FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 19989
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20680
Concepts Direct, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1781893
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
2950 Colorful Avenue, Longmont, CO 80504
(Address of principal executive offices, Zip Code)
(303) 772-9171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of April 23, 1999, 4,975,286 shares of Common Stock, $.10 par value, were
outstanding.
CONCEPTS DIRECT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 31, 1999 and December 31, 1998
Statements of Operations for the three months ended
March 31, 1999 and March 31, 1998
Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and reports on Form 8-K
Item 1.
CONCEPTS DIRECT, INC.
Balance Sheets
March 31, December 31,
1999 1998
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $3,402,151 $4,070,369
Accounts receivable, less allowances 389,815 391,280
Deferred advertising costs 3,088,270 4,454,553
Inventories, less allowances 9,255,507 10,053,406
Prepaid expenses and other 343,540 267,107
Total current assets 16,479,283 19,236,715
Property and equipment, net 12,690,656 12,272,441
Other assets 552,859 563,591
TOTAL ASSETS $29,722,798 $32,072,747
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $3,985,111 $5,969,535
Current maturities of debt and
capital lease obligations 850,259 779,685
Accrued employee compensation 671,952 547,691
Customer liabilities 698,577 494,428
Interest payable 10,000 29,348
Deferred income taxes payable 503,869 732,980
Total current liabilities 6,719,768 8,553,667
Debt and capital lease obligations 5,966,891 6,078,620
Commitments and contingencies
Stockholders' equity
Common Stock, $.10 par value, authorized
6,000,000 shares, issued and outstanding
4,975,286 and 4,967,286 in 1999 and 1998,
respectively 497,529 496,729
Additional paid-in capital 14,363,635 14,323,773
Retained earnings 2,174,975 2,619,958
Total stockholders' equity 17,036,139 17,440,460
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $29,722,798 $32,072,747
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended
March 31,
1999 1998
Net sales $12,545,759 $15,480,319
Operating costs and expenses:
Cost of product and delivery 8,000,447 8,730,014
Selling, general and administrative 5,149,894 7,794,907
Total operating costs and expenses 13,150,341 16,524,921
Operating loss (604,582) (1,044,602)
Other income (expense), net (69,512) 84,548
Loss before income taxes (674,094) (960,054)
Benefit for income taxes (229,111) (336,000)
Net loss $(444,983) $(624,054)
Basic loss per share $(0.09) $(0.13)
Diluted loss per share $(0.09) $(0.13)
Weighted average number of common shares 4,971,286 4,957,286
Weighted average number of common shares
and dilutive stock options 4,971,286 4,957,286
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1999 1998
OPERATING ACTIVITIES
Net loss $(444,983) $(624,054)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for losses on accounts receivable 4,012 4,000
Provision for losses in inventory values 352,624 86,798
Depreciation 259,001 279,608
Decrease in current and deferred
income taxes (229,111) (386,363)
Changes in operating assets and liabilities:
Accounts receivable (2,547) (162,093)
Deferred advertising costs 1,366,283 1,123,013
Inventories 445,274 2,836
Prepaid expenses and other (76,433) 710,764
Accounts payable (1,984,422) (5,162,946)
Accrued employee compensation 124,261 (444,097)
Customer liabilities 204,149 (437,225)
Interest payable (19,348) (20,980)
NET CASH USED IN OPERATING ACTIVITIES (1,240) (5,030,739)
INVESTING ACTIVITIES
Release of cash restricted as collateral - 128,403
Purchases of property and equipment (677,216) (164,025)
Other investing activities, net 10,732 (74,383)
NET CASH USED IN INVESTING ACTIVITIES (666,484) (110,005)
FINANCING ACTIVITIES
Principal payments on debt
and lease obligations (228,843) (62,201)
Issuance of debt obligations 187,687 102,695
Exercise of common stock options 40,662 -
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (494) 40,494
DECREASE IN CASH AND CASH EQUIVALENTS (668,218) (5,100,250)
Cash and cash equivalents at beginning of year 4,070,369 13,773,815
Cash and cash equivalents at end of period $3,402,151 $8,673,565
See notes to financial statements.
CONCEPTS DIRECT, INC.
