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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24048
GEERLINGS & WADE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2935863
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
960 Turnpike Street, Canton, MA 02021
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (781) 821-4152
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Par Value Date Number of Shares
--------- ---- ----------------
Common Stock $.01 August 14, 2002 3,879,450
GEERLINGS & WADE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 2001 and June 30, 2002
(Unaudited) ................................................ 3
Statements of Operations for the Three Months and Six Months
Ended June 30, 2001 and June 30, 2002 (Unaudited) .......... 4
Statements of Cash Flows for the Six Months Ended June 30,
2001 and June 30, 2002 (Unaudited) ......................... 5
Notes to Financial Statements ................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk ..... 12
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities ............................... 13
Item 4. Submission of Matters to a Vote of Security Holders ........... 13
Item 5. Other Information ............................................. 13
Item 6. Exhibits and Reports on Form 8-K .............................. 13
SIGNATURES ................................................................ 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEERLINGS & WADE, INC.
BALANCE SHEETS
(Unaudited)
December 31, June 30,
2001 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 3,380,068 $ 2,178,040
Accounts receivable ............................... 1,213,860 863,883
Inventory ......................................... 8,680,158 5,407,928
Prepaid mailing costs ............................. 122,515 295,606
Prepaid expenses and other assets ................. 1,050,572 1,005,469
----------- -----------
Total Current Assets ........................... 14,447,173 9,750,926
----------- -----------
PROPERTY AND EQUIPMENT, AT COST ...................... 2,379,435 2,354,250
Less--Accumulated Depreciation .................... 1,765,464 1,929,113
----------- -----------
613,971 425,137
----------- -----------
Other Assets ......................................... 93,030 93,539
----------- -----------
$15,154,174 $10,269,602
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit .................................... $ 2,250,000 $ 914,182
Accounts payable .................................. 1,772,280 1,695,135
Current portion of deferred revenue ............... 1,407,336 1,320,773
Accrued expenses .................................. 1,051,084 772,433
----------- -----------
Total Current Liabilities ...................... 6,480,700 4,702,523
----------- -----------
Deferred Revenue, less current revenue ............... 367,729 325,490
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized-1,000,000 shares
Outstanding-none -- --
Common stock, $.01 par value-
Authorized-10,000,000 shares-
Issued and outstanding-3,870,113 and 3,879,450
shares in 2001 and 2002, respectively .......... 38,701 38,795
Additional paid-in capital ........................ 10,128,580 10,136,027
Retained deficit .................................. (1,861,536) (4,933,233)
----------- -----------
Total Stockholders' Equity ..................... 8,305,745 5,241,589
----------- -----------
$15,154,174 $10,269,602
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
---------- ----------- ----------- -----------
Sales ............................................ $7,845,968 $ 6,208,117 $14,998,656 $13,572,547
Cost of Sales .................................... 3,560,964 2,859,509 6,928,137 6,239,097
---------- ----------- ----------- -----------
Gross Profit ..................................... 4,285,004 3,348,608 8,070,519 7,333,450
Selling, general and administrative expenses ..... 4,379,594 5,654,448 8,303,445 10,367,215
---------- ----------- ----------- -----------
Loss from operations ............................. (94,590) (2,305,840) (232,926) (3,033,765)
Loss on disposal of fixed assets, net ............ -- (25,453) -- (24,453)
Interest income .................................. 4,217 7,534 12,333 16,788
Interest expense ................................. (37,647) (7,275) (81,460) (30,267)
---------- ----------- ----------- -----------
Loss before income taxes ......................... (128,020) (2,331,034) (302,053) (3,071,697)
Provision (benefit) for income taxes ............. -- -- -- --
---------- ----------- ----------- -----------
Net loss ......................................... $ (128,020) (2,331,034) $ (302,053) $(3,071,697)
========== =========== =========== ===========
Net loss per share
Basic ...................................... $ (0.03) $ (0.60) $ (0.08) $ (0.80)
========== =========== =========== ===========
Diluted .................................... $ (0.03) $ (0.60) $ (0.08) $ (0.80)
========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding
Basic ...................................... 3,863,068 3,879,450 3,863,068 3,879,450
========== =========== =========== ===========
Diluted .................................... 3,863,068 3,879,450 3,863,068 3,879,450
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
GEERLINGS & WADE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, June 30,
2001 2002
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ................................................................. $ (302,053) $(3,071,697)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization ...................................... 259,222 212,528
