<PAGE>
PROSPECTUS
11,125,000 SHARES
GENESIS DIRECT, INC.
COMMON STOCK
Of the 11,125,000 shares of Common Stock offered hereby, 9,625,000 shares
will be sold by Genesis Direct, Inc. ("Genesis Direct" or the "Company") and
1,500,000 shares will be sold by certain Selling Stockholders. See "Principal
and Selling Stockholders." Prior to this offering, there has been no public
market for the Common Stock. For a discussion of the factors considered in
determining the initial public offering price, see "Underwriting." The
Company's Common Stock has been approved for trading on the Nasdaq Stock
Market under the symbol GEND.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $15.00 $0.975 $14.025 $14.025
- --------------------------------------------------------------------------------
Total(3)................. $166,875,000 $10,846,875 $134,990,625 $21,037,500
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,668,750 additional shares of Common Stock solely to cover over-
allotments, if any. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $191,906,250, $12,473,906 and $158,394,844, respectively. See
"Underwriting."
----------------
The shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this offering and to reject orders in whole or in part. It is expected that
delivery of the shares will be made against payment therefor on or about May
13, 1998, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167.
----------------
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
INVEMED ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
May 7, 1998
<PAGE>
[INSERT PHOTOS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references in this Prospectus to the "Company" or
"Genesis Direct" are to Genesis Direct, Inc., a Delaware corporation, and its
direct and indirect wholly-owned subsidiaries and its predecessor, Genesis
Direct L.L.C., a Delaware limited liability company. As used in this
Prospectus, references to a fiscal year refer to the Company's fiscal year
ended or ending on the Saturday next preceding April 1 of the next calendar
year. Unless otherwise indicated, the information in this Prospectus (i) has
been adjusted to give effect to (a) the conversion of all outstanding shares of
the Company's Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") into 8,644,156 shares of Common Stock, (b) the conversion of
$9.75 million principal amount of the Company's outstanding Convertible
Subordinated Debentures due June 1, 2003 (the "Debentures") into 2,331,521
shares of Common Stock, (c) the conversion of an outstanding note in the amount
of $1.4 million into 128,333 shares of Common Stock and (d) a 275-for-1 split
of the Common Stock (the "Stock Split"), all of which transactions will occur
immediately prior to the consummation of this offering and (ii) assumes that
the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Genesis Direct is a leading database-driven specialty retailer in the rapidly
growing universe of non-store shopping. With a current portfolio of 30 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. The Company's marketing efforts are supported by a
customer database of over 10 million names, a 450-station call center at its
Secaucus, New Jersey headquarters and a custom-designed 500,000 square foot
distribution center strategically located in Memphis, Tennessee. For the nine
months ended December 27, 1997, the Company had net sales of approximately
$81.5 million.
The Company currently offers more than 15,000 products within four distinct,
but interrelated, market categories: sports (including licensed and non-
licensed apparel, accessories, home furnishings, equipment and limited edition
collectibles), kids (including toys, games, crafts, clothing and educational
and developmental materials), gifts and collectibles (including mechanical
toys, dolls, and music- and entertainment-related products and memorabilia) and
institutional/business-to-business (including educational, recreational and
therapeutic products for schools, camps and therapists). The Company has
established a variety of strategic relationships including, in the sports
market, with the National Basketball Association, the National Hockey League,
Major League Baseball, the National Association of Stock Car Auto Racing
(NASCAR) and the NFL Quarterback Club. Pursuant to these relationships, the
Company produces the exclusive official catalogs of these organizations and
offers through them licensed and non-licensed merchandise directly to consumers
and institutions, including, in the case of the NBA, the NHL, Major League
Baseball and NASCAR, through the leagues' websites.
In recent years, retailing in the United States has been characterized by a
rapidly growing shift to non-store sales through such media as printed
catalogs, broadcast and cable television infomercials, home shopping channels
and the Internet. According to the Direct Marketing Association ("DMA"), an
industry trade group, these alternative forms of non-store retailing, which in
1997 accounted for approximately $382.0 billion in sales, are expected to grow
approximately 9% per annum for the next five years. The Company believes that
this growth is due to the convenience of home shopping for time-constrained,
dual-career consumer households and the increasingly high level of customer
service and reliability offered by leading direct marketing firms. The
traditional catalog segment of the United States direct marketing industry,
which, according to the DMA, generated approximately $79.0 billion in total
sales in 1997, is highly fragmented. The Company believes that
3
<PAGE>
there are over 12,000 catalog companies in existence, most of which lack the
necessary capital, support systems and economies of scale to effectively
exploit available opportunities for growth. The Company believes it is well-
positioned to pursue an active consolidation strategy in this market because of
its high capacity order-taking, processing and fulfillment infrastructure, its
well-developed expertise in catalog design and merchandising, its use of
sophisticated statistical modeling and cross-marketing segmentation techniques
and its development of detailed criteria for identifying and evaluating
potential acquisition candidates. Since its inception, the Company has
completed 15 acquisitions of catalog businesses, of which all but one were
acquired since November 1996.
The Company was founded in June 1995 by Warren Struhl, Hunter Cohen and David
Sable, who presently serve, respectively, as its chief executive, chief
operating and chief marketing officers. Prior to forming the Company, Mr.
Struhl was the principal shareholder and chief executive officer, and Messrs.
Cohen and Sable were directors, of PaperDirect, Inc., a leading direct marketer
of high quality business papers and presentation materials, founded by Mr.
Struhl in October 1989 and sold in August 1993. Since its inception, Genesis
Direct has received $168.1 million of funding from various sources, including
the founders and major institutional investors, which has been utilized to
acquire and start up catalogs and to build an infrastructure in anticipation of
further growth.
OPERATING STRATEGY
The key elements of the Company's operating strategy are as follows:
. TARGET AND PENETRATE NICHE MARKETS. The Company identifies and focuses
its efforts on penetrating niche markets that it believes are
underserved by retail stores and other catalogs, that will be responsive
to its innovative direct marketing techniques and in which it can become
a market leader. The Company then acquires a variety of catalogs within
the target market, each of which it transforms into a readily
identifiable brand by investing heavily to enhance the catalog's image.
In addition, the Company trains a core group of specialized customer-
responsive employees to serve that market and seeks to establish
innovative strategic relationships with other participants in that
market. The Company also employs sophisticated database management
techniques and systems to cross-sell product offerings designed for one
niche market to customers in its other niche markets. The Company
believes that by targeting several niche markets and serving each market
with multiple brands, it reduces its reliance on any particular market
or brand.
. DEVELOP CENTRALIZED STATE-OF-THE-ART INFRASTRUCTURE. Since its
inception, the Company has invested approximately $20.4 million to
develop an order-taking, processing and fulfillment infrastructure with
sufficient capacity and operational flexibility to service increased
sales volume and exploit strategic or market opportunities as they
occur. In addition to its state-of-the-art call center and distribution
center, the Company has invested in sophisticated management information
systems and database technologies that effectively coordinate a full
range of functions from catalog production and mailing to order-taking
and fulfillment. The Company's substantial investment in infrastructure
allows it to quickly consolidate and integrate newly acquired catalogs
and to introduce new catalogs. The Company believes that, as sales
volume increases through acquisitions and internal growth, it can
leverage its infrastructure to reduce the per order cost of fulfillment.
The Company believes that, without significant additional capital
expenditures beyond its fiscal 1998 spending plan, its current systems
infrastructure, call center and distribution center can accommodate up
to $1.0 billion in annual sales.
. OFFER PROPRIETARY, PERSONALIZED AND HARD-TO-FIND PRODUCTS. The Company
seeks to increase its gross margins by offering proprietary and
personalized products, as well as products that are difficult
4
<PAGE>
to find in retail stores and other catalogs. The Company strives to
offer customers in each of its target markets a broader merchandise
selection than is generally offered by traditional retailers and smaller
direct marketers. The Company has established a department dedicated to
the development of proprietary products and the personalization of
products within each of the Company's target markets. As part of this
initiative, the Company is currently building a customization facility
in its distribution center that will enable it to personalize most of
its products by means of etching, laser engraving and embroidery.
. UTILIZE MULTIPLE MARKETING CHANNELS. To reach potential customers, the
Company uses multiple marketing channels, including mail, Internet
websites, television and radio advertisements, infomercials, airplane
seat-backs, hotel rooms, sports events and trade shows. The Company
currently takes on-line orders for products from Internet websites under
two of its brands and maintains informational websites for eight of its
other brands. In addition, under exclusive arrangements with the NBA,
NHL and Major League Baseball, the Company maintains the on-line store
on those leagues' websites, where potential customers can receive
information, view merchandise, enter inquiries and orders and request
catalogs.
. BUILD LIFETIME CUSTOMER RELATIONSHIPS. The Company's objective is to
make every customer a customer for life. Through its niche marketing
strategy and sophisticated database, enhanced with up-to-date
demographic information, the Company offers products intended to satisfy
customer preferences as they evolve over their lifetimes. In addition,
the Company strives to provide consistently prompt, knowledgeable and
courteous service and rapid order fulfillment. In its 450-station call
center, calls are routed to the customer service representative most
knowledgeable about the products within the particular catalog brand in
question. Because of the high level of automation at its distribution
center and the strategic location of that center at a shipping hub for
such carriers as Federal Express, UPS and the U.S. Postal Service, the
Company is able to provide next-day delivery, if requested, on orders
received prior to 11:00 p.m. EST. The Company continually strives to
develop the Genesis Direct name into an umbrella seal-of-approval symbol
associated with superior service and product quality.
. ATTRACT AND RETAIN EXPERIENCED MANAGEMENT TEAM. The Company seeks to
attract and retain highly qualified management personnel with extensive
experience. To date, the Company has assembled some of the country's
most experienced professionals in direct marketing or related
industries. The Company has also retained many of the former owners of
the acquired catalog companies, who bring extensive expertise in their
respective niche markets.
GROWTH STRATEGY
The key elements of the Company's growth strategy are as follows:
. PURSUE STRATEGIC ACQUISITIONS. As a result of its acquisition of 15
catalog businesses, the Company has developed considerable expertise in
identifying and evaluating appropriate acquisition candidates and in
integrating the operations and expanding the sales of acquired
companies. The Company believes that the fragmented direct marketing
industry provides significant consolidation opportunities and is
pursuing an aggressive but disciplined acquisition strategy focused
primarily on catalog brands that complement existing brands in its
targeted niche markets. In particular, the Company seeks catalog brands
that have been unable to realize their growth and profitability
potential due to capital constraints and infrastructure limitations. To
date, the typical acquisition candidate has demonstrated a high average
order value and a low rate of merchandise returns and is believed to
have the potential to eventually achieve at least $25.0 million in
annual sales, realize high rates in customer retention and successfully
offer higher margin proprietary products.
5
<PAGE>
. INCREASE REVENUES OF ACQUIRED CATALOGS. The Company believes that, in
addition to achieving synergies through the integration of acquired
catalogs, there are opportunities to substantially increase the revenues
of acquired catalogs by utilizing the Company's database to efficiently
target a more precise group of potential customers based on demographic
information and individual purchase behavior. In addition, the Company
believes that its superior customer service and its development of each
acquired catalog into a readily identifiable brand can increase the
revenue opportunities of those catalogs.
. DEVELOP NEW BRANDS. The Company uses its existing customer database to
create and introduce new catalog brands. The Company currently has eight
active start-up catalog brands and intends to introduce and develop
additional new catalog brands featuring original merchandise concepts
that will allow it to penetrate further distinct segments of its niche
markets. For example, the Company has recently used its customer lists
in the sports and kids market segments to start-up S.K.U.S.A. (an
acronym for Sports Kids U.S.A.), through which the Company offers hard-
to-find "sports lifestyle" products for children, including apparel,
home furnishings and toys.
. EXPAND AND LEVERAGE CUSTOMER DATABASE. The Company is continually
expanding its customer database through a variety of techniques,
including catalog and list acquisitions, renting of mailing lists and
strategic alliances. Examples of strategic alliances that enhance the
Company's customer database are its exclusive arrangements with
professional sports leagues that allow the Company access to the
leagues' databases, Internet websites and advertising opportunities. The
Company uses sophisticated statistical modeling and segmentation
techniques to develop purchasing profiles of the customers in its
database, which facilitates cross-marketing, cross-selling and more
precisely focused catalog distributions and marketing efforts.
. EXPAND INTERNATIONAL SALES. The demographic and technological trends
that are driving the retail consumer shift to non-store shopping in the
United States are also present in many international markets. The
Company believes that its catalog development expertise and existing
infrastructure will enable it to expand into certain of those markets,
particularly those with a strong interest in U.S. sports-related
products. The Company intends, where appropriate, to produce foreign
language versions of several of its catalogs. In addition, the Company's
distribution center in Memphis, Tennessee is strategically placed at the
hub of courier services serving international markets to permit rapid
direct-to-consumer overseas order fulfillment. The Company is currently
expanding its operations into France, Germany, Japan and the United
Kingdom and expects to launch an extension of its 1-800-Pro-Team brand
in several of those countries.
. GENERATE MULTIPLE REVENUE STREAMS. The Company intends to generate
multiple revenue streams within its target markets by permitting third-
party direct marketers to sell non-competing goods and services to its
customers, by including third-party/vendor advertising in Company
catalogs and by renting its customer lists to non-competing vendors. For
example, through several of its sports brands, the Company offers MBNA
credit cards with sports team logos.
ANTICIPATED FOURTH QUARTER AND YEAR-END RESULTS
For the three months ended March 28, 1998, the Company expects to report a
net loss of approximately $19.0 million to $20.0 million on net sales of
approximately $23.0 million to $24.0 million, and for the fiscal year then
ended the Company expects to report a net loss of approximately $76.0 million
to $77.0 million on net sales of approximately $104.0 million to $105.0
million. Definitive results for those periods are subject to final review and
audit. Management believes that the Company's historical results of operations
are not necessarily indicative of future operating results.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company..................... 9,625,000 shares
The Selling Stockholders........ 1,500,000 shares
Common Stock to be outstanding
after this offering(1)........... 29,728,660 shares
Use of proceeds................... For general corporate purposes, including
debt reduction, acquisitions, capital
expenditures and working capital. See "Use
of Proceeds."
Proposed Nasdaq Stock Market
symbol........................... GEND
</TABLE>
- --------
(1) Excludes (a) 1,598,162 shares of Common Stock issuable upon the exercise of
stock options outstanding as of April 15, 1998 at a weighted average
exercise price of $12.32 per share and (b) 275,000 shares of Common Stock
issuable upon the exercise of outstanding warrants at a price of $10.91 per
share. In addition, upon consummation of this offering, the Company will
grant to certain executive officers additional options to purchase an
aggregate of 1,155,000 shares. See "Management--Option Grants in Last
Fiscal Year," "--Stock Option Plan" and Note 11 to the Company's
Consolidated Financial Statements.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Common Stock.
---------
The Company's executive offices are located at 100 Plaza Drive, Secaucus, New
Jersey 07094 and its telephone number is (201) 867-2800.
---------
Hand-in-Hand(R), The Music Stand(R), Gifts For Grandkids(R), The Voyager's
Collection(R), 1-800-Pro-Team(R), Manny's Baseball Land(R), Competitive Edge
Golf(R) and Biobottoms(R) are registered trademarks of the Company. Genesis
Direct(TM), Childswork/Childsplay(TM), Command Performance(TM), From The
Sidelines(TM), Hot Off The Ice(TM), Nothin' But Hoops(TM), S.K.U.S.A.(TM),
Sports Kids USA(TM), The Training Camp(TM), Lilliput(TM), Ninos(TM),
Sportime(TM), Abilitations(TM), Chime Time(TM), Sportime Senior Products(TM),
Active Minds(TM) and Soccer Madness(TM) are trademarks or service marks of the
Company.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following Summary Consolidated Financial and Operating Data of the
Company are qualified by reference to and should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and notes thereto and the
Pro Forma Condensed Combined Financial Statements and notes thereto, which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PERIOD FROM FISCAL YEAR FISCAL NINE MONTHS ENDED NINE MONTHS
JUNE 8, 1995 ENDED YEAR ENDED ------------------------- ENDED
(INCEPTION) THROUGH MARCH 29, MARCH 29, DECEMBER 28, DECEMBER 27, DECEMBER 27,
MARCH 30, 1996(1) 1997(1) 1997(2) 1996 1997 1997(2)
------------------- ----------- ---------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... -- $ 18,537 $ 157,369 $ 6,051 $ 81,505 $ 130,967
Gross profit............ -- 8,089 66,098 2,633 19,362 41,395
Selling, general and
administrative
expenses............... $ 2,710 20,711 85,010 8,246 73,053 95,131
------- --------- --------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (18,912) (5,613) (53,691) (53,736)
Interest expense, net... 5 888 4,605 112 3,163 3,354
------- --------- --------- --------- --------- ---------
Net loss................ (2,715) (13,510) (23,517) (5,725) (56,854) (57,090)
Dividends accruing on
Series A Preferred
Stock.................. -- -- 1,373 -- 1,032 2,123
------- --------- --------- --------- --------- ---------
Net loss attributable to
Common Stockholders.... $(2,715) $ (13,510) $ (24,890) $ (5,725) $ (57,886) $ (59,213)
======= ========= ========= ========= ========= =========
Net loss per share
attributable to Common
Stockholders (3)....... $ (4.49) $ (4.60) $ (8.22) $ (2.73) $ (6.57) $ (6.65)
======= ========= ========= ========= ========= =========
Weighted average number
of shares outstanding.. 605,000 2,933,700 3,028,025 2,093,300 8,810,175 8,904,500
======= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 7,615 $ 20,274 $117,815
Working capital (deficiency).......... (378) 11,472 116,363
Total assets.......................... 110,294 151,673 249,214
Debentures............................ 30,000 20,250 --
Other long-term debt, less current
portion.............................. 7,852 7,840 7,840
Series A Preferred Stock.............. 72,390 -- --
Total stockholders' equity
(deficiency)......................... (42,518) 65,341 193,232
</TABLE>
- --------
(1) The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. Accordingly, the year
ended March 29, 1997 is referred to as "Fiscal 1996" and the period from
June 8, 1995 (inception) through March 30, 1996 is referred to as "Fiscal
1995."
(2) Prepared on a pro forma basis to reflect the acquisition of Biobottoms,
Inc. ("Biobottoms"), in April 1998 (the "Biobottoms Acquisition"), and all
acquisitions completed after March 31, 1996 and before the date hereof, as
if such acquisitions were completed as of March 31, 1996. See "Pro Forma
Condensed Combined Financial Statements."
(3) The net loss per share is based upon the weighted average number of shares
of Common Stock outstanding during each period. See Note 2 to the Company's
Consolidated Financial Statements and Note 4 to the Company's Pro Forma
Condensed Combined Financial Statements.
(4) Prepared on a pro forma basis to reflect (i) the Biobottoms Acquisition and
the acquisition completed after December 27, 1997 and before the date
hereof, as if they had been completed as of December 27, 1997, (ii) the
sale, on December 29, 1997, of 22,942 shares of Series A Preferred Stock
for aggregate proceeds of $22,942,000, (iii) the issuance of Bridge Notes
in the amount of $7.65 million (as defined under "Use of Proceeds") during
April 1998 and (iv) the following transactions which will occur immediately
prior to the consummation of this offering: (a) the conversion of all
outstanding shares of Series A Preferred Stock into 8,644,156 shares of
Common Stock; (b) the conversion of $9.75 million principal amount of
outstanding Debentures into 2,331,521 shares of Common Stock; and (c) the
conversion of an outstanding note in the amount of $1.4 million into
128,333 shares of Common Stock. See "Pro Forma Condensed Combined Financial
Statements."
(5) Prepared on a pro forma as adjusted basis to reflect (i) the Biobottoms
Acquisition and the acquisition completed after December 27, 1997 and
before the date hereof, as if they had been completed as of December 27,
1997, (ii) the sale, on December 29, 1997, of 22,942 shares of Series A
Preferred Stock for aggregate proceeds of $22,942,000, (iii) the issuance
of Bridge Notes in the amount of $7.65 million during April 1998, (iv) the
following transactions which will occur immediately prior to the
consummation of this offering: (a) the conversion of all outstanding shares
of Series A Preferred Stock into 8,644,156 shares of Common Stock; (b) the
conversion of $9.75 million of outstanding Debentures into 2,331,521 shares
of Common Stock; and (c) the conversion of an outstanding note in the
amount of $1.4 million into 128,333 shares of Common Stock, and (v) the
sale by the Company of 9,625,000 shares of Common Stock in this offering
and the application of the net proceeds therefrom as described under "Use
of Proceeds." Pursuant to the terms of the Debentures, the Company will
redeem approximately $20.25 million principal amount of Debentures plus
accrued interest and prepayment premium through May 13, 1998, the
anticipated date of redemption. Approximately $5.3 million of the cash
prepayment premium will be recorded as an extraordinary item in the period
in which the redemption occurs. See "Pro Forma Condensed Combined Financial
Statements."
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all of the information in
this Prospectus and, in particular, should evaluate the following risks in
connection with an investment in the Common Stock being offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company was organized in June 1995 and, accordingly, has had only a
limited operating history. Since its formation, the Company has expended
significant funds to acquire other direct marketing businesses, to create and
develop various marketing vehicles and brands and to build an order processing
and distribution infrastructure capable of supporting future operations on a
scale substantially in excess of current levels. As a result, the Company has
incurred losses since its inception and expects to continue to incur losses
through fiscal 1998. The Company had an accumulated deficit of approximately
$73.1 million at December 27, 1997 and had a net loss of $56.9 million for the
nine months then ended. The Company expects that, for the three months ended
March 28, 1998, it will report a net loss of approximately $19.0 million to
$20.0 million and, for the fiscal year then ended, it will report a net loss
of approximately $76.0 million to $77.0 million. There can be no assurance
that the Company will be able to achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL CAPITAL
The Company will require substantial additional capital in order to pursue
its acquisition strategy, grow its database, enhance its existing brands and
merchandise lines and introduce and develop new brands and merchandise lines.
Additional capital may be sought through public or private offerings of equity
or debt securities as well as additional bank borrowings. The Company does not
have any commitments for additional financing and there can be no assurance
that such financing will be available when and to the extent required or that,
if available, such financing will be obtainable on acceptable terms.
RISKS ASSOCIATED WITH ACQUISITIONS
To date, the Company has acquired 15 catalog businesses, of which all but
one were acquired since November 1996. The Company's continued growth will
depend in part upon its ability to identify other direct marketing companies
that are suitable acquisition candidates, to acquire those companies upon
appropriate terms and to effectively integrate and expand their operations
within its own infrastructure. There can be no assurance that the Company will
be able to continue to identify candidates that it deems suitable for
acquisition or that the Company will be able to consummate desired
acquisitions on acceptable terms and integrate and expand the operations of
acquired companies, without excessive costs, delays or other problems.
DEPENDENCE ON KEY OPERATING SYSTEMS AND THIRD-PARTY SERVICE PROVIDERS
The Company's ability to provide high quality customer service, process and
fulfill orders and manage inventory depends, to a large degree, on the
efficient and uninterrupted operation of its call center, distribution center
and management information systems and on the timely performance of vendors,
catalog printers, shipping companies and the U.S. Postal Service. Any material
disruption or slowdown in the operation of the Company's call center,
distribution center or management information systems, or comparable
disruptions or slowdowns suffered by its principal service providers, could
cause delays in the Company's ability to receive, process and fulfill customer
orders and may cause orders to be canceled, lost or delivered late, goods to
be returned or receipt of goods to be refused. In the course of replacing and
upgrading its systems, the Company has occasionally experienced temporary
system shutdowns, slowdowns and processing problems. For example, between
September and December 1997, the Company experienced a temporary inability of
its call center software to interface with its distribution center software,
resulting in a higher than normal rate of order cancellations that the Company
believes accounted for a significant percentage of the loss for the nine
months ended December 27, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company plans to upgrade
certain of the equipment and operating systems at its distribution center. The
Company has taken a number of precautions to prevent disruptions in the
operation of its call center, distribution
9
<PAGE>
center and management information systems, including in connection with the
future upgrades, but there can be no assurance that the Company will not
experience systems failures or other disruptions that could have a material
adverse effect on the Company's results of operations.
FLUCTUATIONS IN COSTS OF PAPER AND POSTAGE
Paper and postage are significant components of the Company's operating
costs. Paper stock represents the largest element of the cost of printed
merchandise catalogs and paper-based packaging products, such as shipping
cartons, constitute a significant element of distribution expense. Paper
prices have historically been volatile, increasing dramatically in 1995 and
declining in 1996 and 1997. Future price increases could have a material
adverse effect on the Company's results of operations. Postage for catalog
mailings is also a significant element of the Company's operating expense. The
Company generally mails its catalogs by third-class mail service. Third-class
postage rates increase periodically and can be expected to increase in the
future, and there can be no assurance that future increases will not adversely
impact the Company's operating margins.
HIGH FIXED COSTS
Operation and maintenance of the Company's call center, distribution center
and management information systems involve substantial fixed costs. Catalog
mailings entail substantial paper, postage, merchandise acquisition and human
resource costs, including costs associated with catalog development and
increased inventories, virtually all of which are incurred prior to the
mailing of the catalog. If net sales from catalog mailings are substantially
below expectations, the Company's results of operations may be adversely
effected. In addition, the Company continually evaluates the results of its
mailings and will discontinue a catalog, particularly a start-up catalog, if
it determines that the catalog's results are not satisfactory, in which event
it may not recover its investment in developing and mailing that catalog.
RELIANCE ON VENDORS
The Company currently purchases merchandise from more than 1,000
unaffiliated vendors. In some instances, the Company's purchases from a
particular vendor may account for a significant percentage of that vendor's
total sales, resulting in more favorable terms for the Company than might
otherwise be available. However, there can be no assurance that the Company
will continue to be able to procure merchandise on such favorable terms. The
Company does not have any long-term contracts with its vendors and competes
with other purchasers for the vendors' production capacity. No vendor
accounted for more than 10% of the Company's inventory purchases in the nine
months ended December 27, 1997.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's net sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of such
factors as the timing of new merchandise offerings and brand introductions,
fluctuations in response rates, paper and postage costs and merchandise return
rates, shifts in the timing of holidays and changes in the Company's
merchandise mix. In addition, the Company's sales, particularly its catalog
sales, generally are higher in the second and fourth calendar quarters, which
correspond to the first and third quarters of its fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MERCHANDISE RETURNS
As part of its customer service commitment, the Company maintains an
unconditional merchandise return policy, which allows customers to return any
non-personalized merchandise, at any time and for any reason, regardless of
condition. The Company has established an allowance for merchandise returns
based on historical return rates. There can be no assurance that the Company's
merchandise returns will not exceed its reserves. Any significant increase in
the Company's merchandise return rate could have a material adverse effect on
its results of operations.
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent upon the efforts of its senior
management team, particularly its founders and principal executive officers,
Warren Struhl, Hunter Cohen and David Sable, each of whom is party to an
employment agreement with the Company. See "Management." The Company maintains
$5.0 million of key man life insurance on Mr. Struhl. The Company's future
success will depend on its ability to retain key managers and to attract and
employ additional qualified management personnel.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new
competitors as well as increased competition from established companies.
Within each merchandise category the Company has significant competitors and
may face new competition from new entrants or existing competitors who focus
on market segments currently served by the Company. These competitors include
large retail operations, including some with catalog operations, other catalog
and direct marketing companies and internet retailers. Increased competition
could result in pricing pressures, increased marketing expenditures and loss
of market share and could have a material adverse effect on the Company's
results of operations.
INTERNATIONAL OPERATIONS
The Company is currently expanding its operations into several international
markets, including France, Germany, Japan and the United Kingdom. In so doing,
the Company will be subject to risks generally associated with doing business
abroad, such as foreign government regulation, economic conditions, exchange
rate fluctuations, duties, taxes and disruptions or delays in shipments. In
addition, the Company's sales historically have been derived from customers in
the United States and most of its information on buying patterns and consumer
preferences is based on those customers. As a result, predicting foreign
consumer demand may present a higher than normal risk of error.
COLLECTION OF STATE SALES TAXES
Various states have sought to impose on direct marketers having no physical
presence in the state the burden of collecting state sales and use taxes on
the sale of merchandise shipped to that state's residents. However, the U.S.
Supreme Court has reaffirmed its 1967 holding in National Bellas Hess v. Ill.
Dept. of Revenue, 368 U.S. 753, that a state, absent Congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are the distribution
of catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods occurs by mail or interstate common
carriers. Recently, the DMA entered into negotiations with various state
taxing authorities towards reaching an agreement for the collection of sales
tax in connection with catalog sales pursuant to uniform rules that would
reduce the cost of compliance with the laws of multiple taxing jurisdictions.
Such an agreement would have required catalog companies that chose to become a
party thereto, to collect sales and use taxes in return for the simplified
collection procedures. Due to objections voiced by members of the catalog
industry and catalog customers, the negotiations were suspended.
YEAR 2000 RISK
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 is reviewing its computer programs and systems to ensure
that the programs and systems will function properly and be year 2000
compliant. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
systems will be year
11
<PAGE>
2000 compliant. However, while the estimated cost of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect. In addition,
the Company cannot predict the effect of the year 2000 problem on entities
with which the Company transacts business, and there can be no assurance that
the effect of the year 2000 problem on such entities will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
Of the net proceeds from this offering, the Company plans to use (i)
approximately $28.3 million to redeem approximately 67.5% of its outstanding
Debentures, all of which are owned by GE Investment Private Placement Partners
II, a Limited Partnership ("GEIPPP II"), a principal stockholder of the
Company, and to exchange the balance of the Debentures for newly-issued shares
of Common Stock, (ii) approximately $7.75 million to repay the entire $7.65
million principal amount (including original issue discount) of the Bridge
Notes held by GEIPPP II, together with accrued interest thereon. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions."
GOVERNMENT REGULATION
The Company's direct mail operations are subject to regulation by the U.S.
Postal Service, the Federal Trade Commission and various state, local and
private consumer protection and other regulatory authorities. In general,
these regulations govern the manner in which orders may be solicited, the form
and content of advertisements, information which must be provided to
prospective customers, the time within which orders must be filled,
obligations to customers if orders are not shipped within a specified period
of time and the time within which refunds must be paid if the ordered
merchandise is unavailable or returned. From time to time, the Company has
modified its methods of doing business and its marketing operations in
response to such regulation. To date, such regulation has not had a material
adverse effect on the Company's business, financial condition or results of
operations. However, there can be no assurance that any future regulatory
requirements or actions will not have a material adverse effect on the
Company's business, financial condition or results of operations.
POTENTIAL EFFECTS OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate of Incorporation") and
Amended and Restated By-laws could delay or impede the removal of incumbent
directors and could make it more difficult for a third party to acquire, or
could discourage acquisition bids for, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Common Stock. For example, the Restated Certificate
of Incorporation provides for a classified Board of Directors with staggered
three-year terms. In addition, shares of preferred stock may be issued by the
Board of Directors of the Company without stockholder approval on such terms
and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The Company
has no current plans to issue any shares of preferred stock. See "Description
of Capital Stock--Anti-takeover Effects of Certain Provisions of the
Certificate of Incorporation and By-laws."
DILUTION
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution in the pro forma net tangible book value per share of
such Common Stock from the initial public offering price. See "Dilution."
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
12
<PAGE>
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although application has been made to list the Common Stock on the
NASDAQ Stock Market, there can be no assurance that an active public market
will develop or be sustained after this offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined through
negotiations among the Company, the Selling Stockholders and the Underwriters.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of Common Stock to be sold in this offering will be freely
tradable. The remaining shares of Common Stock, representing approximately
62.5% of the outstanding Common Stock upon completion of this offering, will
be deemed "restricted securities" under the Securities Act of 1933, as amended
(the "Securities Act"), and, as such, will be subject to restrictions on the
timing, manner and volume of sales of such shares. Holders of substantially
all of those shares will have the right to request the registration of their
shares under the Securities Act following the completion of a period of 180
days after the date of this Prospectus, which, upon the effectiveness of such
registration, would permit the free transferability of such shares. See
"Shares Eligible for Future Sale."
The Company, its executive officers, key employees, directors and
substantially all of its current stockholders have agreed that, subject to
certain limited exceptions, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Bear, Stearns & Co. Inc.,
they will not, directly or indirectly, offer to sell, sell or otherwise
dispose of any shares of Common Stock. See "Underwriting."
No predictions can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale, will have on the market
price for Common Stock prevailing from time to time. The sale of a substantial
number of shares held by existing stockholders, whether pursuant to a
subsequent public offering or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through
an offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $133,491,000 ($156,895,000 if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders.
Of such proceeds, (i) approximately $28.3 million will be used to redeem a
portion of the Company's outstanding Debentures, aggregating $20.25 million in
principal amount (which bear interest at 8% per annum and are due on June 1,
2003) plus a prepayment premium, all of which are owned by GEIPPP II,
(ii) approximately $7.75 million will be used to repay the entire $7.65
million principal amount (including original issue discount of $300,000),
together with accrued interest at a rate of 15% per annum, of promissory notes
held by GEIPPP II (the "Bridge Notes"), (iii) approximately $40.0 million will
be used for future acquisitions and (iv) approximately $17.0 million will be
used for capital expenditures. The balance of the proceeds will be used for
general corporate purposes, including working capital. Pending application,
the net proceeds will be invested in short-term, investment-grade, interest-
bearing obligations.
Proceeds from the Bridge Notes which were issued in April 1998, are being
used (a) to pay for the expansion and upgrading of the infrastructure at the
Company's distribution center, (b) to fund the Biobottoms Acquisition and (c)
to provide additional working capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Relationships and Related Transactions."
The Company continually evaluates potential acquisitions. The Company has
held preliminary discussions with a number of acquisition candidates and has
entered into one non-binding letter of intent with respect to a potential
acquisition. The Company has no outstanding contracts or obligations with
respect to any future acquisitions.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock and
does not expect to pay dividends in the foreseeable future. The Company's
current policy is to retain all of its earnings to finance future growth. Any
future declaration of dividends will be subject to the discretion of the Board
of Directors of the Company and will depend upon, among other things, the
future earnings, results of operations, capital requirements and general
financial condition of the Company, general economic conditions and other
factors. The Company's existing loan agreements with its lenders generally
restrict its ability to pay dividends or make other distributions on the
Common Stock without the prior approval of the lenders. The Company
anticipates that any future credit facility or other indebtedness that the
Company may enter into or incur may contain a similar restriction.
