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, 2000
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 10, 2000, 5,013,448 shares of Common Stock, $.10 par value, were
outstanding.
CONCEPTS DIRECT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE NO.
Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Statements of Operations for the three and six months ended
June 30, 2000 and June 30, 1999 4
Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 16
CONCEPTS DIRECT, INC.
Balance Sheets
June 30, December 31,
2000 1999
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 0 $ 1,230,900
Accounts receivable, less allowances 266,577 640,531
Deferred advertising costs 3,369,131 2,114,902
Inventories, less allowances 5,941,038 5,220,566
Prepaid expenses and other 511,491 473,291
Total current assets 10,088,237 9,680,190
Property and equipment, net 11,879,729 12,484,016
Capitalized software costs, net 2,328,612 2,238,839
Trademark and other intangible assets, net 1,203,216 1,240,615
Other assets 433,682 549,193
TOTAL ASSETS $25,933,476 $26,192,853
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,385,153 $ 4,614,129
Current maturities of debt and capital lease
obligations 638,377 1,503,399
Line of credit 3,000,000 0
Accrued employee compensation 668,061 590,437
Customer liabilities 427,396 779,053
Total current liabilities 11,118,987 7,487,018
Debt and capital lease obligations 4,531,009 4,817,585
Commitments and contingencies
Stockholders' equity
Common Stock, $.10 par value, authorized
7,500,000 shares, issued and outstanding
5,013,448 and 4,985,618 shares in 2000 and
1999, respectively 501,345 498,562
Additional paid-in capital 14,394,794 14,397,577
Retained deficit (4,612,659) (1,007,889)
Total stockholders' equity 10,2,3,480 13,888,250
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,933,476 $26,192,853
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Net sales $11,178,766 $11,067,694 $23,984,394 $23,613,453
Operating costs and
expenses:
Cost of product and
delivery 7,498,795 6,941,089 15,717,310 14,526,536
Selling, general and
administrative 5,388,632 5,163,383 11,658,519 10,728,277
Total operating costs and
expenses 12,887,427 12,104,472 27,375,829 25,254,813
Operating loss (1,708,661) (1,036,778) (3,391,435) (1,641,360)
Other expense, net (141,263) (73,475) (213,335) (142,987)
Loss before income taxes (1,849,924) (1,110,253) (3,604,770) (1,784,347)
Benefit for income taxes 0 (373,902) 0 (603,013)
Net loss $(1,849,924) $(736,351) $(3,604,770) $(1,181,334)
Basic and diluted loss per
share $(0.37) $(0.15) $(0.72) $(0.24)
Weighted average number of
common shares 4,997,546 4,976,619 4,991,582 4,972,619
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2000 1999
OPERATING ACTIVITIES
Net loss $(3,604,770) $(1,181,334)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision (credit) for losses on accounts
receivable (54,152) 8,131
Provision (credit) for losses in inventory values(266,955) 735,684
Depreciation 1,168,784 539,696
Amortization 56,697 0
Current and deferred income taxes 0 (603,013)
Gain on disposal of property and equipment (6,051) 0
Gain on disposal of other assets (42,751) 0
Changes in operating assets and liabilities:
Accounts receivable 428,106 59,370
Deferred advertising costs (1,254,229) 1,729,257
Inventories (453,517) 905,411
Prepaid expenses and other (38,200) (132,902)
Accounts payable 1,771,024 (2,248,255)
Accrued employee compensation 77,624 287,685
Customer liabilities (351,657) 181,453
Interest payable 0 (29,348)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,570,047) 251,835
INVESTING ACTIVITIES
Capital expenditures (655,437) (1,778,806)
Acquisition of assets 0 (1,916,644)
Sales of property and equipment 7,218 0
Sales of other assets 74,995 0
Other investing activities, net 63,969 29,569
NET CASH USED IN INVESTING ACTIVITIES (509,255) (3,665,881)
FINANCING ACTIVITIES
Advances on revolving line of credit 4,750,000 0
Repayments on revolving line of credit (1,750,000) 0
Principal payments on debt and lease obligations (1,151,598) (1,124,604)
Issuance of debt obligations 0 901,726
Exercise of common stock options 0 47,993
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,848,402 (174,885)
DECREASE IN CASH AND CASH EQUIVALENTS (1,230,900) (3,588,931)
Cash and cash equivalents at beginning of year 1,230,900 4,070,369
Cash and cash equivalents at end of period $0 $481,438
See notes to financial statements.
