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, 1997
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 and Warrants to
purchase Common Stock, par value
$.01 per share
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, 1997 were $12.6 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 24, 1997,
was approximately $10,016,300. As of October 24, 1997, the Registrant had
outstanding 3,455,000 shares of Common Stock.
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THE MILLBROOK PRESS, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Description of Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 15
Item 7. Financial Statements 19
Item 8. Changes in and Disagreements with Accountants 35
on Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 35
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation 35
Item 11. Security Ownership of Certain Beneficial Owners and 35
Management
Item 12. Certain Relationships and Related Transactions 35
Item 13. Exhibits, List and Reports on Form 8-K 36
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PART 1
ITEM I 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. Since its inception, the Company has
published more than 800 hardcover and 340 paperback books under its Millbrook
and Copper Beech imprints. The Company's books have been placed on numerous
recommended lists by libraries, retail bookstores, and educational
organizations. Books published under the Millbrook imprint have evolved from
information-intensive school and library books to include its current mix of
highly graphic, consumer-oriented books. Therefore, many of its books can be
distributed to the school and public library market as hardcover books while
being simultaneously distributed to the consumer market as either hardcover or
paperback books. As a result, the Company is better able to fully exploit a
book's sales potential.
The consumer market in children's books consists of books purchased by consumers
through the traditional bookstores including national chains such as Barnes &
Noble, Borders and Waldenbooks, educational chain stores such as Zainy Brainy,
Learningsmith, and Noodle Knoodle and mass merchandisers including K-Mart,
Target, and the Warehouse Clubs; as well as the non-traditional distribution
channels such as direct sales, catalogs, direct mail, book clubs, book fairs,
non-book retail stores, and on a smaller scale, certain museums, national parks,
historical sites, theme parks, gift shops and toy stores.
In order to continue its growth as a publisher of quality children's books, the
Company will: (i) extend its publishing program of preschool novelty books,
books for beginning readers and early readers, chapter books for young readers
and children's popular-reference books; (ii) acquire companies or develop
strategic partnerships that broaden its product line and extend its distribution
in both consumer and library market channels; (iii) expand its marketing
capabilities in the consumer and library 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
The Company operates in two distinct markets: the school and public library
market, and the consumer market. The fastest-growing segment of the children's
book marketplace is paperbacks; their sales increased by 14% in 1996. Hardcover
children's books
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experienced a 4% sales increase in 1996. This trend is continuing and the Book
Industry Study Group anticipates that the demand for children's hardcover books
will increase by a rate of 4% and that for children's paperback books will
increase by a rate of 4.2%, each on a compounded basis from 1996 through the
year 2001. As a result of that growth, BOOK INDUSTRY TRENDS 1997 predicts that
public library expenditures will reach approximately $197 million in the year
2001, and school library expenditures will reach approximately $182 million in
the year 2001, for a total of approximately $379 million. Veronis, Suhler &
Associates predicts that by the year 2001, children's hardcover book sales in
the consumer market will reach approximately $1.8 billion and children's
paperback book sales in the consumer market will reach approximately $1.4
billion, for a total of approximately $3.2 billion.
School and Library Market
The school and public library market is undergoing significant change due to
long-term social and economic forces. The United States Department of Education
predicts that the student population from kindergarten through twelfth grade
will increase 8% from 1995 to 2006, with an overall net gain of approximately
3.8 million students. Because many school districts allocate instructional
material funds on a "per head" basis, the Company believes that money allocated
to schools for book acquisitions should increase as the student population
increases. Purchases are primarily driven by favorable book reviews.
Age-appropriate books on the right topic with favorable reviews sell along a
predictable curve. In addition to the demographic changes, demand for books has
also increased as a result of the school and public library market becoming
aware of, responsive to, and supporting the innovative instructional programs
being developed and used in the classroom. New teaching philosophies such as the
"reading initiative," the "whole-language movement" and "cross-curriculum
teaching" developed in the 1980s and 1990s have increased the demand for
different and better books. Librarians are working with classroom teachers to
select books that meet classroom criteria of being multicultural, visually
stimulating, interesting, curriculum-related and suitable for a range of
reading-ability.
CONSUMER MARKET
Demand for children's books should also increase in the consumer market due to
the projected increase in the number of school-age children. The Company
believes that, in addition to the larger school age population the most
important factors that will sustain larger sales of children's books include the
increased availability of quality books, particularly paperback books, and the
convenience of being able to purchase inexpensive paperback books as opposed to
traveling to libraries. In addition, the Company believes the growth in the
number of affluent, better-educated parents and the increased emphasis they
place on education as a whole has also contributed to this trend.
Demand for children's books in the consumer market has also increased because
the methods by which hardcover and paperback books are distributed have changed
significantly in the past five years, leading to greater accessibility and shelf
space for books. Traditionally, books were primarily sold at small local
bookstores with limited
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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 market and the consumer market.
Traditionally, hardcover library books address topics typical for school reports
and research and were created with the purpose of maximizing information content
rather than appealing to consumers. Because books sold in the school and public
library market in the past were sold to librarians/teachers based on content,
the product was often informationally rich, but somewhat aesthetically
unappealing. Conversely, a paperback book sold in the consumer market was not
designed as an information source, but rather to attract a consumer's attention
and thereby sell itself from the shelf, and accordingly failed to address
certain topics and lacked the informational content of library books. The
Company's books, and books for the children's book market in general, are now
designed to appeal to both markets. A book filled with information is combined
with an attractive title, cover and internal design to catch the eye of the
consumer browsing the shelf. The same book can then be bound as a hardcover book
and sold to school and public libraries. Additionally, as either a hardcover or
a paperback, the book appeals to teachers and can be used as supplemental
reading in the classroom.