Loss on disposition of fixed asset ................................. -- 24,453
Realized loss from exchange rate fluctuation ....................... 4,480 --
Changes in operating assets and liabilities --
Accounts receivable ................................................ (310,444) 349,977
Inventory .......................................................... 913,119 3,272,230
Prepaid mailing costs .............................................. (136,452) (173,091)
Prepaid expenses ................................................... (21,539) 42,818
Other assets ....................................................... 2,103 (508)
Accounts payable ................................................... (249,767) (77,145)
Deferred revenue ................................................... (242,724) (128,802)
Accrued expenses ................................................... (164,777) (278,655)
---------- -----------
Net cash provided by (used in) operating activities ............. (248,832) 172,108
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net ................................. (65,289) (46,859)
Receipts from disposition of fixed assets ................................ -- 1,000
--------- -----------
Net cash used in investing activities .......................... (65,289) (45,859)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under the line of credit ................................... (425,000) (3,844,177)
Borrowings under the line of credit ................................... -- 2,508,360
Issuance of shares under the Employee Stock Purchase Plan ............. 12,479 7,540
--------- -----------
Net cash used in financing activities ........................... (412,521) (1,328,277)
--------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..................................... (726,642) (1,202,028)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................. 1,872,267 3,380,068
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $1,145,625 $ 2,178,040
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid ........................................................ $ 23,100 $ 29,600
========== ===========
Interest paid ............................................................ $ 75,442 $ 30,267
========== ===========
The accompanying notes are an integral part of these financial statements.
5
Notes to Financial Statements
1. Basis of Presentation
The interim period information set forth in these financial statements is
unaudited and may be subject to normal year-end adjustments. In the opinion of
management, the information reflects all adjustments, which consist of normal
recurring accruals that are considered necessary to present a fair statement of
the results of operations of Geerlings & Wade, Inc. (the "Company") for the
interim periods presented. The operating results for the six months ended June
30, 2002 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 2002.
The financial statements presented herein should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001. Certain information in these footnote
disclosures normally included in financial statements has been condensed or
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
2. Basic and Diluted Net Income Per Common Share
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share, which establishes standards for
computing and presenting earnings per share. For the quarters ended June 30,
2001 and June 30, 2002 options to purchase a total of 343,099 and 346,863 common
shares, respectively, have been excluded from the calculation of diluted
earnings per share. For the six months ended June 30, 2001 and June 30, 2002
options to purchase a total of 343,099 and 346,863 common shares, respectively,
have been excluded from the calculation of diluted earnings per share. These
shares are considered antidilutive as the Company recorded a loss for each of
the quarters.
3. Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company did not have any components of comprehensive
income (loss) for the six months ended June 30, 2001 and June 30, 2002.
4. Derivative Instruments and Hedging
Effective July 1, 2000, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all
derivatives, including foreign currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through earnings. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value is to be immediately recognized in earnings.
As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, the Company hedges certain
significant purchase commitments of inventory denominated in foreign currencies.
Forward foreign exchange contracts are used to hedge these exposures. These
foreign exchange contracts are entered into in the normal course of business,
and accordingly, are not speculative in nature. The Company does not hold or
transact in financial instruments for purposes other than risk management.
The Company records its foreign currency exchange contracts at fair value in its
balance sheet and the related gains or losses on these hedge contracts are
recognized in earnings. Gains and losses resulting from the impact of currency
exchange rate movements on forward foreign exchange contracts are designated to
offset certain purchase commitments and are recognized as other income or
expense in the period in which the exchange rates change and offset the foreign
currency losses and gains on the underlying exposures being hedged. The gains
and losses resulting from the impact of currency rate movements on forward
currency exchange contracts are recognized in other comprehensive income for
this portion of the hedge. At June 30, 2002, the Company had no hedges.