14
<PAGE>
DILUTION
At December 27, 1997, the Company had a pro forma net tangible book value of
approximately $4,872,000 or $0.24 per share. "Net tangible book value" per
share represents net tangible assets (total assets less liabilities and cost
in excess of net assets acquired) of the Company on a consolidated basis,
divided by the total number of shares outstanding before this offering, after
giving effect to (i) the Biobottoms Acquisition and the acquisition completed
after December 27, 1997 and before the date hereof, as if they had been
completed as of December 27, 1997, (ii) the sale, on December 29, 1997, of
22,942 shares of Series A Preferred Stock for aggregate proceeds of
$22,942,000, (iii) the issuance of Bridge Notes in the amount of $7.65 million
during April 1998 and (iv) the following transactions which will occur
immediately prior to the consummation of this offering: (a) the conversion of
all outstanding shares of Series A Preferred Stock into 8,644,156 shares of
Common Stock, (b) the conversion of $9.75 million principal amount of
outstanding Debentures into 2,331,521 shares of Common Stock and (c) the
conversion of an outstanding note in the amount of $1.4 million into 128,333
shares of Common Stock. After giving effect to the receipt of approximately
$133,491,000 of estimated net proceeds from the sale by the Company of
9,625,000 shares of Common Stock in this offering (at the initial public
offering price of $15.00 per share) and the application of the estimated net
proceeds as described under "Use of Proceeds," the pro forma net tangible book
value at December 27, 1997 would have been approximately $132,762,000, or
$4.47 per share of Common Stock. This represents an immediate increase in pro
forma net tangible book value of $4.23 per share of Common Stock to existing
stockholders and an immediate dilution to new investors of $10.53 per share of
Common Stock. The following table illustrates such dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $15.00
Pro forma net tangible book value per share as of
December 27, 1997(1)....................................... $0.24
Increase per share attributable to new investors............ 4.23
-----
Pro forma net tangible book value per share after this
offering..................................................... 4.47
------
Dilution per share to new investors........................... $10.53
======
</TABLE>
The following table sets forth at December 27, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing holders of Common Stock and by
new investors purchasing shares of Common Stock sold by the Company in this
offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 20,053,335 67.6% $138,679,000 49.0% $ 6.92
New investors................ 9,625,000 32.4 144,375,000 51.0 15.00
---------- ----- ------------ -----
Total...................... 29,678,335 100.0% $283,054,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Includes the conversion of the Series A Preferred Stock into 8,644,156
shares of Common Stock, the conversion of $9.75 million principal amount
of Debentures into 2,331,521 shares of Common Stock, the conversion of an
outstanding note in the amount of $1.4 million into 128,333 shares of
Common Stock and the issuance of 91,575 shares of Common Stock in
connection with the acquisition of Select Service & Supply, Inc. ("Select
Service") in January 1998.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 27, 1997 (i) on an actual basis, (ii) on a pro forma basis to give
effect to (a) the Biobottoms Acquisition and the acquisition completed after
December 27, 1997 and before the date hereof, as if they had been completed as
of December 27, 1997, (b) the sale, on December 29, 1997, of 22,942 shares of
Series A Preferred Stock for aggregate proceeds of $22,942,000, (c) the
issuance of Bridge Notes in the amount of $7.65 million during April 1998 and
(d) the following transactions which will occur immediately prior to the
consummation of this offering: (1) the conversion of all outstanding shares of
Series A Preferred Stock into 8,644,156 shares of Common Stock; (2) the
conversion of $9.75 million principal amount of outstanding Debentures into
2,331,521 shares of Common Stock; and (3) the conversion of an outstanding
note in the amount of $1.4 million into 128,333 shares of Common Stock, and
(iii) on a pro forma as adjusted basis to give further effect to the sale by
the Company of 9,625,000 shares of Common Stock in this offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds." Pursuant to the terms of the Debentures, the Company will redeem
approximately $20.25 million of principal amount of Debentures plus accrued
interest and prepayment premium through May 13, 1998, the anticipated date of
redemption. A portion of such cash prepayment premium approximating $5.3
million will be recorded as an extraordinary item in the period in which the
redemption occurs. This table should be read in conjunction with the
Consolidated Financial Statements and the notes thereto appearing elsewhere in
the Prospectus. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Pro Forma Condensed Combined
Financial Statements."
<TABLE>
<CAPTION>
DECEMBER 27, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 7,615 $ 20,274 $117,815
======== ======== ========
Short-term debt:
Revolving line of credit..................... $ 264 $ 264 $ 264
Current portion of notes and long-term debt.. $ 7,001 $ 16,535 $ 9,185
======== ======== ========
Long-term debt:
Convertible Subordinated Debentures due June
1, 2003..................................... $ 30,000 $ 20,250 $ --
Other long-term debt, less current portion... 7,852 7,840 7,840
Series A Cumulative Convertible Preferred
Stock, $.01 par value, 122,000 shares
authorized; 71,358 shares issued and
outstanding (actual) and no shares issued and
outstanding (pro forma and pro forma as
adjusted)..................................... 72,390 -- --
Stockholders' equity:
Common Stock, $.01 par value; 275,000,000
shares authorized; 8,857,750 shares issued
and outstanding (actual); 20,053,335 shares
issued and outstanding (pro forma) and
29,678,335 shares issued and outstanding
(pro forma as adjusted)(1).................. 89 201 297
Additional paid-in capital................... 30,472 138,219 271,614
Accumulated deficit.......................... (73,079) (73,079) (78,679)
-------- -------- --------
Total stockholders' (deficiency) equity.... (42,518) 65,341 193,232
-------- -------- --------
Total capitalization....................... $ 67,724 $ 93,431 $201,072
======== ======== ========
</TABLE>
- --------
(1) Excludes (a) 1,847,450 shares of Common Stock reserved for issuance under
the Option Plan, of which 1,065,625 shares of Common Stock are issuable
upon the exercise of outstanding stock options with a weighted average
exercise price of $10.91 per share, and (b) 275,000 shares of Common Stock
issuable upon the exercise of outstanding warrants at a price of $10.91
per share. See "Management--Stock Option and Incentive Plans" and Note 11
to Consolidated Financial Statements.
16
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet of the
Company as of December 27, 1997 gives effect to (i) the acquisition of Select
Service on January 7, 1998, (ii) the sale of 22,942 shares of Series A
Preferred Stock for aggregate proceeds of $22,942,000 on December 29, 1997,
(iii) the Biobottoms Acquisition and (iv) the issuance of Bridge Notes in the
amount of $7.65 million during April 1998, net of original issue discount. The
pro forma combined balance sheet also gives effect to (i) the conversion of
all outstanding shares of Series A Preferred Stock into 8,644,156 shares of
Common Stock, (ii) the conversion of $9.75 million principal amount of
Debentures into 2,331,521 shares of Common Stock, and (iii) the conversion of
an outstanding note in the amount of $1.4 million into 128,333 shares of
Common Stock, as if all such transactions had been completed as of December
27, 1997.
The following unaudited pro forma combined statements of operations for the
year ended March 29, 1997 and the nine months ended December 27, 1997 give
effect to the acquisition of each of Manny's Baseball Land, Inc. ("Manny's
Baseball"), Athletic Supply of Dallas, Inc. ("Athletic Supply"), Lilliput
Motor Company, Ltd. ("Lilliput"), First Step Designs, Ltd. ("First Step"), The
Thursley Group, Inc. ("Thursley"), Duclos Direct Marketing, Inc. ("Duclos")
(collectively, the "Fiscal 1996 Acquisitions"), and the Center for Applied
Psychology, Inc., Artesania, Inc., Global Friends Collection, Inc., Fanfare
Enterprises, Inc., H&L Productions, Inc., Zig Zag Imports, Inc. and Select
Service (collectively, the "Fiscal 1997 Acquisitions"), and the Biobottoms
Acquisition and the financing of each such acquisition, as if all such
transactions had occurred as of March 31, 1996. Disclosure regarding the
results of operations for each of the Company's Fiscal 1997 Acquisitions,
except for Select Service (which is individually significant), has been
presented on a combined basis rather than individually since each acquisition
is individually insignificant. Disclosure regarding the results of operations
for Biobottoms has been presented separately because it is scheduled to close
in April 1998.
The following unaudited pro forma condensed combined financial statements
have been prepared assuming the Select Service acquisition was, and the
Biobottoms Acquisition will be, accounted for under the purchase method of
accounting. Under the purchase method of accounting, the assets acquired and
liabilities assumed will be recorded at their fair values at the date of
acquisition. The total purchase price has been allocated to the assets
acquired and liabilities assumed based upon estimates of their respective fair
values which are subject to revision.
The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. The Company's historical
consolidated financial statements include the results of operations of each of
the acquired businesses for the period subsequent to the date of acquisition.
Each of the Fiscal 1996 Acquisitions and the Fiscal 1997 Acquisitions had
fiscal years which differ from the Company's fiscal year-end. The historical
results of operations for the Fiscal 1996 Acquisitions (except for Duclos
Direct Marketing, Inc., whose fiscal year ends within 93 days of that of the
Company) and the Fiscal 1997 Acquisitions presented below have been adjusted
to conform to the Company's year-end for purposes of the Pro Forma Condensed
Combined Statements of Operations. For the twelve months ended March 29, 1997,
the adjustments were accomplished by adding subsequent unaudited interim
period results through March 1997 to the most recent historic fiscal year end
of the acquired company prior to March 29, 1997 and deducting the comparable
preceding year unaudited interim period results. Similarly, for the nine
months ended December 27, 1997, the adjustments were accomplished by adding
subsequent unaudited interim period results through December 1997 to the most
recent historic fiscal year end of the acquired company prior to December 27,
1997 and deducting any period prior to March 30, 1997.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of operating results which would have been achieved had
the foregoing transactions been completed at the beginning of the respective
periods and should not be construed as representative of future operating
results.
These unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the accompanying notes, the Company's historical
consolidated financial statements, the historical financial statements of
certain of the Fiscal 1996 Acquisitions and Fiscal 1997 Acquisitions including
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all included elsewhere in this
Prospectus.
17
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 27, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS
FOR FOR EQUITY
ACQUISITIONS TRANSACTIONS PRO FORMA
GENESIS AND RELATED PRO FORMA AND COMBINED
DIRECT, INC. SELECT SERVICE BIOBOTTOMS FINANCINGS COMBINED CONVERSIONS (AS ADJUSTED)
------------ -------------- ---------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash & Cash $ 7,615 $ 397 $ 1 $ 20,304 $ 20,274
Equivalents........... $ 22,942 (a) $ (30)(e)
7,350 (b)
(17,001)(c)
(1,000)(d)
Accounts Receivable.... 5,619 3,658 302 -- 9,579 -- 9,579
Merchandise Inventory,
net................... 22,993 3,844 3,297 -- 30,134 -- 30,134
Prepaid expenses &
other current assets.. 3,615 1,963 1,324 -- 6,902 -- 6,902
-------- ------- ------ -------- -------- -------- --------
Total current assets.. 39,842 9,862 4,924 12,291 66,919 (30) 66,889
Intangibles & goodwill.. 47,579 -- -- 11,571 (c) 60,469 -- 60,469
1,319 (d)
Property, equipment and
leasehold improvements,
net.................... 19,857 1,333 368 -- 21,558 -- 21,558
Other assets............ 1,656 115 626 (1,000)(c) 1,397 -- 1,397
Note Receivable......... 1,360 -- -- -- 1,360 -- 1,360
-------- ------- ------ -------- -------- -------- --------
$110,294 $11,310 $5,918 $ 24,181 $151,703 $ (30) $151,673
======== ======= ====== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....... $ 14,373 $ 1,410 $2,896 $ -- $ 18,679 $ -- $ 18,679
Accrued liabilities.... 15,309 971 494 -- 16,774 (483)(f) 16,291
Current portion of
notes and
long-term debt........ 7,265 2,892 1,514 7,350 (b) 16,799 -- 16,799
(2,892)(c)
670 (d)
Other current 3,273
liabilities........... -- -- 250 (c) 3,648 3,648
125 (c) --
-------- ------- ------ -------- -------- -------- --------
Total current
liabilities.......... 40,220 5,273 4,904 5,503 55,900 (483) 55,417
Notes & long-term debt,
less current portion... 7,852 84 63 750 (c) 9,165 (1,325)(g) 7,840
(84)(c) --
500 (d)
Subordinated notes--
related parties........ 30,000 -- -- -- 30,000 (9,750)(h) 20,250
Other liabilities....... 2,350 -- -- 375 (c) 2,825 -- 2,825
100 (d)
Series A Preferred 72,390 -- -- 22,942 (a) 95,332 --
stock.................. (95,332)(i)
Total stockholders'
equity (deficiency).... (42,518) 5,953 951 (5,953)(c) (41,519) (30)(e) 65,341
999 (c) 483 (f)
(951)(d) 1,325 (g)
9,750 (h)
95,332 (i)
-------- ------- ------ -------- -------- -------- --------
$110,294 $11,310 $5,918 $ 24,181 $151,703 $ (30) $151,673
======== ======= ====== ======== ======== ======== ========
</TABLE>
18
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL 1996 ACQUISITIONS FISCAL 1997
------------------------------------------------------- ACQUISITIONS
GENESIS MANNY'S ATHLETIC EXCLUDING
DIRECT, INC. BASEBALL SUPPLY LILLIPUT FIRST STEP THURSLEY DUCLOS SELECT SERVICE SELECT SERVICE BIOBOTTOMS
------------ -------- -------- -------- ---------- -------- ------ -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales....... $ 18,537 $11,269 $21,732 $794 $ 8,306 $ 604 $6,287 $40,733 $27,877 $21,230
Cost of Goods
Sold........... 10,448 8,119 9,013 572 5,503 332 3,711 22,460 17,434 13,679
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Gross Profit.... 8,089 3,150 12,719 222 2,803 272 2,576 18,273 10,443 7,551
Selling, general
and
administrative
expenses....... 20,711 3,787 12,875 156 3,976 724 2,912 18,587 8,445 8,318
-- -- -- -- -- -- -- -- -- --
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Income (Loss)
from
operations..... (12,622) (637) (156) 66 (1,173) (452) (336) (314) 1,998 (767)
Interest
expense........ 1,162 141 152 23 299 86 14 247 137 136
Interest
income......... 274 22 -- -- 8 -- -- 28 -- --
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Income (Loss)
before income
taxes.......... (13,510) (756) (308) 43 (1,464) (538) (350) (533) 1,861 (903)
Income taxes
(benefit)...... -- -- 164 3 -- 1 30 -- -- 83
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Net Income
(Loss)......... $ (13,510) $ (756) $ (472) $ 40 $(1,464) $(539) $ (380) $ (533) $ 1,861 $ (986)
======= ======= ==== ======= ===== ====== ======= ======= =======
Dividends
accruing on
Series A
Preferred
Stock.......... --
---------
Net loss
attributable to
common
stockholders... $ (13,510)
=========
Pro forma loss
per share...... $ (4.61)
=========
Weighted average
number of
common shares
outstanding.... 2,933,700
=========
<CAPTION>
ADJUSTMENTS
FOR THE PRO FORMA
ACQUISITIONS COMBINED
-------------- ----------
<S> <C> <C>
Net Sales....... $ -- $ 157,369
Cost of Goods
Sold........... -- 91,271
-------------- ----------
Gross Profit.... -- 66,098
Selling, general
and
administrative
expenses....... (33)(a) 85,010
4,552 (b) --
-------------- ----------
Income (Loss)
from
operations..... (4,519) (18,912)
Interest
expense........ 3,775 (c) 4,937
(1,235)(d) --
Interest
income......... -- 332
-------------- ----------
Income (Loss)
before income
taxes.......... (7,059) (23,517)
Income taxes
(benefit)...... (281)(e) --
-------------- ----------
Net Income
(Loss)......... $(6,778) $ (23,517)
Dividends
accruing on
Series A
Preferred
Stock.......... (1,373)(f) (1,373)
-------------- ----------
Net loss
attributable to
common
stockholders... $(8,151) $ (24,890)
============== ==========
Pro forma loss
per share...... $ (8.22)
==========
Weighted average
number of
common shares
outstanding.... 3,028,025
==========
</TABLE>
19
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED DECEMBER 27, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FISCAL 1997 ACQUISITIONS FOR THE
------------------------------------------ ACQUISITIONS
GENESIS FANFARE H & L ZIG-ZAG & PREFERRED
DIRECT, ENTERPRISES, PRODUCTIONS, IMPORTS, SELECT STOCK PRO FORMA
INC. INC. INC. INC. SERVICE BIOBOTTOMS OFFERING COMBINED
---------- ------------ ------------ -------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............... $ 81,505 $2,018 $5,903 $4,100 $24,173 $13,268 $ -- $ 130,967
Cost of Goods Sold...... 62,143 512 3,312 2,937 12,441 8,227 -- 89,572
---------- ------ ------ ------ ------- ------- ------- ----------
Gross Profit............ 19,362 1,506 2,591 1,163 11,732 5,041 -- 41,395
Selling, general and
administrative
expenses............... 73,053 2,240 1,981 1,393 9,113 6,176 1,175 (b) 95,131
---------- ------ ------ ------ ------- ------- ------- ----------
Income (Loss) from
operations............. (53,691) (734) 610 (230) 2,619 (1,135) (1,175) (53,736)
Interest expense........ 3,163 35 -- -- 147 177 214 (c) 3,377
(359)(d)
Interest income......... -- 23 -- -- -- -- -- 23
---------- ------ ------ ------ ------- ------- ------- ----------
Income (Loss) before
income taxes........... (56,854) (746) 610 (230) 2,472 (1,312) (1,030) (57,090)
Income taxes (benefit).. -- -- -- -- -- (193) (193)(e) --
---------- ------ ------ ------ ------- ------- ------- ----------
Net Income (Loss)....... (56,854) (746) 610 (230) 2,472 (1,119) (1,223) (57,090)
Dividends accruing on
Series A
Preferred Stock........ (1,032) (1,091)(f) (2,123)
---------- ------ ------ ------ ------- ------- ------- ----------
Net loss attributable to
common stockholders.... $ (57,886) $ (746) $ 610 $ (230) $ 2,472 $(1,119) $(2,314) $ (59,213)
========== ====== ====== ====== ======= ======= ======= ==========
Pro forma loss per
share.................. $ (6.57) $ (6.65)
========== ==========
Weighted average number
of
common shares
outstanding............ 8,810,175 8,904,500
========== ==========
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BACKGROUND AND DESCRIPTION OF TRANSACTIONS
Adjustments for the Acquisitions and Related Financings
Genesis Direct, Inc. (in the form of its predecessor entity Genesis Direct
L.L.C.) was organized in June 1995. During Fiscal 1996 and for the nine months
ended December 27, 1997, the Company completed the acquisition of twelve
businesses, consisting of the Fiscal 1996 Acquisitions and the Fiscal 1997
Acquisitions (other than Select Service) and Biobottoms all of which are
engaged in the catalog and direct marketing business. All of these
acquisitions were accounted for under the purchase method of accounting. The
operating results of each acquired business is included in the historic
financial statements of the Company from the date of the respective
acquisition.
Subsequent to December 27, 1997, the Company completed the sale of 22,942
shares of its Series A Preferred Stock for aggregate proceeds of $22,942,000.
The principal use of these proceeds was the acquisition of Select Service.
Dividends on the Series A Preferred Stock are cumulative from the date of
issuance at an annual rate of 6% and are payable in cash or shares of Common
Stock, at the option of the Company. Upon liquidation or conversion, in
connection with a "qualifying sale or qualifying public offering" (as
defined), dividends are payable only to the extent required to yield the
holders of Series A Preferred Stock an "annualized compound rate of return"
(as defined) of 30%. The Company at its option may redeem all shares, but not
less than all shares, of Series A Preferred Stock on or after January 31, 2005
at an amount equal to liquidation value. Liquidation value is $1,000 per share
plus any unpaid dividends. As of December 27, 1997, dividends of $1.032
million have accrued on the Series A Preferred Stock. The holders of Series A
Preferred Stock may elect to require the Company to redeem all such shares on
any date on or after January 31, 2005. Upon such redemption, the holders would
be entitled to receive the liquidation value in cash. If the Company fails to
redeem all such shares, the dividend rate shall be increased to 14% per annum,
payable quarterly in cash until such shares are redeemed. The Series A
Preferred Stock is convertible, at the holders' option, at any time into
shares of Common Stock at an initial conversion price of $10.91 per share,
subject to adjustment. The Series A Preferred Stock also is subject to
automatic conversion into shares of Common Stock upon the completion of a
qualifying public offering at an initial conversion of $10.91 per share,
subject to adjustment and, therefore, has been reflected as if converted into
Common Stock for purposes of the Pro Forma Condensed Combined Financial
Statements. Potential adjustments to the initial conversion price for both
optional and automatic conversions would result principally from the issuance
or sale of certain "equity instruments" (as defined) at less than the initial
conversion price per share by the Company prior to the date of such
conversions. In all cases, fractional shares resulting from conversion of
Series A Preferred Stock will be exchanged for cash.
In January 1998, the Company completed the acquisition of certain assets and
assumed certain liabilities of Select Service, a company engaged in the direct
marketing of licensed and other sports merchandise. Payment of the aggregate
preliminary purchase price of approximately $20.4 million consisted of (i)
$18.1 million of cash, (ii) a $1.0 million promissory note payable in equal
semi-annual installments of $250,000 commencing July 1998 through January 2000
together with interest at an annual rate of 8%, (iii) $.5 million of non-
compete payments due in equal quarterly installments of $31,250 commencing
January 1998 through January 2002 and (iv) the issuance of 91,575 shares of
Common Stock. The Common Stock was valued at $10.91 per share (the conversion
price per share of the Series A Preferred Stock described above, the proceeds
of which were used to finance the acquisition). Prior to December 27, 1997,
the Company deposited $1.0 million in an escrow account for purposes of
completing the transaction. The excess of the preliminary purchase price over
the estimated fair value of the net assets acquired (approximately $11.0
million) has been recorded as goodwill. The acquisition has been accounted for
under the purchase method of accounting.
In April 1998, the Company acquired Biobottoms, a company engaged in the
direct marketing of children's apparel. Payment of the aggregate preliminary
purchase price of $2.27 million will include (i) $1.0 million of cash, (ii)
$1.17 million of notes, together with interest at an annual rate of 7.0%, of
which $670,000 is due within four months after this offering and the balance
is due 15 months after the closing of the acquisition, and (iii)
21
<PAGE>
$100,000 of non-compete payments due in equal annual installments of $50,000
on the first and second anniversaries of the closing of the acquisition. The
excess of the preliminary purchase price over the estimated fair value of the
net assets acquired (approximately $619,000 as of December 27, 1997) will be
recorded as goodwill. The acquisition will be accounted for under the purchase
method of accounting.
In April 1998, the Company issued to GEIPP, a principal stockholder of the
Company, Bridge Notes in the amount of $7.65 million. A portion of the
proceeds from the Bridge Notes will be used to finance the Biobottoms
Acquisition. Cash proceeds from the issuance of the Bridge Notes were $7.35
million, resulting in original issue discount of $300,000. The Bridge Notes
bear interest at a rate of 15% per annum, payable quarterly in arrears
commencing June 30, 1998, increasing to 30% per annum if the full principal is
not repaid by January 1, 1999. The Bridge Notes will be prepaid in full from
the proceeds of this offering.
Adjustments for Equity Conversions
From inception through December 27, 1997, the Company issued $30.0 million
principal amount of Debentures. The Debentures bear interest at 8% and are due
June 1, 2003. The Debentures are convertible at the option of the holder, at
an initial price of $4.18 per share, into 7,173,913 shares of Common Stock at
any time after the earlier of (i) June 25, 2001, (ii) an "initial public
offering" (as defined) or (iii) a "change in control event" (as defined). At
the time of such conversion, the Company has the option to redeem up to 67.5%
of the principal amount of the Debentures surrendered for conversion. The
Debentures are also redeemable at the option of the Company any time after the
earlier of (i) an initial public offering or (ii) June 25, 1998, at an amount
which provides a total annualized return of 30% of the principal amount being
redeemed. At the date of redemption, however, the holders have the right to
convert up to 32.5% of the principal amount being redeemed. The Company has
been notified by the holder of its intention to convert 32.5% of the $30.0
million aggregate principal amount of Debentures and, therefore, for purposes
of the pro forma balance sheet, the Company has assumed that $9.75 million
aggregate principal amount of Debentures will be converted into 2,331,521
shares of Common Stock.
In connection with the acquisition of H&L Productions, Inc. the Company
issued to one of the sellers a note in the principal amount of $1.325 million.
In the event the Company completes this offering, the holder may elect to
convert the balance of this note into Common Stock at a rate of $10.91 per
share. The Company has been notified by the holder of its intention to convert
such debt into Common Stock and, therefore, such conversion is assumed to
occur for purposes of the Pro Forma Condensed Combined Financial Statements.
In the event of such conversion, the principal amount of the note for purposes
of calculating the number of shares into which the note will be converted will
be deemed to be $1.4 million. The amount of this increase, less the amount of
interest actually accrued on the note through the date of conversion, will
result in the recognition of additional interest expense by the Company upon
conversion.
2. HISTORICAL FINANCIAL STATEMENTS
Each of the Fiscal 1996 Acquisitions and the Fiscal 1997 Acquisitions had
fiscal years which differ from the Company's fiscal year-end. The historical
results of operations for the Fiscal 1996 Acquisitions (except for Duclos
Direct Marketing, Inc.) and the Fiscal 1997 Acquisitions have been adjusted to
conform to the Company's year-end for purposes of the Pro Forma Condensed
Combined Statements of Operations. The historical financial data presented in
the Pro Forma Condensed Combined Statements of Operations for the year ended
March 29, 1997 and for the nine months ended December 27, 1997 represent the
results of operations of the Company and each of the Fiscal 1996 Acquisitions
and the Fiscal 1997 Acquisitions for the year and the nine months ended March
29, 1997 and December 27, 1997, respectively (except that the results of
operations of Duclos Direct Marketing, Inc. are as of January 31, 1997 for
purposes of inclusion in the year ended March 29, 1997). Such data is derived
from the respective financial statements of such companies.
22
<PAGE>
3. PRO FORMA ADJUSTMENTS
Balance Sheet
<TABLE>
<C> <S> <C>
(a) Record sale and aggregate proceeds of Series A Preferred
Stock......................................................... $ 22,942
(b) Record issuance and proceeds from Bridge Notes payable:
Cash.......................................................... 7,350
Notes payable--current, net of original issue discount of
$300......................................................... 7,350
(c) Purchase accounting adjustments to reflect Select Service
assets and liabilities at
estimated fair value:
Cash.......................................................... (17,001)
Other assets.................................................. (1,000)
Intangibles and goodwill...................................... 11,571
Liabilities not assumed:
Notes, current portion........................................ 2,892
Notes......................................................... 84
Stockholders' Equity.......................................... 5,953
Record financing used to complete acquisition:
Notes issued to sellers--current.............................. (250)
Notes issued to sellers--non-current.......................... (750)
Common stock issued to sellers................................ (999)
Other liabilities--current.................................... (125)
Other liabilities--non-current................................ (375)
(d) Purchase accounting adjustments to reflect Biobottoms assets
and liabilities at
estimated fair value:
Cash.......................................................... (1,000)
Intangibles and goodwill...................................... 1,319
Stockholders' Equity.......................................... 951
Record financing used to complete acquisition:
Notes issued to seller--current............................... (670)
Notes issued to seller--non-current........................... (500)
Other liabilities............................................. (100)
(e) Redemption in cash of Series A Preferred Stock fractional
shares upon conversion........................................ (30)
(f) Record forgiveness of deferred interest on Debentures......... 483
(g) Record conversion of seller note.............................. 1,325
(h) Record conversion of Debentures............................... 9,750
(i) Record conversion of Series A Preferred Stock................. 95,332
</TABLE>
23
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<C> <S> <C> <C>
(a) Eliminate amortization of historic
basis goodwill and other intangibles
recorded by acquired companies...... $ 33
(b) Record additional amortization of
goodwill and other intangibles
resulting from business
acquisitions, including aggregate
goodwill of $53.4 million, of which
$45.1 million is amortized over
forty years and $8.3 million is
amortized over ten years, $7.2
million of customer lists amortized
over three years and $4.3 million of
non-compete agreements amortized
over their respective terms,
principally four years.............. 4,552 $1,175
(c) Record incremental interest expense
as of the beginning of the period
presented attributable to additional
indebtedness resulting from the
portion of acquisition consideration
funded through borrowings or
issuance of notes or other
obligations to sellers including
$30.0 million of debentures payable
with interest at 8.0% per annum, an
aggregate of $15.4 million of seller
notes and other obligations payable
to sellers with interest at 12% per
annum, an aggregate of $7.22 million
of seller notes or other obligations
with interest at rates ranging from
5.76% to 8.0% per annum and $1.0
million of bridge note financing
with interest at 15% per annum...... 3,775 214
(d) Eliminate interest expense
attributable to indebtedness not
assumed in business acquisitions.... 1,235 359
(e) Elimination of provision (benefit)
for income taxes assuming inclusion
of all acquired entities in the
consolidated tax return of the
Company............................. (281) (193)
(f) Accrued dividends on $22,942 of
Series A Preferred Stock............ 1,373 1,091
</TABLE>
4. PRO FORMA LOSS PER SHARE
Pro forma loss per share is based on 2,933,700 and 8,810,175 weighted
average number of shares of Common Stock outstanding for the year ended March
29, 1997 and for the nine months ended December 27, 1997, respectively, each
increased by an aggregate of 94,325 shares representing the total shares of
Common Stock issued in connection with the acquisitions of Zig Zag Imports,
Inc. (2,750 shares) and Select Service (91,575 shares) as if such shares were
outstanding from the beginning of the respective periods.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of March 30,
1996 and for the period from June 8, 1995 (inception) through March 30, 1996,
as of March 29, 1997 and for the fiscal year ended March 29, 1997 and as of
December 27, 1997 and the nine months ended December 27, 1997 and December 28,
1996 has been derived from the Company's Consolidated Financial Statements.
The selected consolidated financial data as of March 30, 1996, March 29, 1997
and December 27, 1997 and for the periods from June 8, 1995 (inception)
through March 30, 1996, the fiscal year ended March 29, 1997 and the nine
months ended December 27, 1997 have been derived from the Company's historical
financial statements which have been audited by Ernst & Young LLP, independent
auditors whose report thereon appears elsewhere in this Prospectus. The
results for the nine months ended December 28, 1996 have been derived from the
Company's unaudited Consolidated Financial Statements and, in the opinion of
the Company, include all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis. The
results for the nine months ended December 27, 1997 are not necessarily
indicative of the results for the full fiscal year. The selected consolidated
financial data are qualified by reference to and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations", the Consolidated Financial Statements and notes thereto, the
Pro Forma Condensed Combined Financial Statements and notes thereto, and other
financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1995 PRO FORMA PRO FORMA
(INCEPTION) FISCAL YEAR FISCAL YEAR NINE MONTHS ENDED NINE MONTHS
THROUGH ENDED ENDED ------------------------- ENDED
MARCH 30, MARCH 29, MARCH 29, DECEMBER 28, DECEMBER 27, DECEMBER 27,
1996(1) 1997(1) 1997(2) 1996 1997 1997 (2)
------------ ----------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... -- $ 18,537 $ 157,369 $ 6,051 $81,505 $ 130,967
Gross profit............ -- 8,089 66,098 2,633 19,362 41,395
Selling, general and
administrative
expenses............... $ 2,710 20,711 85,010 8,246 73,053 95,131
------- --------- --------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (18,912) (5,613) (53,691) (53,736)
Interest expense, net... 5 888 4,605 112 3,163 3,354
------- --------- --------- --------- --------- ---------
Net loss................ (2,715) (13,510) (23,517) (5,725) (56,854) (57,090)
Dividends accruing on
Series A Preferred
Stock.................. -- -- 1,373 -- 1,032 2,123
------- --------- --------- --------- --------- ---------
Net loss attributable to
Common Stockholders.... $(2,715) $ (13,510) $ (24,890) $ (5,725) $ (57,886) $ (59,213)
======= ========= ========= ========= ========= =========
Net loss per share
attributable to Common
Stockholders(3)........ $ (4.49) $ (4.60) $ (8.22) $ (2.73) $ (6.57) $ (6.65)
======= ========= ========= ========= ========= =========
Weighted average number
of shares outstanding.. 605,000 2,933,700 3,028,025 2,093,300 8,810,175 8,904,500
======= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1997
-------------------------------------
PRO FORMA
MARCH 30, 1996 MARCH 29, 1997 ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------------- -------------- -------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 240 $ 8,184 $ 7,615 $ 20,274 $117,815
Working capital
(deficiency)........... (1,197) (53) (378) 11,472 116,363
Total assets............ 1,186 56,866 110,294 151,673 249,214
Debentures.............. -- 22,500 30,000 20,250 --
Other long-term debt,
less current portion... -- 4,918 7,852 7,840 7,840
Series A Preferred
Stock.................. -- -- 72,390 -- --
Total stockholders'
equity (deficiency).... (515) 8,375 (42,518) 65,341 193,232
</TABLE>
- --------
footnotes on next page
25
<PAGE>
(1) The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. Accordingly, the year
ended March 29, 1997 is referred to as "Fiscal 1996" and the period from
June 8, 1995 (inception) through March 30, 1996 is referred to as "Fiscal
1995."
(2) Prepared on a pro forma basis to reflect the Biobottoms Acquisition and
all acquisitions completed after March 31, 1996 and before the date
hereof, as if such acquisitions were completed as of March 31, 1996. See
"Pro Forma Condensed Combined Financial Statements."
(3) The net loss per share is based upon the weighted average number of shares
of Common Stock outstanding during each period. See Note 2 to the
Company's Consolidated Financial Statements and Note 4 to the Company's
Pro Forma Condensed Combined Financial Statements.
(4) Prepared on a pro forma basis to reflect (i) the Biobottoms Acquisition
and the acquisition completed after December 27, 1997 and before the date
hereof, as if they had been completed as of December 27, 1997, (ii) the
sale, on December 29, 1997, of 22,942 shares of Series A Preferred Stock
for aggregate proceeds of $22,942,000 (iii) the issuance of Bridge Notes
in the amount of $7.65 million during April 1998 and (iv) the following
transactions which will occur immediately prior to the consummation of
this offering: (a) the conversion of all outstanding shares of Series A
Preferred Stock into 8,644,156 shares of Common Stock; (b) the conversion
of $9.75 million principal amount of outstanding Debentures into 2,331,521
shares of Common Stock; and (c) the conversion of an outstanding note in
the amount of $1.4 million into 128,333 shares of Common Stock. See "Pro
Forma Condensed Combined Financial Statements."
