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, 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 November 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 September 30, 2000 and
December 31, 1999 3
Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 4
Statements of Cash Flows for the nine months ended
September 30, 2000 and 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
September 30, December 31,
2000 1999
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ - $1,231,000
Accounts receivable, less allowances 629,000 641,000
Deferred advertising costs 4,811,000 2,115,000
Inventories, less allowances 5,545,000 5,221,000
Prepaid expenses and other 389,000 473,000
Total current assets 11,374,000 9,681,000
Property and equipment, net 10,706,000 11,844,000
Capitalized software costs, net 2,096,000 2,239,000
Trademark and other intangible assets, net 1,158,000 1,241,000
Net long-term assets of discontinued operations - 640,000
Other assets 431,000 549,000
TOTAL ASSETS $25,765,000 $26,194,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $6,964,000 $4,506,000
Current maturities of debt and
capital lease obligations 1,663,000 1,503,000
Line of credit 3,000,000 -
Accrued employee compensation 813,000 583,000
Customer liabilities 1,509,000 779,000
Net current liabilities of discontinued
operations 37,000 116,000
Total current liabilities 13,986,000 7,487,000
Debt and capital lease obligations 4,333,000 4,818,000
Commitments and contingencies
Stockckholders' equity
Common stock, $.10 par value, authorized
7,500,000 shares, issued and outstanding
5,013,448 and 4,985,618 share in 2000
and 1999 respectively 501,000 499,000
Additional paid-in capital 14,396,000 14,398,000
Accumulated deficit (7,451,000) (1,008,000)
Total stockholders' equity 7,446,000 13,889,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,765,000 $26,194,000
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Net sales $11,391,000 $11,252,000 $35,311,000 $34,866,000
Operating costs and expenses:
Cost of product and delivery 6,907,000 7,145,000 21,750,000 21,656,000
Selling, general and
administrative 5,943,000 4,926,000 16,320,000 15,625,000
Restructuring costs 417,000 - 417,000 -
Total operating costs and
expenses 13,267,000 12,071,000 38,487,000 37,281,000
Operating loss from continuing
operations (1,876,000) (819,000) (3,176,000) (2,415,000)
Other expense, net (286,000) (123,000) (499,000) (266,000)
Loss from continuing operations
before income taxes (2,162,000) (942,000) (3,675,000) (2,681,000)
Benefit for income taxes - 320,000 - 908,000
Loss from continuing operations (2,162,000) (622,000) (3,675,000) (1,773,000)
Loss from discontinued operations:
Operating loss (243,000) (114,000) (2,335,000) (144,000)
Loss on discontinuance (433,000) - (433,000) -
Total loss from discontinued
operations (676,000) (114,000) (2,768,000) (144,000)
Net loss $(2,838,000) $(736,000)$(6,443,000)$(1,917,000)
Basic and diluted loss per share
Continuing operations $(0.43) $(0.13) $(0.74) $(0.36)
Discontinued operations (0.14) (0.02) (0.55) (0.03)
Net loss $(0.57) $(0.15) $(1.29) $(0.39)
Weighted average number of
common shares 5,013,448 4,977,952 4,998,871 4,972,619
See notes to financial statements.
