UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
THE MILLBROOK PRESS INC.
(Name of Small Business Issuer as Specified in its Charter)
Delaware 06-1390025
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2 Old New Milford Road
Brookfield, CT 06804
(Address of principal executive offices)
(203) 740-2220
(Issuer's telephone number, including area code)
Securities Registered pursuant to Section 12 (b) of the Exchange Act:
Common Stock
Securities Registered pursuant to Section 12 (g) of the Exchange Act:
None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes /X/ No __
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy of information statements incorporated by
reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB.
(X)
Revenues for the Fiscal year ended July 31, 1998 were $15.6 million.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon price of the Common Stock on October 22, 1998, was
approximately $3,894,000. As of July 31, 1998, the Registrant had outstanding
3,455,000 shares of Common Stock.
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THE MILLBROOK PRESS, INC.
FORM 10-KSB ANNUAL REPORT
Table of Contents
PART I
Page
Item 1. Description of Business 2
Item 2. Description of Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholders Matters 12
Item 6. Management's Discussion and Analysis or Plan of Operations 13
Item 7. Financial Statements 17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 34
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 34
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management 34
Item 12. Certain Relationships and Related Transactions 34
Item 13. Exhibits, List and Reports on Form 8-K 35
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Part I
Item 1. Description of Business
Overview
The Millbrook Press Inc. (the "Company" or "Millbrook"), is a publisher of
children's nonfiction books, in both hardcover and paperback, for the school and
library market and the consumer market. The Company has published more than 1100
hardcover and 500 paperback books under its Millbrook, Copper Beech, and
Twenty-First Century imprints. The Company's books have been placed on numerous
recommended lists by libraries, retail bookstores, and educational
organizations. Books published under the Millbrook imprint have evolved from
information-intensive school and library books to include its current mix of
highly graphic, consumer-oriented books. Therefore, many of its books can be
distributed to the school and public library market as hardcover books while
being simultaneously distributed to the consumer market as either hardcover or
paperback books. The majority of Copper Beech books are published to both the
consumer and library markets. Twenty-First Century Books titles are published
primarily for the library market.
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 Zainy 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) continue publishing preschool/early
elementary 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 book
sales to the expanding consumer market while at the same time increasing its
established sales base in the school and library market.
Industry Background
Although consumer expenditures for children's books showed a modest decline in
1997, after significant growth from 1992-1996, the Book Industry Study Group
estimates an increase of 5.9% in 1998 and a compounded annual rate of 5.7% for
the period 1997-2002. This growth will result in expenditures of $1.8 billion
for hardcover books and $1.4 billion for paperback books.
As a result, school library expenditures are estimated to grow to $190 million
and public library expenditures to $205 by the year 2002, for a total of $395
million.
SCHOOL AND LIBRARY MARKET
The school and public library market is undergoing significant change due to
long-term social and
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economic forces. The United States Department of Education predicts that the
student population from kindergarten through twelfth grade will increase 8% from
1997 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 increase as the student population increases. In addition to
demographic changes, demand for books has also increased as a result of the
school and public library market becoming aware of, and responsive to,
supporting the innovative instructional programs being developed and used in the
classroom. New teaching philosophies such as the "reading initiative," and
"cross-curriculum teaching" developed in the 1980s and 1990s have increased the
demand for different and better books. Librarians are working with classroom
teachers to select books that meet classroom criteria of being multicultural,
visually stimulating, interesting, curriculum-related and suitable for a range
of reading ability.
CONSUMER MARKET
Demand for children's books 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 TJ 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 and the consumer market. Traditionally,
hardcover library books addressed topics typical for school reports and research
and were created with the purpose of maximizing information content rather than
appealing to consumers. Because books sold in the school and public library
market in the past were sold to librarians/teachers based on content, the
product was often informationally rich, but somewhat aesthetically unappealing.
Conversely, a paperback book sold in the consumer market was not designed as an
information source, but rather to attract a consumer's attention and thereby
sell itself from the shelf. Accordingly these books failed to address certain
topics and lacked the informational content of library books. The Company's
books, and books for the children's book market in general,
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are now designed to appeal to both markets. A book filled with information is
combined with an attractive title, cover and internal design to catch the eye of
the consumer browsing the shelf. The same book can then be bound as a hardcover
book and sold to school and public libraries. Additionally, as either a
hardcover or a paperback, the book appeals to teachers and can be used as
supplemental reading in the classroom.
Company Strategy
The Company's goal is to be a "one-stop publisher," publishing and marketing a
diverse product line servicing most of the major segments of the children's book
market. The Company's strategy is to continue to diversify its products and
distribution channels for those products by capitalizing on the long-term and
short-term changes occurring in the children's book publishing industry in both
the school and public library market and 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 eight 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 increase the recognition of its brand names. The Company believes that the
elements required to achieve this goal are (i) publishing books of the highest
quality, created in house, through packaging arrangements or licensed, with the
ability to satisfy two or more of the markets which it now services, (ii)
expanding its product offerings to take advantage of its investments in
distribution and its exposure to the consumer market and (iii) enhancing its
existing marketing operations to support its product-line expansion initiatives.
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 in
commercial on-line services and on the Internet. Key elements of the Company's
strategy are:
o CROSSOVER OF SALES. The Company believes that significant opportunities
exist to market products typically developed for one market into other
markets. To initiate its strategy of selling books that can crossover into
two or more markets, in 1995 the Company began reformatting many of its
previously published ("backlist") school and public library books under its
Millbrook imprint into paperback books, selling them in the consumer
market. In addition, the Company's paperback books have also been sold as
supplemental materials for the classroom. Similarly, the Company's 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.
o TARGET NEW MARKET NICHES/ACQUISITION OPPORTUNITIES. The Company is
continually seeking new market niches that offer opportunities for
achieving significant sales growth. The Company has targeted the preschool
novelty as a growing market and plans to continue its emphasis on 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
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(five to eight years old) as well as chapter books for ages seven through
eleven. The Company will publish popular reference materials for young
readers from seven through fifteen. 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 has entered into a joint venture with the Magic Attic Press to
publish their doll-related fiction titles, which the Company believes
should provide significant growth in both the library and consumer markets.
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 or joint ventures.
o 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.
o 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 to 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 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.
o ADAPT 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.
o CONTINUE TO DEVELOP HIGH QUALITY BOOKS. The Company intends to develop
additional books through internal development in collaboration with its
network of authors and artists. The Company is now selectively entering
into agreements with certain high-profile authors and illustrators to
increase the recognition of its brand names.
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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, 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 fiscal 1998, the Company published 99 hardcover books under the
Millbrook imprint for the school and public library market, of which 44 books
were suitable for and published simultaneously as hardcovers or paperbacks to be
sold in the consumer market, and 68 hardcover books under the Copper Beech
imprint for the school and library market, of which 37 books were suitable for
and published simultaneously as hardcovers or paperbacks, to be sold in the
consumer market.
Product Development
The Company develops books through internal and external resources. The Company
may also acquire books through co-publishing arrangements and/or the acquisition
of other licenses.
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 fair,
(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 contact with librarians, teachers,
and booksellers. Once conceived, a book proposal is circulated to sales,
production, marketing, design and financial departments of the Company for their
input and depending on their input, the proposal will go forward or be
terminated. A favorable decision causes the editorial department to contract
with an appropriate author and/or artist from its pool of approximately 350
authors and artists. The Company believes it has excellent relationships with
its authors and artists, including many well-known names in the field.