(5) Prepared on a pro forma as adjusted basis to reflect (i) all acquisitions
completed after December 27, 1997 and before the date hereof, as if they
had been completed as of December 27, 1997, (ii) the sale, on December 29,
1997, of 22,942 shares of Series A Preferred Stock for aggregate proceeds
of $22,942,000, (iii) the issuance of Bridge Notes in the amount of $7.65
million during April 1998, (iv) the following transactions which will
occur immediately prior to the consummation of this offering: (a) the
conversion of all outstanding shares of Series A Preferred Stock into
8,644,156 shares of Common Stock; (b) the conversion of $9.75 million
principal amount of outstanding Debentures into 2,331,521 shares of Common
Stock; and (c) the conversion of an outstanding note in the amount of $1.4
million into 128,333 shares of Common Stock, and (v) the sale by the
Company of 9,625,000 shares of Common Stock in this offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds." Pursuant to the terms of the Debentures, the Company will
redeem approximately $20.25 million of principal amount of Debentures plus
accrued interest and prepayment premium through May 13, 1998, the
anticipated date of redemption. A portion of such cash prepayment premium
approximating $5.3 million will be recorded as an extraordinary item in
the period in which the redemption occurs. See "Pro Forma Condensed
Combined Financial Statements."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the related notes thereto which are included
elsewhere in this Prospectus. Except for the historical information contained
herein, the discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus shall be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those anticipated 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 "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
Genesis Direct is a leading database-driven specialty retailer in the
rapidly growing universe of non-store shopping. With a current portfolio of 30
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. The Company intends to continue its expansion
program through acquisitions and start-ups of a variety of catalog brands
which it believes have the potential, among other things, to produce high
gross margins, low merchandise return rates, high average orders and repeat
customers. The Company believes it is well-positioned to pursue an active
consolidation strategy in the fast-growing, highly fragmented direct marketing
industry.
Since its inception, the Company has concentrated on building an
infrastructure necessary to manage its operating and growth strategies. To
date, the Company has invested approximately $20.4 million on its state-of-
the-art call center, distribution center and management information systems
and database technologies that effectively coordinate the call center, order-
taking, distribution and fulfillment functions. Because of the Company's
desire to build a state-of-the-art infrastructure and to become a leading
database-driven specialty catalog-based retailer as rapidly as possible, the
Company has accumulated a significant amount of expenses in a very short time
and, as a result, has not been profitable. The Company had an accumulated
deficit of approximately $73.1 million at December 27, 1997 and had a net loss
of $56.9 million for the nine months then ended. For the three months ended
March 28, 1998, the Company expects to report a net loss of approximately
$19.0 million to $20.0 million on net sales of approximately $23.0 million to
$24.0 million, and for the fiscal year then ended the Company expects to
report a net loss of approximately $76.0 million to $77.0 million on net sales
of approximately $104.0 million to $105.0 million. Management believes that
the Company's historical results of operations are not 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>
PERCENTAGE OF NET SALES
-------------------------------------------------------------------------
PERIOD FROM
JUNE 8, 1995 NINE MONTHS ENDED
(INCEPTION) THROUGH FISCAL YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
------------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... -- 100.0% 100.0% 100.0%
Gross profit............ -- 43.6 40.5 23.8
Selling, general and
administrative
expenses............... 100.0% 111.7 126.8 89.6
Loss from operations.... 100.0 68.1 86.3 65.9
Interest expense........ -- 6.3 5.3 3.9
Net loss................ 100.0 72.9 88.1 69.8
</TABLE>
27
<PAGE>
NINE MONTHS ENDED DECEMBER 27, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 28,
1996
Net Sales. Net sales increased to $81.5 million in the nine months ended
December 27, 1997 from $6.5 million in the nine months ended December 28,
1996. This increase was attributable to acquisitions completed and start-ups
launched during the 1997 period, revenue growth from existing catalogs and the
1996 acquisitions (which were completed in December 1996) being included for
the entire 1997 period.
Gross Profit. Gross profit increased to $19.4 million or 23.8% of sales for
the 1997 period compared to $2.6 million or 40.5% for the 1996 period. This
increase was attributable to the acquisitions completed and start-ups launched
during the 1997 period and the 1996 acquisitions being included for the entire
1997 period. The decrease in the gross profit percentage primarily occurred in
the period between September and December 1997, when the Company experienced a
temporary inability of its call center software to interface with its
distribution center software resulting in lost sales revenues, reduced gross
margins and increased per order fulfillment costs. The Company believes that
this disruption contributed significantly to the loss for the nine month
period ended December 27, 1997.
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
$73.1 million in the 1997 period, from $8.2 million in the 1996 period.
Selling, general and administrative expenses as a percentage of net sales
decreased to 89.6% in the 1997 period from 127% in the 1996 period. This
decrease was due to increased sales volume resulting from the acquisitions
completed and start-ups launched during 1997 and the 1996 acquisitions being
included for the entire 1997 period, offset in part by increased costs
associated with the Company's decision to 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 brands. In connection with the Company's
acquisitions, amortization of acquired intangibles of $2.9 million is included
in selling, general and administrative expenses in the 1997 period as compared
to $30,000 in the 1996 period.
Interest expense. Interest expense increased to $3.2 million in the nine
months ended December 27, 1997 from $0.3 million in the nine months ended
December 28, 1996, primarily as a result of a higher average debt balance.
FISCAL YEAR ENDED MARCH 29, 1997 ("FISCAL 1996") COMPARED TO PERIOD FROM JUNE
8, 1995 THROUGH MARCH 30, 1996 ("FISCAL 1995")
Net Sales and Gross Profit. Net sales in Fiscal 1996, the first year of the
Company's sales, were $18.5 million. Gross profit was $8.1 million in Fiscal
1996. As a percentage of net sales, gross profit was 43.6% in Fiscal 1996.
Such net sales and gross profit were attributable to the acquisitions
completed and start-ups launched during Fiscal 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $20.7 million in Fiscal 1996 from $2.7
million in Fiscal 1995. This increase was due to (i) the Company's decision to
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 brands
and (ii) the acquisitions completed and start-ups launched during Fiscal 1996.
Interest expense. Interest expense increased to $1.16 million in Fiscal 1996
from $5,000 in Fiscal 1995, primarily as a result of the issuance of $22.5
million principal amount of convertible debt in Fiscal 1996 and $10.2 million
in notes related to the acquisitions completed during Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1997, the Company had cash of $7.6 million and a working
capital deficit of $0.4 million. The Company's capitalization, defined as the
sum of long-term debt, redeemable preferred stock and stockholders' equity, at
December 27, 1997 was $67.7 million.
28
<PAGE>
The Company's principal capital needs arise 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.
The Company's ability to acquire new catalog businesses will depend on a
number of factors, including the ability of management of the Company to
identify target businesses and to negotiate acceptable acquisition terms, the
availability of adequate financing and other factors, many of which are beyond
the control of the Company. Through December 27, 1997, the Company acquired 13
businesses for an aggregate of $32.8 million cash, $30,000 of Common Stock,
$17.2 million of notes and certain other deferred payments and up to $1.9
million in contingent payments. There can be no assurance that the Company
will be successful in identifying and acquiring new businesses or that the
Company can integrate such new businesses into its operations.
Since its inception, the Company has received $168.1 million of funding from
various sources, including the founders and major institutional investors as
well as a $5.0 million term loan. From June 1996 through April 1997, the
Company raised $62.2 million of capital commitments from GEIPPP II and Genesis
Direct, L.P. ("GDLP"). See "Certain Relationships and Related Transactions."
The $62.2 million consisted of $32.2 million of Common Stock and $30.0 million
of Debentures to GEIPPP II. In September and December 1997, the Company raised
a total of $94.3 million through the issuance of Series A Preferred Stock to
GEIPPP II, GDLP and several other private equity funds. The proceeds of these
financings were used to fund the Company's acquisitions, working capital needs
and capital expenditure program. In April 1998, the Company raised a total of
$7.35 million through the issuance of Bridge Notes to GEIPPP II. Proceeds from
the Bridge Notes are being 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 and a $5.0 million term loan with The CIT Group/Business Credit Inc.
(the "Credit Facility"). The Credit Facility is collateralized by
substantially all of the Company's assets. The $25.0 million revolving credit
portion of the Credit Facility bears interest at a variable rate equal to
Prime Rate of The Bank of New York plus 1/2% or LIBOR plus 3%. The $5.0
million term loan is payable over five years and bears interest at the Prime
Rate plus 1/2%. The Credit Facility contains a covenant with respect to the
maintenance of specified consolidated net worth.
During the nine months ended December 27, 1997, net cash used by operating
activities was $57.4 million. Net cash used in investing activities was $30.1
million, consisting primarily of cash paid for acquisitions, net of cash
acquired, of $13.4 million and cash paid for additions to property and
equipment of $16.9 million. Net cash provided by financing activities was
$87.2 million consisting primarily of the $85.6 million raised from GEIPPP II
and GDLP and other holders of Series A Preferred Stock as set forth above.
During Fiscal 1996, net cash used by operating activities was $13.5 million.
Net cash used by investing activities was $25.0 million, consisting primarily
of cash paid for acquisitions of $19.2 million and cash paid for additions to
property and equipment of $3.0 million. Net cash provided by financing
activities resulted from $44.9 million raised by GEIPPP II and GDLP as set
forth above.
The Company expects to make 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 the expenditures. The
Company anticipates that its cash, proceeds from this offering and financing
available under the 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 29, 1997, the Company had approximately $10.0 million of federal
tax net operating loss carryforwards which expire in 2012. The Company also
has approximately $8.6 million of state tax net operating loss carryforwards
which expire principally in 2004. In addition, the Company incurred
approximately $46 million of tax losses for the nine-month period ended
December 27, 1997.
29
<PAGE>
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 this offering, the Company's net operating loss
carryforwards may be subject to 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.
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.
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 is reviewing its computer programs and systems to ensure
that the programs and systems will function properly and be year 2000
compliant. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
system will be year 2000 compliant. The estimated cost of these efforts are
not expected to be material to the Company's financial position or any year's
results of operations, although there can be no assurance to this effect. In
addition, the year 2000 problem may impact other entities with which the
Company transacts business, and the Company cannot predict the effect of the
year 2000 problem on such entities.
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 December 27, 1997, 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. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will
be
30
<PAGE>
effective for the Company for the fiscal year ending March 27, 1999, is not
currently anticipated to have a significant impact on the Company's financial
statements based on the current financial structure and operations of 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
and provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
31
<PAGE>
BUSINESS
Genesis Direct is a leading database-driven specialty retailer in the
rapidly growing universe of non-store shopping. With a current portfolio of 30
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. The Company's marketing efforts are supported
by a customer database of over 10 million names, a 450-station call center at
its Secaucus, New Jersey, headquarters and a custom-designed 500,000 square
foot distribution center strategically located in Memphis, Tennessee. For the
nine months ended December 27, 1997, the Company had net sales of
approximately $81.5 million.
MARKET OVERVIEW
According to the DMA, in recent years, retailing in the United States has
been characterized by a rapidly growing shift to non-store sales through such
media as printed catalogs, broadcast and cable television infomercials, home
shopping channels and the Internet. These alternative forms of non-store
retailing, which in 1997 accounted for approximately $382.0 billion in sales,
are expected to grow approximately 8% per annum for the next five years. The
Company believes that this growth is due to the convenience of home shopping
for time-constrained, dual-career consumer households and the increasingly
high level of customer service and reliability offered by leading direct
marketing firms. The Company also believes that, on a percentage basis, the
fastest growing portion of the home shopping market will be on-line shopping
via the Internet. According to estimates published by the Yankee Group, a
Boston-based research firm, Internet-driven sales in 1997 totaled $2.7
billion. The Yankee Group predicts that consumer Internet-driven sales will
grow to $10.0 billion by the year 2000 and $32.0 billion by the year 2002. In
addition, the Yankee Group estimates that the total number of on-line
households grew from 15.5 million in 1996 to 20.0 million in 1997.
The DMA has also found that the traditional catalog segment of the United
States direct marketing industry, which generated approximately $79.0 billion
in total sales in 1997, is highly fragmented. The Company believes that there
are over 12,000 consumer catalog companies in existence, most of which lack
the necessary capital, support systems and economies of scale to effectively
exploit available opportunities for growth. The Company believes that the most
successful catalog marketers will be those with a critical mass of at least
$25.0 million in annual sales, whether through internal growth or acquisition.
There will also be a need to recognize the strategic importance of developing
a presence in electronic media and capitalizing on expanding international
markets. In order to implement these strategies, catalog operators require
capital and management and development expertise.
According to Marketing Logistics, an industry consulting and research group,
international consumers and businesses have spent more than $94.0 billion in
1995 buying from direct marketing sources. Germany and Japan offer
particularly interesting direct marketing opportunities. According to the U.S.
Commerce Department, catalog sales in Germany were estimated to have reached
$24.0 billion in 1995. Research conducted by the U.S. and Foreign Commercial
Service, as of 1996, shows that Germany was the world's second largest mail
order market with spending on mail order products in 1995 averaging $293 per
capita, second only to the United States. Moreover, according to research
conducted by the German postal service, the apparel return ratio in Germany is
lower than the ratio experienced by most countries. In addition, according to
the U.S. Commerce Department, catalog sales in Japan reached $20.0 billion in
1995, with United States catalogers generating over $1.0 billion of such
annual sales. With the advent of the single European market, there should also
be opportunity for catalog growth, as well as other remote shopping growth, in
the rest of the European community.
THE GENESIS DIRECT STRATEGY
The Company's objective is to become the leading provider of a broad array
of branded consumer and business catalogs offered in a variety of traditional
and innovative markets. The key elements of the Company's operating and growth
strategies are set forth below:
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<PAGE>
OPERATING STRATEGY
The key elements of the Company's operating strategy are as follows:
. TARGET AND PENETRATE NICHE MARKETS. The Company identifies and focuses
its efforts on penetrating niche markets that it believes are
underserved by retail stores and other catalogs, that will be responsive
to its innovative direct marketing techniques and in which it can become
a market leader. The Company then acquires a variety of catalogs within
the target market, each of which it transforms into a readily
identifiable brand by investing heavily to enhance the catalog's image.
In addition, the Company trains a core group of specialized customer-
responsive employees to serve that market and seeks to establish
innovative strategic relationships with other participants in that
market. The Company also employs sophisticated database management
techniques and systems to cross-sell product offerings designed for one
niche market to customers in its other niche markets. The Company
believes that by targeting several niche markets and serving each market
with multiple brands, it reduces its reliance on any particular market
or brand.
. DEVELOP CENTRALIZED STATE-OF-THE-ART INFRASTRUCTURE. Since its
inception, the Company has invested approximately $20.4 million to
develop an order-taking, processing and fulfillment infrastructure with
sufficient capacity and operational flexibility to service increased
sales volume and exploit strategic or market opportunities as they
occur. In addition to its state-of-the-art call center and distribution
center, the Company has invested in sophisticated management information
systems and database technologies that effectively coordinate a full
range of functions from catalog production and mailing to order-taking
and fulfillment. The Company's substantial investment in infrastructure
allows it to quickly consolidate and integrate newly acquired catalogs
and to introduce new catalogs. The Company believes that, as sales
volume increases through acquisitions and internal growth, it can
leverage its infrastructure to reduce the per order cost of fulfillment.
The Company believes that, without significant additional capital
expenditures beyond its fiscal 1998 spending plan, its current systems
infrastructure, call center and distribution center can accommodate up
to $1.0 billion in annual sales.
. OFFER PROPRIETARY, PERSONALIZED AND HARD-TO-FIND PRODUCTS. The Company
seeks to increase its gross margins by offering proprietary and
personalized products, as well as products that are difficult to find in
retail stores and other catalogs. The Company strives to offer customers
in each of its target markets a broader merchandise selection than is
generally offered by traditional retailers and smaller direct marketers.
The Company has established a department dedicated to the development of
proprietary products and the personalization of products within each of
the Company's target markets. As part of this initiative, the Company is
currently building a customization facility in its distribution center
that will enable it to personalize most of its products by means of
etching, laser engraving and embroidery.
. UTILIZE MULTIPLE MARKETING CHANNELS. To reach potential customers, the
Company uses multiple marketing channels, including mail, Internet
websites, television and radio advertisements, infomercials, airplane
seat-backs, hotel rooms, sports events and trade shows. The Company
currently takes on-line orders for products from Internet websites under
two of its brands and maintains informational websites for eight of its
other brands. In addition, under exclusive arrangements with the NBA,
NHL and Major League Baseball, the Company maintains the on-line store
on those leagues' websites, where potential customers can receive
information, view merchandise, enter inquiries and orders and request
catalogs.
. BUILD LIFETIME CUSTOMER RELATIONSHIPS. The Company's objective is to
make every customer a customer for life. Through its niche marketing
strategy and sophisticated database, enhanced with up-to-date
demographic information, the Company offers products intended to satisfy
preferences as they evolve over their lifetimes. In addition, the
Company strives to provide consistently prompt, knowledgeable and
courteous service and rapid order fulfillment. In its 450-station call
center, calls are routed to the customer service representative most
knowledgeable about the products within the
33
<PAGE>
particular catalog brand in question. Because of the high level of
automation at its distribution center and the strategic location of that
center at a shipping hub for such carriers as Federal Express, UPS and
the U.S. Postal Service, the Company is able to provide next-day
delivery, if requested, on orders received prior to 11:00 p.m. EST. The
Company continually strives to develop the Genesis Direct name into an
umbrella seal-of-approval symbol associated with superior service and
product quality.
. ATTRACT AND RETAIN EXPERIENCED MANAGEMENT TEAM. The Company seeks to
attract and retain highly qualified management personnel with extensive
experience. To date, the Company has assembled some of the country's
most experienced professionals in direct marketing or related
industries. The Company has also retained many of the former owners of
the acquired catalog companies, who bring extensive expertise in their
respective niche markets.
GROWTH STRATEGY
The key elements of the Company's growth strategy are as follows:
. PURSUE STRATEGIC ACQUISITIONS. As a result of its acquisition of 15
catalog businesses, the Company has developed considerable expertise in
identifying and evaluating appropriate acquisition candidates and in
integrating the operations and expanding the sales of acquired
companies. The Company believes that the fragmented direct marketing
industry provides significant consolidation opportunities and is
pursuing an aggressive but disciplined acquisition strategy focused
primarily on catalog brands that complement existing brands in its
targeted niche markets. In particular, the Company seeks catalog brands
that have been unable to realize their growth and profitability
potential due to capital constraints and infrastructure limitations. To
date, the typical acquisition candidate has demonstrated a high average
order value and a low rate of merchandise returns and is believed to
have the potential to eventually achieve at least $25.0 million in
annual sales, realize high rates in customer retention and successfully
offer higher margin proprietary products.
. INCREASE REVENUES OF ACQUIRED CATALOGS. The Company believes that, in
addition to achieving synergies through the integration of acquired
catalogs, there are opportunities to substantially increase the revenues
of acquired catalogs by utilizing the Company's database to efficiently
target a more precise group of potential customers based on demographic
information and individual purchase behavior. In addition, the Company
believes that its superior customer service and its development of each
acquired catalog into a readily identifiable brand can increase the
revenue opportunities of those catalogs.
. DEVELOP NEW BRANDS. The Company uses its existing customer database to
create and introduce new catalog brands. The Company currently has eight
active start-up catalog brands and intends to introduce and develop
additional new catalog brands featuring original merchandise concepts
that will allow it to penetrate further distinct segments of its niche
markets. For example, the Company has recently used its customer lists
in the sports and kids market segments to start-up S.K.U.S.A. (an
acronym for Sports Kids U.S.A.), through which the Company will offer
hard-to-find "sports lifestyle" products for children, including
apparel, home furnishings and toys.
. EXPAND AND LEVERAGE CUSTOMER DATABASE. The Company is continually
expanding its customer database through a variety of techniques,
including catalog and list acquisitions, renting of mailing lists and
strategic alliances. Examples of strategic alliances that enhance the
Company's customer database are its exclusive arrangements with
professional sports leagues that allow the Company access to the
leagues' databases, Internet websites and advertising opportunities. The
Company uses sophisticated statistical modeling and segmentation
techniques to develop purchasing profiles of the customers in its
database, which facilitates cross-marketing, cross-selling and more
precisely focused catalog distributions and marketing efforts.
34
<PAGE>
. EXPAND INTERNATIONAL SALES. The demographic and technological trends
that are driving the retail consumer shift to non-store shopping in the
United States are also present in many international markets. The
Company believes that its catalog development expertise and existing
infrastructure will enable it to expand into certain of those markets,
particularly those with a strong interest in U.S. sports-related
products. The Company intends, where appropriate, to produce foreign
language versions of several of its catalogs. In addition, the Company's
distribution center in Memphis, Tennessee is strategically placed at the
hub of courier services serving international markets to permit rapid
direct-to-consumer overseas order fulfillment. The Company is currently
expanding its operations into France, Germany, Japan and the United
Kingdom and expects to launch an extension of its 1-800-Pro-Team brand
in several of those countries.
. GENERATE MULTIPLE REVENUE STREAMS. The Company intends to generate
multiple revenue streams within its target markets by permitting third-
party direct marketers to sell non-competing goods and services to its
customers, by including third-party/vendor advertising in Company
catalogs and by renting its customer lists to non-competing vendors. For
example, through several of its sports brands, the Company offers MBNA
credit cards with sports team logos.
THE GENESIS DIRECT PORTFOLIO OF BRANDS
The Company currently organizes its product offerings within four distinct,
but interrelated, market categories, each with a specific market focus
designed to appeal to a particular customer profile: sports, kids, gifts and
collectibles and institutional/business to business. The Company has trained a
core group of specialized customer-responsive managers and employees to serve
each of those markets and is establishing innovative and strategic
relationships with participants in each market. In addition, the Company has
retained and seeks to incentivize a majority of the former owners of its
acquired catalog companies who have expertise in merchandising to customers in
their targeted niche markets. The Company also employs sophisticated database
management techniques and systems to cross-sell product offerings designed for
one niche market to customers in its other niche markets.
SPORTS
The Company has developed a strategy of building specialty sports brands,
each focused on a single sport, plus one multi-sport brand. Sports merchandise
includes licensed and non-licensed apparel, accessories, home furnishings,
equipment and limited edition collectibles, as well as fantasy packages which
offer customers the opportunity to interact with sports celebrities. The
Company believes that an important factor in the success of its sports brands
is its ability to offer a much greater selection of licensed merchandise
compared to traditional retailers. In particular, in many communities there is
strong demand for non-local team products that is generally not fulfilled by
local retailers because of capacity constraints. In addition, serving the
sports market segment adds selling seasons to the traditional holiday seasons
through marketing efforts around major sporting events, such as the Super
Bowl, the World Series, the NBA Championship and the Stanley Cup. The Company
has exclusive "Official Catalog" relationships with the NBA, the NHL, Major
League Baseball and NASCAR, as well as a strategic relationship with the NFL.
Hot Off The Ice, the first Genesis Direct start-up catalog, was launched
during the 1996 holiday period. Under an exclusive arrangement with the NHL,
Hot off The Ice is marketed as the "Official Catalog of the Coolest Game on
Earth." Hot Off The Ice offers licensed and non-licensed hockey-related
products and collectibles. Hot Off The Ice has access to the NHL's proprietary
database for its Hot Off The Ice mailings. In addition, Hot Off The Ice
reaches customers as the exclusive store on the NHL's website. The average
order value for Hot Off The Ice merchandise for fiscal 1997 was approximately
$83.
Nothin' But Hoops, a start-up catalog, was launched in October 1997. Under
an exclusive arrangement with the NBA, Nothin' But Hoops is marketed as the
"Official Catalog of the NBA." Nothin' But Hoops offers
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<PAGE>
licensed NBA products, non-licensed basketball products and basketball
collectibles. The Company has access to the NBA's proprietary database for its
Nothin' But Hoops mailings. In addition, Nothin' But Hoops reaches customers
as the exclusive store on the NBA's website, through NBA-provided television,
radio and print advertisements at no additional fee to the Company and through
the ability to distribute advertising materials at sports events. The average
order value for Nothin' But Hoops merchandise for fiscal 1997 from launch was
approximately $82.
Manny's Baseball Land, a start-up catalog, was launched in March 1998. Under
an exclusive arrangement with Major League Baseball, Manny's Baseball Land is
marketed as the "Official Catalog of Major League Baseball." Manny's Baseball
Land is based on the well-known and established brand name "Manny's Baseball
Land," which was started in 1949 outside of Yankee Stadium. Manny's Baseball
Land offers baseball-related products, including licensed Major League
Baseball products.
From The Sidelines, a start-up catalog, was launched in July 1997. From the
Sidelines was previously operated under the name Athletic Supply, which was
acquired by the Company in December 1996. During 1997, the Company changed the
acquired catalog's focus from multi-sport to football and launched the new
catalog under the name From The Sidelines, offering licensed and non-licensed
football products and memorabilia. The average order value for From The
Sidelines merchandise for fiscal 1997 from launch was approximately $85. In
connection with the Athletic Supply acquisition, the Company acquired the
Official NFL Quarterback Club catalog, which offers limited edition
autographed football collectibles. The average order value for Official NFL
Quarterback Club merchandise for the period from acquisition to date was
approximately $85.
The Official NASCAR Catalog, acquired in October 1997, offers licensed
NASCAR merchandise, including apparel and collectibles. The Company also owns
NASCAR Shoptalk, a television infomercial on ESPN, and the Official NHRA
Catalog, which offers licensed National Hot Rod Association merchandise
including apparel and collectibles. In addition, the Company has a related
commercial promotions business, through which it markets its products through
various sports activities and events, often in connection with well-known
consumer product companies. The Company hopes to capitalize from the
anticipated increased media attention resulting from NASCAR's planned
promotional events surrounding its 50th anniversary in 1998. The average order
value for The Official NASCAR Catalog merchandise for the period from
acquisition to date was approximatelly $72.
1-800-Pro-Team was acquired in December 1996. 1-800-Pro-Team is a source for
team or league logo merchandise that is typically hard-to-find, with an
emphasis on professional team licensed products. 1-800-Pro-Team is not only a
strong brand with a loyal customer base of its own, but is also used as a
prospecting vehicle, bringing customers with strong potential to the single-
sport catalogs. The Company upgraded the look and feel of the catalog
following its acquisition and has implemented an aggressive customer
acquisition plan to take advantage of the former owners' under-utilization of
direct-mail prospecting opportunities. The average order value for 1-800-Pro-
Team merchandise for fiscal 1997 was approximately $69. 1-800-Pro-Team is also
mailed under an exclusive arrangement with Sears to a portion of the Sears
mailing list under the name Sears My Team. The average order value for Sears
My Team merchandise for fiscal 1997 was approximately $69. In May 1998, the
Company plans to launch 1-800-Pro-Team in the United Kingdom, France, Germany
and Japan (under the catalog name USA ProSports Direct).
Competitive Edge Golf was acquired in March 1997. Competitive Edge Golf
offers proprietary and non-proprietary golf products, including equipment,
apparel and novelties that appeal both to golf fans and players. The founder
of Competitive Edge Golf was retained after the acquisition to manage and
develop the brand. The average order value for Competitive Edge Golf
merchandise for fiscal 1997 was approximately $112.
Soccer Madness was acquired in October 1997. Soccer Madness offers brand-
name merchandise, including soccer shoes, apparel, equipment, bags, watches,
jewelry and accessories. As with Competitive Edge Golf, Soccer Madness appeals
to participants as well as fans and capitalizes on the growing popularity of
soccer in the United States. The Company also offers soccer merchandise in
Japan through a Japanese language version of Soccer Madness. The average order
value for Soccer Madness merchandise for the period from acquisition to date
was approximately $85.
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ProSports Liquidators, a start-up catalog, was launched in March 1998.
ProSports Liquidators offers discounted merchandise from the Company's various
sports catalogs and is mailed primarily to the Company's less responsive or
discount-driven customers.
KIDS
The kids market is one of the principal entry points for the lifetime
customer that the Company hopes to develop. Through its various brands in the
kids market, the Company seeks to give families helpful, trusted choices in
providing for their children's needs as they grow and change. The Company
takes a lifestage approach to the market and creates and acquires catalogs
that offer high quality products and serve children's needs in all aspects of
life, from the nursery through high school, from schoolwork to school
clothing, for playtime and family time. Kids merchandise includes toys, games,
crafts, clothing and educational and developmental materials. Through its
sophisticated database marketing, the Company is able to track the demographic
changes in its customer households and prospective households, thereby
targeting appropriate offerings to each lifestage.
Gifts For Grandkids, which was acquired in October 1995, celebrates the
unique relationship between generations of family members and enhances the
experience of gift giving and receiving for all ages. Products offered range
from infant toys and dolls to room furnishings and outdoor play products.
Gift-giving grandparents can also purchase personalized products for special
occasions and special kids. The brand has established its own niche in the
market and the catalog has received consistent national publicity as one of
the premium children's gift catalogs. The average order value for Gifts For
Grandkids merchandise for fiscal 1997 was approximately $70.
Hand-in-Hand was acquired in February 1997. Under Hand-in-Hand, the Company
offers a selection of high quality, distinctive products for infants,
toddlers, and young children, serving both consumers through the Hand-in-Hand
Consumer Catalog and child care professionals and institutions through the
Hand-in-Hand Professional Catalog. The products offered focus on the lifestyle
of children and their families and include toys, furniture, arts and crafts,
videos, books and apparel. Hand-in-Hand has been carefully nurtured as a high
quality, high value brand that will make a contribution to children's lives.
The Company also offers such merchandise in Japan through a version of Hand-
in-Hand that is selectively translated into Japanese. The average order value
for Hand-in-Hand merchandise for fiscal 1997 was approximately $81.
The Training Camp, a start-up catalog, was launched in May 1997 and offers
unique children's developmental sports training products, methods and
equipment to inspire and help improve "whole child" development and introduce
children to the fun and rewards of sports and good sportsmanship. In print
catalog and website format, The Training Camp offers unique, safe and high-
value items including play products that help develop motor skills, such as
ball throwing machines, basketball shooting training devices and sports
parenting videos. Additionally, the catalog and website include tips from
renowned coaches in a number of athletic disciplines on the fundamentals of
the sport for which equipment is being sold. The average order value for The
Training Camp merchandise for fiscal 1997 from launch was approximately $92.
S.K.U.S.A., a start-up catalog, was launched in March 1998 using the
Company's customer lists in the sports and kids market segments. S.K.U.S.A.
offers hard-to-find "sports lifestyle" products for children, including
apparel, home furnishings and toys.
Biobottoms, which was acquired in April 1998, offers a wide selection of
natural fiber children's apparel., The Company believes that Biobottoms will
enable the Company to offer an enhanced selection of children's merchandise.
GIFTS AND COLLECTIBLES
Gifts and collectibles offers unique, hard-to-find items for gift givers and
collectors. This segment markets nostalgic themed entertainment- and music-
related memorabilia and collectible items, including personalized sweatshirts
with designs of musical instruments, miniature toy mechanical cars,
collectible dolls and limited edition hand-signed lithographs from well-known
musical groups. Many of the gifts and collectibles catalog brands have high
gross margins, low stock-keeping unit ("SKU") counts, low inventory
obsolescence, high customer loyalty and few competitors.
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Lilliput was acquired in December 1996. Lilliput offers a collection of
unique, hand-crafted, limited production, primarily European-made mechanical
toys, including automobiles, airplanes, building blocks, musical toys, steam
engines and trains. Lilliput owns exclusive North American distribution rights
for models and mechanical toy cars produced by Schuco of Germany and Gonio of
the Czech Republic. The founders of Lilliput were retained after the
acquisition, and have applied their knowledge of merchandising and developing
proprietary products through all of the Company's target markets. The average
order value for Lilliput merchandise for fiscal 1997 was approximately $196.
The Voyager's Collection was acquired in March 1997 and is an example of the
use of alternate distribution channels, a component of the Company's overall
strategy. When acquired, the catalog was distributed only to consumers in
upscale hotel rooms throughout the United States and provided travel products
to the discriminating and time-sensitive business traveler. Since the
acquisition, the Company has supplemented the catalog with product offerings
from its numerous other catalogs. Including merchandise from other Genesis
Direct catalogs allows The Voyager's Collection to be not only a strong
catalog with a loyal customer base of its own, but also used as a prospecting
vehicle, bringing customers with high potential to other Genesis Direct
catalogs. In addition, the Company has entered into an agreement with a major
commercial airline for the exclusive right to distribute The Voyager's
Collection catalogs in seat pockets on the airline's domestic flights and in
its passenger clubs in domestic airports. The Company plans to enlarge The
Voyager's Collection's customer base by distributing its catalog in other
travel-related areas, including additional commercial airliners and hotel
rooms. The average order value for The Voyager's Collection merchandise for
fiscal 1997 was approximately $110.
Global Friends, acquired in two steps in June 1997 and April 1998, offers
proprietary theme dolls each from a different country or region with related
books, videos and playkits to create an educational and fun experience for
young girls. To further promote the Global Friends brand, customers can join a
Pen Pal club and communicate with other customers from around the world by
letter and through the Internet on Global Friends' website. The average order
value for Global Friends merchandise for fiscal 1997 from acquisition was
approximately $110.
Command Performance, a start up catalog, was launched in July 1997. Command
Performance includes a variety of music- and entertainment-related
collectibles and memorabilia, including limited edition lithographs of album
cover art autographed by musicians and videocassettes of classic television
series. Also included are a variety of music and music-related products. The
average order value for Command Performance merchandise for fiscal 1997 from
launch was approximately $91.
The Music Stand was acquired in August 1997. The Music Stand offers music-
related gifts and collectibles, including a substantial number of products
which can be personalized. The average order value for The Music Stand
merchandise for fiscal 1997 from acquisition was approximately $54.
In May 1998, the Company plans to launch Romance Boutique, a start-up
catalog that will offer romantic gifts, such as lingerie, fragrance products,
candles and candy.
INSTITUTIONAL/BUSINESS-TO-BUSINESS
The institutional/business-to-business marketing segment offers educational,
recreational and therapeutic products for schools, camps and therapists. The
Company believes that developing catalogs in the institutional/business-to-
business niche market is important strategically for several reasons. Since
sales to businesses and institutions generally do not peak during the holiday
season, as do sales to individual consumers, catalog brands in the
institutional/business-to-business market may serve to reduce the seasonal
fluctuation in the Company's sales. The Company plans to explore opportunities
for extending many of the product offerings in its consumer catalogs into the
institutional and business markets.
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Childswork/Childsplay was acquired in April 1997, and was the Company's
first investment in the school and professional markets.
Childswork/Childsplay, created by the widely recognized child psychologist and
founder of the catalog, Dr. Lawrence Shapiro, an industry leader in special
education products, helps parents, educators, therapists and other mental
health professionals who work with socially and emotionally challenged
children. Childswork/Childsplay offers proprietary learning tools that
encourage children to work through problems while enjoying books, games and
special activities. Dr. Shapiro was retained by the Company after the
acquisition and continues to manage and develop the catalog. The average order
value for Childswork/Childsplay merchandise for fiscal 1997 was approximately
$109.
