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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 December 26, 1998
Commission file number 0-24173
GENESIS DIRECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3449666
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
100 Plaza Drive
Secaucus, New Jersey 07094
(201) 867-2800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, par value
$0.01 per share, was 32,358,961 on February 5, 1999.
1
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GENESIS DIRECT, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended December 26, 1998
INDEX
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<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 26, 1998 and March 28, 1998 3
Consolidated Statements of Operations -
Three months and nine months ended December 26, 1998 and
December 27, 1997 4
Consolidated Statement of Stockholders' Equity (Deficiency)-
Nine months ended December 26, 1998 and the year ended March 28, 1998 5
Consolidated Statements of Cash Flows -
Nine months ended December 26, 1998 and December 27, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits 20
</TABLE>
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PART I
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 26, 1998 March 28, 1998
----------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents, including restricted cash of
$2,048 and $2,268, respectively.................................. $ 11,662 $ 2,722
Accounts receivable, less allowances of $2,643 and
$1,415, respectively.............................................. 17,532 5,594
Merchandise inventory, net of reserves.............................. 62,119 27,350
Deferred advertising costs.......................................... 12,218 10,239
Other current assets................................................ 4,955 1,348
Note receivable, current portion.................................... 479 340
---------------- ---------------
Total current assets............................................. 108,965 47,593
Intangibles, net of accumulated amortization of $6,778 and
$3,509, respectively................................................ 9,747 8,240
Goodwill, net of accumulated amortization of $3,682 and
$1,643, respectively................................................ 93,844 55,140
Property, equipment and leasehold improvements, net.................... 46,323 25,639
Note receivable, less current portion.................................. 1,020 1,275
Other assets........................................................... 988 1,389
---------------- ---------------
$ 260,887 $ 139,276
================ ===============
Liabilities and common stockholders' equity (deficiency)
Current liabilities:
Accounts payable.................................................... $ 40,733 $ 20,435
Accrued expenses.................................................... 45,772 14,549
Current portion of notes payable and long-term debt................. 24,043 20,478
Current portion of obligations under capital leases................. 1,996 1,840
Other current liabilities........................................... 2,181 3,203
---------------- ---------------
Total current liabilities........................................ 114,725 60,505
Notes payable and long-term debt, less current portion................. 18,227 7,176
Debentures--related parties............................................. - 30,000
Obligations under capital leases, net of current portion............... 3,293 3,978
Other liabilities...................................................... 2,296 2,717
Series A Preferred Stock (liquidation value $1,000 per share),
122,000 shares authorized, 94,300 shares issued and
outstanding at March 28, 1998....................................... - 96,739
Common stockholders' equity (deficiency):
Common stock, par value $.01 per share; 275,000,000 shares
authorized, 32,354,018 and 8,990,575 shares issued and
outstanding at December 26, 1998 and March 28, 1998,
respectively...................................................... 323 90
Additional paid-in capital.......................................... 278,542 30,507
Accumulated deficit................................................. (156,519) (92,436)
---------------- ---------------
Total common stockholders' equity (deficiency)................... 122,346 (61,839)
---------------- ---------------
Total liabilities and common stockholders' equity................ $ 260,887 $ 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 Nine months ended
------------------ -----------------
December 26,1998 December 27, 1997 December 26,1998 December 27, 1997
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 117,927 $ 55,915 $ 192,773 $ 81,505
Cost of goods sold......................... 75,722 46,019 127,792 62,143
---------------- ----------------- ---------------- -----------------
Gross profit............................... 42,205 9,896 64,981 19,362
Selling, general and administrative
expenses................................... 59,919 40,351 121,152 73,479
---------------- ----------------- ---------------- -----------------
Loss from operations....................... (17,714) (30,455) (56,171) (54,117)
Interest expense........................... 1,299 1,031 3,597 3,163
Interest income............................ 124 354 920 426
---------------- ----------------- ---------------- -----------------
Net loss before extraordinary item......... (18,889) (31,132) (58,848) (56,854)
Extraordinary item-loss on extinguishment
of debt.................................... - - (5,235) -
---------------- ----------------- ---------------- -----------------
Net loss.................................... $ (18,889) $ (31,132) $ (64,083) $ (56,854)
---------------- ----------------- ---------------- -----------------
Dividends accrued on Series A Preferred
Stock - (1,032) - (1,032)
---------------- ----------------- ---------------- -----------------
Net loss attributable to common stockholders $ (18,889) $ (32,164) $ (64,083) $ (57,886)
================ ================= ================ =================
Basic net loss per share:
Loss before extraordinary item........... $ (.58) $ (3.63) $ (2.13) $ (6.57)
Extraordinary item...................... - - (.19) -
---------------- ----------------- ---------------- -----------------
Net loss................................ $ (.58) $ (3.63) $ (2.32) $(6.57)
---------------- ----------------- ---------------- -----------------
Weighted average shares - basic............ 32,354,018 8,856,723 27,630,445 8,810,175
================ ================= ================ =================
</TABLE>
See accompanying notes.
