-----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, Hu95cp0vh1twUH+g88v7Vw8q89YvxTcdZZJfyaab/6Np9hojgx4kDzoxqzILfntQ 8URG2gTlrXgaUxOtLIe95Q== 0000892569-99-003076.txt : 19991117 0000892569-99-003076.hdr.sgml : 19991117 ACCESSION NUMBER: 0000892569-99-003076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVISUAL BOOKS INC /CA CENTRAL INDEX KEY: 0000879813 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 922929217 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10916 FILM NUMBER: 99753197 BUSINESS ADDRESS: STREET 1: 2716 OCEAN PARK BLVD STREET 2: SUITE 2020 CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3103968708 MAIL ADDRESS: STREET 1: 2716 OCEAN PARK BLVD SUITE 2020 CITY: SANTA MONICA STATE: CA ZIP: 90405 10-Q 1 FORM 10-Q DATED 09/30/1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT OR TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ______________________ to _____________________ Commission File Number: 1-10916 INTERVISUAL BOOKS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-2929217 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2716 Ocean Park Boulevard, Suite 2020 Santa Monica, California 90405 - -------------------------------------- ------------------- Address of principal executive offices Zip Code Registrant's telephone number, including area code: (310) 396-8708 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of September 30, 1999, there were 5,885,115 shares of common stock outstanding. 2 INTERVISUAL BOOKS, INC. TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - September 30, 1999, and December 31, 1998 1 Statements of Operations - Three and Nine months ended September 30, 1999 and 1998 2 Statements of Cash Flows - Nine months ended September 30, 1999 and 1998 3 Notes to Financial Statements - September 30, 1999 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11
i 3 INTERVISUAL BOOKS, INC. BALANCE SHEETS (In thousands)
9/30/99 12/31/98 ------------- ------------ (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 372 $ 1,561 Accounts receivable, less allowances of $115 and $175 7,510 2,246 Inventories 2,129 1,634 Prepaid expenses 136 159 Commission and royalty advances 527 352 Income taxes receivable -- 117 Other current assets 196 206 -------- -------- Total current assets 10,870 6,275 Production costs, net of accumulated amortization of $16,649 and $15,721 3,435 3,427 Goodwill 1,559 -- Acquisition costs 342 83 Other assets 13 -- Property and equipment, net of accumulated depreciation of $1,634 and $952 308 187 Deferred income taxes 513 443 -------- -------- $ 17,040 $ 10,415 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 7,493 3,131 Line of credit 1,605 1,700 Accrued royalties 210 282 Accrued expenses 164 226 Customer deposits 440 68 -------- -------- Total current liabilities 9,912 5,407 Long term debt 2,200 -- Other liabilities-long term 197 85 -------- -------- TOTAL LIABILITIES 12,309 5,492 -------- -------- Stockholders' Equity: Preferred stock, shares authorized 3,000,000, none issued -- -- Common stock, no par value; shares authorized 12,000,000, shares issued and outstanding 5,885,115 at September 30, 1999 and 5,164,531 at December 31, 1998 5,290 4,731 Additional paid in capital 367 330 Retained deficit (926) (138) -------- -------- TOTAL STOCKHOLDERS' EQUITY 4,731 4,923 -------- -------- $ 17,040 $ 10,415 ======== ========
See accompanying notes to financial statements 1 4 INTERVISUAL BOOKS, INC. STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Quarter Ended Sept. 30, 9 Months Ended Sept. 30, ------------------------ ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Net sales $ 6,598 $ 3,537 $ 11,875 $ 8,274 Rights income 28 53 221 256 -------- -------- -------- -------- Total revenues 6,626 3,590 12,096 8,530 Cost of sales 5,064 2,920 9,246 6,672 -------- -------- -------- -------- Gross profit 1,562 670 2,850 1,858 Selling, general and administrative expenses 1,402 1,035 3,481 3,333 -------- -------- -------- -------- Income (loss) from operations 160 (365) (631) (1,475) Interest expense (84) (23) (185) (26) -------- -------- -------- -------- Income (loss) before income taxes 76 (388) (816) (1,501) Income tax benefit -- (94) (70) (397) -------- -------- -------- -------- Net income (loss) $ 76 $ (294) $ (746) $ (1,104) ======== ======== ======== ======== Loss per common share Basic $ 0.01 $ (0.06) $ (0.13) $ (0.22) ======== ======== ======== ======== Diluted $ 0.01 $ (0.06) $ (0.13) $ (0.22) ======== ======== ======== ======== Weighted average number of common shares and equivalents outstanding: Basic 5,885 5,138 5,549 5,094 ======== ======== ======== ======== Diluted 5,885 5,138 5,549 5,094 ======== ======== ======== ========
See accompanying notes to financial statements. 2 5 INTERVISUAL BOOKS, INC. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (In thousands)