CONCEPTS DIRECT, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2000 1999
OPERATING ACTIVITIES
Loss from continuing operations $(3,675,000) $(1,773,000)
Adjustments to reconcile net loss
from continuing operations to
net cash provided by (used in)\
continuing operating activities:
Provision (credit) for losses
on accounts receivable (49,000) 31,000
Provision (credit) for losses
in inventory values (189,000) 831,000
Depreciation 1,444,000 792,000
Amortization 387,000 177,000
Current and deferred income taxes (733,000)
Gain on disposal of property and equipment (6,000) -
Loss on disposal of other assets 53,000 -
Changes in operating assets and liabilities:
Accounts receivable 61,000 (220,000)
Deferred advertising costs (2,696,000) 200,000
Inventories (135,000) 628,000
Prepaid expenses and other 84,000 (79,000)
Accounts payable 3,546,000 (601,000)
Accrued employee compensation 230,000 290,000
Customer liabilities 730,000 727,000
Interest payable - (29,000)
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATING ACTIVITIES (215,000) 241,000
INVESTING ACTIVITIES
Capital expenditures (659,000) (2,709,000)
Acquisition of assets - (1,923,000)
Sales of property and equipment 200,000 -
Sales of other assets 75,000 -
Other investing activities, net (29,000) (182,000)
NET CASH USED IN CONTINUING
INVESTING ACTIVITIES (413,000) (4,814,000)
FINANCING ACTIVITIES
Advances on revolving line of credit 4,750,000 -
Repayments on revolving line of credit (1,750,000) -
Principal payments on debt and lease
obligations (1,396,000) (1,580,000)
Issuance of debt obligations - 2,459,000
Exercise of common stock options - 48,000
NET CASH PROVIDED BY CONTINUING FINANCING
ACTIVITIES 1,604,000 927,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS 976,000 (3,646,000)
NET CASH USED IN DISCONTINUED OPERATIONS (2,207,000) (424,000)
DECREASE IN CASH AND CASH EQUIVALENTS (1,231,000) (4,070,000)
Cash and cash equivalents at beginning of year 1,231,000 4,070,000
Cash and cash equivalents at end of period $ - $ -
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 accounting principles generally accepted in the United
States 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 accounting principles
generally accepted in the United States 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, 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 - Discontinued Operations
During the third quarter of 2000, the Company restructured its operations,
including the discontinuance of its BOTWEB, Inc. business segment.
Specifically, all employees of Botweb, Inc. were terminated, the BOTWEB.com
website was shut down and the related software costs were fully written off.
Future expenses related to completing the dissolution of BOTWEB, Inc. are
expected to be minimal.
Operating results of the discontinued operations were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Net sales $ - $ - $ 64,000 $ -
Loss before income taxes (676,000) (173,000) (2,768,000) (218,000)
Benefit for income taxes - 59,000 - 74,000
Net loss $(676,000) $(114,000) $(2,768,000) $(144,000)
Following is a summary of the net assets and liabilities of BOTWEB, Inc.:
September 30, December 31,
2000 1999
Net long-term assets:
Property and equipment, net $ - $ 640,000
Net current liabilities:
Accounts receivable, less allowances $ 31,000 $ -
Accounts payable (62,000) (109,000)
Accrued employee compensation (6,000) (7,000)
Total net current liabilities $ (37,000) $ (116,000)
Note 3 - Restructuring Costs
During the third quarter of 2000, the Company restructured its business,
including a decision to significantly reduce the on-going activities of its
iConcepts business segment. In connection with this restructuring,
management determined that certain capitalized software and website
development costs associated with the operations of the iConcepts business
segment were significantly impaired. Accordingly, the carrying value of such
assets were fully written off in the third quarter of 2000, with associated
charges to restructuring costs.
Note 4 - Segment Disclosure
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.
Concepts Direct also operates the inventory liquidation website,
NewBargains.com.
iConcepts
iConcepts was set up as a business incubator, conceptualizing and developing
new Internet businesses. iConcepts also planned to 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. As discussed more fully in footnote 3,
the operations of iConcepts business segment have been significantly
curtailed. The primary focus of iConcepts is now to support the operations of
Concepts Direct.
BOTWEB
BOTWEB was 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 discussed more fully in footnote 2, the
operations of the BOTWEB business segment are classified as a discontinued
operation of the Consolidated Company.
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 September
30, 2000 and 1999 as if this reorganization had occurred at January 1, 1999.
