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 September 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 November 12, 2002, 5,468,276 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
September 30, 2002(unaudited)....................3
Statements of Operations for the three and
nine months ended September 30, 2002 and 2001
(unaudited)......................................4
Statements of Cash Flows for the nine months
ended September 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................9
Item 4. Controls and Procedures ..........................14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........15
Item 5. Other Information.................................15
Item 6. Exhibits and Reports on Form 8-K..................15
CONCEPTS DIRECT, INC.
BALANCE SHEETS
(Dollars in thousands, except share data)
September 30,
2002 December 31,
(unaudited) 2001
ASSETS
Current assets:
Cash and cash equivalents $ 452 $ 1,656
Accounts receivable, less allowances 255 241
Deferred advertising costs 3,215 5,032
Inventories, less allowances 6,119 5,736
Prepaid expenses and other 642 447
Total current assets 10,683 13,112
Property and equipment, net 1,411 1,352
Capitalized software costs, net 1,281 1,564
Trademark and other intangibles, net 938 1,016
Other assets 1,345 1,355
Total assets $ 15,658 $ 18,399
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued
expenses $ 5,329 $ 5,414
Current maturities of notes payable
to related parties 378 -
Current maturities of capital leases
payable 57 -
Accrued employee compensation 642 612
Deferred gain 199 199
Customer liabilities 1,572 799
Total current liabilities 8,177 7,024
Notes payable to related parties 2,422 -
Capital leases payable 105 -
Deferred gain 3,399 3,548
Deferred rent 328 17
Total liabilities 14,431 10,589
Stockholders' equity:
Common stock, $.10 par value, 7,500,000
shares authorized, 5,561,976 and
5,017,238 shares issued and outstanding
on September 30, 2002 and December 31,
2001, respectively. 556 502
Additional paid-in capital 15,408 14,396
Accumulated deficit (14,510) (6,861)
Treasury stock at cost, 93,700 shares (227) (227)
Total stockholders' equity 1,227 7,810
Total liabilities and stockholders'
equity $ 15,658 $ 18,399
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net sales $ 10,562 $ 11,248 $ 36,317 $ 33,102
Cost of product and delivery 7,106 6,371 23,037 19,812
Gross profit 3,456 4,877 13,280 13,290
Operating expenses:
Advertising 4,086 3,935 15,589 11,827
General and administrative 1,643 1,564 5,074 4,167
Total operating expenses 5,729 5,499 20,663 15,994
Loss from operations (2,273) (622) (7,383) (2,704)
Other expense, net (226) (234) (266) (759)
Net loss from operations (2,499) (856) (7,649) (3,463)
Net loss applicable to common
shares $ (2,499) $ (856) $ (7,649) $ (3,463)
Net loss per share, basic and
diluted $ (0.48) $ (0.17) $ (1.52) $ (0.69)
Weighted average number of common
shares used in computing basic
and diluted loss per share 5,243,276 4,991,748 5,031,288 4,993,958
See notes to financial statements.
CONCEPTS DIRECT, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Nine Months Ended September 30,
2002 2001
OPERATING ACTIVITIES
Loss from continuing operations $ (7,649) $ (3,463)
Adjustments to reconcile loss from continuing
operations to net cash provided by (used in)
continuing operating activities:
Increase (decrease) in allowance for bad debt (5) 4
Decrease in inventory valuation reserves (23) (95)
Depreciation 463 799
Amortization 437 447
Deferred gain amortization (149) -
Loss on disposals of property and equipment 132 -
Loss on disposal of other assets - 70
Interest financed as debt - 95
Changes in operating assets and liabilities:
Accounts receivable (9) (81)
Deferred advertising costs 1,817 (1,676)
Inventories (360) 518
Prepaid expenses and other (185) (78)
Accounts payable (85) (198)
Accrued employee compensation 30 241
Customer liabilities 773 1,239
Deferred rent 311 -
Net cash used in operating activities (4,502) (2,178)
INVESTING ACTIVITIES
Release of cash restricted as collateral - 250
Capital expenditures (546) (111)
Sales of property and equipment - -
Payoff of note receivable on sale of land - 810
Other investing activities, net - (9)
Net cash provided by (used in) investing activities (546) 940
FINANCING ACTIVITIES
Purchase of treasury stock - (95)
Issuance of debt to related parties 2,933 -
Issuance of warrants associated with related
party debt obligations 1,067 -
Principal payment on debt and capital lease
obligations (156) (35)
Net cash provided by (used in) financing activities 3,844 (130)
Net decrease in cash and cash equivalents from
operations (1,204) (1,368)
Cash and cash equivalents at beginning of year 1,656 2,289
Cash and cash equivalents at end of period $ 452 $ 921
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
management's 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 September
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. The pattern may be abnormal in 2002 due to increased
catalog circulation during the first seven months of the year.
