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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1997
[ ] 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
incorporation or organization) Identification Number)
960 TURNPIKE STREET, CANTON, MASSACHUSETTS 02021
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 781-821-4152
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE LISTED ON THE NASDAQ STOCK MARKET
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. [X]
The aggregate market value of Common Stock of the registrant held by non-
affiliates of the registrant was approximately $9,535,986 on March 20, 1998.
For purposes of the foregoing sentence, the term "affiliate" includes each
director and executive officer of the registrant.
3,785,316 shares of Common Stock were outstanding at March 20, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
registrant's 1998 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 27.
Page 1 of 30 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's 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"), incorporated
in Massachusetts in 1994, is a direct marketer of premium imported and domestic
wines, and wine-related merchandise to individual consumers. Through frequent
mailings to existing and potential 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 and ease of ordering and convenient delivery.
Since the Company is in a retail industry, the sales generated in the fourth
quarter are generally expected to be higher than in the other quarters.
The Company seeks to comply with myriad of applicable laws and regulations
which govern the sale of wine on a federal, state and local level. 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 (December
1994), Virginia (January 1995), Ohio (April 1995), Minnesota (July 1995),
Colorado (August 1995), Arizona (September 1995) and Michigan (July 1997). The
Company ships wine to consumers in a limited number of additional states, but to
date sales in such states have been relatively insignificant. In 1997, Nevada
changed its liquor laws to permit shipment of wine from out-of-state retailers,
and the Company commenced selling to Nevada customers in September 1997. The
Company's active customers (customers who have made a purchase within the twelve
preceding months) have increased from approximately 98,700 at December 31, 1996
to approximately 110,800 at December 31, 1997.
COMPANY STRATEGY
The Company, as one of the leading direct marketers of premium wines, 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:
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Source Quality Wines and Offer Value Pricing. Geerlings & Wade primarily
sources its imported wines directly from producers and negotiants (those persons
who serve as intermediaries or agents to producers in the purchasing process) in
the countries of origin. The Company primary sources domestic wines through
wholesale channels with domestic negotiants, certain wineries and wine
producers. In the case of both foreign and domestic wines, the Company at times
purchases wine from traditional wholesalers. The Company selects only those
wines that 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 time
of 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 wine varietals
(grape type), grape-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. The
Company mails promotional offers to potential customers about five times per
year to acquire new customers and build the "house file" of customers. The
Company employs techniques designed to enhance response rates, lower costs and
ultimately find new customers that will continue to place frequent and high
dollar value orders for long periods.
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, control 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 buying wine 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. The Company also plans to
cater its product offers to match regional preferences of its customers. For
example, the Company intends to present more domestically-produced wines to
customers residing in the western U.S., who tend to buy a higher proportion of
domestic wines than imported wines.
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Enter New Markets. Geerlings & Wade is licensed or otherwise authorized to
sell wine to individual customers in twenty-three states comprising
approximately 74% of the overall U.S. market for table wine. Certain states are
designated as "control" states in which the state government owns and operates
the liquor stores within its borders. These control states generally prohibit
the sale of wine by private entities. However, there are additional states in
which the Company can sell wine by obtaining applicable licenses. 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 who are 21 years of age or
older 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 100-point-scale 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. Geerlings & Wade distributes primarily two types of
promotional wine mailings: "house mailings" to its file of active customers and
qualified leads and "prospect mailings" to potential customers obtained from
rented mailing lists.
House Mailings. Geerlings & Wade distributes house mailings to customers
(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 Geerlings and Wade products by mail). The marketing
department determines the number and timing of house mailings to any individual
based on various factors, including the wines offered, the wine prices, wine
ratings, the season and frequency and amount of customer purchases. The Company
uses the computer system to select and analyze which customers to target and
strives to optimize sales, average order value and response rates in relation to
marketing expenses. 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 1997, the
Company sent approximately 2,885,000 house mailings, an increase of about 6.3%
over the pieces mailed in 1996.
The Company generally uses three 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 and information on the region from which
they were produced, the vintage and the background of the producer and the
quantitative and qualitative results of the tastings from which the featured
wines were selected. In addition to the featured wines, these brochures
typically offer six to eight additional wine selections, along with tasting
notes and ratings for these wines. In 1996 and 1997, the Company mailed
nineteen separate brochure mailings to its customers. Not all customers receive
each brochure mailing.
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"Odds and Ends Mailings" offer a large selection of previously featured
wines and some new wines available in limited quantities. These mailings
expressly encourage customers to take advantage of what may be their last
opportunity to purchase wines that they may have previously purchased and
enjoyed. The Company normally mails one "Odds and Ends" mailing per quarter.
Preferred Customer and Membership Mailings. Geerlings & Wade also creates
and mails special offers to customers based on their purchasing behavior. For
example, last holiday season, the Company mailed a special champagne offer to
customers who purchased champagne from Geerlings & Wade in the past or whom it
had reason to believe would likely purchase champagne. These preferred offers
generate high responses from customers and enhance the personal touch of the
Company's wine-selling service. The Company normally mails three to four
preferred customer mailings each year. At least once a year, the Company mails
a special mailing to its members in which it offers special wines.
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 purchase the wine. Names are obtained through rented
lists, which are screened with a demographic profile consistent with the
Company's existing customers. The Company generally offers prospective customers
the option to purchase 6 or 12 bottles.
Production. Most of Geerlings & Wade promotional 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. Printing, production and
fulfillment (collating, folding, inserting and mailing) are performed
commercially off-site. The Company seeks to reduce creative, printing and
mailing costs to maximize the availability of funding for the purpose of
acquiring new customers. Mailings generally include a personalized letter, the
offering brochure, an order form and a return envelope.
Catalog. During 1997, Geerlings & Wade mailed a 24-page Spring Catalog
and a 32-page Holiday Catalog featuring wine, wine-related merchandise and other
products intended to complement the Company's wine offerings. The Company
mailed the catalogs to both prospective and existing customers. The Company
plans to further research the development of its catalog market and test
different product offerings in 1998. In 1998, the Company will not mail a
Spring Catalog and is expected to produce a more limited Holiday Catalog. The
Company believes there is an opportunity to enhance sales to existing customers
and expand its customer base through catalog mailings, but there is no assurance
that this marketing vehicle will provide sales growth for the Company.
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, 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, Avalon,
Rose Valley, San Valencia Winery and St. Carolyne Winery. 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
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vintage after vintage by selling quality wines, the Company intends to encourage
a strong demand for these brands among its customers and generate strong sales
growth for these brands.
The wines offered by the Company are selected based on consumption patterns
and the Company's prior experience with a particular type of wine. In 1997,
approximately 70% of the cases sold by the Company were imported wines and 30%
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 $100 in 1997.
WINE SOURCING AND PURCHASING
The Company sources imported and domestic wines through a network of
producers, negotiants, importers and wholesalers. In 1997, the Company sourced
directly from producers or negotiants a substantial majority of the cases it
sold.
The Company's sourcing methods differ from typical sourcing methods of wine
retailers. The Company's sourcing techniques are more typical of a
wholesaler/importer, in that it actively searches for and identifies wines from
producers or negotiants. Through 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 its
customers wines of quality and value. Following selection and sourcing, the
Company purchases both domestic and imported wines from licensed wholesalers
located in each state where the Company maintains licensed facilities.
The Company generally selects wines several months in advance of offering
them for sale 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. In order to foster movement of
inventory, the majority of wine is specifically purchased to meet the Company's
promotional mailing schedule.
Sourcing Imported Wines. In 1997, the vast majority of imported wines sold
by the Company were sourced directly from the countries of origin. The Company
uses consultants for sourcing certain imported wines. Many European wines are
purchased using 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. At the Company's
headquarters, samples, including wine submitted by Mr. Van Hoof, are tasted and
selected on a blind comparison basis by the Company's Wine Director, Mr. Francis
Sanders. Mr. Sanders also compares the samples against widely available brand-
name wines.
Sourcing Domestic Wines. In 1997, a substantial majority of the Company's
domestic wines were sourced through wholesale channels with domestic negotiants
and certain wineries and wine producers, and the remaining wines, national
brands, were purchased from wholesalers. The Company sources many wines through
its primary domestic negotiant, Codera Wine Group, Inc. ("Codera") of Grayton,
California. Codera sources wines in the United States from many high-quality
producers and makes and sells its own national wine brands. 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
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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 sources wines directly from various California wineries.
As a high-volume purchaser, the Company is directly approached by wineries and
wine producers with offers to purchase wine lots of various sizes. These wines
are reviewed based on their quality and price characteristics.
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, it 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.
Geerlings and Wade believes by maintaining these relationships with quality wine
suppliers, it can enhance its opportunity of uncovering wines of acceptable
quality at attractive prices.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company 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 financial and management reporting. The Company's system was developed in-
house and is based on client-server software purchased by the Company. In 1997,
the Company upgraded much of its computer hardware to improve processing time
and reliability. The Company had previously announced plans to convert to an
integrated, direct marketing software package from an outside vendor. The
Company has recently decided not to use that software package and is reviewing
alternatives to upgrade or replace its existing software.
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 inclusion in 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 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's system provides real-time inventory management. The Company
maintains access to running totals of case sales by market, warehouse inventory,
products in transit to each warehouse and customer delivery logs, all designed
to arrange for prompt and convenient 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 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 its marketing programs to specific
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segments of its customer base. The system also provides extensive reporting
capabilities that allow the Company to evaluate the effectiveness of its
mailings and assist the Company in its business planning.
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 expandable, permitting the
Company to add lines as necessary to increase its customer service capabilities.
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 that offers quality wines at competitive
prices. The Company monitors its progress in attaining this goal by tracking new
customer accounts and customer retention statistics. In 1997, the Company made
some progress in lowering customer attrition rates over 1996. The Company plans
to promote customer retention through increased telemarketing and mailing
special offers to first- and second-time buyers and to customers who purchased
many times historically, but not in the last 12 months.
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 customers, increase the average order value of customer
purchases and enhance the Company's customer service capabilities.
New Marketing Programs. In addition to its present direct-mail formats, in
1997 the Company tested alternative channels of direct marketing to enhance
sales and increase its customer base. These alternatives included launching a
"wine-of-the-month" continuity program in which customers or their gift
recipients receive two bottles of wines each month. The first mailing in
September yielded unsatisfactory results and the Company plans to test different
offers in 1998 in an effort to improve the results from this type of marketing
program. Additionally, the Company initiated several "affinity" marketing
programs with corporate partners such as America West, Brookstone, American
Express and Skymall. Each of these programs are unique but generally designed
to market Geerlings & Wade wines to the customer base of each corporate partner.
Some programs are presented as wine clubs sponsored by the corporate partner and
others are presented as Geerlings & Wade offers endorsed by the corporate
partner. The Company experienced various degrees of success with these programs
and intends to further develop this marketing channel in 1998 and beyond. The
estimated dollar amount spent during 1996 and 1997 on development of new
marketing programs was approximately $45,000 and $220,000 respectively. As
mentioned earlier, the Company telemarketed its products to prospective
customers, recent customers and customers who have not purchased for some time
in 1997. There can be no assurance that these marketing channels will have a
favorable impact on operations.
Internet Commerce. In 1998, Geerlings & Wade expects to launch a new web
site in which customers can learn about the Company, its products and, most
importantly, order wine electronically. Internet commerce is at its infancy,
but the Company believes customers will, over time, migrate to purchasing
products on-line. Sales associated with advertisements placed over the Internet
will be made, or limited, in compliance with the applicable law. The Company
will periodically refresh the product offering and enhance the web site by
adding services and products as it learns more about this new sales channel.
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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 on their 12-bottle case purchases. On occasion, the
membership program has generated regulatory scrutiny, and there is no assurance
that the Company will be able to continue its membership programs in their
current forms in existing jurisdictions or those jurisdictions in which the
Company may become licensed in the future. As of December 31, 1997, the Company
had approximately 44,100 members, and of the 12-month customers, approximately
25% were members as of December 31, 1997.
CUSTOMER SERVICE
Customers send the Company orders by e-mail, mail, telephone (1-800-782-
WINE) and fax (1-800-FAX-8466). The Company accepts orders and makes sales in
accordance with applicable law. Sales are consummated in the appropriate
Company licensed facility. 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 transaction 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 on a voice messaging system. The Company
accepts the return of unopened bottles from dissatisfied customers and credits 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 products 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 sell
branded products not offered by the Company.
The Company believes that by providing quality wines at competitive prices
coupled with a high level of service, 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 customers. In addition,
the Company believes that it distinguishes itself from its direct mail or
Internet competitors by seeking to operate its highly regulated business in
adherence to applicable law and regulation. 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.
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COMPANY OPERATIONS WITHIN REGULATORY FRAMEWORK
Regulatory Framework. The alcoholic beverage industry is highly regulated
and subject to change. Extensive and complex regulation at the federal and state
levels has resulted in what is known as the "three-tier licensing system." At
the first tier are manufacturers and importers who are licensed to sell to the
second tier, wholesalers. Wholesalers in turn supply the third tier, retailers,
who ultimately sell to the public. Each tier is subject to various restrictions
on its activities. Geerlings and Wade is in the third tier. In virtually all
states, retailers are granted a license that 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 retailer engaged
in direct marketing 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. In addition, many Southern states,
including Alabama, South Carolina, Tennessee and Georgia prohibit the retail
delivery of alcoholic beverages altogether. For this reason, the Company
delivers its own products in New Jersey and Massachusetts and contracts with
local couriers in Arizona, Colorado and Minnesota to deliver orders to the
Company's customers.
Company Licensing and Regulatory Matters. The Company holds retail
licenses in the fourteen states where it maintains licensed facilities, which
are typically renewed on a yearly basis. 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, Louisiana, Nebraska and
Nevada. 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 1997 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, in-transit
wine purchases and customer deliveries, all designed to 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.
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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 and in all states where required, and in general, customer payments are
received prior to the delivery of product.
In Massachusetts, and in New Jersey, where UPS is not currently 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 California, Connecticut, Florida, Idaho, Illinois, Iowa, Missouri,
Nebraska, New Mexico, New York, Nevada, Ohio, Oregon, Virginia, Washington and
West Virginia, the Company uses UPS to make deliveries. In Arizona, Colorado
and Minnesota, the Company uses licensed delivery companies to make deliveries.
The Company has yet to commence selling in Louisiana although it has a license
to do so. Orders from customers in the states in which UPS or other delivery
companies are 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.
11
<PAGE>
SALES OR USE TAX
The Company presently collects sales tax in each of the states in which it
holds a license and which apply a sales tax to the sale of wine and wine
accessories. These states are Arizona, California, Colorado, Connecticut,
Florida, Illinois, Michigan, 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.
Nevada and Louisiana passed state laws in 1997 that allow for out-of-state
retailers to ship limited quantities of wine to residents in their states as
long as use tax is collected from the consumers and remitted to the state.
Louisiana also requires as a condition of cross-border sales that the retailer
remit wine excise tax to the state for all wine shipped to its residents.
Geerlings & Wade began shipping into Nevada in 1997 and collects and pays the
use tax. In 1998, the Company intends to begin selling to Louisiana residents
and likewise begin collecting use tax and remitting use and excise tax to the
State of Louisiana.
TRADEMARKS
The following are registered trademarks or service marks of the Company:
Geerlings & Wade Personal Wine Service, Geerlings & Wade Personal Wine
Importers, J. Krant Cellars, Glass Ridge, Alazar Winery, Amsbury Winery, Lapis
Lazuli Winery & Vineyards, St. Carolyne Winery, San Valencia Winery, Mariel
Winery, Jack Canyon Cellars, Bryan Woods Winery, Mischler Estates, Hamilton
Estates, Mira Luna, International Beer and Ale Society, Devina Estates and
Domaine Paul. The Company has filed trademark or service mark applications with
the United States Patent and Trademark Office for the following names: For the
Love of Wine, Red Brick Cellars, Expeditions, They'll Remember You Not Once But
Every Month, and Vintage Impressions Plus. The Company believes that its
trademarks or service marks have significant value and are an important factor
in the marketing of its products and the development of house brands.
12
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company employed a total of 66 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 1997, one of the Company's peak sales periods, the ratio of
full-time to part-time employees was 3 to 1.
13
<PAGE>
ITEM 2: PROPERTIES
As of December 31, 1997, Geerlings & Wade operated fourteen licensed
facilities. All of these facilities are leased, with the exception of the
Company's California facility which is situated in a public warehouse, and are
used to warehouse inventory. Each facility is centrally located with easy
access to major routes for delivery efficiencies. Since December 31, 1997, the
Company has renewed its leases in Arizona, Colorado, Washington and Minnesota
and has entered into a lease in Boston and plans to open a wine store at this
location to serve walk-in retail customers.
