<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24048
GEERLINGS & WADE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2935863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
960 Turnpike Street, Canton, MA 02021
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (781) 821-4152
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
<TABLE>
<CAPTION>
Par Value Date Number of Shares
--------- ---- ----------------
<S> <C> <C> <C>
Common Stock $ .01 November 16, 1998 3,789,495
</TABLE>
<PAGE>
GEERLINGS & WADE, INC.
INDEX
<TABLE>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1997 and
September 30, 1998 (Unaudited)................................................... 2
Statements of Income for the Quarters Ended September 30, 1997
and September 30, 1998 and for the Nine Months Ended September
30, 1997 and September 30, 1998 (Unaudited)...................................... 3
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
September 30, 1998 (Unaudited).................................................. 4
Notes to Financial Statements.................................................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................. 13
SIGNATURES ................................................................................. 14
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEERLINGS & WADE, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 358,043 $ 3,102,846
Accounts receivable 559,046 507,550
Inventory 10,984,590 8,212,145
Prepaid mailing costs 957,483 1,012,724
Prepaid expenses and other assets 987,034 878,488
Deferred income taxes 855,910 424,865
--------------------- ---------------------
Total Current Assets 14,702,106 14,138,618
--------------------- ---------------------
PROPERTY AND EQUIPMENT, AT COST 2,550,646 2,533,893
Less--Accumulated Depreciation 1,240,777 1,566,669
--------------------- ---------------------
1,309,869 967,224
--------------------- ---------------------
OTHER ASSETS 112,367 840,662
--------------------- ---------------------
$ 16,124,342 $ 15,946,504
--------------------- ---------------------
--------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 982,395 $ ---
Accounts payable 1,900,761 2,756,502
Deferred revenue 766,392 618,756
Accrued expenses 1,749,958 999,327
--------------------- ---------------------
Total Current Liabilities 5,399,506 4,374,585
--------------------- ---------------------
DEFERRED REVENUE, LESS CURRENT PORTION 363,163 575,224
--------------------- ---------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized-1,000,000 shares
Outstanding-none
Common stock, $.01 par value-
Authorized-10,000,000 shares-
Issued and outstanding-3,781,343 and 3,789,495 shares
in 1997 and 1998, respectively 37,812 37,895
Additional paid-in capital 9,729,781 9,759,372
Retained earnings 594,080 1,199,428
--------------------- ---------------------
Total Stockholders' Equity 10,361,673 10,996,695
--------------------- ---------------------
$ 16,124,342 $ 15,946,504
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales................................... $ 7,258,227 $ 7,034,645 $ 22,780,395 $ 22,619,598
Cost of Sales........................... 4,072,544 3,597,633 12,414,990 11,687,250
------------- -------------- ------------- -------------
Gross Profit............................ 3,185,683 3,437,012 10,365,405 10,932,348
Selling, general and administrative
expenses................................ 2,990,969 3,072,220 9,764,652 9,906,799
------------- -------------- ------------- -------------
Income from operations................. 194,714 364,792 600,753 1,025,549
Interest income......................... 1,332 13,951 20,818 15,316
Interest expense........................ 3,017 --- 8,620 20,616
------------- -------------- ------------- -------------
Income before income taxes.............. 193,029 378,743 612,951 1,020,249
Provision for income taxes.............. 78,000 158,300 246,000 414,900
------------- -------------- ------------- -------------
Net income.............................. $ 115,029 $ 220,443 $ 366,951 $ 605,349
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Net income per share
Basic........................... $ 0.03 $ 0.06 $ 0.10 $ 0.16
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Diluted......................... $ 0.03 $ 0.06 $ 0.10 $ 0.16
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Weighted average common shares and common
equivalents outstanding
Basic............................ 3,779,380 3,787,814 3,779,088 3,785,358
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Diluted.......................... 3,779,900 3,788,076 3,795,101 3,799,678
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1998
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income............................................................. $ 366,951 $ 605,349
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization.................................... 403,252 407,365
Deferred income taxes............................................ 118,150 ---
Loss from disposition of fixed asset............................. 2,083 ---
Changes in current assets and liabilities --
Accounts receivable.............................................. 169,889 51,496
Inventory........................................................ (2,518,985) 2,772,444
