##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the quarterly period ended November 30, 2007
 o
    
    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.
  Delaware
    
    41-1368898(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 (Address of principal executive offices) (Zip Code)
 (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1: Financial Statements:Consolidated Balance Sheets as of November 30, 2007 (Unaudited), November 30, 2006 (Unaudited) and May 31, 2007
    
    
    3Unaudited Consolidated Statements of Operations for the Three and Six Months Ended November 30,
2007 and 2006
    
    
    4Unaudited Consolidated Statement of Changes in Stockholders Equity for the Six Months Ended
November 30, 2007
    
    
    5Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
November 30, 2007 and 2006
    
    
    6Condensed Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4: Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    21Item 1A: Risk Factors
    
    
    21Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3: Defaults Upon Senior Securities
    
    
    22Item 4: Submission of Matters to a Vote of Security Holders
    
    
    22Item 5: Other Information
    
    
    22Item 6: Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBITSCEO CertificationCFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
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##### Table of Contents



Part I
 
 Item 1. Financial Statements
 PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 UNAUDITED
    
    
    
    
    
    
    UNAUDITED(In Thousands-Except Share Data)
    
    November 30, 2007
    
    
    May 31, 2007
    
    
    November 30, 2006ASSETSCurrent AssetsCash
    
    $
    172
    
    
    $
    98
    
    
    $
    755Accounts Receivable Net of Allowances for
Doubtful Accounts and Returns
    
    
    2,726
    
    
    
    3,961
    
    
    
    3,192Inventory
    
    
    4,887
    
    
    
    5,270
    
    
    
    5,671Prepaid Expenses and Other
    
    
    443
    
    
    
    334
    
    
    
    127Prepaid Marketing Expenses
    
    
    635
    
    
    
    638
    
    
    
    356Deferred Income Taxes
    
    
    1,119
    
    
    
    871
    
    
    
    655Total Current Assets
    
    
    9,982
    
    
    
    11,172
    
    
    
    10,756Equipment and Leasehold Improvements- At Cost, Less
Accumulated Depreciation of $1,843, $1,692 and $1,538, respectively
    
    
    634
    
    
    
    697
    
    
    
    820Other AssetsDeferred Prepublication Costs, Net
    
    
    16,555
    
    
    
    17,180
    
    
    
    17,518Deferred Income Taxes
    
    
    534
    
    
    
    1,155
    
    
    
    689Trademarks, Net
    
    
    170
    
    
    
    141
    
    
    
    136Prepaid Expenses and Other
    
    
    324
    
    
    
    370
    
    
    
    95Prepaid Marketing Expenses
    
    
    765
    
    
    
    1,036
    
    
    
    1,264Total Other Assets
    
    
    18,348
    
    
    
    19,882
    
    
    
    19,702Total Assets
    
    $
    28,964
    
    
    $
    31,751
    
    
    $
    31,278LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent Maturities of Long Term Obligations
    
    $
    570
    
    
    $
    649
    
    
    $
    1,047Accounts Payable
    
    
    6,406
    
    
    
    6,304
    
    
    
    10,366Accrued Compensation
    
    
    178
    
    
    
    547
    
    
    
    575Other Accrued Expenses
    
    
    401
    
    
    
    327
    
    
    
    226Deferred Revenue
    
    
    656
    
    
    
    327
    
    
    
    352Total Current Liabilities
    
    
    8,211
    
    
    
    8,154
    
    
    
    12,566Long Term Obligations, Less Current Maturities
    
    
    12,715
    
    
    
    16,405
    
    
    
    10,587Total Liabilities
    
    
    20,926
    
    
    
    24,559
    
    
    
    23,153Commitments and ContingenciesStockholders EquityPreferred Stock, authorized 1,500,000 shares; none issuedCommon Stock, $0.02 par value; authorized
8,500,000 shares; issued: 4,470,734 for
November 2007 and 4,441,173 for May 2007 &
November 2006
    
    
    89
    
    
    
    89
    
    
    
    89Additional Paid In Capital
    
    
    7,980
    
    
    
    7,875
    
    
    
    7,832Retained Earnings (Accumulated Deficit)
    
    
    33
    
    
    
    (708
    )
    
