UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20680
Concepts Direct, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1781893
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
2950 Colorful Avenue, Longmont, CO 80504
(Address of principal executive offices, Zip Code)
(303) 772-9171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 12, 2002, 4,923,538 shares of the Registrant's Common
Stock, $.10 par value, were outstanding.
CONCEPTS DIRECT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE NO.
Balance Sheets as of December 31, 2001 and
June 30, 2002 (unaudited)........................3
Statements of Operations for the three and six
months ended June 30, 2002 and 2001(unaudited)...4
Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited).........5
Notes to Financial Statements....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........13
Item 6. Exhibits and reports on Form 8-K...................13
CONCEPTS DIRECT, INC.
BALANCE SHEETS
(Dollars in thousands, except share data)
June 30,
2002 December 31,
(unaudited) 2001
ASSETS
Current assets:
Cash and cash equivalents $ 1,215 $ 1,656
Accounts receivable,
less allowances 160 241
Deferred advertising costs 3,316 5,032
Inventories, less allowances 6,438 5,736
Prepaid expenses and other 793 447
Total current assets 11,922 13,112
Property and equipment, net 1,319 1,352
Capitalized software costs, net 1,484 1,564
Trademark and other intangibles, net 959 1,016
Other assets 1,355 1,355
Total assets $ 17,039 $ 18,399
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and
accrued expenses $ 5,181 $ 5,414
Current maturities of note payable
to related party 353 -
Accrued employee compensation 656 612
Deferred gain 199 199
Customer liabilities 710 799
Total current liabilities 7,099 7,024
Note payable to related party 2,542 -
Deferred gain 3,449 3,548
Deferred rent 222 17
Total liabilities 13,312 10,589
Stockholders' equity:
Common stock, $.10 par value, 7,500,000
shares authorized, 5,017,238 shares
issued and outstanding on June 30,
2002 and December 31, 2001. 502 502
Additional paid-in capital 14,396 14,396
Warrants 1,067 -
Accumulated deficit (12,011) (6,861)
Treasury stock at cost, 93,700 shares (227) (227)
Total stockholders' equity 3,727 7,810
Total liabilities and
stockholders' equity $ 17,039 $ 18,399
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Net sales $ 11,822 $ 9,762 $ 25,755 $ 21,854
Cost of product and delivery 7,638 5,458 15,700 12,447
Gross profit 4,184 4,304 10,055 9,407
Operating expenses:
Advertising 5,267 3,712 11,503 7,892
General and administrative 1,902 1,712 3,662 3,597
Total operating expenses 7,169 5,424 15,165 11,489
Loss from operations (2,985) (1,120) (5,110) (2,082)
Other expense, net (78) (321) (40) (525)
Net loss from operations (3,063) (1,441) (5,150) (2,607)
Net loss applicable to common
shares $ (3,063) $ (1,441) $ (5,150) $ (2,607)
Net loss per share, basic and
diluted $ (0.62) $ (0.29) $ (1.05) $ (0.52)
Weighted average number of
common shares used in
computing basic and diluted
loss per share 4,923,538 4,991,748 4,923,538 4,995,063
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Six Months Ended June 30,
2002 2001
OPERATING ACTIVITIES
Loss from continuing operations $ (5,150) $ (2,607
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) continuing
operating activities:
Increase (decrease) in allowance for bad
debt (3) 4
Decrease in inventory valuation reserves (243) (147)
Depreciation 324 547
Amortization 287 311
Deferred gain amortization (99) -
Loss on disposals of property and equipment 4 -
Loss on disposal of other assets - 70
Changes in operating assets and liabilities:
Accounts receivable 84 189
Deferred advertising costs 1,716 968
Inventories (459) 408
Prepaid expenses and other (346) (42)
Accounts payable (233) (2,192)
Accrued employee compensation 44 (49)
Customer liabilities (89) 22
Deferred rent 205 -
Net cash used in operating activities (3,958) (2,518)
INVESTING ACTIVITIES
Capital expenditures (445) (77)
Other investing activities, net - 25
Net cash used in investing activities (445) (52)
FINANCING ACTIVITIES
Purchase of treasury stock - (95)
Issuance of debt to related party 2,933 -
Issuance of warrants associated with
related party debt obligations 1,067 -
Payoff of note receivable on sale of land - 810
Capitalization of interest - 63
Principal payment on debt and capital
lease obligations (38) (35)
Net cash provided by (used in) financing
activities 3,962 743
Net increase (decrease) in cash and cash
equivalents from operations (441) (1,827)
Cash and cash equivalents at beginning of year 1,656 2,289
Cash and cash equivalents at end of period $ 1,215 $ 462
See notes to financial statements.
