Attached files
file | filename |
---|---|
EX-31.2 - PEOPLES EDUCATIONAL HOLDINGS | v196837_ex31-2.htm |
EX-32.1 - PEOPLES EDUCATIONAL HOLDINGS | v196837_ex32-1.htm |
EX-31.1 - PEOPLES EDUCATIONAL HOLDINGS | v196837_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
Amendment No.
1
|
x
|
Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended May 31, 2010
|
¨
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period from _____ to ______
Commission
File No. 000-50916
|
|
PEOPLES
EDUCATIONAL HOLDINGS, INC.
|
|
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
41-1368898
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
299
Market Street, Saddle Brook, NJ
|
07663
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (201)
712-0090
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
|
Title of each class
|
Name of each exchange on which
registered
|
Common
Stock, $0.02 par value
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes ¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
¨
Yes ¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).¨
Yes x
No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
November 30, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter) was $3,440,111
The
number of shares outstanding of the issuer's common stock on August 02, 2010 was
4,465,202.
Documents
incorporated by reference: None.
EXPLANATORY
NOTE
We are filing this Amendment No. 1 (“Amendment No.
1”) to our
Annual Report on Form 10-K for the fiscal year ended May 31, 2010 (the “Form
10-K”), which was originally filed with the Securities and Exchange Commission
on August 9, 2010. This Amendment No. 1 is being filed solely for the purpose of
correcting a typographical error in the beneficial ownership of our directors
and officers as a group, shown in the beneficial ownership table in Part III,
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. This Amendment No. 1 amends and restates Item 12 of
Part III in its entirety. No other information included in the original Form
10-K is amended hereby.
For convenience and ease of reference, we are filing the Annual Report
in its entirety with applicable changes. This Amendment No. 1 to our Annual
Report on Form 10-K does not reflect events occurring after the original filing
of the Form 10-K or modify or update the disclosure contained therein in any way
other than as described above. In addition, as required by Rule 12b-15 of the
Securities Exchange Act of 1934, new certifications by our principal executive
officer and principal financial officer are included as exhibits to this
Amendment No. 1.
TABLE OF
CONTENTS
Page No.
|
|||
PART
I
|
1 | ||
ITEM
1.
|
BUSINESS
|
1 | |
ITEM
2.
|
PROPERTIES
|
9 | |
ITEM
3.
|
LEGAL
PROCEEDINGS
|
10 | |
PART
II
|
10 | ||
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
10 | |
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
11 | |
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
16 | |
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
32 | |
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
33 | |
ITEM
9B.
|
OTHER
INFORMATION
|
34 | |
PART
III
|
34 | ||
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
34 | |
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
37 | |
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
40 | |
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
41 | |
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
41 | |
PART
IV
|
43 | ||
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
43 | |
SIGNATURES
|
45 |
PART
I
ITEM
1.
|
BUSINESS
|
OVERVIEW
AND COMPANY HISTORY
Peoples
Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples
Education, Inc. (PE), develops and sells its own proprietary print and digital
education products, which are predominantly state-specific and standards-based,
focused on state-required tests. We also distribute other publishers’ products.
Historically our products were organized into two product groups, one designated
as Test Preparation, Assessment, and Instruction, and the other as College
Preparation. In March 2009 we added a third product group, Literacy, as we
entered into exclusive distribution agreements with three publishers to
distribute their Literacy products in the United States. The Test Preparation,
Assessment, and Instruction materials are almost exclusively proprietary
products, while the College Preparation materials are mainly nonproprietary
products accompanied by a growing number of proprietary titles. The Literacy
products are exclusively nonproprietary. Marketing channels include Company and
independent sales representatives, telemarketing, direct mail, and catalogs.
Throughout this document PE and PEH will be collectively referred to as “we,”
“our,” and “the Company.”
PE was
founded in 1989 by James J. Peoples, the current Chairman of the Board, and by
Diane M. Miller, the current Executive Vice President and Chief Creative
Officer. It began operations in 1990 with the acquisition of a small
supplementary product line. Effective November 1, 1998, PE merged into a
subsidiary of PEH. All of PEH’s operations are currently conducted through PE.
In November 2001, PEH reincorporated in Delaware. Effective June 1, 2005, the
common stock of PEH was approved for quotation and trading on the NASDAQ Capital
Market under the symbol PEDH.
Test Preparation,
Assessment, and Instruction Product Group
|
·
|
Test
Preparation and Assessment: We create and sell state-customized print and
digital test preparation and assessment materials that help teachers
prepare students for success in school and for required state proficiency
tests, grades 1–12.
|
|
·
|
Instruction:
We produce and sell proprietary state-customized print worktexts and print
and web-based delivered assessments, for grades 1-8. These products
provide students with in-depth instruction and practice in reading,
language arts, and mathematics. In addition, our backlist remedial and
multicultural products are included in this
group.
|
College Preparation Product
Group
|
·
|
We
distribute and publish instructional materials that meet the required
academic standards for high school honors, college preparation, and
Advanced Placement courses. We are the exclusive high school distributor
for two major college publishers. We also publish our own proprietary
college preparation supplements and ancillary materials. These products do
not compete with the products that we distribute for the two major college
publishers.
|
Literacy Product
Group
|
·
|
We
distribute for three publishers, on an exclusive basis in the United
States, supplemental literacy materials for grades K–8. These materials
include an extensive selection of leveled reading materials;
high-interest, engaging resources for striving readers; series that
integrate reading, science, and social studies; and selections and
strategies for students who are in the process of learning
English.
|
The
Company is located at 299 Market Street, Saddle Brook, NJ 07663. The telephone
number is (201)
712-0090. The website is www.peopleseducation.com. The contents of our website
are not part of or incorporated into this report.
1
INDUSTRY
BACKGROUND
School
Enrollment
The
National Center for Education Statistics (NCES) forecasts record public school
enrollment through 2018. The fall 2011 public school enrollment is estimated at
50 million students, and a small but steady annual growth is projected through
2018, when elementary and secondary enrollments are expected to increase to 53.9
million students. School publishers have shifted marketing and selling resources
to meet changes in regional enrollments. For example, between 2000–2009 the
South and the West enrollments increased by 2.0 million and 1.0 million
students, respectively. During the same period the Midwest and Northeast school
enrollments decreased slightly. The most recent NCES estimate has K–12 private
school enrollment at 6.1 million students (estimated 2008 enrollment) growing to
6.4 million students by 2014. Rising immigration and the baby boom echo that
began in the mid-1970s and peaked in 1990 are boosting school enrollments. As
school enrollments grow, the unit sales of instructional materials are also
expected to increase.
Educational
Funding
The
relationship between state and local school funding has been shifting over the
last 30 years, with local funding decreasing to 43.9% and state funding rising
to 47.6%. Federal funds for schools have grown to 8.5% (National Center for Education
Statistics, 2008).
Fiscal
2010 presented the most difficult financial challenge for state governments
since the Great Depression, and fiscal 2011 is expected to bring more of the
same. The severe national recession, while showing signs of ending, has
drastically reduced tax revenues from every source. Historically, state revenues
lag behind any national economic recovery, so state revenues will continue to be
negatively affected throughout fiscal years 2011 and 2012.
According
to the June 2010 Fiscal Survey of States, in fiscal 2010, 40 states made midyear
budget cuts totaling $22 billion. This is a slight improvement over fiscal 2009,
when 43 states reduced enacted budgets by $31.3 billion, but is still a
significant increase in budget reductions from the 13 states that had to reduce
their enacted budgets in fiscal 2008, and the three states that reduced their
enacted budgets during 2007. Overall in fiscal 2011, general fund expenditures
are projected to rise 3.6% over fiscal 2010 but will remain well below
pre-recession levels, and 13 states recommend lower general fund expenditures in
fiscal 2011 compared to fiscal 2010. For K–12 educational funding
specifically, in fiscal 2010, 34 states made cuts to K–12 expenditures totaling
$5.46 billion, and 31 states have proposed cuts to K–12 spending for fiscal
2011. Unlike the federal government, states can’t run deficit budgets so
legislators continue to seek new revenue sources and struggle with the increased
costs of health care and education, the two largest expenditures in the states’
general fund budgets.
The
federal 2010 budget, which began October 1, 2009, included discretionary
educational spending of $46.2 billion, an increase of 2% over the prior year.
The 2011 federal education budget includes $49.7 billion for the Department of
Education’s discretionary programs, an increase of $3.5 billion or 7.5% over
2010. The $3.5 billion increase includes $3 billion additional competitive
funding for the Elementary and Secondary Education Act (ESEA), the largest
increase ever requested for programs under the 1965 law.
Elementary and Secondary
Education Act (currently NCLB)/Common Core Standards
In 2001,
the ESEA was reauthorized and became known to all as No Child Left Behind
(NCLB). Under NCLB, states are required to establish rigorous, state-wide
academic standards in reading, mathematics, and science for students in grades
3–8 and in high school. States are also required to conduct assessments to
determine if these standards are being met on an annual basis. The 2005–2006
school year marked the first year that all states were required to have annual
reading and mathematics tests in grades 3 through 8, and once during the span of
grades 10 through 12. In the 2007–2008 school year, all states were required to
test science three times in a student’s career, at the elementary, middle, and
high school levels.
Within
the 2011 fiscal year budget proposal, the Obama administration recommended some
significant changes to the reauthorization of ESEA. One significant change is to
replace the accountability system under NCLB with a new system that has a goal
to help all students graduate high school and be college and career ready.
President Obama’s proposal eliminates the NCLB mandate that all students be
proficient in reading and math by 2014, and replaces it with performance targets
through 2020, with the goal that all students will be college and career ready
by this time. States came together to develop new college and career ready
Common Core State Standards (CCSS) over the past year, and they are now
finalized. Beginning in 2015, formula funds for assessments will only be
available to states that implement common assessments based on these new
standards. Another significant change is to reward excellence with federal
funds, based on competition and performance.
2
Early in
2009, Congress passed the American Recovery and Reinvestment Act (ARRA), better
known as the stimulus act, which provides more than $64 billion of federal funds
for the Department of Education. The majority of this funding was delivered to
states between April 2009 and spring of 2010. There remains about $3.2 billion
in unobligated funds, including $1.4 billion for Title I.
Under
ARRA, $4.35 billion was allocated for Race to the Top. States applied for this
funding and needed to agree to certain conditions that are aligned to the ESEA
reauthorization, such as adopting the new Common Core State Standards and
meeting annual performance targets. President Obama’s 2011 fiscal year budget
proposal includes an additional $1.35 billion in Race to the Top
funds.
Within
the requirements for Race to the Top, states must agree to adopt and implement a
set of CCSS. The standards development initiative is led by the National
Governors Association (NGA) and the Council of Chief State School Officers in
partnership with Achieve, ACT, and the College Board. The CCSS have been
finalized as of June 2010 and states competing in Race to the Top have until
August 2, 2010 to adopt them. These standards are clearer, fewer, and higher
than most states’ current standards. They lay the groundwork for children to
live and compete in today’s global world. They are high quality, consistent,
evidence based, and aligned with college and work expectations.
The
adoption of the CCSS is voluntary for states; however, the majority are agreeing
to adopt them in some manner. States choosing to adopt the CCSS have agreed that
the common core will represent at least 85% of the state’s standards in
mathematics and English language arts. States must adopt the CCSS in their
entirety, but they can add 15% state specificity as needed.
In
considering the states in which we publish, some have adopted or will likely
adopt the CCSS and potentially will add 15% state specificity, such as Arizona,
California, Florida, Georgia, and New York. Other states such as Ohio and New
Jersey have wholeheartedly adopted the CCSS and will NOT add their own 15%
specificity. Texas and Virginia have chosen not to participate in the Race to
the Top and will not adopt the CCSS.
Even with
some uncertainty, our materials can be positioned to support the changes and
continue to help students succeed to new and more rigorous standards. Our
strategy has been, and will continue to be one that will meet the needs of each
state by providing quality materials that help all students succeed, are price
sensitive, and can meet a variety of needs. Our development process begins with
research to understand the needs of individual states and then developing
materials to help those students learn and achieve mastery of the adopted
standards. Timing will be critical; as will understanding not only when the
state adopts the CCSS, but when and how they will be implemented in the
classroom. Also, the new assessment that will test the CCSS will not be fully
operational until 2014–2015, so our current books will meet the needs of the
students who are preparing for the test that is in place now.
Supplementary Materials
Market
The K–12
instructional materials market, including instructional materials (textbooks and
supplements), technology products (hardware, software, and internet), and other
which includes trade books, book clubs/fairs, periodicals and tests, totaled
$15.9 billion in sales in the 2008–2009 school year. It is projected that sales
in 2009–2010 will be approximately $16.4 billion, a 3.3% increase compared to
the prior year (Education Market Research (EMR), 2010). The supplemental
instructional materials are estimated to be at $3.2 billion in 2008, which
represents a 6.9% decline (EMR, 2010). When respondents from the EMR study were
asked about sales forecast and confidence level for 2009, the most frequent
response was a decrease of 15% (21.7%), and the majority predicted some level of
sales decline in 2009 (53.8%). Respondents were also asked about the impact to
the ARRA stimulus funding, and most (68.6%) said they experienced no positive
effect. Most of the respondents (58.9%) indicated that their volume of sales
orders had decreased in the first half of 2009 compared to the same period in
2008.
3
We
believe that the supplemental market revenue performance will continue to
reflect the economic environment, but see an upside to the market as schools
unify print and technology tools to pursue remediation, intervention, test
preparation, and formative instruction.
Test Preparation,
Assessment, and Instruction Market
As
required by law, all states have developed state content standards and
high-stakes state tests (tests that have major consequences or are used as the
basis for promotion or graduation). State standards are not static, and the
states frequently adjust and upgrade their standards. No states have identical
standards, and there are significant differences from state to state in both
content standards and the tests used to assess student proficiency.
We
develop and sell Test Preparation materials in language arts, reading,
mathematics, science, and social studies and offer both instructional worktexts
and print assessments (Diagnostic Practice Tests). Our Test Preparation books
are 100% customized for each state. In practice, this means that no two of our
Test Preparation books are identical. State-specific customization, along with
the thoroughness and quality of our Test Preparation materials, provide us with
a unique sales and marketing position.
Like our
Test Preparation products, our Assessment products are also customized for each
state. The Assessment materials are also available in digital form. Launched
this year, ePath Knowledge™ offers a suite of online tools for educators and
students. ePath Assess™, formerly Measuring Up e-Path®, offers
both formative and summative assessments and progress monitoring. Recently
launched this past fall (2009), ePath Discovery™ (only available in Texas and
California) offers online instruction that ultimately takes our worktexts and
offers a digital version with interactive elements. Also launched this past fall
(2009), Practice Path™ provides skill practice and test preparation that levels
the content based on the student’s performance. Our programs allow teachers to
review data and to make instructional decisions that focus a student’s learning
on the areas that need the most attention. They allow teachers to differentiate
instruction as described in the Response to Intervention (RTI) requirement of
the Individuals with Disabilities Education Act (IDEA).