Authors and artists are typically engaged on a royalty basis. Royalties on
hardcover and paperback editions are paid on the net sales and range from 6% to
10% of net sales with an average of 7% of net sales for hardcover and paperback
books. 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 $15,000 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
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for the book. Upon completion of the editing, graphics and layout, a computer
produces a mechanical of the book with all elements in place. A cost estimate is
then prepared which determines print quantity and retail price of the book. Book
printing is done by an outside supplier, usually in the United States, on a bid
contract basis. The Company's products require varying periods of development
time depending upon the complexity of the graphics and design and the editing
process. Most of the Company's books can be developed in a period that ranges
from nine to eighteen months. Millbrook is often cited in reviews of 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 sales to libraries. 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's sales. Development recovery amounts are paid to
the Company based on sales by Aladdin to other parts of the world.
LICENSES
In the normal course of its business, the Company acquires licenses from foreign
book publishers for the rights to market and sell in the United States books
that were created either with or without input from the Company. The licensing
usually includes all subsidiary rights such as first and second serialization,
commercial rights, electronic rights, foreign and translation rights, reprint
rights and rights to any means yet to be developed for transmitting information.
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
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amount of shelf space devoted to its product line in retail outlets, including
complimentary copies, reviews and recommendations, catalogs, advertising,
brochures, exhibits, publicity campaigns and in-store promotions. The Company's
marketing efforts are geared toward its two major markets: (i) the school and
public library market and (ii) the consumer market.
SCHOOL AND PUBLIC LIBRARY
The Company targets the school and public library market through three main
channels: wholesalers, telemarketing and direct sales. Large school and public
library systems tend to purchase their books through wholesalers on a bid basis,
while smaller systems purchase directly from a commission sales representative
or through a telemarketing program such as the one the Company conducts. During
the fiscal year ended July 31, 1998, approximately 67% of the Company's sales in
the school and public library market were made through wholesalers. While most
wholesalers do not engage in sales and marketing efforts on behalf of the
Company's products, they provide schools and public libraries with a wide range
of selection and convenience as well as discounts on bulk orders. Baker &
Taylor, one of the largest wholesalers in the school and public library market,
accounted for 13% of the Company's net sales in the fiscal year ended July 31,
1998. 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 25% 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. In
September 1998, the Company initiated a website that will allow librarians to
participate in the "preview program" electronically. This should extend the
reach of the program significantly. The remaining 8% of the Company's sales in
this area results from direct-selling efforts where commissioned salespersons
conduct face-to-face meetings at school 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 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 the
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 School Library Journal (the major professional journal from
which librarians make purchase decisions) and at 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 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
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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 $4.8 million in fiscal year 1997 to $5.7
million in fiscal 1998.
As in 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 7% of the
Company's net sales in the fiscal year ended July 31, 1998, and 67% 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 manager of national accounts and a full-time
salaried sales person, is responsible for sales, promotion and merchandising to
the major national and large regional accounts. Two additional full-time
salaried sales people will be added January 1, 1999. 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 bookstores, small
regional chains and certain special sales outlets and regional jobbers. The
special sales group managed by a sales director markets to specialized retail
outlets such as museums, national parks, historical sites, theme parks, gift
shops and toy stores, consumer and school catalogs, direct mail, book fairs,
book clubs, and display sales companies. The Company's sales representatives
sell the full range of the Company's products. The sales groups provide the
Company with highly valuable insight by obtaining feedback from customers on
current product performance and potential acceptance of proposed products. In
addition to the marketing efforts discussed with respect to the school and
public library market, the Company conducts additional marketing designed to
increase brand name recognition in the consumer market. The Company makes
certain that good reviews, which can stimulate sales, are sent to the news media
on a regular basis. The Company participates with various outlets in advertising
directly to individuals through media and catalogs. In-store promotions, such as
posters, points of purchase displays, brochures, holiday end-of-counter and
front-of-store displays, are also utilized by the Company to further enhance its
sales in the consumer market.
Manufacturing and Shipping
All of the Company's books are printed and bound by third-party manufacturers.
During fiscal year 1998, approximately 30% 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 $5.5 million (or approximately 35% of net sales) spent
in 1998. 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
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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 processing department. The Company leases
warehouse space from, and its products are shipped to, Mercedes Distribution
Center of Brooklyn, New York.
Competition
The children's book publishing marketplace in the school and public library
market and in the consumer market is fragmented and very competitive.
Competition in the school and public library market is based upon quality of
products, brand name recognition and book content. In the consumer market, the
primary factors are brand name recognition, book content, availability and
price.
There are many publishers of material similar to the Company's product
offerings. The Company's chief and direct competitors in the school and public
library market include Childrens Press, Dorling Kindersley Publishing Inc.,
Franklin Watts 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. Nevertheless, the Company believes that the depth of
experience of its management and its connections into the hierarchy of the
education sector give the Company a competitive edge not only in producing
quality books marketable in the school and library and consumer markets, but
also in foreseeing long-term and short-term social and economic forces
influencing the children's book industry.
Protection of Proprietary Rights
Nearly all the Company's books have been copyrighted in the United States, in
the name of the author or artist and then all such copyrights have been assigned
to the Company. As a result, the Company owns the exclusive right to exploit the
copyright in the marketplace. On books created in-house by the Company, it owns
world rights for all aspects of the market, including first and second
serialization, commercial rights, electronic rights, foreign and translation
rights, reprint rights, and rights to any means yet to be developed for
transmitting information. There are a limited number of books for which foreign
rights and electronic rights will revert to the author if the Company does not
exploit them in a given period of time, 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 the Canadian rights as well. The
Company's trade names, Millbrook, Twenty-First Century and Copper Beech, are
used to publish books primarily for the school and library market and consumer
market respectively. The Company considers these trade names material to its
business.
-10-
<PAGE>
For the Copper Beech titles, the Company has exclusive rights for all markets in
the United States and Canada. World rights are retained for books originated by
Aladdin and the Company participates in the profits generated from such sales on
a 25% basis.
Employees
As of July 31, 1998, the Company has approximately 48 employees. 90% are
full-time and 10% 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.
Item 2. Description of Properties
The Company owns no real property. The Company conducts its operation through
two facilities. The Company leases approximately 5,500 square feet of office
space in Brookfield, Connecticut at a current rental of $112,000 per year plus
utilities and taxes. This lease expires in December 2002. The Company also
leases approximately 1,900 square feet and 751 square feet of space in New York
City at a rental of $34,340 per year plus utilities and taxes and $16,522 per
year plus utilities and taxes respectively. These leases expire in April 2004
and February 1999 respectively. The Company also leases office space in
Southhampton, New York at a current rental of $12,000 per year plus utilities
and taxes. This lease expires in September 1999.
Item 3. Legal Proceedings
The Company is not currently a party to any material legal proceedings.
-11-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
The Common Stock of The Millbrook Press Inc. is traded under the symbol MILB on
the NASDAQ SmallCap Market. The Company's Common Stock is also traded on the
Boston Stock Exchange under the symbol MILB. The following table sets forth the
ranges of the high and low closing bid prices for the Common Stock for the
fiscal years ended July 31, 1997 and July 31, 1998, as reported on the NASDAQ
SmallCap Market, the principal trading market for the Common Stock. The
Company's Common Stock commenced trading on the Nasdaq SmallCap Market on
December 17, 1996. The quotations are interdealer prices without adjustment for
retail markups, markdowns, or commission and do not necessarily represent actual
transactions.