Ninos was acquired in April 1997. Ninos, a pioneer in the bilingual
children's direct marketing category, provides quality Spanish-language
educational toys, books and audio-visual products to parents and bilingual
educators nationwide. The products range from reference books to translations
of popular English books and videos that teach Spanish and/or Hispanic
culture. The founder of Ninos was retained by the Company after the
acquisition to manage the catalog and to assist the Company in serving other
bilingual markets. The average order value for Ninos merchandise for fiscal
1997 was approximately $109.
Sportime was acquired in January 1998. Sportime, which is an innovator of
proprietary products and owner of several patents and trademarks, offers
schools, camps, parks and other institutions traditional recreational and
athletic products including balls, rackets, hockey sticks, nets, parachutes
and jump ropes as well as innovative physical education products that enable
children to learn important social, athletic and creative skills through play.
Examples of the innovative products offered by Sportime include the Co-oper
Blanket, designed to teach groups cooperation skills, Perceptual Motorugs, to
teach balance, coordination, visual perception and spatial planning, and a
variety of teacher resources. The Company also offers Sportime merchandise in
Canada, several countries in Europe (under the catalog name Spordas),
Australia, New Zealand and Japan (through a Japanese language version). The
average order value for Sportime merchandise for fiscal 1997 from acquisition
was approximately $198.
Abilitations, which was acquired together with Sportime, offers equipment
for development and restoration of physical and mental ability to physical,
recreational and occupational therapists. The average order value for
Abilitations merchandise for fiscal 1997 from acquisition was approximately
$136.
Chime Time, which was acquired together with Sportime, offers movement-
related products to the pre-school market. The average order value for Chime
Time merchandise for fiscal 1997 from acquisition was approximately $160.
Senior Products, which was acquired together with Sportime, offers age-
appropriate physical, social and recreation activities to senior groups. The
average order value for Senior Products merchandise for fiscal 1997 from
acquisition was approximately $83.
Active Minds, which was acquired together with Sportime and initially mailed
in February 1998, offers creative movement-oriented educational products for
the pre-school and grade school markets. The average order value for Active
Minds merchandise from the initial mailing was approximately $65.
MARKETING
The Company's marketing strategy is to invest in the Genesis Direct name as
an "umbrella seal of approval" associated with superior service and product
quality. Each catalog includes or will include the Genesis Direct logo and tag
line to further draw a connection between the individual catalog, Genesis
Direct and sister catalogs. The message creates a credible link between each
brand, ultimately enabling the Company to fulfill its mission of "Every
Customer--A Customer For Life," through cross-selling between and among brands
as customers' needs develop and change.
The Company seeks to transform each catalog into a well-known brand through
a variety of marketing methods, including: enhancing logos, investing in easy-
to-remember toll-free phone numbers, introducing proprietary products labeled
with a brand's logo, enhancing the look, feel, and tone of the catalog,
establishing a brand personality that appeals to the target market, developing
a dialogue with customers through contests,
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surveys, e-mail, and "customer care" programs, adding value through
information-rich materials and event promotions and developing strategic
alliances with other participants in the niche market. Finally, the Company
expands the prospecting efforts and merchandise selection, broadening into
areas that match the interests of a very clearly defined target market.
GROWING THE CUSTOMER DATABASE. The Company believes that building a large
and loyal customer base is critical to its growth strategy. The Company grows
its customer database through catalog and list acquisitions, renting of
mailing lists and strategic alliances. Examples of strategic alliances that
enhance the Company's customer database are the Company's exclusive
arrangements with professional sports leagues that allow the Company to use
the leagues' databases, Internet websites and advertising opportunities. As of
December 27, 1997, Genesis Direct had a proprietary mailing list of
approximately 10 million individuals, of which approximately 1.2 million have
purchased from the Company's businesses in the last twelve months.
CUSTOMER DATABASE MANAGEMENT; CUSTOMER SEGMENTATION. In March 1998, the
Company introduced a state-of-the-art marketing database system to allow it to
use more sophisticated and efficient methods to analyze the performance of
each catalog mailing and predict future performance of products and customers.
This marketing database system allows the Company to segment its customer base
according to many variables and to analyze each segment's performance and
buying patterns. Names will be selectable not only by frequency and monetary
value of purchases, but by specific product, product category, brand, market
segment, or overall Company purchase behavior. Statistical models will also be
able to analyze promotional history, individual vs. household buying
information, merchandise return information and externally enhanced
information such as creditworthiness and household demographics. The resulting
information is used to refine the frequency and name selection for Genesis
Direct's various mailings to maximize the productivity of each market segment.
This analysis also enables the Company to strengthen the merchandising of its
catalogs through analysis of various products' roles in enhancing the long-
term profitability of particular customer segments.
In addition, database analysis of product purchase history combined with
demographic information allows the Company to identify important cross-selling
opportunities. For example, the Company intends to mail S.K.U.S.A. to existing
sports catalog customers who have been purchasers of children's products.
SPECIAL PROMOTIONS. The Company uses special promotions to strengthen brand
image and to enhance customer retention and is currently testing many concepts
and innovations through its mailings and product offerings. For example, prior
to the Super Bowl, From The Sidelines, in cooperation with the NFL, tested an
exclusive product promotion, "Super Bowl In A Box," a box containing items
that appeal to avid football fans, including a hat and T-shirt, each with the
Super Bowl teams logos, an official Super Bowl program and coupons for
discounts on future From The Sidelines purchases. A postcard promoting the
product, which could be ordered by dialing 1-800-SUPERBOWL, was mailed to a
test group of From The Sidelines customers and was promoted in radio and print
advertisements. Another example of a special promotion was a full-color 1998
calendar produced by the Company and inserted free of charge into all outgoing
packages in the sports brands during the Holiday season of 1997. The calendar
advertises promotions on each page which encourage customers to purchase all
year long from each brand in the sports market segment. These tests were
successful and the Company plans to develop similar promotions in the future.
ALTERNATE MEDIA. The Company has developed an Alternate Media department
dedicated to evaluating and developing new channels of distribution for the
Company. Currently, the Alternate Media Department focuses on three areas: (i)
the Internet and other forms of electronic commerce, (ii) television,
including short and long form television infomercials, and (iii) promotional
books and videos. The Company also plans to employ new technologies that it
believes will enable it to effectively bring its brands to its customers.
The Company currently conducts on-line transactions on two of its websites.
The Company also takes catalog requests and provides information on eight of
its other websites, including its recently completed corporate website. The
Company continues to expand its web presence by placing its catalog brands
into high traffic, high profile sites as well as smaller associate sites
through strategic relationships with third parties
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including the NHL, the NBA, Major League Baseball and NASCAR. These strategic
relationships reduce the Company's web marketing and production costs,
increases traffic into the on-line stores and allows the Company to take
advantage of its partners' access to other media, such as television, print
and radio. The Company has recently licensed, from InterWorld, an Internet
software package that will enhance the Company's ability to allow customers to
obtain products by placing secure orders over the world-wide web. As a result,
the Company expects to incur lower expenses to build and maintain appealing
websites. In addition, acquiring electronic commerce capability should result
in higher margins as the Company can cross-market its products across several
media including print, web and television without the need for catalogs,
thereby saving the cost of producing, printing and mailing catalogs.
The Company has begun the expansion of its television efforts and produced
its first television and radio spots this year with the NBA and Classic Sports
Network. The Company has also acquired the rights to a series of ESPN programs
called NASCAR Shoptalk, a television infomercial featuring famous drivers,
that airs after NASCAR events. The Company plans to replicate this infomercial
format for several of its product lines and has produced the first two in a
series of The Training Camp videos, and the first The Training Camp book,
which was published by a division of Simon & Schuster in Spring 1998.
MERCHANDISING
MERCHANDISE SELECTIONS. The Company's objective in selecting its merchandise
is to offer products that are reflective of the identities and interests of
its target customers. The Company's merchandising personnel utilize the
Company's proprietary databases and their niche market expertise to identify
merchandise in each market that appeal to their customers. By providing
customers with products that are (i) exclusive or hard-to-find, (ii)
proprietary or in limited editions and (iii) personalized or customized, the
Company believes it achieves higher gross margins and lower return rates than
those that generally prevail in the industry.
A critical element of the Company's merchandising strategy is to offer
proprietary and limited edition products. The Company works closely with its
vendors to develop and source such products. Many of the Company's brands
currently offer such products, including Command Performance, Competitive Edge
Golf, Childswork/Childsplay and Sportime. The Company has developed in-house
new product development expertise to create unique products which appeal to
the Company's niche market customers. Based on its experience, the Company
believes that proprietary and limited edition products have high gross
margins.
Personalized and customized products have already proven to be strong
sellers with high margin potential in The Music Stand, Gifts For Grandkids and
many of the sports catalogs. The Company is committed to further developing
its personalization capabilities and is building a 20,000-square-foot
customization facility (that is expected to be fully operational by August
1998) in its distribution center that will enable it to personalize and
customize most of its products by means of etching (for example, trophies and
awards), laser engraving (for example, desk accessories) and embroidery (for
example, caps and sweatshirts).
The Company continually adds new merchandise and refines existing
merchandise categories in an effort to promote additional purchases from
target customers and increase retention rates by responding to customers'
changing preferences. The Company has begun increasing the page counts of its
catalogs to accommodate the introduction of new, related or similar
merchandise and merchandise categories. The Company's merchandising personnel
continually evaluate the performance of the Company's existing products and
make merchandise placement and promotion decisions based on item quality,
sales trends, customer demand, performance histories, current inventory
positions and the projected success of each item. Merchandising personnel also
plan the introduction and testing of new items. Consequently, the Company's
merchandise mix is continually refined as new items are introduced and tested
and as items which do not meet the Company's performance standards are
replaced.
Satisfying customer preferences requires the Company to maintain a wide
assortment of products. Currently, the Company has 45,000 SKUs, with
capability to expand to 130,000 SKUs. This large capacity enables the Company
to offer significant depth and breadth of merchandise selection, particularly
in sports apparel. Licensed
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sports apparel is an example of a merchandise category that is not readily
available in a wide selection through traditional retailers, has high gross
margins and low return rates since it is generally non-fitted with limited
fashion risk.
PRODUCT PRESENTATION. Genesis Direct catalogs and websites include full
color photographs displaying the merchandise as well as product descriptions
and pricing information. Merchandise is described in a manner designed to
stimulate the reader's interest, highlight lifestyle and use of product and
convey the unique spirit of each item to the customer, thereby promoting the
purchase decision. Many of the catalogs and websites include additional
information of interest to the niche market customer. For example, several of
the sports catalogs include season game schedules and sports trivia and tips
and The Voyager's Collection includes travel tips. Merchandise narratives are
often presented in a thematic manner or "voice" designed to deliver the
catalog brand's essence to each customer and to personalize the catalog
shopping experience.
The Company has an in-house design team that designs new catalogs and
upgrades acquired catalogs. The in-house design team is responsible for all
catalog design and an in-house desktop publishing studio that controls all
aspects of the final digital preparation of the catalogs. These capabilities
allow the Company to preserve each catalog's distinctive character and also
allow the Company greater control of the catalog production schedule, which
the Company believes reduces the lead time necessary to produce catalogs and
reduces the costs of preparing pages for printing.
OPERATIONS
The Company has invested heavily to develop an infrastructure that
effectively integrates the call center, order entry, distributions,
fulfillment and inventory management functions.
CALL CENTER. The Company maintains a highly efficient, state-of-the-art call
center in Secaucus, New Jersey. The Company offers prompt, knowledgeable and
courteous order entry services through the use of its easy-to-remember toll-
free telephone numbers, which may be called 24 hours a day, seven days a week
to place orders, request a catalog, or make merchandise inquiries. The Company
has 450 customer service stations installed in its call center. During the
1997 holiday season, the Company had 551 full-time, part-time or seasonal
trained customer service representatives on staff. Once a call is received by
the Company, it is automatically routed to the best available customer service
representative who is knowledgeable about the particular catalog in question.
The Company closely tracks forecasted demand and hires and trains new customer
service representatives and seasonal customer service representatives as
required to maintain its service standards. All of the Company's customer
service representatives undergo a two-week training program and receive
ongoing training at "Genesis University," the Company's on-site training
facility. Customer service representatives are trained in responding to all
customer inquiries as well as in up-selling and cross-selling and are
compensated in part based on gross margins. Since becoming fully operational
in August 1997, the Company's call center handled approximately 1.5 million
calls and handled approximately 27,300 calls on its peak sales day.
The Company uses an integrated management information system that allows
telephone orders to be captured on-line and mail orders to be efficiently
entered. As the Company's sales representative processes the order, the
Company's on-line data processing system provides, among other things,
customer history information, merchandise availability information,
merchandise specifications, available substitutes and accessories, expected
shipping date and order number. Customers can pay with major credit cards,
checks or money orders. All credit charges are pre-authorized prior to
shipping the order and credit authorization occurs coincident with order
processing. The Company has also recently implemented a deferred billing
program for several of its catalogs that enables customers to defer payment
for merchandise over several months.
DISTRIBUTION AND ORDER FULFILLMENT. The Company's 500,000 square foot
distribution center in Memphis, Tennessee is efficiently integrated with the
Company's order entry systems to enable the Company to send out most orders on
the same day they are placed.
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Once a customer's telephone order is completed, the Company's computer
system forwards the order to the Company's distribution center, where all
necessary distribution and shipping documents are printed to facilitate
processing. Thereafter, the orders are prepared, packed and shipped
continually throughout the day with the last shipment for the day leaving the
distribution center at 1:30 a.m. EST. Shipped orders are bar-coded and scanned
and the merchandise and ship date are entered automatically into the customer
order file for access by sales agents. A system of conveyors automatically
routes totes and boxes carrying merchandise throughout the distribution center
for fulfillment of orders and replenishment of inventory. A unique feature of
the conveyor system design is its ability to rapidly receive, shelve and
integrate products of acquired companies into the distribution center. An
electronic link between the Company's distribution center and its headquarters
allows senior management to monitor its distribution center operations at any
time.
The distribution center is strategically placed at the hub of courier
services as well as convenient access to U.S. Postal Service priority mail all
serving domestic and international markets to permit rapid order fulfillment.
The distribution center's location near courier hubs enables the Company to
ship orders until midnight, and for an expedited delivery fee the customer can
receive merchandise by 8:00 a.m. the next day. Currently, approximately 90% of
the in-stock orders placed before 5:00 p.m. EST are shipped on the same day of
the order.
INVENTORY MANAGEMENT. The Company's broad assortment of products is
carefully controlled through sophisticated inventory management techniques. As
of December 27, 1997, the Company's inventory management system contained over
45,000 SKUs. Purchases are forecasted down to the SKU level using a database
system that takes into account historical category results, seasonality
models, market expectations and product and raw material lead times. The
Company believes that its centralized inventory management system enables it
to maintain high levels of inventory accuracy and to continuously measure and
analyze inventory levels and compare them against demand. This helps the
Company to lower inventory levels, increase turns, maintain high fill rates,
reduce mark-downs and increase gross margins. If an overstock position
develops, the Company acts quickly to dispose of the excess inventory at the
highest possible margin by moving the product through several promotional
distribution channels, including price promotions in current season catalogs,
end-of-season clearance catalogs and sales flyers in outbound packages.
The Company regularly evaluates the performance of its brands and catalog
mailings and adjusts its mailings in response to anticipated market demand.
Despite circulation adjustments and inventory forecasting techniques, the
Company has designed a process for selling any excess inventory. In March
1998, the Company launched Pro Sports Liquidators, a start-up catalog. Pro
Sports Liquidators, which is mailed primarily to the Company's less responsive
or discount driven customers, offers discounted merchandise selected from the
Company's various sports catalogs and is an important component of the
Company's inventory management for the sports market segment.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has adopted a "best of breed" philosophy and flexible systems
architecture as the foundation of its information systems strategy. The
Company has implemented a variety of widely used, state-of-the-art systems,
each uniquely qualified for use in a specific functional area. These systems
are widely used by leading companies in the direct marketing industry for
catalog management, order-taking (mail and telephone), Internet/electronic
commerce, order fulfillment, inventory management, inventory forecasting,
catalog production, and financial management. The systems are electronically
integrated to facilitate seamless data flow in support of the Company's
operations.
The Company's software systems operate on a variety of hardware platforms,
including Hewlett Packard 3000, Hewlett Packard 9000, IBM AS400 and Sun Sparc
systems. The Company believes its systems architecture, systems investment and
implementation of a Siemens telephone switch provide the Company with a
reliable, redundant and scaleable systems environment facilitating both
current operations and future growth.
The Company's telecommunications system strategy is designed to reduce the
risk of telephone delays and capacity constraints, as well as optimize the
routing of calls to the most skilled customer service representatives.
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In the event the call center is unable to receive incoming calls due to
factors such as natural disasters, equipment or electrical failures, the
Company's telecommunications system has the capacity to route calls to a third
party call service bureau to ensure that service interruptions can be
minimized.
The Company's information systems are engineered to provide quick response
and minimize the risk of data loss and operational delays due to system
failure. Critical processing systems operate in a redundant manner such that
all data is duplicated simultaneously on backup systems. In the event that one
of the Company's critical business systems fails, the Company is equipped to
transact business on a real-time back-up system with minimal downtime.
REGULATION
The direct response business as conducted by the Company is subject to the
Mail or Telephone Order Merchandise Trade Regulation and related regulations
promulgated by the Federal Trade Commission. While the Company believes it is
in compliance with such regulations, no assurance can be given that new laws
or regulations will not be enacted or adopted which might adversely affect the
Company's operations.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new
competitors as well as increased competition from established companies.
Although the Company believes that it does not compete directly with any
single company with respect to its entire range of merchandise, within each
merchandise category the Company has significant competitors and may face new
competition from new entrants or existing competitors who focus on market
segments currently served by the Company. These competitors include large
retail operations, including some with catalog operations, other catalog and
direct marketing companies and international competitors.
EMPLOYEES
As of April 10, 1998, the Company had approximately 800 full-time employees,
260 part-time employees, 35 seasonal employees and 30 consultants or temporary
employees. As of December 1997, the Company had approximately 850 full-time
employees, 370 part-time employees, 130 seasonal employees and 185 consultants
or temporary employees. During the Company's peak selling season, which
includes November and December, the Company utilizes a substantial number of
seasonal employees. None of the Company's employees is currently covered by
collective bargaining agreements. The Company considers its employee relations
to be excellent.
PROPERTIES
The Company leases a 500,000 square foot distribution center in Memphis,
Tennessee and 100,000 square feet of office space for its principal executive
and administrative offices and its call center in Secaucus, New Jersey. The
Memphis lease expires in 2007 and the Secaucus lease expires in 2005. In
addition, the Company currently leases smaller office and
warehouse/distribution space in several locations in the United States. The
Company intends to integrate the call center and distribution center
operations of these locations with its facilities in Memphis and Secaucus, but
may retain a small office presence in several of these locations. The Company
also leases office space in Windsor, England for its international
headquarters. The Windsor lease is terminable by either party upon three
months notice.
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.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL
The executive officers, directors and other key personnel of the Company and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Warren Struhl................ 36 Chairman of the Board of Directors,
President and Chief Executive Officer(1)(2)
Hunter C. Cohen.............. 41 Chief Operating Officer and a director(2)
David M. Sable............... 43 Chief Marketing Officer and a director(2)
Ronald R. Benanto............ 49 Vice President and Chief Financial Officer
Raphael S. Grunfeld.......... 51 Vice President, General Counsel and
Secretary
Edward Spiegel............... 59 Director
David W. Wiederecht.......... 42 Director(1)(2)
OTHER KEY PERSONNEL
James D. Abrams.............. 52 Vice President of Kids Marketing
Kathleen M. Davis............ 36 Vice President of Human Resources
George A. D'Amico............ 42 Vice President of Customer Service and
Sales
Dominic J. DiMascia.......... 38 Vice President of Information Systems
Linda C. Ireland............. 38 Vice President of Personalization and
Product Development
Alan J. Kipust............... 35 Vice President of Operations and
Institutional/Business-to-Business
Dale G. Marksberry........... 48 Vice President of Distribution Center
George J. Mollo Jr........... 46 Vice President of Merchandise Operations
and Inventory Control
Douglas S. Rose.............. 35 Vice President of Corporate Development
Mitchel E. Rothschild........ 43 Vice President of Sports Marketing
Stephen H. Samuels........... 48 Vice President of Alternate Media
Monica E. Schulze-Hodges..... 34 Vice President of Product Marketing
Charles S. Silver............ 44 Vice President of Gifts and Collectibles
Edward D. Wallo.............. 48 Vice President of International
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Executive Committee.
EXECUTIVE OFFICERS AND DIRECTORS
WARREN STRUHL. Mr. Struhl has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since its founding in
June 1995. He founded PaperDirect, Inc. in 1989 and served as its President
until he joined the Company. PaperDirect, Inc. was sold to Deluxe Corporation
in August 1993. From 1984 to 1989, Mr. Struhl was Vice President of JMB Realty
Corporation. Mr. Struhl is a director of CyberShop, Inc.
HUNTER C. COHEN. Mr. Cohen has served as Chief Operating Officer and a
director of the Company since its founding in June 1995. From 1993 until he
joined the Company, he served as Chief Financial Officer of PaperDirect. From
March 1990 to June 1993, Mr. Cohen was President of The Soundcoat Company,
Inc., a multinational noise control materials manufacturer.
DAVID M. SABLE. Mr. Sable has served as Chief Marketing Officer and a
director of the Company since its founding in June 1995. From 1990 to 1995, he
was the Executive Vice President and Director of Account Management at Young &
Rubicam. Mr. Sable served as a director of PaperDirect from 1989 to 1993. He
is a member of the U.S. Postal Service Marketing Advisory Board.
45
<PAGE>
RONALD R. BENANTO. Mr. Benanto has served as Vice President and Chief
Financial Officer of the Company since February 1998. From 1991 until December
1997, he served as Senior Vice President of Finance, Chief Financial Officer
and Treasurer of Viewlogic Systems, Inc., a publicly traded electronic design
automation software company. From 1988 to 1991, Mr. Benanto served as Vice
President of Finance and Operations and Chief Financial Officer of Symbolics,
Inc., a public artificial intelligence company.
RAPHAEL S. GRUNFELD. Mr. Grunfeld has served as Vice President, Secretary
and General Counsel of the Company since November 1995. From 1992 to 1995, Mr.
Grunfeld was General Counsel and Secretary to First Capital Asset Management,
Inc. and Executive Vice President of its operating subsidiaries including
newspaper, media, money management and public companies. From 1990 to 1992,
Mr. Grunfeld was an attorney with Baer Marks & Upham and from 1986 to 1990,
Mr. Grunfeld was an attorney with Skadden, Arps, Slate, Meagher & Flom LLP.
EDWARD SPIEGEL. Mr. Spiegel has served as a director of the Company since
January 1998. Since December 1996, Mr. Spiegel has served as a limited partner
and consultant to The Goldman Sachs Group, L.P. From December 1984 to November
1996, Mr. Spiegel served as a general partner of The Goldman Sachs Group, L.P.
where he was responsible for the New York Institutional Sales Department.
DAVID W. WIEDERECHT. Mr. Wiederecht has served as a director of the Company
since June 1996. Since 1978, Mr. Wiederecht has served in various capacities
at General Electric Company ("GE"); currently he serves as Vice President-
Alternative Investment of GE Investment Corporation, a subsidiary of GE. Mr.
Wiederecht is a director of Elephant & Castle Group, Inc.
Directors of the Company are elected by holders of Common Stock for a three-
year term, and are divided into three classes with staggered terms that
currently have expiration dates as follows: (a) Class A Directors--1999, (b)
Class B Directors--2000 and (c) Class C Directors--2001. As of the date
hereof, Mr. Cohen serves as Class A Director, Mr. Sable and Mr. Spiegel serve
as Class B Directors and Mr. Struhl and Mr. Wiederecht serve as Class C
Directors. The Company intends to add two additional directors as soon as
practicable following this offering but has not yet identified potential
nominees for those positions.
OTHER KEY PERSONNEL
JAMES D. ABRAMS. Mr. Abrams has served as Vice President of Kids Marketing
since October 1996. From December 1991 to September 1996, Mr. Abrams served in
various positions with Biobottoms, Inc., a direct marketer of children's
apparel and, most recently, as its President. Mr. Abrams' prior experience
includes senior financial and operational positions at Williams-Sonoma, Inc.
and The Gap. He was co-founder and President of Kinderzimmer, a start-up
venture specializing in children's playthings and furniture.
KATHLEEN M. DAVIS. Ms. Davis has served as Vice President of Human Resources
since June 1995. From November 1993 to May 1995, she was Director of Human
Resources for Noble Centers, a not-for-profit social service agency serving
people with developmental disabilities. From May 1989 to November 1993, she
worked for Resort Condominiums International, an international vacation
exchange and travel company where she held positions in corporate recruitment,
human resources consulting and employment services management.
GEORGE A. D'AMICO. Mr. D'Amico has served as Vice President of Customer
Service and Sales since January 1997. From 1991 to January 1997, he served in
various capacities, including as Director of Corporate Sales and Vice
President of Sales and Distribution of Micro Warehouse, Inc., a computer
catalog company.
DOMINIC J. DIMASCIA. Mr. DiMascia has served as Vice President of
Information Systems since August 1996. From November 1993 to July 1996, Mr.
DiMascia was Vice President Product Development for Smith Gardner &
Associates, a software vendor for the direct marketing and catalog industry.
From January 1991 to November 1993, Mr. DiMascia was President of Target
Information Systems Inc., a catalog management systems vendor. Prior to that,
Mr. DiMascia also held positions in applications development and client
services for Hanover Direct, Inc., Coral Group and QVC Network, Inc.
46
<PAGE>
LINDA C. IRELAND. Ms. Ireland has served as Vice President of
Personalization and Product Development since joining the Company in September
1997. From June 1988 to August 1997, Ms. Ireland served in various capacities
at Deluxe Corporation, including as Group Product Manager of Deluxe Business
Forms and Supplies and as Director of Merchandising and Business Development
at PaperDirect.
ALAN J. KIPUST. Mr. Kipust has served as Vice President of Operations since
joining the Company in October 1997 and has also served as Vice President of
Institutional/Business-to-Business since January 1998. From March 1996 to
September 1997, Mr. Kipust was an Executive Consultant at Banker's Trust. From
1989 to 1995 he was Senior Vice President of PaperDirect.
DALE G. MARKSBERRY. Mr. Marksberry has served as Vice President of the
Distribution Center since January 1997. From April 1995 to January 1997, Mr.
Marksberry served as Vice President/General Manager of Logistics for Nobody
Beats The Wiz, where he was responsible for the construction and operation of
distribution centers. From January 1993 to April 1995, Mr. Marksberry was
Operations Manager of Sears Logistics Services (SLS) distribution center in
Delano, CA which serviced approximately one third of Sears U.S. retail stores.
From 1991 to January 1993, Mr. Marksberry served as National Manager of Sears
Store Support Transportation, where he supervised the liquidation of the Sears
support fleet.
GEORGE J. MOLLO, JR. Mr. Mollo has served as Vice President of Merchandise
Operations and Inventory Control since September 1997. From January 1997 to
September 1997, Mr. Mollo worked as an inventory operations consultant. From
May 1996 to January 1997, Mr. Mollo was Director of Merchandise Planning and
Operations of Time Warner Music Sound Exchange. From January 1994 to December
1995, he was Director of Merchandise Operations of Disney Direct, Inc. From
1985 to 1993, he served in various capacities at J. Crew Group Inc., including
as Vice President of Merchandise Planning and Inventory Operations of J. Crew,
Inc. from November 1990 to December 1993.
DOUGLAS S. ROSE. Mr. Rose has served as Vice President of Corporate
Development since he joined the Company in June 1996. From April 1995 to May
1996, Mr. Rose was an independent investment banker providing merger and
acquisition advisory services to middle-market companies. From June 1993 to
March 1995, Mr. Rose was Managing Director of Grendel Capital Co., a private
investment firm. From March 1989 to June 1993, Mr. Rose was Vice President of
Niederhoffer and Niederhoffer, Inc., a merger and acquisition advisory firm.
MITCHEL E. ROTHSCHILD. Mr. Rothschild has served as Vice President of Sports
Marketing since February 1997 and served as a consultant to the Company from
November 1996 to February 1997. Mr. Rothschild was the General Manager of
Viewer's Edge from January 1991 to October 1996. From 1984 to 1991, Mr.
Rothschild served as Vice President of Prentice Hall Media, a direct marketer
of educational media. From 1979 to 1984, Mr. Rothschild served in the
Circulation Department at Time Inc. and became Circulation Director in 1984.
STEPHEN H. SAMUELS. Mr. Samuels has served as Vice President of Alternate
Media since he joined the Company in July 1996. From 1989 to 1996, Mr. Samuels
served as President of NMI, a television production company. Mr. Samuels was
an executive producer of television programming and documentary features that
have won awards including the Academy Award.
MONICA E. SCHULZE-HODGES. Ms. Schulze-Hodges has served as Vice President of
Marketing since April 1996. From October 1991 to February 1996, she served in
various capacities, including as Vice President of Marketing, at PaperDirect.
From June 1985 to August 1989, Ms. Schulze-Hodges served in various
capacities, including as Vice President of Retail and Mail Order, for
Inkadinkado, a manufacturer/distributor of decorative rubber stamps.
CHARLES S. SILVER. Mr. Silver has served as Vice President of Gifts and
Collectibles since May 1997. Mr. Silver was Senior Vice President and General
Manager of Time Warner Music Sound Exchange Catalog from January 1996 to March
1997. From October 1991 to December 1995, Mr. Silver served in various
capacities, including as Vice President and General Manager, of Disney Direct,
Inc., which included the Disney catalog, Play Clothes, Child Craft and Just
Kids catalogs. From October 1984 to October 1991, Mr. Silver served in various
capacities at J. Crew, including as Vice President of Marketing.
47
<PAGE>
EDWARD D. WALLO. Mr. Wallo has served as Vice President of International
since November 1996. From July 1994 to October 1996, Mr. Wallo worked as an
international marketing consultant. From 1977 to 1994 (with the exception of
1982 to 1984), Mr. Wallo served in various capacities, including as Country
General Manager and Vice President of Marketing, at Inmac Corp., a business-
to-business catalog company, and resided in six countries: the United Kingdom,
France, Germany, Italy, Japan and the U.S.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Executive Committee and a
Compensation Committee. Subject to the supervision of the Board of Directors,
the Executive Committee is responsible for the operations of the Company in
the ordinary course of business. The Executive Committee is composed of
Messrs. Struhl, Cohen, Sable and Wiederecht. The Compensation Committee is
responsible for reviewing and establishing the compensation structure for the
Company's officers and directors, including salary rates, participation in
incentive compensation and benefit plans, 401(k) plans, stock option and
purchase plans and other forms of compensation, and, after the effective date
of the initial registration of the Company's Common Stock under Section 12(g)
of the Securities Exchange Act of 1934 (the "Securities Exchange Act"),
administering the Company's Stock Option/Stock Issuance Plan. See "--Stock
Option and Incentive Plans." The Compensation Committee is composed of Messrs.
Struhl and Wiederecht.
Subsequent to this offering, the Board of Directors will establish an Audit
Committee. The Audit Committee will be comprised solely of independent
directors and will be responsible for recommending the firm to be appointed as
independent accountants to audit the Company's financial statements,
discussing the scope and results of the audit with the independent
accountants, reviewing the functions of the Company's management and
independent accountants with respect to the Company's financial statements and
performing such other related duties and functions as are deemed appropriate
by the Audit Committee and the Board of Directors.
DIRECTORS COMPENSATION
No compensation has been paid by the Company to its directors prior to this
offering. Upon completion of the offering, directors who are not employees of
the Company will receive compensation to be determined by the Board of
Directors.
48
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's four most highly compensated executive
officers other than the Chief Executive Officer whose total annual salaries
and bonuses exceeded $100,000 for services rendered in all capacities to the
Company during Fiscal 1997. Fiscal 1997 covers the period from March 30, 1997
through March 28, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION (1)
--------------------------- ---------- --------------------- ----------------
<S> <C> <C> <C> <C>
Warren Struhl
Chief Executive Officer .... $300,000 -- 137,500 $16,205
Hunter Cohen
Chief Operating Officer..... 300,000 -- 137,500 18,765
David Sable
Chief Marketing Officer..... 300,000 -- 137,500 22,289
Barry Curtis
Chief Financial Officer(2).. 183,333 $ 5,000 -- 3,147
Raphael Grunfeld
General Counsel............. 175,000 5,000 -- 10,583
</TABLE>
- --------
(1) Includes (a) Company contributions under the Company's 401(k) Plan of
$1,731 for each of Messrs. Struhl, Cohen and Sable and of $4,750 for Mr.
Grunfeld, (b) Company payments of health insurance premiums of $4,309 for
each of Messrs. Struhl, Cohen, Sable and Grunfeld and of $3,147 for Mr.
Curtis and (c) Company payments of premiums on life insurance of $10,165
for Mr. Struhl, $12,725 for Mr. Cohen, $16,249 for Mr. Sable and $1,525
for Mr. Grunfeld, the value of each of which belongs in part to the
Company and in part to the individuals.
(2) Mr. Curtis resigned as Chief Financial Officer of the Company in February
1998. Ronald Benanto has served as Chief Financial Officer of the Company
since February 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
to each of the executives named in the Summary Compensation Table during
Fiscal 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF SHARES PERCENTAGE OF APPRECIATION FOR
NAME UNDERLYING OPTIONS GRANTED OPTION TERM(2)
- ---- OPTIONS TO EMPLOYEES EXERCISE PRICE EXPIRATION ---------------------
GRANTED DURING FISCAL YEAR PER SHARE DATE 5% 10%
---------------- ------------------ -------------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warren Struhl........... 137,500(1) 12.5% $16.36 March 2, 2008 $193,342 $1,640,614
Hunter Cohen............ 137,500(1) 12.5% 16.36 March 2, 2008 193,342 1,640,614
David Sable............. 137,500(1) 12.5% 16.36 March 2, 2008 193,342 1,640,614
</TABLE>
- --------
(1) This option becomes fully exercisable on March 2, 1999.
(2) The amounts shown in these columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Securities and Exchange
Commission's executive compensation disclosure rules and are not intended
to forecast appreciation of the Common Stock.
