<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NO. 2-86551C
PEOPLES EDUCATIONAL HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1368898
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
299 MARKET STREET, SADDLE BROOK, NJ 07663
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(201) 712-0090
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME OF REGISTRANT: CONCOURSE CORPORATION
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Check whether the Issuer, (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. NOT APPLICABLE
State Issuer's revenues for its most recent fiscal year: $9,598,000
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates: NOT APPLICABLE (See Item 5).
The number of shares outstanding of the Issuer's common stock on March 30, 2000
was 3,188,850.
Documents incorporated by reference: NONE.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
-------
PART I
<S> <C> <C> <C>
Item 1. DESCRIPTION OF BUSINESS 1
Item 2. DESCRIPTION OF PROPERTY 6
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
Item 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 7
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 7
Item 7. FINANCIAL STATEMENTS 12
Item 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 12
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT 13
Item 10. EXECUTIVE COMPENSATION 15
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 16
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND COMPANY HISTORY
The Peoples Publishing Group, Inc. ("PPG") publishes, distributes and markets
supplementary educational texts and related materials for the pre-K--12 market.
Supplementary educational materials are predominantly soft cover textbooks that
can be sold efficiently through catalogs, direct mail, telemarketing and
independent commission sales representatives to the schools. Since its
inception, PPG has introduced more than 92 new programs. A program can be as few
as one and as many as four or more ancillaries designed to be used together as a
complete learning package. The market for supplementary educational materials
consists of a large and growing number of distinct niches. PPG's strategy is to
develop and acquire products for individual niches.
PPG was founded in 1989 by James J. Peoples, the current President and CEO, and
by Diane M. Miller, the current Executive Vice President. It began operations in
1990 with the acquisition of a small supplementary product line aimed at the
high school student-at-risk population. Effective November 1, 1998, PPG merged
into a subsidiary of Peoples Educational Holdings, Inc. (the "Company," formerly
Concourse Corporation) a public company with minimal operations. As a result of
the merger, PPG became a wholly-owned subsidiary of the Company. All of the
Company's operations are currently conducted through PPG. For accounting
purposes, the merger was treated as if PPG acquired Concourse Corporation. As a
result, this report excludes any financial results of Concourse Corporation
prior to the merger.
PPG develops and sells its own proprietary products and also distributes other
publishers' products. PPG's current product line consists of supplementary
educational materials in three market niches:
- Instruction. Proprietary and distributed texts and related materials
which focus on remedial and multicultural instruction for the
student-at-risk and urban markets, grades pre-K--12.
- Test Preparation. PPG publishes materials for use by schools to help
prepare students for required state proficiency tests, grades 2-9.
- Advanced Placement. PPG is the exclusive distributor of college texts
published by two major college publishers. These texts are used in
senior high schools as part of Advanced Placement and honors classes.
The Company and PPG are located at 299 Market Street, Saddle Brook, NJ 07663.
The telephone number is 201/712-0090, x275; web site www.peoplespublishing.com.
The contents of the Company's web site are not part of, or incorporated into,
this report.
INDUSTRY BACKGROUND
THE SCHOOL MARKET
Enrollments
Student enrollments resulting from the baby boom of the 1980s are increasing for
pre-kindergarten through grade 12, and this trend is expected to continue for at
least the next six years. The U.S. Department of Education predicts that the
student population from kindergarten through grade 12 will increase 5.7% from
1996 to 2006, to 54.6 million students, with an overall net gain of
approximately 3.8 million students. In 1992, there were approximately 42.8
million children enrolled in school; by 1997, this figure had grown to
approximately 50.9 million children. About 70% of students are in grades
pre-K--8, and 30% are in grades 9-12. Grades pre-K--8 are forecast to grow
4%-10% yearly through 2002, and grades 9-12 are forecast to grow 7.4%-13.4%
yearly through 2002. (Sources: NCES, OERI, 1997 Education Statistics and
Projections through 2008.)
For the 1999-2000 school year, there are approximately a total of 87,600 public
and 22,900 non-public K-12 schools. Total public school enrollment is projected
to rise from the 46.8 million in 1998 to 48.2 million in 2008, an increase of
1
<PAGE> 4
3%. During this same period, total private school enrollment is expected to
increase by 2%, rising from 5.9 million to 6.1 million. The total number of K-12
classroom teachers (in public and private schools) is projected to increase at
an annual growth rate of 0.9%, to reach a level of 3.34 million by 2007.
(Source: Quality Education Data, 2000, NCES 1998.)
Overall Educational Funding
Funding for educational materials is increasing, with state and local funds
continuing to comprise the majority of dollars spent on educational materials.
Throughout the 1990s, on average, the proportion of funding sources was as
follows: 7% from federal sources, 47% from state sources, and 46% from local
sources. Precise funding data vary by year and state. States continually enact
new legislation, the federal government contributes specialized funding, such as
Chapter 1, and local funds vary greatly. Per pupil spending is projected to
increase, in current dollars, from $5,961 in 1997 to $7,179 in 2001. (Source:
NCES, OERI, 1997 Education Statistics.)
Overall, sales of supplementary educational materials grew faster from 1993-1997
than sales of textbooks, with supplementary materials having an annual compound
growth rate of 10.6% while textbooks grew 4.4% during that period, partially
because additional funding sources are available to purchase supplementary
materials. State and local funding for specialized needs varies greatly year to
year and these funds are used for a variety of purposes, including salaries and
building materials, as well as instructional materials.
Instructional and Textbook Funding
In 1997, approximately $4.77-billion was spent on instructional materials; this
figure includes purchases of textbooks as well as other materials, such as
chalkboards and supplies. Within these expenditures, about 30%, or approximately
$1.43 billion was spent in the supplementary materials market, the market niche
in which PPG competes. This is an increased percentage from 27.5% in 1993.
Approximately $220 million was spent in 1998 for Advanced Placement materials.
Specialized and Supplementary Educational Funding
Although no funding figures are available from an outside source for the test
preparation market niche, 48 states now have state assessment requirements that
are linked to student graduation or promotion, and 36 states publish annual
report cards on individual schools. In most states, standardized tests are given
two to three times in a student's school life.
A priority on the national education agenda is a demand for higher student
performance standards and accountability. As states and cities increase spending
on education, governmental authorities, the public, and educational units are
demanding that schools demonstrate student progress as measured by state
performance tests. The public quid pro quo for increased spending on education
is a demand for accountability. Within this environment, states have established
new performance standards and methods of measuring student performance, along
with systems for rewarding school success and punishing failure. Funding is
often adjusted accordingly.
For many years, states used multiple choice tests and reported results in terms
of norms that compared individual student test performance with national
averages. As states developed new standards for student performance, it became
clear that multiple choice questions could not measure the problem solving,
critical thinking, and other performance criteria that make up the new
standards. Multiple choice tests worked when the measurement outcome was focused
on memorization and factual knowledge, but off-the-shelf normed tests could not
assess the new standards. For example, state curricula often require students to
demonstrate writing, speaking, and thinking skills that are impossible to assess
with multiple choice questions. Changes brought about by new performance
standards and new assessment tools are providing market opportunities for a new
generation of test preparation materials which PPG is actively pursuing.
Advanced Placement materials are used in high school courses for college credit
using college textbooks. PPG has agreements with two college publishers giving
PPG exclusive rights to distribute these publishers' college texts to the
schools. According to the College Board, 685,981 students were enrolled in
Advanced Placement courses in 1999, with 1,055,355 Advanced Placement exams
taken that year. The College Board also projects that 1,225,000 Advanced
Placement exams will be taken in 2000. (Source: College Board.)
The Company believes that the growth in demand for test preparation and other
supplementary educational materials (including workbooks) has outpaced the
growth in demand for basal, mainstream textbooks because of increasing pressure
2
<PAGE> 5
from parents, colleges and employers for improved student performance and for
accountability by schools and teachers, and repeated reports highlighting the
poor comparative performance of U.S. students in mathematics and science.
PRODUCTS
Supplementary educational materials are predominantly soft cover textbooks that
can be sold efficiently through catalogs, direct mail, telemarketing and
independent commission sales representatives to the schools. Since its
inception, PPG has introduced more than 92 new programs. A program can be as few
as one and as many as four or more ancillaries designed to be used together as a
complete learning package. The market for supplementary educational materials
consists of a large and growing number of distinct niches. PPG's strategy is to
develop and acquire products for individual niches. PPG develops and sells its
own proprietary products and also distributes other publishers' products. PPG's
current product line consists of supplementary educational materials in three
market niches:
- Instruction. Proprietary and distributed texts and related materials
which focus on remedial and multicultural instruction for the
student-at-risk and urban markets, grades pre-K--12. PPG's current
Instruction products include a particular emphasis on social studies
and life skills. Instruction materials represented approximately 19%
of the Company's 1999 revenues.
- Test Preparation. PPG publishes materials for use by schools to help
prepare students for required state proficiency tests, grades 2 - 12.
Given the increasing legislative mandates and funding for testing of
all public school students several times throughout their K-12
education, PPG took the initiative during 1997 of entering the test
preparation market by developing a successful group of test
preparation materials. The test preparation materials represented
approximately 16% of the Company's 1999 revenues.
- Advanced Placement. PPG is the exclusive distributor of college texts
published by two college publishers. These texts are used in senior
high schools as part of Advanced Placement and honors classes. PPG's
Advanced Placement revenues consist of sales billed by PPG. Advanced
Placement revenues represented approximately 65% of the Company's 1999
revenues. The Advanced Placement program, sponsored by the College
Board, is an intense program of college level curricula and
examinations that provide high school students with an opportunity to
earn advanced placement, college credits, or both at nearly 3,000
Universities and Colleges across the country.
PRODUCT DEVELOPMENT
PPG combines its internal product development resources with outside freelance
talent to develop and design its proprietary products in a cost-effective
manner. PPG utilizes a variety of outside authors, writers, editors, and
development houses to develop products. Sometimes this outside talent is
compensated with a flat fee, sometimes with a royalty contract where payment is
made contingent on actual sales of the product. Some authors, especially Test
Preparation authors, are provided advances against future royalty earnings.
