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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 27, 1998
Commission file number 0-24173
GENESIS DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3449666
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
100 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
(201) 867-2800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
-------
The number of outstanding shares of the registrant's Common Stock, par value
$0.01 per share, was 29,719,585 on August 7, 1998.
1
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GENESIS DIRECT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
INDEX
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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 27, 1998 and March 28, 1998 3
Consolidated Statements of Operations -
Three months ended June 27, 1998 and June 28, 1997 4
Consolidated Statement of Stockholders' Equity (Deficiency)-
Three months ended June 27, 1998 and the year ended
March 28, 1998 5
Consolidated Statements of Cash Flows -
Three months ended June 27, 1998 and June 28, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 19
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 27, 1998 MARCH 28, 1998
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$2,286 and $2,268, respectively ......................................... $ 61,230 $ 2,722
Accounts receivable, less allowances of $1,108 and
$1,415, respectively ..................................................... 8,072 5,594
Merchandise inventory, net of reserves .................................... 30,145 27,350
Deferred advertising costs ................................................ 12,036 10,239
Other current assets ...................................................... 1,929 1,348
Note receivable, current portion .......................................... 479 340
--------- ---------
Total current assets ..................................................... 113,891 47,593
Intangibles, net of accumulated amortization of $4,391 and
$3,509, respectively ...................................................... 9,342 8,240
Goodwill, net of accumulated amortization of $2,192 and
$1,643, respectively ...................................................... 59,700 55,140
Property, equipment and leasehold improvements, net ........................ 31,305 25,639
Note receivable, less current portion ...................................... 1,190 1,275
Other assets ............................................................... 354 1,389
--------- ---------
$ 215,782 $ 139,276
========= =========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable .......................................................... $ 9,178 $ 20,435
Accrued expenses .......................................................... 15,907 14,549
Current portion of notes payable and long-term debt ....................... 18,628 20,478
Current portion of obligations under capital leases......................... 1,817 1,840
Other current liabilities ................................................. 3,012 3,203
--------- ---------
Total current liabilities ................................................ 48,542 60,505
Notes payable and long-term debt, less current portion ..................... 5,101 7,176
Debentures--related parties ................................................ -- 30,000
Obligations under capital leases, net of current portion..................... 4,296 3,978
Other liabilities .......................................................... 3,116 2,717
Series A Preferred Stock (liquidation value $1,000 per share),
122,000 shares authorized, 94,300 shares issued and
outstanding at March 28, 1998 ............................................. - 96,739
Common stockholders' equity (deficiency):
Common stock, par value $.01 per share; 275,000,000 shares
authorized, 29,719,585 and 8,990,575 shares issued and
outstanding at June 27, 1998 and March 28, 1998,
respectively ............................................................. 297 90
Additional paid-in capital ................................................ 270,841 30,507
Accumulated deficit ....................................................... (116,411) (92,436)
--------- ---------
Total common stockholders' equity (deficiency) ........................... 154,727 (61,839)
--------- ---------
Total liabilities and common stockholders' equity ........................ $ 215,782 $ 139,276
========= =========
</TABLE>
See accompanying notes.