49
<PAGE>
Upon the consummation of this offering, the Company will grant to each of
Messrs. Struhl, Cohen and Sable options to purchase a total of 385,000 shares
of Common Stock as follows: (1) options to purchase 165,000 shares with an
exercise price equal to the greater of $23.64 and the Price to Public shown on
the cover page of this Prospectus, exercisable on March 2, 2000 and (2)
options to purchase 220,000 shares with an exercise price equal to the greater
of $30.91 and the Price to Public shown on the cover page of this Prospectus
exercisable on March 2, 2001.
FISCAL YEAR-END OPTION VALUES
To date, no options have been exercised by the executives named in the
Summary Compensation Table. The following table sets forth certain information
concerning the number of shares covered by both exercisable and unexercisable
stock options as of March 31, 1998. Also reported are values of "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT VALUE OF IN-THE-MONEY
TO UNEXERCISED OPTIONS AT OPTIONS AT FISCAL YEAR
FISCAL YEAR-END END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Warren Struhl............... 0 137,500 $0 $0
Hunter Cohen................ 0 137,500 0 0
David Sable................. 0 137,500 0 0
Barry Curtis................ 5,500 0 0 0
Raphael Grunfeld............ 5,500 22,000 0 0
</TABLE>
- --------
(1) Based on estimated fair market value of $10.91 per share on March 31,
1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Warren Struhl, David Sable and Hunter Cohen (the "Senior
Executives") to serve as Chief Executive Officer, Chief Marketing Officer and
Chief Operating Officer, respectively, from March 1, 1998 through February 28,
2001. The term of the Employment Agreements will be extended automatically for
additional one-year periods on March 1 of each year beginning in 1999, unless
the Company provides notice of termination at least 90 days prior to any such
extension date. In addition, the Employment Agreements will remain in effect
for at least 24 months following a Change of Control (as defined in the
Employment Agreements). The Company has agreed to nominate each of the Senior
Executives as a director of the Company during the period from March 1, 1998
through February 28, 2001.
Pursuant to the Employment Agreements, each of the Senior Executives
receives an annual base salary of $300,000, increasing to $400,000 upon the
consummation of this offering, subject to annual review and increase. In
addition, (1) each Senior Executive is entitled to receive a bonus of up to
50% of his annual base salary depending on performance results and (2) the
Company pays annual premiums on split-dollar life insurance policies in the
amount of $4,000,000 for each of the Senior Executives. The Employment
Agreements further provide for grants to each of the Senior Executives of
options to purchase 522,500 shares of Common Stock as described above under
the heading "Option Grants in Last Fiscal Year."
If a Senior Executive's employment is terminated either by the Company
without Cause (as defined in the Employment Agreements) or by such Senior
Executive for Good Reason (as defined in the Employment Agreements), the
Company shall pay to such Senior Executive two times the Senior Executive's
annual base salary plus two times the highest annual bonus paid to the Senior
Executive during the 36-month period ending the date of termination.
50
<PAGE>
If the Senior Executive's employment is terminated by the Company for Cause,
or by the Senior Executive without Good Reason, then for a period of one year
after the termination of his employment, the Senior Executive may not engage
in any business which competes with the business conducted by the Company.
If the Senior Executive terminates his employment with the Company without
Good Reason, then for a period of two years after such termination, or for a
period of one year after his employment is terminated for any other reason,
the Senior Executive may not solicit or hire any employee of the Company.
STOCK OPTION PLAN
The Board of Directors and the Company's stockholders adopted the Genesis
Direct Long-Term Incentive Plan in February 1997, and adopted amendments to
such plan in December 1997 and April 1998 (as so amended, the "Option Plan").
As of the consummation of this offering, a total of 4,125,000 shares of Common
Stock will be reserved for issuance upon exercise of outstanding options under
the Option Plan. The purpose of the Option Plan is to attract and retain
qualified personnel and to provide additional incentive to executive and other
key employees of the Company.
The Option Plan provides for the granting to executives and other key
employees of the Company incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, and non-
qualified stock options, stock appreciation rights, restricted stock,
performance shares and units and other stock-based awards. To date, the
Company has granted only incentive stock options and non-qualified stock
options under the Option Plan. The Option Plan is administered by the
Compensation Committee which determines the terms of the options granted under
the Option Plan, including the exercise price, number of shares subject to the
option and exercisability. The exercise price may not be less than the fair
market value as of the date of grant of the shares subject to option and the
term of the option may not exceed ten years. Generally, unless the
Compensation Committee otherwise determines, no option may be transferred by
the optionee other than by will or the laws of descent or distribution. Each
option may be exercised during the lifetime of the optionee only by the
optionee.
As of April 15, 1998, options to purchase 1,598,162 shares of Common Stock
were outstanding under the Option Plan at a weighted average exercise price of
$12.32 per share.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's proposed 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), was approved by the Board of Directors and the Company's
stockholders in April 1998. The Stock Purchase Plan is intended to qualify as
an "employee stock purchase plan" under Section 423 of the Code in order to
provide employees of the Company with an opportunity to purchase Common Stock
through payroll deductions. An aggregate of 250,000 shares of Common Stock has
been reserved for purchase under the Stock Purchase Plan, subject to
adjustment in the event of a stock split, stock dividend or other similar
change in the Common Stock or the capital structure of the Company. All
employees of the Company (and employees of "subsidiary corporations" of the
Company (as defined in the Code) designated by the administrator of the Stock
Purchase Plan) whose customary employment is for more than five months in a
calendar year and 20 hours per week are eligible to participate in the Stock
Purchase Plan, subject to a six month waiting period after hiring. Non-
employee directors and consultants, as well as employees who are subject to
the rules or laws of a foreign jurisdiction that prohibit or make impractical
the participation in the Stock Purchase Plan, are not eligible to participate
in the Stock Purchase Plan.
The Stock Purchase Plan designates Offer Periods and Exercise Dates. During
an Offer Period, participating employees may use payroll deductions to create
a fund that will be applied to purchase shares of Common Stock. Offer Periods
are periods of up to 27 months in duration. The initial Offer Period may begin
on the date of this Prospectus. Additional Offer Periods may commence from
time to time thereafter and may overlap an Offer period already in progress.
"Exercise Dates" are the dates on which the funds accumulated during the Offer
Period are applied to purchase Common Stock. Exercise Dates occur at six-month
intervals.
51
<PAGE>
On the first day of each Offer Period, a participating employee is granted
the right to purchase shares of Common Stock. During the Offer Period,
deductions are made from the pay of participants in amounts authorized by them
up to a statutory limit, and are credited to their accounts under the Stock
Purchase Plan. On each Exercise Date, the funds in the participant's account
are used to purchase shares of Common Stock. The price per share of such
Common Stock is determined using a formula established before the beginning of
the Offer Period, and is a percentage between 85% and 100% of the fair market
value of the Common Stock on the first day of the Offer Period or the Exercise
Date or at such percentage of the lesser of the price on both such dates. The
participant's purchase right is exercised in this manner on every Exercise
Date arising in the Offer Period unless the participant withdraws from the
Stock Purchase Plan before that date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay, exclusive of bonuses, overtime, shift-
premiums or commissions. Participants may not make direct cash payments to
their accounts. The maximum amount of shares of Common Stock that a
participant may purchase under the Stock Purchase Plan during the calendar
year is $25,000.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate
or amend the Stock Purchase Plan (subject to specified restrictions) and
otherwise to administer the Stock Purchase Plan and to resolve all questions
relating to the administration of the Stock Purchase Plan. In the event of a
merger of the Company with or into another corporation, the sale of
substantially all of the assets of the Company, or certain other transactions
in which the stockholders of the Company before the transaction own less than
50% of the total combined voting power of the Company's outstanding securities
following the transaction, the administrator of the Stock Purchase Plan may
elect to shorten the Offer Period then in progress.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Struhl, who is Chairman of
the Board of Directors, President and Chief Executive Officer of the Company.
No other member of the Compensation Committee was at any time during the
fiscal year ended March 29, 1997, or at any other time, an officer or employee
of the Company.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 25, 1996, the Company entered into a Note and Stock Purchase
Agreement (as amended, the "Note and Stock Purchase Agreement") with GEIPPP II
and GDLP. Pursuant to the Note and Stock Purchase Agreement, between June 1996
and April 1997, the Company issued (i) to GEIPPP II, an aggregate of 2,750,000
shares of Common Stock and $30.0 million principal amount of Debentures, in
consideration of $40.0 million in cash and (ii) to GDLP, an aggregate of
6,105,000 shares of Common Stock, in consideration of $20.0 million in cash
and $2.2 million in value by contribution of GDLP's interest in Genesis Direct
L.L.C., the Company's predecessor. Upon consummation of this offering, $9.75
million principal amount of GEIPPP II's Debentures will be converted into
2,331,521 shares of Common Stock and approximately $28.3 million from the
proceeds of this offering will be used to redeem the remaining amount of the
Debentures. Following such conversion and redemption, the Company will no
longer have any obligations under the Debentures, but GEIPPP II will continue
to be a principal stockholder of the Company.
On September 30, 1997, the Company entered into a Stock Purchase Agreement
("Stock Purchase Agreement") with certain investors, including GEIPPP II,
GDLP, Genesis Direct II, L.P. ("GDLP II"), First Union Capital Partners, Inc.
("First Union"), Strategic Investment Partners, Ltd. and Invemed Associates,
Inc., one of the underwriters of this offering, pursuant to which such
investors purchased an aggregate of 71,358 shares of Series A Preferred Stock
from the Company for an aggregate purchase price of $71,358,000. The Stock
Purchase Agreement contemplated the sale of additional shares of Series A
Preferred Stock. On December 29, 1997, the Stock Purchase Agreement was
supplemented to reflect the sale by the Company of an additional 22,942 shares
of Series A Preferred Stock for an aggregate purchase price of $22,942,000 to
certain investors, including the Warren Struhl Family Partnership and Genesis
Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., one of the
underwriters of this offering. The 94,300 shares of Series A Preferred Stock
issued pursuant to the Stock Purchase Agreement will automatically convert
into 8,644,156 shares of Common Stock immediately prior to consummation of
this offering.
During April 1998, the Company issued to GEIPPP II Bridge Notes in the
amount of $7.65 million (with original issue discount of $300,000). The
Company will use approximately $7.75 million of the net proceeds of this
offering to prepay the entire $7.65 million principal amount of the Bridge
Notes, together with accrued interest thereon at a rate of 15% per annum.
As noted above, GDLP, a principal stockholder of the Company, owns
6,105,000 shares of Common Stock. In addition, GDLP owns 2,732 shares of
Series A Preferred Stock which will automatically be converted into 250,433
shares of Common Stock upon consummation of this offering. Pursuant to the
GDLP partnership agreement, Genesis Direct Management LLC ("GD Management"),
the general partner of GDLP, has voting power over all of the shares of stock
owned by GDLP. The voting members of GD Management are Warren Struhl, Hunter
Cohen, David Sable, Ted Struhl, the Warren Struhl Family Partnership and the
Ted Struhl Family Partnership. Warren Struhl, Hunter Cohen and David Sable are
directors and executive officers of the Company, Ted Struhl is Warren Struhl's
brother, Warren Struhl is the managing partner of the Warren Struhl Family
Partnership and Ted Struhl is the managing partner of the Ted Struhl Family
Partnership.
GD Management is also the general partner of GDLP II, which owns 8,709
shares of Series A Preferred Stock which will automatically be converted into
798,325 shares of Common Stock immediately prior to consummation of this
offering. Pursuant to the GDLP II partnership agreement, GD Management has
voting power over all of the shares of stock owned by GDLP II.
David Wiederecht and Edward Spiegel, directors of the Company, were
designated as directors by GEIPPP II pursuant to the Note and Stock Purchase
Agreement. Mr. Wiederecht is Vice President--Investments for the Investment
Division of General Electric Company, an affiliate of GE. Mr. Spiegel is a
limited partner of The Goldman Sachs Group, L.P., which is an affiliate of
Goldman, Sachs & Co., one of the underwriters of this offering. The Company
and GEIPPP II have agreed that, following the consummation of this offering
and for so long as GEIPPP II continues to own certain threshold amounts of
shares of the Company, GEIPPP II may continue to designate two nominees to the
Board of Directors.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of May 4, 1998, except as otherwise
provided, information with respect to beneficial ownership of the Common Stock
by (i) each director, (ii) each executive officer named in the Summary
Compensation Table under "Management", (iii) the executive officers and
directors as a group and (iv) each person known to the Company who
beneficially owns 5% or more of the outstanding shares of the Common Stock.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned. Unless
otherwise indicated, the address of each person listed below is c/o Genesis
Direct, Inc., 100 Plaza Drive, Secaucus, NJ 07094.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING THE OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ------------------------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
GE Investment Private
Placement Partners II, a
Limited Partnership(1)..... 8,117,979 40.1% -- 8,117,979 27.1%
Genesis Direct, L.P.(2)(3).. 6,355,433 36.0 640,031 3,221,848 10.8
Genesis Direct II,
L.P.(2)(3)................. 798,325 4.5 44,253 -- --
Genesis Direct Management
L.L.C.(2)(3)............... 7,153,758 40.5 -- 3,963,701 13.3
First Union Capital Part-
ners, Inc.(6).............. 1,100,000 6.2 -- 1,100,000 3.7
Genesis Acquisition
Corp.(7)................... 1,375,000 7.8 -- 1,375,000 4.6
Strategic Investment Part-
ners Ltd.(8)............... 1,358,041 7.7 679,020 679,021 2.3
Stan Druckenmiller(9)....... 9,166 * 4,583 4,583 *
Arminio Fraga(9)............ 2,291 * 1,145 1,146 *
Gerald Kerner(9)............ 1,375 * 687 688 *
Paul McNulty(9)............. 2,291 * 1,145 1,146 *
Sean Warren(9).............. 1,833 * 916 917 *
WERCO--Genesis Direct
L.L.C.(9).................. 75,808 * 18,221 57,587 *
NATC Holding Company,
Ltd.(9).................... 18,333 * 18,333 -- --
Mark Graham(9).............. 91,666 * 91,666 -- --
Ted Struhl(3)(4)............ 1,448,636 8.2 -- 802,649 2.7
Warren Struhl(3)(4)(5)...... 2,746,352 15.6 -- 1,531,897 5.2
Hunter Cohen(3)(4)(5)....... 1,100,963 6.2 -- 610,014 2.1
David Sable(3)(4)(5)........ 1,100,963 6.2 -- 610,014 2.1
Raphael Grunfeld(3)(10)..... 6,385 * -- 6,385 *
Barry Curtis(11)............ 5,500 * -- 5,500 *
Edward Spiegel.............. -- -- -- -- --
David Wiederecht(1)......... -- -- -- -- --
All current officers and
directors as a group
(7 persons)(3)(4)(5)....... 4,960,163 28.1 -- 2,763,808 9.3
</TABLE>
- --------
*Less than 1%.
(1) Includes (1) 30,125 shares of Series A Preferred Stock which will be
converted into 2,761,458 shares of Common Stock immediately prior to the
consummation of this offering, (2) warrants to purchase 275,000 shares of
Common Stock which are currently exercisable and (3) 2,331,521 shares of
Common Stock which will be issued upon the conversion of a portion of the
Debentures immediately prior to the consummation of this offering. Mr.
Wiederecht, a Director of the Company, is an officer of an affiliate of
GEIPPP II. Mr. Wiederecht disclaims beneficial ownership of the shares
owned by GEIPPP II. The address of GEIPPP II is c/o GE Investment
Management Incorporated, General Electric Investment Corporation, 3003
Summer Street, Stamford, CT 06904.
(2) The shares beneficially owned before this offering (a) by GDLP include
2,732 shares of Series A Preferred Stock, which will be converted into
250,433 shares of Common Stock, and (b) by GDLP II consist of 2,903 shares
of Series A Preferred Stock, which will be converted into 798,325 shares
of Common Stock, such conversions to be effective immediately prior to the
consummation of this offering. GD Management is the
54
<PAGE>
General Partner of each of GDLP and GDLP II as well as a limited partner of
GDLP. By virtue of its position as General Partner of GDLP and GDLP II, GD
Management may be deemed to beneficially own all of the shares owned by
GDLP and GDLP II.
(3) In connection with this offering, GDLP is distributing a portion of its
interest, and GDLP II is distributing all of its interest, in the Common
Stock on a pro rata basis to its respective partners, who have been
granted the right to have GDLP and GDLP II sell in this offering all of
the shares they would receive in such distribution and receive the
proceeds in cash. Of the 3,133,585 shares of Common Stock being
distributed to the partners of GDLP, 640,031 shares are being sold in
this offering, and of the 798,325 shares of Common Stock being
distributed to the partners of GDLP II, 44,253 shares are being sold in
this offering. GD Management has elected to retain all of the shares of
Common Stock it will receive in the distribution.
(4) The voting members of GD Management are Warren Struhl, Hunter Cohen,
David Sable, Ted Struhl, and certain family trusts and partnerships of
such persons. By virtue of their voting interests in GD Management, each
of Warren Struhl, Hunter Cohen, David Sable and Ted Struhl may be deemed
to beneficially own that portion of the total number of shares of Common
Stock held by GDLP and GDLP II equal to his percentage interest in GD
Management. However, each of them disclaims beneficial ownership of the
shares beneficially owned by the other partners of GDLP and GDLP II. For
Warren Struhl, the number of shares listed includes 250 shares of Series
A Preferred Stock, owned by a partnership for the benefit of Warren
Struhl's family, which will be converted into 22,916 shares of Common
Stock immediately prior to the consummation of this offering.
(5) Messrs. Struhl, Sable and Cohen are not selling any shares in this
offering. The reduction in their beneficial ownership after the offering
is due to the distribution of shares by GDLP and GDLP II. As described
above, through their respective interests in GD Management, Messrs.
Struhl, Sable and Cohen have voting and dispositive rights over certain
of the shares held by GDLP and GDLP II (including those that are
beneficially owned by the other partners of GDLP and GDLP II).
Accordingly, when shares are distributed by GDLP and GDLP II, Messrs.
Struhl, Sable and Cohen will have voting and dispositive rights with
respect to fewer shares. However, their pecuniary interest in the Company
will not change as a result of such distribution.
(6) The number of shares beneficially owned before this offering consists of
12,000 shares of Series A Preferred Stock which will be converted into
1,100,000 shares of Common Stock immediately prior to the consummation of
this offering. The address of First Union Capital Partners, Inc. is One
First Union Center, 301 S. College Street, 5th Floor, Charlotte, NC
28288-0732.
(7) The number of shares beneficially owned before this offering consists of
15,000 shares of Series A Preferred Stock which will be converted into
1,375,000 shares of Common Stock immediately prior to the consummation of
this offering. The address of Genesis Acquisition Corp. is c/o Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167.
(8) The number of shares beneficially owned before this offering consists of
14,815 shares of Series A Preferred Stock which will be converted into
1,358,041 shares of Common Stock immediately prior to the consummation of
this offering. The address of Strategic Investments is c/o Curacao
International Trust Company N.V., Kaya Flamboyan 9, Willemstad, Curacao,
Netherlands Antilles.
(9) For each of Stan Druckenmiller, Arminio Fraga, Gerald Kerner, Paul
McNulty, Sean Warren, WERCO--Genesis Direct L.L.C., NATC Holding Company,
Ltd. and Mark Graham, the number of shares listed consists of shares of
Series A Preferred Stock which will be converted into shares of Common
Stock immediately prior to the consummation of this offering.
(10) Consists of (1) 5,500 shares of Common Stock issuable upon the exercise
of currently exercisable options granted to Mr. Grunfeld and (2) pursuant
to Mr. Grunfeld's limited partnership interest in GDLP, 885 shares of
Common Stock owned by GDLP prior to this offering, of which 517 will be
distributed to Mr. Grunfeld as shares upon the consummation of this
offering. Mr. Grunfeld disclaims beneficial ownership of the shares owned
by GDLP.
(11) Consists of 5,500 shares of Common Stock issuable upon the exercise of
currently exercisable options granted to Mr. Curtis.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of this offering, the Company's Certificate of
Incorporation and By-laws will be amended and restated in their entirety. The
following description of the Company's capital stock and certain provisions of
such Amended and Restated Certificate of Incorporation (the "Restated
Certificate of Incorporation") and such Amended and Restated By-laws (the
"Restated By-laws") is qualified in its entirety by the provisions of such
Certificate of Incorporation and such By-laws (which are included as exhibits
to the Registration Statement of which this Prospectus is a part).
Immediately prior to the consummation of this offering, the Company effected
a 275-for-1 stock split of its current outstanding Common Stock. The Restated
Certificate of Incorporation authorizes 275,000,000 shares of Common Stock,
par value $0.01 per share, and 500,000 shares of preferred stock, par value
$0.01 per share (the "Preferred Stock").
COMMON STOCK
There will be 29,728,660 shares of Common Stock outstanding upon completion
of this offering.
All outstanding shares of Common Stock are, and the shares offered hereby
will be, fully paid and nonassessable. The holders of Common Stock are
entitled to one vote for each share held of record on all matters voted upon
by stockholders and may not cumulate votes. Thus, the owners of a majority of
the Common Stock outstanding may elect all of the directors if they choose to
do so, and the owners of the balance of such shares would not be able to elect
any directors. Subject to the rights of holders of any future series of
undesignated Preferred Stock that may be designated, each share of outstanding
Common Stock is entitled to participate equally in any distribution of net
assets made to the stockholders in a liquidation, dissolution or winding up of
the Company and is entitled to participate equally in dividends as and when
declared by the Board of Directors. There are no redemption, sinking fund,
conversion or preemptive rights with respect to the shares of Common Stock.
All shares of Common Stock have equal rights and preferences.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 500,000 shares of Preferred Stock in one or more
series with such designations and such powers, preferences and rights, and
such qualifications, limitations or restrictions (which may differ with
respect to each series) as the Board of Directors may fix by resolution.
The Board of Directors is empowered to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences).
Accordingly, the Board of Directors, without stockholder approval, may issue
shares of Preferred Stock with terms that could adversely affect the voting
power and other rights of holders of Common Stock.
On September 29, 1997, the Company filed a Certificate of Designation
designating Series A Preferred Stock. In September and December 1997, the
Company issued 94,300 shares of Series A Preferred Stock, all of which will
convert automatically upon the consummation of this offering into an aggregate
of 8,644,156 shares of Common Stock. Accordingly, upon the consummation of
this offering, no shares of Preferred Stock will be outstanding, and the
Company has no present plans to issue any shares of Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Restated Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable to the company or its
stockholders for monetary damages for breach of their fiduciary duties as
directors, except liability for (i) any breach of their duty of loyalty to the
company or its stockholders, (ii) acts or omissions not in good faith or
56
<PAGE>
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions or
(iv) any transaction from which the directors derived an improper personal
benefit. The Restated Certificate of Incorporation also provides that the
Company shall indemnify any director or officer to the maximum extent provided
by Delaware law, and that such right of indemnification shall continue as to a
person who has ceased to be a director or officer of the Company.
Responsibility for determinations with respect to such indemnification will be
made by the Board of Directors. In addition the Company intends to enter into
indemnity agreements (the "Indemnity Agreements") with its directors and
officers that further indemnifies them to the maximum extent permitted by
Delaware law.
The limited liability provisions in the Restated Certificate of
Incorporation with respect to directors, and the indemnification provisions
with respect to directors and officers in the Restated Certificate of
Incorporation and pursuant to the Indemnity Agreements may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty and also may have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. Furthermore, a stockholder's investment in the Company may be
adversely affected to the extent that costs of settlement and damage awards
against the Company's directors and officers are paid by the Company pursuant
to the indemnification provisions contained in the Restated Certificate of
Incorporation described above.
CERTAIN PROVISIONS OF DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION
AND BY-LAW PROVISIONS
THE DELAWARE BUSINESS COMBINATION ACT. Upon completion of this offering, the
Company will be subject to Section 203 (the "Delaware Business Combination
Act") of the General Corporation Law of the State of Delaware ("DGCL") which
imposes a three-year moratorium on business combinations between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an "interested stockholder" (in general,
stockholder owning 15% or more of a corporation's outstanding voting stock) or
an affiliate or associate thereof unless (a) prior to an interested
stockholder becoming such, the board of directors of the corporation approved
either the business combination or the transaction resulting in the interested
stockholder becoming such, (b) upon consummation of the transaction resulting
in an interested stockholder becoming such, the interested stockholder owns
85% of the voting stock outstanding at the time the transaction commenced
(excluding, from the calculation of outstanding shares, shares beneficially
owned by directors who are also officers and certain employee stock plans) or
(c) on or after an interested stockholder becomes such, the business
combination is approved by (i) the board of directors and (ii) holders of at
least 66 2/3% of the outstanding shares (other than those shares beneficially
owned by the interested stockholder) at a meeting of stockholders. The term
"business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder"
involving the assets or stock of the corporation or its majority-owned
subsidiaries and transactions which increase an "interested stockholder's"
percentage ownership of stock.
SUPERMAJORITY VOTING REQUIREMENTS. The Restated Certificate of Incorporation
and Restated By-laws provide that certain provisions in the Restated
Certificate of Incorporation and Restated By-laws may not be amended, altered,
changed or repealed in any respect, and new provisions inconsistent therewith
may not be adopted unless such action is approved by the affirmative vote of
the holders of at least eighty percent (80%) of the votes represented by the
outstanding shares of capital stock of the Company entitled to vote in the
election of Directors.
ADVANCE NOTICE PROVISIONS. The Restated By-laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders
of the Company. The Restated By-laws provide that only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. Under the Restated By-laws,
for notice of stockholder nominations to
57
<PAGE>
be made at an annual meeting to be timely, such notice must be received by the
Company not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders or, in the
event that the annual meeting is called for a date that is not within 30 days
before or after such anniversary date, notice by the stockholder to be timely
must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. Under the Restated By-laws, a
stockholder's notice must also contain certain information specified in the
Restated By-laws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND BY-LAWS
Certain provisions of the Restated Certificate of Incorporation and Restated
By-laws and the DGCL, summarized in the following paragraphs, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in
the policies formulated by the Board of Directors and to discourage certain
types of transactions that may involve an actual or threatened change of
control of the Company, such as an unsolicited acquisition proposal. Because
these provisions could have the effect of discouraging a third party from
acquiring control of the Company, they may inhibit fluctuations in the market
price of shares of Common Stock that could otherwise result from actual or
rumored takeover attempts and, therefore could deprive stockholders of an
opportunity to realize a takeover premium. These provisions also may have the
effect of limiting the price that certain investors might be willing to pay in
the future for shares of the Company's Common Stock and of preventing changes
in the management of the Company.
CLASSIFIED BOARD OF DIRECTORS. The Restated Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Board of Directors will be elected each year. Classification of
the Board of Directors expands the time required to change the composition of
a majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. Moreover, under the DGCL in the case of a
corporation having a classified board of directors, the stockholders may
remove a director only for cause. In addition, the Restated By-laws provide
that any director or the entire Board of Directors may be removed from office
at any time, but only for cause and by the affirmative vote of at least a
majority of all of the outstanding shares of capital stock of the Company
entitled to vote in the election of directors at a meeting of stockholders
called for that purpose. These provisions, when coupled with the provisions of
the Restated By-laws authorizing (with a limited exception) only the Board of
Directors to fill vacant directorships, will preclude stockholders of the
Company from removing incumbent directors without cause, and simultaneously
gaining control of the Board of Directors by filling the vacancies with their
own nominees.
PREFERRED STOCK. It is possible that the ability of the Board of Directors
to issue Preferred Stock may have the effect of discouraging attempts, through
the acquisition of a substantial number of shares of Common Stock, to acquire
control of the Company with a view to effecting a merger, sale or exchange of
assets or a similar transaction. For example, the Board of Directors could
issue such shares as a dividend to holders of Common Stock or place such
shares privately with purchasers who may side with the Board of Directors in
opposing a takeover bid. The anti-takeover effects of the undesignated
Preferred Stock may deny stockholders the receipt of a premium on their Common
Stock and may also have a depressive effect on the market price of the Common
Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 29,728,660 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the 11,125,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 18,603,660 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. Holders of substantially
all of those shares will have the right to request the registration of their
shares under the Securities Act following the completion of a period of 180
days after the date of this Prospectus, which, upon the effectiveness of such
registration, would permit the free transferability of such shares.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an Affiliate of the Company, or person (or persons whose shares
are aggregated) who has beneficially owned Restricted Shares for at least one
year, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of the Company's Common Stock or (ii) the average weekly trading volume
of the Company's Common Stock in the Nasdaq Stock Market during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above.
The Company, its executive officers, key personnel, directors and all of its
current stockholders have agreed that, subject to certain exceptions, they
will not, without the prior written consent of Bear, Stearns & Co. Inc.,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them during the 180-day period commencing on the date of this
Prospectus. The Company may, however, issue shares of Common Stock upon the
exercise of stock options that are currently outstanding, and may grant
additional options under the Option Plan. Substantially all of the Restricted
Shares are subject to the lock-up agreements described in this paragraph. Upon
the expiration of the lock-up period, 16,380,287 of the Restricted Shares will
be eligible for sale under Rule 144 subject to the volume and other
restrictions of Rule 144. The remaining 2,223,373 shares will become eligible
for sale pursuant to Rule 144 upon expiration of applicable holding periods.
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. In addition, non-Affiliates may sell Rule 701 shares without
complying with the public information, volume and notice provisions of Rule
144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to this offering.
59
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Option
Plan. Based on the number of options outstanding and shares to be reserved for
issuance under the Option Plan upon the consummation of this offering, such
registration statement would cover 4,125,000 shares. Such registration
statement is expected to be filed and to become effective as soon as
practicable after the date of this Prospectus. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, unless such shares
are subject to vesting restrictions with the Company or the lock-up agreements
described above. See "Management."
60
<PAGE>
UNDERWRITING
The underwriters of this offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc., Goldman, Sachs & Co., Smith Barney Inc., Invemed
Associates, Inc. and Morgan Keegan & Company, Inc. are acting as
representatives, have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the Underwriting
Agreement (the form of which has been filed as an exhibit to the Registration
Statement on Form S-1 of which this Prospectus is a part), to purchase from
the Company and the Selling Stockholders the aggregate number of shares of
Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc. ................................ 1,901,000
Goldman, Sachs & Co....................................... 1,901,000
Smith Barney Inc. ........................................ 1,901,000
Invemed Associates, Inc. ................................. 951,000
Morgan Keegan & Company, Inc. ........................... 951,000
BancAmerica Robertson Stephens............................ 220,000
CIBC Oppenheimer Corp. ................................... 220,000
EVEREN Securities, Inc. .................................. 220,000
Furman Selz LLC........................................... 220,000
Lehman Brothers Inc. ..................................... 220,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 220,000
J.P. Morgan Securities Inc. ............................. 220,000
Morgan Stanley & Co. Incorporated......................... 220,000
Schroder & Co. Inc. ...................................... 220,000
Wheat First Securities, Inc. ............................. 220,000
Allen & Company Incorporated.............................. 110,000
Blackford Securities Corp. ............................... 110,000
Brean Murray & Co., Inc. ................................. 110,000
Gaines, Berland Inc. ..................................... 110,000
Hoak Breedlove Wesneski & Co. ............................ 110,000
Josephthal & Co. Inc. .................................... 110,000
Ladenburg Thalmann & Co. Inc. ........................... 110,000
Needham & Company, Inc. .................................. 110,000
Raymond James & Associates, Inc. ......................... 110,000
The Robinson-Humphrey Company, LLC........................ 110,000
Scott & Stringfellow, Inc. .............................. 110,000
Wit Capital Corporation................................... 110,000
----------
Total................................................. 11,125,000
==========
</TABLE>
The nature of the obligations of the Underwriters is such that all of the
Common Stock must be purchased if any is purchased. Those obligations are
subject, however, to various conditions, including the approval of certain
matters by counsel. The Company and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the Underwriters may be required to make in
respect of such liabilities.
The Company and the Selling Stockholders have been advised that the
Underwriters proposed to offer the Common Stock directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession not
to exceed $0.59 per share, that the Underwriters may allow, and such selected
dealers may reallow, a concession to certain other dealers not to exceed $0.10
per share and that after the commencement of this offering, the public
offering price and the concessions may be changed.
61
<PAGE>
The Company has granted to the Underwriters an option to purchase in the
aggregate up to 1,668,750 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at
any time within 30 days after the date of this Prospectus. To the extent the
option is exercised, the Underwriters will be severally committed, subject to
certain conditions, including the approval of certain matters by counsel, to
purchase the additional shares of Common Stock in proportion to their
respective purchase commitments as indicated in the preceding table.
The underwriters have reserved for sale at the initial public offering price
up to 550,000 shares of Common Stock for sale to certain directors, officers
and employees of the Company, business affiliates and related persons who have
expressed an interest in purchasing shares. The number of shares available for
sale to the general public will be reduced to the extent any reserved shares
are purchased. Any reserved shares not so purchased will be offered by the
Underwriters on the same basis as the other shares offered hereby.
The Company, its executive officers, key personnel, directors and all of its
current stockholders have agreed that, subject to certain limited exceptions,
for a period of 180 days after the date of this Prospectus, without the prior
written consent of Bear, Stearns & Co. Inc., they will not directly or
indirectly, offer or agree to sell, sell or otherwise dispose of any shares of
Common Stock (or securities convertible into, exchangeable for or evidencing
the right to purchase shares of Common Stock).
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined through
negotiations among the Company, the Selling Stockholders and the
representatives of the Underwriters. Among the factors considered in making
such determination were the Company's financial and operating history and
condition, its prospects and prospects for the industry in which it does
business in general, the management of the Company, prevailing equity market
conditions and the demand for securities considered comparable to those of the
Company.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after this offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company. The Underwriters may
elect to cover any such short position by purchasing shares of Common Stock in
the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, the Underwriters may stabilize or maintain the
price of the Common Stock by bidding for or purchasing shares of Common Stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in this offering are reclaimed if shares of Common Stock previously
distributed in this offering are repurchased in connection with stabilization
transactions or otherwise. The effect of these transactions may be to
stabilize or maintain the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that
it discourages resales thereof. No representation is made as to the magnitude
or effect of any such stabilization or other transactions. Such transactions
may be effected on the Nasdaq Stock Market or otherwise and, if commenced, may
be discontinued at any time.
Certain of the Underwriters and their affiliates have from time to time
provided, and may continue to provide, investment banking services and general
financing and banking transactions to the Company and certain of its
affiliates for such Underwriters or affiliates have received and will receive
fees and commissions. As of April 15, 1998, Genesis Acquisition Corp. an
affiliate of Bear, Stearns & Co. Inc., held 15,000 shares of Series A
Preferred Stock (which will be converted into 1,375,000 shares of Common Stock
immediately prior to the consummation of this offering). In addition, as of
such date, certain directors, officers and employees of Bear, Stearns & Co.
