Attached files
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EX-32 - PEOPLES EDUCATIONAL HOLDINGS | v207728_ex32.htm |
EX-31.2 - PEOPLES EDUCATIONAL HOLDINGS | v207728_ex31-2.htm |
EX-31.1 - PEOPLES EDUCATIONAL HOLDINGS | v207728_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended November 30, 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
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
299
Market Street, Saddle Brook, NJ 07663
|
(Address
of principal executive offices) (Zip Code)
|
(201)
712-0090
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its Website, 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
file). Yes ¨ No
¨
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 definition 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 Exchange Act). Yes ¨ No
x
Indicate
the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practical date: 4,465,202 shares of Common Stock (par
value $0.02 per share) outstanding on January 3, 2011
TABLE OF
CONTENTS
Page
|
||||
PART
I.
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FINANCIAL
INFORMATION
|
|||
Item
1:
|
Financial
Statements:
|
|||
Condensed
Consolidated Balance Sheets as of November 30, 2010 (Unaudited) and May
31, 2010 and November 30, 2009 (Unaudited)
|
3
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|||
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
November 30, 2010 and 2009 (Unaudited)
|
4
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|||
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended November
30, 2010 and 2009 (Unaudited)
|
5
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|||
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
6
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|||
Item
2:
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
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||
Item
4:
|
Controls
and Procedures
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18
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PART
II.
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OTHER
INFORMATION
|
|||
Item
1:
|
Legal
Proceedings
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18
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Item
2:
|
Unregistered
Sales of Equity Securities and Use of Proceeds
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19
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Item
3:
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Defaults
Upon Senior Securities
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19
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Item
5:
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Other
Information
|
19
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Item
6:
|
Exhibits
|
19
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SIGNATURES
|
20
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|||
EXHIBITS
|
|
21
|
2
Part I
Financial
Information
Item
1. Financial Statements
PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
UNAUDITED
|
UNAUDITED
|
|||||||||||
(In Thousands-Except Share Data)
|
November 30, 2010
|
May 31, 2010
|
November 30, 2009
|
|||||||||
ASSETS
|
||||||||||||
Current Assets
|
||||||||||||
Cash
and Cash Equivalents
|
$ | 34 | $ | 110 | $ | 118 | ||||||
Accounts
Receivable, Net of Allowances for
|
||||||||||||
Doubtful
Accounts and Returns
|
2,190 | 2,990 | 2,203 | |||||||||
Inventory,
Net
|
3,673 | 3,591 | 4,047 | |||||||||
Prepaid
Expenses and Other
|
320 | 264 | 347 | |||||||||
Prepaid
Marketing Expenses
|
625 | 642 | 617 | |||||||||
Deferred
Income Taxes
|
632 | 833 | 708 | |||||||||
Total
Current Assets
|
7,474 | 8,430 | 8,040 | |||||||||
Equipment
- At Cost, Less Accumulated Depreciation
|
||||||||||||
of
$2,528, $2,444 and $2,358, respectively
|
206 | 249 | 319 | |||||||||
Other Assets
|
||||||||||||
Deferred
Prepublication Costs, Net
|
13,445 | 12,864 | 12,233 | |||||||||
Deferred
Income Taxes
|
402 | 477 | 700 | |||||||||
Trademarks,
Net
|
226 | 189 | 188 | |||||||||
Prepaid
Expenses and Other
|
131 | 167 | 224 | |||||||||
Total
Other Assets
|
14,204 | 13,697 | 13,345 | |||||||||
Total Assets
|
$ | 21,884 | $ | 22,376 | $ | 21,704 | ||||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||||||
Current Liabilities
|
||||||||||||
Current
Maturities of Long Term Obligations
|
$ | 2,000 | $ | 2,000 | $ | 2,012 | ||||||
Accounts
Payable
|
6,097 | 4,904 | 5,392 | |||||||||
Accrued
Compensation
|
199 | 153 | 155 | |||||||||
Other
Accrued Expenses
|
438 | 527 | 557 | |||||||||
Deferred
Revenue
|
534 | 404 | 375 | |||||||||
Total
Current Liabilities
|
9,268 | 7,988 | 8,491 | |||||||||
Long
Term Obligations, Less Current Maturities
|
6,315 | 8,584 | 6,528 | |||||||||
Total Liabilities
|
15,583 | 16,572 | 15,019 | |||||||||
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: 4,481,434
shares as of November 30, 2010 and 4,478,434 shares, as of May 31, 2010
and November 30, 2009
|
90 | 90 | 90 | |||||||||
Additional
Paid In Capital
|
8,146 | 8,120 | 8,094 | |||||||||
Accumulated
Deficit
|
(1,871 | ) | (2,342 | ) | (1,435 | ) | ||||||
Treasury
Stock - 16,232 shares, at cost
|
(64 | ) | (64 | ) | (64 | ) | ||||||
Total Stockholders' Equity
|
6,301 | 5,804 | 6,685 | |||||||||
Total Liabilities and Stockholders'
Equity
|
$ | 21,884 | $ | 22,376 | $ | 21,704 |
See Notes
to Condensed Consolidated Financial Statements.
