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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
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 (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
960 TURNPIKE STREET, CANTON, 02021
MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 617-821-4152
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $0.01
per share The Nasdaq National Market System
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock of the registrant held by non-
affiliates of the registrant was approximately $8,733,491 on March 21, 1997.
For purposes of the foregoing sentence, the term "affiliate" includes each
director and executive officer of the registrant.
3,779,380 shares of Common Stock were outstanding at March 21, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
registrant's 1997 Annual Meeting of Stockholders ("Proxy Statement") to be
filed pursuant to Regulation 14A are incorporated by reference in Part III of
this Report.
EXHIBIT INDEX APPEARS ON PAGE .
PAGE 1 OF PAGES.
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PART I
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined under the
Federal Securities Laws. Actual results could vary materially. Factors that
could cause actual results to vary materially are described herein and in
other documents. Readers should pay particular attention to the considerations
described in the section of this report entitled "Management' Discussion and
Analysis of Financial Condition and Results of Operations--Factors that May
Affect Future Results." Readers should also carefully review the risk factors
described in the other documents the Company files from time to time with the
Securities and Exchange Commission.
ITEM 1: BUSINESS
GENERAL
Geerlings & Wade, Inc. ("Geerlings & Wade" or the "Company") is a direct
marketer of premium imported and domestic wines and wine- and cigar-related
merchandise to individual consumers. Through frequent mailings to existing and
potential new customers, the Company offers wines selected on the basis of
their quality and price characteristics. The Company seeks to eliminate the
"intimidation factor" in the consumer's wine purchasing decision by focusing
on a relatively small number of wines and by providing information on their
selection and enjoyment. The Company believes that it is developing a
"Geerlings & Wade" image based on informative mailings, reliable wine
recommendations, value-pricing, ease of ordering and convenient home delivery.
The Company is required by law to operate licensed facilities or otherwise
be permitted to sell wine to individual consumers in each state in which it
operates. Geerlings & Wade opened its first licensed facility in Massachusetts
in 1988. Since then, the Company has opened additional licensed facilities in
Connecticut (June 1991), New York (September 1991), Illinois (November 1991),
Florida (April 1993), California (May 1993), New Jersey (July 1993),
Washington state (December 1994), Virginia (January 1995), Ohio (April 1995),
Minnesota (July 1995), Colorado (August 1995) and Arizona (September 1995).
The Company may ship wine to consumers in a limited number of additional
states, but to date sales in such states have been relatively insignificant.
The Company's active customers (customers who have made a purchase within the
twelve preceding months) have increased from approximately 96,600 at December
31, 1995 to approximately 98,700 at December 31, 1996.
COMPANY STRATEGY
The Company, as one of the leading direct marketers of premium wines and
wine- and cigar-related merchandise, hopes to simplify the wine buying
process, educate the wine consumer and develop a loyal and broad customer
base. The key elements of the Company's strategy to achieve these objectives
include:
Source Quality Wines and Offer Value Pricing. Geerlings & Wade sources its
imported wines directly from producers and negotiants in the countries of
origin. The Company sources domestic wines through wholesale channels with
domestic negotiants, certain wineries and wine producers. The Company selects
those wines which perform well in blind comparative tastings. The Company
promotes value in its selections by offering only those wines which the
Company believes demonstrate a combination of superior quality and price
characteristics. These sourcing and selection techniques, combined with its
ability to purchase in large quantities and manage the consolidation and
transportation of its directly-sourced products, enable Geerlings & Wade to
offer premium wines at attractive prices.
Facilitate Purchasing Decisions and Educate Consumers. Geerlings & Wade
believes that many consumers who buy wine through traditional retail channels
experience difficulty in their purchasing decisions, due to their limited
personal knowledge of wine and the general lack of dependable advice at the
point of
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purchase. The Company seeks to eliminate this "intimidation factor" and
facilitate the wine buying process by focusing each offering on a relatively
small number of wines that performed well in blind comparative tastings and
offering the convenience of telephone ordering and home delivery. The Company
continually provides its customers with information on various wines, growing
regions and vintages, as well as recommendations on the selection, storage and
enjoyment of wine. By educating its customers, the Company strives to give
them greater confidence in their wine purchasing decisions.
Enhance Productivity of Mailings. Geerlings & Wade seeks to improve the
productivity of mailings to its existing customers by analyzing buying
histories and tailoring the frequency and content of the Company's house
mailings to increase sales and to improve cost efficiencies.
Apply Computer Systems to Enhance Operations. Geerlings & Wade has developed
and seeks to maintain customized computer systems to integrate all major
aspects of the Company's business to promote operational efficiencies and
provide better customer service. The Company's systems integrate order
processing; inventory planning, ordering and management; customer list and
circulation management and analysis; and accounting and management reporting.
Expand in Existing Markets. Geerlings & Wade believes that it has penetrated
its current markets to a limited extent and that significant opportunities
exist to increase sales in these markets among both current and new customers.
The Company seeks to increase sales among its current customers by a variety
of means, including enhancing its customers' appreciation of wine through
education, broadening the selection of wine and purchasing options offered and
attempting to make wine buying more convenient and less intimidating. The
Company seeks to acquire new customers within existing markets through
improvements in the content, quality and circulation management of its
prospect mailings, and through direct response print advertising and active
encouragement of referrals from existing customers.
Enter New Markets. Geerlings & Wade is licensed or otherwise authorized to
sell wine to individual customers in twenty states comprising approximately
72% of the overall U.S. market for table wine. The Company plans to enter the
Michigan market in the 2nd quarter. The State of Michigan, Liquor Control
Commission issued an order granting the Company a retail license once certain
conditions relating to the set up of the facility are met. The Company is
currently evaluating opportunities to obtain licenses in additional states in
order to serve a larger customer base, although no assurance can be given that
it will be successful in obtaining any additional licenses. Those states
representing markets with both high consumption of table wine and a large
number of mail order prospects will be considered based on the Company's
ability to overcome licensing and other regulatory obstacles to serve
customers in such states.
COMPANY LITERATURE AND MAILINGS
The Company sells wine to individual consumers primarily through targeted
mailings. In addition to describing the distinguishing characteristics of the
featured wines, each mailing contains general information intended to broaden
the customer's knowledge of wines, wine producers and wine producing regions,
along with the Company's tasting notes and ratings.
The Company's tasting notes and ratings included with the mailing provide
the consumer with detailed information on the subjective and objective
qualities of each wine. The tasting notes describe each wine's most salient
qualities, including color, bouquet and taste characteristics. In 1996, the
Company changed its wine rating system from a 20-point scale to a 100-point
scale and rates each wine it offers for overall quality and price
characteristics. The 100-point scale mirrors other leading wine rating
systems, and the Company believes our customers are more comfortable with the
100-point system.
Geerlings & Wade distributes two types of promotional wine mailings: "house
mailings" to its file of active customers and qualified leads and "prospect
mailings" to rented mailing lists.
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House Mailings. Geerlings & Wade distributes house mailings to buyers (those
persons who have made a purchase) and qualified leads (those persons who have
indicated an interest in being placed on the Company's mailing list but who
have not yet purchased). The number and timing of house mailings to any
individual is determined based upon the Company's circulation management
systems, which are designed to optimize the return on the cost of house
mailings. The Company further tailors the frequency and content of each house
mailing and the wines featured to the particular market served. In addition to
information on the featured wines, each mailing includes a personalized
letter, an order form and a business reply envelope. In 1996, the Company sent
approximately 2,694,000 house mailings.
The Company generally uses two types of house mailings:
"Brochure Mailings" include a four-page brochure which highlights one or
two selected wines from a specific region. These brochures contain detailed
descriptions of the wines being offered, include information on the growing
region from which they were produced, the vintage and the background of the
producer and the results of the tastings from which the featured wines were
selected. In addition to the featured wines, these brochures offer a number
of additional selections, along with tasting notes and ratings for these
wines.
"Odds and Ends Mailings" offer remaining quantities of previously
featured wines or new wines available in limited quantities. In contrast to
the other mailings, these mailings typically offer thirty or more wines and
highlight the limited quantity of remaining cases and may include an insert
describing especially limited quantity "Telephone Order Only" wines. These
mailings expressly encourage customers to take advantage of what may be
their last opportunity to purchase certain wines they may have previously
purchased. "Odds and Ends" mailings have tended to be among the most
popular because they offer customers the opportunity to purchase wines they
may have previously enjoyed.
Prospect Mailings. The Company's primary method of acquiring new customers
is its prospect mailing program. A typical prospect mailing explains the
Company's selling concept, describes the particular wine being offered and
contains an order form to buy the wine. Excerpts from articles about the
Company are typically included. Names are obtained through the rental of lists
which are screened with a demographic profile consistent with the Company's
existing customers. The Company generally offers prospective customers a 6- or
12- bottle purchasing options.
Production. All Geerlings & Wade wine mailings are created and designed in-
house on a desktop publishing system. The in-house creation and design of
house and prospect mailings allows flexibility for editorial changes and
results in significant cost and time savings. Fulfillment (collating, folding,
inserting and mailing) is performed commercially. During 1996, the Company
outsourced print production of its mailings to commercial printers utilizing
advanced printing technologies. Mailings generally include a personalized
letter, the offering brochure, an order form and a return envelope.
Catalog. During 1996, Geerlings & Wade mailed a full color, thirty-six page
Holiday Collection Catalog featuring wine- and cigar-related merchandise and
other products intended to compliment the Company's wine offerings. The
Company mailed the catalog to both prospective and existing customers. In 1997
the Company's intends to develop a spring and a fall catalog. The Company
believes there is an opportunity to enhance sales to existing customers and
expand its customer file through catalog mailings.
MERCHANDISING
Geerlings & Wade offers its customers premium imported and domestic wines.
Imported wines are sourced primarily from France, Italy, Australia and Chile.
The Company's domestic wines are sourced primarily from California, many of
which are sold under private labels, including the Company's own brands: Glass
Ridge, J. Krant Cellars, Hamilton Estates, Alazar Winery & Vineyards, Amsbury
Winery, Bryan Woods Winery, Devina Estates, Foxtail Vineyards & Winery,
Domaine Paul, Jack Canyon Cellars, Lapis Lazuli Winery & Vineyards, Marc
Cellars, Mariel Winery, Mira Luna, Mischler Estates, Penstemon, Red Brick
Cellars, Rock Rabbit, Rose
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Valley, San Valencia Winery and St. Carolyne Winery. In 1997, the Company
intends to promote its best-selling brands and build a long term,
merchandising program that builds brand equity for these brands. By
reinforcing brand recognition vintage after vintage with quality wines, the
Company should encourage a strong demand for these brands among its customers
and generate strong sales growth for these brands.
The wines offered by the Company to its customers are determined based on
consumption patterns and the Company's prior experience with a particular type
of wine. In 1996, approximately 64% of the cases sold by the Company were
imported wines and 36% were domestic. The Company's wines are generally sold
within the price range of $69 to $1,000 per case, with average case prices of
approximately $110 in 1996.
WINE SOURCING AND PURCHASING
The Company sources imported and domestic wines through a network of
producers, negotiants (those persons who serve as intermediaries or agents to
producers in the purchasing process), importers and wholesalers. In 1996, the
Company sourced the vast majority of the cases it sold directly from producers
or negotiants.
The Company's sourcing methods differ from typical sourcing methods of
traditional wine retailers. The Company's sourcing techniques are more typical
of a wholesaler/importer, which actively searches for and identifies wines
from producers or negotiants. With its active role in the sourcing decision,
the Company makes its own determination as to the quality and price
characteristics of the wine it sells, and thereby is assured of its ability to
offer to its customers wines of quality and value. Following selection and
sourcing, both domestic and imported wines are purchased from appropriately
licensed businesses located in each state where the Company maintains licensed
facilities.
The Company generally selects its wines several months in advance of
offering them for sale in order to coordinate availability, shipping and
promotional mailing schedules. The Company selects most of these wines based
on blind comparative tastings of samples judged on overall quality and price
characteristics. The Company often tastes over fifty wines prior to making a
featured selection and currently rates each wine on a 100-point scale.
Sourcing Imported Wines. In 1996, the vast majority of imported wines sold
by the Company were sourced directly in the countries of origin. The Company
presently utilizes consultants for sourcing certain imported wines. European
wines are purchased utilizing the services of Mr. Peter van Hoof, a consultant
to the Company, who visits European growers and negotiants and administers
blind comparative tastings from his office in Rotterdam, The Netherlands. The
tastings are performed by panels which include wine connoisseurs as well as
less sophisticated wine consumers who rate each wine. Mr. van Hoof negotiates
the price of imported wines and forwards samples of the top three wines for
each category to Mr. Michael McCann, the Company's Wine Director. Mr. McCann
then selects from these finalists which wine to offer to our customers by
blind tasting these finalists against comparable wines offered nationally.
Sourcing Domestic Wines. In 1996, the vast majority of the Company's
domestic wines were sourced through wholesale channels with domestic
negotiants, certain wineries and wine producers. The Company sources many
wines through its primary domestic negotiant, Codera Wine Group, Inc.
("Codera") of Emeryville, California. Codera sources wine in the United States
from many high quality producers. Codera continuously reviews wines at various
stages of production and forwards selected samples to the Company. After the
Company has selected a particular wine from among the samples forwarded by
Codera, Codera coordinates finish vinification and bottling of the wine under
a number of private labels, including the Company's own brands. In addition,
Codera has occasionally identified branded products for purchase by the
Company.
The Company also occasionally sources wines directly from various California
wineries. As a volume purchaser, the Company is frequently approached directly
by wineries and wine producers with offers to purchase wine lots of various
sizes. These wines are reviewed based on the same quality and price
characteristics as other wines sourced by the Company.
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Wines Sourced by Others. Geerlings & Wade also purchases non-proprietary
wines which have been sourced independently of the Company. Due to the
Company's ability to purchase in large quantities, the Company is frequently
approached by importers and wholesalers. Wines forwarded to the Company are
reviewed according to the same quality and price standards as other wines
sourced by the Company. The Company believes by maintaining these
relationships with quality wine suppliers, it can enhance its opportunity of
uncovering the best wines at the best prices.
INFORMATION SYSTEMS AND TECHNOLOGY
Information systems are central to all phases of the Company's business. The
Company has developed and seeks to maintain computer-based systems to
integrate all major aspects of the Company's business, including order
processing, inventory planning and management, customer list and circulation
management and analysis, and management reporting. The Company's system was
developed in-house and is based on client-server software purchased by the
Company. During 1996, the Company commenced a significant upgrading of its
computer system which will continue into and through 1997. The main focus of
the upgrade is the implementation of Renaissance Direct, a new integrated,
direct marketing software package, and supporting hardware and software
upgrades. To accomplish this software conversion, Geerlings & Wade will also
need to invest in upgrades to existing hardware and software. The Company
expects that new software will form a better foundation for existing programs
and enable the Company to pursue database marketing initiatives that would not
have been previously attainable.
The Company's customized order processing system integrates order entry with
each of the Company's licensed facilities and provides the on-line, real-time
information processing capabilities necessary for prompt delivery to customers
and resolution of customer service issues. The system allows telephone orders
to be captured on-line and mail orders to be efficiently processed. The names
and addresses of individuals who have responded to mailings by ordering or by
requesting that they be placed on the Company's mailing list are entered in
the Company's database and assigned an "import number" which appears on all
customer correspondence and is used to track account activity. The system
provides the Company's customer service representatives access to an array of
product and customer information during the order processing. The Company
believes the customer information provided by the system, including tasting
notes, purchasing and billing histories, delivery instructions and prospective
shipping dates, enhances the quality of service to its customers. The Company
expects that the new Renaissance Direct will enhance the system's capabilities
including the Company's ability to introduce outbound telemarketing and
continuity programs.
The Company's system provides real-time inventory management. The Company
maintains access to running totals of case sales by market, warehouse
inventory, incoming product consolidation and transportation and outgoing
delivery logs, all designed to arrange for prompt delivery to customers.
Regulatory requirements have been incorporated into the software to allow the
Company to manage inventory centrally for each of its licensed facilities.
The Company continually updates its database of customer names and
purchasing histories in order to maximize the productivity of house and
prospect mailings. The system's database provides the Company with a flexible
system that offers highly sophisticated data manipulation which enables the
Company to target marketing programs to specific segments of its customer
base. The system also provides extensive reporting capabilities which allow
the Company to evaluate the effectiveness of its mailings and assist the
Company in its business planning. The Company plans to test LifeTime, a new
software package developed Mr. Huib Geerlings, which dynamically segments
customers based on their purchasing histories. With this analysis, the Company
would contact customers based on their most recent purchasing patterns with
special offers through mailings and/or telemarketing.
The Company's computerized telephone system allows the Company to monitor
the volume of incoming calls, monitor customer service representatives and
record other useful information. The system is fully expandable, permitting
the Company to add lines as necessary to increase its customer service
capabilities.
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MARKETING
The goal of the Company's marketing program is to expand and improve the
Company's customer base and establish and maintain customer loyalty through
informative marketing literature. The Company monitors its progress in
attaining this goal by tracking new customer accounts and customer retention
statistics. In 1996, the number of new customers added to the Company's
mailing list was 47,500, as compared to 60,400 in 1995 and 40,800 in 1994.
The Company's ongoing marketing programs are designed to generate
information concerning existing and new customers and customer groups. This
information is incorporated into the Company's database and is used to target
and acquire new buyers, increase the average order value and average order
size of customer purchases and enhance the Company's customer service
capabilities.
In addition to its present direct mail formats, the Company plans to test
alternative channels of direct marketing to enhance sales and increase its
customer base. These alternatives include: an Internet web-site with on-line
ordering, a wine continuity program, in which customers receive monthly
deliveries of 2 bottles of wine or bi-monthly deliveries of 6 bottles of wine,
and a corporate affinity programs in which the Company co-markets with
corporate partners such as airlines or hotel franchises. There can be no
assurance that these marketing channels, if implemented, will have a favorable
impact on operations.