CONCEPTS DIRECT, INC.
Notes to Financial Statements
(Unaudited)
Note 1 - Basis of presentation
The unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States for interim financial reporting and the regulations
of the Securities and Exchange Commission in regard to quarterly
reporting. Accordingly, they do not include all information and
footnotes required by accounting principles generally accepted in
the United States for complete financial statements. In our
opinion, the statements include all adjustments, consisting only
of normal recurring adjustments, which are necessary for a fair
presentation of the financial position, results of operations and
cash flows for the interim periods. Results of operations for the
three-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2002. Seasonal fluctuations in sales of our products
result primarily from the purchasing patterns of the individual
consumer during the Christmas holiday season. These patterns tend
to concentrate sales in the latter half of the year, particularly
in the fourth quarter. For further information refer to the
financial statements and footnotes thereto included in our annual
report on Form 10-K for the year ended December 31, 2001.
Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 presentation.
Note 2 - Advertising expense
These expenses primarily relate to paper, printing, postage, and
distribution of catalog materials. Such expenses 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 expenses
were $5.3 million and $3.7 million in the second quarters of 2002
and 2001, respectively, and $11.5 million and $7.9 million during
the first six months of 2002 and 2001, respectively.
Note 3 - Property and equipment
In November 2000, we refinanced our 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"). In accordance
with Statement of Financial Accounting Standards No. 98
"Accounting for Leases," (Statement No. 98) the lease was recorded
as a financing transaction due to our continuing involvement in
the Limited Partnership. We accounted for our investment in the
Limited Partnership under the equity method. Accordingly, we
capitalized the building, land, and associated transaction costs
as an asset and the proceeds from the sale/leaseback were recorded
as debt financing.
In December 2001, we sold our 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 our continuing involvement in the
Limited Partnership. In accordance with SFAS No. 98 and SFAS No.
66 "Accounting for Sales of Real Estate", we now account for the
transaction under sale-leaseback accounting which resulted in the
related property and debt being eliminated and the creation of a
deferred gain in the amount of $3,755,000. We now account for the
lease as an operating lease and the deferred gain is being
recognized ratably over the remaining term of the lease. The
twenty-year lease requires monthly lease payments of $103,000, and
annual lease escalations of 3% per year.
Note 4 - Collection of note receivable
In June 2001, we collected $810,000 of an $880,000 note receivable
(the "Note") related to the sale of approximately 92 acres of land
in 2000. The Note was due in 2003. In consideration for the
early payment, we wrote off $70,000 of the Note, which is recorded
as a loss in other expense.
Note 5 - Share repurchase program
In December 2000, our Board of Directors authorized the repurchase
of up to $250,000 of our common stock in the open market or in
privately negotiated transactions in accordance with applicable
securities laws. As of June 30, 2002, we had repurchased 93,700
shares of our common stock under the program at a total cost of
$227,000.
Note 6 - Related Party Transactions
On April 26, 2002, we closed on a $4 million financing (the
"Financing") with St. Cloud Capital Partners, LP ("St. Cloud") and
Phillip A. and Linda S. Wiland (the "Wilands"). The Financing
entailed two 10% Senior Secured Promissory Notes (the "Notes") in
the aggregate principal amount of $4,000,000 and two Common Stock
Purchase Warrants, representing the right to acquire in the
aggregate 550,000 shares of common stock. The Notes are secured by
assets of the Colorful Images brand pursuant to a security
agreement (the "Security Agreement") and undeveloped land that we
own. The Notes mature on May 1, 2007. The proceeds from the
Financing are to fund general working capital needs.
