-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzTq5MBcqae2kJLz/KIrCTG/eL4+Q7E1Es/r3ZZf/qZxTyLCZllLCP/wkTzmeI3x mF+dxTY+heyMqFIlmeDa1Q== 0000921895-98-000855.txt : 19981102 0000921895-98-000855.hdr.sgml : 19981102 ACCESSION NUMBER: 0000921895-98-000855 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILLBROOK PRESS INC CENTRAL INDEX KEY: 0001022899 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 061390025 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12555 FILM NUMBER: 98733535 BUSINESS ADDRESS: STREET 1: 2 OLD NEW MILDORD RD CITY: BROOKFIELD STATE: CT ZIP: 06804 BUSINESS PHONE: 2037402220 MAIL ADDRESS: STREET 1: 2 OLD MILFORD RD STREET 2: 2 OLD MILFORD RD CITY: BROOKFIELD STATE: CT ZIP: 06804 10KSB 1 FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1998 THE MILLBROOK PRESS INC. (Name of Small Business Issuer as Specified in its Charter) Delaware 06-1390025 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2 Old New Milford Road Brookfield, CT 06804 (Address of principal executive offices) (203) 740-2220 (Issuer's telephone number, including area code) Securities Registered pursuant to Section 12 (b) of the Exchange Act: Common Stock Securities Registered pursuant to Section 12 (g) of the Exchange Act: None Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes /X/ No __ Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB. (X) Revenues for the Fiscal year ended July 31, 1998 were $15.6 million. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon price of the Common Stock on October 22, 1998, was approximately $3,894,000. As of July 31, 1998, the Registrant had outstanding 3,455,000 shares of Common Stock. THE MILLBROOK PRESS, INC. FORM 10-KSB ANNUAL REPORT Table of Contents PART I Page Item 1. Description of Business 2 Item 2. Description of Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Common Equity and Related Stockholders Matters 12 Item 6. Management's Discussion and Analysis or Plan of Operations 13 Item 7. Financial Statements 17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 34 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 34 Item 10. Executive Compensation 34 Item 11. Security Ownership of Certain Beneficial Owners and Management 34 Item 12. Certain Relationships and Related Transactions 34 Item 13. Exhibits, List and Reports on Form 8-K 35 Part I Item 1. Description of Business Overview The Millbrook Press Inc. (the "Company" or "Millbrook"), is a publisher of children's nonfiction books, in both hardcover and paperback, for the school and library market and the consumer market. The Company has published more than 1100 hardcover and 500 paperback books under its Millbrook, Copper Beech, and Twenty-First Century imprints. The Company's books have been placed on numerous recommended lists by libraries, retail bookstores, and educational organizations. Books published under the Millbrook imprint have evolved from information-intensive school and library books to include its current mix of highly graphic, consumer-oriented books. Therefore, many of its books can be distributed to the school and public library market as hardcover books while being simultaneously distributed to the consumer market as either hardcover or paperback books. The majority of Copper Beech books are published to both the consumer and library markets. Twenty-First Century Books titles are published primarily for the library market. The consumer market in children's books consists of books purchased by consumers through the traditional trade bookstores such as Barnes & Noble and Waldenbooks and educational chain stores such as Zainy Brainy and Learningsmith, Inc., as well as the non-traditional distribution channels such as direct sales, catalogs, direct mail, book clubs, book fairs, non-book retail stores, and on a smaller scale, certain museums, national parks, historical sites, theme parks, gift shops and toy stores. In order to establish itself as a leading publisher of children's books for the consumer market, the Company intends to: (i) continue publishing preschool/early elementary novelty books, books for beginning readers and early readers, chapter books for young readers and children's popular-reference books; (ii) acquire companies or develop strategic partnerships that broaden its product line and extend its distribution in consumer market channels; (iii) expand its marketing capabilities in the consumer market by increasing its in-house sales force and management; and (iv) develop books that can be exploited through emerging distribution channels in the consumer market, including special sales channels such as book clubs, book fairs, direct sales, catalogs, direct mail, commercial on-line services and the Internet. The Company believes that the high quality of its books, its emphasis on publishing books for multiple markets and its expanded distribution capabilities makes it well positioned to increase its book sales to the expanding consumer market while at the same time increasing its established sales base in the school and library market. Industry Background Although consumer expenditures for children's books showed a modest decline in 1997, after significant growth from 1992-1996, the Book Industry Study Group estimates an increase of 5.9% in 1998 and a compounded annual rate of 5.7% for the period 1997-2002. This growth will result in expenditures of $1.8 billion for hardcover books and $1.4 billion for paperback books. As a result, school library expenditures are estimated to grow to $190 million and public library expenditures to $205 by the year 2002, for a total of $395 million. SCHOOL AND LIBRARY MARKET The school and public library market is undergoing significant change due to long-term social and -2- economic forces. The United States Department of Education predicts that the student population from kindergarten through twelfth grade will increase 8% from 1997 to 2006, with an overall net gain of approximately 3.8 million students. Because many school districts allocate instructional material funds on a "per head" basis, the Company believes that money allocated to schools for book acquisitions should increase as the student population increases. In addition to demographic changes, demand for books has also increased as a result of the school and public library market becoming aware of, and responsive to, supporting the innovative instructional programs being developed and used in the classroom. New teaching philosophies such as the "reading initiative," and "cross-curriculum teaching" developed in the 1980s and 1990s have increased the demand for different and better books. Librarians are working with classroom teachers to select books that meet classroom criteria of being multicultural, visually stimulating, interesting, curriculum-related and suitable for a range of reading ability. CONSUMER MARKET Demand for children's books should also increase in the consumer market due to the projected increase in the number of school-age children. The Company believes that, in addition to the larger school-age population the most important factors that will sustain larger sales of children's books include the increased availability of quality books, particularly paperback books, and the convenience of being able to purchase inexpensive paperback books as opposed to traveling to libraries. In addition, the Company believes the growth in the number of affluent, better-educated parents and the increased emphasis they place on education as a whole has also contributed to this trend. Demand for children's books in the consumer market has also increased because the methods by which hardcover and paperback books are distributed have changed significantly in the past five years, leading to greater accessibility and shelf space for books. Traditionally, books were primarily sold at small local bookstores with limited selections. Many such bookstores were replaced by larger mall bookstores which in turn were replaced by book superstores (such as Barnes & Noble). Concurrently, alternate means of distribution have developed. For example, books are now sold by certain retailers such as TJ Maxx, educational chain stores such as Learningsmith and Zany Brainy, outlets and warehouse clubs such as Sam's Warehouse, Costco, and B.J.'s and on a smaller scale, certain museums, national parks, historical sites, theme parks, gift shops and toy stores. Books are also more accessible to children and parents through the expansion of direct sales channels such as book fairs, school and consumer book clubs, display sales and catalogs. Book fairs are generally week-long events conducted on school premises and sponsored by school librarians and/or parent-teacher organizations and are intended to provide students with quality books at reasonable prices in order to help them become more interested in reading. The Company has identified more than 600 catalogs that sell children's books, including such oddly diverse ones as an anatomical supply catalog. CROSSOVER OF SALES Demand for children's books has also increased because a book can now be sold to both the school and public library and the consumer market. Traditionally, hardcover library books addressed topics typical for school reports and research and were created with the purpose of maximizing information content rather than appealing to consumers. Because books sold in the school and public library market in the past were sold to librarians/teachers based on content, the product was often informationally rich, but somewhat aesthetically unappealing. Conversely, a paperback book sold in the consumer market was not designed as an information source, but rather to attract a consumer's attention and thereby sell itself from the shelf. Accordingly these books failed to address certain topics and lacked the informational content of library books. The Company's books, and books for the children's book market in general, -3- are now designed to appeal to both markets. A book filled with information is combined with an attractive title, cover and internal design to catch the eye of the consumer browsing the shelf. The same book can then be bound as a hardcover book and sold to school and public libraries. Additionally, as either a hardcover or a paperback, the book appeals to teachers and can be used as supplemental reading in the classroom. Company Strategy The Company's goal is to be a "one-stop publisher," publishing and marketing a diverse product line servicing most of the major segments of the children's book market. The Company's strategy is to continue to diversify its products and distribution channels for those products by capitalizing on the long-term and short-term changes occurring in the children's book publishing industry in both the school and public library market and particularly in the consumer market. The Company believes that this diversified approach to its product line will enable it to achieve broad market penetration in the children's book market and minimize the risk of fluctuations or weakness in any one particular segment. The Company believes that its experience in publishing children's books as well as its reputation for quality gained over the past eight years, combined with the evolution and anticipated growth rates for children's books in the school and public library and consumer markets, creates an opportunity for the Company to expand the list of books in which it maintains a significant ownership interest and increase the recognition of its brand names. The Company believes that the elements required to achieve this goal are (i) publishing books of the highest quality, created in house, through packaging arrangements or licensed, with the ability to satisfy two or more of the markets which it now services, (ii) expanding its product offerings to take advantage of its investments in distribution and its exposure to the consumer market and (iii) enhancing its existing marketing operations to support its product-line expansion initiatives. Industry conditions among publishers in recent years has led to ongoing divestitures and the Company intends to accelerate its growth and increase its market penetration by selectively acquiring other publishers of children's books or by formulating strategic alliances to increase the market exposure of its books. The Company also intends to explore opportunities in electronic media by selectively participating in publishing and marketing opportunities in commercial on-line services and on the Internet. Key elements of the Company's strategy are: o CROSSOVER OF SALES. The Company believes that significant opportunities exist to market products typically developed for one market into other markets. To initiate its strategy of selling books that can crossover into two or more markets, in 1995 the Company began reformatting many of its previously published ("backlist") school and public library books under its Millbrook imprint into paperback books, selling them in the consumer market. In addition, the Company's paperback books have also been sold as supplemental materials for the classroom. Similarly, the Company's books under the Copper Beech imprint are also published in hardcover format to sell to