<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 13, 1996
REGISTRATION NO. 333-14631
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MILLBROOK PRESS INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2731 06-1390025
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(203) 740-2220 (PHONE)
(203) 740-2526 (TELECOPY)
(Address and telephone number of principal executive offices)
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(Address of principal place of business or intended principal place of business)
FRANK J. FARRELL
THE MILLBROOK PRESS INC.
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(203) 740-2220 (PHONE)
(203) 740-2526 (TELECOPY)
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN WOLOSKY, ESQ. DAVID ALAN MILLER, ESQ.
KENNETH A. SCHLESINGER, ESQ. RONIT V. FISCHER, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP GRAUBARD MOLLEN & MILLER
505 PARK AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10016-1903
(212) 753-7200 (PHONE) (212) 818-8800 (PHONE)
(212) 755-1467 (TELECOPY) (212) 687-6989 (TELECOPY)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Common Stock, $.01 par value ("Common
Stock")(2)............................................... 1,955,000 $4.50 $8,797,500 $2,665.91
Underwriter's Common Stock Purchase Option ("CPO")......... 170,000 .00059 100 0.30
Shares of Common Stock included as part of the CPO(3)...... 170,000 -- -- --
Shares of Common Stock underlying the Warrants issued to
certain investors in connection with a private
placement(3)............................................. 875,000 $3.00(4) 2,625,000 795.45
Total.................................................. $11,422,600 $3,461.39
</TABLE>
- ------------------------------
(1) Estimated solely for the purpose of calculating the registration fee. A
filing fee of $6,442.45 was previously paid.
(2) Includes 255,000 shares of Common Stock which may be issued on exercise of a
45-day option granted to the Underwriter to cover over-allotments, if any.
See "Underwriting."
(3) Pursuant to Rule 416, there are also being registered such indeterminable
number of additional securities as may be issued as a result of the
anti-dilution provisions.
(4) Represents the exercise price of the Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 13, 1996
PROSPECTUS
[LOGO]
THE MILLBROOK PRESS INC.
1,700,000 SHARES OF COMMON STOCK
All of the 1,700,000 shares of common stock ("Common Stock") are being sold by
The Millbrook Press Inc. ("Company").
Prior to this Offering, there has been no public market for the Common Stock and
there can be no assurance that any such market will develop. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price of the Common Stock. The Company has applied for quotation
of the Common Stock on the Nasdaq SmallCap Market under the symbol "MILB".
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" AT PAGE 6 HEREOF AND "DILUTION" AT PAGE 13 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................... $4.50 $.45 $4.05
Total(3)............................ $7,650,000 $765,000 $6,885,000
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Underwriter. The Company has also agreed to sell to the
Underwriter an option ("Underwriter's Purchase Option") to purchase 170,000
shares of Common Stock and to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended ("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $229,500 ($263,925 if the
Underwriter's over-allotment option is exercised in full), estimated at
approximately $560,000.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 255,000 additional
shares of Common Stock on the same terms set forth above, solely for the
purpose of covering over-allotments, if any. If such over-allotment option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $8,797,500, $879,750 and
$7,917,750, respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriter, on a firm
commitment basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to the approval of certain legal matters
by counsel and certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify this Offering and to reject any order in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment therefor at the offices of the
Underwriter in New York City on or about , 1996.
GKN SECURITIES
, 1996
<PAGE>
(A display of some of the Company's books)
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus includes references to trademarks of entities other than the
Company, which have reserved all rights with respect to their respective
trademarks.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS
BEEN ADJUSTED TO REFLECT (I) A REVERSE STOCK SPLIT OF THE COMMON STOCK ON THE
BASIS OF .3976 SHARES OF COMMON STOCK FOR EACH SHARE OF COMMON STOCK ("REVERSE
STOCK SPLIT") EFFECTED IN AUGUST 1996 AND (II) THE CONVERSION OF ALL OUTSTANDING
SERIES A REDEEMABLE VOTING PREFERRED STOCK ("PREFERRED STOCK") AND ALL ACCRUED
AND UNPAID DIVIDENDS THEREON INTO 473,692 SHARES OF COMMON STOCK (POST-REVERSE
STOCK SPLIT), IN ACCORDANCE WITH THE COMPANY'S ARTICLES OF INCORPORATION
("PREFERRED STOCK CONVERSION"), UPON THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS FORMS A PART.
THE COMPANY
The Company is a publisher of children's nonfiction books, in both hardcover
and paperback, for the school and public library market and the consumer market.
Since its inception, the Company has published more than 680 hardcover and 330
paperback books under its Millbrook and Copper Beech 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 retail bookstores and
other specialty retail, direct sales and special market outlets as either
hardcover or paperback books. As a result, the Company is better able to fully
exploit a book's sales potential.
The evolution in the Company's products anticipated changes in the
book-publishing industry. In the early 1990's there were only marginal increases
in the funds allocated to book acquisition by schools and public libraries.
Conversely, the consumer market became a steady source of sales growing from
approximately $910 million in 1986 to an expected $2.6 billion in 1996. In
addition, paperbacks have become a significant factor in the classroom
marketplace as a supplemental teaching and learning tool. In 1995, the Company
began selling books in bookstores and other retail outlets with the introduction
of a high-quality line of consumer-oriented children's paperbacks under its
Copper Beech imprint.
In order to establish itself as a leading publisher of children's books for
the consumer market, the Company intends to: (i) enter new product areas, such
as preschool novelty books, books for beginning readers and early readers,
chapter books for young readers and popular reference children's books; (ii)
acquire companies or develop strategic partnerships that broaden its product
line and extend its distribution in consumer market channels; (iii) expand its
marketing capabilities in the consumer market by increasing its in-house sales
force and management; and (iv) develop books that can be exploited through
emerging distribution channels in the consumer market, including special sales
channels such as book clubs, book fairs, direct sales, catalogs, direct mail,
commercial on-line services and the Internet. The Company believes that the high
quality of its books, its emphasis on publishing books for multiple markets and
its expanded distribution capabilities make it well positioned to increase its
books sales to the consumer market while at the same time increasing its
established sales base in the school and public library market.
In February of 1994, the Company was incorporated and acquired the assets of
the Millbrook Press Inc., which had commenced operations in 1989.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Securities Offered............................ 1,700,000 shares of Common Stock. See
"Description of Securities."
Common Stock Outstanding Prior to the
Offering.................................... 1,500,000 shares
Common Stock to be Outstanding After the
Offering.................................... 3,200,000 shares
Proposed Nasdaq SmallCap Symbols.............. Common Stock: MILB
</TABLE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering approximately
as follows: (i) $2.5 million for product development; (ii) $1.8 million to repay
in full the unsecured promissory notes ("Bridge Notes") of the Company issued in
the Bridge Financing; (iii) $750,000 for the enhancement of marketing
capabilities; (iv) $408,000 for accrued development, manufacturing and royalty
expenses to an affiliate of a principal stockholder; and (v) $792,000 for
working capital and general corporate purposes. See "Use of Proceeds" and
"Certain Transactions."
RISK FACTORS
The securities offered hereby involve a high degree of risk, including
without limitation: history of losses; need for market acceptance of products;
dependence on key accounts; possible need for additional financing; potential
adverse impact of returns; seasonal business and quarterly fluctuations;
competition; and dependence on government funding. See "Risk Factors."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements of the Company appearing elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JULY 31, OCTOBER 31,
------------------------ ------------------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Actual:
Net sales................................................. $ 6,866,000 $ 9,940,000 $ 2,706,000 $ 3,266,000
Operating income (loss)................................... (616,000) (218,000) 103,000 (7,000)
Net income (loss)......................................... (806,000) (463,000) 54,000 (88,000)
Preferred dividend accrued................................ (589,000) (656,000) (161,000) (180,000)
Net loss available to common stockholders................. $(1,395,000) $(1,119,000) $ (107,000) $ (268,000)
Net loss per share after preferred dividend requirements
(primary and fully diluted)............................. $ (1.60) $ (1.09) $ (0.10) $ (0.26)
Weighted average shares................................... 872,186 1,026,308 1,026,308 1,026,308
Pro forma(1):
Net income (loss) available to common stockholders........ $ (806,000) $ (463,000) $ 54,000 $ (88,000)
Net income (loss) per share (primary and fully diluted)... $ (.60) $ (.31) $ 0.04 $ (0.06)
Weighted average shares................................... 1,345,878 1,500,000 1,500,000 1,500,000
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(2)
------------ --------------
BALANCE SHEET DATA:
Total assets...................................................................... $ 14,357,000 $ 18,245,000
Working capital................................................................... 1,900,000 9,103,000
Total liabilities................................................................. 7,381,000 5,243,000
Stockholders' equity.............................................................. $ 6,976,000 $ 13,002,000
</TABLE>
- ------------------------
(1) Gives effect to the conversion of the Company's Preferred Stock and all
accrued and unpaid dividends thereon which will convert into 473,692 shares
of Common Stock in accordance with the Preferred Stock Conversion after
giving effect to the Reverse Stock Split.
(2) Reflects (i) the receipt of the net proceeds of approximately $6,325,000
from the sale of the Common Stock offered hereby, (ii) the repayment of the
Bridge Notes of $1,750,000 and the related effect of writing off the
$279,000, net of amortization, in financing costs relating to the Bridge
Financing and the discount on the Bridge Notes of $20,000, net of
amortization, and (iii) the repayment of $408,000 in manufacturing,
development and royalty expenses under the Company's joint venture with
Aladdin Ltd. ("Aladdin") and (iv) the reclassification of approximately $2.6
million under the Company's Loan and Security Agreement entered into with
People's Bank in December 1995 ("Loan and Security Agreement") from
short-term to long-term.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO THE EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION OR THE
UNDERWRITER'S PURCHASE OPTION, AND DOES NOT INCLUDE: (I) 475,000 SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE UPON EXERCISE OF STOCK OPTIONS WHICH MAY BE
GRANTED UNDER THE COMPANY'S 1994 STOCK OPTION PLAN ("STOCK OPTION PLAN"), OF
WHICH OPTIONS TO PURCHASE 390,000 SHARES OF COMMON STOCK HAVE BEEN GRANTED TO
DATE, AND (II) 875,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE
EXERCISE OF WARRANTS ISSUED IN THE BRIDGE FINANCING ("BRIDGE WARRANTS"). SEE
"MANAGEMENT-- EXECUTIVE COMPENSATION" AND "--STOCK OPTION PLAN," "PRINCIPAL
STOCKHOLDERS," "CERTAIN TRANSACTIONS" AND "DESCRIPTION OF SECURITIES--WARRANTS."
5
<PAGE>
THE COMPANY
The Company, incorporated in Delaware in February 1994, was founded by
Howard Graham, Frank J. Farrell and Jean E. Reynolds. The Company was the
successor to The Millbrook Press Inc., incorporated in 1989, whose financial
support was provided by Group de la Cite International ("GLC"), a French
publishing conglomerate. From 1989 until February 1994, The Millbrook Press Inc.
was a wholly owned subsidiary of Antia Publishing Company, a Delaware
corporation, which in turn was a wholly owned subsidiary of GLC. In February
1994, the founders effected a management buyout by forming the Company, which
purchased substantially all of the assets of The Millbrook Press Inc. Unless
otherwise indicated, references to the Company also includes its predecessor.
The Company and its executive offices are located at 2 Old New Milford Road,
Brookfield, Connecticut 06804, its telephone number is (203) 740-2220 and its
Worldwide Web site address is www.neca.com/mall/millbrook.
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. ACCORDINGLY, IN ANALYZING AN INVESTMENT IN THESE SECURITIES,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS.
HISTORY OF LOSSES; ACCUMULATED LOSSES. The Company has incurred significant
losses since the management buyout in February 1994. For the fiscal years ended
July 31, 1995 and July 31, 1996, and the three months ended October 31, 1996,
the Company had net losses of $806,000, $463,000 and $88,000, respectively. At
October 31, 1996, the Company had an accumulated loss of $1,748,000. The ability
of the Company to achieve profitability in the future or, if achieved, to
sustain profitability, will depend in part upon the successful and timely
introduction of new products, the successful marketing of its existing products
and the Company's ability to collect trade receivables in a timely manner. There
can be no assurance that the Company will be able to sustain net sales in the
future or achieve profitability irrespective of the level of net sales. The
Company will incur additional marketing and administrative expenses in 1997 and
expenses relating to one-time charges in the fiscal quarter in which this
Offering occurs, for financing costs relating to the Bridge Financing and the
discount on the Bridge Notes, which the Company anticipates could result in a
net loss for the fiscal year ending July 31, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
NEED FOR MARKET ACCEPTANCE OF PRODUCTS. The nature of the publishing
industry is that net sales derived from more successful books will be used to
cover the costs of development and production of less successful books. While
the Company experienced an approximately 45% increase in net sales from the
fiscal year ended July 31, 1995, to the fiscal year ended July 31, 1996, there
can be no assurance that this growth will continue. The Company's continued
success depends on the timely introduction of successful new books and sequels
or updates to existing books to replace declining net sales from older books.
Although the Company intends to make substantial investments in product
development each year and is continually seeking new product opportunities,
there can be no assurance that any of the Company's new books will achieve
market acceptance or that, if accepted, such acceptance will be sustained for a
period long enough to recoup costs or realize profits. If market acceptance is
not sustained, the Company may be required to write-down unsold excess inventory
and/or accept substantial product returns to maintain access to its distribution
channels. See "Business--Company Strategy," "--Product Development" and "--
Competition."
DEPENDENCE ON KEY ACCOUNTS. Approximately 66% of the Company's sales in the
school and public library market in the fiscal year ended July 31, 1996 (or 45%
of the Company's net sales) were from wholesale accounts. One such wholesale
account, Baker & Taylor, accounted for approximately 37% of total wholesale
sales attributable to the Company's school and public library business in the
fiscal year ended July 31, 1996 (or 17% of the Company's net sales).
Approximately 31% of the Company's sales in the consumer market in the fiscal
year ended July 31, 1996 (or 9% of the Company's net sales) were from
6
<PAGE>
wholesale accounts. One such wholesale account, Ingram Book Company ("Ingram"),
accounted for approximately 56% of total wholesale sales attributable to the
Company's consumer business in the fiscal year ended July 31, 1996 (or 5% of the
Company's net sales). The Company expects to continue to depend on a relatively
small number of wholesalers for a significant percentage of its sales,
particularly since a relatively small number of wholesalers in the publishing
industry account for a significant portion of wholesale sales. The Company has
no contracts with any of such wholesalers and significant reductions in sales to
any one or more of the Company's largest wholesalers would have a material
adverse effect on the Company's results of operations. See "Business--Marketing
and Distribution."
POSSIBLE NEED FOR ADDITIONAL FINANCING. Since inception, the Company's
internally generated cash flow has not been sufficient to finance either its
working capital needs including trade receivables, inventory, capital equipment
requirements or its significant investment in new product development, or to
support its operations. Management believes that the net proceeds of this
Offering, together with the Company's existing resources and cash generated from
its operations, if any, will be adequate for the Company's cash requirements
through approximately July 31, 1998. However, there can be no assurance that the
Company's working capital requirements during this period will not exceed its
available resources or that these funds will be sufficient to meet the Company's
longer-term cash requirements. Accordingly, either before or after July 31,
1998, the Company may seek additional funds from borrowings or through debt or
equity financings. There can be no assurance that any additional financing will
be available to the Company on acceptable terms, if at all, when required by the
Company. Any inability by the Company to obtain additional financing, if
required, could have a material adverse effect on the financial condition and
results of operations of the Company. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
POTENTIAL ADVERSE IMPACT OF RETURNS. The practice in the publishing
industry is to permit customers, including wholesalers and retailers, to return
merchandise. The Company gives credit for books that are returned and
establishes reserves as a deduction from gross sales for returns. Historically,
returns have been approximately 8% of the Company's gross sales to school and
public library wholesalers. For the fiscal year ended July 31, 1996, consumer
sales returns were approximately 17% of gross consumer sales. The rate of return
can have a significant impact on quarterly results since certain wholesalers
have in the past returned a large quantity of products at one time irrespective
of marketplace demand for such products, rather than spreading out the returns
during the course of the year. In both the school and public library and
consumer markets, the Company now offers a preferential discount for
non-returnability, an option being taken by an increasing number of customers.
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 these
historical levels or that the actual returns will not exceed the amount of
reserves in the future. In the event that the amount of reserves proves to be
inadequate, the Company's results of operation and financial condition will be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SEASONAL BUSINESS; QUARTERLY FLUCTUATIONS. A substantial portion of the
Company's business is highly seasonal, causing significant variations in
operating results from quarter to quarter. In the fiscal year ended July 31,
1996, 69% of total net sales were derived from the school and public library
market. In the school and public library market, net sales typically 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. In the
fiscal year ended July 31, 1996, 29% of total net sales came from the consumer
market. The consumer market also tends to be highly seasonal and, given the
importance of holiday gift sales, a large proportion of net sales can occur in
the third quarter in anticipation of the holiday gift season. The Company can
exercise very little control over the timing of customer orders, particularly
those of wholesalers; thus orders anticipated in the second calendar quarter,
for example, may fall into the third calendar quarter, thereby affecting both
quarters' results. In addition, even when customer orders are placed, such
orders generally are cancelable at any time without penalty. Due to the long
product development cycle of books (nine to
7
<PAGE>
18 months), the Company generally must enter into product development
commitments prior to having firm orders. In any quarter where sales fall below
the Company's expectations, the Company's financial results will be negatively
impacted because expenses based on those expectations have already been incurred
in advance of actual receipt of orders. As a result, there can be no assurance
that the Company can maintain sufficient flexibility with respect to its working
capital needs and its ability to manufacture products to be able to minimize the
adverse effects of an unanticipated shortfall in or increase in demand for its
products. Failure to predict accurately and respond to consumer demand may cause
the Company to produce excess inventory which could result in write-offs.
Conversely, if a product achieves greater success than anticipated, the Company
may not have sufficient inventory to meet customer demand, thereby losing sales.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION. Children's book publishing in the school and public library
market and in the consumer market is fragmented and highly competitive. There
are many publishers in the school and public library market who publish
materials similar to the Company's product offerings. The Company also competes
with a large number of other publishers for retail shelf space in large
bookstore chains. A number of these competitors have considerably greater
financial and marketing resources than the Company, including Childrens Press,
Dorling Kindersley Publishing Inc., Franklin Watts Inc., Lerner Publications Co.
and Troll Communications in the school and public library market and Barron's
Educational Series Inc., Candlewick Press, Larousse Kingfisher Chambers Inc.,
Random House Inc. and Usborne Publishing Ltd in the consumer market. 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. Increased competition may
result in the loss of school and public library accounts, loss of shelf space
for the Company's books at retail stores and significant price competition, any
of which could adversely affect the Company's operating results. See
"Business--Industry Background" and "-- Competition."
DEPENDENCE ON GOVERNMENT FUNDING. The majority of the school and public
library funding is dependent on government funding from federal, state and local
authorities. Budget deficits affecting these three levels of government have
limited the availability of funding for school libraries and educational
programs. The school library market is especially affected by budget cutbacks as
library expenditures and needs are typically considered less important than the
expenditures and needs of the classroom. Continued restraints in the future on
federal, state and local support for educational funding could have an adverse
effect on the Company's financial condition and results of operations. See
"Business--Industry Background."
DEPENDENCE ON QUALIFIED PERSONNEL; DEPENDENCE ON MANAGEMENT. The ability to
attract and retain highly competent executives, professionals, sales personnel
and other employees is critical to the ongoing success of the Company. A stable
and skilled work force is essential to establishing and maintaining
relationships with authors, illustrators, vendors and customers, and such
relationships are critical to the Company's long-term growth. The Company has
not experienced any difficulties in attracting and retaining qualified
personnel, although there can be no assurance that it will not encounter such
problems in the future. In particular, the Company's operations are dependent on
the efforts of Jeffrey Conrad (the newly appointed Chief Executive Officer and
President), Jean E. Reynolds (Senior Vice President--Publisher), Frank J.
Farrell (Vice President and Secretary) and Howard Graham (Vice President). The
Company has employment agreements with Mr. Conrad and Ms. Reynolds which expire
in October 1999 and September 1999, respectively. It is anticipated that both
Mr. Farrell and Mr. Graham will resign as officers of the Company effective
December 31, 1996, or shortly thereafter. The Company has entered into
consulting agreements with entities controlled by Mr. Farrell and Mr. Graham
commencing January 1, 1997 and expiring December 1998 which provide that each of
Mr. Farrell and Mr. Graham, respectively, shall be available to perform certain
services for the Company for a minimum of six months per year. In addition to
the services to be rendered to the Company by Mr. Farrell and Mr. Graham, each
of them will be involved in various business projects unrelated to the business
of the Company. Substantially all of the duties
8
<PAGE>
currently performed by Mr. Farrell and Mr. Graham as officers of the Company
will be performed by Jeffrey Conrad (the newly appointed Chief Executive Officer
and President). The Company has obtained a "key person" insurance policy on the
life of Mr. Conrad in the amount of $1,000,000, under which the Company is the
beneficiary. The loss of the services of any one of the above named persons
could have a material adverse effect on the Company. See "Management."
DEPENDENCE ON CO-PUBLISHING RIGHTS/RELATIONSHIPS. The Company sells books
developed by its own editorial staff and authors, books fully developed by other
publishers and purchased by Millbrook, as well as books co-developed by
Millbrook and other publishers as a way of spreading production costs and risks.
Such multiple sourcing utilizes a broad band of creative talent to generate book
concepts through finished books. Approximately 20% of the Company's net sales in
the fiscal year ended July 31, 1996, were derived from products sourced from
outside publishers and packagers. Competition for these arrangements is
substantial and the Company competes directly with larger companies having
greater financial and marketing resources. Although the Company has been
successful in developing such relationships in the past, there can be no
assurance that it will continue to enjoy such success in the future. See
"Business-- Company Strategy" and "--Product Development."
DEPENDENCE ON AUTHORS, ILLUSTRATORS. The ability to attract successful and
highly qualified authors and illustrators is critical to the ongoing success of
the Company. Competition for this type of resource is intense and authors and
illustrators have many options in terms of publisher affiliation. The Company
has been successful in developing long-term relationships with a number of
excellent authors and illustrators in the past, but there can be no assurance
that the Company can continue to retain superior-quality authors and
illustrators in the future. See "Business--Company Strategy" and "--Product
Development."
DEPENDENCE ON THIRD PARTY MANUFACTURERS; ABILITY TO OFFSET MANUFACTURING
COSTS. The Company's books are printed and bound by third-party manufacturers
who pass on certain costs, including paper costs, to the Company. The Company
requires substantial amounts of high-quality paper to manufacture its products,
and in periods of short supply, competition for paper can be substantial,
increasing the cost of manufacturing. To cover such costs, the Company has been
successful in raising prices of its books in the past, but there can be no
assurance that the Company will be able to raise prices in the future.
Management believes that current arrangements for the manufacture of the
Company's books are satisfactory for the Company's anticipated requirements.
Nevertheless, there can be no assurance that in the future these third parties'
manufacturing capacities will be sufficient to satisfy the Company's
requirements, that interruptions or delays in manufacturing will not adversely
affect the Company's operations, or that alternative manufacturing sources will
be available to the Company on commercially reasonable terms or at all. In
particular, due to the short-run nature of the Company's manufacturing needs,
the Company, is restricted to a select list of specialty book manufacturers.
During fiscal year 1996, Worzalla Publishing, Inc. ("Worzalla") and Aladdin
provided approximately 36% and 31% of the Company's printing and bindings needs,
respectively. The Company has no contract with Worzalla and while the Company
believes that other specialty book manufacturers would be available, if
necessary, the inability of the Company to obtain printing for its books at
favorable prices, or at all, could have a material adverse effect on the
Company's results of operations. See "Business--Manufacturing and Shipping."
POSSIBLE TERMINATION OF AGREEMENT WITH ALADDIN. In May 1994, the Company
entered into an agreement with Aladdin, whereby Aladdin agreed to produce no
less than 50 books per year for the Company through January 1, 2002. The books
are to be wholly-owned by the Company. 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 U.S.A., 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. As of December 5, 1996, net payables to Aladdin
were approximately $727,000 of which the Company was delinquent on approximately
$408,000. From October 17, 1996 to December 5, 1996, the Company paid Aladdin
$512,000. The terms of payment under the agreement are as follows:
9
<PAGE>
(i) merchandising costs are due 90 days from the date of shippment; (ii) royalty
payments are made on June 30 and December 31 of each year and are due 90 days
from such date; and (iii) plant and development costs are due each month in the
amount of $30,000 with a reconciliation done at December 31 of each year.
Aladdin may terminate its agreement with the Company in the event of a material
breach by the Company of any of the terms and conditions of the agreement. The
Company's payment delinquency constitutes a material breach under the agreement,
although Aladdin has agreed to waive this default until the consummation of this
Offering. In the future, in the event of a material breach by the Company of any
of the terms and conditions of the agreement, Aladdin may terminate the
agreement which would have a material adverse effect on the Company. See "Use of
Proceeds" and "Certain Transactions."
