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 June 30, 1999
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 Identification No.)
of incorporation or organization)
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 August 16, 1999 3,846,716
<PAGE>
GEERLINGS & WADE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1998 and
June 30, 1999 (Unaudited).............................. 2
Statements of Operations for the Quarters Ended
June 30, 1998 and June 30, 1999 and for the
Six Months Ended June 30, 1998 and
June 30, 1999 (Unaudited).............................. 3
Statements of Cash Flows for the Six Months Ended
June 30, 1998 and June 30, 1999 (Unaudited)............ 4
Notes to Financial Statements.......................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................... 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 12
SIGNATURES .............................................................. 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEERLINGS & WADE, INC.
BALANCE SHEETS
(Unaudited)
December 31, June 30,
1998 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,289,646 $ 3,065,905
Accounts receivable 610,382 430,302
Inventory 8,213,801 9,854,091
Prepaid mailing costs 1,357,950 320,355
Prepaid expenses and other assets 833,376 640,551
Deferred income taxes 87,119 87,119
----------- -----------
Total Current Assets 15,392,274 14,398,323
----------- -----------
PROPERTY AND EQUIPMENT, AT COST 2,514,299 2,938,809
Less--Accumulated Depreciation 1,646,580 1,851,132
----------- -----------
867,719 1,087,677
----------- -----------
DEFERRED INCOME TAXES, NET 493,436 493,436
----------- -----------
OTHER ASSETS 451,799 406,744
----------- -----------
$17,205,228 $16,386,180
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,401,392 $ 3,112,147
Current portion of deferred revenue 1,089,659 501,900
Accrued expenses 924,561 350,380
----------- -----------
Total Current Liabilities 5,415,612 3,964,427
----------- -----------
DEFERRED REVENUE, LESS CURRENT PORTION 384,940 819,170
----------- -----------
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-3,789,495 and
3,846,716 shares in 1998 and
1999, respectively 37,895 38,467
Additional paid-in capital 9,759,371 10,022,486
Retained earnings 1,607,410 1,541,630
----------- -----------
Total Stockholders' Equity 11,404,676 11,602,583
----------- -----------
$17,205,228 $16,386,180
=========== ===========
2
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 8,193,886 $ 8,559,354 $ 15,584,952 $ 17,089,277
Cost of Sales 4,158,993 4,403,731 8,089,616 8,831,631
------------ ------------ ------------ ------------
Gross Profit 4,034,893 4,155,623 7,495,336 8,257,646
Selling, general and administrative expenses 3,535,567 3,793,530 6,834,579 8,397,289
------------ ------------ ------------ ------------
Income (loss) from operations 499,326 362,093 660,757 (139,643)
Interest income 1,246 11,755 1,364 26,765
Interest expense 42 -- 20,616 --
------------ ------------ ------------ ------------
Income (loss) before income taxes 500,530 373,848 641,505 (112,878)
Provision for income taxes 199,600 157,300 256,600 (47,100)
------------ ------------ ------------ ------------
Net income (loss) $ 300,930 $ 216,548 $ 384,905 $ (65,778)
============ ============ ============ ============
Net income (loss) per share
Basic $ 0.08 $ 0.06 $ 0.10 $ (0.02)
============ ============ ============ ============
Diluted $ 0.08 $ 0.06 $ 0.10 $ (0.02)
============ ============ ============ ============
Weighted average common shares and common
equivalents outstanding
Basic 3,785,316 3,846,623 3,784,109 3,837,352
============ ============ ============ ============
Diluted 3,817,361 3,922,428 3,809,169 3,837,352
============ ============ ============ ============
</TABLE>
3
<PAGE>
GEERLINGS & WADE, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 384,905 $ (65,778)
Adjustments to reconcile net income (loss) to net cash used in
operating activities --
Depreciation and amortization 265,244 228,731
Changes in current assets and liabilities --
Accounts receivable 403,902 180,080
Inventory 2,894,936 (1,640,290)
Prepaid mailing costs 342,832 1,037,596
Prepaid expenses 181,374 201,139
Accounts payable (125,026) (289,245)
Deferred revenue 39,632 (153,530)
Accrued expenses (629,498) (574,181)
----------- -----------
Net cash (used in) provided by operating activities 3,758,301 (1,075,478)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (36,130) (424,509)
Receipts from a return of fixed assets 70,000 --
Change in other assets (8,655) 12,560
----------- -----------
Net cash provided by (used in) investing activities 25,215 (411,949)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 1,651,090 --
Repayments on line of credit (2,633,485) --
Proceeds from stock award plans 13,931 263,687
----------- -----------
Net cash (used in) provided by financing activities (968,464) 263,687
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,815,052 (1,223,740)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 358,043 4,289,645
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,173,095 $ 3,065,905
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period -
Income taxes paid $ 621,350 $ 304,389
=========== ===========
Interest $ 20,616 $ --
=========== ===========
</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 June 30,
1999 are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 1999.
