<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, 2000
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 Identification No.)
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 November 14, 2000 3,855,940
<PAGE>
GEERLINGS & WADE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1999
and September 30, 2000 (Unaudited)............................ 3
Statements of Operations for the Three Months Ended September 30,
1999 and September 30, 2000 and for the Nine Months ended
September 30, 1999 and September 30, 2000
(Unaudited)................................................... 4
Statements of Cash Flows for the Nine Months ended September 30,
1999 and September 30, 2000
(Unaudited)................................................... 5
Notes to Financial
Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 11
PART II. OTHER INFORMATION
Item 5. Other Information.............................................. 12
Item 6. Exhibits and Reports on Form 8-K............................... 12
SIGNATURES.................................................................. 13
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEERLINGS & WADE, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,624,990 $ 300,765
Accounts receivable 1,395,305 1,178,724
Inventory 9,481,779 15,142,088
Prepaid mailing costs 899,400 1,212,469
Prepaid expenses and other current assets 1,265,916 1,163,176
Deferred income taxes, net 229,139 229,139
----------- -----------
Total Current Assets 15,896,529 19,226,361
----------- -----------
PROPERTY AND EQUIPMENT, AT COST 2,442,285 2,349,911
Less--Accumulated Depreciation 1,326,174 1,522,282
----------- -----------
1,116,111 827,629
----------- -----------
Deferred Income Taxes, net 352,408 352,408
----------- -----------
Other Assets 390,411 366,846
----------- -----------
$17,755,459 $20,773,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ --- $ 2,750,000
Accounts payable 3,354,972 5,950,050
Current portion of deferred revenue 1,171,406 1,315,974
Accrued expenses 1,316,166 1,032,637
----------- -----------
Total Current Liabilities 5,842,544 11,048,661
----------- -----------
Deferred Revenue, less current portion 436,206 445,680
----------- -----------
Purchase Price Advance from Liquid Holdings 1,250,0000 ---
----------- -----------
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-3,849,071 and
3,855,940 shares in 1999 and 2000,
respectively 38,491 38,559
Additional paid-in capital 10,075,279 10,107,108
Retained earnings (deficit) 112,939 (866,764)
----------- -----------
Total Stockholders' Equity 10,226,709 9,278,903
----------- -----------
$17,755,459 $20,773,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $7,362,390 $6,898,480 $24,451,667 $23,943,697
Cost of Sales 3,651,336 3,668,444 12,482,967 12,379,979
---------- ---------- ----------- -----------
Gross Profit 3,711,054 3,230,036 11,968,700 11,563,718
Selling, general and administrative expenses 3,422,423 3,391,862 11,819,712 13,593,878
Merger related expenses 696,664 --- 696,664 48,981
---------- ---------- ----------- -----------
Loss from operations (408,033) (161,826) (547,676) (2,079,141)
Loss on disposal of fixed asset 50,742 --- 50,742 68,886
Purchase price advance from Liquid Holdings --- --- --- 1,250,000
Interest income 6,954 290 33,719 7,104
Interest expense --- (48,556) --- (88,778)
---------- ---------- ----------- -----------
Loss before income taxes (451,821) (210,092) (564,699) (979,701)
Benefit for income taxes (189,700) --- (236,800) ---
---------- ---------- ----------- -----------
Net Loss $ (262,121) $ (210,092) $ (327,899) $ (979,701)
========== ========== =========== ===========
Net Loss per share
$ (0.07) $ (0.05) $ (0.09) $ (0.25)
Basic ========== =========== ========== ===========
Diluted $ (0.07) $ (0.05) $ (0.09) $ (0.25)
========== =========== ========== ===========
Weighted average common shares and common
equivalents outstanding
Basic
3,847,524 3,855,940 3,840,780 3,854,780
========== ========== =========== ===========
Diluted 3,847,524 3,855,940 3,840,780 3,854,780
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
GEERLINGS & WADE, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $ (327,899) $ (979,701)
Adjustments to reconcile net Loss to net cash used in
operating activities --
Depreciation and amortization 396,432 392,811
Loss on disposition of fixed asset 50,742 68,886
Recognition of purchase price advance from Liquid Holdings --- (1,250,000)
Changes in current assets and liabilities --
Accounts receivable (532,905) 216,581
Inventory (2,439,696) (5,660,309)
Prepaid mailing costs 730,391 (313,069)
Prepaid expenses 76,506 (299,979)
Prepaid income tax (713,221) 395,507
Accounts payable 498,617 2,595,078
Deferred revenue (123,332) 154,042
Accrued expenses 521,375 (283,529)
----------- -----------
Net cash used in operating activities (1,862,990) (4,963,682)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (957,506) (145,469)
Change in other assets 13,109 3,030
----------- -----------
Net cash used in investing activities (944,397) (142,439)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: 1,250,000
Purchase price advance from Liquid Holdings --- ---
Borrowings under the loan facility 2,750,000
Proceeds from issuance under the Employee Stock Purchase Plan 26,945 11,021
Proceeds from exercise of stock options 247,689 20,875
----------- -----------
Net cash provided by financing activities 1,524,634 2,781,896
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,282,753) (2,324,225)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,289,645 2,624,990
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,006,892 $ 300,765
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period -
Income Taxes $ 562,389 $ 11,460
=========== ===========
Interest $ --- $ 88,778
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<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, 2000 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 2000.