SIGNIFICANT PORTION OF PROCEEDS USED TO SATISFY INDEBTEDNESS; BENEFIT TO
AFFILIATES. Approximately $1.8 million, or 29% of the net proceeds received by
the Company from this Offering, will be used to repay the Bridge Notes and
accrued interest, of which approximately $513,000 will be repaid to entities
which are 5% stockholders of the Company and affiliated with certain directors
of the Company, and approximately $408,000, or 6% of the net proceeds of the
Offering, will be used to satisfy payables and accrued product development
expenses in connection with the Company's joint venture with Aladdin, an
affiliate of an entity that is a principal stockholder of the Company, under the
terms of its joint venture with the Company. See "Use of Proceeds" and "Certain
Transactions."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $800,000, or
13%, of the net proceeds of the Offering has been allocated to working capital
and general corporate purposes. The Company will have broad discretion regarding
how and when such proceeds will be applied and will use a portion of such
proceeds to pay salaries, including salaries of its executive officers. See "Use
of Proceeds."
DEPENDENCE ON CREDIT FACILITY. The Company entered into the Loan and
Security Agreement in December 1995. Under the terms of the Loan and Security
Agreement, People's Bank has taken a first-priority security interest in
substantially all of the Company's assets, which assets serve as collateral for
the Loan and Security Agreement. Although the Company has not been in default
under its Loan and Security Agreement, in anticipation of the Bridge Financing
and this Offering and in order to continue to comply with certain covenants of
the Loan and Security Agreement, the Company obtained from People's Bank a
waiver of all of the financial covenants in the Loan and Security Agreement,
including those with respect to the Company's current ratio, total liabilities
to tangible net worth ratio and tangible net worth until December 31, 1996.
Without the waiver from People's Bank, the consummation of the Bridge Financing
would have caused the Company to be in default of all of the financial covenants
in the Loan and Security Agreement. In the event that the Company is in default
under the Loan and Security Agreement in the future or is unable to repay or
refinance such loan upon maturity, People's Bank could foreclose its lien which
would have a material adverse effect on the Company. As of October 31, 1996, the
Company had borrowings outstanding of approximately $2.6 million under the Loan
and Security Agreement. On November 18, 1996, the Company received a $175,000
in-formula overline extending the availability of the Loan and Security
Agreement, which had a maximum credit line of $2.7 million. This overline is
governed by the same terms of the Loan and Security Agreement and will terminate
on December 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
MANAGEMENT OF GROWTH. The Company has experienced significant growth in
recent years, and this growth has placed significant demands on the Company's
management, operational and financial resources. In addition, the Company has
recently hired a new Chief Executive Officer and President, Jeffrey Conrad, and
will be appointing a new Chief Financial Officer. There can be no assurance that
the Company's new management will be successfully integrated into the business
of the Company or if the Company continues to grow, that management will be
effective in attracting and retaining additional qualified personnel, expanding
the Company's physical facilities, integrating acquired businesses or otherwise
managing growth. If the Company is unable to manage growth effectively, the
Company's
10
<PAGE>
business, financial condition and operating results could be materially
adversely affected. See "Business" and "Management."
CONTROL BY CURRENT STOCKHOLDERS, DIRECTORS AND OFFICERS. The Company's
current principal stockholders, directors and officers, and certain of their
affiliates, will beneficially own approximately 42.8% of the outstanding Common
Stock immediately after this Offering and will have significant influence over
the outcome of all matters submitted to the stockholders for approval, including
the election of directors of the Company, thereby enabling such current
principal stockholders, directors and officers, and their affiliates to control
all major decisions of the Company. Furthermore, such concentration of ownership
may have the effect of preventing a change in control of the Company. See
"Principal Stockholders" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will incur an immediate and substantial dilution of approximately 32% of
their investment in the Common Stock because the net tangible book value of the
Company's Common Stock after this Offering will be approximately $3.05 per share
as compared with the initial public offering price of $4.50 per share of Common
Stock. See "Dilution."
NO PRIOR MARKET; POTENTIAL LOSS OF ACTIVE TRADING MARKET; ARBITRARY OFFERING
PRICE; POSSIBLE VOLATILITY OF STOCK PRICE. There has been no prior market for
the Company's Common Stock, and there can be no assurance that a public market
for the Common Stock will develop or be sustained after the Offering. The
Company's Common Stock has been approved for trading on the Nasdaq SmallCap
Market ("Nasdaq") although there can be no assurance that an active trading
market in the Common Stock will develop or be maintained. To continue to be
listed on Nasdaq after the Offering, the Company must satisfy certain
maintenance criteria. The failure to meet these maintenance criteria in the
future may result in the Common Stock being ineligible for quotation on Nasdaq
and trading, if any, of the Common Stock would thereafter be conducted on the
OTC Bulletin Board. As a result of such ineligibility for quotation, an investor
may find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of the Common Stock. The public offering price of the Common
Stock was established by negotiation between the Company and the Underwriter and
may not be indicative of prices that will prevail in the trading market. In the
absence of an active trading market, purchasers of the Common Stock may
experience substantial difficulty in selling their securities. The trading price
of the Company's Common Stock is expected to be subject to significant
fluctuations in response to variations in quarterly operating results, changes
in analysts' earnings estimates, general conditions in the publishing industry
and other factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies and that are often
unrelated to operating performance. See "Description of Securities" and
"Underwriting."
RISK OF LOW PRICED SECURITIES. To continue to be listed on the Nasdaq
SmallCap Market after the Offering, the Company must satisfy certain maintenance
criteria. The failure to meet these maintenance criteria in the future may
result in the Common Stock being ineligible for quotation on Nasdaq and trading,
if any, of the Common Stock would thereafter be conducted on the OTC Bulletin
Board. As a result of such ineligibility for quotation, an investor may find it
more difficult to dispose of, or to obtain accurate quotation as to the market
value of the Common Stock. Furthermore, the regulations of the Securities and
Exchange Commission promulgated under the Exchange Act require additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Commission regulations generally define a
penny stock to be an equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Unless an exception is available,
those regulations require the delivery, prior to any transaction involving a
penny stock, of a disclosure schedule explaining the penny stock market and the
risks associated therewith and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). In addition, the
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson
in the
11
<PAGE>
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. Moreover, broker-dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. If the Company's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be severely affected. In such an event, the regulations on penny stocks
could limit the ability of broker-dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
NO DIVIDENDS. The Company has never paid cash dividends on its Common
Stock. The Company intends to retain any future earnings to finance its growth.
Accordingly, any potential investor who anticipates the need for current
dividends from an investment in the Common Stock should not purchase any of the
Common Stock offered hereby. In addition, the Loan and Security Agreement limits
the Company's ability to pay dividends without the lender's consent. See
"Dividend Policy."
EFFECT OF OUTSTANDING OPTIONS AND BRIDGE WARRANTS. Immediately after this
Offering, there will be outstanding stock options pursuant to the Stock Option
Plan to purchase an aggregate of 390,000 shares of Common Stock at a per-share
exercise price equal to the Offering Price of the Common Stock. In addition,
there will be outstanding 875,000 Bridge Warrants. The exercise of any of such
outstanding stock options and Bridge Warrants, and the Underwriter's Purchase
Option will dilute the percentage ownership of the Company's stockholders, and
any sales in the public market of Common Stock underlying such stock options,
Bridge Warrants and the Underwriter's Purchase Option may adversely affect
prevailing market prices for the Common Stock. Moreover, the terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected, since the holders of such outstanding securities can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than those
provided in such stock options, Bridge Warrants and the Underwriter's Purchase
Option. In addition, the Company has granted certain demand and piggy-back
registration rights to the Underwriter with respect to the securities issuable
upon exercise of the Underwriter's Purchase Option. See "Management--Stock
Option Plan," "Certain Transactions," "Description of Securities" and
"Underwriting."
FUTURE SALES OF COMMON STOCK. Sales of the Company's Common Stock in the
public market after this Offering by existing stockholders could adversely
affect the market price of the Common Stock. See "Shares Eligible for Future
Sale."
ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. Pursuant to its
Certificate of Incorporation, as amended, the Company has an authorized class of
1,000,000 shares of preferred stock which may be issued by the Board of
Directors on such terms and with such rights, preferences and designations as
the Board may determine without any vote of the stockholders. Issuance of such
preferred stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company, could result in the dilution of the voting power of the
Common Stock purchased in this Offering. In addition, certain "anti-takeover"
provisions of the Delaware General Corporation Law, among other things, may
restrict the ability of the stockholders to expect a merger or business
combination or to obtain control of the Company. See "Description of
Securities--Preferred Stock" and "--Delaware Law."
LIMITED LIABILITY FOR DIRECTORS. The Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions under Delaware law. This may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director. In addition, the Company's By-laws
provide for mandatory indemnification of directors and officers. See
"Description of Securities--Limitation on Liability and Indemnification
Matters."
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<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this Offering constitutes the dilution per share of Common Stock to investors in
this Offering. Net tangible book value per share is determined by dividing the
net tangible book value (total tangible assets less total liabilities) by the
number of outstanding shares of Common Stock.
As of October 31, 1996, the Company had a net tangible book value of
$3,459,000, or approximately $2.31 per share of Common Stock (based on 1,500,000
shares of Common Stock outstanding at October 31, 1996). After giving effect to
the sale of the Common Stock offered hereby (less underwriting discounts and
estimated expenses of this Offering) and the application of the net proceeds
therefrom, the pro forma net tangible book value at that date would have been
$9,764,000, or approximately $3.05 per share. This represents an immediate
increase in net tangible book value of approximately $.74 per share to existing
stockholders and an immediate dilution of approximately $1.45 per share, or
approximately 32%, to investors in this Offering.
The following table illustrates the per share dilution without giving effect
to results of operations of the Company subsequent to October 31, 1996.
<TABLE>
<S> <C> <C>
Public offering price of the Common Stock..................... $ 4.50
Net tangible book value before Offering............... $ 2.31
Increase attributable to new investors................ .74
---------
Pro forma net tangible book value after Offering.............. 3.05
---------
Dilution to new investors..................................... $ 1.45
---------
---------
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid and the average price per share paid by existing stockholders and by
investors pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............................... 1,500,000 47% $ 10,191,000 57% $ 6.79
Investors in this Offering.......................... 1,700,000 53 7,650,000 43 $ 4.50
---------- --- ------------- ---
---------- --- ------------- ---
Total....................................... 3,200,000 100% $ 17,841,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $6.3 million (approximately $7.4
million if the Underwriter's over-allotment option is exercised in full). The
Company intends to apply the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ----------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Product Development.................................................... $ 2,550,000 40.5%
Repayment of Bridge Notes.............................................. 1,800,000 28.6
Marketing Enhancements................................................. 750,000 11.9
Payable to an Affiliate................................................ 408,000 6.5
Working Capital and General Corporate Purposes......................... 792,000 12.5
------------ -----
Total.............................................................. $ 6,300,000 100.0%
------------ -----
</TABLE>
Approximately $2,550,000 of the net proceeds of this Offering will be
allocated to product development, consisting of expanding the Company's product
lines in the consumer market through publishing preschool novelty books, books
for beginning readers and early readers, chapter books for young readers and
popular children's reference books. See "Business--Company Strategy."
Approximately $1,800,000 of the net proceeds of this Offering will be used
to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in August 1996. The Bridge Notes consist of 17 1/2 notes in the
aggregate principal amount of $1.75 million, bearing interest at the rate of 10%
per annum through November 30, 1996 and at a rate of 15% per annum thereafter
and payable upon the consummation of this Offering. If the Offering is
consummated in December 1996, the interest to be paid on the Bridge Notes will
be approximately $44,600. Approximately $513,000 of the principal and interest
to be repaid on the Bridge Notes is held by 5% stockholders and entities
affiliated with directors of the Company. The net proceeds from the sale of the
Bridge Notes have been used primarily for working capital purposes, including
payments to suppliers and the repayment of $500,000 of principal amount of
unsecured notes ("Prebridge Notes") and $16,000 of accrued interest. In the
event that this Offering is not consummated, the holders of the Bridge Notes may
elect to convert the entire principal amount of the Bridge Notes and interest
payable thereon into the number of shares of Common Stock equal to the principal
amount and interest payable divided by $2.50. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Approximately $750,000 of the net proceeds of this Offering will be
allocated to marketing enhancements including (i) attracting and hiring
marketing management personnel to direct and focus the Company's marketing
efforts, (ii) increasing the use of direct mail, expanding the circulation of
catalogs and extending advertising programs, (iii) increasing the in-house sales
force in the consumer market and (iv) expanding the Company's telemarketing
programs. See "Business--Company Strategy."
As of December 5, 1996, net payables to Aladdin were approximately $727,000
of which the Company was delinquent on approximately $408,000. From October 17,
1996 to December 5, 1996, the Company paid Aladdin $512,000. The terms of
payment under the agreement are as follows: (i) merchandising costs are due 90
days from the date of shipment; (ii) royalty payments are made on June 30 and
December 31 of each year and are due 90 days from such date; and (iii) plant and
development costs are due each month in the amount of $30,000 with a
reconciliation done at December 31 of each year. Approximately $408,000 of the
net proceeds of this Offering will be used to repay the accrued development,
manufacturing and royalty expenses under its joint venture with Aladdin, an
affiliate of Archon Press, Inc., a principal stockholder of the Company. See
"Certain Transactions."
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<PAGE>
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including, among other things,
additional inventory and increases in accounts receivable, payment of general
corporate expenses (including the costs of being a public company), salaries of
additional financial and management personnel, salaries of executive officers,
and the costs of possible license or acquisition of fully developed products or
businesses complementary to the Company's operations (although the Company is
not currently negotiating to acquire any business and has no commitments,
understandings or arrangements with respect to any such acquisition). If the
Underwriter exercises the over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,100,000, which will also be
added to the Company's working capital.
Based on its current operating plan, the Company anticipates that the
proceeds of the Offering, together with existing resources and cash generated
from operations, if any, should be sufficient to satisfy the Company's
contemplated working capital requirements through July 31, 1998. There can be no
assurance, however, that the Company's working capital requirements during this
period will not exceed its available resources or that these funds will be
sufficient to meet the Company's longer term cash requirements for operations.
In the event the Company's plans or assumptions change or prove to be
inaccurate, or the proceeds of the Offering together with cash generated from
future revenues, if any, prove to be insufficient to fund operations (due to
unanticipated expenses, problems or other factors), the Company may find it
necessary and/or advisable to reallocate some of the proceeds within the above-
described categories or to use portions thereof for other purposes and therefore
management will have significant discretion regarding how and when such proceeds
will be applied.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest-bearing investments.
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock for the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors. In addition, the Loan and Security Agreement prohibits the distribution
or declaration or payment of any dividends (in cash or in stock) on, or
purchase, acquisition, redemption, or retirement of, any of the Company's
capital stock without the prior written consent of People's Bank which consent
shall not be unreasonably withheld.
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company: (i) at October 31, 1996; and (ii) as adjusted to give effect to the
sale of the 1,700,000 shares of Common Stock offered hereby, the Preferred Stock
Conversion and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(2)
------------ --------------
<S> <C> <C>
Short-term debt..................................................................... $ 2,628,000 $ --
Long-term obligations............................................................... 1,730,000 2,628,000
Stockholders' equity:
12% Series A Voting Cumulative Preferred Stock, par value 0.01 per share; 10,000
shares authorized, 4,700 shares issued and outstanding; 1,000,000 shares
authorized, no shares issued and outstanding, as adjusted....................... 6,370,000(1) --
Common Stock, $.01 par value; 5,000,000 shares authorized;
12,000,000 shares authorized, as adjusted; 1,026,308 shares issued and
outstanding, actual; 3,200,000 shares issued and outstanding, as adjusted....... 10,000 32,000
Additional paid-in capital.......................................................... 4,014,000 16,687,000
Accumulated deficit................................................................. (3,418,000) (3,717,000)
------------ --------------
Total stockholders' equity........................................................ 6,976,000 13,002,000
------------ --------------
Total capitalization............................................................ $ 8,706,000 $ 15,630,000
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) On the effective date of the Registration Statement, of which this
Prospectus is a part, all of the outstanding shares of the Company's
Preferred Stock and all accrued and unpaid dividends thereon will convert
into 473,692 shares of Common Stock in accordance with the Preferred Stock
Conversion after giving effect to the Reverse Stock Split.
(2) Reflects (i) the receipt of the net proceeds of approximately $6,325,000
from the sale of the Common Stock offered hereby, (ii) the repayment of the
Bridge Notes of $1,750,000 and the related effect of writing off $279,000,
net of amortization, in financing costs relating to the Bridge Financing and
the discount on the Bridge Notes of $20,000, net of amortization and (iii)
the reclassification of approximately $2.6 million under the Company's Loan
and Security Agreement from short-term to long-term.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES TO FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
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 to the school and public library market. For the fiscal
year ended July 31, 1996, the Company's net sales increased by 45% to $9.9
million from $6.9 million in the fiscal year ended July 31, 1995. For the
quarter ended October 31, 1996 the Company's net sales increased by 21% to $3.3
million from $2.7 million for the quarter ended October 31, 1995. This increase
was primarily attributable to greater sales to the consumer market. To date,
however, the Company has had continuing losses. These losses are primarily
attributable to the costs associated with the investment in expanding the
Company's operations and developing and expanding the Company's product line. In
particular, 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 the consumer market. These expenses include
establishing distribution channels and marketing the Company's products. The
Company believes that for the fiscal year ending July 31, 1997, net sales will
increase due to its ability to produce books which can appeal to both the school
and public library market and the consumer market. However, the Company
anticipates that additional marketing and administrative expenses, and financing
costs relating to one-time charges in the fiscal quarter in which this Offering
occurs, could result in a net loss for the fiscal year ending July 31, 1997.
Generally, the Company's general and administrative, manufacturing support and
product development costs do not vary directly with net sales. Consequently, if
net sales continue to increase in accordance with the Company's expectations,
the Company believes that it could achieve profitability in periods subsequent
to the fiscal year ending July 31, 1997. However, there can be no assurance that
such net sales will increase in accordance with the Company's expectations or
that the Company will ever achieve profitability.
CONSUMER MARKET COMPARED TO THE SCHOOL AND PUBLIC LIBRARY MARKET
In addition to an increase in net sales, as the Company sells more of its
products in the consumer market, its results of operations and 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 public
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. And sales to
the consumer market have a lower gross profit margin than sales to the school
and public 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 public 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
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the importance of holiday gift sales, a large proportion of net sales can occur
in the third calendar quarter in anticipation of the holiday gift season. The
Company expects its future net sales and operating results will reflect these
seasonal factors. In addition, the Company's quarterly operating results have
varied significantly depending on factors such as the timing of customer orders
and are likely to do so in the future. The Company can exercise very little
control over the timing of customer orders, particularly those of wholesalers,
thus orders anticipated in the second calendar quarter, for example, may fall
into the third calendar quarter, thereby affecting both quarters' results. In
addition, even when customer orders are placed, such orders are generally
cancellable at any time. Due to the long product development cycle of books
(nine to 18 months), the Company generally must invest significantly in product
development prior to having firm orders. The financial results in any quarter
where net sales fall below Company expectations will be negatively impacted as
expenses based on those expectations have already been incurred in advance of
actual receipt of orders. In addition, there can be no assurance that the
Company can maintain sufficient flexibility with respect to its working capital
needs and its ability to manufacture products to be able to minimize the adverse
affects of an unanticipated shortfall in or an increase in demand for its
products. Failure to predict accurately and respond to consumer demand may cause
the Company to produce excess inventory which could result in write-offs.
Conversely, if a product achieves greater success than anticipated, the Company
may not have sufficient inventory to meet customer demand.
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. 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 for such returned
books. 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 product, 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 allowances 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.
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statement of
operations for the fiscal years ended July 31, 1995 and 1996, and for the three
months ended October 31, 1995 and 1996, and the relative percentage of net sales
represented by certain income and expense items:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31, THREE MONTHS ENDED OCTOBER 31,
---------------------------------------------- ----------------------------------------------
1995 1996 1995 1996
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 6,866 100.0% $ 9,940 100.0% $ 2,706 100.0% $ 3,266 100.0%
Cost of sales................... 3,407 49.6 5,099 51.3 1,373 50.7 1,743 53.4
--------- --------- --------- ---------
Gross profit.................. 3,459 50.4 4,841 48.7 1,333 49.3 1,523 46.6
Operating expenses:
Selling and marketing......... 3,024 44.0 3,854 38.8 937 34.6 1,140 34.9
General and administrative.... 1,051 15.3 1,205 12.1 293 10.8 390 11.9
--------- --------- --------- ---------
Total operating expenses.... 4,075 59.4 5,059 50.9 1,230 45.5 1,530 46.8
Operating income (loss)......... (616) (9.0) (218) (2.2) 103 3.8 (7) (0.2)
Interest expense................ 190 2.7 245 2.5 49 1.8 81 2.5
--------- --------- --------- ---------
Net income (loss)............... $ (806) (11.7)% $ (463) (4.7)% $ 54 2.0% $ (88) (2.7)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1995.
NET SALES. Net sales increased $560,000, or approximately 21%, from $2.7
million for the three months ended October 31, 1995, to $3.3 million for the
three months ended October 31, 1996. This increase is solely attributable to
increases in net sales to the consumer market, which increased approximately 93%
from $830,000 in the three months ended October 31, 1995, to $1.6 million in the
three months ended October 31, 1996. Net sales in the school and public library
market decreased $74,000, or approximately 4%, from $1.8 million in the three
months ended October 31, 1995, to $1.7 million in the three months ended October
31, 1996. This decrease was primarily attributable to a change in the timing of
purchasing patterns of several wholesalers, particularly Baker & Taylor, which
reduced advanced purchases. Management believes that the reduction in advanced
purchases will be offset by the increase in restocking orders, thus neutralizing
the overall effect on expected school and public library sales during the course
of the upcoming year. In addition, returns have increased by $144,000 over the
prior three months ended October 31, 1995 as a result of trends in the industry.
COST OF SALES. Cost of sales increased $370,000, or approximately 27%, from
$1.4 million in the three months ended October 31, 1995, to $1.7 million in the
three months ended October 31, 1996. This increase is primarily attributable to
the increase in net sales. Cost of sales was approximately 51% and 53% of net
sales in the three months ended October 31, 1995 and 1996, respectively. Cost of
sales increased as a percentage of net sales in the three months ended October
31, 1996 due to the proportionately higher level of product sold to the consumer
market. Sales to the consumer market comprised approximately 48% in the three
months ended October 31, 1996, as compared to approximately 31% in the three
months ended October 31, 1995. The terms and conditions of sales in the consumer
market cause it to have a higher cost of sales since consumer sales have higher
discounts and promotional allowances than sales to the school and public library
market.
SELLING AND MARKETING. Selling and marketing expenses increased $203,000,
or approximately 22%, from $937,000 in the three months ended October 31, 1995,
to $1.1 million in the three months ended October 31, 1996. This increase is
primarily attributable to the substantial increase in consumer sales which carry
an overall higher distribution cost. Additionally, certain special wholesale
school and library sales
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<PAGE>
occurred in the three months ended October 31, 1996 which carried higher
discounts than is typical, causing fulfillment costs to rise as a percentage of
net sales. This increase also reflects the effect of the Company's efforts to
expand its production department in order to better control schedules and to
substantially decrease the cost of and dependence on freelance help.
Additionally, the Company has continued to increase marketing expenditures in
order to expand the infrastructures needed to deliver the anticipated increase
in sales for fiscal year 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$97,000, or approximately 33%, from $293,000 in the three months ended October
31, 1995, to $390,000 in the three months ended October 31, 1996. This increase
was primarily attributable to increased personnel and the establishment of a
consumer credit and collection capability. Additionally, provision for
amortization of financing costs also contributed to this increase.
NET INTEREST AND OTHER EXPENSES. Net interest expense increased by $32,000,
or approximately 65%, from $49,000 as at the end of the three months ended
October 31, 1995, to $81,000 for the three months ended October 31, 1996. Such
increases were largely due to higher than average borrowings.
FISCAL YEARS ENDED JULY 31, 1995 AND 1996
NET SALES. Net sales increased $3.0 million, or approximately 45%, from
$6.9 million for the fiscal year ended July 31, 1995, to $9.9 million for the
fiscal year ended July 31, 1996. This increase is primarily attributable to
increases in net sales to the consumer market, which increased from $908,000 in
the fiscal year ended July 31, 1995, to $2.8 million in the fiscal year ended
July 31, 1996. In the fiscal year ended July 31, 1996, the Company published 55
books for the consumer market as compared to 28 books for this market in the
prior fiscal year. This increase was primarily attributable to the increase in
books published under the Company's Copper Beech imprint and the crossover of
books published under the Millbrook imprint into the consumer market. Net sales
in the school and public library market increased from $5.5 million in the
fiscal year ended July 31, 1995 to $6.8 million in the fiscal year ended July
31, 1996. This increase is attributable to the introduction and crossover of
books published under the Copper Beech imprint into the Company's traditional
school and public library market and sales from the Company's backlist.