Our
Focused Instruction materials are also customized to meet specific state
standards. Test preparation has a valuable place in the school, but student
instruction is considerably more than just test preparation. Our Focused
Instruction products are state-specific, standards-based materials that are used
by teachers to deliver explicit, in-depth instruction in the skills and
strategies essential to student proficiency in reading comprehension, critical
reading, basic mathematics skills, mathematics problem solving, and vocabulary
development. We also offer intervention kits, which integrate a variety of our
Focused Instruction materials and provide a guide that specifically outlines
what to do on each day and what materials/lessons to use. These kits are a great
solution to intervention programs that are offered during the school day as well
as Saturday programs and for summer school. Online tests support Focused
Instruction materials, providing both formative assessment and targeted
assessment.
The
accountability pressure NCLB placed on schools to make Adequate Yearly Progress
(AYP) has created a public window into our schools that is unprecedented.
Aligning standards with classroom instruction and holding schools accountable
has been permanently imprinted in our schools. The accountability pressure will
continue to fuel the market demand for supplemental test preparation,
assessment, and instruction materials like those produced and sold by the
Company. A recent survey of the K–12 test preparation market by EMR (2010)
reported that 76.3% of the respondents use test preparation materials, and of
those respondents, 62.3% purchase test preparation materials from commercial
vendors. We believe that state-specific test preparation, assessment, and
instruction materials will continue to be a strong niche in the supplementary
market. As such, schools and school districts are expected to aggressively
purchase these materials.
In 2008,
sales of test preparation materials declined by 2.4% and online/digital content
increased by 24.9% (EMR, 2010). Also noted, the vast majority of respondents use
some type of formative assessment. The primary purposes for using formative
assessment are to identify students who need additional assistance (61.6%),
prepare students for state/standardized tests (60.5%), provide diagnostic
information to promote targeted instruction (55.7%), track students’ progress as
they move towards proficiency (51.8%), and provide an early indicator or a
predictive score in NCLB testing grades (15.6%). Our instructional worktexts,
assessments, and online systems support the need of formative
assessment.
4
Literacy
Market
Our
newest product niche for the Company, Literacy, launched in March 2009 and it
serves the K–8 supplemental literacy market with a comprehensive selection of
research-based, cross-curricular leveled reading materials. All products support
the requirements of the NCLB legislation, target specific learning objectives to
achieve adequate yearly progress (AYP), and provide teachers with the ability to
differentiate instruction as described in the RTI requirement of the
IDEA.
The
unprecedented pressure on schools to show AYP for all students has increased the
need for schools to use materials that are aligned closely with students needs.
The Literacy product line includes an extensive selection of leveled reading
materials that provide teachers with the ability to differentiate instruction to
meet individual student needs. Teacher resources are built upon researched-based
effective practices, while assessment products provide tools for measuring and
monitoring student achievement.
A recent
survey done by EMR (2010) reported that a significant number of respondents
(62.9%) used leveled reading books and 29.6% of the respondents who are
currently using basal reading programs (hardcover textbooks used in classrooms)
feel the most important improvement to their current program is more leveled
reading books. We believe that the increased accountability for improving
student performance aligns our products with this strong segment of the
supplementary market.
College Preparation
Market
College
Preparation materials are used in high school Advanced Placement (AP), honors,
and college preparation courses. Several factors support optimistic funding
predictions for the growth of college preparation instructional materials,
including competitive college entrance requirements and strong annual growth in
the number of students taking the AP examinations.
According
to the College Board, the total number of AP test takers increased at an annual
compound growth rate of over 10% from 1997 to 2009, rising from 0.9 million
tests taken in 1997 to 2.9 million in 2009. In 2009, students from 17,374
secondary schools took AP examinations. These schools offer, on average, eight
different AP courses from which their students can choose.
The
College Board offers AP exams in 30 content areas. High scores on the AP examinations
add to a school’s prestige and recognition as a quality school. Most colleges
and universities in the United States, as well as in 30 countries, recognize AP
examination results in the admission process as a sign of a student’s ability to
succeed in rigorous curricula. As the College Preparation market has grown, it
has become increasingly competitive. We have responded to this competition by
increasing marketing, adding inside and outside sales representatives, and
utilizing sales and market data to guide our business decisions.
PRODUCTS
We are a
leading publisher and distributor of supplemental instructional materials for
the kindergarten through high school sector (K–12). We design and produce
materials in both print and digital formats, with a growing emphasis on
Internet-based delivery. The materials are predominantly state-specific and
standards-based, focused on state-required tests. We also distribute college
preparation products developed internally, and by other publishers, and literacy
products developed by other publishers.
We
operate as one business segment, with three product groups.
Test
Preparation, Assessment, and Instruction Product Group
Test Preparation,
Assessment
|
·
|
We
create and sell print and digital products targeted to grades 1-12 to
help students prepare for state proficiency tests. The Measuring Up®
Test Preparation and Assessment print products are sold in eleven
states. Measuring Up® is
positioned as standards-based, state customized instruction and classroom
assessment, designed to be an integral part of a school’s instructional
program throughout the school year.
|
5
|
·
|
ePath
Knowledge™ is a suite of online tools designed to meet unique needs of
schools and districts. Our first offering, ePath Assess™, formerly
Measuring Up e-Path®
was developed in conjunction with Cisco Learning Systems. ePath
Assess™ provides formative assessment and ongoing progress-monitoring that
allows educators to make data-driven decisions. ePath Discovery™ delivers
immediate online standards-based instructional intervention for students.
Lastly, Practice Path™ provides an easy-to-use student-based interface for
online standards and test-based skill building and practice. The ePath
Knowledge™ suite of tools provides educators with online options to best
meet the needs of their students and teachers, while providing state
customized content for assessment and
instruction.
|
Instruction
|
·
|
We
have two product lines within this group: Focused Instruction and remedial
and multicultural related materials. Focused Instruction materials provide
standards-based, state-specific supplemental instruction in particular
subject areas such as reading comprehension, mathematics problem solving,
and vocabulary development. Essential to this strategy is the market
alignment of the Focused Instruction and Test Preparation and Assessment
products so that both product lines are suitable for sale to an identical
customer base with an identical sales force. We continue to sell our
backlist remedial and multicultural materials, but we are not investing in
new development for these products.
|
Our Test
Preparation, Assessment, and Instruction products are primarily proprietary, and
management believes this niche will continue to be our fastest growth area in
the future. The Test Preparation, Assessment, and Instruction market is highly
competitive, and we expect our competitors to pursue similar development and
expansion efforts.
Revenue
from the Test Preparation, Assessment, and Instruction product group as a
percentage of total revenue was as follows:
Year
Ended May 31, 2010
|
58 | % | ||
Year
Ended May 31, 2009
|
61 | % |
College
Preparation Product Group
We have
exclusive sales and marketing agreements with two major college publishers who
do not have school divisions, to sell their books into the high school market.
The distribution agreements cover all sales made to the K–12 market, including
each publisher's college products and certain trade and professional products.
We also develop our own proprietary college preparation supplements and
ancillary materials. The first of these products was published in 2004. These
products do not compete with products we distribute under our existing publisher
agreements and are crafted as supplements to help students with their college
preparation studies.
The loss
of either major college publisher distribution agreement would have a material
adverse effect on our revenue and operations. One of the agreements has been in
place for 20 years and expires in December 2012. The other agreement has been in
place for 14 years and expires in September 2011.
Revenue
from the College Preparation product group, as a percentage of total revenue,
was as follows:
Year
Ended May 31, 2010
|
35 | % | ||
Year
Ended May 31, 2009
|
38 | % |
6
Literacy
Product Group
In March
2009 we entered into exclusive sales and distribution agreements within the
United States for specific products from three publishers. These materials
include an extensive selection of leveled reading materials; high-interest
engaging resources for striving readers; series that integrate reading, science,
and social studies; and selections and strategies for students who are in the
process of learning English. Revenue from the Literacy product group, as a
percentage of total revenue, was as follows:
Year
Ended May 31, 2010
|
7 | % | ||
Year
Ended May 31, 2009
|
1 | % |
PRODUCT
DEVELOPMENT
We
combine our internal product development resources with outside freelance talent
to develop and design our proprietary products in a cost-effective manner. We
utilize a variety of authors, writers, editors, and development houses to
develop products.
Our
editorial department has the responsibility for maintaining editorial quality,
schedules, and budgets. Product
development is carried out by a combination of in-house staff and contracted
personnel with tight in-house control. We maintain an in-house system of
computer-based technology that makes it possible to complete nearly the entire
production cycle in-house, resulting in digitized material.
Once
conceived, a product proposal is circulated to the management group for input.
Depending on their input and additional market research, the proposal will go
forward or be terminated. A pro forma financial statement is prepared to aid in
determining whether the new title is desirable for publication. We believe we
have excellent relationships with our authors, including many well-known names
in the education field.
All
printing is contracted to outside vendors by competitive bidding. All printers
utilized by us are located in the United States, with the exception of the
occasional use of a printer in Canada. We do not rely on the services of any one
printer.
Our
products require varying periods of development time, depending on the
complexity of the graphics and design, and the writing and editing process. Most
of our multi-book programs can be developed in a period that ranges from six to
twelve months. We believe that our use of outside authors, illustrators, and
freelancers for writing, editing, creating art, designing, and copy editing
allows us to produce the budgeted number of books per year with a relatively
small staff, and allows the flexibility we need to continue to produce and
expand our product lines and to quickly enter market niches with new product
lines.
See also
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Product Development.”
CUSTOMER
BASE
No
customer during the past five years has represented more than 10% of our total
revenue in any one year.
SALES,
MARKETING, AND DISTRIBUTION
Overview
We
conduct our sales activities through inside and outside sales groups (both
salaried and independent), direct mail, conventions, and workshops. We believe
this system is well suited to the supplementary educational materials market. As
we continue to grow, our sales and marketing infrastructure will expand along
with increases in the numbers of inside and outside sales representatives and
managers. We have also increased marketing spending for teacher workshops and
staff development, sample books, exhibits, direct mail, and Web
initiatives.
7
Integrated Catalog/Inside
and Outside Sales Model
In the
2009–2010 school year, approximately 273,000 copies of thirty-seven catalogs and
approximately 100,000 copies of forty print promotional and direct mail pieces
reached our various market niches. Catalogs and other direct mail pieces are
mailed to internally maintained house lists and other appropriate contact
individuals at K–12 schools and district sites throughout the United States. In
the same school year, approximately 200 electronic mailings, sent via e-mail
(e-blasts), were deployed that targeted about 1.9 million K–12
educators.
Web Site
Our Web
site (located at www.peopleseducation.com) is primarily used as a sales and
marketing tool that offers product information. The site also includes
additional resources for teachers, including state-specific links, sample
lessons, and research information. This past year we also launched a new site
for our digital products, which is located at www.epathknowledge.com.
Our Literacy brand can be found at www.BrightpointLiteracy.com.
Lastly, our College Preparation materials can be found at www.PeoplesCollegePrep.com.
Sales
Representatives
We
utilize the services of outside independent sales representatives, outside
salaried field representatives, and inside sales representatives to sell our
products. We plan to continue using this sales organization structure in the
future.
Warehouse and
Distribution
During
fiscal year 2010, we outsourced warehousing and distribution/shipping services
to two separate third party warehouse and distribution companies - one located
in Wayne, NJ and the other in Independence, KY. The Wayne, NJ facility
warehouses and ships all products within the Test Preparation, Assessment, and
Instruction product group, the proprietary products from the College Preparation
product group and select titles within the Literacy product group. The
Independence KY facility warehouses and ships only products within the Literacy
product group. In fiscal 2009 we also utilized the services of an
additional third party warehouse and distribution company located in Brooklyn,
NY. Orders for nonproprietary College Preparation materials are billed by
us and drop shipped by the college publishers to our customers. We operate and
maintain our own internal data processing system; however, the services that the
warehouse and distribution companies provide are significant to our
operations.
COMPETITION
We face
competition in each of our three product groups. The competitive landscape for
each product group is as follows.
Test Preparation,
Assessment, and Instruction Product Group
Our Test
Preparation, Assessment and Instruction products compete among a variety of
companies that offer print and online learning tools. Schools and
districts will purchase supplemental materials from a variety of companies to
meet their standards-based and test preparation needs. Our competitors
offer the following:
|
·
|
Supplemental
standards-based instructional materials that are offered in print and/or
digital formats
|
|
·
|
Supplemental
test preparation materials that are offered in print and/or digital
formats
|
|
·
|
Supplemental
instructional materials that support intervention and remediation in print
and/or digital formats
|
|
·
|
Formative
and short cycle assessments that are offered via
web
|
|
·
|
Traditional
K-12 textbook companies who provide free supplemental
materials
|
The
majority of the products we offer fall within the supplemental assessment
category. According to the EMR 2010 survey to educators, when asked to rank
assessment categories, educators spend most (51%) for formative assessment,
summative assessment and test preparation. Included in the categories are early
childhood screening, I.Q/aptitude tests, formative assessment, test preparation,
learning management systems, summative assessment, and other testing-related
materials/services. EMR also states that the top-ranking publishers for test
preparation are Harcourt/Steck-Vaugh, BuckleDown Publishing, Curriculum
Associates, Triumph Learning, ECS Learning Systems, Options Publishing,
Spectrum, American Book Company, and Peoples Education.
According
to the reports of 155 supplemental companies participating in the EMR survey,
overall sales of supplemental educational products in 2008 totaled $5.0 billion,
down 2% compared to the $5.1 billion reported in 2007. That $5.0 billion in 2008
was comprised of $2.4 billion in supplemental materials. Out of the 24 different
types of supplemental materials, the following ranks were assigned based on the
total sales in 2008: assessment (print or online) ranked third, instructional
software ranked fourth, consumable workbooks ranked fifth, supplemental
textbooks ranked sixth, and test prep materials ranked eighth.
8
Our
competitive advantage in our defined market place is due to the following
factors:
|
·
|
Legacy
that we have helped over 12 million students succeed with our flagship
series, Measuring Up®, since 2000
|
|
·
|
Content
highly customized to state
standards
|
|
·
|
Quality
instructional supplemental content customized to the state
standards
|
|
·
|
Quality
formative and summative assessments that are customized to state
standards
|
|
·
|
Flexible
options for intervention and remediation that are cost
effective
|
|
·
|
Print
(instruction) and Digital (formative assessment/progress
monitoring/practice) solutions that are
linked
|
|
·
|
Quality
of customer support
|
|
·
|
Free
training
|
|
·
|
Affordable
pricing
|
College Preparation Product
Group
Our
college preparation materials compete against a variety of companies. Our
competitors offer the following:
|
·
|
College
textbooks that are distributed into the HS market (print or
digital)
|
|
·
|
Traditional
textbook companies that develop materials specifically for the college
preparation and advanced placement
courses
|
However,
we believe we are competitive based on our quality content, highly flexible
inside sales team, and strong product offering that includes textbooks and
supplements in a variety of formats and the only resource for instructor access
to our online instructor resources.
Literacy Product
Group
Brightpoint
Literacy is competitively positioned in the supplemental reading market for
grades K-8 for districts that are looking for leveled literacy resources to
enhance or fill gaps in their existing programs. We compete against a
variety of supplemental companies that offer reading materials for small group
instruction. The breadth and depth of our leveled reading collections, easy to
use assessment, and the fresh look and feel of innovative new programs keeps
Brightpoint Literacy in the forefront of this competitive market.
