10-Q 1 e10-q.txt FORM 10-Q (06/30/2000) 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 June 30, 2000 [ ] 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 June 30, 2000, there were 5,937,883 shares of common stock outstanding. 2 INTERVISUAL BOOKS, INC. TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Balance Sheets - June 30, 2000, and December 31, 1999 1 Statements of Operations - Three and six months ended June 30, 2000 and 1999 2 Statements of Cash Flows - Six months ended June 30, 2000 and 1999 3 Notes to Consolidated Financial Statements - June 30, 2000 4 Item 2. Management's Discussion and Analysis of Financial Condition 6 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 9 PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 10 Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 10
i 3 INTERVISUAL BOOKS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
(unaudited) ASSETS 6/30/00 12/31/99 -------------- --------- --------- Current Assets: Cash and cash equivalents $ 637 $ 644 Accounts receivable, less allowances of $134 and $174 4,314 6,094 Inventories 1,943 1,779 Prepaid expenses 430 354 Commission & royalty advances 391 447 Other current assets 230 209 -------- -------- Total current assets 7,945 9,527 Production costs, net of accumulated amortization of $17,531 and $17,153 3,714 3,417 Goodwill 1,501 1,541 Acquisition costs 272 312 Property and equipment, net of accumulated depreciation of $1,734 and $1,668 245 265 Deferred income taxes 442 442 -------- -------- $ 14,119 $ 15,504 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,054 $ 6,242 Line of credit with bank 2,475 1,475 Accrued royalties 308 581 Accrued expenses 280 208 Customer deposits (50) 63 -------- -------- Total current liabilities 8,067 8,569 Long term debt 2,300 2,200 Other liabilities-long term 89 114 -------- -------- TOTAL LIABILITIES 10,456 10,883 -------- -------- 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 5,937,883 at June 30, 2000 and 5,915,617 at December 31, 1999 5,365 5,332 Additional paid in capital 402 373 Retained deficit (2,104) (1,084) -------- -------- TOTAL STOCKHOLDERS' EQUITY 3,663 4,621 -------- -------- $ 14,119 $ 15,504 ======== ========
See notes to consolidated financial statements. 1 4 INTERVISUAL BOOKS, INC. STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Three Months ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Net sales $ 4,523 $ 3,758 $ 8,253 $ 5,277 Rights income 48 190 68 193 ------- ------- ------- ------- Total revenues 4,571 3,948 8,321 5,470 Cost of sales 3,728 3,112 6,539 4,182 ------- ------- ------- ------- Gross profit 843 836 1,782 1,288 Selling, general and administrative expense 1,306 1,213 2,565 2,079 ------- ------- ------- ------- Loss from operations (463) (377) (783) (791) Interest expense (139) (62) (237) (101) ------- ------- ------- ------- Loss before income taxes (602) (439) (1,020) (892) Income tax benefit -- -- -- (70) ------- ------- ------- ------- Net loss $ (602) $ (439) $(1,020) $ (822) ======= ======= ======= ======= Loss per common share: Basic $ (0.10) $ (0.08) $ (0.17) $ (0.15) ======= ======= ======= ======= Diluted $ (0.10) $ (0.08) $ (0.17) $ (0.15) ======= ======= ======= ======= Weighted average number of common shares and equivalents outstanding: Basic 5,938 5,546 5,929 5,378 ======= ======= ======= ======= Diluted 5,938 5,546 5,929 5,378 ======= ======= ======= =======
See notes to consolidated financial statements. 2 5 INTERVISUAL BOOKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (In Thousands and Unaudited)
Six Months Ended June 30, Cash flows from operating activities: 2000 1999 ---------- -------- Net loss $(1,020) $ (822) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 541 588 Provision for losses on accounts receivable (40) -- Provision for abandoned titles 10 15 Deferred income taxes -- (70) Stock-based compensation expense 11 25 Increase (decrease) from changes in: Accounts receivable 1,820 (496) Inventories (164) (415) Prepaid expenses (76) 95 Royalty advances 56 60 Other current assets (21) 20 Accounts payable (1,188) (513) Accrued royalties (273) (155) Accrued expenses 72 (74) Customer deposits (113) 143 Other liabilities (25) (25) ------- ------- Net cash used in operating activities (410) (1,624) ------- ------- Cash flows from investing activities: Additions to property and equipment (45) (2) Additions to production costs (685) (594) Additions to acquisition costs . (260) ------- ------- Net cash used in investing activities (730) (856) ------- ------- Cash flows from financing activities: Cash acquired in acquisition -- 305 Proceeds from exercise of options 33 70 Proceeds from bank line of credit 1,000 -- Proceeds from subordinated line of credit 100 2,000 Repayment on bank line of credit -- (1,300) ------- ------- Net cash provided by financing activities 1,133 1,075 ------- ------- Net decrease in cash and cash equivalents (7) (1,405) Cash and cash equivalents, beginning of period 644 1,561 ------- ------- Cash and cash equivalents, end of period $ 637 $ 156 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for interest expense $ 237 $ 101