Notes to Financial Statements
(Unaudited)
1. Accounting Policies
The unaudited interim financial statements have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial reporting and the regulations of the Securities and Exchange
Commission in regard to quarterly reporting. Accordingly, they do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company, the statements include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods. Operating results for the three month period ended March 31, 1999
is not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. Seasonal fluctuations in sales of the
Company's products result primarily from the purchasing patterns of the
individual consumer during the Christmas holiday season. These patterns
tend to moderately concentrate sales in the latter half of the year,
particularly in the fourth quarter. For further information refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
On April 19, 1999, the Company announced that it had signed a letter of
intent to purchase the assets of The Music Stand, a leading catalog marketer
of assorted music-related gifts, awards and collectibles. The purchase is
subject to negotiation of a definitive purchase agreement and various other
contingencies and approvals.
On May 5, 1999, the Company increased its existing revolving line of credit
from $2,000,000 to $4,500,000. The line of credit expires in May 2000 and
limits capital expenditures for fiscal year 1999. For a period of 30 days
during the fourth quarter, the balance of the line must be zero. No balance
was outstanding on the line of credit at March 31, 1999.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
The Company remains in the process of transition from a single catalog
company selling primarily personalized paper products to a multi-catalog
company selling primarily gift and merchandise items. The Company is also
in the process of developing e-commerce sales sites.
In 1999, the Company changed its contact strategy for Colorful Images,
its only mature catalog. We have returned to the strategy of mailing one
version of each catalog to both customers and prospects as opposed to 1998
when we mailed a different version of the catalog to customers and
prospects. In addition, the Company plans to reduce the number of times we
mail to Colorful Images customers and impose limits on planned prospecting
losses for its other catalogs which should increase the catalog
contribution to general and administrative expenses and profit. In early
1999, this strategy appears to be working in that catalog contribution is
increasing. However, due to the reduction of customer contacts, for the
three-month period ended March 31, 1999, revenues have decreased.
On April 19, 1999, the Company announced that it had signed a letter of
intent to purchase the assets of The Music Stand, a leading catalog
marketer of assorted music-related gifts, awards and collectibles. The
purchase is subject to negotiation of a definitive purchase agreement and
various other contingencies and approvals.
Sales
Decrease in Net Sales
The Company's net sales decreased by $3.0 million, or 19%, to $12.5
million for the three-month period ended March 31, 1999 from $15.5 million
in the same period in 1998. This decrease resulted primarily from the
changes in our strategy for Colorful Images discussed above. Sales for
other catalogs increased in the first quarter of 1999 as compared to the
same period of 1998.
Cost of Product and Delivery and Gross Profit
Cost of product and delivery as a percentage of sales was 64% for
the first quarter of 1999 as compared to 56% for the same period in 1998.
Gross profit was $4.5 million, or 36% of sales for the first quarter of
1999 as compared to $6.8 million, or 44% of sales for the same period in
1998.
The increase in cost of product and delivery and the corresponding
decrease in gross profit for the quarter occurred primarily because of
increased sales of gift and merchandise items during the period. These
items generally have higher product costs as a percentage of sales than
personalized paper products. In addition, the increased reserves that we
established for losses in inventory value and lower sales over which to
spread higher fixed costs of fulfillment such as facilities and equipment
contributed to a lesser degree to the decrease in gross profit as a
percentage of net sales. See "Outlook" below for a discussion of our
inventory management strategy.
Selling General and Administrative Expense
Selling general and administrative expense ("SG&A") decreased $2.7
million, or 34%, to $5.1 million for the first quarter of 1999 from $7.8
for the same period in 1998. As a percentage of net sales, SG&A decreased
to 41% for the first quarter of 1999 from 50% for same period in 1998.
The decrease in SG&A occurred primarily from a reduction in total
catalog circulation in the quarter as compared to the same period in 1998.
To a lesser degree the decrease related to imposed limits that we have on
planned prospecting losses per mail cycle and creative costs saved because
of distribution of a single version of the Colorful Images catalog to both
customers and prospects.
Other Income (Expense)
The primary components of other income (expense) are vendor payment
discounts, interest income, and interest expense. For the first quarter of
1999, we had an expense of $70,000 as compared to income of $85,000 for the
same period in 1998. The most significant cause of decrease in other income
was a decrease in interest income because of reduced cash balances available
for investing.