COST OF SALES. Cost of sales increased $1.7 million, or approximately 50%,
from $3.4 million in the fiscal year ended July 31, 1995, to $5.1 million in the
fiscal year ended July 31, 1996. Cost of sales was approximately 49.6% and 51.3%
of net sales in the fiscal years ended July 31, 1995 and 1996, respectively.
Cost of sales increased as a percentage of net sales due primarily to the terms
and conditions of sales in the consumer market as opposed to the school and
public library market (i.e., consumer sales have higher discounts and
promotional allowances than sales to the school and public library market).
SELLING AND MARKETING. Selling and marketing expenses increased $830,000,
or approximately 27%, from $3.0 million in the fiscal year ended July 31, 1995,
to $3.8 million in the fiscal year ended July 31, 1996. This increase is
primarily attributed to increases in commissions and salaries of marketing
personnel and warehousing and distribution costs. However, as a percentage of
net sales, selling and marketing expenses decreased from approximately 44% in
the fiscal year ended July 31, 1995, to 39% in the fiscal year ended July 31,
1996. Management anticipates that while such expenses will be approximately 40%
of net sales during the fiscal year ended July 31, 1997, they should constitute
a lower percentage of net sales beyond the fiscal year ended July 31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$154,000, or approximately 15%, from $1.1 million in the fiscal year ended July
31, 1995 to $1.2 million in the fiscal year ended July 31, 1996, primarily as a
result of costs relating to additional personnel and the Company's debt
financings. However, as a percentage of net sales, general and administrative
expenses decreased from approximately 15% in the fiscal year ended July 31,
1995, to 12% in the fiscal year ended July 31, 1996.
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<PAGE>
NET INTEREST AND OTHER EXPENSES. Net interest expense increased by $55,000
or 29% from $190,000 in the fiscal year ended July 31, 1995, to $245,000 for the
fiscal year ended July 31, 1996. Such increases are largely due to higher
average borrowings on the Company's line of credit.
INCOME TAXES. The Company has incurred cumulative net operating losses for
federal tax purposes of approximately $970,000. In the absence of an ownership
change as defined in the Internal Revenue Code of 1986, as amended ("Code"),
these federal net operating losses would be available to reduce the federal
income taxes of the Company in the future, although such federal net operating
loss carryforward will expire in the years 2009 through 2011. Upon the
completion of this Offering utilization of the net operating loss carryforwards
may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Code. The annual limitation may result in the
expiration of net operating loss carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's internally generated cash flow has not been
sufficient to finance either its working capital needs including trade
receivables, inventory, capital equipment requirements or its significant
investment in new product development, or to support operations. Due to the long
product development cycle of books (nine to 18 months), the Company generally
must enter into product development commitments prior to having firm orders. In
addition, the Company has experienced delays in obtaining external financing. As
a result, the Company has experienced working capital shortfalls in the past,
which has restricted the Company's ability to conduct and develop its business
as planned. The Company has not generated positive cash flows from operations
over any twelve-month period since inception.
The Company has met its capital requirements to date in part through
borrowings under the Loan and Security Agreement. At October 31, 1996, the
balance outstanding under the revolving credit facility was approximately $2.6
million. Currently, the Company's credit line under the Loan and Security
Agreement is (i) fully utilized; (ii) secured by substantially all of the
Company's assets with advances based upon 80% of the Company's eligible accounts
receivables and 50% of the Company's inventory, with this segment capped at $1.5
million of the total line of $2.7 million; and (iii) partially guaranteed by
Jean E. Reynolds, Howard Graham and Frank J. Farrell. See "Certain
Transactions." Although the Company has not been in default under its Loan and
Security Agreement, in anticipation of the Bridge Financing and this Offering
and in order to continue to comply with certain covenants in the Loan and
Security Agreement, People's Bank has modified certain financial covenants in
the Loan and Security Agreement until December 31, 1996. The Company believes
that with the proceeds from this Offering it will be in compliance with the
covenants under the Loan and Security Agreement even after the modifications to
the covenants expire. The Loan and Security Agreement also 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 interests in the assets of the Company or to pay dividends on the
Company's securities. On November 18, 1996, the Company received a $175,000
in-formula overline extending the availability of the Loan and Security
Agreement, which had a maximum credit line of $2.7 million. This overline is
governed by the same terms of the Loan and Security Agreement and will terminate
on December 31, 1996. The Company expects to fully utilize this additional
credit for working capital purposes prior to the consummation of the Offering.
In addition to bank borrowings, the Company's principal sources of capital
since August 1, 1994, have been as follows:
(i) Between October 1994 and April 1995, the Company issued an aggregate
of 77,656 shares of Common Stock to Archon Press for $500,000. See "Certain
Transactions."
(ii) In June 1995, the Company issued an aggregate of 155,312 shares of
Common Stock to Applewood Associates, L.P. ("Applewood"), 21st Century
Communications T-E Partners, L.P. ("21st
21
<PAGE>
T-E"), 21st Century Foreign Partners ("21st Foreign") and 21st Century
Communications Partners, L.P. ("21st Partners" and, collectively with 21st
T-E and 21st Foreign, "21st Century Funds") for an aggregate purchase price
of $1,000,000. See "Certain Transactions."
(iii) In April 1996, the Company consummated a financing ("Prebridge
Financing") by issuing the Prebridge Notes. Applewood, 21st T-E, 21st
Foreign and 21st Partners purchased $250,000, $57,000, $23,000 and $170,000
principal amounts of the Prebridge Notes, respectively. See "Use of
Proceeds," "Principal Stockholders" and "Certain Transactions."
(iv) In August 1996, the Company issued an aggregate of 1.75 million
Bridge Notes in connection with the Bridge Financing, in which the Company
issued 17 1/2 Bridge Units ("Bridge Units") at a purchase price of $100,000
per Bridge Unit, each Bridge Unit consisting of a $100,000 principal amount
Bridge Note and 50,000 Bridge Warrants each to purchase one share of Common
Stock at a purchase price of $3.00 per share. As part of such Bridge
Financing, the Prebridge Notes were converted into Bridge Units. The Bridge
Notes are in the aggregate principal amount of $1.75 million, bearing
interest at the rate of 10% per annum through November 30, 1996, and at a
rate of 15% per annum thereafter, with principal and interest payable in
full upon the consummation of this Offering. The Bridge Notes are being
repaid out of the proceeds from this Offering. See "Use of Proceeds,"
"Certain Transactions," "Principal Stockholders" and "Selling
Securityholders and Plan of Distribution."
As of October 31, 1996, the Company had working capital of $1,900,000. At
such date, an aggregate of approximately $7.0 million (or 92.5%) of the
Company's total current assets consisted of accounts receivable and inventories
and the Company had accounts payable and accrued expenses of approximately $2.7
million, of which it was delinquent on approximately $1.1 million. Based on its
current operating plan, the Company anticipates that the proceeds of the
Offering, together with existing resources and cash generated from operations,
if any, will be sufficient to satisfy the Company's contemplated working capital
requirements through approximately July 31, 1998. 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, 1998, the Company may seek additional funds from borrowings or
through debt or equity financings.
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<PAGE>
BUSINESS
OVERVIEW
The Company is a publisher of children's nonfiction books, in both hardcover
and paperback, for the school and public library market and the consumer market.
Since its inception, the Company has published more than 680 hardcover and 330
paperback books under its Millbrook and Copper Beech 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. As a result, the Company is better able to
fully exploit a book's sales potential.
The consumer market in children's books consists of books purchased by
consumers through the traditional trade bookstores such as Barnes & Noble and
Waldenbooks and educational chain stores such as Zany Brainy and Learningsmith,
Inc., as well as the non-traditional distribution channels such as direct sales,
catalogs, direct mail, book clubs, book fairs, non-book retail stores, and on a
smaller scale, certain museums, national parks, historical sites, theme parks,
gift shops and toy stores.
In order to establish itself as a leading publisher of children's books for
the consumer market, the Company intends to: (i) begin publishing preschool
novelty books, books for beginning readers and early readers, chapter books for
young readers and children's popular-reference books; (ii) acquire companies or
develop strategic partnerships that broaden its product line and extend its
distribution in consumer market channels; (iii) expand its marketing
capabilities in the consumer market by increasing its in-house sales force and
management; and (iv) develop books that can be exploited through emerging
distribution channels in the consumer market, including special sales channels
such as book clubs, book fairs, direct sales, catalogs, direct mail, commercial
on-line services and the Internet. The Company believes that the high quality of
its books, its emphasis on publishing books for multiple markets and its
expanded distribution capabilities makes it well positioned to increase its
books sales to the expanding consumer market while at the same time increasing
its established sales base in the school and public library market.
INDUSTRY BACKGROUND
The Company operates in two distinct markets: the school and public library
market, and the consumer market. The fastest-growing segment of the children's
book marketplace is paperbacks; their sales increased by 21% in 1995. Hardcover
children's books experienced a 5.2% sales increase in 1995. This trend is
continuing and The Book Industry Study Group anticipates that the demand for
children's hardcover books will increase by a rate of 4.7% and that for
children's paperback books will increase by a rate of 8.3%, each on a compounded
basis from 1995 through the year 2000. As a result of that growth, BOOK INDUSTRY
TRENDS 1996 predicts that public library expenditures on children's books will
reach approximately $190 million in the year 2000, and school library
expenditures will reach approximately $174 million in the year 2000, for a total
of approximately $364 million. Veronis, Suhler & Associates predicts that by the
year 2000, children's hardcover book sales in the consumer market will reach
approximately $1.6 billion and children's paperback book sales in the consumer
market will reach approximately $1.4 billion, for a total of approximately $3.0
billion.
SCHOOL AND PUBLIC 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 1995 to 2006, with an 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
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<PAGE>
increase as the student population increases. Purchases are primarily driven by
favorable book reviews. Age-appropriate books on the right topic with favorable
reviews sell along a predictable curve. In addition to the demographic changes,
demand for books has also increased as a result of the school and public library
market becoming increasingly 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," the "whole-language
movement" 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 should also increase in the consumer market due
to the projected increase in the number of school-age children. The Company
believes that, in addition to the larger school age population the most
important factors that will sustain larger sales of children's books include the
increased availability of quality books, particularly paperback books, and the
convenience of being able to purchase inexpensive paperback books as opposed to
traveling to libraries. In addition, the Company believes the growth in the
number of affluent, better-educated parents and the increased emphasis they
place on education as a whole has also contributed to this trend.
Demand for children's books in the consumer market has also increased
because the methods by which hardcover and paperback books are distributed have
changed significantly in the past five years, leading to greater accessibility
and shelf space for books. 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 T.J. Maxx,
educational chain stores such as Learningsmith and Zany Brainy, outlets and
warehouse clubs such as Sam's Warehouse, COSTCO and B.J.'s and on a smaller
scale, certain museums, national parks, historical sites, theme parks, gift
shops and toy stores. Books are also more accessible to children and parents
through the expansion of direct sales channels such as book fairs, school and
consumer book clubs, display sales and catalogs. Book fairs are generally
week-long events conducted on school premises and sponsored by school librarians
and/or parent-teacher organizations and are intended to provide students with
quality books at reasonable prices in order to help them become more interested
in reading. The Company has identified more than 600 catalogs that sell
children's books, including such oddly diverse ones as an anatomical supply
catalog.
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 market 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, and accordingly 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.
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COMPANY STRATEGY
The Company's goal is to be a "one-stop publisher," publishing and marketing
a diverse product 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
the 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 particularly in the consumer
market.
The Company believes that this diversified approach to its product line will
enable it to achieve broad 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 as well as
its reputation for quality gained over the past six years, 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 expand 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 either 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.
Industry conditions among publishers in recent years has led to ongoing
divestitures and the Company intends to accelerate its growth and increase its
market penetration by selectively acquiring other publishers of children's books
or by formulating strategic alliances to increase the market exposure of its
books. The Company also intends to explore opportunities in electronic media by
selectively participating in publishing and marketing opportunities on
commercial on-line services and on the Internet. Key elements of the Company's
strategy are:
- 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 which can crossover
into two or more markets, in 1995 the Company began reformatting many of
its previously published ("back-list") school and public library books
under its Millbrook imprint into paperback books and 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 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.
- TARGET NEW MARKET NICHES/ACQUISITION OPPORTUNITIES. The Company is
continually seeking new market niches which offer opportunities for
significant sales growth. The Company has targeted the preschool novelty
area as a future market and plans to enter that segment with books
containing moveable elements or books bundled with additional
merchandise. The Company will publish books for the beginning reader
(four to six years old) and early reader (five to eight years old) as
well as chapter books for ages seven through 11. The Company will publish
popular reference materials for young readers from seven through 15. In
addition, the Company will seek to expand its penetration of the
supplemental classroom market where its books may also be used as
instructional material. Where possible, the Company will re-format
existing books for distribution into new markets, leveraging its
investments in product development over a broader base.
The Company may also seek acquisition opportunities covering niche
markets in which the Company does not currently compete and product
extensions in its existing markets. The Company's product development
strategy may include joint ventures with strategic partners to minimize
up-front development costs. Currently, however, the Company has no
commitments or agreements with respect to any acquisitions.
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- ENHANCE MARKETING AND SALES FORCE. Since inception, the Company has
increased its penetration into the school and public library market. The
Company intends to continue to build on these efforts by increasing its
use of direct mail, expanding circulation of catalogs and extending its
advertising programs to achieve better coverage and increased marketplace
penetration. The Company also intends to enhance its telemarketing
capabilities in order to help strengthen sales of books to retailers. In
the consumer market, the Company intends to rely more heavily on an in-
house sales force rather than a commissioned sales force, with a view to
entirely replacing the commissioned force with in-house personnel in the
future. The Company believes this change will enable it to more
effectively concentrate the Company's selling efforts on mass retail,
major book chains and special sales accounts and to facilitate the
Company's entry into newly targeted markets.
- EXPAND DISTRIBUTION. The Company intends to expand its existing channels
of distribution by increasing its use of in-store promotion, consumer
advertising and telemarketing. The Company believes that decision-making
with respect to purchasing books is becoming more complex due to
expansion in types of outlets selling books and the increasing use of
marketing techniques that put the Millbrook imprint in direct contact
with children, parents and teachers will increase sales. The Company
intends to increase its participation in book fairs, book clubs, catalogs
and to distribute its books to other alternative retail outlets. 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. Currently, however, the Company has no
commitments or agreements with respect to any strategic partnership.
- ADAPT PRODUCT TO NEW TECHNOLOGIES. The Company has begun digitally
storing the text and graphics of its books so as to be well positioned to
take advantage of opportunities in the electronic media industry,
including commercial on-line services and the Internet, if and when such
opportunities become available.
- 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's
Millbrook imprint primarily targets the school and public library market, while
its Copper Beech imprint primarily targets the consumer market. Nevertheless,
the Company designs virtually 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 1995, the Company published 111
hardcover books under the Millbrook imprint for the school and public library
market, of which 59 books were suitable for and published simultaneously as
hardcovers or paperbacks to be sold in the consumer market, and 42 hardcover
books under the Copper Beech imprint to be sold in the consumer market, of which
26 books were suitable for and published simultaneously as hardcovers or
paperbacks, to be sold in the school and public library market.
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The following list is an example of the hardcover books published by the
Company under its Millbrook imprint from Spring 1995 through the Fall 1996 which
have either paperback or hardcover editions to be sold in the school and public
library or consumer market:
CRAFTS FOR VALENTINES DAY
THE QUILT-BLOCK HISTORY OF PIONEER DAYS WITH PROJECTS KIDS CAN MAKE
NATURE IN YOUR BACKYARD: SIMPLE ACTIVITIES FOR CHILDREN
COMPOST! GROWING GARDENS FROM YOUR GARBAGE
MICHAEL ROSEN'S ABC
EVERY DAY IS EARTH DAY: A CRAFT BOOK
THE CROCODILE AND THE DENTIST
CITYMAZE! A COLLECTION OF AMAZING CITY MAZES
THE CHILDREN'S ATLAS OF THE TWENTIETH CENTURY
BEARS AT THE BEACH: COUNTING FROM 10 TO 20
NOW I KNOW BETTER: KIDS TELL KIDS ABOUT SAFETY
THE ANCIENT EGYPTIANS: LIFE IN THE NILE VALLEY
MALCOLM X: HIS LIFE AND LEGACY
YITZHAK RABIN: ISRAEL'S SOLDIER STATESMAN
The following list is an example of the hardcover books published by the
Company under its Copper Beech imprint from Spring 1995 through Fall 1996 which
have either paperback or hardcover editions to be sold in the school and public
library or consumer market:
PIRATES
PLAYING WITH MAGNETS
THE PLANETS
THE PYRAMIDS
KNIGHTS: FACT OR FICTION
BLOOD
MOST EXCELLENT BOOK OF HOW TO BE A MAGICIAN
MOST EXCELLENT BOOK OF HOW TO BE A PUPPETEER
BRAIN SURGERY FOR BEGINNERS
53 1/2 THINGS THAT SAVED THE WORLD AND SOME THAT DIDN'T
FASCINATING FACTS ABOUT SHARKS
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.
INTERNAL DEVELOPMENT
Nearly 75% of the books published under the Millbrook imprint are produced
by the Company's editorial staff. A book concept can originate from a number of
sources such as (i) analysis of the Company's sales statistics for an existing
book to help assess how a similar book targeting a similar age group will fare,
(ii) analysis of school age demographics and other social and economic factors
from current philosophical trends in education (i.e., the whole language
movement) 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 contacts with librarians, teachers
and booksellers. Once conceived, a book proposal is circulated to the sales,
production, marketing, design and financial departments of the Company for their
input and depending on the input, the proposal will go forward or be terminated.
A favorable decision causes the editorial department to contract with an
appropriate author and/or artist
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<PAGE>
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. The Company believes its average royalty rates are slightly lower than
overall industry standards. The Company expects its average royalty rates to
increase as the Company increases its emphasis on consumer-oriented books.
Virtually all of Millbrook's contracts call for an advance payment against
future royalties. Advances range from $1,000 for a simple series book to as much
as $13,000 to a well-known artist for a picture book. 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 equally 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 as well as the editing process. Most
of the Company's books can be developed in a period that ranges from nine to 18
months. Millbrook is often cited in reviews of the Company's 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 allows a tremendous amount of 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. These arrangements include cooperation with other publishers
in England, such as Templar or Quarto, to which the Company pays a share of the
cost of developing a relatively expensive book such as an atlas, and the Company
retains the rights to sell the book in the United States and Canada while the
publisher retains the right to sell the book in its home country and/or
elsewhere. At present, the Company has six regular suppliers from England and
two United States companies with whom it has ongoing projects. The Company has
entered into an exclusive, long-term joint venture with Aladdin, a major
children's packager for the international market, which expires on January 1,
2002, but can be renewed thereafter, to produce 50 nonfiction titles per year to
be published under the Company's newly-created imprint, Copper Beech. 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 sale to libraries. In May 1994,
the Company entered into an agreement with Aladdin, whereby Aladdin agreed to
produce no less than 50 books per year for the Company through January 1, 2002.
The books are to be wholly owned by the Company. 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 sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world. See "Certain Transactions."
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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 which 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.
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 complementary 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, 1996, approximately 66% of the Company's sales in
the school and public library market were made through wholesalers. While
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. Baker &
Taylor, one of the largest wholesalers in the school and public library market,
accounted for 17% of the Company's net sales in the fiscal year ended July 31,
1996. While the Company believes that there are alternative wholesalers
available, a significant reduction in sales to Baker & Taylor would have a
material adverse effect on the Company's results of operations. 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 generates 27% of the Company's sales in the
school and public library market. Telemarketing penetrates the market through
its "preview 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.
The remaining 7% of the Company's sales in this area results from direct-selling
efforts where commissioned salespersons conduct face-to-face meeting at schools
and libraries with decision-makers or by purchase from the Company's catalogs
and advertising.
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 also
maintains personal contact with reviewers on a regular basis. 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, but there can be no assurance that the Company will continue to receive
favorable reviews in the future. The Company produces three 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 Fall that is mailed to 100,000 current and
perspective accounts. An eight-page insert is produced in January to introduce
the new list for Spring for distribution in the School Library Journal (the
major professional journal from which librarians make purchase decisions) and at
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conventions throughout the year. 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 both the school and public library and
consumer markets.
The expanding use of children's books in the classroom, especially in
paperback formats, has complicated the traditional distribution networks since
contacting the particular teacher or other individual in charge of curriculum
decisions can be more difficult than contacting the school librarian. The
Company has created marketing programs to extend school sales beyond the library
and into the classroom. For example, the Company's telemarketing division is
currently test-marketing curriculum-related books and materials to teachers,
principals and curriculum coordinators.
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 new in-house consumer sales group covers the two major areas:
traditional consumer book markets and non-traditional consumer book markets. The
Company's merchandising and marketing programs have increased its traditional
and non-traditional consumer sales from $908,000 in fiscal year 1995 to over
$2.8 million in fiscal 1996 even though its personnel were in place for only
four months in fiscal year 1995. Prior to June 1995, the Company's books were
distributed in the consumer market by an unrelated third party.
As is the case with the school and public library market, a large proportion
of the Company's sales in the consumer market are made through wholesalers.
Ingram, one of the largest wholesalers in the consumer market, accounted for 5%
of the Company's net sales in the fiscal year ended July 31, 1996, and 56% of
its wholesale sales to the consumer market. While the Company believes that
there are alternative wholesalers available, a significant reduction in sales to
Ingram would have a material adverse effect on the Company's operations.
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,
consisting of an in-house sales director, a merchandising manager and a
full-time salaried sales person, is responsible for sales, promotion and
merchandising to the major national and large regional accounts. This group is
also responsible for sales to the network of wholesalers supporting these
accounts. The commissioned sales group currently consists of approximately 30
commissioned representatives who are responsible for sales to independent book
stores, small regional chains and certain special sales outlets and regional
jobbers. The special sales group markets to specialized retail outlets such as
museums, national parks, historical sites, theme parks, gift shops and toy
stores and consumer companies such as direct sales catalogs and direct mail. The
Company's sales representatives sell the full range of the Company's products.
The sales groups provide the Company with 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 the news media on a regular basis which can stimulate sales. The Company
participates with various outlets in advertising directly to individuals through
media and catalogs. In-store promotions, such as posters, point 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.
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MANUFACTURING AND SHIPPING
All of the Company's books are printed and bound by third-party
manufacturers. During fiscal year 1996, approximately 36% of the Company's
printing and binding needs were provided by Worzalla, an industry leader in
library-bound, short-run printing and binding. Manufacturing is a significant
expense item for the Company, with a total of $3.3 million (or approximately 33%
of net sales) spent in 1996. The Company has used Worzalla's services since the
Company's inception and enjoys a strong working relationship with Worzalla. The
Company believes it has sufficient alternative sources of manufacturing services
to meet its foreseeable needs should Worzalla'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 betters this timetable. The Company processes
customer orders through an in-house order processing department. The Company
leases warehouse space from, and its products are shipped by, Mercedes
Distribution Company 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, Dorling Kindersley Publishing Inc.,
Franklin Watts Inc., Gareth Stevens Inc., Lerner Publications Co. and Troll
Communications. The Company's chief and direct competitors in the consumer
market include Barron's Educational Series Inc., Candlewick Press, Dorling
Kindersley Inc., 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 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, although the Company believes that the depth of experience of
its management and its connections into the hierarchy of the education sector
gives 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 of 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, usually two years after
publication. On books that are imported under the Millbrook imprint, the Company
has exclusive rights for all United States markets and the Philippines. On more
than half of the imported titles, the Company holds Canadian rights as well. The
Company's trade names Millbrook and
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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 the date of this Prospectus, the Company has approximately 68
employees. Approximately 60% are full-time and 40% are 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.