See notes to consolidated financial statements. 3 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (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 June 30, 2000, and the results of operations for the three and six month periods ended June 30, 2000, and cash flows for the six month period ended June 30, 2000 and 1999. 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, 1999. The results of operations for the three and six month periods ended June 30, 2000, 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, 1999. 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 and warrants for the three and six months ended June 30, 2000 and 1999 were not included in the computation of diluted loss per common share because the effect would be antidilutive. 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 was not paid as the terms of the original agreement were not met. This transaction has been accounted for as a purchase and resulted in goodwill of $1,587,000 which is being amortized over the estimated useful life of 20 years. 4 7 Note 4 - Lines of Credit The Company has a revolving line of credit facility with a bank that provides an asset based credit line of up to $2,500,000, subject to certain covenants. The Company may borrow against this line, as well as issue letters of credit. Advances under the facility bear interest at prime plus 2.5% and are secured by the Company's assets. This facility has been extended to May 1, 2001. At June 30, 2000, the Company had an outstanding indebtedness of $2,475,000 with the bank and was in compliance with all financial statement covenants. In May 1999, the Company entered into a subordinated revolving line of credit agreement with a private party that provides for a line of credit of up to $2,300,000, originally scheduled to expire May 13, 2000. This line is subordinated to the bank line of credit. Advances under this line bear interest at 5% above LIBOR and are secured by the Company's assets. On March 23, 2000, the Company exercised its option to extend the line of credit for an additional 12 months to May 13, 2001, under the same terms and conditions. To extend this line of credit, the agreement requires that warrants for 150,000 shares of the Company's common stock be issued. The Company valued the warrants and will recognize the expense over the remaining term of the subordinated revolving line of credit. The warrants were issued on May 13, 2000 and are exercisable for up to two years after the issue date at a price of $1.7325. At June 30, 2000, the Company had an outstanding indebtedness of $2,300,000 under this line of credit and was in compliance with all covenants. 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 June 30, 2000, Fast Forward recorded a reserve for returns against accounts receivable of $111,000 and a reserve for returns against accounts payable for $94,000. 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 enhances 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. The Fast Forward Marketing sales force started selling the Company's self-published titles effective June 1, 1999. Prior to this, the Company marketed its products to retailers using the services of Andrews McMeel, a leading US publisher/distributor located in Kansas City. Andrews McMeel handled sales, collection, billing, warehousing and order fulfillment functions. Effective January 1, 2000, this arrangement ended and all sales, collections, and billing was brought in house, while warehousing and order fulfillment is being handled by 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. The need to offset this decline is the main reason behind the Company's decision to self-publish certain of its titles. The Company's self-publishing program is in its third year and the results continue to improve. 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 was not paid as the terms of the original agreement were not met. This transaction was accounted for as a purchase and resulted in goodwill of $1,587,000 which is being amortized over the estimated useful life of 20 years. RESULTS OF OPERATIONS Net sales for the three and six month periods ended June 30, 2000 were $4,523,000 and $8,253,000 as compared to $3,758,000 and $5,277,000 last year. This was an increase of $765,000 and $2,976,000 over the prior year. The increase for the first six months of this year resulted from $3,518,000 in video sales and higher self-publishing sales of $718,000 offset by a $1,260,000 decrease in packaging sales. The increase in video sales primarily relates to the acquisition of Fast Forward being finalized mid-May 1999. The decline in packaging sales is due partially to the inclusion of orders on new product shipping in the first half of 1999 not duplicated this year. Also contributing to this decrease was the timing of orders from one of the Company's largest customers which were included in the first half of 1999 that are expected later this year. Rights income for the three and six month periods ended June 30, 2000 were $48,000 and $68,000, respectively, as compared to $190,000 and $193,000 for 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 the three and six month periods ended June 30, 2000 was 18.4% and 21.4%, respectively, as compared to 21.2% and 23.5% for the prior year. The main reason for an overall drop in margins was a change in the mix of products sold. A much larger portion of this year's sales were from the distribution of video titles which have a lower margin than do the Company's other products. The gross margin on sales of video products for the first six months of 2000 was 19.6% as compared to 23.2% in the prior year. Historically margins on the video products range between 17% and 19%. The combined gross margin on its packaged and published book products came in at 23.6% for the first six months of both 2000 and 1999. Cost of sales for book product consists primarily of manufacturing costs, book development amortization and royalties. Selling, general and administrative expenses for the three and six month periods ended June 30, 2000 were $1,306,000 and $2,565,000 as compared to $1,213,000 and $2,079,000 for the comparable periods of the prior year and represented increases of $93,000 and $486,000 for the quarter and six months. Included in the 2000 figures were $514,000 and $987,000 of overhead expenses from Fast Forward for the quarter and six months. Excluding the Fast Forward expenses, selling, general and administrative expenses, which include personnel costs, decreased $86,000 for the quarter and $166,000 for the six months as compared to the prior year. Personnel expenses, excluding Fast Forward, were $332,000 and $616,000 for the three month and six months ended June 30, 2000 as compared to $372,000 and $809,000 