6
5. Line of Credit
On April 13, 2000, the Company entered into a two-year credit agreement with a
bank that allowed the Company to borrow the lesser of $5,000,000 or 50% of
certain inventories, as defined in the agreement. Substantially all of the
assets of the Company are pledged as collateral under this credit facility. As
of December 31, 2001 and June 30, 2002, the Company had $2,250,000 and $914,182,
respectively, outstanding under the line of credit. In 2001, the borrowings
under the line of credit bore interest at the bank's prime rate. The Company was
required to maintain certain financial covenants, including a minimum
consolidated debt service ratio and a minimum consolidated leverage ratio. The
Company was not in compliance with the minimum consolidated debt service ratio
at the end of the fourth quarter of fiscal 2001.
On March 26, 2002, in connection with a waiver for the default resulting from
such non-compliance, the Company and its bank amended the credit agreement to
reduce the principal amount available for borrowing under the facility to
$3,000,000 and to extend the credit agreement through March 31, 2003. Borrowings
under the amended line of credit bear interest at the bank's prime rate plus 2%.
Additionally, the line of credit was amended whereby the Company is required to
maintain certain financial covenants, including minimum quarterly earnings or
losses before income taxes, depreciation and amortization and minimum current
and quick ratios, in addition to continuing to meet and maintain other covenants
under the original terms of the agreement. The Company was not in compliance
with these covenants as of June 30, 2002.
The Company is negotiating with its lender to obtain a waiver of the default and
an amendment to its line of credit that would establish new financial covenants
based on revised financial forecasts. At the request of its lender, the Company
has engaged a turnaround consultant to assist the Company in determining the
feasibility of revised financial forecasts that would form the basis for an
amendment and in identifying cost savings. There can be no assurance that the
Company will be able to obtain a waiver and an amendment on acceptable terms or
at all. If the Company is unsuccessful in obtaining a waiver and an amendment or
alternative financing, there is a substantial risk that the Company cannot
continue as a going concern.
6. Shipping and Handling Fees
The Emerging Issues Task Force (EITF) issued EITF 00-10 "Accounting for Shipping
and Handling Fees and Costs", which provides guidance on classification of
amounts billed to a customer and amounts incurred for shipping and handling fees
related to a sale of product. The EITF reached the consensus that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenues earned for the goods provided and should be classified
as revenue. The EITF also concluded that the classification of shipping and
handling costs is an accounting policy decision. The Company has elected to
classify shipping costs in Selling, General and Administrative Expenses.
7
Important Factors Regarding Forward-Looking Statements
The Company may occasionally make forward-looking statements and estimates such
as forecasts and projections of the Company's future performance or statements
of management's plans and objectives. These forward-looking statements may be
contained in SEC filings, press releases and oral statements, among others, made
by the Company. Actual results could differ materially from those in such
forward-looking statements. Therefore, no assurance can be given that the
results in such forward-looking statements will be achieved. Important factors
could cause the Company's actual results to differ from those contained in such
forward-looking statements, including, among other things, the factors mentioned
in the Company's Annual Report on Form 10-K for the year ended December 31, 2001
on file with the U.S. Securities and Exchange Commission. The following
discussion in Item 2 and disclosure in Item 3 below involve forward-looking
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Geerlings & Wade is a direct marketer and Internet retailer of premium wines and
wine-related merchandise to retail consumers. The Company currently maintains
licensed facilities in sixteen states. Federal, state and local laws strictly
govern the sale of wine in each market served by the Company.
Quarters Ended June 30, 2001 and June 30, 2002
Sales
During the three months ended June 30, 2002, the Company experienced lower sales
in comparison to the same quarter of 2001. Sales were $6,208,000 in the three
months ended June 30, 2002, which is a decrease of $1,638,000, or 20.9%, from
sales of $7,846,000 in the three months ended June 30, 2001 due primarily to
lower response rates to house mailings. Sales of wine decreased $1,533,000, or
21.0%, from $7,294,000 in the second quarter of 2001 to $5,761,000 in the second
quarter of 2002 in markets (defined by the shipping region of each warehouse) in
which the Company has operated for at least one year. The number of
twelve-bottle equivalent cases ("cases"), exclusive of wine reservation sales,
sold by the Company decreased by 17,794, or 25.9%, from 68,713 in the three
months ended June 30, 2001 to 50,919 in the three months ended June 30, 2002.