<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 *
Licensed facility (public warehouse) San Jose, CA ** **
Licensed facility Kent, WA 5,000 2001
Licensed facility Chantilly, VA 4,800 1999
Licensed facility Miamisburg, OH 5,900 2000
Licensed facility Denver, CO 6,800 2001
Licensed facility Tempe, AZ 6,600 2001
Licensed facility Bloomington, MN 4,700 2001
Licensed facility Ann Arbor, MI 5,300 1999
License pending Boston, MA 1,400 2001
</TABLE>
* The Company presently rents the facility on a month-to-month basis and
intends to negotiate a long-term lease.
** 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.
14
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market 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 The
Nasdaq Stock Market.
<TABLE>
1996 1997
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 7 1/8 3 3/4 5 3/8 4 1/8
Second Quarter 6 3 3/4 5 7/8 3 1/4
Third Quarter 7 3 1/2 5 7/8 4
Fourth Quarter 7 1/4 4 5 1/2 3 9/16
</TABLE>
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
As of March 20, 1998, there were approximately 141 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 20, 1998,
3,785,316 shares were issued and outstanding; and 1,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 20, 1998, 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.
15
<PAGE>
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,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Sales $12,428 $20,292 $ 29,718 $31,501 $33,701
Cost of sales 6,898 10,780 16,138 17,188 18,185
------- ------- -------- ------- -------
Gross profit 5,530 9,512 13,580 14,313 15,517
Selling, general and administrative expenses 4,954 7,849 14,690 14,427 14,066
------- ------- -------- ------- -------
Income (loss) from operations 576 1,663 (1,110) (113) 1,450
Interest income (expense), net (35) 36 (37) (257) (23)
------- ------- -------- ------- -------
Income (loss) before income taxes 541 1,699 (1,147) (370) 1,427
Provision (benefit) for income taxes 50 403 (470) (152) 604
------- ------- -------- ------- -------
Net income (loss) $ 491 $ 1,296 ($677) ($218) $ 823
======= ======= ======== ======= =======
PRO FORMA STATEMENTS OF INCOME DATA(1):
Income (loss) before taxes, as reported $ 541 $ 1,699 ($1,147) ($370) $ 1,427
Provision (benefit) for income taxes 216 636 (470) (152) 604
------- ------- -------- ------- -------
Net income (loss) $ 325 $ 1,063 ($677) ($218) $ 823
======= ======= ======== ======= =======
Net income (loss) per share
Basic $ 0.13 $ 0.34 ($0.18) ($0.06) $ 0.22
======= ======= ======== ======= =======
Diluted --- --- --- --- $ 0.22
======= ======= ======== ======= =======
Common shares and equivalents
Basic 2,475 3,156 3,755 3,776 3,780
Diluted --- --- --- --- 3,796
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 1,207 $ 9,666 $ 8,694 $ 8,045 $ 9,303
Total assets 4,766 13,529 16,717 12,952 16,124
Long-term debt, less current portion 940 --- --- --- ---
Total stockholders' equity 546 10,060 9,733 9,526 10,362
</TABLE>
- -------------------------------
No cash dividends have been declared per common share for each year shown
(1) Net income and net income per share is reported on a pro forma basis for
1993 and 1994 to reflect what comparative results would have been had the
Company been taxed as a C corporation for the entirety of 1993 and 1994.
Results for 1995, 1996 and 1997 are reported on an actual basis.
16
<PAGE>
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-related merchandise to individual consumers. In 1997, sales
increased $2,201,000, or 7%, over sales of $31,501,000 in 1996. The increase in
revenues did not meet the Company's expectation due to weaker-than-expected
response rates to house mailings during the first four months of 1997. However,
the Company achieved its primary goal for 1997, which was to earn a profit. The
Company earned $1,450,000 in operating income in 1997 as compared to reporting a
net operating loss of $113,000 for 1996. This marked improvement of $1,563,000
resulted from higher sales, increasing gross profit by sixty basis points, and
reducing selling, general and administrative expenses by $360,000. Selling,
general and administrative expenses were lowered by cutting delivery expenses,
marketing expenses as a percentage of sales and overhead and by increasing
shipping and handling fees. The Company has focused on hiring experienced people
who can contribute to the Company's growth. In 1997, the Company persevered to
reduce existing inventory and then purchased high quality wines to provide the
best values for the customer. The Company operates from 14 licensed facilities
in separate states to comply with laws and regulations related to the sale of
wine. Having these separate locations creates special challenge to keep
operating costs at acceptable levels. 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, five
facilities in 1995 and one in 1997. From these 14 facilities, the Company is
able to serve customers in 23 states. Louisiana and Nevada changed their state
laws in 1997 to allow for shipments into their states from out-of-state
retailers. The Company commenced shipping to Nevada residents in late 1997 and
plans to start selling to Louisiana residents in the second quarter of 1998.
The Company considers each area served by a licensed facility to be a separate
market. After assessing international opportunities to sell wine directly, the
Company has decided to pursue this type of expansion in several years if market
conditions warrant so. To find ways to increase revenues in 1997, the Company
tested various new marketing programs, including continuity ("wine of the
month") programs, corporate affinity marketing programs and outbound
telemarketing programs. These efforts are encouraging, and Geerlings & Wade
plans to continue refining and developing these programs to increase revenues in
the years to come. Spring and Holiday catalogs offering wine and wine-related
accessories were mailed in 1997. Sales results from these marketing pieces
encourage further development of the catalog in effort to make it a significant
contributor to revenues in the future. The Company plans to mail a Holiday
catalog in 1998.
The Company's revenues are derived from the sale of wine, wine-related
accessories and memberships. Sales from memberships and wine-related
accessories were approximately 4% of overall revenues in 1996 and in 1997. The
Company's sales growth between 1996 and 1997 reflects increased comparative
state sales for all states ("markets") except Connecticut and New York.
Comparative sales were down 7% for Connecticut and down 3% for New York.
Comparative sales increased by 11% in Massachusetts, 5% in Illinois, 9% in
Florida, 2% in California, 1% in New Jersey, 8% in Washington, 15% in Virginia,
19% in Ohio, 22% in Minnesota, 26% in Colorado and 26% in Arizona. Michigan was
not open in 1996. The Company intends to increase sales in all markets in 1998
and will focus on adding sales in New York and Connecticut.
17
<PAGE>
The following table sets forth total sales by market for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
(in thousands)
--------------
MARKET 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Massachusetts $ 3,916 $ 4,746 $ 5,970 $ 5,685 $ 6,310
Connecticut 1,628 2,010 2,246 2,186 2,025
New York 3,176 4,469 5,297 5,078 4,929
Illinois(1) 891 1,603 2,418 2,563 2,702
Florida 888 1,941 2,679 2,810 3,066
California(1) 1,050 2,707 3,541 3,466 3,530
New Jersey 879 2,742 3,795 3,637 3,658
Washington (December 1994) 74 884 1,017 1,093
Virginia (January 1995) 1,398 1,707 1,963
Ohio (April 1995) 1,123 2,017 2,402
Minnesota (July 1995) 134 338 413
Colorado (July 1995) 151 566 713
Arizona (September 1995) 82 431 542
Michigan (June 1997) 356
------- ------- ------- ------- -------
TOTALS $12,428 $20,292 $29,718 $31,501 $33,702
======= ======= ======= ======= =======
</TABLE>
(1) Includes authorized sales into additional states.
The Company believes that if 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.
In 1997, the Company offered wines at lower prices more frequently than in the
prior year. These lower prices generated lower average orders but the increase
in number of orders more than offset the drop in revenues from lowering prices.
18
<PAGE>
The Company sent 22 house mailings in each of 1996 and 1997 and plans to
mail the same number in 1998 to each of its active customers. By keeping the
number of mailings constant, the marketing cost per customer remains relatively
fixed. The Company is focusing its efforts to increase the average order size
and order frequency to leverage its marketing costs and improve profitability.
Although, the average case price was lower in 1997, the Company does not intend
to adjust prices in the immediate future to encourage sales.
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
gift packages offered in its catalogs or as part of the subscription or
continuity programs in which 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 statements of income for
the years ended December 31, 1995, 1996 and 1997 and pro forma statements of
income for the years ended December 31, 1993 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.5 53.1 54.3 54.6 54.0
Gross profit 44.5 46.9 45.7 45.4 46.0
Selling, general and administrative expenses 39.9 38.7 49.4 45.8 41.7
Income (loss) from operations 4.6 8.2 (3.7) (0.4) 4.3
Interest (expense) income, net (0.3) 0.2 (0.2) (0.8) (0.1)
Income (loss) before income taxes 4.3 8.4 (3.9) (1.2) 4.2
Provision (benefit) for income taxes 0.4 2.0 (1.6) (0.5) 1.8
Net income (loss) 3.9 6.4 (2.3) (0.7) 2.4
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, 1997, 1996 AND 1995
SALES
Sales increased $2,201,000 or 7%, from $31,502,000 in 1996 to $33,701,000
in 1997. This increase was attributable to a 3.3% sales increase for all
markets opened prior to January 1, 1995 and a 18.6% sales increase for all
markets opened after December 31, 1994, excluding Michigan which opened in 1997.
Included in the 7% sales increase in 1997 were sales of $1,498,000 generated
from the Company's 1997 catalogs, an increase of 55% over 1996 sales of
$965,000. Sales increased $1,783,000, or 6%, from $29,718,000 in 1995 to
$31,501,000 in 1996. This increase
19
<PAGE>
resulted from the combination of a 1% sales decline for markets opened prior to
1995 and a 75% increase for markets opened during 1995.
The number of cases sold by the Company increased by 43,148, or 15.5%, to
321,395 in 1997 from 278,247 in 1996. From 1995 to 1996, the number of cases
sold increased from 253,500 to 278,247, a 9.8% increase. The average case price
for cases sold by the Company decreased from $110.19 in 1996 to $100.44 in 1997,
an 8.8% decrease. This average price decrease was primarily due to a decision
to offer wines at lower price points to generate higher sales and response
rates. Geerlings & Wade believes this average price adjustment makes the
Company more competitive. However, the Company does not see the need to lower
prices further to compete in the market place. This does not preclude price
adjustments that may be necessary to track price trends in the marketplace that
may be precipitated by market factors such as a drop in the price of wine from
suppliers or major changes in foreign currency exchange rates. In 1996,
Geerlings & Wade changed the product mix to lower- priced products and
discounted some product to reduce inventory. 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 variations in the
product mix sold between the two years. The average number of cases purchased
per year increased from 2.82 in 1996 to 2.91 in 1997. This is an encouraging
trend and one which the Company plans to foster. The average number of cases
purchased per customer each year increased from 2.64 in 1995 to 2.82 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.
GROSS PROFIT
In 1997, gross profit increased $1,203,000, or 8.4%, from $14,313,000 in
1996 to $15,517,000 in 1997 and increased as a percentage of sales from 45.4% in
1996 to 46.0% in 1997. This increase in gross profit resulted from improved
purchasing by the Company and by favorable changes in foreign currency exchange
rates. Gross profit increased $733,000, or 5.4%, 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 per case was $48.28 in 1997, which
was a decrease of $3.16 per case from $51.44 in 1996. In 1995, the gross
profit per case was $53.57 per case. This trend results from lowering the
average price paid for each case of wine sold by the Company. The Company hopes
to reverse this trend now that the Company has realigned its product pricing and
plans to improve gross margin as a percentage of sales by improved purchasing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses fell by $360,000, or 2.5%,
from $14,427,000 in 1996 to $14,067,000 in 1997, while decreasing as a
percentage of sales from 45.8% in 1996 to 41.7% in 1997. This decrease in
selling, general, and administrative expenses was primarily attributable to
increasing shipping and handling fees to offset the related delivery expenses,
reducing salaries and lowering the cost per piece of mail for prospecting
campaigns. The opening of the Michigan facility added to the Company's
fulfillment expense as did increased staffing in the customer service and sales
departments which was done to improve the level of customer service. Marketing
costs were marginally higher in 1997. Most of the increase resulted from mailing
the additional catalog in the Spring of 1997. Selling, general and
administrative expenses decreased $263,000, or 1.8%, from $14,690,000 in 1995 to
20
<PAGE>
$14,427,000 in 1996, while decreasing as a percentage of sales from 49.4% in
1995 to 45.8% in 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. The Company also
reduced costs in 1996 by mailing significantly fewer prospect mail pieces in
1996 than it did in 1995.
INTEREST INCOME (EXPENSE)
Net interest expense decreased by $234,000, or 91.1%, from $257,000 of net
interest expense to $23,000 of net expense in 1997. This dramatic drop in net
interest expense was due to paying down the line of credit with cash generated
from operations. In the second quarter of 1997, the line of credit was repaid
and excess cash was invested in interest-bearing financial instruments. For
1996, net interest expense increased $220,000, or 595%, from net interest
expense of $37,000 in 1995 to a net interest expense of $257,000 in 1996. This
increase in net interest expense was due to increased borrowings under the
Company's line of credit to support working capital needs throughout 1996.
PROVISION FOR INCOME TAXES
The Company was subject to corporate level income taxes for the entirety of
1995, 1996 and 1997. Income taxes were benefited at approximately 41% in 1995
and 1996 and income taxes were provided at 42% in 1997. 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, 1997, the Company had cash and cash equivalents totaling $358,000.
In addition, the Company has a credit facility with The First National Bank of
Boston ("BankBoston") comprised of a revolving discretionary demand line of
credit in the maximum principal amount equal to the lesser of 50% of qualifying
inventory or $5.0 million (the "Line of Credit"). The Line of Credit bears
interest at BankBoston's base rate (which approximates the prime rate) plus
three quarters of one percent (3/4%), and is collateralized by substantially all
of the assets of the Company. As of December 31, 1997, $1,901,000 was
outstanding under the Line of Credit.
In 1997, the Company generated $42,000 in cash from operating activities
compared to generating $2,432,000 in 1996. The decrease in cash generated from
operations resulted primarily from an increase in inventory of $2,625,000, in
accounts receivable of $252,000 and in prepaid expenses of $700,000 but was
offset by increases in accounts payable of $1,259,000, accrued expenses of
$478,000, accrued sales, income and payroll tax of $691,000 and net income of
$823,000.
At December 31, 1997 and December 31, 1996 the Company had working capital
of $9,303,000 and $8,045,000, respectively. The Company intends to lower
inventory levels and expects to reach desired inventory levels in the second
quarter of 1998. 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
21
<PAGE>
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 1997, net cash of $43,000 was used in investing activities. The
Company used cash from operations and borrowings under its Line of Credit to
invest approximately $193,000 in property and equipment. These purchases
included approximately $120,000 in computer and telephone hardware and software
enhancements, and $60,000 of leasehold improvements and furniture and fixtures
purchases. The Company also invested $12,000 for equipment employed at its
warehouses. The Company began using third-party delivery services in Arizona
and Colorado in 1997, and, therefore, sold its delivery vehicles previously used
for delivery in these states.
During 1997, total cash used for financing activities was $415,000 of which
$4,943,000 of borrowings under the Line of Credit was a source of funds and
$4,900,000 was used for repayment 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 BankBoston and The Chase Manhattan Bank, each of
which allow the Company to enter into forward currency exchange contracts of up
to $500,000 maturing on any one day. As of December 31, 1997, 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 with the Securities and Exchange
Commission.
22
<PAGE>
Regulation. The alcoholic beverage industry is subject to extensive
specialized regulation under state and Federal laws and regulations, including
the following matters: 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
law and regulation, 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 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 material adverse effect on the Company's
business and 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 in 1997, the Company was not profitable in
1995 and 1996 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 results of operations. Increases in the cost of paper or printing
could have a negative impact on the Company's business and 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
distribute its mailings 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 results of operations.
23
<PAGE>
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 and New Jersey, the Company is dependent upon delivery services
provided by UPS or other licensed delivery companies. A work stoppage, strike
or other interruption in service experienced by UPS or other delivery companies,
like the UPS driver strike in 1997, 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 consistently develop
a selection of wines that 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. 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 Company orders an excessive quantity of
one or more wines, it 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 Geerlings and Wade 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 successfully compete 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 results of operations.
Health Issues. Since 1989, federal law has required health warning labels
on all alcoholic beverages. Although an increasing 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 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. From time to time, 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 results of operations.
24
<PAGE>
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 1997,
approximately 70% 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 results of operations.
Agricultural Conditions; Grape Supply. Wine making and grape growing are
subject to a variety of agricultural risks. Various diseases and pests,
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 and on the prices of wine established by the Company's
competition.
