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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, 1998
[_]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)
04-2935863
Massachusetts (IRS Employer Identification Number)
(State or other jurisdiction of
incorporation or organization)
02021
(Zip Code)
960 Turnpike Street, Canton,
Massachusetts
(Address of Principal Executive
Offices)
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:
Geerlings & Wade, Inc.'s common stock trades on The NASDAQ Stock Market under
the symbol GEER.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Common Stock of the registrant held by non-
affiliates of the registrant was approximately $8,580,754 on March 26, 1999.
For purposes of the foregoing sentence, the term "affiliate" includes each
director and executive officer of the registrant.
3,846,550 shares of Common Stock were outstanding at March 26, 1999
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.
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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 1986, 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 and, starting in 1998,
through e-commerce Websites, the Company offers wines selected on the basis of
their quality and price characteristics. Sales levels largely depend on
response rates to and circulation (number) of "house mailings" which are
product offerings sent via the U.S. Postal Service to existing customers and
of "acquisition mailings" which are product offerings sent via the U.S. Postal
Service to potential, new customers. Customers place orders by mail, the
telephone, facsimile, e-mail and via the Internet. In 1998, the Company
established an e-commerce Website, www.geerwade.com, through which customers
may place orders for wine. In 1999, the Company expanded its selection on this
Website by offering rare, high price point, Bordeaux wines and wine
accessories and racking. On July 7, 1998, the Company purchased Passport Wine
Club which sells wine over the telephone, fax, e-mail and the Internet.
Passport offers continuity programs in which customers receive monthly
shipments of 2 or 4 bottles of wine per shipment and sell individual orders of
wine. 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 and e-commerce Websites, 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 the 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 by reciprocal rights granted by law 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), Michigan (July 1997), Boston
Massachusetts (July 1998) and Texas (February 1999). Pursuant to reciprocal
rights it holds in a number of states in which it is licensed, the Company
ships wine to consumers in a limited number of additional states, but sales in
such states have been relatively insignificant to date. In 1997, Nevada
changed its alcoholic beverage laws to permit shipment of wine from out-of-
state retailers, and the Company commenced selling to Nevada customers in
September 1997. In 1997, Louisiana also changed its liquor laws to permit
shipment of wine from out-of-state retailers, and the Company commenced
selling to Louisiana customers in June 1998. The Company's active customers
(customers who have made a purchase within the twelve preceding months) have
increased 16.4% from approximately 110,800 at December 31, 1997 to
approximately 129,000 at December 31, 1998.
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Company Strategy
The Company, as one of the leading direct marketers of premium wines, seeks
to simplify the wine-buying process, educate the wine consumer and develop a
loyal and broad customer base. The Company also offers periodically through
catalogs wine accessories such as cork screws, books, wine racks and other
products related to the enjoyment of wine. The key elements of the Company's
strategy to achieve these objectives include:
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 each wine's origin. The Company primarily 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
strives to develop new relationships with domestic wine suppliers to improve
the quality and selection of wines for its customers and has begun to add a
greater assortment of nationally branded wines to its product mix. When
choosing non-branded wine, 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. The Company strives to encourage repeat purchases by
customers by providing the highest quality wine it can source at each price
point. Geerlings & Wade customers rely on the Company to select and provide
high quality wines rather than relying on brand recognition, third party
endorsements or ratings of wine. Geerlings & Wade strives to maintain this
relationship of trust, which is critical to the success of the Company.
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 either performed well in blind
comparative tastings or, in the case of branded wines, are highly rated by
third party wine experts. The Company offers its customers the convenience of
ordering products through numerous channels which include telephone,
facsimile, mail, e-mail, and, since May of 1998, the Internet with delivery of
each order directly to their home or office as quickly as possible. Since the
Company ships from its 15 warehouses in 15 states as of March 1999, delivery
times are relatively short. Currently the Company does not make deliveries
from its Boston, Massachusetts store. In addition to providing convenience to
busy customers, 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 mailings to
existing customers ("house mailings"). The Company mails promotional offers to
potential customers between five and seven times per year to acquire new
customers and build the list of repeat customers (the "house file"). Customers
that purchase within the prior twelve-month period are counted and referred to
as the Company's 12-month buyers. The Company employs techniques designed to
enhance response rates to promotional mail, lower costs and ultimately find
new customers that will continue to place frequent and high dollar value
orders for long periods. The Company plans to better integrate the marketing
activities of its direct mail efforts and its Internet offerings in order to
optimize the effectiveness of these two marketing channels.
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
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management reporting. In the third quarter of 1999, the Company plans to
replace its existing software system with a software package designed to meet
Company's unique requirements. This software system will provide an order
entry interface for our telephone sales representatives, electronic order
entry over the Internet, inventory management, warehouse fulfillment support,
purchasing, accounting, marketing analysis and management reporting.
Develop e-commerce. In 1998, the Company launched its e-commerce Website
www.geerwade.com and purchased Passport Wine Club that sells cases of wine and
continuity programs (in which customers receive monthly shipments of wine)
over the telephone and the Internet from its e-commerce Website
www.topwine.com. Sales from these Websites are encouraging and have been
increasing each month since the second quarter of 1998. Due to these
encouraging signs, the Company has decided to completely redesign
www.geerwade.com to allow for more interaction between the customers and the
Company, greater product assortment and more enriched content. Hill, Holliday,
Connors Cosmopulos, Inc. ("Hill, Holliday") has been retained to redesign
www.geerwade.com. Additionally, the Company has hired Hill, Holliday to design
another e-commerce Website that will offer between 1,000 and 2,000 national
brands of fine wine as well as wine accessories. This site will also feature a
wine locator that allows the customer to place orders for "hard to find"
wines, and the Company will use its best efforts to locate that wine and sell
it to the customer. Both Websites will permit customers to view past purchase
history, check on the status of their orders and communicate with Company
through e-mail. The Company will test various advertising media including
print advertisements and radio to promote the new Website, that will offer
national brands.
Expand in Existing Markets. Geerlings & Wade believes that it has penetrated
its current markets to a limited extent and that 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
mailings to potential customers ("acquisition 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.
E-commerce and Continuity Acquisitions. The Company plans to develop
customer acquisition programs using www.geerwade.com, www.topwine.com and its
new Website, which will sell nationally branded wine. To date, the Company has
advertised www.geerwade.com only to its existing customers by including
promotions in its house mailings. The Company also directs website visitors of
www.geerwade.com to Passport if they want to investigate the Company's wine
club by directly linking to www.topwine.com. Later in 1999 after the Company
launches its newest Website that will offer between 1,000 to 2,000 national
brands, the Company will test various forms of advertising using print, radio,
and Internet media. There can be no assurance that this advertising will
generate significant sales for the Company. The Company also plans to develop
marketing relationships with other companies doing business on the Internet.
Enter New Markets. Geerlings & Wade is licensed or otherwise authorized to
sell wine to individual customers in twenty-seven states comprising
approximately 81% of the overall U.S. market for table wine as of March 1999.
Certain states are designated as "control" states in which the state
government owns and operates the liquor stores within its state 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 retail liquor 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. The Company obtained a
retail license in Texas to sell wine in February 1999 and commenced selling
wine to Texas residents in March 1999. Additionally, New Hampshire and Rhode
Island amended their laws to allow shipment of wine from licensed retailers
located in other states. Alaska has clarified
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its laws by permitting the intrastate shipment of wines that are ordered over
the Internet, but orders made by mail or telephone from out-of-state retailers
are prohibited. The Company commenced selling and shipping wine to residents
in Alaska (via the Internet only), Rhode Island and New Hampshire residents in
March 1999. The entry into Texas is expected to contribute to the Company's
sales growth since Texas is about the fifth largest state in terms of wine
consumption. 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. The Company also recommends foods and recipes to pair
with the featured wines and compares the featured wines with nationally
branded wines. Geerlings & Wade distributes primarily two types of promotional
wine mailings: "house mailings" to its file of active customers and qualified
leads and "acquisition mailings" to prospective 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). The marketing
department determines the number and timing of house mailings to be sent 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 to mailings 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 1998, the Company sent approximately 2,989,000
house mailings, an increase of about 3.6% over the number of pieces mailed in
1997.
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 wine making 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 eight to nine additional wine
selections, along with tasting notes and ratings for these wines. The
Company mailed nineteen and eighteen separate brochure mailings to its
customers in 1997 and 1998, respectively. Not all customers receive each
brochure mailing.
"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 certain wines that they may have previously
purchased and enjoyed. In addition, the prices of some wines are reduced.
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 Chardonnay
offer to customers who purchased Chardonnay from Geerlings & Wade in the
past or whom it had reason to believe would likely purchase Chardonnay.
These preferred offers, which typically are in the form of letters from the
Company president, generate high responses from customers and enhance the
personal touch of the Company's wine-selling service. The Company normally
mails five
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to seven 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 at membership prices.
Acquisition Mailings. The Company's primary method of acquiring new
customers is its acquisition-mailing program. A typical acquisition mailing
explains the Company's selling concept, describes the particular wine being
offered and contains an order form to purchase the wine. Potential customer
names are obtained by renting lists, which are screened with a demographic
profile consistent with the Company's existing customers and rented more than
once based on historical performance. The Company generally presents
prospective customers with an offer to buy six bottles of wine for their first
purchase. After the customer purchases from the Company, they are encouraged
to buy a minimum of 6 bottles per order, and the repeat buyers purchase 1.2
cases per order on average.
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 acquisition mailings allows flexibility for editorial
changes and results in significant cost and timesavings. 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 1998, Geerlings & Wade mailed a 16-page wine catalog and a
24-page wine accessories catalog during the holiday season. The wine catalog
featured wines from around the world and offered wine gift samplers to
facilitate customer's gift buying needs. Additionally, some wine accessories
were offered throughout this catalog. The Company mailed the catalogs to both
prospective and existing customers. The wine accessories catalog, which was
mailed after Thanksgiving, offered only wine accessories and, therefore, was
also mailed to customers living states in which the Company is not licensed to
deliver wine. The Company plans to further research the development of its
catalog market and test different product offerings and mailing schedules in
1999. 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. In February 1999, the Company began offering wine accessories
on its e-commerce Website.
Passport Wine Club Mailings. The Company began selling continuity programs
in the fall of 1997 and sent out promotional mailings to generate these sales.
Continuity programs entail delivering monthly shipments of 2, 4, or 6 bottles
of wine for 3, 6 or 12 months or for an open-ended period until the customer
cancels. In July of 1998, the Company acquired Passport Wine Club that sells
much of its wine as part of its various continuity programs. Passport closely
ties its marketing concept to written discussions of trips to the wine growing
regions and wineries from which it offers wine. Passport sales representatives
also sell individual purchases to its customers as well. Due to low response
rates to mailings promoting continuity programs, the Company has decided to
promote Passport programs through Passport's Website www.topwine.com and
through www.geerwade.com by linking to www.topwine.com Website.
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, 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
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.
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The wines offered by the Company are selected based on consumption patterns
and the Company's prior experience with wines from particular wine-producing
regions and varietals. In 1998, approximately 68% of the cases sold by the
Company were imported wines and 32% were domestic. The Company's wines are
generally sold within the price range of $69 to $1,000 per 12-bottle case,
with average case prices of approximately $99.60 in 1998.
Wine Sourcing and Purchasing
The Company sources imported and domestic wines through a network of
producers, negotiants, importers and wholesalers. In 1998, 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. Management develops an annual merchandising plan for each wine to
be featured in its house mailings ("feature" or "wine feature(s)"). This plan
specifies wine varietals, producing region of origin and price point for each
of these features. Then, the Merchandising Department develops and purchases a
complementary product mix of 7 to 9 wines that will be offered with each
feature. These complementary wines are referred to as "I.D. wines" by the
Company. The Company selects most of these feature and I.D. wines based on
blind comparative tastings of samples judged on overall quality and price
characteristics. The Company often tastes over fifty wines prior to selecting
a wine feature 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. Purchase quantities are
based on sales forecasts for the particular promotions in which the wine will
be offered.
Sourcing Imported Wines. In 1998, 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, compared 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 1998, 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 licensed wholesalers. The Company sources
many wines through its 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
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.
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Wines Sourced by Others. Geerlings & Wade also purchases wines which have
been sourced independently for the Company by negotiants, importers and
wholesalers. 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. The Company believes that by maintaining
these relationships with quality wine suppliers, it can enhance its
opportunity of uncovering wines of high 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, warehouse
fulfillment, inventory planning and management, merchandising, customer list
and circulation management and analysis, and financial and management
reporting. The Company's present system was developed in-house and is based on
client-server software purchased by the Company. The Company's current
customized order processing system provides integrated order entry with each
of the Company's licensed facilities for telephone orders to be captured on-
line and mail orders to be efficiently processed. It provides customer service
representatives with access to an array of product and customer information
during order processing, tracking of customer order history and real-time
inventory management. It also provides the capability to target the Company's
marketing programs to specific segments of its customer base and extensive
reporting capabilities that allow the Company to evaluate the effectiveness of
its mailings and assist the Company in its business planning. In 1998, the
Company upgraded much of its computer hardware to improve processing time and
reliability.
The Company has recently selected an integrated, direct marketing software
package named Catman from Avexxis Corporation of Avon, Connecticut. Geerlings
& Wade plans to convert from its current software system to the Catman system
early in the third quarter of 1999. This package will replace the Company's
present internally designed software system and provide all of the
functionality that the current system provides as well as enhance the
Company's capability to generate reports and manage its resources and data.
Additionally, Avexxis Corporation has represented that the Catman software and
the Universe database are year 2000 ready ("Y2K Ready"). This means that the
software will not fail to function partially or totally as a result of using
dates beyond December 31, 1999. Catman will provide telephonic and direct mail
order-entry via data entry or order entry from electronic submissions over
Internet, warehouse fulfillment management including inventory control and
management, merchandising forecasting and purchasing, accounts payable,
account receivable and general ledger modules for accounting and marketing
analysis and circulation management. This integrated, enterprise-wide software
package relies on the Universe database sold by Ardent Software of
Westborough, Massachusetts. Ardent Software represents that Universe database
is Y2K Ready.
The Catman order processing system will integrate order entry with each of
the Company's licensed facilities and provide the on-line, real-time
information processing capabilities necessary for prompt fulfillment and
delivery to customers and resolution of customer service issues. The Catman
software will allow telephone orders to be captured on-line and mail orders to
be efficiently processed through data entry. Internet orders will be
electronically submitted to the Catman system from the Company's interactive
e-commerce Websites that are under development. The names and addresses of
individuals who have responded to mailings by ordering or by requesting
inclusion in the Company's mailing list will be entered in the Company's
database and assigned an "import number" which appears on all customer
correspondence and will be used to track account activity against each
marketing promotion that is sent to a customer. The Catman system will provide
the Company's customer service representatives access to an array of product
and customer information during order processing. The Company believes the
customer information to be provided by the system, including tasting notes,
purchasing and billing histories, delivery instructions and prospective
shipping dates, will enhance the quality of service to its customers.
The Catman system will provide real-time inventory management. The Company
will maintain 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
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will be incorporated into the Catman software to allow the Company to manage
centrally inventory for each of its licensed facilities.
The Company continually updates its current database of customer names and
purchasing histories to maximize the productivity of house and acquisition
mailings. The Catman system will provide the Company with a flexible system
that offers highly sophisticated data manipulation which will enable the
Company to target its marketing programs to specific segments of its customer
base. The system also will provide extensive reporting capabilities that will
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. The warehouse personnel in the Company's 15 facilities located
throughout the country and sales representatives serving Passport Wine
customers from our California facility, communicate via the Internet on a
virtual private network with our computer software and hardware system in
Canton, Massachusetts. The Catman software will employ the same communication
links with the Company's facilities located outside of Massachusetts. To
support the Catman software implementation, the Company has purchased a new
server, which will run the Catman, and Universe database.
The Company has also retained Hill, Holliday to design, program and
implement a new Websites from which customers can purchase Geerlings & Wade
products (the " e-commerce solution"). One of these new Websites will replace
the Company's current Website, located at www.geerwade.com, the other will
provide nationally branded wines as previously discussed. These Websites will
allow for interactive queries and orders between our customers and the Catman
software and Universe database. For instance, customers will be able to query,
indirectly, the Universe database to determine which inventory is available
for sale, their order fulfillment status and their order shipping status.
Orders, including regulatory compliance verification data, will be
electronically entered via the Catman system and e-mails will be sent back to
customers notifying them of order receipt and status. Inventory updates will
be performed automatically based on order status in the Catman system. The
Company expects this e-commerce solution to generate strong customer
satisfaction and allow the Company to keep its Websites current with minimal
cost to the Company. This will allow the Company to focus on the Website
content and on marketing initiatives to increase e-commerce sales.
The entire capital investment for the Catman software, associated
integration costs, new computer hardware and the e-commerce solution will be
approximately $800,000 to $1,000,000.
Marketing
The goal of the Company's marketing program is to increase the size of the
Company's customer base through acquisition, retention, repurchase, and upsell
programs delivered through targeted, high-value marketing communications that
offer quality wines at competitive prices. Marketing communications are
delivered primarily through the mail, with increasing use of both
telemarketing and Internet channels.
The Company's ongoing marketing programs are also designed to generate
information concerning existing and new customers. 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. Increasingly, this data, along
with customer purchase behavior and buying preferences, will be leveraged to
define differentiated customer contact strategies.
The Company monitors its progress in attaining its goals by tracking new and
existing customer purchase behaviors, customer retention statistics, and
individual marketing campaign performance. A primary focus is placed on
repurchase behaviors of first- and second-time buyers, high-value customers,
and multi-order customers who have not purchased in the last 12 months.
8
<PAGE>
New Marketing Programs. In addition to its present direct-mail formats, in
1998 the Company continued testing alternative channels of direct marketing to
enhance sales and increase its customer base. These alternatives included
promoting a "wine-of-the-month" continuity program in which customers or their
gift recipients receive two (or four) bottles of wines each month. After
purchasing Passport Wine Club in July 1998, the Company merged its continuity
business with Passport's continuity programs. The Company will promote
continuity programs primarily over the Internet in the near future.
Additionally, the Company continued several "affinity" marketing programs with
corporate partners such as America West, Brookstone, American Express, Brooks
Brothers and Skymall. Each of these programs are unique but generally are
designed to market Geerlings & Wade wines to the customer base of each
corporate partner. Some programs are presented either as wine clubs sponsored
by the corporate partner or as Geerlings & Wade offers endorsed by the
corporate partner. The Company experienced various degrees of success with
these programs and intends to further test this marketing channel. Overall,
Company marketing efforts will increasingly seek to enhance the return on
program and campaign investments aimed at existing Geerlings & Wade customers.
Electronic Commerce. In 1998, Geerlings & Wade launched a new Website
www.geerwade.com through which customers can learn about the Company, its
products and, most importantly, order wine and wine accessories
electronically. Additionally, the Company purchased Passport Wine Club on July
7, 1998. Passport Wine Club sells monthly subscriptions of wine from its
Website www.topwine.com. Customers can access the www.topwine.com directly or
through www.geerwade.com. While e-commerce is still in a development stage,
the Company believes that the potential may exist for selected customers to
migrate their purchasing of products to this on-line channel over time. In
1998, the level of sales placed over the Company's Website was encouraging.
The Company intends to continue testing this interactive channel by expanding
its wine and wine accessories available through its Website. In addition, the
Company has announced a major redesign of its current Website,
www.geerwade.com and a new Website offering nationally branded wine. These
Websites are targeted for completion in the third quarter of 1999.
Membership. To increase customer loyalty, Geerlings & Wade offers customers
the opportunity to purchase one- or three-year memberships. The Company offers
memberships in all states in which it operates and where such offers are
legally permissible. Members receive a personalized membership card, are
uniquely maintained on mailing lists, and, 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 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, 1998, the Company had
approximately 40,700 members, and of the 12-month customers, approximately 25%
were members.