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Consolidated Statements of Stockholders' Equity (Deficiency)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Shares of Additional Stockholders'
Common Common Paid-In Accumulated Equity
Stock Stock Capital Deficit (Deficiency)
---------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at March 29, 1997............... 6,792,500 $ 68 $ 24,532 $ (16,225) $ 8,375
Issuance of Common Stock............. 2,062,500 21 7,479 7,500
Common stock purchase warrant
issued in connection with
Debentures........................ 203 203
Issuance Costs of Series A
Preferred Stock................... (746) (746)
Dividends accrued on Series
A Preferred Stock................. (2,439) (2,439)
Issuance of Common Stock in
Connection with business
Acquisitions and licenses......... 135,575 1 1,478 1,479
Net loss............................. (76,211) (76,211)
----------- -------- ----------- ------------- ------------
Balance at March 28, 1998............... 8,990,575 90 30,507 (92,436) (61,839)
=========== ======== =========== ============= ============
Issuance of Common Stock upon
conversion of Debentures.......... 2,331,521 23 9,727 9,750
Issuance of Common Stock upon
conversion of note issued in
connection with acquisition....... 128,333 1 1,399 1,400
Issuance of Common Stock upon
conversion of Series A Preferred
Stock............................. 8,644,156 87 94,213 94,300
Dividends accrued on Series A
Preferred Stock................... (620) (620)
Forgiveness of dividends on Series A
Preferred Stock.................. 3,059 3,059
Issuance of Common Stock in
connection with Initial Public
Offering.......................... 9,625,000 96 132,419 132,515
Issuance of Common Stock in
connection with acquisitions...... 2,634,433 26 7,838 7,864
Net loss............................. (64,083) (64,083)
----------- -------- ----------- ------------- ------------
Balance at December 26, 1998.
(unaudited)........................... 32,354,018 $ 323 $ 278,542 $ (156,519) $ 122,346
=========== ======== =========== ============= ============
</TABLE>
See accompanying notes.
5
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months ended
-------------------------------------------
December 26, 1998 December 27, 1997
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities
Net loss........................................... $ (64,083) $ (56,854)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 9,222 4,275
Provision for losses on accounts receivable........ 951 836
Non-cash interest expense.......................... 102 2,440
Changes in operating assets and liabilities net of
business acquired:................................
Accounts receivable................................ (9,948) (4,744)
Merchandise inventory.............................. (13,325) (10,595)
Deferred advertising costs and other current assets 2,628 1,824
Accounts payable and accrued liabilities........... 15,436 6,134
Other assets....................................... 1,182 (1,002)
Other liabilities.................................. (2,940) 242
-------------- --------------
Net cash used in operating activities.............. $ (60,775) $ (57,444)
Cash flows from investing activities
Intangibles and goodwill........................... (1,295) (56)
Acquisition of property, equipment and leasehold
improvements...................................... (19,902) (16,902)
Cash paid for acquired businesses, net of cash
acquired.......................................... (20,179) (13,376)
(Increase) decrease in restricted cash............. 220 240
--------------- --------------
Net cash used in investing activities.............. $ (41,156) $ (30,094)
Cash flows from financing activities
(Repayment of) proceeds from line of credit........ 5,217 264
(Repayment of) proceeds from issuance of
Debentures--related parties....................... (20,250) 7,500
Proceeds from sale of Common Stock................. 132,515 7,500
Proceeds from Bridge Notes......................... - 44,437
Proceeds from sale of Series A Preferred Stock,
net of issuance costs............................. - 26,175
(Repayment of) proceeds from term loan............. (800) 5,000
Payments of notes payable.......................... (5,591) (3,667)
--------------- --------------
Net cash provided by financing activities.......... $ 111,091 $ 87,209
--------------- --------------
Increase (decrease) in cash and cash equivalents... 9,160 (329)
Cash and cash equivalents at beginning of period... 454 5,744
--------------- --------------
Cash and cash equivalents at end of period......... $ 9,614 $ 5,415
=============== ==============
Supplemental disclosures of cash flow information
Interest paid...................................... $ 5,666 $ 1,659
=============== ==============
Supplemental disclosures of non-cash investing and
financing activities
Acquisitions:
Liabilities assumed............................. 37,037 8,145
Issuance of notes payable....................... 17,538 4,138
Issuance of Common Stock........................ 7,864 30
Obligations under noncompete agreements......... 184 1,213
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
Conversion of Series A Preferred Stock to Common
Stock............................................. 94,300 -
Conversion of Debentures to Common Stock........... 9,750 -
Conversion of note payable to Common Stock......... 1,400 -
Capital leases..................................... 713 -
</TABLE>
See accompanying notes.
