FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[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 0-20680
CONCEPTS DIRECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1781893
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2950 Colorful Avenue, Longmont, Colorado 80504
(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (303) 772-9171
_______________________________________________
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 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 (Sec 229.405 of this chapter) 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 5, 1999 was approximately $10,726,000. This figure
was calculated as follows: The number of shares beneficially owned by
executive officers and directors of the registrant as a group and by persons
known to the registrant to be beneficial owners of more than 5% of the
outstanding common stock of the registrant was subtracted from the total
number of shares outstanding. The resulting figure was then multiplied by
the average of the bid and asked prices of the registrant's stock in the
over-the-counter market on March 5, 1999. The foregoing calculation should
not be deemed an admission that any of the officers and directors of the
registrant or any holder of more than 5% of the outstanding common stock of
the registrant is an "affiliate."
The number of shares outstanding of the registrant's common stock as of
March 5, 1999 was 4,975,286.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its annual meeting of
shareholders scheduled for April 30, 1999 are incorporated by reference into
Part III.
PART 1
ITEM 1. BUSINESS
General
Concepts Direct, Inc. (the "Company" or "Concepts Direct") is a direct
marketing company, headquartered in Longmont, Colorado. From 1988 to 1992,
Company operations were conducted in the Consumer Products division of
Wiland Services, Inc. ("Wiland"), which provided a variety of database
management, list processing and marketing research services to direct
marketing companies. The Company was organized as a Delaware corporation in
May 1992 and began operations under its name on September 30, 1992, as a
result of a spin-off from Wiland.
Two primary strengths of the Company are its proprietary database
(consisting of approximately 8.8 million customers, catalog requesters,
catalog referrals and gift recipients as of December 31, 1998) and its
direct marketing expertise. The Company's four primary direct marketing
vehicles are the "Colorful Images(," "Linda Anderson(", "Snoopy( etc., A
catalog with character" and "Linda Anderson's Collectibles(" catalogs.
Through these media, the Company currently sells personalized paper products
and a diverse line of merchandise, including collectibles, gift items, home
decorative items and casual apparel. The Company's long-term strategy is to
utilize its direct marketing expertise and its database to produce multiple
independent revenue streams from multiple marketing vehicles.
Strategic Focus
The strategic focus of Concepts Direct is reflected in the Company name.
The basic strategy is a focus on direct marketing with the goal of creating
and operating multiple direct marketing concepts that profitably sell
merchandise to a targeted customer base. The principal strategies for
achieving this goal are as follows:
* The Company employs an analytical approach to prospecting
for new customers which emphasizes list testing and segment
analysis, adherence to list performance guidelines and the
recognition of the long-term value of a customer.
* The Company seeks to maximize effective use of its proprietary
database. In addition to recency, frequency of purchase and other
monetary data typically used in database direct marketing, the
Company also collects information concerning the types and themes of
merchandise purchased by its customers. The use of this data, in
conjunction with purchase history data such as latest order date and
order size, helps the Company make niche selections from its
database and offer products which are suited to the styles and
tastes of its customers.
* The Company plans to effectively expand the circulation of its
catalogs and marketing offers. The Company believes that its list
testing strategy, evaluation of performance data and recognition of the
long-term value of a new customer have been significant
contributing factors to its success in expanding circulation,
achieving acceptable overall response rates and enlarging its
proprietary database.
* The Company intends to leverage its proprietary database and
understanding of product preferences of its primary audience by
introducing new complementary catalog titles. For example, Colorful
Images( and other Company catalogs have produced a database
comprised in part of customers who collect certain figurines. The
Company believes this provides opportunity to launch new catalogs
addressing these particular interests.
* The Company plans to leverage its fulfillment infrastructure
and direct marketing expertise to market products via e-commerce sites.
The Company believes that it can use certain e-commerce advantages such
as ease of ordering, constant availability to the consumer and cost
effective means of offer presentation to achieve a significant
retailing presence via electronic media.
Customer Database
The Company's proprietary database stores information on each customer. The
information is derived primarily from customer transactions and updated as
new transactions are recorded. The Company also conducts prospect mailings
to rented and exchanged mailing lists obtained from other companies and
sources. The use of rented and exchanged mailing lists is expected to be a
component of the Company's efforts to obtain new customers and add them to
the proprietary database. During 1998, the Company mailed over 78 million
copies of four different catalog titles, of which over 40% were mailed to
prospective customers.
At the end of 1998, the Company's proprietary database contained
approximately 8.8 million customers, catalog requesters, catalog referrals
and gift recipients, approximately 1.9 million of whom had placed orders
with the Company during the last fiscal year. The Company's database has
grown substantially during the past three years, increasing from 4.4 million
at the end of 1995 to 8.8 million at the end of 1998. Information contained
in the customer database assists in determining which offers customers are
to receive and the frequency of those offers.
The Company selects from its database the individuals it believes are most
likely to respond to a particular merchandise offer, thus maximizing sales
while managing cost as a percent of sales. The Company believes that its
ability to analyze its database and select recipients for a particular
direct marketing campaign are significant factors in its growth. The
Company utilizes various indicators, including frequency and size of order,
date of last order, and style and theme of products purchased to offer
specific catalog mailings to those most likely to purchase its merchandise.
The Company updates its customer database in a real time environment.
Marketing and Product Lines
The Company not only markets to its customer database but also exchanges
lists with and rents lists from other direct marketers in order to gain new
customers. Prospects receive a catalog or other direct marketing offer
tailored to what the Company believes to be their merchandise tastes and
preferences based on historical results. The Company currently markets its
products primarily under four catalog titles:
1. Colorful Images
Colorful Images is the trade name under which the Company markets its line
of personalized labels, notepads, various personalized products and general
merchandise such as T-shirts and collectibles. Under this trade name, the
Company creates its own designs, purchases styles and designs from outside
sources and licenses certain images on a royalty basis.
The Company's line of personalized self-adhesive labels is one of the
largest assortments of such products available from any company. There are
over 900 different label choices appropriate to popular interests as well as
most regions of the country, many hobbies, professions and lifestyles. The
Company now offers self-adhesive labels with popular licensed characters and
names such as Snoopy(tm), other PEANUTS characters and Boyds Bears.
The primary marketing vehicle used to sell Colorful Images products is a
digest-sized catalog (measuring approximately 5" x 7 1/2") with price points
typically ranging from $6.95 to $54.95, excluding shipping and handling.
The catalog, which is bright and colorful, features photographs of labels
and other products. In the past the Colorful Images catalog generally has
been produced in two versions, one for customers and one for prospects. The
prospect version generally contains fewer pages and is typically limited to
merchandise items which have been popular in past mailings to prospects.
The customer version contains merchandise which has been popular in past
mailings to customers, additional merchandise in existing categories and new
merchandise that the Company wishes to test. This presentation of two
different versions of the catalog worked effectively in prior years, but in
1998 response rates declined. In response to this decline, the Company will
discontinue the prospect version in 1999 and mail one version of the catalog
to both customers and prospects.
The catalog is composed of personalized paper products and gift and
merchandise products and the Company believed that certain segments of
Colorful Images customer database preferred one product line or the other.
In 1998, the Company tried to appeal to these perceived preferences by
mailing two different Colorful Images( catalogs. One edition included
primarily personalized paper products and was offered to those customers who
the Company believed demonstrated a paper product buying preference. The
other edition included primarily gift and merchandise products and was
offered to those customers the Company believed demonstrated a preference
for purchasing gift and merchandise items. The Colorful Images gift and
personalized paper catalogs mailed in 1998 nine and eight times,
respectively. Successful test results of this strategy did not hold up when
mailing sizes were increased and customer response rates and contribution
declined at the same time as prospecting results. In 1999, the Company will
return to mailing a single version of the catalog and will utilize a contact
strategy of mailing eight Colorful Images catalogs during the year which is
similar to 1996 and early 1997 contact strategy.
The discontinuing of the prospect version of the catalog and decrease in
frequency of customer contact may result in a decline in sales volume in
1999. Colorful Images has been a successful catalog for many years and it
is normal for catalogs to mature at certain points in their life cycle and
not grow at the same rate as at points earlier in their life cycle. The
Company anticipates that this catalog will continue to produce a significant
contribution to profitability and general and administrative costs.
2. Linda Anderson
Linda Anderson is the trade name under which the Company markets an
assortment of gifts, home decorative merchandise and casual apparel
generally at higher price points than Colorful Images. This merchandise is
offered through the Linda Anderson catalog, which the Company presents in a
style similar to the Colorful Images catalog. Price points in the Linda
Anderson catalog typically range from $8.95 to $164.95, excluding shipping
and handling.
During 1998, the Company mailed six editions of the Linda Anderson catalog
with several remails. More than 300,000 customers placed orders through the
Linda Anderson catalog in the twelve month period ended December 31, 1998.
The Company plans to mail eight editions of Linda Anderson in 1999.
The new customers of Linda Anderson catalog have responded to our other
catalogs at a favorable rate. This action suggests that the quality of new
customers added through our Linda Anderson prospecting efforts is high.
During 1999, the Company plans to reduce losses of prospecting by limiting
the prospecting investment per mail cycle and eliminating remails of
essentially the same catalog to customers. This action may slow the rate of
revenue and database growth.
3. Linda Anderson's Collectibles
The initial edition of Linda Anderson's Collectibles was issued in 1997 and
included more than 55 lines of collectible merchandise. A 1998 version of
the catalog was 64 pages and included over 330 individual items with product
prices between $8.95 and $219.95. The catalog also included information
about collecting and the lines represented. The Company mailed the catalog
three times in 1998 and the number of customers climbed to over 80,000.
Although the response from lists tested, the catalog's creative presentation
and the merchandise lines offered showed significant promise, Linda
Anderson's Collectibles will remain in a "test" status. During 1999, the
Company plans to reduce the level of investment in acquiring new customers
by reducing the planned prospecting loss per mail cycle and will mail Linda
Anderson's Collectibles four times during the year.
4. Snoopy etc., a catalog with character
Operating under an agreement with United Feature Syndicate, the licensing
agent for Charles M. Schulz, the creator of the PEANUTS comic strip, the
Company has developed a catalog consisting exclusively of merchandise
featuring Snoopy and the other PEANUTS characters. The merchandise in
the catalog is a combination of items from licensed manufacturers and
items designed exclusively by the Company for the catalog. The
Company pays a royalty on sales generated by the catalog.