Customer Service
Customers send the Company orders by e-mail, mail, telephone (1-800-782-
WINE) and fax (1-800-FAX-8466) and over the Internet (www.geerwade.com and
www.topwine.com). 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. As described above, the new
Catman software is designed to provide, at a minimum, the same functionality
for Company sales and customer service representatives as the current system.
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 fiscal
years.
9
<PAGE>
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 mostly branded products many of which are 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, being an early entrant in many of its
markets, exploiting computer technology in the management of its operations
and its direct marketing programs and 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.
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 wine makers, manufacturers, and importers who
are licensed to sell wine to the second tier, licensed wholesalers.
Wholesalers in turn supply the third tier, licensed retailers, who ultimately
sell wine to the public for personal use and not for resale. Each tier is
subject to various restrictions on its activities. Geerlings and Wade operates
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). Additionally, some states such as
Nevada, Louisiana, Rhode Island and New Hampshire have amended their beverage
alcohol laws so that licensed retailers can ship into their state as long as
certain procedures are followed by the shipper. In addition, regulatory
restrictions prohibit a retailer with licensed facilities in multiple states
from transferring inventories between its 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, some 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 most of its orders in Massachusetts and contracts with local
couriers in Arizona, Colorado, Minnesota and New Hampshire to deliver orders
to the Company's customers. In Massachusetts, the Company also contracts with
local couriers to deliver some orders to its customers.
Company Licensing and Regulatory Matters. The Company holds retail licenses
in the fifteen states where it maintains sixteen 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
facilities, the Company is permitted to sell and/or ship to consumers in
Alaska, Iowa, Louisiana, Nebraska, Nevada, New Hampshire and Rhode Island.
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.
10
<PAGE>
Most of the states where the Company is licensed have legal barriers against
the Company also engaging in licensed wholesaler activities in that or any
other state. As such, the Company holds only retail licenses. All domestic and
imported inventories are sold and 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 and Internet
operations within this regulatory framework, the Company occasionally receives
inquiries from state regulators regarding its business practices. To date,
such inquiries made during or prior to 1998 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, order fulfillment and accounting for its
inventory and plans to not only maintain this capability with new Catman
software system, but improve this area of data management. 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.
The Company's facilities maintain regular hours and sales are made to
customers who visit the licensed facility. 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 out-of-state licensed facilities such as
from California to its Nevada customers). An adult's signature is required for
deliveries of wine 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. The drivers in
the course of their normal routes perform pickup of returns. In Massachusetts,
third party couriers deliver wine for some of the Company's more distant
routes.
In Alaska, California, Connecticut, Florida, Idaho, Illinois, Iowa,
Louisiana, Missouri, Nebraska, New Mexico, New York, Nevada, Ohio, Oregon,
Rhode Island, Texas, Virginia, Washington and West Virginia, the Company uses
UPS to make deliveries. In Arizona, Colorado, Minnesota, New Hampshire and
Texas, the Company uses licensed delivery companies to make deliveries. 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.
Sales or Use Tax
The Company presently collects sales tax in each of the states in which it
operates a facility 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, Texas,
Virginia and Washington. Massachusetts does not impose sales tax on wine but
does so on wine accessories. Additionally, certain states have enacted
legislation permitting the delivery of wine to residents of their states by
licensed, out-
11
<PAGE>
of-state shippers on the condition certain sales, wine excise and/or other
taxes are imposed on the customer and remitted to the state by the shipper and
or the customer. These states include Louisiana, Nevada, New Hampshire and
Rhode Island. Since 1993, the Company has shipped wine to Oregon, Idaho, New
Mexico, Missouri and West Virginia under "reciprocity laws" 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 13, 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. Although it has not yet become
law, this legislation was reintroduced on January 29, 1998. The Company cannot
predict whether or when this legislation will be enacted. Given the Company's
ability to collect sales tax in the jurisdictions indicated above, the Company
does not believe the collection of use taxes would present an undue burden
upon the Company in the event that it were determined that the Company was
obligated to collect such taxes, and would have no significant impact on the
administrative expenses of the Company or the prices charged to customers.
Trademarks
The following are registered trademarks or service marks of the Company:
Geerlings & Wade Personal Wine Service, 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, Passport Wine Club,
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: Expeditions,
Vintage Impressions Plus, They'll Remember You Not Once But Every Month,
Vintage Rewards and Bestwinebuys.com. 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.
Employees
As of December 31, 1998, the Company employed a total of 79 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.
12
<PAGE>
Item 2: Properties
As of December 31, 1998, Geerlings & Wade operated fifteen licensed
facilities. The Company leases all of these facilities. 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, Minnesota and Ohio and has entered into a lease in Boston,
Massachusetts and Stafford, Texas each with a term of three years. The Company
obtained its license to sell wine from its Texas facility in February 1999 and
commenced selling wine to Texas customers in March 1999. The addition of Texas
brings the total number of retail, licensed facilities for the Company to 16.
<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................... Petaluma, CA 13,800 1999
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
Licensed facility................... Boston, MA 1,400 2001
Licensed facility................... Stafford, TX 5,700 2001
</TABLE>
- --------
* The Company presently rents the facility on a month-to-month basis and
intends to negotiate a long-term lease.
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.
13
<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
NASDAQ Stock Market.
<TABLE>
<CAPTION>
1997 1998
----------- -------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter................................ 5 3/8 4 1/8 5 3/8 4
Second Quarter............................... 5 7/8 3 1/4 6 7/16 4
Third Quarter................................ 5 7/8 4 4 13/16 2 7/8
Fourth Quarter............................... 5 1/2 3 9/16 12 3/16 2 11/16
</TABLE>
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, markdown or commissions and may not necessarily represent
actual transactions.
As of March 26, 1999, there were approximately 126 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 26, 1999,
3,846,550 shares were issued and outstanding; and 1,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 26, 1999,
no 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.
14
<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,
------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Sales.............................. $20,292 $29,718 $31,501 $33,701 $34,774
Cost of sales...................... 10,780 16,138 17,188 18,185 18,160
------- ------- ------- ------- -------
Gross profit....................... 9,512 13,580 14,313 15,516 16,614
Selling, general and administrative
expenses.......................... 7,849 14,690 14,426 14,066 14,860
------- ------- ------- ------- -------
Income (loss) from operations...... 1,663 (1,110) (113) 1,450 1,754
Interest income (expense), net..... 36 (37) (257) (23) 10
------- ------- ------- ------- -------
Income (loss) before income taxes.. 1,699 (1,147) (370) 1,427 1,764
Provision (benefit) for income
taxes............................. 403 (470) (152) 604 751
------- ------- ------- ------- -------
Net income (loss).................. $ 1,296 $ (677) $ (218) $ 823 $ 1,013
======= ======= ======= ======= =======
Pro Forma Statements of Income
Data(1):
Income (loss) before taxes, as
reported.......................... $ 1,699 $(1,147) $ (370) $ 1,427 $ 1,764
Provision (benefit) for income
taxes............................. 636 (470) (152) 604 751
------- ------- ------- ------- -------
Net income (loss).................. $ 1,063 $ (677) $ (218) $ 823 $ 1,013
======= ======= ======= ======= =======
Net income (loss) per share
Basic............................ $ 0.34 $ (0.18) $ (0.06) $ 0.22 $ 0.27
======= ======= ======= ======= =======
Diluted.......................... $ 0.34 $ (0.18) $ (0.06) $ 0.22 $ 0.27
======= ======= ======= ======= =======
Common shares and equivalents
Basic............................ 3,123 3,755 3,776 3,780 3,786
Diluted.......................... 3,135 3,755 3,776 3,796 3,801
<CAPTION>
December 31,
------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................... $ 9,666 $ 8,694 $ 8,045 $ 9,303 $ 9,977
Total assets....................... 13,529 16,717 12,952 16,124 17,205
Long-term debt, less current
portion........................... -- -- -- -- --
Total stockholders' equity......... 10,060 9,733 9,526 10,362 11,405
</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
1994 to reflect what comparative results would have been had the Company
been taxed as a C corporation for the entirety of 1994. Results for 1995,
1996, 1997 and 1998 are reported on an actual basis.
15
<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 1998, sales
increased $1,072,000, or 3.2%, from $33,701,000 in 1997 to sales of
$34,774,000 in 1998. The increase in revenues did not meet the Company's
expectation due to weaker-than-expected response rates to house mailings
during the first eight months of 1998. However, the Company achieved its
primary goal for 1998, which was to increase net income from 1997. The Company
earned $1,764,000 in operating income in 1998 as compared to $1,450,000 in
1997. This marked improvement in operating income resulted from higher sales
and increased gross profit margin by 180 basis points. Selling, general and
administrative expenses were higher in 1998 than in 1997 by $794,000.
Marketing expense, which is referred to as advertising costs in the financial
statement footnotes, increased $482,000 from $4,756,000 in 1997 to $5,238,000
in 1998. As a percentage of sales, marketing expense was 15.1% of sales in
1998 and 14.1% of sales in 1997. The majority of the increase in market
expense resulted from mailing more acquisition and continuity promotional
pieces to potential customers in 1998. General and administrative expenses
increased because of increased staffing as a result of the acquisition of
Passport Wine Club in July 1998, opening of the Newbury Street store in Boston
and several additions to the support staff. Delivery expense also increased
during 1998 primarily as a result of rate increases by courier services. In
1998, the Company focused on improving the balance sheet, and did so by
lowering inventory by yearend from $10,985,000 in 1997 to $8,214,000 in 1998.
The Company was also able to improve terms from certain suppliers during 1998
and thereby leverage its working capital. The Company's cash balance as of
December 31, 1998 was $4,290,000 as compared to $358,000 with an outstanding
balance under its line of credit of $982,000 at December 31, 1997. The Company
operated in 1998 from 15 licensed facilities in 14 separate states to comply
with laws and regulations related to the retail sale of wine. Operating these
separate locations forces the Company to incur unusually high overhead expense
as a percentage of sales. 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 1986, three additional
licensed facilities in each of 1991 and 1993, one facility in 1994, five
facilities in 1995, one in 1997, one (a retail store) in 1998 and one in 1999.
From these 16 facilities, the Company is able to serve customers in 28 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 Louisiana residents in the second quarter
of 1998. New Hampshire and Rhode change their respective state laws to allow
for out of state shipment of wine by licensed retailers in 1998. Alaska has
clarified its laws and has affirmed that only sales placed over the Internet
to out-of-state retailers are permissible. Mail order and telephone sales from
out-of-state retailers are prohibited in Alaska. The Company commenced
shipping to residents of these three states in March 1999. In February 1999,
the Company obtained a permit to sell wine from the Texas Alcoholic Beverage
Commission ("TABC"). The Company opened a facility in Stafford, Texas and
commenced shipping wine to Texas residents in March 1999. In order to meet
TABC laws, the Company created Geerlings & Wade of Texas, Inc., a Texas
corporation, and Geerlings & Wade of Texas, Inc. will sell and deliver wine to
Texas customers. The Company considers each area served by a licensed
facility, excluding the Newbury Street store and the Canton, MA facility, to
be a separate market.
In 1998, the Company continued testing various new marketing programs to
find ways to increase revenues including continuity ("wine of the month")
programs, corporate affinity marketing programs ("affinity programs") and
outbound telemarketing programs. In July 1998, the Company purchased the
assets of Passport Wine Club, which offers both continuity programs and
individual cases of wine to customers. In 1999, the Company plans to continue
operating this separate business as Passport Wine and to direct Geerlings &
Wade customers or potential customers to Passport Wine in order to increase
sales for this business. The Company has determined that affinity programs
offered in stores or direct mail pieces of its partners do not warrant further
investment by the Company. However, the Company plans to explore partnering
with companies in attempt to market wine over the Internet. Telemarketing, on
the other hand, has proved successful, and the Company plans
16
<PAGE>
to significantly increase its outbound telemarketing to its customer base. As
part of this program, the Company plans to curtail mailings to these customers
that are called so as to reduce mailing expense. Holiday catalogs offering
wine and wine-related accessories were mailed in 1998. Sales results from
these marketing pieces encourage further development of the catalog in an
effort to make it a significant contributor to revenues in the future. The
Company has mailed, for the first time, three separate catalogs in the first
quarter of 1999 and plans to mail Holiday catalogs in the fall of 1999.
In May of 1998, the Company commenced selling wine from its Website at
www.geerwade.com. This Website was revamped in October 1998 and will be
completely redesigned with interactive elements by Hill, Holliday, Connors,
Cosmopulos, Inc. ("Hill, Holliday"). The Company plans to launch the new
Website in the third quarter of 1999. Since the third quarter of 1998, sales
from this Website continue to grow each month even though the fourth quarter
has produced historically the largest percentage of sales for the Company
compared to the next three quarters. In addition to redesigning the existing
Website, www.geerwade.com, the Company plans to launch later in the third
quarter of 1999 a totally separate Website, which offers a broad selection of
nationally branded wines that will only be marketed on the Website. A new
image will be developed for this e-commerce business, and the Company will
market this e-commerce Website separately and test new forms of advertising
such as space advertisements, radio and Internet banner advertising as well as
develop relationship with other Websites and companies. Both the new Website
and www.geerwade.com will be interactive with the Company's main computer
system and database and allow customers to view only inventory that is
available for sale, check the status of their orders and receive UPS tracking
numbers when applicable to track the location of their packages. This new
computer system will replace the existing computer system that supports the
majority of the Company's information requirements. The Company plans to
convert to this new system in the summer of 1999.
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 1997 and in 1998. The
Company's sales growth between 1997 and 1998 reflects increased comparative
state sales for all states ("markets") except Massachusetts, New Jersey and
Washington. Comparative sales were down 6% for Massachusetts, 3% for New
Jersey and 4% for Washington. Comparative sales increased by 3% in Connecticut
and New York, 4% in Illinois and Florida, 9% in California, 2% in Virginia, 7%
in Ohio, 6% in Minnesota, 1% in Colorado, 11% in Arizona and 158% in Michigan.
The Company hopes to increase sales in all markets in 1999.
The following table sets forth total sales by market for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
Market 1994 1995 1996 1997 1998
------ ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Massachusetts(1)....................... $ 4,746 $ 5,970 $ 5,685 $ 6,310 $ 5,960
Connecticut............................ 2,010 2,246 2,186 2,025 2,079
New York............................... 4,469 5,297 5,078 4,929 5,061
Illinois(2)............................ 1,603 2,418 2,563 2,702 2,805
Florida................................ 1,941 2,679 2,810 3,066 3,194
California(2).......................... 2,707 3,541 3,466 3,530 3,833
New Jersey............................. 2,742 3,795 3,637 3,658 3,559
Washington (December 1994)............. 74 884 1,017 1,093 1,049
Virginia (January 1995)................ 1,398 1,707 1,963 1,996
Ohio (April 1995)...................... 1,123 2,017 2,401 2,566
Minnesota (July 1995).................. 134 338 413 436
Colorado (July 1995)................... 151 566 713 718
Arizona (September 1995)............... 82 431 542 601
Michigan (June 1997)................... 356 917
------- ------- ------- ------- -------
Totals............................... $20,292 $29,718 $31,501 $33,701 $34,774
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes sales from catalog accessories and from the Newbury Street,
Boston store.
(2) Includes authorized sales into additional states.
17
<PAGE>
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 acquisition mailings and other
marketing programs under development. The price point for initial purchases by
new customers is normally under the Company's average price point; therefore,
increased orders by new customers lowers the average price point for the
Company.
The Company sent 23 house mailings in 1997 and 22 in 1998 and plans to mail
the 22 house mailings in 1999 to its active customers. By keeping the number
of mailings relatively constant, the marketing cost per customer remains
nearly constant. 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 1998, 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, 1997 and 1998 and pro forma
statements of income for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 53.1 54.3 54.6 54.0 52.2
Gross profit............................... 46.9 45.7 45.4 46.0 47.8
Selling, general and administrative
expenses.................................. 38.7 49.4 45.8 41.7 42.7
Income (loss) from operations.............. 8.2 (3.7) (0.4) 4.3 5.1
Interest (expense) income, net............. 0.2 (0.2) (0.8) (0.1) 0.0
Income (loss) before income taxes.......... 8.4 (3.9) (1.2) 4.2 5.1
Provision (benefit) for income taxes....... 2.0 (1.6) (0.5) 1.8 2.2
Net income (loss).......................... 6.4 (2.3) (0.7) 2.4 2.9
Pro forma income before taxes.............. 8.4 -- -- -- --
Pro forma income taxes..................... 3.1 -- -- -- --
Pro forma net income....................... 5.3 -- -- -- --
</TABLE>
Years Ended December 31, 1998, 1997 and 1996
Sales
Sales increased $1,072,000 or 3.2%, from $33,701,000 in 1997 to $34,774,000
in 1998. This increase was attributable to a 1.5% sales increase for all 13
markets opened prior to 1997 and a 158% sales increase for
18
<PAGE>
Michigan, which opened in 1997. Included in the $34,774,000 of sales for 1998
were sales of $1,499,000 generated from the Company's 1998 catalogs, which is
nearly the same as the catalog sales of $1,498,000 in 1997. Sales increased
$2,200,000, or 7.0%, from $31,501,000 in 1996 to $33,701,000 in 1997. This
increase resulted from the combination of a 3.3% sales increase for markets
opened prior to 1995 and an 18.6% increase for markets opened during 1995.
The number of cases sold by the Company increased by 15,300, or 4.8%, from
321,395 in 1997 to 336,695 in 1998. From 1996 to 1997, the number of cases
sold increased from 278,247 to 321,395, a 15.5% increase. The average case
price for cases sold by the Company decreased from $100.44 in 1997 to $99.64
in 1998, which is a 0.8% decrease. This decrease is due to the combination of
maintaining case prices consistent with 1997 and the effects of mailing
substantially more acquisition pieces which resulted in more first time
customers in 1998 than in 1997. The average price per case for the Company was
skewed downward by the lower price point for these first time customers. The
average price per case for sales to repeat customers actually increased about
1% from 1997 to 1998. 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 1997,
Geerlings & Wade changed the product mix to lower-priced products and began
periodic discounting on selected products to reduce inventory and maintain a
manageable number of stock keeping units. The average case price for cases
sold by the Company decreased from $110.19 in 1996 to $100.44 in 1997, which
is 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 to promotional mailings.
The average number of cases purchased per 12-month customer decreased from
2.91 per year in 1997 to 2.61 per year in 1998. The increase in sales to first
time buyers, who buy less than one case on average for their first purchase,
was the major factor in reducing the annual, average number of cases
purchased. While the average case purchased per 12-month buyer decreased 10.3%
from 1997 to 1998, the average number of cases purchased by repeat buyers
decreased 8.8% from 1997 to 1998 from 4.66 cases per repeat buyer in 1997 to
4.25 cases in 1998. The average number of cases purchased per customer each
year increased from 2.82 in 1996 to 2.91 in 1997. This increase was
attributable, in part, to lower price points in 1997 than in 1996 which
permits customers to purchase larger quantities without increasing their
average order.
Gross Profit
In 1998, gross profit increased $1,098,000, or 7.1%, from $15,517,000 in
1997 to $16,614,000 in 1998 and increased as a percentage of sales from 46.0%
in 1997 to 47.8% in 1998. This increase in gross profit resulted from improved
purchasing by the Company and by favorable changes in foreign currency
exchange rates. Gross profit increased $1,203,000, or 8.4%, from $14,313,000
in 1996 to $15,517,000 in 1997, while increasing as a percentage of sales from
45.4% in 1995 to 46.0% in 1997. This increase in gross profit as a percentage
of sales resulted from improved purchasing by the Company as well. Gross
profit for all sales (including accessory sales) per case of wine sold was
$49.34 in 1998, which is an increase of $1.06 per case from $48.28 per case in
1997. In 1996, the gross profit per case was $51.44 per case. This decrease
from 1996 to 1997 resulted from lowering the average price paid for each case
of wine sold by the Company in 1997. The Company hopes to improve gross margin
as a percentage of sales by improving purchasing in 1999 but can make no
guarantee that it will achieve this goal. Adding more nationally branded wines
to the product mix tends to lower the overall gross profit percentage since
these wines generate much lower margins than the present selection of wines
sold by the Company. So if the Company sells a higher percentage of these
nationally branded wines in the future, the gross profit percentage will
decrease. The Company plans to increase the proportion of nationally-branded
products if it can successfully offset a lower gross profit with savings in
marketing and by increasing response rates to the Company's various
advertising programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $793,000, or 5.6%,
from $14,067,000 in 1997 to $14,860,000 in 1998, while increasing as a
percentage of sales from 41.7% in 1997 to 42.7% in 1998. This
19
<PAGE>
increase in selling, general, and administrative expenses was attributable to
both fixed and variable costs. For variable costs, advertising costs, which
are mostly comprised of direct mail that the Company sends to prospective and
repeat customers increased 10.1% from 1997 to 1998. In 1997, advertising costs
were $4,756,000 and in 1998 were $5,238,000, which is an increase of $482,000.