6
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Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine and three months ended December 26,
1998 are not necessarily indicative of the results that may be expected for the
year ended March 27, 1999. These financial statements should be read in
conjunction with the financial statements and footnotes thereto and management's
discussion and analysis thereof included in the Company's Annual Report on Form
10-K for the fiscal year ended March 28, 1998 and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 2
hereof.
Fiscal Year
The Company's fiscal year ends on the Saturday next preceding April 1,
resulting in either a 52 or 53 week fiscal year. The year ended March 28, 1998
("fiscal 1997") was a 52-week year. The Company's fiscal quarter is a 13-week
period which ends on a Saturday.
Loss Per Share
Loss per share amounts for all periods are based on the provisions of
Statement of Financial Accounting Standards No. 128 Earnings Per Share. Diluted
loss per share is not presented since the effect of all potentially dilutive
securities is anti-dilutive. The number of securities that could potentially
dilute basic earnings per share in the future but that were not included in the
computation of diluted earnings per share because to do so would have been
anti-dilutive for the periods presented is 4,567,253 (before application of the
treasury stock method).
2. Completion of Initial Public Offering
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). A total of 11,125,000 shares of Common
Stock were sold to the public, of which 9,625,000 were sold by the Company and
1,500,000 were sold by certain stockholders of the Company. The Company received
net proceeds of $132.5 million from the Initial Public Offering, after deducting
underwriters commissions and other related costs. See Item 2, Management's
Discussion and Analysis regarding the use of proceeds to date. In connection
with the partial repayment of the Debentures (as described in Item 2,
Management's Discussion and Analysis), the Company incurred a one-time
extraordinary charge of $5.2 million consisting of prepayment penalties.
In connection with the Initial Public Offering, the remainder of the
Debentures were converted into 2,331,521 shares of Common Stock and a
convertible note issued to sellers in connection with a business acquisition was
converted into 128,333 shares of Common Stock. In addition, all of the
outstanding shares of the Company's Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") were converted, in accordance with their
terms, into 8,644,156 shares of Common Stock, and the related accrual for unpaid
dividends was reversed.
3. Acquisitions
In September 1998, the Company acquired certain assets and liabilities of
Carol Wright Gifts, Inc., a company engaged in the direct marketing of general
merchandise to consumers. Payment of the aggregate purchase price of $18,900,000
consisted of (i) 2,400,000 shares of the Company's Common Stock valued at
$2.5625 per share (the closing price of the Common Stock on the closing date),
and (ii) a convertible promissory note in the principal amount of $12,750,000,
bearing interest at an annual rate equal to the prime interest rate publicly
announced by Citibank, N.A., New York, New York plus 0.5%. The convertible note
is payable in its full amount on March 14, 2001; provided, that, in lieu of such
payment, the holder of the convertible note may at any time after the Conversion
Date (as defined below) convert the principal amount of the convertible note at
a conversion price of $12.75 per share into 1,000,000 shares of Common Stock,
subject to certain adjustments. The Conversion Date is the date immediately
following the tenth
7
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consecutive trading day at which the closing price of the Common Stock on the
Nasdaq Stock Market on each such day as reported in the Wall Street Journal was
equal to or exceeded $12.75. Pursuant to the terms of the note, upon the
occurrence and continuation of an event of default, the note is convertible into
shares of the Common Stock at a significantly lower conversion price. In
addition to the purchase price, the Company paid $100,000 in consideration of
non-compete obligations. The cost of the acquisition exceeded the fair value of
the acquired net assets by approximately $15,317,000 which has been recorded as
goodwill and is being amortized over 40 years.
In August 1998, the Company acquired certain assets and liabilities of The
Edge Company Catalog, Inc., a company engaged in the direct marketing of
distinctive gifts, tools, collectibles, electronics and action gear, including
collectible knives. Payment of the aggregate purchase price of $22,332,541
consisted of (i) $17 million in cash, (ii) 234,433 shares of the Company's
Common Stock valued at $7.3125 per share (the closing price of the Common Stock
on the closing date), (iii) a 6% interest bearing promissory note in the
principal amount of $960,000 payable on April 10, 1999, (iv) an 8% interest
bearing promissory note in the principal amount of $900,000 payable in three
equal annual installments commencing on August 10, 1999 and (v) an 8% interest
bearing promissory note in the principal amount of $1,758,250 payable in four
equal semi-annual installments commencing on February 10, 1999. In addition to
the purchase price, the Company is required to pay $100,000 in consideration of
non-compete obligations payable in equal annual installments of $25,000
beginning August 1999 and ending August 2002. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $21,510,000
which has been recorded as goodwill and is being amortized over 40 years.
In June 1998, the Company acquired Fan and Fun, a company engaged in the
direct marketing of sports apparel and merchandise. Payment of the purchase
price consisted of $0.8 million of cash.
