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, 1998
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, 1998, 4,967,286 shares of Common Stock, $.10 par value,
were outstanding.
CONCEPTS DIRECT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE NO.
Balance Sheets as of September 30, 1998 and
December 31, 1997..................................3
Statements of Operations for the three and
nine months ended September 30, 1998
and September 30, 1997............................4
Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1997..........5
Notes to Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................7-9
PART II. OTHER INFORMATION
Item 5. Other Information.......................................11
Item 6. Exhibits and reports on Form 8-K........................11
Item 1.
CONCEPTS DIRECT, INC.
Balance Sheets
September 30, December 31,
1998 1997
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $4,007,434 $13,773,815
Restricted cash - 128,403
Accounts receivable, less allowances 398,255 259,219
Deferred advertising costs 11,187,016 7,616,138
Inventories, less allowances 10,777,186 5,167,729
Income taxes recoverable 49,992 373,000
Prepaid expenses and other 453,903 904,281
Total current assets 26,873,786 28,222,585
Property and equipment, net 11,659,058 11,860,954
Other assets 752,770 294,263
TOTAL ASSETS $39,285,614 $40,377,802
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $10,975,921 $9,837,028
Current maturities of debt
and lease obligations 891,463 594,971
Accrued employee compensation 750,804 1,101,972
Customer liabilities 2,720,298 1,715,775
Interest payable - 20,980
Current and deferred income taxes payable 464,685 1,808,056
Total current liabilities 15,803,171 15,078,782
Debt and capital lease obligations 6,466,567 6,486,384
Commitments and contingencies
Stockholders' equity
Common stock, $.10 par value, authorized
6,000,000 shares, issued and outstanding
4,967,286 and 4,957,286 shares in 1998
and 1997, respectively 496,729 495,729
Additional paid-in capital 14,323,773 14,319,338
Retained earnings 2,195,374 3,997,569
Total stockholders' equity 17,015,876 18,812,636
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $39,285,614 $40,377,802
See notes to financial statements.
3
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net sales $19,494,748 $14,630,076 $50,830,390 $45,348,716
Operating costs and expenses:
Cost of product and delivery 11,008,066 8,331,851 28,672,895 24,105,665
Selling, general and
administrative 9,909,845 7,337,187 24,911,634 20,884,728
Total operating costs
and expenses 20,917,911 15,669,038 53,584,529 44,990,393
Operating income (loss) (1,423,163) (1,038,962) (2,754,139) 358,323
Other income (loss), net (91,839) 121,341 (18,056) 345,205
Income (loss) before
income taxes (1,515,002) (917,621) (2,772,195) 703,528
Provision (benefit)
for income taxes (530,000) (327,000) (970,000) 253,000
Net income (loss) $(985,002) $(590,621)$(1,802,195) $450,528
Basic earnings (loss) per share $(0.20) $(0.12) $(0.36) $0.10
Diluted earnings (loss) per share $(0.20) $(0.12) $(0.36) $0.10
Weighted average number
of common shares 4,962,286 4,955,286 4,959,786 4,484,322
Weighted average number
of common shares
and dilutive stock options 4,962,286 4,955,286 4,959,786 4,710,130
See notes to financial statements.
4
CONCEPTS DIRECT, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1998 1997
OPERATING ACTIVITIES
Net income (loss) $(1,802,195) $450,528
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Provision for losses on accounts receivable 14,000 8,000
Provision for losses in inventory values 405,880 148,529
Depreciation 746,862 302,179
Current and deferred income taxes (1,020,363) 33,000
Loss on disposals of property and equipment 56,298 -
Changes in operating assets and liabilities:
Accounts receivable (153,036) 464
Deferred advertising costs (3,570,878) (6,759,658)
Inventories (6,015,337) (765,236)
Prepaid expenses and other 450,378 (601,069)
Accounts payable 1,138,893 2,136,454
Accrued employee compensation (351,168) 62,689
Customer liabilities 1,004,523 3,491,523
Interest payable (20,980) 30,685
NET CASH USED IN OPERATING ACTIVITIES " (9,117,123)" " (1,461,912)"
INVESTING ACTIVITIES
Cash restricted as collateral - (500,000)
Release of cash restricted as collateral 128,403 -
Purchases of property and equipment (601,264) (10,463,763)
Other investing activities, netm (458,507) 22,237
NET CASH USED IN INVESTING ACTIVITIES " (931,368)" " (10,941,526)"
FINANCING ACTIVITIES
Principal payments on debt and lease obligations (410,794) (56,422)
Issuance of debt and capital lease obligations 687,469 3,682,213
Sale of common stock - 10,212,674
Exercise of common stock options 5,435 14,672
NET CASH PROVIDED BY FINANCING ACTIVITIES 282,110 13,853,137
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,766,381) 1,449,699
Cash and cash equivalents at beginning of year 13,773,815 6,425,137
Cash and cash equivalents at end of period $4,007,434 $7,874,836
See notes to financial statements.
