and equipment in the amount of $55.5 and $55.9 at May 31, 2011 and 2010, respectively. Amortization of assets under capital leases was $1.2, $3.5 and $4.0 for the fiscal years ended May 31, 2011, 2010 and 2009, respectively and is included in Depreciation and amortization expense. The most significant of the Company’s capital leases is the lease related to the New York office where the Company’s headquarters are located. This capital lease has an imputed interest rate of 7.9% and the term ends July 2039.
The following table sets forth the composition of capital leases reflected as Property, Plant and Equipment in the Consolidated Balance Sheets at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
||
|
Land |
|
$ |
3.5 |
|
$ |
3.5 |
|
|
Buildings |
|
|
39.0 |
|
|
39.0 |
|
|
Equipment |
|
|
3.0 |
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.5 |
|
|
50.5 |
|
|
Accumulated amortization |
|
|
(14.1 |
) |
|
(17.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31.4 |
|
$ |
32.9 |
|
|
|
|
|
|
|
|
|
|
The following table sets forth the aggregate minimum future annual rental commitments at May 31, 2011 under all non-cancelable leases for fiscal years ending May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Operating Leases |
|
Capital Leases |
|
||
|
|
|
|
|
|
|
||
|
2012 |
|
$ |
34.5 |
|
$ |
5.0 |
|
|
2013 |
|
|
31.0 |
|
|
5.6 |
|
|
2014 |
|
|
23.9 |
|
|
5.1 |
|
|
2015 |
|
|
19.2 |
|
|
5.1 |
|
|
2016 |
|
|
15.4 |
|
|
5.1 |
|
|
Thereafter |
|
|
43.2 |
|
|
191.1 |
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
167.2 |
|
$ |
217.0 |
|
|
Less amount representing interest |
|
|
|
|
|
161.5 |
|
|
Present value of net minimum capital lease payments |
|
|
|
|
|
55.5 |
|
|
Less current maturities of capital lease obligations |
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations |
|
|
|
|
$ |
55.0 |
|
|
|
|
|
|
|
|
|
|
Other Commitments
The Company had contractual commitments relating to royalty advances at May 31, 2011 totaling $8.6. The aggregate annual commitments for royalty advances are as follows: fiscal 2012 – $5.8; fiscal 2013 – $2.0; fiscal 2014 - $0.6; fiscal 2015 - $0.1; fiscal 2016 - $0.1.
The Company had contractual commitments relating to minimum print quantities at May 31, 2011 totaling $504.9. The annual commitments relating to minimum print quantities are as follows: fiscal 2012 – $55.7; fiscal 2013 – $56.7; fiscal 2014 – $57.8; fiscal 2015 - $58.8; fiscal 2016 - $59.8; thereafter – $216.1.
As of May 31, 2011, the Company had open standby letters of credit of $6.6 issued under certain credit lines, compared to $7.2 as of May 31, 2010. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration.
Contingencies
As previously reported, the Company is party to certain actions filed by each of Alaska Laborers Employee Retirement Fund and Paul Baicu, which were consolidated on November 8, 2007. On September 26, 2008, the plaintiff sought leave of the Court to file a second amended class action complaint, in order to add allegations relating to the Company’s restatement announced in the Company’s Annual Report on Form 10-K filed on July 30, 2008. The Court thereafter dismissed the Company’s pending motion to dismiss as moot. On October 20, 2008, the plaintiff filed the second amended complaint, and on October 31, 2008, the Company filed a motion to dismiss the second amended complaint. On September 30, 2010, the Court granted the Company’s motion to dismiss the second amended complaint for failure to state a cause of action, while also granting leave to the plaintiff to move to file a new proposed amended complaint. On December 1, 2010, the plaintiff filed a motion for leave to file a proposed third amended class action complaint, as well as a motion to replace Alaska Laborer Employers Retirement Fund with City of Sterling Heights Police and Fire Retirement System as lead plaintiff, and, on January 14, 2011, the Company filed an opposition to plaintiff’s motions for leave to file a third amended class action complaint and to substitute lead plaintiff, which was argued on March 3, 2011 and is awaiting decision by the court. The proposed third amended class action complaint shortens the original class action period to end on December 16, 2005 rather than on March 23, 2006, but otherwise continues to allege securities fraud relating to statements made by the Company concerning its operations and financial results, now for the period between March 18, 2005 and December 16, 2005, and seeks unspecified compensatory damages. The Company continues to believe that the allegations in such complaint are without merit and is vigorously defending the lawsuit.