3
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 27, 1998 JUNE 28, 1997
------------------ -----------------
<S> <C> <C>
Net sales ...................................... $ 33,884 $ 14,047
Cost of goods sold ............................. 23,205 9,077
----------------- -----------------
Gross profit ................................... 10,679 4,970
Selling, general and administrative
expenses ...................................... 28,403 13,300
----------------- -----------------
Loss from operations ........................... (17,724) (8,330)
Interest expense ............................... 1,523 1,034
Interest income ................................ 507 50
----------------- -----------------
Net loss before extraordinary item ............. (18,740) (9,314)
Extraordinary item - loss on extinguishment of
debt............................................ (5,235) --
----------------- -----------------
Net loss ....................................... $ (23,975) $ (9,314)
================= =================
Basic net loss per share:
Loss before extraordinary item.................. $ (0.92) $ (1.07)
Extraordinary item.............................. (0.26) --
---------------- -----------------
Net loss........................................ $ (1.18) $ (1.07)
================= =================
Weighted average shares - basic.................. 20,380,100 8,719,000
================= =================
</TABLE>
See accompanying notes.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
SHARES OF COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS'
COMMON STOCK PAID-IN DEFICIT EQUITY
STOCK CAPITAL (DEFICIENCY)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 29, 1997........... 6,792,500 $ 68 $ 24,532 $ (16,225) $ 8,375
Issuance of Common Stock.......... 2,062,500 21 7,479 7,500
Common stock purchase
warrant issued in
connection with
Debentures...................... 203 203
Issuance Costs of Series A
Preferred Stock................. (746) (746)
Dividends accruing on Series
A Preferred Stock............... (2,439) (2,439)
Issuance of Common Stock in
connection with business
acquisitions and licenses....... 135,575 1 1,478 1,479
Net loss.......................... (76,211) (76,211)
---------- ---- -------- --------- --------
Balance at March 28, 1998........... 8,990,575 90 30,507 (92,436) (61,839)
========== ==== ======== ========= ========
Issuance of Common Stock
upon conversion of
Debentures...................... 2,331,521 23 9,727 9,750
Issuance of Common Stock
upon conversion of note
issued in connection with
acquisition..................... 128,333 1 1,399 1,400
Issuance of Common Stock
upon conversion of Series A
Preferred Stock................. 8,644,156 87 94,213 94,300
Issuance of Common Stock
in connection with Initial
Public Offering................. 9,625,000 96 132,556 132,652
Dividends accruing on Series
A Preferred Stock............... (620) (620)
Forgiveness of dividends on
Series A Preferred Stock........ 3,059 3,059
Net loss.......................... (23,975) (23,975)
---------------------------------------------------------------------
Balance at June 27, 1998............ 29,719,585 $297 $270,841 $(116,411) $154,727
=========== ==== ======== ========= ========
</TABLE>
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997
------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss................................................... $(23,975) $ (9,314)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 2,299 1,610
Provision for losses on accounts receivable................ -- 1,161
Non-cash interest expense.................................. 117 760
Changes in operating assets and liabilities net of
business acquired:........................................
Accounts receivable........................................ (2,047) (1,543)
Merchandise inventory...................................... (1,132) (4,282)
Deferred advertising costs and other current assets........ (2,120) (639)
Accounts payable and accrued liabilities................... (14,407) 2,066
Other assets............................................... 889 7
Other liabilities.......................................... 125 (449)
------------ ----------
Net cash used in operating activities...................... (40,251) (9,725)
CASH FLOWS FROM INVESTING ACTIVITIES
Intangibles................................................ (291) --
Acquisition of property, equipment and leasehold
improvements.............................................. (6,715) (9,434)
Disposition of property, equipment and leasehold
improvements.............................................. 537 --
Cash paid for acquired businesses, net of cash acquired.... (3,290) (4,955)
Increase (decrease) in restricted cash..................... (18) --
------------ ----------
Net cash used in investing activities...................... (9,777) (14,389)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment of) proceeds from line of credit.................. (1,993) 183
(Repayment of) proceeds from issuance of Debentures--related
parties................................................... (20,250) 7,500
Proceeds from sale of Common Stock......................... 132,652 7,500
Proceeds from Bridge Notes 7,350 --
Repayment of Bridge Notes (7,350) --
(Repayment of) proceeds from term loan..................... (800) 5,000
Payments of notes payable.................................. (1,091) (472)
------------ ----------
Net cash provided by financing activities.................. 108,518 19,711
------------ ----------
Increase (decrease) in cash and cash equivalents....... 58,490 (4,403)
Cash and cash equivalents at beginning of period........... 454 5,744
------------ ----------
Cash and cash equivalents at end of period................. $ 58,944 $ 1,341
============ ==========
Supplemental disclosures of cash flow information
Interest paid.............................................. $ 3,560 $ 232
============ ==========
Supplemental disclosures of non-cash investing and
financing activities
Acquisitions:
Liabilities assumed..................................... $ 4,552 $ 1,305
Issuance of notes payable............................... 1,170 177
Obligations under noncompete agreements................. 216 655
Conversion of Series A Preferred Stock to Common Stock..... 94,300 0
Conversion of Debentures to Common Stock................... 9,750 0
Conversion of note payable to Common Stock................. 1,400 0
Capital leases............................................. 295 0
</TABLE>
See accompanying notes.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended June 27, 1998 are not
necessarily indicative of the results that may be expected for the year ended
March 27, 1999. These financial statements should be read in conjunction with
the financial statements and footnotes thereto and management's discussion and
analysis thereof included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 28, 1998 and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 2 hereof.
