10-Q 1 d10q.txt FORM 10-Q 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, 2001 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, 2001 3,863,396 GEERLINGS & WADE, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of December 31, 2000 and September 30, 2001 (Unaudited).................................................... 3 Statements of Operations for the Three Months and Nine Months Ended September 30, 2000 and September 30, 2001 (Unaudited).... 4 Statements of Cash Flows for the Nine Months Ended September 30, 2000 and September 30, 2001 (Unaudited).................... 5 Notes to Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9 Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 13 PART II. OTHER INFORMATION Item 5. Other Information.............................................. 14 Item 6. Exhibits and Reports on Form 8-K............................... 14 SIGNATURES................................................................. 15 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements GEERLINGS & WADE, INC. BALANCE SHEETS (Unaudited)
December 31, September 30, 2000 2001 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,872,267 $ 1,411,213 Accounts receivable 1,088,660 1,785,684 Inventory 12,489,631 11,510,115 Prepaid mailing costs 93,312 751,458 Prepaid expenses and other current assets 986,127 1,086,868 Deferred income taxes, net 171,455 171,455 ----------- ----------- Total Current Assets 16,701,452 16,716,793 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST 2,429,845 2,608,976 Less--Accumulated Depreciation 1,632,938 1,943,880 ----------- ----------- 796,907 665,096 ----------- ----------- Deferred Income Taxes, net 299,162 299,162 Other Assets 360,962 305,121 ----------- ----------- $18,158,483 $17,986,172 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit (note 7) $ 2,225,000 $ 2,800,000 Accounts payable 3,093,647 3,593,981 Current portion of deferred revenue 1,478,648 1,289,732 Accrued expenses 1,159,358 722,268 ----------- ----------- Total Current Liabilities 7,956,653 8,405,981 ----------- ----------- Deferred Revenue, less current portion 413,886 374,692 ----------- ----------- 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-3,855,940 and 3,863,396 shares in 2000 and 2001, respectively 38,559 38,634 Additional paid-in capital 10,107,108 10,119,512 Retained deficit (357,723) (952,647) ----------- ----------- Total Stockholders' Equity 9,787,944 9,205,499 ----------- ----------- $18,158,483 $17,986,172 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 GEERLINGS & WADE, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2000 2001 2000 2001 ---- ---- ---- ---- Sales $7,251,899 $6,901,118 $25,143,673 $21,899,774 Cost of Sales 3,668,444 3,074,154 12,379,979 10,002,292 ---------- ---------- ----------- ----------- Gross Profit 3,583,455 3,826,964 12,763,694 11,897,482 Selling, general and administrative expenses 3,745,281 4,096,372 14,793,854 12,399,816 Merger related expenses -- -- 48,981 -- ---------- ---------- ----------- ----------- Loss from operations (161,826) (269,408) (2,079,141) (502,334) Loss on disposal of fixed asset -- -- (68,886) -- Purchase price advance from Liquid Holdings -- -- 1,250,000 -- Interest income 290 3,750 7,104 16,083 Interest expense (48,556) (27,213) (88,778) (108,673) ---------- ---------- ----------- ----------- Loss before income taxes (210,092) (292,871) (979,701) (594,924) Provision (benefit) for income taxes -- -- -- -- ---------- ---------- ----------- ----------- Net loss $ (210,092) $ (292,871) $ (979,701) $ (594,924) ========== ========== =========== =========== Net loss per share Basic $ (0.05) $ (0.08) $ (0.25) $ (0.15) ========== ========== =========== =========== Diluted $ (0.05) $ (0.08) $ (0.25) $ (0.15) ========== ========== =========== =========== Weighted average common shares and common equivalents outstanding Basic 3,855,940 3,863,396 3,854,780 3,860,829 ========== ========== =========== =========== Diluted 3,855,940 3,863,396 3,854,780 3,860,829 ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 GEERLINGS & WADE, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, September 30, 2000 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (979,701) $ (594,924) Adjustments to reconcile net loss to net cash used in operating activities -- Depreciation and amortization 392,811 367,864 Loss on disposition of fixed asset 68,886 -- Changes in current assets and liabilities -- Accounts receivable 216,581 (697,024) Inventory (5,660,309) 979,516 Prepaid mailing costs (313,069) (658,146) Prepaid expenses 95,528 (104,168) Accounts payable 2,595,078 500,335 Deferred revenue 154,042 (228,110) Accrued expenses (283,529) (437,091) ----------- ---------- Net cash used in operating activities (3,713,682) (871,748) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (145,469) (179,131) Change in other assets 3,030 2,346 ----------- ---------- Net cash used in investing activities (142,439) (176,785) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under the line of credit 2,750,000 1,000,000 Repayments under the line of credit -- (425,000) Recognition of purchase price advance from Liquid Holdings (1,250,000) -- Issuance of shares under the Employee Stock Purchase Plan 11,021 12,479 Proceeds from exercise of stock options 20,875 -- ----------- ---------- Net cash provided by financing activities 1,531,896 587,479 ----------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,324,225) (461,054) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,624,995 1,872,267 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 300,765 $1,411,213 =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 11,460 $ 23,100 =========== ========== Interest paid $ 88,778 $ 113,153 =========== ==========