5
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 three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information," which is required to be adopted on December 31,
1998. The Company has not completed its analysis of whether the reporting
requirements of Statement No. 131 apply to the Company's operations. The
Company does not expect any significant additional disclosures to be
necessary when the statement is adopted.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use." The SOP
requires the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for
internal-use. The Company previously expensed such costs as incurred. The
Company adopted SOP 98-1 effective January 1, 1998. The effect of the
adoption of SOP 98-1 was immaterial to the results of operations of the
Company for the three and nine month periods ended September 30, 1998.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
The Company has been making a transition from a single catalog company
selling primarily paper products to a multi-catalog company selling
primarily gift and merchandise items. We believe our new catalogs show
significant promise. However, as discussed below, this transition has
adversely affected the Company's earnings during the third quarter and first
nine months of 1998.
Also, in 1998 we changed our strategy for Colorful Images, our only mature
catalog. Instead of mailing one catalog advertising both personalized
paper products and gift and merchandise items, we began to mail two
catalogs - one advertising primarily personalized paper products and the
other advertising primarily gift and merchandise items. In addition to
mailings targeted to customers with a history of purchasing each type of
product, we mailed both catalogs to our best Colorful Images customers.
Our strategy was to increase Colorful Images' contribution by increasing
the number of customer contacts. Although this strategy appeared to be
working earlier in the year, it has become apparent that our previous
approach was much more successful and that we mailed too frequently.
Sales
Increase in Net Sales
The Company's net sales increased by $5.5 million, or 12%, to $50.8 million
for the nine-month period ended September 30, 1998 from $45.3 million in
the same period in 1997. For the third quarter of 1998, net sales
increased by $4.9 million, or 33%, to $19.5 million from $14.6 million for
the same period in 1997. These increases resulted primarily from increases
in sales from our new catalogs, including Linda Anderson, Snoopy(, etc. and
Linda Anderson's Collectibles. We more than doubled our Linda Anderson
mailings when compared with the prior periods and the Snoopy(, etc. and
Linda Anderson's Collectibles catalogs were not mailed in any volume prior
to the fourth quarter of 1997.
Sales of Gift and Merchandise Items Vs. Sales of Personalized
Paper Products
The shift in the direction of our business has resulted in an increase in
sales of gift and merchandise items and a decrease in sales of personalized
paper products. Sales of gift and merchandise items increased by
approximately $9.6 million, or 42%, for the nine-month period ended
September 30, 1998 and increased $5.7 million, or 77%, for the third
quarter. Gift and merchandise item sales also increased as a percentage of
total sales for the nine months ended September 30, 1998 to 62% from 47% for
the same period in 1997. For the third quarter, gift and merchandise item
sales increased as a percentage of total sales to 66% from 47% for the third
quarter of 1997.
In contrast, sales of personalized paper products decreased by approximately
$4.9 million, or 20%, for the nine-month period ended September 30, 1998 and
decreased $1.2 million, or 16%, for the third quarter. Personalized paper
products sales also decreased as a percentage of total sales for the nine
months ended September 30, 1998 to 38% from 53% in the same period in 1997.
For the third quarter, personalized paper product sales decreased as a
percentage of total sales to 34% from 53% for the third quarter of 1997.
While the primary reason for decreased sales of personalized paper products
has been the shift in our product sales emphasis, disappointing responses by
customers and prospects to the Colorful Images paper products catalogs have
also been a factor in the decline.
Cost of Product and Delivery and Gross Profit
Cost of product and delivery for the nine-month period ended September 30,
1998 increased as a percentage of net sales to 56% in 1998 from 53% in 1997.