the school and public library market. The Company will seek to continue to produce books in the future under both the Millbrook and Copper Beech imprints that will appeal to two or more markets in order to fully exploit a book's sales potential. o TARGET NEW MARKET NICHES/ACQUISITION OPPORTUNITIES. The Company is continually seeking new market niches that offer opportunities for achieving significant sales growth. The Company has targeted the preschool novelty as a growing market and plans to continue its emphasis on that segment with books containing moveable elements or books bundled with additional merchandise. The Company will publish books for the beginning reader (four to six years old) and early reader -4- (five to eight years old) as well as chapter books for ages seven through eleven. The Company will publish popular reference materials for young readers from seven through fifteen. In addition, the Company will seek to expand its penetration of the supplemental classroom market where its books may also be used as instructional material. Where possible, the Company will re-format existing books for distribution into new markets, leveraging its investments in product development over a broader base. The Company has entered into a joint venture with the Magic Attic Press to publish their doll-related fiction titles, which the Company believes should provide significant growth in both the library and consumer markets. The Company may also seek acquisition opportunities covering niche markets in which the Company does not currently compete and product extensions in its existing markets. The Company's product development strategy may include joint ventures with strategic partners to minimize up-front development costs. Currently, however, the Company has no commitments or agreements with respect to any acquisitions or joint ventures. o ENHANCE MARKETING AND SALES FORCE. Since inception, the Company has increased its penetration into the school and public library market. The Company intends to continue to build on these efforts by increasing its use of direct mail, expanding circulation of catalogs and extending its advertising programs to achieve better coverage and increased marketplace penetration. The Company also intends to enhance its telemarketing capabilities in order to help strengthen sales of books to retailers. In the consumer market, the Company intends to rely more heavily on an in-house sales force rather than a commissioned sales force, with a view to entirely replacing the commissioned force with in-house personnel in the future. The Company believes this change will enable it to more effectively concentrate the Company's selling efforts on mass retail, major book chains and special sales accounts and to facilitate the Company's entry into newly targeted markets. o EXPAND DISTRIBUTION. The Company intends to expand its existing channels of distribution by increasing its use of in-store promotion, consumer advertising and telemarketing. The Company believes that decision-making with respect to purchasing books is becoming more complex due to expansion in types of outlets selling books and the increasing use of marketing techniques to put the Millbrook imprint in direct contact with children, parents and teachers will increase sales. The Company intends to increase its participation in book fairs, book clubs, catalogs and to distribute its books to alternative retail outlets. The Company may also seek to enter into additional strategic partnerships to extend its distribution in both the consumer and in school and public library market channels. Currently, however, the Company has no commitments or agreements with respect to any strategic partnership. o ADAPT TO NEW TECHNOLOGIES. The Company has begun digitally storing the text and graphics of its books so as to be well positioned to take advantage of opportunities in the electronic media industry, including commercial on-line services and the Internet, if and when such opportunities become available. o CONTINUE TO DEVELOP HIGH QUALITY BOOKS. The Company intends to develop additional books through internal development in collaboration with its network of authors and artists. The Company is now selectively entering into agreements with certain high-profile authors and illustrators to increase the recognition of its brand names. -5- Products The Company publishes children's books in hardcover and paperback formats for the school and public library market and the consumer market. When the Company began publishing books in 1991, the books created were mainly series books and were intended to be sold singularly and in sets to the school and public library market. Since then, the Company's products have evolved into a diverse set of highly-graphic, consumer-oriented single books. The Company's Millbrook imprint primarily targets the school and public library, while its Copper Beech imprint primarily targets the consumer market. Nevertheless, the Company designs virtually all of its books to appeal to teachers and librarians, as well as to children and parents. This approach allows the Company's books to be introduced simultaneously in more than one market, with the intent of increasing sales. For example, in fiscal 1998, the Company published 99 hardcover books under the Millbrook imprint for the school and public library market, of which 44 books were suitable for and published simultaneously as hardcovers or paperbacks to be sold in the consumer market, and 68 hardcover books under the Copper Beech imprint for the school and library market, of which 37 books were suitable for and published simultaneously as hardcovers or paperbacks, to be sold in the consumer market. Product Development The Company develops books through internal and external resources. The Company may also acquire books through co-publishing arrangements and/or the acquisition of other licenses. INTERNAL DEVELOPMENT Nearly 75% of the books published under the Millbrook imprint are produced by the Company's editorial staff. A book concept can originate from a number of sources such as (i) analysis of the Company's sales statistics for an existing book to help assess how a similar book targeting a similar age group will fair, (ii) analysis of school age demographics and other social and economic factors from current philosophical trends in education (i.e. the whole language movement) to the globalization of education, (iii) review of competitors' books to determine if and how the Company can publish a superior book on a similar topic, (iv) reading children's magazines to determine what young people are interested in and (v) maintaining personal contact with librarians, teachers, and booksellers. Once conceived, a book proposal is circulated to sales, production, marketing, design and financial departments of the Company for their input and depending on their input, the proposal will go forward or be terminated. A favorable decision causes the editorial department to contract with an appropriate author and/or artist from its pool of approximately 350 authors and artists. The Company believes it has excellent relationships with its authors and artists, including many well-known names in the field. Authors and artists are typically engaged on a royalty basis. Royalties on hardcover and paperback editions are paid on the net sales and range from 6% to 10% of net sales with an average of 7% of net sales for hardcover and paperback books. The Company believes its average royalty rates are slightly lower than overall industry standards. The Company expects its average royalty rates to increase as the Company increases its emphasis on consumer-oriented books. Virtually all of Millbrook's contracts call for an advance payment against future royalties. Advances range from $1,000 for a simple series book to as much as $15,000 to a well-known artist for a picture book. In almost all cases, the Company retains control of all book club, reprint, electronic, foreign, serialization, and commercial rights. The income generated from such arrangements is divided equally between the Company and the author. Upon the delivery of a manuscript from an author/illustrator and after editing, fact-checking and approval, the Company's in-house staff plans and prepares the layout, illustrations and cover to be used -6- for the book. Upon completion of the editing, graphics and layout, a computer produces a mechanical of the book with all elements in place. A cost estimate is then prepared which determines print quantity and retail price of the book. Book printing is done by an outside supplier, usually in the United States, on a bid contract basis. The Company's products require varying periods of development time depending upon the complexity of the graphics and design and the editing process. Most of the Company's books can be developed in a period that ranges from nine to eighteen months. Millbrook is often cited in reviews of the Company's books for one or more outstanding design elements (cover, layout, type, etc.). Jackets and interior design are either created in-house or assigned to freelance artists under the supervision of the Company's art department. The use of outside authors, illustrators and freelancers for jacket design, fact-checking and copy editing allows the Company to produce a large number of books per year with a relatively small staff and allows a tremendous amount of flexibility needed for the Company to continue to produce a broad product line. EXTERNAL DEVELOPMENT Approximately 25% of books published under the Millbrook imprint are produced by outside sources. Most of these books are produced by outside packagers that cooperate and consult with Millbrook during the development process but otherwise provide the full range of services needed to publish children's books. These arrangements include cooperation with other publishers in England, such as Templar or Quarto, to which the Company pays a share of the cost of developing a relatively expensive book such as an atlas, and the Company retains the rights to sell the book in the United States and Canada while the publisher retains the right to sell the book in its home country and/or elsewhere. At present, the Company has six regular suppliers from England and two United States companies with whom it has ongoing projects. The Company has entered into an exclusive, long-term joint venture with Aladdin, a major children's packager for the international market, which expires on January 1, 2002, but can be renewed thereafter, to produce 50 nonfiction titles per year to be published under the Company's newly-created imprint, Copper Beech. The exclusive agreement between the Company and Aladdin was designed to produce books with strong consumer market appeal in popularly priced paperback books as well as content suitable for hardcover books for sales to libraries. The books are to be wholly owned by the Company. Aladdin is responsible for the production, printing and binding of such books, although development costs for such books are shared by Aladdin and the Company. Aladdin retains the sales rights for these books to countries other than the United States, Canada and the Philippines. Royalties are paid to Aladdin based on the Company's sales. Development recovery amounts are paid to the Company based on sales by Aladdin to other parts of the world. LICENSES In the normal course of its business, the Company acquires licenses from foreign book publishers for the rights to market and sell in the United States books that were created either with or without input from the Company. The licensing usually includes all subsidiary rights such as first and second serialization, commercial rights, electronic rights, foreign and translation rights, reprint rights and rights to any means yet to be developed for transmitting information. Marketing and Distribution The Company's sales and marketing efforts are designed to broaden product distribution, increase the number of first-time and repeat purchasers, promote brand-name recognition, assist retailers and properly position, package and merchandise the Company's products. The Company utilizes various marketing techniques designed to promote brand awareness and recognition and to maximize the -7- amount of shelf space devoted to its product line in retail outlets, including complimentary copies, reviews and recommendations, catalogs, advertising, brochures, exhibits, publicity campaigns and in-store promotions. The Company's marketing efforts are geared toward its two major markets: (i) the school and public library market and (ii) the consumer market. SCHOOL AND PUBLIC LIBRARY The Company targets the school and public library market through three main channels: wholesalers, telemarketing and direct sales. Large school and public library systems tend to purchase their books through wholesalers on a bid basis, while smaller systems purchase directly from a commission sales representative or through a telemarketing program such as the one the Company conducts. During the fiscal year ended July 31, 1998, approximately 67% of the Company's sales in the school and public library market were made through wholesalers. While most