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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 26, 1999
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 registrants 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 32,363,490 on August 12, 1999.
1
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GENESIS DIRECT, INC.
Quarterly Report on Form 10-Q
For the Period Ended June 26, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 26, 1999 and March 27, 1999 3
Consolidated Statements of Operations -
Three months ended June 26, 1999 and June 27, 1998 4
Consolidated Statement of Stockholders' Equity (Deficiency)-
Three months ended June 26, 1999 and the year ended
March 28, 1998 5
Consolidated Statements of Cash Flows -
Three months ended June 26, 1999 and June 27, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits 18
</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 26, 1999
-------------
(Unaudited) March 27, 1999
------------- --------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents, including restricted cash of
$4,114 and $2,823, respectively .......................................... $ 4,682 $ 4,366
Accounts receivable, less allowances of $1,904 and
$2,426, respectively ...................................................... 3,177 3,470
Merchandise inventory, net of reserves ...................................... 18,185 22,714
Deferred advertising costs .................................................. 2,513 5,268
Other current assets ........................................................ 1,230 1,256
Note receivable, current portion ............................................ 479 979
Net assets available for sale ............................................... 6,655 49,574
--------- ---------
Total current assets ....................................................... 36,921 87,627
Intangibles, net of accumulated amortization of $3,681 and
$3,276, respectively ...................................................... 1,713 2,117
Goodwill, net of accumulated amortization of $2,688 and
$2,373, respectively ...................................................... 24,623 24,943
Property, equipment and leasehold improvements, net ........................... 14,094 14,529
Advances to officers .......................................................... 100 100
Note receivable, less current portion ......................................... 850 935
Other assets .................................................................. - 54
--------- ---------
$ 78,301 $ 130,305
========= =========
Liabilities and common stockholders' equity (deficiency)
Current liabilities:
Accounts payable .......................................................... $ 12,665 $ 27,138
Accrued expenses .......................................................... 19,766 23,552
Current portion of notes payable and long-term debt ....................... 16,570 18,155
Subordinated notes-related parties ........................................ 8,731 6,231
Current portion of obligations under capital leases......................... 1,784 1,686
Other current liabilities ................................................. 2,510 2,525
--------- ---------
Total current liabilities ............................................. 62,026 79,287
Notes payable and long-term debt, less current portion ........................ 13,090 14,140
Obligations under capital leases, net of current portion........................ 1,645 2,120
Other liabilities ............................................................. 1,219 1,745
Common stockholders' equity (deficiency):
Common stock, par value $.01 per share; 82,500,000 shares
Authorized, 32,358,961 shares issued and
Outstanding at June 26, 1999 and March 27, 1999,
Respectively .............................................................. 323 323
Additional paid-in capital .................................................. 280,927 280,927
Accumulated deficit ......................................................... (280,929) (248,237)
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Total common stockholders' equity .......................................... 321 33,013
--------- ---------
Total liabilities and common stockholders' equity .......................... $ 78,301 $ 130,305
========= =========
</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 26, 1999 June 27, 1998
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<S> <C> <C>
Net sales .............................................. $ 38,379 $ 33,884
Cost of goods sold ..................................... 25,732 23,205
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Gross profit ........................................... 12,647 10,679
Selling, general and administrative expenses ........... 30,989 28,403
Provision for losses on assets of businesses available
for sale................................................. 13,000 --
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Loss from operations ................................... (31,342) (17,724)
Interest expense ....................................... 1,425 1,523
Interest income ........................................ 75 507
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Net loss before extraordinary item ..................... (32,692) (18,740)
Extraordinary item - loss on extinguishment of debt...... -- (5,235)
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Net loss ............................................... $ (32,692) $ (23,975)
============ ===========
Basic net loss per share:
Loss before extraordinary item........................ $ (1.01) $ (0.92)
Extraordinary item.................................... -- (0.26)
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Net loss.............................................. $ (1.01) $ (1.18)
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Weighted average shares - basic.......................... 32,359,000 20,380,100
============ ===========
</TABLE>
See accompanying notes.