PROPERTIES
The Company owns no real property. The Company conducts its operations
through two facilities. The Company leases approximately 5,500 square feet of
office space in Brookfield, Connecticut at a current rental of $64,340 per year
plus utilities and taxes. This lease expires in December 2002. The Company also
leases approximately 1,900 square feet of space in New York City at a rental of
$33,330 per year plus utilities and taxes. This lease expires in April 2004. The
Company leases warehouse space equal to approximately 24,000 square feet in
Brooklyn, New York at a rental of $84,000 per year, which includes data
processing and order-entry services. This lease expires in September 1997. The
Company also leases office space in Southampton, New York at a current rental of
$13,284 per year plus utilities and taxes. This lease expires in September 1997.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Barry Fingerhut...................................... 51 Chairman of the Board
Jeffrey Conrad....................................... 53 President and Chief Executive Officer
Jean E. Reynolds..................................... 54 Senior Vice President-Publisher
Donald A. D'Angelo................................... 57 Vice President and Chief Financial Officer
Frank J. Farrell..................................... 60 Vice President, Secretary and Director
Howard Graham........................................ 66 Vice President and Director
Michael J. Marocco................................... 37 Director
Barry Rubenstein..................................... 52 Director
</TABLE>
BARRY FINGERHUT has served as the Chairman of the Board of the Company since
February 1994. Mr. Fingerhut has served as President since 1994, Senior Vice
President from 1981 to 1994 and a director since 1981 of GeoCapital Corporation,
a registered investment advisory firm. Since February 1995, Mr. Fingerhut has
served as a director and officer of InfoMedia Associates, Ltd. ("InfoMedia"), a
New York corporation, which is a general partner of the 21st Century Funds. In
addition, since 1992, he has served as a general partner of Applewood
Associates, L.P. ("Applewood"), an investment partnership. Mr. Fingerhut also
serves as a director of Glasser Legal Works, Inc., a niche publisher of legal
texts, journals and seminars and Carriage Funeral Services Inc., an operator of
funeral homes.
JEFFREY CONRAD has served as President and Chief Executive Officer of the
Company since October 1996. From March 1992 to October 1996, Mr. Conrad served
in various capacities at Larousse Kingfisher Chambers Inc., a subsidiary of the
British publishing company Larousse PLC, most recently as President and Chief
Executive Officer from January 1993 to October 1996. Prior thereto, Mr. Conrad
was the Executive Vice President of Garland Press, an academic and reference
publisher from 1981 to March 1992.
JEAN E. REYNOLDS, one of the Company's founders, has served as Senior Vice
President-Publisher since October 1996 and as President of the Company from its
inception in 1989 to October 1996. From 1970 to 1981, Ms. Reynolds served in
various management positions at Grolier, Inc. ("Grolier"), including the
editor-in-chief of Young People's Publications and of The New Book of Knowledge.
Ms. Reynolds is a director of the Book Industry Study Group and chairs its
Juvenile Interest Group, which monitors industry statistics. She is a director
of the industry trade organization, The Children's Book Council. She also serves
as a director of Kiper Enterprises, Inc., a private company specializing in
first aid materials and Wellington Leisure Products, Inc., a private company
specializing in the manufacturer of rope, craft and watersports material.
DONALD A. D'ANGELO has served as Chief Financial Officer and Assistant
Secretary of the Company since February 1994, and a Vice President of the
Company since June 1992. From 1989 until 1992, Mr. D'Angelo was an independent
financial consultant in the publishing industry as well as a financial
consultant to individuals.
FRANK J. FARRELL, one of the Company's founders, has served as a Vice
President, Secretary and a director of the Company since its inception in 1989,
and is primarily responsible for overseeing the Company's operations and
finances. From 1978 to 1989, Mr. Farrell served in various senior management
positions with Grolier and its subsidiaries, including President of Grolier
Educational Corporation and President of Grolier Electronic Publishing, Inc. and
Group Vice President of Grolier's domestic reference materials operations. He
also served on Grolier's board of directors from 1988 to 1989.
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HOWARD GRAHAM, one of the Company's founders, has served as a Vice President
and director of the Company since its inception in 1989 and is primarily
responsible for the Company's marketing programs. From 1970 to 1988, Mr. Graham
served in various senior management positions at Grolier and its subsidiaries,
including President of Grolier International and executive Vice President of
Grolier. He also served on Grolier's board of directors from 1983 to 1988. Mr.
Graham currently serves as a director of the Save the Children Fund, a nonprofit
corporation.
MICHAEL J. MAROCCO has served as a director of the Company since February
1994. Mr. Marocco is a managing director of Sandler Capital Management which he
joined in 1989. He is a general partner of Sandler Associates and, through
affiliates, a general partner of the Sandler Media Partnerships, Sandler
Mezzanine Partnerships, 21st Partners, 21st T-E and 21st Foreign. He was a Vice
President at Morgan Stanley & Co. Inc., serving in its communications group,
from 1984 to 1989. Mr. Marocco is a director of YES! Entertainment, a public
company manufacturing children's toys and other educational and interactive
products, and of Source Media, Inc., a public company specializing in
interactive television.
BARRY RUBENSTEIN has served as a director of the Company since February
1994. Since February 1995, Mr. Rubenstein has served as a director and officer
of InfoMedia. In addition, since 1992, 1979 and 1976, respectively, Mr.
Rubenstein has served as a general partner of Applewood, Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. Mr.
Rubenstein also serves as a director of Infonautics, Inc., a provider of on-line
and internet information.
The Board of Directors has a Stock Option and Compensation Committee which
administers the Stock Option Plan and makes recommendations concerning salaries,
incentive compensation for employees of and consultants to the Company, and an
Audit Committee which reviews the results and scope of the audit and other
services provided by the Company's independent accountants. The Stock Option and
Compensation Committee is composed of Messrs. Fingerhut, Rubenstein and Graham
and the Audit Committee is composed of Messrs. Fingerhut, Marocco and Farrell.
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the next
annual meeting of the Company or until their successors have been duly elected
or qualified. There are no family relationships among any of the executive
officers and directors of the Company.
The Company intends to maintain a "key person" life insurance policy in the
amount of $1.0 million on the life of Mr. Conrad after the Offering.
DIRECTOR COMPENSATION
The Company's directors are not compensated for attendance at meetings. The
Company currently does not plan to compensate its outside directors for services
rendered in their capacity as directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the year ended July 31, 1996 to Jean E. Reynolds, the
principal executive officer of the Company, and each of the Company's most
highly compensated executive officers whose salary and bonus exceeded $100,000
with respect to the fiscal year ended July 31, 1996 ("Named Executive
Officers").
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<TABLE>
<S> <C> <C>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION(1)
<S> <C> <C>
<CAPTION>
NAME AND PRINCIPAL POSITIONS YEAR SALARY
<S> <C> <C>
Jean E. Reynolds......................................... 1996 $125,000(2)
Senior Vice President-
Publisher
Frank J. Farrell......................................... 1996 $100,000(3)
Vice President
Howard Graham............................................ 1996 $100,000(3)
Vice President
</TABLE>
(1) Certain of the officers of the Company routinely receive other benefits from
the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during fiscal 1996, did
not exceed the lesser of $50,000 and 10% of the compensation set forth above
as to any named individual.
(2) Prior to October 1996, Jean E. Reynolds was the President of the Company. As
of October 1996, Jeffrey Conrad became Chief Executive Officer and President
of the Company. Mr. Conrad will be paid a base salary of $200,000 per year
and has received options to purchase 80,000 shares of the Company's Common
Stock.
(3) Amounts paid to Messrs. Farrell and Graham constitute consulting fees paid
to Farrell Associates, Inc. and Graham International Publishing and
Research, Inc., respectively.
STOCK OPTION PLAN
The Company's Stock Option Plan was adopted to attract and retain employees
and provides for the issuance of options to purchase up to an aggregate of
475,000 shares of Common Stock. To date, options to purchase 390,000 shares of
Common Stock have been granted under the Stock Option Plan. All options
currently outstanding under the Stock Option Plan have an exercise price equal
to the Offering Price. Under the Stock Option Plan, options to purchase shares
of Common Stock may be granted to any full-time or part-time employee,
consultant or officer. The Stock Option Plan is currently administered by the
Company's Stock Option and Compensation Committee, which is generally empowered
to interpret the Stock Option Plan, prescribe rules and regulations relating
thereto and determine the individuals to whom options are to be granted.
Under the Stock Option Plan, the per-share exercise price for incentive
stock options ("ISOs") will be the greater of the fair market value of a share
of Common Stock on the date the option is granted or the Offering Price and for
non-qualified stock options ("NQSOs") will be not less than the Offering Price.
Upon exercise of an option, the optionee may pay the purchase price with
previously acquired securities of the Company, provided that with respect to
ISOs applicable holding requirements under the Code are satisfied.
Unless otherwise determined by the Stock Option and Compensation Committee,
ISOs and NQSOs granted under the Stock Option Plan shall be exercisable for a
term not greater than seven years from the date of grant and vest after a
five-year period at a rate of one-fifth upon each successive anniversary of the
date of grant; provided, however, that with respect to all unvested options
which are currently outstanding, 50% shall vest one year from the date of this
Prospectus and 50% shall vest two years from the date of this Prospectus;
provided, however, further, that all options shall vest completely upon the
fifth anniversary of the date of grant. In addition, all options granted under
the Stock Option Plan become fully vested if (a) the optionee is employed by the
Company on or within 90 days of (i) the sale of all or substantially all
35
<PAGE>
of the assets of the Company, (ii) the sale or exchange of an amount of the
Company's stock to an unaffiliated third party that results in a change of
control, (b) on the date of the optionee's death or (c) on the date the optionee
becomes disabled. ISOs are not transferable other than by will or the laws of
descent and distribution. NQSOs may be transferred, subject to certain
restrictions. Options may be exercised during the holder's lifetime only by the
holder, his or her guardian or legal representative.
The Stock Option and Compensation Committee may modify, suspend or terminate
the Stock Option Plan; provided, however, that certain material modifications
affecting the Stock Option Plan must be approved by the stockholders, and any
change in the Stock Option Plan that may adversely affect an optionee's rights
under an option previously granted under the Stock Option Plan requires the
consent of the optionee.
The Company has adopted a policy whereby all future grants of stock options
will be at an exercise price of at least 85% of the fair market value of the
Common Stock on the date of the grant.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers during the
fiscal year ended July 31, 1996.
FISCAL YEAR END OPTION VALUES
No options were exercised by the Named Executive Officers during fiscal
1996. The following table shows the number of shares covered by both exercisable
and unexercisable employee stock options, as of July 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT JULY IN-THE-MONEY
31, 1996 OPTIONS AT JULY 31, 1996
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
<S> <C> <C>
Jean E. Reynolds.................... 21,000/31,500 0
Frank J. Farrell.................... 31,500/47,250 0
Howard Graham....................... 31,500/47,250 0
</TABLE>
(1) The exercise price of the options held by the Named Executive Officers was
amended after July 31, 1996, to the Offering Price of the Company's Common
Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Company made all compensation decisions
regarding compensation of executive officers during the Company's 1996 fiscal
year. During such period, Messrs. Farrell and Graham were executive officers and
directors of the Company. For information concerning transactions with the
Directors of the Company and entities affiliated with certain Directors, see
"Certain Transactions."
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS
The Company has entered into an employment agreement with Jeffrey Conrad
pursuant to which he is employed on a full-time basis as the Company's Chief
Executive Officer and President. The term of the employment agreement expires in
October 1999, and is automatically renewable for a one-year term unless either
party terminates the employment agreement at least thirty (30) days prior to the
expiration of the initial term or any subsequent term. Mr. Conrad's annual base
cash compensation under the employment agreement is $200,000. For the fiscal
years ended July 31, 1997, July 31, 1998 and July 31, 1999 Mr. Conrad can also
receive a bonus equal to 10%, 15% and 15% of his salary, respectively, if the
Company meets the objectives agreed upon each fiscal year in advance by the
Board of Directors. In addition, Mr. Conrad received options to purchase 80,000
shares of Common Stock at an exercise price equal to the Offering
36
<PAGE>
Price pursuant to the Stock Option Plan. Mr. Conrad has agreed not to compete
with the Company during the term of his employment agreement and for a period of
two years thereafter.
The Company has entered into an employment agreement with Jean E. Reynolds
pursuant to which she is employed on a full-time basis as the Company's Senior
Vice President--Publisher. The term of the employment agreement expires in
September 1999. Ms. Reynolds annual base cash compensation under the employment
agreement is $125,000. Ms. Reynolds' base salary will be reviewed annually by
the Board of Directors. Ms. Reynolds has agreed not to compete with the Company
during the term of her employment agreement and for a period of two years
thereafter.
The Company has entered into a consulting agreement with a corporation
controlled by Frank J. Farrell commencing January 1, 1997 pursuant to which the
corporation will make Mr. Farrell available as a consultant for a minimum of six
months per year with the time of such service to be determined by the Board of
Directors or the Chief Executive Officer. It is anticipated that Mr. Farrell
will resign as Vice President and Secretary of the Company effective December
31, 1996, or shortly thereafter. The consulting agreement provides that Mr.
Farrell shall provide certain services with respect to, including but not
limited to, cash management, relations with respect to major vendors, relations
with respect to banks, relations with respect to legal advisors, compliance with
the legal requirements of the Securities Act and the Securities Exchange Act of
1934, as amended ("Exchange Act"), relations with respect to outside auditors
and any audit-related issues, the development of internal controls, such as
inventory and finance controls, due diligence and evaluation with respect to
potential acquisitions, the development, review and critique of the Company's
strategic planning, relations with respect to its personnel and any other area
which the Chief Executive Officer and/or the Board of Directors may request. In
addition to the services to be rendered to the Company by Mr. Farrell, he will
be involved in various business projects unrelated to the business of the
Company. Substantially all of the duties currently performed by Mr. Farrell as
an officer of the Company will be performed by Jeffrey Conrad (the newly
appointed Chief Executive Officer and President). The term of the consulting
agreement expires in December 1998. The cash compensation under the consulting
agreement is $60,000 during the first year of the agreement and $50,000 during
the second year of the agreement. Mr. Farrell has agreed not to compete with the
Company during the term of his consulting agreement and for a period of two
years thereafter.
The Company has entered into a consulting agreement with a corporation
controlled by Howard Graham commencing January 1, 1997 pursuant to which the
corporation will make Mr. Graham available as a consultant for a minimum of six
months per year with the time of such service to be determined by the Board of
Directors or the Chief Executive Officer. It is anticipated that Mr. Graham will
resign as Vice President of the Company effective December 31, 1996, or shortly
thereafter. The consulting agreement provides that Mr. Graham shall provide
certain services with respect to, including but not limited to, strategic
planning, market development, acquisition searches, product planning,
international sales, joint ventures and any other area which the Chief Executive
Officer and/or the Board of Directors may request. In addition to the services
to be rendered to the Company by Mr. Graham, he will be involved in various
business projects unrelated to the business of the Company. Substantially all of
the duties currently performed by Mr. Graham as an officer of the Company will
be performed by Jeffrey Conrad (the newly appointed Chief Executive Officer and
President). The term of the consulting agreement expires in December 1998. The
annual base cash compensation under the consulting agreement is $60,000 during
the first year of the agreement and $50,000 during the second year of the
agreement. Mr. Graham has agreed not to compete with the Company during the term
of his consulting agreement and for a period of two years thereafter.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to beneficially own
more than 5% of the capital stock, (ii) each of the Company's directors, (iii)
each of the Named Officers and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the address for directors, executive officers
and 5% stockholders is 2 Old New Milford Road, Brookfield, Connecticut 06804.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS OWNED(1) OFFERING OFFERING(1)
- -------------------------------------------------------------------------- ----------- ---------- -------------
<S> <C> <C> <C>
Barry Fingerhut........................................................... 1,120,748(2) 74.7% 35.0%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Irwin Lieber.............................................................. 1,120,748(3) 74.7% 35.0%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Barry Rubenstein.......................................................... 1,120,748(4) 74.7% 35.0%
68 Wheatley Road
Brookville, NY 11545
Harvey Sandler............................................................ 911,261(5) 60.8% 28.5%
767 Fifth Avenue, 45th Floor
New York, NY 10153
John Kornreich............................................................ 900,917(6) 60.1% 28.2%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Barry Lewis............................................................... 900,917(7) 60.1% 28.2%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Michael J. Marocco........................................................ 900,917(8) 60.1% 28.2%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Andrew Sandler............................................................ 887,988(9) 59.2% 27.8%
767 Fifth Avenue, 45th Floor
New York, NY 10153
21st Century Communications Foreign Partners, L.P......................... 883,678(10) 58.9% 27.6%
c/o Fiduciary Trust (Cayman) Limited
P.O. Box 1062
Grand Cayman, B.W.I
21st Century Communications Partners, L.P................................. 883,678(11) 58.9% 27.6%
767 Fifth Avenue, 45th Floor
New York, NY 10053
21st Century Communications T-E Partners, L.P............................. 883,678(12) 58.9% 27.6%
767 Fifth Avenue, 45th Floor
New York, NY 10053
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS OWNED(1) OFFERING OFFERING(1)
- -------------------------------------------------------------------------- ----------- ---------- -------------
<S> <C> <C> <C>
Jonathan Lieber........................................................... 215,523(13) 14.4% 6.7%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber............................................................... 215,523(14) 14.4% 6.7%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Applewood Associates, L.P.(15)............................................ 211,213 14.1% 6.6%
68 Wheatley Road
Brookville, NY 11545
Frank J. Farrell.......................................................... 104,277(16) 6.8% 3.2%
Howard Graham............................................................. 104,277(17) 6.8% 3.2%
Archon Press.............................................................. 80,993(18) 5.4% 2.5%
28 Percy Street
Wipold, London
England
Jean E. Reynolds.......................................................... 37,172(19) 2.4% 1.1%
Jeffrey Conrad............................................................ -- -- --
All directors and executive officers as a group (8 persons)............... 1,409,570(20) 86.2% 42.8%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock upon the exercise of options, warrants currently exercisable, or
exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Represents (i) 25,857 shares of Common Stock owned by Mr. Fingerhut, (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign and (iii) 211,213 shares of Common Stock owned by
Applewood. By virtue of being a shareholder, officer and director of
InfoMedia which is a general partner of 21st Partners, 21st T-E and 21st
Foreign, and a general partner of Applewood, Mr. Fingerhut may be deemed to
have shared power to vote and to dispose of 1,094,891 shares of Common Stock
owned by such recordholders, of which Mr. Fingerhut disclaims beneficial
ownership, except to the extent of his equity interest in such
recordholders.
(3) Represents (i) 25,857 shares owned by Mr. Lieber, (ii) 883,678 shares of
Common Stock owned by 21st Partners, 21st T-E and 21st Foreign, and (iii)
211,213 shares of Common Stock owned by Applewood. By virtue of being a
shareholder, officer and director of InfoMedia which is a general partner of
21st Partners, 21st T-E and 21st Foreign, and a general partner of
Applewood, Mr. Lieber may be deemed to have shared power to vote and dispose
of the shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign and Applewood. Mr. Lieber disclaims beneficial ownership of the
securities owned by 21st Partners, 21st T-E and 21st Foreign and Applewood,
except to the extent of his equity interest in such recordholders.
(4) Represents (i) an aggregate of 883,678 shares of Common Stock owned by 21st
Partners, 21st T-E and 21st Foreign, and (ii) an aggregate of 237,070 shares
of Common Stock owned by Applewood and
39
<PAGE>
Woodland Partners ("Woodland"). By virtue of being a shareholder, officer
and director of InfoMedia which is a general partner of 21st Partners, 21st
T-E and 21st Foreign and a general partner of Applewood and Woodland, Mr.
Rubenstein may be deemed to have shared power to vote and dispose of the
shares owned by 21st Partners, 21st T-E and 21st Foreign, Applewood and
Woodland. Mr. Rubenstein disclaims beneficial ownership of all of the above
securities except to the extent of his equity interest in such
recordholders.
(5) Represents (i) 27,583 shares of Common Stock owned by Mr. Sandler and (ii)
883,678 shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign. By virtue of being the majority shareholder and director of an
entity which is a general partner of an entity which is the general partner
of another entity which is a general partner of 21st Partners, 21st T-E and
21st Foreign, Mr. Sandler may be deemed to have shared power to vote and to
dispose of such 883,678 shares of Common Stock, of which Mr. Sandler
disclaims beneficial ownership.
(6) Represents (i) 17,239 shares of Common Stock owned by Mr. Kornreich and (ii)
883,678 shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign. By virtue of being the majority shareholder and director of an
entity which is a general partner of an entity which is the general partner
of another entity which is a general partner of 21st Partners, 21st T-E and
21st Foreign, Mr. Kornreich may be deemed to have shared power to vote and
to dispose of such 883,678 shares of Common Stock, of which Mr. Kornreich
disclaims beneficial ownership.
(7) Represents (i) 17,239 shares of Common Stock owned by Mr. Lewis and (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign. By virtue of being the majority shareholder and director
of an entity which is a general partner of an entity which is the general
partner of another entity which is a general partner of 21st Partners, 21st
T-E and 21st Foreign, Mr. Lewis may be deemed to have shared power to vote
and to dispose of such 883,678 shares of Common Stock, of which Mr. Lewis
disclaims beneficial ownership.
(8) Represents (i) 17,239 shares of Common Stock owned by Mr. Marocco and (ii)
an aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st
T-E and 21st Foreign. By virtue of Mr. Marocco being the sole shareholder,
officer and director of an entity which is a general partner of an entity
which is the general partner of another entity which is a general partner of
21st Partners, 21st T-E and 21st Foreign, Mr. Marocco may be deemed to have
shared power to vote and to dispose of such 883,678 shares of Common Stock,
of which Mr. Marocco disclaims beneficial ownership.
(9) Represents (i) 4,310 shares of Common Stock owned by Mr. Sandler and (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign. By virtue of being the majority shareholder and director
of an entity which is a general partner of an entity which is the general
partner of another entity which is a general partner of 21st Partners, 21st
T-E and 21st Foreign, Mr. Sandler may be deemed to have shared power to vote
and to dispose of such 883,678 shares of Common Stock, of which Mr. Andrew
Sandler disclaims beneficial ownership.
(10) Represents (i) 80,662 shares of Common Stock owned by 21st Foreign and (ii)
599,160 shares of Common Stock and 203,856 shares of Common Stock owned by
21st Partners and 21st T-E, respectively, of which 21st Foreign disclaims
beneficial ownership. The general partners of 21st Foreign are Sandler
Investment Partners, L.P., a New York limited partnership ("Sandler General
Partner") and InfoMedia. The general partner of the Sandler General Partner
is Sandler Capital Management, a New York general partnership ("SCM"). The
general partners of SCM are corporations that are affiliates of Harvey
Sandler, Barry Lewis, John Kornreich, Michael Marocco and Andrew Sandler.
Infomedia's shareholders are Irwin Lieber, Barry Fingerhut and Barry
Rubenstein.
(11) Represents (i) 599,160 shares of Common Stock owned by 21st Partners and
(ii) 203,856 shares of Common Stock and 80,662 shares of Common Stock owned
by 21st T-E and 21st Foreign, respectively, of which 21st Partners disclaims
beneficial ownership. The general partners of 21st Partners are the
40
<PAGE>
Sandler General Partner and InfoMedia. The general partner of the Sandler
General Partner is SCM. The general partners of SCM are corporations that
are affiliates of one or more of Harvey Sandler, Barry Lewis, John
Kornreich, Michael Marocco and Andrew Sandler. Infomedia's shareholders are
Irwin Lieber, Barry Fingerhut and Barry Rubenstein.
(12) Represents (i) 203,856 shares of Common Stock owned by 21st T-E and (ii)
599,160 shares of Common Stock and 80,662 shares of Common Stock owned by
21st Partners and 21st Foreign, respectively, of which 21st T-E disclaims
beneficial ownership. The general partners of 21st Partners are the Sandler
General Partner and InfoMedia. The general partner of the Sandler General
Partner is SCM. The general partners of SCM are corporations that are
affiliates of one or more of Harvey Sandler, Barry Lewis, John Kornreich,
Michael Marocco and Andrew Sandler. Infomedia's shareholders are Irwin
Lieber, Barry Fingerhut and Barry Rubenstein.
(13) Represents (i) 4,310 shares of Common Stock owned by Mr. Lieber and (ii)
211,213 shares of Common Stock owned by Applewood. By virtue of being an
affiliate of an entity which is a general partner of Applewood, Mr. Lieber
may be deemed to have shared power to vote and dispose of the shares of
Common Stock owned by Applewood, Mr. Lieber disclaims beneficial ownership
with respect to the securities owned by Applewood, except to the extent of
his equity interest in such recordholder. Jonathan Lieber is the son of
Irwin Lieber.
(14) Represents (i) 4,310 shares of Common Stock owned by Mr. Lieber and (ii)
211,213 shares owned by Applewood. By virtue of being an affiliate of an
entity which is a general partner of Applewood, Mr. Lieber may be deemed to
have shared power to vote and dispose of the shares of Common Stock owned by
Applewood. Mr. Lieber disclaims beneficial ownership with respect to the
securities owned by Applewood, except to the extent of his equity interest
in such recordholder. Seth Lieber is the son of Irwin Lieber.
(15) The general partners of Applewood are Irwin Lieber, Barry Rubenstein, Barry
Fingerhut and Applewood Capital Corp., a New York corporation.
(16) Includes 34,498 shares of Common Stock issuable upon presently exercisable
options.
(17) Represents 34,498 shares of Common Stock issuable upon presently
exercisable options and 69,779 shares of Common Stock which are owned by Mr.
Graham and his wife as joint tenants.
(18) Includes 3,337 shares of Common Stock issuable upon presently exercisable
options held by Charles Nicholas, who is the controlling stockholder and a
director of Archon Press.