wholesalers do not engage in sales and marketing efforts on behalf of the Company's products, they provide schools and public libraries with a wide range of selection and convenience as well as discounts on bulk orders. Baker & Taylor, one of the largest wholesalers in the school and public library market, accounted for 13% of the Company's net sales in the fiscal year ended July 31, 1998. While the Company believes that there are alternative wholesalers available, a significant reduction in sales to Baker & Taylor would have a material adverse effect on the Company's results of operations. Through a complementary marketing program of telemarketing, advertising, review programs and direct sales calls, the Company believes that one of its greatest strengths is its ability to reach the individual teacher, principal or librarian making the purchase decision. Telemarketing generates 25% of the Company's sales in the school and public library market. Telemarketing penetrates the market through its "preview program" where books are given on loan to teachers and other decision-makers on the premise that the quality of the book will sell itself. In September 1998, the Company initiated a website that will allow librarians to participate in the "preview program" electronically. This should extend the reach of the program significantly. The remaining 8% of the Company's sales in this area results from direct-selling efforts where commissioned salespersons conduct face-to-face meetings at school and libraries with decision-makers or by purchase from the Company's catalogs and advertising. The Company markets its books in numerous ways to support the foregoing efforts. The Company sends complementary copies of each newly published book to library media reviewers and columnists and major county or district school systems that have their own review and recommendation process. The Company believes that a favorable review in a respected library journal can significantly influence the sales prospects of a particular book. Many of the Company's books published under the Millbrook imprint have received favorable reviews, but there can be no assurance that the Company will continue to receive favorable reviews in the future. The Company produces three catalogs and one magazine insert per year. For its school and library accounts, the Company produces one full-line catalog, consisting of a complete annotated backlist as well as new publications for the Fall that is mailed to 100,000 current and perspective accounts. An eight-page insert is produced in January to introduce the new list for Spring for distribution in School Library Journal (the major professional journal from which librarians make purchase decisions) and at conventions throughout the year. The Company produces two full-line catalogs per year for the consumer market in May and December. The Company also advertises in many consumer journals, newsletters and newspapers. The Company produces promotional materials for individual titles, themes, authors and illustrators. It also produces standard "leave-behind" sell sheets that refresh a librarian's recollection of a sales presentation. Finally, the Company exhibits its books at many national conventions covering the school and public library and consumer markets. The expanding use of children's books in the classroom, especially in paperback formats, has complicated the traditional distribution networks since contacting the particular teacher or other -8- individual in charge of curriculum decisions can be more difficult than contacting the school librarian. The Company has created marketing programs to extend school sales beyond the library and into the classroom. For example, the Company's telemarketing division is currently test-marketing curriculum-related books and materials to teachers, principals and curriculum coordinators. CONSUMER The sales channels in the consumer market are more diverse than the school and public library market and require a different marketing approach. The Company has recently attracted experienced and talented sales and marketing personnel. The new in-house consumer sales group covers the two major areas: traditional consumer book markets and non-traditional consumer book markets. The Company's merchandising and marketing programs have increased its traditional and non-traditional consumer sales from $4.8 million in fiscal year 1997 to $5.7 million in fiscal 1998. As in the case with the school and public library market, a large proportion of the Company's sales in the consumer market are made through wholesalers. Ingram, one of the largest wholesalers in the consumer market, accounted for 7% of the Company's net sales in the fiscal year ended July 31, 1998, and 67% of its wholesale sales to the consumer market. While the Company believes that there are alternative wholesalers available, a significant reduction in sales to Ingram would have a material adverse effect on the Company's operations. The Company has three sales groups: the in-house sales group, the commissioned sales group and the special sales group. The in-house sales group, consisting of an in-house sales director, a manager of national accounts and a full-time salaried sales person, is responsible for sales, promotion and merchandising to the major national and large regional accounts. Two additional full-time salaried sales people will be added January 1, 1999. This group is also responsible for sales to the network of wholesalers supporting these accounts. The commissioned sales group currently consists of approximately 30 commissioned representatives who are responsible for sales to independent bookstores, small regional chains and certain special sales outlets and regional jobbers. The special sales group managed by a sales director markets to specialized retail outlets such as museums, national parks, historical sites, theme parks, gift shops and toy stores, consumer and school catalogs, direct mail, book fairs, book clubs, and display sales companies. The Company's sales representatives sell the full range of the Company's products. The sales groups provide the Company with highly valuable insight by obtaining feedback from customers on current product performance and potential acceptance of proposed products. In addition to the marketing efforts discussed with respect to the school and public library market, the Company conducts additional marketing designed to increase brand name recognition in the consumer market. The Company makes certain that good reviews, which can stimulate sales, are sent to the news media on a regular basis. The Company participates with various outlets in advertising directly to individuals through media and catalogs. In-store promotions, such as posters, points of purchase displays, brochures, holiday end-of-counter and front-of-store displays, are also utilized by the Company to further enhance its sales in the consumer market. Manufacturing and Shipping All of the Company's books are printed and bound by third-party manufacturers. During fiscal year 1998, approximately 30% of the Company's printing and binding needs were provided by Worzalla, an industry leader in library-bound, short-run printing and binding. Manufacturing is a significant expense item for the Company, with a total of $5.5 million (or approximately 35% of net sales) spent in 1998. The Company has used Worzalla's services since the Company's inception and enjoys a strong working relationship with Worzalla. The Company believes it has sufficient alternative sources of manufacturing -9- services to meet its foreseeable needs should Worzalla's services no longer be available to the Company although manufacturing costs could be adversely impacted. Shipping orders accurately and promptly upon their receipt is an important factor in the Company's customer service and in closing a sale. Most publishing companies ship products within one week of receipt of a customer order, and in general the Company meets or betters this timetable. The Company processes customer orders through an in-house processing department. The Company leases warehouse space from, and its products are shipped to, Mercedes Distribution Center of Brooklyn, New York. Competition The children's book publishing marketplace in the school and public library market and in the consumer market is fragmented and very competitive. Competition in the school and public library market is based upon quality of products, brand name recognition and book content. In the consumer market, the primary factors are brand name recognition, book content, availability and price. There are many publishers of material similar to the Company's product offerings. The Company's chief and direct competitors in the school and public library market include Childrens Press, Dorling Kindersley Publishing Inc., Franklin Watts Inc., Lerner Publications Co. and Troll Communications. The Company's chief and direct competitors in the consumer market include Barron's Educational Series Inc., Candlewick Press, Dorling Kindersley Inc., Larousse Kingfisher Chambers Inc., Random House Inc. and Usborne Publishing Ltd. The Company also competes with a large number of other publishers for retail shelf space in large bookstore chains such as Barnes & Noble, Borders and Waldenbooks. In addition to competition among like types of publishing programs, the overall competition for limited educational budgets is intense when other producers of materials used in classrooms and libraries are included, especially producers and distributors of electronic hardware and software. A number of these competitors have considerably greater financial and marketing resources than the Company. Nevertheless, the Company believes that the depth of experience of its management and its connections into the hierarchy of the education sector give the Company a competitive edge not only in producing quality books marketable in the school and library and consumer markets, but also in foreseeing long-term and short-term social and economic forces influencing the children's book industry. Protection of Proprietary Rights Nearly all the Company's books have been copyrighted in the United States, in the name of the author or artist and then all such copyrights have been assigned to the Company. As a result, the Company owns the exclusive right to exploit the copyright in the marketplace. On books created in-house by the Company, it owns world rights for all aspects of the market, including first and second serialization, commercial rights, electronic rights, foreign and translation rights, reprint rights, and rights to any means yet to be developed for transmitting information. There are a limited number of books for which foreign rights and electronic rights will revert to the author if the Company does not exploit them in a given period of time, usually two years after publication. On books that are imported under the Millbrook imprint, the Company has exclusive rights for all United States markets and the Philippines. On more than half of the imported titles, the Company holds the Canadian rights as well. The Company's trade names, Millbrook, Twenty-First Century and Copper Beech, are used to publish books primarily for the school and library market and consumer market respectively. The Company considers these trade names material to its business. -10- For the Copper Beech titles, the Company has exclusive rights for all markets in the United States and Canada. World rights are retained for books originated by Aladdin and the Company participates in the profits generated from such sales on a 25% basis. Employees As of July 31, 1998, the Company has approximately 48 employees. 