##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended May 31, 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. Employerincorporation 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: NONE
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.02 par value
 o þ
 o
 þ o
 o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART I
    
    
    1ITEM 1. BUSINESS
    
    
    1ITEM 1A. RISK FACTORS
    
    
    8ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    11ITEM 2. PROPERTIES
    
    
    11ITEM 3. LEGAL PROCEEDINGS
    
    
    11ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    11PART II
    
    
    12ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    12ITEM 6. SELECTED FINANCIAL DATA
    
    
    14ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    26ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    44ITEM 9A. CONTROLS AND PROCEDURES
    
    
    44ITEM 9B. OTHER INFORMATION
    
    
    44PART III
    
    
    45ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    45ITEM 11. EXECUTIVE COMPENSATION
    
    
    45ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    45ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    45ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    45PART IV
    
    
    46ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    46SIGNATURES
    
    
    48ConsentCertificationCertificationCertificationCertification




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PART I
 EXPLANATORY NOTE REGARDING CHANGE IN FISCAL YEAR
  
 ITEM 1. BUSINESS
 OVERVIEW AND COMPANY HISTORY
    Test Preparation, Assessment, and Instruction Product Group
 
    
    Test Preparation and Assessment: We create and sell state-customized, print and
electronic, test preparation and assessment materials that help teachers prepare students
for success in school and for required state proficiency tests, grades 2-12.
    
    Instruction: We produce and sell proprietary state-customized print worktexts and print
and web-based delivered assessments, for Grades 2-8. 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 schools 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.
  1




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INDUSTRY BACKGROUND
 School Enrollment
  Educational Funding
 (National Center for Education
Statistics, 2006)
  (Fiscal Survey of States, National Association of State Budget Officers, June 2006, 2005)
  No Child Left Behind
   Supplementary Materials Market
  2




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Test Preparation, Assessment, and Instruction
      College Preparation Market
 
 PRODUCTS
  3




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Test Preparation, Assessment, and Instruction
 Test Preparation and Assessment
 ®  ®
 ® ®
 Instruction
  Professional Development
    12 Months Ended May 31, 2007
    
    
    67
    %5 Months Ended May 31, 2006
    
    
    82
    %12 Months Ended December 31, 2005
    
    
    66
    %12 Months Ended December 31, 2004
    
    
    66
    %
  4




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College Preparation
    12 Months Ended May 31, 2007
    
    
    33
    %5 Months Ended May 31, 2006
    
    
    18
    %12 Months Ended December 31, 2005
    
    
    34
    %12 Months Ended December 31, 2004
    
    
    34
    %
  PRODUCT DEVELOPMENT
       5




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CUSTOMER BASE
  SALES, MARKETING, AND DISTRIBUTION
 Overview
  Integrated Catalog/Inside and Outside Sales Model
  Website
  Sales Representatives
  Warehouse and Distribution
  COMPETITION
  PROTECTION OF PROPRIETARY RIGHTS
  6




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EMPLOYEES
  EXECUTIVE OFFICERS OF THE REGISTRANT
  Name and Age
    
    Age
    
    PositionJames J. Peoples
    
    70
    
    Co-founder, Chairman, and Senior AdvisorBrian T. Beckwith
    
    51
    
    President and Chief Executive OfficerDiane M. Miller
    
    55
    
    Co-founder, Executive Vice President and Chief Creative OfficerMichael L. DeMarco
    
    43
    
    Executive Vice President and Chief Financial Officer
  summa cum laude
   7




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ITEM 1A. RISK FACTORS
 An investment in our common stock involves a high degree of risk. You should carefully consider
the risks described below with respect to an investment in our shares. If any of the following
risks are actually realized, our business, financial condition, operating results or cash provided
by operations could be materially harmed. As a result, the trading price of our common stock could
decline, and you might lose all or part of your investment. When evaluating an investment in our
common stock, you should also refer to the other information in this report, including our
consolidated financial statements and the related notes.
 Risks Relating to Our Business
 If the federal No Child Left Behind Act is materially changed or repealed, or found
unconstitutional, our revenue and profitability would be materially adversely affected.
  Legislation reducing government funding to our customers, a delay in government appropriations, or
a change in federally mandated or state standards-based testing legislation would have a material
adverse effect on our revenue.
   Fluctuations in our quarterly results may adversely affect our stock price.
  Loss of either of our exclusive distributorship contracts with major college publishers could have
a material adverse effect on our business or operating results.
  8




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Misuse, misappropriation, or other loss of our proprietary rights could have a material adverse
effect on our results of operations.
 ® ® ®
   Failure to retain our key executives or attract and retain qualified personnel could have a
material adverse effect on our business and operating results.
  Competition in our industry is intense and could adversely affect our performance.
  9




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Our future success will depend on our ability to adapt to technological changes and meet evolving
standards in the supplemental educational materials industry.
  Our business requires significant investments in product development, and our profitability depends
on market acceptance of those products.
  Risks Related to Ownership of Our Common Stock
 Our principal stockholders own a large percentage of our voting stock, which will allow them to
control substantially all matters requiring stockholder approval.
  If an active trading market for our common stock does not develop, the value and liquidity of your
investment in our common stock could be adversely affected.
  The trading price of our common stock may become volatile and could decline.
  
    
    variations in our revenue and profitability;
    
    variations in quarterly operating results due to seasonal fluctuations in our business;
    
    changes in earnings estimates by analysts;
    
    announcements of new contracts or product offerings by us or our competitors;
    
    disputes or other developments concerning proprietary rights;
    
    departures of key personnel;
    
    adverse legislative changes; or
    
    announcements by us, or our competitors, of acquisitions, strategic partnerships, joint
ventures or capital commitments.
 10




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Because it is unlikely that we will pay dividends, you will only be able to benefit from holding
our stock if the stock price appreciates.
  Our certificate of incorporation and Delaware law may discourage an acquisition that could deprive
our stockholders of opportunities to sell their shares at prices higher than prevailing market
prices.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
     
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  11




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market for Common Stock
  Year Ended
    
    Five Months Ended
    
    Year EndedMay 31, 2007
    
    May 31, 2006
    
    December 31, 2005Quarter
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low1st
    
    $
    4.25
    
    
    $
    3.65
    
    
    $
    5.68
    
    
    $
    4.77
    
    
    $
    6.50
    
    
    $
    5.752nd
    
    $
    5.00
    
    
    $
    3.37
    
    
    $
    4.79
    
    
    $
    3.93
    
    
    $
    9.30
    
    
    $
    6.453rd
    
    $
    4.90
    
    
    $
    3.35
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    8.50
    
    
    $
    4.804th
    
    $
    3.69
    
    
    $
    2.20
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    5.70
    
    
    $
    4.11
  Record Holders
  Dividends
  Stock Performance Graph
  12




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COMPARISON OF CUMULATIVE TOTAL RETURN
 
 8/26/2004
    
    
    12/31/2004
    
    
    5/31/2005
    
    
    12/30/2005
    
    
    5/31/2006
    
    
    12/30/2006
    
    
    5/31/2007Peoples Educational
Holdings, Inc.
    