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.
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. We
adopted Statement 141 beginning January 1, 2002. There was no
impact as a result of the adoption.
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, we
adopted Statement 142 beginning January 1, 2002. There was no
impact as a result of the adoption.
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. We adopted Statement
144 beginning January 1, 2002. We periodically review the
carrying amounts of our long-lived assets to determine whether
events or circumstances require adjustments to the carrying
amounts. In such reviews, estimated undiscounted future cash
flows associated with long-lived assets or operations are compared
with their carrying value to determine if a write-down is
required.
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 catalogs. Such expenses are deferred for
financial reporting purposes until the catalogs 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 $4.1 million and $3.9 million in the third quarters of 2002
and 2001, respectively, and $15.6 million and $11.8 million during
the first nine 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, which carried an imputed interest rate of
12.48%.
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 September 30, 2002, we had repurchased
93,700 shares of our common stock under the program at a total
cost of $227,000. Our last repurchase occurred in November 2001.
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. A portion of the
Financing was ascribed to the value of the warrants, with the
remaining amount recorded as notes payable. We are accreting the
notes payable up to their full face amount over the term of the
notes. 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 were used 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.
St. Cloud and the Wilands exercised their Warrants on August 7,
2002. The exercise price for the Warrants was $.10, of which St.
Cloud and the Wilands had already paid $.09. St. Cloud and the
Wilands exercised the Warrants using the cashless exercise
procedure detailed in the Warrant Agreements and were each issued
272,369 shares of our common stock.
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, predecessor 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)," "SnoopyTM 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 13.5 million customers,
catalog requesters, catalog referrals and gift recipients as of
September 30, 2002) and our direct marketing expertise.
Net sales
Net sales decreased by 6% to $10.6 million during the third
quarter of 2002, compared to $11.2 million during the same period
of 2001. Net sales increased by 10% to $36.3 million during the
first nine months of 2002, compared to $33.1 million during the
same period of 2001. During the first nine months of 2002 in an
effort to reactivate certain customers and grow our customer
database, we increased circulation of catalogs over the same
period of the prior year. However, circulation volumes decreased
in the third quarter of 2002 versus the third 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 consumer catalog 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. 2002 may not fit this pattern due
to the increased circulation volumes in the first seven months of
the year.
Cost of product and delivery and gross profit
Cost of product and delivery as a percentage of net sales
increased to 67% in the third quarter of 2002 compared to 57% in
the same period of 2001. Cost of product and delivery as a
percentage of sales increased to 63% in the first nine months of
2002 compared to 60% in the same period of 2001. Gross profit
decreased by $1.4 million or 29% to $3.5 million in the third
quarter of 2002 from $4.9 million in the same period of 2001.
Gross profit remained almost the same for the first nine months of
2002 compared to the same period of 2001. The increase in cost of
product and delivery as a percentage of net sales during the third
quarter of 2002 and for the first nine months of 2002 was mainly
due, in order of magnitude, to rent expense on our corporate
headquarters and fulfillment center booked to cost of product and
delivery beginning December 2001 (see Note 3), increases in cost
of product on certain new merchandise, write-offs of equipment and
software, and an increase in the inventory obsolescence reserve on
older inventory items.
During the third quarter, headcount in operations decreased by
81 permanent full-time employees. This increased our reliance on
seasonal and temporary employees, and allows us more flexibility
in managing our fulfillment center and related expenses.
