<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 MARCH 31, 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 (I.R.S. Employer
of 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:
Par Value Date Number of Shares
--------- ---- ----------------
Common Stock $ .01 May 14, 1998 3,785,316
<PAGE>
GEERLINGS & WADE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets at December 31, 1997 and
March 31, 1998 (Unaudited)........................................ 2
Statements of Operations for the Quarters Ended March 31, 1997 and
March 31, 1998 (Unaudited)........................................ 3
Statements of Cash Flows for the Three Months Ended March 31, 1997
and March 31, 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 4. Submissions of Matters to a Vote of Security Holders.............. 9
Item 6. Exhibits and Reports on Form 8-K.................................. 9
SIGNATURES........................................................................... 10
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEERLINGS & WADE, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 358,043 $ 331,443
Accounts receivable 559,046 245,648
Inventory 10,984,590 10,309,646
Prepaid mailing costs 957,483 588,207
Prepaid expenses and other assets 987,034 897,595
Deferred income taxes 855,910 430,910
----------- -----------
Total Current Assets 14,702,106 12,803,449
----------- -----------
PROPERTY AND EQUIPMENT, AT COST 2,550,646 2,495,275
Less--Accumulated Depreciation 1,240,777 1,345,502
----------- -----------
1,309,869 1,149,773
----------- -----------
OTHER ASSETS 112,367 533,887
----------- -----------
$16,124,342 $14,487,109
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 982,395 $ ---
Accounts payable 1,900,761 1,865,229
Deferred revenue 766,392 702,796
Accrued expenses 1,749,958 1,031,838
----------- -----------
Total Current Liabilities 5,399,506 3,599,863
----------- -----------
DEFERRED REVENUE, LESS CURRENT PORTION 363,163 427,667
----------- -----------
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 3,785,316 shares in 1997 and
1998, respectively 37,812 37,853
Additional paid-in capital 9,729,781 9,743,671
Retained earnings 594,080 678,055
----------- -----------
Total Stockholders' Equity 10,361,673 10,459,579
----------- -----------
$16,124,342 $14,487,109
=========== ===========
</TABLE>
2
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, March 31,
1997 1998
--------- ---------
<S> <C> <C>
Sales $7,119,799 $7,391,066
Cost of Sales 3,761,795 3,930,623
---------- ----------
Gross Profit 3,358,004 3,460,443
Selling, general and administrative expenses 3,377,371 3,299,012
---------- ----------
Income (loss) from operations (19,367) 161,431
Interest income 485 118
Interest expense (6,087) (20,574)
---------- ----------
Income (loss) before income taxes (24,969) 140,975
Provision (benefit) for income taxes (10,720) 57,000
---------- ----------
Net income (loss) $ (14,249) $ 83,975
========== ==========
Net income (loss) per share
Basic $0.00 $0.02
========== ==========
Diluted $0.00 $0.02
========== ==========
Weighted average common and common equivalent shares
outstanding
Basic 3,779,000 3,782,932
========== ==========
Diluted 3,779,000 3,800,644
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GEERLINGS & WADE, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, March 31,
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (14,249) $ 83,975
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization 135,601 125,404
Deferred income taxes (10,720) ---
Changes in current assets and liabilities --
Accounts receivable 220,160 313,397
Inventory 2,800,766 674,944
Prepaid mailing costs 50,100 369,278
Prepaid expenses (14,142) 72,239
Refundable income taxes 1,885 0
Accounts payable (278,687) (35,532)
Deferred revenue 8,941 909
Accrued expenses (146,908) (718,121)
----------- -----------
Net cash provided by operating activities 2,752,747 886,493
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (44,291) (7,962)
Proceeds on disposal of assets --- 63,333
Change in other assets 98,934 ---
----------- -----------
Net cash provided by investing activities 54,643 55,371
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 310,540 1,651,090
Repayments on line of credit (1,249,559) (2,633,485)
Proceeds from stock award plans 6,504 13,931
----------- -----------
Net cash used in financing activities (932,515) (968,464)
----------- -----------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 1,874,875 (26,600)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 744,514 358,043
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,649,389 $ 331,443
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period -
Income Taxes $ --- $ 403,850
=========== ===========
Interest $ 16,938 $ 20,574
=========== ===========
</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 March
31, 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 (Loss) Per Common Share Data
---------------------------------------------------------
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.
This Standard is effective for fiscal periods ending after December 15, 1997.
