<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________
Commission File Number 1-10916
INTERVISUAL BOOKS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
California 95-2929217
(State of Incorporation or Organization) (I.R.S. Employer I.D. No.)
2716 Ocean Park Boulevard, Suite 2020
Santa Monica, California 90405
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 396-8708
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, No par value
(Title of Class)
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__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of February 26, 1999, was approximately $3,386,360. The
aggregate market value was based on the closing price of the common stock as
quoted by The Nasdaq Stock Market on such date.
Number of shares outstanding of common stock:
5,215,115 shares as of February 26, 1999.
Documents incorporated by reference: None
================================================================================
<PAGE> 2
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE FACTORS SET FORTH IN OR IMPLIED BY THE STATEMENTS CONTAINED
IN THIS REPORT.
PART I
Item 1. BUSINESS
Introduction
Intervisual Books, Inc. (the "Company") was incorporated in California
in 1975. The Company is engaged in the business of creating and producing a
diversified line of pop-up and dimensional novelty books, which they sell to
domestic retailers and international and US publishers. To a lesser extent, the
Company also produces pop-up and dimensional game boards and playsets, as well
as cloth books.
The Company develops its own books and generally grants the exclusive
publishing rights to one publisher in each country. It also develops books in
partnership with the publisher to produce pop-up versions of existing titles
owned by the publishers, including the works of key artists or writers
controlled by the publisher. In some cases, the Company will self publish
certain titles and offer them to retailers through a distributor. In
substantially all cases, the Company retains the exclusive right to produce
these books.
In 1998, the Company reentered the commercial/premium business. This
effort includes the creation, development and production of paper-based premiums
and advertising products. The Company was a leader in this area before selling
its commercial division in 1991. Sales of paper-based premiums and advertising
products were immaterial in 1998.
The Company's creative department includes book designers, writers, and
highly trained and specialized "paper engineers" who conceive and design the
books and other products at the Company's offices in Santa Monica, California.
The books, most of which require printing and labor-intensive hand-assembly are
manufactured for the Company on a subcontracted basis by printers in Colombia,
Singapore, Thailand, China and Hong Kong. The Company enters into agreements
with publishers to create and produce books and derives its revenues from the
unit price charged to the publisher for the product created.
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The Company endeavors to combine the finest of children's contemporary
book illustration with high quality color printing and paper engineering which
achieves dramatic paper-folding effects. The Company's products incorporate
dimensional and movable features where illustrations come to life through
multiple movements activated by pull tabs and turning wheels. Pop-up paper
scenes are created when printed paper pieces are glued onto a page in such a way
that when the pages are opened, a complex three-dimensional model erects itself.
The model then folds itself neatly away when the page is turned or when the book
is closed. The Company also incorporates electronic audio and musical chips,
lights, stuffed animals and other elements into some of its works.
Publishing Agreements
Approximately 60% of the books produced by the Company are conceived and
developed by the Company's creative department. After the Company conceives an
idea and makes a dummy book, key publishers are consulted to determine if they
have an interest in publishing and marketing the book. In such cases, the
Company and publisher sign an agreement which stipulates that the publisher will
purchase a specified quantity of their edition for the right to control
distribution and set pricing to sell the book. The Company may also decide that
a title's potential would be maximized by self publishing it.
In addition, the publishing agreement allows the Company, on most
titles, to recapture publishing rights if the publisher does not continue to
reorder books. Normally the Company is also given the exclusive right in
perpetuity to produce all future print orders of book titles.
The Company often contracts with publishers to produce and market
internationally a pop-up version of a classic title owned by the publisher. In
such cases, the Company enters into a co-publishing agreement which requires the
Company to provide, at its expense, paper engineering, dimensional design, art
production and color separations. The publisher, who has contracted to order a
set number of books, provides the funds which enable the Company to guarantee
the quality of the final printing, hand assembly and binding of the book. The
agreement also provides that the Company receives the right to sell the books in
all world markets. In most cases, a royalty is paid to the co-publishing partner
for all international sales.
Where the Company has contracted with a publisher to produce a book, the
Company does not normally incur the expense of final
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printing and assembly of books without firm publishers' orders in hand.
Approximately half of the Company's revenues are derived from such co-editions.
Most of the co-published works are authored and/or illustrated by top
international children's book authors and illustrators with the publisher or are
recognized classics still in copyright with the publisher. Examples of these
books include: Peter Rabbit by Beatrix Potter, Winnie-the-Pooh by A. A. Milne,
Good Night Moon Room by Margaret Wise Brown and The Little Engine That Could by
Watty Piper. Because of the Company's reputation, prominent authors and/or
illustrators have been attracted to produce their books with the Company. The
Company has produced works authored and/or illustrated by Tomie DePaola, Jan
Pienkowski, Tasha Tudor, Eric Carle, David Carter, Babette Cole, Mary
Engelbreit, Jane Hissey, Mick Inkpen, Kees Moerbeek, and others.
Customers
In 1998, 1997, and 1996, approximately 56%, 48%, and 60%, respectively,
of the Company's books were sold in the United States; the balance of its sales
are international co-editions sold primarily in the United Kingdom, France,
Australia, Italy and Japan. In 1998, the Company sold books to 94 different
publishers in 23 countries.
Sales from six different imprints of two major US publishing groups,
Simon & Schuster and The Penguin Group, and sales from Dainippon Kaiga Co. of
Japan have been the source of 34% of the Company's revenues during the last
three years. In 1998, these three publishers represented 23% of total sales. The
Penguin Group represented approximately 13% of the Company's total sales in
1998.
Foreign sales accounted for 44%, 52%, and 40%, respectively, of the
Company's net sales for the years ended December 31, 1998, 1997 and 1996. The
Company sells in US dollars to all customers and, accordingly, currency
fluctuations which increase the price of the Company's products to its foreign
customers can adversely impact the level of the Company's export sales from time
to time. The following table breaks down revenues attributed to export sales in
the geographic areas indicated as well as each area's percent of total sales:
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Export Sales as a Percentage of Total Revenues
(000's omitted)
<TABLE>
<CAPTION>
Geographic Area 1998 % 1997 % 1996 %
- --------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Europe $3,387 30 $5,932 32 $4,767 28
Asia 448 4 2,404 13 1,266 8
Other 1,127 10 1,374 7 622 4
</TABLE>
Because all sales are generated through the Company's US headquarters,
the Company does not distinguish operating profit or loss between US sales and
foreign sales. The Company has no identifiable assets attributable to foreign
sales.
Types of Books
Although the Company has produced pop-up versions of many popular
children's books, such as Madeline, Good Night Moon Room, Paddington, Clifford,
Tales of Peter Rabbit, and fairy tale classics, approximately half of the
Company's books are non-fiction educational books. The Human Body, a book with
anatomical pop-ups, and a series of "Learn About" books, which teach children
about such things as colors, shapes, sizes, numbers, etc. and were translated
into 13 languages are examples of such educational books. The Company publishes
several pop-up books by Jan Pienkowski including Haunted House which is probably
the world's best selling pop-up book with over 1,200,000 copies in print. In
1997 and 1998, the Company sold over 550,000 copies of the best-selling
interactive playset Choo Choo Charlie.
The Company has produced "electronic" books with micro-chip components
that play the music to songs such as Twinkle, Twinkle Little Star, Happy
Birthday, Silent Night, Jingle Bells, Lullaby and Goodnight, etc.; as well as
other books which have electronic sounds such as those created by a car horn,
telephone, doorbell, and a toilet flushing. To date, approximately 3,300,000
copies of electronic books have been sold by the Company.
Marketing and Direct Distribution
The Company's primary marketing activities take place with the
presentation of its pop-up books at the International Children's Book Fair in
Bologna, Italy, each April and at the Frankfurt International Book Fair in
Germany each October. The Company also attends the Book Expo America held in a
US city each June. The sales executives of the Company also market its products
by calling directly on major publishers, both in the United States and
internationally. In 1998, the Company introduced a total of 53 new titles, with
first run printing averaging 45,000 copies per title.
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In 1998, the Company added 49 titles to its self-publishing program in
the US, 13 of which were newly developed in the year. Items sold to retailers
through the Company's self-publishing program are designed and produced by the
Company and offered through a distributor, Andrews McMeel, located in Kansas
City, Missouri. Andrews McMeel provides sales, marketing, billing, warehousing,
and collection services. The Company purchases and owns the inventory required
to support these sales.
Seasonality of Business
The Company's business is seasonal, as is the publishing business as a
whole, with the major volume of sales occurring in the last six months of the
year. This is due primarily to the increase in retail sales during the
"back-to-school" season, Thanksgiving, and Christmas holidays. It is not unusual
for the Company's sales volume in the last half of the year to exceed by 50% or
more its sales volume for the first six months of the year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Competition
The Company operates in the highly competitive book selling industry and
its products compete generally with the entire publishing industry to attract
retail buyers. Pop-up and novelty books represent a relatively small percentage
of total US retail sales of juvenile hardcover books. While the Company believes
it is currently the largest pop-up packager in the world, it realizes that other
packagers have established a competitive presence in the United States and the
United Kingdom. The Company estimates that there are currently approximately six
companies who compete with the Company as packagers of quality pop-up and labor
intensive novelty books.
Backlist
In the calendar year after a new book has been shipped, the book is
classified as a "backlist" title. Sales from the backlist are a significant
indicator of the strength of a publisher or book packager. In 1998, 1997 and
1996, approximately 63%, 53%, and 55%, respectively, of the Company's sales were
derived from the
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Company's backlist. As of the date of this Report, the Company has approximately
1,200 backlist titles with 350 titles on its "active" backlist (titles for which
the Company has received orders within the last 24 months).
Paper Engineers
Management believes its pool of paper engineers is the most experienced
in the world. In the creation of pop-up books, the paper engineer has the
responsibility to design dramatic pop-up effects which are sturdy and durable,
yet can be hand-assembled with ease and at a reasonable cost. Paper engineering
is a skill rarely taught in schools; it is usually learned by doing. The Company
employs 5 paper engineers.
Printers
The Company does not engage in any of its own printing, binding,
hand-assembly, manufacturing, or shipping, but contracts such services from
independent suppliers. The Company primarily utilizes printers in Colombia,
Singapore, Hong Kong, China and Thailand to perform the printing, hand-assembly,
binding, and shipping of its products. The Company supplies its printers with
color separated printing films and, for certain projects, components are
procured by the Company and provided to the printer to complete assembly.
Because pop-up books are usually printed on 10 and 12 point board stock,
not paper, the production operations required for pop-up books demand that the
printers have top-quality die cutting, printing, box making, and packaging
capabilities. The hand-assembly of the bits and pieces of the movable parts of
the books requires skilled labor similar to the level required to assemble
precision electronic products and cannot be automated. Workers must apply the
right amount of glue and assemble the parts together properly to enable the
moving parts to function perfectly; one failed glue point could be the cause for
book rejection.
Carvajal, one of the Company's primary producers, is located in Colombia
and is a major international printer. Carvajal operates two hand-assembly
plants, one in Colombia and the other in Ecuador, and produced 29% of the
Company's product in 1998. Tien Wah Press maintains its printing facilities in
Singapore and its hand-assembly plants in Malaysia and Indonesia. In 1998, the
Company produced 12% of its product at Tien Wah Press. Hua Yang Printing,
located in Hong Kong maintains its printing operation and hand-assembly plant in
China and was responsible for 34%
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of the Company's production in 1998. Production on the Company's cloth book line
was handled by Pal-Up Taiwan Co. with silk screening, embroidery and hand
assembly in China. The balance of the Company's 1998 production was handled by
Sirivatana in Thailand, Excel Printing Co. and Winner Offset Printing located in
Hong Kong with hand assembly plants in China and two other smaller suppliers.
The Company has no long-term contracts with its printers but enters into
contracts on an order-by-order basis. The Company has been working with Carvajal
and Tien Wah Press for over 20 years and with Hua Yang Printing for 10 years.
The Company has not experienced any material difficulties in manufacturing its
products or achieving acceptable levels of quality control through these
printers and believes its relationships with them to be excellent.
Backlog
The Company's backlog consists of anticipated revenues from sales of
books for which the Company has confirmed orders which have not yet been
manufactured and shipped. The backlog at February 10, 1999, and February 2, 1998
was $3,300,000. The backlog at February 10, 1999, consisted of confirmed orders
for delivery in 1999. The Company believes that backlog as of any date is not
necessarily indicative of future revenues.
Employees
As of March 26, 1999, the Company had 27 full-time employees. These
employees include members of the administrative, creative, production and
marketing departments. None of the Company's employees are covered by a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes its labor relations are satisfactory. The Company also
contracts with people on an independent contractor basis, particularly in the
performance of such functions as graphic design, finished art, art production,
and specialized writing.
Item 2. PROPERTIES
The Company's approximately 11,600 square foot executive offices are
located in Santa Monica, California. The lease rate is approximately $17,600 per
month through July 30, 1999, and then increases to $18,500 for the remainder of
the lease and is subject to adjustment only for increases in annual operating
expenses and taxes. The lease expires on January 31, 2002, subject to an option
to extend for an additional five years at an adjusted rental based on 95% of the
prevailing rates for comparable space.
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The Company believes that its physical properties are adequate for its
current needs.