For the third quarter, there was a percentage decrease to 56% from 57% in
the same quarter of 1997. For the nine-month period ended September 30,
1998, gross profit was $22.2 million or 44% of sales as compared to $21.2
million or 47% of sales for the same period in 1997. For the quarter, gross
profit was $8.5 million, or 44% of sales as compared to $6.3 million, or 43%
of sales for the same period in 1997.
The increase in cost of product and delivery and the corresponding decrease
in gross profit for the nine months occurred primarily because of increased
sales of gift and merchandise items during the period. These items
generally have higher product costs as a percentage of sales than
personalized paper products. In addition, higher fixed costs of operations
contributed to a lesser degree to the decrease in gross profit as a
percentage of net sales. These higher fixed costs included facility and
equipment costs, both of which are higher due to our move in the third
quarter of 1997 to our new building and the new equipment acquired at the
same time.
The improvement in the gross profit percentage for the third quarter
occurred despite an increase in gift and merchandise item sales as a
percentage of the total product sales. The increase resulted in large part
from spreading fixed costs over a larger sales volume. Additionally, a
decrease as a percentage of sales of certain fulfillment and delivery costs,
such as telephone and shipping costs, helped improve gross margin.
Selling General and Administrative Expense
Selling general and administrative expense ("SG&A") increased $4.0 million,
or 19%, to $24.9 million for the first nine months of 1998 from $20.9 for
the same period in 1997. SG&A increased $2.6 million, or 36%, to $9.9
million for the third quarter from $7.3 million in the same quarter last
year. As a percentage of net sales, SG&A increased to 49% for the first
nine months of 1998 from 46% for same period in 1997 and increased to 51%
for the third quarter of 1998 from 50% for the same quarter in 1997.
The increases for the nine-month period ended September 30, 1998, in terms
of both absolute dollar amount and as a percentage of net sales, resulted
primarily from increases in the cost of the paper we use to produce our
catalogs during this period as compared to the same period in 1997. Also,
increased creative costs associated with the development of our new catalogs
and higher fixed general and administrative costs contributed to these
increases to a lesser degree. The higher fixed general and administrative
costs included costs associated with additional merchandise and creative
personnel hired to assist in the production of the new catalogs.
The increase in SG&A in the third quarter as a percentage of net sales
resulted primarily from low response rates per catalog from Colorful Images
customers and prospects as compared with historical response rates. We
mailed more frequently to our best customers and to prospects causing sales
to increase, but responses per catalog declined. Additionally, increased
creative costs associated with the development of new catalogs contributed
to this increase but to a lesser degree.
Operating Income (Loss)
Our net sales, operating costs and expenses combined to produce an operating
loss of $2.8 million for the nine-month period ended September 30,
1998. In contrast, we had operating income of $358,000 for the same
period in 1997. For the third quarter, we had an operating loss of
$1.4 million in 1998, as compared to a loss of $1.0 million for the
same quarter in 1997.
Other Income (Loss)
The primary components of other income are vendor payment discounts,
interest income, interest expense and losses on write-offs of equipment.
For the nine-month period ended September 30, 1998, we had a $18,000 loss
as compared to income of $345,000 for the same period in 1997. For the
third quarter, we had a $92,000 loss as compared to income of $122,000 for
the same period in 1997.
An increase in interest expense was the most significant cause of the
change in other income. Interest expense increased for the period ended
September 30, 1998 to $377,000 from $33,000 for the same period in 1997
and increased in the third quarter to $118,000 from $31,000 for the third
quarter of 1997. The increases in interest expense resulted primarily from
the financing of the Company's new facilities.
Income Taxes
The Company had an income tax benefit of $970,000 for the nine month period
ended September 30, 1998 as compared to a provision for income taxes
of $253,000 for the same period in 1997. The Company had an income
tax benefit of $530,000 for the quarter ended September 30, 1998 as
compared to an income tax benefit of $327,000 for the same quarter
in 1997. The provision for income taxes for 1998 reflects the 35%
income tax rate that management anticipates for the year.
Outlook
The Company intends to continue with its transition from a single
catalog company selling primarily paper products to a multi-catalog
company selling primarily gift and merchandise items. In order to
successfully complete this transition, we must, among other things,
offset the increase in product cost as a percentage of sales with
decreases in delivery and marketing costs as a percentage of sales.