(19) Includes 21,666 shares of Common Stock issuable upon presently exercisable
options.
(20) Includes 90,662 shares of Common Stock issuable upon presently exercisable
options and 1,120,748 shares owned by 21st Foreign, 21st Partners, 21st T-E,
Applewood and Woodland.
41
<PAGE>
CERTAIN TRANSACTIONS
SALES OF DEBT AND EQUITY SECURITIES. From time to time, the Company has
raised capital through the sale of debt and equity securities. Most of the
investors in such offerings have been officers, directors and entities
associated with directors, and beneficial owners of 5% or more of the Company's
securities. In each transaction, such persons participated on terms no more
favorable than those offered to all other investors and the Company believes
each transaction was on terms as favorable as the Company might expect from
arm's length transactions with unrelated third parties.
In May 1994, the Company entered into an agreement with Aladdin, whereby
Aladdin agreed to produce no less than 50 books per year for the Company through
January 1, 2002. The books are to be wholly-owned by the Company. 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 U.S.A., Canada
and the Philippines. Royalties are paid to Aladdin based on the Company sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world. Net payables to Aladdin at July 31, 1996 and 1995,
were $556,000 and $355,000, respectively, which includes goods on order,
payables, shared product development costs and net royalty payments. As of
December 5, 1996, net payables to Aladdin were approximately $727,000 million of
which the Company was delinquent on approximately $408,000. Approximately
$408,000 of the net proceeds of this Offering will be used to pay Aladdin.
Concurrent with the agreement with Aladdin, The Archon Press, an
Aladdin-affiliated company, agreed to invest $500,000 in the Company in return
for Common Stock. This investment was received by the Company over a period of
months in the fiscal year ended July 31, 1995, as follows:
- In October 1994, the Company issued 31,063 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $200,000.
- In December 1994, the Company issued 15,531 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $100,000.
- In February 1995, the Company issued 15,531 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $100,000.
- In April 1995, the Company issued 15,531 shares of its Common Stock at a
price of $6.44 per share to Archon Press for an aggregate purchase price
of $100,000.
In June 1995, the Company entered into Subscription Agreements pursuant to
which it sold to Applewood and 21st Century Funds an aggregate of 155,312 shares
of Common Stock at a price of $6.44 per share, for an aggregate purchase price
of $1,000,000.
In December 1995, the Company entered into the Loan and Security Agreement
which provides the Company with a $2.7 million revolving line of credit. Such
line of credit is partially collateralized by the Company's accounts
receivables, which are personally guaranteed by Messrs. Graham and Farrell and
Ms. Reynolds. However, each of such officers has a right of contribution from
all of the current stockholders of the Company in the event the Company fails to
indemnify each of such officers from a claim under the guaranty. Such officers
do not intend to personally guarantee any indebtedness or other obligations of
the Company in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In April 1996, in connection with the Prebridge Financing, Applewood, 21st
T-E, 21st Foreign and 21st Partners, entities that own more than 5% of the
outstanding Common Stock, purchased $250,000, $57,000, $23,000 and $170,000
principal amounts of the Prebridge Notes, respectively.
In August 1996, the Company consummated the Bridge Financing. As part of
such Bridge Financing, Applewood, 21st T-E, 21st Foreign and 21st Partners
converted their Prebridge Notes into Bridge Units
42
<PAGE>
and accordingly received $250,000 principal amount of Bridge Notes and 125,000
Bridge Warrants, $57,000 principal amount of Bridge Notes and 28,500 Bridge
Warrants, $23,000 principal amount of Bridge Notes and 11,500 Bridge Warrants
and $170,000 principal amount of Bridge Notes and 85,000 Bridge Warrants,
respectively. Messrs. Rubenstein and Fingerhut, directors of the Company, are
general partners of Applewood and are directors and officers of InfoMedia, which
is a general partner of 21st Foreign, 21st T-E and 21st Partners. Mr. Marocco, a
director of the Company, is an officer and director of an entity which is a
general partner of an entity that is a general partner of 21st Foreign, 21st T-E
and 21st Partners.
The Company has adopted a policy whereby all future transactions between the
Company and its officers, directors, principal stockholders or affiliates, will
be approved by a majority of the Board of Directors, including all of the
independent and disinterested members of the Board of Directors or, if required
by law, a majority of disinterested stockholders, and will be on terms no less
favorable to the Company than could be obtained in arm's length transactions
from unaffiliated third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 13,000,000 shares, consisting
of 12,000,000 shares of Common Stock, $.01 par value per share and 1,000,000
shares of preferred stock, $.01 par value per share ("Preferred Stock"). As of
October 15, 1996, there were 1,500,000 shares of Common Stock outstanding. Upon
the completion of this Offering there will be 3,200,000 shares of Common Stock
outstanding, after giving effect to the Preferred Stock Conversion. No shares of
Preferred Stock will be outstanding after the date hereof.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption, preemptive or other subscription rights, and there
are no conversion provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued and paid for as set forth in this Prospectus, will be, fully
paid and nonassessable.
PREFERRED STOCK
On the effective date of the Registration Statement, of which this
Prospectus is a part, all of the outstanding shares of the Company's Preferred
Stock and all accrued and unpaid dividends thereon will convert into 473,692
shares of Common Stock (post-Reverse Stock Split) in accordance with the
Company's Certificate of Incorporation, as amended. Subsequent to the Preferred
Stock Conversion, the Company's authorized shares of Preferred Stock may be
issued in one or more series, and the Board of Directors is authorized, without
further action by the stockholders, to designate the rights, preferences,
limitations and restrictions of and upon shares of each series, including
dividend, voting, redemption and conversion rights. The Board of Directors also
may designate par value, preferences in liquidation and the number of shares
constituting any series. The Company believes that the availability of Preferred
Stock issuable in series will provide increased flexibility for structuring
possible future financings and acquisitions, if any, and in meeting other
corporate needs. It is not possible to state the actual effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of a series of Preferred
43
<PAGE>
Stock. However, such effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock, or
impairing liquidation rights of such shares without further action by holders of
the Common Stock. In addition, under various circumstances, the issuance of
Preferred Stock may have the effect of facilitating, as well as impeding or
discouraging, a merger, tender offer, proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent management. Issuance of Preferred Stock could also adversely effect
the market price of the Common Stock. The Company has no present plan to issue
any additional shares of Preferred Stock.
WARRANTS
The Bridge Warrants are exercisable at an initial exercise price of $3.00
per share, commencing August 29, 1997 and expiring at the close of business, on
August 29, 2001.
A holder of Bridge Warrants will not have any rights, privileges or
liabilities as a stockholder of the Company prior to exercise of the Bridge
Warrants. The Company is required to keep available a sufficient number of
authorized shares of Common Stock to permit exercise of the Bridge Warrants.
The exercise price of the Bridge Warrants and the number of shares issuable
upon exercise of the Bridge Warrants will be subject to adjustment to protect
against dilution in the event of a merger, acquisition, recapitalization, or
split-up of the Common Stock, the issuance of a stock dividend or any similar
event. No assurance can be given that the market price of the Company's Common
Stock will exceed the exercise price of the Bridge Warrants at any time during
the exercise period. The Company has registered the shares of Common Stock
underlying the Bridge Warrants on the Registration Statement, of which this
Prospectus forms a part.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Certificate of Incorporation, as amended, limits the personal liability of a
director or officer to the Company for monetary damages for breach of fiduciary
duty of care as a director. Liability is not eliminated for (i) any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or stock purchases or
redemptions pursuant to Section 174 of the DGCL, or (iv) any transaction from
which the director derived an improper personal benefit.
The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly held Delaware corporation for three
44
<PAGE>
years following the date such person became an interested stockholder, unless:
(i) before such person became an interested stockholder, the board of directors
of the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. A "business combination" includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
stockholder.
The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, NY.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and after giving effect to the Preferred
Stock Conversion, the Company will have outstanding 3,200,000 shares of Common
Stock, not including shares of Common Stock issuable upon exercise of
outstanding options or warrants.
- Of these outstanding shares, the 1,700,000 shares of Common Stock sold to
the public in this Offering may be freely traded without restriction or
further registration under the Securities Act, except that any shares
that may be held by an "affiliate" of the Company (as that term is
defined in the rules and regulations under the Securities Act) may be
sold only pursuant to a registration under the Securities Act or pursuant
to an exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
- The 1,500,000 shares of Common Stock outstanding prior to the
consummation of this Offering are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares") and
may not be sold unless such sale is registered under the Securities Act,
or is made pursuant to an exemption from registration under the
Securities Act, including the exemption provided by Rule 144. Of such
shares, (i) 1,313,594 shares are presently available for sale pursuant to
Rule 144, (ii) 15,531 shares will be available for sale pursuant to Rule
144 commencing February 1997 and (iii) 15,531 shares will be available
for sale pursuant to Rule 144 commencing April 1997 and (iv) 155,344
shares will be available for sale pursuant to Rule 144 commencing June
1997. All officers, directors and existing stockholders of the Company
have agreed that for a period of 24 months after the date of this
Prospectus, they will not sell any of their shares (representing all of
the Restricted Shares) without the prior consent of the Underwriter. See
"Description of Securities."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least two years (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Securities and Exchange
Commission ("Commission"), provided certain public information, manner of sale
and notice requirements are satisfied. A stockholder who is deemed to be an
affiliate of the Company,
45
<PAGE>
including members of the Board of Directors and senior management of the
Company, will still need to comply with the restrictions and requirements of
Rule 144, other than the two-year holding period requirement, in order to sell
shares of Common Stock that are not restricted securities, unless such sale is
registered under the Securities Act. A stockholder (or stockholders whose shares
are aggregated) who is deemed not to have been an affiliate of the Company at
any time during the 90 days preceding a sale by such stockholder, and who has
beneficially owned restricted securities for at least three years, will be
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. The Commission is currently considering a reduction
in the required holding periods under Rule 144.
No predictions can be made of the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect the then-prevailing
market price.
46
<PAGE>
UNDERWRITING
GKN Securities Corp. ("Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 1,700,000 shares of Common Stock. The obligations of the Underwriter under
the Underwriting Agreement are subject to approval of certain legal matters by
counsel and various other conditions precedent, and the Underwriter is obligated
to purchase all of the shares of Common Stock offered by this Prospectus (other
than shares of Common Stock covered by the over-allotment option described
below) if any are purchased.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock to the public at the initial offering price set forth on the
cover page of this Prospectus and to certain dealers at that price less a
concession not in excess of $ per share of Common Stock. The Underwriter
may allow, and such dealers may reallow, a concession not in excess of
$ per share of Common Stock to certain other dealers. After this
Offering, the offering price and other selling terms may be changed by the
Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the shares of
the Common Stock offered by this Prospectus (including the sale of any shares of
the Common Stock subject to the Underwriter's over-allotment option), $50,000 of
which has been paid to date. The Company also has agreed to pay all expenses in
connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriter may designate and registering
this Offering with the National Association of Securities Dealers, Inc.,
including fees and expenses of counsel retained for such purposes by the
Underwriter.
The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company at
the offering price, less underwriting discounts and the nonaccountable expense
allowance, up to an aggregate of 255,000 additional shares of Common Stock for
the sole purpose of covering over-allotments, if any.
In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $100, the Underwriter's Purchase Option,
consisting of the right to purchase up to an aggregate of 170,000 shares of
Common Stock. The Underwriter's Purchase Option is exercisable initially at a
price of 110% of the initial offering price of the Common Stock for a period of
four years commencing one year from the date hereof. The Underwriter's Purchase
Option may not be transferred, sold, assigned or hypothecated during the one
year period following the date of this Prospectus except to officers of the
Underwriter and the selected dealers and their officers or partners. The
Underwriter's Purchase Option grants to the holders thereof certain "piggyback"
and demand rights for periods of seven and five years, respectively, from the
date of this Prospectus with respect to the registration under the Securities
Act of the securities directly and indirectly issuable upon exercise of the
Underwriter's Purchase Option.
Pursuant to the Underwriting Agreement, all of the officers, directors and
existing stockholders of the Company as of the date of this Prospectus (who hold
in the aggregate 1,500,000 outstanding shares of Common Stock) have agreed not
to sell any of their shares of Common Stock until 24 months from the date of
this Prospectus. In addition, the Underwriting Agreement provides that, for a
period of three years from the date of this Prospectus, the Company will
recommend and use its best efforts to elect a designee of the Underwriter as a
member of the Board of Directors. Alternatively, the Underwriter will have the
right to send a representative to observe each meeting of the Board of
Directors. The Underwriter has not yet selected such designee or representative.
During the three-year period following the date of this Prospectus, the
Underwriter shall have the right to purchase for the Underwriter's account or to
sell for the account of the officers and directors of the Company (and any
family member or affiliate of any of the foregoing persons), any securities sold
by any of such persons in the open market.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the Offering Price of the Common Stock has
been determined by negotiation between the
47
<PAGE>
Company and the Underwriter and does not necessarily bear any relation to
established valuation criteria. Factors considered in determining such prices
and terms, in addition to prevailing market conditions, included an assessment
of the prospect for the industry in which the Company will compete, the
Company's management and the Company's capital structure.
In August 1996, the Underwriter acted as placement agent in the Bridge
Financing and was paid commissions of $148,750 (8.5%) and a nonaccountable
expense allowance of $52,500 (3%).
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby are
being passed upon for the Company by Olshan Grundman Frome & Rosenzweig LLP, New
York, New York. Graubard Mollen & Miller, New York, New York, has served as
counsel to the Underwriter in connection with this Offering.
EXPERTS
The financial statements of Millbrook as of July 31, 1995 and 1996 and for
each of the years in the two year period ended July 31, 1996 have been included
herein and in the Registration Statement of which this Prospectus is a part, in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain portions having been omitted from this
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the securities offered by this
Prospectus and such omitted information, reference is made to the Registration
Statement, including any and all exhibits and amendments thereto. Statements
contained in this Prospectus concerning the provisions of any document filed as
an exhibit are of necessity brief descriptions thereof and are not necessarily
complete, and in each instance reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in its entirety by this reference.
Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith the Company files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, New York, New York 10048. Copies of
such material, including the Registration Statement, can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Common Stock and the Warrants are traded on
the Nasdaq SmallCap Market and The Boston Stock Exchange. The foregoing material
should also be available for inspection at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C., 20006 and The
Boston Stock Exchange, One Boston Place, Boston, Massachusetts 02108. The
Commission also maintains a site on the Worldwide Web that contains reports,
proxy and information statements and other information regarding Registrants
that file electronically. The address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited and reported on by its
independent public accounting firm, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
YEAR END FINANCIAL INFORMATION
Independent Auditors' Report................................................... F-2
Balance Sheets at July 31, 1995 and 1996....................................... F-3
Statements of Operations for the years ended July 31, 1995 and 1996............ F-4
Statements of Stockholders' Equity for the years ended July 31, 1995 and
1996......................................................................... F-5
Statements of Cash Flows for the years ended July 31, 1995 and 1996............ F-6
Notes to Financial Statements at July 31, 1995 and 1996........................ F-7
INTERIM FINANCIAL INFORMATION
Balance Sheet at of October 31, 1996 (Unaudited)............................... F-16
Statements of Operations for the three months ended October 31, 1995 and 1996
(Unaudited).................................................................. F-17
Statement of Stockholders' Equity for the three months ended October 31, 1996
(Unaudited).................................................................. F-18
Statements of Cash Flows for the three months ended October 31, 1995 and 1996
(Unaudited).................................................................. F-19
Notes to Financial Statements at October 31, 1996 (Unaudited).................. F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1995 and 1996, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Millbrook Press Inc. as
of July 31, 1995 and 1996 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
October 16, 1996
New York, New York
F-2
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 538,000 $ 134,000
Accounts receivable (less allowance for returns and bad debts of $213,000 in 1995
and $329,000 in 1996).......................................................... 1,283,000 2,084,000
Inventories...................................................................... 2,658,000 3,477,000
Royalty advances, net............................................................ 394,000 364,000
Prepaid expenses................................................................. 326,000 292,000
------------- -------------
Total current assets........................................................... 5,199,000 6,351,000
------------- -------------
Plant costs, net................................................................... 2,063,000 2,582,000
Fixed assets, net.................................................................. 235,000 270,000
Goodwill, net...................................................................... 3,431,000 3,245,000
Royalty advances, net.............................................................. 127,000 67,000
Other assets....................................................................... 23,000 59,000
------------- -------------
Total assets................................................................... $ 11,078,000 $ 12,574,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (note 4).................................................. $ 2,000,000 $ 2,742,000
Accounts payable and accrued expenses............................................ 1,483,000 2,141,000
Royalties payable................................................................ 91,000 150,000
------------- -------------
Total current liabilities...................................................... 3,574,000 5,033,000
Shareholder notes (note 5)......................................................... -- 500,000
------------- -------------
Total liabilities.............................................................. 3,574,000 5,533,000
------------- -------------
Commitments (note 9)
Stockholders' equity:
12% Series A voting, cumulative Preferred Stock, par value $.01 per share;
authorized 10,000 shares; issued and outstanding 4,700 shares (at aggregate
liquidation preference including dividends in arrears)......................... 5,534,000 6,190,000
Common stock--par value $.01 per share, authorized 5,000,000 shares; issued and
outstanding 1,026,308 shares in 1995 and 1996.................................. 10,000 10,000
Additional paid-in capital....................................................... 3,991,000 3,991,000
Accumulated deficit.............................................................. (2,031,000) (3,150,000)
------------- -------------
Total stockholders' equity..................................................... 7,504,000 7,041,000
------------- -------------
Total liabilities and stockholders' equity..................................... $ 11,078,000 $ 12,574,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Net sales........................................................................... $ 6,866,000 $ 9,940,000
Cost of sales....................................................................... 3,407,000 5,099,000
------------- -------------
Gross profit...................................................................... 3,459,000 4,841,000
------------- -------------
Operating expenses:
Selling and marketing............................................................. 3,024,000 3,854,000
General and administrative........................................................ 1,051,000 1,205,000
------------- -------------
Total operating expenses........................................................ 4,075,000 5,059,000
------------- -------------
Operating loss...................................................................... (616,000) (218,000)
Interest expense.................................................................... 190,000 245,000
------------- -------------
Net loss............................................................................ (806,000) (463,000)
Preferred dividend accrued.......................................................... (589,000) (656,000)
------------- -------------
Net loss available to common stockholders........................................... $ (1,395,000) $ (1,119,000)
------------- -------------
------------- -------------
Loss per share after preferred dividend requirements (primary and fully diluted).... $ (1.60) $ (1.09)
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994........... 4,700 $ 4,945,000 793,340 $ 8,000 $ 2,493,000 $ (636,000) $ 6,810,000
Sale of common stock............... -- -- 232,968 2,000 1,498,000 -- 1,500,000
Preferred stock dividend........... -- 589,000 -- -- -- (589,000) --
Net loss........................... -- -- -- -- -- (806,000) (806,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at July 31, 1995........... 4,700 5,534,000 1,026,308 10,000 3,991,000 (2,031,000) 7,504,000
Preferred stock dividend........... -- 656,000 -- -- -- (656,000) --
Net loss........................... -- -- -- -- -- (463,000) (463,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at July 31, 1996........... 4,700 $ 6,190,000 1,026,308 $ 10,000 $ 3,991,000 $ (3,150,000) $ 7,041,000
----- ------------ ---------- --------- ------------ ------------- -------------
----- ------------ ---------- --------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (806,000) $ (463,000)
Depreciation and amortization..................................................... 1,102,000 1,047,000
Provision for returns and bad debts............................................... 18,000 116,000
Changes in assets and liabilities:
Increase in accounts receivable................................................. (252,000) (917,000)
Increase in inventories......................................................... (1,034,000) (819,000)
Decrease in royalty advances.................................................... 57,000 90,000
(Increase) decrease in prepaid expenses......................................... (194,000) 34,000
Increase in other assets........................................................ -- (36,000)
Increase in accounts payable and accrued expenses............................... 480,000 658,000
Increase in royalties payable................................................... 26,000 59,000
------------- -------------
Net cash used in operating activities......................................... (603,000) (231,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures.............................................................. (112,000) (102,000)
Plant costs....................................................................... (1,221,000) (1,313,000)
------------- -------------
Net cash used in investing activities......................................... (1,333,000) (1,415,000)
------------- -------------
Cash flows from financing activities:
Repayment of debt................................................................. -- (2,000,000)
Proceeds from borrowings under notes payable...................................... 600,000 3,242,000
Proceeds from sale of capital stock............................................... 1,500,000 --
------------- -------------
Net cash provided by financing activities..................................... 2,100,000 1,242,000
------------- -------------
Net increase (decrease) in cash............................................... 164,000 (404,000)
Cash at beginning of period....................................................... 374,000 538,000
------------- -------------
Cash at end of period............................................................. $ 538,000 $ 134,000
------------- -------------
------------- -------------
Supplemental disclosures:
Interest paid..................................................................... $ 190,000 $ 239,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995 AND 1996
(1) DESCRIPTION OF THE BUSINESS AND FINANCIAL STATUS AND PLANS
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 through wholesalers, its own telemarketing efforts and
commissioned sales representatives. The Company was formed to acquire the net
assets of a wholly owned subsidiary of Antia Publishing Company, which is a
wholly owned subsidiary of Groupe de la Cite International, a French
corporation.
On February 23, 1994 the Company sold 4,700 shares of preferred stock and
715,684 shares of common stock for a total of $6,700,000 and used a portion of
such proceeds to acquire substantially all of the net assets related to the
business of the Company. In conjunction with the acquisition, the purchase price
was allocated as follows:
<TABLE>
<S> <C>
Cash paid, including acquisition costs...................... $ 3,025,000
Fair value of liabilities assumed........................... 6,384,000
-------------
Total purchase price...................................... 9,409,000
Less: Fair value of assets acquired......................... 5,718,000
-------------
Costs in excess of fair value of net assets acquired........ $ 3,691,000
-------------
-------------
</TABLE>
Also on February 23, 1994, the Company repaid acquired debt payable to
Societe Generale in the amount of $4,911,000.
During fiscal 1995 and June 1994, the Company sold 232,968 and 77,656 shares
of common stock for $1,500,000 and $500,000, respectively. Of the 232,968 shares
sold, 77,656 were sold to The Archon Press through the transaction described
below.
Concurrent with the agreement with Aladdin Books, detailed in note 9, The
Archon Press, an Aladdin-affiliated company, agreed to invest $500,000 in The
Millbrook Press. This investment was received over a period of months in fiscal
1995. Archon currently owns 77,656 common shares (7.57%) of the Company.
FINANCIAL STATUS AND PLANS
The Company has incurred losses of $1,660,000 since its inception. The
Company has taken or is planning the following actions to fund its ongoing
operations and to maintain compliance with certain covenants relating to its
notes payable to its bank.
- The Company has obtained a deferral of compliance with certain covenants
under its notes payable to the bank through December 31, 1996.
- In August 1996, the Company received proceeds of $1,036,000, net of
offering costs ($214,000) and the conversion of shareholder loans
($500,000) as described in note 12. These proceeds were used to fund
working capital requirements. The aggregate debt of $1,750,000 becomes due
and payable
F-7
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(1) DESCRIPTION OF THE BUSINESS AND FINANCIAL STATUS AND PLANS (CONTINUED)
upon the earlier of February 28, 1998 or the completion of an initial
public offering by the Company.
- The Company is in the process of offering 1,700,000 shares of common stock
in an initial public offering to raise approximately $6,325,000 which is
scheduled for completion in the second quarter of fiscal 1997. Management
intends to use the proceeds to repay the $1,750,000 bridge loan and
finance its working capital needs and the expansion of its operations.
There can be no assurance that the initial public offering will be
successfully completed and that, absent of the initial public offering, the
Company will be in compliance with its debt covenants once the waiver expires on
December 31, 1996 or that the Company will be able to repay its indebtedness
when due. If the initial public offering is not successfully completed, the
Company anticipates that it will have to refinance existing indebtedness, sell
assets and/or otherwise raise funds in either the private or public markets and
seek further waivers from its lenders. There can be no assurance, however, that
the Company will be able to raise such funds.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISKS
Revenue from the sale of books to wholesalers is 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.
Ongoing credit evaluations of customers' financial condition are performed
and collateral is not required. One customer accounted for 19% and 17% of the
Company's net sales for the years ended July 31, 1995 and 1996, respectively.
INVENTORIES
Inventories of sheets and bound books, which are primarily located in a
public warehouse and in-transit or at customers as inventory on preview, are
stated at the lower of cost or market, with cost determined by the average cost
method.
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 incurred 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.
