SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES 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 of (IRS Employer
incorporation or organization) Identification No.)
2950 Colorful Avenue, Longmont, Colorado 80504
(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (303) 772-9171
_______________________________________________
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
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 ___
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 7, 2002 was
approximately $2,020,964. This figure was calculated as follows:
The number of shares beneficially owned by executive officers and
directors of the registrant as a group and by persons known to the
registrant to be beneficial owners of more than 5% of the
outstanding common stock of the registrant was subtracted from the
total number of shares outstanding. The resulting figure was then
multiplied by the average of the bid and asked prices of the
registrant's stock in the over-the-counter market on March 7,
2002. The foregoing calculation should not be deemed an admission
that any of the officers and directors of the registrant or any
holder of more than 5% of the outstanding common stock of the
registrant is an "affiliate."
The number of shares outstanding of the registrant's Common Stock
as of March 7, 2002 was 4,923,538.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be
filed pursuant to regulation 14A for its annual meeting of
shareholders scheduled for May 8, 2002 are incorporated by
reference into Part III.
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Par. 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
PART 1
ITEM 1. BUSINESS
General
Concepts Direct, Inc. ("Concepts Direct" or "the Company") is a
direct retailing company, headquartered in Longmont, Colorado.
From 1988 to 1992, operations were conducted in the Consumer
Products division of Wiland Services, Inc. ("Wiland Services"),
which provided a variety of database management, list processing
and marketing research services to direct marketing companies.
The Company was organized as a Delaware corporation in May 1992
and began operations under its name on September 30, 1992, as a
result of a spin-off from Wiland Services. Since its inception,
Concepts Direct's primary focus has been on utilizing its direct
marketing expertise and its database to produce multiple
independent revenue streams from multiple marketing vehicles.
Today it owns and operates five catalog titles, their associated
websites and related niche marketing vehicles.
In early 2000, after a period of extensive Internet infrastructure
development activity, the Company moved certain of its technology
assets and liabilities to two wholly-owned subsidiary corporations
called iConcepts, Inc. ("iConcepts") and BOTWEB, Inc. ("BOTWEB").
This reorganization was accomplished to enhance focus of the
companies on their various missions and goals and to better
communicate the status of each company to investors.
During the second half of 2000, as a result of greater than
anticipated losses and lack of available third party capital to
support continued expansion of the two Internet companies, the
Company significantly scaled back its planned Internet
initiatives. This resulted in the discontinuance of BOTWEB and
the elimination of all on-going expenditures associated with
BOTWEB. The operations of iConcepts were discontinued and
absorbed back into Concepts Direct to support only the on-going
operations of the catalog business of Concepts Direct.
Concepts Direct operates the established catalog business and
associated Internet sites. Concepts Direct's five primary direct
marketing vehicles are the "Colorful Images(R)," "Linda
Anderson(R)," "Snoopy(R) etc.," "Linda Anderson's Collectibles(R)"
and "the Music Stand(R)" catalogs. Through these media and related
Internet sites, it sells personalized paper products and a diverse
line of merchandise, including collectibles, gift items, home
decorative items and casual apparel. Two primary strengths of
Concepts Direct are its proprietary database (consisting of
approximately 12.8 million customers, catalog requesters, catalog
referrals and gift recipients as of December 31, 2001) and its
direct marketing expertise.
Financial Information about Foreign and Domestic Operations and
Export Sales
Identifiable assets are attributable entirely to domestic
operations. There are no foreign operations, but Concepts Direct
does advertise in Canada and may do so again in the future. In
June 2001, the Company began receiving orders outside the United
States. For the twelve months ended December 31, 2001, the
Company recognized sales of $142,282 through its marketing efforts
into Canada and an additional $9,145 to other foreign countries.
Strategic Focus
The strategic focus of Concepts Direct is to prudently increase
revenues and earnings through the successful operation of its
catalogs and related Internet sites. It may also launch, acquire
or license additional catalogs when timing and capital make it
appropriate to do so. In December 2001, Concepts Direct signed a
license agreement with PAWS, Inc. for the exclusive right to
produce, distribute and advertise the Garfield Stuff catalog and
Internet store.
The principal strategies for achieving the Company's current goals
are as follows:
* Concepts Direct employs an analytical approach to
prospecting for new customers which emphasizes list testing
and segment analysis, adherence to list performance guidelines
and the recognition of the long-term value of a customer.
* Concepts Direct seeks to maximize effective use of its
proprietary database. In addition to recency, frequency of
purchase and other monetary data typically used in database
direct marketing, Concepts Direct also collects information
concerning the types and themes of merchandise purchased by
its customers. The use of this data, in conjunction with
purchase history data such as latest order date and order
size, facilitates selections from the database and product
offerings that are suited to the styles and tastes of
customers. This information is used to determine which names
from Concepts Direct's database are to be selected for
subsequent marketing contacts.
* Concepts Direct plans to effectively manage the circulation
of its catalogs and marketing offers. Concepts Direct
believes that its list testing strategy, evaluation of
performance data and recognition of the long-term value of a
new customer have been significant contributing factors to its
success in expanding and contracting circulation in various
business environments. As response rates allow, Concepts
Direct may attempt in 2002 to increase circulation and enlarge
its proprietary database more rapidly than in 2001.
* Concepts Direct believes that it enjoys strong brand
recognition and customer loyalty for its catalogs. As a
result, Concepts Direct intends to leverage its proprietary
database and understanding of product preferences of its
primary audience by introducing new complementary catalog
offers under existing catalog brand names. Colorful
Images(R) and other Concepts Direct catalogs have produced a
database comprised in part of customers who have purchased
many different product types. This database provides an
opportunity to launch new marketing programs under the
umbrella of the various catalog titles, targeted to address
these particular interests.
* Concepts Direct plans to leverage its fulfillment
infrastructure, its direct marketing expertise and
technological expertise to market products via e-commerce
sites. Concepts Direct believes that it can use certain
e-commerce advantages such as ease of ordering, constant
availability to the consumer and cost effective means of offer
presentation to achieve a significant retailing presence via
electronic media.
* Concepts Direct may seek to acquire catalog assets, license
the rights to catalog titles or launch new catalogs leveraging
its existing infrastructure. Such efforts will only occur if
it is complimentary to the Company's existing strategy and
when market timing and the availability of capital make it
appropriate to do so.
Customer Database
The Concepts Direct proprietary database stores information on
each customer. The information is derived primarily from customer
transactions and is updated as new transactions are recorded.
Concepts Direct also conducts prospect mailings to rented and
exchanged mailing lists obtained from other companies and sources.
The use of rented and exchanged mailing lists is expected to be a
component of future efforts to obtain new customers and add them
to the proprietary database. During 2001, Concepts Direct mailed
over 48 million copies of its catalog titles.
At the end of 2001, the proprietary database contained
approximately 12.8 million customers, catalog requesters, catalog
referrals and gift recipients, approximately 1.3 million had
placed orders during the last fiscal year. The database has grown
substantially during the past four years, increasing from 7.7
million names at the end of 1997 to 12.8 million names at the end
of 2001. The 1999 acquisition of the assets of the Music Stand(R)
catalog added approximately 2.1 million names to the database.
Information contained in the customer database assists in
determining which offers customers are to receive and the
frequency of those offers.
Concepts Direct selects from its database the individuals it
believes are most likely to respond to a particular merchandise
offer, thus maximizing sales while managing costs as a percent of
sales. Concepts Direct believes that its ability to analyze its
database and select recipients for a particular direct marketing
campaign are significant factors in its growth. Various
indicators, including frequency and size of order, date of last
order, and style and theme of products purchased are utilized to
direct specific catalog mailings to those most likely to purchase
its merchandise. The customer database is updated in a real time
environment.
Marketing Lines
Concepts Direct not only markets to its customer database but also
exchanges lists with and rents lists from other direct marketers
in order to gain new customers. Concepts Direct is also
developing an Internet presence that makes its products available
to customers and prospects.
Concepts Direct currently markets its products primarily under
five catalog titles:
1. Colorful Images(R)
Colorful Images(R) is the trade name under which Concepts
Direct markets its line of personalized labels,
personalized notepads, various other personalized paper
products and general merchandise such as T-shirts and
collectibles. Colorful Images(R) creates its own designs,
purchases styles and designs from outside sources and
licenses certain images on a royalty basis.
The Colorful Images(R) line of personalized self-adhesive
labels is one of the largest assortments of such products
available from any company. There are over 1,800 different
label choices appropriate to popular interests, most
regions of the country, hobbies, professions and
lifestyles. In addition, labels are available with popular
licensed characters such as Snoopy(TM), other PEANUTS(R)
characters and Boyds Bears(R).
The primary marketing vehicle utilized to sell
Colorful Images(R) products is a digest-sized catalog
(measuring approximately 5" x 7 1/2") with price points
typically ranging from $6.95 to about $60.00, excluding
shipping and handling.
Although certain segments of the Colorful Images(R) customer
database may prefer one product line or the other,
generally all customers receive the same version of the
catalog. During 2001, the Company mailed the core
Colorful Images catalog to customers and prospects nine
times versus seven core mailings in 2000.
In addition to the core catalog mailings, the Company
continued to test, during various points in 2001, niche
catalog versions. These niche versions attempt to match a
more narrowly focused product selection to carefully
targeted and selected customers and prospects, who had
demonstrated an affinity to certain themes of merchandise.
As a result of the successful niche versions test, the
Company expects to continue the niche Colorful Images(R)
mailing strategy, as well as mailing the core catalog
version in 2002.
Colorful Images(R) continues to be a successful catalog.
During 2001, Colorful Images(R) produced sales growth in
excess of 12.0% over 2000 levels as a result of higher
customer prospecting and increased catalog circulation.
During 2000, Colorful Images(R) produced modest growth in both
sales and catalog circulation above 1999 levels.
Management anticipates that Colorful Images(R) will continue
to produce a significant contribution to profitability and
general and administrative costs and anticipates continued
growth in 2002.
ColorfulImages.com, featuring a full array of Colorful
Images(R) products was launched in late 2000. Management
believes that it is less expensive to process orders
received via the website and will encourage customers to
place orders at ColorfulImages.com. Management intends to
pursue various "percent of sales" marketing arrangements
with other organizations to affordably attract new
customers via the Internet.
2. Linda Anderson(R)
Linda Anderson(R) markets an assortment of gifts, home
decorative merchandise and casual apparel, generally at
higher price points than Colorful Images(R). This
merchandise is offered through the Linda Anderson(R)
catalog and at LindaAnderson.com. Price points for Linda
Anderson(R) merchandise typically range from about $9.00 to
about $175.00, excluding shipping and handling.
Approximately 77,000 customers placed orders through the
Linda Anderson(R) catalog in the twelve month period ended
December 31, 2001, compared to more than 107,000 in 2000.
This decrease was a result of lower catalog circulation
levels in 2001 versus 2000. In late 1999, the Company
reduced the level of investment in acquiring new customers
by reducing the prospecting loss per mail cycle. This
decision reduced the number of new customers acquired
during both 2000 and 2001 and reduced overall sales for the
catalog. The Company plans to increase catalog
circulation for Linda Anderson(R) to both customer prospects
and existing customers in 2002 in order to revive growth in
the business.
New customers of the Linda Anderson(R) catalog have responded
to our other catalogs at a favorable rate. Because of
this, during 1998 and the first half of 1999, Linda
Anderson(R) invested heavily in prospecting for new
customers. While this effort produced a significant number
of new customers, the financial investment was substantial.
LindaAnderson.com was launched in June of 1999, as our
first Internet retailing site. It offers a wide range of
current and past products from the Linda Anderson(R) catalog
and the Linda Anderson's Collectibles(R) catalog.
Management is pleased with these results and will attempt
to increase Internet sales to customers and prospects in a
profitable manner.
3. Linda Anderson's Collectibles(R)
Linda Anderson's Collectibles(R) was launched in 1997
featuring an extensive line of collectible merchandise and
information about collecting and the lines represented.
During 2001, catalog circulation was increased over 2000
levels increasing the total number of customers to
239,000 at the end of 2001 versus 213,000 at the end of
2000. Total Linda Anderson's Collectibles(R) customers, at
the end of 1999, were about 176,000.
During 1999, a strategic decision to decrease the level of
investment in acquiring new customers by reducing the
prospecting loss per mail cycle was implemented. As a
result, the number of active twelve-month customers
decreased from December 31, 2000 to December 31, 2001.
Active twelve-month customers as of December 31, 2001 were
33,000, down from 38,000 at December 31, 2000. Total Linda
Anderson's Collectibles(R) active twelve-month customers were
49,000 at the end of 1999. Concepts Direct expects to
increase Linda Anderson's Collectibles(R) catalog circulation
and prospecting activity in 2002, resulting in higher sales
over 2001 levels.