CONCEPTS DIRECT, INC.
Notes to Financial Statements
(Unaudited)
Note 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, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
Note 2 - Segment Disclosure
<TABLE>
During 1999, the Company began to pursue several e-commerce business
strategies designed to compliment and enhance its core catalog business. The
initiatives included web service and hosting as well as design of an
Internet portal. As part of this continuing development in late 1999,
management began to assess and evaluate these initiatives as separate
business lines. Consistent with this perspective and to provide better
operational focus, management also at this time initiated a reorganization
process designed to reflect its business as three separate operating
segments. These segments are:
Concepts Direct
Concepts Direct markets various products directly to individual consumers,
including personalized paper products, gift items, home decorative items and
other merchandise under several catalog titles and Internet sites associated
with the catalog titles. Concepts Direct will also provide back office
functions for all segments such as warehousing, distribution, fulfillment,
order entry, inventory procurement, accounting and human resources.
iConcepts
iConcepts will operate as a business incubator, conceptualizing and
developing new Internet businesses. iConcepts will also provide technology
support to Concepts Direct, BOTWEB and third parties. Services offered by
iConcepts will include site hosting and development, online order processing
and database management. iConcepts currently has four live sites,
iGift.com, NewBargains.com YourCountryStore.com and TheBearHouse.com.
BOTWEB
BOTWEB is a portal whose primary target customers are female catalog or
Internet shoppers. In addition to offering a directory and Internet search
of reviewed sites that BOTWEB has classified Best Of The WEB, BOTWEB offers
a variety of free services, including email, driving directions and maps,
news, weather and sports.
As a result of the reorganization discussed above, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information"" (Statement No. 131).
The Company evaluates the performance of its business segments based on
operating profit (loss). As required by Statement No. 131, the Company has
presented the segment information as of and for the periods ended June 30,
1999 as if this reorganization had occurred at January 1, 1999.
Pertinent financial data by operating segment are as follows (in thousands):
Six Months Ended June 30, 2000
Concepts Direct iConcepts BOTWEB Eliminations Total
<S> <C> <C> <C> <C> <C>
Net Sales to Third Parties $23,585 $335 $64 $0 $23,984
Net Sales to Related Parties 45(1) 1,068(2) 28 (3) (1,141) 0
Total Net Sales 23,630 1,403 92 (1,141) 23,984
Cost of product and delivery from Third Parties 13,321 1,522 874 0 15,717
Cost of product and delivery from Related Parties 559 44 480 (1,083) 0
Total cost of product and delivery 13,880 1,566 1,354 (1,083) 15,717
Selling, general and administrative from Third Parties 9,177 1,200 1,282 0 11,659
Selling, general and administrative from Related Parties 18 10 30 (58) 0
Total selling, general and administrative 9,195 1,210 1,312 (58) 11,659
Total Expenses 23,075 2,776 2,666 (1,141) 27,376
Operating income (loss) 555 (1,373) (2,574) 0 (3,392)
Other expense (205) (8) 0 0 (213)
Income (loss) before income taxes $350 $(1,381) $(2,574) $0 $(3,605)
Identifiable assets $28,984 $5,217 $550 $(9,118) $25,633
Six Months Ended June 30, 1999
Concepts Direct iConcepts BOTWEB Eliminations Total