4
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Genesis Direct, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficiency)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Genesis
Direct, Total
L.L.C. Shares of Additional Stockholders'
Members' Common Common Paid-In Accumulated Equity
Contributions Stock Stock Capital Deficit (Deficiency)
------------- ------------ ------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 30, 1996................ $ 2,200 $ (2,715) $ (515)
Capital contribution to
Genesis Direct, Inc.................. (2,200) 605,000 $ 6 $ 2,194
Issuance of Common Stock............... 6,187,500 62 22,338 22,400
Net loss............................... (13,510) (13,510)
---------- --------- ------ -------- ---------- ---------
Balance at March 29, 1997................ 6,792,500 68 24,532 (16,225) 8,375
Issuance of Common Stock............... 2,062,500 21 7,479 7,500
Common stock purchase
warrant issued in connec-
tion 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 including
reversal of accrued
dividends of $3,059............... 8,644,156 87 96,652 96,739
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
Sale of Common Stock................. 4,943 41 41
Issuance of Common Stock
purchase options to non-
employees......................... 344 344
Common stock purchase
warrants issued in connec-
tion with indebtedness............ 2,000 2,000
Net loss............................. (155,801) (155,801)
---------- ---------- ------ -------- ---------- ---------
Balance at March 27, 1999.............. 32,358,961 $ 323 $280,927 $(248,237) $ 33,013
---------- ---------- ------ -------- ---------- ---------
Net loss.............................. (32,692) (32,692)
------- ---------
Balance at June 26, 1999.............. $ - 32,358,961 $ 323 $280,927 $(280,929) $ 321
---------- ---------- ------ -------- ---------- ---------
</TABLE>
See accompanying notes.
5
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Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
---------------------------------
June 26, 1999 June 27, 1998
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<S> <C> <C>
Cash flows from operating activities
Net loss.................................................................. $ (32,692) $ (23,975)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash restructuring charges............................................ 13,000
Depreciation and amortization............................................. 3,087 2,299
Provision for losses on accounts receivable............................... (522) -
Non-cash interest expense................................................. 989 117
Changes in operating assets and liabilities net of business acquired:
Accounts receivable....................................................... 610 (2,047)
Merchandise inventory..................................................... 6,423 (1,132)
Deferred advertising costs and other current assets....................... 2,068 (2,120)
Accounts payable and accrued liabilities.................................. (24,810) (14,407)
Other assets.............................................................. 139 889
Other liabilities......................................................... (455) 125
------------- -------------
Net cash used in operating activities..................................... (32,163) (40,251)
Cash flows from investing activities
Intangibles............................................................... -- (291)
Acquisition of property, equipment and leasehold.......................... (389) (6,715)
improvements
Disposition of property, equipment and leasehold.......................... -- 537
improvements
Cash paid for acquired businesses, net of cash acquired................... -- (3,290)
Proceeds from sale of businesses.......................................... 33,456 --
Increase (decrease) in restricted cash.................................... (1,291) (18)
------------- -------------
Net cash provided by (used in) investing activities....................... 31,776 (9,777)
Cash flows from financing activities
Repayment of line of credit............................................... (9) (1,993)
Repayment of Debentures--related parties.................................. -- (20,250)
Proceeds from issuance of subordinated notes- related parties............. 2,000 --
Proceeds from sale of Common Stock........................................ -- 132,652
Proceeds from Bridge Notes................................................ -- 7,350
Repayment of Bridge Notes................................................. -- (7,350)
Repayment of term loan.................................................... (1,101) (800)
Payments of notes payable................................................. (1,478) (1,091)
------------- -------------
Net cash provided by (used in) financing activities....................... (588) 108,518
------------- -------------
Increase (decrease) in cash and cash equivalents.......................... (975) 58,490
Cash and cash equivalents at beginning of period.......................... 1,543 454
------------- -------------
Cash and cash equivalents at end of period................................ $ 568 $ 58,944
============= =============
Supplemental disclosures of cash flow information
Interest paid.............................................................. $ 276 $ 3,560
============= =============
Supplemental disclosures of non-cash investing and financing
activities
Acquisitions:
Liabilities assumed..................................................... -- $ 4,552
Issuance of notes payable............................................... -- 1,170
Obligations under noncompete agreements................................. -- 216
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............................................................ -- 295
</TABLE>
See accompanying notes.