PROTECTION
OF PROPRIETARY RIGHTS
All of
our proprietary products have been copyrighted in the United States with United
States rights, most in the name of The Peoples Publishing Group or Peoples
Education. A few titles are copyrighted by the author, and we have secured
unlimited exclusive rights to sell and update these titles. Therefore, we own
the exclusive rights to exploit the copyright in the marketplace. For products
created in-house, we have registered United States rights for all markets,
including first and second serialization, commercial rights, electronic rights,
foreign and translation rights, reprint rights, and rights to any means yet to
be developed for transmitting information in any form. We believe we have
adequately protected our copyrights, but the loss of copyrights or failure of
copyright protection could have a material adverse effect on the
Company.
EMPLOYEES
As of May
31, 2010, we had 91 employees. We have never experienced a work stoppage and our
employees are not covered by a collective bargaining agreement. We believe our
relations with our employees are good.
ITEM
2.
|
PROPERTIES
|
We do not
own any real property. We primarily conduct our operations out of our Saddle
Brook, NJ facility. We lease approximately 23,000 square feet of office space at
this location at an average rental of approximately $450,000 per year through
October 2014.
9
We lease
approximately 1,000 square feet of office space in Columbus, OH at an average
rental of approximately $14,000 per year through November 2011.
Based on
present plans, we believe that our current facilities will be adequate to meet
our anticipated needs for at least the next year.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We are
not currently a party to any material legal proceedings.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
for Common Stock
Our
common stock has been quoted for trading on the NASDAQ Capital Market under the
symbol “PEDH” since June 1, 2005, and was quoted for trading on the OTC Bulletin
Board from September 10, 2004 through May 31, 2005. Prior to September 10, 2004,
there was no established public trading market for our common stock. The
following table sets forth the high and low closing sale prices of our common
stock as reported by NASDAQ for the periods indicated.
Year
Ended
|
Year
Ended
|
|||||||||||||||
May
31, 2010
|
May
31, 2009
|
|||||||||||||||
Quarter
|
High
|
Low
|
High
|
Low
|
||||||||||||
1st
|
$ | 3.20 | $ | 1.40 | $ | 2.40 | $ | 1.90 | ||||||||
2nd
|
$ | 3.03 | $ | 1.40 | $ | 3.30 | $ | 1.22 | ||||||||
3rd
|
$ | 2.31 | $ | 1.30 | $ | 1.72 | $ | 0.86 | ||||||||
4th
|
$ | 1.75 | $ | 0.78 | $ | 2.40 | $ | 0.53 |
On July
26, 2010, the last reported bid price of our common stock on NASDAQ Capital
Market was $1.00 per share.
Holders
There
were approximately 496 beneficial holders of our common stock as of July 22,
2010.
We have
not paid dividends on our common stock and do not presently plan to pay
dividends on our common stock for the foreseeable future. We plan to retain all
net earnings, if any, to fund the development of our business. Our Board of
Directors has sole discretion over the declaration and payment of future
dividends, subject to the availability of sufficient funds to pay dividends. Any
future dividends will depend upon our profitability, financial condition, cash
requirements, future prospects, general business conditions, the terms of our
debt agreements which currently restrict the payment of dividends and other
factors our Board of Directors believes are relevant.
Issuer
Purchases of Equity Securities
The
Company did not repurchase any of its common stock during the twelve months
ended May 31, 2010.
In 2005,
our Board of Directors approved a share repurchase program, permitting us to
repurchase up to 100,000 shares of our common stock. As of May 31, 2010, 83,768
shares remained available for purchase under the program. No share repurchase
plan or program expired, or was terminated, during the period covered by this
report.
10
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Forward–Looking
Statements
This
Report contains statements that constitute “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934. The words
“expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions
and variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of Peoples Educational
Holdings, Inc. (the “Company”), its directors or officers with respect to, among
other things, (a) trends affecting the financial condition or results of
operations of the Company and (b) the business and growth strategies of the
Company. These forward-looking statements involve a number of risks and
uncertainties, including (1) demand from major customers, (2) effects of
competition, (3) changes in product or customer mix or revenues and in the level
of operating expenses, (4) rapidly changing technologies and our ability to
respond thereto, (5) the impact of competitive products and pricing, (6) local
and state levels of educational spending, (7) ability to retain qualified
personnel, (8) ability to retain our distribution agreements with our major
college publishers in the College Preparation market, (9) the sufficiency of our
copyright protection, and (10) ability to continue to rely on the services of
third party warehouses, and other factors as discussed elsewhere in this report
or in our other filings with the SEC. The potential investors and shareholders
of the Company are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those projected in this Annual Report, for the reasons, among
others, discussed in the Section “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof.
Critical
Accounting Policies and Significant Estimates
Our
critical accounting policies and significant estimates are summarized in the
footnotes to our consolidated financial statements. Some of our accounting
policies require management to exercise significant judgment in selecting the
appropriate assumptions for calculating financial estimates. These judgments are
subject to an inherent degree of uncertainty. These judgments are based on our
historical experience, known trends in our industry, terms of existing contracts
and other information from outside sources, as appropriate. Actual results may
differ from these estimates under different assumptions and conditions. Certain
of the most critical policies that require significant judgment are as
follows:
Revenue Recognition and
Allowance for Returns
Revenue
is recognized when products are shipped, the customer takes title and assumes
risk of loss, and collection of the related receivable is probable. The
allowances for returns as of May 31, 2010 and 2009 were approximately $153,000
and, $520,000 respectively. These allowances are recorded at the time of revenue
recognition, if the right of return exists, and are recorded as a reduction of
accounts receivable. This allowance is estimated by management based on our
historical rate of returns. We recognize shipping and handling revenues as
part of revenue, and shipping and handling expenses as part of cost of revenue
on the consolidated statements of operations. Subscription based revenue on our
digital products is recognized prorata over the life of the
agreement.
Deferred Prepublication
Costs
Deferred
prepublication costs are recorded at their original cost and amortized over a
three or five-year period, based on the estimated lives of the related
publications. The net carrying value of the deferred prepublication costs is
periodically reviewed and compared to an estimate of future net undiscounted
cash flows. The valuation allowances as of May 31, 2010 and 2009 were
approximately $137,000 and $159,000, respectively, and are believed to be
adequate for any exposure to loss. If future net undiscounted cash flows are not
sufficient to realize the net carrying value of the asset, an impairment charge
will be recognized.
11
Allowance for Doubtful
Accounts
Credit to
our customers is determined on a customer-by-customer basis. Trade receivables
are carried at original invoice amount less an estimate made for the doubtful
receivables based on a review of all outstanding amounts on a monthly basis. We
determine the allowance for doubtful accounts after reviewing individual
customer accounts as well as considering both historical and expected credit
loss experience. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received. The allowance for doubtful accounts as of May 31, 2010 and 2009 were
$10,000 and $40,000, respectively, and are believed to be adequate for any
exposure to loss.
Allowance for Excess and
Slow-Moving Inventory
We
continuously monitor our inventory on hand for salability. This monitoring
includes review of historical sales experience, projected sales activity by
title, and any planned changes to a title that are known by us. Any slow-moving
or non-salable inventory identified is reserved or written down at that time.
The reserves of approximately $923,000 and $660,000 at May 31, 2010 and 2009,
respectively, are believed to be adequate to cover inventory loss
exposure.
Income
Taxes
We
recognize deferred tax assets and liabilities based on the differences between
the financial statements carrying amounts and the tax basis of assets and
liabilities. We provide a valuation allowance for deferred tax assets if we
determine, based on the weight of available evidence, that it is more likely
than not that some or all of the deferred tax assets will not be realized. As of
May 31, 2010 and 2009, a valuation allowance has been provided in the amount of
$700,000 related to the tax benefit of our available federal and state Net
Operating Losses (NOLs). The carrying value of the net deferred tax asset
assumes that we will be able to generate sufficient taxable income in the
future. We perform a comprehensive tax review quarterly and if future levels of
taxable income are not sufficient or fail to materialize in the near term,
management will adjust the valuation allowance accordingly.
Year Ended May 31, 2010 vs.
Year Ended May 31, 2009
OVERVIEW
In fiscal
2010, we had net income of $0.3 million or $0.06 per share compared to a net
loss of $1.1 million or $0.25 per share in the prior year. Net revenue declined
by approximately 5% on a year-over-year basis due principally to an overall
decline in educational spending. Income from operations increased by $0.6
million on a year-over-year basis, due to lower prepublication cost
amortization, and our efforts to monitor and control costs offset by lower
revenue. Interest expense declined by $0.4 million primarily as a result of
lower average outstanding debt and a decline in interest rates. Net income
before income taxes was $0.4 million compared to loss of $0.7 million in the
prior year.
NET
REVENUE
(In
Thousands)
|
Year
Ended May 31,
|
|||||||||||||||
2010
|
2009
|
Variance
|
Variance
%
|
|||||||||||||
Test
Preparation, Assessment and Instruction
|
$ | 20,211 | $ | 22,368 | $ | (2,157 | ) | -9.6 | % | |||||||
College
Preparation
|
12,139 | 14,056 | (1,917 | ) | -13.6 | % | ||||||||||
Literacy
|
2,565 | 443 | 2,122 | 479.0 | % | |||||||||||
Total
Net Revenue
|
$ | 34,915 | $ | 36,867 | $ | (1,952 | ) | -5.3 | % |
Test Preparation,
Assessment, and Instruction
Revenue
for this product group in fiscal year 2010 was $20.2 million, a decline of 9.6%
from the prior year. Testing and Assessment revenue was $17.4 million, a
decrease of 9.0% compared to the prior year, while Instruction revenue was $2.8
million, down 13.2% from the prior year.
The
product group’s overall decrease was due in part to an overall decline in
supplemental education spending for the past year. According to AAP, the
educational market for the twelve months ended May 31, 2010 was down
approximately 10% from the prior year. In spite of current economic challenges,
we are optimistic about the opportunities for growth in this market niche and we
will continue to invest in new proprietary product development for this product
group.
12
College
Preparation
Revenue
for this product group was $12.1 million, a decrease of 13.6% from the prior
year. Distribution revenue, which accounts for approximately 95% of the total
revenue within this group, was down 13.9% and revenue from our proprietary
products decreased by 9% on a year-over-year basis. Revenue decline is
primarily due to the effects of decreased school spending as a result of school
budget cuts. We will continue to invest in new proprietary product development
as we are optimistic about the opportunities for future growth in this market
niche.
Literacy
This
product group, which was launched in the fourth fiscal quarter of last year,
generated $2.6 million of revenue for the twelve months ended May 31, 2010
compared to $0.4 million in prior year. These new products allow us to
enter a market niche for which previously we did not have a product offering. We
anticipate growing the number of products within this group through additional
distribution agreements and in-house development.
COST OF
REVENUE
Cost of
Revenue for fiscal 2010 was $20.4 million (58.3% of revenue) compared to $22.9
million (62.2% of revenue) in the prior year.
Cost of
Revenue consists of two components: direct costs and prepublication cost
amortization. Direct costs consist of (1) product cost, which includes paper,
printing, binding, and prepress costs for proprietary products and product
purchases for nonproprietary products, (2) royalties, and (3) warehousing and
shipping costs for all products.
|
·
|
Direct
costs as a percentage of revenue for fiscal 2010 were 42.9%, a decrease
from 44.4% in the prior year. The percentage decrease is primarily due to
revenue mix, as College Preparation revenue decreased from 38.1% of total
revenue in fiscal 2009 to 34.8% in fiscal 2010. College Preparation direct
costs are substantially higher than the direct cost of Testing, Assessment
and Instruction, as the majority of College Preparation revenue consists
of nonproprietary products.
|
Prepublication
costs include one-time expenses associated with developing and producing new or
revised proprietary products. It includes all editorial expenses, writing, page
design and makeup, art and other permissions, prepress, and any other costs
incurred up to the print/bind stage of the books. These prepublication costs
also include expenses incurred for other forms of product development.
Prepublication costs are capitalized and expensed on a straight-line basis over
a three or five-year period, based upon the product. We believe our amortization
policy is in line with industry practice. For fiscal 2010, amortization expense
was $5.4 million, compared to $6.6 million in the prior year.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(In
Thousands)
|
Year
Ended May 31,
|
|||||||||||||||
2010
|
2009
|
Variance
|
Variance
%
|
|||||||||||||
Selling
and Marketing Expense
|
$ | 9,345 | $ | 9,275 | $ | 70 | 0.8 | % | ||||||||
General
and Administrative Expenses
|
4,474 | 4,543 | (69 | ) | -1.5 | % | ||||||||||
Total Selling, General and Administrative
Expenses
|
$ | 13,819 | $ | 13,818 | $ | 1 | 0.0 | % |
Selling,
general and administrative (SG&A) expenses for fiscal 2010 were $13.8
million, which was flat with the prior year. As a percentage of revenue,
SG&A expenses for fiscal 2010 were 39.6%, an increase of 2.1 percentage
points from the prior year.
Selling
and Marketing expenses for fiscal 2010 were $9.3 million, flat with the prior
year. Selling expenses decreased $174,000 due to the revenue decline but
marketing expenses increased $244,000 primarily due to a full year of expenses
supporting the Literacy division. As a percentage of revenue, the expense
increased from 25.2% in the prior year to 26.8%.
General
and Administrative expenses for the year were $4.5 million, a year-over-year
decrease of 1.5% as we continue to control expenses.
13
INTEREST
EXPENSE
Interest
expense for the year was $277,000, a decrease of $400,000 from the prior year.
The change is primarily related to lower average outstanding debt and a decline
in interest rates. Included in interest expense are non-cash income and
(expenses) of $153,000 and ($5,000) as of May 31, 2010 and 2009, respectively,
related to the change in the market value of the term loan interest swap
agreement.
INCOME TAX
EXPENSE
For the
year ended May 31, 2010, the effective tax rate was 40.0% compared to 39.3% in
the prior year.
LIQUIDITY AND CAPITAL
RESOURCES
Net cash
provided by operating activities for fiscal 2010 was $8.1 million, compared to
$7.1 million in the prior year. Net cash provided by operating activities in
2010 was primarily provided by our profitability before depreciation and
amortization as well as decreases in inventory, deferred taxes and prepaid
expenses, increases in accounts payable and accrued expenses, and deferred
revenue, offset by an increase in accounts receivable.
Net cash
used in investing activities, consisting primarily of expenditures for
prepublication costs, was $4.9 million for fiscal 2010, consistent with the
prior year.
Net cash
used in financing activities was $3.2 million for fiscal 2010, compared to $2.2
million in the prior year, consisting primarily of net repayments under our bank
agreement for both the line of credit and the term loan.
We have a
$20 million credit agreement with Sovereign Bank. Amounts borrowed under the
agreement are secured by substantially all of the assets of the Company. The
agreement provides for a $10 million revolving line of credit and a $10 million
term loan.
The
revolving line of credit provides for advances up to $10 million and expires in
March 2012. The interest rate on the revolving line of credit ranges from LIBOR
plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with the exact
interest rate based on the ratio of our total funded debt to EBITDA. At
May 31, 2010, $5.1 million was outstanding under this facility, and $4.9 million
was available for borrowing.
