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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, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- --
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 0-24048
GEERLINGS & WADE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of incorporation or organization)
960 Turnpike Street, Canton, Massachusetts
(Address of Principal Executive Offices)
04-2935863
(IRS Employer Identification Number)
02021
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 781-821-4152
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
GEERLINGS & WADE, INC.'S COMMON STOCK TRADES ON THE NASDAQ STOCK MARKET(R) 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 $18,315,715 on March 28, 2000.
For purposes of the foregoing sentence, the term ''affiliate'' includes each
director and executive officer of the registrant.
3,855,940 shares of Common Stock were outstanding at March 28, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
registrant's 2000 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A are incorporated by reference in Part III of this Report.
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--Risk 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
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Geerlings & Wade, Inc. (''Geerlings & Wade'' or the ''Company''), incorporated
in Massachusetts in 1986, is a direct marketer and Internet retailer of premium,
imported and domestic wines and wine-related merchandise to individual
consumers. Through frequent mailings to existing and potential customers and
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 of ''house mailings,'' which are product offerings sent
via the United States Postal Service to existing customers; "house e-mails,"
which are product offerings sent via e-mail to existing customers; and
''acquisition mailings,'' which are product offerings sent via the United States
Postal Service to potential customers. Customers place orders in person or by
mail, telephone, facsimile, e-mail or through the Internet.
In 1998, the Company established an e-commerce website, geerwade.com, through
which customers may place orders for wine. In 1999, the Company redesigned the
geerwade.com website and integrated the website with its new order management
computer system, which provides real-time inventory, electronic transfers of
orders and order status and dynamic page generation to keep the website current.
In the first quarter of 1999, the Company began offering wine accessories on
geerwade.com, and during the course of the year, migrated most of its accessory
sales from accessory catalogs to geerwade.com. In November 1999, the Company
launched WineBins.com as a separate e-commerce site through which customers can
purchase many of the national wine brands that are customarily offered in wine
stores. The WineBins.com site has similar functionality as geerwade.com. The
Company believes that it is developing a ''Geerlings & Wade'' image based on
informative mailings and e-commerce websites, reliable wine recommendations,
value pricing, ease of ordering and convenient delivery.
The Company seeks to comply with myriad 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 pursuant to rights granted by law to individual consumers in each state in
which it operates. Geerlings & Wade opened its first licensed facility in
Canton, Massachusetts in 1988. The Company opened additional licensed facilities
in Connecticut, New York and Illinois in 1991; Florida, California and New
Jersey in 1993; Washington (state) in 1994; Virginia in 1995; Ohio, Minnesota,
Colorado and Arizona in 1995; Michigan in 1997; Boston, Massachusetts in 1998;
and Texas in February 1999. In February 2000, the Company obtained a permit to
sell wine from its North Carolina retail facility and plans to begin selling
wine from this location in May 2000. Pursuant to reciprocal rights under
certain states' laws, the Company ships wine to consumers in a limited number of
additional states, but sales in such states have been relatively insignificant
to date. Certain other states now permit direct shipment of wine from out-of-
state retailers, so the Company commenced shipping into Nevada in September 1997
and into Louisiana in June 1998. Residents of Alaska, Montana, New Hampshire,
North Dakota and Rhode Island also began purchasing wine from the Company's
licensed facilities in 1999. The Company's
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active customers (customers who have made a purchase within the twelve preceding
months) have increased 4.7% from approximately 129,000 at December 31, 1998 to
approximately 135,000 at December 31, 1999.
COMPANY STRATEGY
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Geerlings & Wade, as one of the leading direct marketers and e-tailers of
premium wines, seeks to simplify the wine-buying process, educate the wine
consumer and develop a loyal and broad customer base. The key elements of the
Company's strategy to achieve these objectives include:
SOURCING QUALITY WINES AND OFFERING VALUE PRICING. Geerlings & Wade
primarily sources its imported wines directly from producers and negociants
(intermediaries or agents to producers in the purchasing process) in the
countries of each wine's origin. The Company mainly sources domestic wines
through wholesale channels with domestic negociants, 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 the Company believes demonstrate a combination of superior quality and
price characteristics. These sourcing and selection techniques combined with an
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 encourages 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.