Income Taxes
The Company had an income tax benefit of $229,000 for the quarter ended
March 31, 1999 as compared to an income tax benefit of $336,000 for the same
quarter in 1998. The provision for income taxes for 1999 reflects the 34%
income tax rate that management anticipates for the year.
Outlook
The Company intends to continue with the transition that is in
progress and with developing e-commerce sites. In order to successfully
complete this transition, we must, among other things, offset the increase
in product cost as a percentage of sales with decreases in delivery and
marketing costs as a percentage of sales.
Currently, two of our four catalogs, Linda Anderson's Collectibles
and Snoopy, etc. are still in the developmental stage. Until they emerge
from this stage, prospecting costs and creative costs associated with
catalog development as a percentage of sales will be higher than desired. We
also plan to develop more niche catalogs, such as our Snoopy(, etc. catalog,
which will be focused on specific groups of potential customers. While in
the developmental stage, these catalogs may also produce some of the same
effects on margins as we have seen in the recent past. We are attempting to
offset this possibility by imposing limits on planned prospecting losses per
mail cycle. This strategy has resulted in increasing catalog contribution
in the first quarter of 1999.
We are now mailing only one version of Colorful Images which
advertises both personalized paper products and gift and merchandise items
to both customers and prospects. Also, we intend to mail the Colorful Images
catalog to customers less often and will likely follow a contact strategy
similar to that used in earlier periods when our customer contribution per
catalog was higher. This reduction in frequency of contact plus reduced
prospecting may reduce revenue but should result in increased profitability
contribution.
As our business has shifted away from sales of personalized paper
products towards sales of gift and merchandise items, we have had a greater
need to increase inventory above historical levels. We are focused on
balancing our need for available products against maintaining excess
inventory. However, we believe that our current inventory levels are higher
than necessary. We are currently employing other strategies to address the
current excess inventory levels, including liquidation and returns to
vendors. However, if these strategies are unsuccessful in the near term, we
will have to increase the provision for losses in inventory value.
During the remainder of 1999, we will incur significant costs
developing e-commerce infrastructure and sites. We currently plan to
complete first phase infrastructure development and begin launching e-sites
in the summer of 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended March 31, 1999, cash and cash
equivalents decreased by $668,000. Those areas which had the greatest
impact on cash and cash equivalents are described below.
The decrease in accounts payable of $1,984,000 resulted primarily
from the payment in the first quarter of 1999 for inventory and advertising
cost purchased or incurred in the fourth quarter of 1998. The decrease in
cash was offset by decrease in deferred advertising of $1,366,000 and
inventories of $445,000 primarily related to reduced levels of advertising
and sales of products in the first quarter of 1999 as compared to the
fourth quarter of 1998.
A significant item of investment of cash during the period was a
purchase of property and equipment of $677,000, which primarily related to
purchases of software and assets relative to development of e-commerce
infrastructure.
The Company has available with Bank One, Colorado, N.A. a revolving
line of credit for $4.5 million for general purposes. No balance was
outstanding on the line of credit at March 31, 1999. The line of credit
expires in May 2000 and the Company does not anticipate problems in
renewing the line.
The Company had $3.4 million of unencumbered cash and cash
equivalents at March 31, 1999. Management believes that results of
operations, continued operational planning review, line of credit
availability and current cash balances will produce funds necessary to meet
the Company's anticipated working capital requirements for the current
year. 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, the Company plans to use its available cash and line of
credit to fund the acquisition of the assets of the catalog, The Music
Stand.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
The Company's computer equipment and software and other devices with
embedded technology that are time-sensitive may recognize a date using "00"
as the year 1900, rather than the year 2000. This could result in a system
failure or miscalculations causing a disruption of operations, including,
among other things, a temporary inability to process transactions, fulfill
orders, or engage in similar normal business activities.
With respect to the Company's information and fulfillment systems,
the vendors of the Company have provided modifications for compliance. All
modifications, conversions and installations are expected to be complete by
mid-1999. 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
January 1, 2000 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 $150,000 has been
incurred through March 31, 1999; the remainder will be incurred in the
remainder of 1999.