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, 1999. 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 establishes standards for computing
and presenting earnings per share. For the quarters ended September 30, 1999
and September 30, 2000 options to purchase a total of 425,467 and 379,648 common
shares, respectively, have been excluded from the calculation of diluted
earnings per share. For the nine months ended September 30, 1999 and September
30, 2000 options to purchase a total of 425,467 and 379,648 common shares,
respectively, have been excluded from the calculation of diluted earnings per
share. These shares are considered antidilutive as the Company recorded a loss
for each of the quarters and the nine-month periods ended September 30, 1999 and
September 30, 2000.
3. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive Income (loss) is defined as a change in equity of a business
enterprise during a period from transactions or other events and circumstances
from nonowner sources. The Company did not have any other items of comprehensive
loss for the quarters or the nine-month periods ended September 30, 1999 and
September 30, 2000, and therefore, total comprehensive loss was the same as
reported net loss for those periods.
4. CHANGE IN ACCOUNTING ESTIMATE
During the quarter ended March 31, 2000, the Company performed a review of its
amortization period for acquisition mailing costs. Based on this review of the
period over which revenue is generated from acquisition mailings, the Company
made a change in accounting estimate that reduced the period over which
acquisition mailing costs are amortized. This change in estimate resulted in
additional marketing expense of approximately $263,000 for the nine months ended
September 30, 2000. This change in estimate increased loss per share by $0.07.
5. PURCHASE PRICE ADVANCE FROM LIQUID HOLDINGS
During 1999, the Company received $1,250,000 from Liquid Holdings, Inc. related
to the proposed merger with Liquid Acquisition Corp., a subsidiary of Liquid
Holdings Inc. As this amount was refundable by the Company under certain limited
circumstances, it was recorded as a liability on the balance sheet at December
31, 1999. This amount was recognized as other income during the quarter ended
March 31, 2000 upon the automatic termination of the merger agreement on
February 22, 2000.
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<PAGE>
6. LINE OF CREDIT
On April 13, 2000, the Company entered into a credit agreement with a bank under
which the Company can borrow up to a maximum principal amount equal to the
lesser of 50% of qualifying inventory or $5.0 million. Amounts borrowed under
this facility bear interest at the prime rate and are collateralized by
substantially all of the assets of the Company. Currently the Company has
borrowings of approximately $2,750,000 outstanding under this credit
facility. The Company received a waiver of interest coverage covenant from the
bank with respect to the quarter ended June 30, 2000. The Company is currently
in default under the credit agreement (as a result of the Company's failures to
meet the required interest service ratio in the third quarter and to obtain
certain landlord's consent and subordination agreements) and is seeking a second
waiver from the bank. Management believes that the Company will obtain a waiver,
but there can be no assurance that the Company will be able to do so.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
is effective for all periods beginning after June 15, 2000, as amended by SFAS
No. 137 and establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. Adoption of SFAS No. 133 is not expected to have a
material impact on the Company's consolidated financial position or results from
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB 101) to clarify the accounting rules on revenue
recognition and to provide more specific guidance on existing broad revenue
recognition rules. The Company believes that its current revenue recognition
policy complies with the SEC guidelines.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation -- an Interpretation of Accounting
Principles Board (APB), Opinion No. 25. The interpretation clarifies the
application of APB Opinion No. 25 in certain situations, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998 but before the effective date. To the
extent that events covered by this interpretation occur during the period after
December 15, 1998 but before the effective date, the effects of applying this
interpretation would be recognized on a prospective basis from the effective
date. Accordingly, upon initial application of the final interpretation, (i) no
adjustments would be made to the financial statements for periods before the
effective date and (ii) no expense would be recognized for any additional
compensation cost measured that is attributable to periods before the effective
date. We expect that the adoption of this interpretation would not have any
effect on the accompanying financial statements.