Most of this increase is attributable to the Company mailing about one million
more pieces of promotional mail to prospective customers ("acquisition
mailings") in 1998 than in 1997. Additionally, the Company amortizes the cost
of these acquisition mailings over five months and in the fall of 1997, the
Company increased significantly the number of these mailings. Therefore, some
of the increased costs were capitalized and expensed in the first four months
of 1998 thereby adding to 1998 advertising expense. Credit card fees increased
due to higher rates charged by credit card companies, compounded by higher
sales and higher shipping and handling fees charged by the Company. The
Company does not include shipping and handling revenue that it charges
customers in its sales but nets this revenue against delivery expense;
therefore, whenever, the Company increases its shipping and handling fees to
customers, the Company incurs higher credit card fees which results in higher
credit card fees as a percentage of sales. This affect is magnified when the
prices for the Company's products remain stable.
As for fixed costs, in 1998 the Company operated and incurred the related
costs of operating its Michigan retail facility for a full year as compared to
1997 when the Company opened that facility in the second quarter. The Company
also opened the Newbury Street store in Boston in the second quarter of 1998
and incurred the cost of opening and operating that store. Also, the Company
acquired the assets of Passport Wine Club in July 1998 and consolidated its
existing California operations located in San Jose with the Passport
operations by relocating both groups to a new retail facility in Petaluma,
California. The Petaluma facility is a much larger facility than the one in
San Jose that was operated by the Company in 1997. Additionally, five people
were hired as part of the Passport acquisition, and this significantly
increased the general and administrative expense for 1998. Finally, the
Company entered into a lease in Stafford, Texas in October 1998 in preparation
of opening a retail facility in Texas. In total, rent expense for 1998 was
$1,003,000 in 1998 and $862,000 in 1997 which is an increase of $141,000. The
Company has also hired personnel for the sales and customer service department
to improve customer service and in the marketing department to increase the
productivity of its marketing programs and expand into the wine accessory
catalog and wine and accessory sales over the Internet. The Company launched
its e-commerce Website in May 1998 and continually upgraded it throughout
1998.
Selling, general and administrative expenses decreased by $360,000, or 2.5%,
from $14,426,000 in 1996 to $14,066,000 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 charged to customers, reducing salaries
and lowering the cost per piece of mail for acquisition mailing 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 increased by
$181,000 in 1997 from $4,575,000 in 1996 to $4,756,000 in 1997, which is a
4.0% increase. Most of the increase resulted from mailing the additional wine
and wine accessories catalog in the spring of 1997.
Interest Income (expense)
In 1998, interest expense decreased $23,000 or 52.3% from $44,000 in 1997 to
$21,000 in 1998. Interest income increased $10,000 from $21,000 in 1997 to
$31,000 in 1998. The net effect was that the company had a net interest
expense of $23,000 in 1997 and net interest income of $10,000 in 1998. This
was an improvement of $33,000 between 1997 and 1998. This dramatic change in
net interest was due to paying down the line of credit with cash generated
from operations. For 1997, net interest expense decreased $234,000, or 91.1%,
from net interest expense of $257,000 in 1996 to a net interest expense of
$23,000 in 1997. This decrease in net interest expense was due to reduced
borrowings under the Company's line of credit to support working capital needs
throughout 1997.
Provision for Income Taxes
The Company was subject to corporate level income taxes for the entirety of
1996, 1997 and 1998. Income taxes were benefited at approximately 41% in 1996
and income taxes were provided at 42% in 1997 and 42.5%
20
<PAGE>
in 1998. 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
acquisition mailings and purchases of inventory to support sales growth. As of
December 31, 1998, the Company had cash and cash equivalents totaling
$4,290,000. 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 one half of one percent ( 1/2%), and is collateralized by
substantially all of the assets of the Company. As of December 31, 1998, the
Company had no borrowings under the Line of Credit.
In 1998, the Company generated $5,396,000 in cash from operating activities
compared to generating $42,000 in 1997. The increase in cash generated from
operations resulted primarily from net income of $1,013,000, a decrease in
inventory of $2,930,000 and increases in accounts payable of $1,501,000 and in
deferred revenue of $345,000. This cash flow increases were offset by
increases in prepaid mailing costs of $372,000 and decreases in accrued
expenses of $209,000 and accrued sales, income and payroll tax of $536,000.
At December 31, 1998 and December 31, 1997 the Company had working capital
of $9,977,000 and $9,303,000, respectively. The Company lowered inventory
levels in 1998 and expects to maintain these lower inventory levels in the
future. Inventory levels will fluctuate with seasonal demand and overall sales
growth. As a result of the alcoholic beverage regulatory scheme within which
the Company operates, the Company is required to maintain separate inventories
in each of the markets in which it operates a licensed facility and is not
permitted to transfer inventory between such facilities. As a result, the
Company believes that its overall inventory levels are necessarily higher than
would be required if the Company were not subject to such regulatory
requirements. In the first quarter of 1999, the Company opened the Texas
licensed facility. The inventory for this facility adds to the overall
inventory levels.
During 1998, net cash of $512,000 was used in investing activities. The
Company used cash from operations and borrowings under its Line of Credit to
invest approximately $112,000 in property and equipment. These purchases
included approximately $93,000 in computer and telephone hardware and software
enhancements and $19,000 of leasehold improvements and furniture and fixture
purchases. The Company received $90,000 from a vendor in exchange for
returning an asset previously paid for by the Company. On July 7, 1998, the
Company purchased the assets of Passport Gift Company, Inc. d/b/a Passport
Wine Club for cash consideration of $434,453. An additional $30,890 was used
for acquisitions costs.
During 1998, total cash used for financing activities was $953,000 of which
$1,651,000 represented borrowings under the Line of Credit and $2,634,000 was
used for repayment of Line of Credit borrowings.
The Company believes that cash flows from operations and current cash
balances, together with the availability under its 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, 1998,
the Company had foreign exchange contracts outstanding to purchase 7.8 million
French francs (equivalent to approximately $1,436,000 at December 31, 1998).
21
<PAGE>
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.
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. In addition, the alcoholic beverage industry is subject to
potential legislation and regulation on a continuous basis including in such
areas as direct and Internet sales of alcohol. 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 and 1998, 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
22
<PAGE>
to Company mailing schedules may have a material adverse effect on the
Company's business and results of operations.
Increases in Postage Rates; Dependence on Shippers. The Company's marketing
efforts have traditionally been conducted through direct mail campaigns. As a
result, increases in postage rates may have a material adverse effect on the
Company's business and its results of operations. Except in Massachusetts 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. Additionally, increases in
shipping rates 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 Mr. Van Hoof, one of
the Company's primary negotiants for Europe, and Codera Wine Group, Inc., one
of the Company's primary negotiants for the U.S. 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.
23
<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 1998,
approximately 68% 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. Winemaking 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 year 2000 issue relates to computer programs and
systems that recognize dates using two digit year data rather than four digit
year data. As a result, such programs and systems may fail or provide
incorrect information when using dates after December 31, 1999. If the year
2000 issue were to cause disruptions to the Company's internal information
technology systems or to the information technology systems of entities with
whom the Company has commercial relationships, material adverse effects to the
Company's operations could result.
The Company's internal computer programs and operating systems consist of
programs and systems relating to virtually all segments of the Company's
business, including merchandising, customer database management and marketing,
order-processing, fulfillment, inventory management, customer service and
financial reporting. These programs and systems are primarily comprised of:
"Front-end" systems. These systems automate and manage business functions
such as order-taking and order-processing, inventory, management,
fulfillment operations as the Company's retail facilities and financial
reporting. Users within the Company interface with these systems through
personal computers via a local area network and from distant locations
through a private network using the Internet. These users also use and
access through their personal computers off-the-shelf e-mail, work
processing, spreadsheet and other commercial software applications.
Customer database management systems. These systems facilitate the
storage of customer data and direct response and catalog mailings for the
Company. Currently, the Company's internal customer database management
system is integrated with the existing front-end system of the Company.
Telecommunications systems. These systems enable the Company to manage
their order-taking and customer service functions.
Voicemail systems. These systems are used for receiving and storing
messages to employees at various Company facilities.
Ancillary services systems. These include such systems as heating,
ventilation and air conditioning control systems and security systems.
The Company has completed preliminary reviews of its internal front-end
systems, its customer database management systems, and its personal computers
and local area networks, to assess the potential impact of the year 2000
issue. These preliminary reviews were completed by the Company's existing
workforce at no identifiable incremental cost. Based upon these reviews, the
Company believes that all of these systems and equipment will operate
correctly when processing data that include dates after December 31, 1999
except for its front-end processing system. The Company believes that minor
remediation or expenditures are required to ensure continued proper operation
of such systems and equipment other than the front-end processing system. The
Company has purchased a replacement software system for front-end processing
and a new production database that are year 2000 compliant. This system
includes the Catman Catalog software that is developed and sold by Axexxis
Corporation and runs on the Universe data base that is sold by Ardent
Software, Inc. Both of these systems process dates based on a system that adds
or subtracts days from a starting date, which is time
24
<PAGE>
zero. Therefore, the system does not rely on years stored as either 2 or 4
digit number such as "99" or "1999" and, as represented to the Company, will
not fail to function when January 1, 2000 arrives. The Company has also
purchased a new server for this software which the vendor represents is Year
2000 compliant. In addition to addressing the year 2000 issue, this new
software and hardware system will enhance the functionality and capability of
the Company's entire computer system. The Company plans to conduct further
reviews and tests of its systems and equipment to insure that all potential
year 2000 issues have been addressed. The approximate cost to purchase this
new system, including any necessary hardware, and to program the new Websites
planned for the Company will be between $800,000 and $1,000,000.
The Company has not yet completed reviews of its internal telecommunications
systems and its internal voicemail and ancillary services systems. Based on
its preliminary reviews, the Company has been advised by its telephone system
vendor that a $3,000 software update can be purchased to bring the Company's
telephone system into compliance. The Company intends to purchase such
software. The Company does not anticipate that upon further reviews that any
remediation relating to such other systems that might be necessary will cause
the Company to incur material costs or present implementation challenges that
cannot be addressed prior to the end of calendar year 1999. The Company
expects to complete its reviews of these systems in the first half of calendar
year 1999.
The computer programs and operating systems used by entities with whom the
Company has commercial relationships also pose potential problems relating to
the year 2000 issue, which may affect the Company's operations in a variety of
ways. These risks are more difficult to assess than those posed by internal
programs and systems, and the Company has not yet completed a plan for
assessing them. The Company believes that the programs and operating systems
used by entities with which it has commercial relationships generally fall
into two categories:
First, the Company relies on programs and systems used by providers of
services necessary to it to reach and communicate with its customers. Examples
of such providers include the United States Postal Service, UPS, telephone
companies, customer list processors and rental agencies, printers and banks.
Services provided by such entities affect almost all facets of the Company's
operations, including processing of orders, printing and mailing of direct
response mail and catalogs, shipping of goods and certain financial services
(e.g., credit card processing). Programs and services in this first category
generally are not specific to the Company's business and disruptions in their
availability would likely have a negative impact on most enterprises within
the direct marketing industry and on many enterprises outside the direct
marketing industry. The Company believes that all of the most reasonably
likely worst case scenarios involving disruptions to its operations stemming
from the year 2000 issue relate to programs and systems in this first
category. The Company intends to include an evaluation of such scenarios in
its plan for assessing the programs and systems of the entities with which it
has commercial relationships.
Second, the Company relies on programs and systems used by a variety of
vendors of the products it markets (in 1998, the Company purchased goods from
many vendors). In the case of risks posed by the year 2000 issue relating to
programs and systems in this second category that are used by product vendors,
such risks are minimal and correctable since these vendors are relatively
small companies and generally rely on off-the-shelf software programs and
hardware. The Company intends to include in its plan for assessing the
programs and systems of the entities with whom it has commercial relationships
the solicitation of assurances of year 2000 compliance from each vendor that
is significant to the Company.
The Company expects to complete its plan for assessing the programs and
systems of the entities with whom it has commercial relationships by the end
of May 1999 and the identification of related risks and uncertainties by the
end of the second quarter of fiscal 1999. Once such identification has been
completed, the Company intends to resolve any material risks and uncertainties
that are identified by communicating further with the relevant vendors, by
working internally to identify alternative sourcing and by formulating
contingency plans to deal with such matters. The Company expects the
resolution of such matters to continue until all year 2000 problems are
resolved satisfactorily.
25
<PAGE>
Dependence on Computers. The Company relies on software, hardware, the
Internet and telecommunications equipment and services to transact, process,
record keep, analyze and manage all aspects of its business. In the event any
of these major components or services fail for an extended period of time,
this could have an adverse material effect on the Company's operations, sales
and profitability. Additionally, the Company plans to begin using the new
Catman computer system in the third quarter 1999. In the event this system
conversion is delayed, this will have an adverse material affect on the
Company, and the Company will have to take extraordinary measures to remediate
its present computer system so that it is Year 2000 compliant.
Market Risk. The Company does not engage in any activity involving market
risk sensitive instruments other than foreign exchange forward contracts
described herein that are material to the business.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk related to foreign currency exchange rates. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company enters into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on vendor accounts payable denominated in
foreign currencies. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on the Company's operating
results. The gains and losses on these contracts are included in earnings when
the underlying foreign currency denominated transaction is recognized. Gains
and losses related to these instruments for fiscal 1998 were not material to
the Company. Looking forward, the Company does not anticipate any material
adverse effect on its financial position, results of operations or cash flows
resulting from the use of these instruments. However, there can be no
assurance that these strategies will be effective or that transaction losses
can be minimized or forecasted accurately.
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.
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 2000," "Director Whose Terms Expire in 2001"
and "Information Concerning the Board and Its Committees" in the Proxy
Statement for use in connection with the Company's 1999 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.
26
<PAGE>
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
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 Company and
The First National Bank of Boston.(1)
10.8 Promissory Note of the Company in favor of The First
National Bank of
Boston dated January 7, 1994.(1)
10.9 Security Agreement between the Company and The First
National Bank
of Boston dated January 7, 1994.(1)
10.10 Stock Option Plan, as amended.
10.11 Non-Employee Director Stock Option Plan, as
amended.(1)(13)
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)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
------- ----------- ----------
<C> <S> <C>
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)
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
the Company 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 Company and The First
National Bank of Boston.(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.(11)
10.31 Lease Addendum between the Company and Mehland
Developers dated January 13, 1998.(11)
10.32 Lease Amendment between the Company and PBP-N, Inc.
dated October 9, 1997.(11)
10.33 Lease Agreement between the Company and 216-218 Newbury
Street Realty Trust dated January 20, 1998.(11)
10.34 Lease Amendment between the Company and Bruce K. Hoyt
dated March 18, 1998.(11)
10.35 Sublease Agreement between the Company and Fishman
Supply Co. dated June 12, 1998 and Lease Agreement
between the Fishman Supply Co. and Charles R. Stephens
dated September 1, 1989. (12)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
------- ----------- ----------
<C> <S> <C>
10.36 Lease Amendment between the Company and Jerry L. Ivy
dated April 21, 1998.
10.37 Lease Agreement between the Company and Corporate
Exchange Limited Partnership dated October 9, 1998.
10.38 Letter agreement, amending $5,000,000 demand
Discretionary Line of Credit, dated August 28, 1998,
between the Company and The First National Bank of
Boston.
21 Subsidiaries of the Company
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 Exhibit to the Company's Registration Statement on Form S-8
filed on September 30, 1997 (File No. 333-36741) and incorporated by
reference herein.
* Management Contract or Compensation Plan
(11) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1997 filed on March 30, 1998 (File No. 0-24048) and
incorporated by reference herein.
(12) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 filed on August 14, 1998 (File No. 0-24048) and
incorporated by reference herein.
(13) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on October 20, 1998 (File No. 333-65907) and incorporated by
reference herein.
(b) No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1998.
29
<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
By: _________________________________
Jay L. Essa
President and Chief Executive
Officer
Date: March 26, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Huib E. Geerlings Chairman of the Board and March 26, 1998
______________________________________ Director
Huib E. Geerlings
/s/ Jay L. Essa President, Chief Executive March 26, 1998
______________________________________ Officer and Director
Jay L. Essa (Principal Executive
Officer)
/s/ David R. Pearce Vice President, Chief March 26, 1998
______________________________________ Financial Officer and
David R. Pearce Treasurer (Principal
Financial and Accounting
Officer)
/s/ Phillip D. Wade Director March 26, 1998
______________________________________
Phillip D. Wade
/s/ James C. Curvey Director March 26, 1998
______________________________________
James C. Curvey
/s/ John M. Connors, Jr. Director March 26, 1998
______________________________________
John M. Connors, Jr.