7
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Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts)
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 26, 1999 are not
necessarily indicative of the results that may be expected for the year ended
March 25, 2000. 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 27, 1999 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 27, 1999
("fiscal 1998") was a 52-week year. The Company's fiscal quarter is a 13-week
period which ends on a Saturday.
2. Going Concern Uncertainty
The Company has incurred net losses of $32,692, $155,801, $76,211 and
$13,510 in the quarter ended June 26, 1999, the years ended fiscal 1998, fiscal
1997 and fiscal 1996, respectively, and has an accumulated deficit of $280,929
at June 26, 1999, and has a working capital deficit of $25,105, inclusive of
$6,655 representing the estimated net realizable value of net assets of
businesses available for sale.
The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the fiscal 1998
financial statements. The paragraph states that the company's recurring losses
and limited working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.
In February 1999, the Company's Board of Directors adopted a restructuring
plan to reposition the Company's operations and focus on its primary sports
merchandising business. The major elements of the restructuring plan, certain of
which have been completed, include the sale or closure of substantially all non-
sports related catalog businesses, sale of the Company's principal distribution
facility and reduction of leased office facilities and employee headcount. The
Company is suffering from a severe working capital shortage and requires a
significant amount of additional working capital in excess of any proceeds which
may be received from the disposition of assets. To date, the Company has not
been successful in obtaining such additional working capital from financing
activities or otherwise. Furthermore, in the quarter ended June 26, 1999, the
Company incurred an additional $13,000 charge in connection with a further
write-down of assets held for sale resulting from the Company's inability to
date to dispose of such assets. As a consequence of its severe working capital
shortage, Management is exploring all possible alternatives, including the
strong possibility of seeking relief under federal bankruptcy laws.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
3. Dispositions
In April 1999, the Company sold its principal distribution facility for net
proceeds of $30,000. In conjunction with this sale the Company entered into a
fulfillment services agreement with the purchaser. The fulfillment services
agreement requires the Company to pay rates substantially above those available
from other third party service providers. Accordingly, the Company has recorded
an accrual for an estimate of the aggregate amount to be paid for
7
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Notes to Consolidated Financial Statements-(Continued)
(in thousands, except share and per share amounts)
fulfillment services above the fair value of such services. The sale of the
distribution center resulted in a net gain of $4,246 and is netted against the
accrual for losses on businesses held for sale at March 27, 1999. This facility
included assets under capital leases with a net carrying value of $1,089 and the
transaction included the transfer of the remaining capital lease obligation of
approximately $898.
In May 1999, the Company sold Childswork/Childsplay for net proceeds of
$1,391 which resulted in a loss of $1,313, which was included in the accrual for
losses on businesses held for sale at March 27, 1999.
In June 1999, the Company sold the assets of The Music Stand, LLC for net
proceeds of $2,100, which resulted in a loss of $2,733, which was included in
the accrual for losses on businesses held for sale at March 27, 1999.
4. Subsequent Events
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $544 under a promissory note payable to Diplomat
Corporation. The obligation under the note is guaranteed by the Company and
secured by a pledge of the limited liability interests of the subsidiary.
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $799 under promissory notes payable to Traven Corp. In
addition to the overdue payment described in the previous sentence, the Company
owes an aggregate of approximately $1,480 in principal under the notes. The
obligations under the notes are guaranteed by the Company and secured by a
pledge of the limited liability interests of the subsidiary.