Item 3. LEGAL PROCEEDINGS
As of the date hereof, there are no material legal proceedings pending
against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Information regarding the Company's executive officers is found in Part
III, Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT of this Annual
Report on Form 10-K.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded under the symbol "IVBK" and was
traded on The Nasdaq National Market during 1998. The following table sets forth
the high and low quotations from The Nasdaq National Market for the Company's
common stock for the periods indicated. Currently, the Company's stock is being
traded on the Nasdaq Small Cap Market System. Quotations do not include retail
markups, markdowns or commissions and may not necessarily represent actual
transactions.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
First Quarter - 1997 $ 2-5/8 $ 1-1/8
Second Quarter - 1997 2-1/2 1-5/8
Third Quarter - 1997 2-1/8 1-1/4
Fourth Quarter - 1997 3-3/8 1-5/8
First Quarter - 1998 3-3/8 2-1/2
Second Quarter - 1998 3 1-3/8
Third Quarter - 1998 2-1/2 1
Fourth Quarter - 1998 1-15/16 11/16
</TABLE>
The number of record holders of the Company's common stock as of
February 26, 1999, was 183, several of which represent "street accounts" of
securities brokers. The Company has not paid a dividend with respect to its
common stock nor does the Company anticipate paying dividends in the foreseeable
future.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data for the Company
for the fiscal years ended December 31, 1998, 1997, 1996, 1995, and 1994 which
should be read in conjunction with the Financial Statements of the Company and
the notes thereto and
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Report.
As a result of a merger with the Hunt Group which was recorded on March
20, 1998, approved by the shareholders of the corporation on July 22, 1998 and
was accounted for as a combination of entities under common control which is
accounted for in a similar manner as a pooling of interest, the Company's
financial statements have been restated to include the results of the Hunt Group
for all periods presented. The Merger was considered insignificant in relation
to the Company's operations and financial condition and, therefore, pro forma
information is not presented.
SELECTED FINANCIAL DATA
INTERVISUAL BOOKS, INC.
Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 11,191,681 $ 18,711,596 $ 16,766,292 $ 19,494,405 $ 18,730,486
Rights income 205,844 321,834 -- -- --
------------ ------------ ------------ ------------ ------------
Total revenue 11,397,525 19,033,430 16,766,292 19,494,405 18,730,486
Cost of sales 9,592,013 14,585,457 12,939,669 14,897,013 13,788,428
------------ ------------ ------------ ------------ ------------
Gross profit 1,805,512 4,447,973 3,826,623 4,597,392 4,942,058
Selling, general,
and administrative expenses 4,768,962 4,471,955 4,649,905 3,990,802 4,417,780
Stock-based compensation
expense 28,498 43,112 49,052 -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (2,991,948) (67,094) (872,334) 606,590 524,278
Interest expense (63,820) -- (4,513) -- --
Other income 70,956 56,211 116,650 228,542 102,468
------------ ------------ ------------ ------------ -----------
Income (loss) before income
tax expense (benefit) (2,984,812) (10,883) (760,197) 835,132 626,746
Income tax expense (benefit) (700,000) 62,682 (347,382) 355,908 284,843
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (2,284,812) $ (73,565) $ (412,815) $ 479,224 $ 341,903
============ ============ ============ ============ ============
Earnings (loss) per share:
Basic $ (0.45) $ (0.02) $ (0.08) $ 0.10 $ 0.07
============ ============ ============ ============ ============
Diluted $ (0.45) $ (0.02) $ (0.08) $ 0.09 $ 0.07
============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 5,110,317 5,036,132 5,032,798 5,032,798 4,886,965
============ ============ ============ ============ ============
Diluted 5,110,317 5,036,132 5,032,798 5,259,872 5,134,750
============ ============ ============ ============ ============
Dividends on common stock -- -- -- -- --
============ ============ ============ ============ ============
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total assets $10,415,134 $13,725,574 $12,438,665 $14,265,175 $12,379,819
Total liabilities $ 5,491,838 $ 6,615,263 $ 5,330,318 $ 6,663,191 $ 5,226,382
Working capital $ 950,736 $ 3,482,308 $ 4,040,873 $ 4,558,293 $ 3,934,339
Shareholders' equity $ 4,923,296 $ 7,110,311 $ 7,108,347 $ 7,601,984 $ 7,153,437
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere in this Report.
General
The Company's inventory consists of finished books for promotional
purposes, materials purchased for production, and finished books for its
self-publishing program which is handled by a distribution arrangement with
Andrews & McMeel. The Company typically retains limited rights to publish the
books it creates and the Company has the rights to publish approximately 1,200
books that are considered part of its "backlist" (titles that were originally
manufactured and sold in previous years). Sales of titles from the Company's
backlist accounted for approximately $7,081,000 or 63% of sales in 1998,
$9,830,000 or 53% of sales in 1997, and $9,204,000 or 55% of sales in 1996.
Book development costs, which include amounts incurred for design, art,
editorial services, paper engineering, cutting dies, and color separations, are
generally capitalized and amortized over a five-year period using the
sum-of-the-years-digits method. The development cycle for books, prior to first
printing, is approximately one year at which point amortization of costs begin.
Items which have an anticipated sales life of one year are written off in the
first year of sale. Book development costs, net of accumulated amortization were
approximately $3,426,000 at December 31, 1998, $3,678,000 at December 31, 1997,
and $3,397,000 at December 31, 1996.
The Company recognizes income upon shipment of books. Historically, the
Company, which has a December 31 year-end, has recognized a significant portion
of its sales in the last six months of each year, resulting from the year-end
holiday season and the spring season of the following year which is often
shipped in December. The Company achieved approximately 57%, 71%, and 60%,
respectively, of its total sales during the last six months of 1998, 1997, and
1996.
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On March 20, 1998, the Company signed an agreement and plan of merger
with the Hunt Creative Group, a related party. The merger was accounted for as a
combination of entities under common control, which is accounted for in a
similar manner as a pooling of interest, and all financial numbers have been
restated to include the results of the Hunt Group.
On March 30, 1999, the Company signed a definitive agreement to acquire
privately-held Fast Forward Marketing Inc. of Marina del Rey, California. Fast
Forward is a distributor of video and audio products for major motion picture
studios. The acquisition would be accounted for as a purchase for stock
transaction and is contingent upon due diligence proceedings, a fairness opinion
and obtainment of adequate financing. The terms of the proposed transaction will
include cash and stock, but have not been finalized and are subject to standard
conditions.
Results of Operations
Comparison of the Year Ended December 31, 1998 to the year ended December 31,
1997. Net sales for the year ended December 31, 1998, were $11,192,000 as
compared to $18,712,000 for the same period in 1997, a decrease of $7,520,000 or
40%. The sales decrease can be attributed to decreases of $4,925,000 in foreign
sales and $2,595,000 in domestic sales. Several factors affected the Company's
sales for the year ended December 31, 1998. The strength of the US dollar
against the currencies of major international countries, especially Japan, UK
and Germany, had an adverse impact on the Company's ability to meet costing
requirements with many of its foreign customers which resulted in lower foreign
sales. Additionally, the continuing Asian economic crisis has materially
affected sales to our customers in Japan which is traditionally the Company's
third largest market. Sales to Japan, the UK and Germany were over 60% lower for
1998 versus 1997. On the domestic side, sales continue to be negatively affected
by consolidations within the US publishing industry with 1998 sales in the US
declining by 29% over 1997. This was partially offset by a 51% increase in the
Company's net sales from its self publishing business. Sales backlog was
$3,300,000 at February 10, 1999 as well as February 2, 1998.
Rights income for the year ended December 31, 1998 was $206,000 as
compared to $322,000 for the year ended December 31, 1997. This income is
primarily derived from the Company's sales of worldwide direct marketing rights
on some of its products.
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Gross profit margin as a percent of sales (excluding the effect of
rights income) for the year ended December 31, 1998, was 14.3% as compared to
21.4% in 1997. As the Company's self-publishing sales continue to expand, the
need to establish an adequate reserve for returns and a reserve for inventory
write-offs became necessary. In 1998, the Company recorded additional expenses
to increase these reserves. The additional expense taken had the effect of
reducing 1998 gross margins. The gross margin in 1998 without these charges
would have been approximately 19.1%. Once established, these reserves will
offset charges in future periods for returns associated with 1998 sales which
will increase gross profit margins. Cost of sales consists primarily of
manufacturing and shipping costs, book development amortization, and royalties.
Manufacturing and shipping costs were $7,749,000 or 69.2% of sales for 1998 as
compared to $12,881,000 or 68.8% of sales for 1997. Also affecting gross profit
margin in 1998 were sales of close out inventory of $175,000 which were sold
below cost. The amortization of book development costs was $1,455,000 for 1998
compared to $1,331,000 for 1997. Royalties for the year ended December 31, 1998
were $395,000 as compared to $498,000 in 1997. Both the increase in amortization
and decrease in royalties were related to the acquisition of the Hunt Group in
March 1998.
Selling, general and administrative expenses for the year ended December
31, 1998 were $4,797,000 compared to $4,515,000 for the year ended December 31,
1997, an increase of $282,000 or 6%. Included in the above was distribution fees
related to self publishing of $627,000 for 1998 as compared to $280,000 in 1997.
Without these fees, selling, general and administrative expenses were nominally
lower. Personnel expenses were $2,161,000 in 1998 as compared to $2,083,000 in
1997. Selling expenses (including distribution fees) in 1998 were $1,546,000
versus $1,225,000 in 1997 for an increase of $321,000. This increase was
primarily related to increases in distribution related costs, promotion
prototypes, and field rep expenses partially offset by decreases in delivery,
travel & entertainment, show expenses and catalog expenses. Administrative
expenses were $1,090,000 in 1998 as compared to $1,207,000 in 1997. The decrease
of $117,000 was primarily comprised of decreases in rent, moving, legal and
accounting expenses partially offset by increases in bad debt allowance and
other expenses. In 1998 in response to the Company's lower sales, a plan
consisting of staff reductions, pay cuts, and salary freezes was put in place.
The full effect of these reductions will not be realized until 1999.
Other income for the year ended December 31, 1998 was $71,000 as
compared to $56,000 in the prior year. Interest expense was
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<PAGE> 15
$64,000 in 1998 as a result of borrowings on the Company's line of credit. There
were no borrowings in 1997, and accordingly, no expense for the year.
The Company experienced a loss before income taxes for the year ended
December 31, 1998 of $2,985,000 compared to a loss of $11,000 for the comparable
period in 1997, a decrease of $2,974,000. As a result of the application of the
Statement of Financial Accounting standards (SFAS) No. 109, "Accounting for
Income Taxes" (see Notes to the financial statement) the Company recognized an
income tax benefit net of applicable income taxes of $700,000 in 1998 and income
tax expense of $63,000 in 1997. As a result of these factors, the Company's net
loss was $2,285,000 in 1998 as compared to net loss of $74,000 in 1997.
The Company is currently in a loss carryforward position primarily due
to the operating losses incurred during the year ended December 31, 1998. At
December 31, 1998, the Company had federal net operating loss carryforward
available to offset future taxable income of approximately $990,000 that expires
in 2018.
The major temporary tax differences that are expected to reverse next
year are allowance for doubtful accounts, reserves for sales and returns and
uniform capitalization of inventory. However, the Company expects new temporary
differences to be established in these years which will either reduce or exceed
the reversing temporary differences.
For the year ended December 31, 1998, the Company recorded a net
deferred tax asset of $443,200. The Company evaluated the gross deferred
tax asset of $775,000 taking into consideration projected operating results and
determined that a valuation allowance of $331,800 should be established. The
Company believes it is more likely than not that the deferred tax asset of
$443,200 will be realized.
Comparison of the Year Ended December 31, 1997, to the year ended December 31,
1996. Net sales for the year ended December 31, 1997, were $18,712,000 as
compared to $16,766,000 for the same period in 1996, an increase of $1,946,000
or 11.6%. The sales increase was attributable to increases of $647,000 in the
sales of backlist titles and $1,320,000 in the sales of new titles compared to
the previous year. Foreign sales represented $9,710,000 or 52% of total sales in
1997 as compared to $6,655,000 or 40% of total sales in 1996, an increase of
$3,055,000 while sales to U.S. publishers were $9,002,000 or 48% of total sales
in 1997 as compared to $10,111,000 or 60% in 1996, a decrease of $1,109,000.
Foreign sales were up
14
<PAGE> 16
due mainly to increased reprints including Disney titles in Brazil, the shipment
of a new format into the UK using magnetic cloth, success with new titles to
direct sellers and the opening of new accounts. Sales in the US were lower due
mainly to lower reprint sales, two major titles Noah's Ark and Star Trek
shipping in 1996 not replaced in 1997, and the loss of a customer due to
consolidations in the publishing industry. These decreases were offset by new
accounts and sales from our self-publishing program. Sales backlog at February
2, 1998 was $3,300,000 compared to $4,600,000 for the prior year.
Gross profit margin for the year ended December 31, 1997, was 21.4% as
compared to 22.8% in 1996. Cost of sales consisted primarily of manufacturing
and shipping costs, book development amortization, and royalties. The decrease
in gross profit was due mainly to lower margins on sales to foreign publishers
resulting from a change in the mix of products sold and the increasing strength
of the US dollar. Also affecting gross margin were one time tooling and startup
costs related to the introduction of a line of books using magnetic cloth.
Manufacturing and shipping costs were $12,881,000 or 68.8% of sales for 1997 as
compared to $11,017,000 or 65.7% of sales for 1996. The amortization of book
development costs was $1,331,000 or 7.1% of sales for 1997 compared to
$1,289,000 or 7.7% of sales for 1996. Royalties for the year ended December 31,
1997 were $498,000 or 2.7% of sales as compared to $679,000 or 4.1% of sales in
1996. The decrease in royalty expense was due mainly to the reversal of
previously expensed royalties in 1996 that the Company determined in 1997 were
not due.