FISCAL YEAR
The Company's fiscal year ends on the Saturday next preceding April 1,
resulting in either a 52 or 53 week fiscal year. The year ended March 28, 1998
("fiscal 1997") was a 52-week year. The Company's fiscal quarter is a 13-week
period which ends on a Saturday.
2. COMPLETION OF INITIAL PUBLIC OFFERING
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). A total of 11,125,000 shares of Common
Stock were sold to the public, of which 9,625,000 were sold by the Company and
1,500,000 were sold by certain stockholders of the Company. The Company
received net proceeds of $132.7 million from the Initial Public Offering, after
deducting underwriters commissions and other related costs. See Item 2,
management's discussion and analysis regarding the use of proceeds to date. In
connection with the partial repayment of the Debentures (as described in Item 2,
management's discussion and analysis), the Company incurred a one-time
extraordinary charge of $5.2 million.
In connection with the Initial Public Offering, the remainder of the
Debentures were converted into 2,331,521 shares of Common Stock and a
convertible note issued to sellers in connection with a business acquisition was
converted into 128,333 shares of Common Stock. In addition, all of the
outstanding shares of the Company's Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") were converted, in accordance with their
terms, into 8,644,156 shares of Common Stock, and the related accrual for unpaid
dividends was reversed.
3. ACQUISITIONS
In April 1998, the Company acquired Biobottoms, Inc., a company engaged in the
direct marketing of children's apparel. Payment of the aggregate purchase price
of $3.70 million consisted of (i) $1.0 million of cash, (ii) $1.43 million for
retirement of debt, (iii) $1.17 million of notes, bearing interest at an annual
rate of 7.0%, of which $670,000 is due in August 1998 and the balance is due in
August 1999, and (iv) $100,000 of non-compete payments due in equal annual
installments of $50,000 due in April 1999 and April 2000. The cost of the
acquisition exceeded the fair value of the acquired net assets by approximately
$5.7 million which has been recorded as goodwill.
In June 1998, the Company acquired Fan and Fun, a German-based company engaged
in the direct marketing of sports apparel and merchandise. Payment of the
purchase price consisted of $0.8 million of cash.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUBSEQUENT EVENTS
In August 1998, the Company entered into a definitive agreement to acquire
Carol Wright Gifts, Inc., a company engaged in the direct marketing of general
merchandise to consumers. Upon closing, payment of the aggregate purchase price
is expected to be $0.1 million in cash and 2.7 million shares of Common Stock.
The number of shares to be issued may be increased or decreased depending on the
price of the Common Stock at the time of closing. The excess of the purchase
price over the estimated fair value of the net assets acquired will be recorded
as goodwill. The acquisition will be accounted for under the purchase method of
accounting.
In August 1998, the Company acquired The Edge Company Catalog, a specialty
catalog featuring distinctive gifts, tools and collectibles. Payment of the
purchase price consisted of (i) $17.0 million of cash, (ii) shares of Common
Stock valued at approximately $1.8 million and (iii) approximately $3.6 million
of notes. The excess of the purchase price over the estimated fair value of the
acquired net assets will be recorded as goodwill.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto which
are included elsewhere in this Quarterly Report on Form 10-Q. Except for the
historical information contained herein, the discussion in this Quarterly Report
on Form 10-Q contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q shall be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's actual results could
differ materially from those anticipated or implied in such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed before and in the section entitled
"Factors That May Affect Future Financial Results" in the Company's Annual
Report on Form 10-K for the fiscal year ended March 28, 1998 (the "1997 Form 10-
K"), which was filed with the Securities and Exchange Commission on July 24,
1998, as well as those discussed elsewhere in this Quarterly Report on Form 10-
Q. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
OVERVIEW
The Company is a leading database-driven specialty retailer in the rapidly
growing universe of non-store shopping. With a current portfolio of 34 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 $26.1 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 $116.4 million at June 27, 1998 and had a net loss of $24.0
million for the fiscal quarter then ended. Management believes that the
Company's historical results of operations are not necessarily indicative of
future operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items from
the Company's statement of operations expressed as a percentage of net sales.