Nine Months Ended Sept. 30, ---------------------- 1999 1998 -------- ------- (Unaudited) Cash flows from operating activities: Net loss $ (746) $(1,103) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,038 858 Provision for losses on accounts receivable -- 39 Provision for abandoned titles 28 27 Excess fair market value over book value of assets acquired -- (3) Deferred income taxes (70) -- Stock-based compensation expense 37 -- Increase (decrease) from changes in: Accounts receivable (3,346) 762 Inventories (495) (1,179) Prepaid expenses 62 (291) Royalty advances 31 (63) Other assets 127 -- Accounts payable 1,261 (1,107) Accrued royalties (111) (136) Accrued expenses (155) (99) Income taxes payable -- (130) Customer deposits 372 36 Other liabilities (38) -- ------- ------- Net cash used in operating activities (2,005) (2,389) ------- ------- Cash flows from investing activities: Additions to property and equipment (29) (30) Additions to leasehold improvements -- (5) Additions to production costs (897) (963) Additions to acquisition costs (283) (47) ------- ------- Net cash used in investing activities (1,209) (1,045) ------- ------- Cash flows from financing activities: Cash acquired in acquisition 305 -- Proceeds from exercise of options 70 69 Proceeds from subordinated line of credit 2,200 -- Proceeds from bank line of credit 950 1,700 Repayment on bank line of credit (1,500) -- ------- ------- Net cash provided by financing activities 2,025 1,769 ------- ------- Net decrease in cash and cash equivalents (1,189) (1,665) Cash and cash equivalents, beginning of period 1,561 2,383 ------- ------- Cash and cash equivalents, end of period $ 372 $ 718 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 1 $ 153 Interest expense 185 26
See accompanying notes to financial statements. 3 6 NOTES TO FINANCIAL STATEMENTS September 30, 1999 (unaudited) Note 1 - Statement of Information Furnished In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting only of normal and recurring accruals) necessary to present fairly the financial position as of September 30, 1999, and the results of operations for the three and nine month periods ended September 30, 1999, and cash flows for the nine month period ended September 30, 1999 and 1998. These results have been determined on the basis of generally accepted accounting principles and practices applied consistently with those used in the preparation of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The results of operations for the three and nine month periods ended September 30, 1999, are not necessarily indicative of the results to be expected for any other period or for the entire year. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Note 2 - Loss Per Common Share The Company computes loss per common share under SFAS No. 128, "Earnings Per Share," which requires presentation of basic and diluted earnings (loss) per share. Basic earnings (loss) per common share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if securities or other contracts, such as stock options, to issue common stock were exercised or converted into common stock. Common stock options for the three and nine months ended September 30, 1999 and 1998 were not included in the computation of diluted loss per common share because the effect would be antidilutive. 4 7 Note 3 - Fast Forward Marketing Acquisition On May 14, 1999, the Company completed the acquisition of Fast Forward Marketing, Inc., (Fast Forward). The transaction was completed under the terms and conditions of a definitive agreement signed March 29, 1999. Under this agreement, the Company acquired all the outstanding shares of Fast Forward for 670,000 shares of its common stock, a contingent cash payment of up to $200,000 due May 1, 2000, and a cash payment of $150,000 due May 1, 2001 subject to reduction for the payment by the Company of certain tax withholdings. The contingent cash payment of up to $200,000 or a lesser prorated amount is due if Fast Forward achieves between 70% and 90% of its 1999 projected gross margin, provided a minimum gross margin requirement is met. Of the 670,000 shares issued, 594,940 are restricted for three years so that no more than 10% can be sold in any one year. The remaining 75,060 shares were issued to certain employees under a pre-existing Fast Forward Phantom Stock Plan. The transferability of these shares is restricted for the period the employee remains with the Company or three years whichever is less. In connection with the acquisition of Fast Forward, The Hunt Family Trust agreed to vote its shares in favor of the election to the Company's Board of Directors of Steven Ades and a second nominee, mutually acceptable to the Company and Mr. Ades, for as long as Mr. Ades is employed