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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 September 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
incorporation or organization) Identification No.)
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
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 November 14, 2002 3,879,450
GEERLINGS & WADE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of December 31, 2001 and September 30, 2002 (Unaudited) ... 3
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2001 and September 30, 2002 (Unaudited) ...................... 4
Statements of Cash Flows for the Nine Months Ended September 30, 2001
and September 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 .................. 14
Item 4. Controls and Procedures .................................................... 14
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities ............................................ 15
Item 5. Other Information .......................................................... 15
Item 6. Exhibits and Reports on Form 8-K ........................................... 15
SIGNATURES .............................................................................. 16
Certifications .......................................................................... 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEERLINGS & WADE, INC.
BALANCE SHEET
(Unaudited)
December 31, September 30,
2001 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,380,068 $ 2,159,856
Accounts receivable 1,213,860 1,324,821
Inventory 8,680,158 6,853,772
Prepaid mailing costs 122,515 78,596
Prepaid expenses and other assets 1,050,572 1,014,020
------------ --------------
Total Current Assets 14,447,173 11,431,065
------------ --------------
PROPERTY AND EQUIPMENT, AT COST 2,379,435 2,361,062
Less--Accumulated Depreciation 1,765,464 1,983,642
------------ --------------
613,971 377,420
------------ --------------
Other Assets 93,030 92,539
------------ --------------
$ 15,154,174 $ 11,901,024
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,250,000 $ 504,430
Accounts payable 1,772,280 3,914,560
Current portion of deferred revenue 1,407,336 1,257,619
Accrued expenses 1,051,084 698,333
------------ --------------
Total Current Liabilities 6,480,700 6,374,942
------------ --------------
Deferred Revenue, less current revenue 367,729 283,358
------------ --------------
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) (4,932,098)
------------ --------------
Total Stockholders' Equity 8,305,745 5,242,724
------------ --------------
$ 15,154,174 $ 11,901,024
============ ==============
The accompanying notes are an integral part of these financial statements.
3
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2002 2001 2002
---- ---- ---- ----
Sales $ 6,901,118 $ 6,032,529 $21,899,774 $19,605,076
Cost of Sales 3,074,154 2,711,086 10,002,292 8,950,183
----------- ----------- ----------- -----------
Gross Profit 3,826,964 3,321,443 11,897,482 10,654,893
Selling, general and administrative expenses 4,096,372 3,308,097 12,399,816 13,675,313
----------- ----------- ----------- -----------
Income (Loss) from operations (269,408) 13,346 (502,334) (3,020,420)
Loss on disposal of fixed asset -- -- -- 24,453
Interest income 3,750 7,631 16,083 24,420
Interest expense (27,213) (19,843) (108,673) (50,110)
----------- ----------- ----------- -----------
Income (Loss) before income taxes (292,871) 1,134 (594,924) (3,070,563)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (292,871) $ 1,134 $ (594,924) $(3,070,563)
=========== =========== =========== ===========
Net income (loss) per share
Basic $ (0.08) $ 0.00 $ (0.15) $ (0.80)
=========== =========== =========== ===========
Diluted $ (0.08) $ 0.00 $ (0.15) $ (0.80)
=========== =========== =========== ===========
Weighted average common shares and common
equivalents outstanding
Basic 3,863,396 3,879,450 3,860,829 3,873,328
=========== =========== =========== ===========
Diluted 3,863,396 3,879,450 3,860,829 3,873,328
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
GEERLINGS & WADE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
2001 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (594,924) $ (3,070,563)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization 367,864 267,247
Loss on disposition of fixed asset --- 24,453
Changes in current assets and liabilities --
Accounts receivable (697,024) (110,961)
Inventory 979,516 1,826,386
Prepaid mailing costs (658,146) 43,919
Prepaid expenses (104,168) 34,075
Accounts payable 500,335 2,142,280
Deferred revenue (228,110) (234,088)
Accrued expenses (437,091) (352,751)
-------------- -------------
Net cash used in (provided by) operating activities (871,748) 569,997
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (179,131) (53,671)
Receipt from disposition of fixed assets --- 1,000
Change in other assets 2,346 492
-------------- -------------
Net cash used in investing activities (176,785) (52,179)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 1,000,000 4,455,832
Repayments under the line of credit (425,000) (6,201,402)
Issuance of shares under the Employee Stock Purchase Plan 12,479 7,540
-------------- -------------
Net cash provided by (used in) financing activities 587,479 (1,738,030)
-------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (461,054) (1,220,212)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,872,267 3,380,068
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,411,213 $ 2,159,856
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 23,100 $ 29,600
============== =============
Interest paid $ 108,673 $ 50,110
============== =============
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 nine months ended
September 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 September
30, 2001 and September 30, 2002 options to purchase a total of 319,141 and
341,863 common shares, respectively, have been excluded from the calculation of
diluted earnings per share. For the nine months ended September 30, 2001 and
September 30, 2002 options to purchase a total of 319,141 and 341,863 common
shares, respectively, have been excluded from the calculation of diluted
earnings per share. These shares for the nine months ended September 30, 2001
and September 30, 2002 and the three months ended September 30, 2001 are
considered antidilutive as the Company recorded a loss for each of these
reporting periods. The shares for the three months ended September 30, 2002 are
considered antidilutive as the average price of the shares during the three
months was below all option exercise prices.