Any trends reflected by the following table may not be indicative of future
results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 27, 1998 JUNE 28, 1997
----------------------- ------------------------
<S> <C> <C>
Net sales..................................... 100.0% 100.0%
Gross profit.................................. 31.5 35.4
Selling, general and administrative expenses.. 83.8 94.7
Loss from operations.......................... 52.3 59.3
Interest expense.............................. 4.5 7.4
Net loss...................................... 70.8 66.3
</TABLE>
9
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THREE MONTHS ENDED JUNE 27, 1998 COMPARED TO THREE MONTHS ENDED JUNE 27, 1997
Net sales. Net sales increased to $33.9 million in the fiscal quarter ended
June 27, 1998 from $14.0 million in the fiscal quarter ended June 28, 1997. This
increase was attributable to acquisitions completed and start-ups launched after
June 1997 and revenue growth from existing catalogs.
Gross profit. Gross profit increased to $10.7 million or 31.5% of net sales
for the fiscal quarter ended June 27, 1998 compared to $5.0 million or 35.4% of
net sales for the fiscal quarter ended June 28, 1997. This increase was
attributable to the acquisitions completed and start-ups launched after June
1997. The decrease in the gross profit percentage was primarily attributable to
higher fulfillment costs as a percentage of revenue incurred in the call center
and the distribution center in the fiscal quarter ended June 28, 1997 compared
to the Company's operations in the quarter ended June 27, 1998. The call center
and distribution center costs reflect expense levels that must be maintained in
preparation for the Company's highest order volume quarter in fiscal 1998, the
fiscal quarter ending December 26, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation and
amortization. Selling, general and administrative expenses increased to $28.4
million in the fiscal quarter ended June 27, 1998 from $13.3 million in the
fiscal quarter ended June 28, 1997. Selling, general and administrative
expenses as a percentage of net sales decreased to 83.8% in the fiscal quarter
ended June 27, 1998 from 94.7% in the fiscal quarter ended June 28, 1997. This
percentage decrease was due to increased sales volume resulting from the
acquisitions completed and start-ups launched after June 1997, 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 $1.4
million is included in selling, general and administrative expenses in the
fiscal quarter ended June 27, 1998 as compared to $0.5 million in the fiscal
quarter ended June 28, 1997.
Interest expense. Interest expense increased to $1.5 million in the fiscal
quarter ended June 27, 1998 from $1.0 million in the fiscal quarter ended June
28, 1997, primarily as a result of a higher average debt balance and the
prepayment penalties on the Bridge Notes.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1998, the Company had cash of $61.2 million and a working capital
balance of $65.3 million. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity, at June 27, 1998 was $164.1 million.
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 appropriate 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. During the fiscal quarter ended June 27,
1998, the Company acquired two businesses for an aggregate of $3.3 million cash
and $1.27 million of notes and certain other deferred payments. There can be no
assurance that the Company will be successful in identifying and acquiring new
businesses or that the Company can successfully integrate such new businesses
into its operations. See "Factors That May Affect Future Financial Results --
Need for Additional Capital" and "--Risks Associated With Acquisitions" in the
1997 Form 10-K.
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). The Company received net proceeds of
$132.7 million from the Initial Public Offering, after deducting underwriters'
commissions and other related costs. To date, the Company has used (i)
approximately
10
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$28.0 million of the net proceeds to redeem a portion of the Company's
outstanding Convertible Subordinated Debentures due June 1, 2003 (the
"Debentures"), all of which were owned by GE Investment Private Placement
Partners II, a Limited Partnership ("GEIPPP II"), (ii) approximately $7.75
million of the net proceeds to repay the notes payable to GEIPPP II in the
principal amount of $7.65 million (the "Bridge Notes"), (iii) approximately
$10.0 million of the net proceeds to repay its outstanding borrowings under the
Revolving Credit Facility and a portion of the Term Loan (each as defined
below), (iv) approximately $0.8 million of the net proceeds for the acquisition
of certain assets of Fan and Fun completed on June 25, 1998, (v) approximately
$17.0 million of the net proceeds for the acquisition of certain assets of The
Edge Company Catalog completed on August 10, 1998, (vi) approximately $7.0
million of the net proceeds for capital expenditures, and (vii) approximately
$51.0 million of the net proceeds for working capital.