3
PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In
Thousands, Except Per Share Data)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
November 30,
|
November 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue,
Net
|
$ | 6,156 | $ | 7,305 | $ | 19,304 | $ | 22,054 | ||||||||
Cost
of Revenue
|
||||||||||||||||
Direct
Costs
|
2,399 | 2,727 | 9,065 | 10,141 | ||||||||||||
Prepublication
Cost Amortization
|
1,239 | 1,328 | 2,533 | 2,728 | ||||||||||||
Total
|
3,638 | 4,055 | 11,598 | 12,869 | ||||||||||||
Gross
Profit
|
2,518 | 3,250 | 7,706 | 9,185 | ||||||||||||
Selling,
General and Administrative Expenses
|
3,374 | 3,640 | 6,783 | 7,150 | ||||||||||||
Income
(Loss) from Operations
|
(856 | ) | (390 | ) | 923 | 2,035 | ||||||||||
Other
Expenses, Net
|
9 | 3 | 17 | 14 | ||||||||||||
Interest
Expense
|
58 | 65 | 159 | 160 | ||||||||||||
Income
(Loss) Before Income Taxes
|
(923 | ) | (458 | ) | 747 | 1,861 | ||||||||||
Income
Tax Expense (Benefit)
|
(342 | ) | (155 | ) | 276 | 703 | ||||||||||
Net
Income (Loss)
|
$ | (581 | ) | $ | (303 | ) | $ | 471 | $ | 1,158 | ||||||
Net
Income (Loss) per Common Share:
|
||||||||||||||||
Basic
and Diluted
|
$ | (0.13 | ) | $ | (0.07 | ) | $ | 0.11 | $ | 0.26 | ||||||
Weighted-average
Number of
|
||||||||||||||||
Common
Shares Outstanding:
|
||||||||||||||||
Basic
|
4,465 | 4,462 | 4,464 | 4,462 | ||||||||||||
Diluted
|
4,465 | 4,462 | 4,465 | 4,465 |
See Notes
to Condensed Consolidated Financial Statements.
4
PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
|
Six Months Ended
|
|||||||
November 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Income
|
$ | 471 | $ | 1,158 | ||||
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||
Provided
by Operating Activities
|
||||||||
Depreciation
|
84 | 117 | ||||||
Amortization
of Prepublication Costs and Intangible Assets
|
2,544 | 2,735 | ||||||
Stock-Based
Compensation
|
22 | 34 | ||||||
Market
Value Adjustment of Interest Rate Swap
|
16 | (79 | ) | |||||
Deferred
Income Taxes
|
276 | 690 | ||||||
Changes
in Assets and Liabilities
|
||||||||
Accounts
Receivable
|
800 | 639 | ||||||
Inventory
|
(82 | ) | 172 | |||||
Prepaid
Expenses and Other
|
(20 | ) | 25 | |||||
Prepaid
Marketing Expenses
|
17 | 245 | ||||||
Accounts
Payable and Accrued Expenses
|
1,150 | 1,081 | ||||||
Deferred
Revenue
|
130 | 97 | ||||||
Net
Cash Provided By Operating Activities
|
5,408 | 6,914 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of Equipment
|
(41 | ) | (49 | ) | ||||
Expenditures
for Intangibles
|
(48 | ) | (25 | ) | ||||
Expenditures
for Prepublication Costs
|
(3,114 | ) | (1,495 | ) | ||||
Net
Cash Used In Investing Activities
|
(3,203 | ) | (1,569 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Net
Payments Under Line of Credit
|
(1,285 | ) | (4,247 | ) | ||||
Exercise
of Stock Options
|
4 | - | ||||||
Principal
Payments On Long-Term Debt
|
(1,000 | ) | (1,022 | ) | ||||
Net
Cash Used In Financing Activities
|
(2,281 | ) | (5,269 | ) | ||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(76 | ) | 76 | |||||
Cash
and Cash Equivalents
|
||||||||
Beginning
of Period
|
110 | 42 | ||||||
End
of Period
|
$ | 34 | $ | 118 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
Payments for:
|
||||||||
Interest
|
$ | 135 | $ | 252 |
See Notes
to Condensed Consolidated Financial Statements.