Net Sales to Third Parties $23,614 $0 $0 $0 $23,614
Net Sales to Related Parties 0(1) 535(2) 0 (3) (535) 0
Total Net Sales 23,614 535 0 (535) 23,614
Cost of product and delivery from Third Parties 14,361 150 16 0 14,527
Cost of product and delivery from Related Parties 326 0 (326) 0
Total cost of product and delivery 14,687 150 16 (326) 14,527
Selling, general and administrative from Third Parties 9,802 897 29 0 10,728
Selling, general and administrative from Related Parties 209 0 0 (209) 0
Total selling, general and administrative 10,011 897 29 (209) 10,728
Total Expenses 24,698 1,047 45 (535) 25,255
Operating income (loss) (1,084) (512) (45) 0 (1,641)
Other expense (143) (0) 0 0 (143)
Income (loss) before income taxes $(1,227) $(512) $(45) $0 $(1,784)
Identifiable assets $25,868 $2,637 $99 $0 $25,633
Three Months Ended June 30, 2000
Concepts Direct iConcepts BOTWEB Eliminations Total
Net Sales to Third Parties $10,886 $292 $0 $0 $11,178
Net Sales to Related Parties 30(1) 566(2) 0 (3) (596) 0
Total Net Sales 10,916 858 0 (596) 11,178
Cost of product and delivery from Third Parties 6,187 865 446 0 7,498
Cost of product and delivery from Related Parties 286 33 268 (587) 0
Total cost of product and delivery 6,473 898 714 (587) 7,498
Selling, general and administrative from Third Parties 4,545 694 150 0 5,389
Selling, general and administrative from Related Parties (3) (1) 13 (9) 0
Total selling, general and administrative 4,542 693 163 (9) 5,389
Total Expenses 11,015 1,591 877 (596) 12,887
Operating income (loss) (99) (733) (877) 0 (1,709)
Other expense (137) (4) 0 0 (141)
Income (loss) before income taxes $(236) $(737) $(877) $0 $(1,850)
Identifiable assets $28,984 $5,217 $550 $(9,118) $25,633
Three Months Ended June 30, 1999
Concepts Direct iConcepts BOTWEB Eliminations Total
Net Sales to Third Parties $11,068 $0 $0 $0 $11,068
Net Sales to Related Parties 0(1) 329(2) 0 (3) (329) 0
Total Net Sales 11,068 329 0 (329) 11,068
Cost of product and delivery from Third Parties 6,888 40 14 0 6,942
Cost of product and delivery from Related Parties 217 0 0 (217) 0
Total cost of product and delivery 7,105 40 14 (217) 6,942
Selling, general and administrative from Third Parties 4,712 428 23 0 5,163
Selling, general and administrative from Related Parties 112 0 0 (112) 0
Total selling, general and administrative 4,824 428 23 (112) 5,163
Total Expenses 11,929 468 37 (329) 12,105
Operating income (loss) (861) (139) (37) 0 (1,037)
Other expense (73) (0) 0 0 (73)
Income (loss) before income taxes $(934) $(139) $(37) $0 $(1,110)
Identifiable assets $25,868 $2,637 $99 $0 $28,604
<FN>
(1) Represents intercompany product sales, inventory ordering and storage
fees and product fulfillment charges.
(2) Represents Internet site development, production and maintenance
charges.
(3) Represents BOTWEB directory advertising charges.
</FN>
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Business Segments
We manage our operations in a manner that requires disclosures of three
business segments - the Concepts Direct segment ("Concepts Direct"), the
iConcepts segment ("iConcepts") and the BOTWEB segment ("BOTWEB"). Concepts
Direct includes our catalog business including the five catalog titles as
well as the Internet sites associated with those catalog titles. iConcepts
includes the non-catalog Internet retailing sites, site hosting operations,
site development operations and database management operations. BOTWEB
includes the BOTWEB.com Internet portal and its related operations. When we
use the term "the Consolidated Company," we refer to all of the segments
combined.