The term
loan was originally for $10 million and matures in December 2012. The term loan
provides for 20 equal quarterly payments of principal and interest, which began
on March 31, 2008. The term loan bears interest at the same rate as the
revolving line of credit for $2.75 million of the $5.5 million outstanding at
May 31, 2010. In May 2007, we entered into a swap agreement to fix the interest
rate on the balance of the term loan for three years at a rate of 5.3% plus an
interest spread of 2.00% to 2.25% based upon our total funded debt to EBITDA
ratio. This swap agreement expired on May 31, 2010. On June 3, 2010, we
entered into a new swap agreement for $3 million, expiring in February 2012,
fixing our interest rate at 1.25% plus an interest spread of 2.00% to 2.25%
based upon our total funded debt to EBITDA ratio. After February 2012, the
interest rate reverts to a variable rate. At May 31, 2010, $5.5 million was
outstanding under this agreement.
The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to EBITDA and a minimum
fixed charge coverage ratio. These financial covenants restrict the payment of
dividends on the Company’s common stock. We were in compliance with
each of these covenants at May 31, 2010 and 2009.
We
believe that our cash and borrowing availability under our lines of credit,
together with cash generated from operations, will be sufficient to meet our
normal cash needs in 2010. We intend to continue investing in prepublication
costs for our proprietary products at our current spending
level.
14
PRODUCT
DEVELOPMENT
Product
development expenditures in fiscal 2010 and 2009 were $4.8 million. We continue
to actively develop new and revised products. We expect the current level of
spending to continue in the future. Product development expenditures in 2010
consisted primarily of both print and digital products within the Testing,
Assessment, and Instruction product group, as we continued to introduce new and
revised products within our existing states. The state test preparation market
is changing with the adoption of the CCSS. However, the current high-stake
tests will continue to be administered until 2014/2015 and there will continue
to be a demand for higher academic performance from students. Our
product development plan will reflect the market need to continue to support the
state-specific needs as it reflects the test in place today as well as the
potential future needs as a result of the adoption and implementation of the
CCSS. We also intend to expand our offering of web-based digital
products. Presently, we publish Test Preparation and Assessment products
for various grades in eleven states.
We will
continue to produce proprietary college preparation supplements and ancillary
materials. These products will not compete with products we distribute under our
existing publisher agreements and will be crafted as supplements to help
teachers and students with their college preparation studies.
We do not
have plans in the upcoming year to develop new products for our Literacy product
line, as we intend to grow this product group by offering additional products
from the existing publishers with whom we currently have distribution
agreements.
Our
strategic growth plan calls for an emphasis on the internal development of
products within the test preparation, assessment and Instruction product lines.
Under favorable circumstances, we would consider an acquisition to supplement
our growth plan.
OFF-BALANCE
SHEET ARRANGEMENTS
NONE
SEASONALITY
The
supplementary school publishing business is seasonal, cycling around the school
year that runs from September through May. Typically, the major marketing
campaigns, including mailings of new catalogs and focused sales efforts, begin
in September when schools reopen. This is the period when sample books are
provided free-of-charge for review to teachers for their purchase consideration.
General marketing efforts, including additional sales and marketing campaigns,
catalog mailings, and complimentary copies, continue throughout the school year.
Teachers and districts generally review and consider books throughout the school
year, make their decisions in the winter and spring, and place their purchase
requests at that time.
Each of
our product lines has its own seasonality. The revenue percentage
for fiscal 2010 by quarter is summarized in the table below.
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
August
31
|
November
30
|
February
28
|
May
31
|
|||||||||||||
Test
Preparation, Assessment and Instruction
|
31%
|
24% | 22% | 23% | ||||||||||||
College
Preparation
|
63% | 16% | 4% | 17% | ||||||||||||
Literacy
|
33% | 16% | 23% | 28% | ||||||||||||
Total
Revenue
|
42% | 21% | 16% | 21% |
15
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Table
of Contents
|
||
May
31, 2010 and 2009
|
||
Report
of Independent Registered Public Accounting Firm (Rothstein, Kass &
Company, P.C.)
|
17 | |
Report
of Independent Registered Public Accounting Firm (McGladrey & Pullen,
LLP)
|
18 | |
Consolidated
Financial Statements:
|
||
Consolidated
Balance Sheets as of May 31, 2010 and 2009
|
19 | |
Consolidated
Statements of Operations for the years ended May 31, 2010 and
2009
|
20 | |
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended May 31,
2010 and 2009
|
21 | |
Consolidated
Statements of Cash Flows for the years ended May 31, 2010 and
2009
|
22 | |
Notes
to Consolidated Financial Statements
|
23-32 |
16
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Peoples
Educational Holdings, Inc.
We have
audited the accompanying consolidated balance sheet of Peoples Educational
Holdings, Inc. and Subsidiary (collectively, “the Company”) as of May 31, 2010,
and the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for the year ended May 31, 2010. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Peoples Educational
Holdings, Inc. and Subsidiary as of May 31, 2010, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
ROTHSTEIN, KASS & COMPANY, P.C.
|
|
Roseland,
New Jersey
|
|
August
9, 2010
|
17
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Peoples
Educational Holdings, Inc.
We have
audited the accompanying consolidated balance sheet of Peoples Educational
Holdings, Inc. and Subsidiary as of May 31, 2009, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Peoples Educational
Holdings, Inc. and Subsidiary as of May 31, 2009, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
McGLADREY & PULLEN, LLP
|
|
Minneapolis,
Minnesota
|
|
August
18, 2009
|
18
CONSOLIDATED
BALANCE SHEETS
|
||||||||
(In
Thousands-Except Share Data)
|
May
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current Assets
|
||||||||
Cash
and Cash Equivalents
|
$ | 110 | $ | 42 | ||||
Accounts
Receivable Net of Allowances for Doubtful Accounts and
Returns
|
2,990 | 2,842 | ||||||
Inventory
|
3,591 | 4,219 | ||||||
Prepaid
Expenses and Other
|
264 | 323 | ||||||
Prepaid
Marketing Expenses
|
642 | 862 | ||||||
Deferred
Income Taxes
|
833 | 1,092 | ||||||
Total
Current Assets
|
8,430 | 9,380 | ||||||
Equipment
- At Cost, Less Accumulated Depreciation of $2,444 and $2,241,
respectively
|
249 | 387 | ||||||
Other Assets
|
||||||||
Deferred
Prepublication Costs, Net
|
12,864 | 13,466 | ||||||
Deferred
Income Taxes
|
477 | 1,006 | ||||||
Trademarks,
Net
|
189 | 170 | ||||||
Prepaid
Expenses and Other
|
167 | 273 | ||||||
Total
Other Assets
|
13,697 | 14,915 | ||||||
Total Assets
|
$ | 22,376 | $ | 24,682 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current Liabilities
|
||||||||
Current
Maturities of Long Term Obligations
|
$ | 2,000 | $ | 2,034 | ||||
Accounts
Payable
|
4,904 | 3,998 | ||||||
Accrued
Compensation
|
153 | 170 | ||||||
Other
Accrued Expenses
|
527 | 855 | ||||||
Deferred
Revenue
|
404 | 278 | ||||||
Total
Current Liabilities
|
7,988 | 7,335 | ||||||
Long
Term Obligations, Less Current Maturities
|
8,584 | 11,854 | ||||||
Total Liabilities
|
16,572 | 19,189 | ||||||
Commitments and
Contingencies
|
||||||||
Stockholders' Equity
|
||||||||
Preferred
Stock, authorized 1,500,000 shares; none issued
|
- | - | ||||||
Common
Stock, $0.02 par value; authorized 8,500,000 shares; issued: 4,478,434 as
of May 31, 2010 and May 31, 2009
|
90 | 90 | ||||||
Additional
Paid In Capital
|
8,120 | 8,060 | ||||||
Accumulated
Deficit
|
(2,342 | ) | (2,593 | ) | ||||
Treasury
Stock, 16,232 shares for both periods, at cost
|
(64 | ) | (64 | ) | ||||
Total Stockholders' Equity
|
5,804 | 5,493 | ||||||
Total Liabilities and Stockholders'
Equity
|
$ | 22,376 | $ | 24,682 |
See Notes
to Consolidated Financial Statements
19
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
(In
Thousands, Except Per Share Data)
|
||||||||
Years
Ended
|
||||||||
May
31,
|
||||||||
2010
|
2009
|
|||||||
Revenue,
Net
|
$ | 34,915 | $ | 36,867 | ||||
Cost
of Revenue
|
||||||||
Direct
Costs
|
14,981 | 16,378 | ||||||
Prepublication
Cost Amortization
|
5,384 | 6,556 | ||||||
Total
|
20,365 | 22,934 | ||||||
Gross
Profit
|
14,550 | 13,933 | ||||||
Selling,
General and Administrative Expenses
|
13,819 | 13,818 | ||||||
Income
from Operations
|
731 | 115 | ||||||
Nonoperating
Expenses
|
||||||||
Other
Expenses, Net
|
37 | 115 | ||||||
Interest
Expense
|
277 | 677 | ||||||
Total
|
314 | 792 | ||||||
Income
(Loss) Before Income Taxes
|
417 | (677 | ) | |||||
Income
Tax Expense (Benefit)
|
166 | 434 | ||||||
Net
Income (Loss)
|
$ | 251 | $ | (1,111 | ) | |||
Net
Income (Loss) per Common Share
|
||||||||
Basic
and Diluted
|
$ | 0.06 | $ | (0.25 | ) | |||
Weighted-average
Number of Common Shares Outstanding
|
||||||||
Basic
|
4,462 | 4,457 | ||||||
Diluted
|
4,465 | 4,457 |
See Notes
to Consolidated Financial Statements
20
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||||||||||||||
(In
Thousands)
|
||||||||||||||||||||
Additional
|
||||||||||||||||||||
Common
|
Paid-In
|
Accumulated
|
Treasury
|
|||||||||||||||||
Stock
|
Capital
|
Deficit
|
Stock
|
Total
|
||||||||||||||||
Balance,
May 31, 2008
|
$ | 89 | $ | 8,013 | $ | (1,482 | ) | $ | (64 | ) | $ | 6,556 | ||||||||
Stock-Based
Compensation
|
- | 39 | - | - | 39 | |||||||||||||||
Issuance
of Common Stock to Employees
|
1 | 8 | - | - | 9 | |||||||||||||||
Net
Loss
|
- | - | (1,111 | ) | - | (1,111 | ) | |||||||||||||
Balance,
May 31, 2009
|
90 | 8,060 | (2,593 | ) | (64 | ) | 5,493 | |||||||||||||
Stock-Based
Compensation
|
- | 60 | - | - | 60 | |||||||||||||||
Net
Income
|
- | - | 251 | - | 251 | |||||||||||||||
Balance,
May 31, 2010
|
$ | 90 | $ | 8,120 | $ | (2,342 | ) | $ | (64 | ) | $ | 5,804 |
See Notes
to Consolidated Financial Statements
21
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(In
Thousands)
|
||||||||
Years
Ended
|
||||||||
May
31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Income (Loss)
|
$ | 251 | $ | (1,111 | ) | |||
Adjustments
to Reconcile Net Income (Loss) to Net Cash Provided by Operating
Activities
|
||||||||
Depreciation
|
223 | 284 | ||||||
Amortization
of Prepublication Costs and Trademarks
|
5,400 | 6,591 | ||||||
Stock-Based
Compensation
|
60 | 48 | ||||||
Market
Value Adjustment of Interest Rate Swap
|
(153 | ) | 5 | |||||
Deferred
Income Taxes
|
153 | 462 | ||||||
Changes
in Assets and Liabilities
|
||||||||
Accounts
Receivable
|
(148 | ) | 822 | |||||
Inventory
|
628 | 175 | ||||||
Prepaid
Expenses and Other
|
165 | 72 | ||||||
Prepaid
Marketing Expenses
|
220 | 462 | ||||||
Accounts
Payable and Accrued Expenses
|
561 | (477 | ) | |||||
Deferred
Revenue
|
126 | (197 | ) | |||||
Income
tax refund attributable to net operating loss carryback
|
635 | - | ||||||
Net
Cash Provided By Operating Activities
|
8,121 | 7,136 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of Equipment
|
(85 | ) | (106 | ) | ||||
Expenditures
for Intangibles
|
(35 | ) | (15 | ) | ||||
Expenditures
for Prepublication Costs
|
(4,782 | ) | (4,821 | ) | ||||
Net
Cash Used In Investing Activities
|
(4,902 | ) | (4,942 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Net
Payments Under Line of Credit
|
(1,117 | ) | (163 | ) | ||||
Principal
Payments On Long Term Debt
|
(2,034 | ) | (2,042 | ) | ||||
Net
Cash Used In Financing Activities
|
(3,151 | ) | (2,205 | ) | ||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
68 | (11 | ) | |||||
Cash
and Cash Equivalents
|
||||||||
Beginning
of Year
|
42 | 53 | ||||||
End
of Year
|
$ | 110 | $ | 42 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
Payments for:
|
||||||||
Interest
|
$ | 487 | $ | 692 |
See Notes
to Consolidated Financial Statements
22
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Nature of Business and Significant Accounting Policies
Nature of business: Peoples
Educational Holdings, Inc. (PEH), through its wholly owned subsidiary, Peoples
Education, Inc. (PE), publishes and markets its own supplementary educational
textbooks and digital programs for K-12 school market. The materials are
predominantly state specific and standards-based, focused on state-required
tests, offering instruction, practice and formative assessment tools in both
print and digital formats. PE publishes its own proprietary, and distributes on
an exclusive basis for other publishers, college textbooks and supplements to
the high school Advanced Placement market. PE also distributes on an
exclusive basis for three publishers supplemental literacy materials for grades
K-8. Marketing channels include direct and commission sales
representatives, telemarketing, direct mail, and catalogs. PE and PEH are
together referred to herein as the “Company”.
Principles of consolidation:
The consolidated financial statements include the accounts of PEH and its wholly
owned subsidiary, PE. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of estimates: In preparing
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Significant items subject to estimate and assumptions include the
estimated lives of deferred prepublication costs, realization of net deferred
income tax assets, allowances for product returns and valuation allowances for
inventory, deferred prepublication costs and stock option accounting. Actual
results could differ from those estimates.
Cash and cash equivalents:
Cash and cash equivalents include money market funds and other highly
liquid investments.
Revenue recognition and accounts
receivable: Revenue is recognized when
products are shipped, the customer takes title and assumes risk of loss, and
collection of related receivable is probable. The allowances for returns as of
May 31, 2010 and 2009 were approximately $153,000 and $520,000, respectively.
These allowances are recorded at the time of revenue recognition, if the right
of return exists, and are recorded as a reduction of accounts receivable. The
Company recognizes shipping and handling revenues as part of revenue, and
shipping and handling expenses as part of cost of revenue on the consolidated
statements of operations. The Company recognizes its subscription based revenue
on its digital products over the life of the agreement.
The
Company provides credit to its customers determined on a customer-by-customer
basis. Trade receivables are carried at original invoice amount less an estimate
made for the doubtful receivables based on a review of all outstanding amounts
on a monthly basis. Management determines the allowance for doubtful accounts
after reviewing individual customer accounts as well as considering both
historical and expected credit loss experience. Trade receivables are written
off when deemed uncollectible. Recoveries of trade receivables previously
written off are recorded when received. The allowance for doubtful accounts was
$10,000 and $40,000 at May 31, 2010 and 2009, respectively.
Major suppliers: The Company
has exclusive distribution agreements with two major college book publishers.