COMMON STOCK
YEAR ENDED JULY 31, 1998
High Low
First Quarter 6-3/8 4-5/8
Second Quarter 5-5/8 4-1/2
Third Quarter 4-1/2 3-3/4
Fourth Quarter 4-1/4 3
YEAR ENDED JULY 31, 1997
First Quarter - -
Second Quarter 7 5-3/8
Third Quarter 6 5
Fourth Quarter 6-3/8 5-3/8
As of July 31, 1998, the Company had 3,455,000 shares of Common Stock
outstanding and 27 holders of record of the Company's Common Stock. The Company
believes that at such date, there were in excess of 600 beneficial owners of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business. Accordingly, the Company does not anticipate
that any cash dividends will be declared on its Common Stock in the foreseeable
future.
-12-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
Financial Statements of The Millbrook Press Inc. and related Notes to the
Financial Statements which are included elsewhere in this Form 10-KSB.
OVERVIEW
General
In February 1994, the Company was incorporated and acquired the assets
of The Millbrook Press Inc., which had commenced operations in 1989. Prior to
January 1991, The Millbrook Press Inc. had no revenues and incurred expenses
related to administrative costs associated with the formation and production of
its first publication list. Subsequent to January 1991, the Company has had
significant net sales in the school and public library market. Books published
under the Millbrook imprint have evolved from information-intensive school and
library books to include its current mix of highly graphic, consumer-oriented
books. Therefore, the Company has incurred significant expenses relating to the
establishment of the infrastructure that can enable the Company to sell books to
the consumer market and/or develop books that can appeal to both the school and
public library market and the consumer market.
Acquisition
On December 5, 1997 the Company completed an acquisition to purchase
certain assets of Twenty-First Century Books, a division of Henry Holt & Co.,
Inc. ("Holt"). The purchase was effective as of December 1, 1997. Under the
agreement, the Company paid Holt $2,013,000 for the assets.
Consumer Market compared to School and Public Library Market
As the Company sells more of its products in the consumer market, the results of
operations and its financial condition could be influenced by certain
distinctions between consumer market and the school and public library market.
It is generally more difficult to collect receivables in the consumer market
than in the school and library market. Sales to the consumer market have a
higher return rate than sales to the school and public library market and
accordingly the Company will need to deduct a higher reserve for return from its
gross sales. Sales to the consumer market have a lower gross profit margin than
sales to the school and library market because consumer sales have higher sales
discounts and promotional allowances than sales to the schools and public
library market.
Sales Incentives and Returns
In connection with the introduction of new books, many book publishers,
including the Company, discount prices of existing products, provide certain
promotional allowances and give other sales incentives to their customers. The
Company intends to continue such practices in the future. In addition, the
practice in the publishing industry is to permit customers including wholesalers
and retailers to return merchandise. Most books not sold may be returned to the
Company, and the Company gives credit. The rate of return also can have a
significant impact on quarterly results since certain wholesalers have in the
past returned large quantities of products at one time irrespective of
marketplace demand for such products, rather than spreading out the returns
during the course of the year. The Company computes net sales by concurrently
deducting a reserve for returns from its gross
-13-
<PAGE>
sales. Return allowance may vary as a percentage of gross sales based on actual
return experience. The Company believes that as gross sales to the consumer
market increase as a proportion of its overall sales, returns will constitute a
greater proportion of net sales. Although the Company believes its reserves have
been adequate to date, there can be no assurance that returns by customers in
the future will not exceed historically observed percentages or that the level
of returns will not exceed the amount of reserves in the future. In the event
that the amount reserved proves to be inadequate, the Company's operating
results will be adversely affected.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Fiscal 1998 revenues increased approximately 24% from $12.6 million in fiscal
1997 to $15.6 million in fiscal 1998. Increased sales resulted from significant
increases in trade and school and library sales. The increasing size of the
Company's backlist, the introduction of the Company's beginning reader program
and the increase in quality of the Company's frontlist is largely responsible
for the trade sales increase. The acquisition of Twenty-First Century Books and
continuing increases in existing imprints were responsible for the growth in the
library market.
Gross profit margin for the fiscal year ended July 31, 1998 increased to 50% of
net sales compared to 46% of net sales for the same period last year. The
increase in gross profit margin resulted from lower paper, printing and binding
cost as a percentage of sales compared to fiscal 1997.
Selling and marketing expenses for fiscal 1998 decreased to 33% of net sales
from 36% of net sales for fiscal 1997. Selling and marketing expenses have
increased as a result of the Company's efforts to expand its internal marketing
operations and higher warehousing and distribution costs due to increased sales.
However, as a percentage of net sales, selling and marketing expenses decreased
due primarily to special sales for which no marketing efforts are needed.
General and administrative expenses for fiscal 1998 decreased by $173,000 to
$1.7 million compared with $1.9 million for fiscal 1997. This decrease is due to
expenses incurred in fiscal 1997 in connection with the Company's initial public
offering (the "IPO").
For the fiscal year ended July 31, 1998, the Company had operating income of
$866,000, or 6% of net sales compared to a loss of $661,000, or 5% of net sales
for fiscal 1997. The increase in operating income is due to increased sales,
lower cost of sales and lower general and administrative expenses.
Net interest expense increased from $197,000 in fiscal 1997 to $218,000 in
fiscal 1998. The increase in interest expense is due to the acquisition of
Twenty-First Century Books.
Liquidity and Capital Resources
As of July 31, 1998, the Company had cash and working capital of $34,000 and
$5.4 million, respectively, as opposed to cash and working capital of $323,000
and $6.6 million, respectively as of July 31, 1997. This decrease in cash and
working capital was due to the acquisition of Twenty-First Century Books.
The Company has available a $7,500,000 revolving line of credit with People's
Bank. The line of credit restricts the ability of the Company to obtain working
capital in the form of indebtedness other than
-14-
<PAGE>
indebtedness incurred in the ordinary course of the Company's business, to grant
security interest in the assets of the Company or to pay dividends on the
Company's securities. As of July 31, 1998, the Company has $3,875,000
outstanding under this line. The reason for the increase in the debt is the
acquisition of Twenty-First Century Books and to meet working capital needs.
Inventory of finished goods totaled $6.7 million and $4.9 million at July 31,
1998 and July 31, 1997, respectively. The higher level of inventory is due to
the acquisition of Twenty-First Century Books, the introduction of the beginning
reader program, and the increasing size of our trade and school and library
backlist. The increase in accounts receivable of $2,121,000 from the prior year
is due to increased sales.
Based on its current operating plan, the Company believes that its existing
resources together with cash generated from operations and cash available
through its credit line will be sufficient to satisfy the Company's contemplated
working capital requirements through approximately July 31, 1999. However, there
can be no assurance that the Company's working capital requirements will not
exceed its available resources or that these funds will be sufficient to meet
the Company's longer-term cash requirements for operations. Accordingly, either
before or after July 31, 1999, the Company may seek additional funds from
borrowings or through debt or equity financing.