    
    $
    100.00
    
    
    
    $
    208.34
    
    
    
    $
    233.67
    
    
    
    $
    175.00
    
    
    
    $
    132.67
    
    
    
    $
    155.00
    
    
    
    $
    108.34Nasdaq Stock Market
(U.S. Companies)
    
    
    $
    100.00
    
    
    
    $
    118.12
    
    
    
    $
    112.64
    
    
    
    $
    120.63
    
    
    
    $
    119.29
    
    
    
    $
    132.53
    
    
    
    $
    142.73Peer Index
    
    
    $
    100.00
    
    
    
    $
    103.72
    
    
    
    $
    105.71
    
    
    
    $
    89.42
    
    
    
    $
    79.21
    
    
    
    $
    98.02
    
    
    
    $
    85.24
  Issuer Purchases of Equity Securities
  Total Number
    
    Maximum Number (orof Shares
    
    Approximate DollarPurchased as
    
    Value) of Shares thatTotal Number
    
    Average
    
    Part of Publicly
    
    May Yet be Purchasedof Shares
    
    Price Paid
    
    Announced Plans
    
    Under the PlansPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    or Programs3/1/07 to 3/31/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,7684/1/07 to 4/30/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,7685/1/07 to 5/31/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,768Total
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    83,768
  13




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ITEM 6. SELECTED FINANCIAL DATA
  Statements of Operations Data:
 12 Months
    
    
    5 MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    12 Months Ended5/31/07
    
    
    5/31/06
    
    
    5/31/05
    
    
    12/31/05
    
    
    12/31/04
    
    
    12/31/03Net Revenue
    
    $
    38,702
    
    
    $
    11,736
    
    
    $
    10,203
    
    
    $
    35,454
    
    
    $
    32,487
    
    
    $
    27,815Cost of RevenueDirect Costs
    
    
    15,905
    
    
    
    4,090
    
    
    
    4087
    
    
    
    15,628
    
    
    
    13,964
    
    
    
    13,050Prepublication Cost Amortization
    
    
    5,955
    
    
    
    2,174
    
    
    
    1703
    
    
    
    5,219
    
    
    
    3,338
    
    
    
    2,245Product Line Restructuring Charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,931
    
    
    
    
    
    
    
    Total
    
    
    21,860
    
    
    
    6,264
    
    
    
    5,790
    
    
    
    24,778
    
    
    
    17,302
    
    
    
    15,295Gross Profit
    
    $
    16,842
    
    
    $
    5,472
    
    
    $
    4,413
    
    
    $
    10,676
    
    
    $
    15,185
    
    
    $
    12,520Selling, General and Administrative Expenses
    
    
    16,161
    
    
    
    6,620
    
    
    
    6,061
    
    
    
    15,229
    
    
    
    12,785
    
    
    
    10,441Income (Loss) from Operations
    
    
    681
    
    
    
    (1,148
    )
    
    
    (1,648
    )
    
    
    (4,553
    )
    
    
    2,400
    
    
    
    2,079Interest Expense
    
    
    1,129
    
    
    
    320
    
    
    
    123
    
    
    
    411
    
    
    
    90
    
    
    
    110Other Expenses, Net
    
    
    43
    
    
    
    30
    
    
    
    4
    
    
    
    46
    
    
    
    22
    
    
    
    8Net Income (Loss) Before Income Taxes
    
    
    (491
    )
    
    
    (1,498
    )
    
    
    (1,775
    )
    
    
    (5,010
    )
    
    
    2,288
    
    
    
    1,961Federal and State Income Tax Expense (Benefit)
    
    
    (215
    )
    
    
    (544
    )
    
    
    (710
    )
    
    
    (1,854
    )
    
    
    878
    
    
    
    743Net Income (Loss)
    
    $
    (276
    )
    
    $
    (954
    )
    
    $
    (1,065
    )
    
    $
    (3,156
    )
    
    $
    1,410
    
    
    $
    1,218Net Income (Loss) per Common ShareBasic
    
    $
    (0.06
    )
    
    $
    (0.21
    )
    
    $
    (0.28
    )
    
    $
    (0.76
    )
    
    $
    0.37
    
    
    $
    0.35Diluted
    
    $
    (0.06
    )
    
    $
    (0.21
    )
    
    $
    (0.28
    )
    
    $
    (0.76
    )
    
    $
    0.34
    
    
    $
    0.34Weighted-average Number of
Common Shares OutstandingBasic
    
    
    4,429
    
    
    
    4,438
    
    
    
    3,809
    
    
    
    4,138
    
    
    
    3,809
    
    
    
    3,520Diluted
    
    
    4,429
    
    
    
    4,438
    
    
    
    3,809
    
    
    
    4,138
    
    
    
    4,209
    
    
    
    3,621
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May 31,
    
    December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data:Working Capital (deficit)
    
    $
    3,018
    
    
    $
    (2,778
    )
    
    $
    (1,197
    )
    
    $
    (623
    )
    
    $
    (392
    )Total Assets
    
    
    31,751
    
    
    
    29,343
    
    
    
    24,372
    
    
    
    17,146
    
    
    
    11,532Long-term obligations
    
    
    16,405
    
    
    
    9,420
    
    
    
    6,587
    
    
    
    3,408
    
    
    
    198Stockholders Equity
    
    
    7,192
    
    
    
    7,436
    
    
    
    8,266
    
    
    
    8,551
    
    
    
    7,141
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 ForwardLooking Statements
  Critical Accounting Policies and Significant Estimates
  Revenue Recognition
 ®
 Deferred Prepublication Costs
  15