/s/ Gordon R. Cooke Director March 26, 1998
______________________________________
Gordon R. Cooke
/s/ Robert Webb Director March 26, 1998
______________________________________
Robert Webb
</TABLE>
30
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-2
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998.......................... F-3
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1998....................................................... F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1998.......................................... F-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1998....................................................... F-6
NOTES TO FINANCIAL STATEMENTS............................................ F-7
</TABLE>
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 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 29, 1999
F-2
<PAGE>
GEERLINGS & WADE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 358,043 $ 4,289,646
Accounts receivable.................................. 559,046 610,382
Inventory............................................ 10,984,590 8,213,801
Prepaid mailing costs................................ 957,483 1,357,950
Prepaid expenses and other current assets............ 987,034 833,376
Deferred income taxes, net........................... 714,910 87,119
----------- -----------
Total current assets............................... 14,561,106 15,392,274
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Office and computer equipment........................ 2,103,555 2,066,480
Motor vehicles....................................... 77,875 77,875
Furniture and fixtures............................... 369,216 369,944
----------- -----------
2,550,646 2,514,299
Less--Accumulated depreciation....................... 1,240,777 1,646,580
----------- -----------
1,309,869 867,719
----------- -----------
DEFERRED INCOME TAXES, NET............................. -- 493,436
----------- -----------
OTHER ASSETS........................................... 112,367 451,799
----------- -----------
$15,983,342 $17,205,228
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit....................................... $ 982,395 $ --
Accounts payable..................................... 1,900,761 3,401,392
Current portion of deferred revenue.................. 766,392 1,089,659
Accrued sales, income and payroll taxes.............. 931,860 395,692
Accrued expenses..................................... 677,098 528,869
----------- -----------
Total current liabilities.......................... 5,258,506 5,415,612
----------- -----------
DEFERRED REVENUE, LESS CURRENT PORTION................. 363,163 384,940
COMMITMENTS AND CONTINGENCIES (Note 6)
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--3,781,343 shares and
3,789,495 shares in 1997 and 1998, respectively..... 37,813 37,895
Additional paid-in capital........................... 9,729,780 9,759,371
Retained earnings.................................... 594,080 1,607,410
----------- -----------
Total stockholders' equity......................... 10,361,673 11,404,676
----------- -----------
$15,983,342 $17,205,228
=========== ===========
</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,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
SALES.................................. $31,501,236 $33,701,832 $34,774,173
COST OF SALES.......................... 17,187,877 18,185,364 18,159,912
----------- ----------- -----------
Gross profit....................... 14,313,359 15,516,468 16,614,261
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 14,426,514 14,066,529 14,860,043
----------- ----------- -----------
(Loss) income from operations...... (113,155) 1,449,939 1,754,218
INTEREST INCOME........................ -- 20,975 31,038
INTEREST EXPENSE....................... (257,259) (44,319) (20,616)
----------- ----------- -----------
(Loss) income before provision
(benefit) for income taxes........ (370,414) 1,426,595 1,764,640
(BENEFIT) PROVISION FOR INCOME TAXES... (152,000) 604,000 751,310
----------- ----------- -----------
Net (loss) income.................. $ (218,414) $ 822,595 $ 1,013,330
=========== =========== ===========
NET (LOSS) INCOME PER SHARE:
Basic................................ $ (0.06) $ 0.22 $ 0.27
=========== =========== ===========
Diluted.............................. $ (0.06) $ 0.22 $ 0.27
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note
4):
Basic................................ 3,776,376 3,779,538 3,786,400
=========== =========== ===========
Diluted.............................. 3,776,376 3,796,460 3,800,601
=========== =========== ===========
</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,
1995................... 3,775,243 $37,752 $9,705,327 $ (10,101) $ 9,732,978
Issuance of stock
under employee stock
purchase plan........ 2,282 23 10,928 -- 10,951
Net loss.............. -- -- -- (218,414) (218,414)
--------- ------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1996................... 3,777,525 37,775 9,716,255 (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 37,813 9,729,780 594,080 10,361,673
Issuance of stock
under employee stock
purchase plan........ 8,152 82 29,591 -- 29,673
Net income............ -- -- -- 1,013,330 1,013,330
--------- ------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1998................... 3,789,495 $37,895 $9,759,371 $1,607,410 $11,404,676
========= ======= ========== ========== ===========
</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,
--------------------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................... $ (218,414) $ 822,595 $ 1,013,330
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Depreciation and amortization, net of
acquisition......................... 570,605 536,301 524,494
Deferred income taxes................ (152,000) (214,910) 134,355
Gain on disposal of property and
equipment........................... (16,102) (5,707) --
Changes in current assets and
liabilities--
Accounts receivable................. (245,439) (251,637) (19,760)
Inventory........................... 3,673,800 (2,624,824) 2,930,301
Prepaid mailing costs............... (13,120) (144,275) (372,191)
Prepaid expenses and other current
assets............................. 785,691 (699,486) 85,030
Accounts payable.................... (2,082,918) 1,258,818 1,500,630
Deferred revenue.................... 100,422 196,382 345,044
Accrued expenses.................... 138,138 478,295 (208,948)
Accrued sales, income and payroll
taxes.............................. (108,538) 690,515 (536,168)
------------ ----------- -----------
Net cash provided by operating
activities........................ 2,432,125 42,067 5,396,117
------------ ----------- -----------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property and equipment,
net.................................. (775,820) (192,769) (112,040)
Proceeds from sale or return of
property and equipment............... 30,893 56,550 90,000
Acquisition of Passport Gift Company,
Inc., net of cash acquired........... -- -- (465,343)
(Increase) decrease in other assets,
exclusive of goodwill................ (129,539) 93,211 (24,409)
------------ ----------- -----------
Net cash used in investing
activities........................ (874,466) (43,008) (511,792)
------------ ----------- -----------
CASH FLOWS USED IN FINANCING
ACTIVITIES:
Bank overdraft........................ 472,469 (472,469) --
Borrowings under line of credit....... 8,960,890 4,943,349 1,651,091
Repayments under line of credit....... (11,037,283) (4,899,973) (2,633,486)
Proceeds from issuance of stock under
the Employee Stock Purchase Plan..... 10,951 13,563 29,673
------------ ----------- -----------
Net cash used in financing
activities........................ (1,592,973) (415,530) (952,722)
------------ ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS...................... (35,314) (416,471) 3,931,603
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................. 809,828 774,514 358,043
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR.................................. $ 774,514 $ 358,043 $ 4,289,646
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest............................. $ 275,107 $ 44,939 $ 20,616
============ =========== ===========
Income taxes......................... $ -- $ 259,650 $ 1,095,131
============ =========== ===========
ACQUISITION OF PASSPORT GIFT COMPANY,
INC.
Fair value of assets acquired......... $ -- $ -- $ 206,160
Liabilities assumed................... -- -- (60,719)
Cash paid............................. -- -- 434,453
Acquisition costs incurred............ -- -- 30,890
------------ ----------- -----------
Goodwill.............................. $ -- $ -- $ 319,902
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(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 15 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 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 and 1998, cash equivalents consist primarily of investments
in money market accounts.
(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 $634,000, $723,000 and $808,000 for the years ended December 31,
1996, 1997 and 1998, 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 1997 and 1998, the Company purchased approximately $3,223,000 and
$2,078,000, 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 $106,000 and $164,000
of paid reservations of certain vintage wines as of December 31, 1997 and
1998, respectively. The Company sold approximately
F-7
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
$283,000 and $247,000 of such reserves to its customers during 1997 and 1998,
respectively. The Company bears the ultimate liability for the wine
reservations sold until delivered and accepted by the customers, at which time
revenue is recognized.
(f) Depreciation
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of the assets over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- -----------
<S> <C>
Office and computer equipment............................... 3-5 years
Motor vehicles.............................................. 3 years
Furniture and fixtures...................................... 5 years
</TABLE>
(g) Other Assets
Other assets primarily consist of the long-term portion of deposits and
goodwill of approximately $320,000 resulting from the acquisition of Passport
Gift Company in 1998 (see Note 3). Goodwill is amortized on the straight-line
basis over 15 years, the estimated useful life, and is shown net of
approximately $10,700 of accumulated amortization as of December 31, 1998.
(h) 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, including intangible 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, 1997 and 1998, the Company determined
that there was no impairment of long-lived assets.
(i) Advertising Costs
Advertising expense was $4,575,253, $4,756,042 and $5,237,893 for the years
ended December 31, 1996, 1997 and 1998, respectively.
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, 1997 and 1998 are $957,483
and $1,357,950, respectively.
(j) Deferred Revenue
Deferred revenue represents customer prepayments, payments for wine
reservations and deferred membership revenues. The components of deferred
revenue as of December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Payments for wine reservations...................... $ 211,459 $ 239,889
Customer prepayments................................ 320,031 460,649
Deferred membership revenues........................ 598,065 774,061
---------- ----------
Deferred revenues................................. $1,129,555 $1,474,599
========== ==========
</TABLE>
F-8
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(k) 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. At
December 31, 1998 the Company had five contracts to purchase approximately 7.8
million French francs (FF) (equivalent to approximately $1.4 million as of
December 31, 1998). These contracts mature at varying dates through April 1999
as the Company's accounts payable in French francs are due.
(l) 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.
(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) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement established standards for reporting and display of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the years ended December 31, 1996,
1997 and 1998 the Company did not have any components of comprehensive income.
(p) Segment Reporting
In December 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that enterprises report selected information about operating segments
in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
operates in one industry segment and provides one service function. The
Company's revenues are wholly derived from customers within the United States.
It is currently impracticable for the Company to report the revenues from
external customers for each group of similar products.
F-9
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(q) Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company does not anticipate the adoption of this statement to have a
material impact on its financial position or results of operations.
(r) Reclassification
The Company has reclassified certain prior year information to conform to
the current year's presentation.
(3) Acquisition
On July 7, 1998, pursuant to an asset purchase agreement with Passport Gift
Company, Inc. (Passport), the Company acquired certain assets and assumed
certain liabilities for consideration of $465,343 in cash, including
acquisition costs. This transaction was accounted for as a purchase in
accordance with APB No. 16, Accounting for Business Combinations, and
accordingly, the results of Passport since July 7, 1998 have been included in
the accompanying statement of operations. The results of Passport's operations
are not material to the financial statements as a whole. The purchase price
was allocated to the acquired assets as follows:
<TABLE>
<S> <C>
Accounts receivable........................................... $ 1,576
Inventory..................................................... 159,513
Prepaid mailing expenses...................................... 28,276
Property and equipment........................................ 13,076
Other assets.................................................. 3,719
Goodwill...................................................... 319,902
Liabilities assumed........................................... (60,719)
--------
$465,343
========
</TABLE>
(4) Net Income (Loss) Per Share
The Company adopted SFAS No. 128, Earnings per Share, effective for the
fiscal year ended December 31, 1997, which replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. Prior period
amounts have been restated to conform to the current period's presentation.
Under SFAS No. 128, basic net income (loss) per common share is computed based
on net income (loss) available to common stockholders and the weighted average
number of common shares outstanding during the period. The diluted net income
(loss) per share is computed by adding the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued to the weighted average number of common shares outstanding. For
the years ended December 31, 1996, 1997 and 1998, 257,619, 227,902 and 245,468
of anti-dilutive shares, respectively, have been excluded from the weighted
average number of common and common equivalent shares outstanding.
F-10
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
A reconciliation of basic and diluted shares outstanding, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding..... 3,776,376 3,779,538 3,786,400
Weighted average common equivalent shares..... -- 16,922 14,201
--------- --------- ---------
Diluted weighted average shares outstanding... 3,776,376 3,796,460 3,800,601
========= ========= =========
</TABLE>
(5) Line of Credit
The Company has a demand line of credit 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 was amended in August 1998, modifying the interest rate
charged from the bank's base rate plus 3/4% to the bank base rate plus 1/2%.
The bank's base rate as of December 31, 1998 was 7.75%. No commitment fees
apply to the unutilized portion of the line of credit. The line of credit is
subject to annual reviews by the bank. Borrowings under the line of credit are
collateralized by all assets of the Company. There were no amounts outstanding
under this line-of-credit agreement at December 31, 1998. The weighted average
borrowing rate for 1998 was 9.25%.
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. As described in Note 2(k), at December 31, 1998, there were
five outstanding forward exchange contracts in French francs for a total of
FF7,864,000 (approximately $1.4 million at December 31, 1998). These contracts
expire at different periods from January through April 1999.
(6) Commitments and Contingencies
(a) Lease Commitments
The Company leases facilities under operating lease agreements expiring
through October 2001. Future minimum rental payments due under these
agreements as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ----------
<S> <C>
1999......................................................... $ 861,452
2000......................................................... 564,284
2001......................................................... 92,019
----------
$1,517,755
==========
</TABLE>
Total rental expense under these agreements included in the accompanying
statements of operations is approximately $799,000, $862,000 and $1,003,000
for the years ended December 31, 1996, 1997 and 1998, 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 or
operations.
F-11
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(7) 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:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- --------
<S> <C> <C> <C>
Current--
Federal................................... $ -- $ 647,000 $486,955
State..................................... -- 172,000 130,000
--------- --------- --------
-- 819,000 616,955
--------- --------- --------
Deferred--
Federal................................... (119,000) (168,000) 105,355
State..................................... (33,000) (47,000) 29,000
--------- --------- --------
(152,000) (215,000) 134,355
--------- --------- --------
$(152,000) $ 604,000 $751,310
========= ========= ========
</TABLE>
The reconciliation of the federal statutory rate to the effective tax rate
for the years ended December 31, 1996, 1997 and 1998 for income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax (benefit) provision at federal statutory
rate................................................. (34)% 34% 34%
State taxes, net of federal benefit................... (6) 6 6
Other, net............................................ (1) 2 2.5
--- --- ----
(41)% 42% 42.5%
=== === ====
</TABLE>
Deferred income taxes relate to the following temporary differences as of
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred revenue...................................... $366,000 $ 482,000
Capitalized inventory................................. 80,000 133,000
Nondeductible reserves................................ 202,000 199,000
Depreciation and amortization......................... (35,000) 18,000
Deferred costs........................................ 102,000 (251,000)
-------- ---------
Total deferred taxes................................ $715,000 $ 581,000
======== =========
</TABLE>
F-12
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(8) 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 125,000 shares of common stock have been reserved for options to be
granted under the Director Plan.
Activity under the Option Plan and Director Plan is summarized as follows:
<TABLE>
<CAPTION>
Option Plan Director Plan
------------------------------------ ------------------------------------
Number Weighted Exercise Weighted Exercise
of Average Price Price per Number Average Price Price per
Shares per Share Share of Shares per Share 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 -- -- --
-------- ------ ------------ ------ ------ ------------
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
-------- ------ ------------ ------ ------ ------------
Outstanding, December
31, 1997............... 213,890 4.84 3.78- 8.00 30,000 6.85 4.38- 15.25
-------- ------ ------------ ------ ------ ------------
Granted............... 196,500 4.31 3.00- 4.50 15,000 4.41 4.31- 4.59
Terminated............ (75,363) 5.55 4.00- 8.00 -- -- --
-------- ------ ------------ ------ ------ ------------
Outstanding, December
31, 1998............... 335,027 $ 4.37 $3.00-$ 8.00 45,000 $ 6.04 $4.31-$15.25
======== ====== ============ ====== ====== ============
Exercisable, December
31, 1998............... 156,250 $ 4.57 $3.78-$ 8.00 18,330 $ 8.38 $4.38-$15.25
======== ====== ============ ====== ====== ============
</TABLE>
F-13
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998 under the Option Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Number Weighted
Outstanding Average Weighted Number Weighted
Exercise as of Remaining Average Exercisable at Average
Price/Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
--------------- ------------ ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$3.00- 3.78 115,000 7.9 $ 3.68 60,000 $ 3.78
$4.00- 4.75 173,232 9.1 $ 4.41 63,445 $ 4.44
$5.25- 8.00 46,795 7.2 $ 5.94 32,795 $ 6.24
------- ------ ------- ------
335,027 $ 4.37 156,250 $ 4.57
======= ====== ======= ======
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998 under the Director Plan:
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Number Weighted
Outstanding Average Weighted Number Weighted
Exercise as of Remaining Average Exercisable at Average
Price/Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
--------------- ------------ ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$4.31- 4.63 35,000 8.7 $ 4.44 8,330 $ 4.48
$8.00-15.25 10,000 5.9 $11.63 10,000 $11.63
------- ------ ------- ------
45,000 $ 6.04 18,330 $ 8.38
======= ====== ======= ======
</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 1996, 1997 and 1998 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, 1996,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997 1998
------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate........................ 6.5% 6.3-6.61% 4.76-5.7%
Expected dividend yield........................ -- -- --
Expected lives................................. 5 years 5 years 9 years
Expected volatility............................ 68% 86% 96%
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1996, 1997 and 1998 under these plans is $2.51, $2.37
and $3.83 respectively. As of December 31, 1996, 1997 and 1998, the weighted
average remaining contractual life of outstanding options under these plans is
9.1, 8.4 and 8.4 years, respectively.
F-14
<PAGE>
GEERLINGS & WADE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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 income (loss) and net income (loss) per share would have been
the following pro forma amounts:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Net income (loss)--
As reported................................ $(218,414) $822,595 $1,013,330
Pro forma.................................. (325,799) 661,277 690,050
Basic net income (loss) per share--
As reported................................ $ (0.06) $ 0.22 $ 0.27
Pro forma.................................. (0.09) 0.18 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.
(c) Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Board of Directors and the stockholders on April 8, 1994 to allow eligible
employees, as defined in the Purchase Plan, to purchase shares of common stock
during one or more six-month periods through payroll deductions. A total of
50,000 shares of common stock have been reserved for purchase under the
Purchase Plan. As of December 31, 1997 and 1998, a cumulative total of 6,100
shares and 14,252 shares, respectively, of common stock have been purchased by
employees under the Purchase Plan.
(9) Employee Savings Plan
The Geerlings & Wade, Inc. 401(k) Employee Savings Plan (the Plan) allows
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 compensation, 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, 1997 and 1998, the
Company's contribution expense was $47,000, $56,500 and $31,500, respectively,
under the Plan.
F-15
<PAGE>
Amended and Restated
as of May 12, 1998.
Exhibit 10.10
GEERLINGS & WADE, INC.
STOCK OPTION PLAN
1. PURPOSE
-------
The purpose of this Stock Option Plan (the "Plan") is to advance the interests
of Geerlings & Wade, Inc. (the "Company") by enhancing the ability of the
Company, and its parent and subsidiaries (if any) to attract and retain able
employees, consultants or advisers to the Company; to reward such individuals
for their contributions; and to encourage such individuals to take into account
the long-term interests of the Company through interests in shares of the
Company's common stock, $.01 par value (the "Stock"). Any employee, consultant,
or adviser selected to receive an award under the Plan is referred to as a
"participant".
Options granted pursuant to the Plan may be incentive stock options as
defined in section 422 of the Internal Revenue Code of 1986 (as from time to
time amended, the "Code") (any option that is intended so to qualify as an
incentive stock option being referred to herein as an "incentive option"), or
options that are not incentive options, or both. Except as otherwise expressly
provided with respect to an option grant, no option granted pursuant to the Plan
shall be an incentive option.
2. ADMINISTRATION
--------------
The Plan shall be administered by the Board of Directors (the "Board") of
the Company. The Board shall have discretionary authority, not inconsistent
with the express provisions of the Plan, (a) to grant option awards to such
eligible persons as the Board may select; (b) to determine the time or times
when awards shall be granted and the number of shares of Stock subject to each
award; (c) to determine which options are, and which options are not, intended
to be incentive options; (d) to determine the terms and conditions of each
award; (e) to prescribe the form or forms of any instruments evidencing awards
and any other instruments required under the Plan and to change such forms from
time to time; (f) to adopt, amend, and rescind rules and regulations for the
administration of the Plan; and (g) to interpret the Plan and to decide any
questions and settle all controversies and disputes that may arise in connection
with the Plan.
<PAGE>
Such determinations of the Board shall be conclusive and shall bind all parties.
Subject to Section 9 the Board shall also have the authority, both generally and
in particular instances, to waive compliance by a participant with any
obligation to be performed by him or her under an award, to waive any condition
or provision of an award, and to amend or cancel any award (and if an award is
cancelled, to grant a new award on such terms as the Board shall specify) except
that the Board may not take any action with respect to an outstanding award that
would adversely affect the rights of the participant under such award without
such participant's consent. Nothing in the preceding sentence shall be construed
as limiting the power of the Board to make adjustments required by Section 4(c)
and Section 6(g).
The Board may, in its discretion, delegate some or all of its powers with
respect to the Plan to a committee (the "Committee"), in which event all
references (as appropriate) to the Board hereunder shall be deemed to refer to
the Committee. The Committee, if one is appointed, shall consist of at least
two directors. A majority of the members of the Committee shall constitute a
quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination of the Committee under the Plan may be made
without notice or meeting of the Committee by a writing signed by a majority of
the Committee members. On and after registration of the Stock under the
Securities Exchange Act of 1934 (the "1934 Act"), the Board shall delegate the
power to select directors and officers to receive awards under the Plan and the
timing, pricing, and amount of such awards to a Committee, all members of which
shall be disinterested persons within the meaning of Rule 16b-3 under the 1934
Act and "outside directors" within the meaning of section 162(m)(4)(c)(i) of the
Code.
3. EFFECTIVE DATE AND TERM OF PLAN
-------------------------------
The Plan shall become effective on the date on which it is approved by the
shareholders of the Company. Grants of awards under the Plan may be made prior
to that date (but after Board adoption of the Plan), subject to approval of the
Plan by the shareholders.
No awards shall be granted under the Plan after the completion of ten years
from the date on which the Plan was adopted by the Board, but awards previously
granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
--------------------------
(a) Number of Shares. Subject to adjustment as provided in Section 4(c),
----------------
the aggregate number of shares of Stock that may be the subject of awards
granted under the Plan shall be 450,000. If any award granted under the Plan
terminates without having been exercised in full, or upon exercise is satisfied
other than by delivery of Stock, the number of shares of Stock as to which such
award was not exercised shall be available for future grants. No employee shall
be
-2-
<PAGE>
entitled to grants of options in excess of 150,000 shares, subject to adjustment
in accordance with Section 4(c).
(b) Shares to be Delivered. Shares delivered under the Plan shall be
----------------------
authorized but unissued Stock, or if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in its
treasury. No fractional shares of Stock shall be delivered under the Plan.