In addition to the above suit, 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.
|
|||
7. INVESTMENTS
Included in the Other assets and deferred charges section of the Company’s Consolidated Balance Sheets were investments of $20.4 and $20.6 at May 31, 2011 and May 31, 2010, respectively.
In fiscal 2010, the Company determined that a cost-method investment in a U.S.-based internet company was other than temporarily impaired. Accordingly, the Company recognized a loss of $1.5 for the fiscal year ended May 31, 2010.
The Company owns a non-controlling interest in a book distribution business located in the United Kingdom. In fiscal 2009, the Company determined that these assets were other than temporarily impaired. For the fiscal year ended May 31, 2009, the Company recorded impairments on investments related to these operations of $13.5. In fiscal 2011, the Company again determined that these assets were other than temporarily impaired. The Company employed Level 3 fair value measures, including discounted cash flow projections, and recognized an impairment loss of $3.6. The carrying value of these assets was $5.7 as of May 31, 2011.
In fiscal 2007, the Company participated in the organization of a new entity that produces and distributes educational children’s television programming. Since inception in August 2006, the Company has contributed a total of $6.0 in cash and certain rights to existing television programming. The Company’s investment, which consists of a 12.25% equity interest, is accounted for using the equity method of accounting. The net value of this investment at May 31, 2011 was $1.3.
The following table summarizes the Company’s investments as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
||
|
Cost method investments: |
|
|
|
|
|
|
|
|
UK-based |
|
$ |
5.7 |
|
$ |
9.1 |
|
|
|
|
|
|
|
|
|
|
|
Total cost method investments |
|
|
5.7 |
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
Equity method investments: |
|
|
|
|
|
|
|
|
UK-based |
|
|
13.4 |
|
|
10.8 |
|
|
U.S.-based |
|
$ |
1.3 |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Total equity method investment |
|
|
14.7 |
|
|
11.5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20.4 |
|
$ |
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|||
8. 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 fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
||
|
Gross beginning balance |
|
$ |
174.0 |
|
$ |
174.0 |
|
|
Accumulated impairment |
|
|
(17.4 |
) |
|
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
|
156.6 |
|
|
157.0 |
|
|
Additions due to acquisition |
|
|
1.0 |
|
|
— |
|
|
Impairment charge |
|
|
(3.4 |
) |
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Gross ending balance |
|
|
175.0 |
|
|
174.0 |
|
|
Accumulated impairment |
|
|
(20.8 |
) |
|
(17.4 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
154.2 |
|
$ |
156.6 |
|
|
|
|
|
|
|
|
|
|
On September 9, 2010, the Company purchased the assets of Math Solutions, an education resources and professional development company focusing on K-12 math instruction, for $8.2, net of cash acquired. The Company has integrated this business with its existing educational technology businesses. The Company utilized Level 3 fair value measurement inputs, using its own assumptions, including internally-developed discounted cash flow forecasts, to determine the fair value of the assets acquired and the amount of goodwill to be allocated to the Math Solutions business. As a result, the Company recognized $0.8 of goodwill and $5.6 of amortizable intangible assets. In the second quarter of fiscal 2011, the Company also recognized $0.2 of goodwill associated with a previously acquired international entity.
As of May 31, 2011, the Company determined the carrying value of its Scholastic Library Publishing and Classroom Magazines business within the Educational Publishing segment exceeded the fair value of this reporting unit. The Company employed internally-developed discounted cash flow forecasts and market comparisons to determine the fair value of the reporting unit and the implied fair value of the reporting unit’s assets and liabilities. Accordingly, the Company recognized an impairment charge of $3.4 at May 31, 2011.
As of May 31, 2010, the Company determined the carrying value of its direct-to-home catalog business specializing in toys exceeded the fair value of this reporting unit. The Company employed internally-developed discounted cash flow forecasts and market comparisons to determine the fair value of the reporting unit and the implied fair value of the reporting unit’s assets and liabilities. Accordingly, the Company recognized an impairment charge of $0.4 at May 31, 2010.
