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, 1999
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, 1999 were $18.7 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 26, 1999, was
approximately $3,780,000. As of July 31, 1999, 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..............................................4
Item 2. Description of Properties...........................................13
Item 3. Legal Proceedings...................................................13
Item 4. Submission of Matters to a Vote of Security Holders.................13
PART II
Item 5. Market for Common Equity and Related Stockholders Matters...........14
Item 6. Management's Discussion and Analysis or Plan of Operations..........15
Item 7. Financial Statements................................................19
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.............................33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................33
Item 10. Executive Compensation..............................................33
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 at a secondary school level.
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 continue as a 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; and (iv) develop books that can be
exploited through specialized distribution 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 distribution capabilities makes
it well positioned to maintain its book sales to the consumer market while at
the same time increasing its established sales base in the school and library
market.
INDUSTRY BACKGROUND
SCHOOL AND LIBRARY MARKET
The school and public library market is undergoing significant change due to
long-term social and economic forces. The United States Department of Education
predicts that the student population from kindergarten through twelfth grade
will increase 8% from 1997 to 2006, with an overall net
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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.
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
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paperback book sold in the consumer market was not designed as an information
source, but rather to attract a consumer's attention and thereby sell itself
from the shelf. Accordingly these books failed to address certain topics and
lacked the informational content of library books. The Company's books, and
books for the children's book market in general, are now designed to appeal to
both markets. A book filled with information is combined with an attractive
title, cover and internal design to catch the eye of the consumer browsing the
shelf. The same book can then be bound as a hardcover book and sold to school
and public libraries. Additionally, as either a hardcover or a paperback, the
book appeals to teachers and can be used as supplemental reading in the
classroom.
COMPANY STRATEGY
The Company's goal is to be a "one-stop publisher," publishing and marketing a
diverse product line servicing most of the major segments of the children's book
market. The Company's strategy is to continue to diversify its products and
distribution channels for those products by capitalizing on the long-term and
short-term changes occurring in the children's book publishing industry in both
the school and public library market and in the consumer market.
The Company believes that this diversified approach to its product line enables
it to achieve market penetration in the children's book market and minimize the
risk of fluctuations or weakness in any one particular segment. The Company
believes that its experience in publishing children's books and its reputation
for quality gained over the past nine 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. 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.
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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 published and will
continue to expand its list of books for the beginning reader (four to
six years old) and early reader (five to eight years old) as well as
chapter books for ages seven through 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, and join with
other companies to achieve critical sales volume.
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 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 or understandings 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 management of the school and library marketing department and sales
force has been significantly strengthened in fiscal 1999, which allows
for growth in future years.
o EXPAND DISTRIBUTION. The Company believes that decision-making with
respect to purchasing books is becoming more complex due to the
expansion in types of outlets selling books and that expanding the use
of marketing techniques to put the Millbrook imprint in direct contact
with children, parents and teachers will increase sales. The Company
intends to increase its participation in book fairs, book clubs,
catalogs and to distribute its books to alternative retail outlets as
well as increase its direct selling and direct mail activities. The
Company may also seek to enter into additional strategic partnerships
to extend its distribution in both the consumer and in school and
public library market channels.
o ADAPT TO NEW TECHNOLOGIES. The Company 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 1999, the Company published 104 hardcover books under the
Millbrook imprint for the school and public library market, of which 46 books
were suitable for and published simultaneously as hardcovers or paperbacks to be
sold in the consumer market, and 53 hardcover books under the Copper Beech
imprint for the school and library market, of which 28 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. Virtually all of Millbrook's
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contracts call for an advance payment against future royalties. Advances range
from $1,000 for a simple series book to as much as $19,000 to a well-known
artist for a picture book. In almost all cases, the Company retains control of
all book club, reprint, electronic, foreign, serialization, and commercial
rights. The income generated from such arrangements is divided equally between
the Company and the author.
Upon the delivery of a manuscript from an author/illustrator and after editing,
fact-checking and approval, the Company's in-house staff plans and prepares the
layout, illustrations and cover to be used for the book. Upon completion of the
editing, graphics and layout, a computer produces a mechanical of the book with
all elements in place. A cost estimate is then prepared which determines print
quantity and retail price of the book. Book printing is done by an outside
supplier, usually in the United States, on a bid contract basis. The Company's
products require varying periods of development time depending upon the
complexity of the graphics and design and the editing process. Most of the
Company's books can be developed in a period that ranges from nine to eighteen
months. Millbrook is often cited in reviews of its books for one or more
outstanding design elements (cover, layout, type, etc.). Jackets and interior
design are either created in-house or assigned to freelance artists under the
supervision of the Company's art department. The use of outside authors,
illustrators and freelancers for jacket design, fact-checking and copy editing
allows the Company to produce a large number of books per year with a relatively
small staff and generally allows for the flexibility needed for the Company to
continue to produce a broad product line.