FACILITATING PURCHASING DECISIONS AND EDUCATING CONSUMERS. Geerlings & Wade
believes that many consumers who buy wine through traditional retail channels
experience difficulty in their purchasing decisions, due to limited personal
knowledge of wine and 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
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.
INCREASING CUSTOMER ACCESS TO PRODUCTS. The Company offers its customers the
convenience of ordering products in person or by telephone, facsimile, mail, e-
mail, and the Internet, with delivery of each order directly to their home or
office as quickly as possible. Since the Company ships from 15 facilities in 15
states as of March 2000, delivery times are relatively short. The Company
expects to commence selling from its North Carolina retail facility in May 2000.
ENHANCING PRODUCTIVITY OF MAILINGS AND E-MAIL. Geerlings & Wade seeks to
improve the productivity of mailings to its existing customers by analyzing
buying histories and tailoring the frequency and content of 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 12-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, to
decrease costs and ultimately to find new customers who will consistently place
frequent and high dollar value orders. The Company also sends e-mails to its
customers who have provided e-mail addresses offering the same products that are
presented in its house mailings and letters from Geerlings & Wade's president
and chief executive officer, Jay Essa. The Company encourages its customers to
respond to its e-mail by placing orders on its e-commerce sites to reduce
fulfillment and marketing
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costs. The Company plans to further integrate the marketing activities of its
direct mail efforts and its Internet offerings to optimize the effectiveness of
these two marketing channels.
APPLYING COMPUTER SYSTEMS TO ENHANCE OPERATIONS. In July 1999, Geerlings &
Wade replaced its software system with a software package which was developed by
Avexxis Corporation and designed to meet the Company's unique requirements. This
software system provides an order entry interface for the Company's telephone
sales representatives, electronic order entry over the Internet, inventory
management, facilities fulfillment support, purchasing, accounting, marketing
analysis and management reporting. All customer orders are entered in the system
and accepted and fulfilled at one of 16 retail facilities. The Company depends
on its computer systems to efficiently process and account for all transactions.
EXPANDING E-COMMERCE. In 1998, the Company purchased Passport Wine Club,
which sells cases of wine and offers continuity programs (through which
customers receive monthly shipments of wine) through its e-commerce website
topwine.com. In August 1999, the Company launched a redesigned geerwade.com
with enhanced functionality including search capabilities, real-time inventory
management and shopping cart functionality. Additionally, in November 1999, the
Company launched WineBins.com, which has the same features as geerwade.com, but
offers national wine brands to customers. Through these websites, Internet
revenue reached nearly $2,000,000 in 1999. To acquire more Internet customers,
Geerlings & Wade plans to use direct mail promotions, which historically have
been the most effective and efficient means by which to acquire new customers.
EXPANDING IN EXISTING MARKETS. Geerlings & Wade believes that it has
penetrated its current markets but that opportunities exist to increase sales in
these markets to both current and new customers. The Company seeks to increase
sales to its current customers by further enhancing 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 through improvements in
the content, quality and circulation management of its mailings to potential
customers, through direct-response print advertising and through active
encouragement of referrals from existing customers.
INCREASING E-COMMERCE AND CUSTOMER ACQUISITIONS. The Company plans to further
develop and test customer acquisition programs using geerwade.com and
topwine.com. The Company has advertised geerwade.com to its existing customers
by including promotions in its house mailings, catalogs and e-mails. In the
second half of 2000, the Company plans to test certain direct mail campaigns
designed to acquire customers willing to make their first purchase online at
geerwade.com. The Company will continue to test, on a small scale, other forms
of marketing to potential Internet customers to determine which advertising may
be cost effective to roll out on a larger scale. The Company also enables
visitors to geerwade.com to directly link to the Passport Wine Club's website,
topwine.com, if they want to investigate the Company's wine club. The Company
also plans to market WineBins.com to its existing geerwade.com customers by
linking the sites and promoting WineBins.com in e-mail promotions to all of the
Company's customers. In 1999, the Company tested print, radio and online
advertising for its WineBins.com e-commerce site and determined from those tests
the most effective marketing strategies to attract new customers to its e-
commerce sites. The Company has also arranged several marketing relationships
with other companies doing business on the Internet and plans to continue to
find strategic partners that will generate sales and new customers for the
Company's e-commerce sites.
