PEOPLES EDUCATIONAL HOLDINGS

The Race to the Top (RTTT) initiative is poised to deepen the investments in the program’s five core reform areas—implementing rigorous standards and assessments, using data to improve instruction and decision-making, recruiting and retaining effective teachers and principals, turning around the lowest-performing schools, and improving State systems of early learning and care. In addition the program addresses the unmet financial demand of States and districts that have demonstrated a commitment to implementing comprehensive and ambitious plans in these areas.  For fiscal 2013, the RTTT funding request is $850 million compared to $549 million in fiscal 2012 and $698.6 million in fiscal 2011.

Like our Test Preparation products, our Assessment products are also customized for each state. These Assessment materials include a robust formative assessment program that includes both pre-created assessments (in a populated assessment library), as well as standards-based practice items; each are delivered in a web-based digital format. Measuring Up Live™ is the platform under which all of our digital products exist. The platform offers a suite of online tools, branded and strategically connected to the Measuring Up® print materials, for educators and students. Measuring Up Insight™ offers both formative and summative assessments, custom-assessment creation tools, and progress monitoring capabilities. A derivative product of Measuring Up Insight, is End-of-Course Online, which delivers similar functionality with an undivided focus on the High School, end-of-course content and subject matter; English I, Algebra, Biology, and Chemistry. Measuring Up MyQuest™ provides a student-driven, standards-based practice environment that was designed not only to deliver relevant and appropriate content, but to do so while keeping students engaged and motivated. The system was uniquely created to scale up or down based on student performance thus providing a completely individualized and differentiated practice experience. Measuring Up Reach™, the newest addition to our Measuring Up Live™ suite offers online instruction that ultimately takes our worktexts and offers a digital version for added instructional flexibility, bridging the gap between the print and digital needs within a given classroom. Our programs allow teachers to generate unique instruments, review data, and to make instructional decisions that focus a student’s learning on the areas that need the most attention. They allow teachers to differentiate instruction as described in the Response to Intervention (RTI) requirement of the Individuals with Disabilities Education Act (IDEA).

We evaluate deferred tax assets for impairment on a quarterly basis. During the fourth quarter, we increased our deferred tax assets reserve by $4.2 million, resulting in a total reserve of $5.2 million or 100% of the gross deferred tax assets. This was based on a variety of factors, including our fourth quarter and full fiscal 2012, prior year’s performance and our expected future performance. We considered all evidence currently available, both positive and negative, in determining, based on the weight of that evidence, the likelihood that the deferred tax asset would be realized. During that review, we determined that the level of our recent historical losses outweighed our forecasted taxable earnings levels for the near and long term. As such, we established a 100% deferred tax valuation allowance. Future profitability would enable us to reduce the valuation allowance and thereby offset income tax expense that would otherwise be recognized.

The Company has incurred losses of approximately $9.3 million and $0.5 million for the years ended May 31, 2012 and 2011, respectively. The May 31, 2012 year end loss primarily consisted of approximately $2.4 million of accelerated amortization on prepublication costs, a $4.5 million increase in deferred tax valuation allowance and approximately $1.5 million of inventory write offs during the year. At May 31, 2012, the Company had cash and cash equivalents of approximately $665,000, a working capital deficit of approximately $2.8 million and an accumulated deficit of approximately $12.2 million. At May 31, 2012, the Credit Facility (“Facility”) with Sovereign Bank (“Sovereign”) consisted of a Revolving Line of Credit (“Revolver”) that provided for advances up to $9.0 million, all of which was outstanding, and a Term Loan originally in the amount of $10.0 million, of which $1.95 million was outstanding. The Company was not in compliance with certain of the covenants under the Facility at May 31, 2012, but such non-compliance was waived by Sovereign in connection with entering into the amended Facility on August 15, 2012 (see Note 5 for further discussion). The Company's Facility with Sovereign expires on June 30, 2013. The Company has agreed to take certain actions to obtain additional funding from sources other than Sovereign by October 1, 2012, to support its operations, and has agreed to take certain steps to cover any projected operating deficits if such financing is not obtained.  There can be no assurance that such actions will be available in general or on terms acceptable to the Company.

Frank R. Gatti has been a Director of the Company since January 2012. He has been a member of the Finance Committee of the Board of The Conference Board, an objective and independent source of economic and business knowledge, since January 2011. He is also an advisor to Accenture for their CFO Network and has served on Pace University’s MS/Publishing Advisory Board since its inception. In addition, he was a member of the Board of Directors of Blackboard, Inc., a global provider of enterprise software applications and related products/services to education, government and industry, and served on its Transaction, Nominating/Governance and Audit (chair) Committees from the April 2004 IPO to the October 2011 sale. He was Chief Financial Officer and a member of the Officer of the President of ETS, a global $1.3 billion assessment, licensure and certification company, from October 1997 to his retirement in May 2011. Prior to ETS, he held senior financial positions at The New York Times Company, including Corporate Vice President / Financial Management commencing in January 1996. Mr. Gatti holds a BBA in accounting degree, earned an MBA in finance and marketing and has completed several executive education programs in planning, strategic marketing and financial management at the Harvard Business School. Mr. Gatti is a Certified Public Accountant. His leadership and management accomplishments have been recognized by the Rutgers Business School, NJBiz, the Executive Council of New York and Pace University.