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Allowance for Doubtful Accounts




Allowance for Excess and Slow-Moving Inventory




Stock-Based Compensation


Share-Based
Payment


Income Taxes




Twelve Months Ended May 31, 2007 vs. Twelve Months Ended December 31, 2005


NET REVENUE




12 Months Ended5/31/2007
    
    
    12/31/2005
    
    
    Variance
    
    
    Variance %Test Preparation, Assessment and Instruction
    
    $
    25,980
    
    
    $
    23,520
    
    
    $
    2,460
    
    
    
    10.5
    %College Preparation
    
    
    12,722
    
    
    
    11,934
    
    
    
    788
    
    
    
    6.6
    %Total Net Revenue
    
    $
    38,702
    
    
    $
    35,454
    
    
    $
    3,248
    
    
    
    9.2
    %


Test Preparation, Assessment, and Instruction




16




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College Preparation




COST OF REVENUE










SELLING, GENERAL AND ADMINISTRATIVE EXPENSES




12 Months Ended5/31/2007
    
    12/31/2005
    
    Variance
    
    Variance %Selling, General and Administrative
    
    $
    16,161
    
    
    $
    15,229
    
    
    $
    932
    
    
    
    6.1
    %






17



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INTEREST EXPENSE
  INCOME TAX BENEFIT
  Five Months Ended May 31, 2006 vs. Five Months Ended May 31, 2005 (Unaudited)
 NET REVENUE
  Five Months EndedMay 31,(Unaudited)2006
    
    
    2005
    
    
    Variance
    
    
    Variance %Test Preparation, Assessment, and Instruction
    
    $
    9,615
    
    
    $
    8,020
    
    
    $
    1,595
    
    
    
    19.9
    %College Preparation
    
    
    2,121
    
    
    
    2,183
    
    
    
    (62
    )
    
    
    -2.8
    %Total
    
    $
    11,736
    
    
    $
    10,203
    
    
    $
    1,533
    
    
    
    15.0
    %
 Test Preparation, Assessment, and Instruction
  College Preparation
  COST OF REVENUE
   18




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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  Five Months EndedMay, 31(Unaudited)2006
    
    2005
    
    Variance
    
    Variance %Selling, General and Administrative
    
    $
    6,620
    
    
    $
    6,061
    
    
    $
    559
    
    
    
    9.2
    %
  
  INTEREST EXPENSE
  INCOME TAX BENEFIT
  Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 NET REVENUE
  2005
    
    
    2004
    
    
    Variance
    
    
    Variance %Test Preparation, Assessment and Instruction
    
    $
    23,520
    
    
    $
    21,422
    
    
    $
    2,098
    
    
    
    9.8
    %College Preparation
    
    
    11,934
    
    
    
    11,065
    
    
    
    869
    
    
    
    7.9
    %Total Net Revenue
    
    $
    35,454
    
    
    $
    32,487
    
    
    $
    2,967
    
    
    
    9.1
    %
  19




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Test Preparation, Assessment and Instruction
     College Preparation
  COST OF REVENUE
       20




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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  2005
    
    2004
    
    Variance
    
    Variance %Selling, General and Adminstrative
    
    $
    15,229
    
    
    $
    12,785
    
    
    $
    2,444
    
    
    
    19.1
    %
    INTEREST EXPENSE
  21




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INCOME TAX EXPENSE (BENEFIT)
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109
 LIQUIDITY AND CAPITAL RESOURCES
     22




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Payments due by PeriodContractual Cash Obligations
    
    Total
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    ThereafterTerm Loan  (excluding interest, see Note 4)
    
    $
    10,000
    
    
    $
    500
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    1,500Line of Credit  (excluding interest, see Note 4)
    
    
    6,829
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,829
    
    
    
    Capital Leases (including interest portion)
    
    
    242
    
    
    
    160
    
    
    
    47
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    1,409
    
    
    
    571
    
    
    
    572
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    18,480
    
    
    $
    1,231
    
    
    $
    2,619
    
    
    $
    2,301
    
    
    $
    2,000
    
    
    $
    8,829
    
    
    $
    1,500
  PRODUCT DEVELOPMENT
 ®
 23




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®
    OFF-BALANCE SHEET ARRANGEMENTS
  SEASONALITY
   1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    QuarterEnded
    
    Ended
    
    Ended
    
    EndedAugust 31
    
    November 30
    
    February 28
    
    May 31Test Preparation, Assessment and Instruction
    
    
    27
    %
    
    
    27
    %
    
    
    20
    %
    
    
    26
    %College Preparation
    
    
    64
    %
    
    
    15
    %
    
    
    7
    %
    
    
    14
    %Total Revenue
    
    
    39
    %
    
    
    23
    %
    
    
    16
    %
    
    
    22
    %
  24




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  25




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     2007Q1
    
    Q2
    
    Q3
    
    Q48/31/2006
    
    11/30/2006
    
    2/28/2007
    
    5/31/2007
    
    TotalRevenue, net
    
    $
    15,347
    
    
    $
    8,239
    
    
    $
    5,934
    
    
    $
    9,182
    
    
    $
    38,702Gross Profit
    
    
    6,146
    
    
    
    3,981
    
    
    
    2,442
    
    
    
    4,273
    
    
    
    16,842Income (Loss) from Operations
    
    
    1,979
    
    
    
    (223
    )
    
    
    (1,411
    )
    
    
    336
    
    
    
    681Net Income (Loss)
    
    
    1,036
    
    
    
    (336
    )
    
    
    (1,007
    )
    
    
    31
    
    
    
    (276
    )Basic Net Income (Loss) per
Common Share
    
    
    0.23
    
    
    
    (0.08
    )
    
    
    (0.23
    )
    
    
    0.02
    
    
    
    (0.06
    )Diluted Net Income (Loss)
per Common Share
    
    
    0.23
    
    
    
    (0.08
    )
    
    
    (0.23
    )
    
    
    0.02
    
    
    
    (0.06
    )
 2006Two monthsQ1
    
    ended3/31/2006
    
    5/31/2006
    
    TotalRevenue, net
    
    $
    5,814
    
    
    $
    5,922
    
    
    $
    11,736Gross Profit
    
    
    2,620
    
    
    
    2,852
    
    
    
    5,472Income (Loss) from Operations
    
    
    (1,057
    )
    