Year 2000 Compliance. The Company depends on computer systems for all
phases of its operations, including production, sales, distribution and
delivery. Because many of the Company's computer software programs recognize
only the last two digits of the year in any date (e.g., "97" for "1997"), some
software may fail to operate properly in 1999 and 2000 if the software is not
reprogrammed or replaced (the "Year 2000 Problem"). The Company believes that
many of its suppliers also have Year 2000 Problems, which could affect the
Company. The Company intends to timely mitigate and/or prevent the adverse
effects of the Year 2000 Problem, and to pursue compliance by suppliers. It is
not possible, at present, to quantify the overall cost of this work, nor the
financial effect of the Year 2000 Problem if it is not timely resolved. The
Company presently believes, however, that the cost of fixing the Year 2000
Problem will not have a material adverse effect on the Company's financial
position, liquidity or results from operations.
Market Risk. The Company does not engage in activity involving market risk
sensitive instruments that are material to the business.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is indexed on page F-1 of this
Report and is contained on the pages following said page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this Item is included under the captions
"Executive Compensation - Executive Officers of the Company", "Election of
Directors - Nominees for Election as Director at the Annual Meeting", "Directors
Whose Terms Expire in 1999," "Director Whose Terms Expire in 2000" and
"Information Concerning the Board and Its Committees" in the Proxy Statement for
use in connection with the Company's 1998 Annual Meeting of Stockholders (the
"Proxy Statement"), and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Executive Compensation - Summary Compensation Table," "Compensation Committee
Report" and "Employment Arrangements" 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" in the Proxy Statement, and is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
N/A
26
<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 Act of 1933, as amended and the Securities
Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
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./1//0/
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./4/
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>
27
<PAGE>
<TABLE>
<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./9/
10.28 Lease Agreement between the Company and William Eddy dated
January 24, 1997./9/
10.29 Employment letter agreement between the Company and David R. Pearce dated
November 8, 1996./ 9//*/
10.30 Lease Amendment between the Company and 47th Avenue South Properties, LLC
dated February 1, 1998.
10.31 Lease Addendum between the Company and Mehland Developers dated January
13, 1998.
10.32 Lease Amendment between the Company and PBP-N, Inc. dated October 9,
1997.
10.33 Lease Agreement between the Company and 216-218 Newbury Street Realty
Trust dated January 20, 1998.
10.34 Lease Amendment between the Company and Bruce K. Hoyt dated March 18,
1998.
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.
/9/ Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1996 filed on March 31, 1997 (File No. 0-24048) and incorporated by
reference herein.
/10/ Filed as an axhibit to the Company's Registration Statement on Form S-8
filed on September 30, 1997 (File No. 333-36741) and incorporated by refrence
herein.
* Management Contract or Compensation Plan
(b) No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
28
<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 27, 1998
29
<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 Board and March 27, 1998
- ------------------------- Director
Huib E. Geerlings
/s/ Jay L. Essa President, Chief Executive Officer March 27, 1998
- ------------------------- Officer and Director
Jay L. Essa (Principal Executive Officer)
/s/ David R. Pearce Vice President, Chief Financial March 27, 1998
- ------------------------- Officer, and Treasurer
David R. Pearce (Principal Financial and
Accounting Officer)
/s/ Phillip D. Wade Director March 27, 1998
- -------------------------
Phillip D. Wade
/s/ James C. Curvey Director March 27, 1998
- -------------------------
James C. Curvey
/s/ John M. Connors, Jr. Director March 27, 1998
- -------------------------
John M. Connors, Jr.
/s/ Gordon R. Cooke Director March 27, 1998
- -------------------------
Gordon R. Cooke
/s/ Robert Webb Director March 27, 1998
- -------------------------
Robert Webb
30
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS REPORT
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page No.
- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
10.30 Lease Amendment between the Company and 47th Avenue South Properties,
LLC dated February 1, 1998.
10.31 Lease Addendum between the Company and Mehland Developers dated
January 13, 1998.
10.32 Lease Amendment between the Company and PBP-N, Inc. dated October 9, 1997.
10.33 Lease Agreement between the Company and 216-218 Newbury Street Realty
Trust dated January 20, 1998.
10.34 Lease Amendment between the Company and Bruce K. Hoyt dated March 18,
1998.
23 Consent of Arthur Andersen LLP.
</TABLE>
<PAGE>
INDEX
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 F-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 F-6
NOTES TO FINANCIAL STATEMENTS F-7
F-1
<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, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Boston, Massachusetts
January 30, 1998
F-2
<PAGE>
GEERLINGS & WADE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 774,514 $ 358,043
Accounts receivable 307,409 559,046
Inventory 8,359,765 10,984,590
Prepaid mailing costs 813,208 957,483
Prepaid expenses and other current assets 326,399 987,034
Deferred income taxes 500,000 855,910
----------- -----------
Total current assets 11,081,295 14,702,106
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Office and computer equipment 1,988,855 2,103,555
Motor vehicles 177,056 77,875
Furniture and fixtures 365,749 369,216
----------- -----------
2,531,660 2,550,646
Less--accumulated depreciation 910,112 1,240,777
----------- -----------
1,621,548 1,309,869
----------- -----------
OTHER ASSETS 249,425 112,367
----------- -----------
$12,952,268 $16,124,342
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft $ 472,469 $ -
Line of credit 939,019 982,395
Accounts payable 641,944 1,900,761
Current portion of deferred revenue 542,305 766,392
Deferred income taxes - 141,000
Accrued sales, income and payroll taxes 241,345 931,860
Accrued expenses 198,803 677,098
----------- -----------
Total current liabilities 3,035,885 5,399,506
----------- -----------
DEFERRED REVENUE, LESS CURRENT PORTION 390,868 363,163
----------- -----------
COMMITMENTS (NOTE 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized--1,000,000 shares
Outstanding--none - -
Common stock, $.01 par value
Authorized--10,000,000 shares
Issued and outstanding--3,777,525 shares
and 3,781,343 shares in 1996 and 1997,
respectively 37,774 37,812
Additional paid-in capital 9,716,256 9,729,781
Retained (deficit) earnings (228,515) 594,080
----------- -----------
Total stockholders' equity 9,525,515 10,361,673
----------- -----------
$12,952,268 $16,124,342
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
SALES $29,717,901 $31,501,236 $33,701,832
COST OF SALES 16,138,372 17,187,877 18,185,364
----------- ----------- -----------
Gross profit 13,579,529 14,313,359 15,516,468
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 14,690,116 14,426,514 14,066,529
----------- ----------- -----------
Income (loss) from operations (1,110,587) (113,155) 1,449,939
INTEREST INCOME 67,273 - 20,975
INTEREST EXPENSE (103,831) (257,259) (44,319)
----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes (1,147,145) (370,414) 1,426,595
(BENEFIT) PROVISION FOR INCOME TAXES (470,000) (152,000) 604,000
----------- ----------- -----------
Net income (loss) $ (677,145) $ (218,414) $ 822,595
=========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.18) $ (0.06) $ 0.22
=========== =========== ===========
Diluted $ (0.18) $ (0.06) $ 0.22
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (NOTE 3):
Basic 3,754,891 3,776,376 3,779,538
=========== =========== ===========
Diluted 3,754,891 3,776,376 3,796,460
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<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, 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
Issuance of stock under employee stock
purchase plan 3,818 38 13,525 - 13,563
Net income - - - 822,595 822,595
--------- ------- ---------- ------- -------
BALANCE, DECEMBER 31, 1997 3,781,343 $37,812 $9,729,781 $594,080 $10,361,673
========= ======= ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GEERLINGS & WADE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (677,145) $ (218,414) $ $822,595
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities
Depreciation and amortization 463,341 570,605 536,301
Deferred income taxes (248,000) (152,000) (214,910)
Gain on disposal of fixed asset - (16,102) (5,707)
Changes in current assets and liabilities
Accounts receivable 1,098 (245,439) (251,637)
Inventory (6,251,498) 3,673,800 (2,624,824)
Prepaid mailing costs 74,726 (13,120) (144,275)
Prepaid expenses and other assets (433,761) 785,691 (699,486)
Accounts payable (63,750) (2,082,918) 1,258,818
Deferred revenue 439,525 100,422 196,382
Accrued expenses 60,665 138,138 478,295
Accrued sales, income and payroll taxes 62,597 (108,538) 690,515
----------- ------------ ------------
Net cash (used in) provided by operating activities (6,572,202) 2,432,125 42,067
----------- ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,015,150) (775,820) (192,769)
Proceeds from sale of property and equipment 17,956 30,893 56,550
Decrease in other assets (121,191) (129,539) 93,211
----------- ------------ ------------
Net cash used in investing activities (1,118,385) (874,466) (43,008)
----------- ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Bank overdraft - 472,469 (472,469)
Borrowings under line of credit 6,378,412 8,960,890 4,943,349
Repayments under line of credit (3,363,000) (11,037,283) (4,899,973)
Decrease in deferred financing costs 2,606 - -
Proceeds from issuance of shares under the Employee Stock
Purchase Plan 349,641 10,951 13,563
----------- ------------ ------------
Net cash provided by (used in) financing activities 3,367,659 (1,592,973) (415,530)
----------- ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,322,928) (35,314) (416,471)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,132,756 809,828 774,514
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 809,828 $ 774,514 $ 358,043
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 63,451 $ 275,107 $ 44,939
=========== ============ ============
Income taxes $ 535,691 $ - $ 259,650
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) OPERATIONS
Geerlings & Wade, Inc. (the Company) is a direct marketer of premium wines
and wine-related merchandise to retail consumers in the United States. The
Company maintains licensed facilities in 14 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 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 applies Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. As of December 31, 1997 cash equivalents consist of
investments in a money market account.
F-7
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(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 $586,000, $634,000 and
$723,000 for the years ended December 31, 1995, 1996 and 1997,
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).
During 1996 and 1997, the Company purchased approximately $3,544,000 and
$3,223,000, respectively 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 $637,000 and
$106,000 of paid reservations of certain vintage wines as of December
31, 1996 and 1997, respectively. In its efforts to reduce the levels of
such inventory, the Company sold approximately $532,000 and $283,000 of
such reserves to its customers during 1996 and 1997, respectively. The
Company bears the ultimate liability for the wine reservations sold
until delivered and accepted 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>
F-8
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(g) Other Assets
Other assets primarily consist of costs of acquiring liquor licenses
which are amortized on a straight-line basis over five years, their
estimated useful life.
(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. Total amounts capitalized as of
December 31, 1996 and 1997 are $813,208 and $957,483, respectively.
Amortization expense of $409,364 and $629,089 was recorded as of
December 31, 1996 and 1997, respectively.
(i) Deferred Revenue
Deferred revenue of $933,173 and $1,129,555 as of December 31, 1996 and
1997, respectively, represents customer prepayments and deferred
membership revenues. Of these amounts, $281,436 and $296,363, as of
December 31, 1996 and 1997, respectively, represent customer
prepayments, and $629,157 and $833,192, as of December 31, 1996 and
1997, 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 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, 1997, the Company did not have any
foreign exchange contracts outstanding.
(k) Fiscal Year
The Company's fiscal year ends on December 31. For interim reporting
purposes, the Company closes its books on the last day of each interim
fiscal quarter.
F-9
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(l) Long-Lived Assets
The Company applies the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of. SFAS No. 121 requires that long-lived assets be reviewed for
impairment by comparing the fair value of assets with their carrying
amounts at each reporting period. Accordingly, the Company evaluates the
possible impairment of long-lived assets based on projected cash flows
of the related asset. At both December 31, 1996 and 1997, the Company
determined that no there was no impairment of long-lived assets.
(m) 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.
(n) 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 instruments.
(o) Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. Both SFAS No. 130 and 131 are effective for fiscal
years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material
impact on the Company's financial statements.
F-10
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(3) INCOME (LOSS) PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This
standard is effective for fiscal periods ending after December 15, 1997 and
requires presentation of both basic and diluted earnings per share on the
face of the statements of income. These financial statements have been
prepared and presented based on the new standard. Prior period amounts have
been restated to conform to current year presentation. For the years ended
December 31, 1995, 1996 and 1997, 112,089, 257,619 and 227,902 of anti-
dilutive shares, respectively, have been excluded from the weighted average
number of common and dilutive potential common shares outstanding.
Basic and diluted income (loss) per share, as required by SFAS No. 128, is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Net income (loss) $(677,145) $ (218,414) $ 822,595
========= ========== ==========
Basic weighted average shares outstanding 3,754,891 $3,776,376 3,779,538
Weighted average common equivalent shares - - 16,922
--------- ---------- ----------
Diluted weighted average shares outstanding 3,754,891 3,776,376 3,796,460
========= ========== ==========
Basic income (loss) per share $ (0.18) $ (0.06) $ $0.22
========= ========== ==========
Diluted income (loss) per share $ (0.18) $ (0.06) $ $0.22
========= ========== ==========
</TABLE>
(4) 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 (8.50%
at December 31, 1997) plus 3/4%. No commitment fees apply to the unutilized
portion of the credit line. The line of credit is subject to annual reviews
by the bank. Borrowings under the line are collateralized by all assets of
the Company. At December 31, 1997, $982,395 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.
F-11
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
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, 1997, there were no outstanding
forward exchange contracts.
(5) COMMITMENTS AND CONTINGENCIES
(a) Lease 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, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
1998 $ 728,244
1999 717,922
2000 483,036
2001 50,415
----------
$1,979,617
==========
</TABLE>
Total rental expense under these agreements included in the accompanying
statements of operations is approximately $509,000, $799,000 and
$862,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) Litigation
In the ordinary course of business, the Company is party to various
types of litigation. The Company believes it has meritorious defenses to
all claims, and, in its opinion, all litigation currently pending or
threatened will not have a material effect on the Company's financial
position or results of operations.
(6) INCOME TAXES
Income taxes, 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 (benefit) provision for income taxes are as follows:
F-12
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current
Federal $(222,000) $ - $647,000
State - 172,000
--------- -------- --------
(222,000) - 819,000
--------- -------- --------
Deferred
Federal (212,000) (119,000) (168,000)
State (36,000) (33,000) (47,000)
--------- -------- --------
(248,000) (152,000) (215,000)
--------- -------- --------
$(470,000) $(152,000) $604,000
========= ========= ========
</TABLE>
The reconciliation of the federal statutory rate to the effective tax rate
for the years ended December 31, 1995, 1996 and 1997 for income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Income tax (benefit) provision at (34)% (34)% 34%
federal statutory rate
State taxes, net of federal benefit (5) (6) 6
Tax-exempt municipal bond interest (3) - -
Other, net 1 (1) 2
---- --- --
(41)% (41)% 42%
==== === ==
</TABLE>
Deferred income taxes relate to the following temporary differences as of
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net operating loss carryforward $56,000 $ -
Deferred revenue 299,000 366,000
Capitalized inventory 58,000 80,000
Nondeductible reserves 136,000 198,000
Other temporary differences - 205,000
Depreciation and amortization (49,000) (35,000)
Deferred costs - (106,000)
------- -------
$500,000 $715,000
Total deferred taxes ======== ========
</TABLE>
F-13
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) STOCKHOLDERS' EQUITY
(a) Preferred Stock
The Company has authorized 1,000,000 shares of $.01 par value preferred
stock. 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.
(b) Stock Option Plans
The Employee Stock Option Plan (Option Plan), 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 450,000 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.
F-14
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
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, 1995 97,089 $12.20 $8.48-$16.00 15,000 $11.13 $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
-------- ------ ------------ ------ ------ ------------
Granted 75,900 4.42 4.00- 5.13 15,000 4.46 4.38- 4.63
Terminated (97,129) 5.52 3.63- 8.00 (7,500) 9.33 4.50- 15.25
Exercised - - - - - -
-------- ------ ------------ ------ ------ ------------
Outstanding,
December 31, 1997 213,890 $ 4.84 $3.78-$ 8.00 30,000 $ 6.85 $4.38-$15.25
======== ====== ============= ====== ====== ============
Exercisable,
December 31, 1997 93,867 $ 5.66 $3.78-$ 8.00 9,998 $ 9.83 $4.50-$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, 1996 and 1997 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, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
-----------------December 31,----------------
1995 1996 1997
<S> <C> <C> <C>
Risk-free interest rate 6.5% 6.5% 6.3-6.61%
Expected dividend yield - - -
Expected lives 5 years 5 years 5 years
Expected volatility 86% 86% 86%
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1995, 1996 and 1997 under these plans is $4.17,
$2.51 and $2.37, respectively.
F-15
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
As of December 31, 1995, 1996 and 1997, the weighted average remaining
contractual life of outstanding options under these plans is 9.16, 9.44
and 9.42 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) income and net (loss) income per share would have
been the following pro forma amounts:
<TABLE>
<CAPTION>
----------------December 31,------------------
1995 1996 1997
<S> <C> <C> <C>
Net (loss) income
As reported $(677,145) $(218,414) $822,595
Pro forma (680,065) (325,799) 661,277
Basic net (loss) income per share
As reported $(0.18) $(0.06) $0.22
Pro forma (0.18) (0.09) 0.18
</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. Shares are purchased at 85% of the lower of the stock price
at the beginning or ending day of the period. A total of 50,000 shares
of common stock have been reserved for purchase under the Purchase Plan.