Membership. To increase customer loyalty, Geerlings & Wade offers customers
the opportunity to purchase one- and three-year memberships. The Company
offers memberships in each state in which it operates, with the exceptions of
Connecticut and Ohio. Members are given a personalized membership card,
assured of being maintained on the mailing list, and, except in Massachusetts,
realize savings on each case of wine purchased during the term of the
membership. In order to comply with regulatory restrictions in Massachusetts,
the Company charges its non-members for delivery and offers its members free
delivery of their 12-bottle case purchases. The membership program has from
time to time generated regulatory scrutiny, and there can be no assurance that
the Company will be able to continue its membership programs in their current
forms in existing jurisdictions or that jurisdictions in which the Company may
become licensed in the future will allow the sale of memberships. As of
December 31, 1996, the Company had approximately 35,300 members, constituting
approximately 35% of its active customer base.
CUSTOMER SERVICE
The Company receives orders by mail, telephone (1-800-782-WINE) and by fax
(1-800-FAX-8466) for processing and transmittal to the appropriate Company
facility seven days a week. The Company's customer service representatives
assist customers in purchasing decisions, process product orders and respond
to customer inquiries on wine information, pricing and availability. The
customer service group responds to approximately 1,000 telephone calls each
day on average. Through the Company's on-line systems, customer service
representatives can quickly access a customer's complete history, including
all prior purchases, payment and delivery information. When processing orders,
customer service representatives have complete listings of all available
products, as well as tasting notes and ratings. When the offices of the
Company are closed, customers may leave orders in a voice messaging system.
The Company accepts the return of unopened bottles from dissatisfied customers
and will credit a customer for all returns. Returns and credits were
approximately two percent of net sales for each of the last three years.
COMPETITION
The retail wine business is highly competitive. The Company competes with
supermarkets, wine specialty stores, retail liquor stores, wine merchants
which advertise delivery of product in specialty publications and an
increasingly larger number of companies specializing in direct marketing of
wine at retail, including companies which are presently marketing on the
Internet. Many of these competitors have significantly greater resources than
the Company and have access to branded products not offered by the Company.
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The Company believes that by providing a high level of service coupled with
attractive prices, the ability to source wines directly from producers and the
convenience of direct delivery it can achieve a competitive advantage over
supermarkets, retail liquor stores, wine specialty stores and other wine
merchants. The Company believes that it has achieved a competitive advantage
over current direct delivery or direct marketing competitors and potential new
entrants by successfully obtaining retail licenses in each of its markets, by
being an early entrant in many of its markets, by exploiting computer
technology in the management of its operations and its direct marketing
programs and by creating a loyal customer base of repeat buyers. However,
there can be no assurance that the Company will be able to continue to compete
effectively against existing competitors or new competitors that may enter the
market in the future.
COMPANY OPERATIONS WITHIN REGULATORY FRAMEWORK
Regulatory Framework. The alcoholic beverage industry is highly regulated.
Extensive and complex regulation at the federal and state levels have resulted
in what is known as the "three tier licensing system." At the first tier are
manufacturers and importers which are licensed to sell to the second tier,
wholesalers. Wholesalers in turn supply the third tier, retailers, which
ultimately sell to the public. Each tier is subject to various restrictions on
its activities. In virtually all states, retailers are granted a license which
enables them to sell products solely to consumers within that state. A small
number of states allow interstate sales to those states having reciprocal
licensing arrangements (for example, a retailer may ship from California to
Oregon, Idaho and New Mexico). In addition, regulatory restrictions prohibit a
retailer with licensed facilities in multiple states from transferring
inventories between its own facilities. In order to acquire and maintain a
retail license to sell within a particular state, a retailer must have a
physical presence (for example, own or lease a warehouse or other licensed
facility) in that state. A direct marketer is further limited in its ability
to sell alcoholic beverages by restrictions imposed by various state laws on
the method of delivery to consumers. For example, United Parcel Service (UPS)
is not licensed to provide intrastate delivery of alcoholic beverages sold by
the Company in Massachusetts, New Jersey or Colorado, and many Southern
states, including Alabama, Louisiana, South Carolina, Tennessee and Georgia
prohibit the retail delivery of alcoholic beverages altogether.
Company Licensing and Regulatory Matters. The Company holds retail licenses
in the thirteen states where it maintains licensed facilities. The Company is
also permitted, from its California or Illinois facilities, to sell and ship
to consumers in Oregon, Idaho, New Mexico, Missouri, and West Virginia under
these states' "reciprocal shipment" laws. In addition, without obtaining
additional licenses, the Company is permitted to sell and/or ship to consumers
in Iowa and Nebraska. Sales to consumers in Missouri and West Virginia to date
have been relatively insignificant because of regulatory restrictions asserted
against direct marketing and consumer advertising in those states.
Most of the states where the Company is licensed have legal barriers against
the Company also engaging in licensed wholesaler activities in such state. As
such, the Company holds only retail licenses. All domestic and imported
inventories are delivered by independent licensed wholesalers directly to each
of the Company's licensed facilities. Because of the relatively unique nature
of the Company's mail order operations within this regulatory framework, the
Company occasionally receives inquiries from state regulators regarding its
business practices. To date such inquiries made during 1996 have not resulted
in any actions by any such regulators that would have a material effect on the
Company's business. The Company believes that it is in compliance in all
material respects with all applicable licensing and other governmental
regulations and that any failure in the past to comply with such regulations
has not had, and is not expected to have, a material adverse impact on the
Company's business.
Customer Order Processing and Delivery. All customer orders are processed
centrally and forwarded to an appropriate licensed facility for acceptance and
fulfillment. The Company has developed extensive proprietary software to
manage the process of ordering, consolidating, transporting and accounting for
its inventory. Through computer software and systems, the Company has real-
time access to running totals of case sales by state, warehouse inventory,
incoming product consolidation and transportation and outgoing deliveries, all
designed to
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arrange for prompt delivery of wine to customers. The Company's software also
ensures that customer orders are processed for acceptance by the proper
licensed facility.
The Company's facilities maintain regular hours and sales are made to walk-
in customers. However, most of the Company's sales are made through home or
office delivery. The Company ships wine directly to a customer from its
licensed facility located in the state in which the customer resides (except
with respect to those states to which the Company is authorized to ship from
its California or Illinois facilities). An adult's signature is required for
deliveries in all states.
In Colorado, Massachusetts, and New Jersey, where UPS or other delivery
companies are not licensed to provide delivery of alcoholic beverages for
retailers, the Company uses its own licensed vehicles and delivery personnel
to make deliveries. The Company coordinates these deliveries from its
Massachusetts headquarters, placing each order as it is received into a
delivery route. The Company has established delivery routes covering each
state and, depending on the frequency and concentration of orders, completes
each route at least once a week. In certain circumstances, if a customer
requires more prompt delivery, the order will be placed in an alternate route
for delivery on an earlier day. Pickup of returns is performed by the drivers
in the course of their normal routes.
In New York, Connecticut, Illinois, Florida, California, Washington,
Virginia, Ohio, Oregon, Idaho, New Mexico, Nebraska, Iowa, Missouri and West
Virginia, the Company uses UPS to make deliveries, and in Arizona and
Minnesota uses licensed delivery companies to make deliveries. Orders from
customers in the states in which UPS or these other delivery companies is
permitted to ship wine are transmitted on the day they are received to the
appropriate licensed facility. Orders are packed into specially designed
shipping containers and picked up by the delivery company daily. Most of these
orders are shipped within 48 hours of receipt. Returns are picked up by the
delivery company pursuant to issuance of a delivery company call tag request
by a Company customer service representative and returned to the appropriate
licensed facility.
SALES OR USE TAX
The Company presently collects sales tax in each of the states in which it
holds licenses which apply a sales tax to the sale of wine and wine and cigar
accessories. These states are Arizona, California, Colorado, Connecticut,
Florida, Illinois, Minnesota, New York, New Jersey, Ohio, Virginia, and
Washington. Massachusetts does not impose sales tax on wine but does so on
wine accessories. Since 1993, the Company has shipped wine to Oregon, Idaho,
New Mexico, Missouri and West Virginia without collecting a sales or use tax
or notifying consumers that a use tax payment may be required. Various states
have attempted to impose on direct marketers the burden of collecting use
taxes on the sale of products shipped to state residents. In 1992, the United
States Supreme Court affirmed that it is unconstitutional for a state to
impose use tax collection obligations on an out-of-state mail order company
whose only contacts with the state are the distribution of advertising
materials through the mail and subsequent delivery of purchased goods by
parcel post and interstate common carriers. However, this decision
acknowledged that Congress has the authority to enact legislation authorizing
states to impose such obligations. On March 3, 1995, legislation was
introduced in the United States Senate which would authorize collection of
certain state and local taxes with respect to mail order sales, delivery and
use of tangible personal property. The Company cannot predict whether or when
this legislation will be enacted. Given the Company's ability to collect sales
tax in the jurisdictions indicated above, the Company does not believe the
collection of use taxes would present an undue burden upon the Company in the
event that it were determined that the Company was obligated to collect such
taxes, and would have no significant impact on the administrative expenses of
the Company or the prices charged to customers.
TRADEMARKS
The following are registered (R) trademarks of the Company: Geerlings & Wade
Personal Wine Service, Geerlings & Wade Personal Wine Importers, J. Krant
Cellars, Alazar Winery, Amsbury Winery, Lapis Lazuli Winery & Vineyards, St.
Carolyne Winery, San Valencia Winery, Mariel Winery, Jack Canyon Cellars,
Bryan
9
<PAGE>
Woods Winery, Mischler Estates, Hamilton Estates, Devina Estates, Domaine
Paul, International Beer and Ale Society and Glass Ridge. The Company has
filed trademark applications with the United States Patent and Trademark
Office for the following names: Red Brick Cellars, Mira Luna, and For the Love
of Wine. The Company believes that its trademarks have significant value and
are an important factor in the marketing of its products and the development
of house brands.
EMPLOYEES
As of March 21, 1997, the Company employed a total of 78 individuals on a
full-time basis. The Company also uses part time employees on a regular basis
at each of its licensed facilities and at its corporate headquarters. For
example, in December 1996, one of the Company's peak sales periods, the ratio
of full time to part time employees was 11 to 1.
ITEM 2: PROPERTIES
As of March 21, 1997, Geerlings & Wade operated thirteen licensed
facilities. All of these facilities are leased, with the exception of the
Company's California facility, which is situated in a public warehouse. Each
facility is centrally located with easy access to major routes for delivery
efficiencies. The Company executed a lease for a Michigan facility on January
24, 1997. The State of Michigan Liquor Control Commission has issued an order
granting the Company a retail liquor license subject to certain conditions.
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE EXPIRATION
-------- --------------- -------------- ----------
<S> <C> <C> <C>
Executive offices, customer service
and licensed facility.............. Canton, MA 32,000 2000
Licensed facility................... Carmel, NY 10,000 2000
Licensed facility................... Somers, CT 4,500 2001
Licensed facility................... Waukegan, IL 9,600 2001
Licensed facility................... Tampa, FL 10,000 2000
Licensed facility................... South River, NJ 4,000 1996
Licensed facility (public
warehouse)......................... San Jose, CA * *
Licensed facility................... Kent, WA 5,000 1997
Licensed facility................... Chantilly, VA 4,800 1999
Licensed facility................... Miamisburg, OH 5,900 1997
Licensed facility................... Denver, CO 6,800 1998
Licensed facility................... Tempe, AZ 6,600 1998
Licensed facility................... Bloomington, MN 4,700 1998
License pending..................... Ann Arbor, MI 5,300 1999
</TABLE>
* The public warehouse facility provides the Company with storage space on an
as-needed basis. The Company's agreement with the public warehouse may be
terminated by the public warehouse on 120-day notice.
The Company believes that its facilities are adequate for its current needs
and that suitable additional space will be available as needed.
ITEM 3: LEGAL PROCEEDINGS
In the ordinary course of business, the Company normally both asserts claims
and defends claims asserted by others against it. The Company believes that
its obligations, if any, with respect to all of such claims would have no
material adverse effect on the financial position of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market System
("NASDAQ/NMS") under the symbol "GEER". The following table sets forth, for
the periods indicated, the high and low per share sales prices for the Common
Stock as reported on the NASDAQ/NMS.
<TABLE>
<CAPTION>
1995 1996
------------- -----------
HIGH LOW HIGH LOW
------ ------ ----- -----
<S> <C> <C> <C> <C>
First Quarter.................................... 17 3/4 11 1/4 7 1/8 3 3/4
Second Quarter................................... 17 1/2 14 6 3 3/4
Third Quarter.................................... 12 1/4 8 7 3 1/2
Fourth Quarter................................... 9 1/2 4 7 1/4 4
</TABLE>
As of March 21, 1997, there were approximately 132 holders of record of the
Company's Common Stock.
The Company's capital stock consists of 10,000,000 authorized shares of
common stock, par value $.01 per share, of which, as of March 21, 1997,
3,779,380 shares were issued and outstanding; and 1,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 21, 1997,
no such shares were issued and outstanding.
The Company has never declared a cash dividend on its Common Stock. The
Board of Directors of the Company has no present intention to pay dividends on
Common Stock and does not anticipate doing so within the next several years.
It is the present policy of the Company to retain earnings, if any, to provide
for growth and working capital needs.
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements, including the
notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Sales.............................. $6,429 $12,428 $20,292 $29,718 $31,501
Cost of sales...................... 3,511 6,898 10,780 16,138 17,188
------ ------- ------- ------- -------
Gross profit....................... 2,918 5,530 9,512 13,580 14,313
Selling, general and administrative
expenses.......................... 2,637 4,954 7,849 14,690 14,427
------ ------- ------- ------- -------
Income (loss) from operations...... 281 576 1,663 (1,110) (113)
Interest income (expense), net..... (12) (35) 36 (37) (257)
Income (loss) before income taxes.. 269 541 1,699 (1,147) (370)
Provision (benefit) for income
taxes............................. 30 50 403 (470) (152)
------ ------- ------- ------- -------
Net income (loss).................. $ 239 $ 491 $ 1,296 ($677) ($218)
====== ======= ======= ======= =======
PRO FORMA STATEMENTS OF INCOME
DATA(1):
Income loss before taxes, as
reported.......................... $ 541 $ 1,699 ($1,147) ($370)
Provision (benefit) for income
taxes............................. 216 636 (470) (152)
------ ------- ------- ------- -------
Net income (loss).................. $ 325 $ 1,063 ($677) ($218)
------ ------- ------- ------- -------
Net income (loss) per share........ $ 0.13 $ 0.34 ($0.18) ($0.06)
====== ======= ======= ======= =======
Weighted average number of shares
outstanding....................... 2,475 3,156 3,755 3,776
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 215 $1,207 $ 9,666 $ 8,694 $ 8,045
Total assets............................. 1,959 4,766 13,529 16,717 12,952
Long-term debt, less current portion..... 5 940 -- -- --
Total stockholders' equity............... 359 546 10,060 9,733 9,526
</TABLE>
- --------
(1) Net income and net income per share is reported on a pro forma basis for
1994 and 1993 to reflect what comparative results would have been had the
Company been taxed as a C corporation for the entirety of 1994 and 1993.
Results for 1995 and 1996 are reported on an actual basis.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Geerlings & Wade is a direct marketer of premium, imported and domestic
wines and wine-and cigar- related merchandise to individual consumers. In
1996, sales increased $1,783,000, or 6% over sales of $29,718,000 in 1995. The
increase in revenues did not meet the Company's expectation. Revenue
expectations were not met due to several of the Company's mailings yielding
lower than anticipated response rates, together with lower retention rates
among customers who made initial purchases in 1995. Notwithstanding the
increase in sales, the Company incurred an operating loss of $113,000 since
selling, general and administrative expenses were reduced in 1996 by only
$263,000 from $14,690,000 in 1995 to $14,427,000 in 1996. The Company reduced
marketing costs in 1996, but invested in personnel to better market our
products, improve the sourcing of quality wines and improve customer service.
The Company operates from 13 licensed facilities in separate states to comply
with alcohol laws and regulations. Having these separate locations creates
inordinately high, fixed operating costs. The Company continuously looks to
lower these fixed costs and manage variable costs to improve operating
margins.
The Company opened its first licensed facility in 1988, three additional
licensed facilities in each of 1991 and 1993, one facility in 1994 and five
facilities in 1995. From these 13 facilities, the Company is able to serve
customers in twenty states. The Company considers each area served by a
licensed facility to be a separate market. The Company intends to open a
facility in Michigan and begin operations in that state in the second quarter
of 1997. The Company is also exploring the possibility of selling wine and
wine-related products outside of the United States through direct marketing
channels. To find ways to increase revenues, the Company plans to test various
marketing programs, including subscription and continuity plans, corporate
affinity marketing programs and outbound telemarketing programs.
The Company's revenues are derived from the sale of wine, wine- and cigar-
related accessories and memberships. Sales from memberships and wine- and
cigar-related accessories were approximately 4% of overall revenues in 1996.
The Company's sales growth reflects increased comparative sales for all states
("markets") that were opened during 1994 and 1995 and Florida and Illinois
which were opened in 1993 and 1992, respectively. Comparative sales in Florida
and Illinois increased by 5% and 6%, respectively in 1996, while comparative
sales in Washington, opened in 1994, increased by 15% in 1996. The combined
comparative sales for Massachusetts, Connecticut, New York, California and New
Jersey decreased by 3.8% for 1996. The Company believes that the decrease of
comparative sales in these markets was the result of marketing programs which
encouraged one-time purchases from new customers and from poor response rates
from untested mailings in the fourth quarter of 1996.