    
    (91
    )
    
    
    (1,148
    )Net Income (Loss)
    
    
    (776
    )
    
    
    (178
    )
    
    
    (954
    )Basic Net Income (Loss) per Common Share
    
    
    (0.17
    )
    
    
    (0.04
    )
    
    
    (0.21
    )Diluted Net Income (Loss) per Common Share
    
    
    (0.17
    )
    
    
    (0.04
    )
    
    
    (0.21
    )
 2005Q1
    
    Q2
    
    Q3
    
    Q4 (a)3/31/2005
    
    6/30/2005
    
    9/30/2005
    
    12/31/2005
    
    TotalRevenue, net
    
    $
    4,924
    
    
    $
    9,493
    
    
    $
    13,995
    
    
    $
    7,042
    
    
    $
    35,454Gross Profit
    
    
    2,172
    
    
    
    4,038
    
    
    
    5,750
    
    
    
    (1,284
    )
    
    
    10,676Income (Loss) from Operations
    
    
    (1,404
    )
    
    
    164
    
    
    
    1,846
    
    
    
    (5,159
    )
    
    
    (4,553
    )Net Income (Loss)
    
    
    (884
    )
    
    
    38
    
    
    
    1,033
    
    
    
    (3,343
    )
    
    
    (3,156
    )Basic Net Income (Loss) per
Common Share
    
    
    (0.23
    )
    
    
    0.01
    
    
    
    0.24
    
    
    
    (0.78
    )
    
    
    (0.76
    )Diluted Net Income (Loss)
per Common Share
    
    
    (0.23
    )
    
    
    0.01
    
    
    
    0.21
    
    
    
    (0.78
    )
    
    
    (0.76
    )
 
 (a)
    
    The fourth quarter of 2005 includes a $3.9 million restructuring charge 26




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ McGLADREY & PULLEN, LLP

McGLADREY & PULLEN, LLP
 
 27




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##### Table of Contents



PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY  CONSOLIDATED BALANCE SHEETS
 (In Thousands-Except Shares)
    
    May 31, 2007
    
    
    May 31, 2006ASSETSCurrent AssetsCash
    
    $
    98
    
    
    $
    750Accounts Receivable Net of Allowances for
Doubtful Accounts and Returns
    
    
    3,961
    
    
    
    3,350Inventory
    
    
    5,270
    
    
    
    3,892Prepaid Expenses and Other
    
    
    334
    
    
    
    254Prepaid Marketing Expenses
    
    
    638
    
    
    
    55Income Taxes Receivable
    
    
    
    
    
    
    661Deferred Income Taxes
    
    
    871
    
    
    
    747Total Current Assets
    
    
    11,172
    
    
    
    9,709Equipment and Leasehold Improvements- At Cost, Less
Accumulated Depreciation of $1,692 in 2007 and $1,375 in 2006
    
    
    697
    
    
    
    829Other AssetsDeferred Prepublication Costs, Net
    
    
    17,180
    
    
    
    16,606Deferred Income Taxes
    
    
    1,155
    
    
    
    1,055Trademarks, Net
    
    
    141
    
    
    
    126Prepaid Expenses and Other
    
    
    370
    
    
    
    173Prepaid Marketing Expenses
    
    
    1,036
    
    
    
    845Total Other Assets
    
    
    19,882
    
    
    
    18,805Total Assets
    
    $
    31,751
    
    
    $
    29,343LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent Maturities of Long Term Obligations
    
    $
    649
    
    
    $
    2,487Short Term Bank Loan
    
    
    
    
    
    
    1,000Accounts Payable
    
    
    6,304
    
    
    
    7,809Accrued Compensation
    
    
    547
    
    
    
    646Other Accrued Expenses
    
    
    327
    
    
    
    287Deferred Revenue
    
    
    327
    
    
    
    258Total Current Liabilities
    
    
    8,154
    
    
    
    12,487Long Term Obligations, Less Current Maturities
    
    
    16,405
    
    
    
    9,420Total Liabilities
    
    
    24,559
    
    
    
    21,907Commitments and ContingenciesStockholders EquityPreferred Stock, authorized 1,500,000 shares; none issued
    
    
    
    
    
    
    Common Stock, $0.02 par value; authorized 8,500,000 shares;
issued: 4,441,173 as of May 31, 2007 and 2006
    
    
    89
    
    
    
    89Additional Paid In Capital
    
    
    7,875
    
    
    
    7,787Accumulated Deficit
    
    
    (708
    )
    
    
    (432
    )Treasury Stock - 16,232 shares in 2007 and 1,650 in 2006
    
    
    (64
    )
    
    
    (8
    )Total Stockholders Equity
    
    
    7,192
    
    
    
    7,436Total Liabilities and Stockholders Equity
    
    $
    31,751
    
    
    $
    29,343
  28




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
  Five MonthsYear Ended
    
    
    Ended
    
    
    Year Ended December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Revenue, net
    
    $
    38,702
    
    
    $
    11,736
    
    
    $
    35,454
    
    
    $
    32,487Cost of RevenueDirect Costs
    
    
    15,905
    
    
    
    4,090
    
    
    
    15,628
    
    
    
    13,964Prepublication Cost Amortization
    
    
    5,955
    
    
    
    2,174
    
    
    
    5,219
    
    
    
    3,338Product Line Restructuring Charge
    
    
    
    
    
    
    
    
    
    
    3,931
    
    
    
    Total
    
    
    21,860
    
    
    
    6,264
    
    
    
    24,778
    
    
    
    17,302Gross Profit
    
    
    16,842
    
    
    
    5,472
    
    
    
    10,676
    
    
    
    15,185Selling, General and Administrative Expenses
    
    
    16,161
    
    
    
    6,620
    
    
    
    15,229
    
    
    
    12,785Income (Loss) from Operations
    
    
    681
    
    
    
    (1,148
    )
    
    
    (4,553
    )
    
    
    2,400Other Expenses, Net
    
    
    43
    
    
    
    30
    
    
    
    46
    
    
    
    22Interest Expense
    
    
    1,129
    
    
    
    320
    
    
    
    411
    
    
    
    90Net Income (Loss) Before Income Taxes
    
    
    (491
    )
    
    
    (1,498
    )
    
    
    (5,010
    )
    
    
    2,288Income Tax Expense (Benefit)
    
