10-Q 1 v75060e10-q.txt FORM 10-Q QUARTER ENDED JUNE 30, 2001 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, 2001 [ ] 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, 2001, there were 6,031,490 shares of common stock outstanding. 2 INTERVISUAL BOOKS, INC. TABLE OF CONTENTS

i 3 INTERVISUAL BOOKS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)

See notes to consolidated financial statements. 1 4 INTERVISUAL BOOKS, INC. STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)

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) (Unaudited)

See notes to consolidated financial statements. 3 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (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, 2001, and the results of operations and cash flows for the three and six month periods ended June 30, 2001 and 2000. 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, 2000. The results of operations for the three and six month periods ended June 30, 2001, 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, 2000. 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 six months ended June 30, 2001 and 2000 were not included in the computation of diluted loss per common share because the effect would be antidilutive. For the three and six month periods ended June 30, 2001 there were options and warrants to purchase 1,609,650 shares, which were not included in the computation of diluted loss per common share because the effect would be antidilutive. Note 3 -- Term Loan With a Bank As of June 30, 2001, the Company has an amortizing term loan with a bank. Amounts outstanding under the facility bear interest at prime (7% as of June 30, 2001) plus 4%, and are secured by the Company's assets. In April 2001, the Company signed an amendment to the line of credit agreement which extended the maturity date to June 30, 2002, converted the line of credit to an amortizing term loan, and increased the interest rate to 4% over the bank's prime rate. In addition, certain financial covenants were amended. As amended, the Lender is no longer obligated to make future advances under the line. Pursuant to the amended agreement, the Company was required to make a principal payment of $225,000 on or before June 30, 2001. In addition, the Company agreed to pay $15,000 per month 4 7 commencing May 1, 2001, which amount is to be applied to the outstanding principal. In further consideration for the amendments, the Company paid to the bank a fee of $25,000. The Company has made the required payments in accordance with the agreement. At June 30, 2001, the Company had an outstanding indebtedness of $2,220,000 under this loan, which is classified as a current liability. The Company was in compliance with all financial statement covenants as of June 30, 2001, as amended. Note 4 - Credit Facility with a Private Party As of June 30, 2001, the Company has a subordinated credit facility with a private party. The credit facility is subordinated to the bank line of credit discussed in Note 3. Amounts outstanding under this facility bear interest at 5% above LIBOR and are secured by the Company's assets. In April 2001, the Company entered into Amendment Number 1 with the subordinated lender which extended the maturity date of the credit facility to June 30, 2002. As amended, the Lender is no longer obligated to make future advances under the line. Pursuant to the amended agreement, the Company paid the subordinated lender $250,000 in April of 2001 and agreed to pay an additional $250,000 on or before March 15, 2002, which amounts are to be applied to the outstanding principal. In addition, the Company paid to the lender a fee of $10,000 in April 2001. At June 30, 2001, the Company had outstanding indebtedness of $2,050,000 under this facility, which is classified as a current liability. 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, 2001, Fast Forward recorded a reserve for returns against accounts receivable of $144,000 and a reserve for returns against accounts payable for $120,000. Note 6 -- Segment Information The Company's operations are classified into two principal reportable industry segments: (a) video distribution sales which involves the sales and marketing to video retailers, including children's educational stores, gift shops, museum stores and educational distributors and (b) sales from the production of pop-up and dimensional novelty books for domestic and international distribution. The difference between segment assets and consolidated assets at June 30, 2001 and 2000 is due to the corporate asset of goodwill not directly attributable to the operating segments.