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
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the past seven years, combined with the evolution and anticipated growth rates
for children's books in the school and public library and consumer markets,
creates an opportunity for the Company to expand the list of books in which it
maintains a significant ownership interest and expand the recognition of its
brand names. The Company believes that the elements required to achieve this
goal are (i) publishing books of the highest quality, created in house, through
packaging arrangements or licensed, with the ability to satisfy two or more of
the markets which it now services, (ii) expanding its product offerings to take
advantage of its investments in distribution and its exposure to the consumer
market and (iii) enhancing its existing marketing operations to support its
product line expansion initiatives. Industry conditions among publishers in
recent years has led to ongoing divestitures and the Company intends to
accelerate its growth and increase its market penetration by selectively
acquiring other publishers of children's books or by formulating strategic
alliances to increase the market exposure of its books. The Company also intends
to explore opportunities in electronic media by selectively participating in
publishing and marketing opportunities on commercial on-line services and on the
Internet. Key elements of the Company's strategy are:
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 which can crossover
into two or more markets, in 1995 the Company began reformatting many of
it 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 which offer opportunities for
significant sales growth. The Company has targeted the preschool novelty
area as a future market and plans to enter that segment with books
containing moveable elements or books bundled with additional merchandise.
The Company will publish books for the beginning reader (four to six years
old) and early reader (five to eight years old) as well as chapter books
for ages seven through 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 may also seek acquisition opportunities covering niche markets
in which the Company does not currently compete and product extensions in
its existing markets. The Company's product development strategy may
include joint ventures with strategic partners to minimize up-front
development costs. Currently, however, the Company has no commitments or
agreements with respect to any acquisitions.
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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
inhouse 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 that put the Millbrook imprint in direct contact with children,
parents and teachers will increase sales. The Company intends to increase
its participation in book fairs, book clubs, catalogs and to distribute
its books to 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.
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.
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
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sales. For example, in 1997, the Company published 75 hardcover books under the
Millbrook imprint for the school and public library market, of which 25 books
were suitable for and published simultaneously as hardcovers or paperbacks to be
sold in the consumer market, and 73 hardcover books under the Copper Beech
imprint to be sold in the consumer market, of which 13 books were suitable for
and published simultaneously as hardcovers or paperbacks, to be sold in the
school and public library 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 fare,
(ii) analysis of school age demographics and other social and economic factors
from current philosophical trends in education (i.e. the whole language
movement) to the globalization of education, (iii) review of competitors' books
to determine if and how the Company can publish a superior book on a similar
topic, (iv) reading children's magazines to determine what young people are
interested in and (v) maintaining personal 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 appropriate authors and/or artists 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 of the book and range
from 6% to 10% of net sales with an average of 7% 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. In almost all cases, the Company retains control of
all book club, reprint, electronic, foreign, serialization, and commercial
rights. The income generated from such arrangements is divided equally between
the Company and the author.
Upon the delivery of a manuscript from an author/illustrator and after editing,
fact-checking and approval, the Company's in-house staff plans and prepares the
layout, illustrations and cover to be used for the book. Upon completion of the
editing, graphics and layout, a computer produces a mechanical of the book with
all elements in place. A
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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 United
States, on a bid contract basis. The Company's products require varying periods
of development time depending upon the complexity of the graphics and design as
well as the editing process. Most of the Company's books can be developed in a
period that ranges from nine to 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. In May 1994, the Company entered into an
exclusive, long-term joint venture with Aladdin Ltd. ("Aladdin"), a major
children's packager for the international market, which expires on January 1,
2002, but can be renewed thereafter, to produce no less than 50 nonfiction
titles per year to be published under the Company's imprint, Copper Beech. The
exclusive agreement between the Company and Aladdin was designed to produce
books with strong consumer market appeal in popularly priced paperback books as
well as content suitable for hardcover books for sale to libraries. 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
which were created either with or without input from the Company. The licensing
usually includes all subsidiary rights such as first and second serialization,
commercial rights, electronic rights, foreign and translation rights, reprint
rights and rights to any means yet to be developed for transmitting information.
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MARKETING AND DISTRIBUTION
The Company's sales and marketing efforts are designed to broaden product
distribution, increase the number of first-time and repeat purchasers, promote
brand-name recognition, assist retailers and properly position, package and
merchandise the Company's products. The Company utilizes various marketing
techniques designed to promote brand awareness and recognition and to maximize
the amount of shelf space devoted to its product line in retail outlets,
including complimentary copies, reviews and recommendations, catalogs,
advertising, brochures, exhibits, publicity campaigns and in-store promotions.
The Company's marketing efforts are geared toward its two major markets: (i) the
school and public library market and (ii) the consumer market.
SCHOOL AND PUBLIC LIBRARY
The Company targets the school and public library market through three main
channels: wholesalers, telemarketing and direct sales. Large school and public
library systems tend to purchase their books through wholesalers on a bid basis,
while smaller systems purchase directly from a commission sales representative
or through a telemarketing program such as the one the Company conducts. During
the fiscal year ended July 31, 1997, approximately 64% of the Company's sales in
the school and public library market were made through wholesalers. While
wholesalers do not engage in sales and marketing efforts on behalf of the
Company's products, they provide schools and public libraries with a wide range
of selection and convenience as well as discounts on bulk orders. Baker &
Taylor, one of the largest wholesalers in the school and public library market,
accounted for 12% of the Company's net sales in the fiscal year ended July 31,
1997. 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 29% of the Company's sales in the
school and public library market. Telemarketing penetrates the market through
its "preview program" where books are given on loan to teachers and other
decision-makers on the premise that the quality of the book will sell itself.