Royalties paid by PPG range from 0.75% to 15%.
PPG retains control of all book club, reprint, electronic, foreign,
serialization, and commercial rights. The income generated from such
arrangements is divided between PPG and the author as agreed upon by the
parties.
PPG's book production, comprised of design, art and graphics, page makeup, and
permissions, is carried out by a combination of in-house staff and contracted
personnel with tight in-house control. PPG maintains an in-house system of
computers, scanners, and advanced software to maximize state-of-the-art
computer-based layout systems, making it possible to complete nearly the entire
production cycle in-house, resulting in digitized material.
A book concept can originate from a number of sources such as (i) analysis of
PPG's sales statistics for an existing book to help assess how a similar book in
a similar subject area will perform, (ii) analysis of demographics and other
social and economic factors from current philosophical trends in education,
(iii) review of competitors' books to determine if and how PPG can publish a
superior book on a similar topic, and (iv) maintaining close personal contact
with current successful authors and writers, teachers, administrators,
counselors, and distributors as they come forward with ideas. Once conceived, a
book proposal is circulated to the management group for input. Depending on
their input and additional market research, the proposal will go forward or be
terminated. A pro forma financial statement is prepared to aid in
3
<PAGE> 6
determining if the new title is desirable for publication. If there is a
favorable decision, PPG will contract with an appropriate author or writer. PPG
believes it has excellent relationships with its authors, including many
well-known names in the field.
All printing is contracted to outside vendors by competitive bidding. All
printers utilized by PPG are located in the United States and PPG has
historically not been dependent on the services of any one printer for a
material portion of its printing needs.
PPG's products require varying periods of development time depending upon the
complexity of the graphics and design and the writing and editing process. Most
of PPG's multi-book programs can be developed in a period that ranges from six
to eighteen months. The Company believes that PPG's use of outside authors,
illustrators, and freelancers for writing, editing, some artwork, some design,
and copy editing allows PPG to produce the budgeted number of books per year
with a relatively small staff and allows the flexibility needed for PPG to
continue to produce and expand its product lines and retain flexibility to enter
niches with new product lines, such as Test Preparation, quickly.
CUSTOMER BASE
PPG's Instruction and Test Preparation materials are marketed to public and
private schools and school districts across the United States. PPG is not
dependent upon just one customer or only a few customers. For these product
lines, the top 20 accounts are as follows: School Board of Broward County,
Sunrise, FL; Jersey City Public Schools, Jersey City, NJ; Paterson Public
Schools, Paterson, NJ; Newark Board of Education, Newark, NJ; Passaic Board of
Education, Passaic, NJ; Detroit Public Schools, Detroit, MI; Camden Board of
Education, Camden, NJ; Atlantic City Board of Education, Atlantic City, NJ;
Chicago Public Schools, Chicago, IL; Wieser Education, Inc., Rancho Santa
Margarita, CA (a distributor); Union City Board of Education, Union City, NJ;
Wayne Board of Education, Wayne, NJ; School District of Palm Beach County, West
Palm Beach, FL; St. Paul Public Schools, St. Paul, MN; Lakeshore, Carson, CA (a
distributor); Central School District #17K, Brooklyn, NY; Woodbridge Township
School District, Woodbridge, NJ; Academic English Master Program, Los Angeles,
CA; Elizabeth Board of Education, Elizabeth, NJ; Perth Amboy Board of Education,
Perth Amboy, NJ.
The market for PPG's Advanced Placement products is primarily U.S. high schools,
public and private, plus commercial companies that distribute Advanced Placement
materials to the high school. For this market niche, the top 20 customers are as
follows: Adams Book Company, Inc., Brooklyn, NY (a distributor); Board of
Education, City of New York, Brooklyn, NY; Fresno Unified School District,
Fresno, CA; Chesapeake Public School, Chesapeake, VA; Detroit Board of
Education, Detroit, MI; La Salle Company, South Bend, IN (a distributor);
Montgomery County Public Schools, Rockville, MD; J.F. Flannery Company, Inc.,
Victorville, CA (a distributor); Tempe High School District #213, Tempe, AZ;
Long Beach Unified School District, Long Beach, CA; Harvard-Westlake School,
North Hollywood, CA; Tippecanoe School Corporation, Lafayette, IN; Pennsylvania
Department of Education, Harrisburg, PA; Thomas Jefferson High School, Fairfax,
VA; Poway Unified School District, Poway, CA; Hinsdale Board of Education,
Hinsdale, IL; Pleasanton Unified School District, Pleasanton, CA; Ransom
Everglades School, Coconut Grove, FL; Palo Alto Unified School District, Palo
Alto, CA; Fremont Union High School District, Sunnyvale, CA.
SALES, MARKETING, AND DISTRIBUTION
OVERVIEW
PPG conducts its sales activities primarily through an integrated catalog and
telemarketing system augmented by direct mail, conventions, workshops, and
commission sales representatives. The Company believes this system is well
suited to the supplementary educational material market where purchasing
decisions are typically made at the local or school level. As the Company grows,
however, more extensive use of commission sales representatives is expected.
The telemarketing manager function is a full-time position while telemarketers
work both full and part-time. Over the past nine years, PPG has created niche
catalogs, built an in-house customer list, and systematically increased the
number of catalogs mailed each school year (September-June), reaching
approximately 700,000 catalogs mailed in the 1999-2000 school year.
4
<PAGE> 7
PPG plans to add resources to grow its marketing and sales efforts. Test
Preparation and Advanced Placement distribution will benefit from additional
resources. In 1999, PPG added a Test Preparation marketing manager in addition
to several telemarketers. For 2000, PPG intends to add a marketing manager,
telemarketers, and per-diem and commission sales representatives. PPG also
intends to increase spending for sample books, exhibits, advertising, direct
mail, and marketing support.
INTEGRATED CATALOG/TELEMARKETING SYSTEM
In the 1999-2000 school year, approximately 700,000 copies of five catalogs
reached PPG's various market niches and included both proprietary products and
distributed products. Catalogs are mailed to house lists and other appropriate
contact individuals at pre-K--12 school sites throughout the United States.
Catalogs are generally produced and mailed for each product line three times per
year. Telemarketers target follow-up calls to close sales to the top third of
PPG's customers and prospects. Telemarketing activities are supported by a
computerized contact management database software and systems.
WEB SITE
The PPG web site (located at www.peoplespublishing.com) contains an online
catalog of PPG's remedial, multicultural, test preparation titles, and Advance
Placement links to the two college publishers whose materials PPG distributes.
The web site is equipped with e-commerce software (shopping cart software), so
that customers can order directly from the site or create a listing for filling
out purchase orders (to give to the school administrator for the traditional
school purchasing system, which is still used much more frequently by schools
and districts than online ordering). The web site also contains information on
PPG, a conference and exhibit calendar, information on manuscript submission, a
form for requesting review copies of titles, sample lessons, and other useful
sections for teachers.
COMMISSION SALES REPRESENTATIVES
PPG utilizes the services of commission sales representatives who sell PPG's
products under a percentage fee arrangement. These independent agents carry
noncompeting products from other school publishers.
WAREHOUSE AND DISTRIBUTION
PPG has outsourced certain data processing, warehousing and
distribution/shipping services to American Book Center, located in Brooklyn, NY.
PPG transmits orders by modem to American Book Center which keeps track of PPG's
sales, inventory and accounts receivable and also warehouses and ships to
customers of PPG's Instruction and Test Preparation products. Orders for
Advanced Placement materials are entered into the ABC system and transmitted to
the college publisher whose materials PPG distributes. Advanced Placement
customers are billed by PPG and drop shipped by the college publishers. The
services that American Book Center provides to PPG are material to PPG.
COMPETITION
The supplementary educational publishing market is extremely competitive and
fragmented. The top eleven supplementary publishers accounted for approximately
$965 million in 1997 sales. These sales cover a wide variety of supplementary
materials, including some technology, manipulatives, magazines, and
library/trade books (non-textbooks) used in schools. Among these top eleven
supplementary publishers are Tribune Company, Primedia, Scholastic, Pearson,
Addison Wesley Longman, and Zaner-Bloser. There are also numerous other
companies that are competitors with PPG. These publishers include American
Guidance Systems (remedial materials), Educational Design (test preparation),
Curriculum Associates (test preparation), and Globe Books (remedial and
multicultural). In addition, there are various catalogers that resell
supplementary materials. Many of the Company's competitors are well established,
significantly larger, and have substantially greater financial and marketing
resources than the Company.
PROTECTION OF PROPRIETARY RIGHTS
All of PPG's books have been copyrighted in the United States with United States
rights, most in the name of PPG. On the few titles that are copyrighted by the
author, PPG has secured unlimited exclusive rights to sell and update the
titles. Therefore, PPG owns the exclusive rights to exploit the copyright in the
marketplace. On books created in-house by PPG,
5
<PAGE> 8
PPG has registered United States rights for all markets, including first and
second serialization, commercial rights, electronic rights, foreign and
translation rights, reprint rights, and rights to any means yet to be developed
for transmitting information in any form. There are a limited number of books
for which foreign rights and electronic rights will revert to the author if PPG
does not exploit them in a given period of time, usually two years after
publication. Foreign rights are not usually lucrative for supplementary
materials, but opportunities are considered on a one-by-one basis. PPG believes
it has adequately protected its copyrights, but the loss of copyrights or
failure of copyright protection could have a material adverse effect on the
Company.
EMPLOYEES
As of December 31, 1999, the Company had approximately 42 employees, 26 of whom
were full-time and 16 were part-time. The Company has never experienced a work
stoppage and its employees are not covered by a collective bargaining agreement.
The Company believes its relations with its employees are good.