Inc. held 806 shares of Series A Preferred Stock (which will be converted into
73,883 shares of Common Stock immediately prior to the consummation of this
offering). As of April 15, 1998, Invemed Associates, Inc. and certain of its
directors, officers and affiliates held 1,937 shares of Series A Preferred
Stock (which will be converted into 177,558 shares of Common Stock immediately
prior to the consummation of this offering). Such shares of Series A Preferred
Stock were purchased in September and December 1997 at a purchase price of
$1,000 per share. For a period of one year from the date of purchase of the
Series A Preferred
62
<PAGE>
Stock described in this paragraph, the holders of such stock may not sell,
transfer, assign, pledge or hypothecate the Series A Preferred Stock or the
Common Stock issuable upon conversion thereof. Edward Spiegel, a director of
the Company, is a limited partner of an affiliate of Goldman, Sachs & Co.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Morrison & Foerster LLP, New York, New York. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Genesis Direct, Inc.,
and its predecessor entity, Genesis Direct LLC at March 30, 1996, March 29,
1997, and December 27, 1997 and for the period from June 8, 1995 (date of
inception) to March 30, 1996, the year ended March 29, 1997 and the nine month
period ended December 27, 1997 and appearing in the Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, and the information under the caption "Selected Consolidated
Financial Data" for each of the aforementioned periods, appearing in this
Prospectus and Registration Statement have been derived from consolidated
financial statements audited by Ernst & Young LLP, as set forth in their
report thereon appearing elsewhere herein. Such consolidated financial
statements, schedule and selected financial data are included in reliance upon
such report given the authority of such firm as experts in accounting and
auditing.
The financial statements of Manny's Baseball Land, Inc. for the year ended
December 31, 1995 and for the period January 1, 1996 to December 3, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Select Service & Supply Co., Inc. at December
31, 1997, and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The statements of income and cash flows of Athletic Supply of Dallas, Inc.
for each of the years in the three-year period ended June 30, 1996 and for the
period from July 1, 1996 to December 20, 1996, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick
LLP refers to a change in the method of accounting for income taxes in fiscal
1994.
The financial statements of Lilliput Motors Corporation for the years ended
August 31, 1995 and 1996, appearing in this Prospectus and Registration
Statement have been audited by Boscia Goldenberg & Company, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of First Step Designs Ltd. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of The Thursley Group, Ltd. for the years ended
December 31, 1995 and 1996, appearing in this Prospectus and Registration
Statement have been audited by Mendlowitz Weitsen, LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
63
<PAGE>
The financial statements of Duclos Direct Marketing, Inc. for the years
ended January 31, 1996 and 1997, appearing in this Prospectus and Registration
Statement have been audited by Mendlowitz Weitsen, LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby (as amended, the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained herein as to the contents of any
documents are not necessarily complete. In each instance, reference is made to
the copy of such document filed as an exhibit to the Registration Statement,
and each such statement is qualified in its entirety by such reference. Copies
of the Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the Commission's principal
office in Washington, D.C. or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission maintains a World Wide Website on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with the
Commission. The Company has filed the Registration Statement, including the
exhibits and schedules thereto, electronically with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
system.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements examined by an independent public
accountant and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Pro Forma Condensed Combined Financial Statements," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," including,
without limitation, those concerning (i) the Company's strategy, (ii) the
Company's expansion plans, (iii) the Company's capital expenditures, (iv) the
number of catalogs expected to be acquired by the Company in the near future,
and (v) the terms upon which such catalogs will be acquired, contain forward-
looking statements (within the meaning of Section 27A of the Securities Act)
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause such differences include, but are
not limited to, those discussed under "Risk Factors." 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.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GENESIS DIRECT, INC.
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets at March 30, 1996, March 29, 1997 and
December 27, 1997...................................................... F-4
Consolidated Statements of Operations for the period June 8, 1995
(inception) to March 30, 1996 and the year ended March 29, 1997 and the
nine-month periods ended December 28, 1996 (unaudited) and December 27,
1997................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
period June 8, 1995 (inception) to March 30, 1996 and the year ended
March 29, 1997 and the nine-month period ended December 27, 1997....... F-6
Consolidated Statements of Cash Flows for the period June 8, 1995
(inception) to March 30, 1996 and the year ended March 29, 1997 and the
nine-month periods ended December 28, 1996 (unaudited) and December 27,
1997................................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
MANNY'S BASEBALL LAND, INC.
Report of Independent Auditors.......................................... F-22
Statements of Operations for the year ended December 31, 1995 and the
period January 1, 1996 to December 2, 1996............................. F-23
Statements of Cash Flows for the year ended December 31, 1995 and the
period January 1, 1996 to December 2, 1996............................. F-24
Notes to Financial Statements........................................... F-25
ATHLETIC SUPPLY OF DALLAS, INC.
Report of Independent Auditors.......................................... F-26
Statements of Income for the years ended June 30, 1994, 1995 and 1996,
for the six months ended December 31, 1995 (unaudited) and for the
period from July 1, 1996 to December 20, 1996.......................... F-27
Statements of Cash Flows for the years ended June 30, 1994, 1995 and
1996, for the six months ended December 31, 1995 (unaudited) and July
1, 1996 to December 20, 1996........................................... F-28
Notes to Financial Statements........................................... F-29
LILLIPUT MOTORS COMPANY, LTD.
Independent Auditors' Report............................................ F-35
Statements of Operations for the years ending August 31, 1996 and 1995
and the four month periods ended December 24, 1996 (unaudited) and
December 31, 1995 (unaudited).......................................... F-36
Statements of Cash Flows for the years ending August 31, 1996 and 1995
and the four month periods ended December 24, 1996 (unaudited) and
December 31, 1995 (unaudited).......................................... F-37
Notes to Financial Statements........................................... F-38
FIRST STEP DESIGNS LTD.
Report of Independent Public Accountants................................ F-40
Statements of Operations for the years ended December 31, 1995 and 1996
and the period from January 1, 1997 to February 6, 1997................ F-41
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the period from January 1, 1997 to February 6, 1997................ F-42
Notes to Financial Statements........................................... F-43
THE THURSLEY GROUP, INC.
Independent Auditors' Report............................................ F-46
Statements of Operations for the years ended December 31, 1996 and
1995................................................................... F-47
Statements of Cash Flows for the years ended December 31, 1996 and
1995................................................................... F-48
Notes to Financial Statements........................................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
DUCLOS DIRECT MARKETING, INC.
Independent Auditors' Report............................................ F-51
Statements of Operations for the years ended January 31, 1997 and 1996.. F-52
Statements of Cash Flows for the years ended January 31, 1997 and 1996.. F-53
Notes to Financial Statements........................................... F-54
SELECT SERVICE AND SUPPLY CO., INC.
Report of Independent Auditors.......................................... F-57
Balance Sheet at December 31, 1997...................................... F-58
Statement of Income and Retained Earnings for the year ended December
31, 1997............................................................... F-59
Statement of Cash Flows for the year ended December 31, 1997............ F-60
Notes to Financial Statements........................................... F-61
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Genesis Direct, Inc.
We have audited the accompanying consolidated balance sheets of Genesis
Direct, Inc. and subsidiaries and its predecessor entity, Genesis Direct, LLC
as of December 27, 1997, March 29, 1997 and March 30, 1996, and the related
consolidated statements of operations, common stockholders' equity
(deficiency) and cash flows for the nine month period ended December 27, 1997,
the year ended March 29, 1997, and the period from June 8, 1995 (date of
inception) to March 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Genesis
Direct, Inc. and subsidiaries and its predecessor entity, Genesis Direct, LLC
at December 27, 1997, March 29, 1997 and March 30, 1996, and the consolidated
results of their operations and their cash flows for the nine month period
ended December 27, 1997, the year ended March 29, 1997, and the period from
June 8, 1995 (date of inception) to March 30, 1996, in conformity with
generally accepted accounting principles.
Hackensack, New Jersey
February 16, 1998 Ernst & Young LLP
F-3
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents,
including restricted cash of
$240, $2,440 and $2,200,
respectively................. $ 240 $ 8,184 $ 7,615
Accounts receivable, less
allowances of $-0-, $254 and
$1,090, respectively......... 1,042 5,619
Merchandise inventory, net.... 50 7,017 22,993
Prepaid expenses.............. 84 2,456 3,193
Other current assets.......... 270 82
Note receivable, current
portion...................... 340
------ ------- --------
Total current assets......... 374 18,969 39,842
Intangibles, net of accumulated
amortization of $21, $549 and
$2,601, respectively.......... 295 6,294 8,129
Goodwill, net of accumulated
amortization of $-0-, $270 and
$1,154, respectively.......... 27,684 39,450
Property, equipment and
leasehold improvements, net... 417 3,536 19,857
Note receivable, less current
portion....................... 1,360
Other assets................... 100 383 1,656
------ ------- --------
$1,186 $56,866 $110,294
====== ======= ========
LIABILITIES AND COMMON
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable.............. $ 213 $ 6,205 $ 14,373
Accrued expenses.............. 636 6,885 15,309
Current portion of notes
payable and long-term debt... 722 5,274 7,265
Other current liabilities..... 658 3,273
------ ------- --------
Total current liabilities.... 1,571 19,022 40,220
Notes payable and long-term
debt, less current portion.... 4,918 7,852
Debentures--related parties.... 22,500 30,000
Other liabilities.............. 130 2,051 2,350
Series A Preferred Stock
(liquidation value $1,000 per
share), 122,000 shares
authorized, 71,358 shares
issued and outstanding at
December 27, 1997............. 72,390
Common stockholders' equity
(deficiency):
Common stock, par value $.01
per share; 82,500,000 shares
authorized, 6,792,500 and
8,857,750 shares issued and
outstanding at March 29, 1997
and December 27, 1997,
respectively (17,858,754
shares on a pro forma basis
at December 31, 1997 assuming
the conversion of the Series
A Preferred Stock and
convertible note)............ 68 89
Capital contributions......... 2,200
Additional paid-in capital.... 24,532 30,472
Accumulated deficit........... (2,715) (16,225) (73,079)
------ ------- --------
Total common stockholders'
equity (deficiency)......... (515) 8,375 (42,518)
------ ------- --------
Total liabilities and common
stockholders' equity........ $1,186 $56,866 $110,294
====== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
<TABLE>
<CAPTION>
PERIOD
JUNE 8, 1995
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
-------------- -------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $ 18,537 $ 6,501 $ 81,505
Cost of goods sold...... 10,448 3,868 62,143
--------- --------- ---------
Gross profit............ 8,089 2,633 19,362
Selling, general and
administrative
expenses............... $ 2,710 20,711 8,246 73,053
------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (5,613) (53,691)
Interest expense........ 5 1,162 345 3,163
Interest income......... 274 233
------- --------- --------- ---------
Net loss................ (2,715) (13,510) (5,725) (56,854)
Dividends accruing on
Series A Preferred
Stock.................. (1,032)
------- --------- --------- ---------
Net loss attributable to
common stockholders.... $(2,715) $ (13,510) $ (5,725) $ (57,886)
======= ========= ========= =========
Basic net loss per
share.................. $ (4.49) $ (4.60) $ (2.73) $ (6.57)
======= ========= ========= =========
Weighted average common
shares outstanding..... 605,000 2,933,700 2,093,300 8,810,175
======= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
GENESIS DIRECT, TOTAL
L.L.C. SHARES OF ADDITIONAL STOCKHOLDERS'
MEMBERS' COMMON COMMON PAID-IN ACCUMULATED EQUITY
CONTRIBUTIONS STOCK STOCK CAPITAL DEFICIT (DEFICIENCY)
--------------- --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 8, 1995
(inception):
Capital
contributions........ $ 2,200 $ 2,200
Net loss.............. $ (2,715) (2,715)
------- --------- --- ------- -------- --------
Balance at March 30,
1996................... 2,200 (2,715) (515)
Capital contribution
to Genesis Direct,
Inc.................. (2,200) 605,000 $ 6 $ 2,194
Issuance of Common
Stock................ 6,187,500 62 22,338 22,400
Net loss.............. (13,510) (13,510)
------- --------- --- ------- -------- --------
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................ (740) (740)
Dividends accruing on
Series A Preferred
Stock................ (1,032) (1,032)
Issuance of Common
Stock in connection
with business
acquisitions......... 2,750 30 30
Net loss.............. (56,854) (56,854)
------- --------- --- ------- -------- --------
Balance at December 27,
1997................... $ -- 8,857,750 $89 $30,472 $(73,079) $(42,518)
======= ========= === ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 8, 1995
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
-------------- -------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss................ $(2,715) $(13,510) $(5,725) $(56,854)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 52 1,303 165 4,275
Provision for losses on
accounts receivable.... 125 836
Non-cash interest
expense................ 966 247 2,440
Changes in operating
assets and liabilities
net of businesses
acquired:
Accounts receivable..... 1,102 (466) (4,744)
Merchandise inventory... (50) (161) 735 (10,595)
Prepaid expenses and
other current assets... (84) (1,569) (486) 1,824
Accounts payable and
accrued liabilities.... 849 (1,038) 1,545 6,134
Other assets............ (100) (221) (980) (1,002)
Other liabilities....... 80 (333) 174 242
------- -------- ------- --------
Net cash used in
operating activities... (1,968) (13,461) (4,666) (57,444)
CASH FLOWS FROM
INVESTING ACTIVITIES
Intangibles............. (42) (550) (507) (56)
Acquisition of property,
equipment and leasehold
improvements........... (448) (3,000) (2,617) (16,902)
Cash paid for acquired
businesses, net of cash
acquired............... (224) (19,223) (15,568) (13,376)
(Increase) decrease in
restricted cash........ (240) (2,200) 240
------- -------- ------- --------
Net cash used in
investing activities... (954) (24,973) (18,692) (30,094)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from (repayment
of) line of credit..... 722 (722) (722) 264
Proceeds from issuance
of Debentures--related
parties................ 22,500 15,000 7,500
Proceeds from sale of
Member Interest or
Common Stock........... 2,200 22,400 14,900 7,500
Proceeds from sale of
Series A Preferred
Stock, net of issuance
costs.................. 44,437
Proceeds from bridge
note borrowing......... 26,175
Proceeds from term
loan................... 5,000
Payments of notes
payable................ (3,667)
------- -------- ------- --------
Net cash provided by
financing activities... 2,922 44,178 29,178 87,209
------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 5,744 5,820 (329)
Cash and cash
equivalents at
beginning of period.... 5,744
------- -------- ------- --------
Cash and cash
equivalents at end of
period................. $ -- $ 5,744 $ 5,820 $ 5,415
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Interest paid........... $ 5 $ 197 $ 108 $ 1,659
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
OF NON-CASH INVESTING
AND FINANCING
ACTIVITIES
Acquisitions:
Liabilities assumed.... $ 17,029 $11,613 $ 8,145
Issuance of notes
payable............... 9,349 9,239 4,138
Issuance of Common
Stock................. 30
Conversion of debt to
Series A Preferred
Stock.................. 26,175
Reduction of seller
notes payable in
connection with the
subsequent sale of net
assets acquired........ 1,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 27, 1997
1. ORGANIZATION
Genesis Direct, Inc. and subsidiaries (collectively "Genesis Direct" or the
"Company") is engaged in catalog, direct and database marketing serving
customers principally in the United States, Europe and Japan. The Company's
current catalog business offers a broad range of consumer products.
Genesis Direct, LLC, the predecessor to Genesis Direct, Inc., was formed on
June 8, 1995 to develop a direct marketing company through the acquisition and
start-up of catalog businesses. On June 25, 1996, the assets and liabilities
of Genesis Direct, LLC were contributed to Genesis Direct, Inc. in exchange
for 2,200 shares of Common Stock. The assets and liabilities contributed by
Genesis Direct, LLC were valued at their carryover basis in accordance with
accounting for predecessor companies. The 2,200 shares issued in exchange for
the contribution of assets and liabilities were assigned a value equal to the
original cash contributions to Genesis Direct, LLC by its members.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
For the period subsequent to June 25, 1996, the consolidated financial
statements include the accounts of Genesis Direct, Inc. and its wholly-owned
subsidiaries. Prior to June 25, 1996, the financial statements included the
accounts of Genesis Direct, LLC. All significant intercompany accounts and
transactions have been eliminated.
Basis of Presentation
All amounts, except share and per share data are presented in thousands,
unless otherwise indicated.
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 29, 1997
("fiscal 1996") was a 52-week year and the period ended March 30, 1996
("fiscal 1995") was from inception on June 8, 1995. The nine months ended
December 27, 1997 is included in fiscal 1997.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less when purchased.
Restricted Cash
Restricted cash represents amounts deposited in a bank to support letters of
credit in connection with certain of the Company's lease obligations.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist of cash and
cash equivalents and trade accounts receivable. The Company restricts its
temporary cash investments to financial institutions with high credit
standing. Accounts receivable include sales to a national retailer under a
fulfillment agreement. The Company believes the credit risk related to this
customer is not significant. The remaining portion of accounts receivable
represent sales to governmental agencies and other institutional customers
throughout the United States. The Company performs periodic credit evaluation
of these customers but does not require collateral.
F-8
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Merchandise Inventory, Net
Merchandise inventory, consisting principally of finished goods, is stated
at the lower of cost (first-in, first-out) or market. Merchandise inventory
reflects valuation reserves of approximately $1,390 and $4,120 at March 29,
1997 and December 27, 1997, respectively.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
life of the improvement or the remainder of the lease term.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Long-Lived Assets
The Company periodically assesses long-lived assets, including goodwill and
other intangibles for recoverability. The Company's assessment at December 27,
1997 is based on undiscounted projected operating results of the acquired
businesses. Management believes that these projections are reasonable,
however, actual future operating results may differ.
Fair Values of Financial Instruments
The estimated fair values of financial instruments have been determined by
the Company using available market information, including current interest
rates, and the following valuation methodologies:
Cash and cash equivalents--the carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair values because of
the short maturity of these instruments.
Notes receivable--the fair value is estimated on the basis of discounted
cash flow analyses, using appropriate interest rates for similar maturities.
Notes payable, Long-term debt and Debentures--related parties--the fair
value is estimated on the basis of rates offered to the Company for debt of
similar maturities.
Revenue Recognition
Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns, net of exchanges, is recorded based upon historical
experience.
Advertising and Promotion Costs
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7, Reporting of Advertising Costs. Advertising
costs other than direct response are expensed at the time the initial
advertising takes place. Direct response advertising costs, consisting
primarily of catalog design, printing and postage expenditures, are amortized
over the period during which associated net revenues are expected,
F-9
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
generally approximating three months or less. Direct response and other
advertising expenses were $3,740 and $35,841 for fiscal 1996 and nine months
ended December 27, 1997, respectively. As of March 29, 1997 and December 27,
1997, approximately $1,379 and $2,421, respectively, of direct response and
other advertising costs are included in prepaid expenses.
Income Taxes
Deferred income taxes are determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Business Combinations
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date
based on their estimated respective fair values and, under certain
circumstances, are subject to revision for a period not to exceed one year
from the date of acquisition. In certain cases, the purchase price is subject
to adjustment based upon the verification of financial position and results of
operations of the acquired business as of a specified date. The results of
operations of the acquired enterprises are included in the Company's
consolidated financial statements for the period subsequent to the
acquisitions.
Goodwill
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired and is being amortized over periods from ten to forty
years.
Intangibles
Intangible assets include the cost of agreements not-to-compete entered into
in connection with certain business combinations and costs to acquire customer
mailing lists. The costs of non-compete agreements are amortized over the
terms of the agreements. The costs of acquired customer lists are amortized
over the period which the acquired company, based on historical experience,
retains its customers, generally three years.
Computer Software
The Company capitalizes the cost of computer software purchased from third
parties which is amortized over five years. Internal costs incurred to modify
purchased software and to develop software for internal use are expensed as
incurred.
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. In addition, no shares have been issued
since inception for amounts representing nominal consideration.
All common share and per share information reflects a 275 for-one stock
split. See Note 16.
Interim Financial Statements
The financial information with respect to the nine-month period ended
December 28, 1996 is unaudited. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for the period.
The results of operations for interim periods are not necessarily indicative
of the results of operations for the full fiscal year due to, among other
things, the seasonality of the Company's revenues.
F-10
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. NOTE RECEIVABLE
The note was received in connection with the sale of certain assets, bears
interest at 6% and is payable in 20 quarterly installments beginning January
1998.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Equipment, furniture and
fixtures................. $163 $2,293 $ 6,476
Computer equipment and
software................. 285 1,372 7,617
Leasehold improvements.... 406 7,638
---- ------ -------
448 4,071 21,731
Lease accumulated depreci-
ation.................... 31 535 1,874
---- ------ -------
$417 $3,536 $19,857
==== ====== =======
</TABLE>
Depreciation expense was approximately $32, $505 and $1,339 for fiscal 1995,
fiscal year 1996 and the nine months ended December 27, 1997, respectively.
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Sales returns................ $ 169 $ 1,395
Employee compensation........ $ 83 627 2,088
Interest..................... 966 1,832
Reorganization costs......... 2,212 2,780
Accrued inventory............ 15 2,265
Due to customers............. 709 1,467
Other........................ 553 2,187 3,482
---- ------ -------
$636 $6,885 $15,309
==== ====== =======
</TABLE>
6. ACQUISITIONS
Fiscal 1997
In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Artesania, Inc. ("Ninos"). Ninos is engaged in the direct
marketing of children's bilingual educational products. The aggregate purchase
price, including all direct costs, was approximately $1,358. The cost of the
acquisition exceeded the fair value of the acquired net assets by
approximately $1,298 which has been recorded as goodwill.
In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Center for Applied Psychology, Inc. ("Childswork/Childsplay").
Childswork/Childsplay is engaged in the direct marketing of children's
educational products to the school and professional markets. The aggregate
purchase price, including all direct costs, was approximately $2,245. The cost
of the acquisition exceeded the fair value of the acquired net assets by
approximately $997 which has been recorded as goodwill.
In June 1997, Genesis acquired certain assets from and entered into a
license agreement with Global Friends Collection, Inc. ("Global Friends").
Global Friends is engaged in the direct marketing of collectible dolls and
related merchandise. The preliminary aggregate purchase price, including all
direct costs, was approximately $1,394 and was partially financed through the
issuance of a $210 non-interest bearing note payable to the seller.
F-11
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
This note has been discounted to its present value using an effective annual
interest rate of 12%. The cost of the acquisition exceeded the fair value of
the acquired assets by approximately $718 which has been recorded as goodwill.
In August 1997, Genesis acquired all of the outstanding common stock of
Fanfare Enterprises, Inc. ("Fanfare"). Fanfare is engaged in the direct
marketing of consumer products relating to the performing arts. The
preliminary aggregate purchase price, including all direct costs, was
approximately $4,888 and was partially financed through the issuance of a $500
interest bearing (8%) note payable to the sellers. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $2,549
which has been recorded as goodwill.
In October 1997, the Company acquired certain assets and assumed certain
liabilities of H&L Productions, Inc. ("NASCAR"). NASCAR is engaged in the
direct marketing of licensed NASCAR merchandise and other collectibles. The
preliminary aggregate purchase price, including all direct costs, was
approximately $6,455 and was partially financed through the issuance of an
aggregate of $1,325 interest bearing (5.76%) convertible notes and $1,075
interest bearing (5.76%) notes payable to the sellers. The cost of the
acquisition exceeded the fair value of the acquired net assets by
approximately $5,820 which has been recorded as goodwill. The principal former
stockholder, who is employed by the Company, is also entitled to certain
additional payments based on operating results for the year ended December 31,
1997. The portion of such additional payments, if any, attributable to
operating results subsequent to the date of acquisition will be accounted for
as compensation expense in accordance with Emerging Issues Task Force (EITF)
Issue No. 95-8.
In October 1997, Genesis acquired all of the outstanding common stock of Zig
Zag Imports, Inc. ("Soccer Madness"). Soccer Madness is engaged in the direct
marketing of licensed and other sports merchandise. The preliminary aggregate
purchase price, including all direct costs, was approximately $3,090 and was
partially financed through the issuance of 2,750 shares of Common Stock valued
at $10.91 per share and $1,050 interest-bearing (7.0%) notes payable to the
sellers. The cost of the acquisition exceeded the fair value of the acquired
net assets by approximately $2,516 which has been recorded as goodwill.
The following unaudited pro forma summary presents the combined results of
operations as if the fiscal 1997 acquisitions had occurred on March 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<S> <C> <C>
Net sales................................... $108,262 $93,526
Net loss.................................... (23,758) (57,846)
Pro forma loss per share.................... $ (8.56) $ (6.68)
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the acquisitions been made
on March 31, 1996 or future results of operations of the combined companies.
Fiscal 1996
In December 1996, Genesis acquired all of the outstanding common stock of
Athletic Supply of Dallas, Inc. ("ASD"). ASD is engaged in the direct
marketing of licensed and other sports merchandise. The aggregate purchase
price, including all direct costs, was approximately $10,000 and was partially
financed through the
F-12
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
issuance of $5,000 of non-interest bearing notes payable to the sellers. These
notes payable have been discounted to their present value at an effective
annual interest rate of 12%. The cost of the acquisition exceeded the fair
value of the acquired net assets by approximately $11,413 which has been
recorded as goodwill. On the date of acquisition, the Company determined it
would divest the fulfillment operations of ASD and expected that divestiture
to occur within one year.
In October 1997, the Company completed the sale of the assets and
liabilities of the fulfillment operations of ASD to one of ASD's former
shareholders. The aggregate proceeds from the sale were approximately $2.7
million, including a $1.0 million reduction in the outstanding principal
balance of the existing seller note payable. The amounts of loss from
operations and allocated interest costs for the period prior to the sale which
were excluded from the determination of net loss in accordance with EITF Issue
No. 87-11 were not material. The sale resulted in a reduction of goodwill of
approximately $2.8 million.
In December 1996, Genesis acquired certain assets and assumed certain
liabilities of Manny's Baseball Land, Inc. ("ProTeam"). ProTeam is engaged in
the direct marketing of licensed and other sports merchandise. The aggregate
purchase price, including all direct costs, was approximately $10,932 and was
partially financed through the issuance of $5,275 of non-interest bearing
notes payable to the sellers. These notes payable have been discounted to
their present value at an effective annual interest rate of 12%. The cost of
the acquisition exceeded the fair value of the acquired net assets by
approximately $11,351 which has been recorded as goodwill.
In February 1997, Genesis acquired certain assets and assumed certain
liabilities of First Step Design Ltd. ("Hand In Hand"). Hand In Hand is
engaged in the direct marketing of children's games, educational material, and
related products. The aggregate purchase price, including all direct costs,
was approximately $2,486. The cost of the acquisition exceeded the fair value
of the acquired net assets by approximately $2,119 which has been recorded as
goodwill.
During fiscal 1996, in separate transactions, Genesis acquired certain
assets and assumed certain liabilities of Lilliput Motor Company, Inc., Duclos
Direct Marketing, Inc. and The Thursley Group, Inc., all of which are engaged
in direct marketing of consumer products. The aggregate purchase price for
these businesses, including all direct costs, was approximately $2,416, and
was partially financed through the issuance of $800 of non-interest bearing
notes payable to the sellers. These notes payable have been discounted to
their present value at an effective annual interest rate of 12%. The cost of
the acquisitions exceeded the fair value of acquired businesses' net assets by
approximately $2,917 which has been recorded as goodwill.
In conjunction with each of the transactions described above, certain
individuals and the Company entered into agreements not-to-compete. These
agreements cover periods ranging from six months to four years from the date
of the respective transactions. The cost of these agreements totaled
approximately $2,610 and $1,119 for the acquisitions completed during fiscal
1996 and the nine months ended December 27, 1997, respectively. Such amounts
are generally payable over the term of the agreements. These obligations have
been discounted to their present value at an effective annual interest rate of
12%.
In connection with certain of the transactions described above, the Company
has adopted, although in certain cases not finalized, plans to relocate the
operations of the acquired businesses. Such plans are finalized when the date
of integration of the acquired business into the Company's call center and
distribution center is
F-13
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
determined, which, in all cases, has been within one year of the date of
consummation of the acquisition. The Company has recorded estimated
liabilities aggregating approximately $2,212 (of which $578 has been paid
through December 27, 1997) and $1,146 for fiscal 1996 and the nine months
ended December 27, 1997, respectively, related principally to employee
termination costs and remaining lease obligations. The ultimate amounts
incurred may differ from the amounts recorded. Any such differences will
result in an adjustment to these estimated liabilities and a corresponding
adjustment to goodwill, unless the differences result from events occurring
after the consummation date, which differences will be expensed when incurred.
In connection with certain of the transactions described above, the Company
has pledged all of its member interests in the respective LLC subsidiary
formed for the purpose of acquiring the business of the sellers and provided a
guarantee of the notes payable.
7. SERIES A PREFERRED STOCK
In September 1997, the Company sold 71,358 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") including 36,413
shares to the holders of all of the shares of the Company's common stock and
outstanding debentures. Dividends at an annual rate of 6% are cumulative from
the date of issuance and are payable in cash or shares of Common Stock, at the
option of the Company. Upon liquidation or conversion, in connection with a
qualifying sale or initial public offering, as defined, dividends are payable
only to the extent required to yield the holders of Series A Preferred Stock
an annualized compound rate of return, as defined, of 30%.
The Company at its option may redeem all shares, but not less than all
shares, of Series A Preferred Stock on or after January 31, 2005 at an amount
equal to liquidation value. Liquidation value is $1,000 per share plus any
unpaid dividends. As of December 27, 1997 dividends of $1,032 have accrued on
Series A Preferred Stock. The holders of Series A Preferred Stock may elect to
require the Company to redeem all such shares on any date on or after January
31, 2005. Upon such mandatory redemption, the holder would be entitled to
receive the liquidation value in cash. If the Company fails to redeem all such
shares the dividend rate shall be increased to 14% per annum, payable
quarterly in cash until such shares are redeemed.
The Series A Preferred Stock is convertible, at the holders option, at any
time into shares of Common Stock at an initial conversion price of $10.91 per
share, subject to adjustment. The Series A Preferred Stock is subject to
automatic conversion upon the completion of (i) a qualifying initial public
offering, as defined, at an initial conversion of $10.91 per share, subject to
adjustment. Potential adjustments to the initial conversion price for both
optional and automatic conversions would result principally from the issuance
or sale of certain equity instruments, as defined, at less than the initial
conversion price per share by the Company prior to the date of such
conversions.
The holders of Series A Preferred Stock are entitled to vote together with
the holders of shares of Common Stock as a single class. Each holder of Series
A Preferred Stock is entitled to that number of votes such holder would be
entitled if the holder had converted the shares of Series A Preferred Stock
into shares of Common Stock.
The purchase of an aggregate of 26,175 shares of Series A Preferred Stock
was completed through the conversion in September 1997 of $26,175,000
principal amount of 8% notes payable issued by the Company during August and
September 1997. Such notes payable were automatically convertible into shares
of the Series A Preferred Stock at a conversion price of $1,000 per share
(which is equivalent to $3.63 per share after the Stock Split) which
represents the price at which all shares of Series A Preferred Stock issued by
the Company were sold and which are all convertible into shares of Common
Stock at a conversion price of $10.91 per share.
F-14
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. NOTES PAYABLE AND LONG-TERM DEBT
The Company's notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Revolving credit note payable
to bank...................... $722 $ 264
Term loan payable to bank..... 5,000
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, due in quarterly
installments of $500 through
March 1998................... $ 4,414 2,548
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, balance due in
December 1998................ 4,682 2,377
5.76% notes payable to sellers
in a business acquisition,
due in semi-annual
installments of $442
beginning April 1998......... 1,075
5.76% convertible note
("convertible note") payable
to sellers in a business
acquisition, due in semi-
annual installments of $442
(subject to adjustment)
beginning April 1999......... 1,325
7% notes payable to sellers in
a business acquisition, due
in annual installments of
$350 beginning October 1998.. 1,050
8% notes payable to sellers in
a business acquisition, due
in April 1998................ 500
Non-interest bearing notes
payable (discounted at 11.4%)
to sellers in a business
acquisition, due February
1998......................... 321 347
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, due December
1998......................... 533 268
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
combination, due March 1999.. 242 174
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
combination, due in annual
installments of $105
beginning June 1998.......... 189
---- ------- -------
722 10,192 15,117
Less current portion.......... 722 5,274 7,265
---- ------- -------
$-- $ 4,918 $ 7,852
==== ======= =======
</TABLE>
The principal balance of the convertible note is subject to reduction based
on a measurement of operating results, as defined, of the acquired business.
The determination of such reduction, if any, has not been finalized and will
result in a reduction of goodwill. In the event the Company completes an
initial public offering of its Common Stock, the holder may elect to convert
the balance of this note into Common Stock at a rate of $10.91 per share.
F-15
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The principal balances of certain of the seller notes described above are
subject to adjustments to reflect finalization of the applicable purchase
transaction. Such potential adjustments principally relate to measurements of
financial targets and indemnification provisions of the purchase agreements.
In May 1997, the Company entered into a $30 million revolving credit and
term loan facility (the "Credit Agreement"), with a commercial lender. Under
the Credit Agreement, the Company may borrow up to $25 million (including $2
million reserved for issuance of letters of credit) under a revolving credit
facility based on eligible collateral which includes specified percentages of
certain accounts receivable and inventory. As of December 27, 1997, based on
existing collateral the Company had approximately an additional $17 million
available under the revolving credit facility. All borrowings under the
revolving credit facility bear interest at the prime rate plus 0.5% or LIBOR
plus 3%, at the Company's option. The term loan bears interest at the prime
rate plus 0.5% with annual payments of $800 beginning in May 1998 and the
balance payable in May 2002. The term loan is also subject to certain
mandatory prepayments should the Company prepay any portion of the outstanding
principal balance of the debentures in connection with an initial public
offering of its stock. The amount of any such required prepayment is based on
a formula specified in the Credit Agreement. Among other things, the Credit
Agreement restricts the Company's ability to incur additional indebtedness,
pay dividends on Common Stock and requires the Company to maintain a specified
level of consolidated net worth, as defined.
The revolving credit note payable in existence at March 30, 1996 was repaid
and was not renewed.
Short-term borrowings at March 30, 1996 and December 27, 1997 were at
weighted-average interest rates of 9% and 9.25%, respectively.
As of December 27, 1997, maturities, excluding imputed interest, of notes
payable and long-term debt over the next three months and the succeeding five
fiscal years are as follows:
<TABLE>
<S> <C>
Three months ending March 28, 1998.................................. 1,096
1998................................................................ 7,348
1999................................................................ 2,481
2000................................................................ 1,592
2001................................................................ 800
2002................................................................ 1,800
</TABLE>
9. DEBENTURES PAYABLE--RELATED PARTIES
On June 25, 1996, the Company entered into a Note and Stock Purchase
Agreement (as amended, the "Note and Stock Purchase Agreement") with GE
Investment Private Placement Partners II ("GEIPPP II") and Genesis Direct LP
("GDLP"). Pursuant to the Note and Stock Purchase Agreement, between June 1996
and April 1997, the Company issued to GEIPPP II 2,750,000 shares of the
Company's common stock and $30.0 million principal amount of Debentures, in
consideration of $40.0 million in cash.