The loss of either of these distribution agreements would have a material
adverse effect on the Company’s revenue and operations. Revenue generated from
these distribution agreements accounted for the following percentage of total
revenue by year:
Year
Ended May 31, 2010
|
33 | % | ||
Year
Ended May 31, 2009
|
36 | % |
Inventory: Inventory is stated
at the lower of cost or market, which is determined using the first-in,
first-out method. Inventory consists entirely of finished goods. Inventory on
the consolidated balance sheet is reflected net of reserves for write-downs or
non-salability of approximately $923,000 and $660,000 at May 31, 2010 and 2009,
respectively.
Deferred prepublication costs:
Prepublication costs include one-time expenses associated with developing and
producing new or revised proprietary products, which include all editorial
expenses, writing, page design and makeup, art and other permissions, prepress,
and any other costs incurred up to completion of the product. These
prepublication costs also include expenses incurred for other forms of product
development. Prepublication costs are capitalized and are amortized over either
a three or five year period (the estimated minimum lives of the related
publication) using the straight-line method beginning on the in-stock date of
the publication. At May 31, 2010 and 2009, the Company had an allowance against
these assets of $137,000 and $159,000, respectively. If future net undiscounted
cash flows are not sufficient to realize the net carrying value of a specific
publication, an impairment charge is recognized.
23
Prepaid marketing expense: The
costs of catalogs and promotional materials, which have not been completed or
delivered to customers, are carried as a prepaid expense until the actual date
of completion and mailing. Prepaid samples consist of workbooks that will be
distributed to educators over the next year. Sample workbooks are expensed as
they are distributed. Marketing expense, including samples, catalogs and
promotional materials was approximately the following:
(In
Thousands)
|
||||
Year
Ended May 31, 2010
|
$ | 1,626 | ||
Year
Ended May 31, 2009
|
$ | 1,692 |
Depreciation: Equipment is
recorded at cost. Depreciation is provided over the equipment’s estimated useful
lives of five to seven years using the straight-line method. Leasehold
improvements are depreciated over the lesser of the useful life of the asset or
the remaining life of the lease. Maintenance and repairs are charged to expense
as incurred, and major renewals or improvements are capitalized. On sale or
retirement of property and equipment, the related costs and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
the results of current operations.
Accounting for long-lived assets:
Long-lived assets, such as equipment, deferred prepublication costs, and
other assets with finite lives, are evaluated for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable in accordance with “Accounting for the Impairment or Disposal of
Long-Lived Assets”. This is accomplished by comparing their carrying value with
the estimated future undiscounted net cash flows expected to result from the use
of the assets, including cash flows from disposition. Should the sum of the
expected future undiscounted net cash flows be less than the carrying value, the
Company would recognize an impairment loss at that date. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
fair value (estimated discounted future cash flows or appraisal of assets) of
the long-lived assets. The Company has not experienced any such losses in the
years presented.
Income taxes: The Company
accounts for deferred taxes on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss or tax credit carryforwards, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
basis.
Deferred
taxes are based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts more
likely than not to be realized. Income tax expense is the tax payable or
refundable for the year plus or minus the change during the year in deferred tax
assets and liabilities.
The
Company complies with the provisions of “Accounting for Uncertainty in Income
Taxes.” The
Company reviewed all income tax positions taken or that they expect to take for
all open tax years and determined that their income tax positions are
appropriately stated and supported for all open years. Under the Company’s
accounting policies, it would recognize interest and penalties accrued on
unrecognized tax benefits as well as interest received from favorable tax
settlements within income tax expense. As of May 31, 2010, the Company recorded
no accrued interest or penalties related to uncertain tax
positions.
The
fiscal tax years 2005 through 2009 remain open to examination by the Internal
Revenue Service and various state taxing jurisdictions to which the Company is
subject. The Company expects no significant change in the amount of unrecognized
tax benefit, accrued interest or penalties within the next
12 months.
Basic and diluted net loss per
share: Basic per share amounts are computed, generally, by dividing net
income (loss) by the weighted-average number of common shares outstanding.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments (see Note 8 for information on stock options)
unless their effect is anti-dilutive, thereby reducing the loss per share or
increasing the income per share. Due to the net loss in 2009, diluted shares
were the same as basic shares since the effect of options and warrants would
have been anti-dilutive.
24
Stock-based
compensation: The Company accounts for share based payments in
accordance with “Share-Based Payment”, which requires compensation cost relating
to share-based payment transactions be recognized in the financial statements
based on the estimated fair value of the equity or liability instrument issued.
Share-based expense recognized includes: (a) share-based expense for all
awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions
of and (b) share-based expense for all awards granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions.
The
Company uses the Black-Scholes option pricing model to estimate the fair value
of such awards which requires forfeitures of share-based awards to be estimated
at the time of the grant and revised in subsequent periods, if actual
forfeitures differ from initial estimates. Therefore, expenses related to
share-based payments and recognized in the years ended May 31, 2010 and 2009
have been reduced for estimated forfeitures. Forfeitures were estimated based on
historical experience. See Note 8 to the Consolidated Financial Statements for
more information regarding the assumptions used in estimating the fair value of
stock options.
Fair value measurements: On
June 1, 2008, the Company adopted a new accounting standard regarding fair value
measurements for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis in
the Company’s financial statements. The Financial Accounting Standards Board
issued a one year deferral of the fair value measurement requirements for
non-financial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis at the time of issuance. The Company
adopted the remainder of the new standard on June 1, 2009. The accounting
standard requires that the Company determine the appropriate level in the fair
value hierarchy for each fair value measurement.
The fair
value framework requires the categorization of assets and liabilities into one
of three levels based on the assumptions (inputs) used in valuing the asset or
liability. Level 1 provides the most reliable measure of fair value, while
Level 3 generally requires significant management judgment. The three
levels are defined as follows:
Level
1:
|
Unadjusted
quoted prices in active markets for identical assets or
liabilities.
|
Level
2:
|
Observable
inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets or liabilities in active markets or quoted prices for
identical assets or liabilities in inactive markets.
|
Level
3:
|
Unobservable
inputs reflecting management's own assumptions about the inputs used in
pricing the asset or
liability.
|
The
consolidated financial statements include the following financial instruments
and methods and assumptions used in estimating their fair values: for cash and
cash equivalents, the carrying amount is fair value, and for accounts
receivable, accounts payable, line of credit and long term debt, the carrying
amounts approximate their fair values due to either the short-term nature of
these instruments or the variable nature of the interest rate. A portion of the
term loan has been effectively converted to a fixed rate of interest,
and is the Company’s only financial liability accounted for at fair value
on a recurring basis see “Derivative financial instruments” below for further
information regarding the fair value of the related interest rate swap
agreement. At May 31, 2010, and 2009, the Company has determined that the fair
value of the swap, based on LIBOR and swap rates, falls within Level 2 in
the fair value hierarchy. No separate comparison of fair values versus carrying
values is presented for the aforementioned financial instruments, since their
fair values are not significantly different than their balance sheet carrying
amounts. In addition, the aggregate fair values of all financial instruments
would not represent the underlying value of the Company.
25
Derivative financial
instruments: “Accounting for Derivative Instruments and
Hedging Activities” defines derivatives and requires that they be carried at
fair value on the balance sheet. On May 23, 2007 the Company entered into an
interest rate swap agreement to effectively convert $5.0 million of their term
loan from a variable rate to a fixed rate for a term of three years. The change
in market value of the interest rate swap is recognized on the balance sheet
within long term obligations and by a charge or credit to interest expense. The
change in the market value for the years ended May 31, 2010 and 2009 resulted in
income of approximately $153,000, and expense of approximately $5,000,
respectively. The swap agreement expired on May 31, 2010. On June 3, 2010, the
Company entered into a new swap agreement expiring in February
2012.
Recently
Adopted Accounting Pronouncements:
In
May 2009, the Financial Accounting Standards Board (“FASB”) updated its
guidance in ASC 855 (formerly SFAS No. 165) regarding subsequent events,
establishing principles and requirements for subsequent events. In particular,
ASC 855 sets forth the period after the balance sheet date during which
management shall evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity shall recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity shall make about events or transactions that occurred after the balance
sheet date. This updated guidance is effective for interim periods ending after
June 15, 2009. The adoption of ASC 855 did not have a material impact on
the Company’s consolidated financial position, results of operations and cash
flows.
In
January 2010, the FASB issued FASB ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements”
(“ASU 2010-06”). This update requires additional disclosures about (1) the
different classes of assets and liabilities measured at fair value, (2) the
valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, and (4) the transfers between Levels 1, 2, and 3 fair value
measurements. ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009. The Company has complied with the additional
disclosures required by this standard. The adoption of this standard had no
impact on the Company’s consolidated financial position, results of operations
and cash flows.
Recently
Issued Accounting Pronouncements:
In June
2009, the FASB updated its guidance in ASC 810 (formerly SFAS No. 167,
Amendments to FASB
Interpretation No. 46(R)). ASC 810 is intended to address (1) the effects
on certain provisions of FASB Interpretation No. 46 (revised December
2003), Consolidation of
Variable Interest Entities, as a result of the elimination of the
qualifying special-purpose entity concept in FAS 166, and (2) constituent
concerns about the application of certain key provisions of Interpretation
46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an
enterprise’s involvement in a variable interest entity. This statement must be
applied as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009. The Company does not
expect the adoption of ASC 810 to have an impact on the Company’s
consolidated financial position, results of operations and cash
flows.
In
October 2009, the FASB issued FASB Accounting Standards Update (“FASB ASU”) No.
09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“FASB ASU
09-13”). FASB ASU 09-13 updates the existing multiple-element arrangement
guidance currently in FASB ASC 605-25 (“Revenue Recognition-Multiple-Element
Arrangements”). This new guidance eliminates the requirement that all
undelivered elements have objective and reliable evidence of fair value before a
company can recognize the portion of the overall arrangement fee that is
attributable to the items that have already been delivered. Further, companies
will be required to allocate revenue in arrangements involving multiple
deliverables based on the estimated selling price of each deliverable, even
though such deliverables are not sold separately by either the company itself or
other vendors. This new guidance also significantly expands the disclosures
required for multiple-element revenue arrangements. The revised guidance will be
effective for the first annual period beginning on or after June 15, 2010. The
Company is currently evaluating the impact FASB ASU 09-13 will have on the
consolidated financial statements.
Note
2. Deferred Prepublication Costs
Deferred
prepublication costs are recorded at their original cost and amortized over a
three or five-year period, based on the estimated lives of the related
publications. The net carrying value of the deferred prepublication costs is
periodically reviewed and compared to an estimate of future undiscounted cash
flows. If future undiscounted cash flows are not sufficient to support the net
carrying value of the asset, an impairment charge will be recognized. The
Company’s allowances as of May 31, 2010 and 2009 were approximately $137,000,
and $159,000, respectively reducing prepublication costs to their estimated net
realizable value.
26
The
activities in deferred prepublication costs were as follows:
(In
Thousands)
|
||||||||
Year
Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Balance,
Beginning
|
$ | 13,466 | $ | 15,201 | ||||
Prepublication
Cost Additions
|
4,782 | 4,821 | ||||||
Amortization
Expense
|
(5,384 | ) | (6,556 | ) | ||||
Balance,
Ending
|
$ | 12,864 | $ | 13,466 |
The
future amortization expense of deferred prepublication costs is estimated to be
as follows:
(In
Thousands)
|
||||
For
the year ending May 31,
|
||||
2011
|
$ | 4,939 | ||
2012
|
3,682 | |||
2013
|
2,171 | |||
2014
|
1,179 | |||
2015
and thereafter
|
893 | |||
$ | 12,864 |
Future
estimated amortization expense may increase as the Company continues its
investments in additional deferred prepublication costs.
Note 3. Trademarks
Costs are
capitalized and amortized over their estimated lives, generally 15 years, using
the straight-line method. The activity and balances were as
follows:
(In
Thousands)
|
||||||||
Year
Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Balance,
Beginning
|
$ | 170 | $ | 191 | ||||
Additions
|
35 | 15 | ||||||
Amortization
Expense
|
(16 | ) | (36 | ) | ||||
Balance,
Ending
|
$ | 189 | $ | 170 |
Note
4. Financing Arrangements
The
Company has a $20 million credit agreement with Sovereign Bank. Amounts borrowed
under the agreement are secured by substantially all of the assets of the
Company. The agreement provides for a $10 million revolving line of credit and a
$10 million term loan.
The
revolving line of credit provides for advances up to $10.0 million and expires
in March 2012. The interest rate on the revolving line of credit ranges from
LIBOR plus 2.0% to LIBOR plus 2.25%, or prime to prime plus 0.5%, with the exact
interest rate based on the ratio of the Company’s Total Funded Debt to EBITDA.
At May 31, 2010, $5.1 million was outstanding under this facility at an interest
rate of 2.5%, and $4.9 million was available for borrowing.
The term
loan was originally for $10 million and matures in December 2012. The term loan
provides for 20 equal quarterly payments of principal and interest, which began
on March 31, 2008. The term loan bears interest at the same rate as the
revolving line of credit for $2.75 million of the $5.5 million outstanding. In
May 2007, the Company entered into a swap agreement to fix the interest rate on
the balance of the term loan for three years at a rate of 5.3% plus an interest
spread of 2.00% to 2.25% based upon the Company’s total funded debt to EBITDA
ratio. This swap agreement expired on May 31, 2010. On June 3, 2010,
the Company entered into a new swap agreement for $3.0 million, expiring in
February 2012, fixing the interest rate at 1.25% plus an interest spread of
2.00% to 2.25% based upon the Company’s total funded debt to EBITDA
ratio. After February 2012, the interest rate reverts to a variable
rate. At May 31, 2010, $5.5 million was outstanding under this
agreement.
27
The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company and its subsidiary, which, among other
things, impose a maximum ratio of total funded debt to EBITDA, and a minimum
fixed charge coverage ratio. These financial covenants restrict the payment of
dividends on the Company’s common stock. The Company is in compliance with each
of these covenants at May 31, 2010.