The following table summarizes Other intangibles subject to amortization as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
|
|
|
Beginning balance-Customer lists |
|
$ |
0.8 |
|
$ |
0.1 |
|
|
Additions |
|
|
— |
|
|
5.1 |
|
|
Impairment charge |
|
|
— |
|
|
(3.8 |
) |
|
Other adjustments |
|
|
— |
|
|
(0.3 |
) |
|
Amortization expense |
|
|
(0.2 |
) |
|
(0.2 |
) |
|
Foreign currency translation |
|
|
0.1 |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists, net of accumulated amortization of $1.1 and $0.9, respectively |
|
$ |
0.7 |
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance-Other intangibles |
|
$ |
2.2 |
|
$ |
2.8 |
|
|
Additions due to acquisition |
|
|
5.6 |
|
|
— |
|
|
Reclassified from indefinite-lived intangible assets |
|
|
10.7 |
|
|
— |
|
|
Amortization expense |
|
|
(1.2 |
) |
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
Other intangibles, net of accumulated amortization of $4.2 and $3.0, respectively |
|
$ |
17.3 |
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18.0 |
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
Amortization expense for Other intangibles totaled $1.4, $0.8 and $0.6 for the fiscal years ended May 31, 2011, 2010 and 2009, respectively. Amortization expense for these assets is currently estimated to total $1.7 for each of the fiscal years ending May 31, 2012 and 2013, $1.2 for the fiscal year ending May 31, 2014, $1.1 for the fiscal year ending May 31, 2015 and $1.0 for the fiscal year ending May 31, 2016. Intangible assets with definite lives consist principally of customer lists and covenants not to compete. Intangible assets with definite lives are amortized over their estimated useful lives. The average remaining useful lives of all amortizable intangible assets is 7 years.
In fiscal 2011, the Company recognized $5.6 of amortizable intangible assets as a result of the Math Solutions acquisition. The Company utilized Level 3 fair value measurement inputs, using its own assumptions including internally-developed discounted cash flow forecasts and market comparisons, to determine the fair value of the intangible assets acquired.
In fiscal 2011, the Company determined that certain intangible assets associated with publishing and trademark rights, which were previously accounted for as indefinite-lived assets, were no longer indefinite-lived. Accordingly, the Company assessed these assets for impairment as of September 1, 2010, and subsequently commenced amortization of the assets. The Company determined that the fair value of the assets exceeded their carrying value as of September 1, 2010, and therefore no impairment was recognized. The Company employed Level 3 fair value measurement techniques to determine the fair value of these assets as of September 1, 2010, including the relief from royalty method.
In the fourth quarter of fiscal 2010, the Company determined that the fair value of the trademark associated with the Company’s direct-to-home catalog business specializing in toys was less than the carrying value of the trademark. The Company used historical and projected results while applying a residual income fair value method to make this determination and recognized an impairment of this trademark of $2.6.
During the first quarter of fiscal 2010, the Company and its joint venture partner terminated a book distribution joint venture in the United Kingdom. As a result of this transaction, the Company received a portion of the business and a related customer list previously held by the joint venture, in exchange for the partial forgiveness of amounts owed to the Company by the joint venture and related entities. The Company recognized this customer list in the first quarter of fiscal 2010 with a carrying value of $5.1, which the Company intended to operate apart from its existing customer list. In the second quarter of fiscal 2010, the Company determined that, to maximize profitability, the acquired customer list should ultimately be combined with its existing customer list. As a result, the Company assessed this customer list for impairment and determined that the customer list was impaired based upon the highest and best use for this asset. This assessment incorporated internally-developed cash flow projections to measure fair value, as market data for this asset is not readily available. Accordingly, the Company recognized an impairment charge in the second quarter of fiscal 2010 related to this asset of $3.8.