The remaining 7% of the Company's sales in this area results from direct-selling
efforts where commissioned salespersons conduct face-to-face 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
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magazine insert per year. For its school and library accounts, the Company
produces one full-line catalog, consisting of a complete annotated backlist as
well as new publications for Fall that is mailed to 100,000 current and
perspective accounts. An eight-page insert is produced in January to introduce
the new list for Spring for distribution in the School Library Journal (the
major professional journal from which librarians make purchase decisions) and at
conventions throughout the year. The Company produces two full-line catalogs per
year for the consumer market in May and December. The Company also advertises in
many consumer journals, newsletters and newspapers. The Company produces
promotional materials for individual titles, themes, authors and illustrators.
It also produces standard "leave-behind" sell sheets that refresh a librarian's
recollection of a sales presentation. Finally, the Company exhibits its books at
many national conventions covering the school and public library and consumer
markets.
The expanding use of children's books in the classroom, especially in paperback
formats, has complicated the traditional distribution networks since contacting
the particular teacher or other individual in charge of curriculum decisions can
be more difficult than contacting the school librarian. The Company has created
marketing programs to extend school sales beyond the library and into the
classroom. 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 $2.8 million in fiscal year 1996 to $4.8
million in fiscal 1997.
As is the case with the school and public library market, a large proportion of
the Company's sales in the consumer market are made through wholesalers. Ingram,
one of the largest wholesalers in the consumer market, accounted for 6% of the
Company's net sales in the fiscal year ended July 31, 1997, and 60% of its
wholesale sales to the consumer market. While the Company believes that there
are alternative wholesalers available, a significant reduction in sales to
Ingram would have a material adverse effect on the Company's operations.
The Company has three sales groups: the in-house sales group, the commissioned
sales group and the special sales group. The in-house sales group, consisting of
an in-house sales director, a merchandising manager and a full-time salaried
sales person, is responsible for sales, promotion and merchandising to the major
national and large regional accounts. This group is also responsible for sales
to the network of wholesalers supporting these accounts. The commissioned sales
group currently consists of approximately 30 commissioned representatives who
are responsible for sales to independent bookstores, small regional chains and
certain special sales outlets and
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regional jobbers. The special sales group markets to specialized retail outlets
such as museums, national parks, historical sites, theme parks, gift shops and
toy stores and consumer companies such as direct sales catalogs and direct mail.
The Company's sales representatives sell the full range of the Company's
products. The sales groups provide the Company with 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 which can stimulate sales. The
Company participates with various outlets in advertising directly to individuals
through media and catalogs. In-store promotions, such as posters, 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 1997, approximately 40% of the Company's printing and binding
needs were provided by Worzalla Publishing, Inc. ("Worzalla"), an industry
leader in library-bound, short-run printing and binding. Manufacturing is a
significant expense item for the Company, with a total of $4.8 million (or
approximately 38% of net sales) spent in 1997. The Company has used Worzalla's
services since the Company's inception and enjoys a strong working relationship
with Worzalla. The Company believes it has sufficient alternative sources of
manufacturing services to meet its foreseeable needs should Worzalla's services
no longer be available to the Company although manufacturing costs could be
adversely impacted.
Shipping orders accurately and promptly upon their receipt is an important
factor in the Company's customer service and in closing a sale. Most publishing
companies ship products within one week of receipt of a customer order, and in
general the Company meets or betters this timetable. The Company processes
customer orders through an in-house processing department. The Company leases
warehouse space from, and its products are shipped to, Mercedes Distribution
Company of Brooklyn, New York.
COMPETITION
The children's book publishing marketplace in the school and public library
market and in the consumer market is fragmented and very competitive.
Competition in the school and public library market is based upon quality of
products, brand name recognition and book content. In the consumer market, the
primary factors are brand name recognition, book content, availability and
price.
There are many publishers of material similar to the Company's product
offerings. The Company's chief and direct competitors in the school and public
library market include Childrens Press, Dorling Kindersley Publishing Inc.,
Franklin Watts Inc., Gareth Stevens Inc., Lerner Publications Co. and Troll
Communications. The Company's chief and direct
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competitors in the consumer market include Barron's Educational Series Inc.,
Candlewick Press, Dorling Kindersley Inc., Larousse Kingfisher Chambers Inc.,
Random House Inc. and Usborne Publishing Ltd.
The Company also competes with a large number of other publishers for retail
shelf space in large bookstore chains such as Barnes & Noble, Borders and
Waldenbooks. In addition to competition among like types of publishing programs,
the overall competition for limited educational budgets is intense when other
producers of materials used in classrooms and libraries are included, especially
producers and distributors of electronic hardware and software. A number of
these competitors have considerably greater financial and marketing resources
than the Company, although the Company believes that the depth of experience of
its management and its connections into the hierarchy of the education sector
gives the Company a competitive edge not only in producing quality books
marketable in the school and library and consumer markets, but also in
foreseeing long-term and short-term social and economic forces influencing the
children's book industry.
PROTECTION OF PROPRIETARY RIGHTS
Nearly all 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 Philippines. On more than half of the
imported titles, the Company holds the Canadian rights as well. The Company's
trade names Millbrook and Copper Beech are used to publish books primarily for
the school and library market and consumer market respectively. The Company
considers these trade names material to its business.