PLANT COSTS
Plant costs consisting of plates, photo engraving, separations, and other
text costs of unpublished books are amortized over three to five years from
publication date or the estimated remaining life, if
F-8
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shorter. Plant costs at July 31, 1995 and 1996 are presented net of accumulated
amortization of $1,300,000 and $979,000, 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 and costs of complimentary copies are expensed ratably over the year in
which the costs are incurred in relation to sales. Advertising expense for the
years ended July 31, 1995 and 1996 was $349,000 and $328,000, 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 of the Company acquired on February 23, 1994. 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, 1995 and 1996 is $259,000 and $446,000, 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.
EARNINGS PER SHARE
Earnings (loss) per share are net earnings (loss) less the dividend
requirements on preferred stock, divided by the weighted average number of
common stock outstanding for the periods. Per share data does not assume the
exercise of common stock options issued under the non-qualified 1994 Stock
Option Plan or the exercise of the warrants issued in conjunction with the
Bridge financing (note 12) because the effects of such exercise would have been
antidilutive. Per share data reflects the reverse stock split effected on August
29, 1996 described in note 12.
F-9
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 123--Accounting for
Stock-Based Compensation. As allowable by SFAS 123, the Company does not intend
to recognize compensation cost for stock-based employee compensation
arrangements, but rather, starting in fiscal 1997, will disclose the pro-forma
impact on net income (loss) and earnings (loss) per share as if the fair value
stock-based compensation had been recognized starting in fiscal 1996.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates either are not applicable or are not
significant to the financial statements of the Company.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles 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, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and equipment........................................ $ 105,000 $ 125,000
Computers............................................................. 176,000 241,000
Telecommunication equipment........................................... 25,000 33,000
Leasehold improvements................................................ 19,000 28,000
---------- ----------
325,000 427,000
Accumulated depreciation.............................................. (90,000) (157,000)
---------- ----------
$ 235,000 $ 270,000
---------- ----------
---------- ----------
</TABLE>
(4) NOTES PAYABLE TO BANKS
The Company had a revolving line of credit from a bank that expired December
31, 1995. The note payable provided for an interest rate at the bank's base rate
(8.75% at July 31, 1995) plus .5% and was collateralized by substantially all of
the assets of the Company. The maximum available principal amount was
$2,000,000, all of which was outstanding at July 31, 1995.
On December 14, 1995, the Company entered into a revolving line of credit
agreement with a bank that provides for borrowings up to $2,700,000. The
proceeds of the new line of credit were used to pay off the $2,000,000
outstanding principal balance of the previous note. The new line of credit
expires on December 15, 1998 and provides for an interest rate at the bank's
base rate plus .5% (8.75% at July 31, 1996). On July 29, 1996 the bank increased
the available line of credit to $2,875,000. The additional line of
F-10
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(4) NOTES PAYABLE TO BANKS (CONTINUED)
$175,000 expired August 31, 1996. At July 31, 1996, the amount outstanding under
this credit agreement was $2,742,000. The advances under this line of credit are
collateralized by substantially all of the assets of the Company.
The revolving line of credit contains various covenants which include, among
other things, a minimum tangible net worth requirement. Although the Company has
not been in default under its line of credit agreement, in anticipation of the
Bridge Loan (decribed in note 12) and in order to maintain compliance with
certain covenants, the Company has obtained a waiver of certain covenants from
the bank that expires on December 31, 1996. The revolving line of credit
prohibits the Company from the declaration or payment of dividends without the
banks prior consent, however, dividends on preferred stock may continue to
accrue.
(5) SHAREHOLDER NOTES
On April 15, 1996, the Company issued interest-bearing promissory notes to
certain shareholders for an aggregate of $500,000. The notes carried interest at
10% and were converted into units sold by the Company as part of the private
placement bridge offering completed by the Company on August 29, 1996 as
described in note 12.
(6) INCOME TAXES
No Federal or state income taxes have been provided for the years ended July
31, 1995 and 1996, due to the Company's net operating losses. The actual income
tax expense differs from the "expected" income tax benefit computed by applying
the U.S. Federal corporate income tax rate to loss before income taxes for the
years ended July 31, 1995 and 1996 as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Computed "expected" income tax benefit.............................. $ (274,000) $ (158,000)
State and local income taxes, net of Federal benefit................ (32,000) (18,000)
Increase in valuation allowance..................................... 302,000 171,000
Nondeductible expenses.............................................. 4,000 5,000
----------- -----------
Provision for income taxes........................................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(6) INCOME TAXES (CONTINUED)
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, 1995 and 1996 are
the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances...................................... $ 81,000 $ 125,000
Inventory reserves.................................................. 44,000 104,000
Accruals not currently deductible................................... 6,000 17,000
Plant cost amortization............................................. 241,000 230,000
Net operating loss carryforwards.................................... 259,000 368,000
---------- ----------
631,000 844,000
Less: Valuation allowance............................................. 608,000 779,000
---------- ----------
Net deferred tax asset............................................ 23,000 65,000
Deferred tax liabilities:
Goodwill amortization............................................... (21,000) (56,000)
Fixed asset depreciation............................................ (2,000) (9,000)
---------- ----------
(23,000) (65,000)
---------- ----------
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. Based on the Company's net operating losses to date, the Company has
established a valuation allowance of $779,000 at July 31, 1996. The Company's
tax net operating loss carryforward of approximately $970,000 at July 31, 1996,
expires in the years 2009 to 2011. The Tax Reform Act of 1986 included certain
provisions relating to changes in stock ownership which, if triggered, could
result in future annual limitations on the utilization of the net operating loss
carryforwards.
(7) STOCK OPTION PLAN
The Company has reserved 310,000 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 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 and are issued at exercise prices which are not less than the
estimated fair value of the stock as determined by the Company on the date of
grant. Stock options vest in 20% increments in each of the five years after the
date of grant. In the event the Company has an initial public offering, all
non-vested options on the effective date of the initial public offering will
vest 50% one year from that date and an additional 50% two years from that date.
F-12
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(7) STOCK OPTION PLAN (CONTINUED)
As of July 31, 1995 and 1996, there were options outstanding for 245,500
shares and 285,000 shares, respectively, at an exercise price of $8.00 per
share. As of July 31, 1996, there were 107,000 options exercisable. During
fiscal 1996, no options were canceled.
In August and October 1996, the Company granted an additional 25,000 and
80,000 shares, respectively, under the Option Plan.
In October 1996, the Company amended the Option Plan to increase the number
of shares of common stock reserved under the Option Plan from 310,000 to
475,000; decrease the exercise price from $8.00 per share to the initial public
offering price; permit the granting of incentive stock options; and allow the
Stock Option and Compensation Committee of the Board of Directors to set vesting
provision at the time of grant for future stock options granted.
(8) 401(K) PROFIT SHARING PLAN
The Company maintains a Non-standardized Prototype Cash or Deferred Profit
Sharing 401(k) Plan ("Plan"). Participation in the Plan by employees requires
that they complete one month of service for the Company and attain 21 years of
age. Employees on the Plan's effective date did not have to satisfy the one-
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, 1995 and 1996.
(9) 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:
<TABLE>
<CAPTION>
YEAR ENDING
JULY 31 AMOUNT
------------ -----------
<S> <C>
1997.......................... $ 124,000
1998.......................... 130,000
1999.......................... 131,000
2000.......................... 134,000
2001.......................... 138,000
Thereafter.................... 250,000
-----------
$ 907,000
-----------
-----------
</TABLE>
Rent expense for the years ended July 31, 1995 and 1996 were $138,000 and
$126,000, 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
F-13
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(9) COMMITMENTS (CONTINUED)
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, 1995 and 1996 are $355,000 and
$556,000, respectively.
(10) 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.
(11) PREFERRED STOCK
The Company's preferred stock has a preference in liquidation of $1,000 per
share and is redeemable at the option of the Company at the liquidation value
plus accrued and unpaid dividends. The terms of the preferred stock provide for
annual cumulative dividends equal to 12% of the liquidation value, which are
added to the liquidation value each March 31. In the event the Company has an
initial public offering, all preferred shares outstanding, plus accrued and
unpaid dividends will convert to 473,692 shares of common stock. At July 31,
1996 dividends in arrears amounted to $1,490,000 ($317 per share).
(12) SUBSEQUENT EVENTS
RECAPITALIZATION PLAN
The Board of Directors of the Company approved a recapitalization plan in
August and October 1996, that includes (i) a bridge financing ("Bridge Loan") in
the principal amount $1,750,000 and the issuance of an aggregate amount of
875,000 warrants as outlined below and (ii) a planned initial public offering of
1,700,000 shares of common stock, respectively.
In connection with the Bridge Loan, the Company effected a reverse stock
split of common stock on the basis of .3976 shares of common stock for each
share of common stock. Common stock outstanding and earnings (loss) per share
data reflect the reverse stock split for all periods presented.
On October 16, 1996, the Company increased the number of authorized shares
of common stock from 5,000,000 shares to 12,000,000 shares and increased the
number of authorized shares of preferred stock from 10,000 shares to 1,000,000
shares. The preferred stock may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders.
BRIDGE LOAN
On August 29, 1996, the Company consummated the closing of a private
placement bridge offering in which it sold 17 1/2 units for an aggregate of
$1,750,000. Each unit consists of a $100,000 interest bearing
F-14
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(12) SUBSEQUENT EVENTS (CONTINUED)
unsecured convertible promissory note ("Note") and a warrant to purchase 50,000
shares of common stock at an initial exercise price of $3.00 per share ("Bridge
Warrant"). The Note provides for interest at a rate of 10% per annum through
November 30, 1996 and thereafter a rate of 15% per annum and is payable upon the
earlier of February 28, 1998 or the closing of an initial public offering by the
Company. The carrying value of the Note has been reduced by $23,000 to reflect
the fair market value of the Bridge Warrants at issue date and will be accreted
up to the face value of $1,750,000 using the interest method. Fees incurred in
connection with the financing were $314,000.
In the event the Company does not successfully complete an initial public
offering the holders of the Notes can elect to convert the entire principal
amount and interest payable into the number of shares of common stock equal to
the principal amount and interest payable divided by $2.50.
F-15
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEET
OCTOBER 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash......................................................................... $ 100,000
Accounts receivable (less allowance for returns and bad debts of $427,000)... 2,889,000
Inventories.................................................................. 4,099,000
Royalty advances, net........................................................ 301,000
Prepaid expenses............................................................. 162,000
----------
Total current assets....................................................... 7,551,000
----------
Plant costs, net............................................................... 2,772,000
Fixed assets, net.............................................................. 284,000
Goodwill, net.................................................................. 3,197,000
Royalty advances, net.......................................................... 129,000
Other assets (note 3).......................................................... 424,000
----------
Total assets............................................................... $14,357,000
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 4)............................................... $2,628,000
Accounts payable and accrued expenses........................................ 2,738,000
Royalties payable............................................................ 285,000
----------
Total current liabilities.................................................. 5,651,000
Long-term debt................................................................. 1,730,000
----------
Total liabilities.......................................................... 7,381,000
----------
Stockholders' equity:
12% Series A voting, cumulative Preferred Stock, par value $.01 per share;
authorized 10,000 shares; issued and outstanding 4,700 shares (at aggregate
liquidation preference including dividends in arrears)..................... 6,370,000
Common Stock, par value $.01 per share, authorized 5,000,000 shares; issued
and outstanding 1,026,308 shares........................................... 10,000
Additional paid-in capital................................................... 4,014,000
Accumulated deficit.......................................................... (3,418,000)
----------
Total stockholders' equity................................................. 6,976,000
----------
Total liabilities and stockholders' equity................................. $14,357,000
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-16
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net sales............................................................................. $ 2,706,000 $ 3,266,000
Cost of sales......................................................................... 1,373,000 1,743,000
------------ ------------
Gross profit........................................................................ 1,333,000 1,523,000
------------ ------------
Operating expenses:
Selling and marketing............................................................... 937,000 1,140,000
General and administrative.......................................................... 293,000 390,000
------------ ------------
Total operating expenses.......................................................... 1,230,000 1,530,000
------------ ------------
Operating income (loss)............................................................... 103,000 (7,000)
Interest expense...................................................................... 49,000 81,000
------------ ------------
Net income (loss)..................................................................... 54,000 (88,000)
Preferred dividend accrued............................................................ (161,000) (180,000)
------------ ------------
Net loss available to common stockholders............................................. $ (107,000) $ (268,000)
------------ ------------
------------ ------------
Net loss per share after preferred dividend requirements (primary and fully
diluted)............................................................................. $ (.10) $ (.26)
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996........... 4,700 $ 6,190,000 1,026,308 $ 10,000 $ 3,991,000 $ (3,150,000) $ 7,041,000
Preferred stock dividend........... -- 180,000 -- -- -- (180,000) --
Issuance of common stock
warrants.......................... -- -- -- -- 23,000 -- 23,000
Net loss........................... -- -- -- -- -- (88,000) (88,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at October 31, 1996........ 4,700 $ 6,370,000 1,026,308 $ 10,000 $ 4,014,000 $ (3,418,000) $ 6,976,000
----- ------------ ---------- --------- ------------ ------------- -------------
----- ------------ ---------- --------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ 54,000 $ (88,000)
Depreciation and amortization..................................................... 270,000 322,000
Provision for returns and bad debts............................................... 75,000 98,000
Changes in assets and liabilities:
Increase in accounts receivable................................................. (1,047,000) (903,000)
Increase in inventories......................................................... (276,000) (622,000)
Decrease in royalty advances.................................................... 5,000 1,000
Decrease in prepaid expenses.................................................... 198,000 130,000
Increase in other assets........................................................ -- (405,000)
Increase in accounts payable and accrued expenses............................... 833,000 597,000
Increase in royalties payable................................................... 10,000 135,000
------------- -------------
Net cash provided by (used in) operating activities........................... 122,000 (735,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures.............................................................. (6,000) (32,000)
Plant costs....................................................................... (468,000) (403,000)
------------- -------------
Net cash used in investing activities......................................... (474,000) (435,000)
------------- -------------
Cash flows from financing activities:
Repayment of debt................................................................. -- (500,000)
Repayment of borrowings under note payable........................................ -- (114,000)
Proceeds from long-term debt...................................................... -- 1,750,000
------------- -------------
Net cash provided by financing activities..................................... -- 1,136,000
------------- -------------
Net decrease in cash.......................................................... (352,000) (34,000)
Cash at beginning of period....................................................... 538,000 134,000
------------- -------------
Cash at end of period............................................................. $ 186,000 $ 100,000
------------- -------------
------------- -------------
Supplemental disclosures:
Interest paid..................................................................... $ 47,000 $ 74,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The Unaudited financial statements of The Millbrook Press Inc. ("Company")
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows. The results of the October 31, 1995 and October 31, 1996 interim
periods are not necessarily indicative of the results that may be expected for
the full year.
The interim financial statements should be read in conjunction with the
annual financial statements and notes included elsewhere in this Prospectus.
(2) CAPITAL STOCK
In August 1996, the Company effected a reverse stock split of common stock
on the basis of .3976 shares of common stock for each share of common stock.
Common stock outstanding and earnings (loss) per share data reflect the reverse
stock split for all periods presented.
On October 16, 1996, the Company increased the number of authorized shares
of common stock from 5,000,000 shares to 12,000,000 shares and increased the
number of authorized shares of preferred stock from 10,000 shares to 1,000,000
shares. The preferred stock may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders.
(3) OTHER ASSETS
Included in other assets are deferred financing costs of $279,000, net of
accumulated amortization, relating to the bridge financing and deferred initial
public offering costs of $101,000.
(4) NOTE PAYABLE TO BANKS
In November 1996, the bank increased the available line of credit to
$2,875,000. The additional line of $175,000 expires December 31, 1996. At
October 31, 1996, the amount outstanding under this credit agreement was
$2,628,000.
(5) INCOME TAXES
No Federal or state income taxes have been provided for the three months
ended October 31, 1995 and 1996, due to the Company's net operating losses. The
actual income tax expense differs from the "expected" income tax benefit
computed by applying the U.S. Federal corporate income tax rate to loss before
income taxes for the three months ended October 31, 1995 and 1996 primarily due
to the increase in the valuation allowance.
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. Based on the Company's net operating losses to date, the Company has
established a valuation allowance for the full amount of the deferred tax assets
at October 31, 1996.
F-20
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(UNAUDITED)
(6) STOCK OPTION PLAN
The Company has reserved 475,000 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 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 and are issued at exercise prices which are not less than the
estimated fair value of the stock as determined by the Company on the date of
grant. Stock options vest in 20% increments in each of the five years after the
date of grant. In the event the Company has an initial public offering, all
non-vested options on the effective date of the initial public offering will
vest 50% one year from that date and an additional 50% two years from that date.
During October 1996, the Stock Option and Compensation Committee of the
Board of Directors were given the authority to set vesting provisions at the
time of grant for future stock options granted.
F-21
<PAGE>
AWARDS _________________________________________________________________________
AMERICAN ASSOCIATION FOR THE
ADVANCEMENT OF SCIENCE--BEST CHILDREN'S SCIENCE BOOK LIST
CATS IN THE ZOO (1994)
CHICO MENDES: DEFENDER OF THE RAIN FOREST (1994) THE NEZ PERCES: PEOPLE OF THE
FAR
WEST (1994)
THE OJIBWAS: PEOPLE OF THE
NORTHERN FORESTS (1994)
PERFORMING DOGS: STARS OF STAGE, SCREEN,
AND TELEVISION (1994) RANCH AND FARM DOGS: HERDERS
AND GUARDS (1994) SEARCH AND RESCUE DOGS (1994)
AMERICAN BOOKSELLER--PICK OF THE LISTS
THE CROCODILE AND THE DENTIST (1995)
EVERY DAY IS EARTH DAY (1995)
ONE DAY WE HAD TO RUN! (1995)
SHARKS (1996)
WITCHES (1996)
AMERICAN LIBRARY ASSOCIATION
BEST BOOKS FOR YOUNG ADULTS
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
AMERICAN LIBRARY ASSOCIATION--PICKS FOR RELUCTANT YOUNG ADULT READERS
JIM ABBOTT: STAR PITCHER (1993)
MARIO LEMIEUX: WIZARD WITH A PUCK (1993)
AMERICAN LIBRARY ASSOCIATION-- OUTSTANDING BOOKS FOR MIDDLE SCHOOL READERS
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
BOOKLIST TOP BLACK HISTORY PICKS FOR YOUTH
AFRICAN-AMERICAN VOICES (1995)
CHILD STUDY ASSOCIATION--
CHILDREN'S BOOKS OF THE YEAR
AFRICAN-AMERICAN INVENTORS (1995)
AFRICAN-AMERICAN SCIENTISTS (1995)
AL GORE (1995)
CHICO MENDES: DEFENDER OF THE RAIN
FOREST (1995)
CHILDREN OF THE SWASTIKA:
THE HITLER YOUTH (1994)
THE CHILDREN'S ATLAS OF EXPLORATION (1994)
CHURCH AND STATE: GOVERNMENT AND
RELIGION IN THE UNITED STATES (1994) DAVID ROBINSON: NBA SUPER CENTER (1994)
DROUGHT (1994)
ELIE WIESEL: BEARING WITNESS (1995)
FREEDOM OF EXPRESSION: THE RIGHT TO SPEAK
OUT IN AMERICA (1994)
GARDENS FROM GARBAGE (1994)
HENRY DAVID THOREAU: IN STEP WITH
NATURE (1994)
THE IRISH-AMERICAN EXPERIENCE (1994)
THE IROQUOIS: PEOPLE OF THE NORTHEAST (1994)
MOHANDAS GANDHI (1995)
MOTHER JONES AND THE MARCH OF THE MILL
CHILDREN (1995)
THE ORCHESTRA: AN INTRODUCTION TO THE
WORLD OF CLASSICAL MUSIC (1994)
OUR GREAT RIVERS AND WATERWAYS (1995)
OUR SONG, OUR TOIL (1995)
OUR SUPREME COURT (1995)
THE PULLMAN STRIKE OF 1894 (1995)
THE RIGHT TO DIE: PUBLIC CONTROVERSY,
PRIVATE MATTER (1994)
RUTH BADER GINSBURG (1995)
THE SCOPES TRIAL (1995)
SONGS AND STORIES FROM THE AMERICAN
REVOLUTION (1995)
SPACES (1994)
THURGOOD MARSHALL AND EQUAL RIGHTS (1994)
THE WEST INDIAN-AMERICAN
EXPERIENCE (1995)
WOUNDED KNEE: THE DEATH OF
A DREAM (1994)
NATIONAL COUNCIL FOR SOCIAL STUDIES/ CHILDREN'S BOOK COUNCIL--NOTABLE CHILDREN'S
TRADE BOOKS IN THE FIELD OF SOCIAL STUDIES
THE AMERICAN REVOLUTION: HOW WE FOUGHT
THE WAR OF INDEPENDENCE (1996)
GROWING UP IN AMERICA: 1830-1860 (1996)
MOTHER JONES AND THE MARCH OF THE
MILL CHILDREN (1995)
OUR SONG, OUR TOIL: THE STORY OF AMERICAN
SLAVERY AS TOLD BY SLAVES (1995)
STRIKE! THE BITTER STRUGGLE OF AMERICAN WORKERS FROM COLONIAL TIMES TO THE
PRESENT (1996)
NATIONAL SCIENCE TEACHERS
ASSOCIATION/CHILDREN'S BOOK
COUNCIL--OUTSTANDING SCIENCE
TRADE BOOKS FOR CHILDREN
BONES (1996)
THE CHILDREN'S ATLAS OF NATURAL
WONDERS (1996)
LUCKY MOUSE (1996)
NATURE IN YOUR BACKYARD (1996)
SCIENTIFIC AMERICAN YOUNG
READERS BOOK AWARD
THE CROCODILE AND THE DENTIST (1995)
THE CHILDREN'S LITERATURE CHOICE LIST
LAUNCH DAY (1995)
INTERNATIONAL READING
ASSOCIATION/CHILDREN'S BOOK
COUNCIL CHILDREN'S CHOICES
DAVID ROBINSON: NBA SUPER CENTER (1994)
DRACULA (1995)
53 1/2 THINGS THAT CHANGED THE WORLD (1995)
FRANKENSTEIN (1995)
THE LOS ANGELES RIOTS: AMERICA'S CITIES
IN CRISIS (1994)
THE WINTER SOLSTICE (1995)
INTERNATIONAL READING
ASSOCIATION YOUNG ADULTS
CHOICES
VIOLENCE ON AMERICA'S STREETS (1994)
NATIONAL PARENTING CENTER SEAL OF APPROVAL
THE CHILDREN'S ATLAS OF THE HUMAN
BODY (1994)
NEW YORK PUBLIC LIBRARY BOOKS FOR THE TEEN AGE
ADOLF HITLER (1996)
AMERICAN INDIAN VOICES (1996)
ANIMAL RIGHTS: A HANDBOOK
FOR YOUNG ADULTS (1994)
BELLES OF THE BALLPARK (1994)
CAMPAIGN FINANCING (1995)
THE CATHEDRAL BUILDERS (1994)
CHILDREN OF THE SWASTIKA: THE HITLER
YOUTH (1994)
CHINA UNDER COMMUNISM (1996)
CHURCH AND STATE: GOVERNMENT AND RELIGION
IN THE UNITED STATES (1994)
COLLECTING BASEBALL CARDS (1994)
CULTS (1995)
FOOD RISKS AND CONTROVERSIES: MINIMIZING
THE DANGERS IN YOUR DIET (1994)
FREEDOM OF EXPRESSION: THE RIGHT TO SPEAK OUT IN AMERICA (1994)
GAMBLING (1996)
HIT ME WITH MUSIC (1996)
THE HUNT FOR HIDDEN KILLERS (1995)
JAPAN AND THE UNITED STATES: ECONOMIC
COMPETITORS (1994)
KNOW ABOUT GAYS AND LESBIANS (1995)
LATINO VOICES (1995)
LIBYA (1995)
THE MAGIC SHOW (1996)
MALCOLM X: HIS LIFE AND LEGACY (1996)
THE MIND AT WORK: HOW TO MAKE IT WORK
BETTER FOR YOU (1994)
MOHANDAS GANDHI (1995)
PROPHETS OF DOOM (1994)
QUINCEANERA (1995)
RIGHTS AND RESPECT (1996)
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
SCIENCE ON ICE (1996)
THOSE INCREDIBLE WOMEN OF
WORLD WAR II (1995)
THE WELFARE SYSTEM (1996)
THE WHITE POWER MOVEMENT: AMERICA'S
RACIST HATE GROUPS (1994)
SCHOOL LIBRARY JOURNAL BEST BOOKS
FOR YA'S
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
SKIPPING STONES 1996 HONOR AWARD
ONE DAY WE HAD TO RUN (1995)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 6
Risk Factors.............................................................. 6
Dilution.................................................................. 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Business.................................................................. 23
Management................................................................ 33
Principal Stockholders.................................................... 38
Certain Transactions...................................................... 42
Description of Securities................................................. 43
Shares Eligible For Future Sale........................................... 45
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 48
Available Information..................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL JANUARY , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE MILLBROOK PRESS INC.