Snoopy etc., a catalog with character was issued five times in 1998 with
products generally priced between $7.95 and $940.00 per item. Since 1996,
the Company has had a license to feature PEANUTS characters on personalized
label products. The Company has accumulated information on its proprietary
database concerning buyers of PEANUTS personalized label products and
other PEANUTS merchandise sold in its other catalogs. Although response to
the 1998 mailings was encouraging and over 50,000 customers of the catalog
have been added, the catalog will remain in a "test" status and the Company
does not anticipate that Snoopy etc., will be a significant source of
revenue increase in 1999. The Company plans to circulate six editions of
the catalog in 1999.
5. Other Catalogs and Offerings
The Company uses its catalog titles, as well as the alternate media
mentioned above, to solicit existing customers and prospect for new
customers. Product and media performance are analyzed based on
profitability. Product continuation and media utilization are determined
based on these analyses. The Company seeks to improve financial results by
presenting customers and prospects merchandise tailored to their historic
tastes and preferences, by increasing circulation, and by expanding the
selection of merchandise offered.
Niche Catalogs
The Company has numerous ideas for new product lines and direct marketing
concepts. All of these ideas involve direct marketing. The Company
believes that the rapid development of Snoopy etc and the Linda Anderson's
Collectibles catalogs and the good customer rate of response that they are
producing validates its strategy to launch other catalogs in niches where
merchandise and the number of buyers of such products on its database
indicate a likelihood of success. The Company has identified several niche
markets such as lawn and garden, pets and business to business for serious
evaluation of catalog opportunities. The Company plans to limit marketing
investment and inventory risk by appropriate testing of catalogs in the
niche areas and may launch and/or test some of these new concepts as
e-commerce sites.
Microniche Offers
The Company also mails offers to very narrrow, special interest segments of
its database called microniches. These offers are directed at the Company's
best customers within very narrowly defined merchandise lines such as Boyds
or Dreamsicles figurines. The Company mailed two microniche offers in 1998
with satisfactory results and plans several more in 1999 with limited test
circulation quantities to limit the financial risk.
E-Commerce
In the last few years another direct marketing channel, e-commerce, has had
significant impact on the retail marketplace. While the Company believes
that most of its customers were not early users of the internet, customer
requests and other statistics indicate that its customer base is using the
internet in increasing numbers. The Company believes that e-commerce has
certain inherent advantages such as providing constant availability of the
marketplace, ease of customer contact, potentially a lower cost structure
and ease of testing new merchandise and marketing techniques. In 1998 the
Company made significant progress in development of e-commerce
infrastructure. During 1999, the Company plans to complete the first phase
of its e-commerce infrastructure and begin launching e-sites to market
certain products and provide certain services.
Licensing and Service Marks
Federally registered service marks exist for each of the Company's primary
catalog titles. The Company anticipates that it will seek registered
service marks for other business concepts and catalog titles as it develops
them in the future.
The Company has developed certain artwork used in its labels and other
products. In addition, the Company has purchased or licensed rights to
certain artwork from third parties, generally for a period of at least five
years. Certain rights are also licensed on a royalty basis, including
PEANUTS, Boyds Collection Ltd., Dreamsicles and others. Management
anticipates the licenses and royalty arrangements may be renewed or
replaced, as appropriate, with minimal disruption to ongoing operations.
Materials and Inventory
The Company purchases its product inventory from numerous domestic
manufacturers and several importers and domestic representatives of foreign
manufacturers. Domestic sources supply essentially all of the Company's
gift and apparel merchandise. Purchase arrangements with suppliers are
generally for a specified product, price and quantity of product. While the
Company purchases its base paper stock for most of its personalized labels
from a few vendors, management believes alternative vendors are available,
if needed. The remainder of the product line and material used in the
production of the Company's catalogs are available from many different
sources.
Except for a few specialized items that are drop shipped directly from
suppliers, the Company maintains an inventory of products it sells. The
Company analyzes past catalog mailings, evaluates probable customer buying
patterns and projects sales levels for new products, to try to avoid
committing excessive amounts of working capital to inventory for substantial
periods of time. During the fourth quarter of 1997, gift and merchandise
backorder levels rose to an unsatisfactory level primarily as a result of a
few vendors' inability to meet Company product demand in a timely fashion.
In the fourth quarter of 1998, the Company was successful in avoiding the
backorder problems that occurred in the fourth quarter of 1997. In the
process inventory levels increased significantly over historic levels.
Efforts are being made to reduce the level of inventories by such measures
as liquidation and returns to vendors. However, in the future as the
Company's merchandise mix includes more gift, home decor and merchandise
products, the Company's investment in gift, home decor and merchandise
inventory as a percentage of sales will need to be increased above historic
levels, particularly in the holiday season.
The Company's gift and apparel inventory liquidation processes include
product exchange agreements with vendors, sale of outdated products through
its small retail outlets and discarding of some items.
The Company spends significant amounts on paper used in the production of
its catalogs and paper products. The cost of paper fluctuates. In the last
half of 1996 and early 1997, the cost of paper the Company used to produce
it catalogs was lower than in previous periods. Accordingly, the Company's
cost of doing business during these periods was lower. Paper costs
increased during the latter part of 1997 and in early 1998 and declined near
the end of 1998. While the Company cannot predict future paper cost
increases, such increases would have an impact on the Company's future
earnings.
Order Fulfillment
Orders for the Company's merchandise are received by mail, telephone and
facsimile. All orders are received and processed at the Company's
headquarters in Longmont, Colorado. The Company's ability to timely fulfill
orders, especially during the busy pre-Christmas season, is important to the
Company's success. This ability depends, in part, on the availability of
part-time employees who have adequate training before the peak of the
holiday season and the efficiency of the Company's in-house telephone call
center. During 1998, approximately 43% of the Company's orders were
received by telephone with the remaining 57% of its orders received by mail
or facsimile.
The Company's order backlog was approximately $1,383,000 as of December 31,
1997, and $506,000 as of December 31, 1998. Orders represented by this
backlog have historically shipped within approximately ten days. The level
of order backlog fluctuates with seasonal sales patterns as discussed above.
The Company generally receives payment in advance from customers for sales
and shipping and handling. The Company's orders are shipped via United
States Postal Service (USPS) and other carriers. Priority or express
service is available for an extra charge.
Customer Service
The Company places great emphasis on customer service and has implemented a
return policy which attempts to guarantee customer satisfaction and to
encourage first time and repeat orders. The retail value of refunds and
merchandise replacements issued under the return policy in 1998 was
approximately 4.4% of net sales. If returned merchandise cannot be
restocked, it is returned to the manufacturer if defective, held for
disposal in inventory liquidation processes described above under "Materials
and Inventory" or discarded. Product and order problem inquiries are
directed to customer service personnel who are trained to resolve most
customer issues.
Seasonality
The Company's business is seasonal. Historically, a substantial portion of
the Company's revenues and net income have been realized during its fourth
quarter. The Company believes this is the general pattern associated with
the mail order and retail industries. Accordingly, the Company increases
inventory of both its paper products and its gift and apparel merchandise
during the Christmas holiday season to accommodate anticipated increases in
sales. Further discussion of the effect of seasonality upon revenues and
income is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition
Direct marketing is highly competitive. Thousands of companies offer
products via catalog, direct mail, newspaper inserts, television and other
media. The Company competes on the basis of the quality, diversity and
price of merchandise offered , customer service and effectiveness of
customer targeting.
Management believes that, although many companies offer personalized labels,
note pads and note cards, there are only a few companies that offer a broad
variety of personalized labels comparable to that offered by the Company,
which the Company believes is a competitive advantage. The Company's other
merchandise product lines face greater competition in the marketplace than
the Company's paper products. A substantial number of competitors
distribute catalogs that contain portions of the merchandise contained in
the Company's catalogs. In addition, certain of the merchandise sold in the
Company's catalogs is available through retail stores and other sources.
The Company believes that e-commerce is becoming a significant force in the
marketplace in which it operates. The Company is developing e-commerce
infrastructure and plans to launch e-sites in 1999. Many of the Company's
competitors are also establishing and operating e-sites.
Certain of the Company's current and potential competitors have
significantly greater development, order fulfillment, marketing and capital
resources and name recognition than the Company.
Employees
As of December 31, 1998, the Company had approximately 530 employees, 305 of
whom were part-time. Of the 225 full-time employees, 20 supported
information technology, 36 supported creative and marketing functions, 147
supported fulfillment operations and 22 supported other administrative
functions. The employees are not covered by collective bargaining
agreements. The Company considers its relationship with its employees to be
satisfactory.
Government Regulations
The Company must comply with Federal, state and local laws that affect its
business. In particular, the Company is subject to Federal Trade Commission
regulations governing the Company's advertising and trade practices. While
the Company believes it is currently in compliance with such regulations, in
the event of noncompliance, the Company may be subject to injunctive
proceedings, cease and desist orders, civil fines and other penalties.
The Company has historically collected and remitted sales and similar taxes
only in those states in which it operates a location. In recent years a
number of states have asserted that advertising by a corporation within
their borders provides sufficient nexus to require the collection and
remittance of such taxes. In a decision rendered on May 26, 1992, the
United States Supreme Court held that application of North Dakota's use tax
statute against an out-of-state mail order house with neither sales
representatives nor outlets in the state placed an unconstitutional burden
on interstate commerce. However, the Court also noted that Congress may be
better equipped to resolve the issue presented by the case. If Congress
should pass applicable legislation, it could have an impact on the future
operations of the Company. The actual impact would depend on the specifics
of any such legislation.
Some states also require residents of the state who purchase products by
mail order to remit to the state the state sales tax that would be collected
by the merchant if the product was sold from a location within the state.
To date, this type of legislation has not had a material impact on the
Company's business.
Financial Information About Foreign and Domestic Operations and Export Sales
The Company's identifiable assets are attributable entirely to the Company's
domestic operations. The Company has no foreign operations, but does
advertise in Canada. Export sales to Canada accounted for approximately
$948,000, $1,014,000 and $68,000 of the Company's sales in 1996, 1997 and
1998, respectively. Export sales excluding Canada are insignificant.