Advertising expense
Advertising expense increased by $151,000, or 4%, to $4.1 million
in the third quarter of 2002 from $3.9 million in the same period
of 2001. Advertising expense increased $3.8 million, or 32% to
$15.6 million during the first nine months of 2002 from $11.8
million for the same period in 2001.
Advertising expense as a percentage of sales increased to
approximately 39% in the third quarter of 2002 from approximately
35% in the same period of 2001. Advertising expense as a
percentage of sales increased to approximately 43% in the first
nine months of 2002 from approximately 36% in the same period of
2001. We increased catalog circulation in the fourth quarter of
2001 and the first seven months of 2002 thus increasing
advertising expense for the first nine months of 2002 compared to
the same period of 2001. Amortization of the increased catalog
circulation volume in prior quarters caused advertising expense to
increase during the third quarter of 2002 compared to the same
period of 2001.
General and administrative expense
General and administrative expense increased by $79,000, or 5%,
during the third quarter of 2002 compared to the same period of
2001. General and administrative expense increased by $907,000, or
22%, during the first nine months of 2002 compared to the same
period of 2001. The increased expense during the first nine months
of 2002 was primarily caused by an increase in general and
administrative headcount of 30 employees during the first six
months of 2002. Beginning July 2, 2002, general and administrative
headcount decreased by 30 employees through reductions in force.
Loss from operations
Loss from operations was $2.5 million and $856,000 in the third
quarters of 2002 and 2001, respectively. Loss from operations was
$7.6 million and $3.5 million in the first nine months of 2002 and
2001, respectively.
The operating loss increase for the third quarter of 2002 was
primarily due to the decrease in net sales, and increase in cost
of product and delivery, and advertising expenses. The operating
loss increase for the first nine months of 2002 was mainly due to
the increase in cost of product and delivery, advertising
expenses, and general and administrative expenses as discussed
above (see "Net sales," "Cost of product and delivery and gross
profit," "Advertising expense," and "General and administrative
expense.")
Other expense
Other expense consisting primarily of interest expense offset by
interest income, was $226,000 in the third quarter of 2002
compared to $234,000 in the same period of 2001. Other expense
was $266,000 in the first nine months of 2002 compared to $759,000
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 (see Note 3). This
was partially offset in the second and third quarters of 2002 by
interest expense on notes payable (see Note 6).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.2 million in the first
nine months of 2002 compared to a decrease of $1.4 million in the
same period of 2001.
The $1.2 million decrease in the first nine months of 2002 was
primarily due to:
* A net loss of $7.6 million, a deferred gain amortization of
$149,000, an increase in inventory of $360,000 in an attempt to
improve product order fill rates, a decrease in prepaid expenses
of $185,000, capital expenditures of $546,000, and note and
capital lease payments of $156,000.
* This was offset by depreciation and amortization expenses of
$900,000, a loss of $132,000 on disposals of assets and
write-offs of internally-developed software, a decrease in
deferred advertising costs of $1.8 million, an increase in
customer liabilities of $773,000, an increase in deferred rent
of $311,000, and $4.0 million in financing with Phillip A. and
Linda S. Wiland, and St. Cloud Capital Partners (see Note 6).
The $1.4 million decrease in the first nine months of 2001 was
mainly due to:
* A net loss of $3.5 million, an increase in deferred advertising
expenses of $1.7 million, and a decrease in accounts payable of
$198,000.
* This was offset by depreciation and amortization expense of $1.2
million, a decrease in inventories of $518,000, an increase in
customer liabilities of $1.2 million, release of $250,000 of
restricted cash, and a note receivable payment of $810,000.
The net changes in cash by quarter during 2001 were: First Quarter
($398,000); Second Quarter ($1,429,000); Third Quarter $459,000
and Fourth Quarter $735,000. Our 2001 net changes in cash include
the sale of our investment in the real estate limited partnership
and the collection of a note receivable (see Note 4, and "Other
income (expense)"). Excluding these non-recurring transactions,
the net changes in cash by quarter during 2001 would have been:
First Quarter ($398,000); Second Quarter ($2,239,000); Third
Quarter $459,000; Fourth Quarter ($90,000).