Long term
debt at May 31, 2010 and 2009 consisted of the following:
(In
Thousands)
|
||||||||
2010
|
2009
|
|||||||
Obligations
under capital leases
|
$ | - | $ | 34 | ||||
Market
value of interest rate swap
|
- | 153 | ||||||
Notes
payable under line of credit (see above)
|
5,084 | 6,201 | ||||||
Term
loan (see above)
|
5,500 | 7,500 | ||||||
10,584 | 13,888 | |||||||
Less
current maturities
|
(2,000 | ) | (2,034 | ) | ||||
$ | 8,584 | $ | 11,854 |
Approximate
maturities of long term debt at May 31, 2010, are as follows:
(In
Thousands)
|
||||
Years
ending May 31:
|
||||
2011
|
$ | 2,000 | ||
2012
|
7,084 | |||
2013
|
1,500 | |||
$ | 10,584 |
28
Note
5. Net Revenue by Product Group
The
Company operates as one business segment, which historically had two product
groups. In March 2009, the Company added a third product group, Literacy. The
Company’s revenues, net of returns, by product group are as
follows:
(In
Thousands)
|
||||||||
Year
Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Test
Preparation, Assessment and Instruction
|
$ | 20,211 | $ | 22,368 | ||||
College
Preparation
|
12,139 | 14,056 | ||||||
Literacy
|
2,565 | 443 | ||||||
Total
Net Revenue
|
$ | 34,915 | $ | 36,867 |
Note
6. Income Taxes
Federal
and state income tax expense (benefit) consists of the following:
(In
Thousands)
|
||||||||
Year
Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Current
|
$ | 13 | $ | (28 | ) | |||
Deferred
|
153 | 462 | ||||||
Total
|
$ | 166 | $ | 434 |
For the
years ended May 31, 2010, and 2009, the income tax provision (benefit) differs
from the amount of income tax expense (benefit) determined by applying the U.S.
federal income tax rate to pretax loss, due to the following:
(In
Thousands)
|
||||||||
Year
Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Computed
federal income tax benefit at statutory rate
|
$ | 146 | $ | (237 | ) | |||
State
income tax benefit, net of federal effect
|
21 | (23 | ) | |||||
Effect
of lower rates
|
(5 | ) | 6 | |||||
Deferred
tax valuation allowance
|
- | 700 | ||||||
Other,
including nondeductible expenses, net
|
4 | (12 | ) | |||||
$ | 166 | $ | 434 |
The
Company established a valuation allowance in accordance with the provisions of
“Accounting for Income Taxes”. In evaluating its ability to realize the net
deferred tax assets, the Company considers all available evidence, both positive
and negative, including its past operating results, tax planning strategies and
forecasts of future taxable income. In considering these sources of taxable
income, the Company made certain assumptions and judgments that are based on the
plans and estimates used to manage their underlying businesses. A valuation
allowance has been provided for deferred tax assets based on past operating
results, expected timing of the reversals of existing temporary book/tax basis
differences, alternative tax strategies and projected future taxable income.
Although realization is not assured for the remaining deferred tax assets, the
Company believes it is more likely than not that they will be realized in the
future. During the year ended May 31, 2009, the Company recorded a valuation
allowance of $0.7 million. The valuation allowance relates to uncertainty in the
realizability of certain federal and state deferred tax assets.
29
The
carrying value of the net deferred tax asset assumes that the Company will be
able to generate sufficient taxable income in the future. The Company performs a
comprehensive tax review quarterly and if future levels of taxable income are
not sufficient or fail to materialize in the near term, management will adjust
the valuation allowance accordingly.
On
November 6, 2009, H.R. 3548, the Worker, Homeownership, and Business Assistance
Act of 2009 (the “Act”) was enacted. Although the Act deals principally with the
extension of unemployment benefits and mortgage relief, it also extends to all
businesses the five-year net operating loss carryback previously available only
to small businesses. The Act provides that a business of any size may elect to
carryback net operating losses incurred in 2008 or 2009 (but not both) for
three, four or five years.
After
considering the fiscal 2008 federal income tax return filed with the IRS and the
expected fiscal 2009 net operating losses, the Company determined that it had a
carryback of approximately $1.9 million of tax-basis net operating losses from
fiscal 2008, which resulted in a refund of approximately $635,000. During the
third quarter of fiscal 2010, the Company filed Form 1120X with the IRS and
received the refund in February 2010. The Company’s deferred tax
asset was reduced by the refund amount.
Net
deferred tax assets and liabilities are comprised of the following:
(In
Thousands)
|
||||||||
May
31,
|
||||||||
2010
|
2009
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for doubtful accounts
|
$ | 4 | $ | 15 | ||||
Allowance
for sales returns
|
59 | 201 | ||||||
Allowance
for prepublication costs
|
53 | 61 | ||||||
Inventory
|
405 | 308 | ||||||
Federal
and state net operating loss carryforward
|
1,470 | 2,459 | ||||||
Other
|
145 | 37 | ||||||
Deferred
tax valuation allowance
|
(700 | ) | (700 | ) | ||||
1,436 | 2,381 | |||||||
Deferred
tax liabilities:
|
||||||||
Equipment
|
(4 | ) | (25 | ) | ||||
Allowance
for purchase returns
|
(45 | ) | (154 | ) | ||||
Prepaid
expenses
|
(77 | ) | (104 | ) | ||||
(126 | ) | (283 | ) | |||||
Net
deferred tax assets
|
$ | 1,310 | $ | 2,098 |
The
aforementioned net deferred tax assets are reflected on the consolidated balance
sheets as follows:
(In
Thousands)
|
||||||||
May,
31
|
||||||||
2010
|
2009
|
|||||||
Current
assets
|
$ | 833 | $ | 1,092 | ||||
Noncurrent
assets
|
477 | 1,006 | ||||||
Net
deferred tax assets
|
$ | 1,310 | $ | 2,098 |
As of May
31, 2010, the Company had approximately $3.3 million of federal net operating
loss (NOL) carryforwards available to reduce federal taxable income which begin
to expire May 31, 2011 through May 31, 2029.
As of May
31, 2010, the Company had approximately $7.5 million of state net operating loss
(NOL) carryforwards available to reduce state taxable income which begin to
expire May 31, 2012 through May 31, 2016.
In
addition, future utilization of NOL carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code. This section
generally relates to a 50 percent change in ownership of a company over a
three-year period. As the Company has not performed an analysis of their
NOL’s under Section 382, it is unknown whether the future utilization of the NOL
will be limited. Accordingly, the Company’s ability to use NOL tax attributes
may be limited.
30
Note
7. Commitments
Operating leases: The Company
leases its various facilities and certain office equipment under non-cancelable
operating lease arrangements.
As of May
31, 2010, future minimum rental obligations under operating leases are as
follows:
(In
Thousands)
|
||||
Years
ending May 31:
|
||||
2011
|
$ | 459 | ||
2012
|
460 | |||
2013
|
459 | |||
2014
|
465 | |||
2015
|
196 | |||
$ | 2,039 |
Rent
expense under operating leases was $554,000 and $616,000 for the years ended May
31, 2010 and 2009 respectively.
Employment
agreements: The Company has employment agreements with certain
executive officers, which provide severance benefits in the event the Company,
without cause, terminates the employment of such officers.
Note
8. Stock Options and Warrants
In
connection with a stock offering in 2005, the underwriter was granted warrants
to purchase 50,000 shares of Company common stock at an exercise price of $7.56
per share. Such warrants became exercisable in June 2006, and expired in June
2010.
The 1998
Stock Option Plan (1998 Plan) permitted the granting of incentive stock options
and nonqualified options. A total of 1,000,000 shares of the Company common
stock were reserved for issuance pursuant to the options granted under the 1998
Plan. Options issued under the 1998 Plan were generally granted with an exercise
price equal to the fair market value of the Company’s stock on the date of grant
and expired up to 10 years from the date of grant. These options generally
vested and became exercisable over a three-year period. The 1998 Plan has
expired and no additional options may be granted under the 1998 Plan. Options
outstanding under the 1998 Plan continue to be exercisable in accordance with
their terms. At May 31, 2010, options to purchase 700,836 shares were
outstanding under the 1998 Plan.
On
January 8, 2009, the shareholders approved the adoption of the 2009 Stock Option
Plan (2009 Plan). The 2009 Plan permits the granting of incentive stock options
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended and nonqualified options that do not meet the requirements of Section
422. A total of 250,000 shares of the Company common stock have been reserved
for issuance pursuant to options granted under the 2009 Plan. Options issued
under the 2009 Plan are generally granted with an exercise price equal to the
fair market value of the Company’s stock on the date of grant and expire up to
10 years from the date of grant. These options generally vest and become
exercisable over a three-year period. At May 31, 2010, options to purchase
134,800 shares were outstanding and 115,200 shares were available for grant
under the 2009 Plan.
Stock-based
compensation expense of $60,000 and $48,000 was recognized for the years ended
May 31, 2010 and 2009, respectively.
31
The
following weighted average assumptions were used in the Black-Scholes
option-pricing model for the indicated years:
2010
|
2009
|
||
Dividend
Yield
|
0.0%
|
0.0%
|
|
Risk
Free Interest Rate
|
2.2%
to 2.6%
|
1.60%
|
|
Expected
Life of Options
|
5
Years
|
5
Years
|
|
Expected
Volatility Factor
|
39%
to 44%
|
36%
|
Expected
volatility is based on the historical volatility of the Company’s share price
for the period prior to option grant equivalent to the expected life of the
options. The expected term is based upon management’s estimate of when the
option will be exercised, which is generally consistent with the term of the
option. The risk-free interest rate for periods within the contractual life of
the option is based upon the U.S. Treasury yield curve in effect at the time of
grant.
A summary
of stock option activity is as follows:
Weighted-
|
Weighted-
|
|||||||||||
Average
|
Average
|
|||||||||||
Grant
|
Exercise
|
|||||||||||
Fair
Value
|
Shares
|
Price
|
||||||||||
Outstanding
at May 31, 2008
|
$ | 1.69 | 830,136 | $ | 3.41 | |||||||
Granted
|
0.61 | 22,000 | 1.80 | |||||||||
Exercised
|
- | - | - | |||||||||
Forfeited
|
2.37 | (64,500 | ) | 4.27 | ||||||||
Outstanding
at May 31, 2009
|
1.97 | 787,636 | 3.29 | |||||||||
Granted
|
0.70 | 122,800 | 2.46 | |||||||||
Exercised
|
- | - | - | |||||||||
Forfeited
|
1.98 | (74,800 | ) | 3.00 | ||||||||
Outstanding
at May 31, 2010
|
1.91 | 835,636 | 3.21 | |||||||||
Exercisable
at May 31, 2010
|
$ | 2.01 | 694,836 | $ | 3.33 |
At May
31, 2010, there was approximately $86,000 of unrecognized compensation cost
related to share-based payments, which is expected to be recognized over a
weighted-average period of three years.
Note
9. Retirement Plan
The
Company maintains a defined contribution plan subject to the provisions of the
Employee Retirement Income Security Act (ERISA). All employees are eligible to
participate following the completion of six months of service. Eligible
participants may elect to contribute a portion of their compensation to the
plan, subject to the Internal Revenue Code limitations for 401(k) plans.
Participants direct the investment of their contributions into various
investment options offered by the plan. The Company may make discretionary
contributions to the plan in which all eligible employees will receive a portion
of the Company’s contribution. There were no discretionary contributions made by
the Company to the plan during the years ended May 31, 2010 and
2009.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
November 23, 2009, the Audit Committee of the Board of Directors of Peoples
Educational Holdings, Inc. (the “Company”) dismissed McGladrey & Pullen, LLP
(“McGladrey”) as the Company’s independent registered public accounting firm,
effective on that date.
The
reports of McGladrey on the financial statements of the Company for the fiscal
years ended May 31, 2009 and May 31, 2008 did not contain an adverse opinion or
a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. During the two most recent
fiscal years and through the effective date of McGladrey’s dismissal, there were
no disagreements between the Company and McGladrey on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of McGladrey, would have
caused McGladrey to make reference thereto in its report on the financial
statements for such fiscal years. During the period described in the
preceding sentence, there were no “reportable events,” as such term is defined
in Item 304(a) (1) (v) of Regulation S-K.
32
The
Company provided McGladrey with a copy of this disclosure and requested that
McGladrey furnish it with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements. A copy of
McGladrey’s letter, dated November 30, 2009, is filed as Exhibit 16.1 to our
Form 8-K filed on November 30, 2009.
On
November 23, 2009, the Company’s Audit Committee appointed Rothstein, Kass &
Company, P.C. as the Company’s independent registered public accounting firm for
the fiscal year ending May 31, 2010. During the Company’s two most
recent fiscal years and through the engagement of Rothstein, Kass & Company,
P.C. as the Company’s accountant on November 23, 2009, neither the Company nor
anyone on the Company’s behalf consulted with Rothstein, Kass & Company,
P.C. with respect to (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on the Company’s financial statements, or (iii) any matter
that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of
Regulation S-K).
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange
Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this
Annual Report on Form 10-K (the “Evaluation Date”).
The
purpose of this evaluation is to determine if, as of the Evaluation Date, our
disclosure controls and procedures were operating effectively such that the
information relating to the Company, required to be disclosed in our Securities
and Exchange Commission (“SEC”) reports (i) was recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) was accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures.
Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were operating effectively.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
the fourth quarter of the fiscal year ended May 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Controls over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control system
was designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.
All
internal controls over financial reporting, no matter how well designed, have
inherent limitations, including the possibility of human error and the
circumvention or overriding of controls. Therefore, even effective internal
control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation and presentation. Further, because of
changes in conditions, the effectiveness of internal controls over financial
reporting may vary over time.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting as
of May 31, 2010. In making its assessment of internal control over
financial reporting, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.
33
Under SEC
rules, management may assess its internal control over financial reporting as
effective if there are no identified material weaknesses at the reporting date.
A material weakness is “a deficiency, or a combination of deficiencies (within
the meaning of PCAOB Auditing Standard No. 5), in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.” Controls for financial close and
reporting were in place as of year-end and were found to be operating
effectively, based on management testing of key controls.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to permanent
exemption rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report as the company
meets the definition of a smaller reporting Company defined in Rule 12b-2 of the
Securities and Exchange Act of 1934.
ITEM
9B.
|
OTHER
INFORMATION
|
NONE
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
following individuals constitute the current directors and executive officers of
the Company:
Name
|
Age
|
Position with the
Company
|
||
G.
Thomas Ahern
|
52
|
Director
(1)
|
||
Brian
T. Beckwith
|
54
|
Director,
President and Chief Executive Officer
|
||
John
C. Bergstrom
|
50
|
Director
(1)(2)(3)
|
||
Richard
J. Casabonne
|
65
|
Director
(3)
|
||
Anton
J. Christianson
|
58
|
Director
(2)(3)
|
||
Michael
L. DeMarco
|
46
|
Executive
Vice President and Chief Financial Officer
|
||
James
P. Dolan
|
61
|
Director
(1)(2)
|
||
Diane
M. Miller
|
58
|
Director,
Executive Vice President and Chief Creative Officer
|
||
James
J. Peoples
|
|
73
|
|
Director,
Chairman, and Senior Advisor
|
(1) Member
of Audit Committee
(2) Member
of Compensation Committee
(3) Member
of Governance Committee
G. Thomas Ahern has been a
Director of the Company since 2006. He has been CEO of Coughlan Companies and
Capstone Publishers, a major publisher of children’s books and online
interactive content through their imprints; Capstone Press, Compass Point Books,
Picture Window, Stone Arch Books and Heinemann Raintree, since 2007. Mr. Ahern
has more than 20 years of executive management, technology and sales experience.
Prior to joining Coughlan Companies, he served as CEO of SwiftKnowledge, a
web-based business intelligence software company from 2002 to 2007. He also was
Executive Vice President, Sales and Marketing for PLATO Learning (NASDAQ: TUTR),
a highly successful educational software company based in Bloomington, MN, from
1990 to 2001. Mr. Ahern is a Communications graduate of Northwestern University
(BA 1980).
Brian T. Beckwith has been a
Director of the Company since 2001, and has served as President and Chief
Executive Officer of the Company since December 2001. Mr. Beckwith has over 25
years of publishing industry experience, including positions in market research,
consumer marketing, operations, business development, and general management.