ENTERING NEW MARKETS. Geerlings & Wade is licensed or otherwise authorized
to sell wine to individual customers in 30 states, comprising approximately 83%
of the overall United States market for table wines as of March 2000. The
Company entered six of these 30 states in 1999. The Company obtained a retail
license to sell wine in Texas in February 1999 and commenced sales in March
1999. In order to satisfy Texas Alcoholic Beverage Laws, the Company created
Geerlings & Wade of Texas, Inc., a Texas corporation which sells and delivers
wine to Texas customers. The Company commenced selling and shipping wine into
residents in Alaska (via the Internet only), Rhode Island and New Hampshire
residents in March 1999. New Hampshire and Rhode Island amended their laws to
allow shipment of wine from licensed retailers located in other states. Alaska
has clarified its laws by permitting the interstate 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 started selling wine in North Dakota
in the fourth quarter of
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1999. Montana residents began purchasing wine from the Company's licensed
facilities in 1999. The Company is currently evaluating opportunities to obtain
licenses in additional states in order to serve a larger customer base, although
no assurance can be given that it will be successful in obtaining any additional
licenses. Those states representing markets with both high consumption of table
wine and a large number of mail-order prospects will be considered, based on the
Company's ability to overcome licensing or other regulatory obstacles to serving
customers in such states.
COMPANY LITERATURE AND MAILINGS
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The Company sells wine to individual consumers who are 21 years of age or
older mainly 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 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 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 & Wade
products). The marketing department determines the number and timing of house
mailings based on such factors as the wines offered, prices, wine ratings, the
season and frequency and amount of customer purchases. The Company uses its
order management 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 uses four 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 additional wine selections, along with tasting
notes and ratings for these wines. Each mailing includes a personalized
letter, an order form and a business reply envelope as well. The Company
mailed 18 separate brochure mailings to its customers in 1998 and 1999. Not
all customers receive each brochure mailing.
''Odds & 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. The prices of some wines offered through the Odds & Ends mailings
are reduced. The Company normally mails one Odds & Ends mailing per quarter.
Preferred Customer and Membership Mailings. Geerlings & Wade also creates
and mails special offers to its members and other customers based on their
purchasing records. For example, during the 1999 holiday season, the Company
mailed a special Lakeville Carneros Chardonnay offer to members and customers
who purchased Chardonnay from Geerlings & Wade in the past or who the Company
had reason to believe would likely purchase Chardonnay. These preferred
offers, which typically are in the form of letters from Geerlings & Wade's
president, generate high responses from customers and enhance the personal
touch of the Company's wine-selling service. The Company mailed nine preferred
customer mailings in 1998 and increased the number of these mailings to 12 in
1999.
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Special Mailings. In 1999, Geerlings & Wade mailed a special offer to its
new customers to encourage repurchases and further familiarize customers with
the benefits and services offered by the Company. The Company plans to mail
these special offers to its first-time customers on a regular basis.
Additionally in 1999, the Company commenced a reactivation program in which it
sends special offers to customers who have not purchased for two to three
years in an effort to reactivate these older customers. The Company mailed
three separate reactivation offers during 1999 and plans to continue this
program in 2000.
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 and business reply envelope. Potential
customer names are obtained by renting lists with a demographic profile
consistent with the Company's existing customers; these lists are repeatedly
rented based on favorable historic 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 six bottles per order. 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 allow flexibility for editorial changes
and result in significant cost and time savings. Printing, production and
fulfillment (collating, folding, inserting and mailing) are performed
commercially off-site. The Company seeks to reduce creative, printing and
mailing costs to maximize the availability of funding for the purpose of
acquiring new customers. Mailings generally include a personalized letter, the
offering brochure, an order form and a return envelope.