by the Company. This transaction has been accounted for as a purchase. On May 14, 1999, the Company issued shares valued at $489,000 and agreed to a contingent cash payment of up to $200,000 and an additional $150,000 payment both due at a later date in exchange for the net book value of Fast Forward of ($957,000). This resulted in goodwill of $1,596,000 which is being amortized over the estimated useful life of 20 years. Note 4 - Lines of Credit The Company signed an agreement with its bank on May 12, 1999 and later amended effective September 30, 1999 that provides for borrowings up to a maximum of $2,000,000 depending on availability. This agreement which expires on May 1, 2000 has an interest rate of 2.5% over prime. The Company also on May 12, 1999 signed a loan agreement with a private party that provides a revolving line of credit of up to $2,300,000. This agreement is for one year and has an interest rate of 5% above the 3-month LIBOR rate. At the Company's option, this agreement can be extended for an additional year under the same terms and conditions. If the Company decides to extend this line of credit, the agreement requires that warrants for up to 150,000 shares of the Company's common stock to be issued. These warrants are exercisable for up to two years after the issue date at a price equal to the average trading price of the Company's stock for the 20 day period prior to the Company's notice to extend the loan agreement. The Company expects to extend this loan for an additional year and has reclassified the related debt to long term debt. In both credit agreements, the Company makes affirmative and negative covenants and the agreement with the Company's bank contains certain financial covenants. As of September 30, 1999, the Company was in compliance with all financial covenants as amended. In connection with both agreements, the Company granted to the lenders a security interest in all of its assets. As of September 30, 1999, the Company had borrowings of $1,605,000 under its bank line of credit and $2,200,000 of borrowings under its revolving line of credit. Note 5 - Accounts Receivable and Payable Fast Forward has an agreement with its customers and suppliers that allows for returns of merchandise. Accordingly, a reserve for accounts receivable and payable has been provided. The reserve accounts require the use of significant estimates. Fast Forward believes the techniques and assumptions used in establishing the reserve accounts are appropriate. At September 30, 1999, Fast Forward recorded a reserve for returns against accounts receivable of $201,000 and a reserve for returns against accounts payable for $174,000. 5 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Intervisual Books, Inc. (the "Company") creates and produces interactive and three-dimensional books designed for children and adults. These products include picture books, playsets, board books and gift books. The Company's books incorporate dimensional and moveable features which require hand-assembly in the manufacturing process. Some titles require the incorporation of such materials as plush, plastic novelty elements and electronic audio chips into the finished books. The majority of the Company's concepts and ideas for projects are generated internally by the in house creative and editorial departments. Additional ideas and concepts are conceived by the illustrators and designers with whom the Company has been associated for many years. After the Company conceives an idea and makes a dummy book, key US and foreign publishers are consulted to determine if they are interested in publishing and marketing the book. If an agreement is reached, the Company and the publisher sign a co-publishing contract which stipulates that the publisher will purchase the title with exclusive rights to sell books in the English language to the book trade for generally a two to four year period. The Company also self-publishes titles and offers the books directly to retailers. The recent acquisition of Fast Forward Marketing, Inc. (see Note 3) brings to the Company a trained sales force which will enhance the Company's ability to sell and service retailers. As a result of the Fast Forward acquisition, the Company also distributes video and audio products for major motion picture studios, including Walt Disney, Warner Bros., Universal, Paramount, 20th Century Fox, and many independent producers. Since its founding in 1987, Fast Forward has built an account base of more than 4,000 retailers, including national chains such as Toys R Us, Blockbuster, Target, Borders, Musicland and Best Buy, as well as specialty retailers such as Zany Brainy, Store of Knowledge, Noodle Kidoodle, Books A Million and other children's bookstores, gift shops, museums, zoos and Internet retailers