U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended OCTOBER 31, 1998.
/ / Transition report under Section 13 or 15(d) of the Exchange
Act For the transition period from ________________ to _________________
Commission file number _____________
THE MILLBROOK PRESS INC.
(Exact Name of Small Business Issuer in Its Charter)
DELAWARE 06-1390025
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 Old New Milford Road, P.O. Box 335
Brookfield, CT 06804
(Address of principal executive offices)
(203) 740-2220
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUES
State the number of share outstanding of each of the issuer's classes of common
equity, as of October 31, 1998
3,455,000 shares of Common Stock outstanding
- --------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
<PAGE>
THE MILLBROOK PRESS, INC.
INDEX TO FORM 10-QSB
October 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months
ended October 31, 1998 and 1997
Balance Sheet as of October 31, 1998
Statements of Cash Flows for three months
ended October 31, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K
<PAGE>
THE MILLBROOK PRESS INC.
Statements of Operations
Three Months Ended October 31
1998 1997
Net revenues $4,815,000 $3,971,000
Cost of sales 2,465,000 2,044,000
--------- ---------
Gross profit 2,350,000 1,927,000
Operating expenses:
Selling and marketing 1,533,000 1,243,000
General and administrative 419,000 433,000
------- -------
Total operating expenses 1,952,000 1,676,000
--------- ---------
Operating income 398,000 251,000
Interest expense 93,000 0
------ -
Net income 305,000 251,000
======= =======
Earnings per share (basic and diluted) $0.09 $0.07
===== =====
Weighted Average Number of Shares Outstanding 3,455,000 3,523,391
========= =========
<PAGE>
Millbrook Press
Balance Sheet
October 31, 1998
Assets
Current Assets:
Cash $86,000
Accounts Receivable, net 5,965,000
Inventory 6,628,000
Prepaid Expense and Other Assets 400,000
Royalty Advances, net 857,000
-----------
Total Current Assets 13,936,000
Plant Costs, net 4,237,000
Royalty Advances, net 626,000
Fixed Assets, net 237,000
Goodwill, net 3,288,000
-----------
Total Assets $22,324,000
===========
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts Payable and Accrued Expenses $ 3,352,000
Notes Payable to Bank 4,636,000
Royalties Payable 84,000
-----------
Total Current Liabilities 8,072,000
===========
Stockholder's Equity:
Common stock, par value $.01, 12,000,000
shares authorized, 3,455,000 shares issued
and outstanding 35,000
Additonal Paid in Capital 17,556,000
Accumulated Deficit (3,339,000)
-----------
Total stockholder's Equity 14,252,000
-----------
Total Liabilities &
Equity $22,324,000
===========
<PAGE>
THE MILLBROOK PRESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended October 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $305,000 $251,000
Add (deduct) to reconcile net income to net cash flow:
Depreciation and amortization 435,000 347,000
Changes in accounts receivable (1,020,000) (916,000)
Changes in inventory 80,000 (212,000)
Changes in prepaid expense and other assets 89,000 358,000
Changes in accounts payable & accrued expenses (225,000) (40,000)
--------- ---------
Cash used in operations (336,000) (212,000)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVIES:
Capital expenditures (20,000) (18,000)
Plant costs (353,000) (390,000)
--------- ---------
Cash used in investing activities (373,000) (408,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 761,000 331,000
------- -------
Cash provided by financing activities 761,000 331,000
------- -------
Net increase/(decrease) in cash 52,000 (289,000)
Cash at beginning of period 34,000 323,000
------ -------
Cash at end of period $86,000 $34,000
------- -------
Supplemental disclosure:
Interest paid $93,000 $0
------- --
</TABLE>
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
Basis of Presentation
The financial statements of The Millbrook Press Inc. (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in cash
flows for all period presented have been made. The results of the October 31,
1998 interim period are not necessarily indicative of the results that may be
expected for the full year.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended July 31, 1998.
Initial Public Offering
The Company completed its initial public offering (IPO) on December 23, 1996
whereby the Company issued and sold 1,955,000 shares of Common Stock and
received net proceeds of approximately $7,093,000. In addition, all the
Company's outstanding preferred stock, including accrued preferred dividends,
was converted into 473,692 shares of common stock. The Company used some of the
proceeds from the offering to repay bank and bridge loans. Prior to the
effectiveness of the IPO, the Company filed an Amended and Restated Certificate
of Incorporation with the State of Delaware whereby its authorized capital stock
increased to 13,000,000 shares, consisting of 12,000,000 shares of Common Stock,
$0.01 par value per share and 1,000,000 shares of Preferred Stock, $0.01 par
value per share.
