UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2000
THE MILLBROOK PRESS INC.
(Name of Small Business Issuer as Specified in its Charter)
Delaware 06-1390025
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2 Old New Milford Road
Brookfield, CT 06804
(Address of principal executive offices)
(203) 740-2220
(Issuer's telephone number, including area code)
Securities Registered pursuant to Section 12 (b) of the Exchange Act:
Common Stock
Securities Registered pursuant to Section 12 (g) of the Exchange Act:
None
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 / /
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy of information statements incorporated by
reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB.
(X)
Revenues for the Fiscal year ended July 31, 2000 were $21.4 million.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon price of the Common Stock on October 25, 2000, was
approximately $3,501,000. As of July 31, 2000, the Registrant had outstanding
2,859,887 shares of Common Stock.
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THE MILLBROOK PRESS INC.
FORM 10-KSB ANNUAL REPORT
Table of Contents
PART I
Page
Item 1. Description of Business.............................................3
Item 2. Description of Properties..........................................11
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
PART II
Item 5. Market for Common Equity and Related Stockholders Matters..........12
Item 6. Management's Discussion and Analysis or Plan of Operations.........13
Item 7. Financial Statements...............................................17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures............................30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................31
Item 10. Executive Compensation.............................................31
Item 11. Security Ownership of Certain Beneficial Owners and
Management.........................................................31
Item 12. Certain Relationships and Related Transactions.....................31
Item 13. Exhibits, List and Reports on Form 8-K.............................32
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PART I
Item 1. Description of Business
Overview
The Millbrook Press Inc. (the "Company" or "Millbrook"), is a publisher of
children's nonfiction books, in both hardcover and paperback, for the school and
library market and the consumer market. The Company began operations in 1989 and
has published more than 1,400 hardcover and 600 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 range
from information intensive school and library books to graphic, colorful,
general interest titles. Therefore, many of its books are distributed to the
school and public library market while simultaneously distributed to the
consumer market. Copper Beech books are published in a number of formats for
both the consumer and library markets. Twenty-First Century Books titles are
published primarily for the educational market at a secondary school level. The
Company's senior management has extensive experience in publishing comprising
over 100 years of employment in the industry.
The consumer market in children's books consists of books purchased by consumers
through traditional trade bookstores such as Barnes & Noble and Borders and
educational stores such as Zany Brainy, as well as non-traditional distribution
channels such as direct sales, catalogs, direct mail, book clubs, book fairs,
non-book retail stores, including museums, national parks, historical sites,
theme parks, gift shops and toy stores.
The Company intends to expand and upgrade its publishing program in both areas.
In addition the Company is embarking on new programs to publish and market (i)
high quality children's picture books and young peoples fiction and (ii) develop
programs for classroom sales of supplementary reading enrichment materials. The
Company does not believe it will release any fiction books until at least the
spring of 2001.
Both programs fit into the Company's marketing capabilities and should allow the
Company to expand its established sales base on a minimal risk basis. The
editorial staff is in the process of being augmented to accommodate these new
programs.
Industry Background
School and Library Market
The school and public library market is undergoing significant change due to
long-term social and economic forces. The United States Department of Education
predicts that the student population from kindergarten through twelfth grade
will increase 8% from 2000 to 2008, with an
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overall net gain of approximately 3.8 million students. Because many school
districts allocate instructional material funds on a "per head" basis, the
Company believes that money allocated to schools for book acquisitions should
increase as the student population increases. In addition to demographic
changes, demand for books has also increased as a result of the school and
public library market becoming aware of, and responsive to, supporting the
innovative instructional programs being developed and used in the classroom. New
teaching philosophies such as the "reading initiative," and "cross-curriculum
teaching" developed in the 1980s and 1990s have increased the demand for
different and better books. Librarians are working with classroom teachers to
select books that meet classroom criteria of being multicultural, visually
stimulating, interesting, curriculum-related and suitable for a range of reading
ability.
Consumer Market
Demand for children's books in the consumer market has increased because of the
increase in the number of channels in which hardcover and paperback books are
distributed. Traditionally, books were primarily sold at small local bookstores
with limited selections. Many such bookstores were replaced by larger mall
bookstores which in turn were replaced by book superstores (such as Barnes &
Noble). Concurrently, alternate means of distribution have developed. For
example, books are now sold by certain retailers such as TJ Maxx, educational
chain stores such as Zany Brainy, outlets and warehouse clubs such as Sam's
Warehouse, Costco, and B.J.'s as well as museums, national parks, historical
sites, theme parks, gift shops and toy stores. The Company sells a considerable
quantity of books through direct sellers such as book clubs, book fairs and
display sales operations. As more direct sales move to the internet, the Company
expects its direct sales market to expand proportionately.
Crossover of Sales
Demand for children's books has also increased because a book can now be sold to
both the school and public library and the consumer market. Traditionally,
hardcover library books addressed topics typical for school reports and research
and were created with the purpose of maximizing information content rather than
appealing to consumers. Because books sold in the school and public library
market in the past were sold to librarians/teachers based on content, the
product was often informationally rich, but somewhat aesthetically unappealing.
Conversely, a paperback book sold in the consumer market was not designed as an
information source, but rather to attract a consumer's attention and thereby
sell itself from the shelf. Accordingly these books failed to address certain
topics and lacked the informational content of library books. The Company's
books, and books for the children's book market in general, are now designed to
appeal to both markets. A book filled with information is combined with an
attractive title, cover and internal design to catch the eye of the consumer
browsing the shelf. The same book can then be bound as a hardcover book and sold
to school and public libraries. Additionally, as either a hardcover or a
paperback, the book appeals to teachers and can be used as supplemental reading
in the classroom.
Company Strategy
The Company's goal is to be a "one-stop publisher," publishing and marketing a
diverse product
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line servicing most of the major segments of the children's book market. The
Company's strategy is to continue to diversify its products and distribution
channels for those products by capitalizing on the long-term and short-term
changes occurring in the children's book publishing industry in both the school
and public library market and in the consumer market.