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, 1999
on file with the U.S. Securities and Exchange Commission.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Geerlings & Wade is a direct marketer and Internet retailer of premium wines and
wine-related merchandise to retail consumers. The Company currently maintains
licensed facilities in sixteen states. Federal, state and local laws strictly
govern the sale of wine in each market served by the Company.
QUARTERS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
SALES
Sales were $6,898,000 in the quarter ended September 30, 2000, which is a
decrease of $464,000, or 6.3%, from sales of $7,362,000 in the quarter ended
September 30, 1999. Sales levels depend largely on the number of "house
mailings," which are product offerings to existing customers, and "acquisition
mailings," which are product offerings to potential new customers, and the
response rates to these mailings. Catalog, Passport Wine Club, retail store and
Internet sales also contribute to total sales. Sales resulting from acquisition
mailings decreased $137,000 during the third quarter of 2000 as compared to the
same period in 1999. This decrease resulted from lower response rates to the
2000 mailings as well as from a timing difference in the mailings. The 1999
acquisition campaign was mailed at the end of August whereas the acquisition
campaign for 2000 was mailed in September. Sales to existing customers decreased
$357,000 during the third quarter of 2000 as compared with the same period in
1999, resulting primarily from the decreased circulation of house mailings and
lower response rates. Sales from e-commerce transactions, the majority of which
were to existing customers, increased by 223% from $350,000 in the third
quarter of 1999 to $1,131,000 in the third quarter of 2000. Sales from the
Passport Wine Club decreased by $32,000 from $176,000 in the third quarter of
1999 to $144,000 in the same quarter in 2000 because the Company has not
promoted this program through separate direct mailings since the fall of 1998.
The Company has continued to advertise the Passport Wine Club in its other
mailings and on its web sites and is considering other means by which to promote
the program.
Sales of wine decreased 7.9% in the third quarter of 2000 as compared to the
third quarter of 1999 in markets (defined by the shipping region of each
warehouse) in which the Company has operated for at least one year. The number
of twelve-bottle equivalent cases ("cases"), exclusive of wine reservation
sales, sold by the Company decreased by 6,660, or 9.5%, from 70,021 in the
quarter ended September 30, 1999 to 63,361 in the quarter ended September 30,
2000. The average case price, exclusive of wine reservation sales, increased by
$3.77, or 3.7%, from $102.64 in the quarter ended September 30, 1999 to $106.41
in the quarter ended September 30, 2000. The average number of cases purchased
per customer order was 1.16 in the quarter ended September 30, 2000 as compared
to 1.25 in the third quarter of 1999.
GROSS PROFIT
Gross profit decreased $481,000, or 13%, from $3,711,000 in the quarter ended
September 30, 1999 to $3,230,000 in the quarter ended September 30, 2000. Gross
profit as a percentage of sales decreased from 50.4% in the quarter ended
September 30, 1999 to 46.8% in the quarter ended September 30, 2000. Gross
profit attributable to wine sales decreased $2.90 per case, or 5.7%, from $50.89
per case in the quarter ended September 30, 1999 to $47.99 per case in the
quarter ended September 30, 2000. The decrease in gross profit per case resulted
principally from higher storage costs and selling expenses related to e-commerce
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $30,600, or 1.0%, from
$3,422,000 in the quarter ended September 30, 1999 to $3,392,000 in the quarter
ended September 30, 2000, and decreased as a percentage of sales from 49.2% in
the quarter ended September 30, 1999 to 46.5% in the quarter ended September 30,
2000. Minor variations in several categories contributed to the reduction in
selling, general and administrative expense. Marketing expense decreased by
$2,800 from $859,000 in the third quarter of 1999 to $857,000.