ITEM 2. PROPERTIES
Real Property
The Company's corporate headquarters, administrative offices and operations
are located in Longmont, Colorado, approximately 40 miles from downtown
Denver. The Company believes that the facilities it occupies are well
maintained and in excellent operating condition. The Company purchased
approximately 139 acres of undeveloped land in January 1997 and developed
and constructed the current headquarters on approximately 11 acres of the
site. Some of the remaining land will be held for expansion, and the
Company will attempt to sell most of the balance of the acreage to other
parties. In late August 1997, the Company moved essentially all of its
operations to the new facility.
The following table sets forth the primary real property which the Company
owns and leases.
Location Function Lease Expiration 1999 Rent Square Feet
Longmont, CO Headquarters Owned Owned 117,000
Longmont, CO Retail Outlet Month-to-month $2,628 1,700
Cheyenne, WY Retail Outlet 10/31/99 $9,147 1,372
Fulfillment Hardware and Software
All of the Company's order fulfillment hardware is located at its
headquarters facility. The primary computer hardware is manufactured by Sun
Microsystems, Inc., Xerox Corporation and Data General Corporation. At
the time of the move to the new facility in 1997, certain changes and
additions to order fulfillment hardware were made. The Company believes
these changes and minor modifications and additions should accommodate the
Company's near-term growth strategy.
Historically, the Company has used various licensed computer software
packages to perform order fulfillment, inventory control and related
functions. The Company currently uses an internally developed order
processing system developed using Oracle as the primary software platform.
Company personnel are working on further improvements to the software. The
Company anticipates that the current software with minor additions and
modifications should accommodate the Company's near-term growth strategy.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation which management believes is
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerning the executive officers of the Company
is included in this report pursuant to General Instruction G (3) of Form
10-K. No person other than those identified below has been chosen to become
an executive officer of the Company. The executive officers serve at the
pleasure of the Board of Directors. No family relationships exist among the
executive officers of the Company.
Phillip A. Wiland, 52, Chief Executive Officer and Chairman of the Board of
Directors since December 18, 1992
J. Michael Wolfe, 40, President and Chief Operating Officer of the Company
since December 18, 1992. Member of the Board of Directors since December
1998.
H. Franklin Marcus, Jr., 53, Secretary-Treasurer and Chief Financial Officer
of the Company and has served in that position September 30, 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market and Price Information
The Company's common stock, par value $.10 (the "Common Stock"), is
currently traded on the Nasdaq National Market under the symbol CDIR. The
quarterly high and low bid quotations, as reported by the National
Association of Securities Dealers, Inc. for each full quarterly period
available for reporting by the Company for 1997 and 1998 are set forth
below.
Quarter and Year High Low
Calendar 1997
1st Quarter 17 1/2 9 1/4
2nd Quarter 22 3/4 17
3rd Quarter 21 5/8 13 1/4
4th Quarter 23 1/4 16 1/2
Calendar 1998
1st Quarter 20 1/2 11 3/4
2nd Quarter 16 13 1/2
3rd Quarter 15 10 3/4
4th Quarter 16 3/4 7 1/4
The foregoing quotations of high and low bid prices represent prices between
dealers and do not include retail mark-up, mark-down or commissions. They
do not necessarily represent actual transactions. The highest bid on each
day is reported. These prices reflect a two-for-one stock split paid on
March 31, 1997 to shareholders of record on March 14, 1997.
Number of Shareholders
As of March 5, 1999, there were approximately 725 registered and beneficial
record holders of the Common Stock, according to the Company's Stock
transfer agent and registrar.
Dividends
Except for the distribution of proceeds from the disposal of the Company's
Direct Marketing Services division in 1992, the Company has never paid cash
dividends on the Common Stock. The Company intends to retain earnings for
use in its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. Payment of dividends is within the
discretion of the Company's Board of Directors, which will periodically
review the Company's dividend policy, considering the Company's earnings,
capital requirements, and financial condition, among other factors.
ITEM 6. SELECTED FINANCIAL DATA
December 31,
1998 1997 1996 1995 1994
(amounts in thousands except per share data)
INCOME STATEMENT DATA
Net sales $84,773 $78,489 $51,126 $42,147 $20,724
Operating income (loss) (1,979) 2,075 2,562 638 1,403
Income (loss) before income taxes (2,030) 2,490 2,808 937 1,490
Net income (loss) (1,378) 1,615 1,937 843 1,490
Basic earnings (loss) per share $(0.28) $0.36 $0.46 $0.20 $0.35
Diluted earnings (loss) per share $(0.28) $0.33 $0.44 $0.19 $0.35
Weighted average common shares 4,959 4,528 4,233 4,211 4,155
Weighted average common shares and
dilutive stock options 4,959 4,828 4,439 4,398 4,305
BALANCE SHEET DATA
Current assets $19,237 $28,223 $13,443 $8,722 $7,174
Current liabilities 8,554 15,079 7,518 4,833 3,963
Total assets 32,073 40,378 14,487 9,924 8,294
Long-term liabilities 6,079 6,486 - 67 160
Stockholders' equity 17,440 18,813 6,969 5,024 4,172
Earnings per share data and weighted average common shares and common share
equivalents outstanding have been restated to reflect the 1994 and 1997
two-shares-for-one-share stock splits.
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and the impact of
Statement No. 128, see the notes to the financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
The period from 1996-1998 has been a time of transition for the
Company. We began this period as a direct marketing business with a single
significant catalog title and many plans for the future. At the end of
this period, we are still a direct marketing business, but we now have four
catalog titles in active or developmental stages. We also have more new
catalogs in development with test marketing planned in 1999. Additionally,
we developed and tested for the first time in 1998 a specialty-mailing
concept within our Paper Based Marketing program. As a consequence of
these changes, our customer base has expanded substantially.
We also made major changes with respect to our product mix as we
developed our new catalogs. Currently, we advertise and sell primarily
gift, home decor and other merchandise items as compared to 1996 when we
advertised and sold primarily personalized paper products. Over the past
three years, we also acquired property and constructed a larger and
technologically more advanced headquarters and operations facility.
Finally, we have recently been preparing to launch a substantial e-commerce
initiative.
All of these changes have had an impact on our revenues, costs and
profitability. Our revenues have increased during this period, although
the costs associated with generating the increased revenues have, not
surprisingly, increased at a disproportionately greater rate. These costs
include costs associated with developing new catalogs and prospecting for
customers. Also, gift, home decor and other merchandise items have higher
costs as a percentage of sales and higher price points than personalized
paper products. Other costs and revenues were occasionally impacted over
the three-year period by other uncertainties associated with our business
such as changes in the cost of paper used to print our catalogs, catalog
distribution issues, customer and prospect receptiveness to changes in our
marketing programs, systems conversions and vendor reliability. However,
management believes that these investments should ultimately position the
Company for substantial growth.
Increase in Net Sales
The Company's net sales increased $6.3 million, or 8%, to $84.8
million for 1998 from $78.5 million in 1997 and increased $27.4 million, or
54%, in 1997 from $51.1 million in 1996. In 1998, the sales increase came
from the new catalogs, Linda Anderson, Linda Anderson's Collectibles and
Snoopy, etc. Sales from our largest catalog, Colorful Images, declined in
1998 as compared to 1997 primarily because fewer catalogs were circulated
to prospects and customer response rates were lower to certain mailings.
The increases in sales in 1997 resulted primarily from the distribution of
a greater number of catalogs and other advertising media, increased page
count of the catalogs and a greater number of products offered. Gift, home
decor and other merchandise products increased as a percentage of total
sales from 41% in 1996 to 52% in 1997 to 66% in 1998. These increases
occurred primarily because of the advertising and sale of a greater number
of gift, home decor and other merchandise items as a percentage of total
products advertised and sold. Sales from the new catalogs are almost
exclusively gift, home decor and other merchandise items.
Cost of Product and Delivery and Gross Profit
Cost of product and delivery as a percentage of sales was 56% in
1998, as compared to 53% in 1997 and 52% in 1996. Gross profit increased by
$700,000, or 2%, to $37.3 million in 1998 from $36.6 million in 1997 and
increased $12.3 million, or 51%, in 1997 from $24.3 million in 1996. Gross
profit as a percentage of net sales was 44% in 1998, 47% in 1997 and 48% in
1996. The decrease in gross profit in 1998 and 1997 resulted primarily from
increased sales of gift, home decor and other merchandise items, which
generally have higher product costs as a percentage of sales than
personalized paper products. In 1998, 1997 and 1996, personalized paper
product costs were less than 15% of sales price compared to gift and
merchandise products whose costs were in excess of 30% of sales price. In
addition, but to a lesser degree, higher fixed costs of operations
contributed to the decrease in gross profit as a percentage of sales. These
higher fixed costs included facility and equipment costs, both of which are
higher due to the move in the third quarter of 1997 to our new facilities
and the new equipment acquired at that time.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased $4.8 million,
or 14%, to $39.3 million in 1998 from $34.5 million in 1997 and increased
$12.8 million, or 59%, in 1997 from $21.7 million in 1996. Selling,
general and administrative costs as a percentage of sales were 46% in 1998,
44% in 1997 and 43% in 1996. The increase in 1998 resulted primarily from
the more than 125% increase in circulation of the new catalogs in 1998 as
compared to 1997, increased creative costs associated with the development
of the new catalogs, higher fixed general and administrative costs
including additional merchandise and creative personnel hired to produce
the new catalogs and decreased response rates from Colorful Images
prospecting efforts. The increase in 1997 primarily related to increased
paper costs in the last quarter of the fiscal year and a higher level of
prospect marketing in 1997 as compared to 1996. Prospect marketing
generally has higher marketing costs as a percentage of sales than customer
marketing because customers tend to respond to marketing offers better than
prospects.
Other income (expense)
Other income (expense), consisting primarily of interest expense,
interest income and vendor payment discounts, was an expense of $51,000 for
1998, and income of $415,000 for 1997 and $246,000 for 1996. An increase
in interest expense was the most significant cause of the expense for 1998.
Interest expense was $507,000 for 1998, $182,000 for 1997 and $13,000 for
1996. The increase in interest expense resulted primarily from the
financing of the Company's new facilities.
Income taxes
The Company had an income tax benefit of $652,000 in 1998 and
provision for income taxes of $875,000 in 1997 and $871,000 in 1996. The
income tax rate in 1998 was approximately 32% and the income tax rate in
1997 was approximately 35%. These income tax rates were lower than the
statutory federal and state tax rates, because of the availability of
certain state income tax credits. The income tax rate in 1996 was
approximately 31% which was lower than the statutory rate, because of the
availability of research and development credits. Management
anticipates the income tax rate in 1999 will be approximately 34%.