Selling, general and administrative expenses for the year ended December
31, 1997 were $4,515,000 compared to $4,699,000 for the year ended December 31,
1996, a decrease of $184,000 or 3.9%. Personnel expenses were $2,083,000 in 1997
as compared to $2,296,000 in 1996. The decrease of $213,000 resulted primarily
from lower salaries and costs related to recruiting. Selling expenses in 1997
were $1,225,000 versus $734,000 in 1996 for an increase of $491,000. The
increase was due mainly to payments made to our distributor for services related
to our self-publishing efforts which started in 1997 and, to a lesser extent, to
higher sample, show expenses and sales materials. Administrative expenses were
$1,207,000 in 1997 as compared to $1,824,000 in 1996. The decrease of $617,000
was primarily comprised of 1996 costs for the extensive evaluation of two
acquisition candidates which were rejected, legal expenses primarily related to
the severance agreement with the Company's former president and CEO, relocation
expenses relating to the Company's office move, accelerated write
15
<PAGE> 17
off of leasehold improvements, directors' fees and office expenses incurred in
1996 which were not duplicated in 1997.
Other income for the year ended December 31, 1997 was $56,000 as
compared to $117,000 in the prior year. These amounts primarily consist of
interest income. The decrease in 1997 resulted from less cash available for
investment purposes.
The Company experienced a loss before income taxes for the year ended
December 31, 1997 of $11,000 compared to loss of $760,000 for the comparable
period in 1996, a decrease of $749,000. The net loss in 1997 included a tax
expense of $63,000 as compared to a 1996 tax benefit of $347,000.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $1,561,000 at
December 31, 1998 from $2,383,000 at December 31, 1997. At December 31, 1998,
working capital was $951,000 compared to $3,482,000 at December 31, 1997.
Net cash used in operations was $1,353,000 in 1998 as compared to
$1,545,000 cash provided by operating activities in 1997. The $2,898,000 change
in cash from operations was primarily attributable to a decrease in accounts
receivable partially offset by a decrease in accounts payable and the increased
net loss for the year, all of which resulted from the decreased sales for the
year. Also affecting the change in cash were increases in taxes receivable and
deferred income taxes, as well as inventories on hand relating to the Company's
increase in their self-publishing efforts.
Net cash used in investing activities amounted to $1,238,000 in 1998,
primarily related to production costs, as compared to cash provided of $209,000
during 1997. In 1997 all marketable securities were allowed to mature to
generate cash and no new investments were made in 1998.
Net cash provided by financing activities in 1998 was $1,769,000 as
compared to cash used in 1997 of $93,000. This difference was primarily
attributable to the Company's borrowings of $1,700,000 on its line of credit
during 1998.
In January 1998, the Company entered into a revolving line of credit
facility with a bank that provides a credit line of up to $2,000,000 subject to
certain covenants. The Company may borrow against this line, as well as issue
letters of credit. Advances
16
<PAGE> 18
under the facility bear interest at Bank of America's Reference Rate (7.75% as
of December 31, 1998) plus 1% and are secured by the Company's assets. This
facility which was originally scheduled to expire on April 1, 1999 has been
extended to June 1, 1999, with an increase in the interest rate to 3% over Bank
of America's Reference Rate.
At December 31, 1998, the Company had an outstanding indebtedness of
$1,700,000 as well as $76,805 in outstanding letters of credit. The Company was
in default of certain financial covenants with respect to working capital and
tangible net worth requirements. The bank has agreed to waive both covenants.
The Company is in the process of negotiating with the bank for a twelve
month extension of its current credit line. The Company is also negotiating with
other primary lenders as an alternative source of credit. In addition, the
Company, subject to certain conditions, has obtained a commitment letter from a
private party for a revolving subordinated credit facility in the amount of
$2,300,000 which would carry a rate of approximately 500 basis points over the
3-month LIBOR rate. The proposed initial term of this facility is twelve months
and would expire on April 15, 2000. The Company, at its sole discretion, would
have the right to extend the term under the same terms and conditions for an
additional twelve months. If an extension is requested, the Company would be
required to grant up to 150,000 warrants with an exercise price equal to the
average twenty day trading price subsequent to the extension date. These
warrants would have a term of two years from the date of grant. This facility is
subject to the Company's ability to obtain a twelve month $2,000,000 line from a
primary lender and the presentation of audited financial statements for the year
ended December 31, 1998. Management believes that the ability of the Company to
obtain a $2,000,000 primary line is enhanced by the subordinated note
commitment. The Company expects positive cash flow from operations for 1999, but
is reliant on its ability to finalize financing arrangements with a primary
lender in addition to closing the subordinated note facility. No assurance can
be given that these results from operations or transactions will occur.
As of February 26, 1999, the Company did not have commitments for any
material capital expenditures for 1999 or beyond. Management of the Company
believes that the existing levels of funds and its ability to borrow, combined
with the Company's ability to generate cash, are adequate to finance current and
17
<PAGE> 19
expected levels of activity as well as anticipated capital expenditures of the
Company for at least the next twelve months.
Recent Accounting Pronouncements
During the year ended December 31, 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate. At December 31, 1998, the Company did not report any segment
information as operations and business activity are considered one unit.
Adoption of SFAS 131 did not have an impact on the Company's financial
position, results of operations and cash flows.
Statement of Financial Accounting Standards No. 132 ("SFAS 132"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
issued by the Financial Accounting Standards Board is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is encouraged. This statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement of recognition of those plans. The Company does not expect adoption
to have any effect on its financial position, results of operations and cash
flows.
Statement of Financial Accounting Standard No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i)the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of the
new standard to have any effect on its financial statements.
18
<PAGE> 20
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 and has upgraded
other software programs. Remaining computer upgrades or modifications are
expected to be completed by July 1, 1999. The total expenditures to date have
been minimal, and additional expenditures needed to complete the process are not
expected to exceed $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 Section and this entire Report on Form 10-K contain forward-looking
statements and include 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 7A. 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
19
<PAGE> 21
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.
20
<PAGE> 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements prepared in accordance with Regulation S-X are
set forth beginning at page 23 hereof.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified
Public Accountants.......................................22
Balance Sheets as of December 31, 1998 and 1997..........23
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.........................24
Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996...................25
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.........................26
Summary of Accounting Policies...........................27
Notes to Financial Statements............................31
Schedule II - Valuation and Qualifying Accounts..........45
</TABLE>
21
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Intervisual Books, Inc.
Santa Monica, California
We have audited the accompanying balance sheets of Intervisual Books, Inc. as of
December 31, 1998 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intervisual Books, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
February 25, 1999, except for Note 17,
as to which the date is March 30, 1999
22
<PAGE> 24
INTERVISUAL BOOKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS (Note 6)
CURRENT:
Cash and cash equivalents $ 1,560,533 $ 2,382,714
Accounts receivable, net (Note 1) 2,246,151 5,467,851
Inventories (Note 2) 1,634,581 1,267,158
Prepaid expenses 241,842 131,006
Royalty advances 351,981 387,314
Income taxes receivable (Note 7) 117,281 -
Other current assets 205,676 163,126
----------- -----------
TOTAL CURRENT ASSETS 6,358,045 9,799,169
PRODUCTION COSTS, net of accumulated amortization of
$15,721,040 and $14,266,567 3,426,390 3,677,601
PROPERTY AND EQUIPMENT, net (Note 3) 187,488 248,804
DEFERRED INCOME TAXES (Note 7) 443,211 -
------------------------
$10,415,134 $13,725,574
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,131,232 $ 5,540,920
Accrued royalties 281,952 378,980
Accrued expenses (Note 10) 226,145 229,686
Income taxes payable (Note 7) - 130,275
Customer deposits (Notes 4 and 5) 67,980 37,000
Line of credit (Note 6) 1,700,000 -
----------- -----------
TOTAL CURRENT LIABILITIES 5,407,309 6,316,861
DEFERRED INCOME TAXES (Note 7) - 160,956
OTHER LIABILITIES (Note 10) 84,529 137,446
----------- -----------
TOTAL LIABILITIES 5,491,838 6,615,263
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, 14 and 18)
STOCKHOLDERS' EQUITY (Notes 8 and 9):
Common stock, no par, shares authorized 10,000,000; issued
and outstanding 5,164,531 and 5,036,132 4,731,029 4,573,850
Additional paid-in capital 329,912 301,414
Retained earnings (deficit) (137,645 ) 2,235,047
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,923,296 7,110,311
----------- -----------
$10,415,134 $13,725,574
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
23
<PAGE> 25
INTERVISUAL BOOKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 11) $ 11,191,681 $ 18,711,596 $ 16,766,292
RIGHTS INCOME (Note 5) 205,844 321,834 --
------------ ------------ ------------
TOTAL REVENUE 11,397,525 19,033,430 16,766,292
COST OF SALES (Note 12) 9,592,013 14,585,457 12,939,669
------------ ------------ ------------
Gross profit 1,805,512 4,447,973 3,826,623
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 14) 4,797,460 4,515,067 4,698,957
------------ ------------ ------------
LOSS FROM OPERATIONS (2,991,948) (67,094) (872,334)
INTEREST EXPENSE (63,820) -- (4,513)
OTHER INCOME 70,956 56,211 116,650
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,984,812) (10,883) (760,197)
INCOME TAX PROVISION (BENEFIT) (Note 7) (700,000) 62,682 (347,382)
------------ ------------ ------------
NET LOSS $ (2,284,812) $ (73,565) $ (412,815)
============ ============ ============
NET LOSS PER SHARE (Note 10)
Basic and Diluted $ (.45) $ (.02) $ (.08)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 16)
Basic and Diluted 5,110,317 5,036,132 5,032,798
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
24
<PAGE> 26
INTERVISUAL BOOKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Retained
Shares Amount Capital Earnings Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 5,032,798 $ 4,569,266 $ 209,250 $ 2,721,427 $ 7,499,943
Stock-based compensation (Note 8) -- -- 49,052 -- 49,052
Net loss for the year -- -- -- (412,815) (412,815)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 5,032,798 $ 4,569,266 $ 258,302 $ 2,308,612 $ 7,136,180
Stock-based compensation (Note 8) -- -- 43,112 -- 43,112
Exercise of stock options (Note 8) 3,334 4,584 -- -- 4,584
Net loss for the year -- -- -- (73,565) (73,565)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 5,036,132 $ 4,573,850 $ 301,414 $ 2,235,047 $ 7,110,311
Stock-based compensation (Note 8) -- -- 28,498 -- 28,498
Exercise of stock options (Note 8) 50,399 69,299 -- -- 69,299
Issuance of contingent shares 78,000 87,880 -- (87,880) --
(Note 14)
Net loss for the year -- -- -- (2,284,812) (2,284,812)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 5,164,531 $ 4,731,029 $ 329,912 $ (137,645) $ 4,923,296
========= =========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
25
<PAGE> 27
INTERVISUAL BOOKS, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,284,812) $ (73,565) $ (412,815)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and amortization 1,550,887 1,425,870 1,371,161
Provision for losses on accounts receivable 66,000 10,000 100,000
Provision for inventory write-offs 121,500 -- --
Loss on disposal of property and equipment -- -- 101,495
Amortization of deferred income 47,229 (15,734) 153,272
Deferred income taxes (604,167) (116,653) (242,321)
Stock-based compensation expense 28,498 43,112 49,052
Increase (decrease) from changes in:
Accounts receivable 3,155,700 (819,247) 2,184,061
Inventories (488,923) (612,961) (297,638)
Prepaid expenses (110,836) 85,496 (111,952)
Royalty advances 35,333 112,422 (58,462)
Income taxes receivable (117,281) -- --
Other current assets (42,550) (35,630) (127,496)
Accounts payable (2,409,688) 1,870,546 (1,376,669)
Accrued royalties (97,028) (351,027) 986
Accrued expenses (103,687) (73,287) 106,415
Income taxes payable (130,275) 130,275 (38,070)
Customer deposits 30,980 (34,211) 18,269
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,353,120) 1,545,406 1,419,288
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (35,098) (215,467) (70,236)
Additions to production costs (1,203,262) (1,610,712) (1,335,512)
Purchases of marketable securities
available for sale -- (12,868,361) (5,457,752)
Proceeds from sales and maturities of marketable
securities available for sale -- 14,903,345 5,350,422
------------ ------------ ------------
Net cash provided by (used in) investing activities (1,238,360) 208,805 (1,513,078)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from bank line of credit 1,700,000 -- --
Proceeds from exercise of stock options 69,299 4,584 --
Proceeds from officer loan -- -- 29,166
Payments on officer loan -- (97,131) --
Payment of dividends -- -- (129,874)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,769,299 (92,547) (100,708)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (822,181) 1,661,664 (194,498)
Cash and cash equivalents, beginning of year 2,382,714 721,050 915,548
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,560,533 $ 2,382,714 $ 721,050
------------ ------------ ------------
Cash paid during the year for:
Income taxes $ 800 $ 800 $ 55,000
============ ============ ============
Interest $ 51,186 $ -- $ 4,513
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
26
<PAGE> 28
INTERVISUAL BOOKS, INC.
SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Intervisual Books, Inc. (the "Company") was incorporated in California in 1975.
The Company is engaged in the creating, packaging and production of pop-up and
dimensional novelty books for domestic and international distribution. The
Company distributes through many publishers in the United States and other
countries.
BASIS OF PRESENTATION
The accompanying financial statements have been restated to reflect the
acquisition of the Hunt Creative Group, which was merged into the Company in a
manner similar to a pooling of interest. The merger was approved by the
Company's shareholders on July 22, 1998 (see also Note 14).
REVENUE RECOGNITION
The Company recognizes revenues upon shipment of books. The Company sells its
books directly to publishers who assume the responsibility for any sales
returns. The Company also sells its books through its self-publishing program;
for which the Company is responsible for all returns. The Company records a
provision for estimated future returns.