AVAILABLE INFORMATION
The Company files annual, quarterly and current reports, and other information
with the SEC. You may read and copy any reports, statements or other information
we file at the SEC's Public Reference Room, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the SEC's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents, upon payment of a duplicating fee, by writing the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. The Company's filings are also available to the public on
the SEC Web site at http://www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTY
The Company and PPG own no real property. The Company and PPG conduct their
operations in one facility. PPG leases approximately 8,600 square feet of office
space in Saddle Brook, New Jersey, at a current rental of $141,200 per year
including utilities and taxes. This lease expires October 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
6
<PAGE> 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded over-the-counter by broker/dealers in the
Minneapolis-St. Paul, Minnesota, metropolitan area from approximately December
1983 until October 1996, when all active trading ceased. Trading in the
Company's common stock had been extremely limited since at least 1993, and, as
of December 31, 1994, there was only one broker/dealer in Minneapolis-St. Paul,
Minnesota providing bid and asked quotations. The last bid quote known to the
Company for the Company's common stock was published as of the close of business
on October 22, 1996, and was $0.005 per share ($0.10 if adjusted for the 20-to-1
reverse stock split which occurred after the date of the last bid). The Company
is unaware of any broker/dealer who has published bid or asked quotations for
the Company's common stock since October 22, 1996.
There were approximately 239 shareholders of record as of March 20, 2000,
including the Depository Trust Company which held 45,863 shares. The Company has
not paid any dividends on its common shares in the past two years and
anticipates retaining future earnings, if any, to finance operations of the
Company.
During 1999, certain officers and directors converted their preferred
convertible stock and preferred redeemable convertible stock into 2,781,956
common shares. During the first quarter of 2000, certain officers and directors
converted $810,850 of accrued dividends on the preferred redeemable convertible
stock into 253,633 shares of common stock at a conversion price of $3.00 per
share and were paid cash of $49,954.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements regarding the Company, PPG
and their markets as defined in section 21E of the Securities Exchange Act of
1934. These forward-looking statements involve a number of risks and
uncertainties, including (1) demand from major customers, (2) effects of
competition, (3) changes in product or customer mix or revenues and in the level
of operating expenses, (4) rapidly changing technologies and the Company's
ability to respond thereto, (5) the impact of competitive products and pricing,
(6) local and state levels of educational spending, (7) the Company's and PPG's
ability to retain qualified personnel, (8) PPG's ability to retain its
distribution agreements in the Advanced Placement market, (9) the sufficiency of
PPG's copyright protection, and (10) PPG's ability to continue to rely on the
services of American Book Center, and other factors disclosed below and
throughout this report. The actual results that the Company or PPG achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report, including
the discussion set forth below and in the Company's other reports filed with the
Securities and Exchange Commission from time to time that attempt to advise
interested parties of the risks and factors that may affect the Company's
business and results of operations.
INTRODUCTION
PPG was incorporated in Delaware in 1989 and on March 19, 1990, completed an
asset purchase of a high school remedial education product line from New Readers
Press, a division of Laubach Literacy International. Effective November 1, 1998,
PPG merged into a subsidiary of Peoples Educational Holdings, Inc. ("the
Company," formerly Concourse Corporation) a public company with only minimal
operations. As a result of the merger, PPG became a wholly-owned subsidiary of
the Company. All of the Company's operations are currently conducted through
PPG. For accounting purposes, the merger was treated as if PPG acquired
Concourse Corporation in a purchase transaction. As a result, this report and
the following discussion excludes any financial results of the Concourse
Corporation prior to the merger.
7
<PAGE> 10
REVENUES AND NET INCOME
OVERVIEW
1999 was a record revenue year for PPG, with sales and commission revenues of
$9,598,000, an increase of 55.7% from 1998. The increase in 1999 revenues was
lead by a 126.8% growth in Advanced Placement revenue and a 62.1% growth in Test
Preparation revenue. The increases were partially offset by a 25.5% decrease in
Instruction sales. Advanced Placement revenue growth was due to significant
increase in marketing and sales effort prompted by a better gross margin
resulting from the renewal and major revision of a contract with one of the
college publishers whose books the Company distributes from a commission to a
sales arrangement. The Test Preparation growth can be attributed to increased
unit sales in the first state the Company entered in 1997 and from fourth
quarter sales from the release of product into a new state. The 1999 decrease in
Instruction revenue as compared to 1998 was the result of the large Midwest
school district sale of $591,000 in 1998, which was not replicated in 1999.
Net Income after tax for 1999 was $300,000, compared to $316,000 in 1998. The
decrease in Net Income in 1999 was related to increased telemarketing and field
selling expense, and higher administrative costs associated with building an
infrastructure to support current and future revenue growth.
<TABLE>
<CAPTION>
1999 1998 Variance % Change
-----------------------------------------------------
Revenues
- ----------------------
<S> <C> <C> <C> <C>
Advanced Placement $6,209,000 $2,738,000 3,471,000 126.8%
Test Preparation 1,548,000 955,000 593,000 62.1%
Instruction 1,841,000 2,471,000 (630,000) -25.5%
------------------------------------------------------
Total $9,598,000 $6,164,000 $3,434,000 55.7%
------------------------------------------------------
Net Income $ 300,000 $ 316,000 $ (16,000) -5.1%
</TABLE>
ADVANCED PLACEMENT REVENUES
Since its inception, PPG has been active in the marketing and selling of college
books and products to the Advanced Placement high school market. Most large
educational publishers have dedicated college divisions producing and selling to
the post-secondary market as well as school divisions dedicated to publishing
and selling to the K-12 market. In these companies, intercompany sales
agreements are in place, which incent the school division to promote and sell
appropriate college books into the high school Advanced Placement, honors and
college prep. markets. PPG has exclusive sales and marketing agreements with two
major college publishers who do not have school divisions to sell their books
into the high school market. The distribution agreements are exclusive and cover
all sales made to the K-12 market, including each publisher's college, trade and
professional products.
Both agreements include noncompete language which restricts PPG from selling
works that compete directly with the college publishers' products. The exclusive
nature of both agreements provides the basis upon which PPG commits considerable
sales and marketing resources to grow Advanced Placement sales. The loss of
either agreement would have a material adverse effect on PPG's revenue and net
income. The term of the oldest of the two agreements expires November 30, 2000.
The Company has no reason to believe that an agreement will not be reached for a
new three-to-five-year term. In the unlikely event that PPG fails to conclude a
new agreement, the Company believes the college publisher will sell books to PPG
for resale but on a nonexclusive basis.
Advanced Placement revenue for 1999 increased $3,471,000 (126.8%) from 1998.
Effective May 1, 1999, PPG signed a new three-year contract with one of its
large volume Advanced Placement publishers. Under the terms of the old contract,
PPG limited its activity to sales and marketing and received a sales commission
from the publisher with no corresponding cost of sales. Under the new agreement,
PPG now invoices customers for the full amount of the sale, is responsible for
collections, and is billed for the cost of the books as the publisher drop-ships
to the customer. This new arrangement has the effect of increasing Advanced
Placement revenue and cost of sales while yielding lower gross margins than
Instruction and Test Preparation revenue. As a result of this new agreement, PPG
believes that it will be able to grow Advanced Placement revenue and to increase
the total amount of gross margin associated with those sales.
8
<PAGE> 11
The following table summarizes and compares Advanced Placement revenues for 1999
and 1998.
<TABLE>
<CAPTION>
1999 1998 Variance % Change
-------------------------------------------------------
<S> <C> <C> <C> <C>
Resale Agreements $6,160,000 $2,298,000 $3,862,000 168.1%
Commission Agreement 49,000 440,000 (391,000) -88.9%
-------------------------------------------------------
Total $6,209,000 $2,738,000 $3,471,000 126.8%
</TABLE>
For comparison purposes only, as a result of the aforementioned publisher
contract change from commission to sales arrangement, the following table
converts 1999 and 1998 commission revenue to resale revenue on a proforma basis.
<TABLE>
<CAPTION>
1999 1998 Variance % Change
-------------------------------------------------------
<S> <C> <C> <C> <C>
Resale Revenue $6,488,000 $5,325,000 $1,163,000 21.8%
</TABLE>
Advanced Placement revenues increased 126.8% over 1998. However, by converting
1999 and 1998 commission revenue to sales on a proforma basis, the increase is
21.8% over 1998. The increase is due to improved telemarketing and the
allocation of increased marketing resources including additional catalog
mailings and direct mail.
TEST PREPARATION PRODUCT REVENUE
Test Preparation product line revenue was $1,548,000 in 1999 compared to
$955,000 in 1998. The Test Preparation growth can be attributed to increased
unit sales in the first state the Company entered in 1997 and from fourth
quarter sales from the release of product into a new state. The Company
currently publishes Test Preparation products for two states and is planning to
expand into other states. All Test Preparation products are proprietary, and
management believes this niche will be the Company's fastest growth area in the
future. This expansion is not without major competitors and similar efforts by
other publishers will make this arena a hotly contested environment.
INSTRUCTION PRODUCT SALES
<TABLE>
<CAPTION>
1999 1998 Variance % Change
-------------------------------------------------------
<S> <C> <C> <C> <C>
Student-At-Risk $ 826,000 $ 937,000 $(111,000) -11.8%
Multicultural 1,015,000 1,534,000 (519,000) -33.8%
-------------------------------------------------------
Total $1,841,000 $2,471,000 $(630,000) -25.5%
</TABLE>
Instruction products include two sales sources referred to as Student-At-Risk
and Multicultural. Student-At-Risk and Multicultural sales in 1999 decreased
11.8% and 33.8%, respectively, compared to 1998.
Multicultural sales decreased by $519,000 primarily as a result of a $591,000
sale of Instruction materials to a Midwest school district during 1998, which
was not replicated in 1999. This sale was unusual in terms of size. It resulted
in a significant increase in revenues, gross margins and operating income in
1998. Excluding this sale from Multicultural revenues for 1998, revenues for
1999 were $72,000 (7.6%) higher than the prior year.
Student-At-Risk sales decreased as a result of lower unit sales of For the
People by the People, a History of the United States, Beginning to the Present,
a single title.
Both Student-at-Risk and Multicultural sales include a mix of proprietary and
nonproprietary or distributed titles. PPG's sales and marketing emphasis is on
proprietary products, and PPG uses distributed products to round out or fill in
a full catalog of product offerings for PPG's customers. Sales of proprietary
products in the Instruction product line represented 69% of Instruction product
sales in 1999.