Seasonality
Company sales have certain seasonal fluctuations that primarily
relate to the purchasing patterns of individual consumers and increased
levels of advertising. These patterns tend to concentrate sales in the
latter half of the year, particularly during the Christmas season. In
1998, 1997 and 1996, approximately 40%, 42% and 41%, respectively, of
sales occurred in the last three months of the year. The net earnings of
any interim quarter are usually seasonally disproportionate to net sales
since administrative and certain operating expenses remain relatively
constant during the year. Although the Company's product mix has changed
significantly during the last three years, prices for the Company's
products have not increased significantly.
Outlook
The Company intends to continue its strategy of developing several
catalog vehicles and related marketing efforts. Currently management
anticipates that Linda Anderson will begin to produce a positive
contribution to profitability during 1999 but both Linda Anderson's
Collectibles and Snoopy, etc. are still in the developmental stage. In
1999, management plans to be less aggressive with prospecting efforts for
Linda Anderson and Linda Anderson's Collectibles and to set limits on
expenditures associated with prospecting. These actions should reduce the
negative financial impact of these catalogs on profitability but may also
slow the rate of revenue and database growth. We also plan to develop more
niche catalogs or marketing efforts similar to Snoopy, etc. which will
focus on specific groups of prospective customers. While in the
developmental stage, these niche offerings may also produce some of the
same effects on margins seen in 1998.
Colorful Images is our most mature catalog. Colorful Images
experienced some contribution reduction in 1998. During 1998 we attempted
to mail two different versions of the catalog. Early test successes did
not hold up when the catalog was mailed in higher volumes. In 1999, we
plan to mail one version of the catalog to customers and prospects at a
reduced frequency as compared to 1998. This reduction in frequency of
contact may reduce revenues from Colorful Images in 1999 but should result
in increased profitability contribution.
During the fourth quarter of 1998, the Company successfully avoided
backorder problems that had occurred in prior years, but inventory levels
increased significantly over historic levels. During 1999, the Company
intends to make efforts to reduce the level of inventories by employing
such measures as liquidation and returns to vendors. However, in the
future as the Company's merchandise mix includes more gift, home decor and
other merchandise items, the Company's investment in such inventory may
need to increase above historic levels and the Company will need to plan to
contain levels of excess inventory.
During the last half of 1998, the Company began a significant
e-commerce infrastructure development effort. During the second quarter of
1999, the Company currently plans to complete first phase infrastructure
development and begin launching e-sites, including sites specific to
certain of its catalogs and sites that offer brand or catalog related
merchandise and services.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $9,703,000 in 1998, increased by
$7,349,000 in 1997 and increased by $3,100,000 in 1996. Activity in
several significant areas had the greatest impact on cash and cash
equivalents as described below.
A decrease in the number of catalogs distributed near the end of the
fourth quarter of 1998 as compared to the same period in 1997, and reduced
costs incurred for distribution of a lesser number of catalogs in the first
quarter of 1999 as compared to the same period in 1998 were the primary
factors resulting in a $3,162,000 decrease in deferred advertising costs in
1998. Increased advertising over 1996 levels, the forward buying of
approximately $1.7 million of paper for catalogs, the distribution of a
greater number of catalogs and the distribution of a significant number of
catalogs near the end of the fourth quarter of 1997 and very early in
January 1998 were the primary factors in the increase of deferred
advertising by $3,797,000 in 1997. The increase in inventories of
$5,427,000 in 1998 primarily related to increased inventory purchasing to
avoid backorder problems and the increase in sales as a percentage of total
company sales of the gift, home decor and other merchandise items which
generally have higher unit cost than paper products. The increases of
inventories of $2,552,000 in 1997 related primarily to increased sales. The
decrease in accounts payable of $3,867,000 in 1998 related primarily to the
timing of payment of advertising costs and inventories. The increase in
accounts payable of $4,514,000 in 1997 and $2,216,000 in 1996 primarily
related to the incurring of significant advertising costs for January
mailings of the subsequent year and timing of payments for inventory.
Improvement in inventory backorder and fulfillment function efficiency were
the main factors in a decrease of customer liabilities (primarily unshipped
customer orders and reserve for future customer warranty costs and product
returns) in 1998 by $1,221,000. During the fourth quarter of 1997, the
increase in customer liabilities of $953,000 related primarily to an
increase in customer order backlog caused by inventory backorder and a lack
of capacity in certain fulfillment functions. The net loss of $1,3 78,000
contributed significantly to the decrease in cash in 1998 and net income of
$1,615,000 and $1,937,000 in 1997 and 1996, respectively, contributed
significantly to increased cash in these years.
Significant items of investment of cash during the periods were
purchases of property and equipment of $1,252,000, $11,653,000 and $377,000
in 1998, 1997 and 1996, respectively, and the use of $500,000 to
collateralize a letter of credit during 1997. The 1998 purchases related
primarily to purchases of software and assets relative to development of
e-commerce infrastructure. The 1997 purchases of property and equipment
related primarily to the purchase of undeveloped land and costs of a newly
constructed facility that the Company moved into in the third quarter of
1997. The purchases during 1996 related primarily to computer equipment,
order fulfillment equipment and furniture to accommodate the sales growth
and expansion of the Company's computer systems. The letter of credit is
related to certain obligations generally expected to be resolved within one
year, in connection with improvements to the building site.
In early July 1997, the Company completed a secondary offering of
1.5 million shares of its common stock. As part of the offering, the
Company issued and sold 471,404 shares. The underwriters also elected to
exercise their over-allotment option for 225,000 additional shares. Net
proceeds from this transaction were approximately $10,213,000.
During 1997, the Company closed on credit facilities with Bank One,
Colorado, N.A. ("Bank One") for long-term financing on its new facility
and a land development loan for the portion of property held for expansion
or sale. The Company has facility mortgages of $4,401,000 bearing interest
at a rate of 5.86%, plus approximately 1% in bank fees and $1,225,000 with
interest at 7.875%. The land development loan is $1,064,000 with a
variable interest rate equal to Bank One's prime rate plus 1.5% (9.25% at
December 31, 1998). The Company also has available through Bank One a
revolving line of credit for $2.0 million for general purposes. The
revolving line of credit expires in May 1999, at which time the Company
anticipates being able to renew the arrangement. The $6,996,000 increase
in debt during 1997 represented draws on these credit facilities.
The Company had $4,070,000 of cash and cash equivalents at December
31, 1998. Management believes that results of operations, continued
operational planning review procedures, current cash balances and line of
credit availability will produce funds necessary to meet its anticipated
working capital requirements for the current year. During 1999, the Company
plans to incur significant cost in the development of its e-commerce
infrastructure, the majority of which will be capitalized. Also while the
Company's growth strategies primarily focus on internal development, the
acquisition of existing catalogs may be considered from time to time.
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 have provided modifications for compliance by early 1999. All
modification, conversions and installations are expected to be complete by
mid-1999. The Company presently believes that with modifications to
existing software, the Year 2000 issue will not pose significant
operational problems. However, if such modifications are not made or
completed timely, the Year 2000 issue could have a material impact on the
operations of the Company. 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 estimates its total cost of achieving Year 2000
compliance to be less than $500,000 over the cost of normal software and
equipment upgrades and replacements. Approximately $100,000 was incurred
in 1998, the remainder will be incurred in 1999.
The Company has initiated formal communication with its significant
suppliers to determine the extent to which the Company's operations are
vulnerable to those third parties' failure to be Year 2000 compliant. The
Company has not yet discovered any major problems and to the extent that
the Company identifies non-compliant issues, it plans to assess the level
of exposure 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 failure by another company will
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 on 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, the availability of personnel trained in this area, the
ability to locate and correct relevant systems and similar uncertainties.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of
1995 (the "Act") provide companies with a "safe harbor" when making
forward-looking statements. This "safe harbor" encourages companies to
provide prospective information about their companies without fear of
litigation. Company statements that are not historical facts, including
statements about management's expectations, beliefs, plans and objectives
for fiscal year 1999 and beyond and about Year 2000 issues, are forward
looking statements (as such term is defined in the Act) and involve various
risks and uncertainties. Factors that could cause the Company's actual
results to differ materially from management's projections, forecasts,
estimates and expectations include, but are not limited to, the following:
* changes in postal rates or the cost of paper;
* changes in the general economic conditions of the United
States leading to increased competitive activity and
changes in consumer spending generally or specifically with
reference to the types of merchandise that the Company
offers in its catalogs;
* changes in the Company's merchandise product mix or changes
in the Company's customer response to advertising offers;
* competitive factors including name recognition and the
Company's relative newness to the mail-order catalog business;
* lack of availability/access to capital or sources of supply
for appropriate inventory;
* lack of effective performance of third party suppliers with
respect to production and distribution of catalogs;
* state tax issues relating to the taxation of out of state
mail-order companies with neither sales representatives nor
outlets in a particular state seeking to impose sales and
similar taxes;
* lack of effective performance of third parties supplying
Year 2000 solutions to the Company;
* 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; and
* changes in strategy and timing related to testing and
rollout of new catalogs and those catalogs still
in the test stage of development.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Concepts Direct, Inc. are set forth
below:
Report of Independent Auditors on the financial statements
and schedules of Concepts Direct, Inc. for the years ended
December 31, as set forth below.
Balance Sheets as of December 31, 1998 and 1997
Income Statements for the years ended December 31, 1998,
1997 and 1996
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Financial Statements - December 31, 1998
The financial statement schedules of Concepts Direct, Inc.
are set forth below:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
Report of Independent Auditors
Stockholders and Board of Directors
Concepts Direct, Inc.
We have audited the accompanying balance sheets of Concepts Direct, Inc. as
of December 31, 1998 and 1997, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. Our audits also included the financial
statement schedule II. 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. 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 Concepts Direct, 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 related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
February 9, 1999
CONCEPTS DIRECT, INC.