INTEREST AND OTHER EXPENSE AND INCOME
Interest income decreased from $6,954 in the quarter ended September 30, 1999 to
$290 in the quarter ended September 30, 2000 due to lower invested cash
balances. There was no interest expense in the third quarter of 1999 and $48,556
of interest expense in the third quarter of 2000. The interest paid during the
third quarter of 2000 was due to borrowings under the Company's new line of
credit.
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<PAGE>
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
SALES
Sales were $23,944,000 in the nine months ended September 30, 2000, which is a
decrease of $508,000, or 2.1%, from sales of $24,452,000 in the nine months
ended September 30, 1999. The decrease in sales resulted from lower sales in the
first quarter of 2000, due to fewer house mailings and catalog mailings to
existing customers and to the cessation of outbound telemarketing efforts to
existing customers, and in the third quarter of 2000, discussed herein.
Additionally, the sales decline for the third quarter of 2000, discussed herein,
contributed to the sales decline for nine months ended 2000. Sales, exclusive of
wine accessory sales, decreased 2.8% in markets (defined by the shipping region
of each warehouse) in which the Company has operated for at least one year. The
number of cases, exclusive of wine reservation sales, sold by the Company
decreased by 2,785, or 1.2%, from 231,513 in the nine months ended September 30,
1999 to 228,728 in the nine months ended September 30, 2000. The average case
price increased by $2.91, or 2.8%, from $101.08 in the nine months ended
September 30, 1999 to $103.99 in the nine months ended September 30, 2000. The
average number of cases purchased per customer order was 1.10 in the nine months
ended September 30, 2000 compared to 1.12 in the comparable fiscal period of
1999. The increase in average case price resulted from an overall average price
increase for products sold to existing customers in the nine months ended
September 30, 2000 as compared to the nine months ended September 30, 1999. This
price increase was accompanied by a reduction in the number of cases per order
purchased by existing customers. Increased sales from acquisition mailings
during the nine months ended September 30, 2000 also contributed to the decrease
in average number of cases per order because the average number of cases ordered
in acquisition orders is lower than in orders from existing customers.
GROSS PROFIT
Gross profit decreased $405,000, or 3.4%, from $11,969,000 in the nine months
ended September 30, 1999 to $11,564,000 in the nine months ended September 30,
2000. Gross profit as a percentage of sales decreased from 48.9% in the nine
months ended September 30, 1999 to 48.3% in the nine months ended September 30,
2000. Gross profit attributable to wine sales decreased $0.70 per case, or 1.4%,
from $50.91 per case in the nine months ended September 30, 1999 to $50.21 per
case in the nine months ended September 30, 2000. The decrease in gross profit
as a percentage of sales and average gross profit per case resulted from
increased storage and e-commerce selling costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $1,774,000, or 15.0%,
from $11,820,000 in the nine months ended September 30, 1999 to $13,594,000 in
the nine months ended September 30, 2000. As a percentage of sales, these
expenses increased from 48.3% in the nine months ended September 30, 1999 to
56.8% in the nine months ended September 30, 2000. The net increase in selling,
general and administrative expenses is largely attributable to increased
shipping expense of $454,000, a change in accounting estimate that reduced the
period over which the Company amortizes costs of acquisition mailings and
increased marketing expense by $263,000, legal expenses of $221,000 related to a
merger with Liquid Holdings Inc. that was not consummated and the Company's new
line of credit, and a one-time charge of $305,000 payable to the Company's
former Chief Executive Officer pursuant to a severance arrangement. Shipping
costs have risen as UPS has ceased shipping alcoholic beverages in a number of
states, forcing the Company to switch couriers in these states. The Company has
successfully reduced shipping costs during the course of 2000 by re-negotiating
shipping charges and in some instances by further changing its courier service
providers. The Company continues to seek means to reduce further its shipping
costs. Marketing expenses, including the effect of the change in accounting
estimate, increased $408,000 from $4,284,000 in the first nine months of 1999 to
$4,692,000 in the first nine months of 2000. Shipping and handling income, which
offsets shipping and handling expense, was reduced by $182,000 in the first nine
months of 2000 as a result of a higher number of acquisition and reactivation
orders in which customers receive free shipping, as well as free or reduced
shipping and handling offers included in general promotions to existing
customers. The additional difference in selling, general and administrative
expense resulted from various other increases in variable and fixed costs.