Sales levels depend largely on the number of "house mailings," which are product
offerings to existing customers, and "acquisition mailings," which are product
offerings to potential new customers, and the response rates to these mailings.
Sales from catalogs, mailed to existing customers, and Passport Wine Club
mailings, mailed to new or prior customers who have not ordered recently, also
contribute to total sales. Sales to existing customers, exclusive of Passport
Wine Club sales, decreased $1,659,000 during the second quarter of 2002 as
compared with the same period in 2001, resulting primarily from lower response
rates to house mailings. Sales resulting from acquisition mailings and new
customer acquisition channels decreased $172,000 during the second quarter of
2002 as compared to the same period in 2001 mostly due to a 38% reduction in
acquisition mailings. These decreases were partially offset by sales from the
Passport Wine Club, which increased by $193,000 from $132,000 to $325,000 in the
same quarter in 2002 due primarily to active telemarketing and direct mail
campaigns designed to increase the number of club members.
Gross Profit
Gross profit as a percentage of sales decreased from 54.6% in the three months
ended June 30, 2001 to 53.9% in the three months ended June 30, 2002. Gross
profit decreased $936,000, or 21.9%, from $4,285,000 in the three months ended
June 30, 2001 to $3,349,000 in the three months ended June 30, 2002. Gross
profit attributable to wine sales increased $4.90 per case, or 8.7%, from $56.10
per case in the three months ended June 30, 2001 to $61.00 per case in the three
months ended June 30, 2002. The decrease in gross profit as a percentage of
sales resulted principally from unfavorable exchange rates and certain price
discounts offered during the quarter ended June 30, 2002. The increase in gross
profit on a per case basis resulted from selling more cases of higher priced
wines as part the Passport Wine Club program.
8
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1,274,000, or 29.1%,
from $4,380,000 in the three months ended June 30, 2001 to $5,654,000 in the
three months ended June 30, 2002. As a percentage of sales, these expenses
increased from 55.8% in the three months ended June 30, 2001 to 91.1% in the
three months ended June 30, 2002. The most significant increase in selling,
general and administrative expenses is attributable to a $1,236,000 increase in
promotional costs resulting primarily from the Company's efforts to find more
effective marketing strategies and tactics to increase sales. These promotional
expenses included costs for developing and testing new promotional pieces,
sending more Passport Wine Club promotions to acquire new customers, consulting
fees and public relation expense. An additional $168,000 of the selling, general
and administrative expenses are attributable to compensation expenses, primarily
for new marketing personnel. Delivery expenses also increased by $11,000 in the
second quarter of 2002 as compared to the second quarter of 2001 resulting from
shipping 2-bottle packages to fulfill Passport Wine Club orders and premium
offers.
Loss on Disposal of Fixed Assets
The Company recorded a loss on disposal of fixed assets of $25,000 for the three
months ended June 30, 2002 as a result of retiring software that had not been
fully depreciated.
Interest
Interest expense decreased in the second quarter of 2002 to $7,000 from $38,000
in the second quarter of 2001, due to lower borrowings under the Company's
credit facility. Interest income increased slightly from $4,000 in the three
months ended June 30, 2001 to $8,000 in the three months ended June 30, 2002.
Six-Month Periods Ended June 30, 2001 and June 30, 2002
Sales
Sales were $13,573,000 in the six months ended June 30, 2002, which is a
decrease of $1,426,000, or 9.5%, from sales of $14,999,000 in the six months
ended June 30, 2001 due primarily to weaker response rates to house mailings
especially during the three months ended June 30, 2002. Sales of wine decreased
$1,268,000, or 9.1%, from $13,863,000 in the six months ended June 30, 2001 to
$12,596,000 in the six months ended June 30, 2002 in markets (defined by the
shipping region of each warehouse) in which the Company has operated for at
least one year. The number of cases, exclusive of wine reservation sales, sold
by the Company decreased by 18,993, or 14.5%, from 130,611 in the six months
ended June 30, 2001 to 111,618 in the six months ended June 30, 2002. During the
six months ended June 30, 2002, sales to existing customers, exclusive of
Passport Wine Club sales, decreased $1,609,000 as compared with the same period
in 2001, resulting primarily from lower response rates to house mailings and a
reduction in the number of mailings. Sales resulting from acquisition mailings
and new customer acquisition channels decreased $78,000 during the six months
ended June 30, 2002 as compared to the same period in 2001 due to mailing fewer
acquisition pieces. These decreases were partially offset by sales from the
Passport Wine Club, which increased by $261,000 from $311,000 during the six
months ending June 30, 2001 to $572,000 in the same six-month period in 2002 due
primarily to active telemarketing and direct mail campaigns designed to increase
the number of club members.