The Company believes that this diversified approach to its product line enables
it to achieve market penetration in the children's book market and minimize the
risk of fluctuations or weakness in any one particular segment. The Company
believes that its experience in publishing children's books and its reputation
for quality, combined with the evolution and anticipated growth rates for
children's books in the school and public library and consumer markets, creates
an opportunity for the Company to expand the list of books in which it maintains
a significant ownership interest and increase the recognition of its brand
names. The Company believes that the elements required to achieve this goal are
(i) publishing books of the highest quality, created in house, through packaging
arrangements or licensed, with the ability to satisfy two or more of the markets
which it now services, (ii) expanding its product offerings to take advantage of
its investments in distribution and its exposure to the consumer market and
(iii) enhancing its existing marketing operations to support its product-line
expansion initiatives. The key elements of the Company's strategy are:
o Crossover of Sales. The Company believes that significant opportunities
exist to market products typically developed for one market into other
markets. To initiate its strategy of selling books that can crossover
into two or more markets, in 1995 the Company began reformatting many
of its previously published ("backlist") school and public library
books under its Millbrook imprint into paperback books, selling them in
the consumer market. In addition, the Company's paperback books have
also been sold as supplemental materials for the classroom. Similarly,
the Company's trade paperback books under the Copper Beech imprint are
also published in hardcover format to sell to the school and public
library market. The Company will seek to continue to produce books in
the future under both the Millbrook and Copper Beech imprints that will
appeal to two or more markets in order to fully exploit a book's sales
potential. (see "Products")
o New Market Opportunities. Millbrook will continue to seek appropriate
acquisitions along the lines of its 21st Century Books acquisition from
Henry Holt Company in fiscal 1998. The acquisition of 21st Century has
been a major factor in enhancing Millbrook's secondary school library
sales. The Company currently has no commitments, agreements or
understandings with respect to any acquisition.
In the past fiscal year, the Company entered into a contract with Net
Library, a major seller of electronic books to academic, public and
school libraries. The agreement allows Net Library to reformat and
distribute an electronic version of over 300 of the Company's titles.
The Company will participate with Follett Library Resources, Net
Library's agent in the school market in joint promotion efforts. To
date, the Company has received only minimal revenues from this
agreement and there can be no assurance that this agreement will result
in significant revenues to the Company in the future.
o Enhance Marketing and Sales Force. Since inception, the Company has
increased its penetration into the school and public library market.
The management of the school and
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library marketing department and sales force was significantly
strengthened in fiscal 1999, which has led to substantial direct sales
growth in fiscal 2000 which is expected to continue.
o Expand Distribution. The Company believes that decision-making with
respect to purchasing books is becoming more complex due to the
expansion in types of outlets selling books and that expanding the use
of marketing techniques to put the Millbrook imprint in direct contact
with children, parents and teachers will increase sales. The Company
will increase its participation in book fairs, book clubs, catalogs and
continue to distribute its books to alternative retail outlets as well
as increase its direct selling and direct mail activities. The Company
may also seek to enter into additional strategic partnerships to extend
its distribution in both the consumer and in school and public library
market channels.
o Adapt to New Technologies. The Company intends to improve its website
to make it more user friendly and provide better information access to
the library community. The website will be completely redesigned to
allow updating on a constant basis. It will be promoted as a source of
information on the Company's titles as well as a convenient way for
libraries to purchase. At some future date, the Company will study the
possibility of a general consumer website.
o Continue to Develop High Quality Books. The Company intends to develop
additional books through internal development in collaboration with its
network of authors and artists. The Company is now selectively entering
into agreements with certain high-profile authors and illustrators to
increase the recognition of its brand names.
Products
The Company publishes children's books in hardcover and paperback formats for
the school and public library market and the consumer market. When the Company
began publishing books in 1991, the books created were mainly series books and
were intended to be sold singularly and in sets to the school and public library
market. Since then, the Company's products have evolved into a diverse set of
highly graphic, consumer-oriented single books. The Company designs all of its
books to appeal to teachers and librarians, as well as to children and parents.
This approach allows the Company's books to be introduced simultaneously in more
than one market, with the intent of increasing sales. For example, in fiscal
2000, the Company published 108 hardcover books under the Millbrook imprint for
the school and public library market, of which 47 books were suitable for and
published simultaneously as hardcover or paperback to be sold in the consumer
market, and 40 hardcover books under the Copper Beech imprint for the school and
library market, of which 20 books were suitable for and published simultaneously
as hardcover or paperback, to be sold in the consumer market.
Product Development
The Company develops books through internal and external resources. The Company
may also acquire books through co-publishing arrangements and/or the acquisition
of other licenses.
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Internal Development
The Company's editorial staff produces most of the books published under the
Millbrook imprint. A book concept can originate from a number of sources such as
(i) analysis of the Company's sales statistics of an existing book to help
assess how a similar book targeting a similar age group will fair, (ii) analysis
of school age demographics and other social and economic factors from the
current philosophical trends in education to the globalization of education,
(iii) review of competitors' books to determine if and how the Company can
publish a superior book on a similar topic, (iv) reading children's magazines to
determine what young people are interested in and (v) maintaining personal
contact with librarians, teachers, and booksellers. Once conceived, a book
proposal is circulated to sales, production, marketing, design and financial
departments of the Company for their input and depending on their input, the
proposal will go forward or terminate. A favorable decision causes the editorial
department to contract with an appropriate author and/or artist from its pool of
approximately 350 authors and artists. The Company believes it has excellent
relationships with its authors and artists, including many well-known names in
the field.
Authors and artists are typically engaged on a royalty basis. Royalties on
hardcover and paperback editions are paid on the net sales and range from 6% to
10% of net sales with an average of 7% of net sales for hardcover and paperback
books. Virtually all of Millbrook's contracts call for an advance payment
against future royalties. In almost all cases, the Company retains control of
all book club, reprint, electronic, foreign, serialization, and commercial
rights. The income generated from such arrangements is divided between the
Company and the author.
Upon the delivery of a manuscript from an author/illustrator and after editing,
fact checking and approval, the Company's in-house staff plans and prepares the
layout, illustrations and cover to be used for the book. Upon completion of the
editing, graphics and layout, a computer produces a mechanical of the book with
all elements in place. A cost estimate is then prepared which determines print
quantity and retail price of the book. Book printing is done by an outside
supplier, usually in the United States, on a bid contract basis. The Company's
products require varying periods of development time depending upon the
complexity of the graphics and design and the editing process. Most of the
Company's books can be developed in a period that ranges from nine to eighteen
months. Millbrook is often cited in reviews of its books for one or more
outstanding design elements (cover, layout, type, etc.). Jackets and interior
design are either created in-house or assigned to freelance artists under the
supervision of the Company's art department. The use of outside authors,
illustrators and freelancers for jacket design, fact-checking and copy editing
allows the Company to produce a large number of books per year with a relatively
small staff and generally allows for the flexibility needed for the Company to
continue to produce a broad product line.