<TABLE>
Pertinent financial data by operating segment are as follows (in thousands):
<CAPTION>
Discontinued
Nine Months Ended September 30, 2000 Concepts Direct iConcepts BOTWEB Operations Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
Net Sales to Third Parties $ 34,698 $ 613 $ 64 $ (64) $ - $35,311
Net Sales to Related Parties 112 (1) 1,450 (2) 28 (3) - (1,590) -
Total Net Sales 34,810 2,063 92 (64) (1,590) 35,311
Cost of product and delivery from Third Parties 19,517 2,233 1,044 (1,044) - 21,750
Cost of product and delivery from Related Parties 863 116 543 - (1,522) -
20,380 2,349 1,587 (1,044) (1,522) 21,750
Selling, general and administrative from Third Parties 14,543 1,777 1,355 (1,355) - 16,320
Selling, general and administrative from Related Parties 18 10 40 - (68) -
14,561 1,787 1,395 (1,355) (68) 16,320
Restructuring Costs - 417 - - - 417
Loss on discontinuance of business segment - - 433 (433) - -
Total Expenses 34,941 4,553 2,982 (2,399) (1,590) 38,487
Operating income (loss) (131) (2,490) (2,890) 2,335 - (3,176)
Other expense (392) (107) - - - (499)
Income (loss) before income taxes (523) $ (2,597) $(2,890) $ 2,335 $ - $(3,675)
Identifiable assets 31,388 $ 4,385 $ 31 $ (31) $(10,008) $25,765
Discontinued
Nine Months Ended September 30, 1999 Concepts Direct iConcepts BOTWEB Operations Eliminations Total
Net Sales to Third Parties $ 34,866 $ - $ - $ - $ - $34,866
Net Sales to Related Parties - (1) 898 (2) - (3) - (898) -
Total Net Sales 34,866 898 - - (898) 34,866
Cost of product and delivery from Third Parties 21,318 338 79 (79) - 21,656
Cost of product and delivery from Related Parties 586 - - - (586) -
21,904 338 79 (79) (586) 21,656
Selling, general and administrative from Third Parties 14,255 1,370 139 (139) - 15,625
Selling, general and administrative from Related Parties 312 - - - (312) -
14,567 1,370 139 (139) (312) 15,625
Total Expenses 36,471 1,708 218 (218) (898) 37,281
Operating loss (1,605) (810) (218) 218 - (2,415)
Other expense (266) - - - - (266)
Loss before income taxes (1,871) $ (810) $ (218) $ 218 $ - $(2,681)
Identifiable assets $ 27,578 $ 3,178 $ 361 $ (361) $ - $30,756
Discontinued
Three Months Ended September 30, 2000 Concepts Direct iConcepts BOTWEB Operations Eliminations Total
Net Sales to Third Parties $ 11,113 $ 278 $ - $ - $ - $11,391
Net Sales to Related Parties 67 (1) 382 (2) - (3) - (449) -
Total Net Sales 11,180 660 - - (449) 11,391
Cost of product and delivery from Third Parties 6,196 711 603 (603) - 6,907
Cost of product and delivery from Related Parties 304 72 63 - (439) -
6,500 783 666 (603) (439) 6,907
Selling, general and administrative from Third Parties 5,366 577 73 (73) - 5,943
Selling, general and administrative from Related Parties - - 10 - (10) -
5,366 577 83 (73) (10) 5,943
Restructuring Costs - 417 - - - 417
Loss on discontinuance of business segment - - 433 (433) - -
Total Expenses 11,866 1,777 1,182 (1,109) (449) 13,267
Operating income (loss) (686) (1,117) (1,182) 1,109 - (1,876)
Other expense (187) (99) - - - (286)
Income (loss) before income taxes $ (873) $ (1,216) $(1,182) $ 1,109 $ - $(2,162)
Identifiable assets $ 31,388 $ 4,385 $ 31 $ (31) $(10,008) $25,765
Discontinued
Three Months Ended September 30, 1999 Concepts Direct iConcepts BOTWEB Operations Eliminations Total
Net Sales to Third Parties $ 11,252 $ - $ - $ - $ - $11,252
Net Sales to Related Parties - (1) 363 (2) - (3) - (363) -
Total Net Sales 11,252 363 - - (363) 11,252
Cost of product and delivery from Third Parties 6,957 188 63 (63) - 7,145
Cost of product and delivery from Related Parties 260 - - - (260) -
7,217 188 63 (63) (260) 7,145
Selling, general and administrative from Third Parties 4,453 473 110 (110) - 4,926
Selling, general and administrative from Related Parties 103 - - - (103) -
4,556 473 110 (110) (103) 4,926
Total Expenses 11,773 661 173 (173) (363) 12,071
Operating loss (521) (298) (173) 173 - (819)
Other expense (123) - - - - (123)
Loss before income taxes $ (644) $ (298) $ (173) $ 173 $ - $ (942)
Identifiable assets $ 27,578 $ 3,178 $ 361 $ (361) $ - $30,756
<FN>
<F1>
(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
General
During the third quarter of 2000, the Consolidated Company remained in
transition. During the first six months of the year, we were changing 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 the third quarter, the Company focused on scaling back the
operations of its two wholly owned Internet subsidiaries and refocusing on its
core direct marketing business. Specifically, the operations of BOTWEB, Inc.
have been discontinued and the focus of iConcepts, Inc. has been redirected to
supporting the core catalog business and its related websites.