PRODUCTION COSTS AND AMORTIZATION
Production costs include amounts incurred for design, art, editorial services,
paper engineering, dies and color separation. The costs for pop-up books are
stated at the lower of cost or net realizable value and are amortized using the
sum-of-the-years-digits method over a five year projected sales life. These
costs are periodically evaluated each year based on management's estimates of
future sales of related products. These costs are written off when management
believes they provide no future benefit. Costs of products which have an
anticipated useful life of one year or less are charged to operations in the
year the sales occur.
Amortization of book production costs included in cost of sales for 1998, 1997
and 1996 was $1,454,923, $1,330,503 and $1,288,930.
INVENTORY
Inventory, which consists of materials and finished goods, is valued at the
lower of cost or market. Cost is determined by the first-in, first-out (FIFO)
method.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed using
accelerated methods for both financial reporting and income tax purposes.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
27
<PAGE> 29
INTERVISUAL BOOKS, INC.
SUMMARY OF ACCOUNTING POLICIES
INCOME TAXES
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109
requires a company to use the asset and liability method of accounting for
income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
and result primarily from differences in methods used to amortize production
costs. A valuation allowance is provided when management cannot determine
whether it is more likely than not that the deferred tax asset will be realized.
Under SFAS 109, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," during 1997. SFAS No.
128 requires presentation of basic and diluted earnings per share. Basic
earnings (loss) per share is computed by dividing income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted earnings per 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,
but does not include the impact of these dilutive securities that would be
antidilutive. During the three years ended December 31, 1998, these dilutive
securities were antidilutive. All prior period weighted average and per share
information had no effect on the amounts presented in accordance with SFAS No.
128.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), as of January 1, 1996,
which establishes a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of the
award and recognize this cost over the service period. The value of the
stock-based award is determined using a pricing model whereby compensation cost
is the excess of the fair value of the stock as determined by the model at grant
date or other measurement date over the amount an employee must pay to acquire
the stock.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the
28
<PAGE> 30
INTERVISUAL BOOKS, INC.
SUMMARY OF ACCOUNTING POLICIES
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
A description of the methods and assumptions used to estimate the fair value of
each class of the Company's financial instruments is as follows:
Cash, investments, receivables, and accounts payable are recorded at carrying
amounts which approximate fair value due to the short maturity of these
instruments.
The fair value of the Company's line of credit approximates its carrying value.
The line of credit is recorded as a current liability in the financial
statements due to it maturing within one year from the balance sheet date (see
Note 6).
COMPREHENSIVE INCOME
During the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," ("SFAS
130") issued by the FASB as it is effective for financial standards with fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is comprised of
net income and all changes to stockholders' equity except those due to
investments by owners and distribution to owners. Adoption of SFAS 130 did not
have an impact on the Company's financial position, results of operations and
cash flows, and no additional disclosure was necessary.
SEGMENTS OF AN ENTERPRISE
During the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate. At December 31, 1998, the Company did not report any segment
information as operations and business activity are considered one unit. Because
all sales are generated through the Company's U.S. headquarters, the Company
does not distinguish operating profit or loss between U.S. sales and foreign
sales. The Company has no identifiable assets attributable to foreign sales.
Adoption of SFAS 131 did not have an impact on the Company's financial position,
results of operations and cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," issued by the
Financial Accounting Standards Board is effective for financial statements with
fiscal years beginning after December 15, 1997. Earlier application is
encouraged. This statement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement of
recognition of
29
<PAGE> 31
INTERVISUAL BOOKS, INC.
SUMMARY OF ACCOUNTING POLICIES
those plans. The Company does not expect adoption to have any effect on its
financial position, results of operations and cash flows.
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to have
any affect on its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to conform the prior year's amounts to
the current year's presentation.
30
<PAGE> 32
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTS RECEIVABLE
Accounts receivable relates to sales to traditional publishing customers, as
well as, sales under the Company's self-publishing program. Sales under the
publishing program are subject to returns, as such the Company has established a
reserve for estimated future returns.
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable $ 2,905,151 $ 5,670,201
Less: Allowance for possible losses (175,300) (127,750)
Less: Allowance for sales returns (483,700) (74,600)
----------- -----------
Accounts receivable, net $ 2,246,151 $ 5,467,851
=========== ===========
</TABLE>
NOTE 2 - INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Materials $ 594,382 $ 354,129
Finished goods 1,177,099 913,029
Less: Allowance for inventory write-offs (121,500) --
Less: Allowance for marketing samples (15,400) --
----------- -----------
Total inventory $ 1,634,581 $ 1,267,158
=========== ===========
</TABLE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The major classes of property and equipment and the related estimated useful
lives are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------- Estimated
1998 1997 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Computer $ 552,497 $ 557,333 5 years
Office furniture and equipment 518,813 483,749 5-7 years
Leasehold improvements 68,151 63,281 5 years
---------- ----------
1,139,461 1,104,363
Less accumulated depreciation 951,973 855,559
---------- ----------
$ 187,488 $ 248,804
========== ==========
</TABLE>
Depreciation expense on property and equipment was $95,964, $92,627 and $77,072
for the years ended December 31, 1998, 1997 and 1996.
31
<PAGE> 33
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CUSTOMER DEPOSITS
Customer deposits of $67,980 and $37,000 recorded at December 31, 1998 and 1997
consist of cash advances received from publishers prior to printing, assembly
and shipping of the related products.
NOTE 5 - RIGHTS INCOME
During 1998 and 1997, the Company sold the direct marketing rights to a third
party to produce and sell two and three of the Company's titles for a
non-refundable fee of $200,000 and $300,000, respectively. The Company fulfilled
all obligations under these agreements prior to recognizing revenue.
NOTE 6 - LINE OF CREDIT
In January 1998, the Company entered into a revolving line of credit facility
with a bank that provides a credit line of up to $2,000,000, 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 (7.75% as of December
31, 1998) plus 1%, and are secured by the Company's assets. This facility which
was originally scheduled to expire on April 1, 1999 has been extended to June 1,
1999, with an increase in the interest rate to 3% over the bank's prime rate.
At December 31, 1998, the Company had an outstanding indebtedness of $1,700,000,
as well as $76,803 in outstanding letters of credit. The Company was in default
of certain financial covenants with respect to working capital and tangible net
worth requirements, for which the Company has received a waiver.
NOTE 7 - INCOME TAXES
Provisions (benefit) for income taxes included in the accompanying statements of
operations consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ (117,300) $ 98,068 $ (86,576)
State 800 32,207 (11,647)
---------- -------- ---------
(116,500) 130,275 (98,223)
---------- -------- ---------
Deferred:
Federal (463,100) (52,702) (190,243)
State (120,400) (14,891) (58,916)
---------- -------- ---------
(583,500) (67,593) (249,159)
---------- -------- ---------
Income tax provision (benefit) $ (700,000) $ 62,682 $ (347,382)
========== ======== ==========
</TABLE>
32
<PAGE> 34
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
The effective tax rate on loss before income taxes differed from the federal
statutory tax rate. The following summary reconciles income taxes at the federal
statutory tax rate with the actual taxes and effective tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Federal statutory tax rate (34.0)% (34.0)% (34.0)%
Increase in taxes resulting from:
Unrealized deferred tax asset 11.1 655.3 -
State taxes, net of federal income tax benefit .5 39.2 (4.9)
Other (1.1) (84.5) (6.8)
-------- ------- ------
Effective tax rate (23.5)% 576.0% (45.6)%
======== ======= ======
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities that give rise to the net deferred tax balance at December 31, 1998
and 1997 and their approximate tax effects, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Deferred revenue $ 20,000 $ -
Allowance for doubtful accounts 70,000 55,319
Reserve for sales and returns 193,000 32,298
Inventory - uniform capitalization 149,000 78,590
Accrued vacation 44,000 36,848
Deferred rent 10,500 14,869
Non-cash stock compensation - 39,907
Severance costs 43,000 65,095
Inventory reserves 54,500 -
Net operating loss carryforwards 375,000 -
---------- ----------
Deferred tax assets 959,000 322,926
---------- ----------
Liabilities:
Excess tax amortization of production costs and depreciation
over book amortization and depreciation (171,000) (483,882)
Royalties payable (13,000) -
---------- ----------
Deferred tax liabilities (184,000) (483,882)
---------- ----------
Net deferred tax asset (liability) before valuation allowance 775,000 (160,956)
Less: Valuation allowance (331,800) -
---------- ----------
Net deferred tax asset (liability) $ 443,200 $ (160,956)
========== ==========
</TABLE>
33
<PAGE> 35
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
At December 31, 1998, the Company had federal net operating loss carryforward
available to offset future taxable income of approximately $990,000 that expires
in 2018.
For the year ended December 31, 1998, the Company recorded a net deferred tax
asset of $443,200. The Company evaluated the gross deferred tax asset of
$775,000 taking into consideration projected operating results determined that a
valuation allowance of $331,800 should be established. The Company believes it
is more likely than not that the deferred tax asset of $443,200 will be
realized.
NOTE 8 - COMMON STOCK OPTIONS
Incentive Stock Option Plans ("ISOP")
Under the terms of the Company's ISOP, under which options to purchase 550,000
shares of common stock can be issued, all key employees are eligible to receive
non-assignable and non-transferrable options to purchase shares. The exercise
price of any option may not be less than the fair market value of the shares on
the date of grant; provided, however, that the exercise price of any option
granted to an eligible employee owning more than 10% of the outstanding common
stock may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant. No options granted may be
exercisable prior to six months from the date of grant, nor more than ten years
after the date of grant. The options granted generally vest evenly over a three
year period, beginning from the date of grant, except for the options granted on
November 25, 1996, which represented a reissue of options granted in prior
periods, which retained the original vesting terms.
Non Qualified Stock Option Plans ("NQSOP")
Under the terms of the Company's NQSOP, options to purchase 200,000 shares of
common stock can be issued to attract and retain qualified persons for positions
of substantial responsibility, such as key officers, directors, and consultants.
Options of the plan are established in the same manner as the ISOPs, are
non-assignable and non-transferrable (for employees of the Company), and are
exercisable over a 10-year period from the date of grant. Each option lapses, if
not previously exercised, on the 10th anniversary of the date of grant. The
options granted generally vest evenly over a three year period, beginning from
the date of grant, except for the options granted on November 25, 1996, which
represented a reissue of options granted in prior periods, which retained the
original vesting terms.
Directors Stock Option Plan ("DSOP")
Under the terms of the Company's DSOP, options to purchase 300,000 shares of
common stock can be issued to directors who are not employees of the Company.
The exercise price of any option may not be less than the fair market value of
the shares on the date of grant. Each person who becomes a director receives an
initial grant to purchase 30,000 shares. Thereafter, on the date of each annual
meeting of the Company's shareholders, each director will receive options to
purchase 2,500 shares. Options are non-assignable and non-transferrable and are
exercisable over a 10-year period from the date of grant or until the director
ceases to be a member of the Board. The options granted vest evenly over a three
year period beginning from the date of grant.
34
<PAGE> 36
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK OPTIONS (CONTINUED)
Nonstatutory Stock Options ("NSSO")
During 1997, the Company granted nonstatutory stock options to purchase an
aggregate of 600,000 shares of common stock to three individuals, as an
inducement to join the Company, of which 125,000 have expired. These options are
non-assignable and non-transferable, are exercisable over a seven year period
from the date of grant and vest in various increments through 2000. The Company
also issued NSSO to purchase 31,000 shares of common stock to the Chairman of
the Board of the Company, subject to shareholder approval which was obtained in
1998. During 1998, the Company granted 100,000 NSSO to two individuals as an
inducement to join the Company and 25,000 NSSO to a director of the Company. All
such options have an exercise price equal to the closing price of the Company's
common stock on the date of grant and were outside of any existing Company stock
option plan.
Non-employee Options
Under the Company's Non-qualified Stock Option Plan, Directors Stock Option Plan
and Non-Statutory Stock Options, the Company granted 37,500, 7,500 and 193,500
shares to non-employees during 1998, 1997 and 1996, respectively. As a result,
the Company recorded non-cash compensation expense related to these options of
$28,498, $43,112 and $49,052 in 1998, 1997 and 1996 with a corresponding credit
to additional paid-in capital.
35
<PAGE> 37
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK OPTIONS (CONTINUED)
All options have an exercise price equal to the closing price of the Company's
common stock on the date of grant. The weighted average fair value of options
granted during the years are included in the option activity table below.