90% are full-time and 10% are part-time. The Company has never experienced a work stoppage and its employees are not covered by a collective bargaining agreement. The Company believes its relations with its employees are good. Item 2. Description of Properties The Company owns no real property. The Company conducts its operation through two facilities. The Company leases approximately 5,500 square feet of office space in Brookfield, Connecticut at a current rental of $112,000 per year plus utilities and taxes. This lease expires in December 2002. The Company also leases approximately 1,900 square feet and 751 square feet of space in New York City at a rental of $34,340 per year plus utilities and taxes and $16,522 per year plus utilities and taxes respectively. These leases expire in April 2004 and February 1999 respectively. The Company also leases office space in Southhampton, New York at a current rental of $12,000 per year plus utilities and taxes. This lease expires in September 1999. Item 3. Legal Proceedings The Company is not currently a party to any material legal proceedings. -11- Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for Common Equity and Related Stockholders Matters The Common Stock of The Millbrook Press Inc. is traded under the symbol MILB on the NASDAQ SmallCap Market. The Company's Common Stock is also traded on the Boston Stock Exchange under the symbol MILB. The following table sets forth the ranges of the high and low closing bid prices for the Common Stock for the fiscal years ended July 31, 1997 and July 31, 1998, as reported on the NASDAQ SmallCap Market, the principal trading market for the Common Stock. The Company's Common Stock commenced trading on the Nasdaq SmallCap Market on December 17, 1996. The quotations are interdealer prices without adjustment for retail markups, markdowns, or commission and do not necessarily represent actual transactions. COMMON STOCK YEAR ENDED JULY 31, 1998 High Low First Quarter 6-3/8 4-5/8 Second Quarter 5-5/8 4-1/2 Third Quarter 4-1/2 3-3/4 Fourth Quarter 4-1/4 3 YEAR ENDED JULY 31, 1997 First Quarter - - Second Quarter 7 5-3/8 Third Quarter 6 5 Fourth Quarter 6-3/8 5-3/8 As of July 31, 1998, the Company had 3,455,000 shares of Common Stock outstanding and 27 holders of record of the Company's Common Stock. The Company believes that at such date, there were in excess of 600 beneficial owners of the Company's Common Stock. The Company has never paid any dividends on its Common Stock. The Company currently intends to retain all earnings, if any, to support the development and growth of the Company's business. Accordingly, the Company does not anticipate that any cash dividends will be declared on its Common Stock in the foreseeable future. -12- Item 6. Management's Discussion and Analysis or Plan of Operation The following discussion and analysis should be read in conjunction with the Financial Statements of The Millbrook Press Inc. and related Notes to the Financial Statements which are included elsewhere in this Form 10-KSB. OVERVIEW General In February 1994, the Company was incorporated and acquired the assets of The Millbrook Press Inc., which had commenced operations in 1989. Prior to January 1991, The Millbrook Press Inc. had no revenues and incurred expenses related to administrative costs associated with the formation and production of its first publication list. Subsequent to January 1991, the Company has had significant net sales in the school and public library market. Books published under the Millbrook imprint have evolved from information-intensive school and library books to include its current mix of highly graphic, consumer-oriented books. Therefore, the Company has incurred significant expenses relating to the establishment of the infrastructure that can enable the Company to sell books to the consumer market and/or develop books that can appeal to both the school and public library market and the consumer market. Acquisition On December 5, 1997 the Company completed an acquisition to purchase certain assets of Twenty-First Century Books, a division of Henry Holt & Co., Inc. ("Holt"). The purchase was effective as of December 1, 1997. Under the agreement, the Company paid Holt $2,013,000 for the assets. Consumer Market compared to School and Public Library Market As the Company sells more of its products in the consumer market, the results of operations and its financial condition could be influenced by certain distinctions between consumer market and the school and public library market. It is generally more difficult to collect receivables in the consumer market than in the school and library market. Sales to the consumer market have a higher return rate than sales to the school and public library market and accordingly the Company will need to deduct a higher reserve for return from its gross sales. Sales to the consumer market have a lower gross profit margin than sales to the school and library market because consumer sales have higher sales discounts and promotional allowances than sales to the schools and public library market. Sales Incentives and Returns In connection with the introduction of new books, many book publishers, including the Company, discount prices of existing products, provide certain promotional allowances and give other sales incentives to their customers. The Company intends to continue such practices in the future. In addition, the practice in the publishing industry is to permit customers including wholesalers and retailers to return merchandise. Most books not sold may be returned to the Company, and the Company gives credit. The rate of return also can have a significant impact on quarterly results since certain wholesalers have in the past returned large quantities of products at one time irrespective of marketplace demand for such products, rather than spreading out the returns during the course of the year. The Company computes net sales by concurrently deducting a reserve for returns from its gross -13- sales. Return allowance may vary as a percentage of gross sales based on actual return experience. The Company believes that as gross sales to the consumer market increase as a proportion of its overall sales, returns will constitute a greater proportion of net sales. Although the Company believes its reserves have been adequate to date, there can be no assurance that returns by customers in the future will not exceed historically observed percentages or that the level of returns will not exceed the amount of reserves in the future. In the event that the amount reserved proves to be inadequate, the Company's operating results will be adversely affected. RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997 Fiscal 1998 revenues increased approximately 24% from $12.6 million in fiscal 1997 to $15.6 million in fiscal 1998. Increased sales resulted from significant increases in trade and school and library sales. The increasing size of the Company's backlist, the introduction of the Company's beginning reader program and the increase in quality of the Company's frontlist is largely responsible for the trade sales increase. The acquisition of Twenty-First Century Books and continuing increases in existing imprints were responsible for the growth in the library market. Gross profit margin for the fiscal year ended July 31, 1998 increased to 50% of net sales compared to 46% of net sales for the same period last year. The increase in gross profit margin resulted from lower paper, printing and binding cost as a percentage of sales compared to fiscal 1997. Selling and marketing expenses for fiscal 1998 decreased to 33% of net sales from 36% of net sales for fiscal 1997. Selling and marketing expenses have increased as a result of the Company's efforts to expand its internal marketing operations and higher warehousing and distribution costs due to increased sales. However, as a percentage of net sales, selling and marketing expenses decreased due primarily to special sales for which no marketing efforts are needed. General and administrative expenses for fiscal 1998 decreased by $173,000 to $1.7 million compared with $1.9 million for fiscal 1997. This decrease is due to expenses incurred in fiscal 1997 in connection with the Company's initial public offering (the "IPO"). For the fiscal year ended July 31, 1998, the Company had operating income of $866,000, or 6% of net sales compared to a loss of $661,000, or 5% of net sales for fiscal 1997. The increase in operating income is due to increased sales, lower cost of sales and lower general and administrative expenses. Net interest expense increased from $197,000 in fiscal 1997 to $218,000 in fiscal 1998. The increase in interest expense is due to the acquisition of Twenty-First Century Books. Liquidity and Capital Resources As of July 31, 1998, the Company had cash and working capital of $34,000 and $5.4 million, respectively, as opposed to cash and working capital of $323,000 and $6.6 million, respectively as of July 31, 1997. This decrease in cash and working capital was due to the acquisition of Twenty-First Century Books. The Company has available a $7,500,000 revolving line of credit with People's Bank. The line of credit restricts the ability of the Company to obtain working capital in the form of indebtedness other than -14- indebtedness incurred in the ordinary course of the Company's business, to grant security interest in the assets of the Company or to pay dividends on the Company's securities. As of July 31, 1998, the Company has $3,875,000 outstanding under this line. The reason for the increase in the debt is the acquisition of Twenty-First Century Books and to meet working capital needs. Inventory of finished goods totaled $6.7 million and $4.9 million at July 31, 1998 and July 31, 1997, respectively. The higher level of inventory is due to the acquisition of Twenty-First Century Books, the introduction of the beginning reader program, and the increasing size of our trade and school and library backlist. The increase in accounts receivable of $2,121,000 from the prior year is due to increased sales. Based on its current operating plan, the Company believes that its existing resources together with cash generated from operations and cash available through its credit line will be sufficient to satisfy the Company's contemplated working capital requirements through approximately July 31, 1999. However, there can be no assurance that the Company's working capital requirements will not exceed its available resources or that these funds will be sufficient to meet the Company's longer-term cash requirements for operations. Accordingly, either before or after July 31, 1999, the Company may seek additional funds from borrowings or through debt or equity financing. Forward-Looking Statements This Form 10KSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created hereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the Company's future cash resources and liquidity and the ability of the Company to fully exploit a book's sales potential in the school and library and consumer markets. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-KSB will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Year 2000 Disclosure Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and software used by many companies, including customers and potential customers of the Company, may need to be upgraded to comply with such "Year 2000" requirements. The Company is closely monitoring the progress the developers of the Software the Company utilizes in many of its customer projects, as well as the developers of the software utilized in internal systems are making towards ensuring that the products the Company utilizes are Year 2000 compliant. The Company believes that its internal systems and third party software incorporated into client solutions will be Year 2000 compliant. Failure to provide Year 2000 compliant business solutions and software to its customers could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's costs to ensure that internal systems and software acquired for integration into client business solutions are Year 2000 compliant has not been and is not expected to become significant. -15- Further, the Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products and services such as those offered by the Company. -16- Item 7. Financial Statements REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Shareholders and The Board of Directors The Millbrook Press Inc.: We have audited the accompanying balance sheet of The Millbrook Press Inc. as of July 31, 1998 and the related statement of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Millbrook Press Inc. as of July 31, 1998 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Stamford, Connecticut, September 15, 1998 -17- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Shareholders and the Board of Directors The MillBrook Press Inc.: We have audited the accompanying balance sheet of The Millbrook Press Inc. as of July 31, 1997, and the reltated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our aduit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of The Millbrook Press Inc. as of July 31, 1997 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in the Notes to Financial Statements, in 1997 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123. "Accouinting for Stock-Based Compensation." /s/ KPMG Peat Marwick LLP New York, New York October 3, 1997 -18- THE MILLBROOK PRESS INC. BALANCE SHEETS JULY 31, 1998 AND 1997
1998 1997 ----------- ----------- ASSETS Current assets: Cash $ 34,000 $ 323,000 Accounts receivable (less allowance for returns and bad debts of $630,000 in 1998 and $456,000 in 1997) 4,945,000 2,824,000 Inventories 6,709,000 4,935,000 Royalty advances, net 857,000 359,000 Prepaid expenses 423,000 582,000 ----------- ----------- Total current assets 12,968,000 9,023,000 ----------- ----------- Plant costs, net 4,248,000 3,124,000 Fixed assets, net 236,000 256,000 Goodwill, net 3,336,000 3,055,000 Royalty advances, net 673,000 277,000 Other assets 15,000 34,000 ----------- ----------- Total assets $21,476,000 $15,769,000 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 3,875,000 $ -- Accounts payable and accrued expenses 3,406,000 2,271,000 Royalties payable 248,000 199,000 ----------- ----------- Total current liabilities 7,529,000 2,470,000 ----------- -----------
-19- THE MILLBROOK PRESS INC. BALANCE SHEETS JULY 31, 1998 AND 1997 (Continued)