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $105 under a promissory note payable to Global Friends
Collection, Inc.
A subsidiary of the Company has failed to make a payment in the amount of
$950 to H&L Productions, Inc. under the terms of the acquisition agreement.
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 27, 1999, which was filed with the Securities and Exchange Commission on
July 12, 1999 and amended by Form 10-K/A No.1 filed on July 23, 1999 the "1998
Form 10-K", 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.
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 26, 1999 June 27, 1998
---------------------- ---------------------
<S> <C> <C>
Net sales....................................... 100.0% 100.0%
Gross profit.................................... 33.0% 31.5%
Selling, general and administrative
expenses...................................... 80.7% 83.8%
Reserve for loss on businesses available
for sale...................................... 33.9% --
Loss from operations............................ 81.7% 52.3%
Interest expense................................ 3.7% 4.5%
Net loss........................................ 85.2% 70.8%
</TABLE>
Three Months Ended June 26, 1999 Compared to Three Months Ended June 27, 1998
Net sales. Net sales increased to $38.4 million in the fiscal quarter
ended June 26, 1999 compared to $33.9 million in the fiscal quarter ended June
27, 1998.
Gross profit. Gross profit increased to $12.6 million or 33% of net sales
for the fiscal quarter ended June 26, 1999 compared to $10.7 million or 31.5% of
net sales for the fiscal quarter ended June 27, 1998. The increase in the gross
profit percentage was primarily attributable to higher gross profit percentage
on the Carol Wright Gifts business which was acquired in September 1998 compared
to other Company brands.
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 $31
million in the fiscal quarter ended June 26, 1999 compared to $28.4 million in
the fiscal quarter ended June 27, 1998. Selling, general and administrative
expenses as a percentage of net sales decreased to 80.7% in the fiscal quarter
ended June 26, 1999 from 83.8% in the fiscal quarter ended June 27, 1998. This
percentage decrease was due to revenue increases from existing catalogs and the
1998 and
9
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1997 acquisitions, which exceeded growth in the Company's selling, general and
administrative expenses. In connection with the Company's acquisitions,
amortization of acquired intangibles of $1.3 million is included in selling,
general and administrative expenses in the fiscal quarter ended June 26, 1999 as
compared to $1.4 million in the fiscal quarter ended June 27, 1998.
Restructuring Charges.
The Company has to date been unable to complete its divestiture program as
expected. As a result, Management does not believe the remaining assets held for
sale will sell for the amounts estimated in the fiscal 1998 financial
statements. Consequently, the Company has taken an additional charge of $13.0
million to write-down the value of the remaining assets held for sale to their
estimated market value.
Interest expense. Interest expense decreased to $1.4 million in the fiscal
quarter ended June 26, 1999 from $1.5 million in the fiscal quarter ended June
27, 1998, primarily as a result of a higher average debt balance and the
prepayment penalties on the Bridge Notes during the fiscal quarter ended June
27, 1998.
Liquidity and Capital Resources
At June 26, 1999 the Company had cash of $4.7 million (including restricted
cash of $2.8 million) and a working capital deficiency of $25 million. The
Company's capitalization, defined as the sum of long-term debt and stockholders'
equity, at June 26, 1999 was $13.4 million.
In February 1999, the Company's Board of Directors adopted a restructuring
plan to reposition the Company's operations and focus on its primary sports
merchandising business. The major elements of the restructuring plan, certain of
which have been completed, include the sale or closure of substantially all
non-sports related catalog businesses, sale of the Company's principal
distribution facility and reduction of leased office facilities and employee
headcount.