In April 1998, the Company raised a total of $7.65 million through the
issuance of Bridge Notes to GEIPPP II. Proceeds from the Bridge Notes were used
(i) to pay for the expansion and upgrading of the infrastructure at the
Company's distribution center, (ii) to fund the Biobottoms acquisition and (iii)
to provide additional working capital.
In May 1997, the Company entered into a $25.0 million revolving credit
facility (the "Revolving Credit Facility") and a $5.0 million term loan (the
"Term Loan," and together with the Revolving Credit Facility, the "Credit
Facility") with The CIT Group/Business Credit Inc. 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 certain covenants, including
a covenant with respect to the maintenance of specified consolidated net worth.
During the fiscal quarter ended June 27, 1998, net cash used by operating
activities was $40.3 million. Net cash used in investing activities was $9.8
million, consisting primarily of cash paid for acquisitions, net of cash
acquired, of $3.3 million and cash paid for additions to property, equipment and
leasehold improvements of $6.7 million. Net cash provided by financing
activities was $108.5 million consisting primarily of the $132.7 million in net
proceeds from the Initial Public Offering.
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 the Initial Public 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 28, 1998, the Company had approximately $78 million of federal tax
net operating loss carryforwards which will expire in 2012 and 2013. The
Company also had approximately $75 million of state tax net operating loss
carryforwards which will expire in 2004 and 2005. Net deferred tax assets are
fully reserved as of June 27, 1998. In addition, the Company incurred
significant additional tax losses for the fiscal quarter ended June 27, 1998.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change." In general,
an ownership change is deemed to occur if the percentage of stock of a
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period. As
a result of cumulative changes in the Company's ownership which have occurred,
including the Initial Public Offering, the Company's net operating loss
carryforwards will be subject to significant annual limitations.
SEASONALITY
The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be derived
from the fall and holiday seasons. As a result, the Company expects its sales
and results of operations generally to be the lowest in the second quarter of
each fiscal year,
11
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which precedes the back-to-school and holiday purchases. The Company's quarterly
results may fluctuate as a result of numerous factors, including the timing of
acquisitions, the timing, quantity and cost of catalog mailings, the response
rates to such mailings, the timing of merchandise deliveries, the merchandise
mix, pricing and presentation of products offered and sold, market acceptance of
the Company's merchandise (including new merchandise categories or products
introduced) and the hiring and training of additional personnel. Accordingly,
results of operations in any quarter will not necessarily be indicative of the
results that may be achieved for a full fiscal year or any future quarters.
Results of operations are affected not only by the seasonality of the Company's
net revenues, but also by seasonal variations in product mix and the fixed
portion of the Company's operating expenses. See "Factors that May Affect Future
Financial Results" in the 1997 Form 10-K.
INFLATION
Results of operations have not been significantly affected by inflation since
the Company's inception. Management expects that in the normal course of
business, the Company will be able to offset the effects of increased costs
through operating efficiencies and selected price increases.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company has reviewed its computer programs and systems to ensure that the
programs and systems will function properly and be year 2000 compliant, and the
Company believes that currently all of its computer systems are year 2000
compliant. However, the Company is continuing to monitor and review its
computer programs and systems to ensure on-going year 2000 compliance. The
Company has received letters from each of its applications vendors stating that
all of the Company's computer system applications are year 2000 compliant.
However, 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. See "Factors that May Affect Future Financial Results-
- -Year 2000 Risk" in the 1997 Form 10-K.
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 June 27, 1998, include the following
Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 129, "Disclosure of Information about Capital Structure," which will
be effective for the Company for the fiscal year ending March 27, 1999,
consolidates existing disclosure requirements. This new standard contains no
change in disclosure requirements for the Company.
SFAS No. 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
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.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is party to claims and litigation that arise in the normal course
of business. Management believes that the ultimate outcome of these claims and
litigation will not have a material impact on the financial position or results
of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Initial Public Offering. On May 6, 1998, the Company's Registration Statement
------------------------
on Form S-1 (File No. 333-47455) relating to the Initial Public Offering was
declared effective by the Securities and Exchange Commission and, on May 13,
1998, the Initial Public Offering closed. Under the Registration Statement, an
aggregate of 11,125,000 shares of the Company's Common Stock were sold to the
public at a price of $15.00 per share. Of such shares, 9,625,000 shares were
sold by the Company and 1,500,000 shares were sold by certain stockholders of
the Company. The aggregate net proceeds (after deducting underwriting discounts
and commissions and before deducting other expenses) received by the Company and
by the selling stockholders from the Initial Public Offering were $134,990,625
and $21,037,500, respectively. In addition to underwriting discounts and
commissions of $9,384,375, the Company incurred approximately $2,300,000 in
other expenses in connection with the Initial Public Offering, including
registration and filing fees, printing expenses, accounting fees and legal fees.