The accompanying notes are an integral part of these financial statements. 5 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, 2001 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2001. 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, 2000. 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 ("SFAS") No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share. For the three months ended September 30, 2000 and September 30, 2001 options to purchase a total of 379,648 and 319,141 common shares, respectively, have been excluded from the calculation of diluted earnings per share. For the nine months ended September 30, 2000 and September 30, 2001 options to purchase a total of 379,648 and 319,141 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 periods. 3. Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company did not have any other components of comprehensive income (loss) for the three and nine months ended September 30, 2000 and 2001. 4. Derivative Instruments and Hedging Effective July 1, 2000, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is to be immediately recognized in earnings. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company hedges significant purchase commitments of inventory denominated in foreign currencies. Forward foreign exchange contracts are used to hedge these exposures. These foreign exchange contracts are entered into in the normal course of business, and accordingly, are not speculative in nature. The Company does not hold or transact in financial instruments for purposes other than risk management. The Company records its foreign currency exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these hedge contracts are recognized in earnings. Gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts are designated to offset certain purchase commitments and are recognized as other income or expense in the period in which the exchange rates change and offset the foreign currency losses and gains on the underlying exposures being hedged. The gains and losses resulting from the impact of currency rate movements on forward currency exchange contracts are recognized in other comprehensive income for this portion of the hedge. At September 30, 2001, the Company had no hedges. 5. Change in Accounting Estimate 6 During the quarter ended March 31, 2000, the Company performed a review of the period over which revenue is generated from customer acquisition mailings. Based on this review, the Company reduced the period over which acquisition mailing costs are amortized. This change resulted in additional marketing expense of approximately $263,000 for the nine months ended September 30, 2000, which increased the loss per share by $0.07 for that period. 6. 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 potentially refundable by the Company under certain 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 when the amount became non-refundable upon the automatic termination of the merger agreement on February 22, 2000. 7. Line of Credit On April 13, 2000, the Company entered into a credit agreement with a bank. The amount borrowed under this facility bears interest at the prime rate and is collateralized by substantially all of the assets of the Company. The Company is required to comply with certain financial covenants as part of the terms and conditions of the line of credit. The Company was in default under its credit agreement at the end of the second, third and fourth quarters of fiscal 2000 as a result of the Company's failure to meet certain financial covenants at the end of these quarters and to obtain certain landlords' consent and subordination agreements. The Company has received waivers from the bank for each of those periods. In connection with the waiver for the December 31, 2000 period, the Company and the bank amended the credit agreement to provide for a reduction in the principal amount available for borrowing under the facility to $1.9 million and to provide that the Company repay amounts outstanding under the facility in $50,000 increments on the 1st and 15th of each calendar month, beginning March 15, 2001, until such time as the Company could certify its compliance with the financial covenants. The Company has met these covenants for the first, second and third quarters of 2001, and as such, no longer has to make the $50,000 repayments. As of May 15, 2001, the Company received a waiver from the bank of its obligation to obtain a certain landlord's consent and subordination agreement. Additionally, the Company's lender increased the amount available for borrowing under the facility from $1.9 million to $3.0 million in August of 2001. The credit facility expires on April 13, 2002. As of September 30, 2001 the Company had borrowings of approximately $2,800,000 outstanding under this credit facility and had $200,000 available to borrow. 8. Shipping and Handling Fees The Emerging Issues Task Force (EITF) issued EITF 00-10 "Accounting for Shipping and Handling Fees and Costs", which provides guidance on classification of amounts billed to a customer and amounts incurred for shipping and handling fees related to a sale of product. The EITF reached the consensus that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The EITF also concluded that the classification of shipping and handling costs is an accounting policy decision. The Company has elected to classify shipping costs in Selling, General and Administrative Expenses. 9. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations." SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method, the purchase method. This Statement is effective for all business combinations initiated after September 30, 2001. In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement goodwill as well as other intangibles determined to have an infinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. This statement is effective for the Company for its first quarter 2002. Management is currently evaluating the impact that this statement will have on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and 7 Transactions. Under this statement it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its results of operations or financial position upon the adoption of SFAS No. 144. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for the fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position. 10. Reclassification Certain reclassifications have been made to the 2000 information to conform to the 2001 presentation. 8 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, 2000 on file with the U.S. Securities and Exchange Commission. The following discussion in Item 2 and disclosure in Item 3 below involve forward-looking statements. 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, 2000 and September 30, 2001 Sales During the quarter ended September 30, 2001, the Company experienced lower sales in comparison to the same quarter of 2000. Sales were $6,901,000 in the quarter ended September 30, 2001, which is a decrease of $351,000, or 4.8%, from sales of $7,252,000 in the quarter ended September 30, 2000. 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 to existing customers decreased $286,000 during the third quarter of 2001 as compared with the same period in 2000, resulting primarily from lower response rates to house mailings. Following the terrorist attacks on the United States on September 11, 2001, sales for the remaining nineteen days of September fell 16% below last year's sales for the same period. Sales from e-commerce transactions, the majority of which were to existing customers, decreased by 5.5% from $1,145,000 in the third quarter of 2000 to $1,082,000 in the third quarter of 2001. Sales from the Passport Wine Club, which were to existing customers, decreased by $33,000 from $146,000 in the third quarter of 2000 to $113,000 in the same quarter in 2001 due primarily to weaker gift giving during the 2000 versus the 1999 holiday season, which affected sales recognized when those gifts were shipped in the ensuing months. 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. These decreases were offset by telemarketing sales to existing customers. The Company has launched a new outbound telemarketing sales program in 2001 to its existing customers that contributed $239,000 in sales during the third quarter of 2001 compared to no sales in the same quarter of 2000. Sales resulting from acquisition mailings increased slightly during the third quarter of 2001 as compared to the same period in 2000. Additional decrease was contributed by lower delivery income of $23,000 and no retail store sales as a result of closing of the Newbury Street store in Boston, which were $57,000 in third quarter of 2000. Sales of wine decreased 3.3% from $7,078,000 in the third quarter of 2000 to $6,844,000 in the third quarter of 2001 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 4,950, or 7.7%, from 64,363 in the quarter ended September 30, 2000 to 59,413 in the quarter ended September 30, 2001. The average case price, exclusive of wine reservation sales, increased by $6.03, from $100.41 in the quarter ended September 30, 2000 to $106.44 in the quarter ended September 30, 2001. The average number of cases purchased per customer order was 1.24 in the quarter ended September 30, 2001 as compared to 1.09 in the third quarter of 2000. Gross Profit Gross profit as a percentage of sales increased from 49.4% in the quarter ended September 30, 2000 to 55.5% in the quarter ended September 30, 2001. Gross profit increased $244,000, or 6.8%, from $3,583,000 in the quarter ended September 30, 2000 to $3,827,000 in the quarter ended September 30, 2001 despite the decrease in sales. Gross profit attributable to wine sales increased 9 $10.37 per case, or 21.6%, from $47.99 per case in the quarter ended September 30, 2000 to $58.36 per case in the quarter ended September 30, 2001. The increase in gross profit as a percentage of sales and on a per case basis resulted principally from improved purchasing and favorable exchange rates. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $351,000, or 9.4%, from $3,745,000 in the quarter ended September 30, 2000 to $4,096,000 in the quarter ended September 30, 2001. As a percentage of sales, these expenses increased from 51.6% in the quarter ended September 30, 2000 to 59.4% in the quarter ended September 30, 2001. The most significant increase in selling, general and administrative expenses, $334,000, is attributable to an increase in promotional costs. Acquisition mailings, which accounted for $240,000 of the promotional cost increase, were mailed earlier in third quarter 2001 and as such generated higher amortization costs in comparison to the comparable acquisition mailing in the third quarter of 2000. Other increases included higher salaries for call center personal, due to increased telemarketing efforts. Marketing and administrative salaries also increased slightly. These increases were partially offset by decreases in warehouse costs and delivery costs of $21,000 and $68,000, respectively, in the third quarter of 2001 as compared to the third quarter of 2000. The Company reduced shipping costs as a percent of sales by 0.4%. Interest Interest expense decreased in the third quarter of 2001 to $27,213 from $48,556 in the third quarter of 2000 due to lower borrowings and reduced interest rates for the majority of the third quarter. Interest income increased from $290 in the quarter ended September 30, 2000 to $3,750 in the quarter ended September 30, 2001 as a result of investing cash in overnight instruments. Benefit from Income Taxes The Company did not record a benefit from income taxes for the quarter ended September 30, 2001 due to the uncertainty of realizing any such benefit in the near future. Nine-Month Periods Ended September 30, 2000 and September 30, 2001 Sales Sales were $21,900,000 in the nine months ended September 30, 2001, which is a decrease of $3,244,000, or 12.9%, from sales of $25,144,000 in the nine months ended September 30, 2000. During the nine months ended September 30, 2001, the Company pursued a policy of reducing marginally profitable mailings in order to improve profitability. These mailing reductions, as well as lower response rates to acquisition mailings, reduced the Company's sales. Sales decreased 11.9% 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 36,629, or 16.2%, from 226,653 in the nine months ended September 30, 2000 to 190,024 in the nine months ended September 30, 2001. The average case price increased by $4.61, or 4.6%, from $100.76 in the nine months ended September 30, 2000 to $105.37 in the nine months ended September 30, 2001. The average number of cases purchased per customer order was 1.23 in the nine months ended September 30, 2001 compared to 1.05 in the comparable fiscal period of 2000. Sales from acquisition mailings during the nine months ended September 30, 2001 increased in average number of cases per order as compared to the first nine months of 2000. This increase also contributed to the increase in the number of cases purchased for all orders. Gross Profit Gross profit decreased $867,000, or 6.8%, from $12,764,000 in the nine months ended September 30, 2000 to $11,897,000 in the nine months ended September 30, 2001 due to lower sales. Gross profit as a percentage of sales increased from 50.8% in the nine months ended September 30, 2000 to 54.3% in the nine months ended September 30, 2001. Gross profit attributable to wine sales increased $6.82 per case, or 13.6%, from $50.21 per case in the nine months ended September 30, 2000 to $57.03 per case in the nine months ended September 30, 2001. The increase in gross profit as a percentage of sales and average gross profit per case resulted from continued improvement in purchasing and favorable exchanges rates. Selling, General and Administrative Expenses 10 Selling, general and administrative expenses decreased $2,394,000, or 16.2%, from $14,794,000 in the nine months ended September 30, 2000 to $12,400,000 in the nine months ended September 30, 2001. As a percentage of sales, these expenses decreased from 58.8% in the nine months ended September 30, 2000 to 56.6% in the nine months ended September 30, 2001. The net decrease in selling, general and administrative expenses is largely attributable to decreased shipping expense of $655,000, an overall decrease during the period in marketing expense of $1,249,000 (inclusive of $263,000 of change in accounting estimate resulting from reduced amortization of acquisition mailing costs), and a one-time charge of $305,000 payable to the Company's former Chief Executive Officer pursuant to a severance agreement incurred in 2000. The balance of the savings resulting from improved control of fulfillment and overhead expenses. The Company has successfully reduced shipping costs by renegotiating shipping charges and, in some instances, by changing its courier service providers. The Company continues to seek means to further reduce its shipping, fulfillment and overhead costs. Interest Interest expense increased from $88,778 in the nine months ended September 30, 2000 to $108,673 in the nine months ended September 30, 2001 as a result of borrowings under the Company's line of credit during the first, second and third quarters of 2001 versus borrowing only in the second and third quarter of 2000. Interest income increased from $7,104 for the nine months ended September 30, 2000 to $16,083 in the nine months ended September 30, 2001 as a result of investing cash overnight. Benefit from Income Taxes The Company did not record a benefit from income taxes for the nine months ended September 30, 2000 and September 30, 2001 due to the uncertainty of realizing any such benefit following such periods. Liquidity and Capital Resources The Company's primary working capital needs include purchases of inventory, advertising expenses related to the cost of acquisition mailings and other expenses associated with promoting sales. As of September 30, 2001, the Company had cash and cash equivalents totaling $1,411,213. On April 13, 2000, the Company entered into a credit agreement with a bank. Amounts borrowed under this facility bear interest at the prime