EXTERNAL DEVELOPMENT
Approximately 25% of books published under the Millbrook imprint are produced by
outside sources. Most of these books are produced by outside packagers that
cooperate and consult with Millbrook during the development process but
otherwise provide the full range of services needed to publish children's books.
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 Books Limited ("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 Copper Beech imprint. The exclusive
agreement between the Company and Aladdin was designed to produce books with
strong consumer market appeal in popularly priced paperback books as well as
content suitable for hardcover books for sales to libraries. Aladdin is
responsible for the production, printing and binding of such books, although
development costs for such books are shared by Aladdin and the Company. Aladdin
retains the sales rights for these books to countries other than the United
States, Canada and the Philippines. Royalties are paid to Aladdin based on the
Company's sales. Development recovery amounts are paid to the Company based on
sales by Aladdin to other parts of the world.
LICENSES
In the normal course of its business, the Company acquires licenses from foreign
book publishers for the rights to market and sell in the United States books
that were created either with or without input from the Company. The licensing
usually includes all subsidiary rights such as first
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and second serialization, commercial rights, electronic rights, foreign and
translation rights, reprint rights and rights to any means yet to be developed
for transmitting information.
MARKETING AND DISTRIBUTION
The Company's sales and marketing efforts are designed to broaden product
distribution, increase the number of first-time and repeat purchasers, promote
brand-name recognition, assist retailers and properly position, package and
merchandise the Company's products. The Company utilizes various marketing
techniques designed to promote brand awareness and recognition and to maximize
the amount of shelf space devoted to its product line in retail outlets,
including 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, 1999, approximately 58% 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 10% of the Company's net sales in the fiscal year ended July 31,
1999. 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 28% 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 14% 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. Direct purchases by school
and public libraries is the fastest growing area of the Company's sales.
The Company markets its books in numerous ways to support the foregoing efforts.
The Company sends complementary copies of each newly published book to library
media reviewers and columnists and major county or district school systems that
have their own review and recommendation process. The Company believes that a
favorable review in a respected library journal can significantly influence the
sales prospects of a particular book. Many of the Company's books published
under the Millbrook imprint have received favorable reviews, but
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there can be no assurance that the Company will continue to receive favorable
reviews in the future. The Company produces six catalogs and one magazine insert
per year. For its school and library accounts, the Company produces one
full-line catalog, consisting of a complete annotated backlist as well as new
publications for the Fall that is mailed to 100,000 current and perspective
accounts. The Company produces a Spring list catalog for mailing to the same
audience. 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 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.
CONSUMER
The sales channels in the consumer market are more diverse than the school and
public library market and require a different marketing approach. The Company
has recently attracted experienced and talented sales and marketing personnel.
The in-house consumer sales group covers the two major areas: traditional
consumer book markets and non-traditional consumer book markets. The Company's
merchandising and marketing programs have increased its traditional and
non-traditional consumer sales from $5.7 million in fiscal year 1998 to $8.2
million in fiscal 1999.
The Company has three sales groups: the in-house sales group, the commissioned
sales group and the special sales group. The in-house sales group consists of an
in-house sales director and an assistant responsible for sales, promotion and
merchandising to the major national and large regional accounts. The
commissioned sales group currently consists of approximately 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.
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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 1999, approximately 30% of the Company's printing and binding
needs were provided by Worzalla Publishing Company ("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 $4.5 million (or
approximately 25% of net sales) spent in 1999. The Company has used Worzalla's
services since the Company's inception and enjoys a good working relationship
with Worzalla. The Company believes it has sufficient alternative sources of
manufacturing services to meet its foreseeable needs should Worzalla's services
no longer be available to the Company, although manufacturing costs could be
adversely impacted.
Shipping orders accurately and promptly upon their receipt is an important
factor in the Company's customer service and in closing a sale. Most publishing
companies ship products within one week of receipt of a customer order, and in
general the Company meets or reduces this timetable. The Company processes
customer orders through an in-house processing department. The Company leases
warehouse space from, and its products are shipped from Mercedes Distribution
Center of Brooklyn, New York.