Net income (loss) per share has been restated for all periods to conform to
current year presentation. For the periods ending March 31, 1997 and March 31,
1998, 230,619 and 248,828 of anti-dilutive shares in the form of options,
respectively, have been excluded from the weighted average number of common and
dilutive potential common shares outstanding.
Basic and diluted net income (loss) per share is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
1997 1998
---------- ----------
<S> <C> <C>
Net income (loss) $ (14,249) $ 83,975
========== ==========
Basic weighted average shares outstanding 3,779,000 3,782,932
Weighted average common equivalent shares computed
under the treasury stock method -- 17,712
---------- ----------
Diluted weighted average shares outstanding 3,779,000 3,800,644
========== ==========
Basic net income per share $ 0.00 $ 0.02
========== ==========
Diluted net income per share $ 0.00 $ 0.02
========== ==========
</TABLE>
3. New Accounting Standards
------------------------
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
other comprehensive income for the quarters ended March 31, 1997 and March 31,
1998, and therefore, total comprehensive income (loss) was the same as reported
net income (loss) for those periods.
In June 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>
4. New Accounting Pronouncements
-----------------------------
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 will adopt SOP
98-5 effective in the second quarter of 1998. Adoption of this Statement will
not have a material impact on the Company's financial position or results of
operations.
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 MARCH 31, 1997 AND MARCH 31, 1998
Sales
Sales increased $271,000, or 3.8%, from $7,120,000 in the quarter March 31,
1997 to $7,391,000 in the quarter ended March 31, 1998. The increase in sales
from the same period in the prior year resulted from additional sales from
existing house customers and telemarketing but was offset by lower sales from
acquisition since only one acquisition mailing was sent in the first quarter of
1998 compared to two that were mailed in the same quarter of 1997. Sales
increased 1.4% 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") sold by the Company increased by 632, or 0.9%, from
68,243 in the quarter ended March 31, 1997 to 68,875 in the quarter ended March
31, 1998. The average case price increased by $0.93, or 0.9%, from $101.88 in
the quarter ended March 31, 1997 to $102.81 in the quarter ended March 31, 1998.
The average case price increased principally as a result of mailing fewer
acquisition pieces in the first quarter of 1998 compared to the first quarter of
1997. The average number of cases purchased per customer order was 1.10 in the
quarter ended March 31, 1998 compared to 1.11 in the same period of 1997.
Gross Profit
Gross profit increased $102,000, or 3.1%, from $3,358,000 in the quarter
ended March 31, 1997 to $3,460,000 in the quarter ended March 31, 1998. Gross
profit as a percentage of sales decreased from 47.2% in the quarter ended March
31, 1997 to 46.8% in the quarter ended March 31, 1998. Gross profit
attributable to wine sales decreased $0.38 per case, or 0.8%, from $48.67 per
case in the quarter ended March 31, 1997 to $48.29 per case in the quarter ended
March 31, 1998. The decrease in gross margin percentage and average gross
profit resulted primarily from minor price reductions that were made to move
inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $78,000, or 2.3%,
from $3,377,000 in the quarter ended March 31, 1997 to $3,299,000 in the quarter
ended March 31, 1998, while decreasing as a percentage of sales from 47.4% in
the quarter ended March 31, 1997 to 44.6% in the quarter ended March 31, 1998.
The net decrease in selling, general and administrative expenses is largely
attributable to two factors. First, net delivery costs were lower due to
charging the customer $6.95 per case for delivery in the first quarter of 1998
whereas in the same period of 1997 delivery was $5.95 per case. Second, the
Company continued its cost reduction efforts initiated at the end of 1996.
Certain marketing expenses are amortized over five months. These cost reduction
benefits were partially offset by higher amortization of such marketing expenses
due to higher marketing costs incurred in the fourth quarter of 1997 as compared
to expenses incurred in the fourth quarter of 1996.
Interest
Interest income decreased from $485 in the quarter ended March 31, 1997 to
$118 in the quarter ended March 31, 1998. Interest expense increased by $15,000
from $6,000 in the quarter ended March 31, 1997 to $21,000 in the quarter ended
March 31, 1998, as a result of increased average borrowings under the Company's
line of credit. This increase is due to the Company's lower cash position.
7
<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 March 31,
1998 reflects an approximate 40% effective income tax rate anticipated for the
full year ended December 31, 1998. During the quarter ended March 31, 1998,
the Company recorded a provision for income taxes of $57,000 for the quarter
ended March 31.