In April 1998, the Company acquired certain assets and liabilities of
Biobottoms, Inc., a company engaged in the direct marketing of children's
apparel. Payment of the aggregate purchase price of $3.60 million consisted of
(i) $1.0 million of cash, (ii) $1.43 million for retirement of debt, (iii) $1.17
million of notes, bearing interest at an annual rate of 7.0%, of which $400,000
was paid in September 1998, $270,000 was due in August 1998 but has not yet been
paid because the Company believes such amount should be used to offset a
post-closing purchase price adjustment due from the sellers in accordance with
the terms of the note, and the balance is due in July 1999. In addition to the
purchase price, the Company is required to pay $100,000 in consideration of
non-compete obligations payable in equal annual installments of $50,000 in April
1999 and April 2000. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $5.7 million which has been recorded as
goodwill and is being amortized over 40 years.
4. Subsequent Events
Subsequent to the end of the Company's fiscal quarter ended December 26,
1998, the Company announced a strategic repositioning of its business designed
to capitalize on its prominence as a leading direct marketer and e-tailer of
sports products, to leverage its sports brands and operating infrastructure and
to facilitate the Company's further development as a web-based sports products
superstore. In connection with the strategic repositioning, the Board of
Directors of the Company has approved changing the name of the Company to
PROTEAM.com, pending shareholder approval at the next annual meeting of
shareholders, and changing the Company's ticker symbol from GEND to PRTM,
effective February 1999.
The Company has retained the investment bank Gruppo Levey & Co. to sell its
non-sports assets. In total, proceeds raised from the sale of all non-sports
assets are expected to be in excess of $60 million, and will be used to repay
certain obligations and to fund ongoing business operations as well as
aggressive expansion of the existing Internet sports business. The Company
already has signed a definitive agreement, subject to certain conditions
including Hart-Scott-Rodino approval, to sell four of its
Institutional/Business-to-Business catalog titles for $23 million to School
Specialty, Inc. In a further effort to reduce fixed costs, the Company has
eliminated approximately 150 salaried positions. The corporate repositioning,
cost reduction program and layoffs are expected to generate approximately $35
million in annual fixed cost savings. The Company expects to incur a pre-tax
restructuring charge of approximately $12 million in the fiscal quarter ending
March 27, 1999. This amount includes the previously announced charge for
inventory writedowns and restructuring costs originally expected to be recorded
in the third quarter. The restructuring charge does not include potential losses
from the sale of discontinued businesses which the Company expects to incur but
cannot estimate at this time.
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Concurrent with the repositioning of the Company, the Company has signed
letters of intent, subject to the approval of the Company's secured lender, to
receive up to a total of $10 million in additional debt financing: $5 million
from one of the Company's principal stockholders and $5 million from a fund in
which the Company's President and Chief Executive Officer is a partner. In
connection with the financing, the Company has agreed to issue to the lenders
warrants to purchase a total of one million shares of the Company's Common
Stock.
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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
As more fully described under "Part II - Item 5 - Other Information -
Changes to Business Plan," in February 1999, the Company announced a strategic
repositioning of its business. Prior to the restructuring, the Company
positioned itself as a database-driven specialty retailer in the rapidly growing
universe of non-store shopping. With 36 Company-owned brands, the Company
offered 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. Following the
restructuring, the Company will focus on its consumer sports business, with an
emphasis on increasing its Internet business. The Company had an accumulated
deficit of approximately $156.5 million at December 26, 1998 and had a net loss
of $18.9 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 Nine Months Ended
December December
------------------------- -------------------------
26, 1998 27, 1997 26, 1998 27, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Gross profit............................... 35.8 17.7 33.7 23.8
Selling, general and administrative
expenses................................ 50.8 72.2 62.8 90.2
Loss from operations....................... 15.0 54.5 29.1 66.4
Interest expense........................... 1.1 1.8 1.9 3.9
Net loss................................... 16.0 55.7 33.2 69.8
</TABLE>
Three Months Ended December 26, 1998 Compared to Three Months Ended
December 27, 1997
Net sales. Net sales increased to $117.9 million in the fiscal quarter
ended December 26, 1998 from $55.9 million in the fiscal quarter ended December
27, 1997. This increase was attributable to acquisitions completed and start-ups
launched after December 1997 and revenue growth from existing catalogs. In the
fiscal quarter ended December 26, 1998, revenue from catalogs that the Company
is retaining and has operated for at least one comparable year was $29.5 million
which represents a 23% increase from the $24.0 million in revenue which was
10
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generated by the same catalogs in the fiscal quarter ended December 27, 1997.
Net sales for the 1998 period were unfavorably affected by general seasonal
softness in the catalog industry, circulation cuts in certain unprofitable
mailings of the Carol Wright Gifts business, circulation reductions in the
Company's consumer catalogs resulting from printed catalogs damaged in an
accident at the Company's largest printer and the impact of the NBA strike on
the catalogs offering basketball-related merchandise.