Option activity within each plan is as follows:
<TABLE>
<CAPTION>
Non
Incentive Qualified Directors Non- Weighted
Stock Stock Stock Statutory Average
Option Option Option Stock Price
Plans Plans Plan Options Per Share
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance outstanding, January 1, 1996 234,500 106,000 75,000 - $2.873
Options granted range from
$1.375 to $2.063 per share 314,500 171,000 92,500 - $1.625
Options cancelled range from
$2.00 to $4.533 per share (232,500) (136,000) (82,500) - $2.654
-------- -------- ------- ------- ------
Balance outstanding, December 31, 1996 316,500 141,000 85,000 - $1.725
Options granted range from
$1.375 to $2.00 per share 50,000 69,000 7,500 631,000 $1.583
Options cancelled range from
$1.375 to $4.533 per share (93,000) (10,000) - - $2.367
-------- -------- ------- ------- ------
Balance outstanding, December 31, 1997 273,500 200,000 92,500 631,000 $1.580
Options granted range from
$1.50 to $2.75 per share 92,250 - 12,500 125,000 $ 2.05
Options expired range from
$1.375 to options exercised (35,250) - - (125,00) $1.457
$2.75 per share
-------- -------- ------- ------- ------
Balance outstanding, December 31, 1998 330,500 200,000 105,000 631,000 $1.613
======== ======== ======= ======= ======
Balance exercisable, December 31, 1998 193,839 145,667 66,665 233,667 $1.547
======== ======== ======= ======= ======
</TABLE>
36
<PAGE> 38
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK OPTIONS (CONTINUED)
Information relating to stock options at December 31, 1998 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- ---------------------
Weighted Average Weighted Average
-------------------------------------------------------
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Incentive Stock Option Plan:
$1.375 197,750 69.6 $ 1.375 171,172 $ 1.375
$1.788 50,000 45.0 1.788 16,667 1.788
$2.750 82,750 109.5 2.750 6,000 2.750
------- ----- -------- ------- --------
330,500 75.9 $ 1.782 193,839 $ 1.453
======= ===== ======== ======= ========
Non Qualified Stock Option
Plan:
$1.375 101,000 74.0 $ 1.375 92,668 $ 1.375
$1.625 69,000 102.0 1.625 22,999 1.625
$2.063 30,000 91.5 2.063 30,000 2.063
------- ----- -------- ------- --------
200,000 86.3 $ 1.564 145,667 $ 1.556
======= ===== ======== ======= ========
Directors Stock Option Plan:
$1.750 7,500 72.0 $ 1.750 2,499 $ 1.750
$2.063 62,500 85.7 2.063 41,666 2.063
$2.500 22,500 102.0 2.500 22,500 2.500
$2.750 5,000 109.5 2.750 - -
$2.1875 7,500 115.0 2.1875 - -
------- ----- -------- ------- --------
105,000 87.2 $ 2.176 66,665 $ 2.198
======= ===== ======== ======= ========
Nonstatutory Stock Options:
$1.375 300,000 61.0 $ 1.375 133,334 $ 1.375
$1.500 300,000 72.4 1.500 90,000 1.500
$1.625 31,000 105.0 1.625 10,333 1.625
------- ----- -------- ------- --------
631,000 68.6 $ 1.447 233,667 $ 1.434
======= ===== ======== ======= ========
</TABLE>
37
<PAGE> 39
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMON STOCK OPTIONS (CONTINUED)
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of the grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value of the grant dates consistent with the method of SFAS
123, the Company's net loss and loss per share for the years ended December 31,
1998, 1997 and 1996 would have been increased to the pro forma amounts
presented:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Net loss, as reported $(2,284,812) $ (73,565) $(412,815)
Net loss, pro forma $(2,564,154) $(246,590) $(494,765)
Basic net loss per common share, as reported $ (.45) $ (0.02) $ (0.08)
Basic net loss per common share, pro forma $ (.50) $ (0.05) $ (0.10)
Diluted net loss per common share, as reported $ (.45) $ (0.02) $ (0.08)
Diluted net loss per common share, pro forma $ (.50) $ (0.05) $ (0.10)
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1998, 1997 and 1996; expected life of options was 7
years, expected volatility of 15%, 12% and 20%, respectively, risk-free interest
rate of 6.0%, 6.0% and 6.1%, respectively, and a 0% dividend yield. The weighted
average fair value on the date of grants for options granted during 1998, 1997
and 1996 was $.74, $.55 and $.55 per option.
Due to the fact that the Company's stock option programs vest over many years
and additional awards are made each year, the above proforma numbers are not
indicative of the financial impact had the disclosure provisions of SFAS 123
been applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995 that vested in 1996, 1997,
and 1998.
NOTE 9 - COMMON STOCK PURCHASE WARRANTS
In connection with its initial public offering of common stock, the Company sold
to the underwriter, for $100, warrants to purchase 170,000 shares of common
stock at $3.75 per share. The warrants were exercisable during the four year
period commencing on December 4, 1992. All such warrants expired as of December
4, 1996. No warrants were exercised.
38
<PAGE> 40
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under various operating
leases which expire at various dates through January 31, 2002. The facility
lease has a renewal option to extend the lease for an additional five years at
an agreed upon rental amount. Future minimum lease payments under the
noncancelable portion of these leases having terms in excess of one year at
December 31, 1998 are presented in the schedule below.
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C>
1999 $ 230,190
2000 235,424
2001 235,424
2002 25,428
---------
$ 726,466
=========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $248,622,
$311,864 and $276,579.
Employment Agreements
Effective January 1995, the Company entered into an employment agreement with an
employee with an initial term of three years and compensation of $90,000. This
agreement was extended to December 31, 1999.
On January 13, 1997, the Company entered into an employment and compensation
agreement with a new President and Chief Operating Officer. This agreement
expires on December 31, 1999. The minimum aggregate obligation under this
agreement in 1999 is $292,200. The agreement also allowed for reimbursable
expenses in 1997 amounting up to approximately $57,000.
On January 13, 1997, the Company entered into another employment and
compensation agreement with an Executive Vice President and Creative Director.
On January 30, 1998, this individual resigned from the Company. Upon
resignation, the employment and compensation agreement was cancelled and the
Company entered into a consulting agreement. The consulting agreement commenced
in February 1998 for a period of twelve months at $12,500 per month. This
agreement expired on January 31, 1999.
39
<PAGE> 41
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS (CONTINUED)
On October 1, 1997, the Company entered into an employment agreement and
compensation agreement with the Chairman of the Board and Chief Executive
Officer. This agreement expires on September 30, 2000, unless further extended
or sooner terminated as provided in the agreement. The Company shall pay the
executive an initial annual salary of $250,000 subject to cost of living
increases and annual Board evaluation. The agreement also allows for an
additional payment of $60,000 annually in lieu of paying any life insurance
premiums which benefit the executive. Additionally, the agreement provides
$10,000 toward the cost of a long-term disability insurance policy. If such
policy is not available, this amount is to be paid to the executive at year end.
A provision for an auto allowance at $10,200 per year, as well as, reimbursement
for other related expenses is included in the agreement.
On November 13, 1997, the Company reached an agreement with a new Executive Vice
President and Chief Financial Officer for employment to begin January 1998. The
employment agreement effective January 19, 1998, was for an initial term of
three years with compensation of $175,000 in the first year, $183,750 in the
second year and $192,950 in the third year.
Consulting Agreement
On November 1, 1996, the Company entered into a consulting agreement with the
former President. This consulting agreement expires on December 31, 2001. The
minimum aggregate obligation under this agreement is: 1999 - $150,000; 2000 -
$120,000; and 2001 - $120,000. Management evaluated the future benefit of the
consulting agreement to the Company and determined that $192,000 related to the
consulting agreement should be recorded in fiscal year 1996 as additional
severance costs. The short term portion of liability is amortized over the term
of the agreement, and is recorded as a reduction to the related expense. At
December 31, 1998, the Company has a remaining liability of $108,672, of which
the short term portion of $41,664 has been classified as accrued expenses and
the long term portion of $67,008 has been classified as other liabilities.
NOTE 11 - SALES
Export sales accounted for approximately 44%, 52% and 40% of the Company's net
sales for the years ended December 31, 1998, 1997 and 1996. Sales by geographic
area are as follows:
<TABLE>
<CAPTION>
Geographic Area 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Europe 30% 32% 28%
Asia 4% 13% 8%
Other 10% 7% 4%
</TABLE>
Approximately 13% of sales was made to one customer in 1998, 15% of sales in
1997 were made to one customer and 25% and 11% of sales in 1996 were made to two
customers. During the year ended December 31, 1998, approximately 31% of the
Company's sales were derived from five key customers.
40
<PAGE> 42
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - PURCHASES
The Company does not have manufacturing facilities. Most of the Company's
products are manufactured by four printers located in Hong Kong, Colombia,
Thailand, and Singapore. The Company's operations are subject to the customary
risks of doing business abroad.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company maintains a qualified defined contribution employee benefit plan
(the "401(k) plan") covering substantially all employees who have been employed
for greater than one year and are at least 21 years of age. The Company may make
a matching contribution of an amount equal to a specified percentage of employee
contributions. In addition, the Board of Directors may further elect to make
discretionary contributions. As of June 1, 1998, the Company's matching
contribution was suspended. Total contributions made by the Company to the
401(k) plan during the years ended December 31, 1998, 1997 and 1996 were
$19,421, $35,941 and $64,344.
NOTE 14 - RELATED PARTY TRANSACTIONS
Transactions With the Hunt Group
In May 1994, the Company entered into an agreement with an affiliated entity,
The Hunt Creative Group ("Hunt Group"), where the principal owner is the
Company's Chief Executive Officer and a member of the Company's Board of
Directors. The Company agreed to subsidize this entity from August 1, 1994
through December 31, 1996 in return for a right of first refusal on any products
developed by the entity pursuant to the terms of the agreement. The subsidy was
$400,000 for 1996 and $0 for 1997 and 1998. At December 31, 1997 and 1996, the
Company had advance royalties less royalties earned of $70,000 and $239,000 to
the Hunt Group.
Merger With the Hunt Group
On March 20, 1998, the Company signed an agreement and plan of merger with the
Hunt Group, a related party, pursuant to which the Hunt Group was merged with
and into the Company. The merger was approved by the Company's shareholders at
its annual meeting on July 22, 1998. The merger was accounted for as a
combination of entities under common control, which is accounted for in a
similar manner as a pooling of interest and the financial statements have been
restated to include the results of the Hunt Group for all periods presented.
Under the terms of the agreement, the Company issued to the Hunt Family Trust,
sole shareholder of the Hunt Group, 250,000 shares of the Company's stock for
all the outstanding stock of the Hunt Group. Additionally, the agreement called
for an additional 78,000 contingent shares to be issued to the Hunt Family Trust
in three separate increments of 26,000 each when cumulative sales of the Hunt
Group developed products exceed $5,000,000, $6,000,000 and $7,000,000,
respectively. As of December 31, 1998, cumulative sales of the Hunt Group
developed products exceeded $7,000,000, and accordingly, an additional 78,000
shares of the Company stock were issued to the Hunt Family Trust and were
included in weighted average shares outstanding based on the date the
contingency was met. These shares are restricted securities and thus are not
registered for resale unless provided for in a registration statement. The
agreement also transfers the ownership of any and all copyrights or patents to
the Company. The agreement also included the Hunt Group forgiving all royalties
earned subsequent to October 1, 1997.
41
<PAGE> 43
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
Combined and separate results of Intervisual Books, Inc. and the Hunt Creative
Group are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Intervisual Books, Inc. $ 11,397,525 $ 19,033,430 $ 16,766,292
Hunt Creative Group - 123,947 445,127
Eliminations - (123,947) (445,127)
------------ ------------ ------------
$ 11,397,525 $ 19,033,430 $ 16,766,292
------------ ------------ ------------
NET INCOME (LOSS):
Intervisual Books, Inc. (2,284,812) (112,075) (544,242)
Hunt Creative Group - 38,510 131,427
------------ ------------ ------------
$ (2,284,812) $ (73,565) $ (412,815)
============ ============= ============
</TABLE>
Operating results of the Hunt Creative Group were not significant for the period
January 1 through March 19, 1999.
NOTE 15 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded adjustments which
increased its loss in the amount of approximately $640,000 which consists of
$312,000 relating to a contract settlement and consulting agreement with the
Company's former President and Chief Executive Officer, increased legal fees of
$63,000, expenses related to the move of its corporate headquarters of $141,000,
expenses related to the pursuit and evaluation of an acquisition candidate of
$94,000 and expenses related to hiring of a new President and Vice President
$30,000.
In the fourth quarter of 1998, the Company recorded net adjustments that
increased its net loss by approximately $525,000, which principally consists of
$155,000 write-off of various accounts receivable, $63,000 write-off of
inventory materials, recording $121,500 inventory reserves, $43,000 write-off of
book production costs, and $99,500 write-off of royalty advances. The Company
believes it is impracticable to determine which quarterly period the
aforementioned adjustments relate to.
42
<PAGE> 44
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - EARNINGS PER SHARE
The following is a reconciliation of the weighted average number of shares used
to compute basic and diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding 5,110,317 5,036,132 5,032,798
Diluted effect of stock options - - -
--------- --------- ---------
Diluted weighted average shares outstanding 5,110,317 5,036,132 5,032,798
========= ========= =========
</TABLE>
Options to purchase 1,266,500, 1,197,000 and 542,500 shares were outstanding
during the years ended 1998, 1997 and 1996, respectively, but were not included
in the computation of diluted loss per common share because the effect would be
antidilutive.
NOTE 17 - SUBSEQUENT EVENTS
On March 30, 1999, the Company signed a definitive agreement to acquire Fast
Forward Marketing Inc., "Fast Forward". Fast Forward is a distributor of video
and audio products for major motion picture studios. The acquisition would be
accounted for as a purchase and is contingent upon due diligence proceedings, a
fairness opinion, and obtainment of adequate financing. The terms of the
proposed transaction will include cash and stock, but have not been finalized
and are subject to standard conditions.
Subsequent to December 31, 1998, the Company formed a strategic alliance with a
related book packager company, White Heat, Ltd. White Heat is also a creator and
producer of interactive pop-up and novelty books. The Company assumed all
production and sales responsibilities for books produced by White Heat, in
exchange the Company shall pay White Heat a certain percent of net profits on
all titles created by White Heat and any new titles covered by the agreement.
NOTE 18 - LIQUIDITY
At December 31, 1998, the Company had an outstanding indebtedness of $1,700,000
as well as $76,805 in outstanding letters of credit. The Company was in default
of certain financial covenants with respect to working capital and tangible net
worth requirements. The bank has agreed to waive those covenants. The bank loan
agreement expires on June 1, 1999.