INTEREST
Interest income decreased from $33,719 in the period ended September 30, 1999 to
$7,104 in the period ended September 30, 2000 due to lower invested cash
balances. Interest expense increased from $0 in the nine months ended September
30, 1999 to $88,778 in the nine months ended September 30, 2000 as a result of
borrowings under the Company's line of credit during the second and third
quarters of 2000.
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<PAGE>
BENEFIT FROM INCOME TAXES
The Company's recorded no benefit from income taxes for the quarter ended
September 30, 2000 due to the uncertainty of using this benefit in the near
term. During the nine months ended September 30, 1999, the Company recorded a
benefit from income taxes of $236,800.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary working capital needs include purchases of inventory,
software development and advertising expenses related to the cost of acquisition
mailings and other expenses associated with promoting sales. As of September 30,
2000, the Company had cash and cash equivalents totaling $300,800. On April 13,
2000, the Company entered into a credit agreement with a bank under which the
Company can borrow up to a maximum principal amount equal to the lesser of 50%
of qualifying inventory or $5.0 million. Amounts borrowed under this facility
bear interest at the prime rate and are collateralized by substantially all of
the assets of the Company. During the second and third quarter, the Company
borrowed approximately $2,750,000 under this credit facility, which is currently
outstanding. The Company received a waiver of interest coverage covenant from
the bank with respect to the quarter ended June 30, 2000. The Company is
currently in default under its credit agreement (as a result of the Company's
failures to meet the required interest service ratio in the third quarter and to
obtain certain landlord's consent and subordination agreements) and is seeking a
second waiver from the bank. Management believes that the Company will obtain a
waiver, but there can be no assurance that the Company will be able to do so. If
the Company is unable to obtain a waiver from the bank, the Company may need to
refinance all or a portion of the amounts outstanding under the credit facility.
In that event, there can be no assurance that the Company would generate
sufficient cash flow from operations or that the Company would be able to effect
such a refinancing on commercially reasonable terms or at all.
During the nine months ended September 30, 2000, net cash of $4,964,000 was used
by operating activities, resulting principally from net losses, recognition of a
purchase price advance from Liquid Holdings and an increase in inventory,
prepaid mailing costs and accounts payable, which reductions were offset by
decreases in accounts receivable and prepaid expenses.
The Company invested $145,000 in computer hardware and software in the nine
months ended September, 2000.
At December 31, 1999 and September 30, 2000, the Company had working capital of
$10,054,000 and $8,177,000, respectively. The decrease in working capital was
primarily due to a decrease in cash and cash equivalents and an increase in the
Company's line of credit, accounts payable and inventory.
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 a foreign
exchange line of credit with Fleet Bank which allows the Company to enter into
forward currency exchange contracts of up to $500,000 maturing on any one day.
As of September 30, 2000, the Company had no forward currency exchange contracts
outstanding.
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<PAGE>
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 September 30, 2000 and 1999 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.
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<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Gordon R. Cooke resigned as a director of the Company as of April 6, 2000 and
Phillip D. Wade resigned as a director and Clerk of the Company as of July 31,
2000. On November 7, 2000, the board of directors reduced the size of the board
to five directors, and appointed John J. Remondi as a Class II director to fill
the vacancy created by the resignation of Mr. Wade. The board also appointed Mr.
Remondi as a member of the Audit Committee and the Compensation Committee of the
board of directors.
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, 2000.
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<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/ David R. Pearce
------------------------------
NAME: David R. Pearce
TITLE: President, Chief Executive
Officer and Chief Financial
Officer
DATED: November 14, 2000
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