1998 1997 ------------ ------------ Commitments Stockholders' equity: Common Stock, par value $.01 per share, authorized 12,000,000 shares; issued and outstanding 35,000 35,000 3,455,000 shares in 1998 and 1997 Additional paid-in capital 17,556,000 17,556,000 Accumulated deficit (3,644,000) (4,292,000) ------------ ------------ Total stockholders' equity 13,947,000 13,299,000 ------------ ------------ Total liabilities and stockholders' equity $ 21,476,000 $ 15,769,000 ------------ ------------
The accompanying notes to financial statements are an integral part of these statements. -20- THE MILLBROOK PRESS INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JULY 31, 1998 AND 1997
1998 1997 ------------ ------------ Net sales $ 15,615,000 $ 12,573,000 Cost of sales 7,802,000 6,738,000 ------------ ------------ Gross profit 7,813,000 5,835,000 ------------ ------------ Operating expenses: Selling and marketing 5,176,000 4,552,000 General and administrative 1,771,000 1,944,000 ------------ ------------ Total operating expenses 6,947,000 6,496,000 ------------ ------------ Operating income (loss) 866,000 (661,000) Interest expense 218,000 197,000 ------------ ------------ Net income (loss) 648,000 (858,000) Preferred dividend accrued -- (284,000) ------------ ------------ Net income (loss) available to common stockholders $ 648,000 $ (1,142,000) ============ ============ Earnings (loss) per share (basic and diluted) $ .19 $ (.46) ============ ============
The accompanying notes to financial statements are an integral part of these statements. -21- THE MILLBROOK PRESS INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1998 AND 1997
Additional Preferred Stock Common Stock Paid-In Accumulated Shares Amount Shares Amount Capital Deficit Total ------ ----------- --------- ------- ----------- ----------- ------------ Balance at July 31, 1996 4,700 $ 6,190,000 1,026,308 $10,000 $ 3,991,000 $(3,150,000) $ 7,041,000 Preferred stock dividend -- 284,000 -- -- -- (284,000) -- Conversion of preferred stock 4,700) (6,474,000) ( 473,692 5,000 6,469,000 -- -- Issuance of common stock warrants -- -- -- -- 23,000 -- 23,000 Issuance of common stock -- -- 1,955,000 20,000 7,073,000 -- 7,093,000 Net loss -- -- -- -- -- (858,000) (858,000) ----- ----------- --------- ------- ----------- ----------- ------------ Balance at July 31, 1997 -- $ -- 3,455,000 $35,000 $17,556,000 $(4,292,000) $ 13,299,000 Net income -- -- -- -- -- 648,000 648,000 ----- ----------- --------- ------- ----------- ----------- ------------ Balance at July 31, 1998 -- $ -- 3,455,000 $35,000 $17,556,000 $(3,644,000) $ 13,947,000 ----- ----------- --------- ------- ----------- ----------- ------------
The accompanying notes to financial statements are an integral part of these statements. -22- THE MILLBROOK PRESS INC. STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31, 1998 AND 1997
1998 1997 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 648,000 $ (858,000) Depreciation and amortization 1,548,000 1,123,000 Provision for returns and bad debts 174,000 127,000 Accretion of warrants -- 23,000 Changes in assets and liabilities, excluding effects from acquisition of Twenty-First Century Books: Increase in accounts receivable (2,295,000) (867,000) Increase in inventories (1,261,000) (1,458,000) Increase in royalty advances (610,000) (205,000) (Increase) decrease in prepaid expenses 159,000 (290,000) Decrease in other assets 19,000 25,000 Increase in accounts payable and accrued expenses 1,135,000 130,000 Increase in royalties payable 49,000 49,000 ----------- ----------- Net cash used in operating activities (434,000) (2,201,000) ----------- ----------- Cash flows from investing activities: Capital expenditures (65,000) (64,000) Plant costs, excluding effect from acquisition of Twenty-First Century Books (1,652,000) (1,397,000) Payment for acquisition of Twenty-First Century Books (2,013,000) -- ----------- ----------- Net cash used in investing activities (3,730,000) (1,461,000) ----------- ----------- Cash flows from financing activities: Repayment of notes payable -- (4,992,000) Proceeds from borrowings under notes payable 3,875,000 1,750,000 Proceeds from sale of capital stock -- 7,093,000 ----------- ----------- Net cash provided by financing activities 3,875,000 3,851,000 ----------- ----------- Net increase (decrease) in cash (289,000) 189,000 ----------- ----------- Cash at beginning of year 323,000 134,000 ----------- ----------- Cash at end of year $ 34,000 $ 323,000 ----------- ----------- Supplemental disclosures: Interest paid $ 218,000 $ 193,000 ----------- -----------
The accompanying notes to financial statements are an integral part of these statements. -23- THE MILLBROOK PRESS INC. NOTES TO FINANCIAL STATEMENTS JULY 31, 1998 AND 1997 (1) DESCRIPTION OF THE BUSINESS: The Millbrook Press Inc. ("Company") was incorporated and commenced operations as an independent company on February 23, 1994. The Company is a publisher of children's nonfiction books, in both hardcover and paperbacks, for preschoolers through young adults. The Company's books are distributed to the school and public library market, trade bookstores and other specialty retail and direct sales markets through wholesalers, its own telemarketing efforts and commissioned sales representatives. The Company was formed to acquire the net assets of a wholly owned subsidiary of Antia Publishing Company, which is a wholly owned subsidiary of Groupe de la Cite International, a French corporation. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS- Cash and cash equivalents consist of cash in banks and highly liquid, short-term investments with original maturities of three months or less at the date acquired. REVENUE RECOGNITION- Revenue from the sale of books to wholesalers is recognized at shipment. The Company provides a reserve for product returns. Sales from telemarketing activities are recognized when the customer accepts all or part of a sample shipment. INVENTORIES- Inventories of sheets and bound books, which are primarily located in a public warehouse or at customers as inventory on preview, are stated at the lower of cost or market, with cost determined by the average cost method. Allowances are established to reduce recorded costs of obsolete and slow moving inventory to its net realizable value. ROYALTY ADVANCES- Licensing agreements for rights to future publications usually require a non-refundable partial payment of the royalty in advance of the publication. The Company charges royalty advances to expense in the period during which the related sales are recorded. If it appears that an advance will exceed total royalties to be incurred based upon -24- estimated sales, such excess is immediately expensed. Royalty advances for publications to be published in excess of one year from the balance sheet date are classified as non-current assets. PLANT COSTS- Plant costs consisting of plates, photo engravings, separations and other text costs of unpublished books are amortized over five years from publication date or the estimated remaining life, if shorter. Plant costs at July 31, 1998 and 1997 are presented net of accumulated amortization of $6,115,000 and $4,859,000 respectively. ADVERTISING COSTS- Advertising costs are expensed in the periods in which the costs are incurred. Catalog costs consisting of the costs of producing and distributing catalogs are expensed ratably over the year in which the costs are incurred in relation to sales. Advertising expense for the years ended July 31, 1998 and 1997 was $538,000 and $460,000, respectively. FIXED ASSETS- Fixed assets are recorded at cost. Depreciation and amortization of fixed assets are computed on the straight-line method based on useful lives ranging from 7-10 years for office furniture and equipment and 5 years for computers. Leasehold improvements are amortized over the lesser of the lease term or the life of the asset. GOODWILL AND OTHER LONG LIVED ASSETS- Goodwill represents the excess of the cost over the fair value of the net assets acquired. For financial reporting purposes, the excess of cost over the fair value of net assets acquired is amortized over 20 years using the straight-line method. Accumulated amortization at July 31, 1998 and 1997 is $842,000 and $636,000, respectively. Pursuant to Internal Revenue Code Section 197, for Federal income tax purposes such goodwill is deductible over 15 years. The Company systematically reviews the recoverability of its long lived assets by comparing their unamortized carrying value to their anticipated undiscounted future cash flows. Any impairment is charged to expense when such determination is made. INCOME TAXES- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. -25- EARNINGS (LOSS) PER SHARE- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic earnings per share ("EPS") and diluted EPS on the face of all statements of earnings for all entities with complex capital structures. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method. The Company has adopted the provisions of SFAS 128 in fiscal 1998. Fiscal 1997 EPS data have been restated to conform to SFAS 128. Earnings (loss) per share are net earnings (loss) less the dividend requirements on preferred stock, divided by the weighted average number of common stock outstanding for the periods. Per share data for 1998 and 1997 does not assume the exercise of common stock options issued under the non-qualified 1994 Stock Option Plan, the Underwriter's Purchase Option or the exercise of the warrants issued in conjunction with the Bridge financing (Note 13) because the effects of such exercise would have been antidilutive. Per share data reflects the reverse stock split effected on August 29, 1996 described in Note 13. STOCK OPTIONS- Prior to August 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On August 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in fiscal 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. USE OF ESTIMATES- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reported periods. Actual results could vary from the estimates and assumptions used in the preparation of the accompanying financial statements. -26- (3) FIXED ASSETS: Fixed assets at July 31, 1998 and 1997 consist of the following: 1998 1997 --------- --------- Office furniture and equipment $ 137,000 $ 126,000 Computers 341,000 289,000 Telecommunication equipment 33,000 33,000 Leasehold improvements 46,000 43,000 --------- --------- 557,000 491,000 Accumulated depreciation (321,000) (235,000) --------- --------- $ 236,000 $ 256,000 --------- --------- Depreciation expense for the years ended July 31, 1998 and 1997 was $86,000 and $79,000, respectively. (4) NOTES PAYABLE TO BANKS: On December 14, 1995, the Company entered into a revolving line of credit agreement with a bank that provided for borrowings up to $2,700,000. The bank increased the available line of credit to $4,000,000 on June 17, 1997 and to $7,500,00 on June 10, 1998. The line of credit provides for an interest rate at the bank's base rate plus .5% (9% at July 31, 1998 and 1997). At July 31, 1998, the amount outstanding under this credit agreement was $3,875,000. Advances under this line of credit are collateralized by substantially all of the assets of the Company. The revolving line of credit, which is payable upon demand by the bank, contains various covenants which include, among other things, a minimum tangible net worth requirement. The revolving line of credit prohibits the Company from the declaration or payment of dividends on common stock. (5) INCOME TAXES: No Federal income taxes have been provided for the years ended July 31, 1998 and 1997, due to the Company's net operating losses. The actual income tax expense differs from the "expected" income tax benefit computed by applying the U.S. Federal corporate income tax rate to loss before income taxes for the years ended July 31, 1998 and 1997 as follows: Computed "expected" income tax benefit $220,000 $(292,000) State and local income taxes, net of Federal benefit 39,000 (17,000) Increase (decrease) in valuation allowance 265,000 292,000 Nondeductible expenses 6,000 17,000 -------- --------- Provision for income taxes $ - $ - ======== ========= -27- The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to the deferred tax assets and deferred tax liabilities at July 31, 1998 and 1997 are the following:
1998 1997 ----------- ----------- Deferred tax assets: Accounts receivable allowances $ 72,000 $ 173,000 Inventory reserves 336,000 180,000 Unicap 51,000 -- Plant costs 93,000 155,000 Net operating loss carryforwards 297,000 638,000 ----------- ----------- 849,000 1,146,000 Less: Valuation allowance (697,000) (1,071,000) ----------- ----------- Net deferred tax asset 152,000 75,000 ----------- ----------- Deferred tax liabilities: Goodwill amortization (139,000) (65,000) Fixed asset depreciation (13,000) (10,000) ----------- ----------- (152,000) (75,000) Net deferred income taxes $ -- $ -- ----------- -----------