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, 1998. 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
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, which Statement establishes standards for
computing and presenting earnings per share. For the quarters ending June 30,
1998 and June 30, 1999, 236,027 and 268,162 of anti-dilutive shares,
respectively, have been excluded from the weighted average number of common and
dilutive potential common shares outstanding. For the six months ending June 30,
1998 and June 30, 1999, 243,012 and 343,967 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 (loss) per share is as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six months Ended June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 300,930 $ 216,548 $ 384,905 $ (65,778)
=========== =========== =========== ===========
Basic weighted average shares outstanding 3,785,316 3,846,623 3,784,109 3,837,352
Weighted average common equivalent shares
computed under the treasury stock method 32,045 75,805 25,060 --
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding 3,817,361 3,922,428 3,809,169 3,837,352
=========== =========== =========== ===========
Basic net income (loss) per share $ 0.08 $ .06 $ 0.10 $ (.02)
=========== =========== =========== ===========
Diluted net income (loss) per share $ 0.08 $ .06 $ 0.10 $ (.02)
=========== =========== =========== ===========
</TABLE>
3. Comprehensive Income
SFAS No. 130, Comprehensive Income, 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 June 30, 1998 and June 30, 1999, and therefore,
total comprehensive income was the same as reported net income for those
periods.
5
<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 by selling to retail consumers via direct
mail, the Internet and stores. The Company currently maintains licensed
facilities in fifteen 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, 1998 on file with the U.S. Securities and Exchange Commission.
Quarters Ended June 30, 1998 and June 30, 1999
Sales
Sales increased $365,000, or 4.5%, from $8,194,000 in the quarter ended
June 30, 1998 to $8,559,000 in the quarter ended June 30, 1999. 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 store and
Internet sales also contribute to total sales. The increase in sales resulted
from sales generated by mailing a wine and accessories catalog with a
circulation of 329,000 mailed at the end of the first quarter of 1999, Passport
Wine Club which was acquired in July 1998, and www.geerwade.com which was
launched in May 1998. About 89% of the Internet orders came from existing
customers in the second quarter of 1999. Sales from house mailings and special
mailings to preferred customers offering one or two select wines ("Jay Essa
letters") generated comparable sales to the sales from these types of promotions
mailed in the second quarter of 1998. Sales from acquisition mailings decreased
significantly in the second quarter of 1999 because the Company only mailed
65,000 pieces of acquisition mail in the second quarter of 1999 compared to the
1.8 million pieces mailed during the second quarter of 1998. Sales from
acquisition mailings in the second quarter of 1999 were also, in part, the
result of 1.8 million acquisition pieces mailed late in the first quarter of
1999. Sales, exclusive of wine accessory sales, increased 1.1% 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 2,120, or
2.6%, from 82,906 in the quarter ended June 30, 1998 to 80,786 in the quarter
ended June 30, 1999. The average case price, exclusive of Bordeaux future sales,
increased by $4.72, or 4.9%, from $96.37 in the quarter ended June 30, 1998 to
$101.09 in the quarter ended June 30, 1999. The average case price increased
principally as a result of fewer sales from acquisition mailings, which feature
lower cost wines. The average number of cases purchased per customer order was
1.12 in the quarter ended June 30, 1999 compared to 1.17 in the same fiscal
period of 1998. The average number of cases per order is reduced by virtue of
continuity orders from Passport Wine Club in the second quarter of 1999. These
continuity orders include 2 or 4 bottles per shipment as compared to the
Company's 6-bottle minimum for other types of orders.
Gross Profit
Gross profit increased $121,000, or 3.0%, from $4,035,000 in the quarter
ended June 30, 1998 to $4,156,000 in the quarter ended June 30, 1999. Gross
profit as a percentage of sales decreased from 49.2% in the quarter ended June
30, 1998 to 48.6% in the quarter ended June 30, 1999. Gross profit attributable
to wine sales increased $2.12 per case, or 4.6%, from $46.45 per case in the
quarter ended June 30, 1998 to $48.57 per case in the quarter ended June 30,
1999. The decrease in gross margin percentage resulted primarily from variation
in the product mix and to a decrease in gross margins from accessory sales. In
order to encourage greater e-commerce sales, the Company commenced selling
accessories on www.geerwade.com at reduced prices at the end of the second
quarter of 1999. The gross margin per case of wine sold increased by 4.6%, which
traded approximately at an increase of 4.9% in the price of a case of wine. The
average price increase primarily reflects the fact that the Company sold fewer
cases of wine to new customers which sell at a lower average price point in the
second quarter of 1999 than the Company did in the second quarter of 1998.