After investigation, the Company has not yet discovered any major
Year 2000 compliance problems with respect to the third parties who are its
critical suppliers of goods and services, such as merchandise vendors,
catalog production and distribution service providers and product delivery
service providers. To the extent that the Company does identify
potentially non-compliant third parties, it plans to assess its level of
exposure and risk and develop contingency plans at that time. These
contingency plans are likely to include identification and confirmation of
the availability of alternative suppliers. However, there can be no
assurance that the systems and infrastructure of other companies will be
made compliant in a timely manner or that such a failure by another company
would not have an adverse effect on the Company. Because most of the
Company's customers are individual consumers, the Company does not expect
Year 2000 issues to materially affect its customers as a group.
The cost of the project and date on which the Company believes it
will complete the Year 2000 modifications are based upon management 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.
Special Note Regarding Forward-Looking Statements
The discussion above contains certain forward-looking statements as
such term is defined in the Private Securities Litigation Reform Act of
1995. Company statements that are not historical facts, including
statements about management's expectations, beliefs, plans and objectives
for 1999 and beyond and about Year 2000 issues, are forward-looking
statements and involve various risks and uncertainties. Factors that could
cause the Company's actual results to differ materially from management's
estimates and expectations include, but are not limited to, the following:
changes in postal rates or the costs of paper; changes in economic and
market conditions; changes in the Company's merchandise product mix or
changes in the Company's customer response to advertising offers; lack of
effective performance by third party suppliers with respect to production
and distribution of catalogs; lack of effective performance by third
parties suppliers with respect to providing product inventory; lack of
effective performance by third parties supplying Year 2000 solutions to the
Company; lack of effective performance of customer service and the
Company's order fulfillment system; lack of effective performance of the
Company's e-commerce infrastructure and retailing sites; and changes in
strategy and timing relating to the testing and rollout of new catalogs.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and
expectations is contained in the Company's SEC filings, including the
Company's report on Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the Company's shareholders was held on
April 30, 1999.
(b) At such annual meeting, the stockholders of the Company elected
Virginia B. Bayless, Robert L. Burrus, Jr., Michael T. Buoncristiano,
Stephen R. Polk, Phillip D. White, Phillip A. Wiland and J. Michael
Wolfe as directors for one-year terms. The elections were approved by
the following votes:
Directors For Withheld
Virginia B. Bayless 4,947,434 919
Robert L. Burrus, Jr. 4,947,434 919
Michael T. Buoncristiano 4,947,434 919
Stephen R. Polk 4,947,434 919
Phillip D. White 4,947,434 919
Phillip A. Wiland 4,947,434 919
(c) At such annual meeting, the stockholders of the Company ratified
the election of Ernst & Young LLP as the independent public
accountants for the Company for the fiscal year ended December 31,
1999. The ratification of Ernst & Young LLP was approved by the
following votes:
For 4,947,615
Against 390
Abstain 348
Broker Non-Votes 0
> (d) At such annual meeting, the stockholders of the Company
approved the amendment to the Company's Certification of
Incorporation to increase the shares of Common Stock authorized for
issuance from 6,000,000 to 7,500,000 by the following votes:
For 3,943,353
Against 4,152
Abstain 848
Broker Non-Votes 0
Item 5. Other Information
The SEC has adopted Rule 14a-4(c), effective June 29, 1998, which determines
how proxies designated by public corporations may use discretionary voting
authority on stockholder proposals made at annual meetings. The Company
will have unrestricted use of discretionary voting authority if it does not
receive prior written notice of an intent to submit a proposal at the
meeting. For the Company's 2000 annual meeting of shareholders, this notice
must be received by February 15, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Documents filed as part of this report:
Exhibit 10: Material Contracts
None
Exhibit 27: Financial Data Schedule (Edgar filing only.)
Registrant hereby agrees to furnish the Commission, upon
request, with instruments defining the rights of holders of
long-term debt of the registrant.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the fiscal quarter ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCEPTS DIRECT, INC.
(registrant)
Date: May 6, 1999 By: /s/ Phillip A. Wiland
Phillip A. Wiland
Chief Executive Officer
Date: May 6, 1999 By: /s/ H. Franklin Marcus, Jr.
H. Franklin Marcus, Jr.
Chief Financial and
Accounting Officer
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