Currently, three of our four catalogs, Linda Anderson, Linda
Anderson's Collectibles and Snoopy(, etc. are still in the
developmental stage. Until they emerge from this stage, prospecting
costs and creative costs associated with catalog development will
likely remain at, or slightly above, current levels. We also plan
to develop more niche catalogs, such as our Snoopy(, etc. catalog,
which will be focused on specific groups of potential customers.
While in the developmental stage, these catalogs may also produce
some of the same effects on margins as we have seen this year.
Additionally, given the disappointing results with mailing two
versions of the Colorful Images catalogs, in 1999 we intend to mail
only one version which will advertise both personalized paper
products and gift and merchandise items. Also, we intend to mail
the Colorful Images catalog to customers less often and will likely
follow a contact strategy similar to that used in earlier periods
when our customer returns per catalog were higher. This reduction
in frequency of contact plus reduced prospecting may reduce revenue.
Finally, in the past a substantial portion of our net sales has been
realized in the fourth quarter. We expect this trend to continue.
However, we also expect that the same factors which have influenced
our results for the first nine months will affect our earnings in
the fourth quarter. At this time, we are unable to predict whether
the higher sales volumes we anticipate will be sufficient to allow
us the produce positive operating income for the quarter.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 1998, cash and cash
equivalents decreased by $9,766,000. Those areas which had the greatest
impact on cash and cash equivalents are described below.
The increase in sales of gift and merchandise items and the increase of gift
and merchandise inventory in anticipation of increased holiday season sales
led to the increase in inventories of $6.0 million. Increased advertising
over 1997 levels and the distribution of a greater number of catalogs were
the primary factors which caused the increase in deferred advertising of
$3.5 million. The net loss of $1.8 million also contributed to the decrease
in cash and cash equivalents.
The Company has available with Bank One, Colorado, N.A. a revolving line of
credit for $2.0 million for general purposes. No balance was outstanding on
the line of credit at September 30, 1998. The line of credit expires in May
1999.
The Company had $4 million of unencumbered cash and cash equivalents at
September 30, 1998. Management believes that results of operations,
continued operational planning review, line of credit availability and
current cash balances will produce funds necessary to meet the Company's
anticipated working capital requirements for the current year.
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. The Company is taking actions
to assess the nature and extent of the work required to make its systems and
infrastructure Year 2000 compliant.
With respect to the Company's information systems, the vendors of the
Company have made arrangements for compliance by early 1999. With respect
to other aspects of internal operations, such as paper product production,
fulfillment and telecommunications systems, we are in the process of making
inquiries of the third parties who supplied us with equipment and services
in these areas to obtain assurances of Year 2000 compliance and, where
modifications are required, to arrange for them to be made and tested.
The Company estimates its total cost of achieving Year 2000 compliance to be
less than $300,000 over the cost of normal software and equipment upgrades
and replacements. A small portion of these costs will be incurred in 1998,
the remainder are expected to be incurred in 1999.
The Company believes that the risk of its having non-compliant systems at
the turn of the century is low. However, to the extent that areas of risk
are identified, contingency plans will be developed during 1999 to minimize
their impact.
The Company is at an earlier stage of assessment 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
and product delivery service providers, but expects to make considerable
progress in this area in the near future. To the extent that the Company
identifies 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.
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 1998 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 production and
distribution of catalogs; lack of effective performance by third parties
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 of customer service and the Company's order
fulfillment system; 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, 1997.
PART II. OTHER INFORMATION
Item 5. Other Information
The SEC has adopted Rule 14a-4(c), effective June 29, 1998, which determines
how proxies designated by public corporations may use discretionary voting
authority on stockholder proposals made at annual meetings. The Company
will have unrestricted use of discretionary voting authority if it does not
receive prior written notice of an intent to submit a proposal at the
meeting. For the Company's 1999 annual meeting of shareholders, this notice
must be received by January 24, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Documents filed as part of this report:
Exhibit 10: Material Contracts
(a) None.
Exhibit 27: Financial Data Schedule (Edgar filing only.)
Registrant hereby agrees to furnish the Commission, 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 x, 1998 By: /s/ Phillip A. Wiland
Phillip A. Wiland
Chief Executive Officer
Date: November x, 1998 By: /s/ H. Franklin Marcus, Jr.
H. Franklin Marcus, Jr.
Chief Financial and Accounting
Officer
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