Gross Profit
Gross profit decreased $738,000, or 9.1%, from $8,071,000 in the six months
ended June 30, 2001 to $7,333,000 in the six months ended June 30, 2002 due to
lower sales. Gross profit as a percentage of sales increased from 53.8% in the
six months ended June 30, 2001 to 54.0% in the six months ended June 30, 2002.
Gross profit attributable to wine sales increased $3.24 per case, or 5.7%, from
$56.42 per case in the six months ended June 30, 2001 to $59.66 per case in the
six months ended June 30, 2002. The increase in gross profit as a percentage of
sales and average gross profit per case resulted from continued improvement in
purchasing and favorable exchanges rates experienced during the first three
months of 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2,064,000, or 24.9%,
from $8,303,000 in the six months ended June 30, 2001 to $10,367,000 in the six
months ended June 30, 2002. As a percentage of sales, these expenses increased
from 55.4% in the six months ended June 30, 2001 to 76.4% in the six months
ended June 30, 2002. The net increase in selling, general and administrative
expenses is largely attributable to a $1,701,000 increase in promotional costs
resulting from developing and testing
9
new promotional pieces, sending more acquisition and Passport Wine Club
promotions and re-evaluating marketing strategies the Company had in place. An
additional $275,000 of the selling, general and administrative expenses is
attributable to compensation expenses, primarily for new marketing personnel.
Delivery expenses also increased by $88,000 in the six months ended June 30,
2002 as compared to the six months ended June 30, 2001 resulting from shipping
2-bottle packages to fulfill Passport Wine Club orders, mailing promotional
premiums to customers and increased rates charged by delivery services.
Loss on Disposal of Fixed Assets
The Company recorded a net loss on disposal of fixed assets of $24,000 for the
six months ended June 30, 2002 as a result of retiring software that had not
been fully depreciated and selling another asset for a $1,000 gain.
Interest
Interest expense decreased from $81,000 in the six months ended June 30, 2001 to
$30,000 in the six months ended June 30, 2002 as a result of lower borrowings
under the Company's line of credit during the first and second quarters of 2002
versus the same period of 2001. Interest income increased from $12,000 for the
six months ended June 30, 2001 to $17,000 in the six months ended June 30, 2002
as a result of investing cash in overnight and municipal investments.
Liquidity and Capital Resources
The Company's primary working capital needs include purchases of inventory,
advertising expenses related to the cost of acquisition mailings and other
expenses associated with promoting sales. As of June 30, 2002, the Company had
cash and cash equivalents totaling $2,178,000.
On April 13, 2000, the Company entered into a credit agreement with a bank,
which agreement has been amended from time to time. Amounts borrowed under this
facility are collateralized by substantially all of the assets of the Company,
and the Company borrows working capital at the prime rate plus two percent. The
Company is required to comply with certain financial covenants as part of the
terms and conditions of the line of credit. The Company was in default under its
credit agreement at the end of the fourth quarter of fiscal 2001 as a result of
the Company's failure to meet certain financial covenants at the end of this
quarter. The Company received a waiver from the bank for such period and for
prior defaults. In connection with the waiver for the fourth quarter of 2001,
the Company and the bank amended the credit agreement to provide for a reduction
in the principal amount available for borrowing under the facility from the
lesser of $5.0 million or 50% of certain inventories to $3.0 million and to
extend the credit agreement through March 31, 2003. This amendment requires the
Company to meet certain revised financial covenants, in addition to continuing
to meet and maintain other covenants under the original terms of the agreement.