(c) Changes in Stock. In the event of a stock dividend, stock split or
----------------
combination of shares, recapitalization, or other change in the Company's
capital stock, the number and kind of shares of stock or securities of the
Company subject to awards then outstanding or subsequently granted under the
Plan, the exercise price of such awards, the maximum number of shares or
securities that may be delivered under the Plan, and other relevant provisions
shall be appropriately adjusted by the Board, whose determination shall be
binding on all persons.
The Board may also adjust the number of shares subject to outstanding
awards, the exercise price of outstanding awards, and the terms of outstanding
awards, to take into consideration material changes in accounting practices or
principles, extraordinary dividends, consolidations or mergers (except those
described in Section 6(g)), acquisitions or dispositions of stock or property,
or any other event if it is determined by the Board that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such adjustment shall be made in the case of an incentive option, without the
consent of the participant, if it would constitute a modification, extension, or
renewal of the option within the meaning of section 424(h) of the Code.
5. AWARDS; ETC.
------------
Persons eligible to receive awards under the Plan shall be those persons
who, in the opinion of the Board, are in a position to make a significant
contribution to the success of the Company and its subsidiaries. A subsidiary
for purposes of the Plan shall be a corporation in which the Company owns,
directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock.
Incentive options shall be granted only to "employees" as defined in the
provisions of the Code or regulations thereunder applicable to incentive stock
options.
-3-
<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
(a) Exercise Price of Options. The exercise price of each option shall
-------------------------
be determined by the Board but in the case of an incentive option shall not be
less than 100% (110%, in the case of an incentive option granted to a ten-
percent shareholder) of the fair market value of the Stock at the time the
option is granted; nor shall the exercise price be less, in the case of an
original issue of authorized stock, than par value. For this purpose, "fair
market value" in the case of incentive options shall have the same meaning as it
does in the provisions of the Code and the regulations thereunder applicable to
incentive options; and "ten-percent shareholder" shall mean any participant who
at the time of grant owns directly, or by reason of the attribution rules set
forth in section 424(d) of the Code is deemed to own, stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or
of any of its parent or subsidiary corporations.
(b) Duration of Options. An option shall be exercisable during such
-------------------
period or periods as the Board may specify. The latest date on which an option
may be exercised (the "Expiration Date") shall be the date which is ten years
(five years, in the case of an incentive option granted to a "ten-percent
shareholder" as defined in (a) above) from the date the option was granted or
such earlier date as may be specified by the Board at the time the option is
granted.
(c) Exercise of Options.
-------------------
(1) An option shall become exercisable at such time or times and upon such
conditions as the Board shall specify. In the case of an option not
immediately exercisable in full, the Board may at any time accelerate
the time at which all or any part of the option may be exercised.
(2) Any exercise of an option shall be in writing, signed by the proper
person and furnished to the Company, accompanied by (i) such documents
as may be required by the Board and (ii) payment in full as specified
below in Section 6(d) for the number of shares for which the option is
exercised.
(3) The Board shall have the right to require that the participant
exercising the option remit to the Company an amount sufficient to
satisfy any federal, state, or local withholding tax requirements (or
make other arrangements satisfactory to the Company with regard to
such taxes) prior to the delivery of any Stock pursuant to the
exercise of the option. If permitted by the Board, either at the time
of the grant of the option or in connection with exercise, the
participant may elect, at such time and in such manner as the Board
may prescribe, to satisfy such withholding obligation by (i)
delivering to the Company Stock owned by such individual having a fair
market value equal to such withholding obligation, or (ii) requesting
that the Company withhold from the shares of Stock to be delivered
-4-
<PAGE>
upon the exercise a number of shares of Stock having a fair market
value equal to such withholding obligation.
In the case of an incentive option, the Board may require as a
condition of exercise that the participant exercising the option agree
to inform the Company promptly of any disposition (within the meaning
of section 424(c) of the Code and the regulations thereunder) of Stock
received upon exercise. In addition, if at the time the option is
exercised the Board determines that under applicable law and
regulations the Company could be liable for the withholding of any
federal or state tax with respect to a disposition of the Stock
received upon exercise, the Board may require as a condition of
exercise that the participant exercising the option agree to give such
security as the Board deems adequate to meet the potential liability
of the Company for the withholding of tax, and to augment such
security from time to time in any amount reasonably deemed necessary
by the Board to preserve the adequacy of such security.
(4) If an option is exercised by the executor or administrator of a
deceased participant, or by the person or persons to whom the option
has been transferred by the participant's will or the applicable laws
of descent and distribution, the Company shall be under no obligation
to deliver Stock pursuant to such exercise until the Company is
satisfied as to the authority of the person or persons exercising the
option.
(d) Payment for and Delivery of Stock. Stock purchased upon exercise of
---------------------------------
an option under the Plan shall be paid for as follows: (i) in cash, check
acceptable to the Company (determined in accordance with such guidelines as the
Board may prescribe), or money order payable to the order of the Company, or
(ii) if so permitted by the Board (which, in the case of an incentive option,
shall specify such method of payment at the time of grant), (A) through the
delivery of shares of Stock (which, in the case of Stock acquired from the
Company, shall have been held for at least six months unless the Board specifies
a shorter period) having a fair market value on the last business day preceding
the date of exercise equal to the purchase price, or (B) by delivery of a
promissory note of the participant to the Company, such note to be payable on
such terms as are specified by the Board, or (C) by delivery of an unconditional
and irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the exercise price, or (D) by any combination of the
permissible forms of payment; provided, that if the Stock delivered upon
exercise of the option is an original issue of authorized Stock, at least so
much of the exercise price as represents the par value of such Stock shall be
paid other than with a personal check or promissory note of the person
exercising the option.
(e) Delivery of Stock. A participant shall not have the rights of a
-----------------
shareholder with regard to awards under the Plan except as to Stock actually
received by him under the Plan.
-5-
<PAGE>
The Company shall not be obligated to deliver any shares of Stock (i)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulations have been complied with, (ii) if the outstanding Stock is
at the time listed on any stock exchange, until the shares to be delivered have
been listed or authorized to be listed on such exchange upon official notice of
issuance, and (iii) until all other legal matters in connection with the
issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Stock has not been registered under the Securities Act
of 1933, as amended, the Company may require, as a condition to exercise of the
award, such representations or agreements as counsel for the Company may
consider appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
(f) Nontransferability of Awards. No award may be transferred other than
----------------------------
by will or by the laws of descent and distribution, and during a participant's
lifetime an award may be exercised only by him or her.
(g) Mergers, etc. In the event of any merger, consolidation,
-------------
dissolution, or liquidation of the Company, the Board in its sole discretion
may, as to any outstanding awards, make such substitution or adjustment in the
aggregate number of shares reserved for issuance under the Plan and in the
number and purchase price (if any) of shares subject to such awards as it may
determine, or accelerate, amend, or terminate such awards upon such terms and
conditions as it shall provide (which, in the case of the termination of the
vested portion of any award, shall require payment or other consideration which
the Board deems equitable in the circumstances).
7. TERMINATION OF EMPLOYMENT
-------------------------
If a participant's employment or other service relationship with the
Company terminates prior to the Expiration Date the following shall apply:
(a) Options that are not exercisable immediately prior to the termination
shall terminate, except that the Board may in its sole discretion
provide that the participant or beneficiary receive in cash, with
respect to each share of Stock to which an option relates, the excess
of (i) the share's fair market value on the date of the participant's
termination, over (ii) the option exercise price.
(b) To the extent exercisable immediately prior to termination of
employment or other service, the option shall continue to be
exercisable thereafter during the period prior to the Expiration Date
and within 60 days following the termination (180 days in the event
that a participant's service terminates by reason of death), unless
the participant's employment or other service is terminated "for
cause" as defined in (c) below, in which case all awards shall
terminate immediately.
-6-
<PAGE>
Except as otherwise provided in an award, after completion of the 60-
day (or 180-day) period, such awards shall terminate to the extent not
previously exercised, expired, or terminated.
(c) The following, as determined by the Board in its reasonable judgment
shall constitute "cause" termination: (i) a participant's failure to
perform, or negligence in the performance of, his or her duties and
responsibilities to the Company; (ii) a participant's fraud,
embezzlement or other material dishonesty with respect to the Company;
or (iii) other conduct by a participant that is harmful to the
business, interest, or reputation of the Company.
No option shall be exercised or surrendered in exchange for a cash payment after
the Expiration Date.
In the case of any award, the Board may provide in the case of any award
for post-termination exercise provisions different from those expressly set
forth in this Section 7, including without limitation terms allowing a later
exercise by a former employee, consultant or advisor (or, in the case of a
former employee, consultant or advisor who is deceased, the person or persons to
whom the award is transferred by will or the laws of descent and distribution)
as to all or any portion of the award not exercisable immediately prior to
termination of employment or other service, but in no case may an award be
exercised after the Expiration Date.
8. EMPLOYMENT RIGHTS
-----------------
Neither the adoption of the Plan nor the grant of awards shall confer upon
any participant any right to continue as an employee of, or consultant or
adviser to, the Company, its parent, or any subsidiary or affect in any way the
right of the Company, its parent, or a subsidiary to terminate the participant's
relationship at any time. Except as specifically provided by the Board in any
particular case, the loss of existing or potential profit in awards granted
under this Plan shall not constitute an element of damages in the event of
termination of the relationship of a participant even if the termination is in
violation of an obligation of the Company to the participant by contract or
otherwise.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, AND TERMINATION
----------------------------------------------------------------
Neither adoption of the Plan nor the grant of awards to a participant shall
affect the Company's right to make awards to such participant that are not
subject to the Plan, to issue to such participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued.
-7-
<PAGE>
The Board may at any time discontinue granting awards under the Plan. With
the consent of the participant, the Board may at any time cancel an existing
award in whole or in part and grant another award for such number of shares as
the Board specifies. The Board may at any time or times amend the Plan or any
outstanding award for the purpose of satisfying the requirements of section 422
of the Code or of any changes in applicable laws or regulations or for any other
purpose that may at the time be permitted by law, or may at any time terminate
the Plan as to any further grants of awards; except that no such amendment shall
adversely affect the rights of any participant (without his or her consent)
under any award previously granted.
-8-
<PAGE>
Exhibit 10.36
EXTENSION OF LEASE
March 16, 1998
Reference is made to that certain Lease dated October 31/st/, 1994 between
Richard C. Johns, as Lessor, subsequently purchased by Jerry L. Ivy Trustee
under Agreement dated April 20, 1990, entitled Jerry Ivy Separate Property
Revocable Trust in the United States Bankruptcy Court for the District of
Arizona hereinafter referred to as Lessor, and Geerlings & Wade, Inc., as
Lessee covering the premises known and designated as 1419 West 12/th/ Place,
Suite 106 in the city of Tempe, Arizona.
By mutual consent, said Lease is amended as follows:
1. The term of this new extension shall be from April 1, 1998 to March 31,
2001.
2. The monthly rental for such extended term shall be: April 1, 1998 to March
31, 1999 at .46 cents per sq/ft plus CAM charge of .06 cents and rental
tax. This would be a monthly rental rate of $3,507.50. April 1, 1999 to
March 31, 2000 at .48 cents per sq/ft plus CAM charge of .06 cents and
rental tax. This would be a monthly rental rate of $3,642.41. April 1, 2000
to March 31, 2001 at .50 cents per sq/ft plus CAM charge of .06 cents and
rental tax. This would be a monthly rental rate of $3,777.31.
3. In all other matters, the terms, covenants and conditions of the original
October 31, 1994 Lease shall apply during the extended period.
LESSOR /s/ Jerry L. Ivy DATE April 21, 1998
------------------------- -- -----
Jerry L. Ivy
LESSEE /s/ Jay L. Essa DATE April 13, 1998
------------------------- -- -----
Geerlings & Wade, Inc.
Jay Essa, President
<PAGE>
EXHIBIT 10.37
C O R P O R A T E E X C H A N G E C E N T E R
-------------------------------------------------
L E A S E A G R E E M E N T
------------------------------
SECTION 1. BASIC PROVISIONS AND CERTAIN
DEFINED TERMS:
1.1. This Lease Agreement is made and entered into on this the 9th day of
October, 1998.
1.2. "Lessor": Corporate Exchange Limited Partnership
Address for payment 9307 W. Sam Houston Parkway, Suite 200
and notices: Houston, Texas 77099
1.3. "Lessee": GEERLINGS & WADE OF TEXAS, INC.
Address for payment 12502 Exchange Drive, Suite 412
and notices: Stafford, Texas 77477
1.4. "Leased Premises": Premises described in plans approved by Lessee
containing approximately 5,712 rentable square feet of office and warehouse
-----
space situated in and sometimes referred to as "The Building" or "The Project"
and further described as the "Building" or the "Project" and further described
as being that certain tract of land as described on Exhibit "B" (Attached) and
depicted in Exhibit "A" (Attached).
Known as 12502 Exchange Drive, Suite 412, Stafford, Texas 77477.
-------------------------------
1.5. Term: Commencing on November 9, 1998, (the "Commencement Date") and
----------------
shall terminate on October 31, 2001 (the "Termination Date"). Lessee will be
-----------------
allowed occupancy of the space on October 9, 1998 with no rental charge.
1.6. Base Rent: A total sum of $108,117.62 payable in 36 monthly
----------- --
installments plus any partial month thereof in the amount of $3,027.36 per
-------------
month.
- ------
Additional rent may be due and payable during the term hereof and any extension
period pursuant to Subsections 4.2, 5.1, 5.2, 8.2, 8.4, and 8.5.
1.7. Services/Operating Expenses:
1.7.1. Building Services. Lessor shall provide the normal utility service
connections to the Building. Lessee shall pay the cost of all utility services,
including, but not limited to, initial connection charges, all charges for gas,
electricity, water, sanitary and storm sewer service, and for all electrical
lights. However, in a multi-occupancy building, Lessor may provide water to the
Leased Premises, in which case Lessee agrees to pay to Lessor its pro rata share
of the cost of such water.
1.7.2. Theft or Burglary. Lessor shall not be liable to Lessee for losses to
Lessee's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Leased Premises or the Building.
1.7.2. Operating Expenses. In the event Lessor's operating expenses for the
Building and/or project of which the Leased Premises are a part shall, in any
calendar year during the term of this Lease, exceed the sum of $1.20 per square
-----
foot, Lessee agrees to pay as additional rent Lessee's pro rata share of such
excess operating expenses. Lessor may invoice Lessee monthly for Lessee's pro
rata share of the estimated operating expenses for each calendar year, which
amount shall be adjusted each year based upon anticipated operating expenses.
Within nine months following the close of each calendar year, Lessor shall
provide Lessee an accounting showing in reasonable detail all computations of
additional rent due under this section. In the event the accounting shows that
the total of the monthly payments made by Lessee exceeds the amount of
additional rent due by Lessee under this section, the accounting shall be
accompanied by a refund. In the event the accounting shows that the total of
the monthly payments made by Lessee is less than the amount of additional rent
due by Lessee under this section, the accounting shall be accompanied by an
invoice for the additional rent. Notwithstanding any other provision in this
Lease, during the year in which the Lease terminates, Lessor, prior to the
termination date, shall have the option to invoice Lessee for Lessee's pro rata
share of the excess operating expenses based upon the previous year's operating
expenses. If this Lease shall terminate on a day other than the last day of a
calendar year, the amount of any additional rent payable by Lessee applicable to
the year in which such termination shall occur shall be prorated on the ratio
that the number of days from the commencement of the calendar year to and
including the termination date bears to 365. Lessee shall have the right, at
its own expense and within a reasonable time, to audit Lessor's books relevant
to the additional rent payable under this section. Lessee agrees to pay any
additional rent due under this section within thirty (30) days following receipt
of the invoice or accounting showing additional rent due.
1
<PAGE>
1.7.4. Definition of Operating Expenses. The term "Operating Expenses"
includes all expenses incurred by Lessor with respect to the maintenance and
operation of the building of which the Leased Premises are a part, excluding
exterior walls and structural foundation, however, including, but not limited
to, the following: maintenance, repair and replacement costs; security;
management fees, wages and benefits payable to employees of Lessor whose duties
are directly connected with the operation and maintenance of the Building; all
services, utilities, supplies, repairs, replacements or other expenses for
maintaining and operating the common parking and plaza areas; the cost,
including interest, amortized over its useful life, of any capital improvement
made to the Building by Lessor after the date of this Lease which is required
under any governmental law or regulation that was not applicable to the Building
at the time is was constructed; the cost, including interest, amortized over its
useful life, of installation of any device or other equipment which improves the
operating efficiency of any system within the Leased Premises and thereby
reduces Operating Expenses; all other expenses which would generally be regarded
as operating and maintenance expenses which would reasonably be amortized over a
period not to exceed five years; all real property taxes and installments of
special assessments, including dues and assessments by means of deed
restrictions and/or owners' associations which accrue against the building of
which the Leased Premises are a part during the term of this Lease; and all
insurance premiums Lessor is required to pay or deems necessary to pay,
including public liability insurance, with respect to the Building. The term
Operating Expenses does not include the following: repairs, restoration or
other work occasioned by fire, wind, the elements or other casualty; income and
franchise taxes of Lessor; expenses incurred in leasing to or procuring Lessees,
leasing commissions, advertising expenses and expenses for the renovating of
space for new Lessees; interest or principal payments on any mortgage or other
indebtedness of Lessor; compensation paid to any employee of Lessor above the
grade of property manager; any depreciation allowance or expense; or operating
expenses which are the responsibility of Lessee.
1.8. Permitted Use: General office and warehouse storage use for the retail
-------------------------------------------------------
sale of wine and other associated products.
- -------------------------------------------
SECTION 2. SECURITY DEPOSIT:
On the date of execution of this Lease by Lessee, Lessor ACKNOWLEDGES THAT
Lessee HAS ESCROWED A SECURITY DEPOSIT IN THE AMOUNT OF $3,027.36 to be held for
---------
the performance by Lessee of Lessee's covenants and obligations under this
Lease, it being expressly understood that the deposit shall not be considered an
advance payment of rental or a measure of Lessor's damage in case of default by
Lessee. Upon the occurrence of any event of default by Lessee or breach by
Lessee of Lessee's covenants under this Lease, Lessor may, from time to time,
without prejudice to any other remedy, use the security deposit to the extent
necessary to make good any arrears of rent and/or any damage, injury, expense or
liability caused to Lessor by the event of default or breach of covenant, with
any remaining balance of the security deposit to be returned by Lessor to Lessee
upon termination of this Lease.
SECTION 3. GRANTING CLAUSE:
In consideration of the obligation of Lessee to pay rent as herein provided
and in consideration of the rents, terms, provisions, and covenants hereof,
Lessor hereby leases, lets and demises to Lessee, and Lessee hereby takes from
Lessor the Leased Premises as described in Subsection 1.4 to have and to hold
said Leased Premises for a term commencing on the "Commencement Date" of this
lease and ending on the "Termination Date" as specified in Subsection 1.5 all
upon the terms and conditions set forth in this Lease.
SECTION 4. RENT:
4.1. Lessee agrees to pay the base and any additional rent specified in
Subsection 1.6 to Lessor at the address (payments and notices) specified in
Subsection 1.2 in legal tender of the United States of America, without demand
and except as expressly provided herein, without abatement, offset, counterclaim
or deduction. One monthly installment of rent shall be due and payable on the
date of execution of this Lease by Lessee for the first month's rent and a like
monthly installment shall be due and payable on/or before the first day of each
calendar month succeeding the "Commencement Date" or Completion Date" during the
demised term provided, that if the "Commencement Date" or "Completion Date"
should be a date other than the first day of a calendar month, the monthly base
rental set forth above shall be prorated to the end of that calendar month and
all succeeding installments of base rent shall be payable in advance on/or
before the first day of each succeeding calendar month during the demised term.
Similarly, if the termination date should be a date other than the final date of
a calendar month, the monthly base rental shall be prorated to the end of the
term of the Lease.