The Note and Warrant that we issued to the Wilands detailed above
replaced an existing note and warrant with the Wilands which was
entered into on March 28, 2002. That note provided that if we
obtained additional financing on or before April 30, 2002, the
Wilands would receive substantially similar terms and conditions
of the prospective investor(s).
Marshall S. Geller, one of our directors, is the co-founder and
senior manager of St. Cloud and he has an interest in St. Cloud.
Phillip A. Wiland is our Chairman, Chief Executive Officer and
President. Linda S. Wiland is Mr. Wiland's spouse. The Wilands
are significant stockholders of Concepts Direct, Inc.
During the first quarter of 2002, at the request of our Board of
Directors, we sought financing from numerous sources including
credit facilities from banks and mezzanine funding. However, we
were not successful in finding financing on terms equal to or
better than the terms offered by the Wilands and St. Cloud.
Therefore, our Board of Directors set up a special committee of
Board members consisting of Virginia B. Bayless and Kenneth M.
Gassman, Jr. to review the negotiations of the Financing. The
Financing was approved by the Board's special committee. In
addition, the Board of Directors unanimously agreed to the terms
of the Financing on April 25, 2002.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
We are 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. We were organized as a Delaware corporation in May
1992 and began operations under the Concepts Direct name on
September 30, 1992, as a result of a spin-off from Wiland
Services. Since inception, our primary focus has been on
utilizing our direct marketing expertise and our database to
produce multiple independent revenue streams from multiple
marketing vehicles. Today we own and operate six catalog titles,
their associated websites and related niche marketing vehicles.
Our six primary direct marketing vehicles are the "Colorful
Images(R)," "Linda Anderson(R)," "Snoopy(TM) etc.," "Linda Anderson's
Collectibles(R)," "the Music Stand(R)," and "Garfield Stuff(R)"
catalogs. Through these media and related Internet sites, we sell
personalized paper products and a diverse line of merchandise,
including collectibles, gift items, home decorative items and
casual apparel. Two of our primary strengths are our proprietary
database (consisting of approximately 13.3 million customers,
catalog requesters, catalog referrals and gift recipients as of
June 30, 2002) and our direct marketing expertise.
Net sales
Net sales increased by 21% to $11.8 million during the second
quarter of 2002, compared to $9.8 million during the same period
of 2001. Net sales increased by 18% to $25.8 million during the
first six months of 2002, compared to $21.9 million during the
same period of 2001. During the first six months of 2002, we
increased prospecting volumes and circulation of catalogs over the
same period of the prior year. We also increased the retail price
for all paper products during the second quarter of 2001.
Our business is seasonal. Historically, a substantial portion of
revenues and net income has been realized during the fourth
quarter. We believe this is the general pattern associated with
the mail order and retail industries. In 2001, approximately 22%,
18%, 20%, and 40% of sales were recognized in the first quarter,
second quarter, third quarter, and fourth quarter, respectively.
Cost of product and delivery and gross profit
Cost of product and delivery as a percentage of sales increased to
65% in the second quarter of 2002 compared to 56% in the same
period of 2001. Cost of product and delivery as a percentage of
sales increased to 61% in the first six months of 2002 compared to
57% in the same period of 2001. Gross profit decreased by $120,000
or 3% to $4.2 million in the second quarter of 2002 from $4.3
million in the same period in 2001. Gross profit increased by
$648,000 or 7% to $10.1 million in the first six months of 2002
from $9.4 million in the same period in 2001. The increase in
product cost and decrease in gross margin during the second
quarter was mainly due to discontinued merchandise that we
liquidated through our two retail locations and other liquidation
methods.