5
Peoples
Educational Holdings, Inc., and Subsidiary
Notes
to Condensed Consolidated Financial Statements (UNAUDITED)
NOTE 1 – Nature of Business
and Basis of Presentation
Nature of
Business: Peoples Educational Holdings, Inc. (PEH), through its wholly owned
subsidiary, Peoples Education, Inc. (PE), is a leading publisher and distributor
of supplemental instructional materials for the kindergarten through high school
sector (K-12). PE designs and produces materials in both print and
digital format, with a growing emphasis on Internet-based delivery. The
materials are predominantly state-specific and standards-based, focused on
state-required tests. PE also distributes college preparation
products developed internally and by other publishers and literacy products
developed by other publishers. Marketing channels include direct and
commission sales representatives, telemarketing, direct mail, and catalogs. PE
and PEH are together referred to herein as the Company.
Basis of
Presentation: The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission and instructions to Form
10-Q for interim financial information and therefore do not include all
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. These
unaudited condensed consolidated financial statements contain, in the opinion of
management, all adjustments (consisting of normal accruals and other recurring
adjustments) necessary for a fair presentation of the consolidated financial
position, results of operations, and cash flows for the periods
presented. The operating results for the three and six month periods
ended November 30, 2010 are not necessarily indicative of the operating results
to be expected for the full fiscal year. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes included in our Annual
Report on Form 10-K/A for the year ended May 31, 2010.
Use of
Estimates: Management is required to make certain estimates and assumptions
which affect the amounts of assets, liabilities, revenue and expenses that the
Company has reported and the disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements. Actual
results could differ materially from these estimates and
assumptions.
NOTE 2 – 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 Company
recognizes subscription based revenue on its digital products prorata over the
life of the subscription agreement. The allowances for returns were as
follows:
November
30, 2010
|
$ | 266,000 | ||
May
31, 2010
|
$ | 153,000 | ||
November
30, 2009
|
$ | 758,000 |
This
allowance is recorded at the time of revenue recognition, if the right of return
exists, and is recorded as a reduction of revenue and 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 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 doubtful accounts based on a monthly review of all outstanding amounts.
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 as of
November 30, 2010, May 31, 2010 and November 30, 2009 were $10,000, $10,000 and
$40,000, respectively.
6
Peoples
Educational Holdings, Inc., and Subsidiary
Notes
to Condensed Consolidated Financial Statements (UNAUDITED)
NOTE 3 – Basic and Diluted Per
Share Amounts
Basic per
share amounts are computed, generally, by dividing net income or 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, unless their effect is anti-dilutive thereby reducing
the loss or increasing the income per common share. Due to the net
losses for the three months ended November 30, 2010 and 2009, diluted shares
were the same as basic shares since the effect of options and warrants would
have been anti-dilutive. The dilutive effect of these additional
shares for the six months ended November 30, 2010 and 2009 was to increase the
weighted average common shares outstanding by 283 and 3,238 shares,
respectively.
NOTE 4 – Deferred
Prepublication Costs
Deferred
prepublication (product development) costs are capitalized and amortized over a
three or five-year period (the estimated lives of the related publications)
using the straight-line method beginning on the in-stock date of the
publication. The activity in deferred prepublication costs is as
follows for the periods presented:
(In Thousands)
|
||||||||||||||||
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
November 30,
|
November 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Balances,
Beginning
|
$ | 13,064 | $ | 12,800 | $ | 12,864 | $ | 13,466 | ||||||||
Prepublication
Cost Additions
|
1,620 | 761 | 3,114 | 1,495 | ||||||||||||
Amortization
Expense
|
(1,239 | ) | (1,328 | ) | (2,533 | ) | (2,728 | ) | ||||||||
Balances,
Ending
|
$ | 13,445 | $ | 12,233 | $ | 13,445 | $ | 12,233 |
The
estimated future amortization expense over the next five years as related to the
above deferred prepublication costs is as follows:
(In
Thousands)
|
||||
Remainder
of fiscal year ending May 31, 2011
|
$ | 2,718 | ||
Year
ending May 31, 2012
|
4,523 | |||
Year
ending May 31, 2013
|
3,002 | |||
Year
ending May 31, 2014
|
1,814 | |||
Year
ending May 31, 2015 and thereafter
|
1,388 | |||
$ | 13,445 |
The
future estimated expense amount is expected to increase as the Company continues
its investments in product development.