    
    268Treasury Stock - 16,232 shares as for all periods, at cost
    
    
    (64
    )
    
    
    (64
    )
    
    
    (64
    )Total Stockholders Equity
    
    
    8,038
    
    
    
    7,192
    
    
    
    8,125Total Liabilities and Stockholders Equity
    
    $
    28,964
    
    
    $
    31,751
    
    
    $
    31,278
  3




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##### Table of Contents



PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,(In Thousands, Except Per Share Data)
    
    2007
    
    2006
    
    2007
    
    2006Revenue, Net
    
    $
    8,502
    
    
    $
    8,239
    
    
    $
    25,369
    
    
    $
    23,586Cost of RevenueDirect Costs
    
    
    3,036
    
    
    
    2,809
    
    
    
    11,739
    
    
    
    10,566Prepublication Cost Amortization
    
    
    1,692
    
    
    
    1,449
    
    
    
    3,395
    
    
    
    2,892Total
    
    
    4,728
    
    
    
    4,258
    
    
    
    15,134
    
    
    
    13,458Gross Profit
    
    
    3,774
    
    
    
    3,981
    
    
    
    10,235
    
    
    
    10,128Selling, General and Administrative Expenses
    
    
    4,226
    
    
    
    4,204
    
    
    
    8,355
    
    
    
    8,371Income (Loss) from Operations
    
    
    (452
    )
    
    
    (223
    )
    
    
    1,880
    
    
    
    1,757Other Expenses (Income), Net
    
    
    12
    
    
    
    26
    
    
    
    24
    
    
    
    20Interest Expense
    
    
    354
    
    
    
    311
    
    
    
    742
    
    
    
    570Net Income (Loss) Before Income Taxes
    
    
    (818
    )
    
    
    (560
    )
    
    
    1,114
    
    
    
    1,167Income Tax Expense (Benefit)
    
    
    (396
    )
    
    
    (224
    )
    
    
    373
    
    
    
    467Net Income (Loss)
    
    $
    (422
    )
    
    $
    (336
    )
    
    $
    741
    
    
    $
    700Net Income (Loss) per Common Share:Basic
    
    $
    (0.09
    )
    
    $
    (0.08
    )
    
    $
    0.17
    
    
    $
    0.16Diluted
    
    $
    (0.09
    )
    
    $
    (0.08
    )
    
    $
    0.16
    
    
    $
    0.15Weighted-average Number of
Common Shares Outstanding:Basic
    
    
    4,443
    
    
    
    4,428
    
    
    
    4,434
    
    
    
    4,433Diluted
    
    
    4,443
    
    
    
    4,428
    
    
    
    4,491
    
    
    
    4,612
  4




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PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
 Additional
    
    RetainedCommon
    
    Paid-In
    
    Earnings
    
    Treasury(In Thousands)
    
    Stock
    
    Capital
    
    (Deficit)
    
    Stock
    
    TotalBalance at May 31, 2007
    
    $
    89
    
    
    $
    7,875
    
    
    $
    (708
    )
    
    $
    (64
    )
    
    $
    7,192Stock Options Exercised
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Stock-Based Compensation
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Net Income
    
    
    
    
    
    
    
    
    
    
    741
    
    
    
    
    
    
    
    741Balance at November 30, 2007
    
    $
    89
    
    
    $
    7,980
    
    
    $
    33
    
    
    $
    (64
    )
    
    $
    8,038
  5




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##### Table of Contents



PEOPLES
EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months EndedNovember 30,(In Thousands)
    
    2007
    
    
    2006Cash Flows From Operating ActivitiesNet Income
    
    $
    741
    
    
    $
    700Adjustments to Reconcile Net Income to Net Cash
Provided by Operating ActivitiesDepreciation
    
    
    151
    
    
    
    163Amortization of Prepublication Costs and Intangible Assets
    
    
    3,412
    
    
    
    2,906Stock-Based Compensation
    
    
    17
    
    
    
    45Market Value Adjustment of Interest Rate Swap
    
    
    136
    
    
    
    76Deferred Income Taxes
    
    
    373
    
    
    
    458Changes in Assets and LiabilitiesAccounts Receivable
    
    
    1,235
    
    
    
    160Inventory
    
    
    383
    
    
    