BALANCE SHEETS
December 31,
1998 1997
ASSETS
Current assets
Cash and cash equivalents $4,070,369 $13,773,815
Restricted cash - 128,403
Accounts receivable, less allowances 391,280 259,219
Deferred advertising costs 4,454,553 7,616,138
Inventories, less allowances 10,053,406 5,167,729
Income taxes recoverable - 373,000
Prepaid expenses and other 267,107 904,281
Total current assets 19,236,715 28,222,585
Property and equipment, net 12,272,441 11,860,954
Other assets 563,591 294,263
$32,072,747 $40,377,802
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $5,969,535 $9,837,028
Current maturities of debt and
capital lease obligations 779,685 594,971
Accrued employee compensation 547,691 1,101,972
Customer liabilities 494,428 1,715,775
Interest payable 29,348 20,980
Deferred income taxes payable 732,980 1,808,056
Total current liabilities 8,553,667 15,078,782
Debt and capital lease obligations 6,078,620 6,486,384
Commitments and contingencies
Common stock, $.10 par value, authorized
6,000,000 shares, issued and outstanding
4,967,286 and 4,957,286 in 1998
and 1997, respectively 496,729 495,729
Additional paid-in capital 14,323,773 14,319,338
Retained earnings 2,619,958 3,997,569
Total stockholders' equity 17,440,460 18,812,636
$32,072,747 $40,377,802
See notes to financial statements.
CONCEPTS DIRECT, INC.
INCOME STATEMENTS
Year Ended December 31,
1998 1997 1996
Net sales $84,773,205 $78,488,903 $51,125,844
Operating costs and expenses
Cost of product and delivery 47,493,436 41,899,656 26,833,956
Selling, general and administrative 39,258,944 34,513,972 21,729,621
Total operating costs and expenses 86,752,380 76,413,628 48,563,577
Operating income (loss) (1,979,175) 2,075,275 2,562,267
Other income (expense), net (50,512) 414,614 245,936
Income (loss) before income taxes (2,029,687) 2,489,889 2,808,203
Provision (benefit) for income taxes (652,076) 875,000 871,000
Net income (loss) $(1,377,611) $1,614,889 $1,937,203
Basic earnings (loss) per share $(0.28) $0.36 $0.46
Diluted earnings (loss) per share $(0.28) $0.33 $0.44
Weighted average number of common shares 4,959,286 4,528,486 4,233,177
Weighted average number of common shares
and dilutive stock options 4,959,286 4,827,561 4,438,564
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Number of
shares of Additional Total
Common Common Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
Bal. at Dec. 31, 1995 2,116,441 $211,644 $4,366,633 $445,477 $5,023,754
Net income - - - 1,937,203 1,937,203
Exercise of stock options 4,667 467 7,822 - 8,289
Bal. at Dec. 31, 1996 2,121,108 212,111 4,374,455 2,382,680 6,969,246
Net income - - - 1,614,889 1,614,889
Stock split 2,125,441 212,544 (212,544) - -
Exercise of stock options 14,333 1,433 14,394 - 15,827
Sale of common stock 696,404 69,641 10,143,033 - 10,212,674
Bal. at Dec. 31, 1997 4,957,286 495,729 14,319,338 3,997,569 18,812,636
Net loss - - - (1,377,611)(1,377,611)
Exercise of stock options 10,000 1 ,000 4,435 - 5,435
Bal. at Dec. 31, 1998 4,967,286 $496,729 $14,323,773 $2,619,958 $17,440,460
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
OPERATING ACTIVITIES
Net income (loss) $(1,377,611) $1,614,889 $1,937,203
Adjustments to reconcile
net income (loss) to net cash
provided by (used in)
operating activities:
Provision for losses on
accounts receivable 12,220 16,000 23,000
Provision for losses in
inventory values 541,168 168,506 41,721
Depreciation 1,015,678 597,089 520,698
Increase (decrease) in current
and deferred income taxes payable (1,075,076) 1,020,413 696,718
Loss (gain) on disposals of
property and equipment 60,271 (410) 59,013
Changes in operating assets
and liabilities:
Accounts receivable (144,281) (109,386) (80,731)
Deferred advertising costs 3,161,585 (3,797,311) (1,611,583)
Inventories (5,426,845) (2,552,236) (26,842)
Income taxes recoverable 373,000 (373,000) -
Prepaid expenses and other 637,174 (655,361) 34,334
Accounts payable (3,867,493) 4,513,750 2,216,104
Accrued employee compensation (554,281) 517,104 (54,075)
Customer liabilities (1,221,347) 953,284 (145,773)
Interest payable 8,368 126,973 -
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (7,857,470) 2,040,304 3,609,787
INVESTING ACTIVITIES
Cash restricted as collateral - (500,000) -
Release of cash restricted
as collateral 128,403 371,597 -
Purchases of property and
equipment (1,251,649) (11,652,622) (377,426)
Sales of property, equipment
and investments - 410 260
Other investing activities, net (269,329) (55,417) (45,300)
NET CASH USED IN
INVESTING ACTIVITIES (1,392,575) (11,836,032) (422,466)
FINANCING ACTIVITIES
Principal payment of debt and
lease obligations (574,241) (79,947) (95,311)
Issuance of debt obligations 115,405 6,995,852 -
Sale of common stock - 10,212,674 -
Exercise of common stock options 5,435 15,827 8,289
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (453,401) 17,144,406 (87,022)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,703,446) 7,348,678 3,100,299
Cash and cash equivalents at
beginning of year 13,773,815 6,425,137 3,324,838
Cash and cash equivalents
at end of year $4,070,369 $13,773,815 $6,425,137
See notes to financial statements.
NOTE 1. Significant Accounting Policies
Organization: Concepts Direct, Inc. markets various products directly to
individual consumers, including a line of personalized paper products,
gift items, home decorative items and other merchandise under various
catalog titles. The Company's corporate and operations facilities are
located in Longmont, Colorado. The Company sells its products nationwide
and in Canada.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Revenue Recognition: Revenues from the sale of products are recognized when
products are shipped to customers.
The Company's sales are attributable entirely to United States operations.
Export sales to Canada were approximately 0.1%, 1.3% and 1.9% of total
sales in 1998, 1997, 1996, respectively. Export sales, excluding Canada,
were less than 1%.
Cash Equivalents: The Company considers all highly liquid investments,
including marketable securities, with a maturity of three months or less
when purchased to be cash equivalents.
Marketable securities of $0 and $4,949,100 at December 31, 1998 and 1997,
respectively, consist of U.S. Government and U.S. Government backed
obligations and are carried at cost which approximates market value.
Deferred Advertising Costs: These costs primarily relate to printing and
distribution of advertising materials. Such costs are deferred for financial
reporting purposes until the advertising materials are distributed, then
amortized over succeeding periods (not to exceed twelve months) on the
basis of estimated sales. Amortization is accelerated in the earlier months
of the amortization period. Historical sales statistics are the principal
factor used in estimating the amortization rate. Other advertising and
promotional costs are expensed as incurred. Advertising costs were
$34,729,000, $30,202,000 and $18,373,000 in 1998, 1997 and 1996,
respectively.
Inventories: Inventories of products, net of valuation allowances of
$740,000 and $394,000 at December 31, 1998 and 1997, respectively, are
stated at the lower of cost (first-in, first-out" method) or market.
Property and Equipment: Such assets are stated on the basis of cost.
Buildings and purchased and leased computer software is depreciated using
the straight-line method. All other property and equipment is depreciated
using accelerated methods. Interest capitalized during the 1997 construction
of the Company's new facility was $6,000.
Warranties: The Company's sales of products are subject to a satisfaction
guarantee. Certain sales of products are also under warranty against
defects in material and workmanship for various periods. The Company
accrues for anticipated future warranty costs and product returns with
periodic adjustments to reflect actual experience.
Income Taxes: Deferred income taxes are based on the liability method as
prescribed by Statement of Financial Accounting Standards No. 109 which
requires an adjustment to the deferred tax liability to reflect income tax
rates currently in effect rather than historical rates. When income tax
rates increase or decrease, a corresponding adjustment to income tax
expense is recorded by applying the rate change to the cumulative temporary
differences.
Earnings Per Share: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share (Statement No. 128). Statement No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement No. 128
requirements.
Dividend Policy: At the present time, the Company intends to retain
earnings to provide funds for operations and expansion of the Company's
business. Thus, it does not foresee paying cash dividends in the future.
Barter Transactions: The Company regularly exchanges customer names with
other direct marketers, on a name for name basis, with no payment made or
received. Such exchanges are not reflected in the Company's financial
statements.
Comprehensive Income: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. There is no difference between net income and
comprehensive income as prescribed by Statement No. 130.
Segment Reporting: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information. The Company has
completed its analysis regarding the reporting requirements of Statement No.
131 and has determined that its operating segments are most appropriately
aggregated as one operating segment as prescribed by Statement No. 131.
NOTE 2. Statements of Cash Flows
Following is supplemental information to the statements of cash flows:
Year Ended December 31,
1998 1997 1996
Non-cash investing and
financing activities:
Debt refinanced $ - $3,842,427 $ -
Interest financed as debt 12,710 105,993 -
Equipment financed through
capital lease 235,787 - -
Cash - flow data:
Cash paid during the year for:
Interest $485,766 $60,486 $12,801
Income taxes - 227,587 174,282
NOTE 3. Property and Equipment
Following is a summary of property and equipment at:
Principal
December 31, Estimated
1998 1997 Useful Lives
Data processing equipment $1,673,995 $1,539,708 3-5 years
Computer software 1,466,058 547,812 5 years
Furniture and equipment 1,993,554 1,876,733 3-5 years
Building 7,214,643 7,168,860 30 years
Land used in operations 1,110,915 1,110,915 N/A
Land held for sale or expansion 1,914,343 1,820,614 N/A
15,373,508 14,064,642
Less accumulated depreciation (3,101,067) (2,203,688)
$12,272,441 $11,860,954
In January, 1997, the Company purchased approximately 139 acres of
undeveloped land in Longmont, Colorado. The Company" used approximately
eleven acres of this land for a new facility and intends to hold the
remaining land for sale or expansion.
NOTE 4. Letter of Credit
On March 25, 1997, an irrevocable standby letter of credit for $500,000 was
issued by a regional bank. The letter of credit relates to certain
obligations in connection with improvements to the Company's land. In 1997,
the letter of credit was collateralized by restricted cash held on
deposit in an interest bearing account at the issuing bank. In 1998, this
collateral was not required to be maintained. As of December 31, 1998
and 1997, $126,468 and $128,403, respectively, was available under this
letter of credit.