GROSS MARGIN AND COST OF SALES
OVERVIEW
Cost of Sales as a percent of sales increased to 63.2% from 51.4% in 1998. The
increase is primarily due to the higher purchase cost of products associated
with the growth in Advanced Placement sales. This is attributed to the new
contract
9
<PAGE> 12
that PPG entered into with one of its large volume Advanced Placement publishers
changing the relationship in 1999 from a commission-based agreement to a
resale-based agreement as discussed in prior sections.
Cost of Sales includes paper, printing and binding, author royalties, and
prepublication costs. For those products that PPG distributes as a reseller,
Cost of Sales consists of the cost of purchasing those products. Prepublication
costs include all the one-time expenses associated with developing and producing
new or revised proprietary products. Prepublication costs include all editorial
expenses, freelance writing, page design and makeup, art permissions 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
market research and other forms of product development, such as expert reviews.
Such product development usually involves creating sample lessons for each
content area of a prospective title; PPG then obtains feedback on these samples,
which it applies to the creation of the rest of the book. Other product
development expenses include payment for manuscript reviewers, the production of
a sample version of the book (for use at conference exhibits and other
meetings), and the purchase of competition reports and products.
Prepublication costs are capitalized and expensed over a three-year period
beginning on the in-stock date of new and revised products. PPG believes its
policy for a three-year amortization schedule is conservative. In book
publishing, prepublication costs represent the major product development expense
and, as such, can serve as an important financial indicator of new product
commitment. In 1999, PPG's prepublication costs incurred were $606,000 compared
to a 1998 expenditure of $452,000. PPG has budgeted $908,000 for 2000
prepublication costs.
ADVANCED PLACEMENT
The cost of goods sold on Advanced Placement resale sales ranges from 75% to 78%
of sales. The cost of sales is high compared to Instruction and Test
Preparation, but the gross profit dollar volume creates a very positive impact
on operating income and cash flow. Advanced Placement commissions revenues of
$49,000 in 1999 and $440,000 in 1998 carry no associated Cost of Sales.
INSTRUCTION AND TEST PREPARATION
The combined gross margins for Instruction and Test Preparation in 1999 and 1998
were 63.3% and 63.9%, respectively. Year-to-date margins fluctuate based on
product mix with proprietary products' Cost of Sales ranging from 16% to 35% of
sales, while nonproprietary distributed sales have higher costs ranging from 40%
to 60% of sales. The slight decrease in margin from 1998 to 1999 is primarily
due to the fact that in 1998 the company had a large sale to Midwest school
district of which $518,000 was proprietary product. No such large sale took
place in 1999. This decrease in margin was almost totally offset by the increase
in Test Preparation revenue
Cost of Sales variances can be caused by variances in paper, printing and
binding costs as well as author royalties and prepublication costs. Author
royalty rates vary depending on the track record of the author and the amount of
an author's contribution to the work and range from 0.75% to 15% of net sales.
Prepublication costs also vary widely by product and product line and are
impacted by product specifications, schedule and production values. For example,
Test Preparation titles are 164-to-350-page paperbacks with plant investments
ranging from $20,000 to $26,000 per book while the plant costs related to PPG's
708-page hardcover U.S. history text were considerably higher at $96,000. In the
future, PPG plans to increase its plant cost investment in Test Preparation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1999 1998 Variance % Change
----------------------------------------------------
<S> <C> <C> <C> <C>
Selling, General and Administrative $3,006,000 $2,446,000 $560,000 22.9%
</TABLE>
Selling, General and Administrative Expenses as a percent of sales was 31.3% and
39.7% for 1999 and 1998 respectively. The dollar increase is related to
additional personnel and general office expense, and systems upgrades to support
the company's 55.7% increase in revenues. In addition, expenses associated with
the Company's public status added approximately $44,000 to Administrative
expense as compared to 1998.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and working capital of $144,000
and $797,000, respectively, as compared to cash and working capital of $566,000
and $771,000, respectively, as of December 31, 1998. The decrease in cash is due
to the increase in accounts receivable related to the major growth in Advanced
Placement revenues, and the addition of inventory to provide for the growth of
Test Preparation revenue. Working Capital is comparable between 1999 and 1998.
PPG has a line of credit agreement with a bank, which currently allows
borrowings up to $1,500,000. The company also has a five-year term loan with the
bank. As of December 31, 1999 the Company had outstanding balances of $450,000
and $114,000 under the line of credit and the term loan respectively.
Inventories totaled $566,000 and $439,000 at December 31, 1999, and December 31,
1998, respectively. This higher level of inventory is associated with the higher
level of Test Preparation sales and the associated inventory.
Accounts receivable totaled $1,424,000 and $505,000 at December 31, 1999, and
December 31, 1998, respectively. The higher Accounts Receivable level in 1999 is
associated with direct billing of customers for Advanced Placement materials and
fourth quarter sales in 1999 that exceeded the prior year by $817,000.
PPG's business is substantially based on development of new educational
materials, the costs of which are then amortized over a period of years. The
prepublication costs of these new educational materials are capitalized on the
Company's balance sheet and amortized over a 36-month period. When the Company
is in an expansion mode, the amount of new product costs capitalized will tend
to exceed the amount of previously developed products being amortized.
Prepublication expenditures totaled $606,000 in 1999 as compared to $452,000 in
1998, resulting in an increased use of cash of $154,000 in 1999 compared to
1998. The Company believes that its cash and line of credit together with cash
generated from operations will be sufficient to meet its normal cash needs for
2000.
PRODUCT DEVELOPMENT
1999 was an active product development year. Additional resources were committed
to strengthen the internal book production staff and to build outside editorial
and author development capabilities needed to support an ambitious 2000 Test
Preparation publishing plan.
The state Test Preparation market continues to grow as the states demand higher
academic performance from students. Most states have high stakes testing
requirements, which means that students, teachers and administrators are
rewarded for positive test performance or penalized for poor performance. The
new state standards and the testing movement are here to stay and represent
attractive publishing opportunities. Presently, the Company publishes Test
Preparation products for two states and during 2000 intends to enter four new
states. In 2001 and beyond, the plan is to continue product development in this
area.
In 1999, the Company developed a new Instruction strategy to develop new
products that align with state standards in mathematics, reading and language
arts for grades 2-9. Essential to this strategy is the market alignment of the
Instruction and Test Preparation products so that both product lines are
suitable for sale to an identical customer base. This means that telemarketers,
field sales and catalog sales efforts will be synergistic, rather than isolated,
unrelated efforts. The Company plans to update and provide successful
Student-at-Risk and Multicultural backlist titles, but will not aggressively
seek new title development in these two areas. Significant new 1999
Student-at-Risk titles included Peoples World Cultures, Africa; Using Geography,
Africa; and Using Geography, Latin America. Additional world cultures and
geography titles were started in 1999 and are expected to be completed in 2000.
In Multicultural publishing, the Company is committed to a significant revision
of the successful African American History: A Journey of Liberation text to be
published in late fall of 2000.
Presently, PPG does not produce any proprietary products for the Advanced
Placement market. However, the Company intends to start a publishing program to
produce proprietary Advanced Placement supplements and ancillary materials.
PPG's products will not compete with any existing publisher agreements and will
be crafted as supplements to help teachers and students with the Advanced
Placement examinations. The goal is to release PPG's first proprietary Advanced
Placement products in 2001.
11
<PAGE> 14
The Company initiated a strategy in an attempt to acquire Test Preparation and
Instruction business that meets our product and market requirements. The
strategy is to build and acquire Test Preparation and Instruction product lines
or companies. Acquisitions in today's competitive market are limited in number
and expensive, so the acquisition strategy may not be successful.
SEASONALITY
The supplementary school publishing business is seasonal, cycling around the
school year that runs September through May. Typically, the major marketing
campaigns, including mailing of new catalogs and focused sales efforts, begin in
September when schools reopen. This is the period when sample books are provided
free for review to teachers for their purchase consideration. General marketing
efforts including additional sales and marketing campaigns, catalog mailings,
and complementary copies continue throughout the school year. Teachers and
districts generally review and consider books throughout the school year, make
their decisions in the winter and spring, and place their purchase orders with
the district office or other administrative units at that time. During spring
and summer, the district offices process purchase orders and send them to
publishers.
For PPG, approximately 48-55% of sales via purchase orders have historically
been received from July through September. The remainder of the year is slower
for sales of most product lines. An exception is the Test Preparation product
line, with purchases occurring near the time the test is given as well as during
the summer months for summer programs that add extra test preparation for
students who are behind in their performance, and for the upcoming school year.
This natural seasonality of the supplementary educational materials market means
that PPG's fiscal year (calendar year) does not coincide with the school
purchase year, so new product development and launch, as well as expenses, must
be planned around the school year. A product launched in the fall of 1999, for
example, should not be expected to generate significant sales until summer of
2000. This seasonal delay in purchase must be accounted for when considering
growth and forecasts in the supplementary educational materials market. As noted
above, PPG receives and fulfills customer orders throughout the year, but its
largest revenue is produced in the July to September third-quarter. In general,
the historical quarterly percentages of revenues to the full year revenues fall
within a predictable range, with net sales ranging from 10-14% in the 1st
quarter, 16-20% in the 2nd quarter, 48-55% in the 3rd quarter and 14-16% in the
4th quarter.
Y2K COMPLIANCE
The Company's total costs to address Y2K compliance issues were approximately
$20,000. The Company did not experience any significant difficulties as a result
of the millennium change. Although the Company did not experience any
significant difficulties, the Company plans to continue to monitor the situation
closely.
ITEM 7. FINANCIAL STATEMENTS
The information required under this heading is contained in Exhibit 99.1 filed
with this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
12
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following individuals constitute the current directors and executive
officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION SINCE
- ------------ -------------------- --------
<S> <C> <C>
John C. Bergstrom (39) Partner in RiverPoint Investments, Inc., St. Paul-based investment 1998
advisory firm since 1995. From 1985 to 1995, Mr. Bergstrom was employed
by Cherry Tree Investments, Inc., based in Minneapolis, Minnesota. For
the past two years, he has been under contract with PPG to consult and
serve as Director, Secretary, and acting Chief Financial Officer.