The following table summarizes Other intangibles not subject to amortization as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
||
|
|
|
|
|
|
|
|
|
|
Net carrying value by major class: |
|
|
|
|
|
|
|
|
Trademarks and other |
|
$ |
1.8 |
|
$ |
12.5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.8 |
|
$ |
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|||
9. TAXES
The components of earnings from continuing operations before income taxes for the fiscal years ended May 31 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
2009 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
United States |
|
$ |
73.9 |
|
$ |
109.6 |
|
$ |
41.1 |
|
|
Non-United States |
|
$ |
7.2 |
|
$ |
2.0 |
|
$ |
(16.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81.1 |
|
$ |
111.6 |
|
$ |
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the fiscal years ended May 31 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
2011 |
|
2010 |
|
2009 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
9.1 |
|
$ |
10.2 |
|
$ |
6.8 |
|
|
Deferred |
|
$ |
9.1 |
|
$ |
29.8 |
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18.2 |
|
$ |
40.0 |
|
$ |
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
3.6 |
|
$ |
1.8 |
|
$ |
1.1 |
|
|
Deferred |
|
$ |
2.2 |
|
$ |
1.1 |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.8 |
|
$ |
2.9 |
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
12.5 |
|
$ |
8.6 |
|
$ |
5.5 |
|
|
Deferred |
|
$ |
1.0 |
|
$ |
1.4 |
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13.5 |
|
$ |
10.0 |
|
$ |
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
25.2 |
|
$ |
20.6 |
|
$ |
13.4 |
|
|
Deferred |
|
$ |
12.3 |
|
$ |
32.3 |
|
$ |
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37.5 |
|
$ |
52.9 |
|
$ |
17.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate Reconciliation
A reconciliation of the significant differences between the effective income tax rate and the federal statutory rate on earnings from continuing operations before income taxes for the fiscal years ended May 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
2011 |
|
2010 |
|
2009 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Computed federal statutory provision |
|
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
|
State income tax provision, net of federal income tax benefit |
|
|
5.2 |
% |
|
5.2 |
% |
|
6.0 |
% |
|
Difference in effective tax rates on earnings of foreign subsidiaries |
|
|
-0.8 |
% |
|
-0.4 |
% |
|
-1.3 |
% |
|
Charitable contributions |
|
|
-1.6 |
% |
|
-1.1 |
% |
|
-1.7 |
% |
|
Tax credits |
|
|
-0.2 |
% |
|
-0.2 |
% |
|
0.0 |
% |
|
Valuation allowances |
|
|
6.1 |
% |
|
5.4 |
% |
|
20.5 |
% |
|
Other - net |
|
|
2.5 |
% |
|
3.5 |
% |
|
13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates |
|
|
46.2 |
% |
|
47.4 |
% |
|
71.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
37.5 |
|
$ |
52.9 |
|
$ |
17.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unremitted Earnings
At May 31, 2011, the Company had not provided U.S. income taxes on accumulated but undistributed earnings of its non-U.S. subsidiaries of approximately $78.6 as substantially all of these undistributed earnings are expected to be permanently reinvested. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determining the unrecognized deferred tax liability related to those investments in these non-U.S. subsidiaries is not practicable. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested.
Deferred Taxes
The significant components for deferred income taxes for the fiscal years ended May 31, including deferred income taxes related to discontinued operations, are as follows:
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|
|
2011 |
|
2010 |
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||
|
|
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|
|
|
||
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Deferred tax assets |
|
|
|
|
|
|
|
|
Tax uniform capitalization |
|
$ |
17.1 |
|
$ |
19.8 |
|
|
Inventory reserves |
|
|
25.8 |
|
|
25.0 |
|
|
Allowance for doubtful accounts |
|
|
6.5 |
|
|
5.3 |
|
|
Other reserves |
|
|
23.2 |
|
|
18.7 |
|
|
Post-retirement, post-employment and pension obligations |
|
|
21.3 |
|
|
24.0 |
|
|
Tax carryforwards |
|
|
41.0 |
|
|
38.2 |
|
|
Lease accounting |
|
|
9.4 |
|
|
8.6 |
|
|
Other - net |
|
|
29.1 |
|
|
29.4 |
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
173.4 |
|
|
169.0 |
|
|
Valuation allowance |
|
|
(36.8 |
) |
|
(36.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
136.6 |
|
|
133.0 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(0.8 |
) |
|
(0.8 |
) |
|
Depreciation and amortization |
|
|
(59.4 |
) |
|
(39.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability |
|
|
(60.2 |
) |
|
(40.1 |
) |
|
Total net deferred tax assets |
|
$ |
76.4 |
|
$ |
92.9 |
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets of $76.4 at May 31, 2011 and $92.9 at May 31, 2010 include $56.2 and $59.3, respectively, in current assets. Total non current deferred tax assets of $20.2 and $33.6 are reflected in noncurrent assets at May 31, 2011 and 2010, respectively.