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences or net operating loss carryforwards become deductible. Based on the Company's net operating losses to date, the Company has established a valuation allowance of $697,000 at July 31, 1998. The Company's tax net operating loss carryforward of approximately $747,000 at July 31, 1998 expires in the years 2009 to 2012. The Tax Reform Act of 1986 included certain provisions relating to changes in stock ownership which, if triggered, could result in future annual limitations on the utilization of the net operating loss carryforwards. (6) STOCK OPTION PLAN: The Company has reserved 675,000 shares of common stock under its non-qualified 1994 Stock Option Plan ("Option Plan") which provides that a committee, appointed by the Board of Directors, may grant stock options to eligible employees, officers and directors of the Company or its affiliates. The number of shares reserved for issuance is adjusted in accordance with the provisions of the Plan. All stock options granted by the Company expire seven years after the grant date. Stock options vest over a period from 2-5 years as determined by the stock option committee. In October 1996, the Company amended the Option Plan to decrease the exercise price on outstanding options from $8.00 per share to the initial public offering price of $4.50 per share. Non-vested options outstanding on the effective date (December 23, 1996) of the initial public offering, representing options for 283,500 shares, will vest 50% one year from that date and an additional 50% two years from that date. As of July 31, 1998 and 1997, -28- there were options outstanding for 502,000 shares and 438,500 shares, respectively, under the Option Plan. The per share weighted-average fair value of stock options granted during 1998 and 1997, calculated in accordance with SFAS No. 123, was $1.88 and $2.51 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1998 - expected volatility 37%, risk-free interest rate of 5.7% and an expected life of 5 years; 1997 - expected volatility 40%, risk-free interest rates ranging from 6.3% to 6.9%, and an expected life of 7 years. The Company applies APB Opinion No. 25 in accounting for its Option Plan. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have changed to the pro forma amounts indicated below: 1998 1997 ----------- -------- Net income (loss) As reported $648,000 $ (858,000) Pro forma 223,000 (1,199,000) Earnings (loss) per share (basic and diluted) As reported .19 (.46) Pro forma .06 (.60) Pro forma net income (loss) reflects only options granted in 1998 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting periods of 2-5 years and compensation cost for options granted prior to August 1, 1995 is not considered. -29- Stock Option Plan activity during the periods indicated is as follows: Weighted- Average Exercise Number of Shares Price ---------------- -------- Balance at July 31, 1996 285,500 8.00 Granted 463,500 4.78 Cancelled (310,500) 8.00 -------- Balance at July 31, 1997 438,500 4.60 (a) Granted 101,000 4.50 Forfeited (37,500) 4.50 -------- Balance at July 31, 1998 502,000 4.50 -------- (a) As discussed above, in October 1996, the Company amended the Option Plan to decrease the exercise price on outstanding options from $8.00 per share to $4.50 per share. At July 31, 1998 and 1997, the range of exercise prices was $4.50 - $6.075. The weighted-average remaining contractual life of outstanding options at July 31, 1998 and 1997 was 4.9 and 4.7 years, respectively. At July 31, 1998 and 1997, the number of options exercisable were 219,000 and 107,000, respectively, and the weighted-average exercise price of those options was $4.50. In December 1996 in connection with the initial public offering, the Company sold to the Underwriter for $100, the Underwriter's Purchase Option ("Purchase Option"), consisting of the right to purchase up to an aggregate of 170,000 shares of common stock. The Purchase Option is exercisable at $6.075 per share for a period of four years commencing one year from December 17, 1996. (7) 401(K) PROFIT SHARING PLAN: The Company maintains a Non-standardized Prototype Cash or Deferred Profit Sharing 401(k) Plan (the "Plan"). Participation in the Plan by employees requires that they complete six months of service for the Company and attain 21 years of age. Employees on the Plan's effective date did not have to satisfy the six-month service requirement. The Company determines each year a discretionary matching contribution. Such additional contribution, if any, shall be allocated to employees in proportion to each participant's contribution. The Company did not contribute to the Plan during the years ended July 31, 1998 and 1997. -30- (8) COMMITMENTS The Company leases office facilities under operating leases which expire at various dates through 2004. The leases are subject to escalation clauses as they relate to certain expenses of the lessor, i.e., utilities and real estate taxes. Minimum future rental payments under non-cancelable operating leases having initial or remaining terms in excess of one year are as follows: Year ending July 31 Amount 1999 $167,000 2000 149,000 2001 148,000 2002 83,000 2003 36,000 Thereafter 24,000 -------- $607,000 ======== Rent expense for the years ended July 31, 1998 and 1997 were $167,000 and $146,000, respectively. In May 1994, the Company entered into an agreement with Aladdin Books, a British publishing company, whereby Aladdin agreed to produce no less than 50 titles per year for Millbrook through January 1, 2002. The titles are to be wholly owned by Millbrook. Aladdin is responsible for production, printing and binding. Production costs are shared by Aladdin and Millbrook. Aladdin retains sales rights for these titles to countries other than the United States, Canada and the Philippines. Royalties are paid to Aladdin based on Millbrook sales. Development recovery amounts are paid to Millbrook based on sales by Aladdin to other parts of the world. Net payables to Aladdin at July 31, 1998 and 1997 are $681,000 and $1,003,000, respectively. During fiscal 1997, the Company signed an agreement with an author to create a beginning reader series consisting of forty-eight titles to be published over the next two years. Twenty-four of these titles were published in fiscal 1998. The Company will advance royalties to this author at $19,000 per title when certain provisions of this agreement are met. At July 31, 1998, the Company has advanced royalties in accordance with this agreement of $667,000. (9) FAIR VALUE OF FINANCIAL INSTRUMENTS: CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES- The carrying amount approximates fair value because of the short term maturity of these instruments. -31- NOTES PAYABLE- The carrying amount of these financial instruments approximates fair values based on the fact that the related interest rates fluctuate with market rates. (10) CONCENTRATION OF CREDIT RISK: The company extends credit to various companies in the retail and mass merchandising industry for the purchase of its merchandise which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company's overall credit risk. Although the Company generally does not require collateral, the Company performs ongoing credit evaluations of its customers and reserves for potential losses are maintained. One customer accounted for 7% and 12% of the Company's net sales for the years ended July 31, 1998 and 1997, respectively. (11) ACQUISITION OF TWENTY-FIRST CENTURY BOOKS: On December 5, 1997, certain assets of Twenty-First Century Books ("Twenty-First Century"), were acquired by the Company for approximately $2,013,000 in cash. The acquisition has been recorded using the purchase method of accounting. Accordingly, the accompanying financial statements include the results of operations of Twenty-First Century from December 5, 1997. The consolidated balance sheet at July 31, 1998 includes the accounts of Twenty-First Century based on a preliminary allocation of the purchase price. The allocation is expected to be finalized after various studies and other work have been completed. Goodwill resulting from this acquisition will be amortized on a straight line basis over 20 years. (12) PREFERRED STOCK: On December 23, 1996, in conjunction with the Company's initial public offering, all preferred shares outstanding, plus accrued and unpaid dividends were converted to 473,692 shares of common stock. Additional preferred stock may be issued by the Board of Directors on such terms and with such rights, preferences and designations as the Board may determine without any vote of the stockholders. No preferred shares were issued or outstanding at July 31, 1998 and 1997. (13) CAPITAL STRUCTURE: In August 1996, the Board of Directors of the Company approved a recapitalization plan that included (i) a bridge financing ("Bridge Loan") in the principal amount of $1,750,000 and the issuance of an aggregate amount of 875,000 warrants as outlined below and (ii) an initial public offering of 1,700,000 shares of common stock. In connection with the Bridge Loan, the Company effected a reverse stock split of common stock on the basis of .3976 shares of common stock for each share of common stock. Common stock outstanding and earnings (loss) per share data reflect the reverse stock split for all periods presented. -32- BRIDGE LOAN- On August 29, 1996, the Company consummated the closing of a private placement bridge offering in which it sold 17 1/2 units for an aggregate of $1,750,000. Each unit consists of a $100,000 interest bearing unsecured convertible promissory note ("Note") and a warrant to purchase 50,000 shares of common stock at an initial exercise price of $3.00 per share ("Bridge Warrant"). The Note provided for interest at a rate of 10% per annum through November 30, 1996 and thereafter at a rate of 15% per annum and is payable upon the earlier of February 28, 1998 or the closing of the initial public offering by the Company. The carrying value of the Note has been reduced by $23,000 to reflect the fair market value of the Bridge Warrants at issue date and has been accreted up to the face value of $1,750,000 using the interest method. Fees incurred in connection with the financing were $314,000. In December 1997, at the consummation of the initial public offering the Bridge Loan was paid in full. INITIAL PUBLIC OFFERING- On December 23, 1996, the Company sold 1,955,000 shares of common stock, including the underwriter's over-allotment, in an initial public offering which generated net proceeds of approximately $7,093,000. The net proceeds were primarily used to repay existing bank debt and the Bridge Loan. -33- Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. On May 5, 1998, the Audit Committee of the Board of Directors of the Registrant dismissed KPMG Peat Marwick LLP ("Peat Marwick") as independent accountants to the Registrant and appointed Arthur Andersen LLP as the new independent accountants to the Registrant. Peat Marwick's accountant's report on the financial statements of the Registrant for the past two years and any subsequent interim period through the date of dismissal did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. There were no other reportable events or disagreements with Peat Marwick to report in response to item 304 (a) of Regulation S-B. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange Act. The information required by Item 9 regarding directors is incorporated by reference to the information appearing under the caption "Election of Directors" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. The information required by Item 9 regarding executive officers appears under the caption "Executive Officers of the Registrant" in Part I. Item 10. Executive Compensation. The information required by Item 10 is incorporated by reference to the information appearing under the caption "Executive Compensation" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by Item 11 is incorporated by reference to the information appearing under the caption "Security Ownership" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. Item 12. Certain Relationships and Related Transactions The information required by Item 12 is incorporated by reference to the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. -34- Item 13. Exhibits, List and Reports on Form 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ -------------------------------------------------------------- **3.1 Restated Certificate of Incorporation of the Company. **3.2 By-laws of the Company, as amended. **4.1 Form of Common Stock Certificate. **4.2 Form of Underwriter's Purchase Option granted to GKN Securities. **4.3 Form of bridge Warrant. *10.1 Employment Agreement, dated as of August 1, 1998, by and between the Company and Jeffrey Conrad. **10.2 Employment Agreement, dated as of December 12, 1996, by and between the Company and Jean E. Reynolds. **10.3 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Farrell Associates, Inc. **10.4 Consulting Agreement, dated as of December 13, 1996, by and between the Company and Graham International Publishing and Research, Inc. **10.5 Form of Indemnification Agreement between each of the Officers and Directors of the Company and the Company. **10.6 Agreement of Lease, dated September 27, 1994, by and between the Company and Arnold S. Paster. **10.7 Agreement of Lease, dated March 26, 1996, by and between the Company and Land First II Group. **10.8 Agreement of Lease and rider attached thereto, dated February 15, 1996, by and between the Company and Ninety-Five Madison Company. **10.9 1994 