The Company is in the process of negotiating with the bank for a twelve month
extension of its current credit line. The Company is also negotiating with other
primary lenders as an alternative source of credit. In addition, the Company,
subject to certain conditions, has obtained a commitment letter from a private
party for a revolving subordinated credit facility in the amount of $2,300,000
which would carry a rate of approximately 500 basis points over the 3-month
LIBOR rate. The proposed initial term of this facility is twelve months and
would expire on April 15, 2000. The Company, at its sole discretion, may extend
the term of this facility under the same terms and conditions for an additional
twelve months. If an extension is requested, the Company will grant up to
150,000 warrants with an exercise price equal to the average twenty day trading
price subsequent to the extension date. These warrants would have a term of two
years
43
<PAGE> 45
INTERVISUAL BOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 18 - LIQUIDITY (CONTINUED)
from the date of grant. This facility is subject to the Company's ability to
obtain a twelve month $2,000,000 line from a primary lender and the presentation
of audited financial statements for the year ended December 31, 1998. Management
believes that the ability of the Company to obtain a $2,000,000 primary line is
enhanced by the subordinated note commitment. The Company expects positive cash
flow from operations for 1999 but is reliant on its ability to finalize
financing arrangements with a primary lender in addition to closing the
subordinated note facility. No assurance can be given that these results from
operations or transactions will occur.
44
<PAGE> 46
INTERVISUAL BOOKS, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------------------------------------------------------------
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of year Expenses Deductions(a) Year
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for possible losses
on receivables
Year ended December 31,
1998 $ 128,000 $ 66,000 $ (19,000) $ 175,000
1997 161,000 10,000 (43,000) 128,000
1996 158,000 100,000 (97,000) 161,000
Allowance for sales returns
Year ended December 31,
1998 $ 75,000 $ 409,000 $ - $ 484,000
1997 - 75,000 - 75,000
1996 - - - -
Allowance for inventory
write-offs
Year ended December 31,
1998 $ - $ 122,000 $ - $ 122,000
1997 - - - -
1996 - - - -
Accumulated amortization of
production costs
Year ended December 31,
1998 $14,266,567 $ 1,454,473 $ - $ 15,721,040
1997 12,936,064 1,330,503 - 14,266,567
1996 11,647,134 1,288,930 - 12,936,064
</TABLE>
(a) Write-off of uncollectible accounts.
45
<PAGE> 47
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
46
<PAGE> 48
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Waldo H. Hunt 78 Chairman of the Board, Chief
Executive Officer, Director
Nathan N. Sheinman 49 President, Chief Operating
Officer, Director
Dan P. Reavis 49 Executive Vice President,
Chief Financial Officer,
Director
Gail A. Thornhill 46 Controller, Secretary
Gordon Hearne 75 Director
Leonard William Jaffe 80 Director
John J. McNaughton 76 Director
Peter Seymour 66 Director
</TABLE>
Directors of the Company hold office until the next annual meeting of
the stockholders, and until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors subject to the
provisions of their employment contracts, if any.
Waldo H. Hunt has been a director and the Chairman of the Board of the
Company since its organization in 1975. In November 1996, he assumed the
additional role of Chief Executive Officer. He previously served as its Chief
Executive Officer and Chief Financial Officer from 1975 to January 1992. From
1994 through December 1996, Mr. Hunt also served as Chairman of The Hunt
Creative Group, a company founded by Mr. Hunt in 1994 (the "Hunt Group"). Mr.
Hunt is the founder of the Company and is considered by many to be the father of
the modern-day pop-up industry.
Nathan N. Sheinman became President and Chief Operating Officer of the
Company on January 27, 1997. Mr. Sheinman joined the Board as a director in
March 1997. Prior to joining the Company, Mr. Sheinman was employed by Penguin
USA serving as Senior Vice President of Special Sales, Publisher of Looney Tunes
books and Co-publisher of Penguin USA's Packaging Division from March 1990 to
December 1996. From 1986, Mr. Sheinman was Vice President Sales/Special Markets
and Vice President Marketing and Director of Sales, Special Markets for Penguin
Books Canada.
47
<PAGE> 49
Dan P. Reavis became Executive Vice President and Chief Financial
Officer on January 19, 1998. Mr. Reavis joined the Board as a director in
February 1998. Prior to joining the Company, Mr. Reavis was the Executive Vice
President of Operations and Chief Financial Officer of Price Stern Sloan
Publishers for ten years before that company was acquired by the Putnam Berkeley
Group.
Gail A. Thornhill was appointed Secretary of the Company in February
1993. Ms. Thornhill has been employed by the Company since 1980 in various
capacities and has served as its Controller and Chief Accounting Officer since
February 1992.
Gordon Hearne became a director of the Company in February 1996. He is a
principal of Hearne & Spector, an advertising agency formed in March 1995. Mr.
Hearne was previously employed by the Company as director of its commercial
division and later as marketing director of the division from June 1985 to June
1991 when the commercial division was sold to R.R. Donnelley. After such sale,
he continued working as a consultant to an affiliate of R. R. Donnelly until
February 1995.
Leonard W. Jaffe became a director of the Company in February 1998.
Prior to joining the Company, Mr. Jaffe was a director, Vice-Chairman and
Chairman of the Executive Committee of National Education Corporation ("NEC")
from 1976 until acquired by Harcourt General in June of 1997. He was a director
of Steck-Vaughn Publishing Company from 1993 until acquired by Harcourt General
in February 1998. He also serves as a consultant to various US and international
companies.
John J. McNaughton has been a director of the Company since September
1991. Mr. McNaughton was a member of the Board of Directors of National
Education Corporation ("NEC"), a company he founded in 1954 until NEC was
acquired by Harcourt General in June 1997. From 1954 to 1984, Mr. McNaughton was
the Chief Executive Officer and from 1954 to 1988 was the Chairman of the Board
of NEC.
Peter Seymour became a director of the Company in February 1996. He was
the Company's Vice President and Editorial Director from January 1991 until his
retirement in June 1995. Mr. Seymour had been employed by the Company since
October 1988 as Editorial Director; and from 1980 to October 1988, he was a
consultant and free-lance editor for the Company.
48
<PAGE> 50
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of copies of such forms
furnished to the Company and certain written representations, the Company
believes that during the last fiscal year all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10-percent beneficial
owners were complied with the exception that Mr. Reavis filed in July 1998 after
the 10th day of the month a Form 4 disclosing the purchase of Company stock
which occurred in June 1998.
49
<PAGE> 51
Item 11. EXECUTIVE COMPENSATION
Cash Compensation
The following table sets forth in the prescribed format the compensation
paid to all person's serving as the Company's Chief Executive Officer and the
other executive officers of the Company which received total annual salary and
bonus in excess of $100,000 for services rendered in all capacities during the
Company's last completed fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options Compensation
Principal Position Year (1) ($) ($) ($) (2) (#) (4) ($) (3)
------------------ -------- ------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Waldo H. Hunt 1998 235,416 - 69,179 -- 3,125
Chairman, CEO 1997 243,333 - 68,414 150,000 4,750
1996 1 - -- -- --
Nathan N. Sheinman 1998 258,958 - -- -- 5,115
President, COO 1997 233,974 - -- 300,000 --
Dan P. Reavis 1998 156,939 - -- -- --
Executive Vice President 1997 - - -- 175,000 --
CFO
</TABLE>
(1) Mr. Sheinman and Mr. Reavis joined the Company in 1997 and 1998,
respectively, and, accordingly, no information is disclosed with respect to
prior years for these individuals. In November 1996, Mr. Hunt assumed the
role of Chief Executive Officer of the Company upon the resignation of the
Company's former President and CEO.
(2) The amount disclosed in this column includes $60,000 for a life insurance
policy and auto allowances.
(3) The amounts disclosed in this column represent contributions relating to the
Company's 401(k) plan.
(4) In November 1997, Mr. Reavis was granted options as part of his employment
agreement as an inducement to join the Company in January 1998.
50
<PAGE> 52
The following tables set forth certain information with respect to the
executive officers named in the Summary Compensation table in the prescribed
formats with respect to options granted and exercised under the Company's
various stock option plans during the last fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Potential Realizable
Securities Value at Assumed
Underlying % of Total Annual Rates of Stock
Options Options Granted Exercise Price Appreciation
Granted To Employees In Price Expiration for Option Term
Name (#) Fiscal Year (%) ($) Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Waldo H. Hunt 0 0.0% - - - -
Nathan Sheinman 0 0.0% - - - -
Dan Reavis 0 0.0% - - - -
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at FY-End at FY-End(1)
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Waldo H. Hunt None N/A 49,999 100,001 0 0
Nathan Sheinman None N/A 183,334 116,666 0 0
Dan P. Reavis None N/A 90,000 85,000 0 0
</TABLE>
(1) The amounts in this column are calculated using the difference between the
closing market price of the Company's common stock at the Company's 1998
fiscal year-end and the option exercise prices. The closing market price of
the Company's common stock was more than the option exercise prices.
Director Compensation. Each director who is not an employee receives a
$5,000 annual retainer, $1,000 for each Board meeting attended in person, $500
for each meeting of a committee of the Board which is separate from a Board
meeting attended in person, and $250 for each Board or committee meeting
attended by telephone. Under the Company's Non-employee Director Stock Option
Plan, non-employee directors receive an initial option grant to purchase 30,000
shares of common stock when such person is first elected or appointed as a
Company director and thereafter, on the date of each annual meeting of the
Company's shareholders, an additional grant to purchase 2,500 shares of common
stock (other than to directors who receive an initial grant during the calendar
year in which the
51
<PAGE> 53
annual meeting is held), provided that such non-employee director continues in
office after the annual meeting.
Employment Agreements. In January 1997, the Company entered into a
three-year Employment Agreement with Mr. Sheinman employing Mr. Sheinman as the
Company's President and Chief Operating Officer. Under his agreement, Mr.
Sheinman is to receive an initial annual salary of $275,000, an automobile
allowance, relocation assistance and certain other benefits. Pursuant to his
Employment Agreement, Mr. Sheinman was granted options to purchase 300,000
shares of the Company's common stock.
Effective October 1997, the Company entered into an Employment Agreement
with Waldo H. Hunt, the Company's Chairman of the Board and Chief Executive
Officer. This agreement expires on September 30, 2000, unless further extended
or sooner terminated as provided in the agreement. The Company shall pay the
executive an initial annual salary of $250,000 subject to cost of living
increases and annual board evaluation. The agreement also allows for lifetime
additional annual payments of $60,000 in lieu of paying any life insurance
premiums which benefit Mr. Hunt. Additionally, the agreement provides $10,000
toward the cost of a long term disability insurance policy. If such policy is
not available, this amount is to be paid to Mr. Hunt at year end. A provision
for an auto allowance at $10,200 per year as well as reimbursement for other
related expenses and certain other benefits are included in the agreement.
Pursuant to his Employment Agreement, Mr. Hunt was also granted options to
purchase 150,000 share of the Company's common stock.
In November 1997, the Company reached an agreement with a Dan P. Reavis,
for employment as the Company's Executive Vice President and Chief Financial
Officer to begin January 1998. The employment agreement effective January 19,
1998, was for an initial term of three years with compensation of $175,000 in
the first year, $183,750 in the second year and $192,950 in the third year.
Pursuant to his Employment Agreement, Mr. Reavis was granted options to purchase
175,000 shares of the Company's common stock.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of common stock of the Company as of February 26, 1999, by any person
who is known by the Company to be the beneficial owner of more than five (5%)
percent of the Company's common stock, by each director of the Company, each
executive
52
<PAGE> 54
officer named in the Summary Compensation Table, and by all current directors
and officers as a group. Except as otherwise noted, the following shareholders
have sole voting and investment power with respect to the shares indicated
except to the extent that authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent
Name Ownership(1)(2) of Class
- ---- --------------- --------
<S> <C> <C>
Waldo H. Hunt/The Hunt Trust (3) . . . . . . . . . 2,933,416 55.7
2716 Ocean Park Blvd. #2020
Santa Monica, CA 90405
Dan P. Reavis . . . . . . . . . . . . . . . . . . . 95,000 1.8
Nathan N. Sheinman. . . . . . . . . . . . . . . . . 183,334 3.4
Gordon Hearne. . . . . . . . . . . . . . . . . . . 31,333 *
Leonard W. Jaffe. . . . . . . . . . . . . . . . . . 8,667 *
John J. McNaughton. . . . . . . . . . . . . . . . . 53,999 1.0
Peter Seymour . . . . . . . . . . . . . . . . . . . 39,591 *
All directors and executive officers
as a group (8 persons). . . . . . . . . . . . . . 3,379,257 59.4
</TABLE>
- ---------------
* Less than 1%
(1) Information relating to beneficial ownership of shares of Company common
stock is based upon the rules set forth under the Securities Exchange Act of
1934. Under such rules, more than one person may be deemed to be a beneficial
owner of the same securities.
(2) Includes the following number of shares of common stock that may be
purchased upon the exercise of options granted by the Company which are
exercisable on February 26, 1999 or within 60 days thereafter: Mr. Hunt, 49,999;
Mr. Reavis, 90,000; Mr. Sheinman, 183,334; Mr. Hearne, 30,833; Mr. Jaffe, 1,667;
Mr. McNaughton, 49,999; Mr. Seymour, 30,000; and all directors and executive
officers as a group, 463,749.
(3) All such shares are owned of record either by Mr. Hunt or by Waldo H. Hunt
and Patricia E. Hunt, Trustees of The Hunt Trust, UTA May 30, 1980, of which
both Trustees have shared voting and investment power.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1994, the Company and Mr. Hunt entered into a letter agreement
pursuant to which Mr. Hunt formed The Hunt Creative Group
53
<PAGE> 55
("Hunt Group"), a company owned by Mr. Hunt. The Hunt Group created new products
not normally pursued by the Company in its day-to-day activities and under the
letter agreement, the Company received a right of first refusal on products
developed by the Hunt Group. Under the agreement, products developed by the Hunt
Group and accepted and subsequently sold by the Company earn a 10% royalty
payable to the Hunt Group.