As of December 31, 1996 and 1997, a cumulative total of 2,282 shares and
6,100 shares, respectively, of common stock have been purchased by
employees under the Purchase Plan.
F-16
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(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 years ended December 31, 1996 and 1997, the
Company's contribution expense was $47,000 and $56,500, respectively, under
the Plan.
F-17
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS REPORT
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page No.
- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
10.30 Lease Amendment between the Company and 47th Avenue South Properties,
LLC dated February 1, 1998.
10.31 Lease Addendum between the Company and Mehland Developers dated
January 13, 1998.
10.32 Lease Amendment between the Company and PBP-N, Inc. dated October 9, 1997.
10.33 Lease Agreement between the Company and 216-218 Newbury Street Realty
Trust dated January 20, 1998.
10.34 Lease Amendment between the Company and Bruce K. Hoyt dated March 18,
1998.
23 Consent of Arthur Andersen LLP.
</TABLE>
<PAGE>
Exhibit 10.30
LEASE AMENDMENT
This Lease Amendment is entered into as of February 1, 1998,by and between
Geerlings & Wade Inc., a Massachusetts Corp. ("Lessee"), and 47th Avenue South
Properties, LLC, a Delaware limited liability company ("Lessor"), with reference
to the following facts:
A. Lessor and Lessee are the current parties to that certain Lease, dated
as of October 6, 1994, for the Lease by Lessee of space in a building located at
6760 E. 47th Avenue Drive, Denver, Colorado 80216, as more particularly
described in the Lease (the "Leased Premises"). All capitalized terms referred
to in this Amendment shall have the same meaning defined in the Lease, except
where expressly defined to the contrary in this Amendment. It is expressly
understood that the terms of this agreement shall take precedence over the terms
and conditions of the option provisions in Section 47 of the Addendum.
B. Lessee and Lessor desire to amend the Lease to extend the Term of the
Lease and increase the rent, and to make certain other changes to the Lease,
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1.0 Confirmation. Lessee acknowledges and agrees that: (a) Lessee is
in sole possession of the Leased Premises demised under the Lease; (b) all work,
improvements and furnishings required by Lessor under the Lease have been
completed and accepted by Lessee; (c) all free rent and any other concession
required under the Lease have been granted, used and otherwise satisfied; and
(d) it has no offset, claim, recoupment or defense against the payment of rent
and other sums and the performance of all obligations of Lessee under the Lease.
2.0 Rent. Beginning on April 1, 1998, the monthly base rent identified in
Article 1.5 of the Lease is as follows:
Months 1-24 $2,975/month
Months 25-36 $3,117/month
3.0 Term. The Term as identified in Section 1.4 of the Lease is extended
until March 31, 2001.
4.0 Lessee's Liability Insurance. Notwithstanding anything to the contrary
contained in the Lease, Lessee shall, at Lessee's expense, obtain and keep in
force during the term of this Lease, a commercial general liability insurance
policy insuring Lessee against the risks of bodily injury and property damage,
personal injury, contractual
<PAGE>
liability, completed operations, products liability, host liquor liability,
owned and non-owned automobile liability arising out of the ownership, use,
occupancy or maintenance of the Leased Premises and the common area adjacent to
the leased premises. Such insurance shall be a combined single limit policy in
an amount not less than ONE MILLION DOLLARS ($ 1,000,000.00) per occurrence with
TWO MILLION DOLLAR ($2,000,000.00) annual aggregate and an umbrella policy of
ONE MILLION DOLLARS ($ 1,000,000.00) any one occurrence. Lessor and any lender
and any other party in interest designated by Lessor shall be named as
additional insured(s). The policy shall contain cross liability endorsements and
shall insure performance by Lessee of the indemnity provisions of this Lease;
shall cover contractual liability, and products liability; shall be primary, not
contributing with, and not in excess of coverage which Lessor may carry; shall
state that Lessor is entitled to recovery for the negligence of Lessee even
though Lessor is named as an additional insured; shall provide for severability
of interest; shall provide that an act or omission of one of the insured or
additional insureds which would void or otherwise reduce coverage shall not void
or reduce coverages as to the other insured or additional insureds; and shall
afford coverage after the term of this Lease (by separate policy or extension if
necessary) for all claims based on acts, omissions, injury or damage which
occurred or arose (or the onset of which occurred or arose) in whole or in part
during the term of this Lease. The limits of said insurance shall not limit any
liability of Lessee hereunder. Not more frequently than every three (3) years,
if, in the reasonable opinion of Lessor, the amount of liability insurance
required hereunder is not adequate, Lessee shall promptly increase said
insurance coverage as required by Lessor.
5.0 Rights of Lessor. Notwithstanding anything to the contrary contained in
the Lease, Lessee shall permit Lessor and Lessor's agents and any mortgagee
under a mortgage or beneficiary under a deed of trust encumbering the Building
containing the Leased Premises and such party's agents to enter the Leased
Premises at all reasonable times after reasonable notice except in case of
emergency, for the purpose of inspecting the same or for the purpose of
maintaining the Building, or for the purpose of making repairs, alterations or
additions to any portion of the Building, including the erection and maintenance
of such scaffolding, canopies, fences and props as may be required, or for the
purpose of placing upon the Building any usual or ordinary "for sale" signs, and
shall permit Lessor, at any time within ninety (90) days prior to the expiration
of this Lease, to place upon the Leased Premises any usual or ordinary "to let"
or "to lease" signs. This Section in no way affects the maintenance obligations
of the parties hereto.
6.0 Priority of Encumbrances. Notwithstanding anything to the contrary
contained in the Lease, this Lease shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Leased Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's
<PAGE>
right to quiet possession of the Leased Premises shall not be disturbed if
Lessee is not in default and so long as Lessee shall pay the rent and observe
and perform all the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms, if any mortgagee, trustee or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed of trust
or ground lease, and shall give written notice thereof to Lessee, this Lease
shall be deemed prior to such mortgage, deed of trust or ground lease, whether
this Lease is dated prior or subsequent to the date of said mortgage, deed of
trust or ground lease or the date of recording thereof.
6.1 Execution of Documents. Lessee agrees to execute any documents that a
re required to effectuate such subordination or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be, and the
failure to do so within ten (10) days after written demand shall be a material
default under the terms of this Lease for which no additional notice of cure
period shall be required. It is understood by all parties that Lessee's failure
to execute the subordination documents referred to above may cause Lessor
serious financial damage by causing the failure of a financing or sale
transaction.
6.2 Attornment. If the holder of any ground lease, mortgage, deed of trust
or security described above (or its successor in interest), enforces its
remedies provided by law or under the pertinent mortgage, deed of trust or
security instrument and succeeds to Lessor's interest in the Leased Premises,
Lessee shall, upon request of any person succeeding to the interest of such
lender as result of such enforcement, automatically become the lessee of said
successor in interest without change in the terms or other provisions of this
Lease, provided, however, that said successor in interest shall not be (i) bound
by any payment of rent for more than thirty (30) days in advance, except
prepayment in the nature of security for the performance by Lessee of its
obligations under this Lease, (ii) bound by any modification or amendment of
this Lease to shorten the term or decrease the monthly rent without the consent
of such lender or such successor in interest, (iii) liable for any act or
omission of any previous landlord (including Lessor), (iv) subject to any
offset, defense, recoupment or counterclaim that Lessee may have given to any
previous landlord (including Lessor), or (v) liable for any deposit that Lessee
may have given to any previous landlord (including Lessor) that has not, as
such, been transferred to said successor in interest. Within ten (10) days after
receipt of request by said successor in interest, Lessee shall execute and
deliver an instrument or instruments confirming such attornment, including a
non-disturbance, attornment and subordination agreement in a form required by
any such successor in interest.
7.0 Execution by Lessee. Notwithstanding anything to the contrary contained
in the Lease, within ten (10) days after the receipt of written request by
Lessor, Lessee shall execute and deliver to Lessor an estoppel certificate
acknowledging such facts regarding this Lease as Lessor may reasonably require,
including without limitation, that (i) this Lease is in full force and effect,
binding and enforceable in accordance with its terms and unmodified (or if
modified, specifying the written modification documents); (ii) no
<PAGE>
default exists on the part of Lessor or Lessee under this Lease; (iii) there are
no events which with the passage of time, or the giving of notice, or both,
would create a default under this Lease; (iv) no rent in excess of one month's
rent has been paid in advance; (v) Lessee has not received any written notice of
any other sale, assignment, transfer, mortgage or pledge of this Lease or the
rent due hereunder, and (vi) Lessee has no defense, set off, recoupment or
counterclaim against Lessor. Any such estoppel certificate maybe relied upon by
Lessor, any lender and any prospective purchaser of the Building or Complex or
any interest therein. Failure to comply with this Article shall be a material
breach of this Lease by Lessee giving Lessor all rights and remedies under
Article 25 hereof, as well as a right to damages caused by the loss of a loan or
sale which may result from such failure by Lessee.
8.0 General Provisions.
8.1 Further Assurances. Lessor and Lessee each agree to execute any and all
documents and agreements reasonably requested by the other party to further
evidence or effectuate this Amendment.
8.2 Successors and Assigns. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their successors and assigns.
8.3 Reaffirmation. As amended hereby, the Lease shall remain in full force
and effect.
8.4 Conflicts. In case of any conflict between any term or provision of
this Amendment and the Lease, the term or provision of this Amendment shall
govern.
8.5 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one agreement.
9.0 Effectiveness. The parties agree that the submission of a draft or copy
of this Amendment for review or signature by a party is not intended, nor shall
it constitute or be deemed, by either party, to be an offer to enter into a
legally binding agreement with respect to the subject matter hereof and may not
be relied on for any legal or equitable rights or obligations. Any draft or
document submitted by Landlord or its agents to Tenant shall not constitute a
reservation of or option or offer in favor of Tenant. The parties shall be
legally bound with respect to the subject matter hereof pursuant to the terms of
this Amendment only if, as and when all the parties have executed and delivered
this Amendment to each other. Prior to the complete execution and delivery of
this Amendment by all parties, each party shall be free to negotiate the form
and terms of this Amendment in a manner acceptable to each party in its sole and
absolute discretion. The parties acknowledge and agree that the execution and
delivery by one party prior to the execution and delivery of this Amendment by
the other party shall be of no force and
<PAGE>
effect and shall in no way prejudice the party so executing this Amendment or
the party that has not executed this Amendment.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first set
forth above.
LESSOR:
47'h Avenue South Properties, LLC, a
Delaware limited liability company
By: Divco West Group, LLC, a
Delaware limited liability
Company, Its Agent
By /s/ Scott Smithers
Scott Smithers, President
Date 2/18/98
LESSEE:
Geerlings & Wade, Inc., a Massachusetts
corporation
By: David R. Pearce
Title Vice President
Date 2/4/98
<PAGE>
Exhibit 10.31
ADDENDUM TO LEASE
BETWEEN: Lessor - Mehland Developers
Lessee - Geerlings & Wade
LEASE DATED: October 31, 1994
SECTION: 5. OPTION TO RENEW.
The Lease shall be extended for one (1) additional term of three (3)
years beginning March 1, 1998 through February 28, 2001.
All other conditions of the Lease shall remain in effect.
LESSEE: LESSOR:
GEERLINGS & WADE, INC. MEHLAND DEVELOPERS
960 Turnpike Street 521 Byers Road Suite 201
Canton, MA 02021 Miamisburg, OH 45342
By: /s/ David R. Pearce BY: /s/ Metzger
Vice President
DATE: 2/23/98 DATE: 1/13/98
<PAGE>
Exhibit 10.32
LEASE AMENDMENT
DATED: October 9, 1997
BETWEEN: PBP-N, INC. dba
PACIFIC BUSINESS PARK NORTH LANDLORD
AND: GEERLINGS AND WADE
A Massachusetts corporation TENANT
By written Lease dated July 18, 1994, Tenant leased from Landlord
approximately 5,000 square feet of warehouse and office space located in
Building No. 5, Pacific Business Park, 7012 South 220th Street, Kent, Washington
98032 (hereinafter referred to as "the Premises"). The Lease expires November
30, 1997.
Tenant now wishes to extend the term of the Lease.
NOW, THEREFORE, the parties agree as follows:
1. The Lease shall be extended for an additional 36 months commencing
December 1, 1997 and continuing through November 30, 2000.
2. The base rent shall increase to $2,060.00 per month through the extended
term.
3. Tenant has deposited $1,860.00 with Landlord under the terms of the
Lease. Tenant shall now deposit with Landlord an additional $200.00, bringing
its total security deposit to $2,060.00.
4. Except as expressly modified hereby, all terms of the Lease shall remain
in full force and effect and shall continue through the extended term.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first written above.
PBP-N, INC. dba GEERLINGS AND WADE
PACIFIC BUSINESS PARK NORTH A Massachusetts corporation
By /s/ Leon Hartvickson By /s/ David R. Pearce
- ------------------------- ------------------------
Leon Hartvickson David R. Pearce
Vice President Vice President
<PAGE>
Exhibit 10.33
SUBMISSION NOT AN OPTION
THE SUBMISSION OF THIS LEASE FOR EXAMINATION AND NEGOTIATION DOES NOT CONSTITUTE
AN OFFER TO LEASE, A RESERVATION OF, OR OPTION FOR THE PREMISES AND SHALL VEST
NO RIGHT IN ANY PARTY. TENANT OR ANYONE CLAIMING UNDER OR THROUGH TENANT SHALL
HAVE THE RIGHTS TO THE PREMISES AS SET FORTH HEREIN AND THIS LEASE BECOMES
EFFECTIVE AS A LEASE ONLY UPON EXECUTION, ACKNOWLEDGEMENT AND DELIVERY THEREOF
BY LANDLORD AND TENANT, REGARDLESS OF ANY WRITTEN OR VERBAL REPRESENTATION OF
ANY AGENT, MANAGER OR EMPLOYEE OF LANDLORD TO THE CONTRARY.
LANDLORD: Zouhair Ali Hassan, as he is Trustee of
216-218 Newbury Street Realty Trust,
under Declaration of Trust dated May 24, 1996
recorded with Suffolk County Registry of Deeds
in Book 20592, Page 119.
TENANT: Geerlings & Wade, Inc.
PREMISES: Approximately 1,420 rentable square feet of
space located on the upper level retail location of the
building located at 218 Newbury Street, Boston,
Massachusetts
<PAGE>
GEERLINGS & WADE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Basic Lease Provisions and Exhibits............. 1
ARTICLE II Premises........................................ 3
ARTICLE III Term; Landlord's and Tenant's Work.............. 3
ARTICLE IV Rent............................................ 5
ARTICLE V Tenant's Covenants and Landlord's Obligations... 7
ARTICLE VI Condition of Premises........................... 10
ARTICLE VII Insurance....................................... 11
ARTICLE VIII Casualties and Eminent Domain................... 12
ARTICLE IX Defaults and Remedies........................... 13
ARTICLE X Subordination................................... 15
ARTICLE XI Miscellaneous Provisions........................ 15
11.1 Parties Bound................................... 15
11.2 Landlord's Liabilities and Additional Rights.... 16
11.3 Covenants and Conditions........................ 16
11.4 Costs and Expenses.............................. 16
11.5 Holding Over.................................... 16
11.6 Quiet Enjoyment................................. 17
11.7 No Brokerage.................................... 17
11.8 Certificates.................................... 17
11.9 Notices......................................... 17
11.10 No Waiver....................................... 17
11.11 Force Majeure................................... 17
11.12 Recording....................................... 17
11.13 Paragraph Headings.............................. 18
11.14 Governing Law................................... 18
11.15 Separability; Construction and Interpretation... 18
11.16 When Lease Becomes Binding; Entire Agreement.... 18
11.17 Execution....................................... 18
EXHIBITS
EXHIBIT A - Plan of Premises................................. 19
EXHIBIT B - Legal Description of Property.................... 20
EXHIBIT C - Landlord's Work.................................. 21
EXHIBIT D - Tenant's Work.................................... 22
EXHIBIT E - Rules and Regulations............................ 23
</TABLE>
<PAGE>
ARTICLE 1 - BASIC LEASE PROVISIONS
Each reference in this Lease to titles or terms contained in Article I
shall be deemed to incorporate the applicable definitions or data. The Exhibits
attached to this Lease are incorporated by reference.
Date of Lease: January 20, 1998
Commencement Date: March 20, 1998 (Sixty (60) days from Lease
execution date)
Rent Commencement Date: March 20, 1998 (Same as Commencement Date)
Landlord: Zouhair Ali Hassan, as he is Trustee of 216-218
Newbury Street Realty Trust, u/d/t dated May 24,
1996 recorded with Suffolk County Registry of
Deeds in Book 20592, Page 119.