Similarly, the Company has retained him to serve as Secretary and acting
CFO. Mr. Bergstrom resigned as the acting CFO in January 2000. Mr.
Bergstrom is a graduate of Gustavus Adolphus College and the University
of Minnesota. He also serves as a director of several private
companies, such as Tecmark, Inc., Instrumental, Inc., and Dolan Media
Company.
Anton J. Christianson (47) Managing General Partner of Cherry Tree Investments, Inc., Minneapolis, 1998
Minnesota since 1981. Director of PPG since 1990. Mr. Christianson
has been involved in the venture capital industry for over 20 years. He
previously also served as a vice president for Norwest Venture Capital.
He serves as a director for several public and private companies, including
Fourth Shift Corp., Transport Corporation of America, Inc., Learning
Ventures, Fair Isaac and Company, Inc. and Dolan Media Company.
Mr. Christianson is a graduate of St. Johns University and Harvard
University.
James P. Dolan (50) Since 1993, Chairman, President and Chief Executive Officer and founder 1999
of Dolan Media Company, Minneapolis, a specialized business
information company that is the world's largest public records gatherer,
publishes daily and weekly business newspapers in 18 U.S. markets and
operates clickdata.com, Web-based electronic data distributor. From 1989
to 1993 he was executive vice president of media investment bank, The
Jordan Group, New York City. He previously held executive positions with
News Corporation Ltd. in New York, Sun-Times Company of Chicago and
Centel Corp., Chicago; and also was an award-winning reporter and editor
at newspapers in San Antonio, New York, Chicago, Sydney and London. He
serves as a director of several private companies and is a journalism
graduate of the University of Oklahoma. Mr. Dolan has served as a
director of PPG since 1999.
Roy E. Mayers (56) Since 1997, President and Chief Executive Officer of Hess Management, 1998
Co., which oversees three major printing companies serving the
education market. Prior to that time and since 1987, Mr. Mayers was
the President and Chief Executive Officer of Steck-Vaughn Publishing
Corporation, a leading publisher in supplementary educational
materials. From 1975 to 1985, he was President of Modern Curriculum
Press, a wholly-owned subsidiary of Esquire, Inc. as well as a group
executive of three Esquire, Inc.
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
operating companies from 1982 to 1985. From 1962 to 1975, Mr. Mayers was
employed by Globe Book Company as Vice President and General Manager. He
is a graduate of the City College of New York with a B.S. in Business
Administration and Accounting. Mr. Mayers has served as a director of PPG
since 1997.
Diane M. Miller (47) Co-founder and Executive Vice President of PPG since 1989, and Executive 1998
Vice President of the Company. Her educational publishing experience
encompasses general management, market research, editorial and marketing.
Prior to forming PPG Ms. Miller was publisher of Globe Books, a remedial
education publisher owned by Simon and Schuster. Prior to joining Globe
Books, she was Senior Editor of Reading for Harcourt Brace Jovanovich.
Ms. Miller is a graduate of Centre College of Kentucky.
James J. Peoples (62) Co-founder, Chairman, President and Chief Executive Officer and Treasurer 1998
of PPG since 1989. Chairman, President, Chief Executive Officer and
Treasurer of the Company. He has 35 years of experience in school book
publishing, including positions in sales, sales management, corporate
staff assignments, and general management. Prior to forming PPG, Mr.
Peoples was President of the Prentice Hall School Group for seven years
and served three years as Group President of the $350 million Simon and
Schuster Educational Group. Mr. Peoples is a graduate of Oregon State
University.
Matti A. Prima (45) Senior Vice President of Business Development since August 1999. n/a
Mr. Prima also serves as President, Education Development Division.
Mr. Prima has over 20 years experience in finance, communications and
publishing. He was most recently VP Finance with SiegelGale, an
Interactive Brand Management Company from 1998 to 1999, where he was
responsible for all divisional budget decisions, funding decisions
relating to investment banking, corporate finance, acquisitions, and
risk management. Prior to that Mr. Prima's work experience included
KPMG Peat Marwick, Corporate Transactions; and Henry Ansbacher as Senior
Managing Director. Mr. Prima is a graduate of Bloomsburg State University
and has an MBA from Pepperdine University.
Michael L. DeMarco (35) Vice-President Finance and Operations of the Company and PPG since May n/a
1999. Mr. DeMarco has over 13 years experience in finance and accounting.
Prior to joining PPG, Mr. DeMarco was Controller for Health Tech, a health
care products company from 1997 to 1999. Prior to joining Health Tech, he
was a Controller for OmniTech Corporate Solutions, a computer integration
and software development company. Mr. DeMarco also spent four years as an
auditor with Ernst and Young. Mr. DeMarco is a graduate of Pace University
in New York and is a Certified Public Accountant.
</TABLE>
In accordance with a voting agreement between Mr. Peoples and Cherry Tree
Ventures III, LP, each party has agreed to vote for the director designated by
the other party. Mr. Christianson has been designated by Cherry Tree Ventures
III, LP and Mr. Peoples has designated himself to serve on the Board.
Board Committees. The Board of Directors has established an Audit Committee and
a Compensation Committee. The Audit Committee is currently composed of Messrs.
Christianson and Mayers. The Audit Committee meets with the
14
<PAGE> 17
Company's independent auditors and representatives of management to review the
internal and external financial reporting of the Company, reviews the scope of
the internal auditors' examination, considers comments by the auditors regarding
internal controls and accounting procedures and management's response to these
comments and approves any material non-audit services to be provided by the
Company's independent auditors.
The Compensation Committee is currently composed of Messrs. Bergstrom,
Christianson and Mayers. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding salaries, compensation,
stock options and benefits of officers and employees. The Compensation Committee
has established a Stock Grant Subcommittee, currently composed of Messrs.
Christianson and Mayers, for the purpose of granting awards under the Company's
1998 Stock Plan.
The Company does not have a nominating committee.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
to the current Chief Executive Officer and Executive Vice President of the
Company and to the former Chief Executive Officer of the Company (the "Named
Executives"). Compensation to the current executive officers is paid by the
Company's wholly owned subsidiary, PPG.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- Awards
Securities All Other
Name Position Year Salary Bonus (1) Underlying Options Compensation (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James Peoples Chairman, President 1999 $126,912 $0 0 $1,067
and CEO 1998 $128,269 $22,007 0 $969
Diane Miller Executive 1999 $94,964 $0 0 $392
Vice President 1998 $93,269 $18,165 48,938 $312
</TABLE>
(1) Represents bonuses earned in 1998 but which were paid in 1999.
(2) Represents premiums paid by PPG for life insurance.
No options were exercised in 1999. The following table sets forth information
with respect to the Named Executives concerning the exercise of options during
1999 and unexercised options held as of December 31, 1999:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
Shares Acquired Value At Fiscal Year End At Fiscal Year End $ (1)
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------ --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Diane Miller 0 $0 16,313 16,312 0 0
</TABLE>
(1) There is no established trading market or market price for the
Company's Common Stock. Based on the last known bid quote for the
Common Stock of $0.005 ($0.10 if adjusted to reflect the 20-to-1
reverse stock split which occurred after the last bid), Ms.
Miller's option (exercisable at $1.20 per share) was not
in-the-money as of December 31, 1999.
15
<PAGE> 18
EMPLOYMENT AGREEMENTS
PPG has entered into employment agreements with Ms. Miller and Mr. Peoples.
The employment agreement between Mr. Peoples and PPG was originally entered into
in 1990 and its continues from year to year unless terminated by either party at
least 60 days prior to the end of each contract year. The agreement contains
noncompetition and nonsolicitation covenants which continue in effect for a
period ending one year after Mr. Peoples ceases to be employed by PPG. If the
employment of Mr. Peoples is terminated unilaterally by Mr. Peoples or for cause
by PPG, the Company has the right to repurchase any Company stock then owned by
Mr. Peoples. Under certain circumstances upon termination, Mr. Peoples has the
right to sell his stock back to the Company. The Company has a right of first
refusal with respect to any share transfers of Company stock by Mr. Peoples.
The employment agreement between Ms. Miller and PPG, as amended, was originally
entered into in 1990. The current term of the agreement expires in February 2000
and continues thereafter for successive one-year periods unless terminated by
either party at least 60 days prior to the end of the contract year. The
employment agreement of Ms. Miller contains the same noncompetition,
nonsolicitation, stock repurchase and other covenants as described above for Mr.
Peoples. Certain stock owned by Ms. Miller is excluded from the Company's
repurchase rights.
Director Compensation. Directors do not receive compensation or fees for
attending Board meetings. Non-employee directors are reimbursed for certain
expenses in connection with attendance at Board and committee meetings. The 1998
Stock Plan permits granting of options to directors at the discretion of the
Board. On August 23, 1999, James Dolan was granted a non-qualified option to
purchase 32,500 shares of the Company's Common Stock at $3.00 per share under
the Company's 1998 Stock Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information provided to the Company as to the
beneficial ownership of the Company's Capital Stock as of March 15, 2000 by (i)
the only shareholders known to the Company to hold 5% or more of such stock, and
each of the directors and officers of the Company individually and as a group.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY
BENEFICIAL OWNER OWNED TOTAL(%)
- ---------------- ------------ ---------
<S> <C> <C>
James J. Peoples 724,581 22.7%
Diane M. Miller (1) 263,033 8.2%
Roy E. Mayers (2) 21,750 *
John C. Bergstrom (3) 54,880 1.7%
Anton J. Christianson (4) 2,058,347 64.5%
James P. Dolan -0- 0%
Directors and officers
as a group (8 persons) (5) 3,133,091 95.3%
</TABLE>
*Less than 1%.
(1) Includes 16,313 shares of Common Stock subject to outstanding stock options
exercisable within 60 days.
(2) Includes 21,750 shares of Common Stock subject to outstanding stock options
exercisable within 60 days.
(3) Includes 48,938 shares of Common Stock subject to outstanding stock options
exercisable within 60 days.
(4) Represents ownership of Stock owned by Cherry Tree Ventures III, LP, of
which Mr. Christianson is Managing General Partner.