General
During the second quarter of 2000, the Consolidated Company remained in the
process of transition from a catalog company selling personalized paper
products and gift and merchandise items to three companies, including one
company housing Internet site hosting and development capabilities and one
company developing its own Internet portal.
During early 1999, we focused on growing our four catalog titles rapidly to
a level at which each could become self-sustaining. This strategy required
significant levels of prospecting. During the second half of 1999 and the
first half of 2000, we concentrated on making these four catalog titles,
plus a fifth title acquired during 1999, into catalogs generating positive
contributions to Concept Directs' profitability. We consider a catalog
title's contribution to be revenue from the catalog minus advertising
expenses and certain product, delivery and catalog related general and
administrative expenses which management believes would be eliminated if the
catalog title were discontinued.
Also, throughout 1999 and the first half of 2000, we engaged in significant
development efforts with respect to Internet initiatives with attendant
significant costs. Additional employees, equipment and services were added
to accommodate these new initiatives. In early 2000, we moved certain of our
Internet assets and activities to two subsidiary corporations to provide the
best opportunity for our internal team and investors to focus on and
understand our Internet strategy and benefit from assets that have been
created to support our Internet initiatives. One subsidiary, iConcepts,
provides technology support to Concepts Direct, BOTWEB and, at an
appropriate time, may provide this service to third parties. Other services
and development directions of iConcepts include Internet site hosting and
development, online order processing, and database management. The other
subsidiary, BOTWEB, operates the Internet portal, BOTWEB.com, with a plan to
focus on developing superior portal features and services and building
significant traffic to the site. Concepts Direct focuses on obtaining
profitable results for the catalog business and the related Internet sites
associated with the catalog titles.
Net Sales
Consolidated.
Net sales in the second quarter of 2000 increased
$0.1 million, or 1%, to $11.2 million from $11.1 million during the same
period in 1999. For the six-month period ended June 30, 2000, net sales
increased $0.4 million or 2% to $24.0 million compared to $23.6 million in
the same period of 1999.
By Segment.
All of the net sales in 1999 and substantially all of the net sales in 2000
occurred in the Concepts Direct segment.
iConcepts operated four Internet retail sites during the first six months of
2000, which collectively realized net sales of $335,000 during the first six
months of 2000, $292,000 of which occurred in the second quarter of 2000.
Most of these sales were through the NewBargains.com site, which the
Consolidated Company uses to liquidate excess inventory. Intercompany sales
to Concepts Direct and BOTWEB of $566,000 during the second quarter of 2000
and $1,068,000 for the six months ended June 30, 2000 related to the
development and maintenance of various web sites and related operating
software.
BOTWEB earned $64,000 of net sales from outside third parties and $28,000
from Concepts Direct and iConcepts in the first quarter of 2000 for space
advertising in the published BOTWEB directory. No additional revenue was
earned in the second quarter of 2000.
Cost of Product and Delivery and Gross Profit
Consolidated.
Cost of product and delivery as a percentage of sales was 67% in the second
quarter of 2000 compared to 63% in the second quarter of 1999. Gross profit
as a percentage of net sales was 33% in the second quarter of 2000, compared
to 37% in the second quarter of 1999.
Cost of product and delivery as a percentage of sales was 66% for the six
months ended June 30, 2000 compared to 62% for the same period in 1999.
Gross profit as a percentage of new sales was 34% during the first six
months of 2000 compared to 38% in the same period of 1999.
By Segment.
Concepts Direct's gross margin increased to 41% in the second quarter of
2000 from 36% in the same period of 1999 and increased to 41% during the
first six months of 2000 compared to 38% for the same period of 1999. These
increases arose because of the increased sale of higher margin paper
products in 2000 compared to the same period in 1999. During the second
quarter of 2000 and the first six months of 2000, sales of paper products
accounted for 45% of product sales compared to 40% in the second quarter of
1999 and 39% for the first six months of 1999. Also, in the first six
months of 1999, approximately 5% of the total Concepts Direct cost of
product and delivery was attributable to provisions for losses in inventory
values, compared to negative 2% in the same period of 2000.
iConcepts' product and delivery costs of $898,000 in the second quarter of
2000 and $40,000 in the same period of 1999 included certain hardware,
software, labor and other expenses directed at providing technological
support to Concepts Direct and BOTWEB and developing Internet business
opportunities. For the six month period ended June 30, 2000, the product
and delivery costs were $1,566,000 compared to $150,000 for the same period
in 1999. The cost increase during 2000 occurred due to the commitment of
additional resources, particularly employees and contract laborers, to the
support of this new business.