Landlord's Mailing Address: 402 Boylston Street, Boston, MA 02116
Tenant: Geerlings & Wade, Inc.
Tenant's Mailing Address: c/o Gregg Kober, 960 Turnpike Street, Canton, MA
02021
Premises: Approximately 1,420 rentable square feet of space
located on the upper retail floor, as shown on
Exhibit A attached hereto, in the building (the
"Building") currently containing approximately
9,150 rentable square feet of space located in
Boston, Suffolk County, Massachusetts, with an
address of 216-218 Newbury Street, and situated on
the property ("Property") legally described in the
metes and bounds description attached hereto as
Exhibit B.
Term: Thirty-Six (36) months in addition to any partial
month at the commencement of the Term, unless
sooner terminated or extended as provided herein,
with one (1) three (3) year option.
Permitted Use: The sale and retail of wine, beer and wine and
cigar accessories and ancillary office use.
Base Rent: Lease Year Annually Monthly
1 $73,840.00 $6,153.33
2 $76,680.00 $6,390.00
3 $78,327.20 $6,527.27
Lease Year: Twelve (12) month period beginning on the
Commencement Date and each anniversary of the
Commencement Date; provided that if the
Commencement Date is not the first day of the
calendar month, the first Lease Year shall include
the partial calendar month at the beginning of
<PAGE>
the Term and subsequent Lease Years shall commence
on the anniversary of the first day of the full
calendar month during the Term.
Option to Extend: Tenant shall have the option to extend this Lease
for an additional three (3) year term upon written
notice to Landlord on or before the first day of
the sixth (6th) calendar month before the end of
the initial Lease Term.
Option Rent: Lease Year Annually Monthly
4 $80,684.40 $6,723.70
5 $83,496.00 $6,958.00
6 $86,847.20 $7,237.27
Additional Rent: All sums, other than Base Rent, due from Tenant
pursuant to the terms of this Lease.
Tax Base: Fiscal Year ending June 30, 1997
Operating Cost Base: Calendar Year 1997
Pro Rata Share: Initially, Fifteen and 52/100 (15.52%) percent.
Tenant's share shall be determined from time to
time during the Term by Landlord's architect or
surveyor and shall be based on the ratio between
the rentable square footage of the Premises and
one-hundred (100%) percent of the rentable square
footage of the space in the Building.
Utilities: Tenant shall have the right to use the utilities
which service the Premises as of the Commencement
Date provided all costs relating to the furnishing
and use of utilities shall be paid by Tenant,
including without limitation, electricity and
heating, water, sewer, ventilation and air
conditioning.
Security Deposit: One (1) month's Base Rent, which amount shall
initially be $6,153.33 and shall be adjusted to
reflect changes in Base Rent.
Permit Period: Tenant shall have ninety (90) days following the
date of full execution hereof to obtain any and all
necessary liquor licenses and use permits from the
appropriate authorities (the "Licenses"). If Tenant
is unable to obtain said Licenses within this
ninety (90) day period, Tenant may request and,
upon a showing that all required Licenses have been
applied for and diligently pursued, shall be
granted a thirty (30) days extension. If for any
reason Tenant is unable to obtain the required
Licenses within the ninety (90) day period (or 120
day period if so extended) then Tenant may
terminate this Lease in which event neither party
shall have any further obligation to the other but,
Landlord shall retain the Deposit as a termination
fee. Notwithstanding any provisions hereof,
Tenant's obligation to pay rent hereunder shall
commence on the Rent Commencement Date.
2
<PAGE>
Broker: To be paid by Landlord and to be divided equally
between Eldridge Realty and The Dartmouth Co. and
to be paid as follows: (i) five (5%) percent of the
Annual Rent for the first year of the Lease, and
(ii) four (4%) percent of the Annual Rent for each
of the second and third years of the Lease. In the
event the Term shall be extended as provided in
Section 3.2 of this Lease, Eldrige Realty and the
Dartmouth Co. shall be paid a brokerage commission
at the time of Tenant's notification of Lease
Extension of two (2%) percent of the Annual Rent
for each of the years of the extended term (the
fourth, fifth, and sixth year of the Term).
Provided, however, such brokerage commission shall
be due and payable as provided herein only, if as
and when Landlord and Tenant have executed this
Lease and provided further no brokerage commission,
fee or other charge shall be due for any year(s) of
the Term (as the same may be extended) following
Tenant's Default.
ARTICLE II - PREMISES
2.1 Premises. On the terms of this lease, Landlord leases to Tenant, and
Tenant accepts from Landlord, the Premises.
2.2 Common Areas. The term "Common Areas" shall mean all areas within the
Property which are available for the common use of tenants of the Property from
time to time, as designated by Landlord, and which are not leased or held for
the exclusive use of Tenant or other tenants including, but not limited to,
sidewalks, loading areas, and corridors. Landlord may, from time to time,
change the size, location, nature and use of any of the Common Areas including,
without limitation, converting Common Areas into leasable area, and increasing
or decreasing Common Areas and/or facilities. Tenant acknowledges that such
activities may result in an inconvenience to Tenant. Tenant further
acknowledges that Landlord may from time to time undertake work and/or repairs
to the Property and or the Premises and that said work and/or repairs may result
in an interruption to Tenant's business. Notwithstanding such inconvenience or
interruption, Tenant shall not be entitled to (a) any reduction in rent, or (b)
damages caused by Landlord, notwithstanding any interference of Tenant's
business upon the Premises or any inconvenience caused by construction work.
Notwithstanding the provisions hereof, (a) Landlord shall not unreasonably
interfere with Tenant's use of the Premises for the Permitted Use hereunder, and
(b) in the event Tenant shall be substantially prevented from undertaking the
Permitted Use hereunder as a result of Landlord's undertaking said work or
repairs to the Premises (other than work or repairs necessitated by Tenant's,
Tenant's employees, licensees or invitees use of the Premises) for a period
exceeding forty eight (48) business hours, Tenant shall be entitled to an
abatement of Base Rent. Landlord acknowledges that Landlord shall exercise best
efforts not to unreasonably interfere with Tenant's use of the Premises for the
Permitted Use hereunder during the months of November and December.
Tenant shall have the non-exclusive right (in common with other tenants,
their employees, agents and invitees, and all others to whom Landlord has
granted or may grant such rights) to use the Common Areas for the intended
purposes, subject to reasonable rules and regulations established
3
<PAGE>
by Landlord from time to time. Tenant shall abide by such rules and regulations
as are applicable to all tenants within the Building, shall cause others who use
the Common Areas with Tenant's express or implied permission to abide by
Landlord's rules and regulations, and shall not interfere with the rights of
Landlord, other tenants or any other person entitled to use the Common Areas. At
any time, Landlord may close any Common Area to perform any acts in the Common
Area as, in Landlord's judgment, are desirable to improve the Property or to
protect Landlord's rights with respect to the Property. Landlord shall maintain
the Common Areas in good order, condition, replacement and repair, subject to
reasonable wear and tear. Notwithstanding the provisions hereof, Landlord shall
not unreasonably interfere with Tenant's use of the Premises for the Permitted
Use hereunder.
ARTICLE III - TERM; LANDLORD'S AND TENANT'S WORK
3.1 Term. This Lease is for the Term beginning on the Commencement Date. If
Landlord is unable to deliver possession on the Commencement Date, Tenant's sole
remedy shall be an abatement of rent for a period of time from the Rent
Commencement Date equal to the period of delay from the Commencement Date until
delivery of possession of the Premises to Tenant, provided there shall be no
abatement if Landlord's failure results from Tenant's acts or omissions. In the
event Landlord is unable to deliver possession of the Premises to the Tenant in
or within six (6) months from the Rent Commencement Date, Tenant may terminate
the Lease and Landlord shall thereupon refund to Tenant the Deposit and the
Landlord and Tenant shall have no further recourse to one another at law and in
equity.
3.2 Option to Terminate. Tenant acknowledges and agrees that Tenant at its
sole cost and expense and using an attorney of Landlord's designation, shall
promptly make application for and diligently pursue and obtain any and all
licenses, permits, authorizations, including without limitation appropriate
liquor licenses, (collectively, the "Licenses") from all appropriate authorities
for undertaking the Permitted Use hereunder. Tenant shall have the option to
terminate this lease by written notice to Landlord in the event Tenant shall not
receive the Licenses in or within ninety (90) days from the date of this lease
(the "Licensing Period"), in which event Landlord shall retain the Security
Deposit as a termination fee and neither party hereunder shall have any further
obligation to the other hereunder.
In the event Tenant shall not have received all Licenses in or within the
Licensing Period and provided Tenant has promptly applied for and diligently
pursued obtaining the Licenses, as provided hereinabove, Tenant may so notify
Landlord in writing and request an extension of the Licensing Period for an
additional thirty (30) day period, which additional thirty (30) day period shall
be granted by Landlord, provided Tenant shall not be in default of this Lease.
3.3 Option to Extend. Tenant shall have the option to extend the Term (the
"Extension Option") for one (1) three (3) year period (the "Extension Period")
by giving notice to Landlord of Tenant's exercise of its Extension Option not
later than the first day of the sixth (6th) calendar month prior to the
expiration of the initial Term, provided that, at the time such Extension Option
is exercised and at the commencement of the Extension Period, (i) Tenant shall
not be in default under any of the terms of this Lease, (ii) Tenant shall not
have assigned this Lease or sublet any portion of the Premises, except as
permitted herein, and (iii) Tenant continues to occupy all portions of the
Premises. Any failure by Tenant to give timely notice of the exercise of its
Extension Option shall be deemed to be an irrevocable waiver of all right to
exercise its Extension Option. All of the terms, conditions, covenants and
agreements
4
<PAGE>
contained herein shall apply during the Extension Period, except that
(i) Base Rent for the Premises during the Extension Period shall be as set forth
above as Option Rent, (ii) Landlord shall not be obligated to undertake any
additional leasehold improvements or to provide any so called "free rent" or
other tenant inducements, and (iii) Tenant shall have no further option to
extend this Lease.
3.4 Landlord's Work. The Premises shall be delivered "AS IS", subject to
all recorded matters, all applicable zoning, and Laws and Insurance Regulations,
as defined in Section 5.1(a), and Landlord shall not be required to make any
repairs or replacements (hereafter jointly "Repairs") or improvements,
installations, physical changes, alterations or additions (hereafter
collectively "Improvements") to the Premises. Tenant acknowledges and agrees
that Landlord has no work to perform in or on the Premises. Tenant further
acknowledges that Tenant has inspected (or had the opportunity to inspect) the
Premises, is satisfied with the condition thereof and waives any existing
defects in the condition of the Premises or Property (latent or otherwise).
3.5 Tenant's Work. Upon delivery of possession, Tenant shall (a) promptly
perform Tenant's work, if any, as set forth in Exhibit D attached hereto and
equip the Premises with all necessary trade fixtures and personal property, and
(b) open for business as soon after the Commencement Date as reasonably
practicable. Tenant's Work shall be done in a good and workmanlike manner using
first-class new materials and equipment, and in accordance with the requirements
of all applicable Laws and Insurance Regulations as defined in Section 5.1 (a).
If Tenant fails to commence Tenant's Work within ten (10) days after delivery of
possession or commence use of the Premises for its business purposes within
sixty (60) days after the Commencement Date, Landlord may terminate the Lease.
Tenant shall not make or perform, or permit the making or performance of,
any Improvements by Tenant in or about the Premises except as provided herein or
as provided in Section 6.1 of this Lease. Tenant shall in no event remove, alter
or deface the architectural details within the Premises, including without
limitation, any fireplace mantels, moldings, paneling or carving work.
ARTICLE IV - RENT
4.1 Base Rent. Tenant shall pay Base Rent monthly, in advance, commencing
on the Rent Commencement Date (or for the partial month beginning on the
Commencement Date if the Commencement Date is not the first day of the month)
and thereafter shall pay Base Rent monthly, in advance, on the first day of each
calendar month thereafter to Landlord at Landlord's Mailing Address or at such
other address as Tenant shall be notified by Landlord or Landlord's agent in
writing. Additional Rent, which includes Operating Cost Rent, Tax Rent and all
other sums (except Base Rent) payable by Tenant, shall be paid when due. All
Base Rent and Additional Rent shall be paid in lawful money of the United
States. If (i) Base Rent and/or any Additional Rent is not received by Landlord
within five (5) days of due date or otherwise paid by the due date, or (ii)
Tenant's check is not honored, and because actual damages resulting from late
payments and dishonored checks are difficult to fix, Tenant agrees to pay three
(3%) percent of the amount outstanding as liquidated damages for each late
payment or dishonored check. In addition, Landlord may charge interest from the
initial due date at the rate of the lesser of 18% or the maximum legal rate on
all amounts not paid or received by Landlord within ten (10) days of the due
date. If two (2) or more of Tenant's checks are dishonored, Landlord may demand
all future payments be by certified or bank check or money order. The late
charge and interest payments do not modify Tenant's obligation to pay Base Rent
and Additional Rent when due, nor is Landlord precluded from pursuing other
remedies under the Lease or as are otherwise available.
5
<PAGE>
4.2 Net Lease. Tenant's rent payments shall be completely net to Landlord
so that this Lease yields to Landlord the net annual Base Rent, and Tenant shall
pay all Base Rent, Additional Rent and costs of every kind relating to the
Premises without notice, demand, setoff, deduction, counterclaim, defense or
abatement except as specifically provided in the Lease.
4.3 Tax Rent. Tenant shall pay Tenant's Pro Rata Share of Taxes in excess
of Tax Base ("Tax Rent"). Taxes shall include all real estate taxes,
assessments, sales or use taxes, sewer entrance fees, and other public charges
on or relating to the Property including, without limitation, the Building,
other improvements, land and personalty, taxes or rentals, and taxes in addition
to or in lieu of existing taxes, foreseen and unforeseen ordinary and
extraordinary, and all costs related to attempts to secure a refund or abatement
(together called "Taxes"); provided Taxes shall not include franchise, estate,
inheritance, succession, transfer, income or excess profits taxes assessed on
Landlord. Tenant also shall pay before the due date all taxes attributable to
its signs or personal property, and all Tax increases resulting from Tenant's
Improvements to the Premises.
Tenant's Pro Rata Share shall be based upon Taxes "as abated" provided
Landlord first shall receive from any Tax refund all costs of securing the
refunds and, to the extent Tenant paid Taxes for which the refund was received,
Tenant then shall be entitled to its Pro Rata Share of the balance. Landlord
shall have sole control of all tax abatement proceedings, and the pendency of
abatement proceedings or Landlord's withholding of tax payments shall not affect
Tenant's obligation to pay Taxes as provided herein.
If the Property or the Premises is not separately assessed, Landlord shall
reasonably determine Tenant's Pro Rata Share of Taxes based on the assessor's
worksheet and other reasonably available information.
Tax Rent shall be paid to Landlord monthly with Base Rent in the amount
which Landlord estimates, from time to time, will represent Tenant's Tax Rent.
Landlord shall notify Tenant of its actual Pro Rata Share after receipt of a Tax
bill, and any excess paid by Tenant shall be applied to Tenant's next Tax Rent
payment or refunded, at Landlord's election, or Tenant shall pay any deficiency
within 15 days of such notice.
4.4 Operating Cost Rent. Tenant shall pay Operating Cost Rent which shall
consist of Tenant's Pro Rata Share of all of the "Operating Costs" in excess of
the Operating Cost Base provided that the Operating Cost Base shall not include
amounts expended for work which is not performed at least on a annual basis.
(a) "Operating Costs" include all costs and expenses of every kind and
nature, except capital costs (which term shall be defined as costs for
substantial and permanent increase of the value of the Property) incurred by
Landlord in operating, managing, equipping, lighting, cleaning, maintaining,
repairing and replacing the Premises, the Building and the Property including,
without limitation, costs for janitorial service, rubbish removal, HVAC service,
utilities, landscaping and snow removal; service contracts with independent
contractors including, but not limited to, elevator and HVAC maintenance;
management fees, wages, salaries, benefits, payroll taxes and unemployment
compensation insurance for employees of Landlord or any contractor of Landlord
engaged in the cleaning, operating, maintenance of
6
<PAGE>
security of the Property; the cost of all of Landlord's insurance, including,
without limitation, casualty, liability and loss of rent insurance; and costs
for work required to comply with Laws and Insurance Regulations. Operating Costs
shall not include leasing commissions, advertising and promotional expenditures,
legal fees and disbursements relating to leasing, and other expenses incurred in
connection with leasing space in the Building; salaries for Landlord's
executives above the grade of building manager; financing or ground lease
expenses; real estate taxes; costs paid directly by individual tenants to
suppliers including tenant electricity and telephone costs; amounts for which
Landlord is otherwise reimbursed through insurance, condemnation awards,
warranties or by payments from other tenants; expenditures for preparing other
tenant space in the Building for occupancy; cost of utilities furnished by
Landlord to other tenants' premises and paid for directly by such tenants for
the premises; and the cost of any special services furnished by Landlord to any
tenants of the Building for which such tenants are charged separately.