12
<PAGE>
The following table sets forth total sales by market for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
MARKET ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Massachusetts................... $ 2,759 $ 3,916 $ 4,746 $ 5,970 $ 5,685
Connecticut..................... 1,198 1,628 2,010 2,246 2,186
New York........................ 1,881 3,176 4,469 5,297 5,078
Illinois(1)..................... 591 891 1,603 2,418 2,563
Florida......................... 888 1,941 2,679 2,810
California(1)................... 1,050 2,707 3,541 3,466
New Jersey...................... 879 2,742 3,795 3,637
Washington (December 1994)...... 74 884 1,017
Virginia (January 1995)......... 1,398 1,707
Ohio (April 1995)............... 1,123 2,017
Minnesota (July 1995)........... 134 338
Colorado (July 1995)............ 151 566
Arizona (September 1995)........ 82 431
------- -------- -------- -------- --------
Totals........................ $ 6,429 $ 12,428 $ 20,292 $ 29,718 $ 31,501
======= ======== ======== ======== ========
</TABLE>
- --------
(1) Includes authorized sales into additional states.
The Company believes that as customers develop trust in the Company's
ability to select and deliver quality wines at attractive prices they tend to
make more wine purchases from the Company, including more expensive
selections. In general, the Company sells its more expensive wines at a lower
gross margin percentage than its less expensive wines. Consequently, the
Company's gross profit as a percentage of sales diminishes if the average
price point of the Company's product mix increases. The Company seeks to
manage its gross profit through management of the average price point of its
wines and overall product mix. The Company expects that its gross profit as a
percentage of sales will continue to fluctuate depending upon the average
price point of its product mix in each period, which in turn will be affected
by the number of new customers generated by prospect mailings and other
marketing programs under development.
The Company sends approximately twenty house mailings per year, twenty-two
in 1996, to each of its active customers, and consequently, the annual cost
per customer of its house mailings is relatively fixed. The Company believes
that the tendency of its customers to increase the size and frequency of their
wine purchases over time has contributed to an increase in revenues.
Consequently, the Company believes that the operating profit margin on house
mailings to repeat customers has increased over time.
In 1996, the Company sold its wine in quantities of 3, 6 and 12 bottles, and
allowed customers to select a mix of any wines available in stock. In the fall
of 1996, the Company decided to discontinue 3-bottle purchases due to the high
cost of fulfilling each order measured as a percentage of sales. However, the
Company intends to continue to offer 2- or 3- bottle shipments as part of kits
(gift packages) offered in its catalogs or as part of the subscription or
continuity programs to be established in 1997 where the ability to pre-package
shipments affords operating efficiencies that warrant promoting these types of
offers. The Company uses the term "case" as an operating characteristic to
describe any twelve bottle equivalent unit.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth as a percentage of
total sales certain items reflected in the Company's pro forma statements of
income:
13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 54.6 55.5 53.1 54.3 54.6
Gross profit............................ 45.4 44.5 46.9 45.7 45.4
Selling, general and administrative
expenses............................... 41.0 39.9 38.7 49.4 45.8
Income (loss) from operations........... 4.4 4.6 8.2 (3.7) (0.4)
Interest (expense) income, net.......... (0.2) (0.3) 0.2 (0.2) (0.8)
Income (loss) before income taxes....... 4.2 4.3 8.4 (3.9) (1.2)
Provision (benefit) for income taxes.... 0.5 0.4 2.0 (1.6) (0.5)
Net income (loss)....................... 3.7 3.9 6.4 (2.3) (0.7)
Pro forma income before taxes........... -- 4.3 8.4 -- --
Pro forma income taxes.................. -- 1.7 3.1 -- --
Pro forma net income.................... -- 2.6 5.3 -- --
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SALES
Sales increased $1,783,000 or 6%, from $29,718,000 in 1995 to $31,501,000 in
1996. This net increase was the combination of a 1% sales decline for markets
opened prior to 1995 and a 75% increase for markets opened during 1995. There
were no new markets in 1996. Included in the 6% overall sales increase in 1996
was $868,000 of sales generated from the Company's 1996 Holiday Catalog. The
1996 Holiday Catalog sales increased 81% over 1995 Holiday Catalog sales of
$480,000. Sales increased $9,426,000 or 46%, from $20,292,000 in 1994 to
$29,718,000 in 1995. This increase was attributable to a 28% increase in sales
generated in markets opened prior to 1994 and sales in new markets, including
one new market in 1994 and five new markets in 1995.
The number of cases sold by the Company increased by 24,747, or 10%, to
278,247 in 1996 from 253,500 in 1995, and by 72,300, or 40%, from 181,200 in
1994. The average case price for cases sold by the Company decreased from
$113.04 in 1995 to $110.19 in 1996, a 2.5% decrease. This average price
decrease was primarily due to price variations in the product mix sold. The
product mix moved toward lower priced product and some discounted product to
reduce inventory in 1996. The average case price for cases sold by the Company
increased from $109.60 in 1994 to $113.04 in 1995, a 3% increase. This average
price increase was primarily due to price increases instituted in 1995 to
offset higher wine costs. The average number of cases purchased per year
increased from 2.64 in 1995 to 2.89 in 1996. This increase was attributable,
in part, to higher circulation of the house mailings which have higher average
orders than acquisition mailings and by the discontinuance of sales of 3-
bottle shipments in the fall of 1996. The average number of cases purchased
per customer decreased from 2.82 in 1994 to 2.64 in 1995. This decrease was
primarily due to the introduction of 3- and 6- bottle cases.
GROSS PROFIT
In 1996, gross profit increased $733,000, or 5%, from $13,580,000 in 1995 to
$14,313,000 in 1996, while decreasing as a percentage of sales from 45.7% in
1995 to 45.4% in 1996. This decrease in gross profit as a percentage of sales
resulted from higher wine costs and discounting of certain prices to reduce
inventory of certain products. Gross profit increased $4,067,000 or 43%, from
$9,512,000 in 1994 to $13,580,000 in 1995, while decreasing as a percentage of
sales from 46.9% in 1994 to 45.7% in 1995. This decrease in gross profit as a
percentage of sales resulted from higher imported wine costs due to
unfavorable foreign exchange rates and from higher domestic costs for wine.
Gross profit per case was $51.44 in 1996, a decrease of $2.13 per case from
the $53.57 in 1995. Gross profit per case increased 1% in 1995 from 1994 when
the gross profit per case was $53.00.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $263,000, or 2%,
from $14,690,000 in 1995 to $14,427,000 in 1996, while decreasing as a
percentage of sales from 49.4% in 1995 to 45.8% in 1996. The net decrease in
selling, general, and administrative expenses was primarily attributable to
the combination of a significant reduction in the number of acquisition
mailings and the increases in costs associated with additional personnel hired
to support marketing, operations and the Holiday Catalog. The Company also
incurred higher depreciation costs related to investments made in 1995 and
1996. Delivery expenses were reduced in 1996 by instituting less expensive
packaging and by introducing a shipping and handling charge of $3.95 for 3-,
6- and 12- bottle cases beginning in April 1996. Selling, general and
administrative costs increased as a percentage of sales in 1995 due to
substantial increases in operating expenses required to support a larger sales
base and new markets opened in 1995, together with lower than anticipated
sales in relation to marketing efforts in both new and existing markets.
Selling, general and administrative expenses increased $6,841,000, or 87%,
from $7,849,000 in 1994 to $14,690,000 in 1995, while increasing as a
percentage of sales from 38.7% in 1994 to 49.4% in 1995. This increase in
selling, general and administrative expenses resulted from increased prospect
mailings in new and existing markets, the hiring of additional personnel
needed to support a larger sales base and increased delivery costs related to
increased sales. Selling, general and administrative expenses increased as a
percentage of sales in 1995 as a result of adding five new facilities and
aggressive marketing through increased prospect mailing.
INTEREST INCOME (EXPENSE)
Net interest expense increased $220,000, or 695%, from net interest expense
of $37,000 in 1995 to net expense of $257,000 in 1996. This increase in net
interest expense was due to increased borrowings to support working capital
needs under the Company's line of credit throughout 1996. Net interest income
decreased $73,000 from income of $36,000 in 1994 to net expense of $37,000 in
1995. The increase in interest expense was primarily due to increased
borrowings under the Company's line of credit to support expansion in 1995
while in 1994 the Company had interest income from investing the proceeds of
the initial public offering ("IPO") that exceeded borrowing costs incurred
earlier in 1994 prior to the IPO.
PROVISION FOR INCOME TAXES
The Company was subject to corporate level income taxes for the entirety of
1995 and 1996 and approximately the second half of 1994. Prior to June 23,
1994, the Company was treated as an S corporation for federal and certain
state income tax purposes. Income taxes were benefited at approximately 41% in
1995 and 1996. Income taxes were provided, on a pro forma basis, at 37% in
1994. These tax rates are reflective of the Company's effective C corporation
income tax rates in each of these periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs continue to be funding the cost of
prospect mailings and purchases of inventory to support sales growth. As of
December 31, 1996, the Company had cash and cash equivalents totaling
$775,000. In addition, the Company has a credit facility with The First
National Bank of Boston ("Bank of Boston") 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 the Bank of Boston's base rate
(which approximates the prime rate) plus one-quarter percent, and is
collateralized by substantially all of the assets of the Company. As of
December 31, 1996, $939,000 was outstanding under the Line of Credit.
In 1996, the Company generated $2,432,000 in cash from operating activities
compared to using $6,572,000 in 1995. The increase in cash generated from
operations resulted primarily from a decrease in inventory of $3,674,000 and a
decrease in refundable income taxes of $784,000. Cash was used to reduce
accounts payable by $2,083,000 which resulted from reduced buying activity at
the end of 1996.
15
<PAGE>
At December 31, 1996 and December 31, 1995 the Company had working capital
of $8,045,000 and $8,694,000, respectively. Working capital decreased in 1996
from 1995 primarily due to the combination of a decrease of $3,674,000 in
inventory levels and $784,000 in refundable income taxes which was offset by a
decrease of $2,076,000 in the line of credit, a cash overdraft increase of
$472,000 and a decrease of $2,083,000 in accounts payable. The Company
believes that inventories were relatively high in 1996, and the Company has
been reducing inventories at all 13 facilities by curtailing inventory
purchasing in the fourth quarter 1996 except for purchases essential to
support specific promotions. The Company intends to continue to lower
inventory levels and expects to reach desired inventory levels in the second
quarter of 1997. The Company expects that once reduced, inventory levels will
fluctuate with seasonal demand and overall sales growth. As a result of the
alcoholic beverage regulatory scheme within which the Company operates, the
Company is required to maintain separate inventories in each of the markets in
which it operates a licensed facility and is not permitted to transfer
inventory between such facilities. As a result, the Company believes that its
overall inventory levels are necessarily higher than would be required if the
Company were not subject to such regulatory requirements.
During 1996, net cash of $875,000 was used in investing activities. The
Company used cash from operations and borrowings under its line of credit to
invest approximately $776,000 in property and equipment. These purchases
included approximately $351,000 in computer and telephone hardware and
software enhancements, including the installment of Renaissance Direct, and
$349,000 of leasehold improvements and furniture and fixtures purchases. The
Company also invested $44,000 for its website development and $32,000 in
warehouse racking and security systems. The Company has also begun leasing
delivery vans for operation in New Jersey and Massachusetts and sold certain
Company vehicles formerly used for delivery.
During 1996, total cash used for financing activities was $1,593,000 of
which $2,076,000 was used for repayments of line of credit borrowings.
The Company 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 needs and capital expenditure requirements for the
foreseeable future.
EXCHANGE RATES
The Company engages 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 maintains two
separate foreign exchange lines with the Bank of Boston and The Chase
Manhattan Bank, each of which allows the Company to enter into forward
currency exchange contracts of up to $500,000 maturing on any one day. As of
December 31, 1996, the Company had no foreign exchange contracts outstanding.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Federal Securities Laws. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain risk factors, including but not limited to those set forth below,
other one-time events and other important factors disclosed previously and
from time to time in the Company's other filings at the U.S. Securities and
Exchange Commission.
Regulation. The alcoholic beverage industry is subject to extensive
specialized regulation under state and federal laws and regulations, including
matters such as licensing; the payment of excise taxes; advertising, trade and
pricing practices; product labeling; sales to minors and intoxicated persons;
changes in officers, directors, ownership or control; and, relationships among
product producers, importers, wholesalers and retailers. While the Company
believes that it is in material compliance with all applicable laws and
regulations, in the event that it should be determined that the Company is not
in compliance with any applicable laws or regulations, the Company could
become subject to cease and desist orders, injunctive proceedings, civil
fines, license revocations and other penalties which could have a material
adverse effect on the Company's business and its results of
16
<PAGE>
operations. There can be no assurance that new or revised laws or regulations,
increased licensing fees, specialized taxes or other regulatory requirements
will not have a material adverse effect on the Company's business and its
results of operations. While to date the Company has been able to obtain and
retain licenses necessary to sell wine at retail, the failure to obtain
renewals or otherwise retain such licenses in one or more of the states in
which the Company operates would have a material adverse effect on the
Company's business and its results of operations. The Company's growth
strategy includes expansion of its business into additional states; however,
there can be no assurance that the Company will be successful in obtaining
licenses in any additional states. Geerlings & Wade offers its customers the
opportunity to purchase one and three year memberships. This membership
program has from time to time generated regulatory scrutiny, and there can be
no assurance that the Company will be able to continue its membership program
in its current form in existing markets or that markets in which the Company
may become licensed in the future will allow the sale of memberships, which
could have a materially adverse effect on the Company's business and its
results of operations.
Limited Operating History; Management of Growth. Geerlings & Wade has a
limited operating history upon which investors may evaluate its performance.
Although the Company was profitable from 1990 to 1994, in 1995 and 1996 the
Company was not profitable and there can be no assurance that it will operate
profitably in the future. In addition, the Company has only limited
management, operational and financial resources to accommodate continued
growth, should it occur. The Company's ability to manage growth effectively
will require it to continue to implement and improve its operational and
financial systems and to hire and train new employees. These demands are
expected to require additional management resources and the development of
additional expertise by existing management. The failure to manage growth
effectively would have a material adverse effect on the Company. There can be
no assurance that Geerlings & Wade will be able successfully to attract and
retain the skilled and experienced personnel required to manage its business.
Effectiveness and Cost of Mailings; Cost of Paper. The Company targets
potential new customers and solicits orders from existing customers through
direct mail marketing campaigns. Direct mail marketing campaigns are capital
intensive and the cost-effectiveness of such campaigns depends, to a large
extent, upon the accuracy of assumptions and judgments made by the Company.
There can be no assurance that such direct marketing campaigns will be
completed on a cost-effective basis. The failure of any such marketing
campaign to identify new customers or to generate new purchases from existing
customers on a cost-effective basis may have a material adverse effect on the
Company's business and its results of operations. Increases in the cost of
paper or printing could have a negative impact on the Company's business and
its results of operations to the extent that the Company is unable to pass on
such increases directly to customers. The Company relies on the services of
outside vendors to prepare and send its mailing in accordance with Company
specifications and schedules. The failure of such outside vendors to perform
such services according to Company specifications or to adhere to Company
mailing schedules may have a material adverse effect on the Company's business
and its results of operations.
Increases in Postage Rates; Dependence on Shippers. The Company's marketing
efforts have traditionally been conducted through direct mail campaigns. As a
result, increases in postage rates may have a material adverse effect on the
Company's business and its results of operations. Except in Massachusetts, New
Jersey and Colorado, the Company is dependent upon delivery services provided
by United Parcel Service ("UPS") or other licensed delivery companies. A work
stoppage, strike or other interruption in service experienced by UPS or the
other delivery companies may have a material adverse effect on the Company's
business and its results of operations.
Dependence on Wine Selection and Sourcing. To a large extent, the Company's
success depends upon its wine selection and sourcing capabilities. There can
be no assurance that the Company will be able to develop consistently a
selection of wines which will enable the Company to maintain or expand its
customer base. Most of the Company's wine is sourced by the Company, Mr. van
Hoof or the Company's primary domestic negotiant, Codera Wine Group, Inc.
(Negotiants are persons who serve as intermediaries or agents to purchasers in
the wine purchasing process.) The loss of services of either of these parties
could have a material adverse effect on the Company and its results of
operations. In the event that a wine proves to be unpopular for any reason, or
the
17
<PAGE>
Company orders an excessive quantity of one or more wines, the Company may
encounter liquidity problems under these circumstances which may have a
material adverse effect on the Company and its results of operations.
Dependence on Consumer Spending; Geographic Concentration of Customers. The
success of the Company's business depends upon a number of factors related to
the level of consumer spending, including the general state of the economy,
federal and state tax rates and consumer confidence. Changes in consumer
spending in both the national and regional economies can affect both the
quantity and the price of wines that consumers are willing to purchase.
Competition; Changes in Consumer Tastes. The Company competes with a broad
range of wine specialty stores, retail liquor stores, other direct mail wine
merchants and certain supermarket stores, many of which may have significantly
greater resources than the Company. Additionally, the Company's wines compete
with other alcoholic and non-alcoholic beverages. There can be no assurance
that the Company will be able to compete successfully with its current or
future competition. Although consumption of premium wines in the United States
has increased, there can be no assurance that changes in consumer preferences
or tastes will not have a material adverse effect on the Company's business
and its results of operations.
Health Issues. Since 1989, federal law has required health warning labels on
all alcoholic beverages. Although a number of research studies suggest that
health benefits may result from the moderate consumption of wine, these
suggestions have been widely challenged and a number of groups advocate
increased governmental action to restrict consumption of alcoholic beverages.
Restrictions on the sale and consumption of wine or increases in the taxes
imposed on wine in response to concerns regarding health issues may have a
material adverse effect on the Company's business and operating results. There
can be no assurance that there will not be legal or regulatory challenges to
the industry as a whole, and any such legal or regulatory challenge may have a
material adverse effect on the Company's business and its results of
operations.