BOTWEB's product and delivery costs were approximately $714,000 in the
second quarter of 2000, compared to $14,000 in the same period of 1999. For
the first six months of 2000, such costs were $1,354,000 compared to $16,000
in the same period of 1999. Such costs were directed at the BOTWEB.com
site, and included programming and site review expenses. The cost increase
in 2000 occurred primarily because of increased staffing.
Selling, General and Administrative Expense
Consolidated.
Selling, general and administrative costs as a percentage of sales were 48%
in the second quarter of 2000 compared to 47% in the same period in 1999.
Such costs were 49% of sales for the first six months of 2000 compared to
45% during the same period of 1999. The increase in 2000 occurred primarily
because of the expenditure of approximately $1.0 million for advertising
BOTWEB.com. By Segment. Concepts Direct selling, general and administrative
expenses represented 42% of net sales in the second quarter of 2000 and 44%
in the second quarter of 1999. During the first six months of 2000, selling
general and administrative expenses represented 39% of net sales compared to
42% during the same period of 1999. The decrease is primarily attributable
to a reduction in prospect marketing in the first half of 2000 compared to
the same period in 1999. Prospect marketing generally has significantly
higher advertising costs as a percentage of sales than marketing to existing
customers.
iConcepts selling, general and administrative expenses were $693,000 in the
second quarter of 2000, compared to $428,000 for the same period in 1999 and
$1,210,000 in the first six months of 2000 compared to $897,000 during the
same period of 1999. The primary components of these costs are salaries
incurred to support administrative and marketing efforts.
BOTWEB selling, general and administrative expenses were $163,000 in the
second quarter of 2000, compared to $23,000 in the same period of 1999 and
$1,312,000 in the first six months of 2000 compared to $29,000 during the
first six months of 1999. Approximately $1.0 million in advertising costs
were incurred in the first quarter of 2000 to determine consumer reaction to
BOTWEB banner advertisements and to the printed BOTWEB directory.
Other Expense
Consolidated.
Other income (expense), consisting primarily of interest expense, interest
income and vendor payment discounts, was an expense of $141,000 for the
second quarter of 2000 and $73,000 in the same period of 1999. Other
income (expense) was an expense of $213,000 during the first six months of
2000 compared to an expense of $143,000 during the same period of 1999.
By Segment.
iConcepts incurred $4,000 of interest expense during the second quarter of
2000 and $8,000 of interest expense during the first six months of 2000. The
remaining other income (expense) is attributable to Concepts Direct
Income taxes
The Consolidated Company had no provision for income taxes in either the
second quarter or the first six months of 2000. The Consolidated Company
had an income tax benefit of $374,000 in the first quarter of 1999 and an
income tax benefit of $603,000 during the first six months of 1999.
Management anticipates the income tax rate in 2000 will be approximately 0%,
principally because of anticipated losses in iConcepts and BOTWEB, which
will increase the net operating loss carryforward available but not expected
to be utilized in the near term. Accordingly, the related deferred income
tax asset is fully reserved.