To date, the Company has used (i) approximately $28.0 million of the net
proceeds to redeem a portion of the Debentures held by GEIPPP II, (ii)
approximately $7.75 million of the net proceeds to repay the Bridge Notes held
by GEIPPP II, (iii) approximately $10.0 million of the net proceeds to repay its
outstanding borrowings under the Revolving Credit Facility and a portion of the
Term Loan, (iv) approximately $0.8 million of the net proceeds for the
acquisition of Fan and Fun on June 25, 1998, (v) approximately $17.0 million of
the net proceeds for the acquisition of The Edge Company Catalog on August 10,
1998, (vi) approximately $7.0 million of the net proceeds for capital
expenditures, and (vii) approximately $51.0 million of the net proceeds for
working capital. The Company has invested the remainder of the net offering
proceeds in short-term investments, which consist of United States Treasury
Notes, obligations of United States government agencies and corporate bonds with
maturities of 90 days or less.
Description of Capital Stock. In connection with the Initial Public Offering,
-----------------------------
the Company amended and restated each of its Certificate of Incorporation and
its By-laws. The Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") provides for a split of each outstanding
share of the Company's Common Stock into 275 shares of Common Stock and provides
for an increase in the authorized capital stock to 275,000,000 shares of Common
Stock and 500,000 shares of Preferred Stock.
Common Stock. 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. The Company has no present plans to issue any shares
of Preferred Stock.
14
<PAGE>
Limitation of Liability and Indemnification Matters. The 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 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 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 has entered
into indemnity agreements (the "Indemnity Agreements") with its directors and
officers that further indemnifies them to the maximum extent permitted by
Delaware law.
Supermajority Voting Requirements. The Certificate of Incorporation and
---------------------------------
the Amended and Restated By-laws (the "By-laws") provide that certain provisions
in the Certificate of Incorporation and 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 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 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 By-laws, for notice of stockholder nominations to 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 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 By-laws, a stockholder's notice must also
contain certain information specified in the By-laws.
Classified Board of Directors. The 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 Delaware General Corporation Law in the case of a
corporation having a classified board of directors, the stockholders may remove
a director only for cause. In addition, the By-laws provide that a director or
the entire Board of Directors may be removed from office at any time, but only
for cause and by affirmative vote 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 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) During the fiscal quarter ended June 27, 1998, prior to the
consummation of the Company's Initial Public Offering on May 13, 1998, the
stockholders of the Company took the following actions by written consent in
accordance with the General Corporation Law of the State of Delaware and the By-
Laws of the Company:
15
<PAGE>
1. By a Written Consent in lieu of a meeting of stockholders, dated as
of April 16, 1998, stockholders representing approximately 71.8% of
the Company's outstanding shares of stock entitled to vote thereon,
voted to (a) amend and restate the Company's Certificate of
Incorporation and (b) amend the Company's 1997 Long-Term Incentive
Plan to increase the number of shares of Common Stock available for
grant to 4,125,000 and to remove the restriction limiting grants to
a single individual in any single calendar year.
2. By a Written Consent in lieu of a meeting of stockholders, dated as
of April 28, 1998, stockholders representing approximately 71.8% of
the Company's outstanding shares of stock entitled to vote thereon,
voted to adopt the Company's 1998 Employee Stock Purchase Plan.
ITEM 5. OTHER INFORMATION
Acquisitions.
------------
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 $3.70 million consisted of (i) $1.0 million of cash, (ii) $1.43 million for
retirement of debt, (iii) $1.17 million of notes, bearing interest at an annual
rate of 7.0%, of which $670,000 is due in August 1998 and the balance is due in
August 1999, and (iv) $100,000 of non-compete payments due in equal annual
installments of $50,000 due in April 1999 and April 2000. The cost of the
acquisition exceeded the fair value of the acquired net assets by approximately
$5.7 million which has been recorded as goodwill.