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 March 31, 1998, the Company had cash and cash equivalents totaling
$331,000. 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 three-quarters
of a percent and is collateralized by substantially all of the assets of the
Company. As of March 31, 1998, the Company had no outstanding balance under the
Line of Credit.
During the quarter ended March 31, 1998, net cash of $886,000 was provided
by operating activities, resulting principally from decreases of accounts
receivable, inventory, prepaid mailing costs, which reductions were offset by a
decrease in accrued expenses.
Cash proceeds of $63,333 provided by the disposal of assets resulted from
returning assets to a vendor.
At December 31, 1997 and March 31, 1998, the Company had working capital of
$9,303,000 and $9,204,000, respectively. The decrease in working capital was
primarily due to a decrease in accounts receivable, inventory, prepaid mailing
costs, prepaid expenses, and was offset by a decrease in accounts payable and
accrued expenses.
On April 17, 1998, the Company entered into a letter of intent to acquire
the assets of Passport Wine Gift Company, Inc. d/b/a Passport Wine Club. The
Company seeks to enter into a definitive purchase agreement in the second
quarter of 1998 and close the transaction shortly thereafter. The Company plans
to use cash to complete this acquisition consisting of existing cash balances
and cash generated from operations.
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
March 31, 1998, the Company had no obligations with respect to forward currency
exchange contracts.
YEAR 2000 COMPLIANCE
The Company depends on computer systems for all phases of its operations.
Because many of the Company's computer software programs recognize only the last
two digits of the year in any date (e.g. "98" for "1998"). Some software may
fail to operate properly in 1999 and 2000 if the software is not reprogrammed or
replaced (the "Year 2000 Problem"). The Company believes that many of its
suppliers also have Year 2000 Problems, which could affect the Company. The
Company intends to timely mitigate and/or prevent the adverse effects of the
Year 2000 Problem, and to pursue compliance by suppliers. It is not possible,
at present, to quantify the overall cost of this work, nor the financial effect
of the Year 2000 Problem if it is not timely resolved. The Company presently
believes, however, that the cost of fixing the Year 2000 Problem will not have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
8
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF STOCKHOLDERS
(a) The Company held its annual meeting on May 12, 1998.
(b) At the annual meeting, stockholders elected Messrs. Gordon R. Cooke, Jay L.
Essa and Robert Webb as a director. Messrs. James C. Curvey, Phillip D.
Wade, John M. Connors, Jr. and Huib E. Geerlings continued serving their
terms of office after the annual meeting.
(c) Results of annual meeting votes:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Proposal For Against Withheld Abstentions Broker Non-votes
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
To elect as director Gordon R. Cooke 3,672,084 11,629
To elect as director Jay L. Essa 3,653,484 30,229
To elect as director Robert Webb 3,678,384 5,329
- -----------------------------------------------------------------------------------------------------------------
To approve an increase to 150,000 as
the number of options which may be 3,575,191 103,522
granted to an individual employee 0 5,000
under the Company's Stock Option Plan
- -----------------------------------------------------------------------------------------------------------------
To approve an increase of 75,000 3,585,061 95,718 2,934
shares reserved for issuance under
the Company's Non-employee Director 0 0 0 0
Stock Option Plan
- -----------------------------------------------------------------------------------------------------------------
To ratify the appointment of Arthur 3,670,344 9,235 4,134
Andersen LLP as independent auditors 0 0 0
of the Company
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K were filed during the quarter ended March 31,
1998.
9
<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: May 14, 1998
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 331,443
<SECURITIES> 0
<RECEIVABLES> 245,648
<ALLOWANCES> 0
<INVENTORY> 10,309,646
<CURRENT-ASSETS> 12,803,449
<PP&E> 2,495,275
<DEPRECIATION> 1,345,502
<TOTAL-ASSETS> 14,487,109
<CURRENT-LIABILITIES> 3,599,863
<BONDS> 0
0
0
<COMMON> 37,853
<OTHER-SE> 10,421,726
<TOTAL-LIABILITY-AND-EQUITY> 14,487,109
<SALES> 7,391,066
<TOTAL-REVENUES> 7,391,066
<CGS> 3,930,623
<TOTAL-COSTS> 3,930,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,574
<INCOME-PRETAX> 140,975
<INCOME-TAX> 57,000
<INCOME-CONTINUING> 83,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,975
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