    
    (215
    )
    
    
    (544
    )
    
    
    (1,854
    )
    
    
    878Net Income (Loss)
    
    $
    (276
    )
    
    $
    (954
    )
    
    $
    (3,156
    )
    
    $
    1,410Net Income (Loss) per Common Share:Basic
    
    $
    (0.06
    )
    
    $
    (0.21
    )
    
    $
    (0.76
    )
    
    $
    0.37Diluted
    
    $
    (0.06
    )
    
    $
    (0.21
    )
    
    $
    (0.76
    )
    
    $
    0.34Weighted-average Number of
Common Shares Outstanding:Basic
    
    
    4,429
    
    
    
    4,438
    
    
    
    4,138
    
    
    
    3,809Diluted
    
    
    4,429
    
    
    
    4,438
    
    
    
    4,138
    
    
    
    4,209
  29




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 AdditionalCommon
    
    Paid-In
    
    Retained
    
    Treasury(In Thousands - Except Shares)
    
    Stock
    
    Capital
    
    Earnings
    
    Stock
    
    TotalBalance, December 31, 2003
    
    $
    76
    
    
    $
    4,797
    
    
    $
    2,268
    
    
    $
    
    
    
    $
    7,141Net Income
    
    
    
    
    
    
    
    
    
    
    1,410
    
    
    
    
    
    
    
    1,410Balance, December 31, 2004
    
    
    76
    
    
    
    4,797
    
    
    
    3,678
    
    
    
    
    
    
    
    8,551Proceeds from the Sale of 575,000 shares of
Common Stock net of offering cost of $700
    
    
    12
    
    
    
    2,865
    
    
    
    
    
    
    
    
    
    
    
    2,877Purchase of Treasury Stock (1,174 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (3,156
    )
    
    
    
    
    
    
    (3,156
    )Balance, December 31, 2005
    
    
    88
    
    
    
    7,662
    
    
    
    522
    
    
    
    (6
    )
    
    
    8,266Stock Options Exercised
    
    
    1
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    73Stock-Based Compensation
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53Purchase of Treasury Stock (476 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (954
    )
    
    
    
    
    
    
    (954
    )Balance at May 31, 2006
    
    
    89
    
    
    
    7,787
    
    
    
    (432
    )
    
    
    (8
    )
    
    
    7,436Stock-Based Compensation
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Purchase of Treasury Stock (14,582 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (276
    )
    
    
    
    
    
    
    (276
    )Balance at May 31, 2007
    
    $
    89
    
    
    $
    7,875
    
    
    $
    (708
    )
    
    $
    (64
    )
    
    $
    7,192
  30




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Five MonthsYear Ended
    
    
    Ended
    
    
    Year Ended December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Cash Flows From Operating ActivitiesNet Income (Loss)
    
    $
    (276
    )
    
    $
    (954
    )
    
    $
    (3,156
    )
    
    $
    1,410Adjustments to Reconcile Net Income (Loss) to Net CashProvided by (Used in) Operating ActivitiesDepreciation
    
    
    317
    
    
    
    132
    
    
    
    323
    
    
    
    263Amortization of Prepublication Costs and Intangible Assets
    
    
    5,973
    
    
    
    2,176
    
    
    
    5,221
    
    
    
    3,338Product Line Restructuring Costs
    
    
    
    
    
    
    
    
    
    
    3,931
    
    
    
    Stock-Based Compensation
    
    
    88
    
    
    
    53
    
    
    
    
    
    
    
    Deferred Income Taxes
    
    
    (224
    )
    
    
    (556
    )
    
    
    (1,308
    )
    
    
    139Changes in Assets and LiabilitiesAccounts Receivable
    
    
    (611
    )
    
    
    (552
    )
    
    
    (631
    )
    
    
    (407
    )Inventory
    
    
    (1,378
    )
    
    
    (367
    )
    
    
    (2,151
    )
    
    
    (609
    )Prepaid Expenses and Other
    
    
    (646
    )
    
    
    (746
    )
    
    
    (47
    )
    
    
    (155
    )Advance Royalties
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    136Accounts Payable and Accrued Expenses
    
    
    (1,571
    )
    
    
    401
    
    
    
    3,606
    
    
    
    724Deferred Revenue
    
    
    69
    
    
    
    (86
    )
    
    
    165
    
    
    
    178Income Taxes Payable or Refundable
    
    
    668
    
    
    
    33
    
    
    
    (592
    )
    
    
    (197
    )Net Cash Provided by (Used in) Operating Activities
    
    
    2,409
    
    
    
    (466
    )
    
    
    5,382
    
    
    
    4,820Cash Flows From Investing ActivitiesPurchases of Equipment and Leasehold Improvements
    
    
    (185
    )
    
    
    (45
    )
    
    
    (425
    )
    
    
    (387
    )Expenditures for Intangibles
    
    
    (33
    )
    
    
    (26
    )
    
    
    (48
    )
    
    
    (21
    )Expenditures for Prepublication Costs
    
    
    (6,529
    )
    
    
    (4,463
    )
    
    
    (11,463
    )
    
    
    (8,044
    )Net Cash Used in Investing Activities
    
    
    (6,747
    )
    
    
    (4,534
    )
    
    
    (11,936
    )
    
    
    (8,452
    )Cash Flows From Financing ActivitiesNet Borrowings Under Line of Credit
    
    
    401
    
    
    
    4,471
    
    
    
    (1,086
    )
    
    
    3,043Proceeds from (Payments on) Short Term Bank Loan
    
    
    (1,000
    )
    
    
    1,000
    
    
    
    
    
    
    
    Net Proceeds From the Sale of Common Stock
    
    
    
    
    
    
    
    
    
    
    2,877
    
    
    
    Proceeds From the Exercise of Stock Options
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    Payment of Debt Issue Costs
    
    
    (405
    )
    
    
    (35
    )
    
    
    (95
    )
    
    
    (3
    )Purchases of Treasury Stock
    
    
    (56
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    Proceeds From Long Term Debt
    
    
    10,000
    
    
    
    160
    
    
    
    5,307
    
    
    
    513Principal Payments On Long-Term Debt
    
    
    (5,254
    )
    
    
    (146
    )
    
    
    (348
    )
    
    
    (214
    )Net Cash Provided By Financing Activities
    
    
    3,686
    
    
    
    5,521
    
    
    