(b) Operating Cost Rent shall be paid to Landlord monthly with Base Rent
in the amount which Landlord estimates, from time to time, will represent
Tenant's Operating Cost Rent. Landlord shall notify Tenant of its actual Pro
Rata Share within ninety (90) days of the end of each calendar year (provided
Landlord's failure to so notify Tenant shall not reduce Tenant's liability when
such notice is issued), and any excess paid by Tenant shall be applied to
Tenant's next Operating Cost Rent payment or refunded, at Landlord's election,
or Tenant shall pay any deficiency within fifteen (15) days of such notice.
4.5 Deposit. Tenant will pay upon execution of this Lease, and Landlord
shall hold during the Term, the Deposit as security for Tenant's performance of
all its Lease obligations. Landlord may apply the Deposit, or any part, to
Landlord's damages arising from Tenant's default without prejudice to any other
Landlord remedy. If any part of the Deposit is applied, Tenant immediately shall
restore the Deposit to its original amount. Upon written request, and so long as
Tenant is not then in Default, Landlord shall return the remaining Deposit to
Tenant on the expiration or termination of the Term (hereafter referred to as
the "end of the Term") and Tenant's surrender of possession of the Premises to
Landlord. Landlord has no obligation to pay interest on the Deposit and may co-
mingle the Deposit with Landlord's funds. If Landlord conveys its interest under
the Lease, the Deposit, or any part not applied previously, may be turned over
to the grantee in which case Tenant shall look solely to the grantee for the
proper application and return of the Deposit.
4.6 First Month's Base Rent. Tenant will pay upon the Rent Commencement
Date of this Lease first month's Base Rent in the amount of $6,153.33 to be
applied by Landlord as payment of Tenant's first installment of Base Rent due
hereunder.
ARTICLE V-TENANT'S COVENANTS AND LANDLORD'S OBLIGATIONS
5.1 General Covenants. In addition to Tenant's other Lease covenants,
Tenant shall, at its expense:
(a) use the Premises solely and continuously for the Permitted Use and
for no other purpose, procure all required licenses and permits, and not use the
Premises or Property in violation of any laws, ordinances, orders or regulations
of any public authority or of any insurer, Board of Fire Underwriters, or
similar insurance rating bureau having jurisdiction over the Premises (hereafter
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collectively "Laws and Insurance Regulations"), or in a manner which may be
injurious to or adversely affect the general character of the Property and not
conduct any auction, bankruptcy or similar sale thereon;
(b) comply with Landlord's sign criteria, if any, and sign criteria
imposed by applicable governmental authorities (it being Landlord's and Tenant's
agreement that Tenant shall be solely responsible for obtaining any and all
approvals for signage from Landlord and applicable governmental authorities,
installation of said signs and the expense of same);
(c) pay, as they become due, all charges for utilities for the Premises
and contract for same in Tenant's name;
(d) keep the Premises in a neat, clean, sanitary condition and in good
order and repair (making replacements as necessary) including, without
limitation, doors, windows, plumbing, electrical, sewage, mechanical, air
conditioning (including without limitation, the air conditioning compressors;
the Landlord hereby representing that as of the date hereof said air
conditioning compressors are in good working order), ventilating and heating
equipment; and all fixtures and equipment appurtenant to the Premises; replace
broken glass with the same quality glass; paint and refurbish the Premises and
restore or replace the floor covering at reasonable intervals, and in any event
at such times as may reasonably be required to keep the Premises attractive in
appearance; not overload, damage or deface the Premises; and properly store and
dispose of all trash using services (if any) designated by Landlord;
(e) make Improvements and Repairs of whatever nature required by Laws
and Insurance Regulations, except that Tenant shall not be required to make any
structural Improvements, unless required as a result of Tenant's Improvements
(including Tenant's Work) to or use of the Premises;
(f) pay for all repairs and replacements to the Premises, the Building
and the Property required by Tenant's misuse or negligence;
(g) keep and maintain the HVAC System serving the Premises in good
working order, condition and repair (including replacement of parts and
equipment, if necessary) (the Landlord represents as of the date of this lease
that the HVAC unit serving the Premises is in good working condition);
(h) remove snow and ice from the walkways and steps serving the Premises
during Tenant's business hours (or if greater, during hours in which Tenant's
employees, licensees or invitees occupy the Premises);
(i) not act in any manner which prevents Landlord or Tenant from
obtaining, or makes void or voidable, any insurance, or creates extra premiums
for or increases the rate of, insurance, and if Tenant causes extra premiums or
increased rates, Tenant will pay the increased costs to Landlord upon demand
(the Landlord acknowledges to Tenant that the Permitted Use shall not make
Landlord's existing insurance void or voidable or cause extra or increased
premiums or rates for said insurance);
(j) not act in any manner which prevents Landlord or Tenant from
obtaining, or causes the revocation of, any government license, permit, or
authority, and if as a direct or indirect result of Tenant's business an
addition to or change in the same is required by Laws or Insurance Regulations,
Tenant shall pay for the addition or change;
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(k) not assign, sublet, mortgage, license, transfer or encumber this
Lease of the Premises in whole or in part, whether by changes in the ownership
or control of any entity which is Tenant, or any direct or indirect owner of
Tenant, whether at one time or at intervals, by sale or transfer of more than
four (4%) of Tenant's stock, partnership or beneficial interest, operation of
law or otherwise ("Transfer"), except as provided in Section 5.2. hereinbelow,
and any purported Transfer shall be void and confer no rights upon any third
person, provided that if there is a Transfer, Landlord may collect rent from the
transferee without waiving the prohibition against Transfers, accepting the
transferee, or releasing Tenant from full performance under this Lease, and
Landlord shall have the right to terminate this Lease on 30 days written notice
within 60 days after written notice from Tenant to Landlord of any Transfer, or
within 1 year after Landlord first learns of the Transfer if no notice is given;
and
(l) abide by reasonable rules and regulations made by Landlord from time
to time. Attached hereto as Exhibit E are rules and regulations currently in
effect.
5.2. Permitted Assignment. Notwithstanding the provisions of Section 5.1 of
this Lease, Tenant may assign or in any manner transfer this Lease or any estate
or interest therein with Landlord's written consent, which written consent shall
not be unreasonably withheld or denied, subject to the following conditions:
(a) Tenant shall no less than thirty (30) days prior to the effective
date of such assignment provide Landlord with written request for consent to
same ("Notice") and deliver to Landlord therewith, the assignee's name, address
and contact person, a description of assignee's business and copies of financial
statements for the proposed assignee in form reasonably satisfactory to
Landlord, and such other documentation reasonably required by Landlord.
(b) Landlord may terminate the Lease by written notice to Tenant within
ten (10) days of Notice in which case the Lease shall terminate automatically
ten (10) days thereafter and thereupon Tenant shall deliver the Premises as
required pursuant to Section 6.2 of this Lease.
(c) The proposed assignee shall be engaged in a business of similar type
and quality to that of Tenant's, shall use the Premises for the Permitted Use
hereunder only and shall be of no less financial condition than Tenant.
(d) Tenant shall reimburse Landlord, any expense (including without
limitation attorneys' fees) incurred by Landlord in connection with the Notice
or any assignment hereunder.
Landlord's written consent to any one assignment as provided hereunder,
shall not be a waiver of Tenant's (or any assignee of Tenant's) obligation
thereafter to receive Landlord's written consent to same as provided hereunder
for each subsequent assignment.
Following any permitted assignment hereunder and notwithstanding Landlord's
written consent to such assignment, Tenant shall remain liable for all Tenant's
obligations pursuant to this Lease.
5.3. Landlord's Obligations. Landlord agrees to keep the Building and the
Property, including the roof, exterior and structural portions of the Building,
the exterior faces of exterior walls, windows, the common stairways and
stairwells, the elevator and elevator walls, fan rooms, electric and telephone
closets, janitor closets and pipes, ducts, conduits, wires and appurtenant
fixtures and other mechanical equipment serving the Building in common, in good
order serviceable condition and repair, reasonable wear and tear excepted,
subject to fire or other casualty, eminent domain and other events beyond
Landlord's reasonable control.
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5.3(b) Landlord's Waiver. Landlord agrees to deliver to Tenant with
delivery of this executed Lease a Landlord's Waiver in form attached
hereto as Exhibit F
5.4. Environmental Covenants.
(a) Definition. As used in this Lease, the term "Hazardous Material"
means any flammable items, explosives, radioactive materials, hazardous or toxic
substances, material or waste or related materials, including any substances
defined as or including in the definition of "hazardous substances," "hazardous
wastes," "infectious wastes," "hazardous materials" or "toxic substances" now or
subsequently regulated under any federal, state or local laws, regulations or
ordinances including, without limitation, oil, petroleum-based products, paints,
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia
compounds and other chemical products, asbestos, PCB's and similar compounds,
and including any different products and materials which are subsequently found
to have adverse effects on the environment or the health and safety of persons.
(b) General Prohibition. Tenant shall not cause or permit any Hazardous
Material to be generated, produced, brought upon, used, stored, treated,
discharged, released, spilled or disposed of on, in, under or about the Premises
by Tenant, its affiliates, agents, employees, contractors, sublessee's,
assignees or invitees. Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all actions (including, without limitation, remedial or
enforcement actions of any kind, administrative or judicial proceedings, and
orders or judgements arising out of or resulting therefrom), costs, claims,
damages (including, without limitation, punitive damages), expenses (including,
without limitation attorneys', consultants' and experts' fees, court costs and
amounts paid in settlement of any claims or actions), fines, forfeitures or
other civil, administrative or criminal penalties, injunctive or other relief
(whether or not based upon personal injury, property damage, or contamination
of, or adverse effects upon, the environment, water tables or natural
resources), liabilities or losses arising from a breach of this prohibition by
Tenant, its affiliates, agents, employees, contractors, sublessees, assignees or
invitees.
(c) Notice. In the event that Hazardous Materials are discovered upon,
in, or under the Premises, and any governmental agency or entity having
jurisdiction over the Premises requires the removal of such Hazardous Materials,
Tenant shall be responsible for removing those Hazardous Materials arising out
of or related to the use or occupancy of the Premises by Tenant or its
affiliates, agents, employees, contractors, sublessees, assignees or invitees
but not those of its predecessors. Notwithstanding the foregoing, Tenant shall
not take any remedial action in or about the Premises without first notifying
Landlord of Tenant's intention to do so and affording Landlord the opportunity
to protect Landlord's interest with respect thereto. Tenant immediately shall
notify Landlord in writing of: (i) any spill, release, discharge or disposal of
any Hazardous Material in, on or under the Premises, the Property or any portion
thereof, (ii) any enforcement, clean-up, removal or other governmental or
regulatory action instituted, contemplated, or threatened (if Tenant has notice
thereof) pursuant to any Hazardous Material Laws; (iii) any claim made or
threatened by any person against Tenant, the Premises, relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials; and (iv) any reports made to any
governmental agency or entity arising out of or in connection with any Hazardous
Materials in, on under or about or removed from the Premises, including any
complaints, notices, warnings reports or asserted violations in connection
therewith. Tenant also shall supply to Landlord as promptly as possible, and in
any event within five (5) business days after Tenant first receives or sends the
same, copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the Premises, the Property or Tenant's use or
occupancy thereof.
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(d) Survival. The respective rights and obligations of Landlord and
Tenant under this subsection shall survive the expiration or earlier termination
of this Lease.
ARTICLE VI - CONDITION OF PREMISES
6.1 Improvements. Tenant may not make structural or non-structural
Improvements to the Premises without Landlord's prior written consent which
consent may be withheld or denied by Landlord at Landlord's sole discretion with
or without reason. At the end of the Term, except to the extent Tenant is
directed by Landlord to remove any Improvements and to repair damage relating to
such removal, the Premises shall remain in the altered condition with all
Improvements.
All work by Tenant shall be done at Tenant's own cost, in a good and
workmanlike manner, using first-class materials and in accordance with all Laws
and Insurance Regulations, and any work which affects the structure of the
Building or the Building systems shall be performed so as not, in Landlord's
sole judgment, to adversely affect same. Tenant shall pay when due all charges
for labor and materials in connection with any work on the Premises.
6.2 Fixtures: Yield-Up. Except as Landlord directs in writing, Tenant shall
remove its goods, effects, signs and trade fixtures, and peaceably yield-up the
Premises, broom-clean and in good order, repair and condition at the end of the
Term, with all Repairs, including painting and patching to the Premises required
by such removal, having been made and all utility lines left exposed or
unconnected having been capped. If Tenant fails to remove its property or to
make the Repairs by the end of the Term, Landlord may remove and store Tenant's
property in a public warehouse at Tenant's expense or sell same at public
auction, and make the Repairs, and Tenant promptly shall reimburse Landlord for
its costs.
6.3 Mechanic's Lien. Tenant shall immediately discharge (by payment, filing
of bonds or otherwise) any mechanic's, materialmen's or other lien against the
Premises and/or Landlord's interest therein arising out of any payment due, or
purported to be due, for any labor, services, materials, supplies, or equipment
alleged to have been furnished to or for Tenant.
ARTICLE VII - INSURANCE
7.1 Insurance. Tenant shall maintain, at its sole expense, coverages in the
following amounts, and such additional types and amounts of insurance as
Landlord may reasonably require including the following coverages:
(a) Comprehensive General Liability Insurance covering the insured
against claims of Bodily Injury, Personal Injury and Property Damage arising out
of Tenant's operations, assumed liabilities or use of the Property and the
Premises, including the performance by Tenant of the indemnity agreements set
forth in Section 7.4 of this Lease, for limits of liability not less than: (i)
Bodily Injury and Property Damage Liability $2,000,000 Each Occurrence and
$2,000,000 Annual Aggregate and (ii) Personal Injury Liability $2,000,000 Each
Occurrence and $2,000,000 Annual Aggregate, or combined single limit coverage of
$2,000,000 or in such higher limits as may be reasonably required by Landlord
based upon inflation, increased liability awards, recommendations of Landlord's
professional insurance advisors and other relevant factors or any Mortgagee, as
hereinafter defined. Liability policies obtained should be extended to include
Contractual Liability, Personal Advertising Injury, Products/Completed
Operations, Host or Full Liquor Liability and Fire Legal Liability.
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(b) Property Damage Insurance covering (i) all trade fixtures,
merchandise, furnishings, equipment, plate glass, if any, signs and personal
property and all other items of Tenant's property and Tenant's customer's
property on the Premises installed by, for, or at the expense of Tenant, (ii)
all Tenant improvements, and (iii) all other improvements, alterations and
additions to the Premises. Such insurance shall be written on an "all risks" of
physical loss or damage basis, for the full replacement cost value new without
deduction for depreciation of the covered items and in amounts that meet any co-
insurance clauses of the policies of insurance, and shall include a vandalism
and malicious mischief endorsement, sprinkler leakage coverage and earthquake
coverage.
(c) Worker's Compensation/Employer's Liability Insurance. If the nature
of Tenant's use of the Premises requires that any or all of its employees be
provided coverage under State Worker's Compensation Insurance or similar
statutes, Tenant shall keep in force Worker's Compensation Insurance sufficient
to cover all employees.
Landlord and Tenant acknowledge that insurance markets experience rapid
changes, and that insurance in the form and amounts described in this Lease may
not be available in the future. Therefore, if Tenant is unable to maintain the
insurance required under this Lease, Tenant shall remain obligated to maintain
insurance coverage which is customary and commercially reasonable in the
insurance industry for Tenant's type of business, as that coverage may change
from time to time. Landlord makes no representation as to the adequacy of any
insurance required under this Lease and, as a result, Tenant shall obtain any
such additional insurance which Landlord deems necessary to protect Landlord and
Tenant. The amount and coverage of Tenant's insurance shall not limit Tenant's
liability nor relieve Tenant of any obligation under this Lease.
7.2 Tenant's Risk. Except as modified by statute, all merchandise,
furniture, fixtures and property which may be on or about the Premises, Building
or Property shall be at the sole risk and hazard of Tenant, and if the whole or
any part of the Premises, Building or Property is destroyed or damaged by any
cause whatsoever, no part of such loss or damage will be charged to Landlord.