    (2,198
    )Prepaid Expenses and Other
    
    
    (63
    )
    
    
    (96
    )Prepaid Marketing Expenses
    
    
    274
    
    
    
    Accounts Payable and Accrued Expenses
    
    
    (329
    )
    
    
    2,418Deferred Revenue
    
    
    329
    
    
    
    95Income Taxes Payable or Refundable
    
    
    
    
    
    
    665Net Cash Provided By Operating Activities
    
    
    6,659
    
    
    
    5,392Cash Flows From Investing ActivitiesPurchases of Equipment and Leasehold Improvements
    
    
    (88
    )
    
    
    (153
    )Expenditures for Intangibles
    
    
    (46
    )
    
    
    (24
    )Expenditures for Prepublication Costs
    
    
    (2,770
    )
    
    
    (3,804
    )Net Cash Used In Investing Activities
    
    
    (2,904
    )
    
    
    (3,981
    )Cash Flows From Financing ActivitiesNet (Payments) Borrowings Under Line of Credit
    
    
    (3,669
    )
    
    
    207Purchases of Treasury Stock
    
    
    
    
    
    
    (56
    )Proceeds From the Exercise of Stock Options
    
    
    88
    
    
    
    Principal Payments On Short Term Loan
    
    
    
    
    
    
    (1,000
    )Principal Payments On Long-Term Debt
    
    
    (100
    )
    
    
    (557
    )Net Cash Used In Financing Activities
    
    
    (3,681
    )
    
    
    (1,406
    )Net Increase in Cash
    
    
    74
    
    
    
    5CashBeginning of Period
    
    
    98
    
    
    
    750End of Period
    
    $
    172
    
    
    $
    755Supplemental Cash Flow InformationCash Payments for:Interest
    
    $
    633
    
    
    $
    493Income Taxes
    
    $
    
    
    
    $
    
  6




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Peoples
Educational Holdings, Inc., and Subsidiary
 
 Notes to Condensed Consolidated Financial Statements (UNAUDITED)
 NOTE 1
    NOTE 2
 ®
 NOTE 3
  7




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NOTE 4
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 30(In Thousands)
    
    2007
    
    2006
    
    2007
    
    2006Balances, Beginning
    
    $
    17,080
    
    
    $
    16,966
    
    
    $
    17,180
    
    
    $
    16,606Prepublication Cost Additions
    
    
    1,167
    
    
    
    2,001
    
    
    
    2,770
    
    
    
    3,804Amortization Expense
    
    
    (1,692
    )
    
    
    (1,449
    )
    
    
    (3,395
    )
    
    
    (2,892
    )Balances, Ending
    
    $
    16,555
    
    
    $
    17,518
    
    
    $
    16,555
    
    
    $
    17,518
  For the remainder of fiscal 2008
    
    $
    3,102For the year ended May 31, 2009
    
    
    5,899For the year ended May 31, 2010
    
    
    3,790For the year ended May 31, 2011
    
    
    2,267For the year ended May 31, 2012
    
    
    1,197Thereafter
    
    
    300$
    16,555
  NOTE 5
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 30(In Thousands)
    
    2007
    
    2006
    
    2007
    
    2006Balances, Beginning
    
    $
    170
    
    
    $
    138
    
    
    $
    141
    
    
    $
    126Additions
    
    
    16
    
    
    
    9
    
    
    
    46
    
    
    
    24Amortization Expense
    
    
    (16
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    (14
    )Balances, Ending
    
    $
    170
    
    
    $
    136
    
    
    $
    170
    
    
    $
    136
  NOTE 6
  8




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##### Table of Contents



November 30,
    
    
    May 31,
    
    
    November 30,(In Thousands)
    
    2007
    
    
    2007
    
    
    2006Total Prepaid Balance
    
    $
    1,400
    
    
    $
    1,674
    
    
    $
    1,620Less current portion
    
    
    635
    
    
    
    638
    
    
    
    356Long-term balance
    
    
    765
    
    
    
    1,036
    
    
    
    1,264
  (In Thousands)For the remainder of fiscal 2008
    
    $
    364For the year ended May 31, 2009
    
    
    541For the year ended May 31, 2010
    
    
    495
 NOTE 7
  
    
    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. At November 30, 2007,
$3.2 million was outstanding under this facility, and $6.8 million was available for
borrowing.
    