NOTE 5. Lines of Credit, Debt and Capital Lease Obligations
Debt and capital lease obligations consist of the following at December 31:
1998 1997
Mortgage loan payable to bank, principal
and interest payable monthly through
2005 at approximately 7%. $4,401,000 $4,480,000
Mortgage loan payable to bank, principal
and interest payable monthly through 2002,
with interest at 7.875%. 1,224,685 1,479,510
Note payable to bank, principal and
interest payable monthly, balance due
in 2000 with interest at prime plus
1.5% (9.25% and 10% at December 31,1998
and 1997, respectively). 1,063,906 1,121,845
Capital lease obligation, principal
and interest payable monthly through 2001,
with interest at 8.56%. 168,714 -
Total debt and capital lease obligations 6,858,305 7,081,355
Less current maturities 779,685 594,971
Long-term debt obligations $6,078,620 $6,486,384
The estimated aggregate debt and capital lease maturities as of December 31,
1998 are:
1999 $779,685
2000 1,359,787
2001 541,165
2002 535,668
2003 231,000
Thereafter 3,411,000
Long-term debt obligations $6,858,305
The carrying amounts of the mortgages and note payable borrowings approximate
their fair market value as all borrrowings have interest rates
which approximate the current market rates for such borrowings.
In September, 1998, the Company entered into a $300,000 credit facility with
a bank, bearing interest at a variable rate equal to the bank's prime rate
and expiring February, 2002. After February, 1999, borrowings under the
credit facility are not allowed. No borrowings have been made under the
credit facility.
In May, 1997, the Company entered into a $3,700,000 credit facility with
a bank, bearing interest at a variable rate equal to the bank's prime rate.
$700,000 of the credit facility was available to finance furniture and
equipment purchases, if needed. No borrowing were made under the $700,000"
credit facility, which was cancelled in November, 1997 in connection with
the Company's permanent mortgage financing of its new facility.
$1,000,000 of the credit facility is available as a revolving line of credit
to finance the purchase of paper to be used in future catalog mailings. No
borrowings have been made under the line of credit.
$2,000,000 of the credit facility was available for general working capital
purposes, at management's discretion, in the form of a revolving line of
credit. No borrowings have been made under the line of credit, which was
reduced to $1,000,000 in November, 1997 in connection with" the Company's
permanent mortgage financing of its new facility.
The remaining $2,000,000 of the credit facility expired in April, 1998, at
which time the Company extended the maturity date to May, 1999.
All debt obligations and available lines of credit outstanding as of
December 31, 1998 are secured by the Company's cash, inventories, accounts
receivable, and property and equipment. The Company must comply with
certain financial and performance covenants, including a minimum current
ratio, a minimum tangible net worth, a maximum total debt to equity ratio
and a minimum debt service coverage ratio. The Company must also maintain
it primary deposit accounts with the bank.
NOTE 6. Operating Lease Obligations
Future minimum lease payments for all non-cancelable operating leases are
as follows at December 31, 1998:
1999 $1,115,304
2000 946,388
2001 603,283
2002 145,437
2003 -
Thereafter -
Total future minimum lease payments $2,810,412
The Company leases various equipment used in operations under agreements
which expire at various dates through December 2001, excluding various
renewal options available, some of which are subject to annual adjustments
for cost escalation. Total rental expense for all operating leases
amounted to $1,281,000, $1,327,000 and $1,269,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 7. Other Income (Expense), Net
Following is a summary of the Company's other income (expense):
Year Ended December 31,
1998 1997 1996
Interest income $363,390 $343,550 $161,430
Interest expense (506,844) (181,538) (12,801)
Vendor payment discounts 153,644 244,791 121,149
Other, net (60,702) 7,811 (23,842)
$(50,512) $414,614 $245,936
NOTE 8. Income Taxes
The differences between federal statutory income tax rates and the Company's
effective tax rates are as follows:
Year Ended December 31,
1998 1997 1996
Federal tax expense at statutory rate $(690,000) $847,000 $955,000
Effect of permanent differences 2,000 3,000 3,000
State income tax less federal tax benefits - 5,000 17,000
Research and experimentation tax credits - - (104,000)
Revision of prior year estimates 35,924 20,000 -
$(652,076) $875,000 $871,000
The income tax expense consists of the following:
Year Ended December 31,
1998 1997 1996
Current Deferred Current Deferred Current Deferred
Federal $422,924 $(1,075,000) $(202,000) $1,069,000 $141,000 $702,000
State - - 30,000 (22,000) 7,000 21,000
$422,924 $(1,075,000) $(172,000) $1,047,000 $148,000 $723,000
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
consist of the following:
December 31,
1998 1997 1996
Deferred tax liabilities:
Deferred advertising costs $(1,167,000) $(2,589,000) $(1,337,000)
Property and equipment (254,000) - -
Deferred tax liabilities (1,421,000) (2,589,000) (1,337,000)
Deferred tax assets:
Allowance for doubtful accounts 14,000 19,000 14,000
Inventory differences 470,000 308,000 236,000
Property and equipment - 92,000 160,000
Other nondeductible accruals 204,000 206,000 166,000
Net operating loss carryforwards - 156,000 -
Deferred tax assets 688,000 781,000 576,000
Net deferred tax liabilities $(733,000) $(1,808,000) $(761,000)
NOTE 9. Stockholders' Equity
On July 2, 1997, the Company completed a stock offering for 1.5 million
shares of common stock. As part of the offering, the Company issued
471,404 shares of stock. The remaining 1,028,596 shares were sold by
certain existing shareholders of the Company. An underwriters'
overallotment option for an additional 225,000 shares was also exercised on
July 9, 1997. The Company received approximately $10,213,000 net
proceeds, after deducting its pro-rata percentage of the costs of the
offering. The Company's pro-rata costs of the offering were $929,790.
On February 25, 1997, the Board of Directors approved a two-for-one stock
split, effected in the form of a stock dividend, payable March 31, 1997 to
shareholders of record on March 14, 1997. Accordingly, December 31, 1997
balances reflect the split with an increase in common stock and a
reduction in additional paid-in capital of $212,544. Stock option, share
and per share data have been retroactively adjusted to reflect the split,
except where noted as pre-split.
Under the terms of the Concepts Direct, Inc. 1992 Employee Stock Option
Plan, certain key employees were granted options to purchase shares of
common stock of the Company at an option price equal to fair market value on
the date of the grant. Options granted are exercisable in annual increments
of 25% commencing four years following the date of grant and expire ten
years following the date of grant. The 1992 Employee Stock Option Plan also
provides for the issuance of incentive stock to key employees. There were
360,000 and 270,000 shares of common stock authorized and reserved for
issuance under the plan as of December 31, 1998 and 1997, respectively.
Under the terms of the Concepts Direct, Inc. 1992 Non-Employee Directors
Stock Option Plan, the outside directors were granted options to purchase
shares of common stock of the Company at an option price equal to fair
market value on the date of grant. Options are exercisable in annual
increments of 33.3% commencing one year following the date of grant and
expire five years following the date of the grant. There were 50,666
shares of common stock authorized and reserved for issuance under the
plan as of December 31, 1997. No additional options may be granted under
this plan.
Under the terms of the Concepts Direct, Inc. 1998 Non-Employee Directors
Stock Option Plan, the outside directors were granted options to purchase
shares of common stock of the Company at an option price equal to fair
market value on the date of grant. Options are exercisable in annual
increments of 33.3% commencing one year following the date of grant and
expire five years following the date of the grant. There were 52,000
shares of common stock authorized and reserved for issuance under the
plan as of December 31, 1998.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123), requires use of option valuation models
that were not developed for use in valuing the stock options. Under APB
25, because the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company
had accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
1998 1997 1996
Risk-free interest rate 5.5% 5.5% 5.5%
Dividend yields 0.0% 0.0% 0.0%
Volatility factors of the
expected market price of the
Company's common stock 0.563 0.573 0.587
Weighted-average expected life
of the employee stock options 5.5 years 5.5 years 5.5 years
Weighted-average expected life
of the non-employee stock options 2 years 2 years 2 years
The weighted-average fair value of options granted were as follows:
1998 1997 1996
Employee Plan $5.50 $12.72 $5.25
Non-Employee Plans $3.55 $- $3.40
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows:
1998 1997 1996
Pro forma net income (loss) $(1,507,882) $1,520,263 $1,911,760
Pro forma basic earnings per share $(0.30) $0.34 $0.45
Pro forma diluted earnings per share $(0.30) $0.31 $0.43
Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected
until 2001.
A summary of the Company's stock option activity, and related information
follows:
Employee Plan Non-Employee Plans
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at December 31, 1995 225,000 $1.51 28,666 $1.69
Granted at market price 25,000 $9.13 16,000 $9.75
Exercised (2,000) $0.58 (7,334) $0.97
Canceled (8,000) $0.88 - $-
Outstanding at December 31, 1996 240,000 $2.33 37,332 $5.28
Granted at market price 20,000 $21.69 - $-
Exercised (8,000) $0.54 (10,666) $1.12
Canceled - $- - $-
Outstanding at December 31, 1997 252,000 $3.92 26,666 $6.95
Granted at market price 81,000 $9.81 22,000 $10.51
Exercised (10,000) $0.54 - $-
Canceled (30,000) $14.64 - $-
Outstanding at December 31, 1998 293,000 $4.57 48,666 $8.56
A summary of outstanding options, by year they become exercisable, follows:
Employee Plan Non-Employee Plans
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Currently exercisable 64,000 $0.77 21,338 $6.25
1999 49,250 $1.63 12,664 $10.19
2000 43,500 $3.00 7,336 $10.51
2001 30,500 $4.06 7,328 $10.51
2002 38,750 $7.79 - $-
2003 26,500 $9.65 - $-
2004 20,250 $9.81 - $-
2005 20,250 $9.81 - $-
Outstanding at
December 31, 1998 293,000 $4.57 48,666 $8.56
Exercise price range of options outstanding:
Employee Plan $0.50-$14.50
Non-Employee Plans $2.75-$14.70
Weighted-average remaining contractual life of options outstanding
Employee Plan 6.86 years
Non-Employee Plans 3.35 years
NOTE 10. Employee Retirement Savings Plan
In May 1985, the Company adopted a Retirement Savings Plan under Section
401(k) of the Internal Revenue Code. Participation in the plan is available
to any employee of the Company who has completed one year of service and is
age twenty-one or older. The Company contributes $10 monthly for each
eligible employee, plus up to $.50 for each dollar contributed by each
participant on the first 4% of eligible compensation, depending on years of
service. The Company may contribute an additional amount if it has
sufficient profits. The Company's Contributions to employees of Concepts
Direct, Inc. were $90,000, $57,000 and $55,000 in 1998, 1997 and 1996,
respectively.
