# Scholastic Corp: Form 10-K for the period ended May 31, 2011 - Company: [Scholastic Corp](/companies/schl.md) (CIK 866729) - Form: 10-K - Filed: 2011-07-27 - Accepted by EDGAR: Jul 27, 2011, 21:20 ET - Period: 2011-05-31 - Accession: 0000930413-11-004927 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/866729/000093041311004927/c66305_10-k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/866729/000093041311004927/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2011-05-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2010-06-01 to 2011-05-31 | $1.91bn | us-gaap:Revenues | | Cost of revenue | 12 months, 2010-06-01 to 2011-05-31 | $885.9m | us-gaap:CostOfGoodsSold | | Selling, general and administrative | 12 months, 2010-06-01 to 2011-05-31 | $835.7m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2010-06-01 to 2011-05-31 | $100.7m | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2010-06-01 to 2011-05-31 | $17.1m | us-gaap:InterestExpense | | Income tax | 12 months, 2010-06-01 to 2011-05-31 | $37.5m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2010-06-01 to 2011-05-31 | $39.4m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2010-06-01 to 2011-05-31 | $1.16 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2010-06-01 to 2011-05-31 | $1.18 | us-gaap:EarningsPerShareBasic | | Operating cash flow | 12 months, 2010-06-01 to 2011-05-31 | $228.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2010-06-01 to 2011-05-31 | $50.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2010-06-01 to 2011-05-31 | $10.8m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 12 months, 2010-06-01 to 2011-05-31 | $166.9m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Current assets | at 2011-05-31 | $758.1m | us-gaap:AssetsCurrent | | Total assets | at 2011-05-31 | $1.49bn | us-gaap:Assets | | Current liabilities | at 2011-05-31 | $422.7m | us-gaap:LiabilitiesCurrent | | Long-term debt | at 2011-05-31 | $159.9m | us-gaap:LongTermDebtNoncurrent | | Shareholders' equity | at 2011-05-31 | $740.0m | us-gaap:StockholdersEquity | ## Business As filed, 35,329 characters. ### Overview 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 provider of educational technology products, related services and children’s media. Scholastic creates quality books, print and technology-based learning materials and programs, magazines, multi-media and other products that help children learn both at school and at home. 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. The Company currently employs approximately 7,300 people in the United States and approximately 2,100 people outside the United States. ### Operating Segments – Continuing Operations 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. The following table sets forth revenues by operating segment for the three fiscal years ended May 31: *(Amounts in millions )* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Children’s Book Publishing and Distribution | $922.0 | $910.6 | $940.4 | | Educational Publishing | 428.0 | 476.5 | 384.2 | | Media, Licensing and Advertising | 111.2 | 113.8 | 125.7 | | International | 444.9 | 412.0 | 399.0 | | **Total** | **$1,906.1** | **$1,912.9** | **$1,849.3** | Additional financial information relating to the Company’s operating segments is included in Note 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein. ### \- 1 - ### CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION (48.4% of fiscal 2011 revenues) ### General The Company’s *Children’s Book Publishing and Distribution* segment 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. The Company is the world’s largest publisher and distributor of children’s books and is a leading operator of school-based book clubs and school-based book fairs in the United States. The Company is also a leading publisher of children’s print and electronic books distributed through the trade channel. Scholastic offers a broad range of children’s books, many of which have received awards for excellence in children’s literature, including the Caldecott and Newbery Medals. The Company obtains titles for sale through its distribution channels from three principal sources. The first source for titles is the Company’s publication of books created under exclusive agreements with authors, illustrators, book packagers or other media companies. Scholastic generally controls the exclusive rights to sell these titles through all channels of distribution in the United States and, to a lesser extent, internationally. Scholastic’s second source of titles is licenses to publish books exclusively in specified channels of distribution, including reprints of books originally published by others for which the Company acquires rights to sell in the school market. The third source of titles is the Company’s purchase of finished books from other publishers. ### School-Based Book Clubs Scholastic founded its first school-based book club in 1948. The Company’s school-based book clubs consist of Honeybee®, serving toddlers to age 4; Firefly®, serving pre-kindergarten (“pre-K”) and kindergarten (“K”) students; SeeSaw®, serving students grades K to 1; Lucky®, serving students grades 2 to 3; Arrow®, serving students grades 4 to 6; TAB®, serving students grades 7 and up; and Club Leo™, which provides Spanish language offers to students in pre-K to grade 6. In addition to its regular offers, the Company creates special theme-based and seasonal offers targeted to different grade levels during the year. The Company mails promotional materials containing order forms to teachers in the vast majority of the pre-K to grade 8 schools in the United States. Teachers who wish to participate in a school-based book club distribute the promotional materials to their students, who may choose from selections at substantial reductions from list prices. The teacher aggregates the students’ orders and forwards them to the Company by internet, phone, mail or fax. The Company estimates that approximately 65% of all elementary school teachers in the United States participate in the Company’s school-based book clubs. In fiscal 2011, 76% of total book club orders were placed via the internet through New COOL (Clubs Ordering On-Line), a new version of the Company’s online ordering platform rolled out to all customers in the fall of 2010 which allows parents, as well as teachers, to order online, with improved ecommerce functionality. The orders are shipped to the classroom for distribution to the students. Sponsors who participate in the book clubs receive bonus points and other promotional incentives, which may be redeemed from the Company for the purchase of additional books and other resource materials for their classrooms or the school. ### School-Based Book Fairs The Company began offering school-based book fairs in 1981 to its school customers. Since that date, the Company has grown this business by expanding into new markets, including through selected acquisitions. In addition, more recently the Company has increased its business in its existing markets by (i) growing revenue on a per fair basis and (ii) increasing the number of second and third fairs held at its existing school customers. The Company is the leading operator of school-based book fairs in the United States. Book fairs are generally week-long events conducted on school premises, operated by school librarians and/or parent-teacher organizations. Book fair events provide children with access to hundreds of titles and allow them, together with family members on their behalf, to purchase books and other select products at the school. The Company provides these products to the schools, and the schools conduct the book fairs to engage students and their families in reading by making quality books available through literacy-focused school events, and as fundraisers to purchase books, supplies and equipment and for other school purposes. The Company operates school-based book fairs in all 50 states under the name Scholastic Book Fairs®. Books and display cases are delivered to schools from the Company’s warehouses principally by a fleet of leased and Company-owned vehicles. Sales and customer service functions are performed from regional sales offices and distribution facilities supported by field representatives and from the Company’s national distribution facility in Missouri. Approximately 90% of the schools that sponsored a Scholastic book fair in fiscal 2010 sponsored a Scholastic book fair again in fiscal 2011. In the fall of 2009, the Company began testing a new Point of Sale (“POS”) program in approximately 25% of its book fairs. Due to the success of the program based on customer satisfaction and utilization rates, the Company continued the deployment of the POS technology in all remaining locations in the fall of 2010 and will have fully adopted the POS program for the school year commencing in the fall of 2011. ### \- 2 - ### Trade Scholastic is a leading publisher of children’s books sold through bookstores, internet retailers and mass merchandisers in the United States. The Company maintains approximately 6,000 titles for trade distribution. Scholastic’s original publications include *Harry Potter®, Hunger Games, The 39 Clues®, The Magic School Bus®, I Spy™, Captain Underpants®, Goosebumps®*, and *Clifford The Big Red Dog®,* and licensed properties such as *Star Wars®, Rainbow Magic®* and *Geronimo Stilton®*. In addition, the Company’s Klutz® imprint is a publisher and creator of “books plus” products for children, including titles such as *Nail Art, Fancy Friendship Bracelets* and *Glossy Bands.* The Company’s trade sales organization focuses on marketing and selling print and ebook editions of Scholastic’s publishing properties to bookstores, internet retailers, mass merchandisers, specialty sales outlets and other book retailers. Print bestsellers in the Trade division during fiscal 2011 included the *Hunger Games* trilogy by Suzanne Collins, which was also an ebook bestseller, *The 39 Clues®* series and the *Harry Potter* series, as well as other titles, such as *Linger* by Maggie Stiefvater and *It’s Christmas, David!* by David Shannon. **EDUCATIONAL PUBLISHING** (22.5% of fiscal 2011 revenues) ### General The Company’s *Educational Publishing* segment 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-K to 12 in the United States. The Company is a leading provider of educational technology products and services, as well as reading materials for schools and libraries. Scholastic has been providing quality, innovative educational materials to schools and libraries since it began publishing classroom magazines in the 1920s. The Company added supplementary books and texts to its product line in the 1960s, professional books for teachers in the 1980s and early childhood products and core curriculum materials, including educational technology products, in the 1990s. The Company markets and sells its *Educational Publishing* products through a combination of field representatives, direct mail, telemarketing and the internet. In 2007, the Company began providing school consulting and professional development services. In fiscal 2011, the Company acquired the assets of Math Solutions, an education resources and professional development company focusing on K-12 math instruction. ### Scholastic Education Scholastic Education, which encompasses the Company’s core curriculum publishing operations, develops and distributes instructional materials directly to schools in the United States, primarily purchased through school and district budgets, often with the help of federal and state funding, as well as local funding. These operations include reading and math improvement programs and other educational technology products, as well as consulting and professional development services. Scholastic Education’s efforts are focused on partnering with school districts to raise student achievement by providing solutions that combine technology, content and services in the areas of reading and math. Significant technology-based reading improvement programs that Scholastic offers include: READ 180®, an intensive reading intervention program for students in grades 4 to 12 reading at least two years below grade level, with the Company launching READ 180® *Next Generation*, a substantially revised version of the product, in the fourth quarter of fiscal 2011; System 44®, an intensive intervention program for students in grades 4 to 12 who have not yet mastered the 44 sounds and 26 letters of the English language; and Scholastic Reading Inventory, which is a research-based, computer-adaptive assessment for grades K to 12 that allows educators to assess a student’s reading comprehension. Other major programs include FASTT Math®, a technology-based program to improve math fluency developed with the creator of READ 180, and Do The Math®, a mathematics intervention program created by Marilyn Burns, a nationally known math educator and the founder of Math Solutions, as well as subscriptions to reference databases for schools and libraries. The Company considers its educational technology products and related services to be a growth driver and continues to focus these businesses on technology and services. ### Scholastic Classroom and Community Group The Company is the leading provider of classroom libraries and paperback collections, including classroom books and guided reading products, to schools and school districts for classroom libraries and other uses, as well as to literacy organizations. Scholastic helps schools compile classroom collections of high quality, award-winning books for every grade level, reading level, and multicultural background, including the *Phyllis C. Hunter* and the *Marilyn Burns Math Classroom Library* series. The Company’s Teaching Resources division publishes and sells professional books designed for and generally purchased by teachers, both directly from the Company and through teacher stores and booksellers, including the Company’s on-line Teacher store, which provides professional books and other educational materials to schools and teachers. ### \- 3 - ### Scholastic Library Publishing and Classroom Magazines Scholastic is a leading publisher of quality children’s reference and non-fiction products sold primarily to schools and libraries in the United States. The Company’s products also include non-fiction books published in the United States under the imprints Children’s Press® and Franklin Watts®. Scholastic is a leading publisher of classroom magazines. Teachers in grades pre-K to 12 use the Company’s 30 classroom magazines, including *Scholastic News®* and *Junior Scholastic®*, to supplement formal learning programs by bringing subjects of current interest into the classroom, including literature, math, science, current events, social studies and foreign languages. Each magazine has its own separate website with online resources that supplement the print materials. Scholastic’s classroom magazine circulation in the United States in fiscal 2011 was 7.4 million, with approximately two-thirds of the circulation in grades pre-K to six. The majority of magazines purchased are paid for with school or district funds, with parents and teachers paying for the balance. Circulation revenue accounted for substantially all of the classroom magazine revenues in fiscal 2011. ### MEDIA, LICENSING AND ADVERTISING (5.8% of fiscal 2011 revenues) ### General The Company’s *Media, Licensing and Advertising* segment includes the production and/or distribution of digital media, consumer promotions and merchandising and advertising revenue, including sponsorship programs. ### Production and Distribution Through Scholastic Media, the Company creates and produces programming and digital content for all platforms including: television, DVDs, audio, movies, interactive games, apps (applications) and websites. Scholastic Media builds consumer awareness and value for the Company’s franchises by creating family-focused media that form the foundation for the Company’s global branding campaigns. The media group generates revenue by exploiting these assets throughout the Scholastic distribution channels, globally across multiple media platforms and by developing and executing cross platform brand-marketing campaigns that support the Company’s key franchises. Scholastic Media consists of Scholastic Entertainment Inc. (SEI), Scholastic Audio, Soup2Nuts Inc. (S2N), Weston Woods Studios, Inc.® and Scholastic Interactive L.L.C. SEI has built a television library consisting of over 500 half-hour productions, including: *Clifford The Big Red Dog®, Clifford’s Puppy Days™, WordGirl®, Maya & Miguel™,* The *Magic School Bus®, Turbo Dogs, I Spy, Goosebumps®, Animorphs®, Dear America®, Horrible Histories®, Sammy’s Storyshop™, Stellaluna, The Very Hungry Caterpillar* and *The Baby-sitters Club®*. These series have been sold in the United States and throughout the world and have garnered over 130 major awards including Emmys, Peabodys and an Academy award. Since 2007, the Company has participated in a children’s programming venture which distributes educational children’s television programming under the name Qubo. Qubo provides programming on NBC, Telemundo and ION TV, as well as a branded 24/7 digital channel, and is now in its fifth year. S2N, an award-winning animation and audio production studio, has produced television programming, including the animated series *Time Warp Trio* and *O’Grady,* and, with SEI, has produced 25 additional half-hour episodes of the Emmy award-winning animated series *Word Girl*. Weston Woods Studios Inc. creates audiovisual adaptations of classic children’s picture books, such as *Where the Wild Things Are, Chrysanthemum* and *Make Way for Ducklings*, which were initially produced for the school and library market. Scholastic audio produces young adult and children’s audio recordings for the school, library and retail markets. Scholastic Interactive creates original and licensed consumer software, including handheld and console products with accessories and mobile apps, for grades Pre-K to 8. Its products are distributed through the Company’s school-based software clubs, book clubs and book fairs, as well as to the library/teacher market and the retail market. The Company’s Nintendo DS, Nintendo Wii, Leapster, Tag and Tag Junior CD-ROM titles include the series *I Spy, Brain Play®, Clifford®, Goosebumps®, The Magic School Bus®, The 39 Clues®* series, *Scholastic Animal Genius®* and *Math Missions®.* ### Other Also included in this segment are: Scholastic In-School Marketing, which develops sponsored educational materials and supplementary classroom programs in partnership with government agencies, nonprofit organizations and business organizations, and Back to Basics Toys®, a direct-to-home catalog business specializing in children’s toys. ### \- 4 - ### INTERNATIONAL (23.3% of fiscal 2011 revenues) ### General The *International* segment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses. Scholastic has operations in Canada, the United Kingdom, Australia, New Zealand, Ireland, India, China, Singapore and other parts of Asia. Scholastic’s operations in Canada, the United Kingdom and Australia generally mirror its United States business model. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, software and other materials through school-based book clubs, school-based book fairs and trade channels; distribute magazines; and offer on-line services. Many of the Company’s international operations also have their own export and foreign rights licensing programs and are book publishing licensees for major media properties. Original books published by most of these operations have received awards of excellence in children’s literature. In Asia, the Company also publishes and distributes reference products and provides services under the Grolier name, and it also operates tutorial centers that provide English language training to students. ### Canada Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books. Scholastic Canada also is the largest school-based book club and school-based book fair operator in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has also produced quality Canadian-authored books and educational materials, including an early reading program sold to schools for grades K to 6. ### United Kingdom Scholastic UK, founded in 1964, is the largest school-based book club and school-based book fair operator and a leading children’s publisher in the United Kingdom. Scholastic UK also publishes magazines for teachers and supplemental educational materials, including professional books, and is one of the leading suppliers of original or licensed children’s books to the United Kingdom trade market. ### Australia Scholastic Australia, founded in 1968, is the largest school-based book club and book fair operation in Australia, reaching approximately 90% of the country’s primary schools. Scholastic Australia publishes quality children’s books supplying the Australian trade market. Scholastic Australia also provides value-added distribution services for the design software and technology peripherals market. ### New Zealand Scholastic New Zealand, founded in 1962, is the largest children’s book publisher and the leading book distributor to schools in New Zealand. Through its school-based book clubs and book fairs, Scholastic New Zealand reaches approximately 90% of the country’s primary schools. In addition, Scholastic New Zealand publishes quality children’s books supplying the New Zealand trade market. ### Asia The Company’s Asia operations include the wholly-owned Grolier direct sales business, which sells English language reference materials and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, Singapore and Thailand. In addition, the Company operates school-based book clubs and book fairs throughout Asia; publishes original titles in English and Hindi languages in India, including specialized curriculum books for local schools; conducts reading improvement programs inside local schools in the Philippines; and operates a chain of English language tutorial centers in China in cooperation with local partners. ### \- 5 - ### Foreign Rights and Export The Company licenses the rights to selected Scholastic titles in over 45 languages to other publishing companies around the world. The Company’s export business sells educational materials, software and children’s books to schools, libraries, bookstores and other book distributors in over 140 countries that are not otherwise directly serviced by Scholastic subsidiaries. The Company partners with governments and non-governmental agencies to create and distribute books to public schools in developing countries. ### 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. ### PRODUCTION AND DISTRIBUTION The Company’s books, magazines, software and interactive products and other materials are manufactured by the Company with the assistance of third parties under contracts entered into through arms-length negotiations or competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volume in exchange for favorable pricing terms. Paper is purchased from paper mills and other third-party sources. The Company does not anticipate any difficulty in continuing to satisfy its manufacturing and paper requirements. In the United States, the Company mainly processes and fulfills orders for school-based book club, trade, curriculum publishing, reference and non-fiction products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. Magazine orders are processed at the Jefferson City facility and are shipped directly from printers. In connection with its trade business, the Company generally outsources certain services, including invoicing, billing, returns processing and collection services, and ships product directly from printers to customers. School-based book fair orders are fulfilled through a network of warehouses across the country. The Company’s international school-based book club, school-based book fair, trade and educational operations use distribution systems similar to those employed in the U.S. ### CONTENT ACQUISITION Access to intellectual property or content (“Content”) for the Company’s product offerings is critical to the success of the Company’s operations. The Company incurs significant costs for the acquisition and development of Content for its product offerings. These costs are often deferred and recognized as the Company generates revenues derived from the benefits of these costs. These costs include the following: - **Prepublication costs**. Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other Content required for the creation of the master copy of a book or other media. While prepublication costs in the *Children’s Book Publishing and Distribution* segment are relatively modest amounts for each individual title, there are a large number of separate titles published annually. Prepublication costs in the *Educational Publishing* segment are often in excess of $1 million for an individual program, as the development of Content for complex intervention and educational programs requires significant resources and investment. - **Royalty advances**. Royalty advances are incurred in all of the Company’s reportable segments, but are most prevalent in the *Children’s Book Publishing and Distribution* segment and enable the Company to obtain contractual commitments from authors to produce Content. The Company regularly provides authors with advances against expected future royalty payments, often before the books are written. Upon publication and sale of the books or other media, the authors generally will not receive further royalty payments until the contractual royalties earned from sales of such books or other media exceed such advances. - **Production costs**. Production costs are incurred in the *Media, Licensing and Advertising* segment. Production costs include the costs to create films, television programming, home videos and other entertainment Content. These costs include the costs of talent, artists, production crews and editors, as well as other costs incurred in connection with the production of this Content. Advertising and promotional costs are not included in production costs. ### \- 6 - ### SEASONALITY 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 result, 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 and educational technology products are typically highest in the first quarter. The Company historically has experienced a loss from operations in the first and third quarters of each fiscal year. ### COMPETITION The markets for children’s educational, educational technology and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion and customer service as well as the nature of the distribution channels. Competitors include numerous other book, textbook, library, reference material and supplementary text publishers, distributors and other resellers (including over the internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, numerous producers of television and film programming (many of which are substantially larger than the Company), television and cable networks, publishers of computer software and interactive products, and distributors of products and services on the internet. In the United States, competitors also include regional and local school-based book fair operators, other fundraising activities in schools, and bookstores. In its educational technology business, additional competitive factors include the demonstrated effectiveness of the products being offered, as well as available funding sources to school districts, and, although the Company believes no other organization or company offers as comprehensive an offering as its suite of reading intervention products and services, the Company faces competition from textbook publishers, distributors of other technology-based programs addressing the subject areas of the Company’s offerings, such as reading, phonics and mathematics, and, with respect to its consulting services, not-for-profit organizations providing consulting covering various areas related to education. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels. The Company believes that its position as both a publisher and distributor are unique to certain of the markets in which it competes, principally in the context of its children’s book business. ### COPYRIGHT AND TRADEMARKS As an international publisher and distributor of books, software and other media products, Scholastic aggressively utilizes the intellectual property protections of the United States and other countries in order to maintain its exclusive rights to identify and distribute many of its products. Accordingly, SCHOLASTIC is a trademark registered in the United States and in a number of countries where the Company conducts business. The Corporation’s principal operating subsidiary in the United States, Scholastic Inc., and the Corporation’s international subsidiaries have registered and/or have pending applications to register in relevant territories trademarks for important services and programs. All of the Company’s publications, including books, magazines and software and interactive products, are subject to copyright protection both in the United States and internationally. The Company also obtains domain name protection for its internet domains. The Company seeks to obtain the broadest possible intellectual property rights for its products, and because inadequate legal and technological protections for intellectual property and proprietary rights could adversely affect operating results, the Company vigorously defends those rights against infringement. ### \- 7 - ### Executive Officers The following individuals have been determined by the Board of Directors to be the executive officers of the Company. Each such individual serves in his or her position with Scholastic until such person’s successor has been elected or appointed and qualified or until such person’s earlier resignation or removal. | Name | Age | Employed by Registrant Since | Position(s) for Past Five Years | | --- | ---: | --- | --- | | **Richard Robinson** | 74 | 1962 | Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975). | | **Maureen O’Connell** | 49 | 2007 | Executive Vice President, Chief Administrative Officer and Chief Financial Officer (since 2007). Prior to joining the Company, Executive Vice President and Chief Financial Officer of Affinion Group, Inc., an affinity marketing company (2006); President and Chief Operating Officer (2003-2004) and Executive Vice President and Chief Financial and Administrative Officer (2002-2003) of Gartner, Inc., an information technology and research advisory firm; and Executive Vice President and Chief Financial Officer of Barnes & Noble, Inc. (2000-2002). | | **Margery W. Mayer** | 59 | 1990 | Executive Vice President (since 1990), President, Scholastic Education (since 2002) and Executive Vice President, Learning Ventures (1998-2002). | | **Judith A. Newman** | 53 | 1993 | Executive Vice President and President, Book Clubs (since 2005) and Scholastic At Home (2005-2006); Senior Vice President and President, Book Clubs and Scholastic At Home (2004-2005); and Senior Vice President, Book Clubs (1997-2004). | | **Cynthia Augustine** | 53 | 2007 | Senior Vice President, Human Resources and Employee Services (since 2007). Prior to joining the Company, Senior Vice President of Talent Management for Time Warner, Inc. (2004-2005); and various positions at The New York Times Company, including Senior Vice President, Human Resources (1998 -2004) and President, Broadcast Group (2000-2004). | | **Andrew S. Hedden** | 70 | 2008 | Member of the Board of Directors (since 1991) and Executive Vice President, General Counsel and Secretary (since 2008). Prior to joining the Company, partner at the law firm of Baker & McKenzie LLP (2005-2008) and the law firm of Coudert Brothers LLP (1975-2005). | | **Alan Boyko** | 57 | 1988 | President of Scholastic Book Fairs, Inc. (since 2005). | ### Available Information The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are accessible at the Investor Relations portion of its website at scholastic.com and are available, without charge, as soon as reasonably practicable after such reports are electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The Company also posts the dates of its upcoming scheduled financial press releases, telephonic investor calls and investor presentations on the “Events and Presentations” portion of its website at least five days prior to the event. The Company’s investor calls are open to the public and remain available through the Company’s website for at least 45 days thereafter. The public may also read and copy materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information, as well as copies of the Company’s filings, from the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site, at www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. ### \- 8 - ## Risk factors As filed, 14,971 characters. Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents that the Corporation files with the SEC are risks that should be considered in evaluating the Corporation’s Common Stock, as well as risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this Report and in other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting the Company’s operating results, the Company’s past financial performance should not be considered an indicator of future performance. **If we cannot anticipate trends and develop new products or adapt to new technologies responding to changing customer preferences, this could adversely affect our revenues or profitability.** The Company operates in highly competitive markets that are subject to rapid change, including, in particular, changes in customer preferences and changes and advances in relevant technologies. There are substantial uncertainties associated with the Company’s efforts to develop successful educational, trade publishing, entertainment and software and interactive products and services for its customers, as well as to adapt its print materials to new digital technologies, including the internet and e-book reader devices. The Company makes significant investments in new products and services that may not be profitable, or whose profitability may be significantly lower than the Company has experienced historically. In particular, in the context of the Company’s current focus on key digital opportunities, including ebooks for children, the market is just beginning to develop and the Company may be unsuccessful in establishing itself as a significant factor in any market which does develop. Many aspects of an ebook market which could develop for children, such as the nature of the relevant software and hardware, the size of the market, relevant methods of delivery, including affordable devices, and relevant content, as well as pricing models, have not yet taken shape but will, most likely, be subject to change on a recurrent basis until a pattern develops and the potential market for children becomes more defined. There can be no assurance that the Company will be successful in implementing its ebook strategy, which could adversely affect the Company’s revenues and growth opportunities. The Company has relied on outside providers to assist in the development of e-book reader technologies. The failure of these providers to continue to deliver services to the Company as expected would have a negative effect on the Company’s endeavors in these new markets. In addition, the Company faces technological risks associated with software product development and service delivery in its educational technology and ecommerce businesses, as well as its internal business support systems, which could involve service failures, delays or internal system failures that result in damages, lost business or failures to be able to fully exploit business opportunities. **Our financial results would suffer if we fail to successfully meet market needs in school-based book clubs and book fairs, two of our core businesses.