Prepaid mailing costs............................................ (270,484) (55,241)
Prepaid expenses................................................. (654,610) 63,452
Refundable income taxes.......................................... 6,317 1,622
Accounts payable................................................. 1,749,068 855,742
Deferred revenue................................................. 118,398 64,426
Accrued expenses................................................. 56,137 (750,632)
------------- --------------
Net cash (used in) provided by operating activities......... (453,834) 4,016,022
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (306,441) (90,889)
Proceeds from the sale of property and equipment....................... 41,550 80,000
Change in other assets................................................. 97,728 (307,609)
------------- --------------
Net cash (used in) investing activities...................... (167,163) (318,498)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit........................................... 1,731,014 1,651,090
Repayments on line of credit........................................... (1,676,973) (2,633,485)
Proceeds from stock purchase plan...................................... 6,504 29,674
------------- --------------
Net cash provided by (used in) financing activities.......... 60,545 (952,721)
------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................... (560,452) 2,744,803
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 774,514 358,043
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 214,062 $ 3,102,846
------------- --------------
------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period -
Interest............................................................... $ 8,620 $ 20,616
------------- --------------
------------- --------------
Income taxes paid...................................................... $ -- $ 1,087,631
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Notes to Financial Statements
1. Basis of Presentation
The interim period information set forth in these financial statements is
unaudited and may be subject to normal year-end adjustments. In the opinion of
management, the information reflects all adjustments, which consist of normal
recurring accruals that are considered necessary to present a fair statement of
the results of operations of Geerlings & Wade, Inc. (the "Company") for the
interim periods presented. The operating results for the quarter ended September
30, 1998 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 1998.
The financial statements presented herein should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. Certain information in these footnote
disclosures normally included in financial statements has been condensed or
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
2. Basic and Diluted Net Income Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
Statement establishes standards for computing and presenting earnings per share.
Net income per share has been restated for all periods to conform to current
year presentation. For the quarters ending September 30, 1997 and September 30,
1998, 235,338 and 381,333 of anti-dilutive shares, respectively, have been
excluded from the weighted average number of common and dilutive potential
common shares outstanding. For the nine months ending September 30, 1997 and
September 30, 1998, 239,845 and 367,275 of anti-dilutive shares, respectively
have been excluded from the weighted average number of common and dilutive
potential common shares outstanding.
Basic and diluted net income per share is as follows:
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 115,029 $ 220,443 $ 366,951 $ 605,349
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
Basic weighted average shares outstanding 3,779,380 3,787,814 $ 3,779,088 $ 3,785,358
Weighted average common equivalent shares computed
under the treasury stock method 520 262 16,013 14,320
--------------- --------------- --------------- --------------
Diluted weighted average shares outstanding 3,779,900 3,788,076 3,795,101 3,799,678
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
Basic net income per share $ 0.03 $ 0.06 $ 0.10 $ 0.16
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
Diluted net income per share $ 0.03 $ 0.06 $ 0.10 $ 0.16
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
</TABLE>
3. New Accounting Standards and Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This Statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in financial statements. It also requires that an entity
classify items of other comprehensive income (e.g., foreign currency translation
adjustments and unrealized gains and losses on certain marketable securities) by
their nature in its financial statements. The Company did not have any items of
comprehensive income for the quarters ended September 30, 1997 and September 30,
1998, and therefore, total comprehensive income was the same as reported net
income for those periods.
In September 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 is effective for fiscal
years ending after December 15, 1997. The Company believes that the adoption of
this new accounting standard will not have a material impact on the Company's
financial statements.