for the comparable periods of 1999. These decreases of $40,000 for the quarter and $193,000 for the six months can be attributed primarily to salary and staff reductions 7 10 and the expiration of a consulting agreement. Personnel expenses, including Fast Forward, were $682,000 and $1,322,000 for the three and six months of 2000 versus $671,000 and $1,109,000 for the comparable periods of 1999. Selling expenses, excluding Fast Forward, were $206,000 and $445,000 for the three and six month periods ended June 30, 2000 versus $261,000 and $431,000 in 1999 resulting in a decrease for the quarter of $55,000 and a $14,000 increase for the six months. Selling expenses, including Fast Forward, were $298,000 and $621,000 for the three and six months of 2000 as compared to $338,000 and $501,000 for the same periods of 1999. Administrative expenses, excluding Fast Forward, were $254,000 and $517,000 for the three and six months ended June 30, 2000 as compared to $245,000 and $503,000 for the same periods of 1999. Administrative expenses, including Fast Forward, were $326,000 and $622,000 for the three and six months of 2000 as compared to $204,000 and $469,000 for the same periods of 1999. All comparisons must take into account the acquisition of Fast Forward in mid-May 1999. Interest expense for the three and six month periods ended June 30, 2000 was $139,000 and $237,000, respectively, as compared to $62,000 and $101,000 for the comparable periods of 1999. The increases of $77,000 and $136,000 for the quarter and six months were a result of higher average borrowings. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased by $7,000 to $637,000 at June 30, 2000 from $644,000 at December 31, 1999. At June 30, 2000, working capital was ($122,000) compared to $958,000 at December 31, 1999. The primary use of cash during the six months ended June 30, 2000 was from investing activities. Net cash used in operations was $410,000 for the six months ended June 30, 2000 as compared to $1,624,000 for the corresponding period of the previous year. The $1,214,000 change in cash from operations compared to the corresponding period was primarily attributable to increases in net operating loss and accounts receivable offset by a decrease in accounts payable. Net cash used in investing activities amounted to $730,000 as compared $856,000 during the same period in 1999. This decrease in cash used is primarily from a decrease in acquisition costs offset by an increase in production costs in the first six months of 2000 versus the same period of 1999. Net cash provided by financing activities was $1,133,000 in 2000 as compared to $1,075,000 for the same period in 1999. This increase in cash provided is primarily from higher borrowings on the Company's lines of credit. The Company has a revolving line of credit facility with a bank that provides an asset based credit line of up to $2,500,000, subject to certain covenants. The Company may borrow against this line, as well as issue letters of credit. Advances under the facility bear interest at prime plus 2.5% and are secured by the Company's assets. This facility has been extended to May 1, 2001. At June 30, 2000, the Company had an outstanding indebtedness with the bank of $2,475,000 and was in compliance of all financial statement covenants. In May 1999, the Company entered into a subordinated revolving line of credit agreement with a private party that provides for a line of credit of up to $2,300,000, originally scheduled to expire May 13, 2000. This line is subordinated to the bank line of credit. Advances under this line bear interest at 5% above LIBOR and are secured by the Company's assets. On March 23, 2000, the Company exercised its option to extend the line of credit for an additional 12 months to May 13, 2001 under the same terms and conditions. To extend this line of credit, the agreement requires that warrants for 150,000 shares of the 8 11 Company's common stock be issued. The Company valued the warrants and will recognize the expense over the remaining term of the subordinated revolving line of credit. The warrants were issued on May 13, 2000 and are exercisable for up to two years after the issue date at a price of $1.7325. At June 30, 2000, the Company had an outstanding indebtedness of $2,300,000 under this line of credit and was in compliance with all covenants. As of May 1, 2000, the Company did not have any commitments for any material capital expenditures for the remainder of 2000 or beyond. The Company's business tends to be seasonal, as is the publishing business as a whole, with the major volume of sales occurring in the last six months of the year. As a result, the Company's cash position is at its lowest during the months of May through October. In response, the Company has commenced cash and inventory management strategies and is investigating the possibility of seeking additional equity or debt financing. Management of the Company believes that the existing levels of funds and its ability to receive additional funding 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. No assurances can be given that such additional financing will be obtained. 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 2. Changes in Securities and Use of Proceeds In connection with the extension of the Company's loan agreement with a private party, a warrant for up to 150,000 shares of the Company's stock was issued with an exercise price per share of $1.7325 on May 13, 2000. This warrant is exercisable at the option of the holder at any time from the date of the warrant until the expiration date on May 12, 2002. The warrant was issued pursuant to Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K 10.1 Amendment Agreement Number Three to Loan and Security Agreement 10.2 Amended and Restated Secured Promissory Note 27. Financial Data Schedule (b) Reports on Form 8-K None 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: August 14, 2000 10