** The Company’s school-based book clubs and book fairs are core businesses, which produce a substantial part of the Company’s revenues. The Company is subject to the risk that it will not successfully develop and execute new promotional strategies for its school-based book clubs or book fairs in response to future customer trends or technological changes or otherwise meet market needs in these businesses in a timely or cost-effective fashion and successfully maintain teacher or school sponsorship levels, which would have an adverse effect on the Company’s financial results. **If we fail to maintain the continuance of strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our business could be adversely affected.** The Company’s business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on the Company’s business and financial performance. ### \- 9 - **If we fail to adapt to new purchasing patterns or requirements, our business and financial results could be adversely affected.** The Company’s business is affected significantly by changes in purchasing patterns or trends in, as well as the underlying strength of, the educational, trade, entertainment and software markets. In particular, the Company’s educational publishing and technology businesses may be adversely affected by budgetary restraints and other changes in state educational funding as a result of new legislation or regulatory actions, both at the federal and state level, as well as changes in the procurement process, to which the Company may be unable to adapt successfully. Recently, shortfalls in funding have negatively impacted purchasing patterns in the education markets. Continuation of this trend could negatively impact the Company. In this context, while Federal economic stimulus funding under the American Recovery and Reinvestment Act benefited the Company by providing additional educational funding to compensate for budget shortfalls at the state level in fiscal 2010, there was a decline in levels of funding used for purchases of the Company’s products in fiscal 2011. There are no guarantees that the former levels of funding will return in fiscal 2012 and thereafter, or the extent to which the Company may continue to benefit therefrom. In addition, there are many competing demands for educational funds, and there can be no guarantee that the Company will otherwise be successful in continuing to obtain sales of its products from any available funding. **The competitive pressures we face in certain of our businesses could adversely affect our financial performance and growth prospects.** The Company is subject to significant competition, including from other educational and trade publishers and media, entertainment and internet companies, many of which are substantially larger than the Company and have much greater resources. To the extent the Company cannot meet these challenges from existing or new competitors, including in the educational publishing business, and develop new product offerings to meet customer preferences or needs, the Company’s revenues and profitability could be adversely affected. **The reputation of the Company is one of its most important assets, and any adverse publicity or adverse events, such as a significant data privacy breach, could cause significant reputational damage and financial loss.** The businesses of the Company focus on learning and education, and its key relationships are with educators, teachers, parents and children. In particular, the Company believes that, in selecting its products, teachers, educators and parents rely on the Company’s reputation for quality educational products appropriate for children. Also, in certain of its businesses the Company holds significant volumes of personal data, including that of customers, and, in its educational technology business, students. Adverse publicity, whether or not valid, could reduce demand for the Company’s products or adversely affect its relationship with teachers or educators, impacting participation in book clubs or book fairs or decisions to purchase educational technology or other products or services of the Company’s educational technology business. Further, a failure to adequately protect personal data, including that of customers or students, could lead to penalties, significant remediation costs and reputational damage, including loss of future business. **If we are unsuccessful in implementing our corporate strategy we may not be able to maintain our historical growth.** The Company’s future growth depends upon a number of factors, including the ability of the Company to successfully implement its strategies for the respective business units, the introduction and acceptance of new products and services, including the success of its digital strategy, its ability to expand in the global markets that it serves and its continuing success in implementing on-going cost containment and reduction programs. Difficulties, delays or failures experienced in connection with any of these factors could materially affect the future growth of the Company. **Increases in certain operating costs and expenses, which are beyond our control and can significantly affect our profitability, could adversely affect our operating performance.** The Company’s major expense categories include employee compensation and printing, paper and distribution (such as postage, shipping and fuel) costs. The Company offers its employees competitive salaries and benefit packages in order to attract and retain the quality of employees required to grow and expand its businesses. Compensation costs are influenced by general economic factors, including those affecting costs of health insurance, post-retirement benefits and any trends specific to the employee skill sets that the Company requires. Paper prices fluctuate based on worldwide demand and supply for paper, in general, as well as for the specific types of paper used by the Company. If there is a significant disruption in the supply of paper or a significant increase in such costs, or in its shipping or fuel costs, beyond those currently anticipated, which would generally be beyond the control of the Company, or if the Company’s strategies to try to manage these costs, including additional cost savings initiatives, are ineffective, the Company’s results of operations could be adversely affected. ### \- 10 - **The loss of or failure to obtain rights to intellectual property material to our businesses would adversely affect our financial results.** The Company’s products generally comprise intellectual property delivered through a variety of media. The ability to achieve anticipated results depends in part on the Company’s ability to defend its intellectual property against infringement, as well as the breadth of rights obtained. The Company’s operating results could be adversely affected by inadequate legal and technological protections for intellectual property and proprietary rights in some jurisdictions, markets and media, as well as by the costs of dealing with claims alleging infringement involving business method patents in the ecommerce and internet area, and the Company’s revenues could be constrained by limitations on the rights that the Company is able to secure to exploit its intellectual property in different media and distribution channels. **Because we sell our products and services in foreign countries, changes in currency exchange rates, as well as other risks and uncertainties, could adversely affect our operations and financial results.** The Company has various operating subsidiaries domiciled in foreign countries. In addition, the Company sells products and services to customers located in foreign countries where it does not have operating subsidiaries. Accordingly, the Company could be adversely affected by changes in currency exchange rates, as well as by the political and economic risks attendant to conducting business in foreign countries. These risks include the potential of political instability in developing nations where the Company is conducting business. **Certain of our activities are subject to weather risks, which could disrupt our operations or otherwise adversely affect our financial performance.** The Company conducts certain of its businesses and maintains warehouse and office facilities in locations that are at risk of being negatively affected by severe weather events, such as hurricanes, tornados, floods or snowstorms. This could impact the Company’s school-based book clubs, school-based book fairs and education businesses, in particular as a result of school closures caused by such events. Accordingly, the Company could be adversely affected by any future significant weather event. **Control of the Company resides in our Chairman of the Board, President and Chief Executive Officer and other members of his family through their ownership of Class A Stock, and the holders of the Common Stock generally have no voting rights with respect to transactions requiring stockholder approval.** The voting power of the Corporation’s capital stock is vested exclusively in the holders of Class A Stock, except for the right of the holders of Common Stock to elect one-fifth of the Board of Directors and except as otherwise provided by law or as may be established in favor of any series of preferred stock that may be issued. Richard Robinson, the Chairman of the Board, President and Chief Executive Officer, and other members of the Robinson family beneficially own all of the outstanding shares of Class A Stock and are able to elect up to four-fifths of the Corporation’s Board of Directors and, without the approval of the Corporation’s other stockholders, to effect or block other actions or transactions requiring stockholder approval, such as a merger, sale of substantially all assets or similar transaction. These factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to and including the date hereof. ### Forward-Looking Statements: This Annual Report on Form 10-K contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, plans, ecommerce and digital initiatives, strategies, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, merit pay, operating margins, working capital, liquidity, capital needs, interest costs, cash flows and income, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in this Annual Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. ## Properties As filed, 1,421 characters. The Company maintains its principal offices in the metropolitan New York area, where it owns and leases approximately 0.6 million square feet of space. The Company also owns or leases approximately 1.7 million square feet of office and warehouse space for its primary warehouse and distribution facility located in the Jefferson City, Missouri area. In addition, the Company owns or leases approximately 3.0 million square feet of office and warehouse space in over 70 facilities in the United States, principally for Scholastic book fairs. Additionally, the Company owns or leases approximately 1.4 million square feet of office and warehouse space in over 100 facilities in Canada, the United Kingdom, Australia, New Zealand, Asia and elsewhere around the world for its international businesses. The Company is in the process of selling its Maumelle, Arkansas facility, formerly operated as a warehousing and distribution facility. The Company considers its properties adequate for its current needs. With respect to the Company’s leased properties, no difficulties are anticipated in negotiating renewals as leases expire or in finding other satisfactory space, if current premises become unavailable. For further information concerning the Company’s obligations under its leases, see Notes 1 and 6 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” ## Legal proceedings As filed, 2,261 characters. 