NOTE 11. Quarterly Financial Information (Unaudited)
Basic Diluted
Income Net Earnings (Loss) Earnings (Loss)
Net (Loss) from Income per Common per Common
Sales Operations (Loss) Share Share
(Dollars in thousands except per share data)
1996:
First $11,584 $263 $266 $0.06 $0.06
Second 9,000 (344) (220) (0.05) (0.05)
Third 9,800 258 220 0.05 0.05
Fourth 20,742 2,386 1,671 0.39 0.38
1997:
First $15,952 $951 $673 $0.16 $0.15
Second 14,766 446 368 0.09 0.08
Third 14,630 (1,039) (591) (0.12) (0.12)
Fourth 33,141 1,717 1,165 0.23 0.22
1998:
First $15,480 $(1,045) $(624) $(0.13) $(0.13)
Second 15,855 (286) (193) (0.04) (0.04)
Third 19,495 (1,423) (985) (0.20) (0.20)
Fourth 33,943 775 424 0.09 0.09
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement of Financial Accounting Standards
No. 128, Earnings Per Share.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CONCEPTS DIRECT, INC.
Year Ended December 31, 1998
COL. A COL. B COL. C COL. D COL. E COL. F
Charged Chrgd to
Balance at (Cred) Other Bal at
Beginning to Costs Accts- Deductions End
DESCRIPTION of Period and Exp Describe Describe of Per
Year Ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $57,000 $12,220 $- $(27,000)(a) $42,220
Allowance for inventory
obsolescence 394,000 573,245 - (226,837) 740,408
Totals deducted from
asset accounts
Product warranty liability $286,297 $(12,292) $- $- $274,005
Year Ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $41,000 $16,000 $- $- $57,000
Allowance for inventory
obsolescence 400,000 168,506 - (174,506)(b)394,000
Totals deducted from
asset accounts $441,000 $184,506 $- $(174,506) $451,000
Product warranty liability $254,124 $32,173 $- $- $286,297
Year Ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $18,078 $23,000 $- $(78)(a) $41,000
Allowance for inventory
obsolescence 691,542 41,721 - (333,263)(b) 400,000
Totals deducted from
asset accounts $709,620 $64,721 $- $(333,341) $441,000
Product warranty liability $383,064 $(128,940)$- $- $254,124
(a) Uncollectible accounts written off, net of recoveries."
(b) Inventory written off, net of recoveries."
ITEM 9. CHANGES IN AND DISAGREEMENTS \WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A.
PART III
Certain information required by Part III is omitted from this Report in that
the Company will file a definitive Proxy Statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this report and certain information included therein
is incorporated herein by reference.
With the exception of the information incorporated by reference from the
Company's Proxy Statement in Items 10, 11, 12 and 13 of Part III of this
Form 10-K, the Company's Proxy Statement for its annual meeting of
shareholders scheduled for April 30, 1999 is not to be deemed filed as a
part of this Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information concerning the directors of the Company is incorporated herein
by reference to material contained under the heading "Election of Directors"
in the Company's Proxy Statement for its annual meeting of shareholders
scheduled for April 30, 1999.
Information concerning the executive officers of the Company is set forth
under the heading "Executive Officers of the Registrant" at the end of Part
I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to material contained under the headings "Compensation of
Directors" and "Executive Compensation" in the Company's Proxy Statement for
its annual meeting of shareholders scheduled for April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information as to security ownership of certain beneficial owners and
management is incorporated herein by reference to material contained under
the heading "Voting Securities and Principal Shareholders" in the Company's
Proxy Statement for its annual meeting of shareholders scheduled for April
30, 1999. The Company does not know of any arrangements the operation of
which may at a subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information as to certain relationships and related transactions is
incorporated herein by reference to material contained under the heading
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for its annual meeting of shareholders scheduled for April 30,
1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K
(a) Documents filed as part of this report:
1. The financial statements and related Report of
Independent Auditors required by this item are
listed and included in Item 8 of this report.
2. The financial statement schedule required by this
item is listed and included in Item 8 of this report.
3. Exhibits required to be filed by Item 601 of
Regulation S-K: SEE INDEX TO EXHIBITS
(b) No Reports on Form 8-K have been filed during the last
quarter of the year ended December 31, 1998.
INDEX TO EXHIBITS
(3) Articles of incorporation and bylaws.
3(a) Registrant's Amended and Restated Certificate of Incorporation filed
as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 is expressly incorporated herein
by this reference.
3(b) Registrant's Bylaws and Statement of Organization of the
Incorporator filed as Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, is expressly
incorporated herein by this reference.
(4) Instruments defining the rights of security holders, including
indentures.
4(a) See the Seventh Article of Exhibit 3(a) and Articles I, IV, V, VI
and VII of Exhibit 3(b).
(10) Material Contracts.
10(a) Letter of Intent between registrant and Saunders Construction, Inc.
dated January 21, 1997 to enter into an agreement for the
construction of a new facility for registrant in Longmont, Colorado
and authorizing Saunders Construction, Inc. to proceed with certain
earthwork activities. This agreement was previously filed as exhibit
10(f) to registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and is expressly incorporated herein by this
reference.
10(b) Letter of Intent between registrant and Saunders Construction, Inc.
dated February 20, 1997 to enter into an agreement for the
construction of a new facility for registrant in Longmont, Colorado
and authorizing Saunders Construction, Inc. to proceed with certain
material pre-orders and structural work. This agreement was
previously filed as exhibit 10(g) to registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and is expressly
incorporated herein by this reference.
10(c) Contract between registrant and Intergroup, Inc. as Architect for
the Provision of Architectural Services, dated September 4, 1996, in
connection with the design of a new facility for registrant in
Longmont, Colorado. This agreement was previously filed as exhibit
10(h) to registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and is expressly incorporated herein by this
reference.
10(d) Registrant's amended Profit Sharing Plan, reflecting an amendment
under Section 401(k) of the Internal Revenue Code dated May 31,
1985. This Plan was previously filed as Exhibit 10(l) to Wiland
Services, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1985 and is expressly incorporated herein by this
reference (Wiland Services, Inc.'s Reporting Number is 0-12967).
10(e) Standard Form of Agreement between Registrant and Saunders
Construction, Inc. as Contractor, dated May 1, 1997, in connection
with construction of a new facility for Registrant in Longmont,
Colorado. This agreement was previously filed as exhibit 10.11 to
Registrant's Amendment No. 1 to Form S-1 filed on June 4, 1997 and
is expressly incorporated herein by reference.
10(f) Loan Agreement between Registrant and Bank One, Colorado, N.A. as
lender, dated May 1, 1997, in connection with a $3.7 million credit
facility. This agreement was previously filed as exhibit 10.12 to
Registrant's Amendment No. 1 to Form S-1 filed on June 4, 1997 and
is expressly incorporated herein by reference.
10(g) Land Development Loan Agreement dated July 10, 1997 between
registrant and Bank One, Colorado, NA. This agreement was previously
filed as exhibit 1 to registrant's Quarterly Report on Form 10-Q for
the year ended June 30, 1997 and is expressly incorporated herein by
this reference.
10(h) Construction Loan Agreement dated July 10, 1997 between registrant
and Bank One, Colorado, NA. This agreement was previously filed as
exhibit 2 to registrant's Quarterly Report on Form 10-Q for the year
ended June 30, 1997 and is expressly incorporated herein by this
reference.
10(i) 1999 Incentive Compensation Plan for officers of the registrant is
filed herewith.
10(j) 1992 Stock Option Plan was previously filed as Exhibit A to
registrant's definitive proxy statement dated June 29, 1993 for the
Annual Meeting of Shareholders held on July 30, 1993, and is
expressly incorporated herein by this reference.
10(k) 1992 Non-Employee Director Stock Option Plan was previously filed as
Exhibit B to the registrant's definitive proxy statement dated June
29, 1993 for the Annual Meeting of Shareholders held on July 30,
1993, and is expressly incorporated herein by this reference.
10(l) First Amendment to the 1992 Stock Option Plan was previously filed
as Exhibit A to registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998 and is expressly incorporated
herein by reference.
10(m) 1998 Non-Employee Directors Stock Option Plan was previously filed
as Exhibit A to the Company's Definitive Proxy Statement dated March
10, 1998 for the Annual Meeting of Stockholders on April 24, 1998 is
expressly incorporated by reference.
(23) Consent of Experts and Counsel.
23(a) The Consent of Ernst & Young LLP is filed herewith.
(27) Financial Data Schedule
27(a) The financial data schedule is included in the electronic Edgar
filing only.
SIGNATURES
Pursuant to the requirements of 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.
CONCEPTS DIRECT, INC.
Date: March 31, 1999 By: /s/ Phillip A. Wilan
Phillip A. Wiland
Chief Executive Officer
Principal Executive
Officer
Date: March 31, 1999 By: /s/ H. Franklin Marcus, Jr.
H. Franklin Marcus, Jr.
Secretary/Treasurer
Chief Financial Officer
Chief Accounting Officer
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.
Date: March 31, 1999 /s/ Michael T. Buoncristiano
Michael T. Buoncristiano, Director
Date: March 31, 1999 /s/ Robert L. Burrus, Jr.
Robert L. Burrus, Jr., Director
Date: March 31, 1999 /s/ Stephen R. Polk
Stephen R. Polk, Director
Date: March 31, 1999 /s/ Phillip D. White
Phillip D. White, Director
Date: March 31, 1999 /s/ Phillip A. Wiland
Phillip A. Wiland, Director
Exhibit 10(12)
1998 Incentive Compensation Plan for officers of the registrant follows.
Exhibit 23(a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
on Form S-8 pertaining to the 1998 Non-Employee Director Stock Option
Plan, the 1992 Non-Employee Director Stock Option Plan and 1992 Stock Option
Plan of Concepts Direct, Inc. of our report dated February 9, 1999, with
respect to the financial statements and schedule II of Concepts Direct, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ Ernst & Young
Denver, Colorado
March 31, 1999
CONCEPTS DIRECT, INC.