Exchange Rates; Currency Fluctuations. The Company sources many of its wines
from certain European countries and Australia and makes payment for such
purchases in local currencies. The Company engages 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.
Changes in exchange rates or currency fluctuations that disfavor the U.S.
dollar could have a material adverse effect on the Company's business and its
results of operations.
Excise Taxes, Customs Duties and Tariffs. The federal government and various
states impose excise taxes, duties and tariffs on wine. Increases in the
federal excise tax on wine, such as the 500% increase which was imposed in
1991, or increases in state excise tax levels, may have a material adverse
effect on the Company's business and its results of operations. In 1996,
approximately 64% of the total cases of wine sold by the Company were
imported. Increases in duty or tariff levels may have a material adverse
effect on the Company's business and its results of operations.
Agricultural Conditions; Grape Supply. Wine making and grape growing are
subject to a variety of agricultural risks. Various diseases, pest, drought,
frosts and certain other weather conditions may have a material adverse effect
on the quality and quantity of grapes available to producers, thereby having a
material adverse effect on the cost of domestic or imported wines available to
the Company.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed on page 25 of this Report
and is contained on the pages following said page 25.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item is included under the
captions "Executive Officers of the Company", "Election of Directors--Nominee
for Election at the 1997 Annual Meeting," "Directors Whose Term Expire in
1998," "Director Whose Term Expires in 1999" and "Information Concerning the
Board and its Committees" in the Proxy Statement, and is incorporated herein
by reference.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 with the SEC. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish to the
Company copies of all Forms 3, 4 and 5 they file. Based solely on the
Company's review of the copies of such forms it has received and written
representations from certain reporting persons, the Company believes that,
except as specified below, all of its executive officers, directors and
greater than ten percent beneficial owners complied with all such filing
requirements applicable to them with respect to transactions during fiscal
1996.
Mr. Curvey's Form 5 was filed with the SEC 31 days late. Mr. Webb's Form 5
was filed with the SEC 27 days late. Mr. Shea's Form 5 was filed with the SEC
24 days late. The Form 4 on which Mr. Shea reported the purchase and sale of
shares of the Company's Common Stock indirectly held by Mr. Shea was filed
several months late. The Form 3 that reported Mr. Pearce's appointment as Vice
President and Chief Financial Officer and which reflected that he beneficially
owned no shares of Common Stock of the Company was filed several months late.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Election of Director--Summary Compensation Table," "Option Grants Under the
Stock Option Plan," "Information Concerning the Board and its Committees" and
"Employment Arrangement with Executive Officer" in the Proxy Statement, and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Ownership of Common Stock" of the Proxy Statement and is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions" of the Proxy Statement and is incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and financial statement schedules filed as part
of this Report are listed and indexed at Page F-1.
Listed below are all Exhibits filed as part of this Report. Certain Exhibits
are incorporated herein by reference to (i) the Company's Registration
Statement on Form S-1 originally filed on May 5, 1994 (File No. 33- 78624),
and (ii) documents previously filed by the Company with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- ----------
<C> <S> <C>
3.1 Form of Amended and Restated Articles or Organization
of the Company./1/
3.2 Amended and Restated By-laws of the Company./1/
4.1 Specimen Certificate of Common Stock./1/,/2/
4.2 Registration Rights Agreement by and among certain
Stockholders and the Company./1/
10.1 Lease Agreement between the Company and Naughton
Company dated April 11, 1994./1/
10.2 Lease Agreement between the Company and John Hancock
Mutual Life Insurance Company dated July 31, 1992./1/
10.3 California Public Warehouse Letter Agreement./1/
10.4 Form of Employment Agreement for Phillip D. Wade./1/
10.5 Form of Employment Agreement for Huib E.
Geerlings./1/
10.6 Consulting Agreement between the Company and Peter
van Hoof effective as of April 1, 1994./1/
10.7 $2,500,000 demand Discretionary Line of Credit dated
January 7, 1994, as amended by letter agreement dated
April 27, 1994, between The First National Bank of
Boston and the Company./1/
10.8 Promissory Note of the Company in favor of The First
National Bank of Boston dated January 7, 1994./1/
10.9 Security Agreement between the Company and The First
National Bank of Boston dated January 7, 1994./1/
10.10 Stock Option Plan, as amended.
10.11 Non-Employee Director Stock Option Plan./1/
10.12 Employee Stock Purchase Plan./1/
10.13 Lease Agreement between the Company and Pacific
Realty Associates, L.P. dated July 18, 1994./1/
10.14 Lease Agreement between the Company and Flint Lee
Limited Partnership dated August 31, 1994./4/
10.15 Lease Agreement between the Company and 47th Avenue
Industrial Properties dated October 6, 1994./4/
10.16 Lease Agreement between the Company and Mehland
Developers dated October 31, 1994./4/
10.17 Letter Agreement dated as of March 15, 1995 between
the Company and the First National Bank of Boston./4/
10.18 Lease agreement between the Company and Hohokam
Realty Condominiums dated October 31, 1994. /5/
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- ----------
<C> <S> <C>
10.19 Lease agreement between the Company and Bruce K. and
Gayle J. Hoyt dated November 23, 1994./6/
10.20 Master Agreement dated as of June 9, 1995 by and
between Geerlings and Wade, Inc. and Chemical Bank, a
New York banking corporation./6/
10.21 Lease Agreement between the Company and The Naughton
Company dated August 16, 1995./7/
10.22 Lease Agreement between the Company and Cole Taylor
Bank dated August 23, 1995./7/
10.23 $ 5,000,000 demand Discretionary Line of Credit dated
January 7, 1994, as amended by letter agreement dated
October 13, 1995, between The First National Bank of
Boston and the Company./7/
10.24 Lease Agreement between the Company and Debra
Campbell dated July 15, 1996./8/
10.25 Lease Agreement between the Company and Simon
Champagne dated July 24, 1996./8/
10.26 Employment letter agreement between the Company and
Jay L. Essa dated September 9, 1996./8/
10.27 Lease Agreement between the Company and Enviro-zyme
International, Incorporated dated January 6, 1997.
10.28 Lease Agreement between the Company and William Eddy
dated January 24, 1997.
10.29 Employment letter agreement between the Company and
David R. Pearce dated November 8, 1996.
23 Consent of Arthur Andersen LLP.
</TABLE>
- --------
/1/ Filed as an Exhibit to the Company's Registration Statement on Form S-1
filed on May 5, 1994 (File No. 33-78624) and incorporated by reference
herein.
/2/ Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on June 9, 1994 (File No. 33-78624) and
incorporated by reference herein.
/3/ Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
ended July 1, 1994 filed on August 15, 1994 (File No. 0-24048) and
incorporated by reference herein.
/4/ Filed as an Exhibit to the Company's Form 10-K for the year ended December
31, 1994 (File No. 0-24048) and incorporated by reference herein.
/5/ Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995 (File No. 0-24048) and
incorporated by reference herein.
/6/ Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended June 30, 1995 filed on August 14, 1995 (File No. 0-24048) and
incorporated by reference herein.
/7/ Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1995 filed on March 29, 1996 (File No. 0-24048) and
incorporated by reference herein.
/8/ Filed as an exhibit to the Company's Form 10-Q for the quarterly period
ended September 28, 1996 filed on November 12, 1996 (File No. 0-24048) and
incorporated by reference herein.
(b) No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
/s/ Jay L. Essa
_____________________________________
Jay L. Essa
President and Chief Executive
Officer
Date: March 28, 1997
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ Huib E. Geerlings Chairman of the March 28, 1997
- ------------------------------------- Board and Director
HUIB E. GEERLINGS
/s/ Jay L. Essa President and Chief March 28, 1997
- ------------------------------------- Executive Officer
JAY L. ESSA (Principal
Executive Officer)
/s/ David R. Pearce Vice President, March 28, 1997
- ------------------------------------- Chief Financial
DAVID R. PEARCE Officer, and
Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Phillip D. Wade Director March 28, 1997
- -------------------------------------
PHILLIP D. WADE
/s/ James C. Curvey Director March 28, 1997
- -------------------------------------
JAMES C. CURVEY
/s/ William J. Shea Director March 28, 1997
- -------------------------------------
WILLIAM J. SHEA
/s/ Robert Webb Director March 28, 1997
- -------------------------------------
ROBERT WEBB
23
<PAGE>
GEERLINGS & WADE, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
24
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. 26
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995.......................... 27
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996....................................................... 28
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996.......................................... 29
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996....................................................... 30
NOTES TO FINANCIAL STATEMENTS............................................ 31
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geerlings & Wade, Inc.:
We have audited the accompanying balance sheets of Geerlings & Wade, Inc. (a
Massachusetts corporation) as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Geerlings & Wade, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 31, 1997
26
<PAGE>
GEERLINGS & WADE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
ASSETS 1995 1996
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 809,828 $ 774,514
Accounts receivable................................ 61,970 307,409
Inventory.......................................... 12,033,565 8,359,765
Prepaid mailing costs.............................. 800,088 813,208
Prepaid expenses................................... 407,848 312,158
Refundable income taxes............................ 798,634 14,241
Deferred income taxes.............................. 348,000 500,000
----------- -----------
Total current assets........................... 15,259,933 11,081,295
----------- -----------
Property and Equipment, at Cost:
Office and computer equipment...................... 1,361,325 1,988,855
Motor vehicles..................................... 340,545 177,056
Furniture and fixtures............................. 217,458 365,749
----------- -----------
1,919,328 2,531,660
Less--Accumulated depreciation..................... 598,944 910,112
----------- -----------
1,320,384 1,621,548
----------- -----------
Other Assets......................................... 136,234 249,425
----------- -----------
$16,716,551 $12,952,268
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Cash overdraft..................................... $ -- $ 472,469
Line of credit..................................... 3,015,412 939,019
Accounts payable................................... 2,724,862 641,944
Current portion of deferred revenue................ 415,114 542,305
Accrued sales, income and payroll taxes............ 349,883 241,345
Accrued expenses................................... 60,665 198,803
----------- -----------
Total current liabilities...................... 6,565,936 3,035,885
----------- -----------
Deferred Revenue, Less Current Portion............... 417,637 390,868
----------- -----------
Commitments (Note 4)
Stockholders' Equity:
Preferred stock, $.01 par value-
Authorized--1,000,000 shares Outstanding--none... -- --
Common stock, $.01 par value- 37,752 37,774
Authorized--10,000,000 shares Issued and
outstanding--3,775,243 shares and 3,777,525
shares in 1995 and 1996, respectively...........
Additional paid-in capital......................... 9,705,327 9,716,256
Accumulated deficit................................ (10,101) (228,515)
----------- -----------
Total stockholders' equity..................... 9,732,978 9,525,515
----------- -----------
$16,716,551 $12,952,268
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................... $20,292,426 $29,717,901 $31,501,236
Cost of Sales........................... 10,780,369 16,138,372 17,187,877
----------- ----------- -----------
Gross profit........................ 9,512,057 13,579,529 14,313,359
Selling, General and Administrative
Expenses............................... 7,848,687 14,690,116 14,426,514
----------- ----------- -----------
Income (loss) from operations....... 1,663,370 (1,110,587) (113,155)
Interest Income......................... 131,149 67,273 --
Interest Expense........................ (95,344) (103,831) (257,259)
----------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes......... 1,699,175 (1,147,145) (370,414)
Provision (Benefit) for Income Taxes.... 403,000 (470,000) (152,000)
----------- ----------- -----------
Net income (loss)................... $ 1,296,175 $ (677,145) $ (218,414)
=========== =========== ===========
Pro Forma Earnings Data (Unaudited)
(Notes 2 and 6):
Income before taxes................... $ 1,699,175
Income taxes.......................... 636,000
-----------
Net income.......................... $ 1,063,175
===========
Net income (loss) per share......... $ 0.34 $ (0.18) $ (0.06)
=========== =========== ===========
Weighted Average Shares Outstanding
(Note 2)............................... 3,156,134 3,754,891 3,776,376
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL RETAINED TOTAL
NUMBER OF $.01 PAID-IN EARNINGS STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY
--------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 2,112,004 $ 21,120 $ 253,880 $ 270,996 $ 545,996
Exercise of common
stock purchase
warrants............. 287,996 2,880 445,310 -- 448,190
Proceeds from initial
public offering, less
offering expenses.... 1,325,000 13,250 9,026,142 -- 9,039,392
Net income............ -- -- -- 1,296,175 1,296,175
Distributions of
accumulated S
corporation earnings
to stockholders...... -- -- (369,144) (900,127) (1,269,271)
--------- -------- ----------- ---------- -----------
Balance, December 31,
1994................... 3,725,000 37,250 9,356,188 667,044 10,060,482
Exercise of common
stock options........ 50,243 502 349,139 -- 349,641
Net loss.............. -- -- -- (677,145) (677,145)
--------- -------- ----------- ---------- -----------
Balance, December 31,
1995................... 3,775,243 37,752 9,705,327 (10,101) 9,732,978
Issuance of stock
under employee stock
purchase plan........ 2,282 22 10,929 -- 10,951
Net loss.............. -- -- -- (218,414) (218,414)
--------- -------- ----------- ---------- -----------
Balance, December 31,
1996................... 3,777,525 $ 37,774 $ 9,716,256 $ (228,515) $ 9,525,515
========= ======== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)..................... $ 1,296,175 $ (677,145) $ (218,414)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities-
Depreciation and amortization........ 179,881 463,341 570,605
Deferred income taxes................ (100,000) (248,000) (152,000)
Gain on disposal of fixed asset...... -- -- (16,102)
Changes in current assets and
liabilities-
Accounts receivable................. (38,099) 1,098 (245,439)
Inventory........................... (2,510,459) (6,251,498) 3,673,800
Prepaid mailing costs............... (482,679) 74,726 (13,120)
Prepaid expenses.................... (506,313) 284,030 1,298
Refundable income taxes............. -- (717,791) 784,393
Accrued expenses.................... -- 60,665 138,138
Accounts payable.................... 760,202 (63,750) (2,082,918)
Accounts payable to a related
party.............................. (565,093) -- --
Deferred revenue.................... 24,372 439,525 100,422
Accrued sales, income and payroll
taxes.............................. 55,035 62,597 (108,538)
----------- ----------- ------------
Net cash (used in) provided by
operating activities.............. (1,886,978) (6,572,202) 2,432,125
----------- ----------- ------------
Cash Flows From Investing Activities:
Purchases of property and equipment,
net.................................. (508,106) (1,015,150) (775,820)
Proceeds from sale of property and
equipment............................ -- 17,956 30,893
Increase in other assets.............. (14,818) (121,191) (129,539)
----------- ----------- ------------
Net cash used in investing
activities........................ (522,924) (1,118,385) (874,466)
----------- ----------- ------------
Cash Flows From Financing Activities:
Bank overdraft........................ -- -- 472,469
Borrowings under line of credit....... 8,145,455 6,378,412 8,960,890
Repayments under line of credit....... (8,145,455) (3,363,000) (11,037,283)
Proceeds from initial public offering,
net.................................. 9,039,392 -- --
Decrease in deferred financing costs.. 114,688 2,606 --
Payments on long-term debt............ (534,079) -- --
Proceeds from long-term debt.......... 17,797 -- --
Distributions to stockholders......... (1,269,271) -- --
Due to stockholder.................... (60,962) -- --
Proceeds from issuance of shares under
the Employee Stock Purchase Plan..... -- 349,641 10,951
----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. 7,307,565 3,367,659 (1,592,973)
----------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 4,897,663 (4,322,928) (35,314)
Cash and Cash Equivalents, Beginning of
Year.................................. 235,093 5,132,756 809,828
----------- ----------- ------------
Cash and Cash Equivalents, End of
Year.................................. $ 5,132,756 $ 809,828 $ 774,514
=========== =========== ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for-
Interest............................. $ 68,058 $ 63,451 $ 275,107
=========== =========== ============
Income taxes......................... $ 482,021 $ 535,691 $ --
=========== =========== ============
Supplemental Disclosure of Noncash
Financing Activities:
Conversion of common stock warrants
under subordinated debt into 287,996
shares of common stock............... $ 448,190 $ -- $ --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1)OPERATIONS
Geerlings & Wade, Inc. (the Company) is a direct marketer of premium wines
and wine-related merchandise to retail consumers. The Company maintains
licensed facilities in 13 states. Federal, state and local laws strictly
govern the sale of wine in each market served by the Company.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies and use of management's estimates described in this
note and elsewhere in the accompanying notes to financial statements.
(a)Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b)Revenue Recognition
Revenue from merchandise sales is recognized at the time of shipment to
the customer. The Company currently offers one- and three-year
membership programs to customers, which provide them with certain
preferred customer privileges. Revenue derived from memberships is
recognized over the related membership period. Sales returns, which are
not material, are recorded in the period of return.
(c)Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
(d)Credit Card Policy
The Company's agreement with a credit card processing company provides
for the electronic processing of credit approvals and electronic
submission of transactions. Payment is transmitted to the Company's
bank account within two to four days of the order transaction. Credit
card processing fees amounted to approximately $346,000, $586,000 and
$634,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and are included in selling, general and administrative
expenses in the accompanying statements of operations.
(e)Inventory
The Company values inventory at the lower of cost (first-in, first-out)
or net realizable market value (estimated proceeds upon sale, net of
fulfillment expenses).
31
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
During 1996, the Company purchased approximately $3,544,000 of
inventory through wholesale channels with a single supplier. Total or
partial loss of the business relationship with this supplier could
result in a temporary near-term disruption of the Company's ability to
source domestically produced wine product. Management believes that
alternative sources of supply are readily available to mitigate the
Company's potential loss exposure.
Included in the Company's inventory are approximately $1,900,000 and
$660,000 of paid reservations of certain vintage wines as of December
31, 1995 and 1996, respectively. In its efforts to reduce the levels of
such inventory, the Company sold approximately $532,000 of such
reserves to its customers during 1996. The Company bears the ultimate
liability for the wine reservations sold until delivered and acceptance
by the customers.