The LindaAnderson.com site offers current and past products
from the Linda Anderson's Collectibles(R) catalog. In order
to enhance the brand's Internet presence, a dedicated site
may be developed in the future. Catalog mailings currently
direct consumers to LindaAnderson.com.
4. Snoopy(TM) etc.
Operating under an agreement with United Feature Syndicate,
Concepts Direct has developed a catalog consisting
exclusively of merchandise featuring Snoopy(TM) and the other
PEANUTS(R) characters. The merchandise in the catalog is a
combination of items from licensed manufacturers and items
designed exclusively for the catalog. A royalty on sales
generated by the catalog is paid to United Feature
Syndicate.
Product price points in the Snoopy(TM) etc. catalog are
generally between $7.95 and $940.00 per item. Since 1996,
Concepts Direct has had a license to feature PEANUTS(R)
characters on personalized label products and has
accumulated information on its proprietary database
concerning buyers of PEANUTS(R) personalized label products
and other PEANUTS(R) merchandise sold in its catalogs.
Catalog circulation of the Snoopy(TM) etc. catalog increased
over 32% to over 1.9 million catalogs. As a result of
increased prospecting activity in 2001, total Snoopy(TM) etc.
catalog customers increased to 329,000 at the end of 2001
versus 252,000 total customers at the end of 2000.
Concepts Direct expects to continue to invest in new
customer prospecting of the Snoopy(TM) etc. catalog in 2002.
In late 1999, Peanuts creator, Mr. Charles M. Schulz,
announced his planned retirement for early 2000. Mr.
Schulz passed away in early 2000. Following the untimely
passing of Mr. Schulz, all our license arrangements remain
in place and consumer interest in the brand remains strong.
In late 2000, we launched SnoopyStore.com, featuring
products from the Snoopy(TM), etc. catalog. In addition to
functioning as a stand-alone website, SnoopyStore.com also
serves as the "store" for Snoopy.com, the official website
managed by United Feature Syndicate.
5. the Music Stand(R)
In June 1999, Concepts Direct purchased substantially all
of the assets of the Music Stand(R) catalog. The catalog
is a well established title with a loyal following of
customers, some of whom have been purchasers for up to
twenty years. The acquisition included primarily the
customer database and inventory of the catalog.
Two editions of the Music Stand(R) catalog were mailed in the
fall of 1999 and five editions in 2000. Results from the
1999 mailings were encouraging, generating a positive
contribution to profit and general and administrative
costs. Results from 2000 mailings were somewhat
disappointing. In 2001, new customer prospecting efforts
increased modestly, improving the base of active customers
throughout 2001. The Company expects modest top line
improvement for the Music Stand(R) in 2002, as a result of
increased circulation to existing customers and to outside
prospects.
During late 1999, theMusicStand.com web site was launched.
Product Lines
Approximately 99% of the Company's 2001 net sales are attributable
to product sales directly to individual consumers of the five
catalog brands and NewBargains.com. The Company's two major
product lines are personalized paper products and gift, home decor
and other merchandise items.
Personalized paper products, which generally have product costs
less than 15% of the product sales price, accounted for
approximately 54% of direct to consumer product sales in 2001.
With the exception of personalized checks, all of the Company's
personalized paper products sold are stocked and shipped directly
to customers from the Company's headquarters and fulfillment
facility in Longmont, Colorado.
Gift, home decor and other merchandise items, which generally have
product costs in excess of 30% of the product sales price,
accounted for about 46% of direct to consumer product sales in
2001. Approximately 98% of the gift, home decor and other
merchandise items sold are stocked and shipped directly from the
Company's headquarters and fulfillment facility in Longmont,
Colorado. The remaining product is shipped directly to consumers
by third party vendors.
Licensing and Service Marks
Federally registered service marks exist for each of the five
Concepts Direct catalog titles, except Snoopy(TM), etc..
Registered service marks for other business concepts and catalog
titles may be applied for in the future.
Concepts Direct has developed certain artwork used in its labels
and other products. In addition, the Company has purchased or
licensed rights to certain artwork from third parties, generally
for a period of at least three to five years. Certain rights are
also licensed on a royalty basis, including PEANUTS(R), Boyds
Collection Ltd.(R), Dreamsicles(R) and others. Management
anticipates the licenses and royalty arrangements may be renewed
or replaced, as appropriate, with minimal disruption to ongoing
operations.
Concepts Direct relies on technology that is licensed from third
parties, including software integrated with internally developed
software to perform key functions. These third party licenses may
not continue to be available on commercially reasonable terms.
Management believes that technology licensed from third parties
can be replaced with minimal disruption to the Company's
operations from a number of other vendors.
Product Liquidation
Concepts Direct liquidates its overstock inventory via vendor
returns, the Company's two retail outlet stores and the
NewBargains.com liquidation website.
The Internet retailing site NewBargains.com was launched in
January 2000 and is one of several liquidation channels used by
the Company to liquidate excess inventory. The site currently has
over 2,000 products available at prices ranging from 25% to 85%
off of the original retail price. Products offered at the site
are first quality and generally in the original packaging from the
vendor. The site encourages bargain-seeking consumers to visit
the site often. Consumers are encouraged to review the "daily
specials," "deepest discount" and other featured products. All
products available at NewBargains are excess inventory items of
Concepts Direct.
Materials and Inventory
Product inventory is purchased from numerous domestic
manufacturers and several importers and domestic representatives
of foreign manufacturers. Domestic sources supply essentially all
of the gift and apparel merchandise. Purchase arrangements with
suppliers are generally for a specified product, price and
quantity of product. While Concepts Direct purchases the base
paper stock for most of its personalized labels from a few
vendors, management believes alternative vendors are available, if
needed. The remainder of the product line and material used in
the production of catalogs are available from many different
sources.
Except for a few specialized items that are drop shipped directly
from suppliers, Concepts Direct maintains an inventory of the
products it sells. Most items offered at the Company's Internet
sites are from the Concepts Direct inventory. Concepts Direct
analyzes past catalog mailings, evaluates probable customer buying
patterns and projects sales levels for new products, to try to
avoid committing excessive amounts of working capital to inventory
for substantial periods of time. During the fourth quarter of
1997, gift and merchandise backorder levels rose to an
unsatisfactory level primarily as a result of a few vendors'
inability to meet Company product demand in a timely fashion. In
the fourth quarter of 1998, the Company was successful in
minimizing the backorder problems that occurred in the fourth
quarter of 1997. In the process of correcting the backorder
problem, inventory levels increased significantly over historic
levels. Efforts were made in 1999 continuing through 2001 to
reduce the level of inventories relative to demand expectations.
Gift and apparel inventory liquidation processes include product
exchange agreements with vendors, sale of outdated products
through small retail outlets and discarding of some items.
Concepts Direct Internet retail sites also offer channels to
market merchandise not currently offered in catalogs.
Concepts Direct spends significant amounts on paper used in the
production of its catalogs and paper products. The cost of paper
fluctuates. In the last half of 1996 and early 1997, the cost of
paper used to produce Concepts Direct catalogs was lower than in
previous periods. Accordingly, the cost of doing business during
these periods was lower. Paper costs increased during the latter
part of 1997 and in early 1998 and declined near the end of 1998.
Paper costs remained relatively stable in 1999, but again
increased in 2000. Throughout 2001, paper prices declined quarter
over quarter and ended the year at levels below 1999 levels.
While Concepts Direct cannot predict future paper cost increases,
such increases would have an impact on future earnings. However,
the Company maintains a purchase agreement through 2002 at prices
that the Company believes are advantageous.
Order Fulfillment
Orders for merchandise are received by mail, telephone, Internet
and facsimile. All orders are received and processed at a single
location in Longmont, Colorado. The ability to timely fulfill
orders, especially during the peak pre-Christmas season, is
important to success. This ability depends, in part, on the
availability of part-time employees who have adequate training
before the peak of the holiday season and the efficiency of the
in-house telephone call center. During 2001, approximately 45.9%
of customer orders were received by telephone, 35.4% by mail or
facsimile and 18.7% via the Internet.
Gross order backlog was approximately $1,360,000 and $821,000 as
of December 31, 2001 and 2000, respectively. This backlog
represented approximately 10.6 days of order shipments subsequent
to December 31, 2001. The Company expects that in excess of 25%
of the year-end backlog may not be fulfilled in 2002. The level
of order backlog fluctuates with seasonal sales patterns as
discussed above.
Customers generally pay in advance for merchandise ordered and
associated shipping and handling. Orders are shipped via the
United States Postal Service (USPS) and other carriers. Priority
or express service is available for an extra charge.
USPS implemented a significant price increase in early 2001 and
has announced plans for another price increase in mid 2002. While
Concepts Direct cannot predict future postage costs, such
increases could have a material impact upon its future operating
and financial results.
Customer Service
Great emphasis is placed on customer service. A return policy
attempts to guarantee customer satisfaction and to encourage first
time and repeat orders. The retail value of refunds issued under
the return policy in 2001 was approximately 3.1% of net sales. If
returned merchandise cannot be restocked, it is returned to the
manufacturer if defective, held for disposal in inventory
liquidation processes described above under "Materials and
Inventory" or discarded. Product and order problem inquiries are
directed to customer service personnel who are trained to resolve
most customer issues.
Seasonality
The Concept Direct business is seasonal. Historically, a
substantial portion of revenues and net income has been realized
during the fourth quarter. Management believes this is the
general pattern associated with the mail order and retail
industries. Accordingly, inventory of both paper products and
gift and apparel merchandise is typically increased during the
Christmas holiday season to accommodate anticipated increases in
sales. In 2001, approximately 22%, 18%, 20% and 40% of sales were
recognized in the first quarter, second quarter, third quarter and
fourth quarter, respectively.
Competition
Direct marketing is highly competitive. Thousands of companies
offer products via catalog, direct mail, newspaper inserts,
television, the Internet and other media. Concepts Direct
competes on the basis of the quality, diversity and price of
merchandise offered, customer service and effectiveness of
customer targeting.
Management believes that, although many companies offer
personalized labels, note pads and note cards, there are only a
few companies that offer a broad variety of personalized labels
comparable to that offered by Colorful Images(R), which management
believes is a competitive advantage. Other merchandise product
lines face greater competition in the marketplace than paper
products. A substantial number of competitors distribute catalogs
that contain portions of the merchandise contained in Concepts
Direct's catalogs. In addition, certain merchandise sold in the
Company's catalogs is available through retail stores and other
sources.
Management believes that e-commerce is becoming a significant
force in the marketplace in which it operates. Management also
believes that the Internet retailing sites supporting its catalog
brands compare favorably to sites operated by competitors.
Certain current and potential competitors have significantly
greater development, order fulfillment, marketing and capital
resources and name recognition than Concepts Direct.
Employees
As of December 31, 2001, there were approximately 168 full-time
employees, 33 supported creative and marketing functions, 92
supported fulfillment operations, 12 supported information
technology functions and 31 supported other administrative
functions. In addition, there were 50 part-time employees
supporting fulfillment operations. Additionally, the Company
employs a seasonal workforce of part-time employees for peak
periods of the year. The employees are not covered by collective
bargaining agreements. The Company considers its relationship
with its employees to be satisfactory.
Government Regulations
The Company must comply with federal, state and local laws that
affect its business. In particular, Concepts Direct is subject to
Federal Trade Commission regulations governing advertising and
trade practices. While the Company believes it is currently in
compliance with such regulations, in the event of noncompliance,
we may be subject to injunctive proceedings, cease and desist
orders, civil fines and other penalties.
Concepts Direct has historically collected and remitted sales and
similar taxes only in those states in which it operates a
location. In recent years, a number of states have asserted that
advertising by a corporation within their borders provides
sufficient nexus to require the collection and remittance of such
taxes. In a decision rendered on May 26, 1992, the United States
Supreme Court held that application of North Dakota's use tax
statute against an out-of-state mail order house with neither
sales representatives nor outlets in the state placed an
unconstitutional burden on interstate commerce. However, the
Court also noted that Congress may be better equipped to resolve
the issue presented by the case. If Congress should pass
applicable legislation, it could have an impact on the future
operations of Concepts Direct. The actual impact would depend on
the specifics of any such legislation.
Some states also require residents of the state who purchase
products by mail order to remit to the state the state sales tax
that would be collected by the merchant if the product was sold
from a location within the state. To date, this type of
legislation has not had a material impact.
Internet Infrastructure and Database Management Software
A key asset of the Company is its database management, fulfillment
management and Internet infrastructure software known as DASH.