As part of the Company's strategic repositioning, it has sold four of its
catalog businesses and its distribution center, and intends to sell certain
other of its non-sports assets. The net proceeds of this asset disposal program
have been approximately $56 million to date, of which $22.5 million were
received from sales completed during fiscal 1998 and $33.5 million were received
during the fiscal quarter ended June 26, 1999 and were used to repay past due
trade obligations, its existing bank credit facilities and to fund ongoing
business operations. The net proceeds of the remainder of such sale program are
expected to be in excess of approximately $7 million and will be used to repay
related obligations and to fund ongoing business operations as well as an
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, in the fourth quarter of fiscal 1998 and the
first fiscal quarter of 1999, the Company received $10 million in additional
debt financing from GEIPPP II and Global Internet Fund IV LLC pursuant to a one-
year debenture to help fund the Company's operations in the interim. Subsequent
to June 26, 1999, GEIPPP II advanced an additional $2.5 million to the Company
pursuant to a secured lending arrangement. In addition, the Company has arranged
for the deferral of $13.1 million of debt to Cox Target Media, Inc.
The Company is suffering from a severe working capital shortage and
requires a significant amount of additional working capital in excess of any
proceeds which may be received from the disposition of assets. To date, the
Company has not been successful in obtaining such additional working capital
from financing activities or otherwise. Furthermore, in the quarter ended June
26, 1999, the Company incurred an additional $13,000 charge in connection with a
further write-down of assets held for sale resulting from the Company's
inability to date to dispose of such assets. As a consequence of its severe
working capital shortage, Management is exploring all possible alternatives,
including the strong possibility of seeking relief under federal bankruptcy
laws. See Note 2 to the Company's Consolidated Financial Statements.
Prior to the restructuring, 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
10
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the near future are expected to arise from funding working capital and capital
expenditures needed to support the revised business levels.
In May 1998, the Company completed the Initial Public Offering. The Company
received net proceeds of approximately $132.5 million from the Initial Public
Offering, after deducting underwriters' commissions of $9.4 million and other
expenses of approximately $2.5 million. The Company has used (i) approximately
$28.0 million of the net proceeds to redeem a portion of the Company's
outstanding Debentures owned 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
(each as defined below), (iv) approximately $0.8 million of the net proceeds for
the Fan and Fun acquisition completed in June 1998, (v) approximately $17.0 of
the net proceeds for the acquisition of certain assets of The Edge Company
Catalog in August 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.
Prior to the Initial Public Offering, 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.
As of March 27, 1999, the Company had repaid the Revolving Credit Facility and
had repaid all but $1.1 million under the Term Loan. Subsequent to March 27,
1999 and the application of proceeds from fiscal 1998 year to date sales of
divested net assets, the Company paid off all outstanding obligations under this
facility and currently is not permitted to make additional borrowings.
During the fiscal quarter ended June 26, 1999, net cash used in operating
activities was $32.2 million. Net cash provided by investing activities was
$31.8 million, consisting primarily of cash paid for additions to property and
equipment of $.4 million offset by proceeds from the sale of businesses of $33.4
million. Net cash used in financing activities was $.6 million consisting
primarily of proceeds from related party subordinated notes of $2 million offset
by repayment of term loan of $1.1 million and payment of notes payable of $1.5
million.
As of March 27, 1999, the Company had approximately $207 million of federal
tax net operating loss carryforwards which will expire in 2012 and 2013. The
Company also had approximately $203 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 26, 1999. In addition, the Company incurred
significant additional tax losses for the fiscal quarter ended June 26, 1999.
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.