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 nine months of 2000, we concentrated on making these four catalog
titles, plus a fifth title acquired during 1999, into catalogs generating
positive contributions to Concept Direct's 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.
As discussed above, throughout 1999 and the first half of 2000, we engaged in
significant development costs with respect to Internet initiatives. Additional
employees, equipment and services were added to accommodate these several new
initiatives. In early 2000, we moved certain of our Internet assets and
activities to two wholly-owned subsidiary corporations to provide the best
opportunity for investors to understand our Internet strategy and benefit from
assets that have been created to support our Internet initiatives. One
subsidiary, iConcepts, Inc., was established to provide technology support to
Concepts Direct, Inc., BOTWEB, Inc. and, at an appropriate time, third
parties. Other services and development directions of iConcepts, Inc. were
planned to include Internet site hosting and development, online order
processing, database management and the establishment of new Internet
retailing brands. The other subsidiary, BOTWEB, Inc., was to operate 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, Inc. was to focus on obtaining profitable results for the
catalog business and the related Internet sites associated with the catalog
titles.
During the third quarter of 2000, as a result of greater than anticipated
losses in all three companies and lack of available third party capital to
support continued expansion of the two Internet companies, we significantly
scaled back our planned Internet initiatives, including the discontinuance of
BOTWEB, Inc. We undertook a series of events in connection with the scaling
back of our Internet initiatives that should result in substantial cash
savings including over $2.0 million dollars per year in labor savings and
another $1.8 million per year in annualized expenditures to third parties for
infrastructure enhancements. In addition, we eliminated all on-going
expenditures associated with BOTWEB, Inc. The remaining assets and employees
of our iConcepts subsidiary are now fully focused on the support of our
catalog and Internet retailing efforts. All of iConcepts' Internet retailing
sites have been folded into the parent company, although NewBargains.com is
the only site that we are actively marketing at the present time.
During 2000, the trading price of the common stock of Concepts Direct, Inc.
has fallen to levels that fail to meet the minimum market value of public
float requirements of the Nasdaq National Market stock exchange. Unless the
per share price of the common stock rises to levels approximately double
recent trading levels, Management anticipates that the listing of the common
stock of Concepts Direct, Inc. will be moved to the Nasdaq SmallCap Market
sometime in late 2000 or early 2001.
Discontinued Operations
As mentioned above, our BOTWEB subsidiary has been shut down and will be
dissolved. Accordingly, for accounting purposes, most of the revenues and
costs attributable to the BOTWEB business segment have been classified as
discontinued operations. Certain costs allocated to the BOTWEB business
segment for segment reporting purposes remain in the calculation of our net
losses from continuing operations to conform to accounting principals
generally accepted in the United States.
The total loss from discontinued operations for the third quarter of 2000 was
$676,000, including one-time restructuring costs classified as a loss on
disposal of $433,000, compared to $114,000 for the same period of 1999. For
the nine-month period ended September 30, 2000, the total loss from
discontinued operations was $2,768,000, including one-time restructuring costs
classified as a loss on disposal of $433,000, compared to $144,000 for the
same period of 1999.
Management anticipates that on-going expenses to fully dissolve BOTWEB will be
nominal.
Business Segments
During the past year, we managed our operations in a manner that required
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 site hosting operations, site development
operations and database management operations. Until August, 2000, iConcepts
also included the non-catalog Internet retailing sites, which are now included
in the operations of Concepts Direct. BOTWEB included the discontinued
operations of the BOTWEB.com Internet portal and its related activities.
Despite the reorganization during the third quarter of 2000, including the
discontinuance of BOTWEB, we will continue to report segment information
through December 31, 2000 for comparability purposes. When we use the term
"the Consolidated Company," we refer to all of the segments combined.
Net Sales
Consolidated.