In July 1998, the Company's shareholders approved an Agreement and Plan
of Merger with the Hunt Group and the Hunt Family Trust whereby the Hunt Group
was merged with and into the Company. Under the terms of the agreement, Mr. Hunt
and the Hunt Group gave up rights to all commissions or royalties due after
October 1, 1997 on products developed by the Hunt Group and sold by the Company
in exchange for 250,000 shares of the Company's common stock which were issued
on the effective date of the merger and an additional 78,000 shares which were
issued later in 1998 when certain sales requirements had been met.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report.
1. Financial Statements. A list of financial statements
is contained in "Index to Financial Statements" on page 21
hereof.
2. Financial Statement Schedule. The following financial
statement schedule of Intervisual Books, Inc., for the
years ended December 31, 1998, 1997, and 1996 is filed as
a part of this Report and should be read in conjunction
with the Financial Statements of Intervisual Books, Inc.
<TABLE>
<CAPTION>
Schedule Page
- -------- ----
<S> <C> <C>
II Valuation and Qualifying Accounts.............. 45
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is indicated in the Financial Statements or Notes thereto.
3. Exhibits.
54
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated and Amended Articles of Incorporation dated
January 8, 1992 (Incorporated by reference to Exhibit 3.1
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.)
3.2 Amended and Restated Bylaws (Incorporated by reference
to Exhibit 3.2 to Registrant's Statement on Form S-18 (No.
33-43068-LA).)
3.3 Amendment to Article III, Section 2 to Amended and
Restated Bylaws.
3.4 Amendment to Article III, Section 4 to Amended and
Restated Bylaws.
10.1* Incentive Stock Option Plan and Form of Incentive Stock
Option Agreement (Incorporated by reference to Exhibit
10.1 to Registrant's Registration Statement on Form S-18
(No. 33-43068-LA).)
10.2* 1993 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 4.3 to Registrant's
Registration Statement on Form S-8 (No. 33-
58990).)
10.3* Non-Qualified Stock Option Plan and Form of
Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.5 to
Registrant's Registration Statement on Form
S-18 (No. 33-43068-LA).)
10.4* 1993 Non-Qualified Stock Option Plan (Incorporated by
reference to Exhibit 4.3 of Registrant's Registration
Statement on Form S-8 (No. 33-58990).)
10.5* Letter Agreement dated May 12, 1994 between the
Company and Waldo H. Hunt (Incorporated by reference
to Exhibit 28.1 to Registrant's Current Report on
Form 8-K dated May 31, 1994.)
</TABLE>
55
<PAGE> 57
<TABLE>
<S> <C>
10.6* Employment Agreement between the Company and Rodger
Smith (Incorporated by reference to Exhibit 10.27 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.7* Non-employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.28 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.)
10.8* Consulting Agreement between the Company and Charles
E. Gates (Incorporated by reference to Exhibit 10.13 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.9* Employment Agreement between the Company and Nathan
N. Sheinman(Incorporated by reference to Exhibit 10.15 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.10* Nonstatutory Stock Option Agreement to purchase 200,000
shares of common stock between the Company Nathan N.
Sheinman (Incorporated by reference to Exhibit 10.16 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.11* Nonstatutory Stock Option Agreement to purchase 100,000
shares of common stock between the Company and Nathan N.
Sheinman (Incorporated by reference to Exhibit 10.17 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.12 Office Lease between Watt Headquarters Limited
Partnership and the Company dated August 8, 1996
(Incorporated by reference to Exhibit 10.21 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.13 Second Lease Addendum between Watt Headquarters Limited
Partnership and the Company dated December 3, 1996
(Incorporated by reference to Exhibit 10.22 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.14 Amendment to Lease Agreement between Watt Headquarters
Limited Partnership and the Company dated January 27, 1997
(Incorporated by reference to
</TABLE>
56
<PAGE> 58
<TABLE>
<S> <C>
Exhibit 10.23 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.)
10.15* Form of Indemnification Agreement provided to Company's
executive officers and directors (Incorporated by
reference to Exhibit 10.18 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.)
10.16* Employment Agreement between the Company and Waldo H.
Hunt (Incorporated by reference to Exhibit 10.19 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.17* Nonstatutory Stock Option Agreement between the Company
and Waldo H. Hunt (Incorporated by reference to Exhibit
10.20 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.)
10.18* Employment Agreement between the Company and Dan P. Reavis
(Incorporated by reference to Exhibit 10.21 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.19* Nonstatutory Stock Option Agreement between the Company
and Dan P. Reavis (Incorporated by reference to Exhibit
10.22 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.)
10.20 Business Loan Agreement between the Company and Santa
Monica Bank (Incorporated by reference to Exhibit 10.23 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.21 Commercial Security Agreement between the Company and
Santa Monica Bank (Incorporated by reference to Exhibit
10.24 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.)
10.22 Assignment of Copyright as Collateral for Line of Credit
between the Company and Santa Monica Bank (Incorporated by
reference to Exhibit 10.25 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.)
</TABLE>
57
<PAGE> 59
<TABLE>
<S> <C>
10.23 Promissory Note between the Company and Santa Monica Bank
(Incorporated by reference to Exhibit 10.26 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.24 Indemnification Agreement between the Company and Waldo
Hunt and The Hunt Family Trust (Incorporated by reference
to Exhibit 10.27 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.)
10.25 Severance Agreement and General Release between the
Company and Neil Stuart (Incorporated by reference to
Exhibit 10.28 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.)
10.26 Consulting Agreement between the Company and Neil Stuart
(Incorporated by reference to Exhibit 10.29 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.27 Agreement and Plan of Merger between the Company and The
Hunt Creative Group and The Hunt Family Trust
(Incorporated by reference to Exhibit 10.30 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
10.28* Amendment of Nonstatutory Stock Option Agreement
between the Company and Dan P. Reavis
10.29* Nonstatutory Stock Option Agreement between the Company
and Leonard William Jaffe
10.30 Waiver Letter from Santa Monica Bank
10.31 Notice of Final Agreement and Change in Terms
Agreement between the Company and Santa Monica Bank
23. Consent of Independent Certified Public Accountants
24. Power of Attorney (contained on signature page)
27. Financial Data Schedule
</TABLE>
- --------------------------
* Indicates management contract or compensatory plan or arrangement
58
<PAGE> 60
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
59
<PAGE> 61
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTERVISUAL BOOKS, INC.
Date: March 30, 1999 By: /s/ Nathan N. Sheinman
---------------------------------
Nathan N. Sheinman, President,
Chief Operating Officer, Director
Date: March 30, 1999 By: /s/ Dan P. Reavis
---------------------------------
Dan P. Reavis, Executive Vice
President, Chief Financial Officer,
Director
Date: March 30, 1999 By: /s/ Gail A. Thornhill
---------------------------------
Gail A. Thornhill, Controller
Chief Accounting Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Waldo H. Hunt, Nathan N. Sheinman and Dan P.
Reavis, or any of them, his attorney-in-fact, each with the power of
substitution in any and all capacities, to sign any amendments to this Report
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Waldo H. Hunt Chairman, Chief March 30, 1999
- ------------------------- Executive Officer,
WALDO H. HUNT Director
</TABLE>
60
<PAGE> 62
<TABLE>
<S> <C> <C>
/s/ Nathan N. Sheinman President, Chief March 30, 1999
- ------------------------- Operating Officer,
NATHAN N. SHEINMAN Director
/s/ Dan P. Reavis Executive Vice March 30, 1999
- ------------------------- President, Chief
DAN P. REAVIS Financial Officer,
Director
/s/ Leonard W. Jaffe Director March 30, 1999
- -------------------------
LEONARD WILLIAM JAFFE
/s/ Gordon Hearne Director March 30, 1999
- -------------------------
GORDON HEARNE
Director
- -------------------------
JOHN J. MCNAUGHTON
/s/ Peter Seymour Director March 30, 1999
- -------------------------
PETER SEYMOUR
</TABLE>
61
<PAGE> 63
INTERVISUAL BOOKS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX OF EXHIBITS FILED WITH REPORT
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
10.28* Amendment of Nonstatutory Stock Option Agreement between the Company and
Dan P. Reavis
10.29* Nonstatutory Stock Option Agreement between the Company and Leonard
William Jaffe
10.30 Waiver Letter from Santa Monica Bank
10.31 Notice of Final Agreement and Change in Terms Agreement between the
Company and Santa Monica Bank
23. Consent of Independent Certified Public Accountants
24. Power of Attorney (contained on signature page)
27. Financial Data Schedule
</TABLE>
62
<PAGE> 1
EXHIBIT 10.28
[INTERVISUAL BOOKS, INC. LETTERHEAD]
July 16, 1998
Dan P. Reavis
17177 Palisades Circle
Pacific Palisades, CA 90272
Re: Amendment of Nonstatutory Stock Option Agreement ("Option Agreement")
Dear Dan:
Intervisual Books, Inc. hereby amends your Option Agreement dated
November 13, 1997 for 175,000 shares of the Company's common stock. This
agreement is amended only as to the following:
Paragraph B. Item 1. Grant.
1. Amendment. The Company hereby agrees to reduce the grant price of
referenced stock options to $1.50 per share (which price equals the fair market
value of the Company's common stock on July 16, 1998, the date of this
amendment).
2. Miscellaneous. Except as expressly amended herein, all the terms and
conditions of the Option Agreement remain in full force and effect. This letter
may be executed in one or more counterparts, each of which shall be deemed an
original. This letter shall be construed and enforced in accordance of the laws
of the State of California.
<PAGE> 2
Please acknowledge your agreement to this letter by executing the
enclosed copy of this letter and returning the copy to the undersigned.
INTERVISUAL BOOKS, INC., a
California corporation
By:/s/ WALDO H. HUNT
--------------------------------
Waldo H. Hunt
Chairman of the Board
Agreed:
/s/ DAN P. REAVIS Date: AUGUST 13, 1998
- -------------------------------- -------------------------------
DAN P. REAVIS, an individual
<PAGE> 1
EXHIBIT 10.29
INTERVISUAL BOOKS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement (the "Agreement") is
made as of this 16th day of July, 1998, between Intervisual Books, Inc. (the
"Company") and Leonard William Jaffe ("Director").
RECITALS
A. Director is providing extensive services to the Company and the
Company desires to compensate Director for such services. In an effort to
conserve the Company's cash, the Company and the Director have agreed that the
Company shall grant as of the date of this Agreement a nonqualified stock option
to Director to purchase 25,000 shares of the Company's common stock (the
"Shares") as provided for herein.
B. The Company and Director desire to enter into this Agreement to
memorialize the grant of the option to Director.
THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the parties hereto agree
as follows:
1. Grant of Option. The Company hereby grants to Director the
right and option (the "Option") to purchase, on the terms and conditions
contained herein, all or any part of an aggregate of 25,000 Shares of Company
common stock. (The number of Shares subject to this Option is subject to
adjustment, under certain circumstances, as provided in Section 6 of this
Agreement.) Director agrees that Director and any other person who may be
entitled hereunder to exercise the Option shall be bound by all terms and
conditions of this Agreement.
2. Purchase Price. The purchase price of the Shares subject to
this Option shall be One Dollar and Fifty Cents ($1.50) per Share, which price
constitutes the closing price of the Company's common stock on the date of
grant. (The purchase price for each Share subject to this Option is subject to
adjustment, under certain circumstances, as provided in Section 6 of this
Agreement.)
3. Vesting Schedule. The Option granted under this Agreement shall
become exercisable on the following schedule:
<PAGE> 2
(i) Beginning on February 10, 1999, as to 8,333 of
the Shares covered by this Option;
(ii) Beginning on February 10, 2000, as to 8,333 of
the Shares covered by this Option; and
(iii) Beginning on February 10, 2001, as to 8,334 of
the Shares covered by this Option.
No Option shall be exercisable as to any Shares with respect to which such
Option previously has been exercised.
4. Exercise. Prior to its expiration and in accordance with the
vesting schedule outline in Section 3 above, this Option may be exercised, in
whole or in part (provided, however, that the Company shall not be required to
issue fractional shares) by delivery of written notice of exercise to the
Secretary of the Company accompanied by the full purchase price of the Shares
being purchased. The purchase price shall be paid at the time of exercise (i) in
cash, (ii) by delivery to the Company of outstanding shares of the Company's
common stock previously held by the Director, the fair market value of which, as
of the date of exercise, is equal to the purchase price, or (iii) by any
combination of cash and previously owned shares.
During Director's lifetime, this Option shall be exercisable
only by Director or, in the event of his or her incompetence, by his or her duly
appointed guardian (provided, however, that such guardian presents proof
satisfactory to the Company of his or her right to exercise this Option on
behalf of such Director). In the event of Director's death, this Option may be
exercised by such Director's designated beneficiary or, in the absence of such
designation, by will or the laws of dissent and distribution for a period of six
(6) months following the Director's death, but only to the extent that this
Option was exercisable on the date of such death.
5. Nontransferability. This Option shall be nonassignable and
nontransferable other than by will or the laws of dissent and distribution. Any
attempt to assign, transfer, pledge, hypothecate or otherwise dispose of this
Option or any right or privilege granted herein contrary to the above provision
shall be void and of no effect.
6. Adjustment Upon Changes in Capitalization. Subject to any
required action by stockholders, the number of shares of Common Stock covered by
this Option and the exercise price thereof shall be proportionately adjusted for
any increase or decrease in the number of issued shares of the Company's common
stock resulting from a subdivision or consolidation of such shares or the
payment of a stock dividend (but only of common stock) or any other increase or
decrease in the number of issued shares of
-2-
<PAGE> 3
common stock effected without receipt of consideration by the Company. Subject
to any required action by stockholders, if the Company is the surviving
corporation in any merger or consolidation, this Option shall pertain and apply
to the securities to which a holder of the number of shares of common stock
subject to the Option would have been entitled.