11
<PAGE>
Seasonality
The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be derived
from the fall and holiday seasons. As a result, the Company expects its sales
and results of operations generally to be the lowest in the second quarter of
each fiscal year, which precedes the back-to-school and holiday purchases. The
Company's quarterly results may fluctuate as a result of numerous factors,
including the timing of acquisitions, the timing, quantity and cost of catalog
mailings, the response rates to such mailings, the timing of merchandise
deliveries, the merchandise mix, pricing and presentation of products offered
and sold, market acceptance of the Company's merchandise (including new
merchandise categories or products introduced) and the hiring and training of
additional personnel. Accordingly, results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full fiscal
year or any future quarters. Results of operations are affected not only by the
seasonality of the Company's net revenues, but also by seasonal variations in
product mix and the fixed portion of the Company's operating expenses. See
"Factors that May Affect Future Financial Results" in the 1998 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 relating to its
continuing businesses 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 1998 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 March 28, 1998, include the following
Statement of Financial Accounting Standards ("SFAS") :
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the Company for the fiscal year ending
March 31, 2001, requires all derivatives to be recorded on the balance sheet at
fair value and establishes "Special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities, or firm commitments (referred to as fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in offsetting changes in fair values or cash
flows of both the hedge and the hedged item being recognized in earnings in the
same period. Changes in fair value of derivatives that do not meet the criteria
of one of these categories of hedges are included in income. The Company has not
engaged in derivative instruments or hedging activities in the past.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently utilizes no material derivative financial instruments
which expose the Company to significant market risk. At June 26, 1999, the
Company is not exposed to significant market risk with respect to interest rate
fluctuations. See 1998 Form 10-K.
<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
Not applicable.
Item 3. Defaults Upon Senior Securities
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $544 under a promissory note payable to Diplomat
Corporation. The obligation under the note is guaranteed by the Company and
secured by a pledge of the limited liability interests of the subsidiary.
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $799 under promissory notes payable to Traven Corp. In
addition to the overdue payments described in the previous sentence, the Company
owes an aggregate of approximately $1,480 in principal under the notes. The
obligations under the notes are guaranteed by the Company and secured by a
pledge of the limited liability interests of the subsidiary.
A subsidiary of the Company has failed to make a principal and interest
payment in the amount of $105 under a promissory note payable to Global Friends
Collection, Inc.
A subsidiary of the Company has failed to make a payment in the amount of
$950 payable to H&L Productions, Inc. under the terms of the acquisition
agreement.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
Dispositions
------------
In April 1999, the Company sold its principal distribution facility for net
proceeds of $30,000. In conjunction with this sale the Company entered into a
fulfillment services agreement with the purchaser. The sale of the distribution
center resulted in a net gain of approximately $3.55 million.
In May 1999, the Company sold Childwork/Childsplay for net proceeds of $1.8
million, which resulted in a loss of approximately $1.4 million.
In June 1999, the Company sold the assets of The Music Stand, LLC for net
proceeds of $2.1 million, which resulted in a loss of approximately $2.3
million.
Changes in Management
---------------------
In June 1999 Hunter C. Cohen resigned from his position as Chief Operating
Officer and Director of the Company.
In July 1999 Ronald Benanto resigned from his position as Chief Financial
Officer and Vice President of the Company.
In July 1999 Warren Struhl resigned from his position as Chief Executive
Officer while remaining as Chairman of the Board for the Company. On this same
day, Harry L. Usher was appointed to the Board of Directors and named the
Company's new President and Chief Executive Officer. Mr. Usher, who is 60 years
old, practiced entertainment and business law for 15 years in California.
Afterwards, he served as Chief
14
<PAGE>
Operating Officer of the 1984 Olympic Organizing Committee. Additionally, he
served as the Commissioner of the United States Football League, Chairman of the
1991 Los Angeles Olympic Sports Festival , Chief Executive Officer of Dorna USA
and most recently of the Jaust Group.
For further information with respect to changes in management, see the
1998 Form 10-K.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission.
Exhibit Description
No.
------ -----------------------------------------------------------------------
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 26, 1999.
(b) Reports on Form 8-K
None.
15
<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 16, 1999 By: /s/Ronald Munkittrick
-----------------------------------
Ronald Munkittrick
Vice President of Finance
16
<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. 333-556 81)).
27.1 Financial Data Schedule for fiscal quarter ended June 27, 1998.
17
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