such as E-Toys. Until the end of 1999, the Company will also market its products to retailers using the services of Andrews McMeel, a leading US publisher/distributor located in Kansas City. Andrews McMeel handles sales, collection, billing, warehousing and order fulfillment functions. Effective January 1, 2000, all sales, collections, and billing will be brought in house, while warehousing and order fulfillment will be handled by Ware-Pak, an independent company located in University Park, Illinois. The market for packaged books has gone through recent changes which has made it more difficult for the Company to generate co-editions. In the past five years, there has been a consolidation trend in the US publishing industry that has reduced the number of the Company's customers. Many of the surviving children's imprints are still consolidating, which is continuing to have a negative impact on the size and frequency of their orders. This trend has been a major factor in the Company's decision to self-publish. The Company's self-publishing program is gaining consumer acceptance, indicating its interactive books and playsets are still in demand. The Company does not engage in any of its own printing, binding, hand assembly, or manufacturing. These services are contracted for with independent printers in Colombia, Singapore, Hong Kong and Thailand. The Company supplies its printers with artwork, color-separated materials and complete sample materials to serve as guides for hand-assembly. 6 9 On May 14, 1999, the Company completed the acquisition of Fast Forward Marketing, Inc., (Fast Forward). The transaction was completed under the terms and conditions of a definitive agreement signed March 29, 1999. Under this agreement, the Company acquired all the outstanding shares of Fast Forward for 670,000 shares of its common stock, a contingent cash payment of up to $200,000 due May 1, 2000, and a cash payment of $150,000 due May 1, 2001 subject to reduction for the payment by the Company of certain tax withholdings. The contingent cash payment of up to $200,000 or a lesser prorated amount is due if Fast Forward Marketing achieves between 70% and 90% of its 1999 projected gross margin, provided a minimum gross margin requirement is met. Of the 670,000 shares issued, 594,940 are restricted for three years so that no more than 10% can be sold in any one year. The remaining 75,060 shares were issued to certain employees under a pre-existing Fast Forward Phantom Stock Plan. The transferability of these shares is restricted for the period the employee remains with the Company or three years, whichever is less. In connection with the acquisition of Fast Forward, The Hunt Family Trust agreed to vote its shares in favor of the election to the Company's Board of Directors of Steven Ades and a second nominee, mutually acceptable to the Company and Mr. Ades, for as long as Mr. Ades is employed by the Company. This transaction was accounted for as a purchase. On May 14, 1999, the Company issued shares valued at $489,000 and agreed to a contingent cash payment of up to $200,000 and an additional $150,000 payment both due at a later date in exchange for the net book value of Fast Forward Marketing of ($957,000). This resulted in goodwill of $1,596,000 which is being amortized over the estimated useful life of 20 years. RESULTS OF OPERATIONS Net sales for the three and nine month period ended September 30, 1999 were $6,598,000 and $11,875,000, respectively, as compared to $3,537,000 and $8,274,000 for the comparable periods of the preceding year. Sales were up $3,061,000 and $3,601,000, respectively, for the three and nine month periods ended September 30, 1999 as compared to the prior year. Domestic sales of book products were up $250,000 and $268,000, respectively, for the quarter and nine month periods, while foreign sales were up $196,000 for the quarter and down $307,000 for the nine month period. Included in the three and nine month figures were $2,614,000 and $3,639,000, respectively, of video sales from the newly acquired Fast Forward Marketing. Rights income for the three and nine month periods of 1999 were $28,000 and $221,000, respectively, as compared to $53,000 and $256,000 for the same periods of the prior year. This income is primarily derived from the Company's sale of worldwide direct marketing rights on some of its products. These sales do not require that the Company manufacture, and, therefore, have no related cost. Gross profit margin for both the three and nine month periods ended September 30, 1999 was 23.6% as compared to 18.7% and 21.8% for the same periods of the prior year. Cost of sales consists primarily of manufacturing, book development amortization and royalties. Improved margins were a result of the Company's ongoing efforts to get