This software has been developed and enhanced by the Company over
several years. The current release of DASH is fully integrated
with our established order fulfillment software. The software is
stable, proven and designed to serve many companies. Purchasing,
general ledger, receiving, warehousing, order fulfillment,
shipping, marketing reporting, Internet site development and
hosting are all integrated in DASH. The Company may gradually add
a variety of new features in the future.
Segment Reporting
During 2001, the Company's operations were entirely within the
Concepts Direct operating segment.
During 1999 and 2000, the Company managed its operations in three
operating segments. The results of operations and assets of each
segment are listed in the audited financial statements included in
Item 8 of this filing. Further description of the Company's
segments is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7
of this filing.
ITEM 2. PROPERTIES
Real Property
The Company's corporate headquarters, administrative offices and
operations are located in Longmont, Colorado, approximately 40
miles from downtown Denver. The Company believes that the
facilities it occupies are well maintained and in excellent
operating condition. The Company purchased approximately 139
acres of undeveloped land in January 1997 and developed and
constructed the current headquarters on approximately 11 acres of
the site. In late August 1997, the Company moved essentially all
of its operations to the new facility. In 2000, the Company sold
all but about 20 acres of the undeveloped land. The remaining
undeveloped land is being held for future expansion and/or
financing opportunities.
During 2000, the Company raised approximately $11,000,000 through
the sale and subsequent leaseback arrangement in which the
Company's primary facility in Longmont, Colorado was sold to a
real estate investment limited partnership. In connection with
this transaction, the Company purchased a 25% interest in the
limited partnership for $625,000 and deposited $1,010,000 with the
limited partnership as a security deposit, providing security to
the limited partnership for the Company's future performance under
the lease. The twenty-year lease, requires monthly lease
payments, including annual lease escalations of at least 3% per
year. As a result of the 25% retained interest in the limited
partnership, the lease transaction was treated as a financing
transaction for accounting purposes due to the Company's
continuing involvement with the limited partnership through the
third quarter of 2001. Accordingly, the building, land and
associated transaction costs were capitalized as an asset of the
Company and the proceeds from the sale/leaseback were recorded as
debt financing. During the fourth quarter of 2001, the Company
sold its 25% retained interest in the limited partnership, thus
eliminating the partnership's assets and corresponding long-term
liability from the Company's balance sheet. The Company now
accounts for the transaction under sales-leaseback accounting.
The Company will account for the lease as an operating lease and
recognize a deferred gain from the sale of the property ratably
over the remainder of the lease term. The sale of the 25%
retained interest generated approximately $825,000 of cash for the
Company.
The following table sets forth the primary real property that the
Company owns and leases.
Location Function Lease Expiration 2002 Rent Square Feet
Longmont, CO Headquarters 10/31/2020 $1,280,393 117,000
Longmont, CO Retail Outlet 2/28/2003 $ 37,221 1,700
Loveland, CO Retail Outlet 10/31/2002 $ 32,000 2,400
Mead, CO Warehouse 9/30/2002 $ 141,750 27,500
Fulfillment Hardware and Software
Substantially all of Concepts Direct's order fulfillment hardware
is located at its headquarters facility, and except for certain
computer and telephone hardware, is owned by Concepts Direct.
Concept Direct believes that the existing hardware should
accommodate its near-term growth strategy.
The primary computer hardware is manufactured by Sun Microsystems,
Inc, Cisco Corporation and Data General Corporation. Concepts
Direct currently uses an internally developed order processing
system and Internet infrastructure developed using Oracle as the
primary software platform. The Company anticipates that the
current software with minor additions and modifications should
accommodate its near-term growth strategy.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation which management
believes is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerning the current executive
officers of the Company is included in this report pursuant to
General Instruction G (3) of Form 10-K. No person other than
those identified below has been chosen to become an executive
officer of the Company. The executive officers serve at the
pleasure of the Board of Directors. No family relationships exist
among the executive officers of the Company.
Phillip A. Wiland, 55, Chairman of the Board of Directors
since December 18, 1992. Chief Executive Officer from July
31, 2001 until present and from December 18, 1992 to February
24, 2000.
Cody S. McGarraugh, 29, Vice President, Finance, Chief
Financial Officer, and Secretary since January 7, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Market and Price Information
The Company's common stock, par value $.10 (the "Common Stock"),
is currently traded on the Nasdaq SmallCap Market under the symbol
CDIR. The following table sets forth the high and low sale prices
per share of the Company's Common Stock for the periods indicated.
Period High Low
Calendar 2000
1st Quarter $15.25 $9.25
2nd Quarter 12.00 7.06
3rd Quarter 9.00 1.75
4th Quarter 3.50 1.56
Calendar 2001
1st Quarter $ 4.13 $2.44
2nd Quarter 5.25 2.30
3rd Quarter 3.50 2.24
4th Quarter 4.15 1.46
Number of Shareholders
As of March 7, 2002, there were approximately 108 record holders
of the Common Stock, according to the Company's stock transfer
agent and registrar and approximately 83 round lot beneficial
holders.
Dividends
Except for the distribution of proceeds from the disposal of the
Company's Direct Marketing Services division in 1992, no cash
dividends have been paid on the Common Stock. Earnings will be
retained for use in the business and management does not
anticipate paying any cash dividends in the foreseeable future.
Payment of dividends is within the discretion of the Board of
Directors, which periodically reviews the dividend policy,
considering the Company's earnings, capital requirements, and
financial condition, among other factors.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
2001 2000 1999 1998 1997
(amounts in thousands except per share data)
INCOME STATEMENT DATA
Net sales $55,757 $55,453 $55,475 $84,773 $78,489
Operating income (loss) from continuing
operations (2,316) (1,515) (3,539) (1,979) 2,075
Income (loss) from continuing operations
before income taxes (3,119) 52 (3,914) (2,030) 2,490
Income (loss) from continuing operations (3,119) 52 (3,125) (1,378) 1,615
Loss from discontinued operations - (2,786) (503) - -
Net income (loss) (3,119) (2,734) (3,628) (1,378) 1,615
Basic earnings (loss) per share
Income (loss) from continuing operations $ (0.63) $ 0.01 $ (0.63) $ (0.28) $ 0.36
Loss from discontinued operations - (0.56) (0.10) - -
Total $ (0.63) $(0.55) $ (0.73) $ (0.28) $ 0.36
Diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.63) $ 0.01 $ (0.63) $ (0.28) $ 0.33
Loss from discontinued operations - (0.56) (0.10) - -
Total $ (0.63) $(0.55) $ (0.73) $ (0.28) $ 0.33
Weighted average common shares 4,983 5,003 4,977 4,959 4,528
Weighted average common shares and
dilutive stock options 4,983 5,003 4,977 4,959 4,828
Cash dividends declared per common share $ - $ - $ - $ - $ -
BALANCE SHEET DATA
Current assets $13,112 $12,087 $10,205 $19,237 $28,223
Current liabilities 7,024 5,566 7,371 8,554 15,079
Total assets (1) 18,399 27,632 26,078 32,073 40,378
Long-term debt and capital lease
obligations (1) (2) - 10,945 6,321 6,858 7,081
Deferred gain (1) 3,548 - - - -
Stockholders' equity 7,810 11,156 13,889 17,440 18,813
(1) ITEM 2 (Properties) describes the accounting impact to
the property and equipment and debt classifications resulting
from the sale of an investment in a real estate limited partnership.
(2) Includes current and long-term portions of debt and capital
lease obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and
Results of Operation ("MD&A") explains the results of operations
of Concepts Direct, Inc. (the "Company"). MD&A should be read in
conjunction with the Consolidated Financial Statements.
RISK FACTORS AND CAUTIONARY STATEMENTS THAT MAY AFFECT FUTURE
RESULTS
This report contains statements concerning the Company's
expectations, plans, objectives, future financial performance and
other statements that are not historical facts.
These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
In most cases, the reader can identify these forward-looking
statements by words such as "anticipate," estimate," "forecast,"
"expect," "believe," "should," "could," "plan," "may" or other
similar word.
The Company makes forward-looking statements with full knowledge
that risks and uncertainties exist that may cause actual results
to be materially different from the results predicted. Factors
that could cause actual results to differ are sometimes presented
with the forward-looking statements themselves. In addition,
other factors could cause actual results to differ materially from
those indicated in any forward-looking statement. These factors
include changes to financial accounting principles or policies
imposed by governing bodies, industry conditions and financial
market conditions, including the availability and cost of capital.
The Company bases its forward-looking statements on management's
beliefs and assumptions using information available at the time
the statements are made. The Company cautions the reader not to
place undue reliance on its forward-looking statements because the
assumptions, beliefs, expectations and projections about future
events may and often do materially differ from actual results. The
Company undertakes no obligation to update any forward-looking
statement to reflect developments occurring after the statement is
made.
Factors that could cause the 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, including significant rate increases
experienced beginning in January 2001 and possible additional
postal rate increases requested by the United States Postal
Service;
* changes in the cost of paper used in the production of the
Company's advertising material including paper used for
catalogs;
* 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 limited
operating history for several of the Company's specialty
brands, and the Company's limited e-commerce operating history;
* lack of availability/access to capital;
* lack of availability/access to sources of supply for appropriate
inventory, forward purchasing of catalog paper, capital
expenditures, etc.;
* lack of effective performance of third party suppliers with
respect to production and distribution of catalogs;
* issues related to management transitions at the 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 sufficient numbers of employees to maintain
acceptable levels of customer satisfaction with catalog order
fulfillment services;
* inability to recruit and retain management personnel;
* lack of effective performance of customer service and the
Company's order fulfillment systems; and
* changes in strategy and timing related to testing and rollout of
new catalogs and those catalogs still in the test stage of
development.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
2001 was a year in which the Company was able to refocus on
building the infrastructure to grow its catalog titles. By
increasing the level of prospecting activity in the second half of
the year, the Company was able to revive revenue growth and
customer reactivation. Although sales declined through the first
nine months of 2001, the Company was successful increasing sales
in the fourth quarter by approximately 12.5%. Sales for the year
increased modestly to $55.8 million.
Company profitability remained depressed as a result of the fixed
overhead of the Company's facilities as a percentage of sales.
Additionally, in the fourth quarter, the Company initiated
marketing tests and increased circulation across all catalog
brands, which had the effect of increasing advertising costs as a
percentage of sales. The Company is now focused on growing all of
its brands at a controlled pace and believes that the marketing
investments made in the fourth quarter will help provide the
foundation to further develop all brands in the future.
Advertising costs as a percentage of gross product sales in 2001
were 37%.
Below is a table of key operating statistics as a percentage of
sales.
2001 2000 1999
Net sales 100.00% 100.00% 100.00%
Operating costs and expenses
Cost of product and delivery 55.62% 60.48% 66.49%
Selling, general and
administrative 48.53% 41.50% 39.89%
Restructuring costs - 0.75% -
Total operating costs and
expenses 104.15% 102.73% 106.38%
Operating loss from continuing
Operations -4.15% -2.73% -6.38%
Other income (expense) net -1.44% 2.83% -0.68%
Income (loss) from continuing
Operations before income taxes -5.59% 0.09% -7.06%
Benefit for income taxes - - 1.42%
Income (loss) from continuing
Operations -5.59% 0.09% -5.63%
Discontinued operations,net of taxes
Operating loss - -4.24% -0.91%
Loss on disposal - -0.78% -
Total loss from discontinued
Operations - -5.02% -0.91%
Net loss -5.59% -4.93% -6.54%
Results of operations for fiscal 2001, compared to fiscal 2000
Net Sales
Net sales increased modestly to $55.8 million in 2001 compared to
$55.5 million in 2000. During the first three-quarters of 2001,
the Company experienced a year over year sales decline as a result
of lower circulation volumes and reduced prospecting as compared
to the 2000 levels. Sales declined 5.1%, 12.7% and 1.3% in the
first quarter, second quarter and third quarter, respectively. In
the fourth quarter, the Company increased prospecting volumes and
circulation of catalogs over the prior year period. This resulted
in fourth quarter sales in 2001 increasing 12.5% to $22.7 million.
Sales of personalized paper products increased to 54% of total
catalog sales in 2001 versus 47% in 2000. The primary driver of
this increase was a 24.2% increase in catalog circulation for the
Colorful Images catalog, which derives the majority of its sales
from paper products.
Cost of Product and Delivery and Gross Margin
Cost of product and delivery decreased 400 basis points to 56%, as
a percentage of sales in 2001, compared to 60%, as a percentage of
sales in 2000. The improvement was a result of a paper products
price increase that was put in place in mid-2001 and the result of
a higher percent of revenues derived from the sale of personalized
paper products. Personalized paper products carry a significantly
higher gross margin than do other product categories.
Gross margin improved to 44% for all of 2001 compared to 40% for
the same period in 2000.