1999 INCENTIVE COMPENSATION PLAN
Effective January 1, 1999
The primary financial objective of Concepts Direct, Inc., is to maximize the
value of the Company for shareholders. A key element - probably
the key element - of achieving this objective is significant,
steady profit improvement.
Concepts Direct wants to increase profits steadily and significantly.
Encouraging our staff to achieve these goals every quarter is the purpose
of this 1999 Incentive Compensation Plan.
For purposes of making the final calculations of amounts due under the plan
set forth herein, Average " Shareholders' Equity will be determined by the
external auditors in the course of audits.
For illustration herein .....$20,500,000
Return on average equity (ROAE) is calculated by averaging the Shareholders'
Equity from each of the four quarterly financial statements, and dividing
the result into after-tax net profit at the end of the year. Bonuses earned
in 1999 will reduce the Company's net income before calculation of the ROAE
bonus. "Net Profit" as used herein means Net Income after bonuses and
taxes excluding any tax-effected gain on the sale of capital assets of the
Company. "EPS" as used herein will also be adjusted to exclude tax-effected
gain on the sale of capital assets of the Company.
It is the goal of the Company for Earnings per share (EPS) to be higher
every quarter than they have ever been during that calendar quarter.
The quarterly incentive compensation plan is established with this
goal in mind. EPS calculations will be made based on "Diluted
EPS" as defined by FASB.
In order to participate in the Incentive Compensation Plan, a person must
be an employee on both the the first business day and last calendar
day of period covered. For the annual incentive bonus, the participant
must be an employee on both the first working day in January and December
31, 1999. A person joining the plan later in January, for example, would
not be eligible for the annual incentive bonus, nor the first quarter bonus.
If they are an employee on the first day and the last day of each of the
remaining three quarters, though, they will be eligible for any incentive
bonuses earned for those quarters.
Persons who voluntarily leave the employ of the company will not receive any
incentive compensation which is payable but as yet unpaid on the date of
their termination of employment. Persons who are terminated involuntarily
will be paid any amount they would have received for a period which was
complete prior to their termination.
All incentive compensation payable under this plan shall be paid in full
within 120 days after the close of the applicable period, with the specific
date to be set by the Chief Financial Officer.
For purposes of computing annual or quarterly bonuses, "Base Salary" is
defined as actual number of base payroll dollars (gross -- before
deductions) but excluding previously paid quarterly and/or annual bonuses
the employee has received during the period. This means that if for any
reason there is an adjustment in salary during the period the amount to
which the incentive compensation percentage will be applied is the sum, as
described above, that the employee has received during the period. In other
words, if we were to make up a W-2 for the quarter, what would it show?
For purposes of computing annual bonuses, "Base Salary" is defined as W-2
earnings before 401-K deductions and excluding previously paid quarterly
and/or annual bonuses and other non-salary items, such as reimbursement for
relocation expense.
Quarterly bonuses will only be paid if the Company is profitable on a
year-to-date basis. For example, if the Company makes money during the
second quarter of 1999, but lost a greater amount of money during the first
quarter (thus leaving the Company in a loss status on a year to date basis),
no second quarter bonus will be paid.
Staff members not named in the plan are not participants in the plan.
Participation in the Incentive Compensation Plan does not constitute a
guarantee of employment, either in a position covered by the plan, or with
the Company, for any fixed period of time. It is not an employment
contract of any kind, nor a forward commitment on the part of the company
for compensation of any nature, in any amount, or for any fixed period of
time.
The 1999 Incentive Compensation Plan is the only plan under which payments
in addition to salary, can be made to the named individuals. Any other
benefit or compensation plans or payment desired or determined necessary for
other employees must be submitted in writing to Personnel for consideration
and may be implemented only after approval by the CEO.
The Company reserves the right to promote, demote, reassign or terminate the
employment of any person under this plan in the same manner as if the
person were not under the plan.
The Company will distribute a copy of the plan to each eligible employee.
At the same time, a cover memo will be distributed containing an
affirmation stating that the employee has read, understands and agrees to
abide by the regulations of the Incentive Compensation Plan. The employee
must sign and return a copy of the memo to participate in the Incentive
Compensation Plan.
The Company reserves the right to discontinue or revise the Incentive
Compensation Plan and/or its regulations and eligibility requirements at any
time.
Occasionally, the Finance Department may make erroneous payments to a
employees under the Incentive Compensation Plan. If this occurs, the
employee receiving the payment is responsible for notifying Finance that an
error has occurred. After discovery of the error, Finance will correct
their prior action by deducting the appropriate amount from subsequent
payments to the employee on a basis to be determined by the CFO.
Employees should be aware that the purpose of the Board of Directors in
establishing this incentive compensation plan is to reward achievement of
profit milestones which surpass previous company performance. Accordingly,
it should be anticipated that future incentive compensation plans, if
adopted, will most likely require increased profitability for bonuses to be
paid.
1. Base Monthly Salaries:
Actual at Proposed
Name Department Job Title (1) Plan 12/1/98 1999
Frank Marcus Accounting Chief Financial Officer A $8,550 $8,550
Phil Wiland Executive Chairman A $20,833 $20,833
Mike Wolfe Executive President A $17,500 $17,500
The incentive compensation plan is divided into Plans A, B and C. The
participants of these plans are defined as follows:
1. The Participants of Plan A consist of all officers of the Company with
the following titles:
Chairman
President
Vice President
Chief Financial Officer
2. Annual Bonus Based on Companywide Return on Average Equity (ROAE) for
1999.
PLAN A PLAN B PLAN C
THRESHOLD BONUS AS BONUS AS BONUS AS
ROAE NET PROFIT % OF BASE % OF BASE % OF BASE
100.00% up 20,500,000 60.00% 20.00% 8.00%
85.00% to 99.99% 17,425,000 58.00% 19.75% 7.80%
75.00% to 84.99% 15,375,000 56.00% 19.50% 7.60%
65.00% to 74.99% 13,325,000 54.00% 19.00% 7.40%
55.00% to 64.99% 11,275,000 52.00% 18.50% 7.20%
45.00% to 54.99% 9,225,000 50.00% 18.00% 7.00%
35.00% to 44.99% 7,175,000 45.00% 16.00% 6.00%
25.00% to 34.99% 5,125,000 35.00% 12.00% 4.50%
21.00% to 24.99% 4,305,000 25.00% 8.00% 3.00%
16.00% to 20.99% 3,280,000 15.00% 5.00% 2.00%
12.00% to 15.99% 2,460,000 5.00% 2.00% 0.00%
8.00% to 11.99% 1,640,000 2.00% 0.50% 0.00%
BELOW 8% 0.00% 0.00% 0.00%
3. Quarterly Bonus Based on "Diluted EPS" as defined by FASB:
Plan A Plan B Plan C
Qtrly Bonus Qtrly Bonus Qtrly Bonus
As % of As % of As % of
EPS this Qtr. vs. Prior Record Same Qtr. Annual Base Annual Base Annual Base
EPS 300% or More of Prior Record 25.00% 6.25% 2.00%
EPS 250% - 299% of Prior Record 24.00% 6.00% 1.90%
EPS 225% - 249% of Prior Record 23.00% 5.50% 1.80%
EPS 200% - 224% of Prior Record 22.00% 5.25% 1.70%
EPS 176% - 199% of Prior Record 18.00% 5.00% 1.60%
EPS 150% - 175% of Prior Record 14.00% 4.50% 1.50%
EPS 140% - 149% of Prior Record 12.00% 3.50% 1.20%
EPS 130% - 139% of Prior Record 10.00% 3.00% 0.90%
EPS 121% -129% of Prior Record 8.00% 2.25% 0.75%
EPS 115% - 120% of Prior Record 6.00% 2.00% 0.60%
EPS 101% -114% of Prior Record 4.00% 1.40% 0.40%
EPS 90% - 100% of Prior Record 2.30% 0.80% 0.25%
EPS 80% - 89% of Prior Record 2.00% 0.70% 0.20%
EPS 60% - 79% of Prior Record 1.70% 0.60% 0.15%
EPS 40% - 59% of Prior Record 1.00% 0.35% 0.00%
EPS 10% - 39% of Prior Record 0.30% 0.10% 0.00%
EPS Less than 10% of Prior Record 0.00% 0.00% 0.00%
The following are the record earnings per share and the years in which each
was set; 1st QTR: $.15 (1997); 2nd Qtr: $.08 (1997): 3rd Qtr: $.09 (1994);
4th Qtr: $.38 (1996). (Note: a new fourth quarter record may be set in
1998.)
4. Additional Annual Bonus for Phillip A. Wiland and J. Michael Wolfe Only:
If all of the following objectives are achieved in 1999, Phillip A. Wiland
and J. Michael Wolfe will each receive an additional bonus equal to 50% of
their 1999 base salary:
a. Revenues in 1999 exceed $110,000,000; and
b. EPS in 1999 exceeds $1.50; and
c. Market Capitalization of the Company's stock at December 31, 1999 exceeds
$125,000,000.
Exhibit 23 (a)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 pertaining to the 1998 Non-Employee Director Stock Option Plan, the
1992 Non-Employee Director Stock Option Plan and 1992 Stock Option Plan of
Concepts Direct, Inc. of our report dated February 9, 1999, with respect to the
financial statements and schedule II of Concepts Direct, Inc. included in its
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young
Denver, Colorado
March 31, 1999
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4070369
<SECURITIES> 0
<RECEIVABLES> 391280
<ALLOWANCES> 0
<INVENTORY> 10053406
<CURRENT-ASSETS> 4721660
<PP&E> 15373508
<DEPRECIATION> 3101067
<TOTAL-ASSETS> 32072747
<CURRENT-LIABILITIES> 8553667
<BONDS> 6078620
0
0
<COMMON> 496729
<OTHER-SE> 16943731
<TOTAL-LIABILITY-AND-EQUITY> 32072747
<SALES> 84773205
<TOTAL-REVENUES> 0
<CGS> 47493436
<TOTAL-COSTS> 86752380
<OTHER-EXPENSES> (456332)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 506844
<INCOME-PRETAX> (2029687)
<INCOME-TAX> (652076)
<INCOME-CONTINUING> (1377611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1377611)
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<EPS-DILUTED> (.28)
</TABLE>