NOTE 5 – Prepaid Marketing
Expense
The costs
of catalogs and promotional materials that 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 materials that will be
distributed to educators and are expensed as they are
distributed. Prepaid marketing expenses include samples, catalogs and
promotional materials.
7
Peoples
Educational Holdings, Inc., and Subsidiary
Notes
to Condensed Consolidated Financial Statements (UNAUDITED)
The
prepaid marketing expenses are presented in the balance sheets as
follows:
November
30, 2010
|
$ | 625,000 | ||
May
31, 2010
|
$ | 642,000 | ||
November
30, 2009
|
$ | 617,000 |
NOTE 6 – 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
as follows:
|
·
|
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 is in a range 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. The average interest rates for the
reporting periods ending November 30, 2010, May 31, 2010 and November 30,
2009 was 2.5%. At November 30, 2010, $3.8 million was
outstanding under this facility, and $6.2 million was available for
borrowing.
|
|
·
|
The
term loan is 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 $2.05
million of the $4.5 million outstanding at November 30,
2010. 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 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. The change in the fair value
of the interest rate swap is recognized as an adjustment to interest
expense during each reporting period. For the six months ended
November 30, 2010, the Company recorded interest expense of $16,000
relating to the swap.
|
The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company, which, among other things, impose a maximum
ratio of total funded debt to EBITDA, and a minimum fixed charge coverage
ratio. These financial covenants also restrict the payment of
dividends on the Company’s common stock. The Company is in compliance with all
covenants at November 30, 2010.
NOTE 7 – Income
Taxes
On a
quarterly basis, the Company estimates what the effective tax rate will be for
the full fiscal year and records a quarterly income tax provision based on the
anticipated rate. As the year progresses, the Company refines the estimate based
on the facts and circumstances by each tax jurisdiction. The effective tax rates
for the six months ended November 30, 2010 and 2009 were approximately
37%.
The
Company established a valuation allowance of $700,000 during the fiscal year
ended May 31, 2009. As of
November 30, 2010, there has been no change to the valuation
allowance.
8
Peoples
Educational Holdings, Inc., and Subsidiary
Notes
to Condensed Consolidated Financial Statements (UNAUDITED)
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.
NOTE 8 – Recently Issued
Accounting Standards
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 does not expect the adoption of FASB ASU 09-13 to have an 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.
9
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD–LOOKING
STATEMENTS
This Form
10-Q contains “forward-looking statements” (as defined in section 21E of the
Securities Exchange Act of 1934) regarding the Company and its markets. These
forward-looking statements involve a number of risks and uncertainties,
including (1) changes in demand from customers, (2) changes in product or
customer mix or revenues and in the level of operating expenses, (3) rapidly
changing technologies and the Company's ability to respond thereto, (4) the
impact of competitive products and pricing, (5) federal, state and local levels
of educational spending, (6) the Company's ability to retain qualified
personnel, (7) the Company’s ability to retain its distribution agreements in
the College Preparation and Literacy markets, (8) the sufficiency of the
Company’s copyright protection, and (9) the Company’s ability to continue to
rely on the services of a third-party warehouse, and other factors disclosed
below and throughout this report. The actual results that the Company achieves
may differ materially from any forward-looking statements due to such risks and
uncertainties. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report, including
the discussion set forth below, and in the Company's other reports filed with
the Securities and Exchange Commission from time to time that attempt to advise
interested parties of the risks and factors that may affect the Company's
business and results of operations.
SEASONALITY
The
supplemental 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.
Each of
our product lines has its own seasonality. The revenue percentage for
fiscal 2010 by quarter is summarized in the table below.
Jun - Aug
|
Sep - Nov
|
Dec - Feb
|
Mar - May
|
|||||||||||||
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|||||||||||||
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% |
PRODUCT
OVERVIEW
We are a
leading publisher and distributor of supplemental instructional materials for
the kindergarten through high school sector. 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.