Sales, General and Administrative Expense
Sales, general and administrative expense increased approximately
17.6% to $27.1 million in 2001 compared to $23.0 million for all
of 2000. As a percentage of sales, SG&A expense was 49% for 2001
compared to 42% for 2000. This increase was almost entirely
driven by increased advertising expenses in the second half of the
year. For the year, advertising as a percentage of sales
increased to approximately 37% of gross product sales versus 31%
of gross product sales for all of 2000.
Operating Loss from Continuing Operations
For the year ended 2001, the Company's operating loss from
continuing operations was approximately $2.3 million versus a loss
of approximately $1.5 million in 2000.
Other Income (Expense), net
Other expenses in 2001 totaled $803,000 versus other income of
approximately $1.6 million in 2000. Other expenses in 2001 were
comprised primarily of interest expense of approximately $1.3
million offset by interest and dividend income of approximately
$311,000. In 2000, other income (expense), consisting primarily
of gains on the sale of assets, interest expense and interest
income, was income of $1.6 million.
Income Taxes
The Company recognized no income tax benefit in either of the
years 2000 or 2001.
Results of operations for fiscal 2000, compared to fiscal 1999
Net Sales
Net sales remained level at $55.5 million in 2000, which was the
same as 1999. In 1999, the sales decreased primarily because of a
reduction in total catalog circulation as compared to the prior
year. Management planned these decreases to achieve its objective
of reducing prospecting losses per mail cycle. Personalized paper
products increased as a percentage of total sales from 34% in 1998
to 41% in 1999 to 47% in 2000. The increases for personalized
paper products in 2000 and 1999 occurred primarily because of a
reduction in circulation of catalogs that primarily sold gift,
home decor and other merchandise. Circulation of the Colorful
Images catalog, which advertises a wide variety of high-margin
personalized paper products, increased during 2000, as did
associated sales from the catalog.
Substantially all of the net sales in 1999 and 2000 occurred in
the Concepts Direct business segment.
Cost of Product and Delivery and Gross Profit
Cost of product and delivery as a percentage of sales was 60% in
2000, compared to 66% in 1999. Gross profit increased by $3.3
million, or 18%, to $21.9 million in 2000 from $18.6 million in
1999.
Gross margin as a percentage of net sales was 40% in 2000
and 34% in 1999.
An increase in the Company's inventory allowance due to a
refinement in the allowance methodology in 1999 had an impact on
its gross profit during the three-year period. The increase in
gross profit in 2000 resulted primarily from the absence of an
increase in the inventory allowance in 2000 and from the increase
in personalized paper products as a percent of sales. Gift, home
decor and other merchandise items generally have higher product
costs as a percentage of sales than personalized paper products.
In 2000 and 1999, personalized paper product costs were generally
less than 15% of sales price compared to gift and merchandise
products whose costs were generally in excess of 30% of sales
price. In addition, but to a lesser degree, lower variable costs
of operations contributed to the increase in gross profit as a
percentage of sales. These lower variable costs included order
processing labor efficiencies. The amount of excess inventory on
hand at the end of 1999 was substantially reduced in 2000 through
a number of liquidation initiatives, with no significant effect on
margins. The total charge to expense for the inventory
obsolescence allowance was a credit of $114,000 in 2000.
Gross profit of Concepts Direct, the catalog business, excluding
the operations of iConcepts and BOTWEB, was 41% in 2000 compared
to 33% in 1999.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased $0.9
million, or 4%, to $23.0 million in 2000 from $22.1 million in
1999.
Selling, general and administrative expenses as a percentage
of sales were 42% in 2000 and 40% in 1999. The increase in 2000
resulted primarily from higher marketing costs as a percentage of
sales. The most significant factor in the 2000 increase in
marketing costs as a percentage of sales was the increase in paper
costs incurred for catalog production compared to such costs in
1999.
Restructuring Costs
One-time, non-cash restructuring costs of $417,000 were recorded
during the third quarter of 2000. These charges related to
certain capitalized software and website development costs, the
value of which were impaired as a result of the Company's scaling
back of its Internet initiatives in the iConcepts subsidiary.
Operating loss from continuing operations
The Company's loss from continuing operations was $1.5 million in
2000 and $3.5 million in 1999. Losses attributable to the
iConcepts business segment and the portion of the BOTWEB business
segment activities included in continuing operations were $3.1
million in 2000 and $1.4 million in 1999. Of the $3.1 million
losses from continuing operations attributable to iConcepts and
BOTWEB in 2000, all but $10,000 was incurred during the first nine
months of the year. The decrease in losses from the operations of
the subsidiaries late in 2000 reflects the Company's decision to
cancel commitments of resources to Internet initiatives not
directly in support of the operations of Concepts Direct.
Other income (expense)
Other income (expense), consisting primarily of gains on the sale
of assets, interest expense, and interest income, was income of
$1.6 million in 2000 and expense of $375,000 in 1999.
The Company realized a gain of $2.4 million on the sale of surplus
land in the fourth quarter of 2000. The Company owned
approximately 120 acres of undeveloped land adjacent to its
corporate headquarters and fulfillment facility in Longmont,
Colorado. The Company sold approximately 100 acres of the land
for approximately $3.9 million, net of closing costs. The Company
financed $880,000 of the sale price through a note receivable due
in 2003. Management does not anticipate that future years will
benefit from similar events.
Interest expense was $884,000 for 2000 and $530,000 for 1999. The
increase in interest expense in 2000 resulted primarily from
short-term borrowings caused primarily by the cash needs
associated with the Internet initiatives of iConcepts and BOTWEB.
Income taxes
The Company had an income tax benefit of $789,000 in
1999. The Company had no income tax provision or benefit in 2000.
The income tax rate of 0% in 2000, and the benefit rate in 1999 of
approximately 20%, was because of the reduction of the deferred
tax asset attributable to net operating losses generated during
those periods to a value anticipated by management to be
realizable in the near future. The 1999 income tax rate was lower
than the statutory federal and state tax rates because of the
availability of certain state income tax credits.
Business Segments
During 2001, the Company operated entirely as one operating
segment ("Concepts Direct") consisting of the catalog operations
and the corresponding websites.
During late 1999 and through the third quarter of 2000, the
Company managed and reported its operations in three business
segments - the Concepts Direct segment ("Concepts Direct"), the
iConcepts segment and the BOTWEB segment.
Concepts Direct contains the catalog brands including the
associated websites. In the new structure, the parent company,
Concepts Direct, was to focus on obtaining profitable results for
the catalog brands and the associated Internet sites.
iConcepts was established to provide technology support to
Concepts Direct, BOTWEB and, at an appropriate time, third
parties. Other services and development directions of iConcepts
were planned to include Internet site hosting and development,
online order processing, database management and the establishment
of new Internet retailing brands.
BOTWEB was to operate an Internet portal, BOTWEB.com, with a plan
to focus on developing superior portal features and services and
building significant traffic to the site. As noted above, the
Company undertook a series of actions in the third quarter of 2000
to substantially curtail the operations of its subsidiaries,
including the discontinuance of BOTWEB, Inc. and the elimination
of all on-going expenditures and activities associated with
BOTWEB.com.
The operations of iConcepts, Inc. were scaled back to support only
the on-going operations of the catalog brands of Concepts Direct,
Inc. The remaining assets and employees of iConcepts, Inc. were
incorporated back into the parent company, Concepts Direct, Inc.,
in the fourth quarter of 2000. These assets and employees had
been charged to the Concepts Direct business segment by the
iConcepts business segment during the first three quarters of
2000, as well as in 1999. The iConcepts Internet retailing sites,
excluding NewBargains.com and TheBearHouse.com, have been shut
down. NewBargains.com has been folded into the parent company as
part of the Company's continuing inventory liquidation program.
TheBearHouse.com has been retained for its potential value to the
Collectibles brand, although no efforts are currently being put
forth to maintain or enhance the site.
As noted above, certain assets and employees of iConcepts were
moved into the parent as of October 1, 2000. The parent company,
Concepts Direct, Inc. paid most of the costs associated with these
assets and employees through inter-company cost sharing
arrangements during the first three quarters of 2000.
Use of "the Company" refers to all of the segments combined.
Discontinued Operations
During 1999 and the first half of 2000, the Company engaged in
significant development efforts, with attendant significant costs,
related to various Internet initiatives. Additional employees,
equipment and services were added to promote these new business
initiatives. The costs associated with these efforts contributed
substantially to the losses in 1999 and 2000. In early 2000, the
Company moved certain of its Internet assets and activities to two
subsidiary corporations, iConcepts, Inc. ("iConcepts") and BOTWEB,
Inc. ("BOTWEB") to provide the best opportunity for investors to
understand its Internet strategy and benefit from assets that were
created to support its Internet initiatives. During the third
quarter of 2000, as a result of greater than anticipated losses
and lack of available third party capital to support continued
expansion of the two Internet companies, the Company discontinued
BOTWEB and significantly scaled back iConcepts. At December 31,
2000, all the remaining operations and assets of iConcepts are
part of the Concepts Direct business segment. While this
structure was in place, the Company provided business segment
financial information for each of the three segments of the
business. The subsidiary operations are discussed more fully in
the Business Segments section of this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 2001 were
$1,656,000 compared to $2,289,000 at December 31, 2000. The
current ratio decreased slightly to 1.87 at December 31, 2001
compared to 2.17 at the end of December 31, 2000. The decrease in
the current ratio was primarily the result of higher accounts
payable, increased accrued employee compensation and higher
customer liabilities at December 31, 2001 compared to levels at
December 31, 2000. Additionally, lower cash balances and accounts
receivable partially offset by higher inventories and deferred
advertising costs decreased the Company's current ratio at
December 31, 2001 compared to December 31, 2000.
In 2001, the Company used $2,246,000 of cash from continuing
operations. In an attempt to improve initial fill rates in the
early part of 2002 and fulfill back orders, inventories increased
$1,052,000 in 2001. Deferred advertising costs increased
$1,285,000 as a result of the increased mail volumes in 2002.
The Company generated $1,875,000 of cash from investing activities
in 2001. During the fourth quarter, the Company generated
$825,000 from the sale of its 25% retained interest in a real
estate partnership. An additional $810,000 of cash was generated
as a result of the payoff of a note receivable on the sale of real
estate. In connection with the real estate transactions, the
Company was successful in releasing $500,000 of cash that had
previously been restricted as collateral.
Other uses of cash were capital expenditures. Capital spending in
2001 decreased significantly compared to 2000 levels. During 2001,
the Company expended $263,000 on capital expenditures compared to
$1,300,000 in 2000. The primary expenditures on capital projects
in 2001 were upgrades to the Company's information systems and the
capitalization of previously developed software applications.
During 2001, the Company purchased treasury stock in the amount of
$227,000. The transactions totaled 93,700 shares at an average
price of $2.42 per share.
A significant portion of the Company's sales, general and
administrative expense is related to catalog advertising. A
portion of these expenses is considered discretionary and, as
such, may be reduced in order to decrease cash outflows from
operations. However, a reduction in advertising may have an
adverse effect on the Company's long-term ability to increase
revenue and retain customers.
At the end of 2001, the Company did not have in place a credit
facility to fund future growth of the business. During the first
three quarters of 2002, the Company expects to be a net user of
cash, as a result of increased working capital requirements to
fund growth. However, the Company expects to generate positive
cash flow from operations in the fourth quarter and for the year.
The Company plans to grow its sales by investing in reactivating
older customers and acquiring new catalog customers through a more
aggressive prospecting program than in the past several years. The
Company anticipates partially meeting its working capital needs
during this time through operating cash flows. In addition, the
Company has entered into a financing to be able to meet its
capital needs during this time-period.
On March 28, 2002, the Company closed on a $2 million financing
(the "Financing") with Phillip A. Wiland and Linda S. Wiland (the
"Wilands"). The Financing entailed a 10% Senior Secured
Promissory Note in an aggregate principal amount of $2,000,000 and
a Common Stock Purchase Warrant, representing the right to acquire
275,000 shares of the Company's common stock. The note is secured
by the assets of the Colorful Images brand pursuant to a security
agreement. The Company entered into the Financing to fund the
Company's growth in sales and is attempting to find additional
financing at substantially similar rates and terms. (For further
discussion of the Financing, please see "Contractual Obligations
and Commercial Commitments" and "Related Party Transactions"
below.)
The Company expects to generate positive cash flow from operations
beginning in the fourth quarter of 2002. The Company believes
that operating cash flows including those increases anticipated by
its aggressive prospecting program will generate enough capital to
meet its cash flow needs in the future.