Net sales in the third quarter of 2000 increased $0.1 million, or 1%, to $11.4
million from $11.3 million during the same period in 1999. For the nine-month
period ended September 30, 2000, net sales increased $0.4 million or 1% to
$35.3 million compared to $34.9 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 retail sites during the first eight months of 2000,
which collectively realized net sales of approximately $600,000 during the
first eight months of 2000, approximately $250,000 of which occurred in the
third quarter of 2000. Intercompany sales to Concepts Direct and BOTWEB of
$382,000 during the third quarter of 2000 and $1,450,000 for the nine months
ended September 30, 2000 related to the development and maintenance of various
web sites and related operating software.
Cost of Product and Delivery and Gross Profit
Consolidated.
Cost of product and delivery as a percentage of sales was 61% in the third
quarter of 2000 compared to 63% in the third quarter of 1999. Gross profit as
a percentage of net sales was 39% in the third quarter of 2000 compared to 37%
in the third quarter of 1999.
Cost of product and delivery as a percentage of sales was 62% for the nine
months ended September 30, 2000 and 1999. Gross profit as a percentage of new
sales was 38% during the first nine months of 2000 and 1999.
By Segment.
Concepts Direct's gross margin increased to 42% in the third quarter of 2000
from 36% in the same period of 1999 and increased to 41% during the first nine
months of 2000 compared to 37% for the same period of 1999. These increases
arose because of the increased sale of high margin paper products in 2000
compared to the same period in 1999. During the third quarter of 2000, sales
of paper products accounted for 54% of product sales compared to 45% in the
third quarter of 1999. Although paper product sales will account for a
smaller percentage of total sales in the fourth quarter of 2000, management
anticipates that the trend toward higher levels of paper sales as a percent of
total sales compared to the same period of 1999 will continue. Also, in the
first nine months of 1999, approximately 4% of the total Concepts Direct cost
of product and delivery was attributable to provisions for losses in inventory
values, compared to -1% in the same period of 2000.
iConcepts' product and delivery costs of $783,000 in the third quarter of
2000 and $188,000 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.
The third quarter of 2000 also included certain charges for severance pay and
other non-recurring costs associated with the downsizing of the iConcepts
workforce discussed above. For the nine month period ended September 30,
2000, the product and delivery costs were $2,349,000 compared to $338,000 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 support this new business.
Selling, General and Administrative Expense
Consolidated.
Selling, general and administrative costs as a percentage of sales were 52% in
the third quarter of 2000 compared to 44% in the same period in 1999. Such
costs were 46% of sales for the first nine months of 2000 compared to 45%
during the same period of 1999.
By Segment.
Concepts Direct selling, general and administrative expenses represented 48%
of net sales in the third quarter of 2000 and 40% in the third quarter of
1999. During the first nine months of 2000 and 1999, selling general and
administrative expenses represented 42% of net sales. The increase in the
third quarter is primarily attributable to a measure of softness from our
catalog mailings early in the quarter and what appears to be a late start on
the fall buying season for several of our September catalogs. While virtually
all of our September campaigns have improved during October and early
November, these sales came in too late to have a positive impact on our third
quarter. iConcepts selling, general and administrative expenses were $577,000
in the third quarter of 2000 compared to $473,000 for the same period in 1999
and $1,787,000 in the first nine months of 2000 compared to $1,370,000 during
the same period of 1999. The primary components of these costs are salaries
incurred to support administrative and marketing efforts.
Restructuring Costs
One-time, non-cash, restructuring costs of $417,000 were incurred by iConcepts
during the third quarter of 2000. These charges related to certain
capitalized software and website development costs, the value of which
management believes have been impaired as a result of management's plans to
significantly scale back the Consolidated Company's Internet initiatives.
Other income (expense)
Consolidated.
Other income (expense) was an expense of $286,000 for the third quarter of
2000 and $123,000 in the same period of 1999. Other income (expense) was an
expense of $499,000 during the first nine months of 2000 compared to an
expense of $266,000 during the same period of 1999. Excluding a $96,000
one-time charge incurred by iConcepts, discussed below, Other income (expense)
consists primarily of interest expense, interest income and vendor payment
discounts.