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Note 7 -- New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of June 30, 2001, the net carrying amount of goodwill is $1,421,795. Amortization expense during the six month period ended June 30, 2001 was $39,678. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. 6 9 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 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 fourth year and the results continue to improve. The warehousing and order fulfillment for the publishing business is being handled by an independent company located in University Park, Illinois. 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. As a result of the Fast Forward Marketing acquisition in 1999, the Company also distributes video and audio products for major motion picture studios and independent producers. FFM has access to titles on subjects ranging from blockbuster studio releases to exercise and children's products. FFM also sells and services the direct mail catalog industry. RESULTS OF OPERATIONS Net sales for the three and six month periods ended June 30, 2001 were $5,040,000 and $9,167,000 as compared to $4,523,000 and $8,253,000 for the prior year. This increase of $517,000 for the second quarter of 2001 resulted from increases of $683,000 in packaging sales and $849,000 in publishing sales offset by a decrease of $1,016,000 in video sales. The sales increase of $914,000 for the six month 7 10 period resulted from increases of $858,000 in packaging sales and $1,740,000 in publishing sales offset by a decrease of $1,684,000 in video sales. Gross profit margin for the three and six month periods ended June 30, 2001 was 22.3% and 23.9% as compared to 18.4% and 21.4% for the same periods of the prior year. This overall increase in gross profit margin resulted primarily from an increase in gross profit margin from publishing sales offset by a decrease in profit margin from video sales. The Company is a distributor of video products that for the most part are the properties of its suppliers. As a distributor, the Company's risk for unsold inventory is limited and sales are made at lower margins than on its book products. Cost of sales relating to the book sales consists primarily of manufacturing, book development amortization and royalties. Selling, general and administrative expenses for the three and six month periods ended June 30, 2001 were $1,311,000 and $2,386,000 as compared to $1,306,000 and $2,565,000 for the comparable periods of the prior year. This represented an increase of $5,000 for the quarter and a decrease of $179,000 for the six month period. Personnel expenses were $577,000 and $1,122,000 for the three and six months ended June 30, 2001 as compared to $682,000 and $1,322,000 for the comparable periods of 2000. These decreases of $105,000 and $200,000 can be attributed primarily to officer salary reductions and a reduction in the expense relating to a consulting agreement. Selling expenses were $304,000 and $614,000 for the three and six month periods ended June 30, 2001 versus $298,000 and $621,000 in 2000 resulting in a minimal change for both periods. Administrative expenses were $430,000 and $650,000 for the three and six month periods ended June 30, 2001 as compared to $326,000 and $622,000 for the same periods of 2000. This resulted in increases of $104,000 and $29,000 for the quarter and six months of 2001. The increase for the quarter was primarily a result of increases in rent, accounting fees, and insurance costs partially offset by a decrease in depreciation. Interest expense for the three and six month periods ended June 30, 2001 was $148,000 and $320,000 as compared to $139,000 and $237,000 for the comparable periods of 2000. The increases of $9,000 and $83,000 for the quarter and six months were a result of higher average borrowings and an increase in the interest rate. Net losses for the three and six month periods ended June 30, 2001 were $331,000 and $497,000 as compared to $602,000 and $1,020,000 for the same periods of the previous year. The reduced loss for the three months of 2001 resulted primarily from increased sales offset by higher interest. The lower loss for the six months of 2001 versus the previous year can be attributed primarily to higher sales and lower overhead expenses offset by higher interest. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased by $72,000 to $324,000 at June 30, 2001 from $396,000 at December 31, 2000. At June 30, 2001, working capital, including bank debt and senior debt, was $(4,029,000) compared to $452,000 at December 31, 2000. If the Company's bank and subordinated debt, both of which mature June 30, 2002 and have been reclassified as current liabilities, are excluded from the calculation then working capital would have been $241,000. The decrease in cash was primarily from investing and financing activities offset by cash provided by operating activities. 