The Company is subject to risks and uncertainties that may
negatively impact cash flows from operations. In addition to
general and industry economic conditions, such risks and
uncertainties include, but are not limited to, the following:
* the Company's operating cash flows not increasing as the Company
presently anticipates due to the Company's growth plans;
* increased costs including increases in postal rates, the cost of
paper or other significant products or merchandise; and
* lack of availability or access to additional capital if needed.
During 2000, the trading price of the common stock of Concepts
Direct, Inc. fell to levels that failed to meet the minimum market
value of public float requirements of the Nasdaq National Market,
causing the listing of the common stock to move to the Nasdaq
SmallCap Market in February 2001.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company leases its corporate headquarters and fulfillment
center, two retail locations, a warehouse and various types of
equipment under operating lease agreements expiring through 2020.
The Company occupies its corporate headquarters and fulfillment
center under the terms of a twenty-year lease, which had an
initial monthly rental of $103,000 per month and escalates 3% per
year. The Company's performance under the lease is secured by a
security deposit of $1.0 million at December 31, 2001. The lease
also provides that the Company, in addition to base rent, is
responsible for reimbursement of property taxes and other costs.
The retail location leases are subject to rental, based on sales,
and operating cost reimbursement adjustments under certain
circumstances. At December 31, 2001, rental commitments under
non-cancelable operating leases, excluding renewal options, with
terms in excess of one year were as follows: (1) total minimum
lease payments - $33,539,000; (2) total payments in 2002 -
$2,176,000; (3) total payments in 2003-2004 - $3,206,000; (4)
total payments in 2005-2006 - $3,163,000; and (5) total payments
after 2006 - $24,994,000.
On March 28, 2002, the Company closed on the Financing. The
Financing entailed a 10% Senior Secured Promissory Note (the
"Note") in an aggregate principal amount of $2,000,000 and a
Common Stock Purchase Warrant, representing the right to acquire
275,000 shares of the Company's common stock. The Company's loan
commitments under the Financing are as follows (assuming the
Company does not prepay the loan which it is allowed to do after
the first year without penalty): (1) total minimum loan payments
- -- approximately $2,550,000; (2) total payments in 2002 --
approximately $382,000; (3) total payments in 2003-2004 --
approximately $1,020,000; (4) total payments in 2005-2006 --
approximately $1,020,000; and (5) total payments after 2006 --
approximately $128,000. The terms of the Note provide that Events
of Default include: (i) failure to make a payment for a period of
thirty (30) days from when such payment is due; (ii) a judgment
creditor obtaining possession of any collateral securing the Note;
(iii) failure to cure within ten (10) days any impairment on the
noteholders' lien on such collateral; and (iv) the filing of
voluntary or involuntary bankruptcy against the Company that is
not dismissed within thirty (30) days. Upon an Event of Default,
all principal and interest shall immediately become due and
payable. The Note is secured by the assets of the Colorful Images
brand pursuant to a security agreement (the "Security Agreement").
The Company entered into the Financing to fund its plans to grow
sales. The Company continues to seek additional financing to fund
these plans. The Note provides that if the Company obtains
additional financing on or before April 30, 2002, the Wilands
would receive substantially similar terms and conditions of the
prospective investor(s) and would agree to amend the Security
Agreement in order for the prospective investor(s) to
collateralize pro rata in the secured assets. (For further
discussion of the Financing, please see "Liquidity and Capital
Resources" above and "Related Party Transactions" below.)
IMPACT OF SALE OF INVESTMENT IN LIMITED PARTNERSHIP
In November 2000, the Company refinanced its corporate
headquarters and fulfillment center in Longmont, Colorado through
the sale and subsequent leaseback of the facility to a real estate
investment limited partnership (the Limited Partnership) for
$11,000,000. In accordance with Statement of Financial Accounting
Standards No. 98 "Accounting for Leases" (SFAS No. 98), the lease
was recorded as a financing transaction due to the Company's
continuing involvement in the Limited Partnership. The Company
effectively retained a 25% ownership interest in the building via
the purchase of a 25% ownership interest in the Limited
Partnership for $625,000. The Company's performance under the
lease is secured by a security deposit of $1.0 million at December
31, 2001. The Company accounted for its investment in the Limited
Partnership under the equity method.
In December 2001, the Company sold its investment in the Limited
Partnership for $825,000 and recognized a net gain on the sale of
$117,500 which is recorded as other income. The sale of the
investment effectively removed the Company's continuing
involvement in the Limited Partnership. In accordance with SFAS
No. 98 and SFAS No. 66 "Accounting for Sales of Real Estate," the
Company now accounts for the transaction under sales-leaseback
accounting which resulted in the related property and debt being
eliminated and the recognition of a deferred gain in the amount of
$3,755,000. The Company now accounts for the lease as an
operating lease and the deferred gain will be recognized ratably
over the remainder of the lease term.
RELATED PARTY TRANSACTIONS
The Financing detailed above in "Liquidity and Capital Resources"
and "Contractual Obligations and Commercial Commitments" is
between the Company and the Wilands. Phillip A. Wiland is the
Chairman and Chief Executive Officer of the Company as well as
being a significant stockholder of the Company. Linda S. Wiland
is Mr. Wiland's spouse.
The Company entered into the Financing to fund its 2002 plans to
grow sales. At the request of the Company's Board of Directors,
the Company sought similar financing from numerous sources
including credit facilities from banks and mezzanine funding.
However, the Company was not successful in finding financing on
terms equal or better to the terms given to the Wilands.
Therefore, the Company's Board of Directors set up a special
committee of Board members consisting of Virginia B. Bayless and
Kenneth M. Gassman, Jr. to review the terms of the Financing. The
Financing was approved by the Board's special committee. The
on-going contractual commitments are detailed above in
"Contractual Obligations and Commercial Commitments."
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in
Note 1 to the Company's Consolidated Financial Statements. The
preparation of the financial statements requires the Company to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. The Company has identified the following
accounting policies that, as a result of the judgments,
uncertainties and complexities of the underlying accounting
standards and operations involved, could result in material
changes to the Company's financial condition or results of
operations under different conditions or using different
assumptions.
Deferred advertising costs are a significant asset of the Company.
These costs primarily relate to paper, printing and distribution
of catalog materials. Such costs are deferred for financial
reporting purposes until the advertising materials are
distributed, then amortized over succeeding periods (not to exceed
twelve months) on the basis of estimated sales. Amortization is
accelerated in the earlier months of the amortization period.
Historical sales statistics are the principal factor used in
estimating the amortization rate. Other advertising and
promotional costs are expensed as incurred.
Inventories of products, net of valuation allowances, are stated
at the lower of cost (first-in, first-out method) or market. The
valuation allowance on products is determined by the age of the
product in inventory and the Company's estimation of demand for
the product, based on historical trends.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statement 141 Business Combinations and Statement 142 Goodwill and
Intangible Assets. Statement 141 eliminates the
pooling-of-interests method of accounting for business
combinations and clarifies the criteria to recognize intangible
assets separately from goodwill. The requirements of Statement
141 are effective for any business combination accounted for by
the purchase method that is completed after June 30, 2001. The
Company is required to adopt Statement 141 beginning January 1,
2002.
Under Statement 142, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives. The
amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt Statement 142 beginning January 1,
2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that is applicable
to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of Accounting Principles Bulletin Opinion 30,
"Reporting the Results of Operations." This Standard provides a
single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met
to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of
the measurement date as presently required. The provisions of
this Standard are not expected to have a significant effect on the
Company's financial position or operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are impacted by significant increases in
paper prices. However, to mitigate this risk in 2002, the Company
entered into a supply agreement with a paper vendor at what the
Company believes is an attractive price.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Concepts Direct, Inc.
are set forth below: Page #
Report of Independent Auditors on the financial
statements and schedules of Concepts Direct, Inc. 31
Consolidated Balance Sheets as of December 31,
2001 and 2000 32
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999 33
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999 34
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 35
Notes to Consolidated Financial Statements -
December 31, 2001 36
Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
Report of Independent Auditors
Stockholders and Board of Directors
Concepts Direct, Inc.
We have audited the accompanying consolidated balance sheets of
Concepts Direct, Inc. (the Company) as of December 31, 2001 and
2000, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also include the financial
statement schedule listed at Item 14(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Concepts Direct, Inc. at December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
Denver, Colorado
March 1, 2002
except for Note 17, as to which the date is
March 28, 2002
Concepts Direct, Inc.
Consolidated Balance Sheets
December 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 1,656,000 $ 2,289,000
Restricted cash - 500,000
Accounts receivable,
less allowances 241,000 404,000
Deferred advertising costs 5,032,000 3,747,000
Inventories, less allowances 5,736,000 4,841,000
Prepaid expenses and other 447,000 306,000
Total current assets 13,112,000 12,087,000
Property and equipment, net 1,352,000 9,607,000
Capitalized software costs, net 1,564,000 1,938,000
Trademark and other intangibles, net 1,016,000 1,130,000
Other assets 1,355,000 2,870,000
TOTAL ASSETS $18,399,000 $27,632,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued
expenses $ 5,414,000 $ 4,481,000
Current maturities of debt and
capital lease obligations - 35,000
Accrued employee compensation 612,000 537,000
Deferred gain 199,000 -
Customer liabilities 799,000 513,000
Total current liabilities 7,024,000 5,566,000
Other liabilities 17,000 -
Deferred gain 3,548,000 -
Debt and capital lease obligations - 10,910,000
Stockholders' equity:
Common stock, $.10 par value,
authorized 7,500,000 shares,
issued and outstanding 5,017,238
and 5,015,448 in 2001 and 2000,
respectively 502,000 502,000
Additional paid-in capital 14,396,000 14,396,000
Retained deficit (6,861,000) (3,742,000)
Treasury stock at cost,
93,700 shares in 2001 (227,000) -
Total stockholders' equity 7,810,000 11,156,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $18,399,000 $27,632,000
See notes to consolidated financial statements.
Concepts Direct, Inc.
Consolidated Statements of Operations
Year Ended December 31,
2001 2000 1999
Net sales $55,757,000 $55,453,000 $55,475,000
Operating costs and expenses
Cost of product and delivery 31,013,000 33,537,000 36,886,000
Selling, general and administrative 27,060,000 23,014,000 22,128,000
Restructuring costs - 417,000 -
Total operating costs and expenses 58,073,000 56,968,000 59,014,000
Operating loss from continuing operations (2,316,000) (1,515,000) (3,539,000)
Other income (expense), net (803,000) 1,567,000 (375,000)
Income (loss) from continuing operations
before income taxes (3,119,000) 52,000 (3,914,000)
Benefit for income taxes - - 789,000
Income (loss) from continuing operations (3,119,000) 52,000 (3,125,000)
Discontinued operations, net of taxes:
Operating loss - (2,353,000) (503,000)
Loss on disposal - (433,000) -
Total loss from discontinued operations - (2,786,000) (503,000)
Net loss $(3,119,000) $(2,734,000) $(3,628,000)
Basic and diluted earnings (loss) per share
Continuing operations $ (0.63) $ 0.01 $ (0.63)
Discontinued operations - (0.56) (0.10)
Net loss $ (0.63) $ (0.55) $ (0.73)
Weighted average number of common
shares used in computing basic
earnings (loss) per share 4,983,169 5,002,586 4,976,819
See notes to consolidated financial statements.
Concepts Direct, Inc.
Consolidated Statements of Stockholders' Equity
Additional Retained Total
Common Stock Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock Equity
Balance at December 31, 1998 4,967,286 $497,000 $14,324,000 $ 2,620,000 $ - $17,441,000
Net loss - - - (3,628,000) - (3,628,000)
Exercise of stock options 18,332 2,000 74,000 - - 76,000
Balance at December 31, 1999 4,985,618 499,000 14,398,000 (1,008,000) - 13,889,000
Net loss - - - (2,734,000) - (2,734,000)
Exercise of stock options 29,830 3,000 (2,000) - - 1,000
Balance at December 31, 2000 5,015,448 502,000 14,396,000 (3,742,000) - 11,156,000
Net loss - - - (3,119,000) - (3,119,000)
Purchase of treasury stock - - - - (227,000) (227,000)
Exercise of stock options 1,790 - - - - -
Balance at December 31, 2001 5,017,238 $502,000 $14,396,000 $(6,861,000) $(227,000) $ 7,810,000
See notes to consolidated financial statements.