Gross profit. Gross profit increased to $42.2 million or 35.8% of net sales
for the fiscal quarter ended December 26, 1998 compared to $9.9 million or 17.7%
of net sales for the fiscal quarter ended December 27, 1997. The increase in
gross profit was attributable to the acquisitions completed and start-ups
launched after December 1997 and growth from existing catalogs. The increase in
gross profit percentage was attributable to improved product margins and
improvement in overall fulfillment costs as a percentage of sales.
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 $59.9
million in the fiscal quarter ended December 26, 1998 from $40.4 million in the
fiscal quarter ended December 27, 1997. Selling, general and administrative
expenses as a percentage of net sales decreased to 50.8% in the fiscal quarter
ended December 26, 1998 from 72.2% in the fiscal quarter ended December 27,
1997. The increase in absolute dollars was attributable to acquisitions
completed since December 1997. The percentage decrease was due to certain
consolidation economies as well as the conscious reduction in high-cost
prospective mailings and fixed creative costs. In connection with the Company's
acquisitions, amortization of acquired intangibles of $2.1 million is included
in selling, general and administrative expenses in the fiscal quarter ended
December 26, 1998 as compared to $1.4 million in the fiscal quarter ended
December 27, 1997.
Interest expense. Interest expense increased to $1.3 million in the fiscal
quarter ended December 26, 1998 from $1.0 million in the fiscal quarter ended
December 27, 1997, primarily as a result of a higher average debt balance for
the period.
Nine Months Ended December 26, 1998 Compared to Nine Months Ended
December 27, 1997
Net sales. Net sales increased to $192.8 million in the nine months ended
December 26, 1998 from $81.5 million in the nine months ended December 27, 1997.
This increase was attributable to acquisitions completed and start-ups launched
after December 1997 and revenue growth from existing catalogs. In the nine
months ended December 26, 1998, revenue from catalogs that the Company is
retaining and has operated for at least one comparable year was $44.0 million
which represents a 31% increase from the $33.7 million in revenue which was
generated by the same catalogs in the nine months ended December 27, 1997. Net
sales for the 1998 period were unfavorably affected by general seasonal softness
in the catalog industry, circulation cuts in certain unprofitable mailings of
the Carol Wright Gifts business, circulation reductions in the Company's
consumer catalogs resulting from printed catalogs damaged in an accident at the
Company's largest printer and the impact of the NBA strike on the catalogs
offering basketball-related merchandise.
Gross profit. Gross profit increased to $65.0 million or 33.7% of net sales
for the nine months ended December 26, 1998 compared to $19.4 million or 23.8%
of net sales for the nine months ended December 27, 1997. The increase in gross
profit was attributable to the acquisitions completed and start-ups launched
after December 1997 and growth from existing catalogs. The increase in gross
profit percentage was attributable to improved product margins and improvement
in overall fulfillment costs as a percentage of sales.
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 $121.2
million in the nine months ended December 26, 1998 from $73.5 million in the
nine months ended December 27, 1997. Selling, general and administrative
expenses as a percentage of net sales decreased to 62.8% in the nine months
ended December 26, 1998 from 90.2% in the nine months ended December 27, 1997.
The increase in absolute dollars was attributable to acquisitions completed
since December 1997. The percentage decrease was due to certain consolidation
economies as well as the
11
<PAGE>
conscious reduction in high-cost prospective mailings and fixed creative costs.
In connection with the Company's acquisitions, amortization of acquired
intangibles of $5.3 million is included in selling, general and administrative
expenses in the nine months ended December 26, 1998 as compared to $2.9 million
in the nine months ended December 27, 1997.
Interest expense. Interest expense increased to $3.6 million in the nine
months ended December 26, 1998 from $3.2 million in the nine months ended
December 27, 1997, primarily as a result of a higher average debt balance for
the period and higher effective interest rates on outstanding debt.
Liquidity and Capital Resources
At December 26, 1998, the Company had cash of $11.7 million ($2 million of
which is restricted) and a working capital deficit of $5.8 million. The
Company's capitalization, defined as the sum of long-term debt and stockholders'
equity, at December 26, 1998 was $143.9 million.
Prior to implementation of the Company's modified business plan as
described in Part II, Item 5 and in the Company's Form 10-Q for the quarter
ended September 26, 1998, the Company's principal capital needs arose from (i)
the acquisition and start-up of new catalog businesses, (ii) the funding of
operating losses arising from maintaining the infrastructure necessary to
support future acquisitions and the investment in growing these new acquisitions
through prospect mailings, (iii) growing the customer database and (iv) capital
expenditures related to the telemarketing and fulfillment centers. Following the
implementation of the Company's modified business plan, the Company's principal
capital needs in the near future are expected to arise from funding working
capital and capital expenditures needed to support the revised business levels.
The Company did not acquire any new businesses during the fiscal quarter ended
December 26, 1998. The Company has been incurring capital expenditures which
will total approximately $20.0 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.