Advertising expense
Advertising expenses increased by $1.6 million, or 42%, to $5.3
million in the second quarter of 2002 from $3.7 million in the
same period in 2001. Advertising expenses increased $3.6 million,
or 46% to $11.5 million during the first six months of 2002 from
$7.9 million for the same period in 2001. Advertising expense as a
percentage of sales increased to about 45% in the second quarter
of 2002 from about 38% in the same period of 2001. Advertising
expense as a percentage of sales increased to about 45% in the
first six months of 2002 from about 36% in the same period of
2001. The increase in advertising expense is due to increased
prospecting volumes and circulation of catalogs in the fourth
quarter of 2001 and the first six months of 2002.
Loss from operations
Loss from operations was $3.0 million and $1.1 million in the
second quarters of 2002 and 2001, respectively. Loss from
operations was $5.1 million and $2.1 million in the first six
months of 2002 and 2001, respectively.
The operating loss increase was primarily due to the increase in
advertising expense and product cost as discussed above (see
"Advertising expense" and "Cost of product and delivery and gross
profit.")
Other income (expense)
Other expense consisting primarily of interest expense offset by
interest income, was $78,000 in the second quarter of 2002
compared to $321,000 in the same period of 2001. Other expense
was $40,000 in the first six months of 2002 compared to $525,000
in the same period of 2001.
The decrease in interest expense was primarily due to decreased
interest costs in 2002 associated with the sale of our interest in
the real estate investment limited partnership as described more
fully below.
In November 2000, we refinanced our corporate headquarters and
fulfillment center in Longmont, Colorado through the sale and
subsequent leaseback of the facility to a real estate investment
limited partnership ("Limited Partnership"). Due to our
continuing involvement in the Limited Partnership, we capitalized
the building, land, and associated transaction costs as an asset
and the proceeds from the sale/leaseback were recorded as debt
financing, which carried an imputed interest rate of 12.48%. We
sold our interest in the Limited Partnership in December 2001,
effectively discontinuing our involvement in the Limited
Partnership (Note 3).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $441,000 in the first six
months of 2002 compared to a decrease of $1.8 million in the same
period of 2001.
The $441,000 decrease in the first six months of 2002 was primarily
due to:
* A net loss of $5.2 million, an increase in inventory of
$459,000, a decrease in inventory valuation reserves of $243,000,
an increase in prepaid expenses of $346,000, a decrease in
accounts payable of $233,000, and capital expenditures of
$445,000.
* This was offset by a decrease in deferred advertising costs of
$1.7 million, depreciation and amortization expense of
$611,000, and $4.0 million in financing with Phillip A. and
Linda S. Wiland, and St. Cloud Capital Partners (see "Related Party
Transactions" below).
The $1.8 million decrease in cash in the first six months of 2001
was mainly due to:
* A net loss of $2.6 million, and a decrease in accounts payable of
$2.2 million.
* This was offset by depreciation and amortization expense of
$858,000, a decrease in deferred advertising costs of $968,000, a
decrease in inventory of $408,000, and a note receivable payment
of $810,000.
Inventory levels increased from December 2001 to June 2002 in an
attempt to improve product order fill rates. Inventory valuation
reserves decreased during the same period due to discontinued
merchandise that we liquidated through our two retail locations
and other liquidation methods. We are expecting inventory levels
at December 2002 to decrease as compared to June 30, 2002.
STRATEGY AND OUTLOOK
During the first six months of 2002, we attempted to increase
sales by investing in reactivating older customers and acquiring
new catalog customers through a more aggressive prospecting
program than in prior years. During the second quarter and
subsequent to closing our financing with the Wilands and St. Cloud
(see "Related Party Transactions"), our sales results have
continued to trend below forecast. As a result, we have initiated
a cost reduction program aimed at reducing corporate overhead and
advertising expenditures. In early July we reduced our workforce
by approximately 100 employees or 27%. In addition, we reduced
circulation plans for all brands for the remainder of 2002 and
2003 in an attempt to preserve cash. In light of the weaker than
expected sales results thus far in 2002, these initiatives will
likely further decrease sales for the second half of 2002 and all
of 2003. We are now projecting 2002 sales to decline as compared
to 2001, and a further sales decline for 2003. We are expecting
continuing losses through 2002 greater than that of 2001 and
improvement to a smaller loss for 2003.