For the Copper Beech titles, the Company has exclusive rights for all markets in
the United States and Canada. World rights are retained for books originated by
Aladdin and the Company participates in the profits generated from such sales on
a 25% basis.
13
<PAGE>
EMPLOYEES
As of July 31, 1997, the Company had approximately 65 employees. Approximately
55% are full-time and 45% 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 PROPERTY
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 $108,600 per year plus
utilities and taxes. This lease expires in December 2002. The Company also
leases approximately 1,900 square feet of space in New York City at a rental of
$35,350 per year plus utilities and taxes. This lease expires in April 2004. The
Company also leases office space in Southhampton, New York at a current rental
of $15,120 per year plus utilities and taxes. This lease expires in September
1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of the Company 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 since the effectiveness of
the initial public offering on December 17, 1996, as reported on the NASDAQ
SmallCap Market, the principal trading market for the Common Stock. The
quotations are interdealer prices without adjustment for retail markups,
markdowns, or commission and do not necessarily represent actual transactions.
14
<PAGE>
COMMON STOCK
YEAR ENDED JULY 31, 1997
High Low
First Quarter - -
Second Quarter 7 5-3/8
Third Quarter 6 5
Fourth Quarter 6-3/8 5-3/8
As of July 31, 1997, the Company had outstanding 3,455,000 shares of Common
Stock and 50 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's
credit facility with People's Bank restricts the payment of dividends. 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 for
the foreseeable future.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Financial Statements of The Millbrook Press Inc. and related Notes to the
Financial Statements and 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 to 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 which can enable
the Company to sell books to the consumer market and/or develop books that can
appeal to both the school and public library market and the consumer market.
15
<PAGE>
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, 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 can have a significant impact on quarterly results.
The Company computes net sales by concurrently deducting a reserve for returns
from its gross sales. Return allowance may vary as a percentage of gross sales
based on actual return experience. The Company believes that as gross sales to
the consumer market increase as a proportion of its overall sales, returns will
constitute a greater proportion of net sales. Although the Company believes its
reserves have been adequate to date, there can be no assurance that returns by
customers in the future will not exceed historically observed percentages or
that the level of returns will not exceed the amount of reserves in the future.
In the event that the amount reserved proves to be inadequate, the Company's
operating results will be adversely affected.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Fiscal 1997 revenues increased approximately 27% from $9.9 million in fiscal
1996 to $12.6 million in fiscal 1997. Increased sales resulted from significant
increases in trade and special sales due to the large number of backlist tiles,
as well as a significant increase in the number of accounts.
Gross profit margin for the fiscal year ended July 31, 1997 decreased to 46% of
net sales compared to 49% of net sales for the same period last year. The
decrease in gross profit margin for fiscal 1997 resulted from the more heavily
weighted mix of trade and special sales as compared to fiscal 1996. The terms
and conditions of sales in the consumer market cause it to have a higher cost of
sales since consumer sales have higher discounts and promotional allowances than
sales to school and library market.
16
<PAGE>
Selling and marketing expenses for fiscal 1997 decreased to 36% of net sales
from 39% of net sales for fiscal 1996. 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 1997 increased by $739,000 to
$1.9 million compared with $1.2 million for fiscal 1996. This increase is
largely due to a one time charge associated with a bridge loan financing,
obtaining Directors' and Officers' insurance and new personnel. The
establishment of a consumer credit and collection function also contributed to
this increase.
As a result of the foregoing, operating loss increased from $218,000 or 2% of
net sales in fiscal 1996 to $661,000, or 5% of net sales in fiscal 1997.
Net interest expense decreased from $245,000 in fiscal 1996 to $197,000 in
fiscal 1997. The decrease in interest expense is due to repayment of bank and
bridge loans with proceeds from the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, the Company had cash and working capital of $323,000 and
$6.7 million, respectively, as opposed to cash and working capital of $134,000
and $1.3 million, respectively as of July 31, 1996. This increase was due to net
proceeds from an initial public offering and repayment of bank and bridge loans.
The Company has available a $4,000,000 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 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, 1997, the Company had no amounts outstanding under this line.
In addition to bank borrowings, the Company has financed its operations since
August 1, 1995 through a pre-bridge financing of $500,000 in April 1996, a
bridge financing whereby the Company received gross proceeds of $1.75 million
(of which approximately $516,000 was used to repay the principal and interest on
notes issued in the pre-bridge financing) and an initial public offering whereby
the Company received approximately $7,093,000 in net proceeds of which
approximately $1,800,000 was used to repay the principal and interest on notes
issued in the bridge financing.
Inventory of finished goods totaled $4.9 million and $3.5 million at July 31,
1997 and July 31, 1996, respectively. The higher level of inventory is due to an
increase in the number of backlist trade and school and library titles, as well
as a need for maintaining sufficient levels to meet consumer demand.
The $740,000 increase in Accounts Receivable from the prior year is due to
increased sales.
17
<PAGE>
Based on its current operating plan, the Company anticipates that its existing
resources together with cash generated from operations will be sufficient to
satisfy the Company's contemplated working capital requirements through
approximately July 31, 1998. However, there can be no assurance that the
Company's working capital will not exceed its available resources or that these
funds will be sufficient to meet the Company's longer-term cash requirements for
operations. Accordingly, either before or after July 31, 1998, the Company may
seek additional funds from borrowings or through debt or equity 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.
18
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Shareholders and The Board of Directors
The Millbrook Press Inc.:
We have audited the accompanying balance sheets of The Millbrook Press Inc. as
of July 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Millbrook Press Inc. as of
July 31, 1996 and 1997 and the results of its operations and its cash flows for
the years 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, "Accounting for Stock-Based
Compensation."