The foregoing adjustments shall be made by the Company's Board
of Directors, whose determination shall be conclusive and binding on the Company
and Employee.
Except as expressly provided in this Section 6, Employee shall
have no rights by reason of any subdivision or consolidation of shares of stock
of any class, the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class, or by reason of any
dissolution, liquidation, merger, consolidation or spin-off of assets or stock
of another corporation, and any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares subject to this option or the exercise price thereof.
This option shall not affect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
7. Expiration of Options. Except as hereinafter provided, this
Option shall expire on the earlier of (a) the last day of the tenth year after
the date of this Agreement or (b) the date that Director ceases to be a member
of the Board; provided, however, that to the extent this Option is otherwise
exercisable on the date that Director ceases to be a member of the Board for any
reason other than "cause", death or retirement under a retirement plan of the
Company, this Option shall remain exercisable for 210 days following the last
day of Director's Board membership to the extent exercisable on such last day
and shall expire if not exercised within said 210-day period.
If Board membership ceases on account of death or retirement
under a retirement plan of the Company, the Option (to the extent it has not
expired) held by Director on the last day of Board membership, which is then
exercisable or would have become exercisable had Director continued as a member
of the Board for one additional year, shall be immediately exercisable and
remain exercisable for 365 days following the last day of Director's Board
membership and shall expire if not exercised within said 365- day period. To the
extent any otherwise unexpired Option is not exercisable in accordance with the
immediately preceding sentence, it shall expire as of the date of death or the
effective date of retirement, as the case may be.
-3-
<PAGE> 4
If Director's membership on the Board ends after the occurrence
of "cause", this Option shall expire immediately on the last date of membership.
"Cause", for the purposes of this Section 7, means any (i) act or omission for
which indemnification of Director is prohibited by the California Corporations
Code, (ii) conviction of a felony which adversely affects the Company, or (iii)
misconduct involving personal profit to Director.
8. Tax Withholding. Any exercise of this Option shall be subject
to withholding of state and federal income taxes, FICA tax or other taxes to the
extent required by applicable law.
9. Laws and Regulations. This Agreement, the grant and exercise of
the Option under this Agreement, and the obligation of the Company to sell or
deliver any of its securities (including, without limitation, the Shares) shall
be subject to all applicable laws, regulations and rules. In the event that the
Shares are not registered under the Securities Act of 1933 (the "Act") or any
applicable state securities laws prior to the delivery of such Shares, the
Company may require, as a condition to the issuance thereof, that the persons to
whom Shares are to be issued represent and warrant in writing to the Company
that such Shares are being acquired by him or her for investment for his or her
own account and not with a view to, for resale in connection with, or with an
intent of participating directly or indirectly in, any distribution of such
Shares within the meaning of the Act, and a legend to that effect may be placed
on the certificates representing the Shares.
10. Continued Service as a Director. This Agreement shall not
obligate the Company or any affiliate of the Company to nominate Director for
election or re-election to the Board nor constitute any contract or agreement of
nomination with Director, nor shall this Agreement interfere in any way with the
right of any person to remove Director.
11. Effect of a Change in Control. In the event of a "Change in
Control" of the Company as defined in below, the unexpired Options under this
Agreement then held by Director on the date of such Change in Control shall be
immediately exercisable in full, notwithstanding the vesting schedule of Section
3 of this Agreement.
For purposes of this Agreement, a "Change in Control" of the
Company shall mean a change in control of a nature that would be required to be
reported in response to Item 1 of Form 8-K required to be filed pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without
limitation, such a Change in Control shall be deemed to have occurred if:
-4-
<PAGE> 5
(a) the shareholders of the Company approve a
definitive agreement to sell, transfer, or otherwise dispose of all or
substantially all of the Company's assets and properties; or
(b) any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who
as of the date this Agreement is a director or officer of the Company (including
any trust of such director or officer), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding securities provided,
however, that the following shall not constitute a "Change in Control" of the
Company:
(i) any acquisition directly from the
Company (excluding any acquisition resulting from the exercise of a conversion
or exchange privilege in respect of outstanding convertible or exchangeable
securities);
(ii) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or
(iii) upon the death of any person who as of
the date of this Agreement is a director or officer of the Company, the transfer
(a) by testamentary disposition or the laws of intestate succession to the
estate or the legal beneficiaries or heirs of such person, or (b) by the
provisions of any living trust to the named current income beneficiaries thereof
of the securities of the Company beneficially owned by such director or officer
of the Company; or
(c) during any period of two consecutive years during
the term of this Plan, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a majority
thereof, unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors representing
at least two-thirds of the directors then in office who were directors at the
beginning of the period; or
(d) the shareholders of the Company approve the
dissolution of the Company or a definitive agreement to merge or consolidate the
Company with or into another entity in which the Company is not the continuing
or surviving corporation or pursuant to which any shares of the Company's stock
would be converted into cash, securities or other property of another entity,
other than a merger of the Company in which holders of the Company's common
stock immediately prior to the merger have the
-5-
<PAGE> 6
same proportionate ownership of common stock (or equivalent securities) of the
surviving entity immediately after the merger as immediately before.
12. General. Neither Director nor any person entitled to exercise
this Option shall have any dividend rights or privileges of a shareholder of the
Company with respect to any Shares issuable upon the exercise of this Option
unless and until a certificate or certificates representing such Shares shall
have been issued and delivered. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificates are issued.
The Option granted under this Agreement is a nonstatutory
option and is not intended to qualify as an incentive stock option under Section
422 of the Internal Revenue Code of 1968, as amended.
This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, heirs,
beneficiaries, executors and administrators.
The paragraph headings used in this Agreement are for
convenience only and are not part of the context.
INTERVISUAL BOOKS, INC. DIRECTOR:
a California corporation
By: /s/ WALDO H. HUNT /s/ LEONARD WILLIAM JAFFE
---------------------------- ----------------------------
Waldo H. Hunt Leonard William Jaffe
Chairman of the Board and
Chief Executive Officer Address:
1025 Granville Drive
Newport Beach, CA 92660
-6-
<PAGE> 1
EXHIBIT 10.30
[LOGO]
[SANTA MONICA BANK LETTERHEAD]
Commercial Banking Department
March 19, 1999
Mr. Dan Reavis
Executive Vice President
Intervisual Books, Inc.
2716 Ocean Park Blvd., #2020
Santa Monica, CA 90405
Dear Mr. Reavis:
Based on the 1998 fiscal year-end draft financial statements, Intervisual Books,
Inc. is in violation of the following terms and conditions contained in the
Business Loan Agreement dated January 15, 1998:
"Borrower will maintain its Tangible Net Worth at a minimum of $6,000,000"
(Current tangible net worth, as reported in the 1998 fiscal year-end
financial statement was $4,896,000, $1,104,000 below the minimum
requirement)
"Borrower will maintain Working capital at a minimum of $1,800,000"
(Current working capital as reported in the 1998 fiscal year-end financial
statement is $951,000, $849,000 below the minimum requirement)
Although the Bank hereby waives the defaults, the Bank continues to reserve its
rights under the above referenced Business Loan Agreement.
Should you have any questions with regard to this letter, please do not
hesitate to contact me at (310) 917-6590.
Respectfully,
/s/ SAM KUNIANSKI
Sam Kunianski
Executive Vice President/
Commercial Banking Group
<PAGE> 1
EXHIBIT 10.31
NOTICE OF FINAL AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 06-01-1999 200302376 5015 GLN
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: INTERVISUAL BOOKS, INC., A CALIFORNIA
CORPORATION (TIN: 95-2929217)
2716 OCEAN PARK BOULEVARD, SUITE 2020
SANTA MONICA, CA 90405
Lender: SANTA MONICA BANK
LOAN SERVICING CENTER
1231 4TH STREET
SANTA MONICA, CA 90401
BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE WRITTEN
LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B) THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE WRITTEN LOAN
AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.
[INITIALS ILLEGIBLE] [INITIALS ILLEGIBLE]
AS USED IN THIS NOTICE, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS:
LOAN. The term "Loan" means the following described loan: a Variable Rate
(3.000% over BANK OF AMERICA'S REFERENCE RATE, making an initial rate of
10.750%), Nondisclosable Revolving Line of Credit Loan to a Corporation
for $2,000,000.00 due on June 1, 1999.
PARTIES. The term "Parties" means SANTA MONICA BANK and any and all
entities or individuals who are obligated to repay the loan or have
pledged property as security for the Loan, including without limitation
the following:
BORROWER: INTERVISUAL BOOKS, INC., A CALIFORNIA CORPORATION
GUARANTOR #1: WALDO H. HUNT
GUARANTOR #2: HUNT FAMILY TRUST DATED JANUARY 26, 1998
LOAN AGREEMENT. The term "Loan Agreement" means one or more promises,
promissory notes, agreements, undertakings, security agreements, deeds of
trust or other documents, or commitments, or any combination of those
actions or documents, relating to the Loan, including without limitation
the following:
NECESSARY FORMS
Corporate Resolution to Borrow - In File
Promissory Note / Change in Terms Agr.
Commercial Guaranty - Entity Guarantors - In File
UCC - 1 - In File
Notice of Final Agreement
Loan Agreement / Negative Pledge - In File
Commercial Guaranty - In File
Security Agreement - In File
Disbursement Request and Authorization
<PAGE> 2
03-23-1999 NOTICE OF FINAL AGREEMENT
LOAN NO 200302376 (CONTINUED) Page 2
===============================================================================
Each Party who signs below, other than SANTA MONICA BANK, acknowledges,
represents, and warrants to SANTA MONICA BANK that it has received, read and
understood this Notice of Final Agreement. This Notice is dated March 23, 1999.
BORROWER:
INTERVISUAL BOOKS, INC., A CALIFORNIA CORPORATION
By: /s/ WALDO H. HUNT
------------------------------------
WALDO H. HUNT, CHAIRMAN OF THE BOARD/CHIEF EXECUTIVE OFFICER
GUARANTOR:
X /s/ WALDO H. HUNT
-------------------------------------
WALDO H. HUNT
GUARANTOR:
HUNT FAMILY TRUST DATED JANUARY 26, 1998
By: /s/ WALDO H. HUNT
-------------------------------------
WALDO H. HUNT, TRUSTEE
By: /s/ PATRICIA E. HUNT
------------------------------------
PATRICIA E. HUNT, TRUSTEE
LENDER:
SANTA MONICA BANK
By: /s/ SAM KUNIANSKI
------------------------------------
SAM KUNIANSKI
Authorized Officer
===============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26b(c) 1999 CFI ProServices, Inc.
All rights reserved, (CA-121 F3.26 8628INTE.LN)
<PAGE> 3
SANTA MONICA BANK
MEMBER FDIC
[SMB LOGO]
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 06-01-1999 200302376 5015 GLN
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: INTERVISUAL BOOKS, INC., A CALIFORNIA
CORPORATION (TIN: 95-2929217)
2716 OCEAN PARK BOULEVARD, SUITE 2020
SANTA MONICA, CA 90405
Lender: SANTA MONICA BANK
LOAN SERVICING CENTER
1231 4TH STREET
SANTA MONICA, CA 90401
================================================================================
PRINCIPAL AMOUNT: $2,000,000.00 DATE OF AGREEMENT: MARCH 23, 1999
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note dated January 15, 1998 in
the amount of $2,000,000.00.
DESCRIPTION OF CHANGE IN TERMS.
1) The interest rate on the Note is hereby changed from 1.00% to 3.00% over the
index as described in the original Note.
2) The maturity date is hereby extended to June 1, 1999, all other terms and
conditions remain unchanged.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations, including all agreements evidenced
or securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligations(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligation(s),
including accommodation parties, unless a party is expressly released by Lender
in writing. Any maker or endorser, including accommodation makers, will not be
released by virtue of this Agreement. If any person who signed the original
obligation does not sign this Agreement below, then all persons signing below
acknowledge that this Agreement is given conditionally, based on the
representation to Lender that the non-signing party consents to the changes and
provisions of this Agreement or otherwise will not be released by it. This
waiver applies not only to any initial extension, modification or release, but
also to all such subsequent actions.
YEAR 2000. Borrower warrants and represents that all software utilized in the
conduct of Borrower's business will have appropriate capabilities and
compatibility for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in the
same manner and with the same functionality as the software does respecting
calendar dates falling on or before December 31, 1999. Further, Borrower
warrants and represents that the data-related user interface functions,
data-fields, and data-related program instructions and function of the software
include the indication of the century.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT, BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
INTERVISUAL BOOKS, INC., A CALIFORNIA CORPORATION
By: /s/ WALDO H. HUNT
------------------------------------------------------------
WALDO H. HUNT, CHAIRMAN OF THE BOARD/CHIEF EXECUTIVE OFFICER
===============================================================================
Variable Rate. Line of Credit.
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26b(c) 1999 CFI ProServices, Inc.
All rights reserved, (CA-D20 8628INTE.LN)
<PAGE> 1
EXHIBIT 23.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Intervisual Books, Inc.
Santa Monica, California
We consent to the incorporation by reference to the Registration Statements on
Form S-8 (SEC file no. 33-548990, SEC file no. 333-04784, SEC file no. 333-34009
and SEC file no. 333-34015) of our report dated February 25, 1999, except for
Note 17, as to which the date is March 30, 1999 with respect to the financial
statements of Intervisual Books, Inc. included in this Annual Report on Form
10-K for the year ended December 31, 1998.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Date: March 30, 1999
Los Angeles, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1998, AND STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS REPORTED ON FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,561
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0
0
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<EPS-PRIMARY> (.45)
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</TABLE>