(f)Depreciation
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of the assets
over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Office and computer equipment.................................. 3-5 Years
Motor vehicles................................................. 3 Years
Furniture and fixtures......................................... 5 Years
</TABLE>
(g)Preopening Costs
The Company capitalizes certain direct costs incurred prior to opening
new licensed facilities and amortizes these costs on a straight-line
basis over a one-year period. Costs of acquiring liquor licenses are
amortized on a straight-line basis over five years.
(h)Prepaid Mailing Costs
Costs of direct advertising materials mailed to prospective customers
are capitalized. These costs are expensed as advertising costs in
relation to the revenues that are derived from the mailings for up to
five months. Revenue estimates are used to determine the cost recovery
period of prepaid mailing costs.
At December 31, 1995 and 1996, approximately $583,000 and $625,000,
respectively, of these advertising costs were reported as a component
of prepaid mailing costs in the accompanying balance sheets.
Advertising expense related to prospective customers included in the
accompanying statement of operations was $2,460,174, $4,207,110 and
$2,436,849 in 1994, 1995 and 1996, respectively.
(i)Deferred Revenue
Deferred revenue of $832,751 and $933,173 as of December 31, 1995 and
1996, respectively, represents customer prepayments and deferred
membership revenues. Of these amounts, $269,894 and $281,436, as of
December 31, 1995 and 1996, respectively, represent customer
prepayments, and $562,857 and $629,157, as of December 31, 1995 and
1996, respectively, represent deferred membership revenues.
(j)Foreign Currency Transactions
Periodically, the Company may enter into foreign exchange contracts to
hedge currency exposure on firm inventory purchase commitments. The
Company charges foreign currency gains or losses to operations in
accordance with Statement of Financial Accounting Standards (SFAS) No.
52, Foreign Currency Translation. Gains and losses are included in cost
of sales, as these amounts have historically not been material. At
December 31, 1996, the Company did not have any foreign exchange
contracts outstanding.
32
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(k)Pro Forma Earnings Data
The Company has presented earnings per share information on a pro forma
basis for 1994 to reflect what earnings per share would have been if
the Company had been taxed as a C corporation for the entirety of 1994
(see Note 6).
Pro forma earnings per share is computed by dividing pro forma net
income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. Common stock
equivalents consist of common stock issuable on the exercise of
outstanding options and warrants and are included when the effect is
dilutive. They have not been included in 1995 and 1996 due to the net
loss, as the effect would be antidilutive. In accordance with
Securities and Exchange Commission requirements, all common stock and
common stock equivalents issued during the 12 months preceding the
Company's Initial Public Offering (IPO) have been included in the net
income per share computation as if they were outstanding for all
periods preceding the effective date of the Company's IPO using the
treasury stock method.
On March 3, 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings per Share. SFAS No. 128 establishes
standards for computing and presenting earnings per share and applies
to entities with publicly held common stock or potential common stock.
This statement is effective for fiscal years ending after December 15,
1997, and early adoption is not permitted. When adopted, the statement
will require restatement of prior years' earnings per share. The
Company will adopt this statement for its fiscal year ended December
31, 1997. In addition, the Company believes that the adoption of SFAS
No. 128 will not have a material effect on its financial statements.
(l)Fiscal Year
The Company's fiscal year ends on December 31. For interim reporting
purposes, the Company closes its books on the Saturday of the
thirteenth week of each interim fiscal quarter.
(m)Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of
During March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets To Be
Disposed Of, which is effective for fiscal years beginning after
December 31, 1995. The adoption of this standard did not have a
material effect on the Company's financial position or results of
operations.
(n)Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments.
Financial instruments consist of cash and cash equivalents, accounts
receivable, investment in wine futures and notes payable. The estimated
fair value of these financial instruments approximates their carrying
value.
(o)Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments
with Off-Balance- Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations. Financial instruments
that potentially subject the Company to concentrations of credit risk
are principally cash equivalents. The Company places its cash
equivalents in highly rated financial institutions.
(p)Reclassifications
Certain amounts in prior year's financial statements have been
reclassified to conform with the current year's presentation.
33
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(3)LINE OF CREDIT
The Company has a demand credit line with a bank that allows the Company to
borrow the lesser of $5,000,000 or 50% of certain inventories, as defined.
The line of credit bears interest at the bank's base rate (8.25% at
December 31, 1996) plus 1/4%. No commitment fees apply to the unutilized
portion of the credit line. The line of credit is subject to periodic
reviews by the bank. Borrowings under the line are collateralized by all
assets of the Company. At December 31, 1996, $939,019 was outstanding under
this line-of-credit agreement.
The Company issued a standby letter of credit in the original amount of
$240,000 as security on its Massachusetts lease. The letter of credit is
reduced ratably over 36 months and expires on August 2, 1998.
The Company maintains separate foreign exchange facilities with two banks,
each of which allows the Company to enter into forward exchange contracts
of up to $500,000, maturing on any one day, for the hedging of future
foreign currency needs. At December 31, 1996, there were no outstanding
forward exchange contracts.
(4)COMMITMENTS
The Company leases facilities under operating lease agreements expiring
through January 2001. Future minimum rental payments due under these
agreements as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -----------
<S> <C>
1997........................................................... $ 884,172
1998........................................................... 660,528
1999........................................................... 635,530
2000........................................................... 473,838
2001........................................................... 82,116
-----------
$ 2,736,184
===========
</TABLE>
Total rental expense under these agreements included in the accompanying
statements of operations is approximately $242,000, $509,000 and $799,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
(5)RELATED PARTIES
For the year ended December 31, 1994, the Company purchased approximately
$2,336,000 of goods through a wholesaler, of which a former key employee-
stockholder held an indirect beneficial interest. Management believes these
purchases were made at terms no less favorable than could have been
obtained from nonrelated parties. No purchases were made from this
wholesaler during 1995 and 1996.
(6)INCOME TAXES
The Company was an S corporation for income tax reporting purposes through
June 22, 1994, the day prior to the closing date of the IPO. As an S
corporation, federal and certain state income tax consequences of the
Company were passed through to the individual stockholders and dividend
distributions were made to the stockholders for payment of their individual
taxes.
34
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Pro forma income taxes, assuming the Company was subject to C corporation
income taxes for the entirety of 1994, are as follows:
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Federal........................................................... $534,000
State taxes, net of federal benefit............................... 102,000
--------
$636,000
========
</TABLE>
Income taxes, including pro forma computations, are provided for in
accordance with SFAS No. 109, Accounting for Income Taxes. Accordingly, a
deferred tax asset or liability is recorded based on the differences
between the financial reporting and tax bases of assets and liabilities, as
measured by the enacted tax rates expected to be in effect when these
differences reverse. The deferred tax provision (benefit) results from the
net change during the year of deferred tax assets and liabilities.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Current-
Federal............................... $ 351,000 $ (222,000) $ --
State................................. 152,000 -- -
--------- ---------- ----------
503,000 (222,000) --
--------- ---------- ----------
Deferred-
Federal............................... (78,000) (212,000) (119,000)
State................................. (22,000) (36,000) (33,000)
--------- ---------- ----------
(100,000) (248,000) (152,000)
--------- ---------- ----------
$ 403,000 $ (470,000) $ (152,000)
========= ========== ==========
</TABLE>
The reconciliation of the federal statutory rate to the pro forma provision
for the year ended December 31, 1994 and reconciliation of federal
statutory rate to the effective tax rate for the years ended December 31,
1995 and 1996 for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate.................................................. 34% (34)% (34)%
State taxes, net of federal benefit.................... 6 (5) (6)
Tax-exempt municipal bond interest..................... (2) (3) -
Other, net............................................. (1) 1 (1)
--- ---- ----
37% (41)% (41)%
=== ==== ====
</TABLE>
35
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Deferred income taxes relate to the following temporary differences as of
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net operating loss carryforward...................... $ 271,000 $ 327,000
Deferred revenue..................................... 278,000 299,000
Nondeductible reserves............................... 138,000 194,000
Depreciation and amortization........................ (68,000) (49,000)
Valuation allowance.................................. (271,000) (271,000)
--------- ---------
Total deferred taxes............................. $ 348,000 $ 500,000
========= =========
</TABLE>
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $797,000. These net operating loss
carryforwards may by used to reduce future taxable income, if any. These
carryforwards expire through 2011 and are subject to review and possible
adjustment by the appropriate taxing authorities.
Due to the uncertainty of the realization of certain of these potential tax
benefits, the Company has recorded a valuation allowance against a portion
of its deferred tax assets.
(7)STOCKHOLDERS' EQUITY
(a)S Corporation Distribution
In connection with the termination of the Company's S corporation tax
status on June 22, 1994, the Company made a final distribution of all
accumulated S corporation taxable earnings. On the date of such
distribution, taxable earnings were $369,144 in excess of S corporation
retained earnings.
(b)Preferred Stock
On April 8, 1994, the Board of Directors and stockholders voted to
amend the Company's Articles and By-laws to permit the issuance of up
to 1,000,000 shares of $.01 par value preferred stock upon the
effective date of the IPO. The Board of Directors has full authority to
issue this stock and to fix the voting powers, preferences, rights,
qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, redemption privileges and liquidation
preferences and the number of shares constituting any series or
designation of such series. With regard to dividends, redemption
privileges and liquidation preferences, any particular series of
preferred stock may rank junior to, on parity with, or senior to any
other series of preferred stock or the common stock.
(c)Stock Option Plans
The Employee Stock Option Plan (Option Plan), which was adopted on June
24, 1993, subsequently amended on February 28, 1994 and April 8, 1994,
provides for the granting of options to employees, consultants and
advisers of the Company. The exercise price of each option is
determined by the Board of Directors, but in the case of incentive
stock options, as defined in the Internal Revenue Code, shall be no
less than 100% of the fair market value of the common stock on the date
of grant. Options are exercisable within 10 years of the original date
of grant. A total of 300,000 shares of common stock has been reserved
for options to be granted under the Option Plan.
The Nonemployee Directors' Stock Option Plan (Director Plan) was
adopted by the Board of Directors and the stockholders on April 8, 1994
to provide for the granting of nonqualified options to Directors of the
Company. The options under the Director Plan are granted at fair market
value on the date of grant. Such options are subject to vesting over
three years and carry a 10-year term. A total of 50,000 shares of
common stock have been reserved for options to be granted under the
Director Plan.
36
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Activity under the Option Plan and Director Plan is summarized as
follows:
<TABLE>
<CAPTION>
OPTION PLAN DIRECTOR PLAN
--------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE PRICE EXERCISE PRICE NUMBER AVERAGE PRICE EXERCISE PRICE
OF SHARES PER SHARE PER SHARE OF SHARES PER SHARE PER SHARE
--------- ------------- -------------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1994...... 99,495 $ 8.07 $ 1.88-$ 13.25 7,500 $ 8.00 $ 8.00
-------- ------ -------------- ------ ------- --------------
Granted............... 95,975 12.90 6.50-16.00 7,500 14.25 14.25
Terminated............ (48,138) 11.78 8.48-13.00 -- -- --
Exercised............. (50,243) 5.71 1.88-8.48 -- -- --
-------- ------ -------------- ------ ------- --------------
Outstanding,
December 31, 1995...... 97,089 12.20 8.48-16.00 15,000 -- 8.00-15.25
-------- ------ -------------- ------ ------- --------------
Granted............... 255,953 5.37 3.63-8.00 7,500 4.50 4.50
Terminated............ (117,923) 11.24 4.13-16.00 -- -- --
Exercised............. -- -- -- -- -- --
-------- ------ -------------- ------ ------- --------------
Outstanding,
December 31, 1996...... 235,119 $ 5.26 $ 3.63-$ 8.00 22,500 $ 8.92 $ 4.50-$ 15.25
======== ====== ============== ====== ======= ==============
Exercisable,
December 31, 1996...... 60,734 $ 6.53 $ 3.78-$ 8.00 7,500 $ 10.42 $ 8.00-$ 15.25
======== ====== ============== ====== ======= ==============
</TABLE>
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-
Based Compensation, which requires the measurement of the fair value of
stock options or warrants to be included in the statement of operations
or disclosed in the notes to the financial statements. The Company has
determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123.
Options granted in 1995 and 1996 have been valued using the Black-
Scholes option pricing model prescribed by SFAS No. 123. The weighted
average assumptions used for the years ended December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 6.5% 6.5%
Expected dividend yield.................................... -- --
Expected lives............................................. 5 Years 5 Years
Expected volatility........................................ 68% 68%
</TABLE>
The weighted average grant date fair value of options granted during
the years ended December 31, 1995 and 1996 under these plans is $4.17
and $2.51, respectively. As of December 31, 1995 and 1996, the weighted
average remaining contractual life of outstanding options under these
plans is 9.16 and 9.44 years, respectively.
Had compensation cost for the Company's stock option plans and Employee
Stock Purchase Plan been determined consistent with SFAS No. 123, the
Company's net loss and net loss per share would have been the following
pro forma amounts:
37
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net loss-
As reported........................................ $ (677,145) $ (218,414)
Pro forma.......................................... (680,065) (325,799)
Net loss per share-
As reported........................................ $ (0.18) $ (0.06)
Pro forma.......................................... (0.18) (0.09)
</TABLE>
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions, including
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its stock options.
(d)Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Board of Directors and the stockholders on April 8, 1994 to allow
eligible employees, as defined in the Purchase Plan, to purchase shares
of common stock during one or more six-month periods through payroll
deductions. A total of 50,000 shares of common stock have been reserved
for purchase under the Purchase Plan. As of December 31, 1996, 2,282
shares of common stock have been purchased by employees under the
Purchase Plan.
(8)EMPLOYEE SAVINGS PLAN
On January 31, 1996, the Board of Directors of the Company voted to approve
the adoption of the Geerlings & Wade, Inc. 401(k) Employee Savings Plan
(the Plan), effective March 1, 1996. The Plan has features that provide for
tax-deferred employee benefits under section 401(k) of the Internal Revenue
Code. Employees of the Company may participate in the Plan after one year
of service. The Company matches 50% of individual contributions, up to 6%
of base salary, as defined. Employee contributions vest immediately, while
Company matching contributions fully vest after five years of service, as
defined. For the fiscal year ended December 31, 1996, the Company's
contribution expense was $7,808 under the Plan.
38
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS REPORT
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE NO.
----------- -------------------------------------------- -------------------
<C> <S> <C>
10.10 Amendment to Stock Option Plan..............
10.27 Lease Agreement between the Company and
Enviro-zyme International, Incorporated
dated January 6, 1997.......................
10.28 Lease Agreement between the Company and
William Eddy dated January 24, 1997.........
10.29 Employment letter agreement between the
Company and David R. Pearce dated November
8, 1996.....................................
23 Consent of Arthur Andersen LLP..............
27 Financial Data Schedule.....................
</TABLE>
39
<PAGE>
As Amended November 1, 1994
and January 9, 1995,
and approved by the Stockholders
of the Company on May 18, 1995
Exhibit 10.10
GEERLINGS & WADE, INC.
STOCK OPTION PLAN
1. PURPOSE
-------
The purpose of this Stock Option Plan (the "Plan") is to advance the
interests of Geerlings & Wade, Inc. (the "Company") by enhancing the ability of
the Company, and its parent and subsidiaries (if any) to attract and retain able
employees, consultants or advisers to the Company; to reward such individuals
for their contributions; and to encourage such individuals to take into account
the long-term interests of the Company through interests in shares of the
Company's common stock, $.01 par value (the "Stock"). Any employee, consultant,
or adviser selected to receive an award under the Plan is referred to as a
"participant".
Options granted pursuant to the Plan may be incentive stock options as
defined in section 422 of the Internal Revenue Code of 1986 (as from time to
time amended, the "Code") (any option that is intended so to qualify as an
incentive stock option being referred to herein as an "incentive option"), or
options that are not incentive options, or both. Except as otherwise expressly
provided with respect to an option grant, no option granted pursuant to the Plan
shall be an incentive option.
2. ADMINISTRATION
--------------
The Plan shall be administered by the Board of Directors (the "Board")
of the Company. The Board shall have discretionary authority, not inconsistent
with the express provisions of the Plan, (a) to grant option awards to such
eligible persons as the Board may select; (b) to determine the time or times
when awards shall be granted and the number of shares of Stock subject to each
award; (c) to determine which options are, and which options are not, intended
to be incentive options; (d) to determine the terms and conditions of each
award; (e) to prescribe the form or forms of any instruments evidencing awards
and any other instruments required under the Plan and to change such forms from
time to time; (f) to adopt, amend, and rescind rules and
<PAGE>
regulations for the administration of the Plan; and (g) to interpret the Plan
and to decide any questions and settle all controversies and disputes that may
arise in connection with the Plan. Such determinations of the Board shall be
conclusive and shall bind all parties. Subject to Section 9 the Board shall
also have the authority, both generally and in particular instances, to waive
compliance by a participant with any obligation to be performed by him or her
under an award, to waive any condition or provision of an award, and to amend or
cancel any award (and if an award is cancelled, to grant a new award on such
terms as the Board shall specify) except that the Board may not take any action
with respect to an outstanding award that would adversely affect the rights of
the participant under such award without such participant's consent. Nothing in
the preceding sentence shall be construed as limiting the power of the Board to
make adjustments required by Section 4(c) and Section 6(g).
The Board may, in its discretion, delegate some or all of its powers
with respect to the Plan to a committee (the "Committee"), in which event all
references (as appropriate) to the Board hereunder shall be deemed to refer to
the Committee. The Committee, if one is appointed, shall consist of at least
two directors. A majority of the members of the Committee shall constitute a
quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination of the Committee under the Plan may be made
without notice or meeting of the Committee by a writing signed by a majority of
the Committee members. On and after registration of the Stock under the
Securities Exchange Act of 1934 (the "1934 Act"), the Board shall delegate the
power to select directors and officers to receive awards under the Plan and the
timing, pricing, and amount of such awards to a Committee, all members of which
shall be disinterested persons within the meaning of Rule 16b-3 under the 1934
Act and "outside directors" within the meaning of section 162(m)(4)(c)(i) of the
Code.