7.3 General Requirements. All insurance policies shall be with companies
qualified to do business in the state in which the Premises are located and
acceptable to Landlord (or having a Best's Key Rating of A:XII or better), and
shall name Landlord, and if Landlord so requests, Landlord's mortgagee(s)
(singlely and collectively, "Mortgagee") and any other party, as insured parties
on casualty policies and additional named insureds on liability policies. In
addition, all liability insurance obtained by Tenant shall be (a) primary
insurance as to all claims thereunder and provide that any insurance carried by
landlord is not excess and is non-contributing with any insurance of Tenant; (b)
contain cross liability endorsements or severability of interest clause
acceptable to Landlord; (c) be written on an occurrence basis; and (d)
specifically cover the liability assumed by Tenant under this Lease including,
but not limited to, Tenant's obligations under Section 7.4. Tenant shall
deliver a copy of the policies or certificates of all insurance to Landlord
prior to the earlier of entry on the Premises or the Commencement Date, and
copies of the new policies or new certificates not later than 30 days prior to
the expiration of each policy. Each policy shall provide (and the certificate
shall evidence) that it will not expire, or be cancelled or modified without 30
days prior written notice to Landlord and, if Landlord requests, to Mortgagee.
If Tenant fails to deliver a policy or certificate to Landlord as required or if
any policy is cancelled or modified during the term without Landlord's consent,
Landlord may obtain such insurance on behalf of Tenant in which case Tenant
shall reimburse Landlord, as additional rent, for the cost of such
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insurance plus interest at the rate set forth in Section 4.1 within fifteen (15)
days after receipt of a statement indicating the cost of such insurance. Tenant
shall have Landlord named as additional insured with respect to the Property.
7.4 Indemnity. Tenant shall save Landlord harmless, and shall exonerate and
indemnify Landlord from all claims, liabilities, penalties and expenses arising
(a) in connection with death, injury and/or property damage on or related to the
Premises which Tenant acknowledges are, subject to the terms of the Lease, under
Tenant's exclusive or substantial control, charge, custody and possession, or
(b) anywhere if caused wholly or in part by any act or omission of Tenant, its
officers, agents, employees, other occupants of the Premises or Tenant's
invitees, except in all cases to the extent that such death, injury and/or
property damage is caused wholly by the willful misconduct or gross negligence
of Landlord, its agents or employees.
7.5 Landlord's Insurance. Landlord acknowledges that Landlord currently
maintains insurance coverage upon the Building and the Property. Landlord shall
continue throughout the lease term to maintain such insurance in coverage
amounts no less than currently existing.
ARTICLE VIII - CASUALTIES AND EMINENT DOMAIN
8.1 Damage. If the Premises become untenantable in whole or part because of
fire or other casualty covered by insurance, or as the result of taking of, or
damage to, the Premises or the Building as a result of the exercise of any power
of eminent domain, condemnation, or purchase under threat or in lieu thereof
("Taking"), then unless the Lease is terminated in accordance with Section 8.2,
Landlord, with reasonable dispatch (but subject to delays for adjustment of
insurance proceeds and causes beyond Landlord's reasonable control), shall
repair the damage so that the Premises are in substantially the same condition
as on delivery of possession subject to rights of Mortgagee, zoning laws, and
building codes then in existence, and provided Landlord shall not be required to
expend more than the net insurance proceeds landlord receives for damage to the
Premises or the net Taking award attributable to the Premises. "Net" means the
insurance proceeds or award less all costs and expenses, including adjustors and
attorney's fees, of obtaining the same. Notwithstanding the foregoing to the
contrary, (a) Tenant shall be required to pay to landlord the amount of any
deductible under Landlord's insurance policy if the casualty is the result of
the acts or omissions of Tenant, its subtenants, assignees or the employee,
agents, or visitors of any such parties and (b) Landlord shall have the right to
require Tenant to perform all or any portion of the non-structural repair which
Landlord would otherwise make and Landlord shall reimburse Tenant for the cost
thereof. Tenant immediately shall give written notice to Landlord of any damage
to the Premises.
8.2 Termination Rights.
(a) If any of the Premises or Building are damaged to the extent of 10%
or more of its insurable value, or by a risk not covered by Landlord's
insurance, or the cost of repair would exceed $100,000.00, or the damage is of a
character that it cannot reasonably be repaired within sixty (60) days of the
date on which repair work commences,
(b) If 25% or more of either (i) the floor area of the Building, or (ii)
the land which constitutes the Premises is taken by a Taking, Landlord may elect
to terminate this Lease by written notice to Tenant within 30 days after the
damage or within 6 months of the date on which the condemning
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authority has the right to possession ("Taking Date") in which case the Lease
shall terminate as of the Taking Date. If the entire Premises are taken by
eminent domain, except for temporary use, this Lease shall terminate
automatically as of the Taking Date.
(c) If 25% or more of the Premises or full access thereto is taken by a
Taking, Tenant may elect to terminate this Lease by written notice to Landlord
within 30 days after the damage or within 6 months of the Taking Date in which
case the Lease shall terminate as of the Taking Date.
8.3 Abatement. If a portion of the Premises is damaged or taken by a
Taking, except for temporary use, and this Lease is not terminated, the Base
Rent and Tenant's Pro Rata Share shall be reduced proportionately based on the
area of the Premises damaged and therefore not used by Tenant or taken by a
Taking until the earlier of when Landlord's Repairs to the Premises are
completed or Tenant begins using the damaged area.
8.4 Taking for Temporary Use. If the Premises is taken by a Taking for
temporary use, this Lease and Tenant's obligations shall continue, except to the
extent the Taking renders compliance impossible or impracticable.
8.5 Disposition of Awards. Except for any separate award for Tenant's
movable trade fixtures or relocation expenses which does not reduce Landlord's
award, all Taking awards to Landlord or Tenant shall be Landlord's property
without Tenant's participation. Tenant assigns to Landlord Tenant's share of
such award, waives any rights with respect to the loss of its leasehold interest
and the Premises, and agrees to execute such instruments as may be necessary to
confirm the assignment and to deliver to Landlord any such award recovered by
Tenant except the separate award described above.
ARTICLE IX - DEFAULTS AND REMEDIES
9.1 Tenant's Default. The following conditions shall be considered a
"Default" by Tenant:
(a) failure to pay Base Rent, Additional Rent, or any other charge
within 10 business days of due date; or
(b) Tenant's leasehold estate is taken by execution or other process of
law; or Tenant is liquidated, dissolved, commits an act of bankruptcy, is
declared bankrupt or insolvent according to law or admits in writing its
inability to pay debts generally as they become due, or an assignment of
Tenant's property is made for the benefit of creditors or a receiver, guardian,
conservator, trustee or assignee, or any other similar officer or person is
appointed to take charge of any part of Tenant's property; or any reorganization
or similar proceedings are commenced by or against Tenant under any bankruptcy
or insolvency law and not dismissed within 30 days from its commencement; or any
court enters an order providing for the modification of rights of Tenant's
creditors; or
(c) vacating of the Premises or closing for business for an aggregate
period during the Term exceeding 30 days except for fires and unavoidable
casualties; or
(d) a Transfer without Landlord's prior written consent; or
(e) failure to perform or observe any other Lease term or covenant for a
period of 30 days after notice, or if same shall reasonably take longer than 30
days, if Tenant fails to commence same promptly and to complete same with due
diligence; or
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If Tenant Defaults, Landlord may at any time until the Default is cured
either (1) terminate this Lease by written notice effective on the date of the
notice or on any date specified in the notice, or (2) without demand or notice,
re-enter, take possession and repossess the Premises and, with a court order and
at Tenant's risk, expel Tenant and those claiming under Tenant and remove, store
and sell their effects at public auction, all without prejudice to any remedies
for arrearages or preceding Defaults. The net proceeds of any sale shall be
applied to sums due to Landlord from Tenant and the balance paid to Tenant.
Tenant waives all statutory rights (including rights of redemption) to the
extent such rights may be lawfully waived. With or without terminating this
Lease, Landlord may re-let all or any part of the Premises from time to time for
periods (even if beyond the Term of this Lease), at such rental, and upon the
terms and conditions as Landlord deems advisable, and may make Improvements and
Repairs to the Premises. No re-entry or taking of possession by Landlord shall
terminate this Lease unless Landlord gives a written notice of such intention to
Tenant or a court of competent jurisdiction terminates the Lease, nor shall
Landlord's right to re-let constitute an obligation to re-let or to mitigate
damages. Notwithstanding the Landlord's rights pursuant to the prior sentence
hereof, the Landlord shall not undertake sale of any collateral described in
that certain Security Agreement dated January 4, 1994 by and between Tenant and
The First National Bank of Boston until such time as said Security Agreement
shall no longer be in full force and effect.
9.2 Damages. Tenant's liability and obligations under this Lease shall
survive termination or repossession, and Tenant shall pay as current damages the
Base Rent, Additional Rent, and other sums up to what would have been the end of
the Term in the absence of the termination or repossession, with a credit for
the net proceeds, if any, Landlord receives from any reletting of the Premises,
after deducting all of Landlord's expenses in connection with the reletting
including, without limitation, expenses of preparing the Premises for the
reletting. Tenant shall pay the current damages to Landlord on the days Base
Rent would have been payable if not for the termination or repossession. In
addition, and notwithstanding any Lease provision or the termination of this
Lease, Tenant shall reimburse Landlord for any free rent and construction
allowance, and all expenses and liabilities incurred by Landlord in connection
with Tenant's Default including brokerage commissions, reasonable attorney's
fees and alteration costs.
After any termination or repossession, whether or not Landlord has
collected any current damages, Tenant shall pay to Landlord, at Landlord's
option and on demand, liquidated final damages in lieu of all current damages
beyond the date final damages are paid. The final damages shall be the amount by
which (i) all rent and other charges which would be payable from the date to
which Tenant paid current damages through what would have been the unexpired
Term exceeds (ii) the then fair net rental value of the Premises for the same
period. If any law validly limits the amount of final liquidated damages to less
than described above, Landlord shall be entitled to the maximum amount legally
allowed. For purposes of this Section, the rent is Tenant's highest total Base
Rent and Additional Rent due for any 12 month period preceding the termination
or repossession.
9.3 Landlord's Self Help. If Tenant Defaults, Landlord may, at its option,
without waiving its right to terminate this Lease or its claim for damages, cure
the Default, and Tenant shall reimburse Landlord for any amount paid or
contractual liability incurred by Landlord in doing so; provided Landlord may
immediately cure any Default or failure by Tenant to perform any Lease
obligation if the cure or performance is reasonably necessary to protect the
Premises or Landlord's interests, or to prevent injury or damage to persons or
property. If Tenant fails to reimburse Landlord upon demand, such amount shall
be added to the next payment of rent due without further notice.
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9.4 Landlord's Default. Landlord shall not be deemed to be in default
hereunder unless its default continues for 30 days, or such additional time as
is reasonably required to correct its default, after Tenant has given written
notice to Landlord specifying the nature of the alleged default.
ARTICLE X - SUBORDINATION
10.1 Subordination. Tenant's rights and interests under this Lease shall
be (i) subject and subordinate to any existing or future mortgages, deeds of
trust, overlease, or similar instruments covering the Premises and to all
advances, modifications, renewals, replacements, and extensions ("Mortgages")
provided that Tenant's rights hereunder shall not be disturbed except in the
event of Tenant's Default hereunder, or (ii) if any Mortgagee of Landlord,
Landlord's successors and/or assigns, elects, prior to the lien of any present
or future Mortgagee. Tenant further shall attorn to and recognize any successor
landlord, whether through foreclosure or otherwise, as if the successor landlord
were the originally named Landlord. Provided Landlord shall give to Tenant the
name and address of Mortgagee, Tenant concurrently shall give Mortgagee the same
notices given to Landlord, and Mortgagee shall have the same opportunity and
rights to cure as are available to Landlord to cure a default provided Mortgagee
shall have an additional thirty (30) days after the expiration of Landlord's
cure period within which to commence a cure or such longer period as may be
reasonably necessary including, without limitation, any period of time
reasonably required for the Mortgagee to obtain possession of the Property or
the Premises from Landlord. Although this Section shall be self-executing and no
further instrument shall be necessary, Tenant shall execute and deliver any
instruments Landlord reasonably requires for the above purposes. An assignment
of lease or similar document shall not result in the assignee having any
liability until the assignee takes possession.
10.2 Request by Mortgagee. If a Mortgagee or prospective Mortgagee requests
any Lease modifications which do not have a material adverse effect on Tenant's
rights Tenant will enter into a written modification agreement in recordable
form (which shall have the same force as a Lease amendment) if the Mortgagee
forecloses or takes similar action. The modification shall not affect the length
of the Term or the size, use, Base Rent, Additional Rent, or location of the
Premises.
ARTICLE XI - MISCELLANEOUS PROVISIONS
11.1 Parties Bound. Except as otherwise provided, the Lease agreements and
conditions to be performed and observed by Landlord or Tenant shall bind and
inure to the heirs, legal representatives, successors and assigns of each,
provided no reference to Tenant's successors and assigns will constitute a
consent to a Transfer by Tenant. If Tenant consists of more than one person or
entity, or if there is a guarantor, then all such person, entities and
guarantors shall be jointly and severally liable and the word "Tenant," as used
in this Lease, including Article IX, includes such person, entities, and
guarantors. The word "Landlord" means only the owner, or the lessee if this
Lease becomes subject to an overlease, or the Mortgagee in possession of the
Premises, for the time being, so that if the Premises is sold, a Mortgagee takes
possession, or another becomes landlord, all prior landlords, including
Landlord, automatically shall be entirely relieved of all landlord covenants and
obligations accruing thereafter. If the entity which holds Landlord's interest
in this Lease is a trust, then the Landlord obligations shall be binding upon
the trustees of said trust, as trustees and not individually, and not upon the
trust estate.
11.2 Landlord's Liabilities and Additional Rights.
16
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(a) Landlord shall have no obligations or liability with respect to or
in any way connected with the Premises or the Building, or services to be
provided from same, except to the extent, if any, specifically set forth in the
Lease. Landlord shall not be deemed to have committed a breach of any repair
obligations unless it makes repairs negligently or fails to commence repairs
within a reasonable time after Landlord receives notice from Tenant, and
Landlord's liability in any case shall be limited to the cost of making the
required repairs.
(b) Landlord shall not be liable for indirect or consequential damages
for any reason, or for any inconvenience, interruption or consequences resulting
from the failure of utilities or any service, making repairs, improvements or
resulting from leaks of steam, gas, electricity, water, or any other substance
from pipes, wires or other conduits, or from the bursting or stoppage thereof,
or from leaks of water, snow, or rain from the plumbing, roof, or for wetness or
dampness for any reason.
(c) Tenant agrees for itself and each succeeding holder of Tenant's
interest, or any portion thereof, that any judgment, decree or award obtained
against Landlord, or any succeeding owner of Landlord's interest, which is
related to this Lease or the Premises, whether at law or in equity, shall be
satisfied out of Landlord's equity in the Premises, and further agrees to look
only to such assets and to no other assets of Landlord for satisfaction. In no
event shall Tenant have the right to deduct any amount allegedly owed to Tenant
from any rent or other sums payable to Landlord hereunder, Tenant's sole remedy
being an independent action against Landlord for such claim.
(d) Landlord reserves the right at any time or times during the Term and
without charge, abatement or reduction in rent (i) to examine and to show the
Premises at reasonable times; (ii) to put up "For Sale" or "For Rent" signs,
which signs Tenant shall not move, remove, block or otherwise interfere with;
(iii) to perform such work as may be required by this Lease, any public
authority, or to facilitate making repairs or improvements to the Building, the
Property or any portion thereof, provided that unless any such work is of an
emergency nature, Landlord shall give reasonable notice and shall use reasonable
efforts to minimize interference with Tenant's operations; (iv) to make repairs
which Tenant fails to make promptly; and (v) to enter upon, and use portions of,
the Premises for the foregoing purposes.
11.3 Covenants and Conditions. Each term and each provision of this Lease
to be performed by Tenant shall be construed to be both a covenant and a
condition.
11.4 Costs and Expenses. Acts to be done by Tenant pursuant to this Lease
shall be at the cost and expense of Tenant unless a contrary intent is
expressed. In addition, Tenant shall reimburse Landlord for any costs or
expenses incurred in connection with enforcement of this Lease by Landlord.
11.5 Holding Over. If Tenant or anyone claiming under it holds over after
end of the Term, the party shall, prior to Landlord's acceptance of rent, be a
tenant at sufferance, and, after Landlord's acceptance of rent and after
Landlord's reasonable notice to Tenant of Landlord's intent to change the
holdover rent, be a tenant at will subject to the provisions of this Lease
insofar as the same may be made applicable to a tenancy at will; provided that
Tenant shall pay Base Rent for the period of such tenancy at the greater of
twice the highest rate of Base Rent payable during the Term or market rent,
Landlord shall have the right to extend the Term for up to 1 year by written
notice to Tenant, and, in addition, Tenant shall be liable for all damages
incurred by Landlord (including consequential damages) as a result of the
holding over.
11.6 Quiet Enjoyment. Provided Tenant timely pays all rent and performs and
observe the
17
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terms, conditions and covenants of the Lease, Tenant may peaceably and quietly
have, hold and enjoy the Premises as provided in the Lease, without hindrance or
molestation from Landlord or anyone claiming legally under Landlord, subject to
the terms of this Lease and any instruments having priority.