KPMG Peat Marwick LLP
October 3, 1997
New York, New York
19
<PAGE>
Balance Sheets
July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash $ 134,000 323,000
Accounts receivable (less allowance for returns and
bad debts of $329,000 in 1996 and $456,000 in 1997) 2,084,000 2,824,000
Inventories 3,477,000 4,935,000
Royalty advances, net 364,000 359,000
Prepaid expenses 292,000 582,000
------------ ------------
Total current assets 6,351,000 9,023,000
------------ ------------
Plant costs, net 2,582,000 3,124,000
Fixed assets, net 270,000 256,000
Goodwill, net 3,245,000 3,055,000
Royalty advances, net 67,000 277,000
Other assets 59,000 34,000
------------ ------------
Total assets $ 12,574,000 15,769,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks 2,742,000 --
Accounts payable and accrued expenses 2,141,000 2,271,000
Royalties payable 150,000 199,000
------------ ------------
Total current liabilities 5,033,000 2,470,000
Shareholder notes 500,000 --
Total liabilities 5,533,000 2,470,000
------------ ------------
Commitments
Stockholders' equity:
12% Series A voting, cumulative Preferred Stock, par value $.01 per share;
authorized 1,000,000 shares; issued and outstanding 4,700 shares (at
aggregate liquidation preference including dividends in arrears)
in 1996 and no shares in 1997 6,190,000 --
Common Stock, par value $.01 per share, authorized
12,000,000 shares; issued and outstanding 1,026,308
shares in 1996 and 3,455,000 shares in 1997 10,000 35,000
Additional paid-in capital 3,991,000 17,556,000
Accumulated deficit (3,150,000) (4,292,000)
------------ ------------
Total stockholders' equity 7,041,000 13,299,000
------------ ------------
Total liabilities and stockholders' equity $ 12,574,000 15,769,000
============ ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
Statements of Operations
Years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net sales $ 9,940,000 12,573,000
Cost of sales 5,099,000 6,738,000
----------- -----------
Gross profit 4,841,000 5,835,000
----------- -----------
Operating expenses:
Selling and marketing 3,854,000 4,552,000
General and administrative 1,205,000 1,944,000
----------- -----------
Total operating expenses 5,059,000 6,496,000
----------- -----------
Operating loss (218,000) (661,000)
Interest expense 245,000 197,000
----------- -----------
Net loss (463,000) (858,000)
Preferred dividend accrued (656,000) (284,000)
----------- -----------
Net loss available to common stockholders $(1,119,000) (1,142,000)
=========== ===========
Loss per share after preferred dividend
requirements (primary and fully diluted) $ (1.09) (.46)
=========== ===========
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
Statements of Stockholders' Equity
Years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
Additional
paid-in
Preferred stock Common stock capital
------------------------- -------------------- ---------- Accumulated
Shares Amount Shares Amount deficit Total
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 4,700 $ 5,534,000 1,026,308 $ 10,000 3,991,000 (2,031,000) 7,504,000
Preferred stock dividend -- 656,000 -- -- -- (656,000) --
Net loss -- -- -- -- -- (463,000) (463,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1996 4,700 6,190,000 1,026,308 10,000 3,991,000 (3,150,000) 7,041,000
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
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
Statements of Cash Flows
Years ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (463,000) (858,000)
Depreciation and amortization 1,047,000 1,123,000
Provision for returns and bad debts 116,000 127,000
Accretion of warrants -- 23,000
Changes in assets and liabilities:
Increase in accounts receivable (917,000) (867,000)
Increase in inventories (819,000) (1,458,000)
(Increase) decrease in royalty advances 90,000 (205,000)
(Increase) decrease in prepaid expenses 34,000 (290,000)
(Increase) decrease in other assets (36,000) 25,000
Increase in accounts payable and accrued expenses 658,000 130,000
Increase in royalties payable 59,000 49,000
----------- -----------
Net cash used in operating activities (231,000) (2,201,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (102,000) (64,000)
Plant costs (1,313,000) (1,397,000)
----------- -----------
Net cash used in investing activities (1,415,000) (1,461,000)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable (2,000,000) (4,992,000)
Proceeds from borrowings under notes payable 3,242,000 1,750,000
Proceeds from sale of capital stock -- 7,093,000
----------- -----------
Net cash provided by financing activities 1,242,000 3,851,000
----------- -----------
Net increase (decrease) in cash (404,000) 189,000
Cash at beginning of period 538,000 134,000
----------- -----------
Cash at end of period $ 134,000 323,000
=========== ===========
Supplemental disclosures:
Interest paid $ 239,000 193,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
Notes to Financial Statements
July 31, 1996 and 1997
(1) DESCRIPTION OF THE BUSINESS AND FINANCIAL STATUS AND PLANS
DESCRIPTION OF THE BUSINESS
The Millbrook Press Inc. ("Company") was incorporated and commenced
operations as an independent company on February 23, 1994. The Company
is a publisher of children's nonfiction books, in both hardcover and
paperbacks, for preschoolers through young adults. The Company's books
are distributed to the school and public library market, trade
bookstores and other specialty retail and direct sales markets through
wholesalers, its own telemarketing efforts and commissioned sales
representatives. The Company was formed to acquire the net assets of a
wholly owned subsidiary of Antia Publishing Company, which is a wholly
owned subsidiary of Groupe de la Cite International, a French
corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISKS
Revenue from the sale of books to wholesalers is recognized at
shipment. The Company provides a reserve for product returns. Sales
from telemarketing activities are recognized when the customer accepts
all or part of a sample shipment.
