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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 26, 1998
Commission file number 0-24173
GENESIS DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3449666
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
100 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
(201) 867-2800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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 [_]
The number of outstanding shares of the registrant's Common Stock, par value
$0.01 per share, was 32,354,018 on November 5, 1998.
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GENESIS DIRECT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 26, 1998 and March 28, 1998 3
Consolidated Statements of Operations -
Three months and six months ended September 26, 1998 and
September 27, 1997 4
Consolidated Statement of Stockholders' Equity (Deficiency)-
Six months ended September 26, 1998 and the year ended
March 28, 1998 5
Consolidated Statements of Cash Flows -
Six months ended September 26, 1998 and September 27, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 19
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PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998 MARCH 28, 1998
------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$1,961 and $2,268, respectively ................................... $ 4,885 $ 2,722
Accounts receivable, less allowances of $1,339 and
$1,415, respectively ............................................... 15,304 5,594
Merchandise inventory, net of reserves .............................. 60,717 27,350
Deferred advertising costs .......................................... 23,302 10,239
Other current assets ................................................ 4,809 1,348
Note receivable, current portion .................................... 479 340
-------------------- ---------------------
Total current assets ............................................... 109,496 47,593
Intangibles, net of accumulated amortization of $5,552 and
$3,509, respectively ................................................. 10,971 8,240
Goodwill, net of accumulated amortization of $2,839 and
$1,643, respectively ................................................ 94,625 55,140
Property, equipment and leasehold improvements, net .................. 40,286 25,639
Note receivable, less current portion ................................ 1,105 1,275
Other assets ......................................................... 334 1,389
-------------------- ---------------------
$ 256,817 $139,276
==================== =====================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable .................................................... $ 27,985 $ 20,435
Accrued expenses .................................................... 38,306 14,549
Current portion of notes payable and long-term debt ................. 19,955 20,478
Current portion of obligations under capital leases................... 1,941 1,840
Other current liabilities ........................................... 2,007 3,203
-------------------- ---------------------
Total current liabilities .......................................... 90,194 60,505
Notes payable and long-term debt, less current portion ............... 18,579 7,176
Debentures--related parties .......................................... 30,000
Obligations under capital leases, net of current portion............... 3,852 3,978
Other liabilities .................................................... 2,957 2,717
Series A Preferred Stock (liquidation value $1,000 per share),
122,000 shares authorized, 94,300 shares issued and
outstanding at March 28, 1998 ........................................ -- 96,739
Common stockholders' equity (deficiency):
Common stock, par value $.01 per share; 275,000,000 shares
Authorized, 32,354,018 and 8,990,575 shares issued and
Outstanding at September 26, 1998 and March 28, 1998,
Respectively......................................................... 323 90
Additional paid-in capital .......................................... 278,542 30,507
Accumulated deficit ................................................. (137,630) (92,436)
-------------------- ---------------------
Total common stockholders' equity (deficiency) ..................... 141,235 (61,839)
-------------------- ---------------------
Total liabilities and common stockholders' equity .................. $ 256,817 $139,276
==================== =====================
</TABLE>
See accompanying notes.
3
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------------------------
SEPTEMBER 26,1998 SEPTEMBER 27, 1997 SEPTEMBER 26,1998 SEPTEMBER 27, 1997
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net Sales $ 40,962 $ 11,543 $ 74,846 $ 25,590
Cost of goods sold ....................... 28,865 7,047 52,070 16,124
----------------- ------------------ ----------------- ------------------
Gross profit ............................. 12,097 4,496 22,776 9,466
Selling, general and administrative
expenses................................... 32,830 19,828 61,233 33,128
----------------- ------------------ ----------------- ------------------
Loss from operations ..................... (20,733) (15,332) (38,457) (23,662)
Interest expense ......................... 775 1,097 2,298 2,132
Interest income .......................... 289 22 796 72
----------------- ------------------ ----------------- ------------------
Net loss before extraordinary item ....... (21,219) (16,407) (39,959) (25,722)
Extraordinary item-loss on
extinguishment of debt..................... 5,235
----------------- ------------------ ----------------- ------------------
Net loss ................................. $ (21,219) $ (16,407) $ (45,194) $ (25,722)
================= ================== ================= ==================
Basic net loss per share:
Loss before extraordinary item............. $ (0.70) $ (1.85) $ (1.44) $ (2.93)
Extraordinary item......................... (0.19)
----------------- ------------------ ----------------- ------------------
Net loss................................... $ (0.70) $ (1.85) $ (1.63) $ (2.93)
----------------- ------------------ ----------------- ------------------
Weighted average shares - basic............ 30,157,200 8,855,000 27,770,100 8,787,000
================= ================== ================= ==================
</TABLE>
See accompanying notes.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
SHARES OF ADDITIONAL STOCKHOLDERS'
COMMON COMMON PAID-IN ACCUMULATED EQUITY
STOCK STOCK CAPITAL DEFICIT (DEFICIENCY)
------------ ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 29, 1997................ 6,792,500 $ 68 $ 24,532 $ (16,225) $ 8,375