In June 1998, the Company acquired Fan and Fun, a German-based company
engaged in the direct marketing of sports apparel and merchandise. Payment of
the purchase price consisted of $0.8 million of cash.
In August 1998, the Company entered into a definitive agreement to
acquire Carol Wright Gifts, a company engaged in the direct marketing of general
merchandise to consumers. Upon closing, payment of the aggregate purchase price
is expected to be $0.1 million in cash and 2.7 million shares of Common Stock.
The number of shares to be issued may be increased or decreased depending on the
price of the Common Stock at the time of closing. The excess of the purchase
price over the estimated fair value of the net assets acquired will be recorded
as goodwill. The acquisition will be accounted for under the purchase method of
accounting.
In August 1998, the Company acquired The Edge Company Catalog, a
specialty catalog featuring distinctive gifts, tools and collectibles. Payment
of the purchase price consisted of (i) $17.0 million of cash, (ii) shares of
Common Stock valued at approximately $1.8 million and (iii) approximately $3.6
million of notes. The excess of the purchase price over the estimated fair value
of the acquired net assets will be recorded as goodwill.
New Directors.
-------------
In July 1998, the Board of Directors of the Company voted to increase
the size of the Board of Directors to seven and appointed two new directors to
fill the vacancies on the Board. The new directors, Ilan Kaufthal and Marvin
Runyon, will serve as Class A directors with terms expiring in 1999. The
following are biographies for Mr. Runyon and Mr. Kaufthal:
Marvin Runyon. Marvin Runyon, who is 73 years of age, has served as a
director of the Company since July 1998. From July 1992 until his retirement in
May 1998, Mr. Runyon served as Postmaster General of the United States and Chief
Executive Officer of the United States Postal Service. From 1988 to 1992, Mr.
Runyon served as Chairman of the Board of the Tennessee Valley Authority, having
been appointed to such position by President Ronald Reagan. From 1980 to 1988,
Mr. Runyon served as President and Chief Executive Officer of Nissan Motor
Manufacturing Corporation U.S.A. Prior to 1980, Mr. Runyon served in various
capacities at Ford Motor Company, including as Vice President, Body and Assembly
Operations.
Ilan Kaufthal. Ilan Kaufthal, who is 50 years of age, has served as a
director of the Company since July 1998. Since February 1987, Mr. Kaufthal has
served as Vice Chairman of Schroder & Co. Inc.
16
<PAGE>
("Schroder"). Mr. Kaufthal is responsible for the mergers and acquisitions
business of Schroder and serves on its executive committee. Mr. Kaufthal is a
director of United Retail Group, Inc., ASI Solutions Inc., Cambrex Corp and Russ
Berrie & Co., Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission.
Exhibit
No. Description
- -------- --------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.5 of the Registrant's Registration Statement
on Form S-1 (File No. 333-47455)).
4.1 Specimen certificate for shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
4.2 Stockholders Agreement dated as of September 30, 1998 (incorporated
by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-1 (File No. 333-47455)).
10.7 Registrant's 1997 Long-Term Incentive Plan (incorporated by
reference to Exhibit 4.5 of the Registrant's Registration Statement
on Form S-8 (File No. 333-55681)).
10.8 Registrant's 1998 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.6 of the Registrant's Registration Statement
on Form S-8 (File No. 333-55681)).
27.1 Financial Data Schedule for fiscal quarter ended June 27, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in or for the three month period ended
June 27, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESIS DIRECT, INC.
Date: August 10, 1998 By: /s/Ronald Benanto
----------------------------------------------
Ronald Benanto
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- --------- --------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.5 of the Registrant's Registration Statement
on Form S-1 (File No. 333-47455)).
4.1 Specimen certificate for shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1 (File No. 333-47455)).
4.2 Stockholders Agreement dated as of September 30, 1998 (incorporated
by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-1 (File No. 333-47455)).
10.7 Registrant's 1997 Long-Term Incentive Plan (incorporated by
reference to Exhibit 4.5 of the Registrant's Registration Statement
on Form S-8 (File No. 333-55681)).
10.8 Registrant's 1998 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.6 of the Registrant's Registration Statement
on Form S-8 (File No. 333-55681)).
27.1 Financial Data Schedule for fiscal quarter ended June 27, 1998.
19
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<PERIOD-END> JUN-27-1998
<CASH> 61,230
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