10
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.
|
|
·
|
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.
|
College
Preparation Product Group
We have
the exclusive U.S. high school distribution rights for college textbooks and
related instruction materials published by two major college
publishers. In addition to these distributed products, we also
publish our own proprietary products for the college preparation
market. The college preparation products that we offer are utilized
in a wide range of Advanced Placement, honors, electives and other high-level
high school courses. Distribution revenue
consists of direct billings to customers, as well as commissions earned on sales
generated by our marketing efforts, but billed directly by the college
publishers. Such sales, for which the commission rate varies, include
purchases by schools through online bookstores and sales derived as a result of
purchases made through state adoption contracts.
Literacy
Product Group
In March
2009, we entered into exclusive sales and distribution agreements within the
United States for specific products with 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. In November 2009, we expanded our product offering
by adding two new series from one of our existing literacy
publishers. We anticipate further growing the number of products
within this group, initially through additional distribution agreements, and in
the future by in-house development.
11
RESULTS
OF OPERATIONS
Three Months Ended November
30, 2010 vs. Three Months Ended November 30, 2009
(Amounts in Thousands - Except Per Share Data)
|
Three Months Ended November 30,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Revenue
|
||||||||||||||||
Test
Preparation, Assessment and Instruction
|
$ | 3,978 | 64.6 | % | $ | 4,907 | 67.2 | % | ||||||||
College
Preparation
|
1,807 | 29.4 | % | 1,993 | 27.3 | % | ||||||||||
Literacy
|
371 | 6.0 | % | 405 | 5.5 | % | ||||||||||
Total
Revenue
|
6,156 | 100.0 | % | 7,305 | 100.0 | % | ||||||||||
Cost
of Revenue
|
||||||||||||||||
Direct
Costs
|
2,399 | 39.0 | % | 2,727 | 37.3 | % | ||||||||||
Prepublication
Cost Amortization
|
1,239 | 20.1 | % | 1,328 | 18.2 | % | ||||||||||
Total
Cost Of Revenue
|
3,638 | 59.1 | % | 4,055 | 55.5 | % | ||||||||||
Gross
Profit
|
2,518 | 40.9 | % | 3,250 | 44.5 | % | ||||||||||
Selling,
General and Administrative Expenses
|
||||||||||||||||
Marketing
and Selling
|
2,329 | 37.8 | % | 2,496 | 34.2 | % | ||||||||||
General
and Administrative
|
1,045 | 17.0 | % | 1,144 | 15.7 | % | ||||||||||
Total
Selling, General and Administrative Expenses
|
3,374 | 54.8 | % | 3,640 | 49.8 | % | ||||||||||
Operating
Loss
|
(856 | ) | -13.9 | % | (390 | ) | -5.3 | % | ||||||||
Other
Expenses, Net
|
9 | 0.1 | % | 3 | 0.0 | % | ||||||||||
Interest
Expense
|
58 | 0.9 | % | 65 | 0.9 | % | ||||||||||
Loss
Before Income Tax Benefit
|
(923 | ) | -15.0 | % | (458 | ) | -6.3 | % | ||||||||
Income
Tax Benefit
|
(342 | ) | -5.6 | % | (155 | ) | -2.1 | % | ||||||||
Net
Loss
|
$ | (581 | ) | -9.4 | % | $ | (303 | ) | -4.1 | % | ||||||
Net
Loss per Common Share:
|
||||||||||||||||
Basic
and Diluted
|
$ | (0.13 | ) | $ | (0.07 | ) |
Overview
The K-12
supplemental market continues to be impacted by state and local budget cuts as
schools are reacting to budgetary pressures and are delaying, and in some cases
reducing or not placing orders for supplemental materials. These
circumstances have had an adverse impact on our revenue for the quarter as
revenue was $6.2 million, a decrease of 15.7% from the same period in the prior
year. Test Preparation, Assessment, and Instruction product group revenue
decreased 18.9% on a year-over-year basis, College Preparation product group
revenue decreased 9.3% and Literacy product group revenue decreased by 8.4%. Net
loss for the quarter was $0.6 million, as compared to $0.3 million in the prior
year. Basic and diluted loss per common share for the quarter was
$0.13, compared to $0.07 for the same period last year.
12
REVENUE
Test Preparation,
Assessment, and Instruction
Revenue
for this product group for the quarter was $4.0 million, compared to $4.9
million during the same period in the prior year. Test Preparation and
Assessment revenue was $3.5 million, a decrease of 20.3% from the prior year,
while Instruction revenue was $0.4 million, compared to $0.5 million in the
prior year.
