UNITED STATES 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, 2002
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 (I.R.S. 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (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. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes ___ No X
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid
and asked price of such common equity, as of the last business day
of the registrant's most recently completed second fiscal quarter
(June 30, 2002): $1,765,453.
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 as of June 30, 2002 was
subtracted from the total number of shares outstanding to
calculate the number of shares held by non-affiliates. 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 is an "affiliate."
The number of shares outstanding of the registrant's Common Stock
as of March 24, 2003 was 5,237,426.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be
filed pursuant to regulation 14A for our 2003 annual meeting of
shareholders are incorporated by reference into Part III.
PART I
Item 1. Business
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 seven catalog
titles, their associated websites and related niche marketing
vehicles.
In early 2000, after a period of extensive Internet infrastructure
development activity, we moved certain of our technology assets
and liabilities to two wholly-owned subsidiary corporations called
iConcepts, Inc. ("iConcepts") and BOTWEB, Inc. ("BOTWEB").
iConcepts was established to provide technology support to
Concepts Direct, BOTWEB and, at an appropriate time, third
parties. 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. The goal of
this reorganization was 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, we
significantly scaled back our 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 only support the on-going operations of our catalog
business.
Our seven primary direct marketing vehicles are the "Colorful
Images(R)," "Linda Anderson(R)," "Snoopy(TM) etc.," "Garfield
Stuff(R)," "Linda Anderson's Collectibles(R)," "the Music
Stand(R)," and "NewBargains(sm)" 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. Our primary
strengths are our proprietary database (consisting of
approximately 13.7 million customers, catalog requesters, catalog
referrals and gift recipients as of December 31, 2002) and our
direct marketing expertise.
Our Internet web site's address is www.conceptsdirectinc.com.
Strategic Focus
Our strategic focus is to prudently increase revenues and earnings
through the successful operation of our catalogs and related
Internet sites.
The principal strategies for achieving our strategic focus are as
follows:
* We employ 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.
* We seek to maximize effective use of our proprietary
database. In addition to recency, frequency of purchase
and other monetary data typically used in database direct
marketing, we also collect information concerning the types
and themes of merchandise purchased by our 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 our
database are to be selected for subsequent marketing
contacts.
* We believe that our list testing strategy, evaluation of
performance data, and recognition of the long-term value of
a new customer have been significant contributing factors
to our success in expanding and contracting circulation in
various business environments.
* We believe that we enjoy strong brand recognition and
customer loyalty for our catalogs. As a result, we intend
to leverage our proprietary database and understanding of
product preferences of our 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.
* We leverage our fulfillment infrastructure, direct
marketing expertise, and technological expertise to market
products via e-commerce sites. We believe that we 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.
Customer Database
Our proprietary database stores information on each customer. The
information is derived primarily from customer transactions and is
updated as new transactions are recorded. We also conduct
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 2002, we mailed almost 42 million copies of all catalog
titles.
At the end of 2002, the proprietary database contained
approximately 13.7 million customers, catalog requesters, catalog
referrals, and gift recipients. Approximately 1.2 million
customers placed orders with us in 2002. The database has grown
during the past three years, increasing from 11.3 million names at
the end of 1999 to 13.7 million names at the end of 2002.
Information contained in the customer database assists in
determining which offers customers should receive and the
frequency of those offers.
We select from our database the individuals we believe are most
likely to respond to a particular merchandise offer, with the goal
of maximizing sales while managing costs as a percent of sales.
Various indicators, including order size and frequency, date of
last order, and style and theme of products purchased are utilized
to direct specific catalog mailings to those most likely to
purchase our merchandise. The customer database is updated in a
real time environment.
Marketing Lines
We not only market to our customer database but also exchange
lists with and rent lists from other direct marketers in order to
gain new customers. Our Internet presence is continuing to grow,
which makes our products available to customers and prospects
online.
We currently market our products primarily under seven catalog
titles:
1. Colorful Images(R)
Colorful Images(R) is the trade name under which we market
our line of personalized labels, personalized notepads,
various other personalized paper products and general
merchandise such as gifts, home decor, T-shirts, and
collectibles. Colorful Images( 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. 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 Garfield(TM)(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 ranging from
approximately $7.00 to $129.00, 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. We
mailed the core Colorful Images(R) catalog to customers and
prospects 10 times in 2002, and nine times in 2001.
In addition to the core catalog mailings, we continued to
test, during various points in 2002, niche catalog versions.
These niche versions attempted 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. We discontinued the niche
Colorful Images(R) mailing strategy during the third quarter
of 2002 due to the increased expense of these catalog
versions.
Approximately 1 million customers placed orders through the
Colorful Images(R) catalog in the twelve month period ended
December 31, 2002, compared to almost 1.2 million in 2001.
This decrease was mainly a result of a decrease in
circulation volumes in 2002.
ColorfulImages.com, featuring a full array of Colorful
Images(R) products was launched in late 2000. We believe
that it is less expensive to process orders received via the
website. We engage in Email campaigns and marketing
arrangements with Internet affiliates and search engines to
attract new customers to ColorfulImages.com and our other
Internet sites.
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 range from about $7.00 to about $300.00,
excluding shipping and handling.
Approximately 64,000 customers placed orders through the
Linda Anderson(R) catalog in the twelve-month period ended
December 31, 2002, compared to approximately 77,000 in 2001.
This decrease was mainly a result of decreased circulation
volume, and repositioning the catalog with higher price point
items in 2002, which caused the catalog to appeal to a
different type of customer than that which already existed in
the database. In 2002, we began acquiring new customers for
the repositioned catalog through prudent prospecting efforts.
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 catalog and the
Linda Anderson's Collectibles(R) catalog. We 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 2002, catalog circulation was decreased substantially
to allow us to increase our focus on Colorful Images(R) and
the repositioned Linda Anderson(R) catalog. We do not
currently expect to increase catalog circulation of Linda
Anderson's Collectibles(R).
The LindaAnderson.com site offers products that have been
offered in the Linda Anderson's Collectibles(R) catalog.
4. Snoopy(TM) etc.
Operating under an agreement with United Feature Syndicate,
the Snoopy(TM), etc. catalog consists 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 $9.00 and $600.00 per item. Since 1996, we
have had a license to feature PEANUTS(R) characters on
personalized label products and have accumulated information
on our proprietary database concerning buyers of PEANUTS(R)
personalized label products and other PEANUTS(R) merchandise
sold in our catalogs.
Approximately 43,000 customers placed orders through the
Snoopy(TM) etc. catalog and related website in the
twelve-month period ended December 31, 2002, compared to
approximately 51,000 in 2001. This decrease was mainly a
result of a decrease in circulation volume.
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
e-commerce site for Snoopy.com, the official website managed
by United Feature Syndicate.
5. the Music Stand(R)
In June 1999, we 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.
Product price points in the Music Stand(R) catalog are
generally between $7.00 and $375.00 per item. Approximately
33,000 customers placed orders through the Music Stand(R)
catalog and related website in the twelve-month period ended
December 31, 2002, compared to approximately 40,000 in 2001.
This decrease was mainly a result of a decrease in
circulation volume.
