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 June 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 July 20, 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 June 30, 1999 and
December 31, 1998
Statements of Operations for the three and six months ended
June 30, 1999 and June 30, 1998
Statements of Cash Flows for the six months ended
June 30, 1999 and June 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
June 30, December 31,
1999 1998
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $481,438 $4,070,369
Accounts receivable, less allowances 348,779 391,280
Deferred advertising costs 2,726,296 4,454,553
Inventories, less allowances 8,933,311 10,053,406
Prepaid expenses and other 400,009 267,107
Total current assets 12,889,833 19,236,715
Property and equipment,net 11,806,858 12,272,441
Capitalized software costs 1,815,231 20,684
Trademark and other intangible assets,net 1,558,438 -
Other assets 534,023 542,907
TOTAL ASSETS $ 28,604,383 $32,072,747
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $3,787,280 $5,969,535
Current maturities of debt and
capital lease obligations 987,453 779,685
Accrued employee compensation 835,376 547,691
Customer liabilities 675,881 494,428
Interest payable - 29,348
Deferred income taxes payable 129,967 732,980
Total current liabilities 6,415,957 8,553,667
Debt and capital lease obligations 5,881,307 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 1,438,624 2,619,958
Total stockholders' equity 16,307,119 17,440,460
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $28,604,383 $32,072,747
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Net sales $11,067,694 $15,855,323 $23,613,453 $31,335,642
Operating costs
and expenses:
Cost of product
and delivery 7,436,089 8,934,815 15,436,536 17,664,829
Selling, general
and administrative 4,668,383 7,206,882 9,818,277 15,001,789
Total operating costs
and expenses 12,104,472 16,141,697 25,254,813 32,666,618
Operating loss (1,036,778) 286,374) (1,641,360) (1,330,976)
Other income (expense),
net (73,475) (10,765) (142,987) 73,783
Loss before income taxes (1,110,253) (297,139) (1,784,347) (1,257,193)
Benefit for income taxes (373,902) (104,000) (603,013) (440,000)
Net loss $(736,351) $(193,139) $(1,181,334) $(817,193)
Basic and diluted loss
per share $(0.15) $(0.04) $(0.24) $(0.16)
Weighted average number
of common shares 4,976,619 4,957,286 4,972,619 4,957,286
See notes to financial statements.
CONCEPTS DIRECT,INC.
Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1999 1998
OPERATING ACTIVITIES
Net loss $(1,181,334) $(817,193)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Provision for losses on accounts receivable 8,131 3,000
Provision for losses in inventory values 735,684 238,576
Depreciation and amortization 539,696 478,406
Current and deferred income taxes (603,013) (490,363)
Changes in operating assets and
liabilities:
Accounts receivable 59,370 (19,343)
Deferred advertising costs 1,729,257 (716,490)
Inventories 905,411 (1,859,957)
Prepaid expenses and other (132,902) 710,132
Accounts payable (2,248,255) (4,806,371)
Accrued employee compensation 287,685 (239,747)
Customer liabilities 181,453 (935,313)
Interest payable (29,348) (20,980)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 251,835 (8,475,643)
INVESTING ACTIVITIES
Release of cash restricted as collateral - 128,403
Capital expenditures (1,778,806) (223,734)
Acquisition of assets (1,916,644) -
Other investing activities, net 29,569 (146,412)
NET CASH USED IN INVESTING ACTIVITIES (3,665,881) (241,743)
FINANCING ACTIVITIES
Principal payments on debt
and lease obligations (1,124,604) (155,639)
Issuance of debt obligations 901,726 102,695
Exercise of common stock options 47,993 -
NET CASH USED IN FINANCING ACTIVITIES (174,885) (52,944)
DECREASE IN CASH AND CASH EQUIVALENTS (3,588,931) (8,770,330)
Cash and cash equivalents at beginning of year 4,070,369 13,773,815
Cash and cash equivalents at end of period $481,438 $5,003,485
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 six month period ended June 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.
On June 2, 1999, the Company acquired the trademark, customer list,
inventory and certain other assets of The Music Stand for approximately $2.1
million. The purchase price was allocated based on estimated fair values at
the date of acquisition. The Music Stand is a catalog marketer of assorted
music-related gifts, awards and collectibles. The accompanying financial
statements reflect the preliminary allocation of purchase price as the
purchase price allocation has not been finalized.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
During the second quarter of 1999, the Company continued the transition
process of developing new catalogs that emphasize gift and merchandise
products and e-commerce sales sites. 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 35% from the second quarter of 1998 to the second
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. Despite a reduction in circulation which
generally helps improve contribution, our prospect marketing programs for
catalogs other than Colorful Images did not perform as well as they did in
the same quarter of 1998 in terms of both revenue and contribution.