(5) Includes 97,501 shares of Common Stock subject to outstanding stock options
exercisable within 60 days.
16
<PAGE> 19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has retained RiverPoint Investments, Inc., a company in which John
C. Bergstrom, a director of the Company is the majority shareholder, for certain
consulting services. The Company pays $48,000 and $33,000 per year in 1999 and
1998 respectively, for such services.
In July 1998, prior to the Merger, Mr. Peoples and Ms. Miller each exercised a
stock option to purchase 50,000 shares of PPG shares at $1.25 per share. These
options had been granted to Mr. Peoples and Ms. Miller in 1993. PPG loaned each
of Mr. Peoples and Ms. Miller $62,500 to exercise such options. The nonrecourse
promissory notes evidencing such loans together with the interest accruing at 6%
per annum are due and payable on July 31, 2003.
During 1999, the Company utilized Press of Ohio, a printing company which is
affiliated with Roy E. Mayers and Hess Management Company. The Company paid
$191,000 for these services in 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are included with this Annual Report on Form 10-KSB (or
incorporated by reference) as required by Item 601 of Regulation S-B.
EXHIBIT
NO. DESCRIPTION
3.1 Restated Articles 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, 1998).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB for the year ended December 31, 1998).
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 Amended and Restated Agreement and Plan of Merger dated as of June 4, 1998,
between the Registrant, Peoples Acquisition Corporation and The Peoples
Publishing Group, Inc. (incorporated by reference to Exhibit 10.6 to the
Registrant's Form 10-KSB for the years ended December 31, 1997, 1996 and
1995).
10.3 Employment Agreement between The Peoples Publishing Group, Inc. and James
J. Peoples (incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-KSB for the year ended December 31, 1998).
10.4 Employment Agreement between The Peoples Publishing Group, Inc. and Diane
M. Miller (incorporated by reference to Exhibit 10.3 to the Registrant's
Form 10-KSB for the year ended December 31, 1998).
21 Subsidiaries of the Registrant: The Peoples Publishing Group, Inc., a
Delaware corporation.
27 Financial Data Schedule.
99.1 The Registrant's Audited Financial Statements for the Years Ended December
31, 1999 and 1998, with notes thereto and the auditor's report thereon.
(b) Reports on Form 8-K.
None
17
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEOPLES EDUCATIONAL HOLDINGS, INC.
Date: March 30, 2000
/s/ James J. Peoples
-----------------------------------
James J. Peoples, Chairman, Chief Executive
Officer and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on March
30, 2000.
/s/ James J. Peoples
-----------------------------------
James J. Peoples, Chairman, Chief Executive
Officer and President (principal executive officer)
/s/ Diane M. Miller
-----------------------------------
Diane M. Miller, Executive Vice President
and Director
/s/ John C. Bergstrom
-----------------------------------
John C. Bergstrom, Secretary and Director
/s/ Anton J. Christianson
-----------------------------------
Anton J. Christianson, Director
/s/ Roy E. Mayers
-----------------------------------
Roy E. Mayers, Director
-----------------------------------
James P. Dolan, Director
/s/ Michael L. DeMarco
-----------------------------------
Michael L. DeMarco, Vice President, Finance and
Operations (principal financial and accounting officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 143852
<SECURITIES> 0
<RECEIVABLES> 1424411
<ALLOWANCES> 0
<INVENTORY> 566357
<CURRENT-ASSETS> 2361583
<PP&E> 333254
<DEPRECIATION> 120938
<TOTAL-ASSETS> 3526338
<CURRENT-LIABILITIES> 1564452
<BONDS> 0
810850
0
<COMMON> 58704
<OTHER-SE> 1994071
<TOTAL-LIABILITY-AND-EQUITY> 3526338
<SALES> 9597744
<TOTAL-REVENUES> 9597744
<CGS> 6066427
<TOTAL-COSTS> 6066427
<OTHER-EXPENSES> 3006131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23005
<INCOME-PRETAX> 512232
<INCOME-TAX> 212000
<INCOME-CONTINUING> 300232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300232
<EPS-BASIC> .25
<EPS-DILUTED> .22
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
PEOPLES EDUCATIONAL HOLDINGS, INC.
AND SUBSIDIARY
CONTENTS
Independent auditor's report F-2
Consolidated balance sheets as of December 31, 1999
and 1998 F-3
Consolidated statements of income for the years
ended December 31, 1999 and 1998 F-5
Consolidated statements of changes in stockholders'
equity (deficit) for the years ended December 31, 1999
and 1998 F-6
Consolidated statements of cash flows for the years
ended December 31, 1999 and 1998 F-7
Notes to consolidated financial statements F-8
F-1
<PAGE> 2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Peoples Educational Holdings, Inc.
Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheets of Peoples
Educational Holdings, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Peoples
Educational Holdings, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
-----------------------------
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 1, 2000
F-2
<PAGE> 3
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------------------
ASSETS (NOTE 4) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 143,852 $ 565,678
Accounts receivable, net allowances for
returns and doubtful accounts
of $444,152 in 1999 and $186,917 in 1998 1,424,411 504,545
Inventory 566,357 439,089
Refundable income taxes - 132,500
Prepaid catalog expenses and other current assets 56,123 65,692
Advance royalties 71,840 66,000
Deferred income taxes (Note 6) 99,000 55,800
-----------------------------------
TOTAL CURRENT ASSETS $ 2,361,583 1,829,304
-----------------------------------
Equipment, at cost, less accumulated depreciation of $120,938
in 1999 and $82,109 in 1998 212,316 112,698
-----------------------------------
Other Assets
Deferred prepublication costs (Note 2) 853,340 540,333
Advance royalties 35,100 40,123
Copyrights and goodwill, net (Note 3) 29,710 72,983
Deferred income taxes (Note 6) 9,000 32,636
Other 25,289 7,845
-----------------------------------
TOTAL OTHER ASSETS 952,439 693,920
-----------------------------------
TOTAL ASSETS $ 3,526,338 $ 2,635,922
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 4
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable under line of credit (Note 4 and 12) $ 450,000 $ 234,000
Current maturities of long-term debt 30,000 -
Accounts payable 886,746 671,053
Accrued expenses (Note 7) 103,190 148,693
Income taxes payable 94,516 4,500
---------------------------------
TOTAL CURRENT LIABILITIES 1,564,452 1,058,246
---------------------------------
Long Term Debt, less current maturities (Note 4 and 12) 83,978 -
---------------------------------
Commitments (Notes 8 and 9)
Mandatory Redeemable Stock (Notes 9 and 12)
1990 Redeemable Convertible Stock, $0.02 par value; voting;
authorized 1,300,000 shares; issued
and outstanding 1,278,120 shares in 1998;
stated at liquidation value plus accrued dividends - 1,564,725
1993 Redeemable Convertible Stock, $0.02 par value; voting;
authorized 700,000 shares; issued and outstanding
680,000 shares in 1998; stated at
liquidation value plus accrued dividends - 1,081,880
Accrued and unpaid dividends on previously outstanding
1990 and 1993 Redeemable Convertible stock
810,850 -
---------------------------------
TOTAL MANDATORY REDEEMABLE STOCK
810,850 2,646,605
---------------------------------
TOTAL LIABILITIES 2,459,280 3,704,851
---------------------------------
Stockholders' Equity (Deficit) (Notes 9, 10 and 12)
Common stock, $0.02 par value; authorized 15,000,000
shares; issued and outstanding 2,935,216 shares
in 1999 and 153,260 shares in 1998
58,704 3,065
1998 Convertible Stock, $0.02 par value; voting; authorized,
issued and outstanding 600,000 shares in 1998 - 12,000
Additional paid-in capital 1,994,071 95,464
Accumulated deficit (850,067) (1,054,458)
--------------------------------
1,202,708 (943,929)
Less: Notes receivable from issuance of 1998 Convertible Stock (135,650) (125,000)
--------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,067,058 (1,068,929)
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,526,338 $ 2,635,922
================================
</TABLE>
F-4
<PAGE> 5
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales and commission revenues (Note 5) $ 9,597,744 $ 6,164,248
Cost of sales 6,066,427 3,171,435
------------------------------
GROSS PROFIT 3,531,317 2,992,813
Selling, general and administrative expenses 3,006,131 2,445,808
------------------------------
INCOME FROM OPERATIONS 525,186 547,005
Nonoperating income (expense):
Interest income 9,551 34,114
Interest expense (23,005) (15,445)
Gain (loss) on sale of assets 500 (6,926)
------------------------------
INCOME BEFORE INCOME TAXES 512,232 558,748
Federal and state income taxes (Note 6) 212,000 242,610
------------------------------
NET INCOME 300,232 316,138
Mandatory Redeemable Convertible Stock dividends 95,841 95,841
------------------------------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 204,391 $ 220,297
==============================
Net income per common share:
Basic $ 0.25 $ 0.36
Diluted 0.22 0.12
==============================
Weighted-average number of common shares outstanding:
Basic 823,262 614,949
Diluted $ 1,355,626 2,512,041
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 6
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1998 Additional
Common Convertible Paid-In Accumulated Notes
Stock Stock Capital Deficit Receivable Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 10,000.00 $ - $ (1,274,755) $ - $(1,264,755)
Exercise of stock options resulting in
issuance of 100,000 shares of 1998
Convertible Stock in exchange for
notes receivable (Note 10) - 2,000 123,000 - (125,000) -
Accrued dividends on Mandatory
Redeemable Convertible Stock - - - (95,841) - (95,841)
Effect of merger transaction on
November 1, 1998 (Note 1) 3,065 - (27,536) - - (24,471)
Net income - - - 316,138 - 316,138
------------------------------------------------------------------------------------
Balance, December 31, 1998 3,065 12,000 95,464 (1,054,458) (125,000) (1,068,929)
Accrued Dividends on Mandatory
Redeemable Convertible Stock - - - (95,841) - (95,841)
Interest on notes receivable from
issuance of 1998 Convertible Stock - - 10,650 - (10,650) -
Conversion of 1990 Mandatory
Redeemable Convertible Stock
into Common Stock 27,799 - 1,053,797 - - 1,081,596
Conversion of 1993 Mandatory
Redeemable Convertible Stock
into Common Stock 14,790 - 835,210 - - 850,000
Conversion of 1998 Convertible
Stock into Common Stock 13,050 (12,000) (1,050) - - -
Net income - - - 300,232 - 300,232
------------------------------------------------------------------------------------
Balance, December 31, 1999
$58,704 $ - $1,994,071 $ (850,067) $(135,650) $1,067,058
====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 7
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 300,232 $ 316,138
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation 39,329 26,862
Amortization of prepublishing costs and intangible assets 336,068 232,704
Deferred income taxes (19,564) 238,031
Changes in assets and liabilities, excluding merger effects in 1998 (Note 1):
Accounts receivable (919,866) 203,280
Inventory (127,268) (102,192)
Refundable income taxes 132,500 (132,500)
Prepaid catalog and other current assets 9,569 (912)
Advance royalties (817) 11,569
Other assets (17,444) (3,150)
Accounts payable and accrued expenses 170,190 (56,875)
Income taxes payable 90,016 1,080
-----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,055) 734,035
-----------------------------
Cash Flows From Investing Activities
Purchases of equipment (139,447) (75,557)
Proceeds from disposal of equipment 500 -
Expenditures for prepublishing costs (605,802) (451,748)
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (744,749) (527,305)
-----------------------------
Cash Flows From Financing Activities
Net borrowings under line of credit 216,000 234,000
Proceeds from long-term borrowings 113,978 -
Principal payments on notes payable - (57,168)
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 329,978 176,832
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (421,826) 383,562
Cash and Cash Equivalents
Beginning of year 565,678 182,116
-----------------------------
End of year $ 143,852 $ 565,678
=============================
Supplemental Cash Flow Information
Cash payments for:
Interest $ 23,005 $ 15,363
Income taxes 6,075 135,920
=============================
Noncash financing activities:
Increase in Preferred Mandatory Redeemable Stock and increase in accumulated deficit
from accrued dividends $ 95,841 $ 95,841
Issuance of common stock in exchange for notes receivable - 125,000
Conversion of 1990 and 1993 Preferred Redeemable Stock to common stock 1,931,596 -
=============================
Changes in assets and liabilities resulting from merger (Note 1):
Receivables $ - $ 61,524
Other assets - 2,091
Accounts payable and accrued expenses, net of cash - (88,086)
-----------------------------
EFFECT OF MERGER ON STOCKHOLDERS' DEFICIT $ - $ (24,471)
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 8
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Peoples Educational Holdings, Inc. (PEH), through its wholly
owned subsidiary, Peoples Publishing Group, Inc. (PPG), publishes, distributes,
and markets supplementary educational texts and related materials for the pre-K
to 12 market. Supplementary educational materials are predominantly soft-cover
textbooks that can be sold efficiently to schools through catalogs, direct mail,
telemarketing, and independent commission-sales representatives. PPG and PEH are
together referred to herein as the Company.