Stock Option Plan
The Company has reserved 675,000 shares of common stock under its non-qualified
1994 Stock Option Plan ("Option Plan") which provides that the Stock Option and
Compensation Committee of the Board of Directors, may grant stock options to
eligible employees, officers, directors of the Company or its affiliates. The
number of shares reserved for issuance is adjusted in accordance with the
provisions of the Option Plan. All stock options granted by the Company
generally expire seven years after the grant date. Stock options generally vest
50% in one year from the date of grant and 25% in each of the next two years
from the date of grant. However, 50% of all non-vested stock options granted
prior to the IPO vested on December 17, 1997 and the balance of such unvested
options vest on December 17, 1998.
<PAGE>
Earning Per Share
In December 1997, the company adopted Statement of Financial Accounting Standard
(SFAS 128) "Earning Per Share". SFAS 128 presents earning per share on a Basic
and Diluted basis. The computation of Basic earnings per share is based on
income available to common stockholders and the weighted average number of
common shares outstanding during the three-month period. Diluted earnings per
share reflects the potential dilution that could occur if dilutive stock options
were exercised resulting in the issuance of common stock that then shared in the
earnings of the Company. The following table details the computation of Basic
and Diluted earnings per share for the three-month period.
For the three months ended
October 31
1998 1997
---- ----
Net Income $305,000 $251,000
Basic & Diluted Shares 3,455,000 3,523,391
Basic & Diluted EPS $0.09 $0.07
Notes Payable to Bank
As of October 31, 1998, the Company had available a $7,500,000 revolving line of
credit with People's Bank and the Company had $4,636,000 outstanding under this
line. The reason for the increase in the debt is the acquisition of Twenty-First
Century Books and increased working capital needs.
Taxes
No federal income taxes have been provided for the three months ended October
31, 1998 and 1997 due to the Company's net operating loss carryforwards.
The Company anticipates fully utilizing all of its remaining net operating loss
carryforwards during the current fiscal year.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
General
The Company is a publisher of children's fiction and non-fiction books, in both
hardcover and paperback, for the the school and library market and the consumer
market. Since its inception, the Company has published more than 1100 hardcover
and 500 paperback books under its Millbrook, Copper Beech, and Twenty-First
Century imprints. The Company's books have been placed on numerous recommended
lists by libraries, retail bookstores and educational organizations. Books
published under the Millbrook imprint have evolved from information intensive
school and library books to include its current mix of highly graphic,
consumer-oriented books. Therefore, many of its books can be distributed to the
school and public library market as hardcover books while being simultaneously
distributed to the consumer market as either hardcover or paperback books. The
majority of Copper Beech books are published to both the consumer and library
markets. Twenty-First Century Books titles are published primarily for the
library market. As a result, the Company is better able to fully exploit a
book's sales potentital. However, the Company has incurred significant expenses
relating to the establishment of the infrastructure which can enable the Company
to sell books to the consumer market and/or develop books that can appeal to
both the school and public library market and consumer market.
Consumer Market Compared to the School and Public Library Market
As the Company sells more of its products in the consumer market, the results of
operations and its financial condition could be influenced by certain
distinctions between the consumer market and the school and public library
market. It is generally more difficult to collect receivables in the consumer
market than in the school and library market. Sales to the consumer market have
a higher return rate than sales to the school and public library market and
accordingly the Company will need to deduct a higher reserve for returns from
its gross sales. Sales to the consumer market have a lower gross profit margin
than sales to the school and library market because consumer sales have higher
sales discounts and promotional allowances than sales to the school and public
library market.
Variability in Quarterly Results
A substantial portion of the Company's business is highly seasonal, causing
significant variations in operating results from quarter to quarter. In the
school and library market, net sales tend to be lowest in the second calendar
quarter and highest in the third calendar quarter, as schools purchase heavily
in anticipation of opening in September. The consumer market also tends to be
highly seasonal and, given the importance of holiday gifts, a large proportion
of net sales can occur in the third calendar quarter in anticipation of the
holiday gift season. The Company's current and future net sales and operating
results will reflect these seasonal factors.
Sales Incentives and Returns
In connection with the introduction of new books, many book publishers,
including the Company, discount prices of existing products, provide certain
promotional allowances and credits or give other sales incentives to their
customers.
<PAGE>
The Company intends to continue such practices in the future. In addition, the
practice in the publishing industry is to permit customers including wholesalers
and retailers to return merchandise. Most books not sold may be returned to the
Company for credit. The rate of return also can have a significant impact on
quarterly results since certain wholesalers returned large quantities of
products at one time irrespective of marketplace demand for such products,
rather than spreading out the returns over the course of the year. The Company
computes net sales by concurrently deducting a reserve for returns from its
gross sales. Return allowance may vary as a percentage of gross sales based on
actual return experience. The Company believes that as gross sales to the
consumer market increase as a proportion of its overall sales, returns will
constitute a greater proportion of net sales. Although the Company believes its
reserves have been adequate to date, there can be no assurance that returns by
customers in the future will not exceed historically observed percentages or
that the level of returns will not exceed the amount of reserves in the future.
In the event that the amount reserved proves to be inadequate, the Company's
operating results will be adversely affected.