For the years ended May 31, 2011 and 2010, the valuation allowance increased by $0.8 and $5.9, respectively. The valuation allowance is based on the Company’s assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. The valuation allowance primarily relates to foreign operating loss carryforwards of $117.2, principally in the UK, which do not expire, and charitable contributions of $17.4 at May 31, 2011.
The benefits of uncertain tax positions are recorded in the financial statements only after determining a more likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. These uncertain tax positions are included in long-term income taxes payable, reduced by the associated federal deduction for state taxes and non-U.S. tax credits, and may also include other long-term tax liabilities that are not uncertain but have not yet been paid. The interest and penalties related to these uncertain tax positions are recorded as part of the Company’s income tax expense and part of the income tax liability on the Company’s Consolidated Balance Sheets.
The total amount of unrecognized tax benefits at May 31, 2011, 2010 and 2009 were $30.8, excluding $5.9 accrued for interest and penalties, $30.6, excluding $5.7 accrued for interest and penalties, and $33.6, excluding $8.5 for interest and penalties, respectively. Of the total amount of unrecognized tax benefits at May 31, 2011, 2010 and 2009, $19.2, $19.5, and $15.1, respectively, would impact the Company’s effective tax rate.
A reconciliation of the unrecognized tax benefits for the fiscal years ended May 31 is as follows:
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|
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|
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|
|
|
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|
|
Gross unrecognized benefits at May 31, 2008 |
|
$ |
33.1 |
|
|
Decreases related to prior year tax positions |
|
|
(1.2 |
) |
|
Increase related to prior year tax position |
|
|
— |
|
|
Increases related to current year tax positions |
|
|
1.7 |
|
|
Settlements during the period |
|
|
— |
|
|
Lapse of statute of limitation |
|
|
— |
|
|
|
|
|
|
|
|
Gross unrecognized benefits at May 31, 2009 |
|
$ |
33.6 |
|
|
Decreases related to prior year tax positions |
|
|
(17.6 |
) |
|
Increase related to prior year tax position |
|
|
15.1 |
|
|
Increases related to current year tax positions |
|
|
4.0 |
|
|
Settlements during the period |
|
|
(1.3 |
) |
|
Lapse of statute of limitation |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
Gross unrecognized benefits at May 31, 2010 |
|
$ |
30.6 |
|
|
Decreases related to prior year tax positions |
|
|
(2.9 |
) |
|
Increase related to prior year tax position |
|
|
2.5 |
|
|
Increases related to current year tax positions |
|
|
2.8 |
|
|
Settlements during the period |
|
|
(2.2 |
) |
|
Lapse of statute of limitation |
|
|
— |
|
|
|
|
|
|
|
|
Gross unrecognized benefits at May 31, 2011 |
|
$ |
30.8 |
|
|
|
|
|
|
|
Unrecognized tax benefits for the Company increased by $0.2 and decreased by $3.0 for the years ended May 31, 2011 and 2010, respectively. Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next twelve months. However, given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
The Company, including subsidiaries, files income tax returns in the U.S., various states and various foreign jurisdictions. The Company is routinely audited by various tax authorities. During the year, the IRS completed the audit for the fiscal years ended May 31, 2004, 2005 and 2006. The IRS has disallowed certain deductions. The Company is contesting the disallowance. At May 31, 2011, the Company is currently under audit by the Internal Revenue Service for its fiscal years ended May 31, 2007, 2008 and 2009. The Company is also currently under audit by New York State for its fiscal years ended May 31, 2002, 2003 and 2004 and New York City for its fiscal years ended May 31, 2005, 2006 and 2007. If any of these tax examinations are concluded within the next twelve months, the Company will make any necessary adjustments to its unrecognized tax benefits.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where appropriate, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements.