Issuance of Common Stock............... 2,062,500 21 7,479 7,500
Common stock purchase warrant
issued in connection with
Debentures........................... 203 203
Issuance Costs of Series A
Preferred Stock...................... (746) (746)
Dividends accruing on Series
A Preferred Stock.................... (2,439) (2,439)
Issuance of Common Stock in
Connection with business
Acquisitions and licenses............ 135,575 1 1,478 1,479
Net loss............................... (76,211) (76,211)
---------- -------- -------- --------- ---------
Balance at March 28, 1998................ 8,990,575 90 30,507 (92,436) (61,839)
========== ======== ======== ========= =========
Issuance of Common Stock upon
conversion of Debentures............. 2,331,521 23 9,727 9,750
Issuance of Common Stock upon
conversion of note issued in
connection with acquisition.......... 128,333 1 1,399 1,400
Issuance of Common Stock upon
conversion of Series A Preferred
Stock................................ 8,644,156 87 94,213 94,300
Dividends accruing on Series A
Preferred Stock...................... (620) (620)
Forgiveness of dividends on Series A
Preferred Stock..................... 3,059 3,059
Issuance of Common Stock in
connection with Initial Public
Offering............................. 9,625,000 96 132,419 132,515
Issuance of Common Stock in
connection with acquisitions......... 2,634,433 26 7,838 7,864
Net loss............................... (45,194) (45,194)
---------- -------- -------- --------- ---------
Balance at September 26, 1998............ 32,354,018 $ 323 $278,542 $(137,630) $ 141,235
========== ======== ======== ========= =========
</TABLE>
See accompanying notes.
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
SEPTEMBER 26, 1998 SEPTEMBER 27, 1997
------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................. $ (45,194) $ (25,722)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................................ 5,190 4,049
Provision for losses on accounts receivable............................ (353) 1,161
Non-cash interest expense.............................................. 372 2,212
Changes in operating assets and liabilities net of business acquired:
Accounts receivable.................................................... (6,416) (787)
Merchandise inventory.................................................. (11,923) (14,681)
Deferred advertising costs and other current assets................... (7,831) (10,199)
Accounts payable and accrued liabilities............................... (5,194) 7,993
Other assets........................................................... 1,272 317
Other liabilities...................................................... (1,929) 88
-------------------- ---------------------
Net cash used in operating activities.................................. (72,006) (35,569)
CASH FLOWS FROM INVESTING ACTIVITIES
Intangibles and goodwill............................................... (1,295) (22)
Acquisition of property, equipment and leashold improvements........... (11,138) (18,381)
Cash paid for acquired businesses, net of cash acquired................ (20,161) (9,034)
Increase (decrease) in restricted cash................................. 307 --
-------------------- ---------------------
Net cash used in investing activities.................................. (32,287) (27,437)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment of) proceeds from line of credit............................ (2,555) 8,143
(Repayment of) proceeds from issuance of Debentures--related parties... (20,250) 7,500
Proceeds from sale of Common Stock..................................... 132,515 7,500
Proceeds from Bridge Notes............................................. -- 26,175
Proceeds from sale of Series A Preferred Stock, net of issuance costs.. -- 1,215
(Repayment of) proceeds from term loan................................. (800) 5,000
Payments of notes payable.............................................. (2,147) (711)
-------------------- ---------------------
Net cash provided by financing activities.............................. 106,763 54,822
-------------------- ---------------------
Increase (decrease) in cash and cash equivalents....................... 2,470 (8,184)
Cash and cash equivalents at beginning of period....................... 454 5,744
-------------------- ---------------------
Cash and cash equivalents at end of period............................. 2,924 (2,440)
==================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid.......................................................... 4,120 469
==================== =====================
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisitions:
Liabilities assumed................................................... 37,037 3,110
Issuance of notes payable............................................. 17,538 677
Issuance of Common Stock.............................................. 7,864 --
Obligations under noncomplete agreements.............................. 184 814
Conversion of Series A Preferred Stock to Common Stock................. 94,300 --
Conversion of Debentures to Common Stock............................... 9,750 --
Conversion of note payable to Common Stock............................. 1,400 --
Capital leases......................................................... 713 --
</TABLE>
See accompanying notes.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six and three months ended September 26,
1998 are not necessarily indicative of the results that may be expected for the
year ended March 27, 1999. These financial statements should be read in
conjunction with the financial statements and footnotes thereto and management's
discussion and analysis thereof included in the Company's Annual Report on Form
10-K for the fiscal year ended March 28, 1998 and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 2
hereof.
FISCAL YEAR
The Company's fiscal year ends on the Saturday next preceding April 1,
resulting in either a 52 or 53 week fiscal year. The year ended March 28, 1998
("fiscal 1997") was a 52-week year. The Company's fiscal quarter is a 13-week
period which ends on a Saturday.
LOSS PER SHARE
Loss per share amounts for all periods are based on the provisions of
Statement of Financial Accounting Standards No. 128 Earnings Per Share. Diluted
loss per share is not presented since the effect of all potentially dilutive
securities is anti-dilutive. The number of securities that could potentially
dilute basic earnings per share in the future but that were not included in the
computation of diluted earnings per share because to do so would have been anti-
dilutive for the periods presented is 4,645,554.