    The term loan is for $10 million and matures in December 2012. The term loan provides
for payments of interest only for the first twelve months and for 20 equal quarterly
payments of principal and interest thereafter until maturity. The term loan bears interest
at the same rate as the revolving line of credit for $5 million of the $10 million
outstanding. 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. After the three-year period, the interest
rate reverts back to a variable rate. The change in the fair value of the interest rate
swap is recognized as interest expense or income during each reporting period. For the
three and six month periods ended November 30, 2007, we have recorded $82,000 and $136,000
of interest expense as a result of the mark-to-market interest rate adjustment.
   9




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NOTE 8
  Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,(Amounts in Thousands)
    
    2007
    
    2006
    
    2007
    
    2006Stock Based Compensation Expense
    
    $
    5
    
    
    $
    17
    
    
    $
    17
    
    
    $
    45
   WeightedWeighted
    
    AverageAverage
    
    RemainingNumber
    
    Exercise
    
    Contractof Shares
    
    Price
    
    LifeOutstanding options at 5/31/07
    
    
    856,036
    
    
    $
    3.44Granted
    
    
    10,000
    
    
    $
    4.05Exercised
    
    
    (29,561
    )
    
    $
    3.00Canceled
    
    
    
    
    
    $
    Outstanding options at 11/30/07
    
    
    836,475
    
    
    $
    3.35
    
    
    3.79 Yrs.Outstanding exercisable at 11/30/07
    
    
    802,675
    
    
    $
    3.42
    
    
    3.57 Yrs.
   NOTE 9
  10




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Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109
  NOTE 10
 Accounting for Asset Retirement Obligations
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 NOTE 11
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302007
    
    2006
    
    2007
    
    2006Casabonne Associates
    
    $
    
    
    
    $
    16
    
    
    $
    19
    
    
    $
    19Marketing Works (1)
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    32Total Payments
    
    $
    
    
    
    $
    35
    
    
    $
    19
    
    
    $
    51
 
 (1)
    
    As Mr. Casabonne is no longer a related party of the organization. 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARDLOOKING STATEMENTS
  SEASONALITY
  Jun - Aug
    
    Sep - Nov
    
    Dec - Feb
    
    Mar - May1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterTest Preparation, Assessment, and Instruction
    
    
    27
    %
    
    
    27
    %
    
    
    20
    %
    
    
    26
    %College Preparation
    
    
    64
    %
    
    
    15
    %
    
    
    7
    %
    
    
    14
    %Total Revenue
    
    
    39
    %
    
    
    23
    %
    
    
    16
    %
    
    
    22
    %
 OVERVIEW
  Test Preparation, Assessment, and Instruction Product Group
 Test Preparation, Assessment
 
    
    We create and sell print and web-based materials targeted to grades 2-12 to help
students prepare for state proficiency tests. The Measuring Up®Test Preparation
and assessment print products are sold in twelve states. MeasuringUp® 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.
    
    Measuring Up e-Pathä, a web-based assessment product developed in conjunction with
Cisco Learning Systems, provides schools and districts the ability to provide formative
classroom level assessments, which, in turn, allows for informed instruction relative to
state standards. Measuring Up e-Pathä delivers a detailed prescriptive instructional
path for individual students tied into our instructional materials or to other products in
use within a school or district. The strategy is to help educators assess a childs
strengths and weaknesses relative to the state standards and then
 12




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##### Table of Contents



provide a Personal
Prescriptive Path for remediation. The assessment data can be aggregated using
NCLB-compliant reporting at the class, school and district level and can be used to drive
not only student learning, but teacher professional development as well.
 Instruction
 
    
    We have two product lines within this grouping: Focused Instruction, and remedial,
multicultural text and professional development related materials. Focused Instruction
materials provide standardsbased, state-specific supplemental instruction on 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, multicultural and professional development 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 though 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.
 13




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##### Table of Contents



RESULTS OF OPERATIONS
 Three Months Ended November 30, 2007 vs. Three Months Ended November 30, 2006
 Three Months Ended November 30,(Amounts in Thousands)
    