Stock Option Plan, as amended. **10.10 Loan and Security Agreement, dated as of December 14, 1995, between People's Bank and the Company. *10.11 Amendment to Loan and Security Agreement, dated June 10, 1998, between People's Bank and the Company. -35- **10.12 Agreement made effective as of August 1, 1996 by and between Aladdin Books Limited and the Company. ***10.13 Employment Agreement, dated as of January 20, 1997, by and between the Company and Satish Dua. *27 Financial Data Schedule - -------------------------------------------------------------------------------- * Filed herewith ** Filed as an Exhibit to the Company's Registration Statement on Form SB-2 (No. 33-14631) *** Filed as an Exhibit to the Company's Annual Report on Form 10-KSB for the year ended July 31, 1997 (b) REPORTS ON FORM 8-K The Company filed a Form 8-K under Item 4 (Form 8-K). -36- SIGNATURES In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MILLBROOK PRESS INC. Dated: October 29, 1998 By: /s/ Jeffrey Conrad ----------------------------- Jeffrey Conrad, President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dated indicated. Signatures Title Date /S/ JEFFREY CONRAD President and October 29, 1998 ------------------------ Chief Executive Officer Jeffrey Conrad (Principal Executive Officer) /S/ SATISH DUA Chief Financial Officer October 29, 1998 ------------------------ (Principal Financial Satish Dua Officer and Principal Accounting Officer) /S/ HOWARD GRAHAM Chairman of the Board October 29, 1998 ------------------------ Howard Graham /S/ FRANK J. FARRELL Director October 29, 1998 ------------------------ Frank Farrell /S/ BARRY FINGERHUT Director October 29, 1998 ------------------------ Barry Fingerhut /S/ BARRY RUBENSTEIN Director October 29, 1998 ------------------------ Barry Rubenstein /S/ HANNAH STONE Director October 29, 1998 ------------------------ Hannah Stone -37- EX-10.1 2 EMPLOYMENT AGREEMENT THE MILLBROOK PRESS INCORPORATED 27A Main Street Southampton, New York 11968 August 1, 1998 Mr. Jeff Conrad 8 Mary Austin Place Norwalk, Conn. 06859 Dear Mr. Conrad: Upon the terms and subject to the conditions set forth below, this letter shall constitute the agreement pursuant to which The Millbrook Press Incorporated ("Millbrook") agrees to employ you as Chief Executive Officer. 1. TERM OF EMPLOYMENT. 1.1 TERM. Millbrook hereby employs you, and you hereby accept employment with Millbrook, for a period of two years commencing August 1, 1998 unless sooner terminated in accordance with the provisions of Section 9 hereof. 1.2 FORMER AGREEMENT. Upon commencement of the term described in paragraph 1.1, the employment agreement of September 27, 1996, as amended December 13, 1996 (collectively the "Old Employment Agreement"), is deemed terminated. After August 1, 1998, the Old Employment Agreement is of no further force or effect and your employment will be based solely upon the terms of this Employment Agreement (the "Agreement"). 1.3 DEFINITION. As used herein, "Employment Term" means the entire period of your employment by Millbrook hereunder, whether for the period provided above, or whether sooner terminated in accordance with the provisions of Section 9 hereof. 2. DUTIES. 2.1 DESCRIPTION OF DUTIES. In your capacity as Chief Executive Officer, you shall perform such duties and exercise such authority, consistent with your position, as may from time to time be given to you by the Board of Directors of Millbrook (the "Directors"). You shall have the responsibility for the supervision of the day-to-day operations of Millbrook. 2.2 DEVOTION OF ENTIRE TIME. During the Employment Term, you agree that you will loyally and conscientiously devote your entire productive time, efforts, ability and attention to the duties of your office and to promote the interests of Millbrook, and that you will not engage in any other business duties or pursuits whatsoever. Notwithstanding any of the foregoing, you will not be prohibited from making passive personal investments or being involved in the private business affairs of your immediate family to the extent that such activities do not interfere with the performance of your duties hereunder and are not in any way competitive with the business of Millbrook. 3. COMPENSATION. 3.1 ANNUAL SALARY. During the Employment Term, you will be compensated at a base salary at the rate of $200,000 per annum, payable in accordance with the customary payroll policies of Millbrook; provided however, that if, pursuant to Section 9.1, 9.2. or 9.3 hereof, your employment is terminated prior to the end of the Employment Term, you will receive the appropriate pro rata portion of your annual salary for the period during which you are actually employed by Millbrook. 3.2 INCENTIVE COMPENSATION. You will be eligible annually to earn incentive compensation equal to fifteen percent (15%) of your annual salary. Such incentive compensation will be based on your meeting or exceeding the annual budgeted amount of operating and net income as a percentage of sales. The budgeted figures are those submitted by the Company to and approved by the Board of Directors. Such submission and approval will be completed prior to July 15th of each year. Such incentive compensation shall be available provided you complete each fiscal year. Neither full nor partial incentive compensation will be paid unless your employment is continued through that date. The Board at its discretion may provide additional compensation for exceeding the budgeted goals. 3.3 REIMBURSEMENT FOR BUSINESS EXPENSES. Millbrook will reimburse you, upon presentation of proper expense statements or such other supporting information as Millbrook may reasonably require, for your reasonable and necessary business expenses (including, without limitation, telephone, travel and entertainment expenses) incurred or paid by you in connection with the performance of your duties hereunder. 4. FRINGE BENEFITS. You shall be entitled to participate on the same basis and subject to the same qualifications as all other regular full time executive employees of Millbrook in any fringe benefit plans Millbrook makes available from time to time for all its employees, including those benefits available, if any, under any vacation, retirement, disability, medical insurance and life insurance plans as the same may be placed into effect from time to time. In addition, you shall be entitled to participate in such other benefit plans, if any, as Millbrook makes generally available from time to time to members of its executive staff. 5. STOCK OPTIONS. The Options granted to you under Section 5 of the Old Employment Agreement shall be modified to provide that -2- (i) the Option Term (as defined in the Old Employment Agreement) shall be extended for two years from the date hereof and (ii) the exercise price of the Option shall be corrected to be $4.50 per share. 6. CHANGE OF CONTROL 6.1 ADDITIONAL OPTION. If prior to the expiration of the Employment Term, there is a Change of Control (as defined hereinafter) you are to be granted an additional Stock Option (the "Additional Option") for 100,000 immediately exercisable shares of stock at an exercise price of $4.00 per share. The Additional Option will have provisions substantially similar to the terms and conditions in Millbrook's Stock Option Plan and the Standard Stock Option Agreement. 6.2 TERMINATION FOLLOWING A CHANGE OF CONTROL. If prior to the Expiration of the Employment Term, there is a Change of Control (as defined hereinafter) and thereafter any of the following occur: (i) this Employment Agreement is, within one year of the anniversary date of such Change of Control, terminated otherwise than by reason of cause as defined in paragraph 9.3; (ii) within one week of the anniversary date of such Change of Control, you tender a notice of resignation from your position as Chief Executive Officer; (iii) you are placed in any position of lesser stature than that of Chief Executive Officer of Millbrook; are assigned duties inconsistent with a Chief Executive Officer or duties which, if performed, would result in a significant change in the nature or scope of powers, authority, functions or duties inherent in such positions on the date hereof; are assigned performance requirements or working conditions which are at variance with the performance requirements and working conditions in effect on the date hereof; or are accorded treatment on a general basis that is in derogation of your stature as a Chief Executive Officer; (iv) any breach of Sections 3 through 5, inclusive, of this agreement; or (v) any requirement of Millbrook that the location at which you perform your principal duties for Millbrook be outside a radius of 40 miles from the location which you performed such duties immediately before the Change of Control, then this Agreement is deemed to be terminated by Millbrook otherwise than by reason of cause, and Millbrook shall pay you Severance Pay in an amount equal to your annual salary for one year within five days after notice from you to such effect. 6.3 DEFINITION. For the purposes of this agreement, a Change of Control means the direct or indirect sale, lease, exchange or other transfer to any entity, individual, or group of individuals of any number of shares of capital stock which would then allow a stockholder or group of related stockholders to (i) replace, appoint, or otherwise change a majority of the Board of Directors (as compared to the Board of Directors at the beginning of that fiscal year); or (ii) effect a substantial change in -3- management, or there is a merger, consolidation, or combination of Millbrook into or with another corporation or entity. Change of Control shall not include any transfer of shares to an entity or group controlling 20% of Millbrook's outstanding shares as of the date of this Agreement. 7. CONFIDENTIALITY. 7.1 TRADE SECRETS. You and Millbrook acknowledge and agree that during the Employment Term and in the course of the discharge of your duties hereunder, you will have access to and become acquainted with information concerning the operation of Millbrook and other valuable information regularly used in Millbrook's business and not generally known to others. You acknowledge and agree that it is Millbrook's policy to maintain such information as secret and confidential, whether relating to Millbrook's business as heretofore or hereafter conducted, or relating to Millbrook's customers, clients, suppliers, employees and other business associates (all such information being referred to hereinafter as "Confidential Information"). You acknowledge and agree that all Confidential Information is owned by Millbrook and constitutes Millbrook's trade secrets. 7.2 NON-DISCLOSURE. You specifically agree that you shall not use, publish, disseminate, misappropriate or otherwise disclose any Confidential Information, whether directly or indirectly, either during the term of this Agreement or at any other time thereafter, except as required by law or in the course of your employment hereunder. This provision shall not apply to Confidential Information which becomes generally known to the public by means other than your breach of this Section. 7.3 UNFAIR COMPETITION. You acknowledge and agree that the sale, unauthorized use or disclosure of any Confidential Information obtained by you during the course of your employment under this Agreement, including but not limited to (a) information concerning Millbrook's current, future or proposed work, services, or products, (b) the fact that any such work, services or products are planned, under consideration, or in production, as well as, (c) and descriptions thereof, constitute unfair competition. You promise and agree not to engage in any unfair competition with Millbrook, either during the term of this Agreement or at any other time thereafter. 7.4 PRECAUTIONS; RETURN OF MATERIALS. You agree to take all reasonable precautions to protect the integrity of all Confidential Information, including all documents and other material entrusted to you containing or embodying Confidential Information. You further agree that all files, records, documents, and similar items relating to Millbrook's business, whether prepared by you or by others, are and shall remain exclusively the property of Millbrook, and that upon the expiration or termination -4- of your employment hereunder you shall return to Millbrook all such material and all copies thereof in your possession or control. 7.5 COPYRIGHTABLE AND PATENTABLE MATERIALS. You agree that during the Employment Term you will take any and all business developments, opportunities and potentially profitable situations relating to Millbrook's business to the Directors for exploitation by Millbrook. You agree promptly to disclose to Millbrook (and only to Millbrook) any and all knowledge possessed or acquired (by you by any means whatsoever during the Employment Term which relates in any way to any developments, concepts, ideas or innovations, whether copyrightable or patentable or not, relating to the business of Millbrook. For the compensation and benefits received hereunder, you hereby assign and agree to assign to Millbrook your entire right, title and interest in and to any of the aforedescribed materials, discoveries, developments, concepts, ideas or innovations. All such materials, discoveries, developments, concepts, ideas and innovations shall be the property of Millbrook, and you shall, without further compensation, do all things necessary to enable Millbrook to perfect title in such materials, discoveries, concepts, ideas and innovations and to obtain and maintain effective patent or copyright protection in the United States and foreign countries thereon, including, without limitation, rendering assistance and executing necessary documents. 