2. COMPLETION OF INITIAL PUBLIC OFFERING
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). A total of 11,125,000 shares of Common
Stock were sold to the public, of which 9,625,000 were sold by the Company and
1,500,000 were sold by certain stockholders of the Company. The Company
received net proceeds of $132.5 million from the Initial Public Offering, after
deducting underwriters commissions and other related costs. See Item 2,
Management's Discussion and Analysis regarding the use of proceeds to date. In
connection with the partial repayment of the Debentures (as described in Item 2,
Management's Discussion and Analysis), the Company incurred a one-time
extraordinary charge of $5.2 million consisting of prepayment penalties.
In connection with the Initial Public Offering, the remainder of the
Debentures were converted into 2,331,521 shares of Common Stock and a
convertible note issued to sellers in connection with a business acquisition was
converted into 128,333 shares of Common Stock. In addition, all of the
outstanding shares of the Company's Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") were converted, in accordance with their
terms, into 8,644,156 shares of Common Stock, and the related accrual for unpaid
dividends was reversed.
3. ACQUISITIONS
In September 1998, the Company acquired Carol Wright Gifts, Inc., a company
engaged in the direct marketing of general merchandise to consumers. Payment of
the aggregate purchase price of $18,900,000 consisted of (i) 2,400,000 shares of
the Company's Common Stock valued at $2.5625 per share (the closing price of the
Common Stock on the closing date), and (ii) a convertible promissory note in the
principal amount of $12,750,000, bearing interest at an annual rate equal to the
prime interest rate publicly announced by Citibank, N.A., New York, New York
plus 0.5%. The convertible note is payable in its full amount on March 14, 2001;
provided, that, in lieu of such payment, the holder of the convertible note may
at any time after the Conversion Date (as defined below) convert the principal
amount of the convertible note at a conversion price of $12.75 per share into
1,000,000 shares of Common Stock, subject to certain adjustments. The Conversion
Date is the date immediately following the tenth consecutive trading day
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at which the closing price of the Common Stock on the Nasdaq Stock Market on
each such day as reported in the Wall Street Journal was equal to or exceeded
$12.75. Pursuant to the terms of the note, upon the occurrence and continuation
of an event of default, the note is convertible into shares of the Common Stock
at a significantly lower conversion price. In addition to the purchase price,
the Company paid $100,000 in consideration of non-compete obligations. The cost
of the acquisition exceeded the fair value of the acquired net assets by
approximately $16,717,000 which has been recorded as goodwill and is being
amortized over 40 years.
In August 1998, the Company acquired The Edge Company Catalog, Inc., a company
engaged in the direct marketing of distinctive gifts, tools, collectibles,
electronics and action gear, including collectible knives. Payment of the
aggregate purchase price of $22,332,541 consisted of (i) $17 million in cash,
(ii) 234,433 shares of the Company's Common Stock valued at $7.3125 per share
(the closing price of the Common Stock on the closing date), (iii) a 6% interest
bearing promissory note in the principal amount of $960,000 payable on April 10,
1999, (iv) an 8% interest bearing promissory note in the principal amount of
$900,000 payable in three equal annual installments commencing on August 10,
1999 and (v) an 8% interest bearing promissory note in the principal amount of
$1,758,250 payable in four equal semi-annual installments commencing on February
10, 1999. In addition to the purchase price, the Company is required to pay
$100,000 in consideration of non-compete obligations payable in equal annual
installments of $25,000 beginning August 1999 and ending August 2002. The cost
of the acquisition exceeded the fair value of the acquired net assets by
approximately $21,510,000 which has been recorded as goodwill and is being
amortized over 40 years.
In June 1998, the Company acquired Fan and Fun, a company engaged in the
direct marketing of sports apparel and merchandise. Payment of the purchase
price consisted of $0.8 million of cash.