Prior to joining the Company, he was a principal in Beckwith & Associates, a
publishing advisory firm specializing in start-ups, acquisitions, and Internet
business development. From 1998 to 2000, he was President and Chief Operating
Officer of Grolier, Inc., a $450 million publisher and direct marketer of
children’s books and other educational products. From 1991 to 1997, Mr. Beckwith
served in various senior management positions with K-III (Primedia) including
President and Chief Executive Officer of the Special Interest Magazine Group.
Mr. Beckwith has also held management positions with News Corporation, CBS
Magazines, and Ziff-Davis Publishing. He holds a B.A. summa cum laude from New
England College and an M.B.A. from Fordham University’s Graduate School of
Business.
34
John C. Bergstrom has been
a Director of the
Company since 1998. He has been a partner in RiverPoint Investments, Inc., a St.
Paul, MN-based business and financial advisory firm since 1995. Mr. Bergstrom is
also a director of The Dolan Company. (NYSE:DM), Znomics, Inc. (OTC:ZNOM),
Tecmark, Inc., Instrumental, Inc., JobDig, Inc., Great River Communications
Corp., Creative Publishing Solutions, Inc., and IDLoyalty, LLC. Mr.
Bergstrom is a graduate of Gustavus Adolphus College, B.A., and the University
of Minnesota, M.B.A.
Richard J. Casabonne has been
a Director of the
Company since 2002. He is the founder and President of Casabonne Associates,
Inc., an educational research, strategy and development firm, since 1972. From
October 2003 to May 2004, he served as Chief Executive Officer of TestU, an
instructional assessment company based in New York City. From July 2001 to April
2002, Mr. Casabonne also served as the President of the Education and Training
Group of Leapfrog Enterprises, Inc. where he also served as a director. He is a
past President of AEP (The Association of Educational Publishers).
Anton J. Christianson has been
a Director of the Company since 1998. He is the Chairman of Cherry Tree
Companies, a firm involved in investment management, investment banking, and
wealth management, since 1980. Mr. Christianson controls Adam Smith
Companies, LLC, Adam Smith Management, LLC, Adam Smith Fund, LLC, and Adam Smith
Growth Partners, LP, which are affiliates of Cherry Tree Companies and investors
in Peoples Educational Holdings, Inc. He serves as a director of
AmeriPride Services, Inc., The Dolan Company (NYSE:DM), Titan Machinery, Inc.
(NASDAQ: TITN), Arctic Cat, Inc. (NASDAQ: ACAT), and Znomics, Inc. (NASDAQ:
ZNOM). Mr. Christianson also served as a director of Capella Education
Company (NASDAQ: CPLA) from 1993 to 2006 and Fair Isaac Corporation (NYSE: FICO)
from 1999 to 2009. Mr. Christianson is a graduate of St. John’s
University, Collegeville, Minnesota, and earned an M.B.A. from Harvard Business
School.
Michael L. DeMarco has served
as, Chief Financial Officer of the Company since May 2002 and Executive Vice
President since June 2007, and previously served as Vice President of Finance
and Operations of the Company from May 1999 to April 2002. Mr. DeMarco has over
20 years of experience in finance and accounting. Prior to joining the Company,
Mr. DeMarco was Controller for Health Tech, a health care products company. He
was also a Controller for Omnitech Corporate Solutions, a computer integration
and software development company. Mr. DeMarco also spent four years as an
auditor with the public accounting firm of Ernst and Young. Mr. DeMarco is a
graduate of Pace University in New York and is a Certified Public
Accountant.
James P. Dolan has been a
Director of the Company since 1999. Since 1992, he has been Chairman, President
and Chief Executive Officer and founder of The Dolan Company, (NYSE:DM)
Minneapolis, a specialized business services and information company that
publishes daily and weekly business newspapers in 21 U.S. markets and operates a
number of services businesses including National Default Exchange, a leading
provider of mortgage default processing services to the foreclosure bar;
DiscoverReady, a leading provider of electronic discovery services to large
companies and their legal counsel; and Counsel Press, the nation’s largest
appellate legal services provider. From 1989 to 1993, he was Executive Vice
President of the Jordan Group, New York City, an investment bank specializing in
media. He previously held executive positions with News Corporation in New York,
Sun-Times Company of Chicago, and Centel Corp., Chicago, and was an
award-winning reporter and editor at newspapers in San Antonio, New York,
Chicago, Sydney, and London. He serves as a director of several private
companies and is a journalism graduate of the University of
Oklahoma.
Diane M. Miller is co-founder
and a Director of
the Company. She has served as Executive Vice President of the Company since
1990; and Chief Creative Officer since 2005. Her educational publishing
experience encompasses general management, product development, strategic
planning, market research, writing, curriculum development, editorial,
marketing, production, and professional development. Prior to forming the
Company, Ms. Miller was publisher of Globe Books, a remedial, supplementary
educational publisher owned by Simon and Schuster. Prior to joining Globe Books,
she was Senior Editor of Reading for Harcourt Brace Jovanovich. Ms. Miller has
classroom and research experience, as well, and is a graduate with honors of
Centre College of Kentucky.
James J. Peoples has been
a Director of the
Company since 1998. He is a co-founder and serves as Chairman. Prior to December
2001, Mr. Peoples also served as CEO and President of the Company. He has over
40 years of experience in schoolbook publishing, including positions in sales,
sales management, corporate staff assignments, and general management. Prior to
forming PE, Mr. Peoples was President of the Prentice Hall School Group for
seven years and served three years as Group President of the $350 million Simon
and Schuster Educational Group. Mr. Peoples is a graduate of Oregon State
University.
35
Board
Committees
The Board
of Directors has established an Audit Committee, a Governance Committee and a
Compensation Committee.
The Audit
Committee is currently composed of Messrs. Bergstrom (Chair), Ahern, and Dolan.
The committee meets with our independent registered public accounting firm and
representatives of management to review the internal and external financial
reporting of the Company, considers comments by the auditors regarding internal
controls and accounting procedures and management's response to these comments,
and approves any material non-audit services to be provided by our independent
registered public accounting firm. Our Board of Directors has determined that
Mr. Bergstrom is an audit committee financial expert as defined in Item
407(d)(5) of Regulation S-K. Each member of the Audit Committee is independent
pursuant to the independence standards promulgated by the NASDAQ Stock
Market.
The
Compensation Committee is currently composed of Messrs. Bergstrom (Chair),
Christianson, and Dolan. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding salaries, compensation,
stock options, and benefits of officers and employees.
The
Governance Committee is currently composed of Messrs. Christianson (Chair),
Bergstrom, and Casabonne. The Governance Committee reviews and makes
recommendations to the Board regarding corporate governance policies and
procedures, reviews our Code of Conduct and compliance thereof, identifies and
makes recommendations to the Board regarding candidates for election as
directors, and evaluates the Board of Directors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
officers and directors, and persons who own more than 10% of a registered class
of the Company’s equity securities, to file reports of ownership on Form 3
and changes in ownership on Form 4 or Form 5 with the SEC. Such
officers, directors and 10% stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms they
file.
Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that,
during the fiscal year ended May 31, 2010, all required Section 16(a)
filings applicable to its officers, directors and 10% stockholders were timely
made.
Code of Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at www.peopleseducation.com
under the captions About Us, Investor Relations, Corporate
Governance.
We intend
to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of the Code of Business
Conduct and Ethics by posting such information on our website, at the address
and location specified above and, to the extent required by the listing
standards of the NASDAQ Capital Market, by filing a Current Report on
Form 8-K with the SEC, disclosing such information.
36
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Summary
of Cash and Certain Other Compensation
The
following table shows, for fiscal 2010 and 2009, the compensation earned by or
awarded to Brian T. Beckwith, the Company’s Chief Executive Officer and
President; Michael L. DeMarco, the Company’s Executive Vice President and Chief
Financial Officer; and Diane M. Miller, Executive Vice President and Chief
Creative Officer, the only other executive officer of the Company (collectively
with Mr. Beckwith and Mr. DeMarco, the “Named Executives”).
Summary
Compensation Table for Fiscal Year Ended May 31, 2010 and 2009
Non-Equity
|
||||||||||||||||||||||
Incentitive
|
(a)
|
(b)
|
||||||||||||||||||||
Plan
|
Option
|
All
Other
|
||||||||||||||||||||
Name
and Principal Position
|
Year
|
Salary
|
Compensation
|
Awards
|
Compensation
|
Total
|
||||||||||||||||
Brian
T. Beckwith
|
2010
|
$ | 320,800 | $ | - | $ | 11,668 | $ | 2,160 | $ | 334,628 | |||||||||||
President
and Chief Executive Officer
|
2009
|
$ | 310,800 | $ | - | $ | 6,086 | $ | 2,160 | $ | 319,046 | |||||||||||
Michael
L. DeMarco
|
2010
|
$ | 212,200 | $ | - | $ | 6,154 | $ | 1,440 | $ | 219,794 | |||||||||||
Executive
Vice President and
|
2009
|
$ | 207,200 | $ | - | $ | 3,043 | $ | 831 | $ | 211,074 | |||||||||||
Chief
Financial Officer
|
||||||||||||||||||||||
Diane
M. Miller
|
2010
|
$ | 185,000 | $ | - | $ | 4,894 | $ | 9,195 | $ | 199,089 | |||||||||||
Executive
Vice President and
|
2009
|
$ | 172,774 | $ | - | $ | 3,043 | $ | 9,195 | $ | 185,012 | |||||||||||
Chief
Creative Officer
|
(a)
|
These
amounts reflect the expense recognized for financial statement reporting
purposes for fiscal 2010 and 2009 in accordance with ASC 718, unreduced by
the estimated service-based forfeitures. The other assumptions used in
calculating these amounts are set forth in Note 8 to the Consolidated
Financial Statements for the fiscal year ended May 31,
2010.
|
(b)
|
The
named executives receive a car allowance and the non-business portion of
this allowance is included as taxable income to the named executive. In
addition, the Company provided supplemental life insurance to Ms. Miller.
The policy premium of $1,995 for both 2010 and 2009 was taxable income to
Ms. Miller.
|
37
Outstanding
Equity Awards at May 31, 2010
The
following table provides a summary of equity awards outstanding for each of the
Named Executives as of the end of fiscal 2010:
Option
Awards
|
|||||||||||||
Number
of Securities
|
|||||||||||||
Underlying
|
|||||||||||||
Unexercised
Options
|
Option
|
||||||||||||
Exercise
|
Option
|
||||||||||||
(#)
|
(#)
|
Price
|
Expiration
|
||||||||||
Named
Executive
|
Exercisable
|
Unexercisable
|
($)
|
Date
|
|||||||||
Brian
T. Beckwith
|
4,250 | 12,750 | (1) | $ | 1.96 |
8/20/2014
|
|||||||
President
and
|
15,000 | 5,000 | (2) | $ | 3.05 |
4/10/2013
|
|||||||
Chief
Executive Officer
|
48,000 | - | $ | 4.50 |
7/30/2012
|
||||||||
125,000 | - | $ | 3.00 |
1/1/2012
|
|||||||||
125,000 | - | $ | 3.00 |
12/18/2011
|
|||||||||
10,000 | - | $ | 5.20 |
10/3/2010
|
|||||||||
Michael
L. DeMarco
|
2,000 | 6,000 | (3) | $ | 1.96 |
8/20/2014
|
|||||||
Executive
Vice President and
|
- | 12,000 | (4) | $ | 3.00 |
10/14/2014
|
|||||||
Chief
Financial Officer
|
15,000 | - | $ | 3.60 |
6/23/2013
|
||||||||
7,500 | 2,500 | (5) | $ | 3.05 |
4/10/2013
|
||||||||
30,000 | - | $ | 3.00 |
5/17/2012
|
|||||||||
10,000 | - | $ | 3.50 |
12/29/2010
|
|||||||||
5,000 | - | $ | 5.20 |
10/3/2010
|
|||||||||
2,000 | - | $ | 3.00 |
12/21/2009
|
|||||||||
Diane
M. Miller
|
2,000 | 6,000 | (3) | $ | 1.96 |
8/20/2014
|
|||||||
Executive
Vice President and
|
7,500 | 2,500 | (5) | $ | 3.05 |
4/10/2013
|
|||||||
Chief
Creative Officer
|
75,000 | - | $ | 3.00 |
10/26/2011
|
||||||||
5,000 | - | $ | 5.20 |
10/3/2010
|
(1)
|
Becomes
exercisable with respect to 4,250 shares on each August 20, 2010, 2011,
and 2012.
|
(2)
|
Becomes
exercisable with respect to 5,000 shares on April 10,
2011.
|
(3)
|
Becomes
exercisable with respect to 2,000 shares on each August 20, 2010, 2011 and
2012.
|
(4)
|
Becomes
exercisable with respect to 4,000 shares on each June 15, 2010, 2011, 2012
and 2013.
|
(5)
|
Becomes
exercisable with respect to 2,500 shares on April 10,
2011.
|
Potential
Payments Upon Termination
Brian T.
Beckwith, our President and Chief Executive Officer, entered into an employment
agreement in 2001, which was amended in July 2004. The agreement, as amended,
provides for a term ending in December 2008 with automatic renewals thereafter
from year to year unless terminated by either party by 180 days’ prior notice
before the end of each contract year. Pursuant to these arrangements, the term
of the agreement has been extended to December 2011. The agreement contains
non-competition and non-solicitation covenants which at the Company’s option
continue in effect for a period ending one year after Mr. Beckwith ceases to be
employed. In consideration for these covenants, Mr. Beckwith will receive on a
monthly basis, 60% of his monthly salary in effect at the time his employment
ceased. If Mr. Beckwith is terminated by the Company without cause, or if Mr.
Beckwith resigns for good reason, Mr. Beckwith is entitled to 18 months of
severance at his then-current annual salary. If we provide Mr. Beckwith notice
of non-renewal, Mr. Beckwith is entitled to 12 months of severance at his
then-current annual salary. The agreement also provides for, under certain
circumstances, our repurchase right and Mr. Beckwith’s put right to the Company
with respect to Company stock owned by Mr. Beckwith, following termination of
his employment, which he has acquired upon exercise of stock options and held
for at least one year.
38
Michael
L. DeMarco, our Executive Vice President and Chief Financial Officer, entered
into an employment agreement in May 2002, which was most recently amended in
June 2007. The agreement, as amended, provides for a term ending in May 2008,
with automatic renewals thereafter from year to year unless terminated by either
party by 180 days’ prior notice before the end of each contract year. Pursuant
to these arrangements, the term of the agreement has been extended to May 2011.
The agreement contains non-competition and non-solicitation covenants which at
the Company’s option continue in effect for a period ending one year after Mr.
DeMarco ceases to be employed by the Company. In consideration for these
covenants, Mr. DeMarco will receive on a monthly basis, 60% of his monthly
salary in effect at the time his employment ceased. If Mr. DeMarco is terminated
without cause or resigns for good reason, Mr. DeMarco is entitled to 12 months
salary as severance at his then-current annual salary.
Diane M.
Miller, our Executive Vice President and Chief Creative Officer, entered into an
employment agreement in 1990, which was amended and restated in November 2004.
The agreement provides for a term ending in November 2007, with automatic
renewals thereafter for successive one-year periods unless terminated by either
party at least 180 days prior to the end of the contract year. Pursuant to these
arrangements, the term of the agreement has been extended to November 2011. The
agreement contains non-competition and non-solicitation covenants which at the
Company’s option continue in effect for a period ending one year after Ms.