The reduced circulation plans and lower overhead burden should
allow us to operate on our limited cash position through 2003. If
actual results fall short of our revised projections we may need
to take further cash preservation steps and/or attempt to raise
additional capital. In addition, we may consider other strategic
alternatives such as the sale of catalog brands or the sale of
other assets that we own to reduce indebtedness or otherwise
provide cash for the business.
The reduced advertising expenditures may have an adverse effect on
our ability to increase revenue and retain customers in the
long-term. In light of our present limited working capital base,
we believe it is in our best interest to curtail growth plans
until customer response rates and cash position improve.
RELATED PARTY TRANSACTIONS
On April 26, 2002, we closed on a $4 million financing (the
"Financing") with St. Cloud Capital Partners, LP ("St. Cloud") and
Phillip A. and Linda S. Wiland (the "Wilands"). The Financing
entailed two 10% Senior Secured Promissory Notes (the "Notes") in
the aggregate principal amount of $4,000,000 and two Common Stock
Purchase Warrants, representing the right to acquire in the
aggregate 550,000 shares of common stock. The Notes are secured by
assets of the Colorful Images brand pursuant to a security
agreement and undeveloped land that we own.
The Note and Warrant that we issued to the Wilands replaced an
existing note and warrant with the Wilands which was entered into
on March 28, 2002. That note provided that if we obtained
additional financing on or before April 30, 2002, the Wilands
would receive substantially similar terms and conditions of the
prospective investor(s).
The Financing is between Concepts Direct, Inc., and St. Cloud and
the Wilands. Marshall S. Geller, one of our directors, is the
co-founder and senior manager of St. Cloud and he has an interest
in St. Cloud. Phillip A. Wiland is our Chairman, Chief Executive
Officer and President. Linda S. Wiland is Mr. Wiland's spouse.
The Wilands are significant stockholders of Concepts Direct, Inc.
The proceeds from the Financing are to fund our general working
capital needs. During the first quarter of 2002, at the request
of our Board of Directors, we sought financing from numerous
sources including credit facilities from banks and mezzanine
funding. However, we were not successful in finding financing on
terms equal to or better than the terms offered by the Wilands and
St. Cloud. Therefore, our Board of Directors set up a special
committee of Board members consisting of Virginia B. Bayless and
Kenneth M. Gassman, Jr. to review the negotiations of the
Financing. The Financing was approved by the Board's special
committee. In addition, the Board of Directors unanimously agreed
to the terms of the Financing on April 25, 2002.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We lease our corporate headquarters and fulfillment center, two
retail locations, a warehouse and various types of equipment under
operating lease agreements expiring through 2020. We occupy our
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. Our performance under the
lease is secured by a security deposit of $1.0 million. The lease
also provides that, in addition to base rent, we are 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.