Ongoing credit evaluations of customers' financial condition are
performed and collateral is not required. One customer accounted for
17% and 12% of the Company's net sales for the years ended July 31,
1996 and 1997, respectively.
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.
ROYALTY ADVANCES
Licensing agreements for rights to future publications usually require
a non-refundable partial payment of the royalty in advance of the
publication. The Company charges royalty advances to expense in the
period during which the related sales are recorded. If it appears that
an advance will exceed total royalties to be incurred based upon
estimated sales, such excess is immediately expensed. Royalty advances
for publications to be published in excess of one year from the balance
sheet date are classified as non-current assets.
24
<PAGE>
(2), CONTINUED
PLANT COSTS
Plant costs consisting of plates, photo engraving, separations, and
other text costs of unpublished books are amortized over three to five
years from publication date or the estimated remaining life, if
shorter. Plant costs at July 31, 1996 and 1997 are presented net of
accumulated amortization of $979,000 and $1,834,000, respectively.
ADVERTISING COSTS
Advertising costs are expensed in the periods in which the costs are
incurred. Catalog costs consisting of the costs of producing and
distributing catalogs and costs of complimentary copies are expensed
ratably over the year in which the costs are incurred in relation to
sales. Advertising expense for the years ended July 31, 1996 and 1997
was $328,000 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 of the company acquired on February 23, 1994. For financial
reporting purposes, the excess of cost over the fair value of net
assets acquired is amortized over 20 years using the straight-line
method. Accumulated amortization at July 31, 1996 and 1997 is $446,000
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
25
<PAGE>
(2), CONTINUED
temporary differences are expected to be realized or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE
Earnings (loss) per share are net earnings (loss) less the dividend
requirements on preferred stock, divided by the weighted average number
of common stock outstanding for the periods. Per share data does not
assume the exercise of common stock options issued under the
non-qualified 1994 Stock Option Plan, the Underwriter's Purchase Option
or the exercise of the warrants issued in conjunction with the Bridge
financing (note 12) because the effects of such exercise would have
been antidilutive. Per share data reflects the reverse stock split
effected on August 29, 1996 described in note 12.
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 permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standard No. 128,
"Earnings per Share" was issued. The statement sets forth guidance on
the presentation of earnings per share and requires dual presentation
of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if all common stock
equivalents were exercised (similar to fully diluted earnings per share
under APB Opinion No. 15). The new standard will not have a significant
effect on earnings per share. The Company is required to adopt the new
standard in the second quarter of fiscal 1998.
26
<PAGE>
(2), CONTINUED
In June 1997, Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" and No. 131, "Disclosures about
Segments of an Enterprise and Related Information" were issued. SFAS
No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. The Company does not expect comprehensive income to be
materially different from net income reported under existing generally
accepted accounting principles. SFAS No. 131 establishes standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders which is currently
not required. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company is required to adopt both new standards in the first quarter of
fiscal 1999.
Other pronouncements issued by the FASB or other authoritative
accounting standard groups with future effective dates either are not
applicable or are not significant to the financial statements of the
Company.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenue and expenses during the
reported periods. Actual results could vary from the estimates and
assumptions used in the preparation of the accompanying financial
statements.
(3) FIXED ASSETS
Fixed assets at July 31, 1996 and 1997 consist of the following:
1996 1997
---- ----
Office furniture and equipment $ 125,000 126,000
Computers 241,000 289,000
Telecommunication equipment 33,000 33,000
Leasehold improvements 28,000 43,000
--------- ----------
427,000 491,000
Accumulated depreciation (157,000) (235,000)
--------- ----------
$ 270,000 256,000
========= ==========
27
<PAGE>
(4) NOTES PAYABLE TO BANKS
On December 14, 1995, the Company entered into a revolving line of
credit agreement with a bank that provided for borrowings up to
$2,700,000. The proceeds of the new line of credit were used to pay off
the $2,000,000 outstanding principal balance of a previous note. The
line of credit expires on December 14, 1998 and provides for an
interest rate at the bank's base rate plus .5% (8.75% and 9% at July
31, 1996 and 1997, respectively). On June 17, 1997 the bank increased
the available line of credit to $4,000,000. At July 31, 1996, the
amount outstanding under this credit agreement was $2,742,000. At July
31, 1997 there was no outstanding balance under this credit agreement.
Advances under this line of credit are collateralized by substantially
all of the assets of the Company. The revolving line of credit contains
various covenants which include, among other things, a minimum tangible
net worth requirement. The revolving line of credit prohibits the
Company from the declaration or payment of dividends on common stock.
(5) SHAREHOLDER NOTES
On April 15, 1996, the Company issued interest-bearing promissory notes
to certain shareholders for an aggregate of $500,000. The notes carried
interest at 10% and were converted into units sold by the Company as
part of the private placement bridge offering completed by the Company
on August 29, 1996 as described in note 12.