6. Garfield Stuff(R)
Under an operating agreement with PAWS, Inc., we mailed our
first Garfield Stuff(R) catalog in July 2002. The Garfield
Stuff(R) catalog consists exclusively of Garfield(R)
merchandise. 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 PAWS, Inc.
Product price points in the Garfield Stuff(R) catalog are
generally between about $7.00 and $250.00 per item.
Approximately 13,000 customers placed orders through the
Garfield Stuff(R) catalog and website in the twelve-month
period ended December 31, 2002.
We launched the GarfieldStuff.com website in April 2002.
7. NewBargains(sm)
In September 2002, we mailed the first NewBargains(sm)
catalog. We launched NewBargains.com in January 2000. The
NewBargains(sm) catalog and associated website are
liquidation vehicles strictly used to market slow-moving
inventory at discounted prices. Customers who receive the
NewBargains(sm) catalog are carefully selected to minimize
eroding our customer databases. Prices in the
NewBargains(sm) catalog are generally discounted 10% to 80%
off original retail prices.
Product Lines
Our 2002 net sales are primarily attributable to product sales
directly to individual consumers of the seven catalog brands. Our
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 50% of direct to consumer product sales in 2002.
With the exception of personalized checks, all of the personalized
paper products sold are stocked and shipped directly to customers
from our 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 50% of direct to consumer product sales in
2002.
Approximately 96% of product revenue relates to items stocked and
shipped directly from our 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 all of our catalog
titles, except Snoopy,(TM) etc, and NewBargains(sm). These primary
trademarks are due for renewal on the following dates: Colorful
Images(R) on February 8, 2004, Linda Anderson(R) on September 19,
2005, Linda Anderson's Collectibles(R) on January 12, 2009, and
the Music Stand(R) on December 8, 2012.
We have developed certain artwork used in our labels and other
products. In addition, we have 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), PAWS, Inc., Boyds Collection
Ltd.(R), Dreamsicles(R), and others. We anticipate the licenses
and royalty arrangements may be renewed or replaced, as
appropriate, with minimal disruption to ongoing operations.
We rely on technology that is licensed from third parties,
including software integrated with internally developed software
to perform key functions. The majority of our software is
licensed on a perpetual basis.
Internet Infrastructure and Database Management Software
One of our key assets is our database management, fulfillment
management, and Internet infrastructure software known as DASH.
We have developed and enhanced this software 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. We may gradually add a variety of new
features in the future.
Product Liquidation
During 2002, we liquidated overstock inventory primarily through
our two retail outlet stores and the NewBargains(sm) catalog and
associated website. We closed one retail outlet in October 2002
and the other in February 2003 when each of those respective
leases expired. Management believes that the current preferred
industry practice for liquidating inventory is via catalog web
sites. Our primary liquidation channels going forward are the
NewBargains(sm) catalog and associated website, NewBargains.com
("NewBargains"). Prices in the catalog and on the website are
discounted 10% to 80% off original retail prices. All products
offered in the catalog and on the website are excess inventory
items of first quality and generally in the original packaging
from the vendor. We have found the NewBargains(sm) catalog and
associated website to be effective ways to liquidate inventory
while maximizing net cash flow.
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 we purchase the base paper stock for
most of our personalized labels from a few vendors, we believe
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, we maintain an inventory of the products that we
sell. We analyze past catalog mailings, evaluate probable
customer buying patterns, and project sales levels for new
products, to try to avoid committing excessive amounts of working
capital to inventory for substantial periods of time. In the
fourth quarter of 2001 and the first quarter of 2002, we attempted
to minimize the number of products on backorder. This caused
inventory levels to increase significantly over historic levels.
During 2002, we were somewhat successful in reducing inventory
levels through improved purchasing processes and by liquidating
slow-moving inventory. We turned our inventory approximately two
times in 2002 compared to the industry average inventory turns of
approximately five to six times. We expect to increase our
inventory turns in 2003 as we liquidate more of the slow-moving
inventory.
Gift and apparel inventory liquidation processes include offering
products in NewBargains(sm) and its associated website, and
discarding of some items. Through February 2003, we also sold
overstock products through small retail outlets. All of our
Internet sites also feature merchandise not currently offered in
our catalogs.
Inventory levels decreased during 2002 primarily as a result of
our liquidation efforts during the year. Management expects
inventory levels to decrease during 2003 as we continue to
liquidate our slow-moving inventory.
We spend significant amounts on paper used in the production of
our catalogs and paper products. While we cannot predict future
paper cost increases, price increases would have an adverse impact
on future earnings.
Order Fulfillment
Orders for merchandise are received by mail, telephone, Internet,
and facsimile. During 2002, approximately 41% of customer orders
were received by telephone, 33% by mail or facsimile, and 26% via
the Internet. 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. 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.
Gross order backlog was approximately $800,000 and $1.4 million as
of December 31, 2002 and 2001, respectively. Backlog at December
31, 2002 represented approximately nine days of order shipments
subsequent to December 31, 2002. Substantially all the backlog at
December 31, 2002 has been filled in 2003. The level of order
backlog fluctuates with seasonal sales patterns as discussed
below.
Customers 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 price increase in June 2002. While we cannot
predict future postage costs, such increases could have a material
impact upon our future operating and financial results.
Customer Service
We place great emphasis on customer service. Our 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 2002 was approximately 3.5% 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 "Product Liquidation,"
or discarded. Product and order problem inquiries are directed to
customer service personnel who are trained to resolve most
customer issues.
Seasonality
Our business is seasonal. Historically, a substantial portion of
our revenues and net income have been realized during the fourth
quarter. We believe this is the general pattern associated with
the mail order and retail industries. Accordingly, our 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 2002,
approximately 27%, 23%, 20% and 30% of sales were recognized in
the first quarter, second quarter, third quarter, and fourth
quarter, respectively. The seasonal variation in 2002 was less
pronounced than in prior years due to increased catalog
circulation during the first eight months of the year, and
decreased mailings during the last four months of 2002 as compared
to the same periods in prior years. For comparative purposes, we
recognized approximately 22%, 18%, 20% and 40% of sales in the
first quarter, second quarter, third quarter, and fourth quarter
of 2001, respectively.
Competition
Direct marketing is highly competitive. Many companies offer
products via catalog, direct mail, newspaper inserts, television,
the Internet, and other media. We compete on the basis of the
quality, diversity and price of merchandise offered, customer
service, and effectiveness of customer targeting.
We believe 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). 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 our catalogs. In
addition, certain merchandise sold in our catalogs is available
through retail stores and other sources.
We believe that e-commerce is becoming a significant force in the
marketplace in which we operate. We also believe that the
Internet retailing sites supporting our 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 we do.
Employees
As of December 31, 2002, there were approximately 161 full-time
employees. Of these, 28 supported creative and marketing
functions, 104 supported fulfillment operations, 12 supported
information technology functions, and 17 supported other
administrative functions. In addition, there were 36 part-time
employees supporting fulfillment operations. Additionally, we
employ a seasonal workforce of part-time employees for peak
periods of the year. Our employees are not covered by collective
bargaining agreements. We consider our relationship with our
employees to be satisfactory.