11.7 No Brokerage. Tenant warrants and represents that it has dealt with no
broker in connection with this Lease except the Broker (if any). Landlord and
Tenant agree to defend and indemnify the other against any brokerage claims
related to this Lease other than by the Broker.
11.8 Certificates. Within 10 days after Landlord's request, Tenant shall
deliver to Landlord or to any prospective Mortgagee or purchaser (a) an estoppel
certificate in recordable form stating such information as Landlord reasonably
requests, and the certificate shall be binding on Tenant, and (b) such financial
statement as Landlord reasonably requires to verify the net worth of Tenant or
any Transferee or Guarantor of Tenant, and Tenant represents and warrants that
each such financial statement shall be true and accurate as of the date thereof.
All financial statements shall be confidential and shall be used only for the
purposes relating to this Lease or the Property.
11.9 Notices. Any notice, consent, or other communication relating to this
Lease shall be given in writing and by hand, by registered or certified mail or
overnight express mail such as "Federal Express," postage or charges prepaid, to
the other party's Notice Address or for Tenant to the Premises, to such other
address or addresses as may be designated by the party by notice, and if to a
Mortgagee, to such address as the Mortgagee shall designate.
11.10 No Waiver. Landlord's failure to complain of any Tenant act or
omission, no matter how long it continues, shall not be deemed a waiver of any
of Landlord's rights. Landlord's waiver, express or implied, of any breach of
this Lease shall not be deemed a waiver of a breach of any other provision or a
consent to any subsequent breach of the same or any other provision. Landlord's
consent to or approval of any action on one occasion shall not be deemed a
consent to or approval of any other action or to such action on any subsequent
occasion. Tenant's payment or Landlord's acceptance of a lesser amount than is
due from Tenant to Landlord shall not be deemed anything but payment on account
and Landlord's acceptance of a check for a lesser amount with an endorsement of
statement thereon or upon a letter accompanying the check that the lesser amount
is payment in full shall not be deemed an accord and satisfaction, and Landlord
may accept the check without prejudice to recover the balance due or pursue any
other remedy. All of Landlord's rights and remedies under this Lease or by
operation of law, either at law or in equity, for any breach shall be distinct,
separate, cumulative and non-exclusive and shall not be deemed inconsistent with
each other.
11.11 Force Majeure. If Landlord's or Tenant's performance of any act
(other than Tenant's payment of Rent hereunder) is delayed, or prevented because
of strikes, lockouts, labor troubles, inability to procure materials, power
failures, restrictive Laws, riots, insurrection, war, collection of insurance
proceeds or taking awards or other causes beyond Landlord's or Tenant's
reasonable control, then that party's performance shall be excused for the
period of the delay and any time period shall be extended for an equivalent
period.
11.12 Recording. Tenant shall not record this Lease, but may record a
memorandum in form acceptable to Landlord hereof. Any breach of this covenant
shall cause this Lease to terminate automatically, if Landlord so elects in
writing. Notwithstanding the provisions hereof, the Tenant shall be permitted to
file a copy of this Lease with the Securities and Exchange Commission as may be
required by governmental laws or regulations.
18
<PAGE>
11.13 Paragraph Headings. All paragraph headings are for convenience and
reference only, and shall not be held to explain, modify, amplify or aid in the
construction, interpretation or meaning of the provisions of this Lease.
11.14 Governing Law. This Lease shall be governed by the laws of the state
in which the Premises are located.
11.15 Separability; Construction and Interpretation. If any Lease term or
provision or the application thereof to any person or circumstance is invalid or
unenforceable, the remainder of this Lease, or the application of the term or
provision to other persons or circumstances shall not be affected, and the Lease
shall be valid and be enforced to the fullest extend permitted by law. If any
Lease provision is capable of two constructions, then the provision shall have
the meaning which renders it valid.
11.16 When Lease Becomes Binding; Entire Agreement. Landlord's employees or
agents have no authority to make or agree to make a lease or any other agreement
or undertaking, and the submission of this document for examination and
negotiation does not constitute an offer to lease, or a reservation of, or
option for, the Premises, and this document shall become effective and binding
only upon the execution and delivery by both Landlord and Tenant. All
negotiations, considerations, representations, and understandings between
Landlord and Tenant are incorporated herein, and no oral statements or prior or
contemporaneous written matter, whether by the parties or otherwise, which is
not specifically incorporated herein shall be of any force or effect. In
entering into this Lease, Tenant relies solely upon the representations and
agreements contained herein. This Lease shall not be modified except by writing
executed by both parties and no act or omission of any employee or agent of
Landlord shall alter, change or modify any of the provisions hereof.
19
<PAGE>
11.17 Execution. This Lease may be executed in any number or original
counterparts. Each fully executed counterpart shall be deemed an original for
all purposes.
EXECUTED AS A SEALED INSTRUMENT
LANDLORD:
Witness Zouhair Ali Hassan, as he is Trustee as
Print Name:_______________________ aforesaid and not individually
TENANT:
GEERLINGS & WADE, INC.
By:_________________________________
Witness Jay L. Essa, its duly authorized
Print Name:_______________________ President
GEERLINGS & WADE, INC.
By:_________________________________
Witness David R. Pearce, its duly authorized
Print Name:_______________________ Treasurer
__________________________________
(attach corporate vote authorizing execution by the above officers)
20
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EXHIBIT A
DEMISED PREMISES
21
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EXHIBIT B
LEGAL DESCRIPTION OF THE PROPERTY
Two certain parcels of land with the buildings and improvements thereon
known as and numbered 216 - 218 Newbury Street, Boston, Suffolk County,
Massachusetts described as follows:
Parcel 1
A certain parcel of land with the buildings thereon in the City of Boston,
County of Suffolk and Commonwealth of Massachusetts, located at what is now
commonly known as 216 Newbury Street, in said Boston, bounded and described as
follows:
Beginning at a point two hundred sixty-one (261) feet Westerly from Exeter
Street, and running thence
WESTERLY by Newbury Street, twenty-three (23) feet; thence
SOUTHERLY by a line running through the brick partition wall, one hundred
twelve (112) feet to a passageway sixteen (16) feet wide; thence
EASTERLY By said passageway twenty-three (23) feet;
and thence
NORTHERLY one hundred twelve (112) feet to the point of beginning
Also that portion of said passageway between the side lines of said lot extended
Southerly eight (8) feet.
Parcel 2
A certain parcel of land with the buildings thereon in the City of Boston,
County of Suffolk and Commonwealth of Massachusetts, located at what is now
commonly known as 218 Newbury Street, in said Boston, bounded and described as
follows:
Beginning on Newbury Street at a point two hundred and eighty-four (284) feet
westerly from Exeter Street and running thence
WESTERLY On Newbury Street twenty-three (23) feet;
22
<PAGE>
SOUTHERLY through the center of the brick partition wall one hundred
twelve (112) feet to a passageway sixteen (16) feet wide;
thence turning and running
EASTERLY By said passageway twenty-three (23) feet;
NORTHERLY through the center of the brick partition wall, one hundred
twelve (112) feet to the point of beginning.
Also that portion of said passageway between the said lines of said lot extended
Southerly eight feet.
23
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EXHIBIT C
LANDLORD'S WORK
NONE
24
<PAGE>
EXHIBIT D
TENANT'S WORK
1/19/98
- - Interior painting
- - Repair and possible replacement of wallpaper
- - Installation of security system
- - Installation of phones and computers
- - Other cosmetic repairs as needed
25
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls of the Building shall not be obstructed or
encumbered or used for any purpose other than ingress and egress to and from the
premises demised to any tenant or occupant.
2. No awnings or other projections shall be attached to the outside walls
or windows of the Building without the prior consent of Landlord. No curtains,
blinds, shades, or screens shall be attached or hung in, or used in connection
with, any window or door of the premises demised to any tenant or occupant,
without the prior consent of Landlord. Any such awnings, projections, curtains,
blinds, shades, screens, or other fixtures permitted by Landlord must be of a
quality type, design and color, and attached in a manner, approved by Landlord.
3. No sign, advertisement, object, notice or other lettering shall be
exhibited, inscribed, painted or affixed on any part of the outside or inside of
the premises demised to any tenant or occupant or of the Building without the
prior consent of Landlord. Interior signs on doors and directory tables, if
any, shall be of a size, color and style approved by Landlord.
4. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed, nor shall any bottles, parcels, or
other articles be placed on any window sills.
5. No show cases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the halls, corridors,
vestibules or other exterior parts of the Building.
6. The water and wash closets and other plumbing fixtures shall not be used
for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein.
7. No tenant or occupant shall mark, paint, drill into, or in any way
deface any part of the Building or the premises demised to such tenant or
occupant. No boring, cutting or stringing of wires shall be permitted, except
with the prior consent of the Landlord, and as Landlord may direct. No tenant or
occupant shall install any resilient title or similar floor covering in the
Premises demised to such tenant or occupant except in a manner approved by
Landlord.
8. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the premises demised to any tenant or occupant. Bicycles may be
stored in racks, if any, furnished for such purpose by Landlord in a common area
of the Building. No cooking shall be done or permitted in the Building by any
tenant without the approval of Landlord. No tenant or occupant shall cause or
permit any unusual or objectionable odors to emanate from the premises demised
to such tenant or occupant.
9. Without the prior consent of Landlord, no space in the Building shall be
used for manufacturing, or for the sale of merchandise, goods or property of any
kind at auction.
26
<PAGE>
10. No tenant or occupant shall make or permit to be made, any unseemly or
disturbing noises or disturb or interfere with other tenants or occupants of the
Building or neighboring buildings or premises whether by the use of any musical
instrument, radio, television set or other audio device, unmusical noise,
whistling, singing, or in any other way. Nothing shall be thrown out of any
doors or windows.
11. Each tenant or occupant must, upon the termination of its tenancy,
restore to Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such tenant or occupant.
12. All removal from the Building, or the carrying in or out of the
Building or the premises demised to any tenant or occupant, of any safes,
freight, furniture, or bulky matter of any description (except Tenant's
inventory) must take place at such time and in such manner as Landlord or its
agents may determine, from time to time. Landlord reserves the right to inspect
all freight to be brought into the Building and to exclude from the Building all
freight which violates any of the Building Rules or the provisions of such
tenant's or occupant's lease.
13. No tenant or occupant shall use or occupy, or permit any portion of the
premises demised to such tenant or occupant to be used or occupied, as an office
for a public stenographer or typist, or for a barber or manicure shop, or as an
employment bureau. No tenant or occupant shall engage or pay any employees in
the Building, except those actually working for such tenant or occupant in the
Building.
14. Landlord shall have the right to prohibit any advertising by any tenant
or occupant which is on the Property or proximate thereto, and which in
Landlord's opinion, tends to impair the reputation of the Building or its
desirability as a building for offices, and upon notice from Landlord, such
tenant or occupant shall refrain from or discontinue such advertising.
15. Except consistent with the Permitted Uses hereunder, no Tenant or
occupant shall purchase spring water, ice, food, beverage, lighting,
maintenance, cleaning towels or other like service, from any company or person
not approved by Landlord, such approval not unreasonably to be withheld,
excluding meal orders in the normal course of business. Landlord acknowledges
and agrees that notwithstanding the foregoing sentence, Tenant is permitted to
engage in the purchase, use and retail sale of the foregoing items in connection
with its Permitted Uses.
16. Landlord reserves the right to exclude from the Building, between the
hours after 11:00 p.m. and before 8:00 a.m. on business days (and after 10:00
p.m. on Saturdays and Sundays ) and at all hours on all other days, all persons
who do not present a pass to the Building signed by the Landlord. Landlord will
furnish passes to persons for whom any tenant or occupant requests such passes.
Each tenant or occupant shall be responsible for all persons for whom it
requests such passes and shall be liable to Landlord for all wrongful acts of
such persons.
17. Each tenant or occupant, before closing and leaving the premises
demised to such tenant or occupant at any time, shall see that all entrance
doors are locked and windows closed.
18. Each tenant or occupant shall, at its expense, provide artificial light
in the premises demised to such tenant or occupant for Landlord's agents,
contractors, and employees while performing janitorial or other cleaning
services and making repairs or alterations in said premises.
19. No premises shall be used, or permitted to be used, for lodging or
sleeping, or for any immoral or illegal purpose.
27
<PAGE>
20. There shall not be used in the Building, either by any tenant or
occupant or by their agents or contractors, in the delivery or receipt of
merchandise, freight or other matter, any hand trucks or other means of
conveyance except those equipped with rubber tires, rubber side guards and such
other safeguards as Landlord may require.
21. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant and occupant shall cooperate in seeking their prevention.
22. If the premises demised to any tenant or occupant become infested with
vermin (caused by Tenant's activities on the Property), such tenant or occupant,
at its sole cost and expense, shall cause its premises to be exterminated from
time to time, to the satisfaction of Landlord, and shall employ such
exterminators therefore as shall be approved by Landlord.
23. No tenant or occupant shall move, or permit to be moved, into or out of
the Building or the premises demised to such tenant or occupant, any heavy or
bulky matter (except Tenant's inventory), without the specific approval of
Landlord. If any such matter requires special handling, only a person holding a
Master Riggers license shall be employed to perform such special handling. No
tenant or occupant shall place, or permit to be placed, on any part of the floor
or floors of the premises demised to such tenant or occupant, a load exceeding
the floor load per square foot which such floor was designed to carry and which
is allowed by law. Landlord reserves the right to prescribe the weight and
position of safes and other heavy matter, which must be placed so as to
distribute the weight.
24. The requirements of tenants or occupants will be attended to only upon
application at the office of the Building. Building employees shall not be
required to perform, and shall not be requested by any tenant or occupant to
perform, any work outside of their regular duties, unless under specific
instructions from the office of the managing agent of the Building.
25. Tenants or occupants shall prevent the wasteful use of utilities within
the premises demised to them.
26. Locks to premises shall not be changed or added without permission of
the Landlord.
27. There shall be no smoking in the common areas of the Building.
28. The Landlord shall have the right to make such further reasonable rules
and regulations as it deems necessary.
28
<PAGE>
Exhibit 10.34
FIRST AMENDMENT TO EXTEND LEASE
DATED NOVEMBER 23, 1994 ("LEASE")
BY AND BETWEEN BRUCE K. HOYT
AND GEERLINGS & WADE, INC.
Whereas the Lease of November 23, 1994 by and between Bruce K. Hoyt (the
"Lessor") and Geerlings & Wade, Inc. (the "Lessee") has an expiration of
February 28, 1998 (the "Lease") and;
Whereas Lessor and Lessee desire to extend the term of this Lease for an
additional thirty-six (36) months.
Now therefore, in consideration of rents reserved and of the covenants and
agreements herein set forth, it is agreed that the Lease be hereby amended from
and after the date hereof as follows:
1. The Lease shall terminate on February 28, 2001.
2. Lessee shall pay to Lessor as Base Rent $1,700.00 per month.
3. Lessor shall, at Lessor's sole cost, replace the inoperative HVAC rooftop
unit with a new unit.
4. Paragraph 11.1(1) shall be replaced with "Tenant shall fail to pay when
due any installment of rent or any other payment required pursuant to this
Lease and the failure is not cured within five (5) days after written notice
to Tenant.
5. "In the third sentence of Paragraph 14.5 replace "...shall be deemed
delivered (whether or not actually received) when deposited in" with
"...shall be deemed delivered when received by the person to whom the notice
is addressed and sent via.
6. "In Paragraph 14.7 strike the word "personally" and the sentence "In the
event any representation or warranty is false, all persons who execute this
Lease shall be liable, individually, as Tenant.
7. "All other terms and conditions of the Lease dated November 23, 1994 shall
remain unchanged.
Agreed and acknowledge this 18th day of March 1998:
LESSEE: LESSOR:
Geerlings & Wade, Inc.
By: /s/ Jay L. Essa By: /s/ Bruce K. Hoyt
---------------------------- -----------------------------
Jay L. Essa Bruce K. Hoyt
President
<PAGE>
EXHIBIT 23
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. 333-36741.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 25, 1998
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 385,063
<SECURITIES> 0
<RECEIVABLES> 559,046
<ALLOWANCES> 0
<INVENTORY> 10,984,590
<CURRENT-ASSETS> 14,702,107
<PP&E> 2,550,646
<DEPRECIATION> 1,240,777
<TOTAL-ASSETS> 16,124,342
<CURRENT-LIABILITIES> 5,399,505
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<COMMON> 37,812
<OTHER-SE> 10,323,861
<TOTAL-LIABILITY-AND-EQUITY> 16,124,342
<SALES> 33,701,832
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<CGS> 18,185,364
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<INCOME-TAX> 604,000
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