MERGER: Effective November 1, 1998, Peoples Acquisition Corporation (PAC), a
subsidiary of Concourse Corporation (Concourse) merged with and into PPG.
Concourse was a public company with only minimal assets, liabilities, and
operations and changed its name to Peoples Educational Holdings, Inc., in
December 1998. PPG survived the merger as a wholly-owned subsidiary of PEH. The
shareholders and option holders of PPG were issued convertible shares and
options of PEH, which will result in the former PPG shareholders and option
holders owning approximately 95 percent of the outstanding shares of PEH upon
full conversion of shares and exercise of options.
For financial reporting purposes, PPG was treated as the acquiring company, and
the merger was accounted for as a "reverse acquisition." The assets and
liabilities reflected in these financial statements are at the historical
carrying amounts reported by PPG, and the operations reflect the historical
operations of PPG, not those previously reported by Concourse. The effect of the
merger was similar to a recapitalization.
INVENTORY: Inventory is stated as lower of cost or market, which is determined
using the first-in, first-out method. Inventory consists entirely of finished
goods. Inventory on the balance sheet is reflected net of reserves for
writedowns or non-salability of $63,743 and $33,744 in 1999 and 1998,
respectively.
DEPRECIATION: Equipment is recorded at cost. Depreciation is provided over the
equipment's estimated useful lives of five to seven years using the
straight-line method. Maintenance and repairs are charged to expense as incurred
and major renewals or improvements are capitalized. On sale or retirement of
property and equipment, the related costs and accumulated depreciation are
removed from the accounts, and any gain or loss is included in the results of
current operations.
ACCOUNTING FOR LONG-LIVED ASSETS: The Company generates operating revenue and
builds up an acceptable revenue base and related cash flows with its long-lived
assets. Management has and will continue, on a periodic basis, to closely
evaluate its equipment, deferred prepublication costs, advance royalties, and
other intangible assets to determine potential impairment by comparing their
carrying value with the estimated future net undiscounted cash flows expected to
result from the use of the assets, including cash flows from disposition. Should
the sum of the expected future net cash flows be less than the carrying value,
the Company would recognize an impairment loss at that date. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value (estimated discounted future cash flows or appraisal of assets)
of the long-lived assets. To date, management has determined that no impairment
of long-lived assets exists.
F-8
<PAGE> 9
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC AND DILUTED NET INCOME PER SHARE: Basic per share amounts are computed,
generally, by dividing net income by the weighted-average number of common
shares outstanding. Diluted per share amounts assume the conversion, exercise,
or issuance of all potential common stock instruments unless the effect is
antidilutive, thereby increasing the income per common share.
In arriving at basic net income per common share, the Company's net income has
been adjusted for undeclared, cumulative dividends on the Company's 1990 and
1993 Redeemable Convertible Stock, which totaled $95,841 for both 1999 and 1998.
In arriving at the weighted-average number of common shares outstanding for
basic net income per share, the Company's 1998 Convertible Stock, which has all
the rights and privileges of the Company's common stock, has been reflected as
equivalent common shares as if converted on January 1, 1998.
In arriving at diluted weighted-average shares and diluted per share amounts,
common stock issuable on conversion of the 1990 and 1993 Redeemable Convertible
Stock has been included as if converted on January 1, 1998 for the respective
fiscal quarters in which such assumed conversion had a dilutive effect. For
these computations, the Company's net income (before reduction for Convertible
Stock dividends) is divided by the weighted-average diluted shares outstanding.
As described in Note 9, prior to their actual conversion to common stock on
December 30, 1999, the conversion of the aforementioned convertible stock had
maximum dilution on any quarter at an additional 2,129,456 shares of common
stock. Options outstanding of 291,102, as described in Note 10, were not
included in the computation of weighted-average diluted shares outstanding since
their effect was not dilutive for any quarter during 1999 or 1998.
INCOME TAXES: The Company accounts for deferred taxes on an asset and liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss or tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred taxes are based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts more likely than not to be realized.
Income tax expense is the tax payable or refundable for the year plus or minus
the change during the year in deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments and methods and assumptions used in estimating
their fair values: for cash and cash equivalents, the carrying amount is fair
value; for trade accounts receivable, accounts payable, and line-of-credit debt,
the carrying amounts approximate their fair values due to either the short-term
nature of these instruments or the variable nature of the interest rate; and for
the fixed-rate notes payable, fair value has been estimated based on discounted
cash flows using interest rates being offered for similar borrowings. No
separate comparison of fair values versus carrying values is presented for the
aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. In addition,
the aggregate fair values of financial instruments would not represent the
underlying value of the Company.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all short-term debt securities purchased with an original maturity of
three months or less to be cash equivalents.
F-9
<PAGE> 10
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company maintains its cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
REVENUE RECOGNITION, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE: Generally, the
Company recognizes sales upon shipment and estimates sales returns if the right
of return exists. The allowances for sales returns as of December 31, 1999 and
1998, were $364,152 and $151,755, respectively. These sales allowances are
recorded as a reduction of accounts receivable.
The Company provides credit to its customers determined on a
customer-by-customer basis. In addition, the Company provides allowances for
uncollectable accounts receivable based on management's periodic assessment of
the need for such allowances. Such allowances were $80,000 and $35,162 at
December 31, 1999 and 1998, respectively.
MAJOR SUPPLIERS: For 1999 approximately 64 percent of total revenues and 99
percent of advanced placement revenues were generated from college books and
products purchased from two major college book publishers.
DEFERRED PREPUBLICATION COSTS: Prepublication costs of new books consist
primarily of freelance page make-up, outside editorial, design, layout, art,
photo services, mechanicals, film, plate preparation charges, and photo and text
permissions. These costs are amortized over three years, the estimated minimum
lives of the related publications, using the straight-line method from the date
of initial publication.
PREPAID CATALOG EXPENSES: The cost of catalogs which have not been delivered to
customers are carried as a prepaid expense until the actual date of mailing.
Catalog expense is recognized in the statement of income in the period in which
the catalogs are mailed or distributed. Advertising expense, excluding catalog
expense, was $133,582 and $140,472 for 1999 and 1998, respectively.
ADVANCE ROYALTIES: Advance royalties, which are recorded as an asset when paid,
incurred, or otherwise acquired, are expensed when earned by the authors.
Amounts classified as current assets on the balance sheets are those amounts
expected to be earned within the next 12 months.
COPYRIGHTS AND GOODWILL: These assets are amortized using the straight-line
method over the following useful lives:
Years
Copyrights 10
Goodwill 40
USE OF ESTIMATES: In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-10
<PAGE> 11
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. DEFERRED PREPUBLICATION COSTS
The activity in deferred prepublication costs and the balances as of December
31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prepublication costs, beginning of year $ 1,121,486 $ 669,738
Accumulated amortization, beginning of year (581,153) (391,722)
-------------------------------------
Net balance 540,333 278,016
Prepublication cost additions, current year 605,802 451,748
Amortization expense, current year (292,795) (189,431)
-------------------------------------
Net balance, end of year $ 853,340 $ 540,333
=====================================
</TABLE>
NOTE 3. COPYRIGHTS AND GOODWILL
Copyrights and goodwill consist of the following at December 31, 1999 and 1998:
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Copyrights $ 658,513 $ 658,513
Goodwill 25,000 25,000
----------------------------
683,513 683,513
Less accumulated amortization (653,803) (610,530)
----------------------------
Net balance, end of year $ 29,710 $ 72,983
============================
</TABLE>
Amortization expense for these assets was $43,273 for both 1999 and 1998.