Outlook
During the remainder of 2000, Concepts Direct will continue to operate its
catalog business and the Internet sites associated with its catalogs focused
on providing strong profitability with modest growth in sales. In addition,
as part of a strategic shift aimed at reducing expenses associated with the
Internet business, Concepts Direct will operate the new Internet retail
sites developed by iConcepts, including NewBargains.com. Also, the Company
has signed a letter of intent with Creative Associates to create and operate
under an exclusive licensing arrangement SnoopyStore.com that should be
operational later this year. A major objective of Concepts Direct will be
to produce improved catalog contribution and performance and continue
certain controls such as prospecting loss limits on the quality of catalog
performance. This may restrict the development of new catalogs until
earnings are consistent at levels management believes are appropriate to
support development costs. During 2000, Concepts Direct does plan to extend
its microniche marketing program and to test narrowly niched catalogs under
its existing brands.
As a result of the strategic shifts mentioned above, iConcepts will be
strictly a technology services business, owning software supporting the
Concepts Direct operations. However, for the present, it will be without
sufficient capital to expand it operations and pursue other opportunities.
Also to curtail expenses, BOTWEB will discontinue the beta version of
BOTWEB.com, our portal site, and pursue development at a greatly reduced
pace. For the present, it will be without sufficient capital to expand its
operations and pursue other opportunities.
Management anticipates losses for the Consolidated Company for the year,
primarily because of anticipated losses of iConcepts and BOTWEB. The
operating losses in the second half should be lessened since BOTWEB's and
iConcepts' expenditure levels have already been cut dramatically and will be
reduced further. However, the curtailment of activity for these businesses
may require accounting adjustments later in the year.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Company had no cash or cash equivalents at June 30, 2000.
Also, as of June 30, 2000, the Consolidated Company was not in compliance
with certain financial covenants associated with the revolving line of
credit and the majority of the Consolidated Company's other debt financing.
The Bank has waived the covenant non-compliance and renewed the revolving
line of credit, which had previously been extended to July 31, 2000, until
September 29, 2000.
Management believes the Consolidated Company will have access to funds
necessary to meet the operating capital requirements of Concepts Direct for
the current year. Management anticipates such funds to come from results of
operations, continued operational planning, existing lines of credit and
leveraging the Consolidated Company's significant real estate assets.
Further, management expects such funds to be available before September 29,
2000 when the line of credit is due and in sufficient time to make necessary
payments to vendors for inventory and seasonal catalog mailings.
Although expenditures at iConcepts and BOTWEB have been cut and will be
reduced further, iConcepts and BOTWEB will still require some additional
cash resources. However, management believes that the additional cuts will
significantly stem the Consolidated Company's cash expenditures on the
subsidiaries and that the resources needed will be available from Concepts
Direct cash flow from operations and real estate leverage.
There can be no assurance that the Consolidated Company will be able to
negotiate a further extension of the bank revolving line of credit, secure
additional capital to meet its needs or secure such capital on terms
favorable to the Consolidated Company. A failure to extend the Bank line of
credit beyond September 29, 2000, acceleration of the Consolidated Company's
other debt financing or failure to obtain additional capital may cause
liquidity concerns for the Consolidated Company and have a material adverse
effect on the operations of the Consolidated Company.
Cash and cash equivalents decreased by $1,231,000 in the first six months of
2000 and decreased by $3,589,000 in the same period of 1999. Activity in
several significant areas had the greatest impact on cash and cash
equivalents as described below.
Significant operating activities that affected cash and cash equivalents
in the first six months of 2000 and 1999 included:
* Net losses of the Consolidated Company of $3,605,000 and $1,181,000
negatively affected cash and cash equivalents in the first quarters of 2000
and 1999, respectively.
* The provision for losses in inventory values of $736,000 in 1999 was a
non-cash expense that reduced the negative effect on cash and cash
equivalents caused by the net loss in 1999. During 2000, the negative
provision for losses in inventory values of $267,000 increased the negative
effect on cash and cash equivalents caused by the net loss in 2000. The
significant provision for losses in inventory values recorded in 1999 did
not recur in 2000 and is not anticipated to recur at the levels incurred
during the balance of 2000. The reduction of this expense item is
attributable primarily to a change in the fourth quarter 1999 of the
Consolidated Company's estimates concerning appropriate reserves to state
inventory values at the lower of cost or market. During the fourth quarter
of 1999, the Consolidated Company recorded an increase to the inventory
obsolescence reserve of approximately $2.2 million.