3. EFFECTIVE DATE AND TERM OF PLAN
-------------------------------
The Plan shall become effective on the date on which it is approved by
the shareholders of the Company. Grants of awards under the Plan may be made
prior to that date (but after Board adoption of the Plan), subject to approval
of the Plan by the shareholders.
No awards shall be granted under the Plan after the completion of ten
years from the date on which the Plan was adopted by the Board, but awards
previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
--------------------------
(a) Number of Shares. Subject to adjustment as provided in Section
----------------
4(c), the aggregate number of shares of Stock that may be the subject of awards
granted under the Plan shall be 300,000. If any award granted under the Plan
terminates without having been exercised in full, or upon exercise is satisfied
other than by delivery of Stock, the number of shares of Stock as to
-2-
<PAGE>
which such award was not exercised shall be available for future grants. No
employee shall be entitled to grants of options in excess of 100,000 shares,
subject to adjustment in accordance with Section 4(c).
(b) Shares to be Delivered. Shares delivered under the Plan shall be
----------------------
authorized but unissued Stock, or if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in its
treasury. No fractional shares of Stock shall be delivered under the Plan.
(c) Changes in Stock. In the event of a stock dividend, stock split
----------------
or combination of shares, recapitalization, or other change in the Company's
capital stock, the number and kind of shares of stock or securities of the
Company subject to awards then outstanding or subsequently granted under the
Plan, the exercise price of such awards, the maximum number of shares or
securities that may be delivered under the Plan, and other relevant provisions
shall be appropriately adjusted by the Board, whose determination shall be
binding on all persons.
The Board may also adjust the number of shares subject to outstanding
awards, the exercise price of outstanding awards, and the terms of outstanding
awards, to take into consideration material changes in accounting practices or
principles, extraordinary dividends, consolidations or mergers (except those
described in Section 6(g)), acquisitions or dispositions of stock or property,
or any other event if it is determined by the Board that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such adjustment shall be made in the case of an incentive option, without the
consent of the participant, if it would constitute a modification, extension, or
renewal of the option within the meaning of section 424(h) of the Code.
5. AWARDS; ETC.
------------
Persons eligible to receive awards under the Plan shall be those
persons who, in the opinion of the Board, are in a position to make a
significant contribution to the success of the Company and its subsidiaries. A
subsidiary for purposes of the Plan shall be a corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock.
Incentive options shall be granted only to "employees" as defined in
the provisions of the Code or regulations thereunder applicable to incentive
stock options.
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
(a) Exercise Price of Options. The exercise price of each option
-------------------------
shall be determined by the Board but in the case of an incentive option shall
not be less than 100% (110%, in the case of
-3-
<PAGE>
an incentive option granted to a ten-percent shareholder) of the fair market
value of the Stock at the time the option is granted; nor shall the exercise
price be less, in the case of an original issue of authorized stock, than par
value. For this purpose, "fair market value" in the case of incentive options
shall have the same meaning as it does in the provisions of the Code and the
regulations thereunder applicable to incentive options; and "ten-percent
shareholder" shall mean any participant who at the time of grant owns directly,
or by reason of the attribution rules set forth in section 424(d) of the Code is
deemed to own, stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or of any of its parent or subsidiary
corporations.
(b) Duration of Options. An option shall be exercisable during such
-------------------
period or periods as the Board may specify. The latest date on which an option
may be exercised (the "Expiration Date") shall be the date which is ten years
(five years, in the case of an incentive option granted to a "ten-percent
shareholder" as defined in (a) above) from the date the option was granted or
such earlier date as may be specified by the Board at the time the option is
granted.
(c) Exercise of Options.
-------------------
(1) An option shall become exercisable at such time or times and upon
such conditions as the Board shall specify. In the case of an option
not immediately exercisable in full, the Board may at any time
accelerate the time at which all or any part of the option may be
exercised.
(2) Any exercise of an option shall be in writing, signed by the proper
person and furnished to the Company, accompanied by (i) such
documents as may be required by the Board and (ii) payment in full as
specified below in Section 6(d) for the number of shares for which
the option is exercised.
(3) The Board shall have the right to require that the participant
exercising the option remit to the Company an amount sufficient to
satisfy any federal, state, or local withholding tax requirements (or
make other arrangements satisfactory to the Company with regard to
such taxes) prior to the delivery of any Stock pursuant to the
exercise of the option. If permitted by the Board, either at the time
of the grant of the option or in connection with exercise, the
participant may elect, at such time and in such manner as the Board
may prescribe, to satisfy such withholding obligation by (i)
delivering to the Company Stock owned by such individual having a
fair market value equal to such withholding obligation, or (ii)
requesting that the Company withhold from the shares of Stock to be
delivered upon the exercise a number of shares of Stock having a fair
market value equal to such withholding obligation.
-4-
<PAGE>
In the case of an incentive option, the Board may require as a
condition of exercise that the participant exercising the option agree
to inform the Company promptly of any disposition (within the meaning
of section 424(c) of the Code and the regulations thereunder) of Stock
received upon exercise. In addition, if at the time the option is
exercised the Board determines that under applicable law and
regulations the Company could be liable for the withholding of any
federal or state tax with respect to a disposition of the Stock
received upon exercise, the Board may require as a condition of
exercise that the participant exercising the option agree to give such
security as the Board deems adequate to meet the potential liability
of the Company for the withholding of tax, and to augment such
security from time to time in any amount reasonably deemed necessary
by the Board to preserve the adequacy of such security.
(4) If an option is exercised by the executor or administrator of a
deceased participant, or by the person or persons to whom the option
has been transferred by the participant's will or the applicable laws
of descent and distribution, the Company shall be under no obligation
to deliver Stock pursuant to such exercise until the Company is
satisfied as to the authority of the person or persons exercising the
option.
(d) Payment for and Delivery of Stock. Stock purchased upon
---------------------------------
exercise of an option under the Plan shall be paid for as follows: (i) in cash,
check acceptable to the Company (determined in accordance with such guidelines
as the Board may prescribe), or money order payable to the order of the Company,
or (ii) if so permitted by the Board (which, in the case of an incentive option,
shall specify such method of payment at the time of grant), (A) through the
delivery of shares of Stock (which, in the case of Stock acquired from the
Company, shall have been held for at least six months unless the Board specifies
a shorter period) having a fair market value on the last business day preceding
the date of exercise equal to the purchase price, or (B) by delivery of a
promissory note of the participant to the Company, such note to be payable on
such terms as are specified by the Board, or (C) by delivery of an unconditional
and irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the exercise price, or (D) by any combination of the
permissible forms of payment; provided, that if the Stock delivered upon
exercise of the option is an original issue of authorized Stock, at least so
much of the exercise price as represents the par value of such Stock shall be
paid other than with a personal check or promissory note of the person
exercising the option.
(e) Delivery of Stock. A participant shall not have the rights of a
-----------------
shareholder with regard to awards under the Plan except as to Stock actually
received by him under the Plan.
The Company shall not be obligated to deliver any shares of Stock (i)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulations have been
-5-
<PAGE>
complied with, (ii) if the outstanding Stock is at the time listed on any stock
exchange, until the shares to be delivered have been listed or authorized to be
listed on such exchange upon official notice of issuance, and (iii) until all
other legal matters in connection with the issuance and delivery of such shares
have been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
(f) Nontransferability of Awards. No award may be transferred other
----------------------------
than by will or by the laws of descent and distribution, and during a
participant's lifetime an award may be exercised only by him or her.
(g) Mergers, etc. In the event of any merger, consolidation,
-------------
dissolution, or liquidation of the Company, the Board in its sole discretion
may, as to any outstanding awards, make such substitution or adjustment in the
aggregate number of shares reserved for issuance under the Plan and in the
number and purchase price (if any) of shares subject to such awards as it may
determine, or accelerate, amend, or terminate such awards upon such terms and
conditions as it shall provide (which, in the case of the termination of the
vested portion of any award, shall require payment or other consideration which
the Board deems equitable in the circumstances).
7. TERMINATION OF EMPLOYMENT
-------------------------
If a participant's employment or other service relationship with the
Company terminates prior to the Expiration Date the following shall apply:
(a) Options that are not exercisable immediately prior to the
termination shall terminate, except that the Board may in its sole
discretion provide that the participant or beneficiary receive in
cash, with respect to each share of Stock to which an option
relates, the excess of (i) the share's fair market value on the
date of the participant's termination, over (ii) the option
exercise price.
(b) To the extent exercisable immediately prior to termination of
employment or other service, the option shall continue to be
exercisable thereafter during the period prior to the Expiration
Date and within 60 days following the termination (180 days in the
event that a participant's service terminates by reason of death),
unless the participant's employment or other service is terminated
"for cause" as defined in (c) below, in which case all awards
shall terminate immediately. Except as otherwise provided in an
award, after completion of the 60-day (or 180-day) period, such
awards shall terminate to the extent not previously exercised,
expired, or terminated.
-6-
<PAGE>
(c) The following, as determined by the Board in its reasonable
judgment shall constitute "cause" termination: (i) a participant's
failure to perform, or negligence in the performance of, his or
her duties and responsibilities to the Company; (ii) a
participant's fraud, embezzlement or other material dishonesty
with respect to the Company; or (iii) other conduct by a
participant that is harmful to the business, interest, or
reputation of the Company.
No option shall be exercised or surrendered in exchange for a cash payment after
the Expiration Date.
In the case of any award, the Board may provide in the case of any
award for post-termination exercise provisions different from those expressly
set forth in this Section 7, including without limitation terms allowing a later
exercise by a former employee, consultant or advisor (or, in the case of a
former employee, consultant or advisor who is deceased, the person or persons to
whom the award is transferred by will or the laws of descent and distribution)
as to all or any portion of the award not exercisable immediately prior to
termination of employment or other service, but in no case may an award be
exercised after the Expiration Date.
8. EMPLOYMENT RIGHTS
-----------------
Neither the adoption of the Plan nor the grant of awards shall confer
upon any participant any right to continue as an employee of, or consultant or
adviser to, the Company, its parent, or any subsidiary or affect in any way the
right of the Company, its parent, or a subsidiary to terminate the participant's
relationship at any time. Except as specifically provided by the Board in any
particular case, the loss of existing or potential profit in awards granted
under this Plan shall not constitute an element of damages in the event of
termination of the relationship of a participant even if the termination is in
violation of an obligation of the Company to the participant by contract or
otherwise.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, AND TERMINATION
----------------------------------------------------------------
Neither adoption of the Plan nor the grant of awards to a participant
shall affect the Company's right to make awards to such participant that are not
subject to the Plan, to issue to such participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued.
The Board may at any time discontinue granting awards under the Plan.
With the consent of the participant, the Board may at any time cancel an
existing award in whole or in part and grant another award for such number of
shares as the Board specifies. The Board may at any time or times amend the
Plan or any outstanding award for the purpose of satisfying the
-7-
<PAGE>
requirements of section 422 of the Code or of any changes in applicable laws or
regulations or for any other purpose that may at the time be permitted by law,
or may at any time terminate the Plan as to any further grants of awards; except
that no such amendment shall adversely affect the rights of any participant
(without his or her consent) under any award previously granted.
-8-
<PAGE>
EXHIBIT 10.27
THIS LEASE AGREEMENT (hereinafter referred to as "Lease"), made as of
this 6th day of January, 1997, between ENVIRO-ZYME INTERNATIONAL, INCORPORATED,
P.O. Box 169, Stormville Mountain Road, Stormville, New York 12582 (hereinafter
referred to as "Landlord"), and GEERLINGS & WADE, INCORPORATED, 960 Turnpike
Street, Canton, Massachusetts 02021 (hereinafter referred to as "Tenant").
WITNESSETH, that the Landlord hereby leases to the Tenant the
following premises: approximately 10,600 square feet in the middle portion
of the building (SEE Exhibit A attached). The space has a single office of
approximately 10 feet by 15 feet, providing a reasonably secure location for
computers, files and other office equipment. The space also has 2 bathrooms;
one approximately 5 feet by 7 feet consisting of a sink and water closet, the
second is approximately 10 feet by 15 feet consisting of a sink, a deep sink, a
water closet and a urinal.
The leased premises are a portion of the building located on the east
side of route 52 in the Town of Kent, County of Putnam and State of New York,
shown on the Tax Map as Section 17, Block 1, Lot 24 (hereinafter referred to as
"Premises"). The Premises are to be used for a retail wine store and mail order
distribution of wines.
This lease is for a term commencing March 1, 1997 and terminating on
February 28, 2000, with an option for an additional three (3) year term as set
forth below:
1. (a) The annual rent is Ninety Seven Thousand Three Hundred Five
and 94/100 ($97,305.94) Dollars, payable in monthly installments of Eight
Thousand One Hundred Eight and 83/100 ($8,108.83) Dollars, in advance, on the
first day of each month of the term (provided that Tenant shall not be deemed to
be in default under this Lease unless Tenant fails to pay such rent within ten
days after receiving written notice of such default from the Landlord).
The rent includes taxes, electricity and heat. Any required air
conditioning and/or refrigeration equipment is the responsibility of the Tenant
and Tenant is to maintain a separate electric meter in the name of the Tenant.
Tenant is to notify Landlord, in advance, of such work.
(b) The Tenant has the option to renew and extend the term of
this Lease for an additional three (3) year term by notifying the Landlord, in
writing, by certified mail, return receipt requested, sent to the address set
forth herein, or at such address as the Landlord may designate, at least ninety
(90) days prior to the expiration of the first term. The annual rent for the
additional three (3) year term shall be computed by taking the first term's
annual rent ($97,305.94) plus a cumulative increase calculated by taking the
increase in the New York/New Jersey Consumer Price Index above the March 1, 1997
Index and multiplying it by the first term's annual rent ($97,305.94).
(c) That during the first year of this lease only (March 1, 1997
to February 28, 1998) the Tenant may terminate this lease upon 90 days written
notice to the Landlord by :
(1) Forwarding said Notice of Termination at least 90 days prior to the date of
termination to the Landlord by certified mail, return receipt requested, sent to
the address set forth herein.
(2) Forwarding to the Landlord with said Notice of Termination a certified or
bank check in the sum of $48,652.98 to the order of the Landlord as a
termination fee.
Upon receipt of the above by the Landlord said lease shall be deemed terminated
and of no further force and effect as of the date of termination set forth in
said Notice of Termination.
2. (a) The Tenant shall take good care of the Premises and shall,
at the Tenant's own cost and expense, make all interior repairs to the premises.
At the end or other expiration of the Lease, the Tenant shall deliver up the
Premises in good order or condition, damage by fire and other casualty and the
elements and normal wear and tear excepted. Failure on Tenant's part to make
such repairs shall give Landlord the right, after reasonable notice, to enter
upon the Premises for the purpose of making repairs and the cost thereof shall
be borne by the Tenant and shall be chargeable as additional rent on the next
rental due date.
(b) If the demised premises or any part thereof consist of a
store, or of a first floor, or of any part thereof, the Tenant will keep the
sidewalk and curb in front thereof clean at all times and free from snow and
ice.
(c) The Landlord will be responsible for exterior property
upkeep, normal maintenance and structural repairs. Landlord will arrange for
ground maintenance at the Landlord's expense.
3. The Tenant shall comply with all Statutes, ordinances, rules,
orders, regulations and requirements of the Federal, State and Local Governments
and of any and all their Departments and Bureaus applicable to the Premises, for
the correction, prevention, and abatement of nuisances or other grievances, in,
upon, or connected with the Premises during the term of the Lease, and shall
also
<PAGE>
promptly comply with and execute all rules, orders and regulations of the New
York Board of Fire underwriters, or any other similar body, at the Tenant's own
cost and expense.
4. The Tenant, its heirs, executors or administrators shall not
assign this Lease, or sub-let or sub-lease the Premises, or any part thereof, or
make any alterations on the Premises, without the Landlord's consent in writing;
or occupy, or permit or suffer the same to be occupied for any business or
purpose deemed disreputable or extra-hazardous on account of fire, under the
penalty of damages and forfeiture, In the event Tenant obtains necessary
approvals from the Landlord and does sub-let, sub-lease or assign this Lease,
Tenant shall nevertheless be liable for the performance of Tenant's obligation
should any such sub-tenant or assignee default in the performance thereof.
5. In the case of damage, by fire or other cause, to the building in
which the Premises are located, if the damage is so extensive as to amount
practically to the total destruction of the Premises or of the building, or if
the Landlord shall within a reasonable time decide not to rebuild, the Lease
shall cease and come to an end, and the rent shall be apportioned to the time of
the damage. In all other cases where the Premises are damaged by fire. The
Landlord shall repair the damage, if the damage has rendered the Premises
untenantable, in whole or in part, and there shall be an apportionment of the
rent until the damage has been repaired. In determining what constitutes
reasonable dispatch consideration shall be given to delays caused by strikes,
adjustment of insurance and other causes beyond Landlord's control.
6. The Tenant agrees that the Landlord and the Landlord's agents and
other representatives shall have the right to enter into and upon the Premises,
or any part thereof, at all reasonable hours for the purpose of examining the
same or making such repairs or alterations therein as may be necessary for the
safety and preservation thereof.
7. Within the final six months of the term or any extension of the
term, the Tenant agrees to permit the Landlord or the Landlord's agent to show
the Premises to persons wishing to rent or purchase the same; and the Tenant
further agrees that on and after the sixth month, next preceding the expiration
of the terms or extended term, the Landlord or the Landlord's agents shall have
the right to place notices on the front of the Premises, or any part thereof,
offering the premises "To Let" or "For Sale", and the Tenant hereby agrees to
permit the same to remain thereon without hindrance or molestation.
