FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20680
Concepts Direct, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1781893
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
2950 Colorful Avenue, Longmont, CO 80504
(Address of principal executive offices, Zip Code)
(303) 772-9171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of October 22, 1999, 4,977,952 shares of Common Stock, $.10 par value,
were outstanding.
CONCEPTS DIRECT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of September 30, 1999 and
December 31, 1998
Statements of Operations for the three and nine months ended
September 30, 1999 and September 30, 1998
Statements of Cash Flows for the nine months ended
September 30, 1999 and September 30, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
Item 1.
CONCEPTS DIRECT, INC.
Balance Sheets
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ - $4,070,369
Accounts receivable, less allowances 605,100 391,280
Deferred advertising costs 4,255,811 4,454,553
Inventories, less allowances 9,115,382 10,053,406
Prepaid expenses and other 346,455 267,107
Total current assets 14,322,748 19,236,715
Property and equipment, net 12,328,310 12,272,441
Capitalized software costs 2,186,763 20,684
Trademark and other intangible assets, net 1,534,405 -
Other assets 745,124 542,907
TOTAL ASSETS $31,117,350 $32,072,747
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $5,510,370 $5,969,535
Current maturities of debt and capital
lease obligations 989,190 779,685
Line of credit 1,300,000 -
Accrued employee compensation 844,150 547,691
Customer liabilities 1,220,554 494,428
Interest payable - 29,348
Deferred income taxes payable - 732,980
Total current liabilities 9,864,264 8,553,667
Debt and capital lease obligations 5,681,484 6,078,620
Commitments and contingencies
Stockholders' equity
Common Stock, $.10 par value,
authorized 7,500,000 and 6,000,000
shares, issued and outstanding 4,977,952
and 4,967,286 shares in 1999 and 1998,
respectively. 497,795 496,729
Additional paid-in capital 14,370,700 14,323,773
Retained earnings 703,107 2,619,958
Total stockholders' equity 15,571,602 17,440,460
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $31,117,350 $32,072,747
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net sales $11,252,451 $19,494,748 $34,865,904 $50,830,390
Operating costs and expenses:
Cost of product and
delivery 7,126,321 11,008,066 21,949,005 28,672,895
Selling, general and
administrative 5,117,441 9,909,845 15,549,572 24,911,634
Total operating costs
and expenses 12,243,762 20,917,911 37,498,577 53,584,529
Operating loss (991,311) (1,423,163) (2,632,673) (2,754,139)
Other expense, net (123,108) (91,839) (266,094) (18,056)
Loss before income taxes (1,114,419) (1,515,002) (2,898,767) (2,772,195)
Benefit for income taxes (378,902) (530,000) (981,915) (970,000)
Net loss $(735,517) $(985,002)$(1,916,852)$(1,802,195)
Basic and diluted loss per share $(0.15) $(0.20) $(0.39) $(0.36)
Weighted average number
of common shares 4,977,952 4,962,286 4,972,619 4,959,786
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1999 1998
OPERATING ACTIVITIES
Net loss $(1,916,851) $(1,802,195)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Provision for losses on accounts receivable 31,088 14,000
Provision for losses in inventory values 831,008 405,880
Depreciation and amortization 969,334 746,862
Current and deferred income taxes (732,980) (1,020,363)
Loss on disposals of property and equipment - 56,298
Changes in operating assets and liabilities:
Accounts receivable (219,908) (153,036)
Deferred advertising costs 199,742 (3,570,878)
Inventories 628,016 (6,015,337)
Prepaid expenses and other (79,348) 450,378
Accounts payable (525,165) 1,138,893
Accrued employee compensation 296,459 (351,168)
Customer liabilities 726,126 1,004,523
Interest payable (29,348) (20,980)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 178,173 (9,117,123)
INVESTING ACTIVITIES
Release of cash restricted as collateral - 128,403
Capital expenditures (3,069,722) (601,264)
Acquisition of assets (1,924,318) -
Other investing activities, net (181,532) (458,507)
NET CASH USED IN INVESTING ACTIVITIES (5,175,572) (931,368)
FINANCING ACTIVITIES
Principal payments on debt and lease obligations (1,580,240) (410,794)
Issuance of debt obligations 2,459,277 687,469
Exercise of common stock options 47,993 5,435
NET CASH PROVIDED BY FINANCING ACTIVITIES 927,030 282,110
DECREASE IN CASH AND CASH EQUIVALENTS (4,070,369) (9,766,381)
Cash and cash equivalents at beginning of year 4,070,369 13,773,815
Cash and cash equivalents at end of period - $4,007,434
See notes to financial statements.