better prices from its customers and lower costs from its printers. Selling, general and administrative expenses for the three and nine month periods ended September 30, 1999 were $1,402,000 and $3,481,000, respectively, as compared to $1,035,000 and $3,333,000, respectively, for the comparable periods of the prior year. Included in the three and nine month periods of 1999 were $541,000 and $837,000, respectively, of overhead expenses from Fast Forward Marketing 7 10 which were not in last year's figures. Personnel expenses, a major component of S G & A, were $772,000 and $1,881,000 for the three and nine month periods ended September 30, 1999, as compared to $484,000 and $1,663,000 for the same periods of 1998, an increase of $218,000 for the nine month period. This increase can be attributed primarily to salary and staff reductions and the expiration of a consulting agreement totalling $431,000 offset by the inclusion of $649,000 in salary related expenses from Fast Forward Marketing. Selling expenses were $391,000 and $899,000 for the three and nine month periods ended September 30, 1999, as compared to $302,000 and $894,000 for the same periods of 1998, an increase of $5,000 for the nine month period. This increase is primarily related to lower distribution costs relating to the Company's self-publishing efforts and lower travel and show expenses, partially offset by increased expenses relating to the addition of a UK sales representative, as well as the addition of selling related expenses from Fast Forward Marketing in the amount of $95,000. The Company's administrative expenses were $239,000 and $701,000 for the three and nine month periods ended September 30, 1999, as compared to $249,000 and $776,000 for the same periods of 1998, a decrease of $75,000 for the nine month period. This decrease for the nine months was primarily related to a reduction in the allowance for uncollectible accounts offset by the additional expenses from Fast Forward Marketing which were not included in last year's figures. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased by $1,189,000 to $372,000 at September 30, 1999 from $1,561,000 at December 31, 1998. At September 30, 1999, working capital was $958,000 compared to $868,000 at December 31, 1998. The primary use of cash during the nine months ended September 30, 1999 was from operations. Net cash used in operations was $2,005,000 for the nine months ended September 30, 1999 as compared to $2,389,000 for the corresponding period of the previous year. The $384,000 change in cash from operations for the first nine months of 1999 was primarily attributable to increases in net operating loss, accounts receivable, inventories and accounts payable. Net cash used in investing activities amounted to $1,209,000 as compared $1,045,000 during the same period in 1998. This increase in cash used is primarily from costs incurred resulting from the acquisition of Fast Forward Marketing in May of 1999. Net cash provided by financing activities was $2,025,000 in 1999 as compared to $1,725,000 for the same period in 1998. This increase in cash provided is primarily from borrowing on the Company's line of credit from a private party and additional borrowing from its bank. The Company signed an agreement with its bank on May 12, 1999 and later amended effective September 30, 1999 that provides for borrowings up to a maximum of $2,000,000 depending on availability. This agreement which expires on May 1, 2000 has an interest rate of 2.5% over prime. The Company also on May 12, 1999 signed a loan agreement with a private party that provides a revolving line of credit of up to $2,300,000. This agreement is for one year and has an interest rate of 5% above the 3-month LIBOR rate. At the Company's option, this agreement can be extended for an additional year under the same terms and conditions. If the Company decides to extend this line of credit, the agreement requires that warrants for up to 150,000 shares of the Company's common stock to be issued. These warrants are exercisable for up to two years after the issue date at a price equal to the average trading price of the Company's stock for the 20 day period prior to the Company's notice to extend the loan agreement. The Company expects to extend this loan for an additional year and has reclassified the related debt to long term debt. In both credit agreements, the Company makes affirmative and negative covenants and the 8 11 agreement with the Company's bank contains certain financial covenants. As of September 30, 1999, the Company was in compliance with all financial covenants as amended. In connection with both agreements, the Company granted to the lenders a security interest in all of its assets. As of September 30, 1999, the Company had borrowings of $1,605,000 