College
Preparation
College
Preparation revenue for the quarter was $1.8 million, compared to $2.0 million
during the same period in the prior year. Revenue from the sale
of products offered from the two major college publishers was $1.7 million, a
decline of 10.3% from the prior year. Revenue from our proprietary
products and other distribution products was $118,000, an increase of 6.3% from
the prior year. Revenue for this product group is extremely seasonal;
historically approximately 16% of the annual revenue is derived during this
quarter.
Literacy
Revenue
for this product group for the quarter was $371,000, a decline of $34,000 from
the prior year. This product group was launched in March 2009 and in November
2009 we expanded our product offering by adding two new series from one of our
existing literacy publishers. We anticipate further growing the
number of products within this group, initially through additional distribution
agreements, and in the future by in-house development.
COST OF REVENUE
Cost of
revenue for the quarter was $3.6 million (59.1% of revenue) compared to $4.1
million (55.5% of revenue) during the same period in the prior
year.
Cost of
revenue consists of two components: direct costs and amortization of
prepublication costs. Direct
costs consist of (1) product cost, which includes paper, printing, and binding
for proprietary print products and product purchases for nonproprietary
products, (2) web-hosting fees for our digital products, (3) royalties on
proprietary products, and (4) warehousing and shipping costs for all non-digital
products.
|
·
|
Direct
costs as a percentage of revenue for the quarter were 39.0%, as compared
to 37.3% during the same period in the prior year. The increase is due to
the revenue mix.
|
|
·
|
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. 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 the quarter, we amortized $1.2 million of
prepublication costs, a decrease of $89,000 and 6.7% from the prior
year.
|
MARKETING
AND SELLING
Marketing
and selling expenses for the quarter were $2.3 million, a year-over-year
decrease of $167,000 and 6.7%. The expense as a percent of revenue increased
from 34.2% in the prior year to 37.8% in the current period due to a revenue
decline.
Marketing
expenses within this category decreased $154,000 for the quarter. Of
the total decrease $142,000 relates to the timing of catalog and samples
mailings. Selling expenses within this category decreased $13,000
from the prior year primarily due to the revenue mix. As a percentage of
revenue, the expense increased from 20.1% in the prior year to 23.6%, primarily
due to revenue mix and the hiring of additional personnel.
13
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses for the quarter were $1.0 million, a decrease of
$99,000 and 8.7% compared to the prior year. The decrease is due to
overall cost containment efforts.
INTEREST
EXPENSE
Interest
expense for the quarter was $58,000, compared to $65,000 for the same period in
the prior year. The year-over-year change is due to a lower interest
rate on the swap portion of our term loan, and lower average outstanding debt,
offset by the change in the fair-value of our swap
agreement. Included in interest expense for the quarter was $7,000 of
income, compared to $40,000 of income during the same period in the prior
year.
Six Months Ended November
30, 2010 vs. Six Months Ended November 30, 2009
(Amounts in Thousands - Except Per Share Data)
|
Six Months Ended November 30,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Revenue
|
||||||||||||||||
Test
Preparation, Assessment and Instruction
|
$ | 9,100 | 47.1 | % | $ | 11,173 | 50.7 | % | ||||||||
College
Preparation
|
8,984 | 46.5 | % | 9,614 | 43.6 | % | ||||||||||
Literacy
|
1,220 | 6.3 | % | 1,267 | 5.7 | % | ||||||||||
Total
Revenue
|
19,304 | 100.0 | % | 22,054 | 100.0 | % | ||||||||||
Cost
of Revenue
|
||||||||||||||||
Direct
Costs
|
9,065 | 47.0 | % | 10,141 | 46.0 | % | ||||||||||
Prepublication
Cost Amortization
|
2,533 | 13.1 | % | 2,728 | 12.4 | % | ||||||||||
Total
Cost Of Revenue
|
11,598 | 60.1 | % | 12,869 | 58.4 | % | ||||||||||
Gross
Profit
|
7,706 | 39.9 | % | 9,185 | 41.6 | % | ||||||||||
Selling,
General and Administrative Expenses
|
||||||||||||||||
Marketing
and Selling
|
4,560 | 23.6 | % | 4,779 | 21.7 | % | ||||||||||
General
and Administrative
|
2,223 | 11.5 | % | 2,371 | 10.8 | % | ||||||||||
Total
Selling, General and Administrative Expenses
|
6,783 | 35.1 | % | 7,150 | 32.4 | % | ||||||||||
Operating
Income
|
923 | 4.8 | % | 2,035 | 9.2 | % | ||||||||||
Other
Expenses, Net
|
17 | 0.1 | % | 14 | 0.1 | % | ||||||||||
Interest
Expense
|
159 | 0.8 | % | 160 | 0.7 | % | ||||||||||
Income
Before Income Tax Expense
|
747 | 3.9 | % | 1,861 | 8.4 | % | ||||||||||
Income
Tax Expense
|
276 | 1.4 | % | 703 | 3.2 | % | ||||||||||
Net
Income
|
$ | 471 | 2.4 | % | $ | 1,158 | 5.3 | % | ||||||||
Net
Income per Common Share:
|
||||||||||||||||
Basic
and Diluted
|
$ | 0.11 | $ | 0.26 |
Overview
The six
months ended November 30, 2010 continued to be challenging, as many schools are
reacting to budgetary pressures and have been delaying or reducing orders and in
some instances not purchasing new materials for the
classrooms. These circumstances have had an adverse impact on
our revenue for the period. Net revenue for the six month period
ended November 30, 2010 was $19.3 million, a decline of 12.5% from the same
period in the prior year. Test Preparation, Assessment, and
Instruction product group revenue decreased 18.6% on a year-over-year basis
while College Preparation product group revenue decreased 6.6% and Literacy
product group revenue decreased by 3.7%.