    6,649
    
    
    
    3,339Net Increase (Decrease) in Cash
    
    
    (652
    )
    
    
    521
    
    
    
    95
    
    
    
    (293
    )CashBeginning of Period
    
    
    750
    
    
    
    229
    
    
    
    134
    
    
    
    427End of Period
    
    $
    98
    
    
    $
    750
    
    
    $
    229
    
    
    $
    134Supplemental Cash Flow InformationCash Payments for:Interest
    
    $
    1,008
    
    
    $
    320
    
    
    $
    411
    
    
    $
    90Income Taxes
    
    $
    
    
    
    $
    99
    
    
    $
    
    
    
    $
    936
  31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Nature of Business and Significant Accounting Policies
 Nature of business:
 Principles of consolidation:
 Use of estimates:
 Cash:
 Revenue recognition and accounts receivable: ®
  Major suppliers:
 12 Months Ended May 31, 2007
    
    
    30
    %5 Months Ended May 31, 2006
    
    
    15
    %12 Months Ended December 31, 2005
    
    
    30
    %12 Months Ended December 31, 2004
    
    
    31
    %
 Inventory:
 32




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##### Table of Contents



Deferred prepublication costs
 Prepaid marketing expense:
  12 Months Ended May 31, 2007
    
    $
    1,7955 Months Ended May 31, 2006
    
    
    78612 Months Ended December 31, 2005
    
    
    1,83512 Months Ended December 31, 2004
    
    
    1,497
   May 31, 2007
    
    
    May 31, 2006Total Prepaid Balance
    
    $
    1,674
    
    
    $
    900Less current portion
    
    
    638
    
    
    
    55Long-term balance
    
    
    1,036
    
    
    
    845
   For the years ended May 31:2008
    
    $
    6382009
    
    
    5412010
    
    
    495
 Depreciation:
 Accounting for long-lived assets:
 33




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##### Table of Contents



Income taxes:
  Basic and diluted net income (loss) per share:
 Total SharesYear ended May 31, 2007
    
    
    146,111Five months ended May 31, 2006
    
    
    234,204Year ended December 31, 2005
    
    
    460,960
 Stock-based compensation:
  34




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##### Table of Contents



Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.
  Years Ended December 31(In Thousands)
    
    2005
    
    2004Net Income (Loss), as reported
    
    $
    (3,156
    )
    
    $
    1,410Deduct total stock-based employee compensation
expense determined under the fair value-based
method for all awards
    
    
    (273
    )
    
    
    (262
    )Net Income (Loss) , proforma
    
    $
    (3,429
    )
    
    $
    1,148Basic Net Income (Loss) per Common Share, as reported
    
    $
    (0.76
    )
    
    $
    0.37Basic Net Income (Loss) per Common Share, proforma
    
    
    (0.83
    )
    
    
    0.30Diluted Net Income (Loss) per Common Share, as reported
    
    
    (0.76
    )
    
    
    0.34Diluted Net Income (Loss) per Common Share, proforma
    
    
    (0.83
    )
    
    
    0.27
  Fair value of financial instruments:
 Reclassifications:
 Derivative
financial instruments:
 35




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109
 Note 2. Deferred Prepublication Costs
    Five MonthsYear Ended
    
    
    Ended
    
    
    Year Ended December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Balances, Beginning
    
    $
    16,606
    
    
    $
    14,317
    
    
    $
    11,667
    
    
    $
    6,961Prepublication Cost Additions
    
    
    6,529
    
    
    
    4,463
    
    
    
    11,463
    
    
    
    8,044Amortization expense
    
    
    (5,955
    )
    
    
    (2,174
    )
    
    
    (5,218
    )
    
    
    (3,338
    )Product Line Restructuring
    
    
    
    
    
    
    
    
    
    
    (3,595
    )
    
    
    Balances, Ending
    
    $
    17,180
    
    
    $
    16,606
    
    
    $
    14,317
    
    
    $
    11,667
 36




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##### Table of Contents



For the year ending May 31,2008
    
    $
    6,1202009
    
    
    5,1482010
    
    
    3,0632011
    
    
    1,8032012 and
thereafter
    
    
    1,046
  Note 3. Trademarks
   Year
    
    
    Five Months
    
    
    Year EndedEnded
    
    
    Ended
    
    
    December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Balances, Beginning
    
    $
    126
    
    
    $
    103
    
    
    $
    57
    
    
    $
    36Additions
    
    
    33
    
    
    
    25
    
    
    
    48
    
    
    
    23Amortization Expense
    
    
    (18
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Balances, Ending
    
    $
    141
    
    
    $
    126
    
    
    $
    103
    
    
    $
    57
  Note 4. Financing Arrangements
     37




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##### Table of Contents



2007
    
    2006Obligations under capital leases (Note 7)
    
    $
    225
    
    
    $
    478Notes payable under line of credit (see above)
    
    
    6,829
    
    
    
    6,429Term Loan (see above)
    
    
    10,000
    
    
    
    5,00017,054
    
    
    
    11,907Less current maturities
    
    
    (649
    )
    
    
    (2,487
    )$
    16,405
    
    
    $
    9,420
   2007Years ending May 31:2008
    
    $
    6492009
    
    
    2,0422010
    
    
    2,0342011
    
    
    2,0002012
    
    
    8,829Thereafter
    
    
    1,500$
    17,054
 Note 5. Net Revenue by Product Group
   Five MonthsYear Ended
    
    
    Ended
    
    
    Year ended December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Test Preparation, Assessment and Instruction
    
    $
    25,980
    
    
    $
    9,615
    
    
    $
    23,520
    
    
    $
    21,422College Preparation
    
    
    12,722
    
    
    
    2,121
    
    
    
    11,934
    
    
    
    11,065Total Net Revenue
    
    $
    38,702
    
    
    $
    11,736
    
    
    $
    35,454
    
    
    $
    32,487
 38




---



##### Table of Contents



Note 6. Income Taxes
 Five MonthsYear Ended
    
    Ended
    
    Year ended December 31,(In Thousands)
    
    May 31, 2007
    
    May 31, 2006
    
    2005
    
    2004Current
    
    $
    9
    
    
    $
    12
    
    
    $
    (546
    )
    
    $
    739Deferred
    
    
    (224
    )
    
    
    (556
    )
    
    
    (1,308
    )
    