By Segment.
iConcepts incurred a one-time charge to expense of $96,000 in the third
quarter of 2000 related to writing off an equity investment in a Company with
which iConcepts was undertaking a joint venture business development project.
iConcepts also incurred $3,000 of interest expense during the third quarter of
2000 and $11,000 of interest expense during the first nine 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 third
quarter or the first nine months of 2000. The Consolidated Company had an
income tax benefit of $320,000 in the third quarter of 1999 and an income tax
benefit of $908,000 during the first nine 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 such carryforward is 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. A major objective of
Concepts Direct will be to produce improved catalog contribution and
performance and to continue certain cost control measures such as prospecting
loss limits on the quality of catalog performance. This may restrict the
development of new catalogs until earnings and cash flows are consistent with
levels that management believes are appropriate to support development costs.
During 2000, Concepts Direct plans 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. Management anticipates that future losses
associated with the operation of iConcepts will be greatly reduced from the
levels experienced in the first nine months of 2000.
Although management anticipates the fourth quarter of 2000 to be at least
modestly profitable, management anticipates losses for the Consolidated
Company for the year, primarily because of the incurred and anticipated losses
of iConcepts and BOTWEB.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Company had no cash or cash equivalents at September 30,
2000.
In early November 2000, the Consolidated Company completed the refinancing of
its corporate headquarters and fulfillment center in Longmont, Colorado
through the sale of the facility to a real estate investment partnership for
$11,000,000. The Consolidated Company will continue to occupy the facility
under the terms of a twenty-year lease and will retain a 25% ownership
interest in the building as a limited partner in the partnership.
Also in early November 2000, the Consolidated Company entered into a contract
to sell approximately 100 acres of undeveloped land adjacent to its facility
to a local non-profit organization for approximately $4,000,000. The
Consolidated Company will retain ownership of approximately 20 acres of
undeveloped land for future expansion or sale. This transaction is scheduled
to close prior to the end of the year. Since purchasing the land in 1997, the
Company has planned on disposing portions of the property at the appropriate
time.
Net proceeds from both sale transactions will be used to retire outstanding
debt, fund continuing operations and support planned growth.
Management believes that such funds, and funds generated from on-going
operations will be sufficient to operate the business at its current levels
and support a reasonable level of growth for Concepts Direct. Such funds will
not be sufficient to consider making significant future investments in the
operations of iConcepts.
Management anticipates that no funds will be available to the Consolidated
Company through debt financing until at least sometime in 2001.
Cash and cash equivalents decreased by $1,231,000 in the first nine months of
2000 and decreased by $4,070,000 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 nine months of 2000 and 1999 included:
* Net losses from continuing operations of the Consolidated Company of
$3,675,000 and $1,773,000 negatively affected cash and cash equivalents in
the first nine months of 2000 and 1999, respectively.
* The provision for losses in inventory values of $831,000 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 $189,000 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 $1,831,000 and $969,000 in the
first nine 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 nine months of 2000 and 1999.
* Deferred advertising costs increased by $2,696,000 in the first nine months
of 2000 and decreased in the same period of 1999 by $200,000. These
fluctuations primarily related to the timing of distribution of Concepts
Direct's catalogs and prepayments made to certain vendors in 2000 to support
advertising activities in the fourth quarter of 2000.
* Inventories increased $135,000 in the first nine months of 2000 and
decreased by $628,000 in the first nine 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 $3,546,000 in the first nine months of 2000
and decreased by $601,000 in the same period of 1999. The increase in 2000
primarily related to the delaying of payments to certain vendors in the
second and third quarters 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 $659,000 and $2,709,000 in the first nine 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.
* The acquisition of the assets of the Music Stand catalog in 1999 for
$1,923,000.
* Significant items of financing included borrowings of $4,750,000 against the
Consolidated Company's revolving line of credit in the first nine months of
2000 and repayments of $1,750,000 against such borrowings during the same
period. Payments of $1,396,000 and $1,580,000 were made against other credit
facilities in the first nine months of 2000 and 1999, respectively.
* The discontinued operations of BOTWEB used $2,207,000 and $424,000 of cash
and cash equivalents in the first nine 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 and Internet sites;
* 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 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 Concept Direct's order
fulfillment systems;
* lack of effective performance of the iConcepts e-commerce infrastructure;
* inability to increase 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 September 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: November 14, 2000 By: /s/ J. Michael Wolfe_______________
J. Michael Wolfe
Chief Executive Officer
Date: November 14, 2000 By: /s/ David H. Haddon______________
David H. Haddon
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer of the
Registrant)