In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering"). The Company received net proceeds of
$132.5 million from the Initial Public Offering, after deducting underwriters'
commissions and other related costs. The Company has used (i) approximately
$28.0 million of the net proceeds to redeem a portion of the Company's
outstanding Convertible Subordinated Debentures due June 1, 2003 (the
"Debentures"), all of which were owned by GE Investment Private Placement
Partners II, a Limited Partnership ("GEIPPP II"), (ii) approximately $7.75
million of the net proceeds to repay the notes payable to GEIPPP II in the
principal amount of $7.65 million (the "Bridge Notes"), (iii) approximately
$10.0 million of the net proceeds to repay its outstanding borrowings under the
Revolving Credit Facility and a portion of the Term Loan (each as defined
below), (iv) approximately $0.8 million of the net proceeds for the acquisition
of certain assets of Fan and Fun completed on June 25, 1998, (v) approximately
$17.0 million of the net proceeds for the acquisition of certain assets of The
Edge Company Catalog completed on August 10, 1998, (vi) approximately $10.3
million of the net proceeds for capital expenditures, and (vii) approximately
$58.6 million of the net proceeds for working capital.
In April 1998, the Company raised a total of $7.65 million through the
issuance of Bridge Notes to GEIPPP II. Proceeds from the Bridge Notes were used
(i) to pay for the expansion and upgrading of the infrastructure at the
Company's distribution center, (ii) to fund the Biobottoms acquisition and (iii)
to provide additional working capital.
In May 1997, the Company entered into a $25.0 million revolving credit
facility (the "Revolving Credit Facility") and a $5.0 million term loan (the
"Term Loan," and together with the Revolving Credit Facility, the "Credit
Facility") with The CIT Group/Business Credit Inc. The Credit Facility is
collateralized by substantially all of the Company's assets. The Revolving
Credit Facility bears interest at a variable rate equal to Prime Rate of The
Bank of New York plus 0.5% or LIBOR plus 3%. The Term Loan is payable over five
years and bears interest at the Prime Rate plus 0.5%. The Credit Facility
contains certain covenants, including a covenant with respect to the maintenance
of specified consolidated net worth.
During the nine months ended December 26, 1998, net cash used by operating
activities was $60.8 million. During the same period, net cash used in investing
activities was $41.2 million, consisting primarily of cash paid for
acquisitions, net of cash acquired, of $20.2 million and cash paid for additions
to property, equipment and
12
<PAGE>
leasehold improvements of $19.9 million. During the same period, net cash
provided by financing activities was $111.1 million consisting primarily of the
$132.5 million in net proceeds from the Initial Public Offering.
As part of the Company's strategic repositioning, it has announced its
intention to sell its non-sports assets. The proceeds of such a sale program are
expected to be in excess of $60 million and will be used to repay certain
obligations including its existing bank credit facility, and to fund ongoing
business operations as well as an aggressive expansion of its existing Internet
business. However, there can be no assurances as to the timing and amount of the
total proceeds to be generated by the divestiture program. Accordingly, the
Company has entered into a letter of intent to receive up to $10 million in
additional debt financing pursuant to a one-year debenture to help fund the
Company's operations in the interim. See "Part II - Item 5 - Changes to Business
Plan." The Company anticipates that its existing cash, the new debt financing,
the anticipated proceeds of the divestiture program and the planned replacement
of its revolving credit facility will be sufficient to meet the Company's
liquidity requirements for its operations for at least the next 12 months.
However, since there can be no assurance that the divestiture program will
generate the expected total proceeds or as to the timing of such proceeds, there
can be no assurances that additional sources of financing will not be required
during such time or thereafter.
In connection with the strategic repositioning described in Part II, Item
5, the Company expects to incur a pre-tax restructuring charge of approximately
$12 million in the fiscal quarter ending March 27, 1999. This amount includes
the previously announced charge for inventory writedowns and restructuring costs
originally expected to be recorded in the third quarter. The restructuring
charge does not include potential losses from the sale of discontinued
businesses which the Company expects to incur but cannot estimate at this time.
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. In addition, the Company
incurred significant additional tax losses for the nine months ended December
26, 1998. Net deferred tax assets are fully reserved as of December 26, 1998.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change." In general,
an ownership change is deemed to occur if the percentage of stock of a
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period. As
a result of cumulative changes in the Company's ownership which have occurred,
including the Initial Public Offering, the Company's net operating loss
carryforwards will be subject to significant annual limitations.
Seasonality
The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be derived
from the fall and holiday seasons. As a result, the Company expects its sales
and results of operations generally to be the lowest in the second quarter of
each fiscal year, which precedes the back-to-school and holiday purchases. The
Company's quarterly results may fluctuate as a result of numerous factors
including the timing, 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 and market acceptance of
the Company's merchandise (including new merchandise categories or products
introduced). 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.