Concepts Direct, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
2001 2000 1999
OPERATING ACTIVITIES
Income (loss) from continuing operations $(3,119,000) $ 52,000 $(3,125,000)
Adjustments to reconcile income (loss)
from continuing operations to net cash
provided by (used in) continuing operating
activities:
Increase (decrease) in allowance for bad debts (7,000) (48,000) 23,000
Increase (decrease) for losses in inventory values 157,000 (114,000) 3,226,000
Depreciation 1,043,000 1,803,000 1,156,000
Amortization 575,000 504,000 310,000
Deferred gain amortization (8,000) - -
Decrease in current and deferred income taxes payable - - (733,000)
Gain on disposals of property and equipment - (2,398,000) -
Loss (gain) on disposal of certain assets (123,000) 53,000 -
Interest financed as debt 233,000 - -
Changes in operating assets and liabilities:
Accounts receivable 170,000 285,000 (248,000)
Deferred advertising costs (1,285,000) (1,632,000) 2,603,000
Inventories (1,052,000) 494,000 2,127,000
Prepaid expenses and other (141,000) 167,000 (206,000)
Trade accounts payable and accrued expenses 933,000 1,063,000 (1,528,000)
Accrued employee compensation 75,000 (46,000) 35,000
Customer liabilities 286,000 (266,000) 285,000
Other 17,000 - (29,000)
Net cash provided by (used in) continuing operating
activities (2,246,000) (83,000) 3,896,000
INVESTING ACTIVITIES
Cash restricted as collateral - (500,000) -
Release of cash restricted as collateral 500,000 - -
Capital expenditures (263,000) (1,300,000) (3,102,000)
Sales of property, equipment and investments - 3,162,000 -
Sales of other assets - 75,000 -
Investment in real estate limited partnership - (625,000) -
Sale of investment in real estate limited partnership 825,000 - -
Issuance of security deposit to real estate limited
partnership - (1,010,000) -
Payoff of note receivable on sale of land 810,000 - -
Acquisition of assets - - (1,925,000)
Other investing activities 3,000 47,000 4,000
Net cash provided by (used in) continuing investing
activities 1,875,000 (151,000) (5,023,000)
FINANCING ACTIVITIES
Advances on revolving line of credit - 4,750,000 -
Repayments on revolving line of credit - (4,750,000) -
Principal payment on debt and capital lease obligations (35,000) (10,196,000) (3,762,000)
Issuance of debt and capital lease obligations - 13,749,000 2,992,000
Exercise of stock options - 1,000 76,000
Purchase of treasury stock (227,000) - -
Net cash provided by (used in) continuing financing
activities (262,000) 3,554,000 (694,000)
Increase (decrease) in cash and cash equivalents
from continuing operations (633,000) 3,320,000 (1,821,000)
Net cash used in discontinued operations - (2,262,000) (1,018,000)
Increase (decrease) in cash and cash equivalents (633,000) 1,058,000 (2,839,000)
Cash and cash equivalents at beginning of year 2,289,000 1,231,000 4,070,000
Cash and cash equivalents at end of year $ 1,656,000 $ 2,289,000 $ 1,231,000
See notes to consolidated financial statements.
NOTE 1. Organization and Summary of Significant Accounting Policies
Description of Business: Concepts Direct, Inc. (the "Company") is
a direct mailing company focused on marketing products directly to
individual consumers. The company sells personalized paper
products and a diverse line of merchandise, including home
decorative items, gift items, collectibles and casual apparel
under various catalog titles and internet sites associated with
the catalog titles.
The Company refers to Concepts Direct, Inc. and its consolidated
subsidiaries, which includes the iConcepts hosting equipment and
software and related operations and the BOTWEB.com Internet portal
and related operations. As described in Notes 2 and 3, the
operations of iConcepts have been significantly curtailed and the
operations of BOTWEB are classified as a discontinued operation of
the Company. All intercompany balances and transactions have been
eliminated.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Geographic Information: The Company derives substantially all of
its revenues from customers in the United States and no individual
customer accounts for 10% or more of revenues for any of the
periods presented. Export sales were immaterial during the years
ended December 31, 2001, 2000 and 1999. All identifiable assets
are located in the United States.
Cash Equivalents: The Company considers all highly liquid debt
instruments with an original maturity of three months or less,
when purchased, to be cash equivalents.
Restricted Cash: The restricted cash balance of $500,000 as of
December 31, 2000 represents cash used to secure a $500,000 line
of credit with a financial institution. During 2001, the Company
terminated the line of credit and the restriction on cash was
removed.
Accounts Receivable: These receivables relate primarily to the
list rental of customer names less allowances for bad debt. List
rental allowance for bad debt as of December 31, 2001 and 2000 was
$11,000 and $18,000 respectively.
Deferred Advertising Costs: These costs primarily relate to paper,
printing and distribution of catalog materials. Such costs are
deferred for financial reporting purposes until the advertising
materials are distributed, then amortized over succeeding periods
(not to exceed twelve months) on the basis of estimated sales.
Amortization is accelerated in the earlier months of the
amortization period. Historical sales statistics are the
principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred.
Advertising costs were $20,620,000, $17,388,000 and $16,721,000 in
2001, 2000 and 1999, respectively.
Property and Equipment: Property and equipment are recorded at
cost and depreciated on a straight-line basis over the estimated
useful lives. Repairs and maintenance are charged to operations
as incurred.
Inventories: Inventories of products, net of valuation allowances
of $1,062,000 and $1,840,000 at December 31, 2001 and 2000,
respectively, are stated at the lower of cost (first-in, first-out
method) or market.
Capitalized Software Costs: Costs of internally developed software
applications, which are for internal use, are capitalized and
amortized over five years. Amortization of capitalized software
costs totaled $461,000, $391,000 and $236,000 in 2001, 2000 and
1999, respectively.
Impairment of Long-lived Assets: The Company periodically reviews
the carrying amounts of its long-lived assets to determine whether
current events or circumstances warrant adjustments to the
carrying amounts. If an impairment adjustment is deemed
necessary, the loss is measured by the amount that the carrying
value of the assets exceeds their fair value. Considerable
management judgment is necessary to estimate the fair value of
assets. Accordingly, actual values could vary significantly from
the estimates.
Barter Transactions: The Company regularly exchanges customer
lists with other direct marketers, on a name-for-name basis, with
no payment made or received. The value of such transactions is
not readily determinable by the Company and, therefore, these
exchanges are not reflected in the Company's financial statements.
Trademarks and Other Intangibles: Trademarks and other intangibles
are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over 20 and 5 years,
respectively. Accumulated amortization on intangibles was
$301,000 and $188,000 at December 31, 2001 and 2000, respectively.
Shipping and Handling Costs: Outbound shipping and handling costs
are included in the cost of product and delivery.
Warranties: The Company's sales of products are subject to a
satisfaction guarantee. Certain sales of products are also under
warranty against defects in material and workmanship for various
periods, generally up to one year. The company accrues for
anticipated future warranty costs and product returns with
periodic adjustments to reflect actual experience. Actual
warranty costs for the years ended December 31, 2001, 2000 and
1999 were $1,750,000, $1,919,000 and $1,644,000, respectively.
Revenue Recognition: Revenues from the sale of products are
recognized when products are shipped to customers.
Per Share Data: Earnings /(loss) per share are computed and
reported on a dual presentation basis. Basic earnings /(loss) per
share are computed by dividing net income by the weighted average
number of shares outstanding during the periods represented.
Diluted earnings/(loss) per share is computed using common and
dilutive common equivalent shares outstanding during the periods
represented. The Company's common share equivalents consist of
stock options issued to key employees and outside directors.
Securities that could potentially dilute basic earnings per share
in the future that were not included in the computation of diluted
earnings per share, because to do so would have been antidilutive
for the periods presented, amounted to 144,517, 127,222 and
187,551 at December 31, 2001, 2000 and 1999, respectively.
Dividend Policy: At the present time, the Company intends to
retain earnings to provide funds for operations and expansion of
the Company's business. Thus, the Company does not expect to pay
cash dividends in the foreseeable future.
Cash Requirements and Management's Plans: The Company incurred a
net loss of $3,119,000 for the year ended December 31, 2001 and
has a retained deficit of $6,861,000 at December 31, 2001. The
Company's future capital requirements will depend on several
factors, including, among others, the ability of the Company to
achieve revenue growth in its core direct mailing business, the
costs involved in the printing and distribution of advertising
materials, and the costs of shipping and handling of merchandise
to customers. Management intends to address the future
requirements of the company through debt financing and revenue
growth strategies focused on its direct mailing business.
Management believes that its operational plans will be sufficient
to allow the Company to sustain its operations through December
31, 2002.
Reclassifications: Certain amounts in the 1999 and 2000 financial
statements have been reclassified to conform to the 2001
presentation.
Impact of Recently Issued Accounting Standards: In June 2001, the
Financial Accounting Standards Board issued Statement 141 Business
Combinations and Statement 142 Goodwill and Intangible Assets.
Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations and clarifies the criteria to
recognize intangible assets separately from goodwill. The
requirements of Statement 141 are effective for any business
combination accounted for by the purchase method that is completed
after June 30, 2001. The Company is required to adopt Statement
141 beginning January 1, 2002.
Under Statement 142, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives. The
amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt Statement 142 beginning January 1,
2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," that is applicable
to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of,"
and portions of Accounting Principles Bulletin Opinion 30,
"Reporting the Results of Operations." This standard provides a
single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met
to classify an asset as held-for-sale. Assets held-for-sale are
not depreciated and are stated at the lower of fair value or
carrying amount. This standard also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of
the measurement date as presently required. The provisions of
this Standard are not expected to have a significant effect on the
Company's financial position or operating results.
NOTE 2. Discontinued Operations
During the third quarter of 2000, the Company discontinued the
operations of the BOTWEB business segment. Specifically, all
employees of BOTWEB were terminated, the BOTWEB.com website was
shut down and the related capitalized software costs were fully
written off.
During 2000 and 1999, BOTWEB had net external sales of $64,000 and
$64,000, respectively. The BOTWEB discontinued operations had net
losses of $2,786,000, including a $433,000 loss on disposal, and
$503,000 during 2000 and 1999, respectively. The net assets of
BOTWEB, Inc. were $0 as of December 31, 2000. During 2001, the
BOTWEB legal entity was dissolved and the discontinued operations
had neither external sales nor net losses.
NOTE 3. Restructuring Costs
During the third quarter of 2000, the Company restructured its
business and decided to significantly reduce the on-going
activities of its iConcepts business segment. In connection with
this restructuring, management determined that certain capitalized
software and web site development costs associated with the
operations of the iConcepts business segment were significantly
impaired. Accordingly, the Company wrote off approximately
$668,000 of capitalized software net of $251,000 accumulated
amortization in the third quarter, for total restructuring costs
of $417,000. During the fourth quarter of 2000, the remaining
assets and employees of iConcepts were incorporated back into
Concepts Direct, Inc.
NOTE 4. Statements of Cash Flows
Following is supplemental information to the consolidated
statements of cash flows:
Year Ended December 31,
2001 2000 1999
Non-cash investing and financing activities:
Interest financed as debt $ 233,000 $ 10,023 $ -
Building and land disposal, net of accumulated
depreciation, due to subsequent recognition
of sale under sale-leaseback accounting
(see Note 5) 7,388,000 - -
Deferred gain due to subsequent recognition of
sale under sale-leaseback accounting (see Note 5) 3,755,000 - -
Note payable reduction due to subsequent recognition
of sale under sale-leaseback accounting
(see Note 5) 11,143,000 - -
Equipment financed through capital leases - - 122,000
Note receivable issued pursuant to land sale
(see Note 5) - 880,000 -
Accounts payable refinanced as debt - 1,088,000 -
Cash flow data:
Cash paid during the year for interest $ 1,247,000 $ 884,000 $561,000
NOTE 5. Property and Equipment
Property and equipment consist of:
Principal
December 31, Estimated
2001 2000 Useful Lives
Data processing equipment $ 2,490,000 $ 2,293,000 3-5 years
Computer software and website development 1,300,000 1,296,000 3-5 years
Furniture and equipment 2,414,000 2,392,000 3-5 years
Building and land leased under financing arrangement - 7,830,000 20 years
Land held for sale or expansion 256,000 303,000 N/A
6,460,000 14,114,000
Less accumulated depreciation (5,108,000) (4,507,000)
Total $ 1,352,000 $ 9,607,000
NOTE 5. Property and Equipment (continued)
Until 2000, the Company owned approximately 128 acres of
undeveloped land in Longmont, Colorado, (classified as "Land held
for sale or expansion" above). In 2000, the Company sold
approximately 100 acres of the land for approximately $3,869,000
(net of $111,000 of closing costs). Of the $3,869,000 of net
proceeds, $880,000 was a note receivable. The note receivable
carried an interest rate of 8.0%, with interest only payments due
quarterly through December 2003, at which time the unpaid interest
and principal payments were due in full. During 2000, the Company
recognized a gain on the transaction of approximately $2,393,000,
which was recorded as other income. In consideration for early
payment on the note receivable, the Company received $810,000 in
June 2001 and recognized a loss of $70,000, which is recorded as
other expense.