CONCEPTS DIRECT, INC.
Notes to Financial Statements
(Unaudited)
1. Accounting Policies
The unaudited interim financial statements have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial reporting and the regulations of the Securities and Exchange
Commission in regard to quarterly reporting. Accordingly, they do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company, the statements include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. Seasonal fluctuations in sales of the
Company's products result primarily from the purchasing patterns of the
individual consumer during the Christmas holiday season. These patterns
tend to moderately concentrate sales in the latter half of the year,
particularly in the fourth quarter. For further information refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10- K for the year ended December 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
During the third quarter of 1999, the Company continued the transition
process of developing new catalogs that emphasize gift and merchandise
products and e- commerce sales sites and internet portal. The Company also
continued its efforts to improve catalog contribution to general and
administrative expenses and profits.
Because the Company has placed certain limits on planned prospecting losses
in order to improve catalog contribution, there was a decrease in catalog
circulation quantities of 62% from the third quarter of 1998 to the third
quarter of 1999. The reduction in customer contact frequency was positive
in that contribution from customers improved but this reduction also led to
a decrease in customer revenue. Contribution from prospects improved but
the reduction in circulation also led to a reduction in prospect marketing
revenue during the third quarter of 1999 as compared to the same quarter in
1998.
During the third quarter, the Company mailed several microniche offers and
issued its first version of the Music Stand catalog. During the second
quarter of 1999, the Company purchased the Music Stand catalog and certain
other assets related to the catalog.
The Company continued significant development efforts with respect to
e-commerce initiatives in the quarter and added additional employees,
equipment and services to accommodate these new business initiatives.
Sales
The Company's net sales decreased by $16.0 million, or 31%, to $34.9 million
for the nine month period ended September 30, 1999 from $50.8 million in the
same period in 1998 and decreased by $8.2 million, or 42%, to $11.3 million
for the third quarter of 1999 from $19.5 million in the same period in 1998.
These decreases resulted primarily from changes in strategy with respect to
Colorful Images and Linda Anderson in order to improve catalog contribution
as discussed above. This strategy change may lead to continued decreases in
circulation quantities and revenues of certain of the catalogs. The Company
also believes that slow delivery of September catalogs by third party
vendors or the United States Postal Service had significant negative impact
upon third quarter sales.
Costs of Product and Delivery and Gross Profit
Cost of product and delivery for the nine month period ended September 30
increased as a percentage of net sales to 63% in 1999 from 56% in 1998 and
increased to 63% in the third quarter of 1999 from 56% for the third quarter
of 1998. Gross profit decreased by $9.3 million, or 42%, to $12.9 million
for the nine months ended September 30, 1999 from $22.2 million for the same
period in 1998. Gross profit was $4.1 million and $8.5 million for the third
quarter of 1999 and 1998, respectively. The decrease in gross profit as a
percentage of net sales occurred primarily because of lower sales over which
to spread fixed costs of fulfillment such as facilities and equipment,
increased fulfillment salaries in anticipation of higher holiday season
sales, slower than anticipated deliveries of September catalogs and
additional costs in the form of labor, equipment and services to accommodate
the new e-commerce business initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense ("SG&A") decreased $9.4 million,
or 38%, to $15.5 million for the first nine months of 1999 from $24.9
million for the same period of 1998 and decreased $4.8 million, or 48%, to
$5.1 million for the third quarter of 1999 from $9.9 million for the same
quarter in 1998. SG&A as a percentage of net sales decreased to 45% for the
first nine months of 1999 from 49% for the same period in 1998 and decreased
to 46% for the third quarter of 1999 from 51% for the same quarter in 1998.