Although
we did lower our expenses on a year-over-year basis, these reductions were not
able to offset the decline in revenue resulting in net income for the six month
period of $0.5 million, a decrease of $0.7 million over the prior
year. Basic and diluted earnings per common share for the period were
$0.11 compared to $0.26 in the prior year.
14
REVENUE
Test Preparation,
Assessment, and Instruction
Revenue
for this product group for the six months ended November 30, 2010 was $9.1
million, a decline of 18.6% compared to the prior year. Test Preparation and
Assessment revenue for the period was $8.1 million, a 16.4% decline from the
prior year while Instruction revenue was $1.0 million, a decrease of $0.5
million on a year-over-year basis.
College
Preparation
College
Preparation revenue for the six-month period was $9.0 million, compared to $9.6
million during the same period in the prior year. Revenue from the
sale of products offered from the two major college publishers, which represents
more than 90% of the total revenue within this product group, was $8.6 million,
a decline of 5.9% compared to the prior year. Revenue from other distribution
agreements and from our proprietary products was $395,000, a decline of $89,000
from the prior year. Revenue for this product group is extremely
seasonal; historically over 79% of the annual revenue is derived in the six
months ended November 30th.
Literacy
Revenue
for this product group for the six-month period was $1.2 million, a decline of
3.7%. We entered this market in March 2009 and in November 2009 we expanded our
product offering by adding two new series from one of our existing literacy
publishers. We expect to continue growing this product group by adding new
products, initially through additional distribution agreements, and in the
future by in-house development.
COST OF REVENUE
Cost of
revenue for the six-month period was $11.6 million (60.1% of revenue) compared
to $12.9 million (58.4% of revenue) during the same period in the prior
year.
Cost of
revenue consists of two components: direct costs and amortization of
prepublication costs. Direct
costs consist of (1) product cost, which includes paper, printing, and binding
for proprietary print products and product purchases for nonproprietary
products, (2) web-hosting fees for our digital products, (3) royalties on
proprietary products, and (4) warehousing and shipping costs for all non-digital
products.
|
·
|
Direct
costs as a percentage of revenue increased from 46.0% in the prior year to
47.0% in the current year. The percentage increase is primarily
due to revenue mix, as College Preparation revenue for the period
increased from 43.6% of the total revenue in the prior year, to 46.5% in
the current year. College Preparation direct costs are
substantially higher than those of our other
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. 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 the period, we amortized $2.5 million of prepublication
costs, a year-over-year decline of $195,000 and 7.1% due to lower spending
levels over the past several fiscal
years.
|
15
MARKETING
AND SELLING
Marketing
and selling expenses for the six-month period were $4.6 million which represents
a decrease of $219,000 and 4.6% from the prior year. As a percent of revenue
however, the expense increased from 21.7% in the prior year to 23.6% in the
current year as a result of lower revenue.
Marketing
expenses within this category decreased $77,000 for the period primarily
relating to the timing of samples. Selling expenses within this
category decreased $142,000 from the prior year due primarily lower commissions
as a result of lower revenue, offset by an increase in personnel. As
a percentage of revenue, selling expenses increased from 14.7% in the prior year
to 16.1% due primarily to revenue mix.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses for the period were $2.2 million, a decrease of 6.2%
from the prior year.