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 nine months ended September 30, 2001 and September 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 September 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 September 30, 2002, the Company had $2,250,000 and
$504,430, 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 the minimum quarterly earnings or losses before income taxes, depreciation
and amortization and minimum current and quick ratios covenants as of June 30,
2002 and not in compliance with the minimum quarterly earnings or losses before
income taxes, depreciation and amortization and the minimum current ratio
covenant as of September 30, 2002. Due to the closure of the Company's Texas
facility, the Company is also in violation of certain other terms of the credit
agreement.
The Company and the bank are in the process of negotiating a waiver of the
defaults and an amendment to the Company's line of credit that requires
repayment of the outstanding balance by December 27, 2002. The Company expects
to have sufficient cash flow to repay its line of credit in full pursuant to the
proposed repayment schedule. Under the terms of the proposed waiver and
amendment the credit agreement would terminate on December 27, 2002. As a
result, the Company is evaluating alternative financing proposals from other
lenders to replace its line of credit. In the event the Company does not secure
a replacement line of credit, the Company believes that due to its planned
reduction of product purchases in 2003 and projected cash flow, barring a severe
downturn from expected sales levels, it has adequate cash to pursue its 2003
plan without making significant business adjustments.
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 fifteen states. The Company discontinued operations in
Texas during October 2002 due to poor economics of operating in the state.
Federal, state and local laws strictly govern the sale of wine in each market
served by the Company.
Three Months Ended September 30, 2001 and September 30, 2002
Sales
During the three months ended September 30, 2002, the Company experienced lower
sales in comparison to the same quarter of 2001. Sales were $6,032,000 in the
three months ended September 30, 2002, which is a decrease of $869,000, or
12.6%, from sales of $6,901,000 in the three months ended September 30, 2001 due
primarily to reduced circulation of mailings to fewer active customers. The
Company has acquired fewer customers in 2001 and 2002 than it did in 1999 and
2000, and consequently has not kept its active customer base at the level it was
during the third quarter of 2001. Sales of wine decreased $785,000, or 12.4%,
from $6,355,000 in the third quarter of 2001 to $5,570,000 in the third 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 9,630, or 16.2%, from 59,413 in the three months ended
September 30, 2001 to 49,782 in the three months ended September 30, 2002. Sales
levels depend largely on the number of "house mailings," which are product
offerings to existing customers, and "acquisition promotions," which are product
offerings to potential new customers, and the response rates to these
promotions. 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. The Company did not mail any Passport Wine Club
promotions during the third quarter of 2001 or 2002. Sales to existing
customers, exclusive of Passport Wine Club sales, decreased $965,000 during the
third quarter of 2002 as compared with the same period in 2001, resulting
primarily from sending 54% fewer pieces of mail to existing customers and to
having fewer active customers. The Company reduced mail circulation to existing
and prospective customers by eliminating certain promotions to unprofitable
customer segments and by changing its customer acquisition program to a more
efficient and economical one during the three months ended September 30, 2002.
Sales resulting from acquisition mailings and new customer acquisition channels
decreased $245,000 during the third quarter of 2002 as compared to the same
period in 2001 mostly due to a reduction in the number of acquisition
promotions. These decreases were partially offset by sales from the Passport
Wine Club, which increased by $270,000 from $113,000 to $383,000 in the same
quarter in 2002 due primarily to active telemarketing and direct mail campaigns
conducted during the first half of 2002.
Gross Profit
Gross profit as a percentage of sales decreased from 55.5% in the three months
ended September 30, 2001 to 55.1% in the three months ended September 30, 2002.
Gross profit decreased $506,000, or 13.2%, from $3,827,000 in the three months
ended September 30, 2001 to $3,321,000 in the three months ended September 30,
2002 primarily as a result of lower sales. Gross profit attributable to wine
sales increased $2.12 per case, or 3.6%, from $58.36 per case in the three
months ended September 30, 2001 to $60.48 per case in the three months ended
September 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 September 30, 2002.