External Development
Approximately 25% of books published under the Millbrook imprint are produced by
outside sources. Most of these books are produced by outside packagers that
cooperate and consult with Millbrook during the development process but
otherwise provide the full range of services needed to publish children's books.
The Company has entered into an exclusive, long-term joint venture with Aladdin
Books Limited ("Aladdin"), a major children's packager for the
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international market, to produce 40 nonfiction titles per year to be published
under the Company's Copper Beech imprint. The exclusive agreement between the
Company and Aladdin was designed to produce books with strong consumer market
appeal in popularly priced paperback books as well as content suitable for
hardcover books for sales to libraries. Aladdin is responsible for the
production, printing and binding of such books, although development costs for
such books are shared by Aladdin and the Company. Aladdin retains the sales
rights for these books to countries other than the United States, Canada and the
Philippines. Royalties are paid to Aladdin based on the Company's sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world.
Licenses
In the normal course of its business, the Company acquires licenses from foreign
book publishers for the rights to market and sell in the United States books
that were created either with or without input from the Company. The licensing
usually includes all subsidiary rights such as 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.
As the Company expands its own publishing program, fewer books will be obtained
from foreign publishers.
Marketing and Distribution
The Company's sales and marketing efforts are designed to broaden product
distribution, increase the number of first-time and repeat purchasers, promote
brand-name recognition, assist retailers and properly position, package and
merchandise the Company's products. The Company utilizes various marketing
techniques designed to promote brand awareness and recognition and to maximize
the amount of shelf space devoted to its product line in retail outlets,
including complimentary copies, reviews and recommendations, catalogs,
advertising, brochures, exhibits, publicity campaigns and in-store promotions.
The Company's marketing efforts are geared toward its two major markets: (i) the
school and public library market and (ii) the consumer market.
School and Public Library
The Company targets the school and public library market through three main
channels: wholesalers, telemarketing and direct sales. Large school and public
library systems tend to purchase their books through wholesalers on a bid basis,
while smaller systems purchase directly from a commission sales representative
or through a telemarketing program such as the one the Company conducts. During
the fiscal year ended July 31, 2000, a significant amount of the Company's sales
in the school and public library market were made through wholesalers. While
most wholesalers do not engage in sales and marketing efforts on behalf of the
Company's products, they provide schools and public libraries with a wide range
of selection and convenience as well as discounts on bulk orders. Through a
complementary marketing program of telemarketing, advertising, review programs
and direct sales calls, the Company believes that one of its greatest strengths
is its ability to reach the individual teacher, principal or librarian making
the purchase decision. Telemarketing penetrates the market through its "preview
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program" where books are given on loan to teachers and other decision-makers on
the premise that the quality of the book will sell itself. In September 1998,
the Company initiated a website that allows librarians to participate in the
"preview program" electronically. This should extend the reach of the program
significantly. The remaining sales in this area result from direct-selling
efforts where commissioned salespersons conduct face-to-face meetings at schools
and libraries with decision-makers or by purchase from the Company's catalogs
and advertising. Direct purchases by schools and libraries are the fastest
growing areas of the Company's sales.
The Company markets its books in numerous ways to support the foregoing efforts.
The Company sends complementary copies of each newly published book to library
media reviewers and columnists and major county or district school systems that
have their own review and recommendation process. The Company believes that a
favorable review in a respected library journal can significantly influence the
sales prospects of a particular book. Many of the Company's books published
under the Millbrook imprint have received favorable reviews. The Company
produces six catalogs and one magazine insert per year. For its school and
library accounts, the Company produces one full-line catalog, consisting of a
complete annotated backlist as well as new publications for the Fall that is
mailed to 100,000 current and prospective accounts. The Company produces a
Spring list catalog for mailing to the same audience. The Company produces a
21st Century Book catalog for mailing to most secondary schools. Its direct
sales force also distributes the Company's catalogs. The Company produces two
full-line catalogs per year for the consumer market in May and December. The
Company also advertises in many consumer journals, newsletters and newspapers.
The Company produces promotional materials for individual titles, themes,
authors and illustrators. It also produces standard "leave-behind" sell sheets
that refresh a librarian's recollection of a sales presentation. Finally, the
Company exhibits its books at many national conventions covering the school and
public library and consumer markets.
The expanding use of children's books in the classroom, especially in paperback
formats, provides new opportunity. The Company intends to create special
publishing and marketing programs to take advantage of this development.
Consumer
The sales channels in the consumer market are more diverse than the school and
public library market and require a different marketing approach. The Company
has recently attracted experienced and talented sales and marketing personnel.
The in-house consumer sales group covers the two major areas: traditional
consumer book markets and non-traditional consumer book markets.
The Company has three sales groups: the in-house sales group, the commissioned
sales group and the special sales group. The in-house sales group consists of an
in-house vice president of sales and an assistant responsible for sales,
promotion and merchandising to the major national and large regional accounts.
The commissioned sales group currently consists of approximately 25 commissioned
representatives who are responsible for sales to independent bookstores, small
regional chains and certain special sales outlets and regional jobbers. The
special sales group managed by a sales vice president markets to specialized
retail outlets such as museums, national parks, historical sites, theme parks,
gift shops and toy stores, consumer and school catalogs, direct mail, book
fairs, book clubs, and display sales companies. The Company's sales
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representatives sell the full range of the Company's products. The sales groups
provide the Company with highly valuable insight by obtaining feedback from
customers on current product performance and potential acceptance of proposed
products. In addition to the marketing efforts discussed with respect to the
school and public library market, the Company conducts additional marketing
designed to increase brand name recognition in the consumer market. The Company
makes certain that good reviews, which can stimulate sales, are sent to schools
and libraries on a regular basis. The Company participates with various outlets
in advertising directly to individuals through media and catalogs. In-store
promotions, such as posters, points of purchase displays, brochures, holiday
end-of-counter and front-of-store displays, are also utilized by the Company to
further enhance its sales in the consumer market.