Forward-Looking Statements
This Form 10KSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created hereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the Company's future cash resources and liquidity and the ability of
the Company to fully exploit a book's sales potential in the school and library
and consumer markets. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-KSB will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Year 2000 Disclosure
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies, including customers and potential customers of
the Company, may need to be upgraded to comply with such "Year 2000"
requirements. The Company is closely monitoring the progress the developers of
the Software the Company utilizes in many of its customer projects, as well as
the developers of the software utilized in internal systems are making towards
ensuring that the products the Company utilizes are Year 2000 compliant. The
Company believes that its internal systems and third party software incorporated
into client solutions will be Year 2000 compliant. Failure to provide Year 2000
compliant business solutions and software to its customers could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's costs to ensure that internal systems and software
acquired for integration into client business solutions are Year 2000 compliant
has not been and is not expected to become significant.
-15-
<PAGE>
Further, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products and services such as those offered by the Company.
-16-
<PAGE>
Item 7. Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders and The Board of Directors
The Millbrook Press Inc.:
We have audited the accompanying balance sheet of The Millbrook Press Inc. as of
July 31, 1998 and the related statement of operations, stockholders' equity and
cash flows for the year 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 audit.
We conducted our audit 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 our audit provides 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, 1998 and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Stamford, Connecticut,
September 15, 1998
-17-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders and the Board of Directors
The MillBrook Press Inc.:
We have audited the accompanying balance sheet of The Millbrook Press Inc. as of
July 31, 1997, and the reltated statements of operations, stockholders' equity
and cash flows for the year 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 audit.
We conducted our audit 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 aduit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of The Millbrook Press Inc. as of
July 31, 1997 and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
As discussed in the Notes to Financial Statements, in 1997 the Company adopted
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123. "Accouinting for Stock-Based
Compensation."
/s/ KPMG Peat Marwick LLP
New York, New York
October 3, 1997
-18-
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 34,000 $ 323,000
Accounts receivable (less allowance for returns and bad debts
of $630,000 in 1998 and $456,000 in 1997) 4,945,000 2,824,000
Inventories 6,709,000 4,935,000
Royalty advances, net 857,000 359,000
Prepaid expenses 423,000 582,000
----------- -----------
Total current assets 12,968,000 9,023,000
----------- -----------
Plant costs, net 4,248,000 3,124,000
Fixed assets, net 236,000 256,000
Goodwill, net 3,336,000 3,055,000
Royalty advances, net 673,000 277,000
Other assets 15,000 34,000
----------- -----------
Total assets $21,476,000 $15,769,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 3,875,000 $ --
Accounts payable and accrued expenses 3,406,000 2,271,000
Royalties payable 248,000 199,000
----------- -----------
Total current liabilities 7,529,000 2,470,000
----------- -----------
</TABLE>
-19-
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1998 AND 1997
(Continued)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commitments
Stockholders' equity:
Common Stock, par value $.01 per share, authorized
12,000,000 shares; issued and outstanding 35,000 35,000
3,455,000 shares in 1998 and 1997
Additional paid-in capital 17,556,000 17,556,000
Accumulated deficit (3,644,000) (4,292,000)
------------ ------------
Total stockholders' equity 13,947,000 13,299,000
------------ ------------
Total liabilities and stockholders' equity $ 21,476,000 $ 15,769,000
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
-20-
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 15,615,000 $ 12,573,000
Cost of sales 7,802,000 6,738,000
------------ ------------
Gross profit 7,813,000 5,835,000
------------ ------------
Operating expenses:
Selling and marketing 5,176,000 4,552,000
General and administrative 1,771,000 1,944,000
------------ ------------
Total operating expenses 6,947,000 6,496,000
------------ ------------
Operating income (loss) 866,000 (661,000)
Interest expense 218,000 197,000
------------ ------------
Net income (loss) 648,000 (858,000)
Preferred dividend accrued -- (284,000)
------------ ------------
Net income (loss) available to common stockholders $ 648,000 $ (1,142,000)
============ ============
Earnings (loss) per share (basic and diluted) $ .19 $ (.46)
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
-21-
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock 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 -- 284,000 -- -- -- (284,000) --
Conversion of preferred stock 4,700) (6,474,000) ( 473,692 5,000 6,469,000 -- --
Issuance of common stock warrants -- -- -- -- 23,000 -- 23,000
Issuance of common stock -- -- 1,955,000 20,000 7,073,000 -- 7,093,000
Net loss -- -- -- -- -- (858,000) (858,000)
----- ----------- --------- ------- ----------- ----------- ------------
Balance at July 31, 1997 -- $ -- 3,455,000 $35,000 $17,556,000 $(4,292,000) $ 13,299,000
Net income -- -- -- -- -- 648,000 648,000
----- ----------- --------- ------- ----------- ----------- ------------
Balance at July 31, 1998 -- $ -- 3,455,000 $35,000 $17,556,000 $(3,644,000) $ 13,947,000
----- ----------- --------- ------- ----------- ----------- ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
-22-
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 648,000 $ (858,000)
Depreciation and amortization 1,548,000 1,123,000
Provision for returns and bad debts 174,000 127,000
Accretion of warrants -- 23,000
Changes in assets and liabilities, excluding effects from acquisition of
Twenty-First Century Books:
Increase in accounts receivable (2,295,000) (867,000)
Increase in inventories (1,261,000) (1,458,000)
Increase in royalty advances (610,000) (205,000)
(Increase) decrease in prepaid expenses 159,000 (290,000)
Decrease in other assets 19,000 25,000
Increase in accounts payable and accrued expenses 1,135,000 130,000
Increase in royalties payable 49,000 49,000
----------- -----------
Net cash used in operating activities (434,000) (2,201,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (65,000) (64,000)
Plant costs, excluding effect from acquisition of Twenty-First Century Books (1,652,000) (1,397,000)
Payment for acquisition of Twenty-First Century Books (2,013,000) --
----------- -----------
Net cash used in investing activities (3,730,000) (1,461,000)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable -- (4,992,000)
Proceeds from borrowings under notes payable 3,875,000 1,750,000
Proceeds from sale of capital stock -- 7,093,000
----------- -----------
Net cash provided by financing activities 3,875,000 3,851,000
----------- -----------
Net increase (decrease) in cash (289,000) 189,000
----------- -----------
Cash at beginning of year 323,000 134,000
----------- -----------
Cash at end of year $ 34,000 $ 323,000
----------- -----------
Supplemental disclosures:
Interest paid $ 218,000 $ 193,000
----------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
-23-
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
(1) DESCRIPTION OF THE BUSINESS:
The Millbrook Press Inc. ("Company") was incorporated and commenced
operations as an independent company on February 23, 1994. The Company
is a publisher of children's nonfiction books, in both hardcover and
paperbacks, for preschoolers through young adults. The Company's books
are distributed to the school and public library market, trade
bookstores and other specialty retail and direct sales markets 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS-
Cash and cash equivalents consist of cash in banks and highly
liquid, short-term investments with original maturities of three
months or less at the date acquired.
REVENUE RECOGNITION-
Revenue from the sale of books 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.
INVENTORIES-
Inventories of sheets and bound books, which are primarily located
in a public warehouse or at customers as inventory on preview, are
stated at the lower of cost or market, with cost determined by the
average cost method. Allowances are established to reduce recorded
costs of obsolete and slow moving inventory to its net realizable
value.
ROYALTY ADVANCES-
Licensing agreements for rights to future publications usually
require a non-refundable partial payment of the royalty in advance
of the publication. The Company charges royalty advances to
expense in the period during which the related sales are recorded.
If it appears that an advance will exceed total royalties to be
incurred based upon
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<PAGE>
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 engravings, separations
and other text costs of unpublished books are amortized over five
years from publication date or the estimated remaining life, if
shorter. Plant costs at July 31, 1998 and 1997 are presented net
of accumulated amortization of $6,115,000 and $4,859,000
respectively.