The net changes in cash by quarter during the first nine months of
2002 were: First Quarter $98,000; Second Quarter ($539,000) and
Third Quarter ($763,000). The negative net changes in cash for
the first nine months of 2002 were offset, in part, by the
proceeds of loans from Phillip A. and Linda S. Wiland of
$2,000,000 in March 2002 and from St. Cloud Capital Partners of
$2,000,000 in April 2002. Excluding these two financings, the net
changes in cash by quarter during 2002 would have been: First
Quarter ($1,902,000); Second Quarter ($2,539,000) and Third
Quarter ($763,000). At this time, we have no arrangements or
expectations for arrangements, other than as described in
"Subsequent Event" below, to be able to offset any additional
negative net changes in cash that may occur. See "Strategy and
Outlook" for a further discussion of liquidity.
Inventory levels increased from December 2001 to September 2002 in
an attempt to improve product order fill rates during the early
part of 2002. We are expecting inventory levels at December 31,
2002 to decrease as compared to September 30, 2002.
STRATEGY AND OUTLOOK
Beginning in the third quarter of 2001, as part of an overall
strategy to increase sales and our customer database size, we
invested in reactivating customers and acquiring new catalog
customers by increasing catalog circulation. We entered into two
financings for a total of $4,000,000 partially to fund this growth
in sales. During the fourth quarter and first seven months of
2002, we increased sales and our active customer base. However,
sales did not increase to the levels that we projected and our
costs rose faster than anticipated.
Beginning July 2, 2002, we instituted significant cost reductions.
Since that date headcount has decreased by 111 permanent full-time
employees, and 44 employees have taken reductions in compensation
ranging from 2.5% to 50%. In addition, we have reduced catalog
circulation volumes.
Beginning in July 2002, we have made arrangements to extend
payments to certain key vendors. During the third quarter, the
average time that vendor invoices were outstanding increased as we
began to manage our payments of vendor invoices. We expect to
continue our management of vendor invoices during the fourth
quarter of 2002.
Historically, we have had negative net changes in cash in at least
the first two or three quarters of each year and the amount of
negative net changes in cash (excluding our financing activities)
in 2002 accelerated until the expense reduction program commenced.
As discussed below in "Subsequent Event," during the fourth
quarter of 2002 we have taken steps to reduce our secured
indebtedness. In addition, we are continuing to attempt to reduce
expenses and manage our payments to vendors during the fourth
quarter. If we continue to successfully reduce expenses and
manage our vendor payments, we should be able to operate on our
limited cash position at least into the first quarter of 2003.
Continuing through that time, we may need to further reduce
expenses and extend payments to vendors, raise additional capital,
or pursue other strategic alternatives. Our failure to secure
additional working capital, if needed, may jeopardize our ability
to meet our cash obligations. Our Board of Directors has formed a
Special Committee consisting of Kenneth M. Gassman, Jr. and
Virginia B. Bayless to review our long-term prospects and evaluate
strategic alternatives. The Special Committee is currently in
negotiations with a financial advisor to assist the Company in
seeking strategic alternatives.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We lease our corporate headquarters and fulfillment center, one
retail location, 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. Our lease
commitments for this lease, as of September 30, 2002, are as
follows: (1) total remaining minimum lease payments -
approximately $30,908,000; (2) total remaining payments in 2002 -
approximately $326,000; (3) total payments in 2003 - 2004 -
approximately $2,684,000; (4) total payments in 2005 - 2006 -
approximately $2,847,000; and (6) total payments after 2006 -
approximately $25,051,000.
In connection with the $4.0 million financing with Phillip A. and
Linda S. Wiland and St. Cloud Capital Partners, we entered into
two loan commitments in the first and second quarters of 2002. Our
loan commitments under both loans, as of September 30, 2002, are
as follows: (1) total remaining minimum loan payments --
approximately $4,674,000; (2) total remaining payments in 2002 --
approximately $254,000; (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. As of September 30, 2002, we believe that
we are in compliance with all covenants under the loan
commitments.