Manufacturing and Shipping
All of the Company's books are printed and bound by third-party manufacturers.
During fiscal year 2000, approximately 32% of the Company's printing and binding
needs were provided by one major printer, an industry leader in library-bound,
short-run printing and binding. Manufacturing is a significant expense item for
the Company, with a total of $5.5 million (or approximately 25% of net sales)
spent in 2000. The Company has used this printer's services since the Company's
inception and enjoys a good working relationship with them. The Company believes
it has sufficient alternative sources of manufacturing services to meet its
foreseeable needs should this printer's services no longer be available to the
Company, although manufacturing costs could be adversely impacted.
Shipping orders accurately and promptly upon their receipt is an important
factor in the Company's customer service and in closing a sale. Most publishing
companies ship products within one week of receipt of a customer order, and in
general the Company meets or reduces this timetable. The Company processes
customer orders through an in-house processing department. The Company leases
warehouse space from, and its products are shipped from Mercedes Distribution
Center of Brooklyn, New York.
Competition
The children's book publishing marketplace in the school and public library
market and in the consumer market is fragmented and very competitive.
Competition in the school and public library market is based upon quality of
products, brand name recognition and book content. In the consumer market, the
primary factors are brand name recognition, book content, availability and
price.
There are many publishers of material similar to the Company's product
offerings. The Company's chief and direct competitors in the school and public
library market include Childrens Press, Franklin Watts Inc., and Lerner
Publications Co. The Company's chief and direct competitors in the consumer
market include Barron's Educational Series Inc., Candlewick Press, Larousse
Kingfisher Chambers Inc., Random House Inc. and Usborne Publishing Ltd.
The Company also competes with a large number of other publishers for retail
shelf space in
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large bookstore chains such as Barnes & Noble, Borders and Waldenbooks. In
addition to competition among like types of publishing programs, the overall
competition for limited educational budgets is intense when other producers of
materials used in classrooms and libraries are included, especially producers
and distributors of electronic hardware and software. A number of these
competitors have considerably greater financial and marketing resources than the
Company. Nevertheless, the Company believes that the depth of experience of its
management and its relationships in the education sector give the Company a
competitive edge not only in producing quality books marketable in the school
and library and consumer markets, but also in foreseeing long-term and
short-term social and economic forces influencing the children's book industry.
Protection of Proprietary Rights
Nearly all the Company's books have been copyrighted in the United States, in
the name of the author or artist and then all such copyrights have been assigned
to the Company. As a result, the Company owns the exclusive right to exploit the
copyright in the marketplace. On books created in-house by the Company, it owns
world rights for all aspects of the market, 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. There are a limited number of books for which foreign
rights and electronic rights will revert to the author if the Company does not
exploit them in a given period of time. On books that are imported under the
Millbrook imprint, the Company has exclusive rights for all United States
markets and the Philippines. The Company's trade names, Millbrook, Twenty-First
Century and Copper Beech, are used to publish books primarily for the school and
library market and consumer market respectively. The Company considers these
trade names material to its business.
For the Copper Beech titles, the Company has exclusive rights for all markets in
the United States and Canada. World rights are retained for books originated by
Aladdin and the Company participates in the profits generated from such sales on
a 25% basis.
Employees
As of July 31, 2000, the Company had approximately 51 employees, 86% of which
were full-time and 14% 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.
Item 2. Description of Properties
The Company owns no real property. The Company conducts its operation through
two facilities. The Company leases approximately 7,000 square feet of office
space in Brookfield, Connecticut at a current rental of $134,000 per year plus
utilities and taxes. This lease expires in December 2002. The Company also
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leases approximately 1,900 square feet in New York City at a rental of $34,600
per year plus utilities and taxes. This lease expires in April 2004. The Company
also leases office space in Southampton, New York at a current rental of $12,000
per year plus utilities and taxes. This lease expires in September 2001.
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
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
The Common Stock of The Millbrook Press Inc. is traded under the symbol MILB on
the NASDAQ SmallCap Market. The Company's Common Stock is also traded on the
Boston Stock Exchange under the symbol MILB. The following table sets forth the
ranges of the high and low closing bid prices for the Common Stock for the
fiscal years ended July 31, 2000 and July 31, 1999, as reported on the NASDAQ
SmallCap Market, the principal trading market for the Common Stock. The
quotations are interdealer prices without adjustment for retail markups,
markdowns, or commission and do not necessarily represent actual transactions.
COMMON STOCK
YEAR ENDED JULY 31, 2000
High Low
First Quarter 2.75 1.88
Second Quarter 2.75 1.53
Third Quarter 2.37 1.93
Fourth Quarter 2.25 1.81
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YEAR ENDED JULY 31, 1999
First Quarter 3.50 1.75
Second Quarter 6.62 1.87
Third Quarter 3.94 2.50
Fourth Quarter 3.00 2.25
As of July 31, 2000, the Company had 2,859,887 shares of Common Stock
outstanding and 58 holders of record of the Company's Common Stock. The Company
believes that at such date, there were in excess of 600 beneficial owners of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business. In addition, the Company's revolving line of
credit with People's Bank prohibits the Company from the declaration or payment
of dividends. Accordingly, the Company does not anticipate that any cash
dividends will be declared on its Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
Financial Statements of The Millbrook Press Inc. and related Notes to the
Financial Statements, which are included elsewhere in this Form 10-KSB.
Overview
General
In February 1994, the Company was incorporated and acquired the assets of The
Millbrook Press Inc., which had commenced operations in 1989. Prior to January
1991, The Millbrook Press Inc. had no revenues and incurred expenses related to
administrative costs associated with the formation and production of its first
publication list. Subsequent to January 1991, the Company has had significant
net sales in the school and public library consumer markets. 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, the Company has incurred significant expenses relating to the
establishment of the infrastructure that 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 the consumer market.
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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 give other sales incentives to their customers. 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, and the Company gives credit. The rate of return also can have a
significant impact on quarterly results since certain wholesalers have in the
past returned large quantities of products at one time irrespective of
marketplace demand for such products, rather than spreading out the returns
during 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.
Acquisition
On December 5, 1997, the Company completed an acquisition to purchase certain
assets of Twenty-First Century Books, a division of Henry Holt & Co., Inc.