6
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $258,000, or 7.3%,
from $3,536,000 in the quarter ended June 30, 1998 to $3,794,000 in the quarter
ended June 30, 1999 and increased as a percentage of sales from 43.2% in the
quarter ended June 30, 1998 to 44.3% in the quarter ended June 30, 1999. The net
increase in selling, general and administrative expenses is largely attributable
to higher marketing cost amortization as a result of mailing 639,000 catalogs in
the first quarter of 1999 and an additional 487,000 pieces of acquisition mail
during the first half of the year. Also, order fulfillment and overhead expenses
were higher due to higher sales and the operation of new facilities including
the Newbury Street store and the Texas retail facility and new businesses
including the Internet operations and the Passport Wine Club.
Interest
Interest income increased from $1,246 in the quarter ended June 30, 1998
to $11,755 in the quarter ended June 30, 1999. This increase in interest income
was due to having higher cash balances invested during the second quarter of
1999 as compared to the second quarter of 1998. There was no interest expense
for the second quarter of 1999 and $42 of interest for the second quarter of
1998.
7
<PAGE>
Six-Month Periods Ended June 30, 1998 and June 30, 1999
Sales
Sales increased $1,504,000, or 9.7%, from $15,585,000 in the six months
ended June 30, 1998 to $17,089,000 in the six months ended June 30, 1999. The
increase in sales resulted primarily from sales generated by mailing winter and
spring catalogs which offer wines and wine accessories, Passport Wine Club which
was acquired in July 1998, Jay Essa letters and house mailings and the Internet.
Sales generated from acquisition mailings were lower, due to lower response
rates, in the first six months of 1999 than for the same period in 1998. Sales,
exclusive of wine accessory sales, increased 5.4% 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, exclusive of Bordeaux futures sales, sold
by the Company increased by 9,666, or 6.4%, from 151,781 in the six months ended
June 30, 1998 to 161,447 in the six months ended June 30, 1999. The average case
price increased by $.30, or 0.3%, from $100.04 in the six months ended June 30,
1998 to $100.34 in the six months ended June 30, 1999. The stability in the
average case price reflects a consistent pricing strategy. The average number of
cases purchased per customer order was 1.11 in the six months ended June 30,
1999 compared to 1.12 in the comparable fiscal period of 1998.
Gross Profit
Gross profit increased $762,000, or 10.2%, from $7,496,000 in the six
months ended June 30, 1998 to $8,258,000 in the six months ended June 30, 1999.
Gross profit as a percentage of sales increased from 48.1% in the six months
ended June 30, 1998 to 48.3% in the six months ended June 30, 1999. Gross profit
attributable to wine sales, exclusive of Bordeaux futures sales, increased $0.63
per case, or 1.3%, from $47.08 per case in the six months ended June 30, 1998 to
$47.71 per case in the six months ended June 30, 1999. The increase in gross
profit percentage and average gross profit per case resulted from improved
purchasing practices, favorable foreign exchange rates and lower costs for
domestic wines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,563,000, or
22.9%, from $6,835,000 in the six months ended June 30, 1998 to $8,397,000 in
the six months ended June 30, 1999. As a percentage of sales, these expenses
increased from 43.9% in the six months ended June 30, 1998 to 49.1% in the six
months ended June 30, 1999. The net increase in selling, general and
administrative expenses is attributable to a) higher overhead primarily related
to adding the Texas facility and Newbury Street store and to additional staffing
and b) significantly higher marketing expense to date due to increased
acquisition mailings during 1999 and mailing 639,000 catalogs in 1999. In 19998,
no catalogs were mailed to customers in the first six months of the year.
Interest
Interest income increased by $25,401 for the six months in 1999 compared
to 1998 due to higher invested cash balances. Interest expense decreased by
$20,616 from $20,616 in the six months ended June 30, 1998 to $0 in the six
months ended June 30, 1999, as a result of not needing to borrow under the
Company's line of credit during the second quarter of 1999.
8
<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 June 30,
1999 reflects an approximate 42% effective income tax rate anticipated for the
full year ended December 31, 1999. During the quarter ended June 30, 1999, the
Company recorded a provision for income taxes of $157,000 and recorded a
deferred benefit for income taxes of $47,000 for the six months ended June 30,
1999.
Liquidity and Capital Resources
The Company's primary working capital needs include purchases of
inventory, software development and advertising expenses for e-commerce sites
and the cost of acquisition mailings and other expenses associated with
promoting sales. As of June 30, 1999, the Company had cash and cash equivalents
totaling $3,066,000. 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 June 30, 1999, the Company had no outstanding balance under the Line of
Credit.