rate and are collateralized by substantially all of the assets of the Company. The Company is required to comply with certain financial covenants as part of the terms and conditions of the line of credit. The Company was in default under its credit agreement at the end of the second, third and fourth quarters of fiscal 2000 as a result of the Company's failure to meet certain financial covenants at the end of these quarters and to obtain certain landlords' consent and subordination agreements. The Company has received waivers from the bank for each of these periods. In connection with the waiver for the December 31, 2000 period, the Company and the bank amended the credit agreement to provide for a reduction in the principal amount available for borrowing under the facility to $1.9 million and to provide that the Company repay amounts outstanding under the facility in $50,000 increments on the 1st and 15th of each calendar month, beginning March 15, 2001, until such time as the Company could certify its compliance with the financial covenants. The Company has met these covenants for the first, second and third quarters of 2001, and as such, no longer has to make the $50,000 repayments. As of May 15, 2001, the Company received a waiver from the bank of its obligation to obtain a certain landlord's consent and subordination agreement. Additionally, the Company's lender increased the amount available for borrowing under the facility from $1.9 million to $3.0 million in August of 2001. Since March 31, 2001, the Company has been in compliance with the required financial covenants under the credit facility. As of September 30, 2001 the Company had borrowings of approximately $2,800,000 outstanding under this credit facility and had $200,000 available to borrow. During the nine months ended September 30, 2001, net cash of $872,000 was used in operating activities, resulting principally from net losses, increases in accounts receivable, prepaid mailing costs, prepaid expenses, accrued expenses and deferred revenue. These cash uses were partially offset by a decrease in inventory and increase in accounts payable. The Company invested $179,000 in computer hardware and software during the nine months ended September 30, 2001, made payments of $425,000 on its line of credit and borrowed $1,000,000 on its line of credit. At December 31, 2000 and September 30, 2001, the Company had working capital of $8,745,000 and $8,311,000, respectively. 11 The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations, the Company believes that cash flow from operations, available cash and financing available under its line of credit will be adequate to meet the Company's working capital needs until the expiration of its credit facility on April 13, 2002. Thereafter, the Company will seek to extend the terms of its credit facility or obtain alternative sources of financing; however, there can be no assurance that the Company will be able to extend the terms of its credit facility or obtain alternative sources of financing on commercially reasonable terms or at all. Exchange Rates The Company engages, from time to time, in foreign exchange forward contracts to reduce its exposure to currency fluctuations related to commitments for the purchases of inventories. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on our operating results. The Company does not use derivative financial instruments for speculative or trading purposes. As of September 30, 2001, the Company had no forward currency exchange contracts outstanding. At each balance sheet date, foreign exchange forward contracts are revalued based on the current market exchange rates. Resulting gains and losses are included in earnings or deferred as a component of other comprehensive income. These deferred gains or losses are recognized in income in the period in which the underlying anticipated transaction occurs. Loss related to these instruments for the second quarter of fiscal 2001 was not material to the Company's financial position. The Company does not anticipate any material adverse effect on its results of operations or cash flows resulting from the use of these instruments. However, it cannot assure that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. The Company has a foreign exchange line of credit with a bank that allows the Company to enter into forward currency exchange contracts of approximately $500,000 maturing on any one day for spot purchases and approximately $950,000 for forward contracts in a twelve month rolling period. 12 Item 3: Quantitative and Qualitative Disclosure about Market Risk The following discussion about the Company's market risk 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, 2001 and September 30, 2000 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. 13 PART II. OTHER INFORMATION Item 5. OTHER INFORMATION The Company announced in a press release on October 30, 2001 that it has hired Richard Libby as the Company's first Chief Marketing Officer. Mr. Libby's employment offer letter is attached hereto as Exhibit 10.1. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Employment Offer Letter from the Company to Richard E. Libby dated September 12, 2001. (b) No reports on Form 8-K were filed during the quarter ended September 30, 2001. 14 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, 2001 15 EXHIBIT INDEX Exhibit Number Document ------- -------- 10.1 Employment Offer Letter from the Company to Richard E. Libby dated September 12, 2001. 16