Miller ceases to be employed. In consideration for these covenants, Ms. Miller
will receive on a monthly basis, 60% of her monthly salary in effect at the time
her employment ceased. If Ms. Miller is terminated without cause or if Ms.
Miller resigns for good reason, Ms. Miller is entitled to 12 months of severance
at the rate in effect at the time her employment ceased. We have a right of
first refusal with respect to any share transfers of Company stock by Ms. Miller
to a competitor.
Compensation
of Non-Management Directors
We use a
combination of cash and stock-based incentive compensation to attract and retain
qualified candidates to serve on the Board of Directors. For 2010, each
non-management member of the Board of Directors received on a quarterly basis
$3,090 for services as a director, plus $515 for each committee on which they
served, plus an additional $515 for each committee of which they were the chair.
Mr. Peoples received an addition $1,030 per quarter for his duties as the Board
of Directors Chairman. Mr. Bergstrom received an additional $5,000 per quarter
for his services on the audit and compensation committee. Non-employee directors
were also reimbursed for certain expenses in connection with attendance at Board
and committee meetings. In addition, each non-employee director receives
nonqualified options to purchase our common stock at an option price equal to
the fair market value of our common stock on the date that the option is
granted. The options are exercisable in annual increments of 25% each over a
four-year period during the term of the options, which was five years. On April
12, 2010, non-management directors were granted 2,000 stock options under the
terms described above at a strike price of $1.59.
In
calendar year 2009, options previously granted to Messrs Christianson (5,000),
Bergstrom (5,000) and Dolan (37,500) expired and on October 14, 2009 Messrs
Christianson, Bergstrom and Dolan were issued new options in the amounts noted
above, at a strike price of $3.00.
Non-Management
Director Compensation for the Fiscal Year Ended May 31, 2010
Fees
Earned
|
||||||||||||||||
or
|
Option
|
All
Other
|
||||||||||||||
Paid
in Cash
|
Awards
|
Compensation
|
Total
|
|||||||||||||
G.
Thomas Ahern
|
$ | 14,420 | $ | 2,750 | (a) | $ | - | $ | 17,170 | |||||||
John
C. Bergstrom
|
$ | 42,660 | $ | 3,275 | (a) | $ | - | $ | 45,935 | |||||||
Richard
J. Casabonne
|
$ | 14,420 | $ | 2,750 | (a) | $ | 40,000 | (b) | $ | 57,170 | ||||||
Anton
J. Christianson
|
$ | 18,540 | $ | 3,275 | (a) | $ | - | $ | 21,815 | |||||||
James
P. Dolan
|
$ | 16,480 | $ | 6,686 | (a) | $ | - | $ | 23,166 | |||||||
James
J. Peoples
|
$ | 16,480 | $ | 1,829 | (a) | $ | 40,000 | (c ) | $ | 58,309 |
39
(a)
|
These
amounts reflect the expense recognized for financial statement reporting
purposes for fiscal 2010 in accordance with ASC 718, unreduced by the
estimated service-based forfeitures. The other assumptions used in
calculating these amounts are set forth in Note 8 to the Consolidated
Financial Statements for the fiscal year ended May 31,
2010.
|
(b)
|
Mr.
Casabonne received an additional $10,000 per quarter for his services
related to marketing and product
development.
|
(c)
|
Mr. Peoples received an
additional $10,000 per quarter for his services related to business
development.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth information provided to the Company as to the
beneficial ownership of our Common Stock as of July 15, 2010 by (i) the only
stockholders known to the Company to hold 5% or more of such stock, and (ii)
each of the directors, the Named Executives set forth in the Summary
Compensation Table in Item 11, and directors and officers as a
group.
Common
Stock
|
||||||||
Beneficially
|
||||||||
Beneficial Owner
|
Owned
|
Total
(%)
|
||||||
Anton
J. Christianson (1) (2)
|
1,705,938 | 38.1 | % | |||||
NAP
& CO - c/o Delaware State Pension Fund (3)
|
603,151 | 13.5 | % | |||||
James
J. Peoples (1) (4)
|
576,081 | 12.9 | % | |||||
Dolphin
Offshore Partners, Inc. (5)
|
361,887 | 8.1 | % | |||||
Diane
M. Miller (1) (4)
|
342,516 | 7.5 | % | |||||
Brian
T. Beckwith (1) (4)
|
366,554 | 7.6 | % | |||||
Michael
L. DeMarco (1)
|
74,500 | 1.6 | % | |||||
John
C. Bergstrom (1)
|
60,400 | 1.3 | % | |||||
James
P. Dolan (1)
|
28,209 | * | ||||||
Richard
J. Casabonne (1)
|
38,834 | * | ||||||
G.
Thomas Ahern (1)
|
22,000 | * | ||||||
Directors
and Officers as a group (9 persons) (1) (2)
|
3,215,032 | 63.2 | % |
* Less
than 1%
(1)
|
Includes
shares of Common Stock subject to outstanding stock options exercisable
within 60 days as follows: Mr. Christianson, 20,084 shares; Mr.
Peoples, 4,500 shares; Ms. Miller, 91,500 shares; Mr.
Beckwith, 331,500 shares; Mr. DeMarco, 74,500 shares; Mr. Bergstrom,
20,084 shares; Mr. Dolan,
28,209 shares; Mr. Casabonne, 38,834 shares; Mr. Ahern, 18,000 and
directors and officers as a group, 627,211
shares.
|
(2)
|
Mr.
Christianson’s ownership includes ownership of 1,613,915 shares held
by Adam Smith Growth Partners, 70,619 shares held by Adam Smith Fund,
LLC and 1,320 shares held individually. The managing member of
Adam Smith Growth Partners is Adam Smith Companies, LLC. Mr. Christianson,
as manager of Adam Smith Companies, LLC, has voting and investment powers
with respect to the securities owned by Adam Smith Growth Partners. The
managing member of Adam Smith Fund, LLC is Adam Smith Management,
LLC, whose managing member is Adam Smith Companies, LLC. Mr.
Christianson, as manager of Adam Smith Companies, LLC, has
investment and voting powers with respect to the securities owned by
Adam Smith Fund, LLC. Mr. Christianson, Adam Smith Companies,
LLC, and Adam Smith Management, LLC disclaim beneficial ownership of
the securities held by Adam Smith Growth Partners and Adam Smith Fund,
LLC except to the extent of their pecuniary interest in such
securities. The address of Mr. Christianson and each of the Adam Smith
entities is 301 Carlson Parkway, Suite #103, Minnetonka, MN
55305.
|
40
(3)
|
The
address of the Delaware State Pension Fund is 860 Silver Lake Boulevard,
McArdle Building, Suite #1, Dover, DE
19904.
|
(4)
|
The
address of Mr. Peoples, Ms. Miller and Mr. Beckwith is 299 Market Street,
Saddle Brook, NJ 07663-5316.
|
(5)
|
The
general partner of Dolphin Direct Equity Partners, L.P. is Dolphin
Advisors, LLC, and the managing member of Dolphin Advisors, LLC is Dolphin
Management, Inc. Peter E. Salas is the President and sole owner of Dolphin
Management, Inc. and exercises voting and investment powers with respect
to the securities owned by Dolphin Direct Equity Partners, L.P.
Dolphin Advisors, LLC, Dolphin Management, Inc. and Mr. Salas disclaim
beneficial ownership of the securities owned by Dolphin Direct Equity
Partners, L.P. except to the extent of their pecuniary interest in such
securities. The address of Dolphin Direct Equity Partners, L.P. is c/o
Dolphin Asset Management Corp., 129 East 17th Street, New York, NY
10003.
|
Equity
Compensation Plan Table
The
following table sets forth aggregate information regarding the Company’s equity
compensation plans as of May 31, 2010.
Number of securities to
be issued upon
exercise of outstanding
options, warrants and
rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
||||||||||
Plan Category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
835,636 | $ | 3.21 | 115,200 |
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Certain
Relationships and Related Transactions
None
Director
Independence
The Board
of Directors of the Company has determined that Messrs. Ahern, Bergstrom,
Casabonne, Christianson and Dolan are “independent” directors, as that term is
defined under the rules of The NASDAQ Stock Market for companies included in The
NASDAQ Capital Market.
ITEM
14
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
In
connection with the fiscal year ended May 31, 2010, Rothstein, Kass &
Company, P.C. provided various audit and non-audit services to the Company and
billed the Company for these services as follows:
(a)
|
Audit Fees.
Fees for audit services totaled approximately $80,000 in fiscal 2010 which
included the fees for the annual audits and the unaudited November 30,
2009 and February 28, 2010 interim reviews of the Company’s quarterly
reports on Form 10-Q.
|
||
(b)
|
Audit-Related
Fees. There were no fees incurred for audit-related services in fiscal
2010.
|
||
(c)
|
Tax
Fees. There were no fees incurred for tax services, including certain tax
compliance assistance in fiscal
2010.
|
41
(d)
|
All
Other Fees. There were no other services in fiscal 2010 provided by
Rothstein, Kass & Company, P.C. not included in the
above.
|
In
connection with the fiscal years ended May 31, 2010 and May 31, 2009, McGladrey
& Pullen, LLP and its related entity RSM McGladrey, Inc., provided various
audit and non-audit services to the Company and billed the Company for these
services as follows:
(a)
|
Audit
Fees. Fees for audit services totaled approximately $20,000 in fiscal 2010
and approximately $132,000 in fiscal 2009 including fees for the annual
audits and the reviews of the Company’s quarterly reports on Form
10-Q.
|
||
(b)
|
Audit-Related
Fees. Fees for audit-related services totaled approximately $ 5,000
and $-0- fiscal 2010 and fiscal 2009, respectively. These services related
to responding to technical and accounting questions and the related
research, meetings with management and transition relating to the
Company’s appointment of Rothstein, Kass & Company, P.C. as the
Company’s independent registered public accounting
firm.
|
||
(c)
|
Tax
Fees. Fees for tax services, including certain tax compliance assistance,
totaled $-0- for both fiscal 2010 and fiscal 2009.
|
||
(d)
|
All
Other Fees. There were no other services provided by McGladrey &
Pullen, LLP or RSM McGladrey, Inc., not included above, in either fiscal
2010 or fiscal 2009.
|
The Audit
Committee preapproves all audit and permissible non-audit services provided by
the independent registered public accounting firm on a case-by-case basis. All
of the services provided by the independent registered public accounting firms
during fiscal 2010 and fiscal 2009, including services related to Audit-Related
Fees and Tax Fees have been approved by the Audit Committee under its
pre-approval process. The Audit Committee has considered whether the provision
of services related to the Audit-Related Fees, Tax Fees and All Other Fees was
compatible with maintaining the independence of Rothstein, Kass & Company,
P.C. and McGladrey & Pullen, LLP and determined that such services did not
adversely affect the independence of either firm.
42
PART
IV
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
The
following documents are filed as a part of this
report:
|
(1)
|
Financial
Statements. See Item 8
above.
|
(2)
|
Exhibits. The
following exhibits are included with this Annual Report on Form 10-K (or
incorporated by reference) as required by Item 601 of Regulation
S-K:
|
EXHIBIT
NO.
|
DESCRIPTION
|
|
3.1
|
Certificate
of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrant’s Form 10-KSB for the year ended December 31,
2001).
|
|
3.2
|
Bylaws
of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant’s Form 8-K dated May 23, 2007).
|
|
10.1‡
|
Registrant's
1998 Stock Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-KSB for the year ended December 31,
1998).
|
|
10.2‡
|
Registrant’s
2009 Stock Plan. (incorporated by reference to Exhibit 99.1 to the
Registrants Registration Statement on Form S-8 Registration No. 333-162914
filed November 5, 2009)
|
|
10.3‡
|
Amended
and Restated Employment Agreement between Peoples Education, Inc. and
Diane M. Miller dated July 1, 2001 (incorporated by reference to Exhibit
10.8 to the Registrant’s Form 10-KSB for the year ended December 31,
2001), as amended by Amendment to Employment Agreement dated November 19,
2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form
8-K dated November 22, 2004).
|
|
10.4‡
|
Amended
and Restated Employment Agreement between the Company and Michael L.
DeMarco dated May 17, 2002 (incorporated by reference to Exhibit 10 to the
Registrant’s Form 10-QSB for the quarter ended June 30, 2002) as amended
by Amendment to Employment Agreement dated October 4, 2005 (incorporated
by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 4,
2005) and by Second Amendment to Employment agreement dated June 1, 2007
(incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
dated June 1, 2007).
|
|
10.5‡
|
Employment
Agreement between the Company and Brian T. Beckwith dated December 18,
2001 (incorporated by reference to Exhibit 10.7 to the Registrant’s Form
10-KSB for the year ended December 31, 2001), as amended by Amendment to
Employment Agreement dated July 30, 2004 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Form 10-QSB for the quarter ended June
30, 2004).
|
|
10.6
|
Loan
Agreement dated February 15, 2007, by and between Peoples Educational
Holdings, Inc. and Sovereign Bank (incorporated by reference to Exhibit
10.1 to the Registrant’s Form 8-K dated February 15,
2007).
|
|
10.7
|
$10
million Revolving Credit Promissory Note dated February 15, 2007 payable
by Peoples Educational Holdings, Inc. to Sovereign Bank (incorporated by
reference to Exhibit 10.2 to the Registrant’s Form 8-K dated February 15,
2007).
|
|
10.8
|
$10
million Term Promissory Note dated February 15, 2007 payable by Peoples
Educational Holdings, Inc. to Sovereign Bank (incorporated by reference to
Exhibit 10.3 to the Registrant’s Form 8-K dated February 15,
2007).
|
43
10.9
|
Security
Agreement dated February 15, 2007, by and between Peoples Educational
Holdings, Inc., Peoples Education, Inc. and Sovereign Bank (incorporated
by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated February
15, 2007).
|
|
|
||
10.10
|
Guaranty
and Suretyship Agreement dated February 15, 2007, by Peoples Educational
Holdings, Inc. and Peoples Education, Inc. in favor of Sovereign Bank
(incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K
dated February 15, 2007).
|
|
10.11
|
Pledge
of Stock Agreement dated February 15, 2007, by Peoples Educational
Holdings, Inc. in favor of Sovereign Bank (incorporated by reference to
Exhibit 10.6 to the Registrant’s Form 8-K dated February 15,
2007).
|
|
14
|
Code
of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s
Form 10-KSB for the year ended December 31, 2003).
|
|
21
|
Subsidiaries
of the Registrant: Peoples Education, Inc., a Delaware
corporation.
|
|
23.1**
|
Consent
of McGladrey & Pullen, LLP.
|
|
23.2**
|
Consent
of Rothstein, Kass & Company, P.C.
|
|
31.1*
|
Certification
of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1*
|
|
Certification
of the Chief Executive Officer and the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
‡
|
Management
contract or compensatory plan.
|
*
|
Filed
herewith.
|
**
|
Filed on August
9, 2010, with the Registrant's Form 10-K for the year ended May 31,
2010.
|
44
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to annual report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEOPLES
EDUCATIONAL HOLDINGS, INC.
|
||
Date:
September 17, 2010
|
||
|
/s/
Brian T. Beckwith
|
|
|
Brian
T. Beckwith, Chief Executive Officer, President
(principal
executive officer) and
Director
|
45