Government Regulations
We must comply with federal, state and local laws that affect our
business. In particular, we are subject to Federal Trade
Commission regulations governing advertising and trade practices.
While we believe we are 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.
We have historically collected and remitted sales and similar
taxes only in those states in which we have a physical 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 our future operations. 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 on us.
Financial Information about Foreign and Domestic Operations and
Export Sales
Identifiable assets are attributable entirely to domestic
operations. There are no foreign operations, but we advertise in
Canada and may do so again in the future. In June 2001, we began
receiving orders outside of the United States and Canada. For the
twelve months ended December 31, 2002, we recognized international
sales of $450,000 to the following regions: Canada - $148,000;
European Union - $87,000; other - $215,000. In 2001, we
recognized sales of $142,000 through our marketing efforts into
Canada, and an additional $9,000 to other foreign countries. All
foreign sales are denominated in U.S. Dollars.
Segment Reporting
During 2002 and 2001, our operations were entirely within the
Concepts Direct operating segment.
During the first nine months of 2000, we managed our 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. Further description of our segments is
included in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7.
Item 2. Properties
Real Property
Our corporate headquarters, administrative offices, and operations
are located in Longmont, Colorado, approximately 40 miles from
downtown Denver. We also occupy a warehouse facility in Mead,
Colorado, approximately 10 miles from our corporate headquarters,
administrative offices, and operations. We believe that the
facilities we occupy are well maintained and in excellent
operating condition. We 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, we moved essentially all of our operations to
the new facility. In 2000, we sold all but approximately 20 acres
of the undeveloped land. The remaining undeveloped land was sold
in 2002. We do not currently own any real estate.
During 2000, we raised approximately $11,000,000 through the sale
and subsequent leaseback arrangement in which our primary facility
in Longmont, Colorado was sold to a real estate investment limited
partnership. In connection with this transaction, we 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 our future
performance under the lease. The twenty-year lease, requires
monthly lease payments, including annual lease escalations of 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 our 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 and the proceeds
from the sale/leaseback were recorded as debt financing. During
the fourth quarter of 2001, we sold our 25% retained interest in
the limited partnership, thus eliminating the partnership's assets
and corresponding long-term liability from our balance sheet. We
now account for the transaction under sales-leaseback accounting.
Accordingly, we 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. We generated approximately
$825,000 in cash as a result of the sale of the 25% retained
interest.
The following table sets forth the real property that we leased as
of December 31, 2002:
Location Function Lease Expiration 2003 Rent Square Feet
Longmont, CO Headquarters 10/31/2020 $1,322,094 117,000
Longmont, CO Retail Outlet 2/28/2003 $6,204 1,700
Mead, CO Warehouse 9/30/2004 $140,004 27,500
The retail outlet lease was not renewed at its expiration.
Fulfillment Hardware and Software
Substantially all of our order fulfillment hardware is located at
our headquarters facility. We own most of the equipment except
for certain computer and telephone hardware. The primary computer
hardware is manufactured by Sun Microsystems, Inc, Cisco
Corporation, and IBM. We currently use an internally developed
order processing system and Internet infrastructure developed
using Oracle as the primary software platform. We believe that
the existing hardware and software should accommodate our
near-term requirements.
Item 3. Legal Proceedings
We are not involved in any litigation that we believe is material.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerning our current executive
officers 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.
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, 56, 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.
Zaid H. Haddad, 38, Chief Financial Officer, Treasurer, and
Secretary since September 3, 2002 and Controller from April
15, 2002 until September 3, 2002. Prior to that, Mr. Haddad
held the following positions: Controller for Persona, Inc.,
an Internet marketing company, from April 2001 until April
2002; Assistant Controller for MessageMedia, Inc, an Email
marketing company, from October 1999 until April 2001;
Financial Reporting Manager for Quark, Inc., a software
company, from August 1998 until October 1999; and Advisory
Financial Analyst for Storage Technology Corporation, a
computer data storage company, from February 1996 until
August 1998.
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
Market and Price Information
Our common stock, par value $.10 (the "Common Stock"), is
currently quoted on the OTC Bulletin Board under the symbol CDIR.
The OTC Bulletin Board is a regulated quotation service for
subscribing members of the National Association of Securities
Dealers that displays real-time quotes, last sale prices, and
volume information in over-the-counter securities. Our Common
Stock was delisted from Nasdaq SmallCap Market on January 15,
2003. The following table sets forth the high and low sale prices
per share of our Common Stock for the periods indicated.
Period High Low
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
Calendar 2002
1st Quarter $2.25 $1.03
2nd Quarter 2.80 0.95
3rd Quarter 1.10 0.70
4th Quarter 0.83 0.36
Number of Shareholders
As of March 14, 2003, there were approximately 104 record holders
of the Common Stock, according to our stock transfer agent and
registrar.
Dividends
Except for the distribution of proceeds from the disposal of the
Direct Marketing Services division in 1992, no cash dividends have
been paid on the Common Stock. We anticipate earnings, if
obtained, will be retained for use in the business and we do not
anticipate paying any cash dividends in the foreseeable future.
Further, under the Note and Warrant Purchase Agreement dated April
26, 2002, by and among Concepts Direct, Inc., St. Cloud Capital
Partners, L.P., and Phillip A. Wiland and Linda S. Wiland, we
cannot pay dividends to our stockholders without the consent of
the other two parties. If such consent is obtained and earnings
are available, payment of dividends will be within the discretion
of the Board of Directors, which will periodically review the
dividend policy, considering our earnings, capital requirements,
and financial condition, among other factors.
Securities authorized for issuance under equity compensation plans
The following table summarizes our equity compensation plans,
including the 1992 Employee Stock Option Plan, the 1992
Non-Employee Directors Stock Option Plan, the 1998 Non-Employee
Directors Stock Option Plan, and the 2001 Incentive Compensation
Plan, as of December 31, 2002:
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options securities reflected in
warrants, and rights warrants, and rights column (a))
Plan Category (a) (b) (c)
______________ ____________________ ____________________ ________________________
Equity
compensation plans
approved by
security holders 294,500 $3.92 43,500(1)
Equity
compensation plans
not approved by
security holders 0 N/A N/A
___________________ ____________________ ________________________
Total 294,500 $3.92 43,500(1)
(1) The number of shares available for future issuance under equity compensation plans
consists of 20,000 shares under the 1998 Non-Employee Directors Stock Option Plan and
23,500 shares under the 2001 Incentive Compensation Plan. The 1992 Employee Stock
Option Plan expired on December 17, 2002, and the 1992 Non-Employee Directors Stock
Option Plan expired on May 1, 1998.