13
<PAGE>
Year 2000 Issue
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company has received letters from each of its applications vendors
stating that all of the Company's informational technology systems, such as its
call center order-taking software and distribution center order-fulfillment
software, are Year 2000 compliant. The Company has begun an assessment of its
non-information technology systems, such as its security systems and telephones,
to determine if they are also Year 2000 compliant. To date, the Company has
determined, based on information published or otherwise provided by such
systems' vendors, that many of its non-information technology systems are or
will be Year 2000 compliant. The Company plans to initiate formal communications
with the vendors of its remaining non-information technology systems. Based on
its assessment to date, the Company is not aware that any of its non-information
technology systems will not be Year 2000 compliant prior to the Year 2000. The
Company has not incurred costs to modify or replace any of its information
technology or non-information technology systems.
The Company has also begun an assessment of its significant vendors,
suppliers, and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
compliance issues. To date, the Company has determined, based on information
published or otherwise provided by such third parties, that many of such
parties' systems are or will be Year 2000 compliant. The Company plans to
initiate formal communications with the remaining third parties with whom the
Company has a significant relationship. Based on its assessment to date, the
Company is not aware that any of its significant vendors, suppliers and service
providers will not be Year 2000 compliant prior to the year 2000.
In addition to the assessments and investigations described above, the
Company plans to conduct internal tests of all of its internal information and
non-information technology systems and all of its system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. However, despite the Company's efforts to ensure that its internal
systems and the systems of its significant vendors, suppliers and service
providers are Year 2000 compliant, there can be no guarantee that the failure of
certain systems will not have a material adverse effect on the Company.
To date, the Company has handled its Year 2000 compliance program using
only internal resources. Accordingly, the only costs incurred by the Company
have been the salary costs of its internal staff. Although at the current time
the Company expects that it will be able to complete its Year 2000 compliance
program using only internal resources, there can be no assurance that the
Company will not require external resources to complete its Year 2000 compliance
program.
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at December 26, 1998, include the following
Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 129, "Disclosure of Information about Capital Structure," which
will be effective for the Company for the fiscal year ending March 27, 1999,
consolidates existing disclosure requirements. This new standard contains no
change in disclosure requirements for the Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the fiscal year ending
March 27, 1999, establishes standards for reporting information about operating
segments in the annual financial statements, selected information about
operating segments in interim financial reports and disclosures about products
and services, geographic areas and major customers. This new standard may
require the Company to report financial information on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required
14
<PAGE>
and provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
15
<PAGE>
PART II
Item 1. Legal Proceedings
The Company is party to claims and litigation that arise in the normal
course of business. Management believes that the ultimate outcome of these
claims and litigation will not have a material impact on the financial position
or results of operations of the Company.
Item 2. Changes In Securities And Use Of Proceeds
Initial Public Offering. As previously reported in the Company's 1997 Form
-----------------------
10-K and the Company's Quarterly Reports on Form 10-Q for the quarters ended
June 27, 1998 and September 26, 1998, on May 13, 1998 the Company completed an
initial public offering ("Initial Public Offering") of shares of its Common
Stock. The aggregate net proceeds (after deducting underwriting discounts and
commissions and before deducting other expenses) received by the Company from
the Initial Public Offering was $134,990,625. In addition to underwriting
discounts and commissions of $9,384,375, the Company incurred approximately
$2,400,000 in other expenses in connection with the Initial Public Offering,
including registration and filing fees, printing expenses, accounting fees and
legal fees.
The Company has used (i) approximately $28.0 million of the net proceeds to
redeem a portion of the Debentures held by GEIPPP II, (ii) approximately $7.75
million of the net proceeds to repay the Bridge Notes held by GEIPPP II, (iii)
approximately $10.0 million of the net proceeds to repay its outstanding
borrowings under the Revolving Credit Facility and a portion of the Term Loan,
(iv) approximately $0.8 million of the net proceeds for the acquisition of Fan
and Fun on June 25, 1998, (v) approximately $17.0 million of the net proceeds
for the acquisition of The Edge Company Catalog on August 10, 1998, (vi)
approximately $10.3 million of the net proceeds for capital expenditures, and
(vii) approximately $58.6 million of the net proceeds for working capital. The
Company has invested the unused portion of the net offering proceeds in
short-term investments, which consist of United States Treasury Notes,
obligations of United States government agencies and corporate bonds with
maturities of 90 days or less.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
Changes to Business Plan
------------------------
Subsequent to the end of the Company's fiscal quarter ended December
26, 1998, the Company announced a strategic repositioning of its business
designed to capitalize on its prominence as a leading direct marketer and
e-tailer of sports products, to leverage its sports brands and operating
infrastructure and to facilitate the Company's further development as a
web-based sports products superstore. In connection with the strategic
repositioning, the Board of Directors of the Company has approved changing the
name of the Company to PROTEAM.com, pending shareholder approval at the next
annual meeting of shareholders, and changing the Company's ticker symbol from
GEND to PRTM, effective February 1999.