8. If the Premises, or any part thereof, shall be deserted or become
vacant during said term for a period of more than thirty consecutive days, and
if any default be made in the performance of any of the convenants herein
contained, beyond the expiration of applicable notice, grace and cure periods,
the Landlord or representatives may re-enter the Premises by summary proceedings
or other wise, and remove all persons therefrom without being liable to
prosecution therefor, and the Tenant shall pay at the same time as the rent
becomes payable under the terms hereof a sum equivalent to the rent reserved
herein, and Landlord agrees to use reasonable efforts to relet the Premises and
in connection therewith reserves the right to rent the Premises for a longer
period of time than fixed in the Lease without releasing the original Tenant
from any liability, applying any moneys collected, first to the expense of
resuming or obtaining possession, second to restoring the Premises to a rentable
condition, and then to the payment of the rent and all other charges due and to
become due to the Landlord, any surplus to be paid to the Tenant, who shall
remain liable for any deficiency.
9. Landlord may replace, upon ten days written notice to Tenant, at
the expense of Tenant, any and all broken glass in Tenant's area. This consists
of the windows on the garage door in the loading area. Bills therefor shall be
rendered by Landlord to Tenant at such times as Landlord may elect, and shall be
due from, and payable by Tenant within fifteen days after receipt by Tenant, and
the amount thereof shall be deemed to be, and be paid, as additional rent.
Damage and injury to the Premises, caused by the carelessness, negligence or
improper conduct on the part of the Tenant or the Tenant's agents or employees
shall be repaired as speedily as possible by the Tenant at the Tenant's own cost
and expense.
10. The Tenant shall neither encumber nor obstruct the sidewalk in
front of, or entrance to, said premises, nor allow the same to be obstructed or
encumbered in any manner.
11. The Landlord is exempt from any and all liability for any damage
or injury to person or property caused by or resulting from steam, electricity,
gas, water, rain, ice or snow, or any leak from flow from or into any part of
the Premises or from any damage or injury resulting or arising from any other
cause of happening whatsoever unless said damage or injury be caused by or due
to the negligence or willful misconduct of the Landlord.
2
<PAGE>
12. If default be made in any of the covenants herein contained and
in the case of Tenant's monetary obligations under this Lease such default
continues for a period of ten days after Tenant receives written notice thereof
from Landlord and in the case of Tenant's non-monetary obligations under this
Lease such default continues for a period of thirty days after Tenant receives
written notice thereof from Landlord, then it shall be lawful for the Landlord
to re-enter the Premises, and the same to have again, re-possess and enjoy.
13. This instrument shall not be a lien against the Premises in
respect to any mortgages that are now on or that hereafter may be placed against
the Premises, and that the recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien of this Lease,
irrespective of the date of recording and the Tenant agrees to execute any such
instrument, without cost, which may be deemed necessary or desirable to further
effect the subordination of this Lease to any such mortgage or mortgages,
provided that as a condition to Tenant's subordination of the Lease and
execution of an instrument confirming such subordination, the holder of the
mortgage agrees for itself and any purchaser or transferee in a foreclosure sale
or by deed in lieu of foreclosure to not disturb Tenant's right of possession
under this Lease and agrees to recognize all the terms and condition of this
Lease.
14. The Tenant has this day deposited with the Landlord the sum of
$3,161.08 as security for the full and faithful performance by the Tenant of all
the terms, covenants and conditions of this Lease upon the Tenant's part to be
performed, which said sum shall be returned to the Tenant within thirty days
after the time fixed as the expiration of the term herein, provided the Tenant
has fully and faithfully carried out all of said terms, covenants and conditions
on Tenant's part to be performed. In the event of a bona fide sale, subject to
this Lease, the Landlord shall have the right to transfer the security to the
vend for the benefit of the Tenant and Landlord shall be considered released by
the Tenant from all liability for the return of such security; and the Tenant
agrees to look to the new Landlord solely for the return of the said security,
and it is agreed that this shall apply to every transfer or assignment made of
the security to a new Landlord. The security shall be placed in an interest
bearing account in the name of the Landlord for the duration of the Lease, with
the interest accruing to the benefit of the Tenant. Until the security deposit
is used or returned to the Tenant, the interest generated shall become a part of
the security deposit. If the Landlord is required to pay incomes taxes on the
interest generated by the security deposit, the Landlord will use the proceeds
from the security deposit.
15. The security deposited under this Lease shall not be mortgaged,
assigned or encumbered by the Tenant without the written consent of the
Landlord.
16. It is expressly understood and agreed that in case default be
made in the payment of the rent or any part thereof beyond the expiration of
applicable notice, grace and cure periods as herein specified, or if, without
the consent of the Landlord, the Tenant shall sell, assign, or mortgage this
Lease or if default be made in the performance of any of the covenants and
agreements in this Lease contained on the part of the Tenant to be kept and
performed beyond the expiration of applicable notice, grace and cure periods, or
if the Tenant shall fail to comply with any of the statutes, ordinances, rules,
orders, regulations and requirements of the Federal, State and Local Governments
or of any and all their Departments and Bureaus, applicable to the Premises, or
if their Departments and Bureaus, applicable to the Premises, or if the Tenant
shall file, or there be filed against Tenant a petition in bankruptcy or the
Tenant makes an assignment for the benefit of creditors or take advantage of any
insolvency act, the Landlord, may if the Landlord so elects, at any time
thereafter terminate this Lease and the term hereof, on giving to the Tenant 15
days' notice in writing of the Landlord's intention so to do, and this Lease and
the term hereof shall expire and come to an end on the date fixed in such notice
as if the said date were the date originally fixed in this lease for the
expiration hereof. Such notice may be given personally or by first class mail
to the Tenant addressed to the Premises.
17. The Tenant understands that the Premises are serviced by a well
and septic system. if repairs and maintenance are necessary, the Tenant shall
pay a pro rata share based on the proportion the Tenant's leased area is to the
whole. The Landlord warrants that the well and septic system are in good
operating condition as of the date of this Lease.
18. The Tenant will not nor will the Tenant permit undertenants or
other persons to do anything in the Premises, or bring anything into the
Premises or permit anything to be brought into the Premises or to be kept
therein, which will in any way increase the rate of fire insurance on the
Premises, nor use the Premises or any part thereof, nor suffer or permit their
use for any business or purpose which would cause an increase in the rate of
fire insurance on said building, and the Tenant agrees to pay on demand any such
increases. Landlord is aware that the Tenant will store wine on the Premises
and the Landlord has consulted his insurance agent and agrees that no additional
increase in the insurance premiums will be required of Tenant with respect to
Tenant's use and occupancy of the Premises.
3
<PAGE>
19. The failure of the Landlord to insist upon a strict performance
of any of the terms, conditions and covenants herein, shall not be deemed a
waiver of any rights or remedies that the Landlord may have, and shall not be
deemed a waiver of any subsequent breach or default in the terms, conditions and
covenants herein contained. This Lease may not be changed, modified, discharged
or terminated orally.
20. If the whole or any part of the Premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose the
Landlord will immediately notify the Tenant and the Tenant will have 120 days to
find a new premises, then and in the event, the term of this Lease shall cease
and terminate from the date of title vesting in such proceeding and Tenant shall
have no claim against Landlord for the value of any unexpired term of the Lease.
21. If after default in payment of rent or violation of any other
provision of this Lease, or upon the expiration of the Lease, the Tenant moves
out or is dispossessed and fails to remove any trade fixtures or other property
prior to such said default, removal, expiration of Lease, or prior to the
issuance of the final order or execution of the warrant, then and in that event,
the said fixtures and property shall be deemed abandoned by the Tenant and shall
become the property of the Landlord after ten days notice in writing to the
Tenant.
22. In the event the relation of the Landlord and Tenant may cease or
terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this Lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or after the abandonment of the Premises by the
Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in
monthly payments the rent which accrues subsequent to the re-entry by the
Landlord, and the Tenant expressly agrees to pay as damages for the breach of
the covenants herein contained, the difference between the rent reserved and the
rent collected and received, if any, by the Landlord during the remainder of the
unexpired term, such difference or deficiency between the rent herein reserved
and the rent collected if any, shall become due and payable in monthly payments
during the remainder of the unexpired term, as the amounts of such difference or
deficiency shall from time to time be ascertained; and it is mutually agreed
between Landlord and Tenant that the respective parties hereto shall and hereby
do waive trial by jury in any action, proceeding or counterclaim brought by
either of the parties against the other on any matters whatsoever arising out of
or in any way connected with this Lease, the Tenant's use or occupancy of the
Premises, and/or any claim of injury or damage.
23. This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no way be affected, impaired or excused because Landlord
is unable to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make, or is delayed in making any
repairs, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of governmental preemption in connection with a
National Emergency or in connection with any rule, order or regulation of any
department of subdivision thereof of any governmental agency or by reason of
the condition of supply and demand which have been or are affected by war or
other emergency.
24. No diminution or abatement of rent, or other compensation, shall
be claimed or allowed for inconvenience or discomfort arising from the making or
repairs or improvements to the Premises or to the building of which the Premises
are a part, or to its appliances or to the equipment, nor for any space taken to
comply with any law, ordinance or order of a governmental authority. In respect
to the various "services", if any, herein expressly or impliedly agreed to be
furnished by the Landlord to the Tenant, it is agreed that there shall be no
diminution or abatement of the rent, or any other compensation, for interruption
or curtailment of such "service" when such interruption or curtailment shall be
due to accident, alterations or repairs desirable or necessary to be made or to
inability or difficulty in securing supplies or labor for the maintenance of
such "services" or to some other cause, not gross negligence on the part of the
Landlord. No such interruption or curtailment of any such service shall be
deemed a constructive eviction. The Landlord shall not be required to furnish,
and the Tenant shall not be entitled to receive any such "services" during any
period wherein the Tenant shall be in default beyond the expiration of
applicable notice, grace and cure periods in respect to the payment of rent.
Neither shall there be any abatement or diminution of rent because of making
repairs, improvements or decorations to the Premises after the date above fixed
for the commencement of the term, it being understood that rent shall, in any
event, commence to run at such date so above fixed.
25. Landlord shall not be liable for failure to give possession of
the Premises upon commencement date by reason of the fact that Premises are not
ready for occupancy or because a prior Tenant or any other person is wrongfully
holding over or is in wrongful possession, or for any other reason. The rent
shall not commence until possession is given or available, but the term herein
shall not be extended.
4
<PAGE>
26. In the event there are violations on the Premises, Tenant shall
immediately take the necessary steps to correct the said violations. In the
event the Tenant fails to correct the said violations, the Landlord may at its
option, after fifteen (15) days written notice to the Tenant, cause the said
changes to be made and add the cost thereof to the next monthly rent due from
the Tenant.
27. (a) The Tenant covenants that the Tenant will, at all times
during the term of this Lease and at the Tenant's own cost and expense, in the
name and for the benefit of the Landlord and the Tenant, the Mortgage/Mortgagees
(hereinafter defined), maintain comprehensive general public liability insurance
against loss by reason of bodily injury, including death, and personal injury in
the amount of at least $2,000,000.00 for injury or death in anyone occurrence
and in the amount of at least $100,000.00 against loss by reason of property
damage incurred either in the interior of the Premises, or any portion thereof
or upon and in or about the Premises. The term "Mortgagee/Mortgagees" shall
mean any Federal, State or Local government authority advancing funds to
Landlord in exchange for a security interest in the Premises or the building or
buildings of which the Premises are a part.
(b) The Tenant agrees to fully indemnify the Landlord for loss
of any Tenants property due to any cause, including fire or theft.
(c) At all times during the term of this Lease, Tenant will at
its own cost and expense, provide and keep in force workmen's compensation
insurance covering all of Tenant's employees working in the premises, disability
insurance, and any other insurance now or hereafter required by Federal, State
or Municipal authorities or any of their departments having jurisdiction
thereof.
(d) All insurance required under this paragraph "27." shall be
in form satisfactory to and must be approved by the Landlord and be carried by
responsible insurance companies qualified to do business in New York and in good
standing therein. The Tenant agrees to furnish and deliver to the Landlord
policies or certificates evidencing all insurance required under this Lease, at
or prior to the commencement of the term set forth herein, with, if requested,
evidence of the payment of premiums, and to deliver to the Landlord renewal
policies or certificates at least thirty (30) days before the expiration of the
insurance which such policies are to renew. All such policies will not be
canceled until after ten (10) days' written notice to the Landlord. In the event
of default by the Tenant in having such policies of insurance issued and
deposited, the Landlord may cause said policies to be issued at the expense of
the Tenant. On default by the Tenant in payment of any of the premiums on such
policies when payment thereof shall be due and payable, whether said insurance
is procured by the Landlord or by the Tenant, the Landlord may thereupon pay the
same and the Tenant agrees on demand to repay to the Landlord the money so paid
together with interest thereon at the rate of nine (9%) percent per annum from
the date or dates of payment by the Landlord, as additional rent.
(e) To the extent not prohibited by New York General Obligations
Law 5-321, Tenant hereby indemnifies and holds Landlord, its officers,
directors, agents and employees, from and against any and all damages, expenses,
fees (including reasonable attorneys' fees), liabilities, losses and demands
(just or unjust), by reason of personal injury, wrongful death or property
damage arising from, out of or in connection with Tenant's use of the Premises.
(f) In the event of any loss or destruction of the Premises or
part thereof by condemnation or fire or other casualty, any rebuilding or repair
shall have the prior approval of the Landlord.
(g) If the Tenant and Landlord agree that any additional
insurance becomes necessary to reasonably protect Landlord's interest in the
Premises, then, upon request of Landlord the Tenant shall obtain any such
insurance from a reputable insurer. Failure of Tenant to obtain any such
insurance shall give Landlord the right to obtain and charge the cost thereof to
Tenant as additional rent which shall be due and payable on the next rental
payment due.
(h) Any policy of insurance acquired by Tenant in carrying out
Tenant's obligations under this Lease or otherwise in any way connected with the
Premises shall include a waiver of subrogation in favor of Landlord.
28. Tenant shall have all garbage and refuse removed from the
Premises at its own expense and shall not allow garbage, trash or rubbish to
accumulate in or about the Premises. No burning of papers or rubbish in and
about the Premises is permitted. No bottles, crates, boxes, baskets or other
containers shall be allowed to be stacked, placed or accumulated in and about
the entrance and the exit or the exterior of the Premises. However, Tenant shall
have the right to store garbage within the Premises in covered metal containers.
29. Tenant shall have the Premises thoroughly cleaned by a licensed
exterminator at least once every six (6) months.
5
<PAGE>
30. No sign, illumination or advertisement of any nature shall be
permitted in any show window, on the door, or on or about the front or the
exterior of the Premises unless the Tenant has first secured written consent
therefor in each instance from the Landlord. If the Tenant violates the terms
of this paragraph, the Landlord shall have the right, without notice to the
Tenant, to remove any such sign, illumination or advertisement, without
incurring any liability by reason of such action, and the Landlord shall have
all of the remedies provided in this Lease for a default by the Tenant. All
interior signs visible from outside the Premises shall be in harmony with the
Landlord's overall plan for the building or buildings of which the Premises may
be a part.
31. Tenant has inspected the Premises and is satisfied as to the
condition thereof. Landlord gives no warranties nor makes any representations
as to the Premises or condition thereof. Within 72 hours prior to the
commencement of the term of this Lease, Tenant shall inspect the Premises and
shall notify Landlord in writing of any discrepancies in the condition of the
Premises on the date of this Lease. In the event of any discrepancy the
commencement of the term of this Lease shall be postponed until Landlord can
make any repairs or replacements of that part of the Premises contributing to
the existence of any such discrepancies.
32. The parties acknowledge and agree that the loading dock and front
entrance railing was damaged by Tenants and/or Tenant's agents prior to the date
hereof and that such damage will be repaired prior to the term of this Agreement
or extension thereof.
33. Premises shall be delivered broom clean and free of debris.
And the Landlord covenants that the Tenant on paying the rent, and
performing the covenants in this agreement shall peacefully and quietly have,
hold and enjoy the Premises for the term, provided however, that this covenant
shall be conditioned upon the retention of a leasehold interest in the Premises
by the Landlord.
AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and
agreements contained in this Lease shall be binding upon the parties hereto and
upon their respective successors, heirs, executors and administrators.
IN WITNESS WHEREOF, The parties have interchangeable set their hands
and seals (or caused these presents to be signed by their proper corporate
officers and caused their proper corporate seal to be hereto affixed) this 6th
day of January, 1997.
GEERLINGS & WADE, INC. ENVIRO-ZYME INTERNATIONAL, INC.
BY: /S/ DAVID R. PEARCE BY: /S/ JAY SILVERSTEIN
---------------------------- -----------------------------
Name: DAVID R. PEARCE Name: JAY SILVERSTEIN
-------------------------- ---------------------------
TITLE: VICE PRESIDENT AND CFO TITLE: PRESIDENT
------------------------- --------------------------
6
<PAGE>
EXHIBIT 10.28
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT is made as of January 24, 1997 between William
Eddy, whose address is 2055 West Stadium Boulevard, Ann Arbor, Michigan, 48103
("Sublandlord"), and Geerlings & Wade, Inc., a Massachusetts corporation, whose
address is 960 Turnpike Street, Canton, Massachusetts, 02021 ("Subtenant").
RECITALS
A. Pursuant to the terms of a Lease Agreement dated December 29,
1994, Sublandlord has leased Property described as Lot 3 Assessor's Plat #45
commonly known as 2055 West Stadium and 1902 - 1904 Federal Street, Ann Arbor,
Michigan 48104 from NBD Bank, as Trustee of James O'Kane, Irrevocable Trust
under agreement dated 8/13/65 (the "Landlord").