[LOGO]
1,700,000 SHARES OF COMMON STOCK
--------------
PROSPECTUS
--------------
[LOGO]
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter provision,
by-law, contract or other arrangement under which any controlling person,
director or officer of The Millbrook Press Inc. ("Company") is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
The Certificate of Incorporation, as amended ("Certificate of
Incorporation"), of the Company provides that the Company shall indemnify to the
fullest extent permitted by Delaware law any person whom it may indemnify
thereunder, including directors, officers, employees and agents of the Company.
The pertinent section of Delaware law is set forth below in full. Such
indemnification (other than as ordered by a court) shall be made by the Company
only upon a determination that indemnification is proper in the circumstances
because the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors, or
by independent legal counsel or by the stockholders. In addition, the
Certificate of Incorporation provides for the elimination, to the extent
permitted by Delaware law, of personal liability of directors to the Company and
its stockholders for monetary damages for breach of fiduciary duty as directors.
The Company obtained a directors and officers insurance and company
reimbursement policy in the amount of $3,000,000. The policy insures directors
and officers against unindemnified loss arising from certain wrongful acts in
their capacities and would reimburse the Company for such loss for which the
Company has lawfully indemnified the directors and officers.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act").
Section 145 of the General Corporation Law provides as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
II-1
<PAGE>
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this section.
Such expenses incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
II-2
<PAGE>
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to any employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company has also agreed to indemnify each director and executive officer
pursuant to an Indemnification Agreement with each such director and executive
officer from and against any and all expenses, losses, claims, damages and
liability incurred by such director or executive officer for or as a result of
action taken or not taken while such director or executive officer was acting in
his capacity as a director, officer, employee or agent of the Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement, other than underwriting commissions and discounts.
<TABLE>
<S> <C>
Registration Fee................................................ 3,461.39
National Association of Securities Dealers, Inc. Fee............ 2,626.01
Nasdaq SmallCap Market and The Boston Stock Exchange Filing
Fee........................................................... 25,000.00
Legal Fees and Expenses......................................... 125,000.00
Accounting Fees and Expenses.................................... 50,000.00
Printing and Engraving Expenses................................. 65,000.00
Blue Sky Fees and Expenses...................................... 50,000.00
Transfer Agent's and Registrar's Fees........................... 5,000.00
Miscellaneous Expenses.......................................... 4,412.60
---------
Total........................................................... 330,500.00
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following securities were sold by the
Company without registration under the Securities Act. Except as otherwise
indicated, the securities were sold by the Company in reliance upon the
exemption provided by Section 4(2) of the Securities Act. With respect to such
transactions, each purchaser of securities represented to the Company that such
purchaser (i) had sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the risks and merits of the
transaction and was capable of bearing the economic risks of such investment
including a complete loss of its investment, (ii) had an opportunity to discuss
the business, management and financial affairs of the Company with the Company's
representatives, (iii) acquired the securities for his own account for the
purpose of investment and not with a view to or for resale in connection with
any distribution thereof and (iv) understood that (a) the securities had not
been registered under the Securities Act by reason of their issuance in a
transaction exempt from the registration requirements of the Securities
II-3
<PAGE>
Act pursuant to Section 4(2) thereof, (b) the securities must be held
indefinitely unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from such registration, (c) the securities would
bear a legend to such effect and (d) the Company will make a notation on its
transfer books to such effect. With respect to all transactions prior to August
1996, all share numbers in this section have been adjusted to reflect (i) the
reverse stock split of the Company's Common Stock, $.01 par value ("Common
Stock") on the basis of .3976 shares of Common Stock for each share of Common
Stock ("Reverse Stock Split") or (ii) the conversion of all of its outstanding
Series A Redeemable Voting Preferred Stock, $.01 par value ("Preferred Stock")
and all accrued and unpaid dividends into 473,692 shares of Common Stock in
accordance with the Company's Articles of Incorporation after giving effect to
the Reverse Stock Split.
In February 1994, the Company was incorporated and acquired substantially
all of the assets of The Millbrook Press Inc. In connection with such merger the
following persons received the following shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF COMMON STOCK
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Frank Farrell.................................................................................. 69,779
Howard Graham.................................................................................. 69,779
Jean Reynolds.................................................................................. 15,506
Applewood Associates, L.P...................................................................... 517,154
Barry Fingerhut................................................................................ 25,858
Woodland Partners.............................................................................. 25,858
Irwin Lieber................................................................................... 25,858
Jonathan Lieber................................................................................ 4,310
Seth Lieber.................................................................................... 4,310
Sandler Capital Management..................................................................... 344,769
Harvey Sandler................................................................................. 27,583
John Kornriech................................................................................. 17,239
Michael Marocco................................................................................ 17,239
Barry Lewis.................................................................................... 17,239
Andrew Sandler................................................................................. 4,310
Hannah Stone................................................................................... 2,586
-----------------
Total...................................................................................... 1,189,376
-----------------
-----------------
</TABLE>
In June 1994, Sandler Capital Management transferred 344,769 shares of
Common Stock to 21st Century Investments ("21st Investments"), which in turn
transferred such shares of Common Stock to its affiliates, 21st Century Foreign
Partners ("21st Foreign"), 21st Century Communications Partners, L.P. ("21st
Partners") and 21st Century Communications T-E Partners, L.P. ("21st T-E"), PRO
RATA according to such entity's interest in 21st Investments.
In June 1994, Applewood Associates, L.P. ("Applewood") transferred 344,767
shares of Common Stock to 21st Investments, which in turn transferred such
shares of Common Stock to its affiliates, 21st Foreign, 21st Partners and 21st
T-E, pro rata according to such entity's interest in 21st Investments.
In June 1994, the Company issued 77,656 shares of its Common Stock to 21st
Investments for an aggregate purchase price of $500,000.
In October 1994, the Company issued 31,063 shares of its Common Stock to
Archon Press for an aggregate purchase price of $200,000.
In December 1994, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
II-4
<PAGE>
In February 1995, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
In April 1995, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
In June 1995, the Company issued 78,979, 26,872, 10,633, 38,828 shares of
its Common Stock to 21st Partners, 21st T-E, 21st Foreign and Applewood,
respectively for aggregate purchase prices of $508,520, $173,020, $68,460 and
$250,000, respectively.
In August 1996, in connection with the Bridge Financing, the Company issued
the following Bridge Notes and Bridge Warrants to the following persons:
<TABLE>
<CAPTION>
NUMBER OF
NAME NOTE AMOUNT WARRANTS
- -------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Leon Abramson and Lorraine Abramson....................................... $ 25,000 12,500
Richard Ackerman.......................................................... 25,000 12,500
David Alexander........................................................... 25,000 12,500
Alsa, Inc................................................................. 50,000 25,000
Applewood Associates LP................................................... 250,000 125,000
Neil Bellett.............................................................. 25,000 12,500
Robert Bender............................................................. 25,000 12,500
Daniel Berger and Carolyn Berger.......................................... 25,000 12,500
Kenneth D. Cole........................................................... 25,000 12,500
Damerel Trading S.A....................................................... 50,000 25,000
Drew Effron............................................................... 25,000 12,500
Chris Engel............................................................... 25,000 12,500
Richard Etra and Kenneth Etra............................................. 25,000 12,500
Steven Etra............................................................... 62,500 31,250
Andrew Feiner............................................................. 25,000 12,500
Gordon M. Freeman......................................................... 200,000 100,000
Ernest Gottdiener......................................................... 25,000 12,500
Paula Graff............................................................... 25,000 12,500
Peter Hunt................................................................ 25,000 12,500
Daniel A. Kaplan.......................................................... 25,000 12,500
Richard C. Kaufman and Elaine J. Lenart................................... 25,000 12,500
Norman Kurtz.............................................................. 25,000 12,500
Mariwood Investments...................................................... 25,000 12,500
Anthony Peyser............................................................ 25,000 12,500
RJB Partners, L.P......................................................... 25,000 12,500
Steven Rosen.............................................................. 12,500 6,250
Rebecca Rubenstein........................................................ 50,000 25,000
Alan J. Rubin............................................................. 25,000 12,500
Jeffrey Rubinstein........................................................ 50,000 25,000
Chana Sasha Foundation.................................................... 33,333.34 16,667
Curtis Schenker........................................................... 25,000 12,500
Alan and Nancy Shapiro.................................................... 25,000 12,500
Carl E. Siegel............................................................ 25,000 12,500
Gregory Trubowitsch....................................................... 12,500 6,250
21st Century Communications Foreign Partners, L.P. 23,000 11,500
21st Century Communications T-E Partners, L.P. 57,000 28,500
21st Century Communications Partners, L.P. 170,000 85,000
Charles Warshaw........................................................... 12,500 6,250
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME NOTE AMOUNT WARRANTS
- -------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Aaron Wolfson............................................................. 33,333.33 16,666
Abraham Wolfson........................................................... 33,333.33 16,667
William Wolfson........................................................... 50,000 25,000
Total................................................................. 1,750,000 875,000
</TABLE>
II-6
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**1 Form of Underwriting Agreement.
*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
*5 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
**10.1 Employment Agreement, dated as of September 27, 1996, by and between the Company and Jeffrey Conrad.
*10.2 Amendment dated as of December 13, 1996 to the Employment Agreement by and between the Company and
Jeffrey Conrad.
*10.3 Employment Agreement, dated as of December 12, 1996, by and between the Company and Jean E. Reynolds.
*10.4 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Farrell
Associates, Inc.
*10.5 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Graham
International Publishing and Research Inc.
**10.6 Form of Indemnification Agreement between each of the Officers and Directors of the Company and the
Company.
**10.7 Agreement of Lease, dated September 27, 1994, by and between the Company and Arnold S. Paster.
**10.8 Agreement of Lease, dated March 26, 1996, by and between the Company and Land First II Group.
**10.9 Agreement of Lease and rider attached thereto, dated February 15, 1996, by and between the Company and
Ninety-Five Madison Company.
**10.10 1994 Stock Option Plan, as amended
**10.11 Loan and Security Agreement, dated as of December 14, 1995, between People's Bank and the Company.
**10.12 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Jean Reynolds.
**10.13 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Frank Farrell.
**10.14 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Howard Graham.
**10.15 Contribution Agreement, dated as of December 14, 1995, entered into among the
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
stockholders of the Company named therein.
<C> <S>
**10.16 Agreement made effective as of August 1, 1996 by and between Aladdin Books Limited and the Company.
**10.17 Heads of Option Agreement, dated July 27, 1993, as amended, among Groupe de la Cite International,
Antia Corporation and SMG Associates.
**10.18 Standardized Adoption Agreement, dated March 20, 1996, for the Company's 401K Plan.
**10.19 Fidelity Guarantee/Guaranty of Validity of Accounts, dated as of December 14, 1995, among Frank
Farrell, Howard Graham, Jean Reynolds and People's Bank.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
**24 Power of Attorney (included in Part II, page II-9).
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) File, during any period in which it offers or sales securities, a
post-effective amendment to this registration statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and in the offering of such securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The undersigned small business issuer will provide to the Representative at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer
II-8
<PAGE>
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of the securities at that time as the initial bona fide
offering of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 2
to the Registration Statement, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
13th day of December 1996.
THE MILLBROOK PRESS INC.
By: /s/ FRANK J. FARRELL
-----------------------------------------
Name: Frank J. Farrell
Title: VICE PRESIDENT AND SECRETARY
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ------------------------------ ---------------------------
* Chief Executive Officer and December 13, 1996
- ------------------------------ President
Jeffrey Conrad
* Vice President and Director December 13, 1996
- ------------------------------
Howard Graham
/s/ FRANK J. FARRELL Vice President, Secretary December 13, 1996
- ------------------------------ and Director
Frank J. Farrell
* Director, Chairman December 13, 1996
- ------------------------------
Barry Fingerhut
* Director December 13, 1996
- ------------------------------
Barry Rubinstein
* Director December 13, 1996
- ------------------------------
Michael Marocco
* Vice President and Chief December 13, 1996
- ------------------------------ Financial Officer
Donald D'Angelo
*
/s/ FRANK J. FARRELL
- ------------------------------
By: Frank J. Farrell,
Attorney-in-Fact
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**1 Form of Underwriting Agreement.
*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
*5 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
**10.1 Employment Agreement, dated as of September 27, 1996, by and between the Company and Jeffrey Conrad.
*10.2 Amendment dated as of December 13, 1996 to the Employment Agreement by and between the Company and
Jeffrey Conrad.
*10.3 Employment Agreement, dated as of December 12, 1996, by and between the Company and Jean E. Reynolds.
*10.4 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Farrell
Associates, Inc.
*10.5 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Graham
International Publishing and Research Inc.
**10.6 Form of Indemnification Agreement between each of the Officers and Directors of the Company and the
Company.
**10.7 Agreement of Lease, dated September 27, 1994, by and between the Company and Arnold S. Paster.
**10.8 Agreement of Lease, dated March 26, 1996, by and between the Company and Land First II Group.
**10.9 Agreement of Lease and rider attached thereto, dated February 15, 1996, by and between the Company and
Ninety-Five Madison Company.
**10.10 1994 Stock Option Plan, as amended
**10.11 Loan and Security Agreement, dated as of December 14, 1995, between People's Bank and the Company.
**10.12 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Jean Reynolds.
**10.13 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Frank Farrell.
**10.14 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Howard Graham.
**10.15 Contribution Agreement, dated as of December 14, 1995, entered into among the stockholders of the
Company named therein.
**10.16 Agreement made effective as of August 1, 1996 by and between Aladdin Books Limited and the Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**10.17 Heads of Option Agreement, dated July 27, 1993, as amended, among Groupe de la Cite International,
Antia Corporation and SMG Associates.
**10.18 Standardized Adoption Agreement, dated March 20, 1996, for the Company's 401K Plan.
**10.19 Fidelity Guarantee/Guaranty of Validity of Accounts, dated as of December 14, 1995, among Frank
Farrell, Howard Graham, Jean Reynolds and People's Bank.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
**24 Power of Attorney (included in Part II, page II-9).
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
<PAGE>
EXHIBIT 23.1
AUDITOR'S CONSENT
The Board of Directors
The Millbrook Press Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/S/ KPMG PEAT MARWICK LLP
New York, New York
December 13, 1996
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MILLBROOK PRESS INC.
The Millbrook Press Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware, certifies as
follows:
1. The certificate of incorporation (the "Certificate of
Incorporation") of Millbrook Acquisition Corp. was filed February 3, 1994 and
the amendment to the Certificate of Incorporation changing the name to The
Millbrook Press Inc. (the "Corporation") was filed March 8, 1994 with the
Secretary of State of the State of Delaware.
2. The Certificate of Incorporation is hereby amended by striking
out Articles FIRST through FIFTHTEENTH thereof and by substituting in lieu
thereof new Articles FIRST through ELEVENTH which are set forth in the
Restated Certificate of Incorporation hereinafter provided for.
3. The provisions of the Certificate of Incorporation of the
Corporation as heretofore amended and/or supplemented, and as herein
amended, are hereby restated and integrated into the single instrument which
is hereinafter set forth, and which is entitled Restated Certificate of
Incorporation of The Millbrook Press Inc. without any further amendments
other than the amendments herein certified and without any discrepancy
between the provisions of the Certificate of Incorporation as heretofore
amended and supplemented and the provisions of the said single instrument
hereinafter set forth.
4. The amendments and the restatement of the Certificate of
Incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware. Prompt written notice of the
adoption of the amendments and the restatement of the Certificate of
Incorporation herein certified has been given to those stockholders who have
not consented in writing thereto, as provided in Section 228 of the General
Corporation Law of the State of Delaware.
5. The Certificate of Incorporation of the Corporation, as amended
and restated herein, shall at the effective time of this Restated Certificate
of Incorporation, read as follows:
<PAGE>
"RESTATED CERTIFICATE OF INCORPORATION
OF
THE MILLBROOK PRESS INC."
FIRST: The name of the corporation (hereinafter sometimes called
the "Corporation") is The Millbrook Press Inc.
SECOND: The address, including street, number, city and county of
the registered office of the Corporation in the State of Delaware is 1013
Centre Road, Wilmington, County of New Castle, Delaware 19805-1297; and the
name of the registered agent of the Corporation in the State of Delaware at
such address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have the authority to issue is thirteen million (13,000,000) shares,
consisting of (i) one million (1,000,000 shares of Preferred Stock, $.10 par
value (the "Preferred Stock") and (ii) twelve million (12,000,000) shares of
Common Stock, $.01 par value (the "Common Stock").
A. PREFERRED STOCK. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock, in one or more series, and to fix for each such series such voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as shall be stated
and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issue of such series (a "Preferred Stock
Designation") and as may be permitted by the General Corporation Law of the
State of Delaware. The number of authorized shares of Preferred Stock may be
increased (but not above the number of authorized shares of the class) or
decreased (but not below the number of shares thereof then outstanding).
Without limiting the generality of the foregoing, the resolutions providing
for issuance of any series of Preferred Stock may provide that such series
shall be superior or rank equally or junior to the Preferred Stock of any
other series to the extent permitted by law. No vote of the holders of the
Preferred Stock or Common Stock shall be required in connection with the
designation or the issuance of any shares of any series of any Preferred
Stock authorized by and complying with the conditions
-2-
<PAGE>
herein, the right to have such vote being expressly waived by all present
and future holders of the capital stock of the Corporation.
B. COMMON STOCK.
Section 1. VOTING. Except as otherwise required by law or as
otherwise provided in any Preferred Stock Designation, the holders of the
Common Stock shall exclusively possess all voting power and each share of
Common Stock shall have one vote.
Section 2. DIVIDENDS. The holders of Common Stock shall be
entitled to receive dividends, when, as and if declared by the Board of
Directors out of funds legally available for such purpose and subject to any
preferential dividend rights of any then outstanding Preferred Stock.
Section 3. LIQUIDATION, DISSOLUTION, WINDING UP. After
distribution in full of the preferential amount, if any (fixed in accordance
with the provisions of paragraph A of this Article FOURTH), to be distributed
to the holders of Preferred Stock in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or winding-up of the
Corporation, the holders of the Common Stock shall be entitled to receive all
the remaining assets of the Corporation, tangible and intangible, of whatever
kind available for distribution to stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively.
FIFTH: The name and the mailing address of the incorporator is as
follows:
Robert Londin
Morrison Cohen Singer & Weinstein
750 Lexington Avenue
New York, New York 10022
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for the Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution under Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or
the stockholders or class of stockholders of the Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a
-3-
<PAGE>
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
the Corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of the Corporation, as the case may be, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
EIGHTH: For the management of the business and for the conduct of
the affairs of the Corporation, and in further definition, limitation and
regulation of the powers of the Corporation and of its directors and its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs
of the Corporation, including the election of the Chairman of the
Board of Directors, if any, the President, the Treasurer, the
Secretary, and other principal officers of the Corporation, shall
be vested in its Board of Directors. The number of directors which
shall constitute the whole Board of Directors shall be fixed by, or
in the manner provided in, the By-Laws. The phrase "whole Board"
and the phrase "total number of directors" shall be deemed to have
the same meaning, to wit, the total number of directors which the
Corporation would have if there were no vacancies. No election of
directors need be by written ballot.
2. The original By-Laws of the Corporation shall be adopted by
the incorporator unless the Certificate of Incorporation shall name
the initial Board of Directors therein. Thereafter, the power to
make, alter, or repeal the By-Laws, and to adopt any new By-Law,
except a By-Law classifying directors for election for staggered
terms, shall be vested in the Board of Directors.
3. Whenever the Corporation shall be authorized to issue only one
class of stock, each outstanding share shall entitle the holder
thereof to notice of, and the right to vote at, any meeting of
stockholders. Whenever the Corporation shall be authorized to
issue more than one class of stock, no outstanding
-4-
<PAGE>
share of any class of stock which is denied voting power under the
provisions of the Certificate of Incorporation shall entitle the
holder thereof to notice of, and the right to vote at, any meeting
of stockholders, except as the provisions of paragraph (b) (2) of
Section 242 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, shall
otherwise require.
NINTH: The personal liability of the directors of the corporation
is hereby eliminated to the fullest extent permitted by paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of the State of
Delaware, as same may be amended and supplemented.
TENTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all
of the expenses, liabilities or other matters referred to in or covered by
said section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any By-Law, agreement, vote of stockholders or disinterested directors
or otherwise, both as to action in their official capacities and as to action
in another capacity while holding such offices, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
ELEVENTH: From time to time any of the provisions of this
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted in the manner and at the time prescribed by
said laws, and all rights at any time conferred upon the stockholders of the
-5-
<PAGE>
Corporation by this Certificate of Incorporation are granted subject to the
provisions of this Article ELEVENTH.
Dated: December 13, 1996
/s/ Jeffrey Conrad
-------------------------------------
Jeffrey Conrad, Chief Executive
Officer and President
/s/ Frank J. Farrell
- ------------------------------------
Frank J. Farrell, Secretary
-6-
<PAGE>
NUMBER SHARES
THE MILLBROOK PRESS INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 600179 10 5
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON SHARES,
PAR VALUE $.0001 PER SHARE, OF
THE MILLBROOK PRESS INC.
(hereinafter the Corporation) transferable on the books of the Corporation by
the holder hereof in person or by duly authorized attorney, upon surrender of
this certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal and facsimile signatures of its duly authorized
officers.
Dated:
/s/ Illegible [SEAL] /s/ Illegible
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT AND REGISTRAR,BY
AUTHORIZED OFFICER
<PAGE>
THE MILLBROOK PRESS INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- Custodian
-------------------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
----------------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELLS, ASSIGNS AND TRANSFERS
UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY
- -----------------------------------------------------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
--------------------
--------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5
December 13, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: The Millbrook Press Inc.
Commission File No. 333-14631
REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form SB-2 dated
October 22, 1996, as amended, (the "Registration Statement"), filed with the
Securities and Exchange Commission by The Millbrook Press Inc., a Delaware
corporation (the "Company"). The Registration Statement relates to (i)
1,955,000 shares (the "Public Offering Shares") of Common Stock, par value
$.01 per share ("Common Stock"), (ii) the Underwriter's Common Stock
Purchase Option (the "CPO") consisting of 170,000 shares of Common Stock
("CPO Shares") and (iii) 875,000 shares of Common Stock underlying the Bridge
Warrants (the "Bridge Financing Shares").
We advise you that we have examined original or copies certified or
otherwise identified to our satisfaction of the Certificate of Incorporation and
By-laws of the Company, minutes of meetings of the Board of Directors and
shareholders of the Company, the Registration Statement and the underwriting
agreement, each as described in the Registration Statement and such other
documents, instruments and certificates of officers and representatives of the
Company and public officials, and we have made such examination of the law as we
have deemed appropriate as the basis for the opinion hereinafter expressed. In
making such examination, we have assumed the genuineness of
<PAGE>
all signatures, the authenticity of all documents submitted to us as originals,
and the conformity to original documents of documents submitted to us as
certified or photostatic copies.
Based upon the foregoing, we are of the opinion that:
(a) The Public Offering Shares have been duly authorized and, when issued
and sold pursuant to the Registration Statement, will be legally issued, fully
paid and non-assessable;
(b) The CPO has been duly authorized and, when issued and sold, will be
legally issued, fully paid and non-assessable;
(c) The CPO Shares have been duly authorized and, when issued and sold as
part of the CPO, will be legally issued, fully paid and non-assessable;
(d) The Bridge Warrants have been duly authorized and granted; and
(e) The Bridge Financing Shares have been duly authorized and reserved
for and, when issued upon the exercise of the Bridge Warrants, will be legally
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and we further consent to the reference to this firm
under the caption "Legal Matters" in the Registration Statement and the
Prospectus forming a part thereof.
Very truly yours,
/s/ OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
<PAGE>
EX. 10.1
The Millbrook Press Incorporated
2 Old New Milford Road
Brookfield, Connecticut 06804
December 13, 1996
Mr. Jeffrey Conrad
8 Mary Austin Place
Norwalk, Connecticut 06859
Re: EMPLOYMENT AGREEMENT
Reference is made to the Employment Agreement between Jeffrey
Conrad ("Conrad") and The Millbrook Press Inc. (the "Company") dated
September 27, 1996 (the "Conrad Agreement"). This letter agreement hereby
amends and supplements the Conrad Agreement as follows:
1. Section 1.1 is hereby amended by deleting the words "of two years"
and inserting in lieu thereof "of three years".
2. Section 3.2 is hereby amended by (i) putting a period after "annual
salary" on line 3 and (ii) deleting the balance of the paragraph after
"annual salary" and inserting in lieu thereof
"such incentive compensation will be based on your meeting or
exceeding the annual budgeted amount of operating and net income as
a percentage of sales. The budgeted figures are those submitted by
the Company to and approved by the Board of Directors. Such
submission and approval will be completed prior to June 15th of
each year. Such incentive compensation shall be available provided
you complete each fiscal year. Neither full nor partial incentive
compensation will be paid unless your employment is continued
through that date."