under its bank line of credit and $2,200,000 of borrowings under its revolving line of credit. As of November 1, 1999, the Company did not have any commitments for any material capital expenditures for the remainder of 1999 or beyond. Management of the Company believes that the existing levels of funds and its ability to borrow on its lines of credit, combined with the Company's ability to generate cash, are adequate to finance current and expected levels of activity as well as anticipated capital expenditures of the Company for at least the next twelve months. YEAR 2000 MODIFICATIONS The Company has reviewed its computer systems to evaluate the extent to which modifications are necessary to insure year 2000 compliance. The Company has upgraded its accounting software for year 2000 compliance, as well as other software programs. All other computer upgrades and modifications needed for year 2000 compliance have been completed. The total expenditures to date have been minimal and are not estimated to have exceeded $20,000. Given the nature of the Company's products, the Company believes that its products do not pose year 2000 compliance issues. As with virtually all companies, the Company relies to some degree, directly and indirectly, on external computer systems utilized by the Company's suppliers, and the Company is reviewing the impact that any failure by these third parties to resolve their year 2000 problems might have on the business of the Company. This Report on Form 10-Q contains forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in this Section and in this entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business and economic conditions; and changes in government laws and regulations, including taxes. Item 3. Quantitative and Qualitative Disclosures About Market Risk All sales by the Company are denominated in US dollars and, accordingly, the Company does not enter into hedging transactions with regard to any foreign currencies. Currency fluctuations can, however, increase the price of the Company's products to its foreign customers which can adversely impact the level of the Company's export sales from time to time. The majority of the Company's cash equivalents are bank accounts and money markets, and the Company does not believe it has significant market risk exposure with regard to its investments. 9 12 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders The Annual Meeting of Shareholders of Intervisual Books, Inc. was held on August 4, 1999 and several matters were put to a vote. The issues and the results are as follows: Abstentions Withhold Votes Cast For Votes Cast Against Authority -------------- ------------------ ----------- (1) To elect eight directors to serve until the next annual meeting of shareholders and until their successors are chosen. Waldo H. Hunt 5,472,923 0 14,250 Nathan N. Sheinman 5,475,973 0 11,200 Dan P. Reavis 5,477,723 0 9,450 Steven D. Ades 5,477,723 0 9,450 Dr. Neil Berkman 5,477,323 0 9,850 Gordon Hearne 5,474,173 0 13,000 Leonard W. Jaffe 5,474,173 0 13,000 John J. McNaughton 5,474,173 0 13,000 (2) Proposal to approve Amended and Restated Articles of Incorporation. 4,131,425 35,713 2,560 (3) Proposal to approve 1999 Stock Option Plan. 4,117,175 49,263 3,260 (3) To ratify the selection of BDO Seidman, LLP, as independent auditors of the Company for 1999. 5,477,263 6,950 2,960 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K 3.1 -- Amended and Restated Articles of Incorporation 10.1 -- Amendment Agreement Number One to Loan and Security Agreement with Santa Monica Bank 27 -- Financial Data Schedule (b) Reports on Form 8-K None 10 13 SIGNATURES Pursuant to the requirements 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. INTERVISUAL BOOKS, INC. By: /s/ Nathan N. Sheinman -------------------------------- Nathan N. Sheinman, President Chief Operating Officer By: /s/ Dan P. Reavis -------------------------------- Dan P. Reavis Executive Vice President Chief Financial Officer Date: November 15,1999 11 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Amended and Restated Articles of Incorporation 10.1 Amendment Agreement Number One to Loan and Security Agreement with Santa Monica Bank 27 Financial Data Schedule EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTERVISUAL BOOKS, INC. Nathan N. Sheinman and Gail A. Thornhill certify that: 1. They are the President and the Secretary, respectively, of Intervisual Books, Inc., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated in their entirety to read as follows: I The name of this corporation is Intervisual Books, Inc. II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The total number of shares of all classes of stock which the corporation shall have the authority to issue is Fifteen Million (15,000,000), consisting