4.2. Other remedies for nonpayment of rent notwithstanding if the monthly
rental payment is not received by Lessor on or before the fifth day of the month
for which rent is due, or if any other payment due Lessor by Lessee is not
received by Lessor on or before the fifth day of the month next following the
month in which Lessee was invoiced, a service charge of six (6%) percent of such
2
<PAGE>
past due amount shall become due and payable in addition to such amounts owed
under this Lease. Said service charge in any case shall not be less than $25.00
if assessed. Lessee agrees to pay such an amount as liquidated damages to cover
the additional costs of collecting and processing such late payment.
SECTION 5. SERVICES AND UTILITIES:
5.1. Lessor or Lessee (as specified in Section l.7) shall be responsible for
paying service /operating expenses, including connection and/or inspection
charges, if any, associated with the Leased Premises. Lessor shall provide the
normal utility service connection points to the Leased Premises. Lessee shall
pay for all telephone charges, connections, and installation fees and for all
electric light lamps or tubes used as part of the Leased Premises.
5.2. Lessee shall pay all costs caused by Lessee introducing excessive
pollutants into the sanitary and/or storm sewer system, including permits, fees
and charges levied by any governmental subdivision for any pollutants or solids
other than ordinary human waste. Lessee shall be responsible for the
installation and maintenance of any dilution tanks, holding tanks, settling
tanks, sewer sampling devices, sandtraps, grease traps or similar devices as may
be required by the governmental subdivision for Lessee's use of the sanitary
and/or storm sewer system. If the Leased Premises are in a multi-occupancy
building, Lessee shall pay all surcharges levied or other charges due to
Lessee's use or waste of natural gas, potable water, sanitary sewer or waste
removal services insofar as such surcharges or waste of such services effect
Lessor or other Lessees in the Building. Lessee shall pay all charges for pest
control and extermination and for garbage and trash pick-up services. Lessor
shall not be required to pay for any services supplies or upkeep in connection
with the Leased Premises unless expressly provided for in this Section 5.
5.3. Lessor shall not be liable in damages or otherwise for failure, stoppage
or interruption of any such service, nor shall the same be construed as an
eviction of Lessee, work an abatement of rent, or relieve Lessee from the
operation of any covenant or agreement; but in the event of any failure,
stoppage or interruption thereof, Lessor shall use reasonable diligence to
resume service promptly. The work of Building maintenance shall not be hindered
by Lessee.
SECTION 6. USE OF PREMISES:
6.1. Lessee warrants and represents to Lessor that the Leased Premises shall
be used and occupied only for the purposes specified in Section 1.8. Lessee
shall occupy the Leased Premises, conduct its business and control its agent,
employees, invitees and visitors in such a way as is lawful, reputable and will
not create any nuisance as determined by Lessor or otherwise interfere with,
annoy or disturb any other Lessee in its normal business operations or Lessor in
its management of the Building.
6.2. Lessee shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction relating to the use, condition and occupancy of the Leased
Premises. Lessee will comply with the rules of the Building adopted by Lessor
which are set forth on a schedule attached to this Lease. Lessor shall have the
right at all times to change the rules and regulations of the Building or to
amend them in any reasonable manner as may be deemed advisable for the safety,
care and cleanliness, and for the preservation of good order, of the Building or
the Leased Premises. All changes and amendments in the rules and regulations of
the Building will be sent in writing by Lessor to Lessee and shall thereafter be
carried out and observed by Lessee.
6.3. Lessee, upon payment of the required rents and performing the terms,
conditions, covenants and agreements contained in this Lease, shall peaceably
and quietly have, hold and enjoy the Leased Premises during the full term of
this Lease as well as any extension or renewal thereof.
6.4 Lessee and its customers shall not be entitled to exclusive use of
specific parking spaces but shall be entitled to park in common areas designated
by Lessor with other Lessees of Lessor. Lessee agrees not to overburden the
parking facilities and specifically not to park or store motor vehicles or other
equipment on such parking facilities for uninterrupted periods of time in all
events not to exceed ten (10) days, and further agrees to cooperate with Lessor
and other Lessees in the use of parking facilities, consenting to the relocation
by Lessor of any such parked or stored motor vehicles or equipment to maintain
the safe and efficient operation and favorable appearance of the Project.
Lessor reserves the right in its absolute discretion to determine whether
parking facilities are becoming crowded and, in such event, to allocate parking
spaces among Lessee and other Lessees.
6.5. Lessee agrees to exonerate, and indemnify, pay and protect, defend (with
counsel reasonably approved by Lessor), and save Lessor and the directors,
officers, shareholders, employees, and agents of the Lessor harmless from and
against any claims (including without limitation, third party claims for
personal injury or real or personal property damage), actions, administrative
proceedings (including informal proceedings), judgments, damages, punitive
damages, penalties,
3
<PAGE>
fines, costs, liabilities (including sums paid in settlement claims) interest,
or losses, including reasonable attorneys' fees and expenses (including, without
limitation, any such fees and expenses incurred in enforcing this Lease or
collecting any sums due hereunder), consultant fees, and expert fees, together
with all other costs and expenses of any kind or nature (collectively, the
"Costs") that arise directly or indirectly from or in connection with the
presence, suspected presence, release, or suspected release of any Hazardous
Material, as hereinafter defined in Subsection 6.6, in or into the air, soil,
ground water, or surface water at, on, about, under, or within the Leased
Premises, or any portion thereof, or elsewhere in connection with the
transportation of Hazardous Materials to or from the Leased Premises. The
indemnification provided in this Subsection 6.5 shall specifically apply to and
include claims or actions brought by or on behalf of employees of Lessee. In the
event Lessor shall suffer or incur any such Costs, Lessee shall pay to Lessor
the total of all such Costs suffered or incurred by Lessor upon demand thereof
by Lessor. Without limiting the generality of the foregoing, the indemnification
provided in this Subsection 6.5 shall specifically cover Costs, including
capital, operating, and maintenance costs, incurred in connection with any
investigation or monitoring of site conditions, any clean-up, containment,
remedial, removal, or restoration work required or performed by any federal,
state, or local governmental agency or political subdivision or performed by any
non governmental entity or person because of the presence, suspected presence,
release, or suspected release of any Hazardous Material in or into the air,
soil, ground water, or surface water at, on, about, under, or within the Leased
Premises (or any portion thereof), or elsewhere in connection with the
transportation of Hazardous Materials to or from the Leased Premises and any
claims of third parties for loss or damage due to such Hazardous Material .
6.6. As used in this Lease, the term "Hazardous Materials" means any
hazardous or toxic substances, materials or wastes, including, but not limited
to, those substances, materials, and wastes listed in the United States
Department of Transportation Hazardous Materials Table (49 C.F.R. (S) 172.101)
or by the Environmental Protection Agency as hazardous substances (40 C.F.R.
Part 302) and amendments thereto, or such substances, materials, and wastes
which are or become regulated under any applicable local, state, or federal law
including, without limitation, any material, waste or substance which is: (i)
petroleum; (ii) asbestos; (iii) polychlorinated biphenyl; (iv) defined as
"hazardous waste," "extremely hazardous waste," or "restricted hazardous waste";
(v) designated as "hazardous substance" pursuant to section 311 of the Clean
Water Act, 33 U.S.C. (S) 1251 et seq. (33 U.S.C. (S) 1321) or listed pursuant to
------
section 307 of the Clean Water Act (33 U.S.C. (S) 1317); (vi) defined as
"hazardous waste" pursuant to section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901 et seq. (42 U.S.C. (S) 6903); or (vii) defined
------
as a "hazardous substance" pursuant to section 101 of the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et
--
seq. (42 U.S.C. (S) 9601).
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SECTION 7. INSURANCE AND PERSONAL PROPERTY TAXES:
7.1. Lessee shall not permit the Leased Premises to be used in any way which
would in the opinion of Lessor, be extra hazardous on account of fire or
otherwise which would in any way increase or render void the fire and extended
coverage insurance on leasehold improvements, contents in the Building belonging
to other Lessees in the Building, or the Building. If at any time during the
term of this Lease the State Board of Insurance or other insurance authority
imposes an additional penalty or surcharge in Lessor's insurance premiums
because of Lessee's original or subsequent placement or use of storage rack or
bins, method of storage or nature of Lessee's inventory or any other act of
Lessee, Lessee agrees to pay as additional rental the increase in Lessor's
insurance premiums.
7.2. Lessee shall, at its expense, maintain a policy or policies of
comprehensive general liability insurance with the annual premiums thereof fully
paid in advance, issued by and binding upon an insurance company having a rating
of A or better by Best's Rating Guide or other comparable service, such
insurance to afford minimum such protection of not less than five hundred
thousand and no/100 dollars ($500,000.00) in respect to bodily injury or death
to any one person, and of not less than five hundred thousand and no/100 dollars
($500,000.00) in respect to any one occurrence, and of not less than one million
and no/100 dollars ($1,000,000.00) for property damage and the Lessor shall be
named as additional insured thereon and a certified copy of such policy shall be
provided or furnished to Lessor by Lessee. All renewals of each such policy
shall be delivered to Lessor not less than thirty (30) days prior to the
expiration of each such policy.
7.3. Lessor shall at all times during the terms of this Lease, at its
expense, maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon an insurance company having a rating of A or
better by Best's Rating Guide, insuring the Building against loss or damage by
fire, explosion or other hazards and contingencies for the full insurable value;
provided, that Lessor shall not be obligated in any way or manner to insure any
personal property (including, but not limited to, any furniture, machinery,
goods or supplies) of Lessee or which Lessee may have upon or within the Leased
Premises or any fixtures installed by or paid for by Lessee upon or within the
Leased Premises or any additional improvements which Lessee may construct on the
Leased Premises.
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7.4. Lessee shall be liable for all taxes levied against personal property
and trade fixtures placed by Lessee in the Leased Premises. If any such taxes
are levied against Lessor or Lessor's property and if Lessor elects to pay the
same or if the assessed value of Lessor's property is increased by inclusion of
personal property and trade fixtures placed by Lessee or in the Leased Premises
and Lessor elects to pay the taxes based on such increase, Lessee shall pay to
Lessor upon demand that part of such taxes for which Lessee is primarily liable
hereunder.
SECTION 8. REPAIRS AND MAINTENANCE:
8.1. Unless otherwise expressly provided herein, Lessor shall not be required
to make any improvements, replacements or repairs of any kind or character on
the Leased Premises during the term of this Lease, except such repairs as are
set forth in this Section 8. Lessor shall maintain only the roof, foundation,
parking area, landscaped areas, and structural soundness of the exterior walls
(excluding all windows, window glass, plate glass, and all doors) of the
Building in good repair and condition except for reasonable wear and tear.
8.2. Lessee shall, at its own risk and expense, maintain all other parts of
the Building and other improvements on the Leased Premises in good repair and
condition, including, but not limited to, down spouts, dock bumpers and regular
removal of debris. Lessee shall take good care of all the property and its
fixtures. Lessee shall, at its own cost and expense, repair or replace any
damage or injury to all or any part of the Leased Premises caused by Lessee or
Lessee's agents, employees, invitees or licensees.
8.3. Lessor shall not be liable to Lessee, except as expressly provided in
this Lease, for any damage or inconvenience, and Lessee shall not be entitled to
any abatement or reduction of rent by reason of any repairs, alterations or
additions made by Lessor under this Lease, except if Lessee is deprived of the
use of the Leased Premises for more than fifteen(15) consecutive days.
8.4. Lessee shall not allow any waste or damage to be committed on any
portion of the Leased Premises, and at the termination of this Lease, by lapse
of time or otherwise, Lessee shall deliver the Leased Premises to Lessor in as
good condition as existed at the Commencement Date or Completion Date of this
lease, ordinary wear and tear, natural deterioration beyond the control of
Lessee, damage by fire, tornado, or other casualty excepted. The cost and
expense of any repairs necessary to restore the condition of the Leased Premises
shall be borne by Lessee, and if Lessor undertakes to restore the Leased
Premises, it shall have a right of reimbursement against Lessee, ordinary wear
and tear excepted.
8.5. If Lessee fails to promptly make repairs or replacements for which
Lessee is responsible pursuant to the provisions of this Lease Agreement, Lessor
may, at Lessor's option, make the repairs or replacement and any reasonable
costs therefor shall be charged to Lessee as additional rental and shall become
payable by Lessee with the payment of the rental next due hereunder.
8.6. All requests for repairs or maintenance that are the responsibility of
Lessor pursuant to any provision of this Lease must be made in writing to Lessor
at the address set forth in Subsection 1.2 (payments & notices).
SECTION 9. IMPROVEMENTS AND ALTERATIONS:
9.1. If construction is to be done by Lessor to the Leased Premises prior to
Lessee's occupancy, Lessor will, at its expense, commence and/or complete the
construction of the improvements constituting the Leased Premises, including
partitions, in accordance with the floor plan and its specifications agreed to
by the parties and made a part of this Lease by reference. The floor plan shall
be approved and signed by the parties prior to the commencement of construction.
Upon completion of the Building and other improvements in accordance with the
plans and specifications, Lessee agrees to accept delivery of the Leased
Premises and to execute and deliver to Lessor a letter accepting delivery of the
Leased Premises.
9.2. Lessee shall not make or allow to be made any alterations or physical
additions in or to the Leased Premises without first obtaining the written
consent of Lessor, such consent to be given or withheld in its sole absolute
discretion. Any alterations, physical additions or improvements to the Leased
Premises made by Lessee shall at once become the property of Lessor and shall be
surrendered to Lessor upon the termination of this Lease. Lessor, at its option,
may require Lessee to remove any physical additions and/or repair any
alterations in order to restore the Leased Premises to the condition existing
prior to the time Lessee took possession, all costs of removal and/or
alterations to be borne by Lessee. This clause shall not apply to moveable
equipment or furniture owned by Lessee which may be removed by Lessee at the end
of the term of this Lease if Lessee is not then in default and if such equipment
and furniture is not then subject to any other rights, liens and interests of
Lessor.
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SECTION 10. CONDEMNATION:
10.1. If more than twenty percent (20%) of the Leased Premises should be
taken for any public or quasi-public use, by right of eminent domain or
otherwise, or should be sold in lieu of condemnation, then either Lessor or
Lessee shall have the right, at its option, to terminate this Lease as of the
date when physical possession of the Leased Premises is taken by the condemning
authority. If 20% or less of the Leased Premises is so taken or sold or if the
Lease is not terminated upon any taking or sale of greater than 20% of the
Leased Premises, the Rent payable hereunder shall be abated in proportion to the
portion of the Leased Premises which are rendered unleasable by such
condemnation.
10.2. All damages awarded for a taking by condemnation of a whole or a part
of the Leased Premises shall belong to Lessor, whether such damages are awarded
as compensation for the diminution in value to the leasehold or to the fee of
the Leased Premises; provided, however, that Lessor shall not be entitled to an
award made for depreciation to, and the cost of removal of, Lessee's stock and
fixtures, if a proper judicial authority makes a separate award for such items
to Lessee.
SECTION 11. FIRE AND CASUALTY:
11.1. The parties hereto mutually agree that if the Leased Premises are
partially or totally destroyed by fire or other casualty covered by the fire and
extended coverage insurance to be carried by Lessor under the terms hereof, then
Lessor may after thirty (30) days' written notice by Lessee, at its option,
repair and restore the Leased Premises, as soon as it is reasonably practicable,
to substantially the same condition in which the Leased Premises were before
such damage, or it may terminate the Lease, provided, however, that in the event
the Leased Premises are completely destroyed or so badly damaged that repairs
cannot be commenced within thirty (30) days and completed within one hundred
eighty (180) days thereafter, then this Lease shall be terminable as of the date
of the occurrence of the damage or destruction by either party thereto serving
written notice upon the other; and provided further, that in any event if
repairs have not been commenced within thirty (30) days from the date of said
damage and thereafter completed within a reasonable time, in no case to exceed
one hundred eighty (180) days, this Lease may be immediately terminated by
Lessee as of the date of occurrence of the damage or destruction, by serving
notice upon the Lessor.
11.2. In the event the Leased Premises are completely destroyed or so damaged
by fire or other casualty covered by the fire and extended coverage insurance to
be carried by Lessor under the terms hereof that it cannot reasonably be used by
Lessee for the purposes herein provided and this Lease is not terminated as
above provided, then there shall be a total abatement of rent until said
premises are usable. In the event the Leased Premises are partially destroyed
or damaged by fire or other hazard herein provided, then there shall be a
partial abatement in the rent corresponding to the time and extent which such
premises cannot be used by Lessee.
SECTION 12. WAIVER OF SUBROGATION:
Anything in this Lease to the contrary notwithstanding, Lessor and Lessee
hereby mutually release each other from any and all liability or responsibility
to it or anyone claiming through or under it by way of subrogation or otherwise,
for any loss or damage caused by fire, lightning, or any of the extended
coverage casualties, even if such fire or other casualty shall have been caused
by the fault or negligence of such party or anyone for whom such party may be
responsible. Because this paragraph will preclude the assignment of any claim
mentioned in it by way of subrogation (or otherwise) to an insurance company (or
any other person) each party to this Lease agrees immediately to give to each
insurance company which has issued to it policies of fire and extended coverage
insurance, written notice of the terms of the mutual waivers contained in this
paragraph and to have the insurance policies properly endorsed, if necessary, to
prevent the invalidation of the insurance coverage by reason of the mutual
waivers contained in this paragraph.
SECTION 13. HOLD HARMLESS:
Lessor shall not be liable to Lessee's employees, agents, invitees, licensees
or visitors, or to any other person, for any injury to person or damage to
property on or about the Leased Premises caused by the negligence or misconduct
of Lessee, its agents, servants or employees, or of any other person entering
upon the Leased Premises under express or implied invitation by Lessee, or other
Lessees of part of all of the remainder of the Building, or caused by the
Building and improvements located on the Leased Premises becoming out of repair,
or caused by leakage of gas, oil, water, or steam or by electricity emanating
from the Leased Premises. Lessee agrees to indemnify and hold harmless Lessor
of and from any loss, attorneys' fees, expenses or claims arising out of any
such damage or injury. Any liability insurance which may be carried by Lessor
or Lessee with respect to the Leased Premises shall be for the sole benefit of
the party carrying the insurance and under its sole control.
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Lessee shall not be liable to Lessor's employees, agents, invitees, licensees
or visitors, or to any other person, for any injury to person or damage to
property on or about the Leased Premises caused by the negligence or misconduct
of Lessor, its agents, servants or employees, or of any other person entering
upon the Leased Premises under express or implied invitation by Lessor, or other
Lessors of part of all of the remainder of the Building, or caused by the
Building and improvements located on the Leased Premises becoming out of repair,
or caused by leakage of gas, oil, water, or steam or by electricity emanating
from the Leased Premises. Lessor agrees to indemnify and hold harmless Lessee
of and from any loss, attorneys' fees, expenses or claims arising out of any
such damage or injury. Any liability insurance which may be carried by Lessee
or Lessor with respect to the Leased Premises shall be for the sole benefit of
the party carrying the insurance and under its sole control.
SECTION 14. LESSOR'S RIGHT OF ENTRY:
Lessor, its officers, agents and representatives, subject to any security
regulations imposed by any governmental authority, shall have the right to enter
all parts of the Leased Premises at all reasonable hours, upon 24 hours written
notice (except in the event of an emergency), to inspect, clean, make repairs,
alterations and additions to the Building or Leased Premises which it may deem
necessary or desirable or to provide any service which it is obligated to
furnish to Lessee and Lessee shall not be entitled to any abatement or reduction
of rent by reason thereof.
SECTION 15. ASSIGNMENT OR SUBLEASE:
Lessor shall have the right to transfer and assign, in whole or in part, its
rights and obligations in the Building and property that are the subject of this
Lease. Lessee shall not assign this Lease, or allow it to be assigned, in whole
or in part by operation of law or otherwise, or mortgage or pledge the same, or
sublet the Leased Premises, or any part thereof, without the prior written
consent of Lessor, such consent not to be unreasonably withhold if Permitted Use
remains general office and warehouse storage use the same, and in no event shall
any such assignment or sublease ever release Lessee from any obligation or
liability hereunder. No assignee or Sublessee of the Leased Premises or any
portion thereof may assign or sublet the Leased Premises or any portion thereof.