ADVERTISING COSTS-
Advertising costs are expensed in the periods in which the costs
are incurred. Catalog costs consisting of the costs of producing
and distributing catalogs are expensed ratably over the year in
which the costs are incurred in relation to sales. Advertising
expense for the years ended July 31, 1998 and 1997 was $538,000
and $460,000, respectively.
FIXED ASSETS-
Fixed assets are recorded at cost. Depreciation and amortization
of fixed assets are computed on the straight-line method based on
useful lives ranging from 7-10 years for office furniture and
equipment and 5 years for computers. Leasehold improvements are
amortized over the lesser of the lease term or the life of the
asset.
GOODWILL AND OTHER LONG LIVED ASSETS-
Goodwill represents the excess of the cost over the fair value of
the net assets acquired. For financial reporting purposes, the
excess of cost over the fair value of net assets acquired is
amortized over 20 years using the straight-line method.
Accumulated amortization at July 31, 1998 and 1997 is $842,000 and
$636,000, 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.
-25-
<PAGE>
EARNINGS (LOSS) PER SHARE-
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic
earnings per share ("EPS") and diluted EPS on the face of all
statements of earnings for all entities with complex capital
structures. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur from common shares issuable through stock-based compensation
plans including stock options, restricted stock awards, warrants
and other convertible securities using the treasury stock method.
The Company has adopted the provisions of SFAS 128 in fiscal 1998.
Fiscal 1997 EPS data have been restated to conform to SFAS 128.
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 for 1998 and 1997 does not assume the exercise of
common stock options issued under the non-qualified 1994 Stock
Option Plan, the Underwriter's Purchase Option or the exercise of
the warrants issued in conjunction with the Bridge financing (Note
13) 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 13.
STOCK OPTIONS-
Prior to August 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On August 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation", which allows
entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in fiscal 1996
and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
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.
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<PAGE>
(3) FIXED ASSETS:
Fixed assets at July 31, 1998 and 1997 consist of the following:
1998 1997
--------- ---------
Office furniture and equipment $ 137,000 $ 126,000
Computers 341,000 289,000
Telecommunication equipment 33,000 33,000
Leasehold improvements 46,000 43,000
--------- ---------
557,000 491,000
Accumulated depreciation (321,000) (235,000)
--------- ---------
$ 236,000 $ 256,000
--------- ---------
Depreciation expense for the years ended July 31, 1998 and 1997 was
$86,000 and $79,000, respectively.
(4) NOTES PAYABLE TO BANKS:
On December 14, 1995, the Company entered into a revolving line of
credit agreement with a bank that provided for borrowings up to
$2,700,000. The bank increased the available line of credit to
$4,000,000 on June 17, 1997 and to $7,500,00 on June 10, 1998. The
line of credit provides for an interest rate at the bank's base rate
plus .5% (9% at July 31, 1998 and 1997). At July 31, 1998, the amount
outstanding under this credit agreement was $3,875,000. Advances under
this line of credit are collateralized by substantially all of the
assets of the Company. The revolving line of credit, which is payable
upon demand by the bank, contains various covenants which include,
among other things, a minimum tangible net worth requirement. The
revolving line of credit prohibits the Company from the declaration or
payment of dividends on common stock.
(5) INCOME TAXES:
No Federal income taxes have been provided for the years ended July
31, 1998 and 1997, 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, 1998 and
1997 as follows:
Computed "expected" income tax benefit $220,000 $(292,000)
State and local income taxes, net of Federal
benefit 39,000 (17,000)
Increase (decrease) in valuation allowance 265,000 292,000
Nondeductible expenses 6,000 17,000
-------- ---------
Provision for income taxes $ - $ -
======== =========
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<PAGE>
The tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities
that give rise to the deferred tax assets and deferred tax liabilities
at July 31, 1998 and 1997 are the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 72,000 $ 173,000
Inventory reserves 336,000 180,000
Unicap 51,000 --
Plant costs 93,000 155,000
Net operating loss carryforwards 297,000 638,000
----------- -----------
849,000 1,146,000
Less: Valuation allowance (697,000) (1,071,000)
----------- -----------
Net deferred tax asset 152,000 75,000
----------- -----------
Deferred tax liabilities:
Goodwill amortization (139,000) (65,000)
Fixed asset depreciation (13,000) (10,000)
----------- -----------
(152,000) (75,000)
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 $697,000 at July 31, 1998. The Company's tax
net operating loss carryforward of approximately $747,000 at July 31,
1998 expires in the years 2009 to 2012. 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.
(6) STOCK OPTION PLAN:
The Company has reserved 675,000 shares of common stock under its
non-qualified 1994 Stock Option Plan ("Option Plan") which provides
that a committee, appointed by the Board of Directors, may grant stock
options to eligible employees, officers and directors of the Company
or its affiliates. The number of shares reserved for issuance is
adjusted in accordance with the provisions of the Plan. All stock
options granted by the Company expire seven years after the grant
date. Stock options vest over a period from 2-5 years as determined by
the stock option committee.
In October 1996, the Company amended the Option Plan to decrease the
exercise price on outstanding options from $8.00 per share to the
initial public offering price of $4.50 per share. Non-vested options
outstanding on the effective date (December 23, 1996) of the initial
public offering, representing options for 283,500 shares, will vest
50% one year from that date and an additional 50% two years from that
date. As of July 31, 1998 and 1997,
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<PAGE>
there were options outstanding for 502,000 shares and 438,500 shares,
respectively, under the Option Plan.
The per share weighted-average fair value of stock options granted
during 1998 and 1997, calculated in accordance with SFAS No. 123, was
$1.88 and $2.51 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1998 - expected volatility 37%, risk-free interest rate of 5.7% and an
expected life of 5 years; 1997 - expected volatility 40%, risk-free
interest rates ranging from 6.3% to 6.9%, and an expected life of 7
years.
The Company applies APB Opinion No. 25 in accounting for its Option
Plan. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have changed to the pro forma
amounts indicated below:
1998 1997
----------- --------
Net income (loss)
As reported $648,000 $ (858,000)
Pro forma 223,000 (1,199,000)
Earnings (loss) per share (basic and diluted)
As reported .19 (.46)
Pro forma .06 (.60)
Pro forma net income (loss) reflects only options granted in 1998 and
1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
loss amounts presented above because compensation cost is reflected
over the options' vesting periods of 2-5 years and compensation cost
for options granted prior to August 1, 1995 is not considered.
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<PAGE>
Stock Option Plan activity during the periods indicated is as follows:
Weighted-
Average
Exercise
Number of Shares Price
---------------- --------
Balance at July 31, 1996 285,500 8.00
Granted 463,500 4.78
Cancelled (310,500) 8.00
--------
Balance at July 31, 1997 438,500 4.60 (a)
Granted 101,000 4.50
Forfeited (37,500) 4.50
--------
Balance at July 31, 1998 502,000 4.50
--------
(a) As discussed above, in October 1996, the Company amended the
Option Plan to decrease the exercise price on outstanding options
from $8.00 per share to $4.50 per share.
At July 31, 1998 and 1997, the range of exercise prices was $4.50 -
$6.075. The weighted-average remaining contractual life of outstanding
options at July 31, 1998 and 1997 was 4.9 and 4.7 years, respectively.