16
<PAGE>
In connection with the restructuring, the Company plans to retain the
following brands:
<TABLE>
<CAPTION>
Name: Sport / League Affiliation:
- ----- ---------------------------
<S> <C>
proteam.com(TM) All Sports
1-800-Pro-Team(R)
Hot Off The Ice(R) - Hockey
The Official Catalog of the Coolest Game on Earth National Hockey League (NHL)
Nothin' But Hoops(R) - Basketball
The Official Catalog of the NBA National Basketball Association (NBA)
Redline(TM) - Auto Racing
The Official Nascar Catalog National Association of Stock Car Auto Racing (NASCAR)
Manny's Baseball Land(R) - Baseball
The Official Catalog of Major League Baseball Major League Baseball (MLB)
From the Sidelines(R) Football
SKUSA - Sports Kids USA(TM) All Sports
Pro Sports Liquidators(TM) All Sports
The Voyager's Collection(R) Travel-related Merchandise
Command Performance(R) Entertainment Collectibles
</TABLE>
Most of the brands listed above are available on Internet web sites
owned and operated either by the Company or by the relevant professional sports
league.
The Company has retained the investment bank Gruppo Levey & Co. to sell
its non-sports assets. In total, proceeds raised from the sale of all non-sports
assets are expected to be in excess of $60 million, and will be used to repay
certain obligations and to fund ongoing business operations as well as
aggressive expansion of the existing Internet sports business. The Company
already has signed a definitive agreement, subject to certain conditions
including Hart-Scott-Rodino approval, to sell four of its
Institutional/Business-to-Business catalog titles for $23 million to School
Specialty, Inc. In a further effort to reduce fixed costs, the Company has
eliminated approximately 150 salaried positions. The corporate repositioning,
cost reduction program and layoffs are expected to generate approximately $35
million in annual fixed cost savings. The Company expects to incur a pre-tax
restructuring charge of approximately $12 million in the fiscal quarter ending
March 27, 1999. This amount includes the previously announced charge for
inventory writedowns and restructuring costs originally expected to be recorded
in the third quarter. The restructuring charge does not include potential losses
from the sale of discontinued businesses which the Company expects to incur but
cannot estimate at this time.
Concurrent with the repositioning of the Company, the Company has
signed letters of intent, subject to the approval of the Company's secured
lender, to receive up to a total of $10 million in additional debt financing: $5
million from GEIPPP II, one of the Company's principal stockholders, and $5
million from Global Internet Fund,
17
<PAGE>
in which Warren Struhl, the Company's President and Chief Executive Officer, is
a partner. In connection with the financing, the Company has agreed to issue to
the lenders warrants to purchase a total of one million shares of the Company's
Common Stock.
The Company's ability to achieve profitability in fiscal 1999 is
dependent in part on the successful implementation of the modifications
described above and other factors. See "Factors That May Affect Future Financial
Results" in the 1997 Form 10-K. Accordingly, there can be no assurance that the
Company will achieve profitability.
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)).
27.1 Financial Data Schedule for fiscal quarter ended December 26, 1998.
(b) Reports on Form 8-K
The Company did not file any following reports on Form 8-K in or for
the three month period ended December 26, 1998.
18
<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: February 8, 1999 By: /s/ Ronald Benanto
-------------------------------------
Ronald Benanto
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
19
<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)).
27.1 Financial Data Schedule for fiscal quarter ended December 26, 1998.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-27-1999 MAR-27-1999
<PERIOD-START> SEP-27-1998 MAR-29-1998
<PERIOD-END> DEC-26-1998 DEC-26-1998
<CASH> 11,662 11,662
<SECURITIES> 0 0
<RECEIVABLES> 17,532 17,532
<ALLOWANCES> 2,643 2,643
<INVENTORY> 62,119 62,119
<CURRENT-ASSETS> 108,965 108,965
<PP&E> 46,323 46,323
<DEPRECIATION> 6,220 6,220
<TOTAL-ASSETS> 260,887 260,887
<CURRENT-LIABILITIES> 114,725 114,725
<BONDS> 0 0
0 0
0 0
<COMMON> 323 323
<OTHER-SE> 122,023 122,023
<TOTAL-LIABILITY-AND-EQUITY> 260,887 260,887
<SALES> 117,927 192,773
<TOTAL-REVENUES> 0 0
<CGS> 75,722 127,792
<TOTAL-COSTS> 135,641 248,944
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,299 3,597
<INCOME-PRETAX> (18,889) (58,848)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (18,889) (58,848)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (5,235)
<CHANGES> 0 0
<NET-INCOME> (18,889) (64,083)
<EPS-PRIMARY> (.58) (2.32)
<EPS-DILUTED> 0 0
</TABLE>