The Debentures are subordinated to all other outstanding obligations, bear
interest at 8% and are due June 1, 2003. The Debentures are convertible, at an
initial conversion price of $4.18 per share, into 7,173,913 shares of Common
Stock at any time after the earlier of (i) June 25, 2001, (ii) a qualified
initial public offering, as defined, or (iii) a change in control event, as
defined. At the time of such conversion, the Company has the option to redeem
up to 75% of the principal amount of the Debentures surrendered for
conversion. The Debentures also are redeemable at the option of the Company
any time after the earlier of (i) a qualified initial public offering, as
defined, or (ii) June 25, 1998 at an amount which provides a total annualized
return of 30% of the principal amount being redeemed ("prepayment interest
rate"). Any such redemption will result in the difference between
F-16
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBENTURES PAYABLE--RELATED PARTIES (CONTINUED)
interest accrued and interest due at the prepayment interest rate being
recorded as an extraordinary charge to earnings in the period in which the
prepayment occurs. At the date of redemption, however, the holders of the
Debentures, have the right to convert up to 32 1/2 percent of the principal
amount being redeemed. The Debentures provide for mandatory prepayment at the
option of the holders upon occurrence of defined mandatory prepayment events
which principally relate to the continued involvement and ownership of the
founders. The holder of the Debentures is also one of the Company's principal
common stockholders.
The Debentures bear interest at an annual rate of 8% (payable semi-annually
on December 1 and June 1) with 6% of such interest deferred through June 1,
1997, 4% deferred through June 1, 1998 and 2% deferred through June 1, 1999.
The deferred interest bears interest at 8% and is payable, at the Company's
option, in either cash or Common Stock at the earlier of either June 1, 2003
or a conversion or redemption of the Debentures as described above. Total
interest expense on the Debentures was $667 and $1,793 for the year ended
March 29, 1997 and the nine months ended December 27, 1997, respectively.
10. STOCKHOLDERS' EQUITY
In conjunction with a subsequent sale of Series A Preferred Stock the
parties to the Note and Stock Purchase Agreement entered into Amendment No. 3
to the Note and Stock Purchase Agreement. In consideration for entering into
such amendment, the Company issued to a holder of the Debentures and Common
Stock four warrants each to purchase up to 68,750 shares of the Common Stock
at an initial price of $10.91 per share, subject to adjustment. The warrants
are exercisable at any time after the Company completes an initial public
offering of its Common Stock. In the event the Company does not complete such
an initial public offering the warrants expire on September 25, 1998, March
17, 1999, May 25, 1999 and July 4, 1999, respectively. The warrants had a fair
value of $200 at the date of grant which has been accounted for as additional
paid-in capital and interest expense.
As of December 27, 1997 the Company has reserved shares of Common Stock for
issuance as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Conversion of outstanding Series A Preferred Stock...... 6,600,000
Conversion of outstanding Debentures.................... 2,331,521
Exercise of common stock purchase warrants.............. 275,000
Conversion of seller note payable....................... 128,333
Exercise of common stock options........................ 1,847,450
----------
Total shares reserved................................. 11,182,304
==========
</TABLE>
11. STOCK OPTION PLAN
During fiscal 1996, the Company's Board of Directors adopted the Genesis
Direct, Inc. Employee Stock Option Plan (the "Plan"). Under the terms of the
Plan, the Board of Directors or committee thereof may grant stock options,
stock appreciation rights, or restricted stock at such prices as may be
determined by the Board of Directors. The maximum number of shares subject to
the Plan is 1,847,450. The options vest ratably over five years and expire
after ten years. Vested options are exercisable at the end of year ten or
earlier in the event the Company completes an initial public offering of its
Common Stock.
F-17
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. STOCK OPTION PLAN (CONTINUED)
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
Outstanding at March 31, 1996...................................... --
Granted.......................................................... 498,025
Forfeited........................................................ --
---------
Outstanding at March 29, 1997...................................... 498,025
Granted.......................................................... 607,200
Forfeited........................................................ 39,600
---------
Outstanding at December 27, 1997................................... 1,065,625
=========
</TABLE>
All grants made under the Plan have been at an exercise price of $10.91 per
share. No options were exercisable at March 29, 1997 or December 27, 1997.
The weighted-average grant date fair value of options was $2.91 and $2.95
per share for fiscal 1996 and nine months ended December 27, 1997,
respectively. At December 27, 1997, the outstanding options have a weighted
average remaining contractual life of 9.4 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for the year
ended March 27, 1997 and the nine month period ended December 27, 1997:
weighted-average risk-free interest rate of 6.5%; no dividends; a near-zero
volatility factor of the expected market price of Common Stock and a weighted-
average expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Had the Company accounted for its employee stock options under the fair
value method of SFAS No. 123, the impact on the Company's net loss for the
year ended March 29, 1997 would have been approximately $22 ($.01 per share)
and approximately $208 ($.02 per share) for the nine months ended December 27,
1997. The pro forma impact of accounting for stock options under SFAS No. 123
could be significant in future periods.
F-18
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS
The Company leases certain office and distribution facilities, as well as
certain equipment, under long-term operating leases. Lease terms range from
five to ten years, with renewal options of up to ten years. In addition,
certain of the leases require the Company to pay additional rents based on
costs of operating the property and contain certain escalation clauses.
Future minimum lease payments under the leases for the next three months and
the succeeding five fiscal years are approximately as follows:
<TABLE>
<S> <C>
Three months ending March 28, 1998.................................... $1,338
1998.................................................................. 5,387
1999.................................................................. 4,947
2000.................................................................. 4,751
2001.................................................................. 4,457
2002.................................................................. 3,891
Thereafter............................................................ 8,758
</TABLE>
Rent expense was $86, $428 and $3,204 for fiscal 1995, fiscal 1996 and the
nine month period ended December 27, 1997, respectively.
13. INCOME TAXES
No provision (benefit) for income taxes has been recorded for fiscal 1995,
fiscal 1996 or for the nine month period ended December 27, 1997 due to the
fact that the Company was an LLC for the period from June 8, 1995 (date of
inception) to June 21, 1996 and due to net operating losses incurred in the
subsequent periods for which a full valuation allowance has been provided.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment............ $ 245 $ --
Goodwill................................. 1,149 2,172
------ -------
Total deferred tax liabilities......... 1,394 2,172
Deferred tax assets:
Accounts receivable...................... 522
Inventory................................ 527 3,157
Intangible assets........................ 73 229
Property and equipment................... 135
Accrued liabilities...................... 2,670 4,201
Net operating loss carryforwards......... 3,913 3,913
------ -------
Total deferred tax assets.................. 7,183 12,157
Valuation allowance........................ 5,789 9,985
------ -------
Net deferred tax assets.................... 1,394 2,172
------ -------
Net deferred tax (assets) liabilities...... $ -- $ --
====== =======
</TABLE>
F-19
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. INCOME TAXES (CONTINUED)
As of March 29, 1997, the Company has approximately $10.0 million of federal
tax net operating loss carryforwards which expire in 2012. The Company also
has approximately $8.6 million of state tax net operating loss carryforwards
which expire principally in 2004. In addition, the Company incurred
approximately $46 million of tax losses for the nine-month period ended
December 27, 1997 that are not reflected in the gross deferred tax assets
above.
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 loss
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 proposed initial public offering, the Company's net
operating loss carryforwards may be subject to annual limitations.
14. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows employees
meeting certain eligibility requirements to contribute up to 15% of their
annual compensation. The Company matches these contributions at a rate of 50%
of the employees' pre-tax contributions up to a maximum of 6% of the
employee's annual compensation. The Company's contributions for fiscal 1996
and the nine months ended December 27, 1997 were $26 and $34, respectively.
15. SALES AND USE TAX
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of
its use tax by a mail order company unless the company has a physical presence
in the state. However, there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. The
Company attempts to conduct its operations in compliance with its
interpretation of the applicable legal standard, but there can be no assurance
that such compliance will not be challenged.
In recent challenges, various states have sought to require companies to
begin collection of use taxes and/or pay taxes from previous sales. The
Company has not received assessments from any state. The amount of potential
assessments, if any, cannot be reasonably estimated.
The Supreme Court decision also established that Congress has the power to
enact legislation which would permit states to require collection of use taxes
by mail order companies. Congress has from time to time considered proposals
for such legislation. The Company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.
16. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 27, 1997, the Company completed the acquisition of
certain assets and certain liabilities of Select Service & Supply Co., Inc.
("Sportime"). Sportime is engaged in the direct marketing of licensed and
other sports merchandise. Payment of the aggregate preliminary purchase price
of approximately $20.4 million included cash of $18.1 million, a $1.0 million
8% term note, $.5 million of non-compete payments due in equal quarterly
installments through January 2002 and the issuance of 91,575 shares of
F-20
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Common Stock valued at $10.91 per share. Prior to December 27, 1997, the
Company deposited $1.0 million in an escrow account for purposes of completing
this transaction. This amount is included in other assets at December 27,
1997. The Company will account for the acquisition under the purchase method
of accounting.
In April 1998, the Company acquired Biobottoms, a company engaged in the
direct marketing of children's apparel. Payment of the aggregate purchase
price of $2.27 million consisted of (i) $1.0 million of cash, (ii) $1.17
million of notes, bearing interest at an annual rate of 7.0%, of which
$670,000 is due within four months after this offering and the balance is due
in August 1999 and (iii) $100,000 of non-compete payments due in equal annual
installments of $50,000 due in April 1999 and April 2000. The excess of the
purchase price over the estimated fair value of the net assets acquired
(approximately $619,000 as of December 27, 1997) will be recorded as goodwill.
The acquisition will be accounted for under the purchase method of accounting.
Subsequent to December 27, 1997, the Company completed the sale of 22,942
shares of its Series A Cumulative Convertible Preferred Stock for aggregate
proceeds of $22,942.
In May 1998, the Company effected a 275 for 1 stock split. All common share
and per share information in the accompanying financial statements has been
retroactively restated to reflect this reverse stock split.
In March 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering of Common Stock.
In March 1998, the Company amended its Credit Agreement with a commercial
lender dated May 1997. Pursuant to the amendment, the Company is no longer
required to prepay the term loan in connection with an initial public offering
of its stock.
Subsequent to December 27, 1997, the Company issued $7.65 million principal
amount of notes payable to GEIPPP II for net proceeds of $7.35 million. The
notes bear interest at 15% per annum and are payable on June 1, 2003. The
notes require prepayment in the event of an initial public offering, as
defined.
Subsequent to December 27, 1997, the Company's Board of Directors approved
grants of stock options to employees and executives who are also principal
stockholders and granted an aggregate of 120,037 stock options to employees at
an exercise price of $10.91 per share and an aggregate of 412,500 stock
options to certain executives at an exercise price of $16.36 per share. The
employee options vest ratably over five years and expire after ten years. The
executive options vest in full on March 2, 1999 and expire after ten years. In
addition, the Company's Board of Directors approved grants to certain
executives aggregating 495,000 stock options at an exercise price of $23.64
and 660,000 stock options at an exercise price of $30.91. Such options will be
granted upon the completion of the Company's initial public offering and will
vest in full on March 2, 2000 and March 2, 2001, respectively, and expire
after ten years from the date of grant. In addition, effective upon the
consummation of the initial public offering, a total of 4,125,000 shares of
Common Stock will be reserved for issuance upon exercise of options granted
under the Option Plan.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Manny's Baseball Land, Inc.
We have audited the accompanying statements of operations and cash flows of
Manny's Baseball Land, Inc. for the period from January 1, 1996 to December 2,
1996 and the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Manny's
Baseball Land, Inc. for the period from January 1, 1996 to December 2, 1996
and the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Hackensack, New Jersey
June 6, 1997
F-22
<PAGE>
MANNY'S BASEBALL LAND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 2, 1996
----------------- ----------------
<S> <C> <C>
Net sales.................................. $19,405,069 $15,741,956
Cost of goods sold......................... 11,621,420 9,775,489
----------- -----------
Gross profit............................... 7,783,649 5,966,467
Selling, general and administrative
expense................................... 7,205,494 6,825,745
----------- -----------
Income (loss) from operations.............. 578,155 (859,278)
Interest expense........................... 192,451 187,619
Interest and other income.................. 21,189 22,086
----------- -----------
Net income (loss).......................... $ 406,893 $(1,024,811)
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MANNY'S BASEBALL LAND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 2, 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 406,893 $(1,024,811)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization............. 217,553 274,047
Provision for losses on accounts
receivable............................... 10,011 48,715
Changes in other operating assets and
liabilities:
Accounts receivable...................... (43,428) (159,176)
Merchandise inventory.................... 144,938 (230,440)
Prepaid expenses......................... (82,220) (134,928)
Deposits................................. (28,286) 29,514
Accounts payable......................... (1,297,603) 949,983
Accrued liabilities...................... (40,793) 158,111
----------- -----------
Net cash used in operating activities...... (712,935) (88,985)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment...... (644,667) (359,476)
----------- -----------
Net cash used in investing activities...... (644,667) (359,476)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to stockholders.............. (597,354) (35,986)
Net borrowings under revolving line of
credit.................................... 1,703,101 579,737
Proceeds from long-term borrowings......... 354,000 118,460
Principal payments on long-term debt....... (102,145) (161,941)
----------- -----------
Net cash provided by financing activities.. 1,357,602 500,270
Net increase in cash....................... -- 51,809
Cash overdraft at beginning of period...... -- --
----------- -----------
Cash at end of period...................... $ -- $ 51,809
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MANNY'S BASEBALL LAND, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Manny's Baseball Land, Inc. (the Company) is a mail order company that sells
authentic professional sports attire. The Company's primary market is the
United States, other markets include Canada, Europe and the Pacific Basin
area.
On December 2, 1996, substantially all assets and liabilities of the Company
were acquired by a third party, Genesis Direct Five, LLC. ("Genesis"), in
exchange for cash of $5,925,000 and promissory notes of $5,275,000.
The financial statements of the Company have been prepared as supplemental
information about the entity which Genesis will own following consummation of
the acquisition. The Company previously operated as a separate independent
entity. The results of operations and cash flows do not reflect any
adjustments relating to the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns is recorded based upon historical experience.
Property and Equipment
Depreciation of furniture and equipment has been provided on the straight-
line method over the estimated useful lives of five to seven years.
Depreciation expense was $205,761 and $264,706 for the year ended December 31,
1995 and the period ended December 2, 1996, respectively.
Income Taxes
The Company has elected to be treated as an S Corporation under the
provisions of the Internal Revenue Code, which eliminates federal income taxes
at the corporate level.
Direct Response Advertising and Promotion Costs
Direct response advertising costs, consisting primarily of catalog
production and postage expenditures, are amortized over the period during
which associated net revenues are expected, generally two months or less.
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7 Reporting of Advertising Costs. Direct
response and other advertising expenses were $2,365,988 and $2,310,295 for the
year ended December 31, 1995 and the period ended December 2, 1996,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows employees
meeting certain eligibility requirements to contribute up to 15% of their
annual compensation. The Company may contribute to such plan at a
discretionary rate determined yearly by the Board of Directors. The Company's
contributions for the year ended December 31, 1995 and the period ended
December 2, 1996 were approximately $7,740 and $12,095, respectively.
4. COMMITMENTS
Rent expense for the year ended December 31, 1995 and the period ended
December 2, 1996 was approximately $87,000 and $100,000 respectively.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Athletic Supply of Dallas, Inc.:
We have audited the accompanying statements of income and cash flows of
Athletic Supply of Dallas, Inc. for each of the years in the three-year period
ended June 30, 1996, and for the period from July 1, 1996 to December 20,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Athletic
Supply of Dallas, Inc. for each of the years in the three-year period ended
June 30, 1996, and for the period from July 1, 1996 to December 20, 1996, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Company changed its
methods of accounting for income taxes in fiscal 1994.
KPMG Peat Marwick LLP
Dallas, Texas
April 18, 1997
F-26
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED JUNE 30, ENDED TO
------------------------------------- DECEMBER 31, DECEMBER 20,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales,
net.................. $26,561,643 $30,973,035 $23,985,590 $21,051,801 $15,990,059
Fulfillment revenues.. -- 2,409,052 5,612,748 2,869,138 2,986,556
Other................. 617,207 341,256 586,651 109,296 783,471
----------- ----------- ----------- ----------- -----------
27,178,850 33,723,343 30,184,989 24,030,235 19,760,086
Operating expenses:
Cost of sales......... 12,679,741 15,050,116 11,464,346 10,146,476 8,009,108
Selling, general and
administrative....... 12,711,937 17,774,347 17,122,691 11,626,390 11,588,454
----------- ----------- ----------- ----------- -----------
25,391,678 32,824,463 28,587,037 21,772,866 19,597,562
----------- ----------- ----------- ----------- -----------
Operating income.... 1,787,172 898,880 1,597,952 2,257,369 162,524
Other income (expense):
Interest expense...... (17,314) (207,521) (267,623) (163,908) (106,287)
Interest income....... 1,298 1,568 149 -- --
----------- ----------- ----------- ----------- -----------
(16,016) (205,953) (267,474) (163,908) (106,287)
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations before
income taxes....... 1,771,156 692,927 1,330,478 2,093,461 56,237
Income taxes (note 4)... 613,802 266,971 527,379 244,000 31,301
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations......... 1,157,354 425,956 803,099 1,849,461 24,936
Discontinued operations
(note 2):
Loss from operations
of discontinued
retail division (net
of income tax benefit
of $8,694 in 1994 and
$42,138 in 1995)..... (16,876) (67,312) -- -- --
Loss on disposal of
retail division (net
income tax benefit of
$77,000 in 1995 and
$26,693 in 1996)..... -- (123,000) (42,640) -- --
----------- ----------- ----------- ----------- -----------
Income before
extraordinary
item............... 1,140,478 235,644 760,459 1,849,461 24,936
Extraordinary item--gain
on extinguishment of
debt (net of income
taxes of $96,690) (note
3)..................... -- 183,392 -- -- --
----------- ----------- ----------- ----------- -----------
Income before
cumulative effect
of a change in
accounting method.. 1,140,478 419,036 760,459 1,849,461 24,936
Cumulative effect of a
change in method of
accounting for income
taxes (note 4)......... 873,351 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income.......... 2,013,829 419,036 760,459 1,849,461 24,936
Preferred stock
dividends.............. -- -- 41,493 -- 20,509
----------- ----------- ----------- ----------- -----------
Income available to
common stock....... $ 2,013,829 $ 419,036 $ 718,966 $ 1,849,461 $ 4,427
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED JUNE 30, ENDED TO
----------------------------------- DECEMBER 31, DECEMBER 20,
1994 1995 1996 1995 1996
----------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 2,013,829 $ 419,036 $ 760,459 $1,849,461 $ 24,936
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 163,859 264,442 371,334 203,070 204,976
Provision for doubtful
accounts............. (8,988) (10,643) 5,892 -- 54,990
Inventory writedown... -- -- -- -- 700,000
Deferred income
taxes................ (268,243) 54,117 136,282 (362,576)
Changes in assets and
liabilities:
Accounts receivable.. 6,241 (759,102) 66,328 (440,676) (1,020,175)
Income taxes......... (150,000) 11,550 308,051 162,738 (237,493)
Inventories.......... (1,650,187) (618,243) 1,026,940 274,610 (129,496)
Prepaid expenses..... (27,377) (145,902) 204,182 (83,455) (187,563)
Other assets......... (13,833) (11,748) 20,627 12,630 --
Accounts payable..... 444,107 841,179 (1,565,299) (829,306) 2,062,790
Customer deposits.... (6,552) 258,296 (174,829) 21,127 583,860
Accrued expenses..... 137,754 513,287 (691,643) 532,176 968,573
----------- ---------- ---------- ---------- ----------
Net cash provided by
operating
activities......... 640,610 816,269 468,324 1,702,375 2,662,822
----------- ---------- ---------- ---------- ----------
Cash flows used in
investing activities--
additions to property
and equipment......... (239,015) (1,016,133) (543,337) (242,382) (335,700)
----------- ---------- ---------- ---------- ----------
Cash flows from
financing activities:
Proceeds received on
borrowings from
stockholders......... 580,000 -- -- --
Proceeds received from
long-term debt....... -- 1,130,000 900,000 --
Proceeds from issuance
of preferred stock... -- -- 600,000 406,601 --
Net (payments made)
proceeds received
under line of
credit............... -- 986,009 (250,000) (2,000,000) (1,750,000)
Payments made on
borrowings from
stockholders......... (360,000) (321,000) -- --
Payments made on long-
term debt............ (316,557) (726,648) (1,036,682) (6,305) --
Preferred stock
issuance costs....... -- -- (211,398) --
Principal payments
under capital lease
obligations.......... (8,176) (42,978) (64,294) (40,308)
Purchase of treasury
stock................ -- (950,000) -- --
----------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities......... (104,733) 75,383 (62,374) (1,599,704) 1,790,308
----------- ---------- ---------- ---------- ----------
Net change in cash and
cash equivalents...... 296,862 (124,481) (137,387) (139,711) 536,814
Cash and cash
equivalents at
beginning of period... 12,922 309,784 185,303 185,304 47,916
----------- ---------- ---------- ---------- ----------
Cash and cash
equivalents at end of
period................ $ 309,784 $ 185,303 $ 47,916 $ 45,539 $ 584,730
=========== ========== ========== ========== ==========
Supplemental
disclosure:
Noncash investing
activity--property
and equipment
acquired under
capital leases....... $ 178,741 $ 64,379 $ 28,538 $ -- $ 13,764
=========== ========== ========== ========== ==========
Interest paid......... $ 17,314 $ 197,466 $ 267,624 $ 176,528 $ 119,399
=========== ========== ========== ========== ==========
Income taxes paid..... $ 150,000 $ 178,855 $ 56,354 $ 30,000 $ 631,372
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General Information
Athletic Supply of Dallas, Inc. (the Company) is engaged in the sale of
sports related apparel and other related products primarily through a mail
order catalog merchandising operation. The mail order operation markets its
products throughout the United States and Canada.
In fiscal year 1995, the Company expanded its business to include a
fulfillment operation for Sears, Roebuck and Co. (Sears) tool and healthcare
products. The Company receives a fixed fee for each call processed by its
telemarketing center and for each item filled through its warehouse. In June
1996, the Company further expanded its business when it entered into an
agreement with Sears and its designated vendors to provide operating systems
and support for catalog order processing for the Sears Wish Book.
The Company discontinued the operations of its retail division, consisting
of one retail store, on December 31, 1995 (see note 2).
On December 20, 1996, all outstanding common stock of the Company was
purchased by Genesis Direct (Genesis) for $10,000,000, consisting of
$5,000,000 cash and a $5,000,000 promissory note. The accompanying financial
statements do not reflect any basis adjustments as a result of this
transaction.
(b) Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments
with original maturities of three months or less. Cash equivalents consisted
of money market accounts of $23,666, $114,906, $3,374, and $6,661, at June 30,
1994, 1995 and 1996, and December 20, 1996, respectively.
(c) Inventories
Inventories are stated at the lower of average cost or market. An allowance
of $700,000 was recorded for the period ended December 20, 1996 to reflect the
reduction of certain inventory items to their estimated net realizable value.
(d) Property and Equipment
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
straight-line over the shorter of the lease term or estimated useful life of
the asset.
Depreciation and amortization charged to expense was $129,715, $230,298, and
$337,190, for the years ended June 30, 1994, 1995 and 1996, respectively and
$187,902 for the period from July 1, 1996 to December 20, 1996.
Costs of maintenance and repairs are charged to expense when incurred. Upon
retirement or other disposition, the cost of assets and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in operations.
(e) Goodwill
Goodwill is amortized over 40 years on a straight-line basis. Included in
selling, general and administrative expenses is goodwill amortization of
$34,144 for each of the years ended June 30, 1994, 1995 and 1996, and
F-29
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$17,072 for the period from July 1, 1996 to December 20, 1996, for the excess
of the purchase price over the fair market value of assets acquired at the
date of purchase.
(f) Revenue Recognition
Revenues from merchandise sales are recognized upon shipment of products.
Fulfillment revenues are recognized as services are rendered. The Company has
an in-house mailing list consisting of approximately 700,000 customers from
which $152,000, $167,000, $112,000, and $53,000 of rental list income was
generated in the years ended June 30, 1994, 1995 and 1996, and the period from
July 1, 1996 to December 20, 1996, respectively. This income is included in
other revenues in the accompanying statements of income.
(g) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement 109). Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective July 1, 1993, the Company adopted Statement 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the statement of income for the year ended June 30, 1994.
(h) Advertising Costs
Advertising costs for newspaper and other media are expensed as incurred.
Direct response advertising costs, which consist primarily of catalog
preparation, printing and postage costs, are capitalized and amortized over
the period during which the benefits of the catalogs are expected, not to
exceed six months.
Advertising expense was $3,756,328, $5,695,737, and $4,654,400 for the years
ended June 30, 1994, 1995 and 1996, respectively, and $112,296 for the period
from July 1, 1996 to December 20, 1996.
(i) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) Unaudited Interim Information
The financial information for the six months ended December 31, 1995 is
unaudited, and certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary to fairly present the
results of operations and cash flows with respect to such interim financial
statements, have been included.
F-30
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) DISCONTINUED OPERATIONS
On June 30, 1995, the Company adopted a formal plan to discontinue
operations of its retail division. Operations of the retail division were
discontinued on December 31, 1995. Sales for the discontinued operations of
the retail division were $3,528,852, $3,143,369, and $627,118 for the years
ended June 30, 1994, 1995 and 1996, respectively.
(3) NOTES PAYABLE AND LONG-TERM DEBT
In July 1994, the Company repaid in full its then existing notes payable to
bank and recognized an extraordinary gain of $280,082. The Company then
entered into a new debt agreement with another bank consisting of a $1,000,000
term note and a $2,000,000 revolving note, both of which were collateralized
by substantially all the assets of the Company. Repayment of the notes was
guaranteed by the president of the Company up to a maximum of $2,000,000. The
interest rate on the notes was .75% per annum above the lender's prime rate
and interest was payable monthly.
Effective July 14, 1995, the Company entered into a new debt agreement with
a different lender and repaid in full its obligations to the previous lender.
The new debt agreement consisted of a $900,000 term note ($600,000 outstanding
at December 20, 1996) and a $3,500,000 revolving note (repaid in full on
December 18, 1996), both of which are collateralized by substantially all the
assets of the Company. The interest rate on the debt agreement is .50% per
annum above the lender's prime rate (8.75% at December 20, 1996) and is
payable monthly. Repayment of the Company's obligations under the new debt
agreement was guaranteed by the president of the Company up to a maximum of
$2,000,000.
Principal payments on the new term note are due in three equal annual
installments of $300,000, with the final payment due on January 10, 1998.
The new debt agreement requires the Company to maintain a minimum tangible
net worth and to comply with other financial and nonfinancial covenants.
Also on July 14, 1995, the Company borrowed $400,000 from Sears. The Sears
borrowings, which are subordinated to borrowings under the bank debt
agreement, bear interest at 9% per annum and are payable in two installments
of $200,000 plus accrued interest.
In connection with the purchase of the common stock of the Company by
Genesis, the outstanding balance of $600,000 on the term note was repaid in
full on December 20, 1996 by Genesis on behalf of the Company.
(4) INCOME TAXES
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JUNE 30, JULY 1, 1996 TO
--------------------------- DECEMBER 20,
1994 1995 1996 1996
-------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Income from continuing
operations.................. $613,802 266,971 527,379 31,301
Discontinued operations...... (8,694) (119,138) (26,693) --
Extraordinary item........... -- 96,690 -- --
-------- -------- ------- ------
$605,108 244,523 500,686 31,301
======== ======== ======= ======
</TABLE>
F-31
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
Year ended June 30, 1994:
Federal...................................... $ -- $ 613,802 $613,802
======== ========= ========
Year ended June 30, 1995:
Federal...................................... 208,181 26,071 234,252
State franchise.............................. 27,553 5,166 32,719
-------- --------- --------
235,734 331,237 266,971
======== ========= ========
Year ended June 30, 1996:
Federal...................................... 421,604 46,616 468,220
State franchise.............................. 53,014 6,145 59,159
-------- --------- --------
474,618 52,761 527,379
======== ========= ========
Period from July 1, 1996 to December 20, 1996:
Federal...................................... 376,152 (346,260) 29,892
State franchise.............................. 17,725 (16,316) 1,409
-------- --------- --------
$393,877 $ 362,576 $ 31,301
======== ========= ========
</TABLE>
Income tax expense attributable to continuing operations differs from the
"expected" tax expense (computed by applying the 34% U.S. federal corporate
rate to income from continuing operations before income taxes) as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JUNE 30, JULY 1, 1996 TO
--------------------------- DECEMBER 20.
1994 1995 1996 1996
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Computed "expected" tax expense
............................... $602,193 $235,592 $452,362 $19,121
State franchise taxes, net of
federal income tax benefit..... -- 21,595 39,045 930
Increase in income taxes
resulting from amortization of
excess cost over net assets
acquired, meals and
entertainment, and officers'
life insurance................. 11,609 11,609 11,609 8,524
Other........................... -- (1,828) 24,363 2,726
-------- -------- -------- -------
$613,802 $266,971 $527,379 $31,301
======== ======== ======== =======
</TABLE>
(5) LEASES
The Company leases warehouse and office space under operating leases that
expire at various dates through 2000. The Company also leases computer,
telephone, and other equipment under capital leases that expire at various
dates through the year 2000.
F-32
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the minimum rental commitments under noncancellable operating
leases and the present value of future minimum capital lease payments as of
December 20, 1996 is as follows:
<TABLE>
<CAPTION>
PERIODS
ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
-------- -------- ---------
<S> <C> <C>
1997................................................... $ 30,148 247,646
1998................................................... 63,864 270,556
1999................................................... 47,402 176,600
2000................................................... 6,049 87,500
-------- --------
147,463 $782,302
========
Less amount representing interest (at 10%)............. 17,036
--------
Present value of minimum capital lease payments........ $130,427
========
</TABLE>
The 1997 payments are for the period December 21, 1996 to June 30, 1997.
Rent expense for the years ended June 30, 1995 and 1996 and the period from
July 1, 1996 to December 20, 1996 was $614,044, $536,504 and $259,345,
respectively.
(6) STOCKHOLDERS' EQUITY
In January and March 1995, the Company repurchased a total of 2,444,596
shares of its common stock, representing 55% ownership, from two principal
shareholders for $950,000. The shares were constructively retired during the
year ended June 30, 1995.
In June 1995, the Company's Board of Directors (Board) approved an amendment
to the Company's Articles of Incorporation to increase the number of common
shares authorized to 10 million and to authorize 5 million shares of Series A
preferred stock at a par value of $2.50 per share. The par value of the Series
A preferred stock was subsequently reduced to $1.75 per share.
In June 1995, the Company's Board approved a 43.11 to 1 common stock split,
increasing outstanding shares at June 30, 1995 to 2 million with a par value
of $20,000. All share disclosures have been retroactively restated to reflect
the common stock split.
In July 1995, 342,857 shares of Series A preferred stock were issued at
$1.75 per share. The Series A preferred stock has a cumulative annual dividend
of 5% of the original purchase price per share and has a liquidation value
equal to the greater of $1.80 per share plus unpaid dividends or such amount
per share of preferred stock as would have been payable and each such share
been converted into common stock immediately prior to liquidation (as defined
in the Series A Preferred Stock and Warrant Purchase Agreement). The stock is
convertible, at any time, into an equal number of shares of the Company's
common stock. The conversion ratio may be adjusted from time to time upon the
occurrence of various capital stock transactions. Holders of the Series A
preferred stock may require the Company to redeem the shares at any time
subsequent to January 14, 1998 at an amount equal to the liquidation value.
The Company may redeem the shares, at an amount equal to the liquidation
value, at the earlier of the closing of an initial public offering on July 14,
2001. As of December 20, 1996, $62,002 in cumulative preferred stock dividends
is in arrears.
In connection with the issuance of the Series A preferred stock, the Company
issued warrants to purchase 68,514 shares of the Series A preferred stock. The
exercise price of the warrants is $2.16 per share. The warrants may be
exercised for all or any lesser number of shares at any time and from time to
time between issuance and January 14, 1998. The exercise price may be adjusted
from time to time upon the occurrence of various capital stock transactions.
F-33
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) RELATED PARTY TRANSACTIONS
In consideration for the Company president's guaranty of borrowings under
the Company's debt agreements discussed in note 3, the Company has agreed to
pay him a fee equal to .167% in fiscal 1995 and .333% in fiscal 1996 and
thereafter of the outstanding balance under the agreements, up to a maximum of
$2,000,000. Such fee amounted to $20,506 and $52,835 for the years ended June
30, 1995 and 1996, respectively, and $44,889 for the period from July 1, 1996
to December 20, 1996.
The Company leases an office/warehouse building, used by the mail order
division, from its president and stockholder. Rentals paid during each of the
years ended June 30, 1994, 1995 and 1996, and during the period from July 1,
1996 to December 20, 1996, amounted to $100,000, and $50,000, respectively.