At July 31, 1998 and 1997, the number of options exercisable were
219,000 and 107,000, respectively, and the weighted-average exercise
price of those options was $4.50.
In December 1996 in connection with the initial public offering, the
Company sold to the Underwriter for $100, the Underwriter's Purchase
Option ("Purchase Option"), consisting of the right to purchase up to
an aggregate of 170,000 shares of common stock. The Purchase Option is
exercisable at $6.075 per share for a period of four years commencing
one year from December 17, 1996.
(7) 401(K) PROFIT SHARING PLAN:
The Company maintains a Non-standardized Prototype Cash or Deferred
Profit Sharing 401(k) Plan (the "Plan"). Participation in the Plan by
employees requires that they complete six months of service for the
Company and attain 21 years of age. Employees on the Plan's effective
date did not have to satisfy the six-month service requirement. The
Company determines each year a discretionary matching contribution.
Such additional contribution, if any, shall be allocated to employees
in proportion to each participant's contribution. The Company did not
contribute to the Plan during the years ended July 31, 1998 and 1997.
-30-
<PAGE>
(8) COMMITMENTS
The Company leases office facilities under operating leases which
expire at various dates through 2004. The leases are subject to
escalation clauses as they relate to certain expenses of the lessor,
i.e., utilities and real estate taxes.
Minimum future rental payments under non-cancelable operating leases
having initial or remaining terms in excess of one year are as
follows:
Year ending July 31 Amount
1999 $167,000
2000 149,000
2001 148,000
2002 83,000
2003 36,000
Thereafter 24,000
--------
$607,000
========
Rent expense for the years ended July 31, 1998 and 1997 were $167,000
and $146,000, respectively.
In May 1994, the Company entered into an agreement with Aladdin Books,
a British publishing company, whereby Aladdin agreed to produce no
less than 50 titles per year for Millbrook through January 1, 2002.
The titles are to be wholly owned by Millbrook. Aladdin is responsible
for production, printing and binding. Production costs are shared by
Aladdin and Millbrook. Aladdin retains sales rights for these titles
to countries other than the United States, Canada and the Philippines.
Royalties are paid to Aladdin based on Millbrook sales. Development
recovery amounts are paid to Millbrook based on sales by Aladdin to
other parts of the world. Net payables to Aladdin at July 31, 1998 and
1997 are $681,000 and $1,003,000, respectively.
During fiscal 1997, the Company signed an agreement with an author to
create a beginning reader series consisting of forty-eight titles to
be published over the next two years. Twenty-four of these titles were
published in fiscal 1998. The Company will advance royalties to this
author at $19,000 per title when certain provisions of this agreement
are met. At July 31, 1998, the Company has advanced royalties in
accordance with this agreement of $667,000.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES-
The carrying amount approximates fair value because of the short term
maturity of these instruments.
-31-
<PAGE>
NOTES PAYABLE-
The carrying amount of these financial instruments approximates
fair values based on the fact that the related interest rates
fluctuate with market rates.
(10) CONCENTRATION OF CREDIT RISK:
The company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which
results in a concentration of credit risk. This concentration of
credit risk may be affected by changes in economic or other industry
conditions and may, accordingly, impact the Company's overall credit
risk. Although the Company generally does not require collateral, the
Company performs ongoing credit evaluations of its customers and
reserves for potential losses are maintained. One customer accounted
for 7% and 12% of the Company's net sales for the years ended July 31,
1998 and 1997, respectively.
(11) ACQUISITION OF TWENTY-FIRST CENTURY BOOKS:
On December 5, 1997, certain assets of Twenty-First Century Books
("Twenty-First Century"), were acquired by the Company for
approximately $2,013,000 in cash. The acquisition has been recorded
using the purchase method of accounting. Accordingly, the accompanying
financial statements include the results of operations of Twenty-First
Century from December 5, 1997. The consolidated balance sheet at July
31, 1998 includes the accounts of Twenty-First Century based on a
preliminary allocation of the purchase price. The allocation is
expected to be finalized after various studies and other work have
been completed. Goodwill resulting from this acquisition will be
amortized on a straight line basis over 20 years.
(12) PREFERRED STOCK:
On December 23, 1996, in conjunction with the Company's initial public
offering, all preferred shares outstanding, plus accrued and unpaid
dividends were converted to 473,692 shares of common stock. Additional
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. No preferred shares
were issued or outstanding at July 31, 1998 and 1997.
(13) CAPITAL STRUCTURE:
In August 1996, the Board of Directors of the Company approved a
recapitalization plan that included (i) a bridge financing ("Bridge
Loan") in the principal amount of $1,750,000 and the issuance of an
aggregate amount of 875,000 warrants as outlined below and (ii) an
initial public offering of 1,700,000 shares of common stock.
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.
-32-
<PAGE>
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 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 provided for interest at a rate of 10% per annum through
November 30, 1996 and thereafter at a rate of 15% per annum and is
payable upon the earlier of February 28, 1998 or the closing of
the 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 has been 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
December 1997, at the consummation of the initial public offering
the Bridge Loan was paid in full.
INITIAL PUBLIC OFFERING-
On December 23, 1996, the Company sold 1,955,000 shares of common
stock, including the underwriter's over-allotment, in an initial
public offering which generated net proceeds of approximately
$7,093,000. The net proceeds were primarily used to repay existing
bank debt and the Bridge Loan.
-33-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
On May 5, 1998, the Audit Committee of the Board of Directors of the Registrant
dismissed KPMG Peat Marwick LLP ("Peat Marwick") as independent accountants to
the Registrant and appointed Arthur Andersen LLP as the new independent
accountants to the Registrant. Peat Marwick's accountant's report on the
financial statements of the Registrant for the past two years and any subsequent
interim period through the date of dismissal did not contain an adverse opinion
or a disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. There were no other reportable events or
disagreements with Peat Marwick to report in response to item 304 (a) of
Regulation S-B.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act.
The information required by Item 9 regarding directors is incorporated
by reference to the information appearing under the caption "Election of
Directors" in the Company's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year. The information
required by Item 9 regarding executive officers appears under the caption
"Executive Officers of the Registrant" in Part I.
Item 10. Executive Compensation.
The information required by Item 10 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Security Ownership" in the Company's
definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year.
-34-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------
**3.1 Restated Certificate of Incorporation of the Company.
**3.2 By-laws of the Company, as amended.
**4.1 Form of Common Stock Certificate.
**4.2 Form of Underwriter's Purchase Option granted to GKN
Securities.
**4.3 Form of bridge Warrant.
*10.1 Employment Agreement, dated as of August 1, 1998, by and
between the Company and Jeffrey Conrad.
**10.2 Employment Agreement, dated as of December 12, 1996, by and
between the Company and Jean E. Reynolds.
**10.3 Consulting Agreement, dated as of December 13, 1996, by and
between the Company and Farrell Associates, Inc.
**10.4 Consulting Agreement, dated as of December 13, 1996, by and
between the Company and Graham International Publishing and
Research, Inc.
**10.5 Form of Indemnification Agreement between each of the Officers
and Directors of the Company and the Company.
**10.6 Agreement of Lease, dated September 27, 1994, by and between
the Company and Arnold S. Paster.
**10.7 Agreement of Lease, dated March 26, 1996, by and between the
Company and Land First II Group.
**10.8 Agreement of Lease and rider attached thereto, dated February
15, 1996, by and between the Company and Ninety-Five Madison
Company.