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. ## Management's discussion and analysis As filed, 63,090 characters. ### General 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. The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.” ### Overview and Outlook In fiscal 2011, revenue was $1,906.1 million, approximately level with the prior year. In fiscal 2011, operating income was $100.7 million, which included an impairment charge of $3.4 million, compared to $128.4 million, which included an impairment charge of $43.1 million, in the prior fiscal year. Lower fiscal 2011 operating results primarily reflected lower sales of educational technology relative to a year ago, when the Company benefited significantly from the federal stimulus program, as well as increased strategic spending on digital initiatives in the children’s book business in fiscal 2011. The Company finished fiscal 2011 with solid momentum as stronger sales of technology products and services, including the newly released *READ 180® Next Generation*, drove fourth quarter growth in *Educational Publishing*. In *Children’s Book Publishing and Distribution*, the Company made significant investments in the School Book Club and Fair channels to drive long-term digital growth, including successfully rolling out an expanded ecommerce platform and developing the infrastructure to sell and distribute children’s ebooks. At the same time, segment revenue held steady, reflecting positive customer response to School Book Clubs and Fairs, as well as the success of bestselling series including Harry Potter and The Hunger Games. Across the Company, working capital discipline contributed to strong cash flow, which helped fund significant share buybacks and dividends during the fiscal year. For fiscal 2012, Scholastic’s plan is to build upon its positions in education and children’s books, while improving margins and operating profits. The successful launch of the *READ 180® Next Generation* and continued expansion of the school customer base is expected to drive strong growth in the higher margin *Educational Publishing* segment. In *Children’s Book Publishing and Distribution*, the Company will continue to move forward with its ebook and ecommerce strategies, including the expanded roll-out of Scholastic’s children’s ereading app and ebookstore, in fiscal 2012. At the same time, Scholastic remains focused across the Company on reducing costs, generating strong cash flow and creating value for shareholders. The Company’s fiscal 2012 plan to improve margins and invest in long-term growth includes the following elements: - In *Educational Publishing*, strong revenue and profit growth are anticipated, driven by new sales and upgrades of *READ 180 Next Generation* and by strong renewals of services to a larger customer base. Continued investment in new reading and math programs, professional development services and digital versions of supplemental products should drive further growth in the future. - In *Children’s Book Publishing and Distribution*, revenue growth in School Book Fairs, driven by higher revenue per fair, is expected to offset a modest decline in Trade sales, compared to fiscal 2011. Revenue in School Book Clubs should hold level, based on more efficient promotion spending. Improved operating results in School Book Clubs and Fairs is expected to offset additional digital spending and the marketing costs associated with the school and consumer roll-out of the Company’s ebook offering. - In International, modest overall revenue growth and higher margins are expected, reflecting strong growth in Asia and improved results in the UK. - The Company is taking steps to reduce costs in non-digital areas across the business. These actions should benefit margins starting in fiscal 2012. In addition, strong cash flow should continue in fiscal 2012, driven by strict working capital management. ### \- 16 - ### Critical Accounting Policies and Estimates ### General: The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations 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; sales returns; amortization periods; stock-based compensation expense; pension and other post-retirement obligations; tax rates; recoverability of inventories, deferred income taxes and tax reserves, fixed assets, prepublication costs, royalty advances and customer reward programs; and the fair value of goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” of this Report. The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations: ### Revenue Recognition: The Company’s revenue recognition policies for its principal businesses are as follows: **School-Based Book Clubs –** Revenue from school-based book clubs is recognized upon shipment of the products. **School-Based Book Fairs –** 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, sales patterns and expectations. Actual returns could differ from the Company’s estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2011 of approximately $1.1 million. 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 and specific reserves on a customer-by-customer basis. While the Company uses a third party to invoice and collect for 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, maintenance and training with these products and, in such cases, revenue is deferred and recognized as services are delivered or 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 is generally 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. Actual returns could differ from the Company’s estimate. **Film Production and Licensing –** Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured. **Magazines –** Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered. **Magazine Advertising –** Revenue is recognized when the magazine is for sale and available to the subscribers. ### \- 17 - **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. ### Accounts receivable: Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for returns are based on historical return rates and sales patterns. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables. In the Company’s trade business, a reserve for estimated bad debts is established at the time of sale and the reserve continues to be monitored based on the aging of accounts receivable held by the Company’s third party administrator and the Company’s evaluation of the creditworthiness of the parties responsible for payment. While the Company uses a third party to invoice and collect for shipments made for certain channels, the Company bears the majority of the responsibility in the case of uncollectible accounts. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable aging, would have resulted in an increase or decrease in operating income for the year ended May 31, 2011 of approximately $2.8 million. ### Inventories: Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage rates and sales patterns of its products. The impact of a one percentage point change in the obsolescence reserve rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2011 of approximately $3.8 million. ### 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. 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, as the related royalties earned are applied first against the remaining unearned portion of the advance. 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 periodically. 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. The determination of the fair value of the Company’s reporting units involves a number of assumptions, including the estimates of future cash flows, discount rates and market-based multiples, among others, each of which is subject to change. Accordingly, it is possible that changes in assumptions and the performance of certain reporting units could lead to impairments in future periods, which may be material. The fair value of each of the Company’s reporting units which have goodwill have fair values that exceed the carrying value of that reporting unit by at least 20% at May 31, 2011. 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 ### \- 18 - 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. ### 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 at the estimated cost of providing 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. As the credits are redeemed, such liability is reduced. Estimates are based on historical redemption patterns and sponsor attrition rates. ### Other noncurrent liabilities: All of the rate assumptions discussed below impact the Company’s calculations of its pension and post-retirement obligations. 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 –** The Corporation and certain of its subsidiaries have defined benefit pension plans (the “pension plans”), covering the majority of their employees who meet certain eligibility requirements. Effective as of June 1, 2009, the U.S. cash balance retirement plan (the “Pension Plan”) closed to new participants and accrual of future benefits under the Plan stopped for virtually all participants. Accordingly, a participant’s benefit does not consider pay earned and service credited after June 1, 2009. Grolier Limited, an indirect subsidiary of Scholastic Corporation located in Canada, provided a defined benefit pension plan (the “Grolier Canada Pension Plan”) that covered its employees who met certain eligibility requirements. During the fiscal year ended May 31, 2011, the Company completed the settlement of the Grolier Canada Pension Plan. The Company’s pension plans and other post-retirement benefits are accounted for using actuarial valuations required by current accounting guidance and the related recognition and disclosure provisions which require the Company to recognize the net funded status of its pension plans in its consolidated balance sheet. 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 interest cost components of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. A one percentage point change in the discount rate and expected long-term return on plan assets would have resulted in an increase or decrease in operating income for the year ended May 31, 2011 of approximately $0.3 million and $1.2 million, respectively. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment periods. **Other post-retirement benefits –** The 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 existing benefit obligation 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 service and interest cost components of net periodic post-retirement benefit cost. A one percentage point change in the discount rate would have resulted in an increase or decrease in operating income of approximately $0.3 million for the year ended May 31, 2011. The assumed health care cost trend rate is used in the measurement of the long-term expected increase in medical claims. A one percentage point change in the health care cost trend rate would have resulted in an increase or decrease in operating income of approximately $0.2 million for the year ended May 31, 2011. A one percentage point change in the health care cost trend rate would have resulted in an increase or decrease in the post-retirement benefit obligation as of May 31, 2011 of approximately $4.1 million and $3.5 million, respectively. **Stock-based compensation –** The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized ratably over the period during which an employee is required to provide service in exchange for the award. The Company adopted this accounting guidance using the modified-prospective application method and, accordingly, recognizes compensation cost for stock-based compensation for all new or modified grants after the date of adoption. In addition, the Company recognizes the unvested portion of the grant-date fair value of awards granted prior to the adoption based on the fair values previously calculated for disclosure purposes. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The determination of the assumptions used in the Black-Scholes model requires management to make significant judgments and estimates. The use of different assumptions and estimates in the option pricing model could have a material impact on the estimated fair value of option grants and the related expense. The risk-free interest rate is based on a U.S. Treasury rate in effect on the date of grant with a term equal to the expected life. The expected term is determined based on historical employee exercise and post-vesting termination behavior. The ### \- 19 - expected dividend yield is based on actual dividends paid or to be paid by the Company. When calculating expected stock price volatility, the Company utilizes the Company’s historical stock price for the preceding eight-year period. **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. In addition, for a description of the significant assumptions and estimates used by management in connection with discontinued operations, see Note 3 of Notes to the Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein. **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 where the projected taxable earnings indicate that realization is not likely, the Company establishes a valuation allowance. In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of 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 recognizes a liability for uncertain tax positions based upon the current accounting guidance, which provides guidance on recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that a company has taken or expects to file in a tax return. The guidance states that a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The Company considers its investments in foreign subsidiaries to be indefinitely reinvested, and, accordingly, does not provide taxes for the repatriation of these investments. 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. ### \- 20 - ### Results of Operations *(Amounts in millions, except per share data) For fiscal years ended May 31,* | Revenues: | 2011 $% (1) | | 2010 $% (1) | | 2009 $% (1) | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Children’s Book Publishing and Distribution | $922.0 | 48.4 | $910.6 | 47.6 | $940.4 | 50.9 | | Educational Publishing | 428.0 | 22.5 | 476.5 | 24.9 | 384.2 | 20.8 | | Media, Licensing and Advertising | 111.2 | 5.8 | 113.8 | 6.0 | 125.7 | 6.7 | | International | 444.9 | 23.3 | 412.0 | 21.5 | 399.0 | 21.6 | | Total revenues | 1,906.1 | 100.0 | 1,912.9 | 100.0 | 1,849.3 | 100.0 | | Cost of goods sold (exclusive of depreciation) | 885.9 | 46.5 | 859.8 | 44.9 | 881.7 | 47.7 | | Selling, general and administrative expenses | 835.7 | 43.8 | 803.4 | 42.0 | 777.2 | 42.0 | | Bad debt expense (2) | 13.6 | 0.7 | 9.5 | 0.5 | 15.8 | 0.9 | | Depreciation and amortization | 60.1 | 3.2 | 59.5 | 3.1 | 61.2 | 3.3 | | Severance (3) | 6.7 | 0.4 | 9.2 | 0.5 | 26.5 | 1.4 | | Impairment charge (4) | 3.4 | 0.1 | 43.1 | 2.3 | 26.3 | 1.4 | | Operating income | 100.7 | 5.3 | 128.4 | 6.7 | 60.6 | 3.3 | | Other (expense) income (5) | (0.4) | — | 0.9 | — | 0.7 | — | | Interest income | 1.5 | 0.1 | 1.6 | 0.1 | 1.2 | 0.1 | | Interest expense | (17.1) | (0.9) | (17.8) | (0.9) | (24.2) | (1.3) | | Loss on investments (6) | (3.6) | (0.2) | (1.5) | (0.1) | (13.5) | (0.7) | | Earnings from continuing operations before income taxes | 81.1 | 4.3 | 111.6 | 5.8 | 24.8 | 1.4 | | Earnings from continuing operations | 43.6 | 2.3 | 58.7 | 3.1 | 7.0 | 0.4 | | Loss from discontinued operations, net of tax | (4.2) | (0.2) | (2.6) | (0.2) | (21.3) | (1.2) | | Net income (loss) | $39.4 | 2.1 | $56.1 | 2.9 | $(14.3) | (0.8) | | Earnings (loss) per share: | | | | | | | | Basic: | | | | | | | | Earnings from continuing operations | $1.31 | | $1.61 | | $0.19 | | | Loss from discontinued operations | $(0.13) | | $(0.07) | | $(0.57) | | | Net income (loss) | $1.18 | | $1.54 | | $(0.38) | | | Diluted: | | | | | | | | Earnings from continuing operations | $1.29 | | $1.59 | | $0.19 | | | Loss from discontinued operations | $(0.13) | | $(0.07) | | $(0.57) | | | Net income (loss) | $1.16 | | $1.52 | | $(0.38) | | (1) Represents percentage of total revenues. (2) In fiscal 2011, the Company recorded pretax bad debt expense of $3.5 associated with the bankruptcy filing of a single customer. (3) In fiscal 2009, the Company recorded a pretax severance expense of $18.1, which was primarily related to the Company’s voluntary retirement program and a workforce reduction program. (4) In fiscal 2011, the Company recorded a pretax impairment charge of $3.4 related to assets in the Scholastic Library Publishing and Classroom Magazines business. In fiscal 2010, the Company recorded a pretax asset impairment charge of $36.3 attributable to intangible assets and prepublication costs associated with the library business, a pretax charge of $3.8 associated with a customer list and a pretax charge of $3.0 for goodwill and intangible assets associated with the Company’s direct-to-home toy catalog business. In fiscal 2009, the Company recorded a pretax $17.0 goodwill impairment charge attributable to the Company’s UK operations and a pretax asset impairment charge of $9.3 related to the Company’s Danbury facility. (5) In fiscal 2011, the Company recorded pretax expense of $0.4 consisting of transaction costs incurred for a business acquisition. In fiscal 2010, the Company recorded a pretax gain of $0.9 on note repurchases of $4.1. In fiscal 2009, the Company recorded a pretax gain of $0.4 on note repurchases of $2.1 and a pretax gain of $0.3 related to an accelerated payment of a note. (6) In fiscal 2011, the Company recorded a pretax loss of $3.6 related to a UK-based cost method investment. In fiscal 2010, the Company recorded a pretax loss of $1.5 related to a U.S.-based cost method investment. In fiscal 2009, the Company recorded a pretax loss of $13.5 on investments in the UK. ### \- 21 - ### Results of Operations – Consolidated Revenues for fiscal 2011 decreased by $6.8 million, to $1,906.1 million, compared to $1,912.9 million in fiscal 2010. This decrease was principally related to a $48.5 million decrease in the *Educational Publishing* segment relating to lower sales of educational technology products and related services by Scholastic Education and lower revenue of $2.6 million in the *Media, Licensing and Advertising* segment. These declines were partially offset by increased revenues of $32.9 million in the *International* segment, of which $23.9 million was related to foreign currency exchange rates, as well as increased revenues of $11.4 million in the *Children’s Book Publishing and Distribution* segment, driven by favorable results in the Company’s trade business. Revenues for fiscal 2010 from continuing operations increased by $63.6 million, to $1,912.9 million, compared to $1,849.3 million in fiscal 2009. This increase was principally related to $92.3 million in increased sales of educational technology products and related services by Scholastic Education in the *Educational Publishing* segment. In addition, foreign exchange positively impacted the Company’s revenues by $27.2 million, principally related to a weakening U.S. dollar against the Canadian dollar and Australian dollar. The increase was partially offset by a decline in revenues of $29.8 million from the Company’s *Children’s Book Publishing and Distribution* segment. Cost of goods sold for fiscal 2011 increased by $26.1 million to $885.9 million, or 46.5% of revenues, from $859.8 million, or 44.9% of revenues, in the prior fiscal year. This increase in dollars and as a percentage of revenue was primarily related to increased product costs relating to promotions, as well as increased shipping costs resulting from an increased number of shipments in the *Children’s Book Publishing and Distribution* segment. Cost of goods sold for fiscal 2010 decreased to $859.8 million, or 44.9% of revenues, compared to $881.7 million, or 47.7% of revenues, in fiscal 2009. This decrease as a percentage of revenue was primarily related to the higher ratio of higher-margin educational technology product sales in fiscal 2010. Components of Cost of goods sold for fiscal 2011, 2010 and 2009 are as follows: *($ amounts in millions)* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Product, service and production costs | $504.3 | $504.0 | $507.8 | | Royalty costs | 93.5 | 94.0 | 106.3 | | Prepublication and production amortization | 51.1 | 51.0 | 44.8 | | Postage, freight, shipping, fulfillment and all other costs | 237.0 | 210.8 | 222.8 | | **Total** | $885.9 | $859.8 | $881.7 | Product, service and production costs for fiscal 2011 remained relatively flat compared to fiscal 2010 and 2009. Royalty costs for fiscal 2011 remained relatively flat to fiscal 2010 and decreased from fiscal 2009 due to the release of *The Tales of Beedle the Bard* in fiscal 2009. Prepublication and production amortization for fiscal 2011 remained flat to fiscal 2010 and increased compared to fiscal 2009 due to the acceleration of amortization of certain interactive and educational technology products. Postage, freight, shipping, fulfillment and all other costs increased in fiscal 2011 from fiscal 2010 primarily due to increased shipping costs resulting from an increased number of shipments in the *Children’s Book Publishing and Distribution* segment. Postage, freight, shipping, fulfillment and all other costs decreased in fiscal 2010 from fiscal 2009 due to lower postage charges as an increased number of orders were combined. Selling, general and administrative expenses for fiscal 2011 increased by $32.3 million, to $835.7 million, compared to $803.4 million in the prior fiscal year, related to increased promotional spending and increased spending on digital initiatives, as well as higher employee costs. Selling, general and administrative expenses for fiscal 2010 increased by $26.2 million, to $803.4 million, from $777.2 million in fiscal 2009. This increase was primarily due to accruals for sales taxes of $15.4 million principally related to settlements with taxing authorities, as well as increased employee costs related to the increase in sales in the *Educational Publishing* segment. Bad debt expense increased in fiscal 2011 by $4.1 million, to $13.6 million, from $9.5 million in fiscal 2010, primarily in the *Children’s Book Publishing and Distribution* segment related to a single customer’s bankruptcy. Bad debt expense decreased in fiscal 2010 by $6.3 million, to $9.5 million, compared to $15.8 million in fiscal 2009, when the Company recorded increased bad debt reserves in the *Children’s Book Publishing and Distribution* and *Educational Publishing* segments. Severance expense for fiscal 2011 decreased by $2.5 million, to $6.7 million, compared to $9.2 million in fiscal 2010, and for fiscal 2010 by $17.3 million, to $9.2 million, compared to $26.5 million in fiscal 2009, primarily due to the expenses incurred in fiscal 2009 related to previously announced cost reduction programs. ### \- 22 - In fiscal 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 and recorded an impairment charge of $3.4 million at May 31, 2011. In fiscal 2010, the Company recorded charges of $43.1 million for asset impairments consisting of: $36.3 million recorded in the *Educational Publishing* segment, as the Company implemented certain strategic initiatives during the fiscal year to centralize publishing efforts within the *Children’s Book Publishing and Distribution* segment, including the elimination of the front list for certain library-specific titles within the *Educational Publishing* segment; $3.8 million recorded in the Company’s *International* segment related to a customer list acquired as part of the dissolution of a joint venture in the United Kingdom; and $3.0 million relating to goodwill and other intangible assets of the Company’s direct-to-home toy catalog business recorded in the Company’s *Media, Licensing and Advertising* segment. In fiscal 2009, the Company recognized a non-cash charge for impairment of goodwill in its UK business of $17.0 million and an asset impairment charge of $9.3 million related to its Danbury operations. The resulting operating income for fiscal 2011 decreased by $27.7 million, to $100.7 million, compared to $128.4 million in fiscal 2010, primarily related to the lower revenues, increased cost of goods sold, increased selling, general and administrative expenses and increased bad debt expense as discussed above, partially offset by the impairment charge in the prior fiscal year. The resulting operating income for fiscal 2010 increased by $67.8 million, to $128.4 million, compared to $60.6 million in the prior fiscal year, principally reflecting the strong results in the Company’s *Educational Publishing* segment compared to the prior fiscal year. Net interest expense for fiscal 2011 decreased by $0.6 million, to $15.6 million, compared to $16.2 million in fiscal 2010, primarily related to lower debt levels. Net interest expense for fiscal 2010 decreased by $6.8 million, to $16.2 million, compared to $23.0 million in fiscal 2009, driven by lower borrowing levels and favorable interest rates. In fiscal 2011, the Company recognized a $3.6 million non-cash loss on a UK-based cost method investment. In fiscal 2010, the Company recognized a non-cash loss on a U.S.