Item 6. Selected Financial Data
Years ended December 31,
_________________________________________________________
2002 2001 2000 1999 1998
_________________________________________________________
(amounts in thousands except per share data)
INCOME STATEMENT DATA
Net sales $ 51,685 $ 55,757 $ 55,453 $ 55,475 $ 84,773
Operating loss from continuing operations (7,078) (2,316) (1,515) (3,539) (1,979)
Income (loss) from continuing operations
Before income taxes (7,040) (3,119) 52 (3,914) (2,030)
Income (loss) from continuing operations (6,872) (3,119) 52 (3,125) (1,378)
Loss from discontinued operations - - (2,786) (503) -
Net loss (6,872) (3,119) (2,734) (3,628) (1,378)
Basic earnings (loss) per share
Income (loss) from continuing operations $ (1.34) $ (0.63) $ 0.01 $ (0.63) $ (0.28)
Loss from discontinued operations - - (0.56) (0.10) -
Total $ (1.34) $ (0.63) $ (0.55) $ (0.73) $ (0.28)
Diluted earnings (loss) per share
Income (loss) from continuing operations $ (1.34) $ (0.63) $ 0.01 $ (0.63) $ (0.28)
Loss from discontinued operations - - (0.56) (0.10) -
Total $ (1.34) $ (0.63) $ (0.55) $ (0.73) $ (0.28)
Weighted average common shares 5,130 4,983 5,003 4,977 4,959
Weighted average common shares and
dilutive stock options 5,130 4,983 5,003 4,977 4,959
Cash dividends declared per common share $ - $ - $ - $ - $ -
BALANCE SHEET DATA
Current assets $ 9,571 $ 13,112 $ 12,087 $ 10,205 $ 19,237
Current liabilities 6,328 7,024 5,566 7,371 8,554
Total assets (1) 13,531 18,399 27,632 26,078 32,073
Long-term debt and capital lease
obligations (1) (2) 2,091 - 10,945 6,321 6,858
Deferred gain (1) 3,349 3,548 - - -
Stockholders' equity 1,907 7,810 11,156 13,889 17,440
(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 our results of operations
and general financial condition. 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 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, financial market
conditions, including the availability and cost of capital, and
the factors discussed in "Liquidity and Capital Resources" below,
and in Note 2 to the financial statements. Additional risks are
discussed below.
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 short-term and long-term
capital, including 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;
* inability to successfully negotiate reasonable extended payment
terms with our vendors;
* 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 economic conditions due to war or terrorism;
* changes in our merchandise product mix or changes in our
customer response to advertising offers;
* changes due to the Company's exploration of strategic
alternatives or a change of control;
* 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.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General: Operations
We increased circulation volumes beginning the fourth quarter of
2001 and into the third quarter of 2002 to reactivate customers
that had not purchased from us in the recent past. This helped
increase our customer database size and caused revenues and
advertising expense to increase through the third quarter. We
decreased circulation volumes during the fourth quarter to
decrease our advertising expense, which also caused revenues to
decrease for the fourth quarter and for 2002 overall compared to
the same periods in 2001. Profitability remained depressed
through the third quarter as a result of increased advertising
expense as a percentage of sales, and the fixed overhead of our
facilities. Although revenues decreased in the fourth quarter,
net income increased compared to the fourth quarter of 2001,
mainly due to decreased advertising expense in the fourth quarter
of 2002. However, increased expenses during the first three
quarters of 2002 caused us to post a greater loss in 2002 compared
to 2001.
Below is a table of key operating statistics as a
percentage of sales.
2002 2001 2000
________ ________ ________
Net sales 100.00% 100.00% 100.00%
Operating costs and expenses
Cost of product and delivery 62.26% 57.07% 62.81%
Advertising 38.17% 36.98% 29.18%
General and administrative 13.26% 10.10% 9.99%
Restructuring costs - - 0.75%
Total operating costs and expenses 113.69% 104.15% 102.73%
Operating loss from continuing
operations -13.69% -4.15% -2.73%
Other income (expense) net 0.07% -1.44% 2.82%
Income (loss) from continuing
operations before income taxes -13.62% -5.59% 0.09%
Benefit for income taxes 0.32% - -
Income (loss) from continuing
operations -13.30% -5.59% 0.09%
Discontinued operations, net of taxes
Operating loss - - -4.24%
Loss on disposal - - -0.78%
Total loss from discontinued
operations - - -5.02%
Net loss -13.30% -5.59% -4.93%
General: Strategies
In 2002, our Board of Directors formed a Special Committee to
review the Company's long-term prospects and explore strategic
alternatives and hired an investment bank to serve as the
Company's financial advisor. Please see "Exploration of Strategic
Alternatives" below for a more complete discussion of this topic.
Results of operations for fiscal 2002, compared to fiscal 2001
Net Sales
Net sales decreased to $51.7 million in 2002 compared to $55.8
million in 2001. During the first nine months of 2002, we
experienced a year over year sales increase of approximately 10%
as a result of increased circulation volumes as compared to 2001.
In the fourth quarter, we decreased circulation volumes compared
to the same period of 2001. This resulted in fourth quarter sales
in 2002 decreasing by 32% compared to the same period of 2001.
Sales of personalized paper products decreased to 50% of total
catalog sales in 2002 compared to 54% in 2001. This was primarily
due to an increase in the number of hard good items advertised in
the Colorful Images(R) catalog.
Cost of Product and Delivery and Gross Margin
Cost of product and delivery increased approximately 1% to $32.2
million in 2002 from $31.8 million in 2001. As a percentage of
sales, cost of product and delivery was 62% of net sales in 2002,
compared to 57% in 2001. This increase was primarily a result of
an increased percentage of our 2002 sales derived from hard good
products as opposed to paper products. Hard goods generally carry
a higher product cost than paper products.
Gross margin decreased to 38% for 2002 compared to 43% 2001.
Advertising Expense
Advertising expense decreased by approximately 5% to $19.7 million
in 2002 from $20.6 million in 2001. As a percentage of sales,
advertising expense increased to 38% in 2002 compared to 37% in
2001. This increase was primarily due to increased circulation of
catalogs during the first seven months of 2002.
General and Administrative Expense
General and administrative expense increased by approximately 22%
to $6.9 million in 2002 from $5.6 million in 2001. As a
percentage of sales, general and administrative expense increased
to 13% for 2002 compared to 10% for 2001. This was mainly due to
an increase in headcount during the first six months of 2002 and a
decrease in net sales compared to 2001. Additionally, during the
fourth quarter of 2002, we determined that the carrying amount of
the Music Stand trademark was impaired, and we wrote the value
down by $417,000.
Operating Loss from Continuing Operations
For the year ended 2002, our loss from operations was
approximately $7.1 million compared to a loss of approximately
$2.3 million in 2001. As a percentage of sales, our loss from
operations increased to approximately 14% in 2002 compared to 4%
in 2001. This was due to a decrease in net sales, and increased
cost of product, advertising expense, and general and
administrative expense as discussed above.
Other Income (Expense), net
Other income (expense) increased to $38,000 of income in 2002
compared to $803,000 of expense in 2001. Other income in 2002
consisted mainly of a gain on the sale of land in November 2002 of
$789,000, offset by interest expense on the related party notes
(see "Liquidity and Capital Resources") of approximately $770,000.
Other expense in 2001 consisted primarily of interest expense of
$1.3 million, offset by dividend and interest income of $311,000.
Income Taxes
We recognized an income tax benefit of $168,000 in 2002 related to
losses incurred in 2001 that were carried back and offset against
1996 taxable income. We did not recognize a tax benefit or
expense in 2001.