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10. CAPITAL STOCK AND STOCK-BASED AWARDS
Scholastic Corporation has authorized capital stock of: 4,000,000 shares of Class A Stock; 70,000,000 shares of Common Stock; and 2,000,000 shares of Preferred Stock.
Class A Stock and Common Stock
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. The Class A Stockholders are entitled to elect all other directors and to vote on all other matters. The Class A Stockholders and the holders of Common Stock are entitled to one vote per share on matters on which they are entitled to vote. The Class A Stockholders 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.
At May 31, 2011, there were 1,656,200 shares of Class A Stock and 29,316,691 shares of Common Stock outstanding. At May 31, 2011, there were 1,499,000 shares of Class A stock authorized for issuance under the Company’s stock-based compensation plans. At May 31, 2011, Scholastic Corporation had reserved for issuance 8,385,923 shares of Common Stock, which includes both shares of Common Stock that were reserved for issuance under the Company’s stock-based compensation plans and 3,155,200 shares of Common Stock that were reserved for the potential issuance of Common Stock upon conversion of the outstanding shares of Class A Stock and shares of Class A Stock reserved for issuance under the Company’s stock-based compensation plans.
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 before each issuance. To date, no shares of Preferred Stock have been issued.
Stock-based awards
At May 31, 2011, the Company maintained two stockholder-approved employee stock-based compensation plans with regard to the Common Stock: the Scholastic Corporation 1995 Stock Option Plan (the “1995 Plan”), under which no further awards can be made; and the Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”). The 2001 Plan provides for the issuance of: incentive stock options, which qualify for favorable treatment under the Internal Revenue Code; options that are not so qualified, called non-qualified stock options; restricted stock; and other stock-based awards.
The Company’s stock-based compensation vests over periods not exceeding four years. Provisions in the Company’s stock-based compensation plans allow for the acceleration of vesting for certain retirement eligible employees, as well as in certain other events.
Stock Options – At May 31, 2011, non-qualified stock options to purchase 316,740 shares and 3,289,126 shares of Common Stock were outstanding under the 1995 Plan and 2001 Plan, respectively. During fiscal 2011, Mr. Robinson was granted 250,000 options at an exercise price of $22.81 under the 2001 Plan, and an additional 303,200 options were granted under the 2001 Plan to other employees at a weighted average exercise price of $23.59.
At May 31, 2011, 409,189 shares of Common Stock were available for additional awards under the 2001 Plan.
The Company also maintains the 1997 Outside Directors’ Stock Option Plan (the “1997 Directors’ Plan”), a stockholder-approved stock option plan for outside directors under which no further awards may be made. The 1997 Directors’ Plan, as amended, provided 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, 2011, options to purchase 210,000 shares of Common Stock were outstanding under the 1997 Directors’ Plan.
In September 2007, the Corporation adopted the Scholastic Corporation 2007 Outside Directors’ Stock Option Plan (the “2007 Directors’ Plan”). The 2007 Directors’ Plan 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 3,000 shares of Common Stock at a purchase price per share equal to the fair market value of a share of Common Stock on the date of grant and 1,200 restricted stock units. In September 2010, 27,000 options at an exercise price of $25.61 per share and 10,800 restricted stock units were granted under the 2007 Directors’ Plan. As of May 31, 2011, 90,000 options were outstanding under the 2007 Directors’ Plan and 371,600 shares of Common Stock remained available for additional awards under the 2007 Directors’ Plan.
The Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”) provided 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 to purchase Class A Stock (the “Class A Options”). In fiscal 2011, there were no awards granted under the Class A Plan. At May 31, 2011, there were 1,499,000 Class A Options granted to Mr. Robinson outstanding, and no shares of Class A Stock remained available for additional awards under the Class A Plan.