COMPETITION
The children's book publishing marketplace in the school and public library
market and in the consumer market is fragmented and very competitive.
Competition in the school and public library market is based upon quality of
products, brand name recognition and book content. In the consumer market, the
primary factors are brand name recognition, book content, availability and
price.
There are many publishers of material similar to the Company's product
offerings. The Company's chief and direct competitors in the school and public
library market include Childrens Press, 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 relationships in the education sector give
the Company a competitive edge not only in producing quality books marketable in
the school and library and consumer markets, but also in foreseeing
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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.
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, 1999, the Company had approximately 50 employees, 80% of which
were full-time and 20% were part-time. The Company has never experienced a work
stoppage and its employees are not covered by a collective bargaining agreement.
The Company believes its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns no real property. The Company conducts its operation through
two facilities. The Company leases approximately 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 in New York City at a rental of $34,600
per year plus utilities and taxes. This lease expires in APRIL 2004. The Company
also leases office space in Southhampton, New York at a current rental of
$12,000 per year plus utilities and taxes. This lease expires in September 1999
with renewal option for another three years. It is the Company's intention to
renew this lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
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, 1998 and July 31, 1999, as reported on the NASDAQ
SmallCap Market, the principal trading market for the Common Stock. The
quotations are interdealer prices without adjustment for retail markups,
markdowns, or commission and do not necessarily represent actual transactions.
COMMON STOCK
YEAR ENDED JULY 31, 1999
High Low
First Quarter 3-1/2 1-3/4
Second Quarter 6-5/8 1-7/8
Third Quarter 3-15/16 2-1/2
Fourth Quarter 3 2-1/4
YEAR ENDED JULY 31, 1998
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
As of July 31, 1999, the Company had 3,455,000 shares of Common Stock
outstanding and 61 holders of record of the Company's Common Stock. The Company
believes that at such date, there were in excess of 600 beneficial owners of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business. In addition, the Company's revolving line of
credit with People's Bank prohibits the
14
<PAGE>
Company from the declaration or payment of dividends. Accordingly, the Company
does not anticipate that any cash dividends will be declared on its Common Stock
in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Financial Statements of The Millbrook Press Inc. and related Notes to the
Financial Statements which are included elsewhere in this Form 10-KSB.
OVERVIEW
GENERAL
In February 1994, the Company was incorporated and acquired the assets
of The Millbrook Press Inc., which had commenced operations in 1989. Prior to
January 1991, The Millbrook Press Inc. had no revenues and incurred expenses
related to administrative costs associated with the formation and production of
its first publication list. Subsequent to January 1991, the Company has had
significant net sales in the school and public library 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.
Sales Incentives and Returns
In connection with the introduction of new books, many book publishers,
including the Company, discount prices of existing products, provide certain
promotional allowances and give other sales incentives to their customers. The
Company intends to continue such practices in the future. In addition, the
practice in the publishing industry is to permit customers including wholesalers
and retailers to return merchandise. Most books not sold may be returned to the
Company, and the Company gives credit. The rate of return also can have a
significant impact on quarterly results since certain wholesalers have in the
past returned large quantities of products at one time irrespective of
marketplace demand for such products, rather than spreading out the returns
during the course of the year. The Company computes net sales by concurrently
deducting a reserve for returns from its gross sales. Return allowance may vary
as a percentage of gross sales based on actual return experience. The Company
believes that as gross sales to the consumer market increase as a proportion of
its overall sales, returns will constitute a greater proportion of net sales.
Although the Company believes its reserves have been adequate to date, there can
be no assurance that returns by customers in the future will not exceed
historically observed percentages or that the level of returns will not exceed
the amount of reserves in the future. In the event that the amount reserved
proves to be inadequate, the Company's operating results will be adversely
affected.
15
<PAGE>
Acquisition
On December 5, 1997 the Company completed an acquisition to purchase
certain assets of Twenty-First Century Books, a division of Henry Holt & Co.,
Inc. ("Holt"). The purchase was effective as of December 1, 1997. Under the
agreement, the Company paid Holt $2,013,000 for the assets.
School and Public Library Market
The addition of Twenty-First Century Books was one element in substantially
increasing school and public library sales. The second element was greater
emphasis on telemarketing and direct sales. Both elements produced substantial
results in fiscal year 1999.