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,
we experienced a year over year sales decline as a result of lower
circulation volumes and reduced prospecting as compared to 2000.
Sales declined 5%, 13% and 1% in the first quarter, second
quarter, and third quarter, respectively. In the fourth quarter,
we increased circulation of catalogs over the prior year period.
This resulted in fourth quarter sales in 2001 increasing 13% 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% increase in catalog circulation for the
Colorful Images(R) catalog, which derived the majority of its sales
from paper products.
Cost of Product and Delivery and Gross Margin
As a percentage of net sales, cost of product and delivery
decreased to 57% in 2001, compared to 63% in 2000. This
improvement was a result of a paper products price increase that
we put in place in mid-2001 and a higher percentage 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 43% for 2001 compared to 37% for 2000.
Advertising Expense
Advertising expense increased approximately 27% to $20.6 million
in 2001 compared to $16.2 million in 2000. As a percentage of net
sales, advertising expense was 37% for 2001 compared to 29% for
2000. This increase was almost entirely driven by increased
circulation of catalogs during the second half 2001.
General and Administrative Expense
General and administrative expense increased by 2% in 2001
compared to 2000. As a percentage of sales, general and
administrative expense remained flat at 10% in 2001 compared to
2000.
Operating Loss from Continuing Operations
For the year ended 2001, our loss from operations was
approximately $2.3 million compared to a loss of approximately
$1.5 million in 2000.
Other Income (Expense), net
Other income (expense) in 2001 decreased to $803,000 of expense
compared to other income of approximately $1.6 million in 2000.
Other expense in 2001 consisted primarily of interest expense of
approximately $1.3 million offset by interest and dividend income
of approximately $311,000. Other income in 2000 consisted
primarily of gains on the sale of assets and interest income,
offset by interest expense.
Income Taxes
We recognized no income tax benefit or expense in 2001 or 2000.
Business Segments
During 2002, we operated entirely as one operating segment
consisting of the catalog operations and the corresponding
websites.
Through the third quarter of 2000, we managed and reported our
operations in three business segments - the Concepts Direct
segment ("Concepts Direct"), the iConcepts segment, and the BOTWEB
segment. Concepts Direct contained the catalog brands including
the associated websites. Its focus was 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. 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 discussed below in "Discontinued Operations," we undertook a
series of actions in the third quarter of 2000 to substantially
curtail the operations of iConcepts and discontinue BOTWEB, Inc.
Discontinued Operations
During the first half of 2000, we 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 2000. In early 2000, we moved certain of our
Internet assets and activities to two subsidiary corporations,
iConcepts, Inc. ("iConcepts") and BOTWEB, Inc. ("BOTWEB") to
provide the best opportunity for investors to understand our
Internet strategy and benefit from assets that were created to
support our 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, we discontinued BOTWEB and
significantly scaled back iConcepts. At December 31, 2000, all
the remaining operations and assets of iConcepts were part of the
Concepts Direct business segment. While this structure was in
place, we provided business segment financial information for each
of the three segments of the business.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at December 31, 2002 were $1.2
million compared to $1.7 million at December 31, 2001.
In 2002, we used approximately $3.8 million of cash in continuing
operations. This was mainly caused by a net loss of $6.9 million
largely due to increased catalog circulation volumes and a
decrease in accounts payable of $946,000, offset by depreciation
and amortization expense of $1.2 million, and a decrease in
deferred advertising costs of $3.0 million.
We generated $469,000 of cash from investing activities in 2002.
In November of 2002, we generated $1.1 million from the sale of
undeveloped land adjacent to our headquarters facility. This was
offset by capital expenditures related to equipment purchases and
capitalization of development of software applications.
We generated approximately $2.9 million of cash from financing
activities in 2002. This was due to the $4.0 million financing
that we closed on during the second quarter (see "Related Party
Transactions" below), offset by $1.0 million in debt principal
payments, and a purchase of $101,000 of treasury stock during the
fourth quarter for $0.43 per share.
In 2001, we used approximately $2.2 million of cash in continuing
operations. In an attempt to improve initial fill rates in the
early part of 2002 and fulfill back orders, inventories increased
$1.1 million in 2001. Deferred advertising costs increased $1.3
million as a result of the increased mail volumes in 2002.
We generated $1.9 million of cash from investing activities in
2001. During the fourth quarter, we generated $825,000 from the
sale of our 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, we were successful
in releasing $500,000 of cash that had previously been restricted
as collateral. We expended $263,000 on capital expenditures,
primarily to upgrade our information systems and capitalizing
previously developed software applications.
During 2001, we purchased treasury stock in the amount of $227,000
for an average price of $2.42 per share.
During the fourth quarter of 2001 and first seven months of 2002,
we increased sales and our active customer base. However, during
this time period, sales did not increase to the levels that we
projected and our costs rose faster than anticipated.
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 the first three quarters of 2002 accelerated.
Beginning July 2, 2002, we instituted significant cost reductions
by reducing headcount, compensation, circulation volumes, and our
secured indebtedness. 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. For example, during
the fourth quarter of 2002, we reduced catalog circulation volumes
by 65% compared to the fourth quarter of 2001. In 2002, as a
result of reduced circulation volumes, we decreased our sales
projections for the fourth quarter of 2002 and all of 2003. Also,
during the fourth quarter we reduced our secured indebtedness by
selling the remaining piece of undeveloped land for $1,050,000
(see "Related Party Transactions" below). We are continuing to
attempt to further reduce our operating costs.
During the third quarter of 2002, we also made three arrangements
to extend payments to certain key vendors, and negotiated a higher
credit limit from a fourth vendor. The average time that vendor
invoices were outstanding increased during the third quarter and
early part of the fourth quarter of 2002 as we managed all of our
payments of vendor invoices. During the fourth quarter, the
average time that vendor invoices were outstanding improved
significantly. During the fourth quarter of 2002 and first
quarter of 2003, we have made all required payments under the
extensions that we received in the third quarter of 2002 including
completing payment under one arrangement and anticipate being able
to complete payments under the other arrangements in accordance
with their terms during the second quarter of 2003.
In addition to the cost reductions that we implemented in the
third quarter of 2002, our cash position has improved due to
above-projected sales beginning in the fourth quarter of 2002.
Management believes that these above-projected sales during the
fourth quarter of 2002 may have been a result of the efforts by
management to improve the merchandise mix and presentation in our
catalogs and reactivation of customers that began in the fourth
quarter of 2001. If we continue to meet or exceed our sales
projection for 2003, this may be an indication that a significant
turnaround in the business is underway.
Due to the seasonal nature of our business, management expects
that our cash position will decrease beginning in the second
quarter of 2003. At such time, management expects that we will
need to begin actively managing our vendor invoices and the
average time outstanding for vendor invoices will increase during
the second quarter of 2003. In anticipation of this, in March
2003, certain of our largest vendors have informally agreed to
allow us to extend payments to them during the second and third
quarters of 2003, and other certain vendors have formally agreed
to such extensions.
If we continue to keep our costs down, successfully manage our
vendor invoices, and continue to meet or exceed our projected
sales volumes, management anticipates that we will be able to
resume normal payment terms with all vendors during the latter
part of the third quarter or early in the fourth quarter of 2003.