5
<PAGE>
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
("SOP 98-5"). SOP 98-5 requires all costs associated with pre-opening and
organization activities to be expensed as incurred. The Company does not expect
the adoption of this Statement to have a material impact on the Company's
financial position or results of operations. The Company will adopt SOP 98-5
effective January 1, 1999.
4. Acquisition
On July 7, 1998, the Company closed the acquisition of the assets of Passport
Wine Gift Company, Inc. d/b/a Passport Wine Club. The acquisition of Passport
will be accounted for as a purchase in accordance with APB No. 16. The financial
results of Passport Wine Club are not material to the Company's financial
statements taken as a whole.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Geerlings & Wade, Inc. (the "Company") is a direct marketer of premium
wines and wine-related merchandise to retail consumers. The Company currently
maintains licensed facilities in fourteen states. Federal, state and local laws
strictly govern the sale of wine in each market served by the Company.
Important Factors Regarding Forward-Looking Statements
The Company may occasionally make forward-looking statements and
estimates such as forecasts and projections of the Company's future performance
or statements of management's plans and objectives. These forward-looking
statements may be contained in SEC filings, press releases and oral statements,
among others, made by the Company. Actual results could differ materially from
those in such forward-looking statements. Therefore, no assurance can be given
that the results in such forward-looking statements will be achieved. Important
factors could cause the Company's actual results to differ from those contained
in such forward-looking statements, including, among other things, the factors
mentioned in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 on file with the U.S. Securities and Exchange Commission.
Quarters Ended September 30, 1997 and September 30, 1998
Sales
Sales decreased $223,000, or 3.1%, from $7,258,000 in the quarter ended
September 30, 1997 to $7,035,000 in the quarter ended September 30, 1998. Sales
levels largely depend on response rates and circulation (number) of "house
mailings" which are product offerings sent via the U.S. Postal Service to
existing customers and of "acquisition mailings" which are product offerings
sent via the U.S. Postal Service to potential new customers. Catalog, retail and
Internet sales also contribute to total sales. The decrease in sales resulted
from not mailing the spring catalog and lower response rates to house mailings
during the third quarter of 1998 compared to the third quarter of 1997 during
which period the Company had experienced strong response rates to several house
mailings. The lower sales from the house mailings were somewhat offset by sales
from acquisition mailings in the third quarter of 1998. No acquisition mailings
were made in the third quarter of 1997. Sales, exclusive of wine accessory
sales, decreased 3.2% in markets, defined by the shipping region of each
warehouse, in which the Company has been open at least one year. The number of
twelve-bottle equivalent cases ("cases"), exclusive of Bordeaux future sales,
sold by the Company decreased by 1,963, or 2.8%, from 70,028 in the quarter
ended September 30, 1997 to 68,065 in the quarter ended September 30, 1998. The
average case price, exclusive of Bordeaux future sales, decreased by $1.52, or
1.5%, from $101.35 in the quarter ended September 30, 1997 to $99.83 in the
quarter ended September 30, 1998. The average case price decreased principally
as a result of sales from acquisition mailings, which feature lower cost wines.
The average number of cases purchased per customer order was 1.15 in the quarter
ended September 30, 1998 compared to 1.20 in the same fiscal period of 1997. The
increase in acquisition mailings lowered the average cases per order since fewer
bottles per order are purchased by first time customers than by existing
customers.
Gross Profit
Gross profit increased $251,000, or 7.9%, from $3,186,000 in the
quarter ended September 30, 1997 to $3,437,000 in the quarter ended September
30, 1998. Gross profit as a percentage of sales increased from 43.9% in the
quarter ended September 30, 1997 to 48.9% in the quarter ended September 30,
1998. Gross profit attributable to wine sales increased $4.00 per case, or 8.8%,
from $45.25 per case in the quarter ended September 30, 1997 to $49.25 per case
in the quarter ended September 30, 1998. The increase in gross margin percentage
and average gross profit resulted primarily from improved purchasing by the
Company and lower domestic wine costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $81,000, or
2.7%, from $2,991,000 in the quarter ended September 30, 1997 to $3,072,000 in
the quarter ended September 30, 1998 and increased as a percentage of sales from
41.2% in the quarter ended September 30, 1997 to 43.7% in the quarter ended
September 30, 1998. The net increase in selling, general and administrative
expenses is largely attributable to higher overhead and salary expense for
operating the Passport Wine Club.