    
    139Total
    
    $
    (215
    )
    
    $
    (544
    )
    
    $
    (1,854
    )
    
    $
    878
  Five MonthsYear Ended
    
    Ended
    
    Year ended December 31,(In Thousands)
    
    May 31, 2007
    
    May 31, 2006
    
    2005
    
    2004Computed federal income tax at statutory rate
    
    $
    (175
    )
    
    $
    (526
    )
    
    $
    (1,754
    )
    
    $
    808State income taxes, net of federal benefit
    
    
    (15
    )
    
    
    (68
    )
    
    
    (220
    )
    
    
    72Income (loss) taxed at lower rate
    
    
    5
    
    
    
    15
    
    
    
    50
    
    
    
    (23
    )Other, including nondeductible expenses, net
    
    
    (30
    )
    
    
    35
    
    
    
    70
    
    
    
    21$
    (215
    )
    
    $
    (544
    )
    
    $
    (1,854
    )
    
    $
    878
  May 31,(In Thousands)
    
    2007
    
    2006Deferred tax assets:Allowance for doubtful accounts
    
    $
    15
    
    
    $
    15Allowance for sales returns
    
    
    184
    
    
    
    175Allowance for prepublication costs
    
    
    41
    
    
    
    39Inventory
    
    
    196
    
    
    
    148Federal and state net operating loss carryforward
    
    
    1,282
    
    
    
    730Deferred Prepublication costs (see Note 10)
    
    
    688
    
    
    
    1,0582,406
    
    
    
    2,165Deferred tax liabilities:Fixed assets
    
    
    (125
    )
    
    
    (128
    )Allowance for purchase returns
    
    
    (142
    )
    
    
    (135
    )Prepaid expenses
    
    
    (113
    )
    
    
    (100
    )(380
    )
    
    
    (363
    )Net deferred tax assets (liabilities)
    
    $
    2,026
    
    
    $
    1,802
 39




---



##### Table of Contents



May 31(In Thousands)
    
    2007
    
    2006Current assets
    
    $
    871
    
    
    $
    747Noncurrent assets
    
    
    1,155
    
    
    
    1,055Net deferred tax assets
    
    $
    2,026
    
    
    $
    1,802
   Note 7. Commitments
 Operating leases:
   Years ending May 31:2008
    
    $
    5712009
    
    
    5722010
    
    
    266$
    1,409
  (In Thousands)Year ended May 31, 2007
    
    $
    669Five Months ended May 31, 2006
    
    
    268Year ended December 31, 2005
    
    
    593Year ended December 31, 2004
    
    
    392
 Capital leases:
 40




---



##### Table of Contents



(In Thousands)2007
    
    2006Office equipment
    
    $
    1,328
    
    
    $
    1,328Less accumulated depreciation
    
    
    920
    
    
    
    735$
    408
    
    
    $
    593
   Years ending May 31:2008
    
    $
    1602009
    
    
    472010
    
    
    35242Less amount representing interest
    
    
    17Present value of minimum lease payments (included in long-term debtNote 3)
    
    $
    225
 Employment agreements
 Note 8. Capital Stock
 Authorized capital stock:
 Common Stock Offering:
 Note 9. Stock Options
   41




---



##### Table of Contents



2007
    
    2006
    
    2005
    
    2004Dividend Yield
    

    0.0%

    
    0.0%
    
    0.0%
    
    0.0%Risk Free Interest Rate
    
    3.3% to 6.3%
    
    3.3% to 6.3%
    
    3.7% to 4.3%
    
    
    4.0
    %Expected Life of Options
    
    
    5 to 10 Years
    
    
    
    5 to 10 Years
    
    
    
    5 to 10 Years
    
    
    8 YearsExpected Volatility Factor
    
    43% to 55%
    
    43% to 55%
    
    43% to 55%
    
    
    55
    %
  Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageGrant
    
    
    
    
    
    
    ExerciseFair Value
    
    
    Shares
    
    
    PriceOutstanding at December 31, 2003
    
    $
    1.16
    
    
    
    728,175
    
    
    $
    2.93Granted
    
    
    2.13
    
    
    
    89,000
    
    
    
    4.34Outstanding at December 31, 2004
    
    
    1.27
    
    
    
    817,175
    
    
    
    3.09Granted
    
    
    2.52
    
    
    
    75,500
    
    
    
    5.47Forfeited
    
    
    2.35
    
    
    
    (12,500
    )
    
    
    3.32Outstanding at December 31, 2005
    
    
    2.04
    
    
    
    880,175
    
    
    
    3.29Granted
    
    
    0.62
    
    
    
    3,336
    
    
    
    4.77Exercised
    
    
    0.57
    
    
    
    (56,975
    )
    
    
    1.28Forfeited
    
    
    1.35
    
    
    
    (500
    )
    
    
    3.00Outstanding at May 31, 2006
    
    
    1.87
    
    
    
    826,036
    
    
    
    3.43Granted
    
    
    1.27
    
    
    
    40,000
    
    
    
    4.18Forfeited
    
    
    4.03
    
    
    
    (10,000
    )
    
    
    6.00Outstanding at May 31, 2007
    
    $
    1.82
    
    
    
    856,036
    
    
    $
    3.44
 Options Outstanding
    
    Options ExercisableWeighted Avg
    
    Weighted
    
    Number
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Exercisable
    
    AverageRange of


    Outstanding
    
    Contractual Life
    
    Exercise
    
    at
    
    ExerciseExercise Prices


    at 5/31/07
    
    Years
    
    Price
    
    05/31/07
    
    Price$3.00


    
    575,700
    
    
    
    3.86
    
    
    $
    3.00
    
    
    
    573,247
    
    
    $
    3.003.50


    
    34,500
    
    
    
    2.52
    
    
    
    3.50
    
    
    
    34,500
    
    
    
    3.503.60


    
    64,000
    
    
    
    5.26
    
    
    
    3.60
    
    
    
    64,000
    
    
    
    3.603.95


    
    10,000
    
    
    
    4.06
    
    
    
    3.95
    
    
    
    6,086
    
    
    
    3.954.00


    
    20,000
    
    
    
    4.13
    
    
    
    4.00
    
    
    
    11,934
    
    
    
    4.004.50


    
    73,000
    
    
    
    5.17
    
    
    
    4.50
    
    
    