At which point, management expects to generate enough cash to
fund operations for the remainder of 2003 and into 2004. Our
business is seasonal, and it is not unusual for us to increase our
cash reserves during the fourth quarter of each year. Management
believes that our financial results and cash position in 2003 will
improve significantly compared to 2002. However, there can be no
assurances that we will be able to meet our internal forecast,
successfully manage our vendor invoices in 2003, or that the
opinion issued in the report by the auditors under Item 8 will not
adversely affect our relationships with vendors. All of our
working capital is generated from operations. We do not have a
revolving credit facility. In the short term, we also may not be
able to secure additional financing of the business if it becomes
necessary.
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 undeveloped land that we owned
and by assets of the Colorful Images brand pursuant to a security
agreement (the "Security Agreement").
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.
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.
On November 12, 2002, we sold the remaining undeveloped land for
$1,050,000 and used the funds to reduce the balance of the Notes.
The original maturity date for the Notes was May 1, 2007. However,
due to the additional principal payment on November 12, 2002, the
Notes are scheduled to be paid in full on December 1, 2005.
Based on securities filings made by the Wilands and St. Cloud, we
understand that the Wilands and St. Cloud have entered into a
letter agreement regarding the Note held by St. Cloud, whereby,
subject to certain conditions, the Wilands or an investor group
formed by the Wilands will purchase the Note held by St. Cloud in
its entirety for the remaining principal balance plus accrued
interest.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We lease our corporate headquarters and fulfillment center, 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. The lease was entered into
as a result of a sale-leaseback transaction (see "Impact of Sale
of Investment in Limited Partnership" below), and presently the
lease rate is significantly above the market for comparable
facilities in Longmont, Colorado. 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.
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.
The Financing includes various affirmative covenants under which
we have agreed we will, among other things:
* deliver financial statements and other information to St.
Cloud and the Wilands;
* permit representatives of St. Cloud and the Wilands to have
reasonable access to our property and records;
* 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;
* maintain reasonable insurance;
* pay all taxes and other governmental charges;
* comply in all material respects with all applicable laws;
* prepay the Notes upon the sale or other disposition of any
real property or related facilities that we own; and
* 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:
* pay dividends or make other distributions to our
shareholders;
* incur, create, assume or permit to exist any additional
indebtedness, subject to a few exceptions;
* merge or sell substantially all of our assets;
* liquidate, dissolve or reorganize;
* sell, lease or otherwise dispose of more than 5% of our
assets in a twelve month period;
* create or permit any lien on any of our assets to exist,
excluding customary permitted liens; and
* make a loan or advance in excess of $50,000.
The terms of the Notes provide that Events of Default include,
among other things:
* failure to make a payment on the Notes for a period of ten
(10) days from when such payment is due;
* 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;
* 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;
* a judgment creditor obtaining possession of any collateral
securing the Notes;
* failure to cure within ten (10) days any impairment on the
noteholders' lien on such collateral; and
* 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. As of December 31, 2002,
we were in compliance in all material respects with all covenants
under the loan commitments.
In 2003, the Company, the Wilands and St. Cloud have entered into
two amendments to the Investors' Rights Agreement, and the Wilands
and St. Cloud have also provided written waivers whereby the
parties have agreed to extend the deadline for the registration of
the shares of common stock issued upon the exercise of the
warrants discussed above. The waivers extended the deadline to
May 15, 2003.
Our commitments under all contractual obligations as of December
31, 2002 are as follows (in $000's):
Payments due by period
Contractual Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
_______________________ ________ ________________ ___________ ___________ _____________
Long-term debt(1) $ 2,900 $1,020 $1,880 - -
Capital lease obligations 168 72 96 - -
Equipment under Operating
leases 1,033 358 494 181 -
Building leases 30,828 1,462 2,869 2,933 23,564
________ ________________ ___________ ___________ _____________
Total contractual
cash obligations $34,929 $2,912 $5,339 $3,114 $23,564
(1)The long-term debt commitments consist of the remaining obligations from the $4.0 million
financing discussed above.
EXPLORATION OF STRATEGIC ALTERNATIVES
As previously announced, the Board of Directors formed a Special
Committee consisting of Kenneth M. Gassman, Jr. and Virginia B.
Bayless to review the Company's long-term prospects and explore
strategic alternatives. The Company also retained the investment
banking firm of Gruppo, Levey & Co. to assist the Special
Committee in its duties. On December 19, 2002, the Special
Committee received a non-binding letter of intent from Phillip A.
Wiland, the Company's Chairman, President and Chief Executive
Officer, and his wife, Linda S. Wiland for the acquisition of the
shares of the Company's common stock not owned by them for $0.68
per share. On December 23, 2002, the Company announced that it
would soon be formally soliciting bids for the Company and the
Wilands had been invited to participate in the bidding process.
After seeking bids for the sale of the Company in January and
early February, the Special Committee received two non-binding
indications of interest from parties other than the Wilands at
nominal prices higher than that received from the Wilands.
However, both of these proposals were subject to significant
conditions which cast significant doubt over both parties' ability
to close a transaction and, as a result, made them less
competitive than the Wilands' proposal. Consequently, the Special
Committee began negotiations with the Wilands. In that process,
the Wilands refined their offer to $0.54 per share net of special
costs that the Company would incur as a result of the transaction
such as investment banking, legal, and other fees. The Wilands
and the Special Committee were unable to reach an agreement by the
expiration time specified in the Wilands' letter of intent and the
Wilands allowed their non-binding offer to expire.
Based on filings of amendments to Schedule 13D, the Company has
been informed that on February 24, 2003 the Wilands entered into a
letter agreement with Laifer Capital Management, Hilltop Partners,
Lance Laifer, St. Cloud Capital Partners, LP, and Marshall S.
Geller, a director of the Company, whereby the Wilands agreed,
subject to certain conditions, to (or to cause their investor
group to) (i) purchase from St. Cloud Capital Partners the note
due to them from the Company; (ii) purchase the 272,369 shares
owned by St. Cloud Capital Partners for $0.54 per share; (iii)
purchase the 25,000 shares owned by Mr. Geller for $0.54 per
share; and (iv) purchase the 942,937 shares owned by Hilltop
Partners, Laifer Capital Management, and Mr. Laifer for $0.54 per
share. If this transaction occurs, the Wilands (or their investor
group, if one is formed) will own all of the Company's secured
debt and approximately 3,339,725 shares of the Company's common
stock or approximately 64% of the outstanding shares. In the
letter agreement, the Wilands state that they "may take other
actions subsequent to closing of the transactions contemplated in
this letter, and that such actions may include, but are not
limited to, loaning the company money, restructuring notes due
[them] to reduce company debt service, raising additional working
capital and/or making a tender offer to other shareholders."
Further in the Wilands' Schedule 13D-Amendment filed with the
Securities and Exchange Commission on February 26, 2002, the
Wilands state they may acquire shares of the Company's common
stock "in open market or privately negotiated purchases from time
to time." Based on the foregoing, the Special Committee is
presently reviewing the Company's long-term prospects and
strategic alternatives.