Interest
Interest income increased from $1,000 in the quarter ended September
30, 1997 to $14,000 in the quarter ended September 30, 1998. This increase in
interest income was due to having higher cash balances invested during the 1998
third
7
<PAGE>
quarter as compared to the 1997 third quarter. There was no interest
expense for the third quarter of 1998 and $3,000 in interest for the third
quarter of 1997.
8
<PAGE>
Nine-Month Periods Ended September 30, 1997 and September 30, 1998
Sales
Sales decreased $160,000, or 0.7%, from $22,780,000 in the nine months
ended September 30, 1997 to $22,620,000 in the nine months ended September 30,
1998. The decrease in sales for the first nine months of 1998 from the
comparable period for the prior year resulted primarily from decreased response
rates to house mailings and to not mailing a spring catalog offering wines and
wine accessories which was offset by additional sales generated from increased
circulation of acquisition mailings to prospective customers and increased
response rates to the Company's acquisition mailings. Sales, exclusive of wine
accessory sales, decreased 1.5% in markets, defined by the shipping region of
each warehouse, in which the Company has been open for at least one year. The
number of cases sold by the Company increased by 2,061, or .9%, from 217,785 in
the nine months ended September 30, 1997 to 219,846 in the nine months ended
September 30, 1998. The average case price decreased by $0.35, or 0.3%, from
$100.37 in the nine months ended September 30, 1997 to $100.02 in the nine
months ended September 30, 1998. The average case price was stable and reflects
a consistent pricing strategy. The average number of cases purchased per
customer order was 1.12 in the nine months ended September 30, 1998 compared to
1.15 in the comparable fiscal period of 1996. This average has trended down for
the first nine months of 1998 as compared to the same period in 1997 as a result
of increased acquisition mailings and increased response rates to those
mailings. As stated above, orders from acquisition mailings yield fewer bottles
per order.
Gross Profit
Gross profit increased $567,000, or 5.5%, from $10,365,000 in the nine
months ended September 30, 1997 to $10,932,000 in the nine months ended
September 30, 1998. Gross profit as a percentage of sales increased from 45.5%
in the nine months ended September 30, 1997 to 48.3% in the nine months ended
September 30, 1998. Gross profit attributable to wine sales increased $1.19 per
case, or 2.5%, from $47.01 per case in the nine months ended September 30, 1997
to $48.20 per case in the nine months ended September 30, 1998. The increase in
gross profit percentage and average gross profit per case resulted from improved
purchasing and lower costs for domestic wines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $142,000, or
1.5%, from $9,765,000 in the nine months ended September 30, 1997 to $9,907,000
in the nine months ended September 30, 1998. As a percentage of sales, these
expenses increased from 42.9% in the nine months ended September 30, 1997 to
43.8% in the nine months ended September 30, 1998. The net increase in selling,
general and administrative expenses is attributable to a) higher overhead
primarily related to adding the Michigan facility and b) slightly higher
marketing costs to date due to amortization of the 1997 fourth quarter
acquisition mailings and increased acquisition mailings during 1998.
Interest
Interest income decreased by $6,000 for the nine months in 1998
compared to 1997 due to lower invested cash balances. Interest expense increased
by $12,000 from $9,000 in the nine months ended September 30, 1997 to $21,000 in
the nine months ended September 30, 1998, as a result of increased average
borrowings under the Company's line of credit during the first quarter of 1998.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Provision for Income Taxes
The Company's provision for income taxes for the quarter ended
September 30, 1998 reflects an approximate 41.8% effective income tax rate
anticipated for the full year ended December 31, 1998. During the quarter ended
September 30, 1998, the Company recorded a provision for income taxes of
$158,000 and recorded a provision for income taxes of $415,000 for the nine
months ended September 30, 1998.