Fourth Quarter Adjustments
Due to less than expected sales on certain titles during the fourth quarter of
1999, the Company is writing off related royalty advances. In addition, the
Company is also increasing its inventory reserve for related product.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Fiscal 1999 revenues increased 20% from $15.6 million in fiscal 1998 to $18.7
million in fiscal 1999. Increased sales resulted from major increases in special
sales to direct sales organizations, book clubs, book fairs and catalogs, plus
an increase in direct sales to school and public libraries through telemarketing
programs, direct sales force and direct mail campaigns.
Gross profits for the year ended July 31, 1999 were $8,604,000, prior to
adjustments, as compared to $7,813,000 for the previous year. Due to less than
expected sales on certain titles during the fourth quarter of 1999, the Company
is writing off related royalty advances. In addition, the Company is also
increasing its inventory reserve for related product. The result of these
write-offs and reserves caused the Company to take $914,000 of non-cash
operating charges. Gross profits after adjustments for fiscal 1999 were
$7,805,000.
Selling and marketing expenses for fiscal 1999 decreased to 32% of net sales
from 33% of net sales for fiscal 1998. Selling and marketing expenses increased
$739,000 over 1998 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 have decreased.
Net operating profit for the year ended July 31, 1999 was $639,000 before
adjustments, compared to $866,000 for the previous year. Taking adjustments into
account, the result was a net operating loss of $275,000 for the year ended July
31, 1999.
16
<PAGE>
Net interest expense increased from $218,000 in fiscal 1998 to $399,000 in
fiscal 1999. The increase in interest expense is due to borrowing for the
acquisition of Twenty-First Century Books (December 1997), and borrowing for
working capital requirements, due to higher sales levels.
Net income for the year ended July 31, 1999 was $240,000 before adjustments,
compared to $648,000 in the previous year. Taking adjustments into account, the
result was a net loss of $674,000 for the year ended July 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1999, the Company had cash and working capital of $133,000 and
$4.7 million, respectively, as compared to cash and working capital of $34,000
and $5.4 million, respectively as of July 31, 1998.
The Company has available a $7,500,000 revolving line of credit with People's
Bank. The line of credit restricts the ability of the Company to obtain working
capital in the form of indebtedness, to grant security interest in the assets of
the Company or to pay dividends on the Company's securities. As of July 31,
1999, the Company has $5,458,000 outstanding under this line, all of which is
classified as current liabilities since it is due on demand. The reason for the
increase in the debt is the acquisition of Twenty-First Century Books and to
meet working capital needs. At July 31, 1999, the Company was not in compliance
with certain covenants contained in its credit agreement with People's Bank, as
amended on June 10, 1998. The Company has obtained a waiver from People's Bank
for its non-compliance status.
Inventory of finished goods totaled $7.1 million and $6.7 million at July 31,
1999 and 1998, respectively. The higher level of inventory is due to 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
$1,159,000 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, 2000. 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, 2000, 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
17
<PAGE>
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, 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.
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.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders and The Board of Directors
The Millbrook Press Inc.:
We have audited the accompanying balance sheets of The Millbrook Press Inc. as
of July 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Millbrook Press Inc. as of
July 31, 1999 and 1998 and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Stamford, Connecticut
October 22, 1999
19
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash $ 133,000 $ 34,000
Accounts receivable (less allowance for returns and bad
debts of $803,000 in 1999 and $630,000 in 1998) 6,104,000 4,945,000
Inventories 7,079,000 6,709,000
Royalty advances, net 699,000 857,000
Prepaid expenses 341,000 423,000
----------- -----------
Total current assets 14,356,000 12,968,000
----------- -----------
Plant costs, net 4,360,000 4,248,000
Fixed assets, net 237,000 236,000
Goodwill, net 3,126,000 3,336,000
Royalty advances, net 852,000 673,000
Other assets -- 15,000
----------- -----------
Total assets $22,931,000 $21,476,000
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
20
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1999 AND 1998
(Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Notes payable to banks $ 5,458,000 $ 3,875,000
Accounts payable and accrued expenses 3,892,000 3,406,000
Royalties payable 308,000 248,000
------------ ------------
Total current liabilities 9,658,000 7,529,000
------------ ------------
Commitments
Stockholders' equity:
Common stock, par value $.01 per share, authorized
12,000,000 shares; issued and outstanding 3,455,000
shares in 1999 and 1998
35,000 35,000
Additional paid-in capital 17,556,000 17,556,000
Accumulated deficit (4,318,000) (3,644,000)
------------ ------------
Total stockholders' equity 13,273,000 13,947,000
------------ ------------
Total liabilities and stockholders' equity $ 22,931,000 $ 21,476,000
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
21
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
1999 1998
---- ----
Net sales $ 18,763,000 $ 15,615,000
Cost of sales 10,958,000 7,802,000
------------ ------------
Gross profit 7,805,000 7,813,000
------------ ------------
Operating expenses:
Selling and marketing 5,915,000 5,176,000
General and administrative 2,165,000 1,771,000
------------ ------------
Total operating expenses 8,080,000 6,947,000
------------ ------------
Operating income (loss) (275,000) 866,000
Interest expense 399,000 218,000
------------ ------------
Net income (loss) $ (674,000) $ 648,000
============ ============
Earnings (loss) per share (basic and diluted) $ (.20) $ .19
============ ============
Weighted average shares outstanding
3,455,000 3,455,000
============ ============
The accompanying notes to financial statements
are an integral part of these financial statements.