8 11 Net cash provided by operations was $1,075,000 for the six months ended June 30, 2001 as compared to $410,000 used in operations for the corresponding period of the previous year. The $1,485,000 change in cash from operations compared to the corresponding period was primarily attributable to a decrease in net operating loss, an increase in customer deposits, a decrease in accounts receivable offset by decrease in accounts payable and an increase in inventories. Net cash used in investing activities amounted to $642,000 as compared to $730,000 during the same period in 2000. This decrease in cash used is primarily from a decrease in production costs in the six months of 2001 versus the same period of 2000. Net cash used in financing activities was $505,000 in 2001 as compared to $1,133,000 provided by financing activities for the same period in 2000. This change in cash resulted from the Company's partial repayment of its bank and subordinated lines of credit in 2001 versus $1,100,000 in borrowings on its credit facilities for the six months of 2000. As of June 30, 2001, the Company has an amortizing term loan with a bank. Amounts outstanding under the facility bear interest at prime (7% as of June 30, 2001) plus 4%, and are secured by the Company's assets. In April 2001, the Company signed an amendment to the line of credit agreement which extended the maturity date to June 30, 2002, converted the line of credit to an amortizing term loan, and increased the interest rate to 4% over the bank's prime rate. In addition, certain financial covenants were amended. As amended, the Lender is no longer obligated to make future advances under the line. Pursuant to the amended agreement, the Company was required to make a principal payment of $225,000 on or before June 30, 2001. In addition, the Company agreed to pay $15,000 per month commencing May 1, 2001, which amount is to be applied to the outstanding principal. In further consideration for the amendments, the Company paid to the bank a fee of $25,000. The Company has made the required payments in accordance with the agreement. At June 30, 2001, the Company had an outstanding indebtedness of $2,220,000 under this loan, which is classified as a current liability. The Company was in compliance with all financial statement covenants as of June 30, 2001, as amended. As of June 30, 2001, the Company has a subordinated credit facility with a private party. The credit facility is subordinated to the bank line of credit discussed above. Amounts outstanding under this facility bear interest at 5% above LIBOR and are secured by the Company's assets. In April 2001, the Company entered into Amendment Number 1 with the subordinated lender which extended the maturity date of the credit facility to June 30, 2002. As amended, the Lender is no longer obligated to make future advances under the line. Pursuant to the amended agreement, the Company paid the subordinated lender $250,000 in April of 2001 and agreed to pay an additional $250,000 on or before March 15, 2002, which amounts are to be applied to the outstanding principal. In addition, the Company paid to the lender a fee of $10,000 in April 2001. At June 30, 2001, the Company had outstanding indebtedness of $2,050,000 under this facility, which is classified as a current liability. The Company has experienced operating losses and negative cash flows for the year ended December 31, 2000 and the six months ended June 30, 2001. The Company's business tends to be seasonal, as is the publishing business as a whole, with the major volume of sales typically 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 September. In response to the losses and negative cash flow, the Company has implemented payment schedules and is making progress payments to its printers, has eliminated positions through attrition, implemented further cost savings and reductions in overhead, offered prepayment discounts to key customers, been more aggressive in requiring customer deposits and is closely managing its cash and inventory levels. In addition, the Company is actively attempting to raise 9 12 additional equity and/or debt financing to address its short term and long term liquidity needs. As of the date of this filing, the Company is in discussions with potential investors and lenders but has not raised additional funds and no assurance can be given that any additional debt or equity financing will be available to the Company on acceptable terms. Any additional capital raised through such financings may dilute the interests of the current shareholders. If the Company is not successful in raising additional financing, its business and current operations will be materially adversely affected. As of August 1, 2001, the Company did not have commitments for any material capital expenditures for 2001 or beyond. 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; the Company's ability to obtain additional financing; the Company's ability to modify, restructure or replace its debt facilities when they come due; 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. 10 13 PART II - OTHER INFORMATION Item 5. Other Information The Company publicly announced on August 10, 2001 that it received on that date a notification from Nasdaq that its common stock would be delisted from the Nasdaq SmallCap Market effective with the opening of business on August 13, 2001. The Company expects that its common stock will be immediately eligible to trade on the NASD-regulated OTC Bulletin Board. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K None (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, 2001

INTERVISUAL BOOKS INC /CA 10-Q