Liquidity and Capital Resources
The Company's primary working capital needs include purchases of
inventory and the cost of prospect mailings and other expenses associated with
promoting sales. As of September 30, 1998, the Company had cash and cash
equivalents totaling $3,103,000. In addition, the Company has a credit facility
with BankBoston comprised of a revolving, discretionary, demand line of credit
in the maximum principal amount equal to the lesser of 50% of qualifying
inventory or $5.0 million (the "Line of Credit"). The Line of Credit bears
interest at BankBoston's base rate (which approximates the prime rate) plus
one-half of a percent and is collateralized by substantially all of the assets
of the Company. As of September 30, 1998, the Company had no outstanding balance
under the Line of Credit.
For the year to date ending September 30, 1998, net cash of $4,016,000
was provided by operating activities, resulting principally from decreases of
accounts receivable and inventory and an increase in accounts payable, which
reductions were offset by a decrease in accrued expenses.
Cash proceeds of $80,000 provided by the disposal of assets resulted
from returning assets to a vendor.
At December 31, 1997 and September 30, 1998, the Company had working
capital of $9,303,000 and $9,764,000, respectively. The increase in working
capital was primarily due to a decrease in accounts receivable and inventory and
an increase in accounts payable prepaid mailing costs and was offset by a
decrease in accrued expenses.
The Company presently believes that cash flows from operations and
current cash balances, together with the Line of Credit, will be sufficient to
meet the Company's working capital and capital expenditure requirements for the
foreseeable future.
Exchange Rates
The Company engages, from time to time, in currency-hedging activities
related to firm commitments for the purchase of inventories in an effort to fix
costs and manage the impact of exchange rate fluctuations. The Company has two
foreign exchange lines of credit, which allow the Company to enter into forward
currency exchange contracts of up to $1,000,000 maturing on any one day. As of
September 30, 1998, the Company had obligations of $160,000 with respect to
forward currency exchange contracts.
Year 2000 Compliance
The year 2000 issue relates to computer programs and systems that
recognize dates using two digit year data rather than four digit year data. As a
result, such programs and systems may fail or provide incorrect information when
using dates after December 31, 1999. If the year 2000 issue were to cause
disruptions to the Company's internal information technology systems or to the
information technology systems of entities with whom the Company has commercial
relationships, material adverse effects to the Company's operations could
result.
The Company's internal computer programs and operating systems consist
of programs and systems relating to virtually all segments of the Company's
business, including merchandising, customer database management and marketing,
order-processing, fulfillment, inventory management, customer service and
financial reporting. These programs and systems are primarily comprised of:
- "Front-end" systems. These systems automate and manage business
functions such as order-taking and order-processing, inventory
management, fulfillment operations at the Company's retail facilities
and financial reporting. Users within the Company interface with these
systems through personal computers via a local area network and from
distance locations through a private network using the Internet. These
users also use and access through their personal computers
off-the-shelf e-mail, word processing, spreadsheet and other commercial
software applications.
10
<PAGE>
- Customer database management systems. These systems facilitate the
storage of customer data and direct response and catalog mailings for
the Company. Currently, the Company's internal customer database
management system is integrated with the existing front-end system of
the Company.
- Telecommunications systems. These systems enable the Company to manage
their order-taking and customer service functions.
- Voicemail systems. These systems are used for receiving and storing
messages to employees at various Company facilities.
- Ancillary services systems. These include such systems as heating,
ventilation and air conditioning control systems and security systems.
The Company has completed preliminary reviews of its internal front-end
systems, its customer database management systems, and its personal computers
and local area networks, to assess the potential impact of the year 2000 issue.