CATALOGS. During 1999, Geerlings & Wade mailed one accessory catalog and
three separate mailings of wine and accessory catalogs to both prospective and
existing customers. Two catalogs were mailed in the first quarter of 1999, and
two were mailed in the fourth quarter of 1999. The wine and accessory catalogs
featured wines and wine accessories from around the world and offered wine gift
samplers to facilitate customer's gift buying needs. The wine accessories
catalog, mailed in the first quarter of 1999, offered only wine accessories and
was also mailed to customers in states in which the Company is not licensed to
deliver wine. In 2000, the Company plans to research the development of its
catalog market, test different mailing schedules and sell primarily wine from
these promotions. 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.
PASSPORT WINE CLUB MAILINGS. In July of 1998, the Company acquired Passport
Wine Club, which sells much of its wine as part of its various continuity
programs. Continuity programs entail delivering monthly shipments of two, four,
or six bottles of wine for three, six or 12 months or for an open-ended period
until the customer cancels. Passport closely ties its marketing concept to
written narratives of trips to the wine growing regions and wineries from which
it offers wine. The Company promotes Passport programs through Passport's
website topwine.com and through a link from the geerwade.com website to the
topwine.com website. The Company also promotes Passport programs to its
existing customers by inserting advertising in house mailings and with orders
delivered to customers.
MERCHANDISING
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Geerlings & Wade offers its customers premium imported and domestic wines.
Imported wines are sourced primarily from France, Italy, Australia and Chile.
The Company also sources a few wines each year from Argentina, New Zealand and
Spain. 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, Domaine Paul, Jack Canyon Cellars, Lapis
Lazuli Winery & Vineyards, Mariel Winery, Mira Luna, Mischler Estates, San
Valencia Winery and St. Carolyne Winery. The Company promotes its best-selling
brands and aims to build a long-term merchandising program that creates brand
equity for these brands. By reinforcing brand recognition vintage after vintage
and by
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selling quality wines, the Company encourages strong demand for these brands
among its customers and strong sales growth for these brands.
The wines offered by the Company are based on consumption patterns and the
Company's prior experience with wines from particular wine-producing regions and
varietals. In 1999, approximately 67% of the cases sold by the Company were
imported wines and 33% 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 $98.44 in 1999 for repeat customers.
In 1999, the Company began to offer a limited selection of nationally branded
wines to its customers through its house mailings and on its website,
geerwade.com. In November 1999, the Company launched WineBins.com, which sells
nationally branded wines exclusively. These wines are primarily purchased from
licensed wholesalers on a state by state basis and are not typically sourced
through the Company's traditional methods.
WINE SOURCING AND PURCHASING
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The Company sources imported and domestic wines through a network of
producers, negociants, importers and wholesalers. In 1999, the Company sourced a
substantial majority of the cases it sold directly from producers or negociants.
In addition, nationally branded wines are purchased from licensed wholesalers on
a state by state basis.
The Company's sourcing methods for non-branded wines 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 negociants. 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 mailing brochures. This plan specifies wine varietals, producing
region of origin and price point for each of these features. The Merchandising
Department then develops and purchases a complementary product mix of seven to
nine wines to be offered with each feature. The Company selects most of these
wines based on blind comparative tastings of samples judged on overall quality
and price characteristics. The Company often tastes over 50 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 1999, the vast majority of imported wines sold
by the Company were sourced directly from the countries of origin. Many European
wines are purchased using the services of a consultant to the Company, Mr. Peter
Van Hoof, who visits European growers and negociants and administers blind
comparative tastings from his office in Rotterdam, The Netherlands. At the
Company's headquarters, wine samples, including those 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 1999, a substantial majority of the Company's
domestic wines were sourced through wholesale channels with domestic negociants
and certain wineries and wine producers. The remaining wines, national brands,
were purchased from licensed wholesalers. Starting in 1999, Mr. Guy Davis, one
of the Company's primary negociants for the United States, began sourcing many
of the California wines sold by the Company. Prior to 1999, the Company sourced
many of its domestic wines from Grayton, California-based Codera Wine Group,
Inc., which continues to source wines for the Company on a limited basis. The
domestic negociants
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and wineries continuously review wines at various stages of production and
forward selected samples to the Company. After the Company has selected a
particular wine from among the samples forwarded by a sourcing agent, the winery
coordinates finish vinification and bottling of the wine under a number of
private labels, including the Company's own brands.