("Holt"). The purchase was effective as of December 1, 1997. Under the
agreement, the Company paid Holt $2,013,000 for the assets.
School and Public Library Market
The addition of Twenty-First Century Books was one element in substantially
increasing school and public library sales. The second element was greater
emphasis on telemarketing and direct sales. Both elements produced substantial
results in fiscal year 2000.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Fiscal 2000 revenues increased 14% from $18.7 million in fiscal 1999 to $21.4
million in fiscal 2000. Increased sales resulted from major increases in special
sales to direct sales organizations, book clubs, book fairs and catalogs, plus
an increase in wholesale sales to school and public libraries and through an
increase in direct sales.
Gross profits for the year ended July 31, 2000 were $9,604,000, or 44.9% of net
sales compared to $7,805,000 or 41.6% of net sales for the year ended July 31,
1999. This percentage increase in margin is due to the increased sales in the
more profitable school and library market.
14
<PAGE>
Selling and marketing expenses for fiscal 2000 decreased to 27% of net sales
from 32% of net sales for fiscal 1999. Selling and marketing expenses decreased
by $82,000 even though the Company increased its direct mail expenditures by
$200,000.
General and administrative expenses for fiscal 2000 have decreased $229,000 to
9% of net sales from 12% a year ago. This is a result of the Company's effort to
tightly control costs and increase productivity.
Net operating profit for the year ended July 31, 2000 was $1,835,000 compared to
a loss of $275,000 for the previous year.
Interest expense increased from $399,000 in fiscal 1999 to $496,000 in fiscal
2000. The increase in interest expense is due to borrowing for the purchase of
595,113 shares of its common stock, and increased interest rates over 1999 on
its line of credit.
Net income after tax for the year ended July 31, 2000 was $1,136,000, compared
to a loss of $674,000 in the previous year.
Liquidity and Capital Resources
As of July 31, 2000, the Company had cash and working capital of $0 and $5.2
million, respectively, as compared to cash and working capital of $133,000 and
$4.7 million, respectively as of July 31, 1999. (All cash at July 31, 2000 was
used to reduce the outstanding loan balance)
The Company has 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, to grant security interest in the assets of
the Company or to pay dividends on the Company's securities. As of July 31,
2000, the Company has $3,683,000 outstanding under this line, all of which is
classified as current liabilities since it is due on demand. The $7,500,000 is
the maximum available, however, it may be lower based upon the eligible value of
accounts receivable and inventory. As of July 31, 2000 the maximum loan
available was $6,962,000. For further information relating to the People's Bank
loan agreement, see Note (4) of "Notes to Financial Statements".
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 at least through July 31, 2001. 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, 2001, the Company may seek additional funds from
borrowings or through debt or equity financing.
15
<PAGE>
Year 2000 Disclosure
The Company has no material Year 2000 issues to report. All internal and third
party hardware and software has functioned as expected since January 1, 2000,
there has been no loss of business or disruption in day to day operations. The
Company's costs regarding Year 2000 compliance were in line with budget and were
not material to the Company's operating results or cash position.
Forward-Looking Statements
This Form 10-KSB 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-KSB 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.
16
<PAGE>
Item 7. Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders and The Board of Directors
The Millbrook Press Inc.:
We have audited the accompanying balance sheets of The Millbrook Press Inc. as
of July 31, 2000 and 1999, and the related statements of operations,
stockholders' equity 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 auditing standards generally accepted
in the United States. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Millbrook Press Inc. as of
July 31, 2000 and 1999 and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Stamford, Connecticut
October 10, 2000
17
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash $ - $ 133,000
Accounts receivable (less allowance for returns and bad
debts of $660,000 in 2000 and $803,000 in 1999) 6,160,000 6,104,000
Inventories 6,649,000 7,079,000
Royalty advances, net 725,000 699,000
Prepaid expenses 202,000 341,000
----------- ------------
Total current assets 13,736,000 14,356,000
Plant costs, net 4,348,000 4,360,000
Fixed assets, net 236,000 237,000
Goodwill, net 2,912,000 3,126,000
Royalty advances, net 1,158,000 852,000
----------- ------------
Total assets $22,390,000 $22,931,000
=========== ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
18
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 2000 AND 1999
(Continued)
<TABLE>
<CAPTION>
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Notes payable to bank $ 3,683,000 $ 5,458,000
Accounts payable and accrued expenses 4,089,000 3,892,000
Royalties payable 412,000 308,000
Current portion of long term debt 400,000 -
----------- ------------
Total current liabilities 8,584,000 9,658,000
Long term debt 364,000 -
----------- ------------
Total liabilities 8,948,000 9,658,000
----------- ------------
Commitments
Stockholders' equity:
Common stock, par value $.01 per share, authorized
12,000,000 shares; 3,455,000 shares issued and
2,859,887 shares outstanding in 2000 and
3,455,000 shares issued and outstanding in 1999 35,000 35,000
Additional paid-in capital 17,556,000 17,556,000
Treasury stock (595,113 shares at cost) (967,000) -
Accumulated deficit (3,182,000) (4,318,000)
----------- ------------
Total stockholders' equity 13,442,000 13,273,000
----------- ------------
Total liabilities and stockholders' equity $22,390,000 $22,931,000
=========== ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
19
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Net sales $21,388,000 $18,763,000
Cost of sales 11,784,000 10,958,000
----------- ------------
Gross profit 9,604,000 7,805,000
----------- ------------
Operating expenses:
Selling and marketing 5,833,000 5,915,000
General and administrative 1,936,000 2,165,000
----------- ------------
Total operating expenses 7,769,000 8,080,000
----------- ------------
Operating income (loss) 1,835,000 (275,000)
Interest expense 496,000 399,000
----------- ------------
Income (loss) before income tax 1,339,000 (674,000)
Provision for income tax 203,000 -
----------- ------------
Net income (loss) $ 1,136,000 $ (674,000)
=========== ============
Earnings (loss) per share (basic and diluted) $ .37 $ (.20)
=========== ============
Weighted average shares outstanding (basic and
diluted) 3,080,079 3,455,000
=========== ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
20
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1998 3,455,000 $35,000 $17,556,000 $ - $ (3,644,000) $13,947,000