**10.9 1994 Stock Option Plan, as amended.
**10.10 Loan and Security Agreement, dated as of December 14, 1995,
between People's Bank and the Company.
*10.11 Amendment to Loan and Security Agreement, dated June 10, 1998,
between People's Bank and the Company.
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<PAGE>
**10.12 Agreement made effective as of August 1, 1996 by and between
Aladdin Books Limited and the Company.
***10.13 Employment Agreement, dated as of January 20, 1997, by and
between the Company and Satish Dua.
*27 Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed herewith
** Filed as an Exhibit to the Company's Registration Statement on
Form SB-2 (No. 33-14631)
*** Filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K under Item 4 (Form 8-K).
-36-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE MILLBROOK PRESS INC.
Dated: October 29, 1998 By: /s/ Jeffrey Conrad
-----------------------------
Jeffrey Conrad, President and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dated indicated.
Signatures Title Date
/S/ JEFFREY CONRAD President and October 29, 1998
------------------------ Chief Executive Officer
Jeffrey Conrad (Principal Executive
Officer)
/S/ SATISH DUA Chief Financial Officer October 29, 1998
------------------------ (Principal Financial
Satish Dua Officer and Principal
Accounting Officer)
/S/ HOWARD GRAHAM Chairman of the Board October 29, 1998
------------------------
Howard Graham
/S/ FRANK J. FARRELL Director October 29, 1998
------------------------
Frank Farrell
/S/ BARRY FINGERHUT Director October 29, 1998
------------------------
Barry Fingerhut
/S/ BARRY RUBENSTEIN Director October 29, 1998
------------------------
Barry Rubenstein
/S/ HANNAH STONE Director October 29, 1998
------------------------
Hannah Stone
-37-
THE MILLBROOK PRESS INCORPORATED
27A Main Street
Southampton, New York 11968
August 1, 1998
Mr. Jeff Conrad
8 Mary Austin Place
Norwalk, Conn. 06859
Dear Mr. Conrad:
Upon the terms and subject to the conditions set forth below, this
letter shall constitute the agreement pursuant to which The Millbrook Press
Incorporated ("Millbrook") agrees to employ you as Chief Executive Officer.
1. TERM OF EMPLOYMENT.
1.1 TERM. Millbrook hereby employs you, and you hereby accept
employment with Millbrook, for a period of two years commencing August 1, 1998
unless sooner terminated in accordance with the provisions of Section 9 hereof.
1.2 FORMER AGREEMENT. Upon commencement of the term described
in paragraph 1.1, the employment agreement of September 27, 1996, as amended
December 13, 1996 (collectively the "Old Employment Agreement"), is deemed
terminated. After August 1, 1998, the Old Employment Agreement is of no further
force or effect and your employment will be based solely upon the terms of this
Employment Agreement (the "Agreement").
1.3 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 9 hereof.
2. DUTIES.
2.1 DESCRIPTION OF DUTIES. In your capacity as Chief Executive
Officer, 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 Board of
Directors of Millbrook (the "Directors"). You shall have the responsibility for
the supervision of the day-to-day operations 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 $200,000 per annum, payable in
accordance with the customary payroll policies of Millbrook; provided however,
that if, pursuant to Section 9.1, 9.2. or 9.3 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 annually to
earn incentive compensation equal to fifteen percent (15%) of your annual
salary. 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 July
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.
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.
5. STOCK OPTIONS. The Options granted to you under Section 5 of
the Old Employment Agreement shall be modified to provide that
-2-
<PAGE>
(i) the Option Term (as defined in the Old Employment Agreement) shall be
extended for two years from the date hereof and (ii) the exercise price of the
Option shall be corrected to be $4.50 per share.
6. CHANGE OF CONTROL
6.1 ADDITIONAL OPTION. If prior to the expiration of the
Employment Term, there is a Change of Control (as defined hereinafter) you are
to be granted an additional Stock Option (the "Additional Option") for 100,000
immediately exercisable shares of stock at an exercise price of $4.00 per share.
The Additional Option will have provisions substantially similar to the terms
and conditions in Millbrook's Stock Option Plan and the Standard Stock Option
Agreement.
6.2 TERMINATION FOLLOWING A CHANGE OF CONTROL. If prior to the
Expiration of the Employment Term, there is a Change of Control (as defined
hereinafter) and thereafter any of the following occur: (i) this Employment
Agreement is, within one year of the anniversary date of such Change of Control,
terminated otherwise than by reason of cause as defined in paragraph 9.3; (ii)
within one week of the anniversary date of such Change of Control, you tender a
notice of resignation from your position as Chief Executive Officer; (iii) you
are placed in any position of lesser stature than that of Chief Executive
Officer of Millbrook; are assigned duties inconsistent with a Chief Executive
Officer or duties which, if performed, would result in a significant change in
the nature or scope of powers, authority, functions or duties inherent in such
positions on the date hereof; are assigned performance requirements or working
conditions which are at variance with the performance requirements and working
conditions in effect on the date hereof; or are accorded treatment on a general
basis that is in derogation of your stature as a Chief Executive Officer; (iv)
any breach of Sections 3 through 5, inclusive, of this agreement; or (v) any
requirement of Millbrook that the location at which you perform your principal
duties for Millbrook be outside a radius of 40 miles from the location which you
performed such duties immediately before the Change of Control, then this
Agreement is deemed to be terminated by Millbrook otherwise than by reason of
cause, and Millbrook shall pay you Severance Pay in an amount equal to your
annual salary for one year within five days after notice from you to such
effect.
6.3 DEFINITION. For the purposes of this agreement, a Change
of Control means the direct or indirect sale, lease, exchange or other transfer
to any entity, individual, or group of individuals of any number of shares of
capital stock which would then allow a stockholder or group of related
stockholders to (i) replace, appoint, or otherwise change a majority of the
Board of Directors (as compared to the Board of Directors at the beginning of
that fiscal year); or (ii) effect a substantial change in
-3-
<PAGE>
management, or there is a merger, consolidation, or combination of Millbrook
into or with another corporation or entity. Change of Control shall not include
any transfer of shares to an entity or group controlling 20% of Millbrook's
outstanding shares as of the date of this Agreement.
7. CONFIDENTIALITY.
7.1 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.
7.2 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 required by law or in the
course of your 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.
7.3 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) and
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.
7.4 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 by others, are and shall remain exclusively the property of Millbrook,
and that upon the expiration or termination
-4-
<PAGE>
of your employment hereunder you shall return to Millbrook all such material and
all copies thereof in your possession or control.
7.5 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 innovations, whether
copyrightable or patentable or not, relating to the business of Millbrook. For
the compensation and benefits received hereunder, you hereby assign and 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.
8. COMPETITIVE ACTIVITIES.
8.1 NON-COMPETITION. During the Employment Term and for a
period of two (2) years after the expiration or earlier termination thereof for
whatever 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.
8.2 SOLICITATION OF EMPLOYEES AND OTHERS. You acknowledge and
agree that Millbrook's directors, officers 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
-5-
<PAGE>
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 engaged in any activity competitive with the activities
of Millbrook.
8.3 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 such 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.
9. TERMINATION.
9.1 BY DEATH. Prior to the end of the Employment Term, your
employment hereunder shall be terminated in the event of your death.
9.2 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.
9.3 TERMINATION FOR 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 the provisions of any laws applicable to 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 given 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.