RESULTS OF OPERATIONS
Net sales for the first quarter ended October 31, 1998 were $4.8 million
compared to $4.0 million for the same period last year. Increased sales resulted
from significant increases in consumer and school and library sales. The
increasing size of the Company's backlist, the introduction of the Company's
beginning reader program and the addition of Magic Attic Press titles are
largely responsible for the consumer sales increase. The acquisition of
Twenty-First Century Books in December, 1997 and continuing increases in
existing imprints were responsible for the growth in the library market.
Gross profit margin for the first quarter ended October 31, 1998 amounted to
$2.4 million, or 49% of net sales compared to $1.9 million, or 49% of net sales
for the same period last year.
Selling and marketing expenses for the quarter ended October 31, 1998 were 32%
of net sales compared to 31% of net sales for the quarter ended October 31,
1997. These expenses increased due to the higher fulfillment cost related to
higher sales and initial Magic Attic marketing expenses.
General and administrative expenses decreased by $14,000 to $419,000 for the
quarter ended October 31, 1998 compared to $433,000 for the quarter ended
October 31, 1997.
During the quarter ended October 31, 1998, the Company had operating income of
$398,000 compared with operating income of $251,000 for the same period in 1997.
The increase in operating income is due to higher sales which offset the
increase in selling and marketing expenses compared to net sales.
Net Income for the first quarter ended October 31, 1998 was $305,000 compared to
net income of $251,000 for the same period in 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company had available a $7,500,000 revolving line of
credit with People's Bank. The line of credit restricts the ability of the
Company to obtain working capital in the form of indebtedness other than
indebtedness incurred in the ordinary course of the Company's business, to grant
security interest in the assets of the Company or to pay dividends on the
Company's securities.
As of October 31, 1998, the Company had $4,636,000 outstanding under this line.
This debit increased due to the acquisition of Twenty-First Century Books and to
meet working capital needs.
As of October 31, 1998, the Company had cash and working capital of $86,000 and
$5,864,000, respectively, as opposed to cash and working capital of $34,000 and
$6,895,000, respectively, as of October 31, 1997. This decrease was due to the
acquistion of Twenty-First Century Books.
Inventory of finished goods totaled $6,628,000 and $5,148,000 at October 31,1998
and October 31, 1997 respectively. The higher level of inventory is due to the
acquisition of Twenty-First Century Books, the introduction of the beginning
reader program, and the increasing size of our trade and school and library
backlist. The increase in Accounts Receivable of $2,225,000 from the prior year
is due to increased sales.
Based on its current operating plan, the Company believes that its existing
resources together with cash generated from operations and cash available
through its credit line will be sufficient to satisfy the Company's contemplated
working capital requirements through approximately July 31, 1999. However, there
can be no assurance that the Company's working capital requirements will not
exceed its available resources or that these funds will be sufficient to meet
the Company's longer-term cash requirements for operations. Accordingly, either
before or after July 31, 1999, the Company may seek additional funds through
debt or equity financing.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created hereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the Company's future cash resources and liquidity and the ability of
the Company to fully exploit a book's sales potential in the school and library
and consumer markets. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-QSB will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
YEAR 2000 DISCLOSURE
The year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than 2000. This could result in a system failure or
miscalculation causing disruption of operations; including among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
3
<PAGE>
Based upon a recent assessment, the Company determined that it was required to
upgrade or replace certain portions of its software so that its computer systems
will properly utilize dates beyond December 31, 1999. During 1998, the Company
continued its implementation of computer hardware and software that is Year 2000
compliant. Resources were devoted to the installation of computer systems and
training related to the new system. It is expected that the new system will be
fully installed and operation during 1999.
The Company presently believes that with upgrades of existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such upgrades and conversions are not made, or are not completed or available in
time, the Year 2000 Issue could have a material impact on the operations of the
Company. Furthermore, the Company could be adversely affected by the failure of
various third parties, such as customers and suppliers, to remediate their own
Year 2000 Issue. Although the Company has initiated formal communications with
its significant suppliers and large customers to determine the potential impact
on the Company, it has not completed its preliminary assessment.
<PAGE>
PART II. OTHER INFORMATION
Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Form 8-K--None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MILLBROOK PRESS, INC.
(Registrant)
December 15, 1998 By: /s/ Satish Dua
--------------------------------------
Satish Dua
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements as of October 31, 1998 and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 86,000
<SECURITIES> 0
<RECEIVABLES> 6,718,000
<ALLOWANCES> 753,000
<INVENTORY> 6,628,000
<CURRENT-ASSETS> 13,936,000
<PP&E> 237,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,324,000
<CURRENT-LIABILITIES> 8,072,000
<BONDS> 0
<COMMON> 17,591,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,324,000
<SALES> 4,815,000
<TOTAL-REVENUES> 4,815,000
<CGS> 2,465,000
<TOTAL-COSTS> 2,465,000
<OTHER-EXPENSES> 1,943,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,000
<INCOME-PRETAX> 314,000
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 305,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