(6) INCOME TAXES
No Federal or state income taxes have been provided for the years ended
July 31, 1996 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, 1996 and 1997
as follows:
1996 1997
---- ----
Computed "expected" income tax benefit $ (158,000) (292,000)
State and local income taxes, net of
Federal benefit (18,000) (17,000)
Increase in valuation allowance 171,000 292,000
Nondeductible expenses 5,000 17,000
--------- ---------
Provision for income taxes $ - -
========= =========
28
<PAGE>
(6), CONTINUED
The tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that
give rise to the deferred tax assets and deferred tax liabilities at
July 31, 1996 and 1997 are the following:
1996 1997
---- ----
Deferred tax assets:
Accounts receivable allowances $ 125,000 173,000
Inventory reserves 104,000 180,000
Accruals not currently deductible 17,000 -
Plant costs 230,000 155,000
Net operating loss carryforwards 368,000 638,000
--------- ---------
844,000 1,146,000
Less: Valuation allowance 779,000 1,071,000
--------- ---------
Net deferred tax asset 65,000 75,000
Deferred tax liabilities:
Goodwill amortization (56,000) (65,000)
Fixed asset depreciation (9,000) (10,000)
--------- ---------
(65,000) (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 $1,071,000 at July 31, 1997. The Company's tax net
operating loss carryforward of approximately $1,680,000 at July 31,
1997 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.
(7) STOCK OPTION PLAN
The Company has reserved 475,000 shares of common stock under its
non-qualified 1994 Stock Option Plan ("Option Plan") which provides
that a committee, appointed by the Board of Directors, may grant stock
options to eligible employees,
29
<PAGE>
(7), CONTINUED
officers of the Company or its affiliates. The number of shares
reserved for issuance is adjusted in accordance with the provisions of
the Plan. All stock options granted by the Company expire seven years
after the grant date. 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, 1996 and 1997 there were options outstanding for 285,500
shares and 438,500 shares, respectively, under the Option Plan.
The per share weighted-average fair value of stock options granted
during 1996 and 1997, calculated in accordance with SFAS No. 123, was
$2.38 and $2.51 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1996 - expected volatility 40%, risk-free interest rates ranging from
5.6% to 6.2%, and an expected life of 7 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 loss would have increased to the pro forma amounts
indicated below:
1996 1997
---- ----
Net loss As reported $ (463,000) (858,000)
Pro forma (473,000) (1,199,000)
Loss per share (primary
and fully diluted) As reported (1.09) (.46)
Pro forma (1.11) (.60)
Pro forma net loss reflects only options granted in 1996 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.
30
<PAGE>
(7), CONTINUED
Stock Option Plan activity during the periods indicated is as follows:
Number of Weighted-average
Shares Exercise Price
Balance at July 31, 1995 245,500 $ 8.00
Granted 40,000 8.00
Exercised - -
Forfeited - -
Expired - -
---------
Balance at July 31, 1996 285,500 8.00
Granted 463,500 4.78
Cancelled (310,500) 8.00
Exercised - -
Forfeited - -
Expired - -
---------
Balance at July 31, 1997 438,500 $ 4.60
=========
At July 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $4.50 - $6.075
and 4.7 years, respectively.
At July 31, 1996 and 1997, the number of options exercisable was
107,000 and the weighted-average exercise price of those options was
$8.00 and $4.50, respectively.
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.
(8) 401(K) PROFIT SHARING PLAN
The Company maintains a Non-standardized Prototype Cash or Deferred
Profit Sharing 401(k) Plan ("Plan"). Participation in the Plan by
employees requires that they complete six month of service for the
Company and attain 21 years of age. Employees on the Plan's effective
date did not have to satisfy the 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, 1996 and 1997.
31
<PAGE>
(9) COMMITMENTS
The Company leases office facilities under operating leases which
expire at various dates through 2004. The leases are subject to
escalation clauses as they relate to certain expenses of the lessor,
i.e., utilities and real estate taxes.
Minimum future rental payments under non-cancelable operating leases
having initial or remaining terms in excess of one year are as follows:
Year ending
July 31 Amount
------- ------
1998 $ 133,000
1999 131,000
2000 134,000
2001 138,000
2002 142,000
Thereafter 108,000
---------------
$ 786,000
Rent expense for the years ended July 31, 1996 and 1997 were $126,000
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, 1996 and
1997 are $556,000 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, the first twelve being published in
January 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, 1997, the Company has advanced royalties in accordance with
this agreement of $361,000.
32
<PAGE>
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short term
maturity of these instruments.
NOTES PAYABLE
The carrying amount of these financial instruments approximates fair
values based on the fact that the related interest rates fluctuate with
market rates.
(11) PREFERRED STOCK
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. The
preferred stock may be issued by the Board of Directors on such terms
and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders. No preferred shares
were issued or outstanding at July 31, 1997.
At July 31, 1996 dividends in arrears amounted to $1,490,000 ($317 per
share).
(12) CAPITAL STRUCTURE
On February 23, 1994 the Company sold 4,700 shares of preferred stock
and 715,684 shares of common stock for a total of $6,700,000 and used a
portion of such proceeds to acquire substantially all of the net assets
related to the business of the Company. In conjunction with the
acquisition, the purchase price was allocated as follows:
Cash paid, including acquisition costs $ 3,025,000
Fair value of liabilities assumed 6,384,000
-----------
Total purchase price 9,409,000
Less: Fair value of assets acquired 5,718,000
-----------
Costs in excess of fair value of net assets acquired $ 3,691,000
===========
Also on February 23, 1994, the Company repaid acquired debt payable to
Societe Generale in the amount of $4,911,000.
33
<PAGE>
(12), CONTINUED
During fiscal 1995 and June 1994, the Company sold 232,968 and 77,656
shares of common stock for $1,500,000 and $500,000, respectively. Of
the 232,968 shares sold, 77,656 were sold to The Archon Press through
the transaction described below.
Concurrent with the agreement with Aladdin Books, detailed in note 9,
The Archon Press, an Aladdin affiliated company, agreed to invest
$500,000 in The Millbrook Press. This investment was received over a
period of months in fiscal 1995. Archon currently owns 77,656 common
shares (2.25%) of the Company.