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising from the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's results of operations or cash flows.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Lilliput Motor Company, Ltd.:
We have audited the accompanying statements of operations and cash flows of
Lilliput Motor Company, Ltd. for the years ending August 31, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit,
also, includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Lilliput
Motor Company, Ltd. for the years ending August 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
Boscia Goldenberg & Company
Wayne, New Jersey
February 2, 1998
F-35
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31, FOUR MONTH PERIODS ENDED
------------------ -----------------------------------
1996 1995 DECEMBER 24, 1996 DECEMBER 31, 1995
-------- -------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $871,062 $855,793 $520,490 $501,380
Cost of sales........... 608,180 583,965 369,604 275,685
-------- -------- -------- --------
Gross profit.......... 262,882 271,828 150,886 225,695
Selling, general and ad-
ministrative expenses.. 253,510 235,362 111,782 126,026
-------- -------- -------- --------
Income from opera-
tions................ 9,372 36,466 39,104 99,669
Other income (Expense)
Gain on sale of as-
sets................. 1,127 -- --
Interest expense...... (22,817) (16,282) -- --
Other income.......... 90 8 6
-------- -------- -------- --------
(21,690) (16,192) 8 6
-------- -------- -------- --------
(Loss) income before
benefit of (provision
for) income taxes...... (12,318) 20,274 39,112 99,675
Tax benefit of net oper-
ating loss carryback
(Provision for federal
income tax)........... 1,848 (3,041) (5,275) (36,640)
-------- -------- -------- --------
Net (Loss) Income....... $(10,470) $ 17,233 $ 33,837 $ 63,035
======== ======== ======== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-36
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST
31, FOUR MONTH PERIODS ENDED
------------------- -------------------------
DECEMBER 24, DECEMBER 31,
1996 1995 1996 1995
--------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.............. $ (10,470) $ 17,233 $ 33,837 $ 63,035
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and
amortization................ 12,988 24,753 864 6,079
Gain on sale of assets....... (1,127)
(Decrease) increase in de-
ferred income taxes......... (1,848) 3,041
Change in assets and
liabilities:
Decrease (increase) in
accounts receivable......... 27,053 (24,431) (22,553) (16,304)
Increase in inventories...... (78,677) (59,206) (14,053) (54,417)
Decrease in prepaid
advertising................. 8,675 (45,158) --
Increase in accounts
payable..................... 58,769 22,614 90,501 77,136
Increase (decrease) in
current portion of long term
debt........................ 80,032 (25,000) (35,016) (35,579)
Increase in other
liabilities................. 1,311 8 5,198 114
--------- -------- -------- --------
Net cash provided by (used
in) operating activities.. 88,031 (32,313) 13,620 76,704
--------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of office furniture
and equipment................. (10,362) -- -- (4,187)
Increase in improvements to
building...................... (6,690) (2,828)
Proceeds from sale of assets... 59,938 255
Purchase of antiques held for
investment.................... (7,740) (20,000) (10,619)
--------- -------- -------- --------
Net cash provided from
(used in) investing
activities................ 41,836 (26,435) (13,447) (4,187)
--------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayment) proceeds of long-
term debt..................... (145,422) 44,020 (173) (4,921)
Proceeds from issuance of
preferred stock............... 6,300 20,000
--------- -------- -------- --------
Net increase in cash from
financing activities...... (139,122) 64,020 (173) (4,921)
--------- -------- -------- --------
Net (Decrease) Increase in Cash.. (9,255) 5,272 -- 67,596
Cash, beginning of the year...... 9,255 3,983 -- 9,255
--------- -------- -------- --------
Cash, end of the year............ $ 0 $ 9,255 $ 0 $ 76,851
========= ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest....................... $ 22,817 $ 16,282 $ 0 $ 0
========= ======== ======== ========
Income taxes................... $ 0 $ 0 $ 0 $ 0
========= ======== ======== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-37
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS--Lilliput Motor Company, Ltd. (the Company) is engaged in mail
order sales of collectibles and toys. The Company markets and sells its
products throughout the United States and has several customers in other
countries. The warehouse and office facility are located in Yerington, Nevada.
INVENTORIES--Inventories consist primarily of collectibles and toys held for
resale. Cost of sales is computed at the lower of cost (first-in, first-out)
or market.
DEPRECIATION--The Company follows the policy of charging to costs and
expenses annual amounts of depreciation which allocate the cost of the office
furniture and equipment, tooling equipment and buildings over their estimated
useful lives. The Company employs the straight-line method for office
furniture and equipment and buildings and the units-of-production method for
tooling equipment for determining the annual charge for depreciation. The
range of estimated useful lives used are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Office furniture and equipment......................................... 5
Buildings and improvements............................................. 30
</TABLE>
Depreciation expense was $12,906 and $24,334 for the years ended August 31,
1996 and 1995, respectively.
CATALOG COSTS--Most catalog costs are deemed to have a short-term benefit
associated only with the production and mailing of a particular catalog. These
short-term catalog costs are recorded to prepaid catalog costs as incurred and
are charged off to operating expenses as the stream of revenue attributable to
the catalog is realized.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. COMMITMENTS
On January 25, 1995, the Company entered into a three year non-cancellable
lease on an office copy machine. The lease has been accounted for as an
operating lease. For the years ending August 31, 1996 and 1995, monthly rental
payments were $1,252 and $835, respectively, and are included in selling,
general and administrative expenses on the statements of operations.
Future minimum lease payments under this lease are as follows:
<TABLE>
<S> <C>
1997.................................................................. $1,252
1998.................................................................. 417
Thereafter............................................................ None
</TABLE>
F-38
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1995
3. INCOME TAXES
Primarily due to timing differences in recognition of depreciation for tax
and financial statement presentation, the Company has taxable income (loss)
which differs from that for financial statement purposes.
The amounts of net operating losses available for carryover at August 31,
1996 and their dates of expiration are as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION DATE
------- ---------------
<S> <C> <C>
$ 838 August 31, 2007
23,863 August 31, 2011
-------
Total................................................ $24,701
=======
</TABLE>
4. RELATED PARTY TRANSACTIONS
During the years ending August 31, 1996 and 1995 the Company borrowed
amounts from common stockholders totaling $11,938 and $14,453, respectively.
These notes were non-interest bearing. The funds were for working capital.
On May 8, 1995, a preferred stockholder loaned $20,000 to the Company. This
loan bears interest at 10%. The funds were used for working capital. Interest
paid on this note was $2,000 and $333 for the years ending August 31, 1996 and
1995, respectively.
During the year ending August 31, 1995, the Company borrowed $25,000 at 10%
interest per year from a trust which was represented by an attorney who
performed legal services for the Company. Interest paid on this note was
$3,072 and $2,283 for the years ending August 31, 1996 and 1995, respectively.
On August 6, 1996 property located at 1247 Missouri Lane, Yerrington, Nevada
was sold to a common stockholder. The outstanding mortgage balance was assumed
by the stockholder. This property was purchased by the Company on April 27,
1993. The sale resulted in a gain to the Company in the amount of $1,127.
5. SUBSEQUENT EVENT
On December 24, 1996 all of the assets except the building located at 321
South Main Street, Yerington, Nevada were acquired by Genesis Direct, Inc.
(Genesis). All liabilities existing on December 24, 1996 except the mortgage
obligation on the building located at 321 South Main Street, Yerington, Nevada
were assumed by Genesis. The operating lease commitment referred to in Note 2
was also assumed by Genesis.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Step Designs Ltd:
We have audited the accompanying statements of operations and cash flows of
First Step Designs Ltd. (a Massachusetts corporation) for the years ended
December 31, 1995 and 1996 and the period ended February 6, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of First Step Designs Ltd. for the years ended December 31, 1995
and 1996 and February 6, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
March 18, 1997
F-40
<PAGE>
FIRST STEP DESIGNS LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1997 TO
------------------------ FEBRUARY 6,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales................................ $10,821,510 $ 9,779,931 $ 453,534
Costs and Expenses:
Cost of sales.......................... 5,966,864 5,321,397 262,690
Selling and marketing.................. 3,572,276 3,311,257 202,397
General and administrative............. 2,136,544 2,496,440 261,412
----------- ----------- ---------
Loss from operations................. (854,174) (1,349,163) (272,965)
Interest Expense, Net.................... (197,532) (269,304) (29,873)
----------- ----------- ---------
Net loss............................. $(1,051,706) $(1,618,467) $(302,838)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these finacial statements.
F-41
<PAGE>
FIRST STEP DESIGNS LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1997 TO
------------------------ FEBRUARY 6,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................ $(1,051,706) $(1,618,467) $(302,838)
Adjustments to reconcile net loss to net
cash used in operating activities--
Amortization of deferred compensation.. 17,014 6,070 605
Depreciation and amortization.......... 32,810 73,583 9,570
Changes in current assets and
liabilities--
Accounts receivable................... (99,820) 42,469 3,311
Inventories........................... (130,633) (48,006) (70,383)
Prepaid expenses...................... (187,909) (74,253) (63,043)
Accounts payable and accrued
expenses............................. 69,852 517,000 161,341
----------- ----------- ---------
Net cash used in operating
activities.......................... (1,350,392) (1,101,604) (261,437)
----------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment...... (30,292) (272,176) --
----------- ----------- ---------
Net cash used in investing
activities.......................... (30,292) (272,176) --
----------- ----------- ---------
Cash Flows From Financing Activities:
Obligations under a capital lease...... -- 13,130 (450)
Proceeds from notes payable to
stockholder............................. 1,629,548 696,793 272,684
Proceeds from notes payable to a bank.... 350,000 650,000 --
Payments on convertible notes payable.... (33,333) -- --
Payments on notes payable to
stockholder............................. (200,000) (500,000) --
Proceeds from the exercise of stock
options................................. 2,550 -- --
----------- ----------- ---------
Net cash provided by financing
activities.......................... 1,748,765 859,923 272,234
----------- ----------- ---------
Net Increase (Decrease) in Cash.......... 368,081 (513,857) 10,797
Cash, Beginning of Period................ 209,867 577,948 64,091
----------- ----------- ---------
Cash, End of Period...................... $ 577,948 $ 64,091 $ 74,888
----------- ----------- ---------
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for interest... $ 7,937 $ 72,511 $ 7,190
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
First Step Designs Ltd. (the Company) has been a direct marketer of products
for infants, toddlers and young children since 1985 and operates principally
in the United States.
On February 6, 1997, the Company entered into a purchase agreement with
Genesis Direct Ten, LLC (the Buyer), whereby substantially all of the assets
and certain liabilities of the Company, as defined, were acquired for a
purchase price of approximately $2,000,000 of which $350,000 is payable one
year from the closing date. Under the agreement, the purchase price is subject
to adjustment based upon the balance sheet at closing. These amounts were used
to partially satisfy the Company's debt obligations.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and other notes to financial
statements.
(a) Mailing List
Through prospective mailing, the Company has historically achieved an order
response rate of 1% to 4%. Customers added to the Company's house file are
expected to provide a recurring revenue base. The house file is also rented to
third parties as an additional source of revenue. Net rental fees derived from
house file rentals totaled approximately $85,000 and $149,000 for the years
ended December 31, 1995 and 1996, respectively, and totaled approximately
$16,000 for the period ending February 6, 1997.
(b) Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenue
from mailing list rentals are recognized at the time of shipment of the names
rented.
(c) Inventories
The Company values inventories at the lower of cost (first-in, first-out) or
market. Inventories are comprised of purchased finished goods.
(d) Prepaid Marketing Costs
Costs related to the production and distribution of marketing materials to
potential customers are capitalized. These costs are charged to operations
over the estimated period in which revenues are derived from the mailings,
which is generally four months.
(e) Depreciation and Amortization
The Company provides for depreciation and amortization, computed on both the
straight-line and accelerated methods, by charges to operations in amounts
that allocate the cost of fixed assets over their estimated useful lives:
furniture and fixtures, 7 years or MACRS; equipment, 5 years; equipment under
capital lease and leasehold improvements, 5 years or the life of the lease, if
shorter.
(f) Income Taxes
The Company has elected to be treated as a subchapter S corporation for
federal and state income tax purposes. Under this election, the taxable income
and losses of the Company are reported on the individual tax returns of its
stockholders.
F-43
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Use of Estimates
The preparation of the statements of operations and cash flows in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995 and 1996, and for the period ending
February 7, 1997, the Company recorded $180,000, $197,000 and $23,000 of
interest expense, respectively, relating to notes payable to a stockholder of
the Company.
(4) COMMITMENTS
The Company conducts its operations in leased facilities and leases certain
equipment under agreements expiring through June 2008. The future minimum
operating lease payments under these agreements as of December 31, 1996 were
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1997............................ $ 105,000
1998............................ 75,000
1999............................ 78,000
2000............................ 80,000
2001............................ 85,000
Thereafter...................... 585,000
----------
$1,008,000
==========
</TABLE>
Rental expense charged to operations for the years ended December 31, 1995 and
1996 and the period ended February 6, 1997 was approximately $77,000, $97,000
and $9,000, respectively.
(5) COMMON STOCK
(a) Stock Option Plan
On August 5, 1993, the Company adopted the First Step Designs Ltd. 1993
Stock Option Plan (the Plan). The Plan provides for the granting of incentive
and nonqualified stock options. The number of options granted and the vesting
of the options are at the discretion of the Board of Directors. The Company
has reserved 150,000 shares of common stock pursuant to the Plan.
<TABLE>
<CAPTION>
NUMBER
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Balance, December 31, 1994 27,216 $.01-$.29
Exercised............................................. (15,309) .01- .29
Terminated............................................ (11,907) .01- .29
------- ---------
Balance, December 31, 1995 -- $ --
Granted............................................... 400 .45
Terminated............................................ (100) .45
------- ---------
Balance, December 31, 1996.............................. 300 $ .45
======= =========
Exercisable, December 31, 1996.......................... 300 $ .45
======= =========
Balance, February 6, 1997............................... 300 $ .45
======= =========
</TABLE>
F-44
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The value of these options under the provision of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
is insignificant. These options terminated with the sale of the business.
(b) Stock Grants
On November 30, 1995, 61,919 shares of stock were issued to an executive of
the Company. Of these shares, 35,385 are no longer subject to forfeiture,
while the balance vests ratably through August 31, 1999. The value of this
restricted stock award, as calculated under SFAS 123, is equal to the
compensation calculated under APB No. 25.
In connection with the sale of the Company's assets, as discussed in Note 1,
this compensation arrangement was terminated. Pursuant to the terms of this
compensation agreement, the Company repurchased 15,480 shares of stock, from
the executive for $.01 per share.
(6) FIRST STEP DESIGNS LTD. SAVINGS AND RETIREMENT PLAN
During 1994, the Company established the First Step Designs Ltd. Savings and
Retirement Plan (the Savings and Retirement Plan). In January 1997, this plan
was terminated. Previously, all employees were eligible to participate in the
Savings and Retirement Plan and were able to contribute specified percentages
of their salaries, a portion of which could be matched by the Company. In
addition, the Company was able to make contributions to the Savings and
Retirement Plan at the discretion of the Board of Directors. There were no
discretionary contributions made in 1995, 1996 or the one month period ended
February 1, 1997.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE THURSLEY GROUP, INC.
New York, New York
We have audited the accompanying statements of operations and cash flows of
THE THURSLEY GROUP, INC. for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits of the statements of operations and
cash flows provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations of
THE THURSLEY GROUP, INC. for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
Mendlowitz Weitsen, LLP
East Brunswick, New Jersey
February 26, 1997
F-46
<PAGE>
THE THURSLEY GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Sales.................................................... $ 603,521 $ 347,601
Cost of Goods Sold....................................... 271,524 155,250
--------- ---------
Gross Profit............................................. 331,997 192,351
Operating Expenses
Selling expenses....................................... 660,169 638,323
General and administrative expenses.................... 123,734 138,363
--------- ---------
Loss From Operations..................................... (451,906) (584,335)
Other Income (Expense), net.............................. (85,576) (19,005)
--------- ---------
Loss Before Provision for Income Taxes................... (537,482) (603,340)
Provision For Income Taxes............................... 1,306 3,769
--------- ---------
Net Loss................................................. $(538,788) $(607,109)
========= =========
</TABLE>
See notes to financial statements
F-47
<PAGE>
THE THURSLEY GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................ $(538,788) $(607,109)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 4,782 6,929
(Increase) decrease in:
Accounts receivable................................... 5,895 (8,547)
Inventories........................................... (16,198) (25,500)
Prepaid expenses...................................... (47,680) 23,475
Security deposits..................................... 653 --
Increase (decrease) in:
Accounts payable and accrued expenses................. 126,263 76,152
Taxes payable......................................... 5,079 7,089
Payroll taxes withheld................................ (2,877) (9,855)
--------- ---------
75,917 69,743
--------- ---------
Net cash (used) by operating activities.............. (462,871) (537,366)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of trade note................... 26,101 150,000
Proceeds from issuance of floating rate convertible de-
bentures.............................................. 397,723 150,000
Proceeds from issuance of common stock................. 499 25,971
--------- ---------
Net cash provided by financing activities............ 424,323 325,971
--------- ---------
Net (Decrease) in Cash................................... (38,548) (211,395)
Cash, beginning.......................................... 61,016 272,411
--------- ---------
Cash, end................................................ $ 22,468 $ 61,016
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense....................................... $ 5,658 $ --
========= =========
Income Tax............................................. $ 1,006 $ 2,869
========= =========
</TABLE>
See notes to financial statements
F-48
<PAGE>
THE THURSLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
THE THURSLEY GROUP, INC. (the "Company") incorporated in Delaware in 1993
and maintains offices in New York City. The Company created The Voyager's
Collection--a catalog of merchandise for business travelers. The catalog was
launched in December 1994 and is distributed in the rooms of many upscale
hotels throughout the United States.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less
to be cash equivalents.
Accounts Receivable
The Company uses the direct write-off method of recognizing uncollectible
accounts receivable. Under this method, accounts are charged to operations
when they are deemed by management to be uncollectible. The effects of using
the direct write-off method approximates those of the allowance method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight line basis over the estimated useful lives of the assets. Additions
and betterments are capitalized, whereas costs of maintenance and repairs are
charged to expense as incurred. Depreciation expense for December 31, 1996 and
1995 was $4,782 and $6,928, respectively.
Inventory
Inventories are stated at the lower of cost or market using the first in,
first out cost method and consists completely of finished goods.
Income Tax
The Company has adopted FASB Statement No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities. The only provision made was for
the minimum statutory taxes. No credit has been taken for tax loss
carryforwards that aggregate $1,613,852 and will expire in years 2008 to 2011.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-49
<PAGE>
THE THURSLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
NOTE 2--INTEREST
A promissory note is payable in the principal amount of $176,101 with 0%
interest to a supplier. The Company defaulted on the terms of the note at
which time all outstanding balances immediately became due. An accrual for
interest has been estimated at 15% per year for one and a half years. Interest
charged to expense was $26,415 and $13,208 as of December 31, 1996 and 1995,
respectively.
Additional accrued interest on convertible debenture as of December 31, 1996
was $29,778.
NOTE 3--COMMITMENTS AND CONTINGENCIES
The Company entered into two consulting agreements expiring on May 31, 1998
with payment to be made in stock options. The maximum obligation under the
contracts is $1,600 per month before conversion into options. The number of
shares per option is equal to 125% of cash amount divided by the per share net
value of common stock on the issue date. Net value is defined as the per share
price paid by the most recent arm's length purchaser of common stock from the
Company, less the exercise price of $0.01 per share.
The Company rented office space under a noncancellable lease until January
31, 1995. Commencing February 1, 1995 the Company began renting this space on
a month to month basis. The annual rent as of December 31, 1996 and 1995 was
$23,087 and $33,509, respectively.
NOTE 4--PENSION PLANS
The Company has a defined contribution SEP pension plan that covers all
qualified employees effective as of January 1996. There were no company
contributions made for 1996.
NOTE 5--SUBSEQUENT EVENTS
On February 18, 1997, the Company entered into an asset purchase agreement
which calls for the sale of substantially all the assets of the Company,
including, without limitation, all inventory, catalogs, mailing lists,
contracts with suppliers and hotels, business goodwill, the names "The
Thursley Group" and "The Voyager's Collection" and all other assets, tangible
and intangible. The closing is expected to take place in March 1997.
F-50
<PAGE>
INDEPENDENT AUDITOR'S REPORT
DUCLOS DIRECT MARKETING, INC.
New York, NY
We have audited the accompanying statements of operations and cash flows of
DUCLOS DIRECT MARKETING, INC. for the years ended January 31, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits of the statements of operations and
cash flows provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations of
DUCLOS DIRECT MARKETING, INC. for the years ended January 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
Mendlowitz Weitsen, LLP
East Brunswick, New Jersey
February 21, 1997
F-51
<PAGE>
DUCLOS DIRECT MARKETING, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
Sales
Sales.............................................. $6,785,361 $6,391,919
Less returns and allowances........................ 498,170 575,759
---------- ----------
Sales, net......................................... 6,287,191 5,816,160
Cost of sales........................................ 2,697,079 2,680,014
---------- ----------
Gross profit......................................... 3,590,112 3,136,146
---------- ----------
Operating expenses
Selling expenses................................... 3,481,435 2,690,324
General and administrative expenses................ 479,681 365,071
---------- ----------
Total operating expenses......................... 3,961,116 3,055,395
---------- ----------
Operating income (loss).............................. (371,004) 80,751
---------- ----------
Other income (expense)
Miscellaneous income............................... 35,493 --
Interest expense................................... (14,039) (7,746)
---------- ----------
Total other income (expense)..................... 21,454 (7,746)
---------- ----------
Income before provision (benefit) for income taxes... (349,550) 73,005
Provision (benefit) for income taxes................. 30,200 (1,426)
---------- ----------
Net income (loss).................................... $ (379,750) $ 74,431
========== ==========
</TABLE>
See Notes to Financial Statements.
F-52
<PAGE>
DUCLOS DIRECT MARKETING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(379,750) $ 74,431
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation................................ 14,095 12,764
Bad debts................................... 6,900 11,100
Deferred taxes (benefit).................... 30,200 (7,100)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable....................... (29,808) (19,492)
Inventory................................. (187,530) 33,180
Income taxes refundable................... (17,755) (27,045)
Prepaid expenses.......................... (44,789) (116,262)
Security deposit.......................... -- (100)
(Decrease) increase in:
Accounts payable and accrued expenses..... 254,715 42,928
Refunds payable........................... 69,468 11,148
Unearned revenue.......................... 9,039 --
Taxes payable............................. 8,302 (832)
--------- ---------
Net cash provided by (used for)
operating activities................... (266,913) 14,720
--------- ---------
Cash flows used for investing activities
Purchase of equipment......................... (5,454) (11,590)
--------- ---------
Cash flows provided by financing activities
Proceeds from notes........................... 268,500 --
Proceeds of loan from officer................. 2,700 2,550
Proceeds from sale of business................ 100,000 --
Payments on notes payable..................... (14,978) (3,491)
Payments on capital lease obligations......... (8,700) (1,140)
--------- ---------
Net cash provided by (used for)
financing activities................... 347,522 (2,081)
--------- ---------
Net increase in cash............................ 75,155 1,049
Cash, beginning................................. 10,732 9,683
--------- ---------
Cash, end....................................... $ 85,887 $ 10,732
========= =========
Supplementary disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 11,339 $ 5,196
========= =========
Income taxes................................ $ 17,756 $ 32,719
========= =========
Non cash transactions
During 1996, equipment was leased for $19,515. This lease is
recorded as a capital lease.
</TABLE>
See Notes to Financial Statements.
F-53
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DUCLOS DIRECT MARKETING, INC. ("the Company"), organized in New York in
1982, is a manufacturer, marketer and distributor of golf equipment and
related clothing and supplies. Its "Competitive Edge" catalog was first mailed
in 1983.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from sales are generally recognized at the time the order is
shipped to the customer. The Company allows for merchandise to be returned
within thirty days of receipt by the customer. The Company has provided for an
estimate of returned merchandise based on prior experience.
Accounts receivable
Provision for losses on trade accounts receivable is made in amounts
required to maintain an adequate allowance to cover anticipated bad debts.
Accounts receivable are charged against the allowance when it is determined by
the Company that payment will not be received. Any subsequent receipts are
credited to the allowance. At year end, the allowance is adjusted by
management based on a review of the accounts receivable. The allowance for
uncollectible accounts was $46,500 at January 31, 1997 and $39,600 at January
31, 1996.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
Advertising expenses
The Company's policy for direct response advertising costs consisting of,
production, printing and mailing of its catalogs, is for it to be capitalized
and amortized over a four month period based on a formula which considers the
life of a catalog in terms of orders received over the time between mailings.
The unamortized costs are included in prepaid expenses.
Equipment and furniture
Equipment and furniture is stated at cost. Depreciation is provided
principally on the double declining balance methods over the estimated useful
lives of the assets, which range from 5 to 7 years. Additions and betterments
are capitalized whereas costs of maintenance, repairs and minor replacements
are charged to operations as incurred.
Income taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of fixed assets,
F-54
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1997
allowances for doubtful accounts and returned merchandise for financial and
income tax reporting. The deferred tax liability represents the future tax
return consequences of those timing differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available to
offset future taxable income and tax credits that are available to offset
future federal income taxes.
2. RELATED PARTY TRANSACTIONS
The amount due to officer is an open obligation, bearing interest at 5% per
annum. Accrued interest of $2,700 for 1997 and $2,550 for 1996 is included in
interest expense.
The Company created and placed advertising for a company owned by a relative
of the Company's sole stockholder. The revenues earned of $30,645 for 1997 and
$-0- for 1996 are included in miscellaneous income. The accounts receivable
included $15,355 from this entity.
3. INCOME TAXES
The provision for income taxes differs from the amount of income tax
determined by applying the federal and state statutory rates to pre-tax
income. The differences are primarily due to the provision for doubtful
accounts and the provision for sales returns and allowances. Taxes have been
provided for state and local purposes as required by those jurisdictions.
Summary of the provisions are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current tax
Federal................................................... $ -- $ 268
State..................................................... -- 2,981
City...................................................... -- 2,425
------- -------
-- 5,674
------- -------
Deferred tax (benefit)
Federal................................................... 15,700 (3,700)
State..................................................... 5,200 (1,200)
City...................................................... 9,300 (2,200)
------- -------
30,200 (7,100)
------- -------
Provision (benefit) for income taxes........................ $30,200 $(1,426)
======= =======
</TABLE>
For tax purposes, the Company has sustained a net operating loss of
approximately $300,000 which can be carried forward to offset future taxable
income. This net operating loss, if unused, will expire in the year 2012.
4. COMMITMENTS
The Company leases its office and warehouse space. The ten year lease
expires December 31, 2002. The annual basic rent is $121,275 and will increase
each January 1 by 5% over the previous year. In addition to the basic rent,
the Company is charged a portion of the real estate taxes.
F-55
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1997
Minimum annual rent for the next six years, exclusive of real estate taxes,
is as follows:
<TABLE>
<S> <C>
January 31,
1998............................................................... $134,263
1999............................................................... 140,976
2000............................................................... 148,025
2001............................................................... 155,426
2002............................................................... 163,197
Thereafter.......................................................... 156,426
</TABLE>
Rent expense, including the additional charge for real estate taxes and rent
taxes, was $141,213 for 1997 and $123,722 for 1996.
The Company has an obligation to purchase merchandise from a supplier over
the next several months. The total of the purchase orders is $200,000.
5. SALE OF BUSINESS
On December 20, 1996 the Company entered into an agreement for the sale of
substantially all of its assets, which will be consummated in March 1997.
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Select Service & Supply Co., Inc.
We have audited the accompanying balance sheet of Select Service & Supply
Co., Inc. as of December 31, 1997, and the related statements of income and
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Select Service & Supply
Co., Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Hackensack, New Jersey
January 30, 1998
F-57
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 397,012
Accounts receivable, less allowance of $131,700.................. 3,657,754
Inventories...................................................... 3,844,340
Deferred advertising costs and other current assets.............. 1,962,695
-----------
Total current assets........................................... 9,861,801
Property, equipment and leasehold improvements, net................ 1,333,243
Other assets....................................................... 115,211
-----------
Total assets................................................... $11,310,255
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................................ $ 2,866,000
Accounts payable................................................. 1,410,261
Accrued expenses................................................. 970,370
Current portion of long-term debt................................ 26,074
-----------
Total current liabilities...................................... 5,272,705
Long-term debt, less current portion............................... 84,226
Stockholders' equity:
Class A common stock, $.10 par value; authorized 100,000 shares,
issued and
outstanding 1,000 shares........................................ 100
Class B common stock, non-voting, $.10 par value; authorized
900,000 shares,
issued and outstanding 99,000 shares............................ 9,900
Additional paid-in capital....................................... 32,889
Retained earnings................................................ 5,910,435
-----------
Total stockholders' equity..................................... 5,953,324
-----------
Total liabilities and stockholders' equity..................... $11,310,255
===========
</TABLE>
See accompanying notes.
F-58
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net sales.......................................................... $29,257,897
Cost of goods sold................................................. 15,314,982
-----------
Gross profit....................................................... 13,942,915
Selling, general and administrative expenses....................... 11,654,280
-----------
Income from operations............................................. 2,288,635
Interest expense................................................... (181,289)
Other income....................................................... 232,199
-----------
Net income......................................................... 2,339,545
Retained earnings at beginning of year............................. 5,612,680
Dividends.......................................................... (2,041,790)
-----------
Retained earnings at end of year................................... $ 5,910,435
===========
</TABLE>
See accompanying notes.
F-59
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $2,339,545
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 356,644
Gain on sale of property and equipment......................... (10,909)
Changes in operating assets and liabilities:
Accounts receivable.......................................... 1,195
Inventories.................................................. (110,306)
Deferred advertising costs and other current assets.......... (349,173)
Accounts payable and accrued expenses........................ 421,308
Other liabilities............................................ (97,415)
----------
Net cash provided by operating activities.................. 2,550,889
Cash flows from investing activities
Purchase of property and equipment............................... (691,721)
Proceeds from disposition of property and equipment.............. 13,650
----------
Net cash used in investing activities...................... (678,071)
Cash flows from financing activities
Increase in revolving line of credit............................. 554,000
Principal payment on long-term debt.............................. (24,471)
Payment of notes to related parties.............................. (75,000)
Payment of dividends............................................. (2,041,790)
----------
Net cash used in financing activities...................... (1,587,261)
----------
Net increase in cash............................................... 285,557
Cash at beginning of year.......................................... 111,455
----------
Cash at end of year................................................ $ 397,012
==========
Supplemental disclosures of cash flow information
Interest paid.................................................... $ 179,977
==========
</TABLE>
See accompanying notes.
F-60
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
The Company is engaged in catalog and direct sales primarily to education
systems, camps and church organizations, principally in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. Accounts receivable represent sales to
government agencies and other institutional customers throughout the United
States. The Company periodically performs credit evaluations of its customers
but generally does not require collateral.
Inventory
Inventories are valued at the lower of cost or market with cost determined
by the first-in, first-out method.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation of assets, including leasehold improvements, is computed using
the straight-line method over the lesser of the estimated useful lives of the
assets or the lease term. Leasehold improvements are amortized on a straight-
line basis over the shorter of the life of the improvement or the remainder of
the lease term. Amortization of leasehold improvements is included in
depreciation expense.
Fair Values of Financial Instruments
The fair value of financial instruments does not materially differ from
their carrying value.
Revenue Recognition
Sales are recorded at the time of shipment and a provision of anticipated
merchandise returns, net of exchanges, is recorded based upon historical
experience.
Direct Response Advertising and Promotion Costs
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7, Reporting of Advertising Costs. Direct
response advertising costs, consisting primarily of catalog design, printing
and postage expenditures, are amortized over the period during which
associated net revenues are expected, generally approximating nine months or
less. Direct response advertising expenses were $2,882,924 for the year ended
December 31, 1997. As of December 31, 1997, approximately $1,816,000 of direct
response advertising costs have been deferred.
Income Taxes
The Company and its stockholders have elected to be treated as an S
Corporation under the Internal Revenue Code for federal and state purposes.
Therefore, no provision for income taxes has been made as the Company's income
will be included in the personal income tax returns of the stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-61
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<S> <C>
Equipment, furniture and fixtures................................ $2,640,360
Leasehold improvements........................................... 105,659
----------
2,746,019
Less accumulated depreciation.................................... 1,412,776
----------
$1,333,243
==========
</TABLE>
Depreciation expense, including amortization of leasehold improvements was
approximately $351,246 for the year ended December 31, 1997.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Employee compensation.............................................. $109,478
Customer prepayments............................................... 455,633
Other.............................................................. 405,259
--------
$970,370
========
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains a revolving line of credit with a bank which provides
for borrowings of up to $5.0 million (including $1.0 million available for
letters of credit) based on eligible collateral. The note is payable on
demand, bears interest payable monthly at the lower of LIBOR plus 1.25% or the
banks prime rate minus .25%, and is secured by certain trade accounts
receivable, inventory, equipment and life insurance. The rate in effect at
December 31, 1997 was 7.2%.
Long-term debt consists of secured notes payable to commercial lenders,
which bear interest at various rates (weighted-average of approximately 14.4%
at December 31, 1997) and are payable in varying monthly installments of
principal and interest through April 2004. The loans are secured by equipment
with a carrying value of $102,000 at December 31, 1997.
As of December 31, 1997, maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................................. $26,074
1999................................................................. 20,896
2000................................................................. 20,430
2002................................................................. 24,047
2003................................................................. 16,463
</TABLE>
6. STOCKHOLDERS' EQUITY
During 1997, the Company's Board of Directors and shareholders approved a
Restatement and Amendment by the Entirety of the Articles of Incorporation
(the "Plan of Reorganization") which authorized two new classes of common
stock which replaced the then existing single class of common stock. As a
result of the Plan of Reorganization, each of the previously existing 900
shares of common stock was converted into 1 and one-ninth
F-62
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
shares of the newly authorized Class A common stock and 110 shares of the
newly authorized Class B Non-Voting Common Stock. As a result of these
conversions, $1,000 was reclassified from additional paid-in capital to Class
B Non-Voting Common Stock.
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS
At December 31, 1996 the Company had outstanding notes payable to related
parties which represented amounts due to individuals related to the Company's
stockholders. The notes carried interest at 12%, and were payable on demand.
These notes were fully repaid in 1997. Interest expense relating to these
notes totaled approximately $7,550 in 1997.
The Company leases office and warehouse facilities under a 15 year non-
cancelable operating lease with a related party which expires in 2005. In
addition to the fixed rental, the lease requires the Company to pay additional
rents based on certain operating costs of the facility including property
taxes. Future minimum rental commitments under this agreement are as follows:
<TABLE>
<S> <C>
1998................................................................ $315,600
1999................................................................ 315,600
2000................................................................ 315,600
2001................................................................ 315,600
2002................................................................ 315,600
Thereafter.......................................................... 798,000
</TABLE>
Rent expense under this agreement was approximately $316,000 in 1997.
8. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows all employees
meeting certain eligibility requirements to contribute a portion of their
annual compensation. Company contributions are at the discretion of the
Company's Board of Directors. The Company accrued a contribution of $45,200
for the year ended December 31, 1997.
9. SUBSEQUENT EVENT
On January 8, 1998, Genesis Direct, Inc. acquired certain of the Company's
assets and assumed certain of the Company's liabilities. These financial
statements represent the historical carrying values of the assets and
liabilities, and no adjustments have been recorded related to this
transaction.
F-63
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Pro Forma Condensed Combined Financial Statements........................ 17
Selected Consolidated Financial Data..................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 32
Management............................................................... 45
Certain Relationships and Related Transactions........................... 53
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Available Information.................................................... 64
Special Note Regarding Forward-Looking Statements........................ 64
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL JUNE 1, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
11,125,000 SHARES
GENESIS DIRECT, INC.
COMMON STOCK
------------
PROSPECTUS
------------
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
INVEMED ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
MAY 7, 1998
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