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 total intrinsic value of stock options exercised during the years ended May 31, 2011, 2010 and 2009 was $0.4, $0.3 and $0.0, respectively. The intrinsic value of these stock options is deductible by the Company for tax purposes upon exercise. The total pretax compensation cost for stock-based payment arrangements recognized in income for fiscal 2011, 2010 and 2009 was $13.7, $14.0 and $11.6, respectively. The Company amortizes the fair value of stock options as stock-based compensation expense over the requisite service period on a straight-line basis, or sooner if the employee effectively vests by meeting certain retirement provisions. The total tax benefit related to stock-based compensation expense for fiscal 2011, 2010 and 2009 was $1.8, $2.1 and $1.9, respectively.
As of May 31, 2011, the total pretax compensation cost not yet recognized by the Company with regard to outstanding unvested stock options was $5.1. The weighted average period over which this compensation cost is expected to be recognized is 1.6 years.
The following table sets forth the stock option activity for the Class A Stock and Common Stock plans for the fiscal year ended May 31, 2011:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Weighted |
|
Weighted |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Outstanding at May 31, 2010 |
|
|
5,589,156 |
|
$ |
31.26 |
|
|
|
|
|
|
|
|
Granted |
|
|
580,200 |
|
|
23.59 |
|
|
|
|
|
|
|
|
Exercised |
|
|
(104,100 |
) |
|
26.52 |
|
|
|
|
|
|
|
|
Expired |
|
|
(519,250 |
) |
|
33.27 |
|
|
|
|
|
|
|
|
Cancellations and forfeitures |
|
|
(141,140 |
) |
|
33.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2011 |
|
|
5,404,866 |
|
$ |
30.28 |
|
|
5.3 |
|
|
5.8 |
|
|
Exercisable at May 31, 2011 |
|
|
3,924,015 |
|
|
32.20 |
|
|
4.3 |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units – In addition to stock options, the Company has issued restricted stock units to certain officers and key executives under the 2001 Plan (“Stock Units”). During fiscal 2011 and 2010, the Company granted 141,600 and 401,541 Stock Units, respectively, with weighted average grant date prices of $25.03 and $20.11 per share, respectively. The Stock Units automatically convert to shares of Common Stock on a one-for-one basis as the award vests, which is typically over a four-year period beginning thirteen months from the grant date and thereafter annually on the anniversary of the grant date. There were 166,553 shares of Common Stock issued upon conversion of Stock Units during fiscal 2011. The Company measures the value of Stock Units at fair value based on the number of Stock Units granted and the price of the underlying Common Stock on the grant date. The Company amortizes the fair value of outstanding Stock Units as stock-based compensation expense over the requisite service period on a straight-line basis, or sooner if the employee effectively vests by meeting certain retirement eligibility requirements. As of May 31, 2011, the total pretax compensation cost not yet recognized by the Company with regard to unvested Stock Units was $6.0. The weighted average period over which this compensation cost is expected to be recognized is 2.4 years.
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 payments in the form of restricted stock units (“RSUs”). The RSUs are purchased by the employee at a 25% discount from the lowest closing price of the Common Stock on NASDAQ on any day 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 2011 and 2010, the Company allocated 121,550 RSUs and 17,191 RSUs, respectively, to participants under the MSPP at a price of $16.90 and $13.90 per RSU, respectively. At May 31, 2011, there were 201,128 shares of Common Stock remaining authorized for issuance under the MSPP. The Company measures the value of RSUs at fair value based on the number of RSUs granted and the price of the underlying Common Stock on the grant date, giving effect to the 25% discount. The Company amortizes this discount as stock-based compensation expense over the vesting term on a straight-line basis, or sooner if the employee effectively vests by meeting certain retirement provisions. As of May 31, 2011, the total pretax compensation cost not yet recognized by the Company with regard to unvested RSUs was $0.2. The weighted average period over which this compensation cost is expected to be recognized is 2.0 years.
The following table sets forth Stock Unit and RSU activity for the year ended May 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Stock Units/RSUs |
|
Weighted |
|
||
|
|
|
|
|
|
|
||
|
Nonvested as of May 31, 2010 |
|
|
663,430 |
|
$ |
9.22 |
|
|
Granted |
|
|
273,950 |
|
|
21.43 |
|
|
Vested |
|
|
(166,553 |
) |
|
24.37 |
|
|
Forfeited |
|
|
(18,423 |
) |
|
21.74 |
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of May 31, 2011 |
|
|
752,404 |
| |||