Net (loss) - - - - (674,000) (674,000)
--------- ------- ----------- ---------- ------------ -----------
Balance at July 31, 1999 3,455,000 35,000 17,556,000 - (4,318,000) 13,273,000
Purchase of treasury stock (595,113) - - (967,000) - (967,000)
Net income - - - - 1,136,000 1,136,000
--------- ------- ----------- ---------- ------------ -----------
Balance at July 31, 2000 2,859,887 $35,000 $17,556,000 $ (967,000) $(3,182,000) $13,442,000
========= ======= =========== ========== ============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
21
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 1,136,000 $ (674,000)
Depreciation and amortization 1,890,000 1,912,000
Changes in assets and liabilities:
Increase in accounts receivable (56,000) (1,159,000)
Decrease (increase) in inventories 430,000 (370,000)
Increase in royalty advances (332,000) (21,000)
Decrease in prepaid expenses 139,000 82,000
Decrease in other assets -- 15,000
Increase in accounts payable and accrued expenses 197,000 486,000
Increase in royalties payable 104,000 60,000
----------- -----------
Net cash provided by operating activities 3,508,000 331,000
----------- -----------
Cash flows from investing activities:
Capital expenditures (96,000) (81,000)
Plant costs (1,567,000) (1,734,000)
----------- -----------
Net cash used in investing activities (1,663,000) (1,815,000)
----------- -----------
Cash flows from financing activities:
(Repayments of) proceeds from borrowings under notes payable (1,775,000) 1,583,000
Proceeds from long term debt 764,000 --
Purchase of treasury stock (967,000) --
----------- -----------
Net cash (used in) provided by financing activities (1,978,000) 1,583,000
----------- -----------
Net (decrease) increase in cash (133,000) 99,000
Cash at beginning of year 133,000 34,000
----------- -----------
Cash at end of year $ -- $ 133,000
=========== ===========
Supplemental disclosures:
Interest paid $ 496,000 $ 399,000
=========== ===========
Income taxes paid $ 57,000 $ 145,000
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
22
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(1) Description of the Business:
The Millbrook Press Inc. ("Company") was incorporated and commenced
operations as an independent company on February 23, 1994. The Company
is a publisher of children's nonfiction books, in both hardcover and
paperbacks, for preschoolers through young adults. The Company's books
are distributed to the school and public library market, trade
bookstores and other specialty retail and direct sales markets in the
United States through wholesalers, its own telemarketing efforts and
commissioned sales representatives.
(2) Summary of Significant Accounting Policies:
Cash and Cash Equivalents-
Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less
at the date acquired.
Revenue Recognition-
Revenue from the sale of books is generally recognized at shipment. The
Company provides a reserve for product returns. Sales from
telemarketing activities are recognized when the customer accepts all
or part of a sample shipment.
Inventories-
Inventories of sheets and bound books, which are primarily located in a
public warehouse or at customers as inventory on preview, are stated at
the lower of cost or market, with cost determined by the average cost
method. Allowances are established to reduce recorded costs of obsolete
and slow moving inventory to its net realizable value.
Royalty Advances-
Licensing agreements for rights to future publications usually require
a non-refundable partial payment of the royalty in advance of the
publication. The Company charges royalty advances to expense in the
period during which the related sales are recorded. If it appears that
an advance will exceed total royalties to be earned based upon
estimated sales, such excess is immediately expensed. Royalty advances
for publications to be published in excess of one year from the balance
sheet date are classified as non-current assets.
23
<PAGE>
Plant Costs-
Plant costs consisting of plates, photo engravings, separations and
other text costs of unpublished books are amortized over five years
from publication date or the estimated remaining life, if shorter.
Plant costs at July 31, 2000 and 1999 are presented net of accumulated
amortization of $9,296,000 and $7,716,000 respectively.
Advertising Costs-
Advertising costs are expensed in the periods in which the costs are
incurred. Catalog costs consisting of the costs of producing and
distributing catalogs are expensed ratably over the year in which the
costs are incurred in relation to sales. Advertising expense for the
years ended July 31, 2000 and 1999 was $750,000 and $479,000,
respectively.
Fixed Assets-
Fixed assets are recorded at cost. Depreciation and amortization of
fixed assets are computed on the straight-line method based on useful
lives ranging from 7-10 years for office furniture and equipment and 5
years for computers. Leasehold improvements are amortized over the
lesser of the lease term or the life of the asset.
Goodwill and Other Long Lived Assets-
Goodwill represents the excess of the cost over the fair value of the
net assets acquired. For financial reporting purposes, the excess of
cost over the fair value of net assets acquired is amortized over 20
years using the straight-line method. Accumulated amortization at July
31, 2000 and 1999 is $1,266,000 and $1,051,000, respectively. Pursuant
to Internal Revenue Code Section 197, for Federal income tax purposes
such goodwill is deductible over 15 years.
The Company systematically reviews the recoverability of its long-lived
assets by comparing their unamortized carrying value to their
anticipated undiscounted future cash flows. Any impairment is charged
to expense when such determination is made.
Income Taxes-
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
24
<PAGE>
Earnings (Loss) Per Share-
Basic EPS is computed as net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock-based compensation plans including stock
options, restricted stock awards, warrants and other convertible
securities using the treasury stock method.
Earnings (loss) per share is net income (loss) divided by the weighted
average number of common stock outstanding for the periods. Per share
data for 2000 and 1999 does not assume the exercise of common stock
options as the option exercise prices are above the average market
price of common stock for the year.
Stock Options-
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied.
Use of Estimates-
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenue and expenses
during the reported periods. Actual results could vary from the
estimates and assumptions used in the preparation of the accompanying
financial statements.
(3) Fixed Assets:
Fixed assets at July 31, 2000 and 1999 consist of the following:
2000 1999
--------- ----------
Office furniture and equipment $ 185,000 $ 184,000
Computers 578,000 487,000
Telecommunication equipment 62,000 61,000
Leasehold improvements 78,000 75,000
--------- ----------
903,000 807,000
Accumulated depreciation (667,000) (570,000)
--------- ----------
$ 236,000 $ 237,000
========= ==========
Depreciation expense for the years ended July 31, 2000 and 1999 was
$97,000 and $80,000, respectively.