The decreases in SG&A occurred primarily because of a reduction in total
catalog circulation during the periods reported as compared to the same
periods in 1998. To a lesser degree, the decrease related to limits placed
on planned prospecting losses per mail cycle.
Other Expense
Other expense, primarily interest expense and vendor payment discounts, was
$266,000 for the nine month period ended September 30, 1999 as compared to
$18,000 for the same period in 1998. Expense for the third quarter of 1999
was $123,000 as compared to $92,000 for the same period in 1998. The most
significant cause of the increase in other expense was a decrease in
interest income because of reduced cash balances available for investing.
Income Taxes
The Company had an income tax benefit of $982,000 for the nine month period
ended September 30, 1999 as compared to a benefit of $970,000 for the same
period in 1998. The Company had an income tax benefit of $379,000 for the
quarter ended September 30, 1999 as compared to a benefit of $530,000 for
the same quarter in 1998. The provision for income taxes for 1999 reflects
the 34% income tax rate that management anticipates for the year.
Outlook
The Company intends to continue its current course of attempting to improve
catalog contribution and developing e-commerce sites. However, in an effort
to ease the impact of the transition period on profitability, the Company
will not launch additional niche catalogs in 1999.
While several of our catalogs have been in the developmental stage,
prospecting and creative costs associated with catalog development have been
higher than desired as a percentage of sales. Beginning in late 1999, we
will focus more on the catalog business profitability and set more stringent
controls on quality of catalog performance. These strategies may lead to
reduced circulation of certain catalogs or other cost control measures.
Over the past few years, as we have shifted more of the product sales to
gift and merchandise items, we have had a greater need to increase inventory
of these items. We are focused on balancing our need for these products
against the risks of maintaining excess inventory. However, we believe that
our current inventory levels are higher than necessary, particularly as we
have reduced catalog circulation quantities. We are currently addressing
the current excess inventory levels primarily by liquidation through various
channels and returns to vendors. In the third quarter of 1999, the Company
did experience some success returning merchandise to vendors. However, if
these measures are unsuccessful or immaterial in impact on a continuing
basis, we will increase the provision for losses in inventory value.
In the second quarter of 1999, we opened our first product sales e-site,
LindaAnderson.com. In the remainder of 1999, we will continue to incur
significant costs developing e-commerce infrastructure and we plan to open
more e-sites such as theMusicstand.com and a new Internet portal. Since we
will continue to add certain costs and overhead to manage and operate the
sites, it may take a period of time for sales from these e-sites to cover
such costs.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 1999, cash and cash
equivalents decreased by $4,070,000. Activity in several areas had a
significant impact on cash and cash equivalents as described below.
The decrease in accounts payable during the nine month period ended
September 30, 1999 of $525,000 resulted primarily from the payment in the
first quarter of 1999 of inventory and advertising costs purchased or
incurred in the fourth quarter of 1998. The decrease in cash was offset by
decreases in deferred advertising of $200,000 and inventories of $628,000
primarily related to reduced levels of advertising and sales of products in
1999 as compared to the same periods of 1998. The decrease in cash was
also offset by depreciation and amortization of $969,000 and an increase of
$831,000 in the provision for losses in inventory value. The increase in
customer liabilities of $726,000 related primarily to customer order backlog
from customer orders received from catalog mailings in September 1999. The
net loss of $1,917,000 also contributed significantly to the decrease in
cash.
Significant items of investment of cash during the period were capital
expenditures of $3,070,000, which primarily related to the purchases of
software and assets relative to development of e-commerce infrastructure and
sites as well as the purchase of certain assets of the Music Stand catalog
for $1,924,000.
The Company has available with Bank One, Colorado, N.A. a revolving line of
credit for $3,000,000 for general purposes. During the third quarter, the
line of credit was reduced from $4,500,000 to $3,000,000 and certain
financial and performance covenants were modified including a maximum annual
capital asset limit, a maximum annual net loss limit and a minimum tangible
net worth. The Company had a balance of $1,300,000 outstanding on the line
of credit at September 30, 1999. The line of credit expires in May 2000.