The Company was not in compliance with certain financial covenants, including
minimum quarterly earnings or losses before income taxes, depreciation and
amortization and minimum current and quick ratios at June 30, 2002. The Company
is negotiating with its lender to obtain a waiver of the default and an
amendment to its line of credit that would establish new financial covenants
based on revised financial forecasts. At the request of its lender, the Company
has engaged a turnaround consultant to assist the Company in determining the
feasibility of revised financial forecasts that would form the basis for an
amendment and in identifying cost savings. There can be no assurance that the
Company will be able to obtain a waiver and an amendment on acceptable terms or
at all. If the Company is unsuccessful in obtaining a waiver and an amendment or
alternative financing, there is a substantial risk the Company cannot continue
as a going concern.
During the six months ended June 30, 2002, net cash of $172,000 was provided by
operating activities, resulting principally from decreases in inventory and
accounts receivable. These were partially offset by an increase in prepaid
mailings, deferred revenue, accrued expenses and by net losses.
The Company invested $47,000 in computer hardware and software and made net
payments of $1,336,000 on its line of credit during the six months ended June
30, 2002.
At December 31, 2001 and June 30, 2002, the Company had working capital of
$7,966,000 and $5,048,000, respectively.
As described above, the Company is in default under the terms of its credit
facility. Even if the Company is able to obtain a waiver of default and an
amendment of certain financial covenants, the Company's ability to make
scheduled payments of principal of, or to pay the interest on, or to refinance,
its indebtedness, or to fund planned capital expenditures will depend on its
future performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Provided the default is waived and an amendment is obtained
prior to the expiration of its line of credit on March 31, 2003, the Company may
seek to extend the terms of its credit facility. In the alternative, the
10
Company may seek to obtain other sources of financing. There can be no assurance
that the Company will be able to obtain a waiver of its default, amend the terms
of its credit facility, extend the terms of its credit facility or obtain
alternative sources of financing on commercially reasonable terms or at all.
Exchange Rates
The Company engages, from time to time, in foreign exchange forward contracts to
reduce its exposure to currency fluctuations related to commitments for the
purchases of inventories. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on our operating results. The
Company does not use derivative financial instruments for speculative or trading
purposes. As of June 30, 2002, the Company had no foreign exchange forward
contracts outstanding. At each balance sheet date, foreign exchange forward
contracts are revalued based on the current market exchange rates. Resulting
gains and losses are included in earnings or deferred as a component of other
comprehensive income. These deferred gains or losses are recognized in income in
the period in which the underlying anticipated transaction occurs. The Company
does not anticipate any material adverse effect on its results of operations or
cash flows resulting from the use of these instruments. However, it cannot
guarantee that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
The Company has a foreign exchange line of credit with a bank that allows the
Company to enter into forward currency exchange contracts of approximately
$500,000 maturing on any one day for spot purchases and approximately $950,000
for forward contracts in a twelve-month, rolling period.
Critical Accounting Policies and Estimates
In SEC Release Nos. 33-8098, 34-45907, the Securities and Exchange Commission,
(the "SEC") proposed amendments to its rules, which would require companies to
include in Management's Discussion and Analysis of Financial Condition and
Operations ("MD&A") disclosure regarding critical accounting policies or methods
used in the preparation of financial statements, disclosure of critical
accounting estimates used by a company in applying its accounting policies and
information concerning the initial adoption of certain accounting policies that
have a material impact on a company's financial presentation. The Notes to the
Financial Statements include a summary of the significant accounting policies
and methods used in the preparation of our Financial Statements. The following
is a brief discussion of the more significant accounting policies and methods
used by the Company. In addition, Financial Reporting Release No. 61, released
by the SEC, reminds all companies to include in MD&A disclosure addressing,
among other things, liquidity, off balance sheet arrangements, contractual
obligations and commercial commitments.
The financial statements contained in this report are prepared in accordance
with accounting principles generally accepted in the U.S., which require the
Company to make estimates and assumptions. On an on-going basis, the Company
evaluates its estimates related to allowance for obsolete and excess
inventories. Management bases its estimates and judgments on historical
experience and on various other factors (such as the turn rate of particular
products and if specific products have been offered in promotions) that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The cost of direct advertising materials mailed to prospective customers is
capitalized. These costs are expensed as advertising costs in relation to the
revenues that are derived from the mailings. Revenue estimates are used to
determine the cost recovery period of prepaid mailing costs in accordance with
SOP93-7: Reporting on Advertising Costs. The Company amortizes these advertising
costs for a period of three to five months depending on the type of promotion.