The Company also sources wines directly from various California wineries. As a
high-volume purchaser, the Company is directly approached by wineries and wine
producers with offers to purchase wine lots of various sizes. These wines are
reviewed based on their quality and price characteristics.
WINES SOURCED BY OTHERS. Geerlings & Wade also purchases wines that have
been sourced independently for the Company by negociants, 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 that can be sold at attractive prices.
INFORMATION SYSTEMS AND TECHNOLOGY
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The Company maintains computer-based systems to integrate all major aspects of
the Company's business, including order processing and acceptance, facility
fulfillment, inventory planning and management, merchandising, customer list and
circulation management and analysis, and financial and management reporting. In
1999, the Company selected an integrated order management and direct marketing
software package from Avexxis Corporation of Avon, Connecticut. Geerlings & Wade
converted from its former software system to the Avexxis system in the third
quarter of 1999. This order management computer package replaced the Company's
internally designed software system and provides all of the functionality that
the former system provided and has enhanced the Company's capability to generate
reports and manage its resources and data. The new order management computer
system provides telephonic and direct mail order information entry via data
processing or entry from electronic submissions over the Internet, licensed
facility order acceptance and fulfillment management including inventory control
and inventory management, merchandising forecasting and purchasing, links to
accounts payable and accounts 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
Informix Software, Inc. of Menlo Park, California (formerly Ardent Software).
The Company's new order management computer system integrates order entry with
each of the Company's licensed facilities and provides the online, real-time
information processing capabilities necessary for prompt fulfillment and
delivery to customers and resolution of customer service issues. Facilities
personnel access the system remotely to process customer order information. The
names and addresses of individuals who have ordered from the Company or
requested inclusion in the Company's mailing list are entered in the Company's
database and assigned an ''import number,'' which appears on all customer
correspondence and is used to track account activity against each marketing
promotion that is sent to a customer. The new system also provides the Company's
customer service representatives access to an array of product and customer
information during order processing. The Company believes the customer
information provided by the system, including tasting notes, purchasing and
billing histories, delivery instructions and prospective shipping dates,
enhances the quality of service to its customers.
The order management computer system also provides real-time inventory
management. The Company maintains access to running totals of case sales by
market, facility inventory and customer delivery logs, all designed to arrange
for prompt and convenient delivery to customers. Regulatory requirements have
been incorporated into the order management software to allow the Company to
manage centrally inventory for each of its licensed facilities.
The order management computer system continually updates the Company's current
database of customer names and purchasing histories to facilitate the maximum
productivity of house and acquisition mailings. The system offers data
manipulation, which enables the Company to target its marketing programs to
specific segments
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of its customer base. The system also provides extensive reporting capabilities
that allow the Company to evaluate the effectiveness of its mailings and assists
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 Company's websites, geerwade.com and WineBins.com, allow for interactive
queries and order requests from customers. For example, customers can query the
web server to obtain real-time information about inventory and their order
status. Accepted orders, including regulatory compliance verification data, are
electronically entered via the order management computer system and e-mails are
sent back to customers notifying them of order receipt. Inventory updates are
performed automatically based on order status in the order management system.
This e-commerce solution has generated strong customer satisfaction and allows
the Company to keep its websites current with minimal cost to the Company. This
allows the Company to focus on the website content and on marketing initiatives
to increase e-commerce sales.
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 Internet channels.
In the fourth quarter of 1999, the Company heavily promoted the WineBins.com
website over the Internet, on the radio and through print media. In 2000, the
Company plans to continue to develop its direct mail and e-mail marketing
campaigns, but scale back significantly on radio, online and print media
advertising.
The Company's ongoing marketing programs are 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.
NEW MARKETING PROGRAMS. In addition to its present direct mail formats, in
1999 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 promotes continuity
programs primarily over the Internet and to its existing customer base.
Additionally, the Company is exploring on-line partnering with certain companies
in an attempt to advertise over the Internet to these partners' customers.
Overall, Company marketing efforts will increasingly seek to enhance the return
on program and campaign investments aimed at existing Geerlings & Wade
customers.