8
The increase in gross profit on a per case basis resulted primarily from selling
more cases of wines as part of the Passport Wine Club program, in which higher
priced wines are offered, and to certain prices increase of wines sold in other
marketing programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $788,000, or 29.1%,
from $4,096,000 in the three months ended September 30, 2001 to $3,308,000 in
the three months ended September 30, 2002. As a percentage of sales, these
expenses decreased from 59.4% in the three months ended September 30, 2001 to
54.8% in the three months ended September 30, 2002. The most significant
decrease in selling, general and administrative expenses is attributable to a
$484,000 decrease in promotional costs resulting primarily from the Company's
efforts to achieve profitability by mailing fewer promotions to less active
customers and to using new customer acquisition channels that are more cost
effective. The Company also completed nearly all of the testing and development
of its new marketing strategies by the end of the second quarter of 2002. By
completing this investment in marketing, the selling expenses in the three
months ended September 30, 2002 were greatly reduced from the three months ended
June 30, 2002. An additional savings of $323,000 of the selling, general and
administrative expenses are attributable to lower compensation and corporate
overhead expenses. Delivery expenses, however, increased by $19,000 in the third
quarter of 2002 as compared to the third quarter of 2001 resulting from shipping
2-bottle packages to fulfill Passport Wine Club orders and premium offers.
The Company is in the process of performing a reorganization of its inventory
management system. This reorganization is designed to provide just-in-time
shipping and to reduce the Company's dependency on state-by-state inventories.
This reorganization should reduce inventories generally and fulfillment expense
in the long term.
Interest
Interest expense decreased in the third quarter of 2002 to $20,000 from $27,000
in the third 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 September 30, 2001 to $8,000 in the three months ended September 30, 2002.
Nine-Month Periods Ended September 30, 2001 and September 30, 2002
Sales
Sales were $19,605,000 in the nine months ended September 30, 2002, which is a
decrease of $2,295,000, or 10.5%, from sales of $21,900,000 in the nine months
ended September 30, 2001 due primarily to mailing fewer promotions to existing
and prospective customers. The Company had fewer active customers in 2002 than
in 2001 as a result of lower customer acquisition rates in the past year. Sales
of wine decreased $1,268,000, or 9.1%, from $13,863,000 in the nine months ended
September 30, 2001 to $12,596,000 in the nine months ended September 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 28,624, or 15.1%, from
190,024 in the nine months ended September 30, 2001 to 161,400 in the nine
months ended September 30, 2002. During the nine months ended September 30,
2002, sales to existing customers, exclusive of Passport Wine Club sales,
decreased $2,742,000, or 14.0%, as compared with the same period in 2001,
resulting primarily from a reduction in the number of mailings and fewer active
customers. Sales resulting from acquisition mailings and new customer
acquisition channels decreased $322,000, or 26.3%, during the nine months ended
September 30, 2002 as compared to the same period in 2001 due to mailing 44.2%
fewer acquisition pieces, which was offset by a limited number of promotions
through new acquisition channels. The reduced mail circulation to existing and
prospective customers by eliminating certain promotions to unprofitable customer
segments and by changing its customer acquisition program to a more efficient
and economical one, especially during the three months ended September 30, 2002.
These decreases were partially offset by sales from the Passport Wine Club,
which increased by $531,000 from $311,000 during the nine months ended September
30, 2001 to $954,000 in the same nine-month period in 2002 due primarily to
active telemarketing and direct mail campaigns during the first six months of
2002.
Gross Profit
Gross profit decreased $1,242,000, or 10.4%, from $11,897,000 in the nine months
ended September 30, 2001 to $10,655,000 in the nine months ended September 30,
2002 due to lower sales. Gross profit as a percentage of sales was equal at
54.3% for the nine months ended September 30, 2001 and September 30, 2002. Gross
profit attributable to wine sales increased $2.10 per case, or 3.7%, from $57.03
per case in the nine months ended September 30, 2001 to $59.13 per case in the
nine months ended September 30, 2002. The gross profit as a percentage of sales
did not change because improvements in purchasing were offset by
9
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,275,000, or 10.3%,
from $12,400,000 in the nine months ended September 30, 2001 to $13,675,000 in
the nine months ended September 30, 2002. As a percentage of sales, these
expenses increased from 56.6% in the nine months ended September 30, 2001 to
69.8% in the nine months ended September 30, 2002. The net increase in selling,
general and administrative expenses is largely attributable to a $1,217,000
increase in promotional costs resulting from developing and testing new
promotional pieces, sending more acquisition and Passport Wine Club promotions
and re-evaluating marketing strategies the Company had in place during the first
half of 2002. An additional $251,000 of the selling, general and administrative
expenses is attributable to compensation expenses, primarily for new marketing
personnel. Delivery expenses also increased by $107,000 in the nine months ended
September 30, 2002 as compared to the nine months ended September 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.
The Company is in the process of performing a reorganization of its inventory
management system. This reorganization is designed to provide just-in-time
shipping and to reduce the Company's dependency on state-by-state inventories.
This reorganization should reduce inventories generally and fulfillment expense
in the long term.