In addition, the Financing detailed above under "Related Party
Transactions" entailed two Notes in the aggregate principal amount
of $4,000,000 and two Common Stock Purchase Warrants, representing
the right to acquire in the aggregate 550,000 shares of common
stock. The Notes are secured by assets of the Colorful Images
brand pursuant to a security agreement and undeveloped land that
we own. Our loan commitments under the Financing are as follows
(assuming we do not prepay the loan which we are allowed to do
after the first year without penalty): (1) total remaining minimum
loan payments as of June 30, 2002 -- approximately $4,972,000; (2)
total remaining payments in 2002 as of June 30, 2002 --
approximately $552,000; (3) total payments in 2003-2004 --
approximately $2,040,000; (4) total payments in 2005-2006 --
approximately $2,040,000; and (5) total payments after 2006 --
approximately $340,000. The Financing includes various
affirmative covenants under which we have agreed it will, among
other things, (1) deliver financial statements and other
information to St. Cloud and the Wilands; (2) permit
representatives of St. Cloud and the Wilands to have reasonable
access to our property and records; (3) maintain and preserve our
existence and good standing in our jurisdiction of organization
and our qualification to do business in all other jurisdictions
where qualification is necessary; (4) maintain reasonable
insurance; (5) pay all taxes and other governmental charges; (6)
comply in all material respects with all applicable laws; (7)
prepay the Notes upon the sale or other disposition of any real
property or related facilities that we own; and (8) keep our
property in good working order and condition. The Financing
includes various negative covenants under which we have agreed we
will not, among other things, (1) pay dividends or make other
distributions to our shareholders; (2) incur, create, assume or
permit to exist any additional indebtedness, subject to a few
exceptions; (3) merge or sell substantially all of our assets; (4)
liquidate, dissolve or reorganize; (5) sell, lease or otherwise
dispose of more than 5% of our assets in a twelve month period;
(6) create or permit any lien on any of our assets to exist,
excluding customary permitted liens; and (7) make a loan or
advance in excess of $50,000. The terms of the Notes provide that
Events of Default include, among other things: (i) failure to
make a payment on the Notes for a period of ten (10) days from
when such payment is due; (ii) the default or failure to observe
or perform any agreement or covenant under the terms of the
Financing that is not remedied within 30 days after we become
aware of such default; (iii) cross-default on certain of our other
indebtedness, including the lease of our headquarters and
fulfillment center detailed above, which indebtedness is not cured
in thirty days; (iv) a judgment creditor obtaining possession of
any collateral securing the Notes; (v) failure to cure within ten
(10) days any impairment on the noteholders' lien on such
collateral; and (vi) the filing of voluntary or involuntary
bankruptcy against us that is not dismissed within thirty (30)
days. Upon an Event of Default, all principal and interest on the
Notes shall immediately become due and payable.
SUBSEQUENT EVENT
On July 2, 2002, we took steps to decrease expenses through a
reduction in force and a decrease in circulation of catalogs. We
decreased the number of our employees by about 100, or 27%, and
instituted pay cuts for the remaining employees, including
management. On an annual basis, we estimate that these steps will
reduce costs by over $2.0 million.
RISK FACTORS AND CAUTIONARY STATEMENTS THAT MAY AFFECT FUTURE
RESULTS
This report contains statements concerning our 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 words.
We make 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.
We base our forward-looking statements on our beliefs and
assumptions using information available at the time the statements
are made. We caution the reader not to place undue reliance on our
forward-looking statements because the assumptions, beliefs,
expectations and projections about future events may and often do
materially differ from actual results. We undertake no obligation
to update any forward-looking statement to reflect developments
occurring after the statement is made.
Factors that could cause our actual results to differ materially
from our projections, forecasts, estimates and expectations
include, but are not limited to, the following
* changes in postal rates, including significant rate increases
experienced beginning in June 2002 and possible additional postal
rate increases requested by the United States Postal Service;
* changes in the cost of paper used in the production of our
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 we offer in our catalogs;
* changes in our merchandise product mix or changes in our
customer response to advertising offers;
* competitive factors including name recognition, the limited
operating history for several of our specialty brands, and our
limited e-commerce operating history;
* lack of availability/access to long-term capital and working
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;
* 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 with current level of employees to maintain
acceptable levels of customer satisfaction with catalog order
fulfillment services;
* inability to recruit and retain management personnel,
particularly in regards to our cost reduction steps;
* reduced advertising expenditures may have an adverse effect on
our ability to increase revenue and retain customers in the
long-term;
* inability to obtain product in a timely manner due to vendor
credit restrictions;
* lack of effective performance of customer service and our 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 26, 2002, as detailed above in "Related Party
Transactions", we closed on the Financing with St. Cloud and the
Wilands. The Financing entailed two 10% Senior Secured Promissory
Notes in the aggregate amount of $4,000,000 and two Common Stock
Purchase Warrants, representing the right to acquire in the
aggregate 550,000 shares of common stock. The exercise price for
the Warrants is $.10, of which St. Cloud and the Wilands have
already paid $.09 cents. The Warrants are exercisable between
July 26, 2002 and April 26, 2009. No underwriters were engaged in
the Financing. St. Cloud and the Wilands are accredited investors
and we relied on Section 4(2) and on Rule 506 of Regulation D in
not registering the Notes and Warrants under the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Our annual shareholders' meeting was held on May 8, 2002.