IMPACT OF SALE OF INVESTMENT IN LIMITED PARTNERSHIP
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) 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 our continuing involvement in the
Limited Partnership. We effectively retained a 25% ownership
interest in the building via the purchase of a 25% ownership
interest in the Limited Partnership for $625,000. We accounted
for our investment in the Limited Partnership under the equity
method.
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 was 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 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. We now account for
the lease as an operating lease and the deferred gain is being
recognized ratably over the remainder of the lease term.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to our
consolidated financial statements. The preparation of the
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances. We have 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 our financial condition or results of operations under
different conditions or using different assumptions.
Deferred advertising costs are a significant asset of ours. 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 our estimation of demand for the product,
based on historical trends.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 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 SFAS No. 141
are effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. We adopted
SFAS No. 141 beginning January 1, 2002. There was no impact as a
result of the adoption.
Under SFAS No. 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 SFAS No. 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 SFAS No. 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 SFAS No.
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.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement to classify
gains and losses from the extinguishment of indebtedness as
extraordinary, requires certain lease modifications to be treated
the same as a sale-leaseback transaction, and makes other
non-substantive technical corrections to existing pronouncements.
We will adopt SFAS No. 145 in 2003. We believe the adoption of
SFAS No. 145 will not materially impact our consolidated financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. We will adopt SFAS No. 148 in 2003. We
believe the adoption of SFAS No. 148 will not materially impact
our consolidated financial position, results of operations or cash
flows.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
We spend significant amounts on paper used both in the production
of our catalogs and in paper products that we advertise. Increases
in paper prices could adversely affect our earnings.
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 schedule Of Concepts Direct, Inc. 34
Consolidated Balance Sheets as of December 31,
2002 and 2001 35
Consolidated Statements of Operations for the
years ended December 31, 2002, 2001, and 2000 36
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001, and 2000 37
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001, and 2000 38
Notes to Consolidated Financial Statements
- December 31, 2002 39
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, 2002 and
2001, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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, 2002 and 2001, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, 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.
The accompanying financial statements have been prepared assuming
that Concepts Direct, Inc. will continue as a going concern. As
more fully described in Note 2, the Company has incurred recurring
operating losses and negative cash flows from operations. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 21, 2003
CONCEPTS DIRECT, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31,
______________________
2002 2001
__________ _________
ASSETS
Current assets:
Cash and cash equivalents $ 1,235 $ 1,656
Accounts receivable, less allowances 457 241
Deferred advertising costs 2,036 5,032
Inventories, less allowances 5,325 5,736
Prepaid expenses and other 518 447
Total current assets 9,571 13,112
_________ _________
Property and equipment, net 988 1,352
Capitalized software costs, net 1,181 1,564
Trademark and other intangibles, net 493 1,016
Other assets 1,298 1,355
_________ _________
Total assets $ 13,531 $ 18,399
_________ _________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 4,468 $ 5,414
Current maturities of notes payable to
related parties 509 -
Current maturities of capital leases payable 59 -
Accrued interest payable 28 -
Accrued employee compensation 525 612
Deferred gain 199 199
Customer liabilities 540 799
_________ ________
Total current liabilities 6,328 7,024
Notes payable to related parties 1,434 -
Capital leases payable 89 -
Deferred gain 3,349 3,548
Deferred rent 424 17
_________ ________
Total liabilities 11,624 10,589
Stockholders' equity:
Common stock, $.10 par value, 7,500,000
shares authorized, 5,567,976 and 5,017,238
shares issued on December 31, 2002 and
December 31, 2001, respectively. 557 502
Additional paid-in capital 15,411 14,396
Accumulated deficit (13,733) (6,861)
Treasury stock at cost, 330,550 shares and
93,700 shares at December 31, 2002 and
December 31, 2001, respectively (328) (227)
_________ ________
Total stockholders' equity 1,907 7,810
_________ ________
Total liabilities and stockholders' equity $ 13,531 $ 18,399
See notes to financial statements.
CONCEPTS DIRECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
2002 2001 2000
___________ ___________ ___________
Net sales $ 51,685 $ 55,757 $ 55,453
Cost of product and delivery 32,184 31,823 34,829
___________ ___________ ___________
Gross profit 19,501 23,934 20,624
Operating expenses:
Advertising 19,726 20,620 16,183
General and administrative 6,853 5,630 5,539
Restructuring costs - - 417
___________ ___________ ___________
Total operating expenses 26,579 26,250 22,139
Operating loss from continuing operations (7,078) (2,316) (1,515)
Other income (expense), net 38 (803) 1,567
___________ ___________ ___________
Income (loss) from continuing operations
before income taxes (7,040) (3,119) 52
Benefit for income taxes 168 - -
___________ ___________ ___________
Income (loss) from continuing operations (6,872) (3,119) 52
Discontinued operations, net of taxes:
Operating loss - - (2,353)
Loss on disposal - - (433)
___________ ___________ ___________
Total loss from discontinued operations - - (2,786)
___________ ___________ ___________
Net loss $ (6,872) $ (3,119) $ (2,734)
Net loss per share, basic and diluted
Continuing operations $ (1.34) $ (0.63) $ 0.01
Discontinued operations - - (0.56)
___________ ___________ ___________
$ (1.34) $ (0.63) $ (0.55)
Weighted average number of common shares
used in computing basic and diluted
loss per share 5,130,000 4,983,169 5,002,586
See notes to financial statements.
CONCEPTS DIRECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Additional Retained Total
Common Stock Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock Equity
_________ _______ __________ _________ ________ _____________
Balance at December 31, 1999 4,985,618 $ 499 $ 14,398 $ (1,008) $ - $ 13,889
Net loss - - - (2,734) - (2,734)
Exercise of stock options 29,830 3 (2) - - 1
_________ _______ ___________ __________ ________ _____________
Balance at December 31, 2000 5,015,448 502 14,396 (3,742) - 11,156
Net loss - - - (3,119) - (3,119)
Purchase of treasury stock - - - - (227) (227)
Exercise of stock options 1,790 - - - - -
_________ _______ ___________ __________ _________ _____________
Balance at December 31, 2001 5,017,238 502 14,396 (6,861) (227) 7,810
Net loss - - - (6,872) - (6,872)
Purchase of treasury stock - - - - (101) (101)
Exercise of warrants 544,738 54 1,012 - - 1,066
Exercise of stock options 6,000 1 3 - - 4
_________ _______ ___________ __________ _________ _____________
Balance at December 31, 2002 5,567,976 $ 557 $ 15,411 $(13,733) $ (328) $ 1,907
See notes to financial statements.