8. COMPETITIVE ACTIVITIES. 8.1 NON-COMPETITION. During the Employment Term and for a period of two (2) years after the expiration or earlier termination thereof for whatever reason, you shall not within the United States: (a) Consult with, be employed by, render services to, or engage in any business activity with (whether as owner, controller, employee, employer, consultant, partner, officer, director, agent or otherwise) any business or business entity competing in any way with the business of Millbrook; (b) Without the prior written consent of the Directors, personally solicit or cause to be solicited or authorize, directly or indirectly, for or on behalf of yourself or any third party, any business competitive with Millbrook, from others who are or were at any time within 12 months prior to the expiration or termination of your employment hereunder customers, suppliers, clients, authors, agents or other business associates of Millbrook. 8.2 SOLICITATION OF EMPLOYEES AND OTHERS. You acknowledge and agree that Millbrook's directors, officers and employees possess special knowledge of Millbrook's operations and are vitally important to the continued success of Millbrook's business. You shall not, without the prior written consent of the -5- Directors, directly or indirectly seek to persuade any director, officer or employee of Millbrook either to discontinue his or her position with Millbrook or to become employed or engaged in any activity competitive with the activities of Millbrook. 8.3 SCOPE. If any court determines that any of the covenants set forth herein, or any part or parts thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable and shall be enforced. 9. TERMINATION. 9.1 BY DEATH. Prior to the end of the Employment Term, your employment hereunder shall be terminated in the event of your death. 9.2 PERMANENT DISABILITY. Your employment hereunder may be terminated by Millbrook upon thirty (30) days' prior written notice to you in the event of your permanent disability. As used herein "permanent disability" shall mean any illness, injury or other physical or mental disability that shall prevent you from performing a substantial portion of your duties hereunder for any period of either 90 consecutive days or an aggregate of 120 days during any consecutive twelve (12) month period. 9.3 TERMINATION FOR CAUSE. Millbrook reserves the right to terminate this Agreement at any time and without notice for "cause" as defined below. As used in this Agreement, the term "cause" shall mean (i) the commission by you of any act which would constitute a felony under state or federal law, or the equivalent under foreign law, if prosecuted; (ii) the commission by you of any act of moral turpitude; (iii) the material breach by you of the provisions of this Agreement; (iv) your failure or refusal to perform your obligations under this Agreement, or other acts or omissions constituting neglect or dereliction of duties hereunder; (v) fraud, dishonesty or other acts or omissions by you that amount to a willful breach of your fiduciary duty to Millbrook; (vi) your personal bankruptcy; or (vii) the happening of any other event which, under the provisions of any laws applicable to Millbrook or its activities, disqualifies you from acting in any or all capacities provided for herein. Millbrook may, at its option, terminate this Agreement for the reasons stated in this Section by given written notice of termination to you without prejudice to any other remedy to which Millbrook may be entitled either by law, in equity, or under this Agreement. Upon any such termination under this Section, and upon Millbrook's request, you agree to resign from all directorships and positions as an executive officer you may then hold with Millbrook or any of its affiliates. -6- 9.4 SEVERANCE PAY. Other than with respect to Section 6 hereof, whether and to what extent you are entitled to severance pay upon termination of your employment with Millbrook will be determined according to Millbrook's severance policies, if any, at the time of such termination. 10. MISCELLANEOUS. 10.1 NOTICES. Notices hereunder shall be in writing and shall be delivered by hand or sent by registered or certified mail, return receipt requested, if to you, at the address set forth above, and if to Millbrook Press, at 27A Main Street, Southampton, New York 11968, or at such other address as to which notice has been given in the manner herein provided. 10.2 ENTIRE AGREEMENT. This Agreement sets forth your and Millbrook's complete understanding with respect to the matters set forth herein. This Agreement may be modified or amended only by an agreement in writing signed by the parties hereto. 10.3 SEVERABILITY. If any term, provision, covenant, or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such term, provision, covenant, or condition as applied to other persons, places and circumstances shall remain in full force and effect. 10.4 HEADINGS. The headings and captions of this Agreement are provided for convenience only and are intended to have no effect in construing or interpreting this Agreement. 10.5 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereunder. -7- If the foregoing accurately reflects your understanding of our agreement and is acceptable to you, please sign the enclosed copy of this letter and return it to the undersigned. Very truly yours, THE MILLBROOK PRESS INCORPORATED By:/s/ Howard B. Graham ----------------------------- Howard B. Graham, Chairman of the Board of Directors By: /s/ Barry Fingerhut ----------------------------- Barry Fingerhut, Chairman of the Compensation Committee Accepted and Agreed: By: /s/ Jeff Conrad ----------------------------- Jeff Conrad -8- EX-10.11 3 AMENDMENT TO LOAN AND SECURITY AGREEMENT SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ----------------------------------------------- WHEREAS, The Millbrook Press Inc., a Delaware corporation, with its chief executive office located at 2 Old New Milford Road, Brookfield, Connecticut 06804 (referred to herein as "Borrower") entered into a Loan and Security Agreement with PEOPLE'S BANK, a Connecticut banking corporation ("People's"), with a place of business located at Bridgeport Center, 850 Main Street, Bridgeport, Connecticut 06607 (referred to herein as "Lender") dated as of December 14, 1995 (the Loan and Security Agreement being herein referred to as the "Loan Agreement"); and WHEREAS, Borrower and Lender entered into a First Amendment to Loan and Security Agreement dated as of June 17, 1997 amending and revising Sections 2.1(a), 2.1(c), 2.6, 4.6, 6.13(a), 6.13(c) and 6.13(d) of the Loan Agreement (the Loan and Security Agreement, as amended by the First Amendment to Loan and Security Agreement shall be referred to herein as the "Amended Agreement"); and WHEREAS, Borrower and Lender have agreed to further amend the terms and provisions of the Loan Agreement effective as of the date stated herein by the provisions set forth below; NOW, THEREFORE, Borrower and Lender hereby agree that effective as on the date stated herein as the date of execution by Lender being June 10, 1998, the Amended Agreement shall be amended to contain the provisions set forth below and the applicable provisions of the Amended Agreement shall be superseded to the extent necessary to give effect to the provisions set forth below: 1. Section 2.1(a) of the Amended Agreement shall be deleted in its entirety and the following inserted in lieu thereof: 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, People's agrees to make revolving advances to Borrower in an amount at any one time outstanding not to exceed the Borrowing Base. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean an amount equal to eighty percent (80%) of the amount of Eligible Accounts PLUS (ii) an amount equal to the lowest of: (x) fifty percent (50%) of the amount of Eligible Inventory, (y) the amount of credit availability created by SECTION 2.1(A) above or (z) Three Million Seven Hundred Fifty Thousand Dollars ($3,750,000). 2. Section 2.1(c) of the Amended Agreement shall be deleted in its entirety and the following inserted in lieu thereof: 2.1(c) People's shall have no obligation to make advances hereunder to the extent they would cause the outstanding Obligations to exceed Seven Million Dollars ($7,500,000) ("Maximum Amount"). 3. Section 2.6(d) of the Amended Agreement shall be deleted in its entirety and the following inserted in lieu thereof: (d) Unused Line Fee. On the first day of each month during the term of this Agreement, and thereafter so long as any Obligations are outstanding, an unused line fee in an amount equal to one-eighth (1/8%) of one percent per annum of the difference between Seven Million ($7,500,000) Dollars and the average amount of Obligations outstanding during the immediately prior calendar month. 4. Section 3.3 of the Amended Agreement shall be deleted in its entirety and the following inserted in lieu thereof: 3.3 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and People's and shall continue in full force and effect for a term ending on December 14, 2001. The foregoing notwithstanding, People's shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 5. Section 6.13(c) of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: 6.13(c) Tangible Net Worth. Tangible Net Worth of at least $4,500,000 through the 1998 fiscal year end and thereafter, measured on a calendar month-end basis; 6. Section 6.13(d) of the Amended Agreement shall be deleted in its entirety and the following inserted in lieu thereof: 6.13(d) Working Capital. Working Capital of not less than $3,750,000 through the 1998 fiscal year end and thereafter, measured on a calendar month-end basis. 7. Lender has requested and Borrower has agreed to execute a Secured Promissory Note to evidence the maximum amount of advances available under Section 2.1(c) which Secured Promissory Note shall be in the form attached hereto as Schedule A. 8. Borrower agrees to pay a one time modification fee of Eight Thousand Seven Hundred Fifty Dollars ($8,750) which is earned, in full, and is due and payable by Borrower to Lender in connection with the execution of this Agreement on the date hereof. Borrower authorizes Lender to charge such modification fee to its account with Lender as an advance. 9. Except as herein amended, all of the terms and provisions of the Amended Agreement shall remain in full force and effect. -2- 10. Borrower and Lender agree that this Second Amendment to Loan and Security Agreement has been prepared by the mutual effort of both parties and that in the event of a conflict or interpretive question with respect to any term, provision or section contained in this Second Amendment to Loan and Security Agreement or the December 14, 1995 Loan and Security Agreement, that this Second Amendment to Loan and Security Agreement and the December 14, 1995 Loan and Security Agreement shall not be construed more strictly against any one party than any other party; it being agreed that both Borrower and Lender have equally negotiated the terms hereof and thereof. 11. The revisions and amendments recited herein shall not become effective and shall be of no force or effect until Borrower has executed this Second Amendment to Loan and Security Agreement and the original form of Secured Promissory Note and provided Lender with a current certificate of the Secretary of Borrower attesting to the adoption and/or passage of applicable corporate resolutions authorizing and approving the revisions and amendments contained in this Second Amendment to Loan and Security Agreement which such certificate shall also contain an acceptable form of incumbency certificate attesting to the current officers and directors of Borrower. The date of execution of this Second Amendment to Loan and Security Agreement by Borrower is June 10, 1998. LENDER: BORROWER: PEOPLE'S BANK THE MILLBROOK PRESS INC. By: Peter Coates By: Satish Dua --------------------------------- -------------------------------- Title: Vice President Title: Vice President & CFO ----------------------------- ----------------------------- -3- EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's Consolidated Financial Statements as of July 31, 1998 and is qualified in its entirety by reference to such consolidated financial statements. 12-MOS JUL-31-1998 AUG-1-1997 JUL-31-1998 34,000 0 5,575,000 630,000 6,709,000 12,968,000 236,000 0 21,476,000 7,529,000 0 17,591,000 0 0 0 21,476,000 15,615,000 15,615,000 7,802,000 7,802,000 6,947,000 0 218,000 648,000 0 648,000 0 0 0 648,000 0.19 0.19
-----END PRIVACY-ENHANCED MESSAGE-----