"The Board at its discretion may provide additional compensation
for exceeding the budgeted goals. For the fiscal year ended
July 31, 1997, the incentive compensation will equal 10% of your base
salary on an annual basis and the goals will be based on targets
for the last seven months of the fiscal year ended July 31, 1997."
"For such period the bonus will be paid if (i) the Company's
operating loss is equal to less than negative
<PAGE>
.59% (.0059) of the Company's net sales for the period between
January 1, 1997 and July 31, 1997; and (ii) the Company's net loss
is equal to or less than negative .15% (.0015) of the Company's net
sales for the period between January 1, 1997 and July 31, 1997."
3. Section 8.1 of the Conrad Agreement shall be deleted in its
entirety and replaced with the following:
8.1 BY DEATH. Prior to the end of the Employment Term, your
employment hereunder shall be terminated in the event of your death.
If you agree with the foregoing, please so indicate by signing below and
returning a copy of this letter agreement so executed to the Company.
Very truly yours,
The Millbrook Press Inc.
/s/
----------------------------
Name: Barry Fingerhut
Title: Chairman of the Board
Agreed and Acknowledged:
/s/
- ----------------------------
Jeffrey Conrad
<PAGE>
EXHIBIT 10.3
MILLBROOK PRESS
2 Old New Milford Road
Brookfield, CT 06804
December 12, 1996
Ms. Jean Reynolds
33 Corn Tassle Road
Danbury, CT 06811
Dear Ms. Reynolds:
Upon the terms and subject to the conditions set forth below, this letter
shall constitute the agreement pursuant to which Millbrook Press
("Millbrook") agrees to employ you as Senior Vice President, Publisher.
1. TERM OF EMPLOYMENT
1.1 TERM. Millbrook hereby employs you, and you hereby accept
employment with Millbrook, for a period of three years commencing
September 15, 1996 unless sooner terminated in accordance with the
provisions of Section 8 hereof.
1.2 DEFINITION. As used herein, "Employment Term" means the entire
period of your employment by Millbrook hereunder, whether for the
period provided above, or whether sooner terminated in accordance
with the provisions of Section 8 hereof.
2. DUTIES
2.1 DESCRIPTION OF DUTIES. In your capacity as Senior Vice President,
Publisher, you shall perform such duties and exercise such
authority, consistent with your position, as may from time to time
be given to you by the Chief Executive Officer of Millbrook.
2.2 DEVOTION OF ENTIRE TIME. During the Employment Term, you agree that
you will loyally and conscientiously devote your entire productive
time, efforts, ability and attention to the duties of your office
and to promote the interests of Millbrook, and that you will not
engage in any other business duties or pursuits whatsoever.
Notwithstanding any of the foregoing, you
<PAGE>
will not be prohibited from making passive personal investments or
being involved in the private business affairs of your immediate family
to the extent that such activities do not interfere with the
performance of your duties hereunder and are not in any way competitive
with the business of Millbrook.
3. COMPENSATION
3.1 ANNUAL SALARY. During the Employment Term, you will be compensated
at a base salary at the rate of $125,000 per annum, payable in
accordance with the customary payroll policies of Millbrook;
provided however, that if, pursuant to Section 8.1, 8.2 or 8.3
hereof, your employment is terminated prior to the end of the
Employment Term, you will receive the appropriate pro rata portion
of your annual salary for the period during which you are actually
employed by Millbrook.
3.2 INCENTIVE COMPENSATION. You will be eligible to earn incentive
compensation equal to 5% of your annual salary in the event
Millbrook meet its budget which will be agreed upon each fiscal
year in advance by the Board of Directors. Such incentive
compensation shall be available only upon your completion of each
year's employment hereunder.
3.3 REIMBURSEMENT FOR BUSINESS EXPENSES. Millbrook will reimburse you,
upon presentation of proper expense statements or such other
supporting information as Millbrook may reasonably require, for
your reasonable and necessary business expenses (including, without
limitation, telephone, travel and entertainment expenses) incurred
or paid by you in connection with the performance of your duties
hereunder.
4. FRINGE BENEFITS.
You shall be entitled to participate on the same basis and subject to
the same qualifications as all other regular full time executive
employees of Millbrook in any fringe benefit plans Millbrook makes
available from time to time for all its employees, including those
benefits available, if any, under any vacation, retirement, disability,
medical insurance and life insurance plans as the same may be placed
into effect from time to time. In addition, you shall be entitled to
participate in such other benefit plans, if any, as Millbrook makes
generally available from time to time to members of its executive staff.
-2-
<PAGE>
5. STOCK OPTIONS
You may from time to time be granted stock options subsequent to January
1, 1997 solely at the discretion of the Compensation Committee of the
Board. Upon termination of your employment:
(i) by reason of death, the Option shall terminate and
be no longer exercisable;
(ii) by the Company for "cause", that Option shall terminate and
no longer be exercisable on the date you are advised by the
Board that you are being terminated for cause;
(iii) by you voluntarily, the Option shall terminate and be no
longer exercisable on the date on which you voluntarily
terminate your employ;
(iv) by the Company without cause, the options may, at your
discretion, be exercised at any time between the date you
are advised by the Board you are being terminated and the
date in which you leave the company's employ.
Other than as stated above, the Option will be governed by
the terms and conditions of Millbrook's Stock Option Plan
and the Standard Stock Option Agreement thereunder to be
executed by you and Millbrook.
6. CONFIDENTIALITY
6.1 TRADE SECRETS. You and Millbrook acknowledge and agree that during
the Employment Term and in the course of the discharge of your
duties hereunder, you will have access to and become acquainted
with information concerning the operation of Millbrook and other
valuable information regularly used in Millbrook's business and not
generally known to others. You acknowledge and agree that it is
Millbrook's policy to maintain such information as secret and
confidential, whether relating to Millbrook's business as
heretofore or hereafter conducted, or relating to Millbrook's
customers, clients, suppliers, employees and other business
associates (all such information being referred to hereinafter as
"Confidential Information"). You acknowledge and agree that all
Confidential Information is owned by Millbrook and constitutes
Millbrook's trade secrets.
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<PAGE>
6.2 NON-DISCLOSURE. You specifically agree that you shall not use,
publish, disseminate, misappropriate or otherwise disclose any
Confidential Information, whether directly or indirectly, either
during the term of this Agreement or at any other time thereafter,
except as is required by law or in the course of employment
hereunder. This provision shall not apply to Confidential
Information which becomes generally known to the public by means
other than your breach of this Section.
6.3 UNFAIR COMPETITION. You acknowledge and agree that the sale,
unauthorized use or disclosure of any Confidential Information
obtained by you during the course of your employment under this
Agreement, including but not limited to (a) information concerning
Millbrook's current, future or proposed work, services, or
products, (b) the fact that any such work, services or products are
planned, under consideration, or in production, as well as, (c) any
descriptions thereof, constitute unfair competition. You promise
and agree not to engage in any unfair competition with Millbrook,
either during the term of this Agreement or at any other time
thereafter.
6.4 PRECAUTIONS; RETURN OF MATERIALS. You agree to take all reasonable
precautions to protect the integrity of all Confidential
Information, including all documents and other material entrusted
to you containing or embodying Confidential Information. You
further agree that all files, records, documents, and similar items
relating to Millbrook's business, whether prepared by you or
others, are and shall remain exclusively the property of Millbrook,
and that upon the expiration or termination of your employment
hereunder you shall return to Millbrook all such material and all
copies thereof in your possession or control.
6.5 COPYRIGHTABLE AND PATENTABLE MATERIALS. You agree that during the
Employment Term you will take any and all business developments,
opportunities and potentially profitable situations relating to
Millbrook's business to the Directors for exploitation by
Millbrook. You agree promptly to disclose to Millbrook (and only
to Millbrook) any and all knowledge possessed or acquired by you by
any means whatsoever during the Employment Term which relates in
any way to any developments, concepts, ideas or relates in any way
to any developments, concepts, ideas or innovations, whether
copyrightable or patentable or not, relating to the business of
Millbrook. For the compensation and benefits received hereunder,
you hereby assign and
-4-
<PAGE>
agree to assign to Millbrook your entire right, title and interest
in and to any of the aforedescribed materials, discoveries,
developments, concepts, ideas or innovations. All such materials,
discoveries, developments, concepts, ideas and innovations shall be
the property of Millbrook, and you shall, without further
compensation, do all things necessary to enable Millbrook to perfect
title in such materials, discoveries, concepts, ideas and innovations
and to obtain and maintain effective patent or copyright protection in
the United States and foreign countries thereon, including, without
limitation, rendering assistance and executing necessary documents.
7. COMPETITIVE ACTIVITIES
7.1 NON-COMPETITION During the Employment Term and for a period 180
days after expiration or earlier termination for cause, or by you
for any reason, you shall not within the United States.
(a) Consult with, be employed by, render services to, or
engage in any business activity with (whether as
owner, controller, employee, employer, consultant,
partner, officer, director, agent or otherwise) any
business or business entity competing in any way
with the business of Millbrook;
(b) Without the prior written consent of the Directors,
personally solicit or cause to be solicited or
authorize, directly or indirectly, for or on behalf
of yourself or any third party, any business
competitive with Millbrook, from others who are or
were at any time within 12 months prior to the
expiration or termination of your employment
hereunder customers, suppliers, clients, authors,
agents or other business associates of Millbrook.
7.2 SOLICITATION OF EMPLOYEES AND OTHERS. You acknowledge and agree
that Millbrook's operations and employees possess special knowledge
of Millbrook's operations and are vitally important to the
continued success of Millbrook's business. You shall not, without
the prior written consent of the Directors, directly or indirectly
seek to persuade any director, officer or employee of Millbrook
either to discontinue his or her position with Millbrook or to
become employed or
-5-
<PAGE>
engaged in any activity competitive with activities of Millbrook.
7.3 SCOPE. If any court determines that any of the covenants set forth
herein, or any part or parts thereof, is unenforceable because of
the duration or geographic scope of the provision, such court shall
have the power to reduce the duration or scope of such provision,
as the case may be, and, in its reduced form, such provision shall
then be enforceable and shall be enforced.
8. TERMINATION
8.1 BY NOTICE OR DEATH. Prior to the end of the Employment Term, your
employment hereunder: (a) may be terminated hereunder by either
party hereto without cause upon one hundred and eighty (180) days'
prior written notice; (b) shall be terminated in the event of
death.
8.2 PERMANENT DISABILITY. Your employment hereunder may be terminated
by Millbrook upon thirty (30) days' prior written notice to you in
the event of your permanent disability. As used herein, "permanent
disability" shall mean any illness, injury or other physical or
mental disability that shall prevent you from performing a
substantial portion of your duties hereunder for any period of
either 90 consecutive days or an aggregate of 120 days during any
consecutive twelve (12) month period.
8.3 TERMINATION OF CAUSE. Millbrook reserves the right to terminate
this Agreement at any time and without notice for "cause" as
defined below. As used in this Agreement, the term "cause" shall
mean (i) the commission by you of any act which would constitute a
felony under state or federal law, or the equivalent under foreign
law, if prosecuted; (ii) the commission by you of any act of moral
turpitude; (iii) the material breach by you of the provisions of
this Agreement; (iv) your failure or refusal to perform your
obligations under this Agreement, or other acts or omissions
constituting neglect or dereliction of duties hereunder; (v) fraud,
dishonesty or other acts or omissions by you that amount to a
willful breach of your fiduciary duty to Millbrook; (vi) your
personal bankruptcy; or (vii) the happening of any other event
which, under provisions of any laws applicable to
-6-
<PAGE>
Millbrook or its activities, disqualifies you from acting in any or
all capacities provided for herein.
Millbrook may, at its option terminate this Agreement for the
reasons stated in this Section by giving written notice of
termination to you without prejudice to any other remedy to which
Millbrook may be entitled either by law, in equity, or under this
Agreement. Upon any such termination under this Section, and upon
Millbrook's request, you agree to resign from all directorships and
positions as an executive officer you may then hold with Millbrook
or any of its affiliates.
8.4 TERMINATION WITHOUT CAUSE AS DEFINED HEREIN: In the event of the
termination of this Agreement by the Company for reason other than
"Cause" the Executive upon notice of termination shall be entitled
to continuation of her base salary for six months. Additionally
the Executive will be entitled to severance pay according to term
of service as outlined in the Employee handbook, the term of
service to be defined from onset of employee's service on January
1, 1990 to the end of six months notification period. Medical
coverage will continue for the six month notification period at
which point the opportunity for continued coverage will be
available in accordance to the Employee Handbook.
9. MISCELLANEOUS
9.1 NOTICES. Notices hereunder shall be in writing and shall be
delivered by hand or sent by registered or certified mail, return
receipt requested, if or you, at the address set forth above, and
if to Millbrook Press, 2 Old New Milford Road, Brookfield, CT,
06804, or at such other address as to which notice has been given
in the manner herein provided.
9.2 ENTIRE AGREEMENT. This Agreement sets forth your and Millbrook's
complete understanding with respect to the matters set forth
herein. This Agreement may be modified or amended only by an
agreement in writing signed by the parties hereto.
9.3 SEVERABILITY. If any term, provision, covenant, or condition of
this Agreement, or the application thereof to any person, place or
circumstance, shall be held by a court or competent jurisdiction to
be invalid, unenforceable, or void, the remainder of this Agreement
and such term, provision, covenant, or condition as applied to
other persons, places, and circumstances shall remain in full force
and effect.
-7-
<PAGE>
9.4 HEADINGS. The headings and captions of the Agreement are provided
for convenience only and are intended to have no effect in
construing or interpreting this Agreement.
9.5 APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Connecticut without
giving effect to the conflict of laws principles thereunder.
If the foregoing accurately reflects your understanding of our agreement and
is acceptable to you, please sign the enclosed copy of this letter and return
it to the undersigned.
Very truly yours,
Millbrook Press Accepted and Agreed:
By: /s/ By: /s/
------------------------------- -------------------------------
Jeffrey Conrad, CEO Jean Reynolds
-8-
<PAGE>
EXHIBIT 10.4
The Millbrook Press Inc.
2 Old New Milford Road
Brookfield, CT 06804
December 13, 1996
Farrell Associates, Inc.
429 North Salem Road
Ridgefield, CT 06877
Re: CONSULTING AGREEMENT
Reference is made to the Consulting Agreement between Frank J. Farrell
("Farrell") and The Millbrook Press Inc. (the "Company") dated October 17,
1996. You hereby acknowledge that you are a corporation controlled by Mr.
Farrell. This letter agreement amends and restates the Consulting Agreement
between Frank J. Farrell and the Company.
1. TERM. This agreement is effective January 1, 1997 and covers the
engagement of Frank J. Farrell as a consultant for the calendar years 1997
and 1998 under the direction of the Chief Executive Officer and/or Board of
Directors.
2. DESCRIPTION OF RESPONSIBILITIES. You shall make Frank J. Farrell
available as a consultant to the Company and Mr. Farrell shall devote his
best efforts to the performance of his duties. Mr. Farrell will make himself
available for a minimum of six months a year, such time periods to be
determined by the Chief Executive Officer and/or the Board of Directors. Mr.
Farrell will assist the Company with (i) cash management, (ii) its relations
with respect to major vendors, (iii) its relations with respect to banks,
(iv) its relations with respect to legal advisors, (v) compliance with the
legal requirements of the Securities Act of 1933, as amended and the
Securities Exchange Act of 1934, as amended, (vi) its relations with respect
to outside auditors and any audit-related issues, (vii) the development of
internal controls, such as inventory and finance controls, (viii) due
diligence and evaluation with respect to potential acquisitions, (ix) the
development, review and critique of the Company's strategic planning
(x) relations with respect to its personnel and (xi) any other area which the
Chief Executive Officer and/or the Board of Directors may request.
3. NON-COMPETITION. During the term of this letter agreement you and Mr.
Farrell shall not engage in any activity that could be construed as
competitive. The Chief Executive Officer and the
<PAGE>
Board of Directors shall be the sole judge of what is competitive, and you
and Mr. Farrell agree that you and Mr. Farrell will abide by their decision
which shall be given in writing should the occasion arise. In the event of
termination of this agreement by reason of the expiration of its terms or
otherwise, you and Mr. Farrell agree that you will each not, during a period
of twenty-four months thereafter, either directly or indirectly, induce or
attempt to induce any of the personnel of the Company or of its affiliates to
terminate their employment or association, nor shall you each engage in any
activity which may be deemed competitive. In the event of a breach of the
foregoing, the Company shall have the right to cancel all unpaid compensation
which has accrued or which may thereafter accrue to your credit.
4. COMPENSATION. Millbrook agrees to provide you with the following:
A. Compensation for the calendar year 1997 at the rate of $60,000/per annum
to be paid in 12 equal installments;
B. Compensation for the calendar year 1998 at the rate of $50,000/per annum
to be paid in 12 equal installments;
C. Continuation of the office at 2 Old New Milford Road, Brookfield, CT
06804 through the term of this Agreement;
D. Secretarial assistance will be available on an as needed basis.
It is understood that the Company will pay direct or that you will be
reimbursed for traveling and other business expenses upon submission of
statements supported by appropriate vouchers.
5. POLICIES OF THE COMPANY. You will induce Mr. Farrell to agree that he
will abide by all policies, rules and regulations of the Company now and
hereafter in effect, and that he personally will conform with and will cause
all others under your direction to conform with such policies, rules and
regulations.
6. SETTLEMENT OF CLAIMS. Any controversy or claim arising out of or
relating to this agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association, and any hearings in connection with such arbitration shall be
held in New York City. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof.
7. RELATIONSHIP BETWEEN THE PARTIES. You will induce Mr. Farrell to agree
(i) to perform all services hereunder as an independent contractor and
(ii) not to hold himself out as a partner, joint venturer, co-employer or
employee of the Company.
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<PAGE>
Nothing herein shall be deemed to create any association, partnership,
joint venture or master and servant or employer and employee relationship
between the parties hereto.
8. TAXES. You shall be solely liable and responsible for (i) any and all
federal, state and local taxes based on or measured by his income or receipts
("Taxes") and (ii) the timely filing (and payment of Taxes in connection
therewith) of all tax returns as required by law in a manner consistent with
your status as an independent contractor. The Company shall have no
responsibility for and no obligation to withhold at any source any federal,
state or local income tax, or employee's portion under that Federal Insurance
Contributions Act; provided, however, that nothing contained herein shall
prevent the Company from withholding taxes as required by law.
9. BENEFITS. The Company shall have no obligation to provide benefits to
you or Mr. Farrell other than as specifically provided in this letter
agreement.
10. COOPERATION. You and Mr. Farrell shall take all reasonable steps to
cooperate in the defense of any claims by any federal, state or local
government authority against the Company or any of its affiliates, regarding
Taxes assessed with respect to you.
11. SURVIVAL. Sections seven through ten of this letter agreement shall
survive the termination of this letter agreement and remain in effect until
the statute of limitation, including extensions thereof, for all claims by
federal, state and local government authorities against the Company or its
affiliates for Taxes expires.
12. TERMINATION. This letter agreement will serve as the only compensation
agreement existing between the Company and yourself or Mr. Farrell. It is
effective through December 31, 1998 and may be canceled by either party only
on the basis of breach of
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<PAGE>
any of the above terms and conditions. Such notice of breach will be given
in writing and a period of 30 days will be allowed to cure such breach.
Sincerely,
The Millbrook Press Inc.
By: /s/
--------------------------------
Barry Fingerhut, Chairman of the Board
Agreed and Accepted: Farrell Associates, Inc.
By: /s/
--------------------------------
Frank J. Farrell
/s/
-------------------------------------
Frank J. Farrell
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<PAGE>
EX. 10.5
The Millbrook Press Inc.
2 Old New Milford Road
Brookfield, CT 06804
December 13, 1996
Graham International Publishing
and Research, Inc.
The Millbrook Press, Inc.
27A Main Street
Southampton, New York 11968
Re: CONSULTING AGREEMENT
Reference is made to the Consulting Agreement between Howard B. Graham
and The Millbrook Press Inc. (the "Company") dated September 12, 1996. You
hereby acknowledge that you are a corporation controlled by Mr. Graham. This
letter agreement amends and restates the Consulting Agreement between Howard
B. Graham and the Company.
1. TERM. This agreement is effective January 1, 1997 and covers the
engagement of Howard B. Graham as a consultant for the calendar years 1997
and 1998 under the direction of the Chief Executive Officer and/or Board of
Directors.
2. DESCRIPTION OF RESPONSIBILITIES. You shall make Howard B. Graham
available as a consultant to the Company and Mr. Graham shall devote his best
efforts to the performance of his duties. Mr. Graham will make himself
available for a minimum of six months a year, such time periods to be
determined by the Chief Executive Officer and/or the Board of Directors. Mr.
Graham will assist in strategic planning, market development, acquisition
searches, product planning, international sales, joint venturing and any
other area which the Chief Executive Officer and/or the Board of Directors
may request.
3. NON-COMPETITION. During the term of this letter agreement you and Mr.
Graham shall not engage in any activity that could be construed as
competitive. The Chief Executive Officer and the Board of Directors shall be
the sole judge of what is competitive, and you and Mr. Graham agree that you
and Mr. Graham will abide by their decision which shall be given in writing
should the occasion arise. In the event of termination of this agreement by
reason of the expiration of its terms or otherwise, you and Mr. Graham agree
that you will each not, during a period of twenty-four months thereafter,
either directly or indirectly,
<PAGE>
induce or attempt to induce any of the personnel of the Company or of its
affiliates to terminate their employment or association, nor shall you each
engage in any activity which may be deemed competitive. In the event of a
breach of the foregoing, the Company shall have the right to cancel all
unpaid compensation which has accrued or which may thereafter accrue to your
credit.
4. COMPENSATION. Millbrook agrees to provide you with the following:
A. Compensation for the calendar year 1997 at the rate of $60,000/per annum
to be paid in 12 equal installments;
B. Compensation for the calendar year 1998 at the rate of $50,000/per annum
to be paid in 12 equal installments;
C. Continuation of the office at 27A Main Street, Southampton, New York
11968 through September 30, 1997;
D. Secretarial assistance will be available on an as needed basis.
It is understood that the Company will pay direct or that you will be
reimbursed for traveling and other business expenses upon submission of
statements supported by appropriate vouchers.
5. POLICIES OF THE COMPANY. You will induce Mr. Graham to agree that he
will abide by all policies, rules and regulations of the Company now and
hereafter in effect, and that he personally will conform with and will cause
all others under your direction to conform with such policies, rules and
regulations.
6. SETTLEMENT OF CLAIMS. Any controversy or claim arising out of or
relating to this agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association, and any hearings in connection with such arbitration shall be
held in New York City. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof.
7. RELATIONSHIP BETWEEN THE PARTIES. You will induce Mr. Graham to agree
(i) to perform all services hereunder as an independent contractor and
(ii) not to hold himself out as a partner, joint venturer, co-employer or
employee of the Company. Nothing herein shall be deemed to create any
association, partnership, joint venture or master and servant or employer and
employee relationship between the parties hereto.
8. TAXES. You shall be solely liable and responsible for (i) any and all
federal, state and local taxes based on or measured by his income or receipts
("Taxes") and (ii) the timely
-2-
<PAGE>
filing (and payment of Taxes in connection therewith) of all tax returns as
required by law in a manner consistent with your status as an independent
contractor. The Company shall have no responsibility for and no obligation
to withhold at any source any federal, state or local income tax, or
employee's portion under that Federal Insurance Contributions Act; provided,
however, that nothing contained herein shall prevent the Company from
withholding taxes as required by law.
9. BENEFITS. The Company shall have no obligation to provide benefits to
you or Mr. Graham other than as specifically provided in this letter
agreement.
10. COOPERATION. You and Mr. Graham shall take all reasonable steps to
cooperate in the defense of any claims by any federal, state or local
government authority against the Company or any of its affiliates, regarding
Taxes assessed with respect to you.
11. SURVIVAL. Sections seven through ten of this letter agreement shall
survive the termination of this letter agreement and remain in effect until
the statute of limitation, including extensions thereof, for all claims by
federal, state and local government authorities against the Company or its
affiliates for Taxes expires.
12. TERMINATION. This letter agreement will serve as the only compensation
agreement existing between the Company and yourself or Mr. Graham. It is
effective through December 31, 1998 and may be canceled by either party only
on the basis of breach of any of the above terms and conditions. Such notice
of breach will be given in writing and a period of 30 days will be allowed to
cure such breach.
Sincerely,
The Millbrook Press Inc.
By: /s/
----------------------------
Barry Fingerhut, Chairman of the Board
Agreed and Accepted: Graham International Publishing
and Research, Inc.
By: /s/
-----------------------------
Howard B. Graham
/s/
---------------------------------
Howard B. Graham
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<PAGE>
EXHIBIT 23.1
AUDITOR'S CONSENT
The Board of Directors
The Millbrook Press Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/S/ KPMG PEAT MARWICK LLP
New York, New York
December 13, 1996