22
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
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
Net income - - - (674,000) (674,000)
--------- ------- ----------- ----------- -----------
Balance at July 31, 1999 3,455,000 $35,000 $17,556,000 $(4,318,000) $13,283,000
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income $ (674,000) $ 648,000
Depreciation and amortization 1,912,000 1,548,000
Changes in assets and liabilities, excluding effects
from acquisition of Twenty-First Century Books:
Increase in accounts receivable (1,159,000) (2,121,000)
Increase in inventories (370,000) (1,261,000)
Increase in royalty advances (21,000) (610,000)
Decrease in prepaid expenses 82,000 159,000
Decrease in other assets 15,000 19,000
Increase in accounts payable and accrued expenses 486,000 1,135,000
Increase in royalties payable 60,000 49,000
----------- -----------
Net cash provided by (used in) by operating activities 331,000 (434,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (81,000) (65,000)
Plant costs, excluding effect from acquisition of
Twenty-First Century Books
(1,734,000) (1,652,000)
Payment for acquisition of Twenty-First Century Books -- (2,013,000)
----------- -----------
Net cash used in investing activities (1,815,000) (3,730,000)
Cash flows from financing activities:
Proceeds from borrowings under notes payable 1,583,000 3,875,000
----------- -----------
Net cash provided by financing activities 1,583,000 3,875,000
Net increase (decrease) in cash 99,000 (289,000)
----------- -----------
Cash at beginning of year 34,000 323,000
----------- -----------
Cash at end of year $ 133,000 $ 34,000
=========== ===========
Supplemental disclosures:
Interest paid $ 399,000 $ 218,000
=========== ===========
Income taxes paid $ 145,000 $ 12,000
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(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
estimated sales, such excess is immediately
25
<PAGE>
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, 1999 and 1998 are presented net of accumulated
amortization of $7,716,000 and $6,115,000 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, 1999 and 1998 was $479,000 and $538,000,
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, 1999 and 1998 is $1,051,000 and $842,000, 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.
26
<PAGE>
Earnings (Loss) Per Share-
Basic EPS is computed as net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock-based compensation plans including stock
options, restricted stock awards, warrants and other convertible
securities using the treasury stock method.
Earnings (loss) per share 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 1999
and 1998 does not assume the exercise of common stock options as the
option exercise price is above the average market price of common stock
for the year.
Stock Options-
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of Accounting Principles
Board ("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.
(3) Fixed Assets:
Fixed assets at July 31, 1999 and 1998 consist of the following:
1999 1998
---- ----
Office furniture and equipment $184,000 $ 184,000
Computers 487,000 407,000
Telecommunication equipment 61,000 60,000
Leasehold improvements 75,000 75,000
-------- ---------
807,000 726,000
Accumulated depreciation (570,000) (490,000)
-------- ---------
$ 237,000 $ 236,000
======== =========
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<PAGE>
Depreciation expense for the years ended July 31, 1999 and 1998 was
$80,000 and $86,000, 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% (8% and 9% at July 31, 1999 and 1998, respectively). In addition, a
certain portion of the line of credit may be priced at the 90 day Libor
rate plus 2.0% (5.03%) at July 31, 1999. At July 31, 1999, the amount
outstanding under this credit agreement was $5,458,000 ($3,000,000 of
which was priced at the Libor rate). Advances under this line of credit
are collateralized by substantially all of the assets of the Company.