For the year to date ending June 30, 1999, net cash of $1,075,000 was used
by operating activities, resulting principally from increase in inventory and
decreases in accounts payable, deferred revenue and accrued expenses, which
reductions were offset by decreases in accounts receivable, prepaid mailings
costs and prepaid expenses.
The Company invested $425,000 in computer hardware and software for the
Catman system and for www.geerwade.com and www.winebins.com and in equipment and
furniture for the Texas retail facility.
At December 31, 1998 and June 30, 1999, the Company had working capital of
$9,977,000 and $10,434,000, respectively. The increase in working capital was
primarily due to decreases in accounts payable, current deferred revenue and
accrued expenses and was offset by decreases in accounts receivable, prepaid
mailing costs and prepaid expenses and other assets.
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
June 30, 1999, the Company had no obligations with respect to forward currency
exchange contracts.
Year 2000 Compliance
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 distant 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.
9
<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 detailed assessments 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 assessments were completed by the Company's existing workforce at no
identifiable incremental cost. Based upon these assessments, the Company
believes that all of these systems and equipment will operate correctly after
minor software patches are installed when processing data that include dates
after December 31, 1999 except for its front-end processing system. The Company
believes that minor remediation or expenditures are required to ensure continued
proper operation of such systems and equipment other than the front-end
processing system. The Company has purchased a replacement software system for
front-end processing and a new production database that are year 2000 compliant.
This system includes the Catman Catalog software that is developed and sold by
Axexxis Corporation and runs on the Universe data base that is sold by Ardent
Software, Inc. Both of these systems process dates based on a system that adds
or subtracts days from a starting date, which is time zero. Therefore, the
system does not rely on years stored as either 2 or 4 digit number such as "99"
or "1999" and, as represented to the Company, will not fail to function when
January 1, 2000 arrives. The Company has also purchased a new server for this
software which the vendor represents is Year 2000 compliant once a software
patch is applied. In addition to addressing the year 2000 issue, this new
software and hardware system will enhance the functionality and capability of
the Company's entire computer system. The Company plans to conduct further
assessments and tests of its systems and equipment to insure that all potential
year 2000 issues have been addressed. The approximate cost to purchase this new
system, including any necessary hardware, and to program the new Websites
planned for the Company will be between $800,000 and $1,000,000.
The Company has completed assessments of its internal telecommunications
systems and its internal voicemail and ancillary telecommunication services
systems. Based on its preliminary assessments, the Company has been advised by
its telephone system vendor that telephone and voice-mail systems are year 2000
compliant. The Company does not anticipate that upon further assessments 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 remediation of these systems in the second 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 which 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 requests from its regular vendors and service providers representations that
they are or will be year 2000 compliant or ready by the end of 1999. To the
extent it is practical, the Company will test any of its systems that interface
with third parties to ensure year 2000 compliance.
10
<PAGE>
Second, the Company relies on programs and systems used by a variety of
vendors of the products it markets (in 1998, 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 generally rely on off-the-shelf software programs and hardware.
The Company intends to solicit assurances from the entities with which it has
significant commercial relationships that their programs and systems are or will
be by the end of 1999 year 2000 compliant or ready
The Company expects to complete its assessment of the programs and systems
of the entities with which it has commercial relationships and the
identification of related risks and uncertainties by the end of September 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.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to foreign currency exchange rates. The Company does not use
derivative financial instruments for speculative or trading purposes. The
Company enters into foreign exchange forward contracts to reduce its exposure to
currency fluctuations on vendor accounts payable denominated in foreign
currencies. The objective of these contracts is to neutralize the impact of
foreign currency exchange rate movements on the Company's operating results. The
gains and losses on these contracts are included in earnings when the underlying
foreign currency denominated transaction is recognized. Gains and losses related
to these instruments for the quarters ended June 30, 1999 and 1998 were not
material to the Company. Looking forward, the Company does not anticipate any
material adverse effect on its financial position, results of operations or cash
flows resulting from the use of these instruments. However, there can be no
assurance that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
11
<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 June 30,
1999.
12
<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: August 16, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,065,905
<SECURITIES> 0
<RECEIVABLES> 430,302
<ALLOWANCES> 0
<INVENTORY> 9,854,091
<CURRENT-ASSETS> 14,398,323
<PP&E> 2,938,809
<DEPRECIATION> 1,851,132
<TOTAL-ASSETS> 16,386,180
<CURRENT-LIABILITIES> 3,964,427
<BONDS> 0
0
0
<COMMON> 38,467
<OTHER-SE> 11,564,116
<TOTAL-LIABILITY-AND-EQUITY> 16,386,180
<SALES> 8,559,354
<TOTAL-REVENUES> 8,559,354
<CGS> 4,403,731
<TOTAL-COSTS> 4,403,731
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 373,848
<INCOME-TAX> 157,300
<INCOME-CONTINUING> 216,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,548
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