E-COMMERCE. The Company participates in the e-commerce channel by
maintaining several websites through which customers can place order information
for wine and wine accessories. Geerwade.com is a vehicle by which customers can
learn about the Company, its products and, most importantly, initiate electronic
orders for wine and wine accessories. The Company's Passport Wine Club sells
monthly subscriptions of wine from its website, topwine.com. Customers can
access topwine.com directly or through geerwade.com. In November 1999, the
Company launched WineBins.com, from which it offers nationally branded wines at
competitive prices. The
9
<PAGE>
Company created this new online store with the intent of attracting wine
consumers that prefer nationally branded wines to the Company's traditional
privately-sourced wines. While e-commerce is still a growing segment of the
retail economy, the Company has attracted new customers to its websites and
converted direct mail customers to Internet customers. In 1999, more than 5% of
the Company's sales were placed through its websites. In 2000 and beyond the
Company plans to promote the sales growth through its Internet websites and
attract customers seeking to purchase wine through the Internet. The Company
intends to continue developing this interactive channel by expanding the number
of its wine and wine accessories available through its websites. In addition,
the Company plans to test new products and promotions on all of its websites and
update website content and functionality. In the fourth quarter of 1999, the
Company became affiliated with Starbucks Corporation and the companies agreed to
cross-promote each other's products through their respective websites. The
Company seeks to arrange other affiliations with e-tailers to promote the
awareness of the Company and generate additional Internet sales. Subject to
regulatory compliance, in 2000, the Company plans to launch a live, "in-person"
wine auction service in a joint venture with Greg Manning Auctions, Inc.
(Nasdaq: GMAI) which will auction wine over a co-branded Internet wine auction
site. Finally, the Company plans to develop and test direct mail campaigns aimed
at acquiring customers who will make their first and follow-on purchases through
any of the Company's websites.
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 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, 1999, the Company had approximately 47,500
members.
CUSTOMER SERVICE
- ----------------
Customers can make purchases in person at the Company's licensed facilities or
send the Company order information by e-mail, mail, telephone (1-800-782-WINE)
and facsimile (1-800-FAX-8466) and through the Internet (geerwade.com,
WineBins.com and 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. 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 where permitted by law. Returns and credits were
approximately 2% of net sales for 1997 and 1998 and 1% of net sales for 1999.
COMPETITION
- -----------
The retail wine business is highly competitive. The Company competes with
supermarkets, wine specialty stores, retail liquor stores, wine merchants who
advertise delivery of products in specialty publications, and an increasing
number of companies specializing in direct retail marketing of wine through the
Internet and other channels. 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 as
well as by providing 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
10
<PAGE>
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, capitalizing on computer technology in
the management of its operations and its direct marketing programs and creating
a loyal customer base. However, there can be no assurance that the Company will
be able to continue to compete effectively against existing or new competitors.
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 & 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. The Company is
permitted from its California or Illinois facilities to sell and ship to
consumers in 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 into Alaska, Iowa,
Louisiana, Nebraska, Nevada, New Hampshire, North Dakota, Oregon and Rhode
Island. Montana residents purchase wine under Montana's personal importation
laws from the Company's licensed facilities. Sales to consumers in Alaska,
Missouri and West Virginia to date have been relatively insignificant because of
regulatory restrictions asserted against direct marketing and consumer
advertising in those states.
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 Connecticut, Florida,
Massachusetts, New Jersey or Colorado. In 1999, UPS stopped delivering wine for
the Company in Nevada, Florida and Connecticut, and the Company began to use
higher cost third party couriers in these states. In addition, some states,
including Alabama, South Carolina, Tennessee and Georgia prohibit the retail
delivery of alcoholic beverages altogether. Accordingly, the Company delivers
its own products in New Jersey and most of its orders in Massachusetts and
contracts with licensed, local couriers in Alaska, Arizona, Colorado,
Connecticut, Florida, Minnesota, Nevada, New Hampshire, North Dakota and Texas
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. As of December 31, 1999 the
Company held retail licenses in the 15 states where it maintains 16 licensed
facilities, which are typically renewed on a yearly basis. As 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 states, 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 1999 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 order information is
processed centrally in Canton, Massachusetts and forwarded to an appropriate
licensed facility for acceptance and fulfillment. The Company manages the
process of ordering, order fulfillment and accounting for its inventory with its
computerized order
11
<PAGE>
management system, through which the Company has real-time access to running
totals of case sales by state, facility 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 licensed facilities. 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 the
Company's 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, services 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.