In November 2000, the Company refinanced its corporate
headquarters and fulfillment center in Longmont, Colorado through
the sale and subsequent leaseback of the facility to a real estate
investment limited partnership (the Limited Partnership) for
$11,000,000. In accordance with Statement of Financial Accounting
Standards No. 98 "Accounting for Leases" (SFAS No. 98) the lease
was recorded as a financing transaction due to the Company's
continuing involvement in the Limited Partnership. The Company
effectively retained a 25% ownership interest in the building via
the purchase of a 25% ownership interest in the Limited
Partnership for $625,000. The Company accounted for its
investment in the Limited Partnership under the equity method.
In December 2001, the Company sold its investment in the Limited
Partnership for $825,000 and recognized a net gain on the sale of
$117,500 which is recorded as other income. The sale of the
investment effectively removed the Company's continuing
involvement in the Limited Partnership. In accordance with SFAS
No. 98 and SFAS No. 66 "Accounting for Sales of Real Estate", the
Company now accounts for the transaction under sale-leaseback
accounting which results in the related property and debt being
eliminated and the creation of a deferred gain in the amount of
$3,755,000. The Company now accounts for the lease as an
operating lease and the deferred gain will be recognized ratably
over the remaining term of the lease.
NOTE 6. Other Assets
Other assets consist of:
December 31,
2001 2000
Investment in Limited Partnership $ - $ 625,000
Note receivable - 880,000
Security deposit 1,010,000 1,010,000
Refundable deposits 100,000 108,000
Lease payments in advance 40,000 -
Product development costs
(net of amortization) 205,000 247,000
Total $1,355,000 $2,870,000
NOTE 7. Lines of Credit, Debt and Capital Lease Obligations
Debt and capital lease obligations consist of the following at December 31:
2001 2000
Financed real estate obligation, principal and interest payable monthly
through 2020, with interest at 12.48% (see note 5) $ - $10,910,000
Capital lease obligation, principal and interest payable monthly through
2001, with interest at 8.56% - 35,000
Total debt and capital lease obligations 10,945,000
Less current maturities 35,000
Long-term debt obligations $ - $10,910,000
The carrying amounts of the Company's borrowings approximate their
fair market value as all borrowings have interest rates which
approximate the current market rates for such borrowings.
In September 1998, the Company entered into a $300,000 credit
facility with a bank, bearing interest at a variable rate equal to
the bank's prime rate and expiring February 2002. After February
1999, borrowings under the credit facility were not allowed, and
subsequently in 2000, the credit facility was cancelled.
As of December 31, 2000, the Company had $500,000 available from a
revolving line of credit with a bank, secured by restricted cash
of a like amount. During 2001, the Company terminated the line of
credit and the restriction on cash was removed.
NOTE 8. Operating Leases
The Company leases its corporate headquarters and fulfillment
center, two retail locations, a warehouse and various types of
equipment under operating lease agreements expiring through 2020.
The Company occupies its corporate headquarters and fulfillment
center under the terms of a twenty-year lease, which has an
initial monthly rental of $103,000 and escalates 3% per year. The
Company's performance under the lease is secured by a security
deposit of $1.0 million at December 31, 2001. The lease also
provides that the Company, in addition to base rent, is
responsible for the reimbursement of property taxes and other
costs. The retail location leases are subject to rental, based on
sales, and operating cost reimbursement adjustments under certain
circumstances.
At December 31, 2001, rental commitments under non-cancelable
operating leases, excluding renewal options, with terms in excess
of one year were as follows:
2002 $ 2,176,000
2003 1,608,000
2004 1,598,000
2005 1,594,000
2006 1,569,000
Thereafter 24,994,000
Total minimum lease payments $ 33,539,000
Rent expense under operating leases amounted to $1,154,000,
$1,144,000 and $1,340,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
NOTE 9. Purchase Agreement
The Company maintains an agreement through 2002 to purchase paper
products in the normal course of business. The agreement
stipulates fixed prices for paper products and contains minimum
quarterly purchase requirements.
NOTE 10. Other Income (Expense), Net
Other income (expense) consists of:
Year Ended December 31,
2001 2000 1999
Interest income $ 181,000 $ 59,000 $ 92,000
Interest expense (1,318,000) (884,000) (530,000)
Limited Partnership investment income 130,000 - -
Gain on disposal of property and equipment - 2,398,000 -
Gain (loss) on disposal of other assets 48,000 (53,000) -
Other, net 156,000 47,000 63,000
$ (803,000) $1,567,000 $ (375,000)
NOTE 11. Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the provisions of SFAS
No. 109, a deferred tax liability or asset (net of valuation
allowance) is provided in the financial statements by applying the
provisions of applicable tax laws to measure the deferred tax
consequences of temporary differences that will result in net
taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or
preceding years.
The differences between income taxes at the federal statutory tax
rate and the Company's effective tax rates are as follows:
Year Ended December 31,
2001 2000 1999
Federal tax benefit at statutory rate $(1,060,000) $ (930,000) $(1,545,000)
Valuation allowance 922,000 923,000 674,000
Effect of permanent differences 2,000 2,000 2,000
Revision of prior year estimates, other 136,000 5,000 (47,000)
$ - $ - $ (916,000)
The income tax expense (benefit) consists of the following:
Year Ended December 31,
2001 2000 1999
Current Deferred Current Deferred Current Deferred
Federal $ - $ - $ - $ - $(55,000) $(861,000)
The components of the Company' deferred tax assets and
liabilities are as follows:
December 31,
2001 2000
Deferred tax liabilities:
Deferred advertising costs $(1,480,000) $(1,081,000)
Property and equipment (543,000) (152,000)
Deferred tax liabilities (2,023,000) (1,233,000)
Deferred tax assets:
Allowance for doubtful accounts 4,000 10,000
Inventory 706,000 904,000
Sale-leaseback 1,274,000 1,070,000
Other nondeductible accruals 197,000 168,000
Net operating loss carryforwards/carrybacks 2,361,000 678,000
Deferred tax assets 4,542,000 2,830,000
Valuation allowance (2,519,000) (1,597,000)
Net deferred tax assets (liabilities) $ - $ -
The Company recorded a valuation allowance equal to the excess of
deferred tax assets over deferred tax liabilities as the Company
was unable to determine that it is more likely than not that the
deferred tax assets will be realized. At December 31, 2001, the
Company had federal and state net operating loss carryforwards for
income tax purposes of approximately $6,943,000, which expire over
twenty year periods beginning in 2019 and ending in 2021.
NOTE 12. Stock Option Plans
Under the terms of the Concepts Direct, Inc. 1992 Employee Stock
Option Plan (the 1992 Employee Plan), certain key employees have
been granted options to purchase shares of common stock of the
Company at an option price equal to fair market value on the date
of the grant. Options granted under the 1992 Employee Plan have
generally been exercisable in annual increments of 25% commencing
four years following the date of grant and expire ten years
following the date of grant. The 1992 Employee Stock Option Plan
also provides for the issuance of incentive stock to key
employees. There were 320,000 and 323,000 shares of common stock
reserved for issuance under this plan as of December 31, 2001 and
2000, respectively. No further options or incentive stock will be
issued under the 1992 Employee Plan.
The Concepts Direct, Inc. 1992 Non-Employee Directors Stock Option
Plan allowed for options to be granted to outside directors to
purchase shares of common stock of the Company at an option price
equal to fair market value on the date of grant. Options granted
have been exercisable in annual increments of 33.3% commencing one
year following the date of grant and expire five years following
the date of the grant. There were 37,000 shares of common stock
reserved for issuance under this plan as of December 31, 2001 and
2000. No further options will be issued under the 1992
Non-Employee Directors Stock Option Plan.
The Concepts Direct, Inc. 1998 Non-Employee Directors Stock Option
Plan allowed for options to be granted to outside directors to
purchase shares of common stock of the Company at an option price
equal to fair market value on the date of grant. Options granted
have been exercisable in annual increments of 33.3% commencing one
year following the date of grant and expire five years following
the date of the grant. There were 52,000 shares of common stock
reserved for issuance under this plan as of December 31, 2001 and
2000. No further options will be issued under the 1998
Non-Employees Directors Stock Option Plan.
The 2001 Incentive Compensation Plan allows for options to be
granted to outside directors and key employees to purchase shares
of common stock of the Company at an option price not less than
the fair market value on the date of grant. Other types of
incentive awards are also available for grant, including but not
limited to, restricted stock awards, performance grants, and stock
appreciation rights. The terms of the individual option grants
are determined by the Compensation Committee of the Board of
Directors. During the year ended December 31, 2001, a total of
42,500 options were granted under this plan. The 2001 Incentive
Compensation Plan reserved an aggregate of 150,000 shares of
common stock for issuance.
The Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock
options because as discussed below, the alternative fair value
accounting provided for under SFAS Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options is generally equal to the
market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its stock options.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123, and has been determined as if the
Company had accounted for its stock options under the fair value
method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000 1999
Risk-free interest rate 4.0% 5.5% 5.5%
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 0.61 0.81 0.56
Expected life of the stock options 4.0 years 5.5 years 5.5 years
The weighted-average fair value of options granted during 2001,
2000, and 1999 was $1.39, $3.68, and $5.14, respectively. For
purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:
2001 2000 1999
Pro forma net loss from continuing operations $(3,396,000) $ (179,000) $(3,356,000)
Pro forma basic and diluted loss per share
from continuing operations $ (0.68) $ (0.04) $ (0.67)
Pro forma net loss $(3,396,000) $(2,965,000) $(3,859,000)
Pro forma basic and diluted loss per share $ (0.68) $ (0.59) $ (0.78)
A summary of the Company's stock option activity and related
information for the three years ended December 31, 2001, 2000,
and 1999 follows:
2001 2000 1999
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding at beginning of year 353,334 $4.94 348,334 $4.94 341,666 $5.14
Granted 66,500 2.75 50,000 5.08 25,000 9.19
Exercised (3,000) 0.63 (32,000) 0.75 (18,332) 4.06
Expired (13,334) 9.75 - - - -
Forfeited (23,666) 8.66 (13,000) 7.41 - -
Outstanding at end of year 379,834 $4.97 353,334 $4.94 348,334 $4.94
Exercisable at end of year 176,584 $3.15 146,756 $3.39 128,920 $2.45
A summary of options outstanding at December 31, 2001 follows:
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$.50 - $.875 84,000 1.53 Yrs. $0.62 84,000 $.62
$2.38 - $6.25 156,500 6.10 Yrs. $2.97 62,750 $3.19
$8.94 - $14.70 139,334 5.92 Yrs. $9.84 29,834 $10.16
379,834 176,584
NOTE 13. Share Repurchase Program
In December 2000, the Board of Directors authorized the Company to
repurchase up to $250,000 of its common stock in the open market
or in privately negotiated transactions in accordance with
applicable securities laws. As of December 31, 2001, the Company
had repurchased 93,700 shares of its common stock under the
program at a total cost of $227,000.
NOTE 14. Employee Retirement Savings Plan
Effective May 1985, the Company adopted the "Concepts Direct, Inc.
Retirement Savings Plan" (the Plan"). The Plan is a qualified
retirement plan under Section 401(k) of the Internal Revenue Code.
Employees who meet certain eligibility requirements may contribute
up to18% of their eligible compensation, subject to statutory
limitations, for investment in several diversified investment
choices, as directed by the employee. The Company made a matching
contribution of 50% of each qualifying employee's contribution on
the first 6% of the employee's eligible compensation.
Contributions to the Plan were $129,000, $120,000, and $100,000 in
2001, 2000 and 1999, respectively.
NOTE 15. Quarterly Financial Information (Unaudited)
Basic and Diluted
Earnings (Loss)
Income per Common Basic and Diluted
(Loss) from Loss from Net Share from Earnings (Loss)
Net Continuing Discontinued Income Continuing per Common
Sales Operations Operations (Loss) Operations Share
(Dollars in thousands except per share data)
2001:
First $12,092 $(1,166) $ - $(1,166) $ (0.23) $ (0.23)
Second 9,762 (1,441) - (1,441) (0.29) (0.29)
Third 11,248 (856) - (856) (0.17) (0.17)
Fourth 22,655 344 - 344 0.06 0.06
$55,757 $(3,119) $ - $(3,119) $ (0.63) $ (0.63)
2000:
First $12,743 $ (259) $ (1,496) $(1,755) $ (0.05) $ (0.35)
Second 11,179 (1,254) (596) (1,850) (0.25) (0.37)
Third 11,391 (2,162) (676) (2,838) (0.43) (0.57)
Fourth 20,140 3,727 (18) 3,709 0.74 0.74
$55,453 $ 52 $ (2,786) $(2,734) $ 0.01 $ (0.55)
1999:
First $12,546 $ (440) $ (5) $ (445) $ (0.09) $ (0.09)
Second 11,068 (711) (25) (736) (0.14) (0.15)
Third 11,252 (622) (114) (736) (0.13) (0.15)
Fourth 20,609 (1,352) (359) (1,711) (0.27) (0.34)
$55,475 $(3,125) $ (503) $(3,628) $ (0.63) $ (0.73)
NOTE 16. 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 were:
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 an Internet inventory liquidation
site.
iConcepts
iConcepts was to operate 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 would have included site
hosting and development, online order processing and database
management. As discussed more fully in note 3, the operations of
the iConcepts business segment were significantly curtailed in the
third quarter of 2000. During the fourth quarter of 2000, the
remaining assets and employees of iConcepts, Inc. were
incorporated back into Concepts Direct, Inc.