Loss on Disposal of Fixed Assets
The Company recorded a net loss on disposal of fixed assets of $24,000 for the
nine months ended September 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 $109,000 in the nine months ended September 30,
2001 to $50,000 in the nine months ended September 30, 2002 as a result of lower
borrowings under the Company's line of credit during the nine months ended
September 30, 2002 versus the nine months ended September 30, 2001. Interest
income increased from $16,000 for the nine months ended September 30, 2001 to
$24,000 in the nine months ended September 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 promotions and other
expenses associated with promoting sales. As of September 30, 2002, the Company
had cash and cash equivalents totaling $2,160,000.
The Company's primary sources of liquidity are cash from operations and
borrowings under the Company's line of credit.
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 that
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. That 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 ratio covenants at June 30, 2002 and September
30, 2002 and was not in compliance with the quick ratio covenant at June 30,
2002. Due to the closure of the Company's Texas facility, the Company is also in
violation of certain other terms of the credit agreement. The Company and the
bank are in the process of negotiating a waiver of the defaults and an amendment
to the Company's line of credit that requires repayment of the outstanding
balance by December 27, 2002. The Company expects to have sufficient cash flow
to repay its line of credit in full pursuant to the proposed repayment schedule.
Under the terms of the proposed waiver and amendment the credit agreement would
terminate on December 27, 2002. As a result, the Company is evaluating
alternative financing proposals from other lenders to replace its line of
credit. There can be no assurance that the Company will be able to obtain a new
line of credit on commercially reasonable terms or at all. In the event the
Company does not secure a replacement line of credit, the Company believes that
due to its
10
planned reduction of product purchases in 2003 and to projected cash flow,
barring a severe downturn from expected sales levels, it has adequate cash to
pursue its 2003 plan without making significant business adjustments.
During the nine months ended September 30, 2002, net cash of $570,000 was
provided by operating activities, resulting principally from decreases in
inventory and accrued expenses and an increase in accounts payable. These were
partially offset by an increase in accounts receivable, a decrease in deferred
revenue and by net losses.
The Company invested $54,000 in computer hardware and software and made net
payments of $1,746,000 on its line of credit during the nine months ended
September 30, 2002.
At December 31, 2001 and September 30, 2002, the Company had working capital of
$7,966,000 and $5,056,000, respectively.
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. The Company is evaluating
proposals from other sources of financing. There can be no assurance that the
Company will be able to obtain financing from another source. The Company
believes that due to its reduced product purchasing in 2003 and to projected
cash flow, barring a severe downturn in expected sales levels, it has adequate
cash to pursue its 2003 plan without making significant business adjustments.
There can be no assurance that the Company will be able to obtain alternative
sources of financing on commercially reasonable terms or at all or that it will
not have to significantly change its business plans in 2003.
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 September 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.
11
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.
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 September 30, 2002 and September 30, 2001 were not material to
the Company. As of September 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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have conducted
an evaluation of the Company's disclosure controls and procedures as
of a date within 90 days of filing this quarterly report. Based on
their evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in the applicable Securities and Exchange Commission rules and
forms.
(b) Changes in Internal Controls and Procedures. There were no
significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the most recent evaluation of these controls by the
Company's Chief Executive Officer and Chief Financial Officer.
12
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company may borrow up to $3,000,000 under the current terms of its credit
facility with a bank. The Company and its bank are in the process of negotiating
a waiver and an amendment to the terms of the facility that would significantly
decrease the cap on its borrowing and require repayment of its outstanding
balances by December 27, 2002, among other things. 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 ratio covenants at June 30, 2002 and September 30, 2002 and was
not in compliance with the quick ratio covenant at June 30, 2002 and as a result
is in default under the terms of the facility. Due to the closure of the
Company's Texas facility, the Company is also in violation of certain other
terms of the credit agreement.
Item 5. OTHER INFORMATION
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 between the Company and Richard E. Libby
dated September 16, 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 November 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 November 14, 2002.
___________
* Management contract
(b) A Current Report on Form 8-K was filed on July 3, 2002 under Item
4 reporting that the Company approved the dismissal of Arthur
Andersen LLP as the Company's independent public accountants,
effective as of July 1, 2002. A Current Report on Form 8-K was
filed on August 13, 2002 under Item 4 reporting that the Company
engaged BDO Seidman, LLP as its independent public accountants.
13
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: November 14, 2002
14
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Huib E. Geerlings, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geerlings & Wade,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Huib E. Geerlings
----------------------
Huib E. Geerlings
President and Chief Executive Officer
15
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Pearce, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geerlings & Wade,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David R. Pearce
-------------------
David R. Pearce
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Document
- ------ --------
10.1 Letter Agreement between the Company and Richard E. Libby dated
September 16, 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 November
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 November
14, 2002.
---------------------
* Management contract
17