    56,078
    
    
    
    4.504.77


    
    3,336
    
    
    
    3.81
    
    
    
    4.77
    
    
    
    3,336
    
    
    
    4.774.78


    
    10,000
    
    
    
    4.37
    
    
    
    4.78
    
    
    
    6,433
    
    
    
    4.785.20


    
    50,000
    
    
    
    3.35
    
    
    
    5.20
    
    
    
    42,080
    
    
    
    5.206.00


    
    15,500
    
    
    
    6.70
    
    
    
    6.00
    
    
    
    14,501
    
    
    
    6.00$3.00 to $6.00


    
    856,036
    
    
    
    4.16
    
    
    $
    3.44
    
    
    
    812,195
    
    
    $
    4.04
    42




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##### Table of Contents



Note 10. Related Party Transactions
     Five MonthsYear ended
    
    
    Ended
    
    
    Year ended December 31,May 31, 2007
    
    
    May 31, 2006
    
    
    2005
    
    
    2004Casabonne Associates
    
    $
    23
    
    
    $
    16
    
    
    $
    33
    
    
    $
    37Marketing Works
    
    
    49
    
    
    
    18
    
    
    
    35
    
    
    
    53Kenneth Miller
    
    
    36
    
    
    
    
    
    
    
    41
    
    
    
    121Total Payments
    
    $
    108
    
    
    $
    34
    
    
    $
    109
    
    
    $
    211
 Note 11. Product Line Restructuring Charge
   Note 12. Year-end Change
  43




---



##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  44




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
     Code of Ethics
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   
 ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES.
  45




---



##### Table of Contents



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)
    
    Financial Statements Schedules:
 Schedule II  Valuation and Qualifying Accounts
 (3)
    
    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:
 EXHIBITNO.
    
    DESCRIPTION3.1
    
    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 ending December 31, 1998).10.2
    
    Employment Agreement between Peoples Education, Inc. and James J. Peoples, dated June 30, 2003
(incorporated by reference to Exhibit 10 to the Registrants Form 10-QSB for the quarter ended June
30, 2003) as amended by Amendment to Employment Agreement dated June 17, 2005 (incorporated by
reference to Exhibit 10.1 to the Registrants Form 8-K dated June 17, 2005), as amended by Second
Amendment to Employment Agreement dated July 31, 2006 (incorporated by reference to Exhibit 10.1 to
the Registrants Form 8-K dated September 11, 2006) and as amended by Third Amendment to Employment
Agreement dated August 3, 2007 (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
dated August 3, 2007)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).
 46




---



##### Table of Contents



EXHIBITNO.
    
    DESCRIPTION10.6
    
    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).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).
 47




---



##### Table of Contents



EXHIBITNO.
    
    DESCRIPTION14
    
    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, LLP31.1*
    
    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 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 48




---



##### Table of Contents



SIGNATURES
  PEOPLES EDUCATIONAL HOLDINGS, INC.Date: August 17, 2007/s/ Brian T. BeckwithBrian T. Beckwith, Chief Executive Officerand President (principal executive officer)  /s/ Brian T. BeckwithBrian T. Beckwith, Chief Executive Officer,President and Director/s/ Michael L. DeMarcoMichael L. DeMarco, Executive Vice President and ChiefFinancial Officer/s/ James J. PeoplesJames J. Peoples, Chairman and Director/s/ Diane M. MillerDiane M. Miller, Executive Vice President, Chief CreativeOfficer and Director/s/ John C. BergstromJohn C. Bergstrom, Director/s/ Richard J. CasabonneRichard J. Casabonne, Director/s/ Anton J. ChristiansonAnton J. Christianson, Director/s/ James P. DolanJames P. Dolan, Director/s/ G. Thomas AhernG. Thomas Ahern Director 49




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##### Table of Contents



AdditionsBalance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodFor the Year ended December 31, 2004Accounts receivable allowances:Allowance for doubtful accounts
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40Allowance for sales returns
    
    
    595
    
    
    
    540
    
    
    
    
    
    
    
    702
    
    
    
    433Total
    
    $
    635
    
    
    $
    540
    
    
    $
    
    
    
    $
    702
    
    
    $
    473Inventory Allowance:Allowance for Obsolete Inventory
    
    $
    187
    
    
    $
    
    
    
    $
    
    
    
    $
    117
    
    
    $
    70For the Year ended December 31, 2005Accounts receivable allowances:Allowance for doubtful accounts
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40Allowance for sales returns
    
    
    433
    
    
    
    507
    
    
    
    
    
    
    
    422
    
    
    
    518Total
    
    $
    473
    
    
    $
    507
    
    
    $
    
    
    
    $
    422
    
    
    $
    558Inventory Allowance:Allowance for Obsolete Inventory
    
    $
    70
    
    
    $
    150
    
    
    $
    
    
    
    $
    25
    
    
    $
    195Prepublication Cost Allowance:Allowance for prepublication costs
    
    $
    
    
    
    $
    100
    
    
    $
    
    
    
    $
    
    
    
    $
    100For the Five Months ended May 31, 2006Accounts receivable allowances:Allowance for doubtful accounts
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40Allowance for sales returns
    
    
    518
    
    
    
    57
    
    
    
    
    
    
    
    122
    
    
    
    453Total
    
    $
    558
    
    
    $
    57
    
    
    $
    
    
    
    $
    122
    
    
    $
    493Inventory Allowance:Allowance for Obsolete Inventory
    
    $
    195
    
    
    $
    60
    
    
    $
    
    
    
    $
    36
    
    
    $
    219Prepublication Cost Allowance:Allowance for prepublication costs
    
    $
    100
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100For the Year ended May 31, 2007Accounts receivable allowances:Allowance for doubtful accounts
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40Allowance for sales returns
    
    
    453
    
    
    
    303
    
    
    
    
    
    
    
    278
    
    
    
    478Total
    
    $
    493
    
    
    $
    303
    
    
    $
    
    
    
    $
    278
    
    
    $
    518Inventory Allowance:Allowance for Obsolete Inventory
    
    $
    219
    
    
    $
    221
    
    
    $
    
    
    
    $
    171
    
    
    $
    269Prepublication Cost Allowance:Allowance for prepublication costs
    
    $
    100
    
    
    $
    6
    
    
    $
    
    
    
    $
    
    
    
    $
    106
 50