Actual results may differ from these estimates under different assumptions or
conditions.
11
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The following discussion about the Company's market risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements.
The Company is exposed to market risk related to foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes. The Company enters into foreign exchange forward contracts
to reduce its exposure to currency fluctuations on vendor accounts payable
denominated in foreign currencies. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on the
Company's operating results. The gains and losses on these contracts are
included in earnings when the underlying foreign currency denominated
transaction is recognized. Gains and losses related to these instruments for the
quarters ended June 30, 2002 and June 30, 2001 were not material to the Company.
As of June 30, 2002, the Company had no foreign exchange forward contracts
outstanding. Looking forward, the Company does not anticipate any material
adverse effect on its financial position, results of operations or cash flows
resulting from the use of these instruments. However, there can be no assurance
that these strategies will be effective or that transaction losses can be
minimized or forecasted accurately.
12
PART II. OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company may borrow up to $3,000,000 under its credit facility with a bank.
Under the terms of the facility, the Company is required to meet and/or maintain
certain financial covenants, including minimum quarterly earnings or losses
before income taxes, depreciation and amortization and minimum current and quick
ratios, in addition to continuing to meet and maintain other covenants. The
Company was not in compliance with certain financial covenants, including
minimum quarterly earnings or losses before income taxes, depreciation and
amortization and minimum current and quick ratios at June 30, 2002 and as a
result is in default under the terms of the facility.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting on May 7, 2002.
(b) At the annual meeting, stockholders elected each of Mr. James C.
Curvey and Mr. John J. Remondi as a director. Messrs. Huib Geerlings,
John Connors and Robert L. Webb continued serving their terms of
office as directors after the annual meeting.
(c) Result of annual meeting votes:
Proposal For Against Withheld Abstentions
- -------- --- ------- -------- -----------
To elect as director James C. Curvey 3,536,709 221,940
To elect as director John J. Remondi 3,536,709 221,940
In light of circumstances facing Arthur Andersen LLP, stockholders approved a
motion to indefinitely postpone the vote regarding the ratification of the
appointment of Arthur Andersen LLP as independent auditors of the Company.
Item 5. OTHER INFORMATION
On July 1, 2002, Mr. Huib Geerlings was appointed President and Chief
Executive Officer of the Company.
The Board of Directors, upon the recommendation of its Audit Committee,
dismissed Arthur Andersen LLP as the Company's independent public
accountants, effective as of July 1, 2002, as previously reported on a
Current Report on Form 8-K filed July 3, 2002.
BDO Seidman LLP has been engaged as the Company's independent public
accountants for the fiscal year ending December 31, 2002, as previously
reported on a Current Report on Form 8-K filed August 13, 2002.
Accompanying this Quarterly Report on Form 10-Q are the certificates of
the Chief Executive Officer and Chief Financial Officer required by
Section 1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, copies of
which are furnished as exhibits to this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter Agreement by and between the Company and David R. Pearce
dated July 2, 2002.*
99.1 Certification of Huib E. Geerlings, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
14, 2002.
99.2 Certification of David R. Pearce, pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
14, 2002.
- --------------------------
* Management contract.
13
(b) As the Company reported on a Current Report on Form 8-K, filed July 3,
2002, the Company's Board of Directors dismissed Arthur Andersen, LLP
as the Company's independent public accountants, effective July 1,
2002. As the Company reported on a Current Report on Form 8-K, filed
August 13, 2002, the Company engaged BDO Seidman as its independent
public accountants.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEERLINGS & WADE, INC.
(Registrant)
By: /s/ Huib Geerlings
---------------------------------------------
Name: Huib Geerlings
Title: President and Chief Executive Officer
By: /s/ David R. Pearce
---------------------------------------------
Name: David R. Pearce
Title: Chief Financial Officer
Dated: August 14, 2002
15
EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
10.1 Letter Agreement by and between the Company and David R.
Pearce dated July 2, 2002.*
99.1 Certification of Huib E. Geerlings, pursuant to
Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 14, 2002.
99.2 Certification of David R. Pearce, pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 14, 2002.
- -------------
* Management contract.
16