In April 1998, the Company acquired Biobottoms, Inc., a company engaged in the
direct marketing of children's apparel. Payment of the aggregate purchase price
of $3.60 million consisted of (i) $1.0 million of cash, (ii) $1.43 million for
retirement of debt, (iii) $1.17 million of notes, bearing interest at an annual
rate of 7.0%, of which $400,000 was paid in September 1998, $270,000 was due in
August 1998 but has not yet been paid because the Company believes such amount
should be used to offset a post-closing purchase price adjustment due from the
sellers in accordance with the terms of the note, and the balance is due in July
1999. In addition to the purchase price, the Company is required to pay
$100,000 in consideration of non-compete obligations payable in equal annual
installments of $50,000 in April 1999 and April 2000. The cost of the
acquisition exceeded the fair value of the acquired net assets by approximately
$5.7 million which has been recorded as goodwill and is being amortized over 40
years.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto which
are included elsewhere in this Quarterly Report on Form 10-Q. Except for the
historical information contained herein, the discussion in this Quarterly Report
on Form 10-Q contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q shall be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's actual results could
differ materially from those anticipated or implied in such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed before and in the section entitled
"Factors That May Affect Future Financial Results" in the Company's Annual
Report on Form 10-K for the fiscal year ended March 28, 1998 (the "1997 Form 10-
K"), which was filed with the Securities and Exchange Commission on July 24,
1998, as well as those discussed elsewhere in this Quarterly Report on Form 10-
Q. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
OVERVIEW
The Company is a leading database-driven specialty retailer in the rapidly
growing universe of non-store shopping. With a current portfolio of 36 Company-
owned brands, the Company offers products directly to consumers in targeted
niche markets primarily through a variety of distinctive, information-rich
catalogs, as well as Internet websites and electronic media, including
television and radio. Since its inception, the Company has acquired and
started-up a variety of catalog brands. In addition, the Company has
concentrated on building an infrastructure necessary to manage its operating and
growth strategies. However, the Company has recently decided to modify its
business plan in order to effectively allocate its financial resources to
establish a cost structure appropriate for its existing business and achieve
profitability, as more fully described under "Part II Item 5 Other Information
Changes to Business Plan." Among other things, the modifications include
suspending, for the near term, its acquisition program, and reducing its fixed
cost structure. The Company had an accumulated deficit of approximately $137.6
million at September 26, 1998 and had a net loss of $21.2 million for the fiscal
quarter then ended. Management believes that the Company's historical results of
operations are not necessarily indicative of future operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items from
the Company's statement of operations expressed as a percentage of net sales.
Any trends reflected by the following table may not be indicative of future
results.
<TABLE>
<CAPTION>
Three Months Ended SIX MONTHS ENDED
SEPTEMBER SEPTEMBER
------------------------ ------------------------
26, 1998 27, 1997 26, 1998 27, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 29.5 39.0 30.4 37.0
Selling, general and administrative expenses.. 80.1 171.8 81.8 129.5
Loss from operations.......................... 50.6 132.8 51.4 92.5
Interest expense.............................. 1.9 9.5 3.1 8.3
Net loss...................................... 51.8 142.1 60.3 100.5
</TABLE>
THREE MONTHS ENDED SEPTEMBER 26, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
27, 1997
Net sales. Net sales increased to $41.0 million in the fiscal quarter ended
September 26, 1998 from $11.5 million in the fiscal quarter ended September 27,
1997. This increase was attributable to acquisitions completed
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and start-ups launched after September 1997 and revenue growth from existing
catalogs. In the fiscal quarter ended September 26, 1998, revenue from catalogs
that the Company has operated for at least one year was $12.5 million which
represents a 61.3% increase from the $7.7 million in revenue which was generated
by the same catalogs in the fiscal quarter ended September 27, 1997. Net sales
for the 1998 period were unfavorably affected by shipping delays caused by
downtime during the installation and testing of upgraded distribution systems,
and by higher than anticipated backorder rates on certain strong-selling items.
Finally, the acquisition of Carol Wright Gifts, Inc. was consummated two weeks
later than anticipated, resulting in lower than expected sales contribution for
the period.
Gross profit. Gross profit increased to $12.1 million or 29.5% of net sales
for the fiscal quarter ended September 26, 1998 compared to $4.5 million or
39.0% of net sales for the fiscal quarter ended September 27, 1997. The increase
in gross profit was attributable to the acquisitions completed and start-ups
launched after September 1997 and growth from existing catalogs. The decrease in
gross profit percentage was primarily attributable to higher variable order-
taking and fulfillment costs as a percentage of revenue incurred in the call
center and the distribution center in the fiscal quarter ended September 26,
1998 compared to the Company's operations in the quarter ended September 27,
1997. The call center and distribution center costs reflect expense levels that
must be maintained in preparation for the Company's highest order volume quarter
in fiscal 1998, the fiscal quarter ending December 26, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation and
amortization. Selling, general and administrative expenses increased to $32.8
million in the fiscal quarter ended September 26, 1998 from $19.8 million in the
fiscal quarter ended September 27, 1997. Selling, general and administrative
expenses as a percentage of net sales decreased to 80.1% in the fiscal quarter
ended September 26, 1998 from 171.8% in the fiscal quarter ended September 27,
1997. This percentage decrease was due to increased sales volume resulting from
the acquisitions completed and start-ups launched after September 1997, offset
in part by increased costs associated with the Company's decision to further
invest in infrastructure in order to take advantage of its opportunities for
future growth in new markets and channels as well as to integrate new catalogs.
In connection with the Company's acquisitions, amortization of acquired
intangibles of $1.8 million is included in selling, general and administrative
expenses in the fiscal quarter ended September 26, 1998 as compared to $1.1
million in the fiscal quarter ended September 27, 1997.
Interest expense. Interest expense decreased to $0.8 million in the fiscal
quarter ended September 26, 1998 from $1.1 million in the fiscal quarter ended
September 27, 1997, primarily as a result of a lower average debt balance for
the period.