25
<PAGE>
(4) Notes Payable to Banks:
On December 14, 1995, the Company entered into a revolving line of
credit agreement with a bank that provided for borrowings up to
$2,700,000. The bank increased the available line of credit to
$4,000,000 on June 17, 1997 and to $7,500,000 on June 10, 1998. The
line of credit provides for an interest rate at the bank's prime rate
(9.5 % and 8% at July 31, 2000 and 1999, respectively). In addition, a
certain portion of the line of credit may be priced at the 90 day Libor
rate plus 2.0% (6.84%) at July 31, 2000. At July 31, 2000, the amount
outstanding under this credit agreement was $3,683,000 ($3,000,000 of
which was priced at the Libor rate). Advances under this line of credit
are collateralized by substantially all of the assets of the Company.
The revolving line of credit, which is payable upon demand by the bank,
contains various covenants which include, among other things, a minimum
tangible net worth requirement. The revolving line of credit prohibits
the Company from the declaration or payment of dividends on common
stock. The $7,500,000 is the maximum available, however it may be lower
based upon the eligible value of the accounts receivable and inventory.
As of July 31, 2000, the eligible inventory and accounts receivable was
$6,962,000. The Company is in compliance with all of its covenants of
the loan agreement, as amended January 31, 2000.
On January 31, 2000, the Company borrowed an additional $964,000 from
People's Bank for the purchase of 595,113 shares of its common stock,
of which $600,000 is based on a 24 month unsecured term loan with equal
monthly payments of $25,000 per month, with interest on the outstanding
balance at prime plus 2%. The remaining $364,000 is secured by eligible
accounts receivable and inventory of the Company and is payable on
January 1, 2002. Interest on the outstanding balance is at the Bank's
prime rate.
(5) Income Taxes:
Federal income taxes were provided for the year ended July 31, 2000. No
federal income taxes were provided for the year ended July 31, 1999 due
to the Company's net operating losses. The actual provision (benefit)
for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income
taxes. The sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
2000 1999
--------- ----------
<S> <C> <C>
Income tax provision (benefit) at the federal
statutory rate $ 439,000 $ (229,000)
State and local income taxes, net of federal tax
provision (benefit) 76,000 (37,000)
(Decrease) increase in valuation allowance (250,000) 263,000
Nondeductible expenses (35,000) 13,000
Other (27,000) (10,000)
--------- ----------
Provision for income taxes $ 203,000 $ -
========= ==========
</TABLE>
26
<PAGE>
The tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that
give rise to the deferred tax assets and deferred tax liabilities at
July 31, 2000 and 1999 are the following:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
Deferred tax assets:
<S> <C> <C>
Accounts receivable allowances $ 263,000 $ 320,000
Inventory reserves 346,000 326,000
Unicap 418,000 373,000
Plate and revision costs 101,000 80,000
Fixed assets 48,000 61,000
Pre-publication costs 578,000 665,000
AMT credit 25,000 25,000
Net operating loss carryforwards - 103,000
Other - 2,000
----------- ----------
Net deferred tax asset 1,779,000 1,955,000
Less: Valuation allowance (710,000) (960,000)
----------- ----------
Net deferred tax asset 1,069,000 995,000
----------- ----------
Deferred tax liabilities:
Returns allowances (289,000) -
Goodwill amortization (266,000) (240,000)
Other (11,000) -
Adjustment for change in tax
accounting method (503,000) (755,000)
----------- ----------
Net deferred tax liability (1,069,000) (995,000)
----------- ----------
Net deferred income taxes $ - $ -
=========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax asset will be realized. The ultimate realization of
the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences or net
operating loss carryforwards become deductible. The Company could not
determine that such deferred tax assets could be realized and therefore
has established a valuation allowance of $710,000 at July 31, 2000.
(6) 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 a committee, appointed by the Board of Directors, may grant stock
options to eligible employees, officers and directors of the Company or
its affiliates. The number of shares reserved for issuance is adjusted
in accordance with the provisions of the Plan. All stock options
granted by the Company expire seven years after the grant date. Stock
options vest over a period from 2-5 years as determined by the stock
option committee.
In October 1996, the Company amended the Option Plan to decrease the
exercise price on outstanding options from $8.00 per share to the
initial public offering price of $4.50 per share. Non-vested options
outstanding on the effective date (December 23, 1996) of the initial
public offering, representing options for 283,500 shares, vested 50%
one year from that date and the
27
<PAGE>
additional 50% two years from that date. As of July 31, 2000 and 1999,
there were options outstanding for 603,500 shares and 517,500 shares,
respectively, under the Option Plan.
The per share weighted-average fair value of stock options granted
during fiscal 2000, calculated in accordance with SFAS No. 123, was
$1.50 on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions: fiscal 2000 - expected
volatility 58%, risk-free interest rate of 5.8% and an expected life of
2 years.
The Company applies APB Opinion No. 25 in accounting for its Option
Plan. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net income (loss)
As reported $ 1,136,000 $ (674,000)
Pro forma 1,070,000 (764,000)
Earnings (loss) per share (basic and diluted)
As reported .37 (.20)
Pro forma .35 (.22)
</TABLE>
Pro forma net income (loss) reflects all options granted since August
1, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is reflected
over the options' vesting periods of 2-5 years and compensation cost
for options granted prior to August 1, 1995 is not considered.
Stock Option Plan activity during the periods indicated is as follows:
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
Balance at July 31, 1998 527,000 4.50
Granted - -
Forfeited (9,500) 4.54
-------
Balance at July 31, 1999 517,500 4.50
Granted 147,500 2.25
Forfeited (61,500) 4.50
-------
Balance at July 31, 2000 603,500 3.94
=======
At July 31, 2000 and 1999, the range of exercise prices was $2.25 -
$6.075. The weighted-average remaining contractual life of outstanding
options at July 31, 2000 and 1999 was 4.1 and 4.2 years, respectively.
28
<PAGE>
At July 31, 2000 and 1999, the number of options exercisable were
391,000 and 353,000, respectively, and the weighted-average exercise
price of those options was $3.94.
In December 1996 in connection with the initial public offering, the
Company sold to the Underwriter for $100, the Underwriter's Purchase
Option ("Purchase Option"), consisting of the right to purchase up to
an aggregate of 170,000 shares of common stock. The Purchase Option is
exercisable at $6.075 per share for a period of four years commencing
on December 17, 1997.