    2007
    
    
    2006RevenueTest Preparation, Assessment and Instruction
    
    $
    6,498
    
    
    
    76.4
    %
    
    $
    6,456
    
    
    
    78.4
    %College Preparation
    
    
    2,004
    
    
    
    23.6
    %
    
    
    1,783
    
    
    
    21.6
    %Total Revenue
    
    
    8,502
    
    
    
    100.0
    %
    
    
    8,239
    
    
    
    100.0
    %Cost of RevenueDirect Costs
    
    
    3,036
    
    
    
    35.7
    %
    
    
    2,809
    
    
    
    34.1
    %Prepublication Cost Amortization
    
    
    1,692
    
    
    
    19.9
    %
    
    
    1,449
    
    
    
    17.6
    %Total Cost Of Revenue
    
    
    4,728
    
    
    
    55.6
    %
    
    
    4,258
    
    
    
    51.7
    %Selling, General and Administrative ExpensesMarketing and Selling
    
    
    3,158
    
    
    
    37.1
    %
    
    
    3,088
    
    
    
    37.5
    %General and Administrative
    
    
    1,068
    
    
    
    12.6
    %
    
    
    1,116
    
    
    
    13.5
    %Total Selling, General and Administrative Expenses
    
    
    4,226
    
    
    
    49.7
    %
    
    
    4,204
    
    
    
    51.0
    %Operating Loss
    
    
    (452
    )
    
    
    -5.3
    %
    
    
    (223
    )
    
    
    -2.7
    %Other Expenses
    
    
    12
    
    
    
    0.1
    %
    
    
    26
    
    
    
    0.3
    %Interest Expense
    
    
    354
    
    
    
    4.2
    %
    
    
    311
    
    
    
    3.8
    %Income Tax Benefit
    
    
    (396
    )
    
    
    -4.6
    %
    
    
    (224
    )
    
    
    -2.7
    %Net Loss
    
    $
    (422
    )
    
    
    -5.0
    %
    
    $
    (336
    )
    
    
    -4.1
    %EPS Basic and Diluted
    
    $
    (0.09
    )
    
    
    
    
    
    $
    (0.08
    )
 Overview
  REVENUE
 Test Preparation, Assessment, and Instruction
  14




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##### Table of Contents



College Preparation
  COST OF REVENUE
   
    
    Direct costs as a percentage of revenue for the three months ended November 30, 2007
were 35.7%, an increase from 34.1% in the prior year. The percentage increase is due to
revenue mix, as College Preparation revenue for the quarter was 23.6% of total revenue, an
increase from 21.6% during the prior year. 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 non-proprietary 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, such as expert reviews. 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 three-month period ending November 30, 2007 we amortized $1.7 million of
prepublication costs, compared to $1.4 million in the prior year.
 MARKETING AND SELLING
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##### Table of Contents



GENERAL AND ADMINISTRATIVE
  INTEREST EXPENSE
  Six Months Ended November 30, 2007 vs. Six Months Ended November 30, 2006
 Six Months Ended November 30,(Amounts in Thousands)
    
    2007
    
    
    2006RevenueTest Preparation, Assessment and Instruction
    
    $
    13,844
    
    
    
    54.6
    %
    
    $
    13,681
    
    
    
    58.0
    %College Preparation
    
    
    11,525
    
    
    
    45.4
    %
    
    
    9,905
    
    
    
    42.0
    %Total Revenue
    
    
    25,369
    
    
    
    100.0
    %
    
    
    23,586
    
    
    
    100.0
    %Cost of RevenueDirect Costs
    
    
    11,739
    
    
    
    46.3
    %
    
    
    10,566
    
    
    
    44.8
    %Prepublication Cost Amortization
    
    
    3,395
    
    
    
    13.4
    %
    
    
    2,892
    
    
    
    12.3
    %Total Cost Of Revenue
    
    
    15,134
    
    
    
    59.7
    %
    
    
    13,458
    
    
    
    57.1
    %Selling, General and Administrative ExpensesMarketing and Selling
    
    
    6,078
    
    
    
    24.0
    %
    
    
    5,954
    
    
    
    25.2
    %General and Administrative
    
    
    2,277
    
    
    
