-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7z0yIs68P7xhe9wAbgN6iDaQl4DVc5L77/vSIDTr16L2TAnTDpPKUbZfrn4nLVk TwlxnzOR9Mn69LLBqyMzIw== 0000891035-99-000013.txt : 19991115 0000891035-99-000013.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891035-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCEPTS DIRECT INC CENTRAL INDEX KEY: 0000891035 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 521781893 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20680 FILM NUMBER: 99747603 BUSINESS ADDRESS: STREET 1: 2950 COLORFUL AVENUE STREET 2: FILING2 CITY: LONGMONT STATE: CO ZIP: 80504 BUSINESS PHONE: 303-772-9171 MAIL ADDRESS: STREET 1: 2950 COLORFUL AVENUE CITY: LONGMONT STATE: CO ZIP: 80504 10-Q 1 EMAIL TEST FORM 10-Q SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-20680 Concepts Direct, Inc. (Exact name of registrant as specified in its charter) Delaware 52-1781893 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification No.) 2950 Colorful Avenue, Longmont, CO 80504 (Address of principal executive offices, Zip Code) (303) 772-9171 (Registrant's telephone number, including area code) 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 As of October 22, 1999, 4,977,952 shares of Common Stock, $.10 par value, were outstanding. CONCEPTS DIRECT, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of September 30, 1999 and December 31, 1998 Statements of Operations for the three and nine months ended September 30, 1999 and September 30, 1998 Statements of Cash Flows for the nine months ended September 30, 1999 and September 30, 1998 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K Item 1. CONCEPTS DIRECT, INC. Balance Sheets September 30, December 31, 1999 1998 (Unaudited) ASSETS Current assets Cash and cash equivalents $ - $4,070,369 Accounts receivable, less allowances 605,100 391,280 Deferred advertising costs 4,255,811 4,454,553 Inventories, less allowances 9,115,382 10,053,406 Prepaid expenses and other 346,455 267,107 Total current assets 14,322,748 19,236,715 Property and equipment, net 12,328,310 12,272,441 Capitalized software costs 2,186,763 20,684 Trademark and other intangible assets, net 1,534,405 - Other assets 745,124 542,907 TOTAL ASSETS $31,117,350 $32,072,747 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $5,510,370 $5,969,535 Current maturities of debt and capital lease obligations 989,190 779,685 Line of credit 1,300,000 - Accrued employee compensation 844,150 547,691 Customer liabilities 1,220,554 494,428 Interest payable - 29,348 Deferred income taxes payable - 732,980 Total current liabilities 9,864,264 8,553,667 Debt and capital lease obligations 5,681,484 6,078,620 Commitments and contingencies Stockholders' equity Common Stock, $.10 par value, authorized 7,500,000 and 6,000,000 shares, issued and outstanding 4,977,952 and 4,967,286 shares in 1999 and 1998, respectively. 497,795 496,729 Additional paid-in capital 14,370,700 14,323,773 Retained earnings 703,107 2,619,958 Total stockholders' equity 15,571,602 17,440,460 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,117,350 $32,072,747 See notes to financial statements. CONCEPTS DIRECT, INC. Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 Net sales $11,252,451 $19,494,748 $34,865,904 $50,830,390 Operating costs and expenses: Cost of product and delivery 7,126,321 11,008,066 21,949,005 28,672,895 Selling, general and administrative 5,117,441 9,909,845 15,549,572 24,911,634 Total operating costs and expenses 12,243,762 20,917,911 37,498,577 53,584,529 Operating loss (991,311) (1,423,163) (2,632,673) (2,754,139) Other expense, net (123,108) (91,839) (266,094) (18,056) Loss before income taxes (1,114,419) (1,515,002) (2,898,767) (2,772,195) Benefit for income taxes (378,902) (530,000) (981,915) (970,000) Net loss $(735,517) $(985,002)$(1,916,852)$(1,802,195) Basic and diluted loss per share $(0.15) $(0.20) $(0.39) $(0.36) Weighted average number of common shares 4,977,952 4,962,286 4,972,619 4,959,786 See notes to financial statements. CONCEPTS DIRECT, INC. Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1999 1998 OPERATING ACTIVITIES Net loss $(1,916,851) $(1,802,195) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for losses on accounts receivable 31,088 14,000 Provision for losses in inventory values 831,008 405,880 Depreciation and amortization 969,334 746,862 Current and deferred income taxes (732,980) (1,020,363) Loss on disposals of property and equipment - 56,298 Changes in operating assets and liabilities: Accounts receivable (219,908) (153,036) Deferred advertising costs 199,742 (3,570,878) Inventories 628,016 (6,015,337) Prepaid expenses and other (79,348) 450,378 Accounts payable (525,165) 1,138,893 Accrued employee compensation 296,459 (351,168) Customer liabilities 726,126 1,004,523 Interest payable (29,348) (20,980) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 178,173 (9,117,123) INVESTING ACTIVITIES Release of cash restricted as collateral - 128,403 Capital expenditures (3,069,722) (601,264) Acquisition of assets (1,924,318) - Other investing activities, net (181,532) (458,507) NET CASH USED IN INVESTING ACTIVITIES (5,175,572) (931,368) FINANCING ACTIVITIES Principal payments on debt and lease obligations (1,580,240) (410,794) Issuance of debt obligations 2,459,277 687,469 Exercise of common stock options 47,993 5,435 NET CASH PROVIDED BY FINANCING ACTIVITIES 927,030 282,110 DECREASE IN CASH AND CASH EQUIVALENTS (4,070,369) (9,766,381) Cash and cash equivalents at beginning of year 4,070,369 13,773,815 Cash and cash equivalents at end of period - $4,007,434 See notes to financial statements. CONCEPTS DIRECT, INC. Notes to Financial Statements (Unaudited) 1. Accounting Policies The unaudited interim financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial reporting and the regulations of the Securities and Exchange Commission in regard to quarterly reporting. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, the statements include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. Operating results for the nine month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Seasonal fluctuations in sales of the Company's products result primarily from the purchasing patterns of the individual consumer during the Christmas holiday season. These patterns tend to moderately concentrate sales in the latter half of the year, particularly in the fourth quarter. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10- K for the year ended December 31, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS AND FINANCIAL CONDITION General During the third quarter of 1999, the Company continued the transition process of developing new catalogs that emphasize gift and merchandise products and e- commerce sales sites and internet portal. The Company also continued its efforts to improve catalog contribution to general and administrative expenses and profits. Because the Company has placed certain limits on planned prospecting losses in order to improve catalog contribution, there was a decrease in catalog circulation quantities of 62% from the third quarter of 1998 to the third quarter of 1999. The reduction in customer contact frequency was positive in that contribution from customers improved but this reduction also led to a decrease in customer revenue. Contribution from prospects improved but the reduction in circulation also led to a reduction in prospect marketing revenue during the third quarter of 1999 as compared to the same quarter in 1998. During the third quarter, the Company mailed several microniche offers and issued its first version of the Music Stand catalog. During the second quarter of 1999, the Company purchased the Music Stand catalog and certain other assets related to the catalog. The Company continued significant development efforts with respect to e-commerce initiatives in the quarter and added additional employees, equipment and services to accommodate these new business initiatives. Sales The Company's net sales decreased by $16.0 million, or 31%, to $34.9 million for the nine month period ended September 30, 1999 from $50.8 million in the same period in 1998 and decreased by $8.2 million, or 42%, to $11.3 million for the third quarter of 1999 from $19.5 million in the same period in 1998. These decreases resulted primarily from changes in strategy with respect to Colorful Images and Linda Anderson in order to improve catalog contribution as discussed above. This strategy change may lead to continued decreases in circulation quantities and revenues of certain of the catalogs. The Company also believes that slow delivery of September catalogs by third party vendors or the United States Postal Service had significant negative impact upon third quarter sales. Costs of Product and Delivery and Gross Profit Cost of product and delivery for the nine month period ended September 30 increased as a percentage of net sales to 63% in 1999 from 56% in 1998 and increased to 63% in the third quarter of 1999 from 56% for the third quarter of 1998. Gross profit decreased by $9.3 million, or 42%, to $12.9 million for the nine months ended September 30, 1999 from $22.2 million for the same period in 1998. Gross profit was $4.1 million and $8.5 million for the third quarter of 1999 and 1998, respectively. The decrease in gross profit as a percentage of net sales occurred primarily because of lower sales over which to spread fixed costs of fulfillment such as facilities and equipment, increased fulfillment salaries in anticipation of higher holiday season sales, slower than anticipated deliveries of September catalogs and additional costs in the form of labor, equipment and services to accommodate the new e-commerce business initiatives. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A") decreased $9.4 million, or 38%, to $15.5 million for the first nine months of 1999 from $24.9 million for the same period of 1998 and decreased $4.8 million, or 48%, to $5.1 million for the third quarter of 1999 from $9.9 million for the same quarter in 1998. SG&A as a percentage of net sales decreased to 45% for the first nine months of 1999 from 49% for the same period in 1998 and decreased to 46% for the third quarter of 1999 from 51% for the same quarter in 1998. The decreases in SG&A occurred primarily because of a reduction in total catalog circulation during the periods reported as compared to the same periods in 1998. To a lesser degree, the decrease related to limits placed on planned prospecting losses per mail cycle. Other Expense Other expense, primarily interest expense and vendor payment discounts, was $266,000 for the nine month period ended September 30, 1999 as compared to $18,000 for the same period in 1998. Expense for the third quarter of 1999 was $123,000 as compared to $92,000 for the same period in 1998. The most significant cause of the increase in other expense was a decrease in interest income because of reduced cash balances available for investing. Income Taxes The Company had an income tax benefit of $982,000 for the nine month period ended September 30, 1999 as compared to a benefit of $970,000 for the same period in 1998. The Company had an income tax benefit of $379,000 for the quarter ended September 30, 1999 as compared to a benefit of $530,000 for the same quarter in 1998. The provision for income taxes for 1999 reflects the 34% income tax rate that management anticipates for the year. Outlook The Company intends to continue its current course of attempting to improve catalog contribution and developing e-commerce sites. However, in an effort to ease the impact of the transition period on profitability, the Company will not launch additional niche catalogs in 1999. While several of our catalogs have been in the developmental stage, prospecting and creative costs associated with catalog development have been higher than desired as a percentage of sales. Beginning in late 1999, we will focus more on the catalog business profitability and set more stringent controls on quality of catalog performance. These strategies may lead to reduced circulation of certain catalogs or other cost control measures. Over the past few years, as we have shifted more of the product sales to gift and merchandise items, we have had a greater need to increase inventory of these items. We are focused on balancing our need for these products against the risks of maintaining excess inventory. However, we believe that our current inventory levels are higher than necessary, particularly as we have reduced catalog circulation quantities. We are currently addressing the current excess inventory levels primarily by liquidation through various channels and returns to vendors. In the third quarter of 1999, the Company did experience some success returning merchandise to vendors. However, if these measures are unsuccessful or immaterial in impact on a continuing basis, we will increase the provision for losses in inventory value. In the second quarter of 1999, we opened our first product sales e-site, LindaAnderson.com. In the remainder of 1999, we will continue to incur significant costs developing e-commerce infrastructure and we plan to open more e-sites such as theMusicstand.com and a new Internet portal. Since we will continue to add certain costs and overhead to manage and operate the sites, it may take a period of time for sales from these e-sites to cover such costs. LIQUIDITY AND CAPITAL RESOURCES During the nine month period ended September 30, 1999, cash and cash equivalents decreased by $4,070,000. Activity in several areas had a significant impact on cash and cash equivalents as described below. The decrease in accounts payable during the nine month period ended September 30, 1999 of $525,000 resulted primarily from the payment in the first quarter of 1999 of inventory and advertising costs purchased or incurred in the fourth quarter of 1998. The decrease in cash was offset by decreases in deferred advertising of $200,000 and inventories of $628,000 primarily related to reduced levels of advertising and sales of products in 1999 as compared to the same periods of 1998. The decrease in cash was also offset by depreciation and amortization of $969,000 and an increase of $831,000 in the provision for losses in inventory value. The increase in customer liabilities of $726,000 related primarily to customer order backlog from customer orders received from catalog mailings in September 1999. The net loss of $1,917,000 also contributed significantly to the decrease in cash. Significant items of investment of cash during the period were capital expenditures of $3,070,000, which primarily related to the purchases of software and assets relative to development of e-commerce infrastructure and sites as well as the purchase of certain assets of the Music Stand catalog for $1,924,000. The Company has available with Bank One, Colorado, N.A. a revolving line of credit for $3,000,000 for general purposes. During the third quarter, the line of credit was reduced from $4,500,000 to $3,000,000 and certain financial and performance covenants were modified including a maximum annual capital asset limit, a maximum annual net loss limit and a minimum tangible net worth. The Company had a balance of $1,300,000 outstanding on the line of credit at September 30, 1999. The line of credit expires in May 2000. The Company had no unencumbered cash and cash equivalents at September 30, 1999. Management believes that results of operations, continued operational planning review, line of credit availability plus current cash balances will produce funds necessary to meet its anticipated working capital requirements during the remainder of 1999. During 1999, the Company plans to incur significant cost in the development of its e- commerce infrastructure and sites, the majority of which will be capitalized. Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and other devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in a system failure or miscalculations causing a disruption of operations, including, among other things, a temporary inability to process transactions, fulfill orders, or engage in similar normal business activities. With respect to the Company's information and fulfillment systems, the vendors of the Company have provided modifications for compliance. All modifications, conversions and installations are complete. The Company believes that the risk of its having non-compliant systems at January 1, 2000 is low. However, to the extent that areas of risk are identified, contingency plans will be developed to minimize their impact. The Company estimates its total cost of achieving Year 2000 compliance to be less than $400,000 over the cost of normal software and equipment upgrades and replacements. Approximately $350,000 has been incurred through September 30, 1999; the remainder will be incurred in the remainder of 1999. After investigation, the Company has not yet discovered any major Year 2000 compliance problems with respect to the third parties who are its critical suppliers of goods and services, such as merchandise vendors, catalog production and distribution service providers, product delivery and critical function service providers. To the extent that the Company does identify potentially non-compliant third parties, it plans to assess its level of exposure and risk and develop contingency plans at that time. These contingency plans are likely to include identification and confirmation of the availability of alternative suppliers. However, there can be no assurance that the systems and infrastructure of other companies will be made compliant in a timely manner or that such a failure by another company would not have an adverse effect on the Company. Because most of the Company's customers are individual consumers, the Company does not expect Year 2000 issues to materially affect its customers as a group. The cost of the project and date on which the Company believes it will complete the Year 2000 modifications are based upon management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from anticipated. Specific factors that might cause such material differences include, but are not limited to, availability of personnel trained in this area, the ability to locate and correct relevant systems and similar uncertainties. Special Note Regarding Forward-Looking Statements The discussion above contains certain forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995. Company statements that are not historical facts, including statements about management's expectations, beliefs, plans and objectives for 1999 and beyond and about Year 2000 issues, are forward-looking statements and involve various risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's estimates and expectations include, but are not limited to, the following: changes in postal rates or the costs of paper; changes in economic and market conditions; changes in the Company's merchandise product mix or changes in the Company's customer response to advertising offers; lack of effective performance by third party suppliers with respect to providing product inventory; lack of effective performance by third parties supplying Year 2000 solutions to the Company; lack of effective performance by third party suppliers with respect to production and distribution of catalogs; lack of effective performance of customer service and the Company's order fulfillment system; lack of effective performance of the Company's e-commerce infrastructure and retailing sites; lack of availability of sufficient credit for business operations and changes in strategy and timing relating to the testing and rollout of new catalogs. Additional discussion of factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations is contained in the Company's SEC filings, including the Company's report on Form 10-K for the year ended December 31, 1998. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Documents filed as part of this report: Exhibit 27: Financial Data Schedule (Edgar filing only.) Registrant hereby agrees to furnish the Commision, upon request, with instruments defining the rights of holders of long-term debt of the registrant. (b) Reports on Form 8-K There were no reports on Form 8-K for the fiscal quarter ended September 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCEPTS DIRECT, INC. (registrant) Date: November 15, 1999 By: /s/ Phillip A. Wiland Phillip A. Wiland Chief Executive Officer Date: November 15, 1999 By: /s/ H. Franklin Marcus, Jr. H. Franklin Marcus, Jr. Chief Financial and Accounting Officer EX-27 2
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