Lessor shall have the option, upon receipt from Lessee of written request for
Lessor's consent to subletting or assignment, to cancel this Lease as of the
date the requested subletting or assignment is to be effective. The option
shall be exercised, if at all, within thirty (30) days following Lessor's
receipt of written notice by delivery to Lessee of written notice of Lessor's
intention to exercise the option. Upon the occurrence of any "event of default"
as defined below, if all or any part of the Leased Premises are then assigned or
sublet, Lessor, in addition to any other remedies provided by this Lease or
provided by law, may, at its option, collect directly from the assignee or
subLessee all rents becoming due to Lessee by reason of the assignment or
sublease and Lessor shall have a security interest in all properties on the
Leased Premises to secure payment of such sums. Any collection directly by
Lessor from the assignee or subLessee shall not be construed to constitute a
release of Lessee from the further performance of its obligations under this
Lease.
SECTION 16. LANDLORD'S LIEN:
SECTION 17. DEFAULT BY LESSEE AND REMEDIES:
17.1. Any of the following shall be deemed to be events of default by Lessee
under this Lease:
17.1.1. Lessee shall fail to pay when due any installment of rent or any
other payment required pursuant to this Lease.
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17.1.2. Lessee shall abandon any substantial portion of the Leased Premises.
17.1.3. Lessee shall fail to comply with any term, provision or covenant of
this Lease, other than the payment of rent, and the failure is not cured within
fifteen (15)days after written notice from Lessor to Lessee. (except for a
default caused by the nonpayment of rent as set forth in Section 4 hereof, for
which no notice is required).
17.1.4. Lessee shall file a petition or be adjudged bankrupt or insolvent
under the National Bankruptcy Act, as amended or any similar law or statute of
the United States or any state or a receiver or trustee shall be appointed for
all or substantially all of the assets of Lessee or Lessee shall make a transfer
in fraud of creditors or shall make an assignment for the benefit of creditors.
17.1.5. Lessee shall create or permit to be created any lien, encumbrance, or
charge (arising out of any work done or materials or supplies furnished by any
contractor, mechanic, laborer, or material man, or any mortgage, conditional
sale, security agreement, or chattel mortgage, or otherwise, by or for Lessee)
which might become a lien, encumbrance, or charge upon the Leased Premises or
any part thereof, or the income therefrom. If Lessee is in default under this
Subsection 17.1.5, all costs and expenses, including attorney's fees, incurred
by Lessor in connection therewith, shall constitute Rent under this Lease, which
Lessee shall pay to Lessor upon demand. Nothing herein contained shall obligate
Lessee to pay or discharge any lien created by Lessor.
17.2. Upon the occurrence of any event of default as set forth herein, Lessor
may treat the occurrence of such event of default as a breach of this Lease, and
in addition to any and all other rights or remedies of Lessor provided in this
Lease or by law or in equity, Lessor shall have the right, at Lessor's option,
and without further notice or demand of any kind to Lessee or to any other
person, to take one or more of the following actions, it being agreed that
Lessor's remedies shall be cumulative and not exclusive of each other, however
Lessor and Lessee agree that paragraph (A) and (B) will not be cumulative and
are exclusive of each other:
(A) Terminate this Lease or terminate Lessee's right to possession by giving
Lessee written notice, in which event, Lessor shall be entitled to recover
forthwith as damages a sum of money equal to:
(i) The total rent and other amounts due and unpaid at the time of
termination plus interest thereon at the maximum non usurious rate permitted by
law, or if applicable law does not provide a maximum non usurious rate, then at
an annual rate equal to the Prime Rate (herein, the interest rate in effect from
time to time, described as the base rate on corporate loans at large U.S. money
center commercial banks as published by The Wall Street Journal, the "Prime
Rate") as it varies, plus two percentage points based upon a 365 day year, from
the date due until the date paid; plus any other amounts necessary to compensate
Lessor for all of the detriment proximately caused by Lessee's failure to
perform its obligations under this Lease, or which in the ordinary course of
things would be likely to result therefrom, including without limitation, the
reasonable cost of renovating and reletting the Leased Premises, reasonable
attorneys' fees, any reasonable fees paid to a collection agency for the process
of collecting any moneys due to Lessor, real estate commissions and fees, and
expenses or costs incurred in connection with mortgagees or other Lessees as a
result of such termination; and
(ii) A sum equal to the amount of the then cash value of the total rent
and all other amounts that Lessee would have been required to pay under the
provisions of this Lease for the period which otherwise would have been the
unexpired portion of the Term (such cash value, if and only if required by
applicable law, reduced by the then cash value of the fair and reasonable
rental value of the Leased Premises for the same period). The "fair and
reasonable rental value of the Leased Premise" shall be determined on the basis
of a Lessee paying not only a return to a landlord for the use and occupation of
the Leased Premises, but also other moneys, costs, charges, and expenses as are
required to be paid by Lessee under the terms of this Lease. The Term "then
cash value" means the amount in question discounted at the rate of twelve
percent (12%) per annum to present worth. Lessor will use reasonable efforts to
relet the Leased Premises after termination.
(B) Terminate Lessee's right of possession and retake possession of the
Leased Premises from Lessee by summary proceedings or otherwise, and it is
agreed that the commencement and prosecution of any action by Lessor in forcible
entry and detainer, ejectment or otherwise, or any execution of any judgment or
decree obtained in any action to recover possession of the Leased Premises,
shall not be construed as an election to terminate this Lease, whether such re-
entry is had or taken under summary proceedings or otherwise, and shall not be
deemed to have discharged Lessee from any of its obligations for the remainder
of the Term. Lessee shall, notwithstanding any such re-entry, continue to be
liable for the payment of all Rent and other amounts due hereunder, and the
performance of the covenants and agreements to be performed by Lessee under this
Lease. In the event Lessor retakes possession of the Leased Premises, Lessor
shall have the right, and use reasonable efforts to relet the Leased Premises
after termination, but not the
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duty, to relet the Leased Premises to some other person, firm or corporation
(whether for a term greater or less than, or equal to the unexpired portion of
the Term; whether the space to relet includes more or less square footage of
leasable area than the Leased Premises; or whether the character and/or use of
the Leased Premises is changed, upon such terms and conditions and for such
rental as the Lessor may deem proper in the exercise of its reasonable business
judgment. Thereafter all of the rentals and other charges received by Lessor for
such reletting shall be applied in the following order: (i) to the payment of
any indebtedness other than rent due hereunder from Lessee to Lessor; (ii) to
the payment of any and all costs of such reletting; (iii) to the payment of the
cost of any reasonable alternations and/or repairs to the Leased Premises; (iv)
the residue, if any, shall be held by Lessor and applied in payment of future
rent and other amounts as the same may become due and payable hereunder. If the
rentals received during any month from such reletting are insufficient,
following the specified application thereof, to cover the rent and other amounts
payable by Lessee during such month, then Lessee shall pay any deficiency to
Lessor, which deficiency shall be calculated and paid monthly. Lessee shall have
no right to any excess rentals received from such reletting but shall receive
credit therefor pursuant to Subsection 17.2 (B) (vi). Lessee also shall pay to
Lessor, as soon as ascertained, any costs and expenses, including but not
limited to brokerage commissions and attorneys' fees and fees paid to collection
agencies, incurred by Lessor in such reletting, or in making such reasonable
alterations and repairs not covered by the rentals received from such reletting.
In the event Lessor retakes possession of the Leased Premises, Lessor shall have
the right, but not the duty, to remove therefrom any or all part of the personal
property located therein, and may place the same in storage at a public
warehouse at the expense and risk of the owner or owners thereof. If Lessor
elects to exercise the remedy prescribed in this paragraph (B), this election
shall in no way prejudice Lessor's right at any time thereafter to cancel said
election in favor of the remedy prescribed in Subsection 17.2 (A).
(C) File suit from time to time to recover any sums due or falling due under
this Lease.
(D) Alter locks or other security devices at the Leased Premises, and Lessor
shall not be required to make a key available to altered locks or security
devices but Lessor may permit access to the Leased Premises during Lessor's
regular business hours. No alteration of locks or other security devices and no
removal or other exercise of dominion by Lessor over the property of Lessee or
others at the Leased Premises shall be deemed unauthorized or constitute a
conversion, Lessee hereby consenting, after an event of default, to the
aforesaid exercise of dominion over Lessee's property within the Leased
Premises. All claims for damages by reason of such reentry or repossession or
alteration of locks or other security devices are hereby waived, as are all
claims for damages by reason of any distress warrant, forcible detainer
proceedings, sequestration proceedings or other legal process. Lessee agrees
that any reentry by Lessor may be pursuant to judgment obtained in forcible
detainer proceedings or other legal proceedings, as Lessor may elect. Lessee
acknowledges that Lessor may require full payment of all sums then due to Lessor
under this Lease as a condition to Lessee's entitlement to a key to new or
altered locks that Lessor may have placed on the Leased Premises after an event
of default.
It is hereby expressly stipulated by Lessor and Lessee that any of the
foregoing actions (B) through (D) will not affect the obligations of the Lessee
for the unexpired Term, including, but not limited to, the obligation for
unaccrued rent and other amounts due.
17.3. All remedies herein given Lessor, including all those not set forth
provide by law or in equity, including specific injunctive relief, shall be
cumulative, and the exercise of one or more of such remedies by Lessor shall not
exclude the exercise of any other consistent remedy, nor shall any waiver by
Lessor, express or implied, of any breach of any term, covenant or condition
hereof be deemed a waiver of such term, covenant or condition hereof.
Acceptance of rent by Lessor from Lessee or any assignee, sub-Lessee or other
successor in interest to Lessee, with or without notice, shall never be
construed as a waiver of any breach of any term, condition or covenant of this
Lease. Failure of Lessor to declare any default at any time and take such
action as may be authorized hereunder, in law or equity, or otherwise shall
never be construed as a waiver of any condition or covenant of this Lease.
SECTION 18. FORCE MAJEURE:
Lessor shall not be required to perform any covenant or obligation in this
Lease, or be liable in damages to Lessee, so long as the performance or non-
performance of the covenant or obligation is delayed, caused by or prevented by
an act of God or force majeure. An "act of God" or "force majeure" is defined
for purpose of this Lease as strikes, lockouts, sit-downs, material or labor
restrictions by any governmental authority, riots, floods, washouts, explosions,
earthquakes, fire, storms, acts of the public enemy, wars, insurrections and any
other cause not reasonably within the control of Lessor and which by the
exercise of due diligence Lessor is unable, wholly or in part, to prevent or
overcome.
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SECTION 19. HOLDING OVER:
In the event of holding over by Lessee after the expiration or termination of
this Lease, such hold over shall be as a Lessee at will and all of the terms and
provisions of this Lease shall be applicable during such period, except that
Lessee shall pay Lessor as rental for the period of such hold over an amount
equal to one and one-half the rent which would have been payable by Lessee had
such hold over period been a part of the original term of this Lease, and Lessee
will vacate said premises and deliver the same to Lessor upon Lessee's receipt
of notice from Lessor to vacate said premises. The rental payable during such
hold over period shall be payable to Lessor on demand. Lessee shall provide
Lessor with written notice of Lessee's intent to terminate this Lease 30 days
prior to the expiration or termination of this Lease. If Lessee does not
provide said 30 day notice, Lessee shall be deemed a holdover tenant until such
time as Lessor has received said 30 days written notice and Lessor shall have
the right to charge holdover rent from the date of receipt of notice of
termination until the expiration of 30 days from the date of receipt of said
notice. No holding over by Lessee, whether with or without consent of Lessor,
shall operate to extend this lease except as herein provided.
SECTION 20. SIGN:
No signs of any kind or nature, symbol or identifying mark shall be put on the
Building entrances, parking areas or upon the doors or walls, whether plate
glass or otherwise, of the Leased Premises nor within the Leased Premises so as
to be visible from the public areas or exterior of the Building, without prior
written approval of Lessor. All signs or lettering shall conform in all
respects to the sign and/or lettering criteria established by Lessor. See
attached Protective Covenants Item 7 "SIGNS".
SECTION 21. SUCCESSORS AND ASSIGNS:
The Lessor and Lessee agree that all provisions hereof are to be construed as
covenants and agreements as though the words imparting such covenants were used
in each separate paragraph hereof, and that, except as restricted by the
provisions of the section entitled "Assignment or Sublease" hereof, this Lease
agreement and all the covenants herein contained shall be binding upon and inure
to the benefit of Lessor and Lessee and their respective heirs, personal
representatives, successors and assigns. It is hereby covenant and agreed that
should Lessor's interest in the Leased Premises cease to exist for any reason
during the term of the Lease, then notwithstanding the happening of such event,
this Lease nevertheless shall remain unimpaired and in full force and effect and
Lessee hereunder agrees to attorn to the then owner of the Leased Premises.
SECTION 22. RIGHTS OF MORTGAGEE:
Lessee accepts this Lease subject and subordinate to any recorded mortgage,
deed of trust or other lien presently existing upon the Leased Premises. Lessor
is hereby irrevocably vested with full power and authority to subordinate
Lessee's interest under this Lease to any mortgage, deed of trust or other lien
hereafter placed on the Leased Premises, and Lessee agrees upon demand to
execute additional instruments subordinating this Lease as Lessor may require.
If the interest of Lessor under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any mortgage on the Leased
Premises, Lessee shall be bound to the transferee (sometimes called the
"Purchaser") under the terms, covenants and conditions of this Lease for the
balance of the term remaining and any extensions or renewals, with the same
force and effect as if the Purchaser were Lessor under this Lease and Lessee
agrees to attorn to the Purchaser, including the mortgagee under any such
mortgage if it be the Purchaser, as its Lessor, the attornment to be effective
and self-operative without the executing of any further instruments upon the
Purchaser succeeding to the interest of Lessor under this Lease. The respective
rights and obligations of Lessee and the Purchaser upon the attornment, to the
extent of the then remaining balance of the term of this Lease, and any
extensions and renewals, shall be and are the same as those set forth in
the Lease.
SECTION 23. ESTOPPEL CERTIFICATES:
Lessee agrees to furnish promptly, from time to time, upon request of Lessor
or Lessor's mortgagee, a statement certifying that Lessee is in possession of
the Leased Premises, the Leased Premises are acceptable, the Lease is in full
force and effect, the Lease is unmodified, Lessee claims no recent charge, lien
or claim of offset against rent, the rent is paid for the current month, but is
not paid and will not be paid for more than one month in advance, there is or is
not an existing default by reason of some act or omission by Lessor and such
other matters as may be reasonably required by Lessor or Lessor's mortgagee.
10
<PAGE>
SECTION 24. DEFINITIONS:
These definitions apply to the terms defined as those terms are used
throughout this Lease.
24.1. "Abandon" means the vacating of all or a substantial portion of the
Leased Premises by Lessee, whether or not Lessee is in default of the rental
payments due under this Lease.
24.2. The "Commencement Date" shall be the earlier of the date set forth in
Subsection 1.5. or taking possession of the suite by the Lessee. The
"Commencement Date" shall constitute the commencement of this Lease Agreement
for all purposes, whether or not Lessee has actually taken possession.
24.3. The "Completion Date" shall be the date on which the improvement
erected and to be erected upon the Leased Premises shall have been completed in
accordance with the plans and specifications described in Section 9. Lessor
shall use its best efforts to establish the "Completion Date" as the date set
forth in Subsection 1.5. In the event that the improvements have not in fact
been completed as of that date, Lessee shall notify Lessor in writing of its
objections. Lessor shall have a reasonable time after delivery of the notice in
which to take such corrective action as may be necessary, and shall notify
Lessee in writing as soon as it deems such corrective action has been completed
so that the improvements are completed and ready for occupancy. Taking of
possession by Lessee shall be conclusively deemed to establish that the
improvements have been completed and that the Leased Premises are in good and
satisfactory condition, as of the date possession was so taken by Lessee, except
for latent defects, if any.
SECTION 25. NOTICES:
Whenever in this Lease it shall be required or permitted that notice or demand
be given or served by either party to this Lease to or on the other, such notice
or demand shall be given or served and shall not be deemed to have been given or
served unless in writing and delivered personally or forwarded by Certified or
Registered Mail, postage prepaid, addressed as follows:
25.1. To the Lessor at the address (payment & notices) specified herein in
Subsection 1.2.
25.2. To the Lessee at the address (billings & notices) specified herein in
Subsection 1.3.
Such addresses may be changed from time to time by either party before serving
notices as above provided.
SECTION 26. SEVERABILITY:
This Lease Agreement shall be construed in accordance with the laws of the
State of Texas. Venue shall lie in Fort Bend County, Texas. If any clause or
provision of this Lease is illegal, invalid, or unenforceable, under present or
future laws effective during the term hereof, then it is the intention of the
parties hereto that the remainder of this Lease shall not be affected thereby,
and it is also the intention of both parties that in lieu of each clause or
provision that is illegal, invalid or unenforceable, there be added as a part of
this Lease a clause or provision as similar in terms to such illegal, invalid,
or unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
SECTION 27. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES:
It is expressly agreed by Lessee, as a material consideration for the
execution of this Lease, that this Lease, with the specific references to
written extrinsic documents, is the entire agreement of the parties, that there
are, and were, no verbal representations, warranties, understandings,
stipulations, agreements or promises pertaining to this Lease or the expressly
mentioned written extrinsic documents not incorporated in writing in this Lease.
Lessor and Lessee expressly agree that there are and shall be no implied
warranties of merchantability, fitness or of any other kind arising out of this
Lease. Lessee hereby waives any implied warranty by Lessor that the Leased
Premises are suitable for their intended commercial purposes and, further,
acknowledges that the obligations of Lessee under this Lease (including, without
limitation, the obligation of Lessee to pay rent) are independent of any such
implied warranty and are independent of all other covenants and warranties of
Lessor. It is likewise agreed that this Lease may not be altered, waived,
amended or extended except by an instrument in writing, signed by both Lessor
and Lessee. The captions appearing in this Lease are inserted only as a matter
of convenience and in no way define, limit, construe or describe the scope or
intent of such paragraph.
SECTION 28. EXTENT OF LESSOR'S LIABILITY:
Except as otherwise provided in this Lease, Lessor shall be in default under
this Lease if Lessor fails to perform any of its obligations hereunder and said
failure continues for a period of thirty (30) days after written notice thereof
11
<PAGE>
from Lessee to Lessor (unless such failure cannot reasonably be cured within
thirty (30) days and Lessor has commenced to cure said failure within said
thirty (30) days and continues to diligently pursue the curing of same. If
Lessor is in default under this Lease, and if as a consequence of such default,
Lessee recovers a money judgment against Lessor, such judgment shall only be
satisfied out of the proceeds of sale received upon execution of such judgment
and levy thereon against the right, title, and interest of Lessor in the
Building or the Project, as the same may then be encumbered. Lessor shall not
be liable for any deficiency; and in no event shall Lessee have the right to
levy execution against any property of Lessor other than its interest in the
Building or the Project.
SECTION 29. BROKERS:
Each party represents and warrants to the other party that it has not dealt
with any realtor, broker or agent in connection with this Lease, except for
O'Connell Realty Advisors, Inc., for Lessor, and Kenneth Li of Century 21
- -------------------------------------------------------------------------
Southwest for Lessee, (individually and collectively, the "Broker"). Each party
- ----------------------
shall indemnify and hold the other party harmless from any cost, expense, loss
or liability (including cost of suit and reasonable attorney's fees) for any
compensation, commission or charges claimed by any other realtor, broker or
agent in connection with this Lease by reason of any act of that party. Lessor
shall pay all fees, charges and commissions owing to the Brokers in connection
with this Lease.