B. Sections of a true copy of the Lease Agreement, are attached
hereto as Exhibit B (the "Lease").
C. Subtenant wishes to sublease from Sublandlord 1902 Federal Street
(the "Premises") as depicted in Exhibit A (all of 1902).
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
1. Sublandlord hereby subleases the Premises to Subtenant, and
Subtenant hires the Premises from Sublandlord, on the terms and subject to the
covenants and conditions contained in the Lease, except as varied by this
Sublease. Subtenant will use and occupy the Premises for retail wine mail order
distribution and incidental walk-in retail sales, as well as the off premises
storage of wine and retail merchandise.
2. The term of this Sublease shall commence September 1, 1996 and
shall continue for a period of three years. Subtenant shall return Premises in
good condition and order as at the commencement of the term, reasonable wear and
tear, damage by fire and other casualty and eminent domain takings excepted.
"Sublease year" shall mean the 12-month period beginning on September 1 of each
year and ending on the following August 31. The first Sublease year is September
1, 1996 through August 31, 1997.
3. The annual rent for the first three Sublease years of the
Sublease shall be the sum of $45,050.00 in lawful money of the United States,
payable in advance, on the first day of each month in equal monthly installments
of $3,754.17. A late payment fee of five (5%) percent of any monthly installment
more than ten (10) days past due may be imposed upon Subtenant if imposed upon
Sublandlord by Landlord.
1
<PAGE>
The rent will be paid to Sublandlord at the office of Sublandlord
designated on page one of this Sublease Agreement, or at such other place as
Sublandlord may subsequently designate in writing.
4. So long as Subtenant is not then in default after the expiration
of applicable notice, grace and cure periods, and this Sublease is still in
effect, Subtenant will have the option to renew the term of this Sublease
directly with the Sublandlord, under the same terms and conditions of this
lease, for one (1) additional term of three (3) years at the monthly rental set
forth above plus the additional sum of Two Hundred Twenty ($220.00) Dollars per
month. If Subtenant desires to exercise such option, it shall do so by giving
Landlord and Sublandlord written notice thereof not later than one hundred
twenty (120) days prior to the expiration of the term of this Sublease.
5. Nothing herein provided to the contrary, the Subtenant reserves
the right to terminate this lease, without any further obligation to
Sublandlord, effective December 31, 1997, provided that the Subtenant gives the
Sublandlord written notice of its intention to terminate this lease no later
than September 30, 1997. Further, the Subtenant shall have the right to
terminate this lease, without any further obligation to Sublandlord, effective
August 31, 1999, provided that the Subtenant has given the Sublandlord actual
notice of its intent to terminate the lease effective August 31, 1999 on or
before May 31, 1999.
6. All of the terms, covenants and conditions (except as modified by
this instrument or inconsistent herewith) which are to be observed or performed
by Sublandlord as tenant under the Lease or which are to be observed or
performed by Landlord under the Lease are incorporated herein by reference and
imposed on Subtenant and Sublandlord, respectively, with the same force and
effect as though fully set forth herein. Except where inconsistent with this
Sublease Agreement, wherever the word "Landlord" appears in the Lease, the word
"Sublandlord" shall be substituted, and wherever the word "Tenant" appears in
the Lease, the word "Subtenant" shall be substituted.
7. All of the terms and conditions contained in the lease in Exhibit
B are incorporated herein except for paragraphs 3, 13, 14, 20, 36, 37, 38
(paragraph 4 through end), 41, 42 and 44, as terms and conditions of this
Sublease (with each reference therein to landlord and tenant to be deemed to
refer to Sublandlord and Subtenant) and along with the terms and conditions set
forth in this Sublease, shall be the complete terms and conditions of this
Sublease.
8. Subtenant will be responsible for compliance with all of
Sublandlord's obligations if and to the extent such Sublandlord's obligations
under the Lease are incorporated in this Sublease and Sublandlord will be
responsible for compliance with all of Landlord's obligations under the Lease
except as provided herein or elsewhere in this Sublease:
a) Subtenant shall not assign this Sublease or any interest therein
nor sublet the demised premises or any part thereof or any right
or privilege appurtenant thereto
2
<PAGE>
nor permit the occupancy or use of any part thereof by any
person, except in the case of a sale or merger of the Subtenant's
business, complete or partial, in which case, the obligations and
responsibilities shall continue to bind both Sublandlord and
Subtenant's successor for purposes of this Sublease and paragraph
8 in Exhibit B, without Sublandlord's consent, which will not be
unreasonably withheld. Except as provided in the immediately
preceding sentence, any such assignment, further subletting,
occupancy or use without the prior written consent of the
Sublandlord shall at the option of the Sublandlord terminate the
Sublease.
b) The Premises will be used for retail specialty food and wine
distribution as defined under the provisions of a Specialty
Designated Merchant (SDM) license, as well as the off premise
storage of retail merchandise and wine.
c) Should the Premises or the building of which it is part be
destroyed to the extent of more than one-half (1/2) the value
thereof, the Subtenant may terminate this Sublease forthwith by
written notice to Sublandlord.
d) Sublandlord agrees to clean and wash the Premises prior to
occupancy. Sublandlord warrants that the existing wall AC unit,
heating, electrical and fixtures are in good working order.
Sublandlord agrees that if equipment specified above is not in
good working condition repairs to such equipment as well as any
other part of the Premises will be performed promptly, at its
expense. Sublandlord agrees to perform or cause to be performed
prior to occupancy by subtenant the following repairs: replace
any burned out or broken light fixtures, repair any damaged or
non-working fixtures. Sublandlord will also fill in hole in wall.
All such repairs shall be done in a good and workmanlike manner.
Subtenant shall be responsible for all future improvements and
repairs to the demised premises except the exterior four walls
and roof which shall remain the responsibility of the
Sublandlord. Provided, however, subtenant shall be responsible
for all repairs to the roof occasioned by the installation or
repair of its roof top AC unit.
e) If damages result to Subtenant or its property due to the
negligence of the Sublandlord, its agents, contractors or
employees, Sublandlord shall indemnify and hold Subtenant
harmless from all costs and expenses resulting from such damages.
f) Sublandlord shall be responsible for maintaining or causing
Landlord to maintain fire and hazard insurance on the Premises
and shall provide Subtenant with written proof that the Premises
is insured at all times, and that the Subtenant is a named
insured, if such proof is available to Sublandlord, or
Sublandlord shall request of Landlord that such proof be
provided. Subtenant shall obtain its own contents and liability
insurance.
3
<PAGE>
g) Provided that Subtenant is not then in material default hereunder
after the expiration of applicable notice, grace and care
periods, should Sublandlord fail to perform any of its
obligations under this Sublease, Subtenant shall have the right
but not the obligation to exercise all of the rights of
Sublandlord that are part of this sublease. Sublandlord shall
reimburse Subtenant within 10 days of demand all costs and
expenses incurred in performing Sublandlord's obligations.
9. Sublandlord warrants that is in lawful possession of the Premises
and that it has the right to enter in this Sublease for the term specified
herein and its extension. Sublandlord agrees that it will pay the rent and do
all things necessary to keep the Lease in full force and effect and will not
modify or amend the Lease without Subtenant's consent. Sublandlord further
agrees that Subtenant's financial obligations to Sublandlord may be met by
Subtenant's paying the Landlord directly in the event that Sublandlord shall
fail to do so.
10. If, for any reason, Subtenant is notified by Landlord of any
breach by it of the terms, covenants or conditions contained in the Lease,
Subtenant agrees to notify Sublandlord in writing of said notice, stating
therein the grounds for the claimed breach. Subtenant shall promptly cure said
breach and shall promptly provide to Sublandlord written evidence of said cure.
11. If, for any reason, Sublandlord is notified by Landlord of any
breach by it of the terms, covenants or conditions contained in the Lease, which
by the terms of this Sublease are the obligations of Sublandlord to perform,
Sublandlord hereby agrees to notify Subtenant in writing of said notice, stating
therein the grounds for the claimed breach. Sublandlord shall promptly cure said
breach and promptly provide to Subtenant written evidence of said cure.
12. As between Sublandlord and Subtenant, the terms of this Sublease
shall govern to the extent of any inconsistency between this Sublease and the
Lease.
13. All notices required hereunder will be given to one party by the
other at the corporate address set forth on the first page hereof, or at any
subsequent address that either party may furnish to the other party. Further,
copies of all such notices shall be given to the respective attorneys for the
parties as follows :
Sublandlord: James A. Fajen
Davis & Fajen, P.C.
320 N. Main Street, Suite 400
Ann Arbor, Michigan 48104-1127
Subtenant: Terrance P. Conlin
Conlin & Associates, P.C.
2455 S. Industrial, Suite G
Ann Arbor, Michigan 48104
4
<PAGE>
14. Upon execution of this Sublease an earnest money deposit of
Twelve Thousand Six Hundred ($12,600.00) Dollars will be paid by Geerlings &
Wade, Inc. and be held in escrow by Peter Allen & Associates, Inc. Upon
commencement of lease, the earnest money deposit shall be paid to the
Sublandlord, after deduction of a real estate commission fee in the amount of
Four Thousand Five Hundred Thirty Six ($4,536.00) Dollars payable to Peter Allen
& Associates, Inc. The remaining Eight Thousand Sixty Four ($8,064.00) Dollars
paid to the Sublandlord shall constitute payment of the 17th month's rent, and
at the option to renew as set forth in Paragraph 4 of this Agreement is
exercised, the 37th month's rent with the remaining amount constituting a
security deposit. If the option to renew is not exercised by the Subtenant, then
the payment attributable to the 37th month rent shall be retained by Sublandlord
as additional rent for the first three year period of the Sublease period.
15. Sublandlord warrants, to the best of his knowledge, that Premises
are free of all Environmental Hazards and Hazardous Materials (as defined in the
Lease), hazardous substances, however defined under applicable federal, state
and local laws, and that Sublandlord will indemnify and hold harmless Subtenant
for any environmental issues determined to be in existence prior to the
commencement of this lease or that result from Sublandlord's, its agents and
employees acts or omissions. Subtenant shall be obligated under the provisions
of paragraph 38 (including paragraphs 4 through end) of Lease Agreement in
Exhibit B should Subtenant, its agents or employees be determined to have caused
any environmental damage during the term of its subtenancy.
16. Subtenant is responsible for its separately metered gas and
electric.
17. Whenever either party shall breach or fail to perform any of the
covenants or provisions of this Sublease, and such breach and failure shall
cause either party to incur any damages or expenses whatsoever, then and in that
event such damages or expenses so incurred by either party with interest thereon
at the maximum rate allowed by law including costs and reasonable attorney's
fees, shall be due forthwith upon notice thereof as additional rent or
prepayment of rent.
18. If (i) Subtenant shall fail to pay the rent or any other amount
required to be paid hereunder by the Subtenant to the Sublandlord when the same
becomes due and payable under the terms of this Sublease, and such rent or other
amount shall remain unpaid for a period of ten (10) days after the date such
amount is due or (ii) if Subtenant shall fail to perform any other duty or
obligation imposed on it by this Sublease and such default shall continue for a
period of thirty (30) days after written notice thereof is given to the
Subtenant by the Sublandlord, or for any unreasonable period of time if thirty
(30) days is not sufficient time necessary to repair, remedy or correct such
default, then Sublandlord may declare an event of default under this Sublease
and Sublandlord shall have all rights and remedies provided in law or in equity.
5
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Sublease Agreement as
of the date first written above.
Sublandlord
/s/ William Eddy
------------------------------
William Eddy
Subtenant
Geerlings & Wade, Inc.
/s/ David R. Pearce
------------------------------
By: David R. Pearce
Its: Vice President and Chief
Financial Offcer
6
<PAGE>
CONSENT BY LANDLORD
NBD Bank, as Trustee of James O'Kane Irrevocable Trust, under agreement dated
8/13/65 (hereinafter "Landlord") consents to that certain Sublease Agreement
made as of June __, 1995 by and between William Eddy (hereinafter "Sublandlord")
and Geerlings & Wade, Inc. (hereinafter "Subtenant"); a copy of which is
attached hereto; subject to the following conditions: (i) Sublandlord and
Subtenant, as applicable, shall submit the detailed plans and specifications for
the renovations of the leased premises described in Section 7(d) of the
Sublease Agreement to Landlord for its approval prior to undertaking any such
renovation, and (ii) Landlord will not unreasonably withhold its approval of
such plans and specifications. This Consent by Landlord applies only to the
terms of the Sublease Agreement attached hereto, and Landlord's consent does not
extend to any modifications, revisions, alterations or amendments to the
Sublease Agreement. Landlord expressly reserves its right to approve or
disapprove any and all modifications, revisions, alterations or amendments to
the Sublease Agreement, or other changes to the terms thereof.
Landlord hereby acknowledges that as of the date of this Consent, William Eddy
d/b/a Custom Sound and Communication (hereinafter"Lessee") is not in default
under Lease Agreement made December 29, 1994 between Landlord and Lessee; said
Lease Agreement.
<PAGE>
has not been amended since first executed and delivered and continues in full
force and effect.
In the event the Lease Agreement is terminated in accordance with its
provisions prior to the expiration of its lease term because of Lessee's default
thereunder, and further provided that Subtenant is then not in default under the
Sublease Agreement between William Eddy and Geerlings & Wade, Inc., Subtenant
may enter into a lease agreement directly with Landlord for the remainder of the
term of said Sublease Agreement upon the same terms and conditions as are set
forth in said Sublease Agreement (with Landlord as the Lessor and Subtenant as
the lessee) except that Subtenant shall, in addition, agree to be bound by, and
shall comply with, the terms of paragraphs 14 and 36 of the Lease Agreement.
Date: July 5, 1995
------------- NBD BANK, as Trustee of James O'Kane
Irrevocable Trust, under agreement
dated 8/13/65 and not otherwise
By /s/ Bruce C. Anderson
------------------------------
Bruce C. Anderson
Its Assistant Vice President
-------------------------
<PAGE>
Exhibit 10.29
November 8, 1996
Mr. David R. Pearce
33 Pleasant Street
Dover, MA 02030-2050
Dear David:
On behalf of Geerlings & Wade, Inc. (the "Company"), I am pleased to confirm our
offer to you of the position of Vice President and Chief Financial Officer of
the Company. As we have discussed, should you accept this offer, the Company
would expect that you would assume your duties on November 11, 1996. In this
role, you will report to me as President and Chief Executive Officer, and will
have responsibility for the financial reporting, accounting and treasury
functions of the Company and such other responsibilities as shall be assigned to
you from time to time by me or the Board of Directors.
In addition to the foregoing, the terms of your employment with the Company
shall be the following:
.You will be paid a base salary at the rate of $130,000 per year, payable
in monthly installments of $10,833 (less taxes and other legally-required
deductions) in accordance with the regular payroll practices of the
Company.
.You will be granted a stock option for 35,000 shares of the Company's
common stock, which will vest as follows: 7,000 options will vest 6
months following the date you commence your employment with the Company,
an additional 7,000 options will vest on the first anniversary of the
date you commence your employment with the Company; thereafter, the
remainder of the options will vest in three equal installments commencing
on the second anniversary of the date you commence your employment with
the Company and annually thereafter. The exercise price of the options
will be the closing price of the Company's common stock on the date you
commence your employment with the Company. Except as otherwise expressly
provided above, the options granted you shall be pursuant to the terms
of any applicable stock option agreement and any applicable stock option
plan and any restriction provisions generally applicable to shares
purchased by Company Employees.
.During employment, you will be eligible to participate in all employee
benefit plans from time to time in effect for employees of the Company
generally. Your participation will be subject to (i) the terms of the
applicable plan documents, (ii) generally applicable Company policies and
(iii) the discretion of the Board of Directors or any administrative or
<PAGE>
other committee provided for in or contemplated by such plan. A copy of
current employee benefits has been sent to you under separate cover.
. You will be required to execute the Company's standard employee
Nondisclosure Agreement, in the form attached hereto, prior to commencing
your employment.
. You will be expected to devote your full business time and your best
professional efforts to the performance of your duties and
responsibilities for the Company and to abide by all Company policies and
procedures, as in effect from time to time.
Please understand that this letter and your response are not meant to constitute
a contract of employment for a specific term. This means that, if you accept
this offer, you will retain the right to terminate your employment at any time
and the Company will retain a similar right. We do ask that you give two weeks'
written notice if you decide to resign. The Company will give you comparable
notice, or pay in lieu of notice, if it initiates termination.
The Board of Directors and I are delighted at the prospect of your joining the
Company and we look forward to a mutually rewarding relationship.
Please acknowledge your agreement with the provisions set forth in this letter
in the space provided below for your signature.
Cordially,
/s/ Jay L. Essa
Jay L. Essa
President and Chief Executive Officer
Geerlings & Wade, Inc.
Accepted and agreed:
/s/ David R. Pearce
- -------------------
David R. Pearce
Date: November 12, 1996
-----------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-86668.
/s/ Arthur Andersen, LLP
Arthur Andersen, LLP
Boston, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 774,514
<SECURITIES> 0
<RECEIVABLES> 307,409
<ALLOWANCES> 0
<INVENTORY> 8,359,765
<CURRENT-ASSETS> 11,081,295
<PP&E> 2,531,660
<DEPRECIATION> 910,112
<TOTAL-ASSETS> 12,952,268
<CURRENT-LIABILITIES> 3,035,885
<BONDS> 0
0
0
<COMMON> 37,774
<OTHER-SE> 9,716,256
<TOTAL-LIABILITY-AND-EQUITY> 12,952,268
<SALES> 31,501,236
<TOTAL-REVENUES> 31,501,236
<CGS> 17,187,877
<TOTAL-COSTS> 14,426,514
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257,259
<INCOME-PRETAX> (370,414)
<INCOME-TAX> (152,000)
<INCOME-CONTINUING> (218,414)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (218,414)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