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 $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.
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 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.
34
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 1997 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 1997 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 1997 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 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year.
35
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
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 September 27, 1996, by and between
the Company and Jeffrey Conrad.
**10.2 Amendment dated as of December 13, 1996 to the Employment
Agreement by and between the Company and Jeffrey Conrad.
**10.3 Employment Agreement, dated as of December 12, 1996, by and between
the Company and Jean E. Reynolds.
**10.4 Consulting Agreement, dated as of December 13, 1996, by and between
the Company and Farrell Associates, Inc.
**10.5 Consulting Agreement, dated as of December 13, 1996, by
and between the Company and Graham International
Publishing and Research, Inc.
**10.6 Form of Indemnification Agreement between each of the Officers and
Directors of the Company and the Company.
**10.7 Agreement of Lease, dated September 27, 1994, by and between the
Company and Arnold S. Paster.
**10.8 Agreement of Lease, dated March 26, 1996, by and between
the Company and Land First II Group.
**10.9 Agreement of Lease and rider attached thereto, dated
February 15, 1996, by and between the Company and Ninety
- Five Madison Company.
**10.10 1994 Stock Option Plan, as amended.
36
<PAGE>
**10.11 Loan and Security Agreement, dated as of December 14, 1995, between
People's Bank and the Company.
**10.12 Agreement made effective as of August 1, 1996 by and between Aladdin
Books Limited and the Company.
*10.13 Employment Agreement, dated as of January 20, 1997, by and between
the Company and Satish Dua.
*27 Financial Data Schedule.
- ------------------
* Filed herewith
** Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(No. 33-14631)
REPORTS ON FORM 8-K
None.
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE MILLBROOK PRESS INC.
Dated: October 29, 1997 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, 1997
- ------------------------- Chief Executive Officer
Jeffrey Conrad (Principal Executive
Officer)
/S/ SATISH DUA Chief Financial Officer October 29, 1997
- ------------------------- (Principal Financial
Satish Dua Officer and Principal
Accounting Officer)
/S/ HOWARD GRAHAM Chairman of the Board October 29, 1997
- -------------------------
Howard Graham
/S/ FRANK J. FARRELL Director October 29, 1997
- --------------------------
Frank J. Farrell
Director October , 1997
- --------------------------
Barry Fingerhut
Director October , 1997
- --------------------------
Barry Rubenstein
/S/ HANNAH STONE Director October 29, 1997
- --------------------------
Hannah Stone
38
Satish Dua
The Millbrook Press Inc.
2 Old New Milford Road
Brookfield, CT 06804
Dear Satish,
This letter will serve as a memorandum of agreement regarding your employment by
the Millbrook Press, Inc.
This agreement is effective January 20, 1997, and covers your employment as
Chief Financial Officer.
The term of employment of this contract is two years. This contract may be
terminated by either party without cause upon one hundred and twenty days
written notice.
You will be paid a base salary of $100,000. You will earn a bonus of $15,000 if
Millbrook achieves or betters both it's budgeted operating profit as a percent
of net sales and net income as a percentage of net sales.
You will be granted as of the commencement of your employ, January 20, 1997, a
stock option to purchase 25,000 shares of Millbrook's common stock. The exercise
price for each share will be $5.53. The option will become exercisable for one
fifth of the shares on the first anniversary of the grant and one fifth on
subsequent anniversary dates.
You will be eligible to participate in the current benefits program at
Millbrook. The employee understands that there is no guaranty that the current
benefits program will remain in effect but the Employee shall be entitled to
participate in the employee benefits of the Company as it may change from time
to time.
You agree that you will abide by all policies, rules and regulations of the
Company now and hereafter in effect, and that you personally will conform with
and will cause all
<PAGE>
others under your direction and control to conform with such policies, rules and
regulations.
In the event of termination of this agreement by reason of the expiration of its
term or otherwise, you agree that you will not, during a period of twelve months
thereafter, either directly or indirectly, induce or attempt to induce any of
the personnel of the Company or of its affiliates to terminate their employment
or association. In the event of a breach of the foregoing on your part, the
Company shall have the right to cancel all unpaid compensation which has accrued
or which may thereafter accrue to your credit.
Any controversy or claim arising out of or relating to this agreement, or the
breach thereof, shall be settled by arbitration in accordance with the Rules of
the American Arbitration Association, and any hearings in connection with such
arbitration shall be held in New York City. Judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
Sincerely,
Jeffrey Conrad
President
Accepted: _________________________________________Date:_______________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements as of July 31, 1997 and is qualified
in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> $323,000
<SECURITIES> $0
<RECEIVABLES> $3,280,000
<ALLOWANCES> $456,000
<INVENTORY> $4,935,000
<CURRENT-ASSETS> $9,023,000
<PP&E> $256,000
<DEPRECIATION> $0
<TOTAL-ASSETS> $15,769,000
<CURRENT-LIABILITIES> $2,470,000
<BONDS> $0
<COMMON> $17,591,000
$0
$0
<OTHER-SE> $0
<TOTAL-LIABILITY-AND-EQUITY> $15,769,000
<SALES> $12,753,000
<TOTAL-REVENUES> $12,753,000
<CGS> $6,738,000
<TOTAL-COSTS> $6,738,000
<OTHER-EXPENSES> $6,496,000
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $197,000
<INCOME-PRETAX> ($1,142,000)
<INCOME-TAX> $0
<INCOME-CONTINUING> ($1,142,000)
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> ($1,142,000)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