SIX MONTHS ENDED SEPTEMBER 26, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 27,
1997
Net sales. Net sales increased to $74.8 million in the six months ended
September 26, 1998 from $25.6 million in the six months ended September 27,
1997. This increase was attributable to acquisitions completed and start-ups
launched after September 1997 and revenue growth from existing catalogs. In the
six months ended September 26, 1998, revenue from catalogs that the Company has
operated for at least one year was $27.1 million which represents a 42.6%
increase from the $19.0 million in revenue which was generated by the same
catalogs in the six months ended September 27, 1997.
Gross profit. Gross profit increased to $22.8 million or 30.4% of net sales
for the six months ended September 26, 1998 compared to $9.5 million or 37.0% of
net sales for the six months ended September 27, 1997. The increase in gross
profit was attributable to the acquisitions completed and start-ups launched
after September 1997 and growth from existing catalogs. The decrease in gross
profit percentage was primarily attributable to higher order-taking and
fulfillment costs as a percentage of revenue incurred in the call center and the
distribution center in the six months ended September 26, 1998 compared to the
Company's operations in the six months ended September 27, 1997. The call
center and distribution center costs reflect expense levels that must be
maintained in preparation for the Company's highest order volume quarter in
fiscal 1998, the fiscal quarter ending December 26, 1998.
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Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation and
amortization. Selling, general and administrative expenses increased to $61.2
million in the six months ended September 26, 1998 from $33.1 million in the six
months ended September 27, 1997. Selling, general and administrative expenses
as a percentage of net sales decreased to 81.8% in the six months ended
September 26, 1998 from 129.5% in the six months ended September 27, 1997. This
percentage decrease was due to increased sales volume resulting from the
acquisitions completed and start-ups launched after September 1997, offset in
part by increased costs associated with the Company's decision to further invest
in infrastructure in order to take advantage of its opportunities for future
growth in new markets and channels as well as to integrate new catalogs. In
connection with the Company's acquisitions, amortization of acquired intangibles
of $3.2 million is included in selling, general and administrative expenses in
the six months ended September 26, 1998 as compared to $1.9 million in the six
months ended September 27, 1997.
Interest expense. Interest expense increased to $2.3 million in the six
months ended September 26, 1998 from $2.1 million in the fiscal quarter ended
September 27, 1997, primarily as a result of a higher average debt balance for
the period and higher effective interest rates on outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, the Company had cash of $4.9 million and a working
capital balance of $19.3 million. The Company's capitalization, defined as the
sum of long-term debt and stockholders' equity, at September 26, 1998 was $163.7
million.
To date, prior to implementation of the Company's modified business plan as
described in Part II Item 5, the Company's principal capital needs arose from
(i) the acquisition and start-up of new catalog businesses, (ii) the funding of
operating losses arising from maintaining the infrastructure necessary to
support future acquisitions and the investment in growing these new acquisitions
through prospect mailings, (iii) growing the customer database and (iv) capital
expenditures related to the telemarketing and fulfillment centers. Following
the implementation of the Company's modified business plan, the Company's
principal capital needs in the near future are expected to arise from funding
working capital and capital expenditures needed to support current business
levels.
During the fiscal quarter ended September 26, 1998, the Company acquired two
businesses for an aggregate of $17.1 million in cash, $16.4 million of notes and
2,634,433 shares of Common Stock. As noted above, the Company does not plan to
pursue additional acquisitions in the near term.
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). The Company received net proceeds of
$132.5 million from the Initial Public Offering, after deducting underwriters'
commissions and other related costs. To date, the Company has used (i)
approximately $28.0 million of the net proceeds to redeem a portion of the
Company's outstanding Convertible Subordinated Debentures due June 1, 2003 (the
"Debentures"), all of which were owned by GE Investment Private Placement
Partners II, a Limited Partnership ("GEIPPP II"), (ii) approximately $7.75
million of the net proceeds to repay the notes payable to GEIPPP II in the
principal amount of $7.65 million (the "Bridge Notes"), (iii) approximately
$10.0 million of the net proceeds to repay its outstanding borrowings under the
Revolving Credit Facility and a portion of the Term Loan (each as defined
below), (iv) approximately $0.8 million of the net proceeds for the acquisition
of certain assets of Fan and Fun completed on June 25, 1998, (v) approximately
$17.0 million of the net proceeds for the acquisition of certain assets of The
Edge Company Catalog completed on August 10, 1998, (vi) approximately $10.3
million of the net proceeds for capital expenditures, and (vii) approximately
$58.6 million of the net proceeds for working capital.
In April 1998, the Company raised a total of $7.65 million through the
issuance of Bridge Notes to GEIPPP II. Proceeds from the Bridge Notes were used
(i) to pay for the expansion and upgrading of the infrastructure at the
Company's distribution center, (ii) to fund the Biobottoms acquisition and (iii)
to provide additional working capital.