At such annual meeting, our stockholders elected Virginia
B. Bayless, Robert L. Burrus, Jr., Kenneth M. Gassman,
Jr., Marshall S. Geller, and Phillip A. Wiland as
directors for one-year terms. The elections were
approved by the following votes:
Directors For Withheld
Virginia B. Bayless 4,778,943 500
Robert L. Burrus, Jr. 4,762,313 17,130
Kenneth M. Gassman, Jr. 4,778,943 500
Marshall S. Geller 4,778,943 500
Phillip A. Wiland 4,762,313 17,130
(b) At such annual meeting, our stockholders ratified the
election of Ernst & Young LLP as the independent public
accountants for the fiscal year ended December 31, 2002.
The ratification of Ernst & Young LLP was approved by the
following votes:
For 4,777,989
Against 20
Abstain 1,434
Broker Non-Votes 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 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 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 reference.
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 April
26, 2002, by the Registrant for the benefit of St.
Cloud Capital Partners, LP, in the principal amount
of $2,000,000 filed as Exhibit 4.1 on Form 8-K dated
May 1, 2002, is expressly incorporated herein by
reference.
4(c) Senior Secured Promissory Note, dated April
26, 2002, by the Registrant for the benefit of
Phillip A. and Linda S. Wiland, in the principal
amount of $2,000,000 filed as Exhibit 4.2 on Form
8-K dated May 1, 2002, is expressly incorporated
herein by reference.
4(d) Security Agreement, dated April 26, 2002, by
the Registrant, St. Cloud Capital Partners, LP, and
Phillip A. and Linda S. Wiland filed as Exhibit 4.3
on Form 8-K dated May 1, 2002, is expressly
incorporated herein by reference.
4(e) Warrant Agreement for Common Stock, dated
April 26, 2002, by the Registrant for the benefit of
St. Cloud Capital Partners, LP, filed as Exhibit 4.4
on Form 8-K dated May 1, 2002, is expressly
incorporated herein by reference.
4(f) Warrant Agreement for Common Stock, dated
April 26, 2002, by the Registrant for the benefit of
Phillip A. and Linda S. Wiland, filed as Exhibit 4.5
on Form 8-K dated May 1, 2002, is expressly
incorporated herein by reference.
4(g) Note and Warrant Purchase Agreement, dated
April 26, 2002, by the Registrant, St. Cloud Capital
Partners, LP, and Phillip A. and Linda S. Wiland
filed as Exhibit 4.6 on Form 8-K dated May 1, 2002,
is expressly incorporated herein by reference.
4(h) Investor Rights Agreement, dated April 26,
2002, by the Registrant, St. Cloud Capital Partners,
LP, and Phillip A. and Linda S. Wiland filed as
Exhibit 4.7 on Form 8-K dated May 1, 2002, is
expressly incorporated herein by reference.
99.1 Chief Executive Officer certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 is
filed herewith.
99.2 Chief Financial Officer certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 is
filed herewith.
(b) Reports on Form 8-K
On May 1, 2002, a current report on Form 8-K under
Item 5 was filed with the Securities and Exchange
Commission announcing a $4 million financing with
St. Cloud Capital Partners, LP, and Phillip A. and
Linda S. Wiland.
On July 3, 2002, a current report on Form 8-K under
Item 5 filed with the Securities and Exchange
Commission announcing a reduction in force and a
decrease in circulation of catalogs.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONCEPTS DIRECT, INC.
(Registrant)
Date: August 14, 2002 By: /s/Cody S. Mcgarraugh
Cody S. McGarraugh
Chief Financial Officer
(Duly Authorized Officer)
Date: August 14, 2002 By: Zaid H. Haddad
Controller
(Principal Accounting Officer)