SECTION 30. TENANT IMPROVEMENTS:
Lessor at Lessor's sole costs and expense, shall bear the cost of constructing
a dock well to the existing semi-dock. Landlord shall not be obligated to
construct the dock well unless all the provisions of SECTION 31 OTHER
PROVISIONS, are obtained by Lessee, including but not limited to all permits and
liquor licenses (the "Licenses") obtained from the appropriate authorities. Upon
Lessee obtaining said Licenses, Lessor shall have forty-five (45) days in which
to construct the dock well.
Lessee has inspected the space and agrees to accept the Leased Premises on an
"As Is" basis, with the exception of the above referenced improvements. All
existing lights, HVAC systems and plumbing fixtures will be in good working
condition prior to the commencement of the lease.
SECTION 31. OTHER PROVISIONS:
Lessee 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") and confirmation from UPS that it can
and will deliver wine within Texas ("UPS consent"). If Lessee is unable to
obtain said Licenses or UPS consent within this ninety (90) day period, Lessee
may request and, upon a showing that all required Licenses and UPS consent have
been applied for and diligently pursued, shall be granted a thirty (30) days
extension. If for any reason Lessee is unable to obtain the required Licenses
and UPS consent within the ninety (90) day period (or 120 day period if so
extended by Lessor) then Lessee may terminate this Lease in which event neither
party shall have any further obligation to the other, however, Lessor shall
retain the security deposit as a termination fee. Lessee shall also pay to
Lessor their broker's fee of $1,453.13 should Lessee terminate this lease.
Notwithstanding any provisions hereof, Lessee's obligation to pay rent hereunder
shall commence upon the Rent Commencement Date of November 9, 1998.
SECTION 32. HVAC MAINTENANCE AND SERVICE REQUIREMENTS:
The service contract must become effective within thirty (30) days of the date
of occupancy of the facility and must be performed on at least a semi-annual
basis. Please be sure that your contractor includes the following items in your
maintenance contract:
1. Adjust belt tension;
2. Lubricate all moving parts, as necessary;
3. Inspect and adjust all temperature and safety controls;
4. Check refrigeration system for leaks and operation;
5. Check refrigeration system for moisture;
6. Inspect compressor oil level and crank heater;
7. Check space conditions;
8. Check condensate drains and drain pans and clean, if
necessary;
10. Inspect and adjust damper;
11. Check and adjust dampers;
12. Run machine through complete cycle.
13. Replace filters on a monthly basis.
12
<PAGE>
SECTION 33. HAZARDOUS SUBSTANCES
Lessor represents and warrants to Lessee that to its knowledge, there are no
hazardous substances located in, on or under the Building, the property or
Leased Premises and there has been no violation thereon of any law governing
hazardous substances. And, if hazardous substances are discovered at some later
date on or about the Building or Leased Premises, which were not caused by
Lessee, Lessor shall be liable for all costs and expenses associated with
regulatory requirements to eliminate such problems.
Lessee represents and warrants to Lessor that to its knowledge there has been
no violation by Lessee of any law governing hazardous substances. And, if
hazardous substances are discovered at some later date on or about the Building
or Leased Premises, which were caused by Lessee, Lessee shall be liable for all
costs and expenses associated with regulatory requirements to eliminate such
problems.
IN WITNESS WHEREOF, the Lessor and Lessee, acting herein by duly authorized
individuals, have caused these presents to be executed in multiple counterparts,
each of which shall have the force and effect of an original, on this 9th day
of October, 1998.
Lessor: CORPORATE EXCHANGE LIMITED PARTNERSHIP
by: Exchange Realty Partners Limited Liability Company,
its sole general partner
By: /s/ Patrick J. O'Connell
------------------------
Name: Patrick J. O'Connell,
Title: President
Lessee: GEERLINGS & WADE OF TEXAS, INC.
By: /s/ Thomas V. DiBello
---------------------
Name: Thomas V. DiBello,
Title: President
EXHIBITS:
Exhibit A: Leased Premises
Exhibit B: Legal Description
Exhibit C: Building Rules and Regulations
Exhibit D: Signage Requirements
Exhibit E: Acceptance Certificate
Exhibit F: Declaration Of Commencement
13
<PAGE>
EXHIBIT "A"
(Description to Come)
14
<PAGE>
EXHIBIT "B"
BEING 9.1354 ACRES OF LAND OUT OF AND A PART OF UNRESTRICTED RESERVE "F",
CORPORATE BUSINESS PARK, A SUBDIVISION RECORDED IN VOLUME 23, PAGE 5 IN THE FORT
BEND COUNTY MAP RECORDS, FORT BEND COUNTY, TEXAS, SAID TRACT ALSO BEING OUT OF
AND A PART OF A REPLAT OF UNRESTRICTED RESERVE "B", CORPORATE BUSINESS PARK, A
SUBDIVISION RECORDED IN VOLUME 22, PAGE 9 IN THE FORT BEND COUNTY MAP RECORDS,
FORT BEND COUNTY, TEXAS, SAID TRACT ALSO BEING IN THE H.J. DEWITT SURVEY,
ABSTRACT NO. 162, STAFFORD, FORT BEND COUNTY, TEXAS, SAID TRACT OF LAND ALSO
BEING MORE PARTICULARLY DESCRIBED BY METES AND BOUNDS AS FOLLOWS:
BEGINNING AT A POINT AT THE INTERSECTION OF THE NORTH BOUNDARY LINE OF RESERVE
"F", CORPORATE BUSINESS PARK, A SUBDIVISION RECORDED IN VOLUME 22, PAGE 9 IN THE
MAP RECORDS OF FORT BEND COUNTY, TEXAS AND THE EXTENSION OF THE CENTERLINE OF
EXCHANGE DRIVE;
THENCE N 89 49' 00" E, ALONG THE NORTH BOUNDARY LINE OF RESERVE "F" OF SAID
CORPORATE BUSINESS PARK, A DISTANCE OF 280.00 FEET TO A 5/8 INCH IRON ROD FOR
CORNER;
THENCE S 00 03' 00" E, A DISTANCE OF 755.07 FEET TO A 5/8 INCH IRON ROD FOR
CORNER;
THENCE S 89 57' 00" W, A DISTANCE OF 250.00 FEET TO A POINT FOR A CORNER, SAID
POINT LYING ON THE EAST RIGHT-OF-WAY LINE OF EXCHANGE DRIVE (60 FEET WIDE);
THENCE 00 03' 00" W, ALONG THE EAST RIGHT-OF-WAY LINE OF EXCHANGE DRIVE (60
FEET WIDE) A DISTANCE OF 80.00 FEET TO A POINT OF CURVATURE;
THENCE ALONG A CURVE TO THE LEFT HAVING A RADIUS OF 60.00 FEET, A CENTRAL ANGLE
BEING 299 59' 59", AN ARC LENGTH OF 314.15 FEET, A TANGENCY OF 69.29 FEET, SAID
CURVE ALSO HAVING A LONG CHORD BEARING OF S 89 56' 49" W, WITH A DISTANCE OF
60.00 FEET TO A POINT, SAID POINT LYING ON THE WEST RIGHT-OF-WAY LINE OF
EXCHANGE DRIVE (60 FEET WIDE);
THENCE S 00 03' 00" E, ALONG THE WEST RIGHT-OF-WAY LINE OF EXCHANGE DRIVE (60
FEET WIDE), A DISTANCE OF 45.00 FEET TO A POINT FOR A CORNER;
THENCE S 89 57' 00" W, A DISTANCE OF 250.00 FEET TO A POINT FOR A CORNER;
THENCE N 00 03' 00" W, A DISTANCE OF 718.77 FEET TO A 5/8 INCH IRON ROD FOR A
CORNER, SAID IRON ROD LYING ON THE NORTH PROPERTY LINE OF RESERVE "F", CORPORATE
BUSINESS PARK;
THENCE N 89 49' 00" E, ALONG THE NORTH PROPERTY LINE OF RESERVE "F", CORPORATE
BUSINESS PARK, A DISTANCE OF 280.00 FEET TO THE POINT OF BEGINNING AND
CONTAINING 9.1354 ACRES OF LAND, MORE OR LESS;
TOGETHER WITH RIGHTS OF INGRESS AND EGRESS ACROSS THAT CERTAIN CUL-DE-SAC
LOCATED AT THE NORTH END OF EXCHANGE DRIVE, CONSISTING OF 0.2596 ACRES AS
REFLECTED IN PLAT RECORDED IN VOLUME 23, PAGE 5 OF THE MAP RECORDS OF FORT BEND
COUNTY, TEXAS.
15
<PAGE>
EXHIBIT "C"
BUILDING RULES AND REGULATIONS
1. LESSOR AGREES TO FURNISH LESSEE TWO KEYS WITHOUT CHARGE. ADDITIONAL KEYS
WILL BE FURNISHED AT A NOMINAL CHARGE.
2. LESSEE WILL REFER TO ALL CONTRACTORS, CONTRACTOR'S REPRESENTATIVES AND
INSTALLATION TECHNICIANS, RENDERING ANY SERVICE ON OR TO THE LEASED PREMISES FOR
LESSEE FOR LESSOR'S APPROVAL AND SUPERVISION BEFORE PERFORMANCE OF ANY
CONTRACTUAL SERVICE. THIS PROVISION SHALL APPLY TO ALL WORK PERFORMED IN THE
BUILDING INCLUDING INSTALLATION OF TELEPHONE, TELEGRAPH EQUIPMENT, ELECTRICAL
DEVICES AND ATTACHMENTS AND INSTALLATIONS OF ANY NATURE AFFECTING FLOORS, WALLS,
WOODWORK, TRIM, WINDOWS, CEILINGS, EQUIPMENT OF ANY OTHER PHYSICAL PORTION OF
THE BUILDING.
3. NO LESSEE SHALL AT ANY TIME OCCUPY ANY PART OF THE BUILDING AS SLEEPING OR
LODGING QUARTERS.
4. LESSEE SHALL NOT PLACE, INSTALL OR OPERATE ON THE LEASED PREMISES OR IN
ANY PART OF THE BUILDING, ANY ENGINE, STORE OR MACHINERY, OR CONDUCT MECHANICAL
OPERATIONS OR COOK THEREON OR THEREIN, OR PLACE OR USE IN OR ABOUT THE LEASED
PREMISES ANY EXPLOSIVES, GASOLINE, KEROSENE, OIL, ACIDS, CAUSTICS, OR ANY
INFLAMMABLE, EXPLOSIVE, OR HAZARDOUS MATERIAL WITHOUT WRITTEN CONSENT OF LESSOR.
5. LESSOR WILL NOT BE RESPONSIBLE FOR LOST OR STOLEN PERSONAL PROPERTY,
EQUIPMENT, MONEY OR JEWELRY FROM LESSEE'S AREA OR PUBLIC ROOMS REGARDLESS OF
WHETHER SUCH LOSS OCCURS WHEN AREA IS LOCKED AGAINST ENTRY OR NOT.
6. NO BIRDS, FOWL OR ANIMALS SHALL BE BROUGHT INTO OR KEPT IN OR ABOUT THE
BUILDING.
7. EMPLOYEES OF LESSOR SHALL NOT RECEIVE OR CARRY MESSAGES FOR OR TO ANY
LESSEE OR OTHER PERSON, NOR CONTRACT WITH OR RENDER FREE OR PAID SERVICES TO ANY
LESSEE OR LESSEE'S AGENTS, EMPLOYEES OR INVITEES.
8. LESSOR WILL NOT PERMIT ENTRANCE TO LESSEE'S OFFICES BY USE OF PASS KEY
CONTROLLED BY LESSOR TO ANY PERSON AT ANY TIME WITHOUT WRITTEN PERMISSION BY
LESSEE, EXCEPT EMPLOYEES, CONTRACTORS, OR SERVICE PERSONNEL DIRECTLY SUPERVISED
BY LESSOR.
9. NONE OF THE ENTRIES, PASSAGES, DOORS, ELEVATORS, HALLWAYS OR STAIRWAYS
SHALL BE BLOCKED OR OBSTRUCTED, OR ANY RUBBISH, LITTER, TRASH, OR MATERIAL OF
ANY NATURE PLACED, EMPTIED OR THROWN INTO THESE AREAS, OR SUCH AREAS, OR SUCH
AREAS TO BE USED AT ANY TIME EXCEPT FOR ACCESS OR EGRESS BY LESSEE, LESSEE'S
AGENTS, EMPLOYEES OR INVITEES.
10. THE WATER CLOSETS AND OTHER WATER FIXTURES SHALL NOT BE USED FOR ANY
PURPOSE OTHER THAN THOSE FOR WHICH THEY WERE CONSTRUCTED, AND ANY DAMAGE
RESULTING TO THEM FROM MISUSE, OR BY THE DEFACING OR INJURY OF ANY PART OF THE
BUILDING SHALL BE BORNE BY THE PERSON WHO SHALL OCCASION IT. NO PERSON SHALL
WASTE WATER BY INTERFERING WITH THE FAUCETS OR OTHERWISE.
11. NO PERSON SHALL DISTURB THE OCCUPANTS OF THE BUILDING BY THE USE OF ANY
MUSICAL INSTRUMENTS, THE MAKING OF UNSEEMLY NOISES, OR ANY UNREASONABLE USE.
12. NOTHING SHALL BE THROWN OUT OF THE WINDOWS OF THE BUILDING, OR DOWN THE
STAIRWAYS OR OTHER PASSAGES.
13. THE WASHING OF MOTOR VEHICLES SHALL BE PROHIBITED.
14. LESSEE AGREES NOT TO OVERBURDEN THE PARKING FACILITIES AND SPECIFICALLY
NOT TO PARK OR STORE MOTOR VEHICLES OR OTHER EQUIPMENT ON SUCH PARKING
FACILITIES FOR UNINTERRUPTED PERIODS OF TIME IN ALL EVENTS NOT TO EXCEED TEN
(10) DAYS, AND FURTHER AGREES TO COOPERATE WITH LESSOR AND OTHER LESSEES IN THE
USE OF PARKING FACILITIES, CONSENTING TO THE RELOCATION BY LESSOR OF ANY SUCH
PARKED OR STORED MOTOR VEHICLES OR EQUIPMENT TO MAINTAIN THE SAFE AND EFFICIENT
OPERATION AND FAVORABLE APPEARANCE OF THE PROJECT.
IT IS LESSOR'S DESIRE TO MAINTAIN IN THE BUILDING THE HIGHEST STANDARD OF
DIGNITY AND GOOD TASTE CONSISTENT WITH COMFORT AND CONVENIENCE FOR LESSEES. ANY
ACTION OR CONDITION NOT MEETING THIS HIGH STANDARD SHOULD BE REPORTED DIRECTLY
TO LESSOR. YOUR COOPERATION WILL BE MUTUALLY BENEFICIAL AND SINCERELY
APPRECIATED. THE LESSOR RESERVES THE RIGHT TO MAKE SUCH OTHER AND FURTHER
REASONABLE RULES AND REGULATIONS AS IN ITS JUDGMENT MAY FROM TIME TO TIME BE
NEEDFUL, FOR THE SAFETY, CARE AND CLEANLINESS OF THE LEASED PREMISES, AND FOR
THE PRESERVATION OF GOOD ORDER THEREIN.
16
<PAGE>
CORPORATE EXCHANGE
PROTECTIVE COVENANTS
ITEM 7 "SIGNS"
7. Signs: All proposed signs, including site information signs, shall be
------
subject to the approval by Lessor. All signs shall conform to the overall sign
program established by Lessor. Unless otherwise approved in writing by Lessor,
all signs must be attached to a building, parallel to and contiguous with its
wall, and must not project above its roof line. No sign of a flashing or moving
character shall be installed and no sign shall be painted on a building wall.
CORPORATE EXCHANGE CENTER LEASE
EXHIBIT "D"
CORPORATE EXCHANGE CENTER
SIGNAGE REQUIREMENTS
Size: 4' x 8' with 1 1/2" radius edge
Background: Ivory
Material: Metal
Design: Any design/logo or lettering style you choose. Color of
lettering of your choice.
Limitations: Not more than 50% of the sign to be colored any
one color other than the background color
17
<PAGE>
Exhibit 10.38
As of August 28, 1998
Geerlings & Wade, Inc.
960 Turnpike St.
Canton, MA 02021
Attention: David Pearce, Vice President &
Chief Financial Officer
Gentlemen:
This letter will serve as confirmation that BankBoston, N.A., f/k/a The First
National Bank of Boston, (the "Bank") is pleased to continue to hold available
for Geerlings & Wade, Inc. (the "Borrower") a $5,000,000 demand, discretionary
line of credit. All advances under the line of credit (the "Line of Credit")
shall be subject to the terms and conditions of the agreement between the Bank
and the Borrower dated as of January 7, 1994, as amended by (i) that certain
letter agreement between the Bank and the Borrower dated as of April 27, 1994,
(ii) that certain letter agreement between the Bank and the Borrower dated as of
March 15, 1995, (iii) that certain letter agreement between the Bank and the
Borrower dated as of October 13, 1995, (iv) that certain letter agreement
between the Bank and the Borrower dated as of June 30, 1996, and (v) that
certain letter agreement between the Bank and the Borrower dated as of July 22,
1996 (as so amended, the "Agreement"). Capitalized terms used herein without
definition shall have the same meaning as described to them in the Agreement.
The obligations of the Borrower under the Agreement will continue to be
evidenced by the Note and secured pursuant to the terms of the Security
Agreement (the Agreement, the Security Agreement and the Note, together with the
other instruments and agreements delivered in connection therewith, are referred
to collectively herein as the "Loan Documents").
In addition, this will confirm our understanding that, notwithstanding any
provision of the Agreement or the Note, interest on the loans made under the
Agreement (not at the time overdue) shall, from and after the date hereof,
accrue at the Base Rate plus one-half of one percent (.50%).
Except to the extent specifically modified hereby, all of the terms, conditions
and provisions of the Loan Documents will remain unaltered and such Loan
Documents, as any may be amended by this agreement, are each confirmed as being
in full force and effect. In addition, this agreement does not constitute a
waiver of any rights or remedies which the Bank may have under any of the Loan
Documents or otherwise arising. Lastly, notwithstanding any reference to a
default, event of default or due date in any Loan Document, the Borrower
acknowledges that the Line of Credit is made available to it by the Bank on a
demand, discretionary basis and that the Bank may make demand under or terminate
the Line of Credit at any time and for any reason, and that if not sooner
terminated or demanded, the Line of Credit will in any event expire on July 31,
1999.
<PAGE>
If the forgoing is acceptable to you, would you please so indicate by executing
and returning to the Bank the enclosed copy of this agreement as soon as
possible. If you have any questions, please feel free to contact me at
434-9716.
We are pleased to extend to you our continuing and strong support.
Very truly yours,
BANKBOSTON, N.A.
By: /s/ Timothy G. Clifford
-------------------------
Title: Director
By: /s/ George Carroll
-------------------------
Title: AVP
Accepted and Agreed to as of the 28th day of August, 1998.
GEERLINGS & WADE, INC.
By: /s/ David R. Pearce
-------------------------
David R. Pearce, Vice President &
Chief Financial Officer
<PAGE>
Exhibit 21
Subsidiaries of Geerlings & Wade, Inc.
Geerlings & Wade of Texas, Inc., a Texas corporation
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN APPEARS HERE]
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 Statements on Form S-8 File No. 333-36741, File No. 333-45311 and
File No. 333-65907.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 29, 1999
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,289,646
<SECURITIES> 0
<RECEIVABLES> 610,382
<ALLOWANCES> 0
<INVENTORY> 8,213,801
<CURRENT-ASSETS> 15,392,274
<PP&E> 2,514,299
<DEPRECIATION> 1,646,580
<TOTAL-ASSETS> 17,205,228
<CURRENT-LIABILITIES> 5,415,612
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0
0
<COMMON> 37,895
<OTHER-SE> 11,366,781
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<SALES> 34,774,173
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<CGS> 18,159,912
<TOTAL-COSTS> 18,159,912
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<INTEREST-EXPENSE> 20,616
<INCOME-PRETAX> 1,764,640
<INCOME-TAX> 751,310
<INCOME-CONTINUING> 1,013,330
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