-based cost method investment in the amount of $1.5 million. In fiscal 2009, the Company recognized non-cash unrealized losses on investments in a UK book distribution business and related entities of $13.5 million. The Company’s provision for income taxes with respect to continuing operations resulted in an effective tax rate of 46.2%, 47.4% and 71.8% for fiscal 2011, 2010 and 2009, respectively. The Company’s effective tax rate for fiscal 2009 exceeds statutory rates as a result of net operating losses experienced in foreign operations, primarily in the United Kingdom, for which the Company does not expect to realize future tax benefits. Earnings from continuing operations decreased by $15.1 million, to $43.6 million, in fiscal 2011, from $58.7 million in fiscal 2010, which increased by $51.7 million, from $7.0 million in fiscal 2009. The basic and diluted earnings from continuing operations per share of Class A Stock and Common Stock were $1.31 and $1.29, respectively, in fiscal 2011, $1.61 and $1.59, respectively, in fiscal 2010 and $0.19 and $0.19, respectively, in fiscal 2009. Loss from discontinued operations, net of tax, increased to $4.2 million in fiscal 2011, compared to a loss, net of tax, of $2.6 million in fiscal 2010. The increase was primarily driven by costs related to the fiscal 2011 settlement of the Canada Grolier Pension Plan. The loss from discontinued operations, net of tax, of $2.6 million in fiscal 2010 decreased by $18.7 million, compared to $21.3 million in fiscal 2009, primarily driven by the Company ceasing certain operations in Latin America. The resulting net income for fiscal 2011 was $39.4 million, or $1.18 and $1.16 per basic and diluted share, respectively, compared to net income of $56.1 million, or $1.54 and $1.52 per basic and diluted share, respectively, in fiscal 2010. Net loss in fiscal 2009 was $14.3 million, or $0.38 per share. The weighted average shares of Class A Stock and Common Stock outstanding, which is used to calculate earnings or loss per share, were lower in fiscal 2011 compared to 2010 and 2009, primarily due to a modified Dutch auction share repurchase program executed in fiscal 2011. ### Results of Operations - Segments ### CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION *($ amounts in millions)* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Revenues | $922.0 | $910.6 | $940.4 | | Operating income | 78.1 | 117.9 | 101.8 | | Operating margin | **8.5%** | **12.9%** | **10.8%** | Revenues in the *Children’s Book Publishing and Distribution* segment accounted for 48.4% of the Company’s revenues in fiscal 2011, 47.6% in fiscal 2010 and 50.9% in fiscal 2009. In fiscal 2011, segment revenues increased by $11.4 million, to $922.0 million, compared to $910.6 million in fiscal 2010. In fiscal 2010, revenues declined by $29.8 million, to $910.6 million, compared to $940.4 million in fiscal 2009. ### \- 23 - Revenues from school book clubs in fiscal 2011 decreased by $6.7 million, to $298.2 million, compared to $304.9 million in the prior fiscal year related to lower revenue per order, slightly offset by a higher number of orders. In fiscal 2010, school book club revenues decreased by $36.0 million, to $304.9 million, compared to $340.9 million in fiscal 2009, primarily reflecting fewer orders and sponsors, principally related to teacher reassignments at the start of the school year which impacted customer acquisition. Revenues from the Company’s trade distribution channel increased by $14.8 million, to $189.4 million, compared to $174.6 million in fiscal 2010, driven by increased sales of ebooks including the *Hunger Games* trilogy. Trade revenues decreased by $9.1 million, to $174.6 million in fiscal 2010, compared to $183.7 million in fiscal 2009 when the Company released *The Tales of Beedle the Bard.* Revenues from school book fairs increased by $3.3 million, to $434.4 million in fiscal 2011, compared to $431.1 million in fiscal 2010, related to higher revenue per fair and higher fair count, partially offset by lower warehouse sales. In fiscal 2010, school book fair revenues increased by $15.3 million, to $431.1 million, compared to $415.8 million in fiscal 2009, primarily due to higher revenue per fair. Segment operating income in fiscal 2011 decreased by $39.8 million, to $78.1 million, compared to $117.9 million in fiscal 2010, which was driven primarily by higher promotional spending in the school book clubs business, as well as spending on digital initiatives, partially offset by favorable cost of goods sold in the Company’s book fairs channel. In fiscal 2010, segment operating income increased by $16.1 million, to $117.9 million, compared to $101.8 million in fiscal 2009. This increase was primarily related to operational improvements in the school-based book fairs business driven by the full implementation of the point-of-sale system, which enhanced inventory controls, favorable returns and reduced bad debt expenses in the trade business and reduced promotional expenses in the school-based book clubs business, partially offset by lower school book clubs revenues and an increase in sales tax expense primarily related to a settlement with a taxing authority. ### EDUCATIONAL PUBLISHING *($ amounts in millions)* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Revenues | $428.0 | $476.5 | $384.2 | | Operating income | 51.6 | 67.2 | 55.8 | | Operating margin | **12.1%** | **14.1%** | **14.5%** | Revenues in the *Educational Publishing* segment accounted for 22.5% of the Company’s revenues in fiscal 2011, 24.9% in fiscal 2010 and 20.8% in fiscal 2009. In fiscal 2011, segment revenues decreased by $48.5 million, to $428.0 million, compared to $476.5 million in fiscal 2010, primarily due to lower sales of educational technology products and related services compared to the prior year when the Company benefited from the significant impact of federal stimulus funding for education. In fiscal 2010, revenues increased by $92.3 million, to $476.5 million, compared to $384.2 million in the prior year. This increase was the result of higher sales of READ 180 ®, System 44 and other educational technology products and related services in Scholastic Education, as well as new adoptions, in particular the California adoption, of READ 180 and System 44, and the significant impact of federal stimulus funding for education. In fiscal 2011, segment operating income decreased by $15.6 million, to $51.6 million, from $67.2 million in fiscal 2010, primarily related to lower revenues and an impairment charge of $3.4 million for certain assets in the Scholastic Library Publishing and Classroom Magazines business, partially offset by the prior fiscal year’s asset impairment charge of $36.3 million. In fiscal 2010, segment operating income increased by $11.4 million, to $67.2 million, compared to $55.8 million in the fiscal 2009, primarily due to higher revenues, partially offset by an asset impairment charge of $36.3 million recorded in the second quarter of fiscal 2010 in connection with the Company’s decision to consolidate supplemental non-fiction and library publishing activities into the *Children’s Book Publishing and Distribution* segment. ### \- 24 - ### MEDIA, LICENSING AND ADVERTISING *($ amounts in millions)* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Revenues | $111.2 | $113.8 | $125.7 | | Operating loss | (1.2) | (4.2) | — | | Operating margin | \* | \* | \* | \* not meaningful Revenues in the *Media, Licensing and Advertising* segment accounted for 5.8% of the Company’s revenues in fiscal 2011, 6.0% in fiscal 2010 and 6.7% in fiscal 2009. In fiscal 2011, segment revenues declined by $2.6 million, to $111.2 million, compared to $113.8 million in fiscal 2010, as a result of lower revenues in the Company’s interactive business, partially offset by an increase in revenues in the Company’s production business. In fiscal 2010, segment revenues decreased by $11.9 million, to $113.8 million, from $125.7 million in fiscal 2009, primarily due to lower revenues from sales of software and interactive products, as well as lower revenues from the Company’s direct-to-home toy catalog business. In fiscal 2011, the segment experienced a lower operating loss of $1.2 million, compared to an operating loss of $4.2 million in fiscal 2010, primarily due to impairment charges of $3.0 million recorded in fiscal 2010 related to the Company’s direct-to-home toy catalog business, which was also the primary driver in the increased loss in fiscal 2010 as compared to fiscal 2009. ### INTERNATIONAL *($ amounts in millions)* | | 2011 | 2010 | 2009 | | --- | ---: | ---: | ---: | | Revenues | $444.9 | $412.0 | $399.0 | | Operating income | 38.3 | 30.0 | 7.3 | | Operating margin | **8.6%** | **7.3%** | **1.8%** | Revenues in the *International* segment accounted for 23.3% of the Company’s revenues in fiscal 2011, 21.5% in fiscal 2010 and 21.6% in fiscal 2009. In fiscal 2011, segment revenues increased by $32.9 million. This increase was primarily due to the favorable impact of foreign currency exchange rates of $23.9 million, principally in Australia and Canada, as well as increased sales in Australia and Canada, partially offset by lower revenue in the United Kingdom. In fiscal 2010, segment revenues increased by $13.0 million, to $412.0 million, from $399.0 million in the prior fiscal year. This increase was primarily due to the favorable impact of foreign currency exchange rates of $27.2 million, principally in Australia and Canada, partially offset by sales declines in Canada of $7.1 million and the United Kingdom of $5.4 million. Segment operating income in fiscal 2011 increased by $8.3 million, to $38.3 million, compared to $30.0 million in fiscal 2010, related to favorable results in the Company’s Australia operations. Segment operating income in fiscal 2010 increased by $22.7 million, to $30.0 million, compared to $7.3 million in the prior fiscal year, primarily reflecting a non-cash charge for impairment of goodwill of $17.0 million in the United Kingdom in the prior year. Restructuring costs in the United Kingdom of $3.0 million and $4.7 million were recorded in fiscal 2011 and 2010, respectively. In addition, a $3.8 million non-cash impairment charge in the United Kingdom was recorded in fiscal 2010. ### Liquidity and Capital Resources The Company’s cash and cash equivalents, including the cash of the discontinued operations, totaled $105.3 million at May 31, 2011, compared to $244.1 million at May 31, 2010 and $143.6 million at May 31, 2009. Cash provided by operating activities was $228.4 million for fiscal 2011, a decline of $47.4 million compared to $275.8 million for fiscal 2010. While earnings from continuing operations were only $15.1 million higher in the prior fiscal year, non-cash items were significantly higher in fiscal 2010 driven by impairment charges of $43.1 million. Tax payments, net of refunds, in fiscal 2011 were $31.5 million, compared to $22.3 million in fiscal 2010. ### \- 25 - The decline in cash provided by operating activities related to net income was offset in part by net changes in the Company’s working capital and other operating accounts, which yielded positive cash flows of $5.6 million in fiscal 2011 as compared to negative cash flows of $30.3 million in the prior fiscal year. This was driven primarily by: - Increases in accounts payable balances resulting in a source of cash of $18.9 million for fiscal 2011 as compared to decreases in accounts payable balances resulting in a use of cash of $27.0 million in fiscal 2010. The changes in both periods are the result of the timing of payments, and are not indicative of changes in the Company’s overall working capital requirements. - Increases in accounts receivable balances which resulted in a cash use of $12.6 million for fiscal 2011, while increases in accounts receivable balances resulted in a cash use of $22.4 million in fiscal 2010, resulting in a lower net use of cash in fiscal 2011 of $9.8 million. The difference is related primarily to higher receivable balances in the Company’s educational technology business. partially offset by: - Increased inventory balances resulting in a use of cash of $10.0 million for fiscal 2011 as compared to decreased inventories which resulted in a source of cash of $3.4 million in fiscal 2010, resulting in an increase in cash used in operating activities of $13.4 million in fiscal 2011. This change was primarily driven by higher purchases in fiscal 2011 following significant inventory reductions during the second half of fiscal 2010. - Decreased accrued royalty balances resulting in a use of cash of $8.3 million in fiscal 2011 as compared to increased accrued royalty balances in the prior year of $0.4 million, resulting in an increase in cash used in operating activities of $8.7 million. Cash used in investing activities increased by $36.1 million, to $141.1 million, for the fiscal year ended May 31, 2011, from $105.0 million in the prior fiscal year. This increase was primarily due to a $24.3 million purchase of the land on which the Company’s corporate headquarters are located and an $8.2 million, net of cash received, business acquisition of Math Solutions in fiscal 2011. The Company’s fiscal 2011 investments in prepublication costs and property plant and equipment reflect spending for the Company’s digital initiatives in fiscal 2011. Cash used in financing activities increased by $159.6 million, to $230.5 million, in fiscal 2011, compared to $70.9 million in fiscal 2010. The change was primarily due to the completion of a modified Dutch auction tender offer in the current year period. The Company accepted for purchase 5,199,699 of its Common shares at a price of $30.00 per share, for a total cost of $157.2 million, inclusive of related fees and expenses. The Company funded the purchase of the shares in the tender offer using cash on hand and short-term borrowings under its existing credit facility, which have since been repaid. Due to the seasonality of its businesses, as discussed in Item 1, “Business - Seasonality,” the Company typically 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 and October, and have declined to their lowest levels in May. The Company’s operating philosophy is to use cash provided from operating activities to create value by paying down debt, to reinvest in existing businesses and, from time to time, to make acquisitions that will complement its portfolio of businesses and to engage in shareholder enhancement initiatives, such as dividend declarations and share purchases. The Company believes that cash on hand, funds generated by its operations and funds available under its credit facilities will be sufficient to finance its short- and long-term capital requirements. Despite the current economic conditions, the Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund on-going operations, including pension contributions, dividends, currently authorized common share repurchases, debt service, planned capital expenditures and other investments. As of May 31, 2011, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $105.3 million, cash from operations, and borrowings remaining available under the Revolving Loan (as described under “Financing” below) totaling $325.0 million. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Accordingly, the Company believes these sources of liquidity are sufficient to finance its on-going operating needs, as well as its financing and investing activities. The Company’s credit rating from Standard & Poor’s Rating Services is “BB-” and its credit rating from Moody’s Investors Service is “Ba2.” Moody’s Investors Service has rated the outlook for the Company as “Positive,” and Standard and Poor’s Rating Services has rated the outlook for the Company as “Stable.” The Company is currently compliant with its debt covenants and expects to remain compliant for the foreseeable future. The Company’s interest rates for the Loan Agreement are associated with certain leverage ratios, and, accordingly, a change in the Company’s credit rating does not result in an increase or decrease in interest costs under the Company’s Loan Agreement. The Company intends to enter into a new revolving credit facility to replace the existing facility, which matures on June 1, 2012. The Company believes that prevailing market conditions, coupled with strong relations with its credit banks, will enable it to secure appropriate new senior financing prior to the termination of its existing credit agreement. ### \- 26 - The following table summarizes, as of May 31, 2011, the Company’s contractual cash obligations by future period (see Notes 5, 6 and 12 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”): *amounts in millions* | Contractual Obligations | Payments Due By Period 1 Year or Less | Years 2-3 | Years 4-5 | After Year 5 | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Minimum print quantities | $55.7 | $114.5 | $118.6 | $216.1 | $504.9 | | Royalty advances | 5.8 | 2.6 | 0.2 | — | 8.6 | | Lines of credit and short-term debt | 0.7 | — | — | — | 0.7 | | Capital leases (1) | 5.0 | 10.7 | 10.2 | 191.1 | 217.0 | | Debt (1) | 50.5 | 167.1 | — | — | 217.6 | | Pension and post-retirement plans | 17.6 | 33.0 | 29.0 | 67.8 | 147.4 | | Operating leases | 34.5 | 54.9 | 34.6 | 43.2 | 167.2 | | **Total** | $169.8 | $382.8 | $192.6 | $518.2 | $1,263.4 | (1) Includes principal and interest. ### Financing On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) elected to replace the Company’s then-existing credit facilities with a new $525.0 million credit facility with certain banks (as amended, the “Loan Agreement”), consisting of a $325.0 million revolving credit component (the “Revolving Loan”) and a $200.0 million 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 million 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 million. The $200.0 million 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 (as more fully described in Note 11 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”) 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 million, with the first payment made on December 31, 2007, and a final payment of $7.4 million 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 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 the payment of a facility fee ranging from 0.125% to 0.250% per annum on the Revolving Loan only, which at May 31, 2011 and 2010 was 0.150%. As of May 31, 2011, $50.2 million was outstanding under the Term Loan at an interest rate of 1.0 %; at May 31, 2010, $93.0 million 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 May 31, 2010. As of May 31, 2011, there was $1.4 million of outstanding standby letters of credit issued under the Loan Agreement. 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. The Company has unsecured money market bid rate credit lines totaling $20.0 million. There were no outstanding borrowings under these credit lines at May 31, 2011 and May 31, 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 sole option of the lender. As of May 31, 2011, the Company also had various local currency credit lines, with maximum available borrowings in amounts equivalent to $30.3 million, 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 ### \- 27 - were borrowings outstanding under these facilities equivalent to $0.7 million at May 31, 2011 at a weighted average interest rate of 6.7%, compared to the equivalent of $7.5 million 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. At May 31, 2011, the Company had open standby letters of credit of $6.6 million issued under certain credit lines, compared to $7.2 million 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. The Company’s total debt obligations were $203.4 million at May 31, 2011 and $252.8 million at May 31, 2010. The lower level of debt at May 31, 2011 compared to the level at May 31, 2010 was primarily due to repayments made on the Term Loan. For a more complete description of the Company’s debt obligations, see Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” ### Acquisitions In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. In fiscal 2011, the Company acquired Math Solutions, an education resources and professional development company focusing on K-12 math instruction (see Note 2 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”). The Company has integrated this business with Scholastic Education, its existing educational technology and services business. The Company will continue to evaluate such opportunities and prospects. ### \- 28 - ## Market risk As filed, 2,803 characters. The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. Additionally, the Company sells product from its domestic operations to its foreign subsidiaries, creating additional currency risk. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts, which were not significant as of May 31, 2011. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes. 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 25% of the Company’s debt at May 31, 2011 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 40% at May 31, 2010. The decrease in variable-rate debt as of May 31, 2011 compared to May 31, 2010 was primarily due to repayments made on the Term Loan. 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. Additional information relating to the Company’s outstanding financial instruments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table sets forth information about the Company’s debt instruments as of May 31, 2011 (see Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”): *$ amounts in millions* | Debt Obligations | Fiscal Year Maturity 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value 2011 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Lines of credit and short-term debt | $0.7 | $— | $— | $— | $— | $0.7 | $0.7 | | Average interest rate | 6.7% | | | | | | | | Long-term debt, including Current portion: | | | | | | | | | Fixed-rate debt | $— | $153.0 | $— | $— | $— | $153.0 | $156.6 | | Average interest rate | | 5.0% | | | | | | | Variable-rate debt | $42.8 | $7.4 (1) | $— | $— | $— | $50.2 | $50.2 | | Interest rate (2) | 1.0% | 1.0% | | | | | | (1) Represents the final payment under the Term Loan, which has a final maturity of June 1, 2012 but may be repaid at any time. (2) Represents the interest rate under the Term Loan at May 31, 2011; the interest rate is subject to change over the life of the Term Loan. ### \- 29 - ## Controls and procedures As filed, 2,778 characters. ### Evaluation of Disclosure Controls and Procedures The Chief Executive Officer and Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of May 31, 2011, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. ### \- 73 - ### Management’s Report on Internal Control over Financial Reporting The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management (with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer), after conducting an evaluation of the effectiveness of the Corporation’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, concluded that the Corporation’s internal control over financial reporting was effective as of May 31, 2011. Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on the Corporation’s internal control over financial reporting as of May 31, 2011, which is included herein. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended May 31, 2011 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Filed Jul 27, 2011. Source: SEC EDGAR, the filing index for accession 0000930413-11-004927. Last ingested by Listed: Oct 27, 2026, 17:32 ET. No prices; not investment advice.