The revolving line of credit, which is payable upon demand by the bank,
contains various covenants which include, among other things, a minimum
tangible net worth requirement. The revolving line of credit prohibits
the Company from the declaration or payment of dividends on common
stock.
At July 31, 1999, the Company was not in compliance with certain
covenants contained in its credit agreement with People's Bank, as
amended on June 10, 1998. The Company has obtained a waiver from
People's Bank for its non-compliance status.
(5) Income Taxes:
No Federal income taxes were provided for the years ended July 31, 1999
and 1998, 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, 1999 and 1998 as follows:
1999 1998
---- ----
Computed "expected" income tax benefit $ (229,000) $220,000
State and local income taxes, net of
Federal benefit (37,000) 39,000
Increase (decrease) in valuation allowance 263,000 (265,000)
Nondeductible expenses 13,000 6,000
Other (10,000) -
---------- ---------
Provision for income taxes $ - $ -
========== =========
28
<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, 1999 and 1998 are the following:
1999 1998
---- ----
Deferred tax assets:
Accounts receivable allowances $ 320,000 $ 72,000
Inventory reserves 326,000 336,000
Unicap 373,000 51,000
Plate and revision costs 80,000 93,000
Fixed assets 61,000 -
Pre-publication costs 665,000 -
AMT credit 25,000 -
Net operating loss carryforwards 103,000 297,000
Other 2,000 -
------------- ----------
Net deferred tax asset 1,955,000 849,000
Less: Valuation allowance (960,000) (697,000)
------------- ----------
Net deferred tax asset 995,000 152,000
------------- ----------
Deferred tax liabilities:
Fixed asset depreciation - (13,000)
Goodwill amortization (240,000) (139,000)
Plate and revision costs - -
Adjustment for change in tax accounting
method (755,000) -
-------------- ----------
Net deferred tax liability (995,000) (152,000)
-------------- -----------
Net deferred income taxes $ - $ -
============== ===========
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 $960,000 at July 31, 1999. The Company's tax net operating
loss carryforward of approximately $103,000 at July 31, 1999 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.
29
<PAGE>
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 additional 50% two years from that date. As
of July 31, 1999 and 1998, there were options outstanding for 517,500
shares and 527,000 shares, respectively, under the Option Plan.
The per share weighted-average fair value of stock options granted
during 1998, calculated in accordance with SFAS No. 123, was $1.88 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.
The Company applies APB Opinion No. 25 in accounting for its Option
Plan. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998
---- ----
Net income (loss)
<S> <C> <C>
As reported $(674,000) $ 648,000
Pro forma (764,000) 587,000
Earnings (loss) per share (basic and diluted)
As reported (.20) .19
Pro forma (.22) .17
</TABLE>
Pro forma net income (loss) reflects only options granted in 1999 and
1998. 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.
30
<PAGE>
Stock Option Plan activity during the periods indicated is as follows:
Weighted-
Number of Average
Shares Exercise 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 126,000 4.50
Forfeited (37,500) 4.50
---------
Balance at July 31, 1998 527,000 4.50
Granted - -
Forfeited (9,500) 4.54
---------
Balance at July 31, 1999 517,500 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, 1999 and 1998, the range of exercise prices was $4.50 -
$6.075. The weighted-average remaining contractual life of outstanding
options at July 31, 1999 and 1998 was 4.2 and 4.9 years, respectively.
At July 31, 1999 and 1998, the number of options exercisable were
353,000 and 219,000, 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, 1999 and 1998.
31
<PAGE>
xx
(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
------------------- ------
2000 $146,000
2001 150,000
2002 154,000
2003 93,000
2004 39,000
Thereafter --
--------
$582,000
========
Rent expense for the years ended July 31, 1999 and 1998 were $158,000
and $167,000, 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, 1999 and
1998 are $858,000 and $681,000, respectively.
(9) Fair Value of Financial Instruments:
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses-
The carrying amount approximates fair value because of the short term
maturity of these instruments.
Notes Payable-
The carrying amount of these financial instruments approximates fair
values based on the fact that the related interest rates fluctuate with
market rates.
32
<PAGE>
(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 10% and 7% of the Company's net sales for the years ended July 31,
1999 and 1998, 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. Goodwill resulting from this acquisition
is being amortized on a straight line basis over 20 years.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
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 1999
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 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
33
<PAGE>
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 1999 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 1999
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.