SUBSEQUENT EVENT
On November 12, 2002, we closed on an agreement to sell our remaining
real estate for $1,050,000 less closing costs. The transaction
closed on November 12, 2002. The funds from the sale were used
to reduce our secured debt under the loan commitments (detailed in
"Contractual Obligations and Commercial Commitments" above).
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:
* lack of availability/access to long-term capital and working
capital;
* inability to adjust our expense structure sufficiently
to create positive cash flows;
* reduced advertising expenditures which 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;
* issues related to management transitions;
* 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;
* changes in postal rates;
* 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 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;
* 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;
* 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.
Item 4. Controls and Procedures
Our principal executive officer and principal financial officer
have evaluated the effectiveness of the Company's "disclosure
controls and procedures," as such term is defined in Rule
13a-14(c) of the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this Quarterly Report on Form
10-Q. Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, to the
best of their knowledge, our disclosure controls and procedures
are effective.
There were no significant changes in our internal controls or in
other factors that could significantly affect these controls,
since the date such controls were evaluated.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
As previously disclosed, we closed on a $4 million financing with
St. Cloud Capital Partners ("St. Cloud") and the Phillip A. and
Linda S. Wiland (the "Wilands") earlier in 2002. Part of the
financing consisted of us issuing St. Cloud and the Wilands Common
Stock Purchase Warrants, representing the right to acquire in the
aggregate 550,000 shares of common stock. Both parties exercised
their Warrants on August 7, 2002. The exercise price for the
Warrants was $.10, of which St. Cloud and the Wilands had already
paid $.09. St. Cloud and the Wilands exercised the Warrants using
the cashless exercise procedure detailed in the Warrant Agreements
and were each issued 272,369 shares of our common stock. No
underwriters were engaged in the financing or in this issuance.
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 common stock issued to both parties.
Item 5. Other Information
We believe that, as of September 30, 2002, we no longer satisfy
Nasdaq's continued listing requirement of having at least
$2,500,000 in shareholders equity. Based on a review of Nasdaq's
website we anticipate that Nasdaq will issue a letter requesting
that we submit a plan of compliance within 10 business days of our
receipt of such letter. Upon review of our plan of compliance,
Nasdaq will determine whether: (i) we have regained compliance;
(ii) an extension of time is warranted; or (iii) to delist our
securities. If Nasdaq determines to delist the securities, we may
appeal at that time. We cannot assure that Nasdaq will accept our
compliance plan.
In addition, on September 25, 2002, we received a notice from
Nasdaq that stated that, for thirty consecutive trading days, the
price of our common stock had closed below the minimum $1.00 per
share requirement for continued listing. We have been provided
180 calendar days from the date of this notice, or until March 24,
2003, to regain compliance. Nasdaq has indicated that to regain
compliance the bid price of our common stock must close at $1.00
per share or more for a minimum of 10 consecutive trading days. In
the notice, Nasdaq indicated that, if we did not regain compliance
by March 24, 2003, Nasdaq will provide written notification that
our securities will be delisted. We can appeal such notification.
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) 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.
99.1 Certification of Phillip A. Wiland, Chairman,
Chief Executive Officer, and President 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 Certification of Zaid H. Haddad, Chief Financial
Officer, 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 July 3, 2002, a current report on Form 8-K under
Item 5 was filed with the Securities and Exchange
Commission announcing a reduction in force and a
decrease in circulation of catalogs.
On September 4, 2002, a current report on Form 8-K
under Item 5 was filed with the Securities and
Exchange Commission announcing the election of Zaid H.
Haddad as Chief Financial Officer and the resignation
of Cody S. McGarraugh as Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONCEPTS DIRECT, INC.
(Registrant)
Date: November 14, 2002 By: /s/ Phillip A. Wiland
Phillip A. Wiland
Chairman, Chief Executive
Officer, and President
(Duly Authorized Officer)
Date: November 14, 2002 By: /s/ Zaid H. Haddad
Zaid H. Haddad
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Phillip A. Wiland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concepts
Direct, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Phillip A. Wiland
Phillip A. Wiland
Chairman, Chief Executive
Officer and President
I, Zaid H. Haddad, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concepts
Direct, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Zaid H. Haddad
Zaid H. Haddad
Chief Financial Officer