of Twelve Million (12,000,000) shares of common stock ("Common Stock") and Three Million (3,000,000) shares of preferred stock ("Preferred Stock"). The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, powers (including voting powers), preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock and any other relative, participating, optional or other special powers, preferences, rights, and the qualifications, limitations or restrictions thereof, all as shall be determined from time to time by the Board of Directors and shall be stated in the resolution or resolutions providing for the issuance of such Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of any series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. 2 IV The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to this corporation and its shareholders. 3. The foregoing amendment and restatement of the Articles of Incorporation have been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of the Articles of Incorporation have been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of Common Stock of this corporation is 5,885,115. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: August 5, 1999 /s/ Nathan N. Sheinman ------------------------------ Nathan N. Sheinman, President /s/ Gail A. Thornhill ------------------------------ Gail A. Thornhill, Secretary 2 EX-10.1 3 AMENDMENT AGREEMENT NUMBER ONE TO LOAN 1 EXHIBIT 10.1 AMENDMENT AGREEMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT AGREEMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of September 30, 1999, is entered into between SANTA MONICA BANK, a California banking corporation ("SMB"), on the one hand, and INTERVISUAL BOOKS, INC., a California corporation ("IBI"), and FAST FORWARD MARKETING, INC., a California corporation formerly known as FFM ACQUISITION CORP. ("FFM"), on the other hand, and amends that certain Loan and Security Agreement, dated as of May 12, 1999, between Bank and Borrower (the "Agreement"). IBI and FFM are sometimes individually and collectively referred to as "Borrower." All terms which are defined in the Agreement shall have the same definition when used herein unless a different definition is ascribed to such term under this Amendment, in which case, the definition contained herein shall govern. This Amendment is entered into in light of the following facts: RECITALS WHEREAS, Borrower has requested that Bank amend certain of the financial covenants contained in the Agreement; WHEREAS, Bank has agreed to honor Borrower's request as set forth in this Amendment, provided, however, that Borrower acknowledges that Bank's agreement to amend certain of the financial covenants does not mean that Bank will agree to any other future amendments to the financial covenants contained in the Agreement. NOW, THEREFORE, the parties agree as follows: 1. The Agreement shall be amended by deleting Section 7.10B and replacing it with a new Section 7.10B as follows: B. Working Capital of not less than the following: Time Period Minimum Amount ----------- -------------- As of June 30, 1999 $500,000 As of September 30, 1999 $900,000 As of December 31, 1999 $750,000 As of March 31, 2000 $500,000 2. The Agreement shall be amended by deleting Section 7.10C and replacing it with a new Section 7.10C as follows: 2 C. Tangible Net Worth of not less than the following: Time Period Minimum Amount ----------- -------------- As of June 30, 1999 $4,400,000 As of September 30, 1999 $4,700,000 As of December 31, 1999 $4,800,000 As of March 31, 2000 $4,500,000 3. IBI and FFM each acknowledges and agrees that Bank shall have no obligation to agree to any future amendments of the Agreement, including, without limitation, any amendments of the financial covenants contained in Section 7.10 of the Agreement. 4. This Amendment shall be deemed effective as of the date first hereinabove written. Except as specifically amended herein, the Agreement shall remain in full force and effect without any other changes, amendments or modifications. IN WITNESS WHEREOF, Bank and Borrower have executed this Amendment. INTERVISUAL BOOKS, INC., a California corporation By /s/ Waldo H. Hunt ------------------------------------- Title: CEO FAST FORWARD MARKETING, INC., a California corporation By /s/ Dan Reavis ------------------------------------- Title: President SANTA MONICA BANK, a California banking corporation By /s/ Sam Kunianski ------------------------------------- Title: EVP EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS REPORTED ON FORM 10-Q. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 372 0 7,625 (115) 2,129 10,870 1,942 (1,634) 17,040 9,912 0 0 0 5,290 (559) 17,040 11,874 12,096 9,246 9,246 2,643 0 185 (710) (70) (640) 0 0 0 (640) (.12) (.12)
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