The Company had no unencumbered cash and cash equivalents at September 30,
1999. Management believes that results of operations, continued operational
planning review, line of credit availability plus current cash balances will
produce funds necessary to meet its anticipated working capital requirements
during the remainder of 1999. During 1999, the Company plans to incur
significant cost in the development of its e- commerce infrastructure and
sites, the majority of which will be capitalized.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and other devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900,
rather than the year 2000. This could result in a system failure or
miscalculations causing a disruption of operations, including, among other
things, a temporary inability to process transactions, fulfill orders, or
engage in similar normal business activities.
With respect to the Company's information and fulfillment systems, the
vendors of the Company have provided modifications for compliance. All
modifications, conversions and installations are complete. The Company
believes that the risk of its having non-compliant systems at January 1,
2000 is low. However, to the extent that areas of risk are identified,
contingency plans will be developed to minimize their impact.
The Company estimates its total cost of achieving Year 2000 compliance to be
less than $400,000 over the cost of normal software and equipment upgrades
and replacements. Approximately $350,000 has been incurred through
September 30, 1999; the remainder will be incurred in the remainder of 1999.
After investigation, the Company has not yet discovered any major Year 2000
compliance problems with respect to the third parties who are its critical
suppliers of goods and services, such as merchandise vendors, catalog
production and distribution service providers, product delivery and critical
function service providers. To the extent that the Company does identify
potentially non-compliant third parties, it plans to assess its level of
exposure and risk and develop contingency plans at that time. These
contingency plans are likely to include identification and confirmation of
the availability of alternative suppliers. However, there can be no
assurance that the systems and infrastructure of other companies will be
made compliant in a timely manner or that such a failure by another company
would not have an adverse effect on the Company. Because most of the
Company's customers are individual consumers, the Company does not expect
Year 2000 issues to materially affect its customers as a group.
The cost of the project and date on which the Company believes it will
complete the Year 2000 modifications are based upon management's best
estimates. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from anticipated.
Specific factors that might cause such material differences include, but are
not limited to, availability of personnel trained in this area, the ability
to locate and correct relevant systems and similar uncertainties.
Special Note Regarding Forward-Looking Statements
The discussion above contains certain forward-looking statements as such
term is defined in the Private Securities Litigation Reform Act of 1995.
Company statements that are not historical facts, including statements about
management's expectations, beliefs, plans and objectives for 1999 and beyond
and about Year 2000 issues, are forward-looking statements and involve
various risks and uncertainties. Factors that could cause the Company's
actual results to differ materially from management's estimates and
expectations include, but are not limited to, the following: changes in
postal rates or the costs of paper; changes in economic and market
conditions; changes in the Company's merchandise product mix or changes in
the Company's customer response to advertising offers; lack of effective
performance by third party suppliers with respect to providing product
inventory; lack of effective performance by third parties supplying Year
2000 solutions to the Company; lack of effective performance by third party
suppliers with respect to production and distribution of catalogs; lack of
effective performance of customer service and the Company's order
fulfillment system; lack of effective performance of the Company's
e-commerce infrastructure and retailing sites; lack of availability of
sufficient credit for business operations and changes in strategy and timing
relating to the testing and rollout of new catalogs. Additional discussion
of factors that could cause actual results to differ materially from
management's projections, forecasts, estimates and expectations is contained
in the Company's SEC filings, including the Company's report on Form 10-K
for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Documents filed as part of this report:
Exhibit 27: Financial Data Schedule (Edgar filing only.)
Registrant hereby agrees to furnish the Commision, upon request, with
instruments defining the rights of holders of long-term debt of the
registrant.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the fiscal quarter ended September 30,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCEPTS DIRECT, INC.
(registrant)
Date: November 15, 1999 By: /s/ Phillip A. Wiland
Phillip A. Wiland
Chief Executive Officer
Date: November 15, 1999 By: /s/ H. Franklin Marcus, Jr.
H. Franklin Marcus, Jr.
Chief Financial and Accounting Officer
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