In May 1997, the Company entered into a $25.0 million revolving credit
facility (the "Revolving Credit Facility") and a $5.0 million term loan (the
"Term Loan," and together with the Revolving Credit Facility, the
11
<PAGE>
"Credit Facility") with The CIT Group/Business Credit Inc. The Credit Facility
is collateralized by substantially all of the Company's assets. The Revolving
Credit Facility bears interest at a variable rate equal to Prime Rate of The
Bank of New York plus 0.5% or LIBOR plus 3%. The Term Loan is payable over five
years and bears interest at the Prime Rate plus 0.5%. The Credit Facility
contains certain covenants, including a covenant with respect to the maintenance
of specified consolidated net worth.
During the six months ended September 26, 1998, net cash used by operating
activities was $72.0 million. During the same period, net cash used in investing
activities was $32.3 million, consisting primarily of cash paid for
acquisitions, net of cash acquired, of $20.2 million and cash paid for additions
to property, equipment and leasehold improvements of $11.1 million. During the
same period, net cash provided by financing activities was $106.8 million
consisting primarily of the $132.5 million in net proceeds from the Initial
Public Offering.
The Company has been incurring capital expenditures which will total
approximately $17.0 million during fiscal 1998 to invest in its existing state-
of-the-art infrastructure, to exploit new channels of distribution and to
increase its activities in international markets. However, no assurance can be
made with respect to the actual timing and amount of all of the expenditures.
Even with the implementation of the Company's modified business plan, an
increase in the Company's available credit line to finance peak seasonal working
capital needs will be required. The Company believes it has sufficient
collateral to support such increased credit line. The Company anticipates that
its existing cash and such increased credit facility will be sufficient to meet
the Company's liquidity requirements for its operations for at least the next 12
months. There can be no assurances that additional sources of financing will not
be required during such time or thereafter.
As of March 28, 1998, the Company had approximately $78 million of federal tax
net operating loss carryforwards which will expire in 2012 and 2013. The
Company also had approximately $75 million of state tax net operating loss
carryforwards which will expire in 2004 and 2005. Net deferred tax assets are
fully reserved as of September 26, 1998. In addition, the Company incurred
significant additional tax losses for the fiscal quarter ended September 26,
1998.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change." In general,
an ownership change is deemed to occur if the percentage of stock of a
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period. As
a result of cumulative changes in the Company's ownership which have occurred,
including the Initial Public Offering, the Company's net operating loss
carryforwards will be subject to significant annual limitations.
SEASONALITY
The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be derived
from the fall and holiday seasons. As a result, the Company expects its sales
and results of operations generally to be the lowest in the second quarter of
each fiscal year, which precedes the back-to-school and holiday purchases. The
Company's quarterly results may fluctuate as a result of numerous factors,
including the timing of acquisitions, the timing, quantity and cost of catalog
mailings, the response rates to such mailings, the timing of merchandise
deliveries, the merchandise mix, pricing and presentation of products offered
and sold, market acceptance of the Company's merchandise (including new
merchandise categories or products introduced) and the hiring and training of
additional personnel. Accordingly, results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full fiscal
year or any future quarters. Results of operations are affected not only by the
seasonality of the Company's net revenues, but also by seasonal variations in
product mix and the fixed portion of the Company's operating expenses. See
"Factors that May Affect Future Financial Results" in the 1997 Form 10-K.
INFLATION
Results of operations have not been significantly affected by inflation since
the Company's inception. Management expects that in the normal course of
business, the Company will be able to offset the effects of increased costs
through operating efficiencies and selected price increases.
12
<PAGE>
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company has received letters from each of its applications vendors stating
that all of the Company's informational technology systems, such as its call
center order-taking software and distribution center order-fulfillment software,
are Year 2000 compliant. The Company has begun an assessment of its non-
information technology systems, such as its security systems and telephones, to
determine if they are also Year 2000 complaint. To date, the Company has
determined, based on information published or otherwise provided by such
systems' vendors, that many of its non-information technology systems are or
will be Year 2000 compliant. The Company plans to initiate formal
communications with the vendors of its remaining non-information technology
systems. Based on its assessment to date, the Company is not aware that any of
its non-information technology systems will not be Year 2000 compliant prior to
the Year 2000. The Company has not incurred costs to modify or replace any of
its information technology or non-information technology systems.
The Company has also begun an assessment of its significant vendors,
suppliers, and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
compliance issues. To date, the Company has determined, based on information
published or otherwise provided by such third parties, that many of such
parties' systems are or will be Year 2000 compliant. The Company plans to
initiate formal communications with the remaining third parties with whom the
Company has a significant relationship. Based on its assessment to date, the
Company is not aware that any of its significant vendors, suppliers and service
providers will not be Year 2000 compliant prior to the year 2000.
In addition to the assessments and investigations described above, the Company
plans to conduct internal tests of all of its internal information and non-
information technology systems and all of its system interfaces with significant
vendors, suppliers and service providers to ensure Year 2000 compliance.
However, despite the Company's efforts to ensure that its internal systems and
the systems of its significant vendors, suppliers and service providers are Year
2000 complaint, there can be no guarantee that the failure of certain systems
will not have a material adverse effect on the Company.