35
<PAGE>
*10.11 Amendment to Loan and Security Agreement, dated June 10, 1998,
between People's Bank and the Company.
**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.
****10.14 Employment Agreement, dated as of February 1999, by and between
the Company and David Allen.
****27 Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1998
** Filed as an Exhibit to the Company's Registration Statement on
Form SB-2 (No. 33-14631)
*** Filed as an Exhibit to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997
**** Filed herewith
(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 27, 1999 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 27, 1999
- -------------------------
Jeffrey Conrad Chief Executive Officer
(Principal Executive
Officer)
/s/ David Allen Chief Financial Officer October 27, 1999
- -------------------------
David Allen (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Howard Graham Chairman of the Board October 27, 1999
- -------------------------
Howard Graham
/s/ Frank J. Farrell Director October 27, 1999
- -------------------------
Frank Farrell
/s/ Barry Fingerhut Director October 27, 1999
- -------------------------
Barry Fingerhut
/s/ Barry Rubenstein Director October 27, 1999
- -------------------------
Barry Rubenstein
/s/ Hannah Stone Director October 27,1999
- -------------------------
Hannah Stone
37
THE MILLBROOK PRESS INCORPORATED
2 Old New Milford Road
Brookfield, CT 06804
February 1, 1999
Mr. David Allen
The Millbrook Press Inc.
2 Old New Milford Road
Brookfield, CT 06804
Dear Mr. Allen:
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 Financial 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 February 1, 1999
unless sooner terminated in accordance with the provisions of Section 9 hereof.
1.2 Definition. As used herein, "Employment Term" means the
entire period of your employment by Millbrook hereunder, whether for the period
provided above, or whether sooner terminated in accordance with the provisions
of Section 9 hereof.
2. Duties.
2.1 Description of Duties. In your capacity as Chief Financial
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 President 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 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.
<PAGE>
3. Compensation.
3.1 Annual Salary. During the Employment Term, you will be
compensated at a base salary at the rate of $150,000 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 thousand dollars ($15,000) per
annum. 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 of
Directors 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. You will be granted as of the commencement of your
employment, February 1, 1999, a stock option to purchase 50,000 shares of
Millbrook's common stock. The exercise price for the options will be $4.50 per
share. The option will become exercisable for one fifth of the shares on the
first anniversary of the grant and one fifth on subsequent anniversary dates.
Exercise of the options is contingent upon your being employed by the Company.
For a further description of the terms of the options, please see the form of
option letter attached hereto as Exhibit A.
-2-
<PAGE>
6. Change of Control
6.1 Termination Following a Change of Control. If prior to the
Expiration of the Employment Term, there is a Change of Control (as defined
hereinafter), all options held by you shall immediately become exercisable.
6.2 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 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
-3-
<PAGE>
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 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 Board of Directors of the Company 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 one (1) 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 Board of
Directors of the Company, 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.
-4-
<PAGE>
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 Board of Directors of the Company, 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.
-5-
<PAGE>
9.4 Severance Pay. In addition to any rights you may have
pursuant to Section 6 hereof, in the event that Millbrook terminates your
employment prior to February 1, 2002 (other than for "cause"), you will be
entitled to a severance payment equal to one month of your annual salary for
every year you were employed by Millbrook. If your employment is terminated
after February 1, 2002, 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 2 Old New Milford Road, Brookfield, CT 06804, or at such other address as to
which notice has been given in the manner herein provided.
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.
-6-
<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:__________________________________________
Howard B. Graham, Chairman of the Board
of Directors
By:__________________________________________
Jeffrey Conrad, President
Accepted and Agreed:
By:_________________________
David Allen
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements as of July 31, 1999 and is qualified
in its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 133,000
<SECURITIES> 0
<RECEIVABLES> 6,907,000
<ALLOWANCES> 803,000
<INVENTORY> 7,079,000
<CURRENT-ASSETS> 14,356,000
<PP&E> 807,000
<DEPRECIATION> 570,000
<TOTAL-ASSETS> 22,931,000
<CURRENT-LIABILITIES> 9,658,000
<BONDS> 0
<COMMON> 17,591,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,931,000
<SALES> 18,763,000
<TOTAL-REVENUES> 18,763,000
<CGS> 10,958,000
<TOTAL-COSTS> 10,958,000
<OTHER-EXPENSES> 8,080,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 399,000
<INCOME-PRETAX> (674,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (674,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (674,000)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