NOTE 4. LINE OF CREDIT AND NOTES PAYABLE
PPG has an agreement with a bank which allows borrowings of up to $1,500,000,
which expires and is subject to renewal on May 22, 2000. Advances under this
line of credit are based upon eligible assets, are due on demand, and bear
interest at the prime rate (8.5 percent at December 31, 1999). All borrowings
are secured by substantially all PPG assets, and are guaranteed by PEH. The
agreement also requires PPG to meet certain covenants, including maintaining a
minimum net worth. There was $450,000 outstanding under this agreement at
December 31, 1999.
PPG obtained a $150,000 installment loan from a bank in 1999, of which only
$113,978 was borrowed. The term of the loan is five years and bears interest at
the prime rate, with monthly installments of $2,500 plus interest, beginning
January 2000. All borrowings are secured by substantially all PPG assets, and
are guaranteed by PEH. The loan had an unpaid balance of $113,978 at December
31, 1999.
F-11
<PAGE> 12
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. REVENUES BY PRODUCT LINE
The Company's revenues by major product line for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Product Line 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruction sales $ 1,841,245 $ 2,471,814
Test preparation sales 1,547,725 954,886
Advanced placement sales and commission revenue 6,208,774 2,737,548
================================
Total revenues $ 9,597,744 $ 6,164,248
================================
</TABLE>
NOTE 6. INCOME TAXES
Federal and state income tax expense for the years ended December 31, 1999 and
1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 231,564 $ 4,579
Deferred (19,564) 238,031
---------------------------------
Total $ 212,000 $ 242,610
================================
</TABLE>
For the years ended December 31, 1999 and 1998, the income tax provision differs
from the amount of income tax determined by applying the U.S. federal income tax
rate to pretax income, due to the following:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computed federal income tax at statutory rate $ 180,000 $ 190,000
State income taxes, net of federal benefit 34,000 33,200
Other, net (2,000) 19,410
--------------------------------
$ 212,000 $ 242,610
================================
</TABLE>
Net deferred tax assets are comprised of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 33,000 $ 14,400
Allowance for sales returns 149,000 62,000
Inventory 41,000 33,900
Intangible assets 9,000 31,600
Other assets - 3,936
Allowance for purchase returns (124,000) (57,400)
--------------------------------
Net deferred tax assets $ 108,000 $ 88,436
===========================================================================================================
</TABLE>
F-12
<PAGE> 13
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The aforementioned net deferred tax assets are reflected on the consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
December 31
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 99,000 $ 55,800
Noncurrent assets 9,000 32,636
----------------------------
Net deferred tax assets $ 108,000 $ 88,436
============================
</TABLE>
NOTE 7. ACCRUED EXPENSES
The components of accrued expenses as of December 31, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation $ 55,771 $ 78,292
Professional fees 25,429 66,358
Other 21,990 4,043
-----------------------------
$ 103,190 $ 148,693
=============================
</TABLE>
NOTE 8. LEASE COMMITMENTS
The Company is leasing its premises under an operating lease which expires in
October 2004. The Company also leases certain office equipment under operating
leases.
Approximate future minimum rental obligations under operating leases are as
follows:
<TABLE>
<CAPTION>
Years ending December 31:
- --------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 153,000
2001 146,000
2002 148,000
2003 147,000
2004 130,000
-----------------
$ 724,000
=================
</TABLE>
Rent expense under the aforementioned operating leases was $76,647 and $42,276
in 1999 and 1998, respectively.
F-13
<PAGE> 14
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMON AND CONVERTIBLE STOCK
AUTHORIZED CAPITAL STOCK: The Company has authorized 25,000,000 shares of
capital stock, of which 15,000,000 are designated as common shares, 2,600,000
are designated as either 1990, 1993, or 1998 Convertible Stock, and 7,400,000
are undesignated.
MANDATORY REDEEMABLE STOCK: Shareholders of 1990 and 1993 Redeemable Convertible
Stock were entitled to cumulative quarterly cash dividends at the rates of
$0.042 and $0.062, respectively, per share per annum. The Redeemable Convertible
Stock has liquidation preferences of $0.84624 and $1.25, respectively, plus
unpaid accumulated dividends prior to payments to common stockholders or 1998
convertible stockholders.
Under a required redemption provision, commencing on August 24, 2000, the
Company was required to redeem one-third of the Redeemable Convertible Stock
from each shareholder, if adequate cash funds were legally available, at a price
equal to the liquidation preference plus accumulated dividends.
Each share of 1990 and 1993 Redeemable Convertible Stock was convertible at the
option of the holder into 1.0875 shares of common stock, subject to a possible
adjustment for noncash dividends on common stock and subject to certain
antidilution provisions. As of December 30, 1999, all of the 1990 and 1993
Redeemable Convertible Stock (exclusive of accrued unpaid dividends) was
converted into 2,129,456 shares of the Company's common stock. At December 31,
1999, the aggregate accumulated unpaid dividends were $536,810 and $274,040 for
the 1990 and 1993 Redeemable Convertible Stock, respectively.
1998 CONVERTIBLE STOCK: Each share of 1998 Convertible Stock was convertible at
the option of the holder into 1.0875 shares of common stock through December 31,
2001, subject to a possible adjustment for dividends on common stock and subject
to certain antidilution provisions. After December 31, 2001, each share of 1998
Convertible Stock was convertible into 0.5 shares of common stock. As of
December 30, 1999, all of the 1998 Convertible Stock was converted into 652,500
shares of the Company's common stock.
NOTE 10. STOCK OPTIONS
The Company adopted the 1998 Stock Option Plan (the Plan) effective August 1998.
The Plan permits the granting of incentive stock options and nonqualified
options. A total of 400,000 shares of the Company's common stock have been
reserved for issuance pursuant to options granted under the Plan.
F-14
<PAGE> 15
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTIONS (CONTINUED)
Grants under the Plan are accounted for following APB Opinion No. 25 and related
interpretations. Had compensation cost for the options been determined using the
fair value method required by FASB Statement No. 123, the Company's net income
applicable to common stockholders, net income, and basic and diluted net income
per common share on a pro forma basis for 1999 and 1998 would have been as
follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income applicable to common stockholders:
As reported $ 204,391 $ 220,297
Pro forma 148,900 196,200
Basic net income per common share:
As reported 0.25 0.36
Pro forma 0.18 0.32
Net income before reduction for Convertible Stock dividends:
As reported 300,232 316,138
Pro forma 244,800 292,000
Diluted net income per common share:
As reported 0.22 0.12
Pro forma 0.18 0.11
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants: no dividends, risk-free interest rate of 6 percent,
expected lives of five to 10 years, and no expected volatility.
A summary of stock option activity, including options originally granted by PPG
and reissued on November 1, 1998, as PEH options in connection with the merger,
is as follows:
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Grant Average
Fair Value Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 $ 0.46 187,000 $ 1.23
Granted 0.32 52,200 1.20
Exercised - (100,000) 1.25
--------
Outstanding at December 31, 1998 0.45 139,200 1.20
Granted 1.35 151,900 3.00
========
Outstanding at December 31, 1999 .92 292,100 2.14
========
</TABLE>
There were 103,483 and 52,473 options exercisable at December 31, 1999 and 1998,
respectively, at weighted-average exercise prices of $1.46 and $1.20 per share,
respectively. The weighted-average remaining contractual life of all outstanding
options was 7.1 years at December 31, 1999
F-15
<PAGE> 16
PEOPLES EDUCATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTIONS (CONTINUED)
In July 1998, prior to the merger transaction where PPG became a subsidiary of
PEH, two officer/stockholders of PPG exercised stock options (granted by PPG in
1993) to purchase 50,000 shares each of 1998 Convertible Stock at $1.25 per
share. The shares were issued in exchange for $125,000 of nonrecourse promissory
notes receivable bearing interest at 6 percent per annum. The notes, plus all
accrued interest, are due on July 31, 2003, and are collateralized by the shares
acquired. For financial reporting purposes, the notes receivable were accounted
for as a reduction of stockholders' equity (deficit).
NOTE 11. RELATED-PARTY TRANSACTIONS
The Company has retained RiverPoint Investments, Inc., a company in which one of
its officers and directors is the majority shareholder, for certain consulting
services. The Company paid $48,000 and $33,000 per year in 1999 and 1998
respectively, for such services.
During 1999, the Company utilized a printing company which is affiliated with a
Director of the Company. Total services purchased from this printing company
totaled $191,000 in 1999.
Following the November 1, 1998, merger, the Company's Board of Directors
approved an agreement pursuant to which the former CEO of PEH acquired
substantially all of PEH's pre-merger assets (approximately $64,000) in exchange
for the assumption of all of PEH's liabilities as of the effective date of the
merger, except certain specified liabilities related to consummating the merger.
This transaction resulted in a loss of approximately $6,000.
NOTE 12. SUBSEQUENT EVENTS
ACCRUED DIVIDENDS: Subsequent to December 31, 1999 certain officers and
directors converted $810,850 of accrued dividends on previously outstanding
redeemable convertible stock into 253,633 shares of common stock at a conversion
price of $3.00 per share and were paid cash of $49,954.
FINANCING: The Company has negotiated a new financing arrangement with a bank
(subject to the completion of certain document requirements) to replace its
existing line of credit and installment loan (See Note 4). The new arrangement
would provide for up to $2,500,000 under a two year revolving credit agreement
with availability based on certain percentages of inventory and receivables. Of
this amount, $1,000,000 would be available for acquisitions. The new agreement
would also provide for up to $500,000 under a one year revolving credit line to
support prepublication expenditures. The arrangement will also require the
company to maintain certain financial covenants. The Company anticipates closing
the new agreements and the repayment of the existing bank financing on or about
April 5, 2000.
F-16