To date, the Company has handled its Year 2000 compliance program using only
internal resources. Accordingly, the only costs incurred by the Company have
been the salary costs of its internal staff. Although at the current time, the
Company expects that it will be able to complete its Year 2000 compliance
program using only internal resources, there can be no assurance that the
Company will not require external resources to complete its Year 2000 compliance
program.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at September 26, 1998, include the
following Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 129, "Disclosure of Information about Capital Structure," which will
be effective for the Company for the fiscal year ending March 27, 1999,
consolidates existing disclosure requirements. This new standard contains no
change in disclosure requirements for the Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the fiscal year ending
March 27, 1999, establishes standards for reporting information about operating
segments in the annual financial statements, selected information about
operating segments in interim financial reports and disclosures about products
and services, geographic areas and major customers. This new standard may
require the Company to report financial information on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required
13
<PAGE>
and provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is party to claims and litigation that arise in the normal course
of business. Management believes that the ultimate outcome of these claims and
litigation will not have a material impact on the financial position or results
of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Initial Public Offering. As previously reported in the Company's 1997 Form
------------------------
10-K and the Company's Quarterly Report on Form 10-Q for the quarter ending June
27, 1998, on May 13, 1998 the Company completed an initial public offering
("Initial Public Offering") of shares of its Common Stock. The aggregate net
proceeds (after deducting underwriting discounts and commissions and before
deducting other expenses) received by the Company from the Initial Public
Offering was $134,990,625. In addition to underwriting discounts and
commissions of $9,384,375, the Company incurred approximately $2,400,000 in
other expenses in connection with the Initial Public Offering, including
registration and filing fees, printing expenses, accounting fees and legal fees.
To date, the Company has used (i) approximately $28.0 million of the net
proceeds to redeem a portion of the Debentures held by GEIPPP II, (ii)
approximately $7.75 million of the net proceeds to repay the Bridge Notes held
by GEIPPP II, (iii) approximately $10.0 million of the net proceeds to repay its
outstanding borrowings under the Revolving Credit Facility and a portion of the
Term Loan, (iv) approximately $0.8 million of the net proceeds for the
acquisition of Fan and Fun on June 25, 1998, (v) approximately $17.0 million of
the net proceeds for the acquisition of The Edge Company Catalog on August 10,
1998, (vi) approximately $10.3 million of the net proceeds for capital
expenditures, and (vii) approximately $58.6 million of the net proceeds for
working capital. The Company has invested the remainder of the net offering
proceeds in short-term investments, which consist of United States Treasury
Notes, obligations of United States government agencies and corporate bonds with
maturities of 90 days or less.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Third Party Inquiries
---------------------
Subsequent to the end of the Company's fiscal quarter ended September 26,
1998, the Company has received unsolicited inquiries from third parties
regarding a possible acquisition or strategic investment. The Company has
retained Goldman, Sachs & Co. and Schroder & Co. to assist in the evaluation of
these inquiries, as well as other alternatives designed to enhance shareholder
value. No assurance can be given that this will result in any transactions.
Changes to Business Plan
------------------------
Subsequent to the end of the Company's fiscal quarter ended September
26, 1998, the Company has decided to modify its business plan in order to
effectively allocate its financial resources to establish a cost structure
appropriate for its existing business and achieve profitability. The three
primary components of the Company's restructuring will be:
Suspension of Acquisition Program. The Company has decided to
---------------------------------
suspend, for the near term, its acquisition program since management believes
that it is not in the best interests of the Company to fund
15
<PAGE>
acquisitions with either shares of Common Stock, given its low market value, or
cash, given the need to use such cash to fund ongoing operations. As the price
of the Common Stock increases, the Company may reactivate its acquisition
program.
Decrease in Customer Prospecting Costs. The Company plans to decrease
--------------------------------------
its reliance on rental mailing lists to identify potential new customers, which
is a less reliable and more expensive method of building its customer file.
Rather, the Company will enhance its reliance on its own database of over 24
million names and will build its database with information gathered from
Internet alliances and partnerships.
Reduction of Fixed Costs. A significant reduction of the Company's
------------------------
fixed cost structure is already in progress. The Company plans to further
reduce fixed costs by, among other things, closing redundant facilities,
eliminating certain underperforming brands and reducing staff. However, the
Company will maintain the appropriate infrastructure to effectively accommodate
reactivation of its acquisition program, as market conditions permit.
The Company anticipates that these actions will generate annualized cost
savings of approximately $21 million on a pre-tax basis beginning in fiscal
1999. The Company expects to incur a one-time pre-tax charge for inventory
write off and restructuring costs aggregating approximately $5 million to $10
million in the fiscal quarter ending December 26, 1998. The Company's ability
to achieve profitability in fiscal 1999 is dependent in part on the successful
implementation of the modifications described above and other factors. See
"Factors That May Affect Future Financial Results" in the 1997 Form 10-K.
Accordingly, there can be no assurance that the Company will achieve
profitability.
New Directors.