    9.0
    %
    
    
    2,417
    
    
    
    10.2
    %Total Selling, General and Administrative Expenses
    
    
    8,355
    
    
    
    33.0
    %
    
    
    8,371
    
    
    
    35.4
    %Operating Income
    
    
    1,880
    
    
    
    7.3
    %
    
    
    1,757
    
    
    
    7.5
    %Other Expenses
    
    
    24
    
    
    
    0.1
    %
    
    
    20
    
    
    
    0.1
    %Interest Expense
    
    
    742
    
    
    
    2.9
    %
    
    
    570
    
    
    
    2.4
    %Income Tax Expense
    
    
    373
    
    
    
    1.5
    %
    
    
    467
    
    
    
    2.0
    %Net Income
    
    $
    741
    
    
    
    2.8
    %
    
    $
    700
    
    
    
    3.0
    %EPS Basic
    
    $
    0.17
    
    
    
    
    
    
    $
    0.16EPS Diluted
    
    $
    0.16
    
    
    
    
    
    
    $
    0.15
 Overview
  16




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##### Table of Contents



REVENUE
 Test Preparation, Assessment, and Instruction
  College Preparation
  COST OF REVENUE
   
    
    Direct costs as a percentage of revenue for the six months ended November 30, 2007 was
46.3%, an increase from 44.8% in the prior year. The percentage increase is due to revenue
mix, as College Preparation revenue increased from 42.0% to 45.4% of the total revenue.
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
non-proprietary 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, such as expert reviews. 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 six-month period ending November 30, 2007 we amortized $3.4 million of
prepublication costs, compared to $2.9 million during the same period in the prior year.
 MARKETING AND SELLING
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##### Table of Contents



GENERAL AND ADMINISTRATIVE
  INTEREST EXPENSE
  LIQUIDITY AND CAPITAL RESOURCES
     
    
    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. At November 30, 2007,
$3.2 million was outstanding under this facility, and $6.8 million was available for
borrowing.
    
    The term loan is for $10 million and matures in December 2012. The term loan provides
for payments of interest only for the first twelve months and for 20 equal quarterly
payments of principal and interest thereafter until maturity. The term loan bears
interest at the same rate as the revolving line of credit for $5 million of the $10 million
outstanding. 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. After the three-year period, the interest
rate reverts back to a variable rate. The change in the fair
 18




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##### Table of Contents



value of the interest rate
swap is recognized as interest expense or income during each reporting
period. For the three and six month periods ended November 30, 2007, we have recorded
$54,000 and $136,000 of interest expense as a result of the mark-to-market interest rate
adjustment.
   (In Thousands)
    
    
    
    
    
    
    
    
    
    Payments Due by PeriodRemainder ofFiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal YearContractual Cash Obligations
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012Term Loan(including interest portion)
    
    $
    10,512
    
    
    $
    872
    
    
    $
    2,637
    
    
    $
    2,486
    
    
    $
    2,334
    
    
    $
    2,183Capital Leases(including interest portion)
    
    
    136
    
    
    
    54
    
    
    
    47
    
    
    
    35
    
    
    
    
    
    
    
    Operating Leases
    
    
    1,138
    
    
    
    287
    
    
    
    577
    
    
    
    271
    
    
    
    3
    
    
    
    Total
    
    $
    11,786
    
    
    $
    1,213
    
    
    $
    3,261
    
    
    $
    2,792
    
    
    $
    2,337
    
    
    $
    2,183
  OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
  Revenue Recognition and Allowance for Returns
  Deferred Prepublication Costs
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##### Table of Contents



Allowance for Doubtful Accounts
  Allowance for Excess and Slow-Moving Inventory
 Stock-Based Compensation
 Share-Based Payment,
 Income Taxes
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  20




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   21




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit 31.1
    
    CEO Certification pursuant to Rule 13a-14(a).Exhibit 31.2
    
    CFO Certification pursuant to Rule 13a-14(a).Exhibit 32.1
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 22




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##### Table of Contents



SIGNATURES
  Dated:
    
    January 14, 2008
    
    PEOPLES EDUCATIONAL HOLDINGS, INC.By: /s/ Brian T. BeckwithBrian T. BeckwithPresident and Chief Executive Officer
 23