BOTWEB
BOTWEB was an Internet portal whose primary target customers were
female catalog or Internet shoppers. In addition to offering a
directory and Internet search of reviewed sites that BOTWEB had
classified Best Of The WEB, BOTWEB offered a variety of free
services, including email, driving directions and maps, news,
weather and sports. As discussed more fully in note 2, the
operations of the BOTWEB business segment are classified as a
discontinued operation of the Company.
The Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (Statement No. 131). The Company evaluated the
performance of its business segments based on operating profit
(loss). The accounting policies of the Company's segments were
the same as those described in Note 1.
During 2001 the Company's operations were entirely within the
Concepts Direct operating segment and therefore a presentation of
the Concepts Direct operating segment results would not be
meaningful. Pertinent financial data by operating segment for the
two years ended December 31, 2000 are as follows (in thousands):
Discontinued
Concepts Direct iConcepts BOTWEB Operations Eliminations Total
2000
Net sales to third parties $54,839 $ 614 $ 64 $ (64) $ - $55,453
Net sales to related parties 112(1) 1,450(2) 28(3) - (1,590) -
Total net sales 54,951 2,064 92 (64) (1,590) 55,453
Cost of product and delivery
from third parties 31,297 2,240 1,044 (1,044) - 33,537
Cost of product and delivery
from related parties 863 116 543 - (1,522) -
32,160 2,356 1,587 (1,044) (1,522) 33,537
Selling, general and
administrative from third
parties 21,236 1,778 1,373 (1,373) - 23,014
Selling, general and
administrative from related
parties 18 10 40 - (68) -
21,254 1,788 1,413 (1,373) (68) 23,014
Restructuring costs - 417 - - - 417
Loss on discontinuance of
business segment - - 433 (433) - -
Total expenses 53,414 4,561 3,433 (2,850) (1,590) 56,968
Operating loss 1,537 (2,497) (3,341) 2,786 - (1,515)
Other income (expense) 1,674 (107) - - - 1,567
Income (loss) before income
taxes $ 3,211 $(2,604) $(3,341) $ 2,786 $ - $ 52
Identifiable assets $27,632 $ - $ - $ - $ - $27,632
NOTE 16. Segment Disclosure (continued)
Discontinued
Concepts Direct iConcepts BOTWEB Operations Eliminations Total
1999
Net sales to third parties $55,471 $ 4 $ 64 $ (64) $ - $55,475
Net sales to related parties 10(1) 1,268(2) 19(3) - (1,297) -
Total net sales 55,481 1,272 83 (64) (1,297) 55,475
Cost of product and delivery
from third parties 36,191 695 202 (202) - 36,886
Cost of product and delivery
from related parties 796 6 52 - (854) -
36,987 701 254 (202) (854) 36,886
Selling, general and
administrative from third
parties 20,235 1,893 492 (492) - 22,128
Selling, general and
administrative from related
parties 425 9 9 - (443) -
20,660 1,902 501 (492) (443) 22,128
Total expenses 57,647 2,603 755 (694) (1,297) 59,014
Operating loss (2,166) (1,331) (672) 630 - (3,539)
Other expense (375) - - - - (375)
Loss before income taxes $(2,541) $(1,331) $ (672) $ 630 $ - $(3,914)
Identifiable assets $19,091 $ 6,404 $ 699 $ 524 $ (524) $26,194
(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
NOTE 17. Subsequent Event
On March 28, 2002, the Company closed on a $2 million financing
(the "Financing") with Phillip A. Wiland (Chairman and Chief
Executive Officer of the Company) and Linda S. Wiland (the
"Wilands"). The Financing entailed the issuance of a 10% Senior
Secured Promissory Note in the aggregate principal amount of
$2,000,000 and the issuance of a Common Stock Purchase Warrant,
representing the right to acquire 275,000 shares of the Company's
common stock at an exercise price of $0.10 per share. The note is
secured by the assets of the Company's Colorful Images catalog
brand and all related business and is to be repaid over a
five-year term.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CONCEPTS DIRECT, INC.
Year Ended December 31, 2001
COL. A COL. B COL. C COL. D COL. E COL. F
Charged Charged to
Balance at (Credited) Other Balance at
Beginning to Costs Accounts - Deductions End
DESCRIPTION of Period and Expenses Describe Describe of Period
Year Ended
December 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 18,000 $ (7,000) $ - $ - $ 11,000
Allowance for inventory
obsolescence 1,840,000 157,000 - (935,000)(a) 1,062,000
Totals deducted from asset
accounts $1,858,000 $ 150,000 $ - $ (935,000) $1,073,000
Product warranty liability $ 224,000 $ (51,000) $ - $ - $ 271,000
Year Ended
December 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 66,000 $ (48,000) $ - $ - $ 18,000
Allowance for inventory
obsolescence 4,488,000 (114,000) - (2,534,000)(a) 1,840,000
Totals deducted from asset
accounts $4,554,000 $ (162,000) $ - $(2,534,000) $1,858,000
Product warranty liability $ 251,000 $ (27,000) $ - $ - $ 224,000
Year Ended
December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 42,000 $ 24,000 $ - $ - $ 66,000
Allowance for inventory
obsolescence 740,000 3,226,000 756,000(b) (234,000)(a) 4,488,000
Totals deducted from asset
accounts $ 782,000 $3,250,000 $ 756,000 $ (234,000) $4,554,000
Product warranty liability $ 274,000 $ (23,000) $ - $ - $ 251,000
(a) Inventory written off, net of recoveries
(b) Reserve established pursuant to the Music Stand acquisition of assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Certain information required by Part III is omitted from this
Report as the Company will file a definitive Proxy Statement
pursuant to Regulation 14A (the "Proxy Statement") not later than
120 days after the end of the fiscal year covered by this report
and certain information included therein is incorporated herein by
reference.
With the exception of the information incorporated by reference
from the Proxy Statement in Items 10, 11, 12 and 13 of Part III of
this Form 10-K, the Proxy Statement for its annual meeting of
shareholders scheduled for May 8, 2002 is not to be deemed filed
as a part of this Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information concerning the directors of the Company is
incorporated herein by reference to material contained under the
heading "Election of Directors" and "Section 16(a) compliance" in
the Proxy Statement for its annual meeting of shareholders
scheduled for May 8, 2002.
Information concerning the executive officers of the Company is
set forth under the heading "Executive Officers of the Registrant"
at the end of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated
herein by reference to material contained under the headings
"Compensation of Directors", "Executive Compensation" and
"Compensation Committee Interlocks and Insider Participation" in
the Company's Proxy Statement for its annual meeting of
shareholders scheduled for May 8, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information as to security ownership of certain beneficial owners
and management is incorporated herein by reference to material
contained under the heading "Stock Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement for its
annual meeting of shareholders scheduled for May 8, 2002.
Management does not know of any arrangements the operation of
which may at a subsequent date result in a change in control of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information as to certain relationships and related transactions
is incorporated herein by reference to material contained under
the heading "Other Transactions" in the Company's Proxy Statement
for its annual meeting of shareholders scheduled for May 8, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORMS 8-K
(a) Documents filed as part of this report:
1. The financial statements and related Report of
Independent Auditors required by this item are
listed and included in Item 8 of this report.
2. The financial statement schedules required by this item
are listed and included in Item 8 of this report.
3. Exhibits required to be filed by Item 601 of
Regulation S-K: See INDEX TO EXHIBITS
(b) No Reports on Form 8-K have been filed during the last
quarter of the year ended December 31, 2001.
INDEX TO EXHIBITS
(3) Articles of incorporation and bylaws.
3(a) Registrant's Amended and Restated Certificate of
Incorporation filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 is expressly incorporated herein
by this reference.
3(b) 3(a)(i) Registrant's Amendment of Amended and
Restated Certificate of Incorporation filed as Exhibit
3(i)(b) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999, is
expressly incorporated herein by this reference.
3(c) Registrant's Bylaws and Statement of Organization of
the Incorporator filed as Exhibit 3(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, is expressly incorporated herein by
this reference.
(4) Instruments defining the rights of security holders,
including indentures.
4(a) See the Seventh Article of Exhibit 3(a) and Articles
I, IV, V, VI and VII of Exhibit 3(b).
4(b) Senior Secured Promissory Note, dated March 28, 2002
by Registrant for the benefit of Phillip A. and Linda
S. Wiland, in the principal amount of $2,000,000, is
filed herein.
4(c) Security Agreement, dated March 28, 2002, by the
Registrant and Phillip A. Wiland and Linda S. Wiland,
is filed herein.
4(d) Warrant Agreement, dated March 28, 2002, by the
Registrant for the benefit of Phillip A. and Linda S.
Wiland, is filed herein.
(10) Material Contracts.
10(a) Commercial Lease Agreement between Registrant and
Colorful Avenue, Ltd. as landlord, dated September
13, 2000, in connection with a lease of the
Registrant's corporate headquarters and fulfillment
center in Longmont, Colorado filed as Exhibit 10(a)
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 is expressly
incorporated herein by this reference.
10(b) First Amendment dated November 2, 2000 to Commercial
Lease Agreement between Registrant and Colorful Avenue
Ltd. as landlord dated September 13, 2000 filed as
Exhibit 10(b) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 is
expressly incorporated herein by this reference.
10(c) *2002 Compensation Plan For Senior Officers and Other
Key Officers of the registrant is filed herewith.
10(d) *2001 Incentive Compensation Plan was previously
filed as Exhibit B to registrant's definitive proxy
statement dated April 6, 2001 for the Annual Meeting
of Shareholders held on May 10, 2001 and is expressly
incorporated herein by this reference.
10(e) *1992 Stock Option Plan was previously filed as
Exhibit A to registrant's definitive proxy statement
dated June 29, 1993 for the Annual Meeting of
Shareholders held on July 30, 1993 and is expressly
incorporated herein by this reference.
10(f) *1992 Non-Employee Director Stock Option Plan was
previously filed as Exhibit B to the registrant's
definitive proxy statement dated June 29, 1993 for
the Annual Meeting of Shareholders held on July 30,
1993 and is expressly incorporated herein by this
reference.
10(g) *First Amendment to the 1992 Stock Option Plan was
previously filed as Exhibit A to registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998 and is expressly incorporated
herein by reference.
10(h) *1998 Non-Employee Directors Stock Option Plan was
previously filed as Exhibit A to the Company's
Definitive Proxy Statement dated March 10, 1998 for
the Annual Meeting of Stockholders on April 24, 1998
and is expressly incorporated by reference.
10(i) *Management forgivable loan agreement by and between
Registrant and Cody S. McGarraugh dated January 7, 2002
is filed herewith.
(23) Consent of Experts and Counsel.
23(a) The Consent of Ernst & Young LLP is filed herewith.
*Management contract or compensatory plan or arrangement of the
Company required to be filed as an exhibit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: April 1, 2002 By:/s/ Phillip A. Wiland
Phillip A. Wiland
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
Date: April 1, 2002 /s/ Virginia B. Bayless
Virginia B. Bayless, Director
Date: April 1, 2002 /s/ Robert L. Burrus, Jr.
Robert L. Burrus, Jr., Director
Date: April 1, 2002 /s/ Kenneth M. Gassman, Jr.
Kenneth M. Gassman, Jr., Director
Date: April 1, 2002 /s/ Marshall S. Geller
Marshall S. Geller, Director
Date: April 1, 2002 /s/ Stephen R. Polk
Stephen R. Polk, Director
Date: April 1, 2002 /s/ Phillip A. Wiland
Phillip A. Wiland, Chairman of the
Board of Directors and Chief
Executive Officer
Date: April 1, 2002 /S/ Cody S. McGarraugh
Cody S. McGarraugh, Chief Financial
Officer (Principle Financial Officer
and Principle Accounting Officer)