CONCEPTS DIRECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2002 2001 2000
_________ ________ _______
OPERATING ACTIVITIES
Income (loss) from continuing operations $(6,872) $(3,119) $ 52
Adjustments to reconcile income (loss) from
continuing operations to net cash used
in continuing operating activities:
Decrease in allowance for bad debt (4) (7) (48)
Increase (decrease) for losses in
inventory values (56) 157 (114)
Depreciation 612 1,043 1,803
Amortization 597 575 504
Impairment write-down of intangible asset 417 - -
Deferred gain amortization (199) (8) -
Gain on disposals of property and equipment (641) - (2,398)
Loss (gain) on disposal of certain assets - (123) 53
Interest financed as debt - 233 -
Changes in operating assets and liabilities:
Accounts receivable (212) 170 285
Deferred advertising costs 2,996 (1,285) (1,632)
Inventories 467 (1,052) 494
Prepaid expenses and other (14) (141) 167
Trade accounts payable and accrued expenses (946) 933 1,063
Accrued employee compensation (87) 75 (46)
Customer liabilities (259) 286 (266)
Accrued interest expense 28 - -
Deferred rent 407 17 -
_________ _________ _________
Net cash used in continuing operating activities (3,766) (2,246) (83)
INVESTING ACTIVITIES
Cash restricted as collateral - - (500)
Release of cash restricted as collateral - 500 -
Capital expenditures (581) (263) (1,300)
Sales of property, equipment and investments 1,050 - 3,162
Sales of other assets - - 75
Investment in real estate limited partnership - - (625)
Sale of investment in real estate limited partnership - 825 -
Issuance of security deposit to real estate
limited partnership - - (1,010)
Payoff of note receivable on sale of land - 810 -
Other investing activities - 3 47
_________ _________ _________
Net cash provided by (used in) continuing
investing activities 469 1,875 (151)
FINANCING ACTIVITIES
Advances on revolving line of credit - - 4,750
Repayments on revolving line of credit - - (4,750)
Principal payment on debt and capital lease
obligations (1,027) (35) (10,196)
Issuance of debt and capital lease obligations 2,933 - 13,749
Exercise of warrants associated with related
party debt obligations 1,067 - -
Exercise of stock options 4 - 1
Purchase of treasury stock (101) (227) -
_________ _________ _________
Net cash provided by (used in) continuing
financing activities 2,876 (262) 3,554
_________ _________ _________
Increase (decrease) in cash and cash equivalents
from continuing operations (421) (633) 3,320
Net cash used in discontinued operations - - (2,262)
_________ _________ _________
Increase (decrease) in cash and cash equivalents (421) (633) 1,058
Cash and cash equivalents at beginning of year 1,656 2,289 1,231
_________ _________ _________
Cash and cash equivalents at end of year $ 1,235 $ 1,656 $ 2,289
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. Organization and Summary of Significant Accounting Policies
Description of Business: We are a direct retailing company
focused on marketing products directly to individual consumers.
We sell "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.
Concepts Direct, Inc. and its consolidated subsidiaries includes
the iConcepts hosting equipment and software and related
operations and the BOTWEB.com Internet portal and related
operations. As described in Notes 3 and 4, the operations of
iConcepts have been absorbed into the parent company, Concepts
Direct, Inc., and the operations of BOTWEB are classified as a
discontinued operation. All balances 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.
Revenue Recognition: Revenues from the sale of products are
recognized when products are shipped to customers.
Geographic Information: We derive substantially all of our
revenues from customers in the United States and no individual
customer accounted for 10% or more of revenues for any of the
periods presented. In June 2001, we began receiving orders from
customers outside of the United States. Export sales were
$450,000 and $151,000 during the years ended December 31, 2002 and
2001, respectively. All identifiable assets are located in the
United States.
Cash Equivalents: We consider 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, we
terminated the line of credit and the restriction on cash was
removed.
Accounts Receivable, less allowances: 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, 2002 and 2001 was $7,000 and $11,000 respectively.
Deferred Advertising Costs: These costs primarily relate to
printing and distribution of advertising 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 $19.7 million, $20.6 million, and 17.4
million in 2002, 2001, and 2000, respectively.
Reclassifications: Certain amounts in the 2000 and 2001 financial
statements have been reclassified to conform to the 2002
presentation.
Impairment of Long-Lived Assets: We periodically review the
carrying amounts of our long-lived assets to determine whether
current events or circumstances warrant adjustments to the
carrying amounts. If an impairment is deemed necessary, the loss
is measured by the amount that the carrying value of the assets
exceeds their fair value. Considerable management judgement is
necessary to estimate the fair value of assets; accordingly,
actual results could vary significantly from the estimates. At
December 31, 2002, we reviewed the carrying amount of the Music
Stand trademark and determined that a $417,000 impairment
adjustment was necessary.
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 $1.0 million and $1.1 million at December 31, 2002 and 2001
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 were $491,000, $461,000, and $391,000 in 2002,
2001, and 2000, respectively.
Trademark and other intangibles: Trademarks and other intangibles
are carried at cost less accumulated amortization which is
calculated on a straight-line basis. At December 31, 2002, we
reviewed the carrying amount of the Music Stand trademark, and
determined that an impairment adjustment was necessary. We wrote
the value down by $417,000 and shortened the remaining life from
approximately 16 years to eight years. Accumulated amortization
on intangibles was $408,000 and $301,000 at December 31, 2002
and 2001 respectively.
Shipping and Handling Revenue: Shipping and handling revenue is
included in net sales.
Shipping and Handling Costs: Shipping and handling costs are
included in cost of product and delivery.
Warranties: Our sales of products are subject to a satisfaction
guarantee. Certain sales of products are also under warranty
against defects in material and workmanship for generally up to
one year. We accrue for anticipated future warranty costs and
product returns with periodic adjustments to reflect actual
experience.
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/(loss) by the weighted
average number of outstanding shares for the period. Diluted
earnings/(loss) per share are computed by dividing net income by
the sum of the weighted average number of outstanding shares and
share equivalents computed. Our 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, were 134,752, 144,517, and 127,222 at
December 31, 2002, 2001, and 2000, respectively.
Dividend Policy: At the present time, we intend to retain
earnings, if any, to provide funds for operations. Thus, we do
not expect to pay cash dividends in the foreseeable future.
Barter Transactions: We regularly exchange 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 and, therefore, these exchanges are not included in
our financial statements.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 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 SFAS No. 141
are effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. We
adopted SFAS No. 141 beginning January 1, 2002. There was no
impact as a result of the adoption.
Under SFAS No. 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 SFAS No. 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 SFAS No. 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 SFAS No.
144 beginning January 1, 2002. We periodically review the
carrying amounts of our long-lived assets to determine whether
events or circumstances require adjustements to the carrying
amounts. In such reviews, estimated undiscounted future cash
flows associated with long-lived assetts or operations are
compared with their carrying value to determine if a write-down is
required.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections". SFAS No. 145 eliminates the requirement to
classify gains and losses from the extinguishment of indebtedness
as extraordinary, requires certain lease modifications to be
treated the same as a sale-leaseback transaction, and makes other
non-substantive technical corrections to existing pronouncements.
We will adopt SFAS No. 145 in 2003. We believe the adoption of
SFAS No. 145 will not materially impact our consolidated
financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. We will adopt SFAS No. 148 in 2003. We
believe the adoption of SFAS No. 148 will not materially impact
our consolidated financial position, results of operations, or
cash flows.
Stock-Based Employee Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation," establishes
accounting and reporting standards for stock-based employee
compensation plans, as amended, (see