INTEREST
EXPENSE
Interest
expense for the six months ended November 30, 2010 was $159,000, which was
consistent with the prior year. For the current period the interest
rate on the swap portion of our term loan and the average outstanding debt was
lower than the prior year. These fluctuations were offset by the change in the
fair-value adjustment of the swap agreement, which for the current six month
period was $16,000 of expense, compared to $79,000 of income in the prior
year.
LIQUIDITY AND CAPITAL
RESOURCES
Net cash
provided by operating activities for the six months ended November 30, 2010 was
$5.4 million. Cash was primarily provided by our net income before
depreciation, amortization and deferred income taxes, as well as increases in
accounts payable and accrued expenses and a decrease in accounts
receivable.
Net cash
used in investing activities was $3.2 million, consisting primarily of
prepublication expenditures of $3.1 million. Prepublication
expenditures for the period were $1.6 million higher than the prior year. The
increase in expenditures is primarily related to timing, as we expect the full
year expenditures to be comparable to the prior year expenditures of $4.8
million.
Net cash
used in financing activities was $2.3 million, consisting of $1.3 million of net
payments on our revolving line of credit and $1.0 million of payments on our
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 as follows:
|
·
|
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 is in a range 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. The average interest rates for the reporting
periods ending November 30, 2010, May 31, 2010 and November 30, 2009 were
2.5%. At November 30, 2010, $3.8 million was outstanding under this
facility, and $6.2 million was available for
borrowing.
|
|
·
|
The
term loan is 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 $2.05
million of the $4.5 million outstanding at November 30,
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 the interest rate at 1.25% plus an interest spread
of 2.00% to 2.25% based upon our total funded debt to EBITDA ratio. The
change in the fair value of the interest rate swap is recognized as an
adjustment to interest expense during each reporting
period. For the six months ended November 30, 2010, we recorded
interest expense of $16,000 relating to the
swap.
|
16
The
credit agreement contains certain financial covenants, calculated on a
consolidated basis for the Company, 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
our common stock.
We use
our cash and borrowing availability under our financing arrangements, together
with cash generated from operations, to meet our cash needs. We
believe that our borrowing capacity together with our existing sources of cash
will be sufficient to meet our anticipated cash needs for the balance of the
fiscal year. We intend to continue investing in prepublication costs
for our proprietary products, using cash generated from operations, and
borrowings under financing arrangements. As we develop more products,
additional investments in inventory will be required.
OFF-BALANCE
SHEET ARRANGEMENTS
None.
CRITICAL
ACCOUNTING ESTIMATES
Our
significant accounting policies are summarized in the footnotes to our financial
statements included in our May 31, 2010 Form 10-K/A. 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
estimates 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. On November
30, 2010, we had a returns valuation allowance of $266,000. The
allowance is recorded at the time of revenue recognition, if the right of return
exists, and is 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 statements of operations.
Subscription based revenue on our digital products is recognized prorata over
the life of the subscription 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. On November 30, 2010, we had an allowance
against this asset of $137,000. If future net undiscounted cash flows
are not sufficient to realize the net carrying value of the asset, an impairment
charge may be necessary.
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 monthly review of all outstanding amounts. 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 was $10,000 at November 30, 2010 and is believed to be
adequate for any exposure to loss.
17
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
management. Any slow-moving or non-salable inventory identified is
reserved or written down at that time. The reserve of $976,000 at
November 30, 2010 is believed to be adequate to cover potential 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, 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. 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.
Item
4. 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
Quarterly Report on Form 10-Q (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 Commissions (“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
During
the fiscal quarter covered by this report, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings
None.
18
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the three months ended November 30, 2010, we did not issue any securities
without registration under the Securities Act of 1933.
|
In
October 2005, our Board of Directors approved a share repurchase program,
permitting us to repurchase up to 100,000 shares of our common
stock. We did not repurchase any shares during the three months
ended November 30, 2010. At November 30, 2010, 83,768 shares
remained that could be purchased under the plan or programs. No
share repurchase plan or program expired, or was terminated, during the
period covered by this report.
|
Item
3. Defaults Upon Senior Securities
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
31.1
|
CEO
Certification pursuant to Rule 13a-14(a).
|
Exhibit
31.2
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CFO
Certification pursuant to Rule 13a-14(a).
|
Exhibit
32
|
Certification
of the CEO and the CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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19
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: January
11, 2011
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PEOPLES
EDUCATIONAL HOLDINGS, INC.
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By: /s/ Brian T.
Beckwith
|
|
Brian
T. Beckwith
|
|
President
and Chief Executive Officer
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20