* Recorded depreciation and amortization of $1,226,000 and $540,000 in the
first six months of 2000 and 1999, respectively, were non-cash expenses that
reduced the negative effect on cash and cash equivalents caused by the net
losses in the first quarters of 2000 and 1999.
* Deferred advertising costs increased by $1,254,000 in the first six months
of 2000 and decreased in the same period of 1999 by $1,729,000. These
fluctuations primarily related to the timing of distribution of Concepts
Direct's catalogs.
* Inventories increased $454,000 in the first six months of 2000 and
decreased by $905,000 in the first six months of 1999. The 2000 increase
primarily related to the timing of purchases of additional paper product
inventory. The 1999 decrease related to the timing of purchases of both
paper and gift and decorative merchandise.
* Accounts payable increased by $1,771,000 in the same period of 2000 and
decreased by $2,248,000 in the first quarter of 1999. The increase in 2000
primarily related to the delaying of payments to certain vendors in the
second quarter of 2000. The 1999 decrease primarily related to the payment
in the first quarter of 1999 of advertising and inventory costs incurred in
the fourth quarter of 1998.
Significant items of investment of cash during the periods included capital
expenditures of $655,000 and $1,779,000 in the first six months of 2000 and
1999, respectively. The capital expenditures related primarily to purchases
and development of software and the acquisition of assets relative to
development of e-commerce infrastructure and Internet sites.
Significant items of financing included borrowings of $4,750,000 against the
Consolidated Company's revolving line of credit in the first six months of
2000 and repayments of $1,750,000 against such borrowings during the same
period. Payments of $1,152,000 and $1,125,000 were made against other credit
facilities in the first six months of 2000 and 1999, respectively.
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. Statements
that are not historical facts, including statements about management's
expectations, beliefs, plans and objectives for fiscal year 2000 and beyond
are forward looking statements (as such term is defined in the Act) and
involve various risks and uncertainties, including the risks associated with
starting new businesses. Factors that could cause the Consolidated
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 Concepts Direct
offers in its catalogs;
* changes in Concepts Direct's merchandise product mix or changes in
Concepts Direct's customer response to advertising offers;
* competitive factors including name recognition, the relative newness to
the mail-order catalog business of several of Concepts Direct's catalogs and
the Consolidated Company's limited e-commerce operating history;
* lack of availability/access to capital or sources of supply for appropriate
inventory;
* lack of availability/access to capital to fund the growth plans for the
Consolidated Company's Internet initiatives;
* lack of effective performance of third party suppliers with respect to
production and distribution of catalogs;
* issues related to management's transitions at the Consolidated Company;
* state tax issues relating to the taxation of out of state mail-order
companies and out of state Internet companies with neither sales
representatives nor outlets in a particular state seeking to impose sales
and similar taxes;
* inability to hire and retain sufficient numbers of qualified software
developers to develop required software products and Internet sites;
* inability to hire sufficient numbers of employees to maintain acceptable
levels of customer satisfaction with catalog order fulfillment services;
* lack of effective performance of customer service and the Concept Direct's
order fulfillment systems;
* lack of effective performance of the iConcept's e-commerce infrastructure,
retailing sites and the BOTWEB search engine;
* inability to increase the level of traffic on BOTWEB.com and the amount of
purchases on the Consolidated Company's e-commerce sites;
* inability to effectively advertise the Consolidated Company's Internet
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.
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
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 June 30,
2000.
SIGNATURES
Pursuant to the requirements of the Securities 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 14, 2000 By:
/s/ J. Michael Wolfe
J. Michael Wolfe
Chief Executive Officer
Date: August 14, 2000 By:
/s/ David H. Haddon
David H. Haddon
Chief Financial and Accounting Officer