These preliminary reviews were completed by the Company's existing workforce at
no identifiable incremental cost. Based upon these reviews, the Company believes
that all of these systems and equipment will operate correctly when processing
data that include dates after December 31, 1999 except for its front-end
processing system. The Company believes that no specific remediation or
expenditures are required to ensure continued proper operation of such systems
and equipment other than the front-end processing system. The Company plans to
either remediate the computer code of its front-end processing system which has
been developed in SQL Windows language at an approximate cost of $125,000 to
$175,000 or purchase in the ordinary course of business a replacement software
system that is year 2000 compliant. The Company is in the process of reviewing
proposals from vendors that sell packaged systems for the direct marketing
industry. If the Company decides to replace the front-end system, the cost is
currently estimated to be approximately $300,000 to $550,000. In addition to
addressing the year 2000 issue, a new front-end system will enhance the
functionality and capability of the Company's entire computer system. The
Company plans to conduct further reviews and tests of its systems and equipment
to insure that all potential year 2000 issues have been addressed.
The Company has not yet completed reviews of its internal
telecommunications systems and its internal voicemail and ancillary services
systems. Based on its preliminary reviews, the Company has been advised by its
telephone system vendor that a $3,000 software update can be purchased to bring
the Company's telephone system into compliance. The Company intends to purchase
such software. The Company does not anticipate that upon further reviews that
any remediation relating to such other systems that might be necessary will
cause the Company to incur material costs or present implementation challenges
that cannot be addressed prior to the end of calendar year 1999. The Company
expects to complete its reviews of these systems in the first half of calendar
year 1999.
The computer programs and operating systems used by entities with whom
the Company has commercial relationships also pose potential problems relating
to the year 2000 issue, which may affect the Company's operations in a variety
of ways. These risks are more difficult to assess than those posed by internal
programs and systems, and the Company has not yet completed a plan for assessing
them. The Company believes that the programs and operating systems used by
entities with whom it has commercial relationships generally fall into two
categories:
First, the Company relies on programs and systems used by providers of
services necessary to it to reach and communicate with its customers. Examples
of such providers include the United States Postal Service, UPS, telephone
companies, customer list processors and rental agencies, printers and banks.
Services provided by such entities affect almost all facets of the Company's
operations, including processing of orders, printing and mailing of direct
response mail and catalogs, shipping of goods and certain financial services
(e.g., credit card processing). Programs and services in this first category
generally are not specific to the Company's business and disruptions in their
availability would likely have a negative impact on most enterprises within the
direct marketing industry and on many enterprises outside the direct marketing
industry. The Company believes that all of the most reasonably likely worst case
scenarios involving disruptions to its operations stemming from the year 2000
issue relate to programs and systems in this first category. The Company intends
to include an evaluation of such scenarios in its plan for assessing the
programs and systems of the entities with whom it has commercial relationships.
Second, the Company relies on programs and systems used by a variety of
vendors of the products it markets (in 1997, the Company purchased goods from
many vendors). In the case of risks posed by the year 2000 issue relating to
programs and systems in this second category that are used by product vendors,
such risks are minimal and correctable since these vendors are relatively small
companies and rely on off-the-shelf software programs and hardware. The Company
intends to include in its plan for assessing the programs and systems of the
entities with whom it has commercial relationships the solicitation of
assurances of year 2000 compliance from each vendor that is significant to the
Company.
11
<PAGE>
The Company expects to complete its plan for assessing the programs and
systems of the entities with whom it has commercial relationships by the end of
fiscal 1998 and the identification of related risks and uncertainties by the end
of the first quarter of fiscal 1999. Once such identification has been
completed, the Company intends to resolve any material risks and uncertainties
that are identified by communicating further with the relevant vendors, by
working internally to identify alternative sourcing and by formulating
contingency plans to deal with such matters. The Company expects the resolution
of such matters to continue until all year 2000 problems are resolved
satisfactorily.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GEERLINGS & WADE, INC.
(Registrant)
By: /s/ Jay L. Essa
---------------
Name: Jay L. Essa
Title: President and Chief Executive Officer
By: /s/ David R. Pearce
-------------------
Name: David R. Pearce
Title: Vice President and Chief Financial Officer
Dated: November 16, 1998
14
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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0
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