-------------
In July 1998, the Board of Directors of the Company voted to increase the
size of the Board of Directors to seven and appointed two new directors to fill
the vacancies on the Board. The new directors, Ilan Kaufthal and Marvin Runyon,
will serve as Class A directors with terms expiring in 1999. The following are
biographies for Mr. Runyon and Mr. Kaufthal:
Marvin Runyon. Marvin Runyon, who is 73 years of age, has served as a
director of the Company since July 1998. From July 1992 until his retirement in
May 1998, Mr. Runyon served as Postmaster General of the United States and Chief
Executive Officer of the United States Postal Service. From 1988 to 1992, Mr.
Runyon served as Chairman of the Board of the Tennessee Valley Authority, having
been appointed to such position by President Ronald Reagan. From 1980 to 1988,
Mr. Runyon served as President and Chief Executive Officer of Nissan Motor
Manufacturing Corporation U.S.A. Prior to 1980, Mr. Runyon served in various
capacities at Ford Motor Company, including as Vice President, Body and Assembly
Operations.
Ilan Kaufthal. Ilan Kaufthal, who is 50 years of age, has served as a
director of the Company since July 1998. Since February 1987, Mr. Kaufthal has
served in various capacities at Schroder & Co. Inc. ("Schroder"), and is
currently the Vice Chairman. Mr. Kaufthal is responsible for the mergers and
acquisitions business of Schroder and serves on its executive committee. Mr.
Kaufthal is a director of United Retail Group, Inc., ASI Solutions Inc., Cambrex
Corp and Russ Berrie & Co., Inc.
Audit Committee.
---------------
In August 1998, the Board of Directors of the Company established an
Audit Committee and appointed the following directors to serve as members of the
Audit Committee: Hunter Cohen, Ilan Kaufthal and David Wiederecht.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission.
Exhibit Description
No.
- ---------- --------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of August 5, 1998, by and among
Genesis Direct Forty Three, LLC, Carol Wright Gifts, Inc. and Cox
Target Media, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K (File No. 0-24173)).
2.2 Amendment No. 1 to Asset Purchase Agreement, dated as of August 5,
1998, by and among Genesis Direct Forty Three, LLC, Carol Wright
Gifts, Inc. and Cox Target Media, Inc. (incorporated by reference to
Exhibit 2.2 of the Registrant's Current Report on Form 8-K (File No.
0-24173)).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.5 of the Registrant's Registration Statement
on Form S-1 (File No. 333-47455)).
4.1 Specimen certificate for shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
4.2 Stockholders Agreement dated as of September 30, 1998 (incorporated
by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-1 (File No. 333-47455)).
4.3 Registration Rights Agreement, date as of September 14, 1998, by and
between Genesis Direct, Inc. and Carol Wright Gifts, Inc.
(incorporated by reference to Exhibit 4.1 of the Registrant's
Current Report on Form 8-K (File No. 0-24173)).
4.4 Convertible Note, dated September 14, 1998, made by Genesis Direct,
Inc. in favor of Carol Wright Gifts, Inc. (incorporated by reference
to Exhibit 4.2 of the Registrant's Current Report on Form 8-K (File
No. 0-24173)).
27.1 Financial Data Schedule for fiscal quarter ended September 26, 1998.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed in or for the three month period
ended September 26, 1998:
In August 1998, the Company filed a Current Report on Form 8-K to report that
the Company acquired The Edge Company Catalog, Inc.
In August 1998, the Company filed a Current Report on Form 8-K to report that
it had signed a definitive agreement to acquire Carol Wright Gifts, Inc ("Carol
Wright Gifts"). In September 1998, the Company filed a Current Report on Form
8-K to report that the Carol Wright Gifts acquisition was consummated.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESIS DIRECT, INC.
Date: November 9, 1998 By: /s/ Ronald Benanto
---------------------------------
Ronald Benanto
Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ---------- --------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of August 5, 1998, by and among
Genesis Direct Forty Three, LLC, Carol Wright Gifts, Inc. and Cox
Target Media, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K (File No. 0-24173)).
2.2 Amendment No. 1 to Asset Purchase Agreement, dated as of August 5,
1998, by and among Genesis Direct Forty Three, LLC, Carol Wright
Gifts, Inc. and Cox Target Media, Inc. (incorporated by reference to
Exhibit 2.2 of the Registrant's Current Report on Form 8-K (File No.
0-24173)).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.5 of the Registrant's Registration Statement
on Form S-1 (File No. 333-47455)).
4.1 Specimen certificate for shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
4.2 Stockholders Agreement dated as of September 30, 1998 (incorporated
by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-1 (File No. 333-47455)).
4.3 Registration Rights Agreement, date as of September 14, 1998, by and
between Genesis Direct, Inc. and Carol Wright Gifts, Inc.
(incorporated by reference to Exhibit 4.1 of the Registrant's
Current Report on Form 8-K (File No. 0-24173)).
4.4 Convertible Note, dated September 14, 1998, made by Genesis Direct,
Inc. in favor of Carol Wright Gifts, Inc. (incorporated by reference
to Exhibit 4.2 of the Registrant's Current Report on Form 8-K (File
No. 0-24173)).
27.1 Financial Data Schedule for fiscal quarter ended September 26, 1998.
19
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