During the second quarter, the Company completed the purchase of certain
assets of The Music Stand, a catalog marketer of assorted music-related
gifts, awards and collectibles. Also during the quarter, the Company mailed
certain new microniche offers and launched a new catalog, Linda's Lawn and
Garden, in test quantities.
In late June, the Company opened its first e-commerce sale site,
LindaAnderson.com., which included much of the same merchandise as the Linda
Anderson catalog, plus other merchandise with a similar theme. The Company
continued significant development efforts with respect to e-commerce
initiatives in the quarter and added additional employees, equipment and
services to accommodate new business initiatives.
Sales
The Company's net sales decreased by $7.7 million, or 25%, to $23.6 million
for the six month period ended June 30, 1999 from $31.3 million in the same
period in 1998 and decreased by $4.8 million, or 30%, to $11.1 million for
the second quarter of 1999 from $15.9 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.
Costs of Product and Delivery and Gross Profit
Cost of product and delivery for the six month period ended June 30
increased as a percentage of net sales to 65% in 1999 from 56% in 1998 and
increased to 67% in the second quarter of 1999 from 56% for the second
quarter of 1998. Gross profit decreased by $5.5 million, or 40%, to $8.2
million for the six months ended June 30, 1999 from $13.7 million for the
same period in 1998. Gross profit was $3.6 million and $6.9 million for the
second quarter of 1999 and 1998, respectively. The decrease in gross profit
as a percentage of net sales occurred primarily because of increased
reserves established for losses in inventory value, lower sales over which
to spread fixed costs of fulfillment such as facilities and equipment and
additional costs in the form of labor, equipment and services to accommodate
the new e-commerce business initiatives. See "Outlook" below for a
discussion of our inventory management strategy.
Selling, General and Administrative Expense
Selling, general and administrative expense ("SG&A") decreased $5.2 million,
or 35%, to $9.8 million for the first six months of 1999 from $15.0 million
for the same period of 1998 and decreased $2.5 million, or 35%, to $4.7
million for the second quarter of 1999 from $7.2 million for the same
quarter in 1998. SG&A as a percentage of net sales decreased to 42% for the
first six months of 1999 from 48% for the same period in 1998 and decreased
to 42% for the second quarter of 1999 from 45% for the same quarter in 1998.
The decrease 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 Income (Expense)
Other income (expense), primarily interest expense, vendor payment
discounts, and interest income, was an expense of $143,000 for the six month
period ended June 30, 1999 as compared to income of $74,000 for the same
period in 1998. Expense for the second quarter of 1999 was $73,000 as
compared to $11,000 for the same period in 1998. The most significant cause
of the 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 $603,000 for the six month period
ended June 30, 1999 as compared to a benefit of $440,000 for the same
period in 1998. The Company had an income tax benefit of $374,000 for the
quarter ended June 30, 1999 as compared to a benefit of $104,000 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 curtail its plans to launch additional niche catalogs and will probably
test only one new catalog in the remainder of 1999.
Several of our catalogs, including the recently launched Linda's Lawn and
Garden, are still in the developmental stage. Until they emerge from this
stage, prospecting and creative costs associated with catalog development
will be higher than desired as a percentage of sales. We will try to
improve margins by further reducing planned prospecting losses per mail
cycles and curtailing plans to launch additional niche catalogs in 1999.
These strategies may continue to result in reduced catalog circulation and
may lead to decreased sales.
In June 1999, the Company completed the purchase of certain assets of The
Music Stand catalog. The catalog is scheduled for its first mailing in the
late summer. Management believes that operations of The Music Stand will
fit well into the Company's existing structure and that, over time, positive
contribution will be derived from The Music Stand's operations.
Over the past few years as we have shifted more of the product sales to gift
and merchandise items and consequently we have had a greater need to
increase inventory of these items. We are focused on balancing our need for
these products against 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. However, if these measures are unsuccessful
or immaterial in impact, we will increase the provision for losses in
inventory value.
During June, 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. We
also will continue to add certain costs and overhead to manage and operate
the sites and it may take a period of time for sales from these e-sites to
cover such costs.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 30, 1999, cash and cash equivalents
decreased by $3,589,000. Activity in several areas had a significant impact
on cash and cash equivalents as described below.
The decrease in accounts payable during the six month period ended June 30,
1999 of $2,248,000 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 $1,729,000 and inventories of $905,000 primarily
related to reduced levels of advertising and sales of products in 1999 as
compared to the same periods of 1998.