-6-
<PAGE>
9.4 SEVERANCE PAY. Other than with respect to Section 6
hereof, whether and to what extent you are entitled to severance pay upon
termination of your employment with Millbrook will be determined according to
Millbrook's severance policies, if any, at the time of such termination.
10. MISCELLANEOUS.
10.1 NOTICES. Notices hereunder shall be in writing and shall
be delivered by hand or sent by registered or certified mail, return receipt
requested, if to you, at the address set forth above, and if to Millbrook Press,
at 27A Main Street, Southampton, New York 11968, or at such other address as to
which notice has been given in the manner herein provided.
10.2 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.
10.3 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 of 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.
10.4 HEADINGS. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement.
10.5 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the conflict of laws principles thereunder.
-7-
<PAGE>
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,
THE MILLBROOK PRESS INCORPORATED
By:/s/ Howard B. Graham
-----------------------------
Howard B. Graham, Chairman of
the Board of Directors
By: /s/ Barry Fingerhut
-----------------------------
Barry Fingerhut, Chairman of
the Compensation Committee
Accepted and Agreed:
By: /s/ Jeff Conrad
-----------------------------
Jeff Conrad
-8-
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
WHEREAS, The Millbrook Press Inc., a Delaware corporation, with its
chief executive office located at 2 Old New Milford Road, Brookfield,
Connecticut 06804 (referred to herein as "Borrower") entered into a Loan and
Security Agreement with PEOPLE'S BANK, a Connecticut banking corporation
("People's"), with a place of business located at Bridgeport Center, 850 Main
Street, Bridgeport, Connecticut 06607 (referred to herein as "Lender") dated as
of December 14, 1995 (the Loan and Security Agreement being herein referred to
as the "Loan Agreement"); and
WHEREAS, Borrower and Lender entered into a First Amendment to Loan and
Security Agreement dated as of June 17, 1997 amending and revising Sections
2.1(a), 2.1(c), 2.6, 4.6, 6.13(a), 6.13(c) and 6.13(d) of the Loan Agreement
(the Loan and Security Agreement, as amended by the First Amendment to Loan and
Security Agreement shall be referred to herein as the "Amended Agreement"); and
WHEREAS, Borrower and Lender have agreed to further amend the terms and
provisions of the Loan Agreement effective as of the date stated herein by the
provisions set forth below;
NOW, THEREFORE, Borrower and Lender hereby agree that effective as on
the date stated herein as the date of execution by Lender being June 10, 1998,
the Amended Agreement shall be amended to contain the provisions set forth below
and the applicable provisions of the Amended Agreement shall be superseded to
the extent necessary to give effect to the provisions set forth below:
1. Section 2.1(a) of the Amended Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
2.1 Revolving Advances. (a) Subject to the terms and conditions of this
Agreement, People's agrees to make revolving advances to Borrower in an amount
at any one time outstanding not to exceed the Borrowing Base. For purposes of
this Agreement, "Borrowing Base", as of any date of determination, shall mean an
amount equal to eighty percent (80%) of the amount of Eligible Accounts PLUS
(ii) an amount equal to the lowest of: (x) fifty percent (50%) of the amount of
Eligible Inventory, (y) the amount of credit availability created by SECTION
2.1(A) above or (z) Three Million Seven Hundred Fifty Thousand Dollars
($3,750,000).
2. Section 2.1(c) of the Amended Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
2.1(c) People's shall have no obligation to make advances hereunder to
the extent they would cause the outstanding Obligations to exceed Seven Million
Dollars ($7,500,000) ("Maximum Amount").
<PAGE>
3. Section 2.6(d) of the Amended Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
(d) Unused Line Fee. On the first day of each month during the term of
this Agreement, and thereafter so long as any Obligations are outstanding, an
unused line fee in an amount equal to one-eighth (1/8%) of one percent per annum
of the difference between Seven Million ($7,500,000) Dollars and the average
amount of Obligations outstanding during the immediately prior calendar month.
4. Section 3.3 of the Amended Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
3.3 Term. This Agreement shall become effective upon the execution and
delivery hereof by Borrower and People's and shall continue in full force and
effect for a term ending on December 14, 2001. The foregoing notwithstanding,
People's shall have the right to terminate its obligations under this Agreement
immediately and without notice upon the occurrence and during the continuation
of an Event of Default.
5. Section 6.13(c) of the Loan Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
6.13(c) Tangible Net Worth. Tangible Net Worth of at least $4,500,000
through the 1998 fiscal year end and thereafter, measured on a calendar
month-end basis;
6. Section 6.13(d) of the Amended Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
6.13(d) Working Capital. Working Capital of not less than $3,750,000
through the 1998 fiscal year end and thereafter, measured on a calendar
month-end basis.
7. Lender has requested and Borrower has agreed to execute a Secured
Promissory Note to evidence the maximum amount of advances available under
Section 2.1(c) which Secured Promissory Note shall be in the form attached
hereto as Schedule A.
8. Borrower agrees to pay a one time modification fee of Eight Thousand
Seven Hundred Fifty Dollars ($8,750) which is earned, in full, and is due and
payable by Borrower to Lender in connection with the execution of this Agreement
on the date hereof. Borrower authorizes Lender to charge such modification fee
to its account with Lender as an advance.
9. Except as herein amended, all of the terms and provisions of the
Amended Agreement shall remain in full force and effect.
-2-
<PAGE>
10. Borrower and Lender agree that this Second Amendment to Loan and
Security Agreement has been prepared by the mutual effort of both parties and
that in the event of a conflict or interpretive question with respect to any
term, provision or section contained in this Second Amendment to Loan and
Security Agreement or the December 14, 1995 Loan and Security Agreement, that
this Second Amendment to Loan and Security Agreement and the December 14, 1995
Loan and Security Agreement shall not be construed more strictly against any one
party than any other party; it being agreed that both Borrower and Lender have
equally negotiated the terms hereof and thereof.
11. The revisions and amendments recited herein shall not become
effective and shall be of no force or effect until Borrower has executed this
Second Amendment to Loan and Security Agreement and the original form of Secured
Promissory Note and provided Lender with a current certificate of the Secretary
of Borrower attesting to the adoption and/or passage of applicable corporate
resolutions authorizing and approving the revisions and amendments contained in
this Second Amendment to Loan and Security Agreement which such certificate
shall also contain an acceptable form of incumbency certificate attesting to the
current officers and directors of Borrower.
The date of execution of this Second Amendment to Loan and Security
Agreement by Borrower is June 10, 1998.
LENDER: BORROWER:
PEOPLE'S BANK THE MILLBROOK PRESS INC.
By: Peter Coates By: Satish Dua
--------------------------------- --------------------------------
Title: Vice President Title: Vice President & CFO
----------------------------- -----------------------------
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements as of July 31, 1998 and is qualified
in its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-1-1997
<PERIOD-END> JUL-31-1998
<CASH> 34,000
<SECURITIES> 0
<RECEIVABLES> 5,575,000
<ALLOWANCES> 630,000
<INVENTORY> 6,709,000
<CURRENT-ASSETS> 12,968,000
<PP&E> 236,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,476,000
<CURRENT-LIABILITIES> 7,529,000
<BONDS> 0
<COMMON> 17,591,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,476,000
<SALES> 15,615,000
<TOTAL-REVENUES> 15,615,000
<CGS> 7,802,000
<TOTAL-COSTS> 7,802,000
<OTHER-EXPENSES> 6,947,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218,000
<INCOME-PRETAX> 648,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 648,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