(7) 401(k) Profit Sharing Plan:
The Company maintains a Non-standardized Prototype Cash or Deferred
Profit Sharing 401(k) Plan (the "Plan"). Participation in the Plan by
employees requires that they complete six months of service for the
Company and attain 21 years of age. Employees on the Plan's effective
date did not have to satisfy the six-month service requirement. The
Company determines each year a discretionary matching contribution.
Such additional contribution, if any, shall be allocated to employees
in proportion to each participant's contribution. The Company did not
contribute to the Plan during the years ended July 31, 2000 and 1999.
(8) Commitments
The Company leases office facilities under operating leases which
expire at various dates through 2004. The leases are subject to
escalation clauses as they relate to certain expenses of the lessor,
i.e., utilities and real estate taxes.
Minimum future rental payments under non-cancelable operating leases
having initial or remaining terms in excess of one year are as follows:
Year ending July 31 Amount
------------------- ------
2001 $173,000
2002 177,000
2003 103,000
2004 39,000
Thereafter -
--------
$492,000
========
Rent expense for the years ended July 31, 2000 and 1999 was $178,000
and $158,000, respectively.
In May 1994, the Company entered into an agreement with Aladdin Books,
a British publishing company, whereby Aladdin agreed to produce no less
than 50 titles per year for Millbrook through January 1, 2002. The
titles are to be wholly owned by Millbrook. Aladdin is responsible for
production, printing and binding. Production costs are shared by
Aladdin and Millbrook. Aladdin retains sales rights for these titles to
countries other than the United States, Canada and the Philippines.
Royalties are paid to Aladdin based on Millbrook sales. Development
recovery amounts are paid to Millbrook based on sales by Aladdin to
other parts of the world. Net payables to Aladdin at July 31, 2000 and
1999 are $652,000 and $858,000, respectively.
29
<PAGE>
(9) Fair Value of Financial Instruments:
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses-
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
Notes Payable-
The carrying amount of these financial instruments approximates fair
values based on the fact that the related interest rates fluctuate with
market rates.
(10) Concentration of Credit Risk:
The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise, which
results in a concentration of credit risk. This concentration of credit
risk may be affected by changes in economic or other industry
conditions and may, accordingly, impact the Company's overall credit
risk. Although the Company generally does not require collateral, the
Company performs ongoing credit evaluations of its customers and
reserves for potential losses are maintained. One customer accounted
for 11% and 10% of the Company's net sales for the years ended July 31,
2000 and 1999, respectively. Two customers accounted for 29% of the
Company's accounts receivable as of the year ended July 31, 2000.
(11) Purchase of Treasury Stock:
On December 16, 1999, the Company purchased 595,113 shares of Common
Stock in a private transaction from a related party for an aggregate
purchase price of $967,000 or $1.625 per share. Upon consummation of
the transaction, the repurchased shares of Common Stock were placed in
treasury. On January 31, 2000, the Company borrowed additional funds to
finance the transaction (see "Notes Payable to Bank"). For the period
from December 16, 1999 to January 31, 2000, the Company's working
capital was used to finance this transaction.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
30
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act.
The information required by Item 9 regarding directors is incorporated by
reference to the information appearing under the caption "Election of Directors"
in the Company's definitive Proxy Statement relating to its 2000 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of its fiscal year.
Item 10. Executive Compensation.
The information required by Item 10 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Security Ownership" in the Company's
definitive Proxy Statement relating to its 2000 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 2000
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year.
31
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
**3.1 Restated Certificate of Incorporation of the Company.
**3.2 By-laws of the Company, as amended.
**4.1 Form of Common Stock Certificate.
**4.2 Form of Underwriter's Purchase Option granted to GKN Securities.
**4.3 Form of bridge Warrant.
*10.1 Employment Agreement, dated as of August 1, 1998, by and between
the Company and Jeffrey Conrad.
**10.2 Employment Agreement, dated as of December 12, 1996, by and
between the Company and Jean E. Reynolds.
**10.3 Consulting Agreement, dated as of December 13, 1996, by and
between the Company and Farrell Associates, Inc.
**10.4 Consulting Agreement, dated as of December 13, 1996, by and
between the Company and Graham International Publishing and
Research, Inc.
**10.5 Form of Indemnification Agreement between each of the Officers and
Directors of the Company and the Company.
**10.6 Agreement of Lease, dated September 27, 1994, by and between the
Company and Arnold S. Paster.
**10.7 Agreement of Lease, dated March 26, 1996, by and between the
Company and Land First II Group.
**10.8 Agreement of Lease and rider attached thereto, dated February 15,
1996, by and between the Company and Ninety-Five Madison Company.
**10.9 1994 Stock Option Plan, as amended.
**10.10 Loan and Security Agreement, dated as of December 14, 1995,
between People's Bank and the Company.
*10.11 Amendment to Loan and Security Agreement, dated June 10, 1998,
between People's Bank and the Company.
32
<PAGE>
**10.12 Agreement made effective as of August 1, 1996 by and between
Aladdin Books Limited and the Company.
***10.13 Employment Agreement, dated as of January 1999, by and between the
Company and David Allen.
****10.14 Amendment to loan and security agreement dated January 31, 2000,
between People's Bank and the Company.
*****27 Financial Data Schedule
--------------------------------------------------------------------------------
* Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1998
** Filed as an Exhibit to the Company's Registration Statement on
Form SB-2 (No. 33-14631)
*** Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1999
**** Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 2000
***** Filed Herewith.
(b) Reports on Form 8-K
None
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) 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.
Dated: October 25, 2000 By: /s/ Jeffrey Conrad
------------------------------------
Jeffrey Conrad, President and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dated indicated.
Signatures Title Date
/s/ Jeffrey Conrad
------------------------- President and October 25, 2000
Jeffrey Conrad Chief Executive Officer
(Principal Executive
Officer)
/s/ David Allen
------------------------- Chief Operating Officer October 25, 2000
David Allen Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ Howard Graham
------------------------- Chairman of the Board October 25, 2000
Howard Graham
/s/ Frank J. Farrell Director October 25, 2000
-------------------------
Frank Farrell
/s/ Bruno A. Quinson Director October 25, 2000
-------------------------
Bruno A. Quinson
/s/ Joseph Kanon Director October 25, 2000
-------------------------
Joseph Kanon
/s/ Hannah Stone Director October 25, 2000
-------------------------
Hannah Stone
34