Significant items of investment of cash during the period were capital
expenditures of $1,779,000, 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 $1,917,000
The Company has available with Bank One, Colorado, N.A. a revolving line of
credit for $4,500,000 for general purposes. Although the Company did draw
on the line of credit during the second quarter, primarily for purchasing
certain assets of The Music Stand catalog, no balance was outstanding on the
line of credit at June 30, 1999. The line of credit expires in May 2000.
The Company had $481,000 of unencumbered cash and cash equivalents at June
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 for the current year. 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 except for certain
immaterial changes. 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 $300,000 has been incurred through June 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 party 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; 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 3(i) Articles of incorporation and bylaws
3(i)(a) Registrant's Amended and Restated Certificate of
Incorporation as filed on June 4, 1992 (filed
herewith).
3(i)(b) Registrant's Certificate of Amendment of Amended
and Restated Certificate of Incorporation as
filed on June 18, 1999 (filed herewith).
Exhibit 27: Financial Data Schedule (Edgar filing only.)
(b) Reports on Form 8-K
There were no reports on Form 8-K for the fiscal quarter ended June
30, 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: August 13, 1999 By: /s/ Phillip A. Wiland
Phillip A. Wiland
Chief Executive Officer
Date: August 13, 1999 By: /s/ H. Franklin Marcus, Jr.
H. Franklin Marcus, Jr.
Chief Financial and Accounting
Officer
Exhibit 3(i)(a)
Amended and Restated
Certificate of Incorporation
For
Nextmark, Inc.
NextMark, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware ("Delaware Corporate
Law") whose Certificate of Incorporation was filed on May 13, 1992, DOES
HEREBY CERFITY:
That the Certificate of Incorporation, pursuant to Section 245 of the
Delaware Corporate Law, is amended and restated.
That said amendment has been duly adopted in accordance with the provisions
of Section 241(b) of the Delaware Corporate Law.
That the corporation has not (1) held an organizational meeting (2) elected
officers (3) elected directors or (4) received payment for or issued stock
and that this certificate is filed in accordance with Section 103 of the
Delaware Corporate law.
That the incorporator has determined that the Article numbered FIRST in the
Certificate of Incorporation should be amended to read as follows:
FIRST: The name of the corporation is Concepts Direct Inc.
Second: The name and address of the registered agent is The Prentice-Hall
Corporation System, Inc., 32 Loockerman Square, Suite L-100, in the city of
Dover, County of Kent, Delaware 19901.
Third: That the purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware
Corporate Law.
Fourth: That the total number of shares which the corporation shall have
authority to issue is 6,000,000 shares of Common Stock, and the par value of
each share is $0.10 per share.
Fifth: That the name and mailing address of the incorporator is John W.
Patterson, McGuire, Woods, Battle & Boothe, 901 East Cary Street, Richmond,
Virginia 23219.
Sixth: That the Board of Directors of the corporation is expressly
authorized to make, alter or repeal bylaws of the corporation but the
stockholders may make additional bylaws and may alter or repeal any bylaw
whether adopted by them or otherwise.
Seventh: That whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and it stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof,
or on the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the provisions of Section 279
of Title 8 of the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths in value
of the creditors or class of creditors, and/or the stockholders or class of
stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as a
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all of the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
Eighth: That no director of this corporation shall be liable to the
corporation or its stockholders for monetary damages for breach or breaches
of fiduciary duties as a director, provided that the provisions of this
article shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty or loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the Delaware Corporate Law, or (iv) for any transaction for
which the director derived an improper personal benefit.
Ninth: That election of directors need not be by written ballot except and
to the extent provided in the said bylaws of the corporation.
IN WITNESS WHEROF, said NextMark, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by John W. Patterson,
Incorporator, this third day of June 1992.
/s/ John W. Patterson
John W. Patterson, Incorporator
Exhibit 3(i)(b)
Certificate of Amendment of Amended and Restated
Certificate of Incorporation
of
Concepts Direct, Inc.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Concepts Direct, Inc.
2. The amended and restated certificate of incorporation of the Corporation
is hereby amended by striking out the Fourth Article thereof and by
substituting in lieu of said Article the following new Article:
Fourth: That the total number of shares which the corporation shall have
authority to issue is 7,500,000 shares of Common Stock, and the par value of
each share is $.10 per share."
3. The amendment of the amended and restated certificate of incorporation
herein certified has been duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
Signed and attested to on June 15, 1999.
/s/ J. Michael Wolfe
J. Michael Wolfe, President
Attest:
/s/ H. Franklin Marcus
H. Franklin Marcus, Jr., Secretary
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