Orders from customers in the states into 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. The Company collects and remits sales tax on
accessory sales in states in which it has nexus based on it operating a facility
in such state. The Company plans to collect and remit sales tax for taxable
sales made in North Carolina once the Company begins selling in that state.
Additionally, certain states have enacted legislation permitting the delivery of
wine to residents of their states by licensed, out-of-state shippers on the
condition that 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 Idaho, Missouri, New Mexico, Oregon and West
Virginia under ''reciprocity laws'' without collecting a sales or use tax or
notifying consumers that a use tax payment may be required. Also, the Company
does not impose or collect sales tax on orders shipped to Alaska, Iowa, Montana,
Nebraska, and North Dakota. 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. Legislation is introduced from
time to time in Congress which would authorize collection of certain state and
local taxes with respect to mail order sales, delivery and use of tangible
personal property. The Company cannot predict whether or when legislation of
this type 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.
12
<PAGE>
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, International Beer and Ale
Society, Devina Estates, Domaine Paul, Expeditions and Vintage Impressions Plus.
The Company has filed trademark or service mark applications with the United
States Patent and Trademark Office for the following names: Vintage Rewards,
Bestwinebuys.com, Brava Terra, Winefirst.com, Redbrick Cellars, WineBins.com and
WineBins.com Wine Redefined. 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, 1999, the Company employed a total of 70 individuals on a
full-time basis. The Company also uses part-time and contract employees on a
regular basis at each of its licensed facilities and at its corporate
headquarters.
ITEM 2: PROPERTIES
As of December 31, 1999, Geerlings & Wade operated 16 licensed facilities
located in 15 states. The Company leases all of these facilities. Each facility
is centrally located with easy access to major routes for delivery efficiencies.
The Company obtained a license to sell wine from its North Carolina facility in
February 2000 and plans to commence selling wine to North Carolina customers in
the second quarter of 2000. The addition of North Carolina brings the total
number of retail, licensed facilities for the Company to 17.
<TABLE>
<CAPTION>
Approximate
-----------
FACILITY LOCATION SQUARE FOOTAGE EXPIRATION
-------- -------- -------------- ----------
<S> <C> <C> <C>
Executive offices, customer service and licensed facility..... Canton, MA 32,000 2005
Licensed facility ............................................ Carmel, NY 10,000 2003
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 10,900 2004
Licensed facility ............................................ Kent, WA 5,000 2000
Licensed facility ............................................ Chantilly, VA 4,800 2002
Licensed facility ............................................ Miamisburg, OH 5,900 2001
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 2002
Licensed facility ............................................ Boston, MA 1,400 2001
Licensed facility ............................................ Stafford, TX 5,700 2001
Licensed facility ............................................ Greensboro, NC 7,000 2005
</TABLE>
* The Company presently rents the facility on a month-to-month basis and intends
to do so for the foreseeable future.
The Company believes that its facilities are adequate for its current needs
and that suitable additional space will be available as needed.
13
<PAGE>
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 results of operation or financial position of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 8, 1999, a special meeting of stockholders was held for the
purpose of voting on a proposal to approve and adopt an Agreement and Plan of
Merger among Geerlings & Wade, Liquid Acquisition Corp. and Liquid Holdings Inc.
The Agreement and Plan of Merger provided for a cash merger in which Geerlings &
Wade's stockholders would receive $10 in cash per share in exchange for their
common stock. The proposal was approved at this special meeting where 2,880,281
votes were cast for the proposal, 58,706 votes were cast against the proposal,
and there were 2,800 abstentions.
On February 22, 2000, the Agreement and Plan of Merger automatically
terminated because the financing needed by Liquid Holdings was not obtained.
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(R) 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 Nasdaq.
<TABLE>
<CAPTION>
1998 1999
-------------------------- ---------------------------
High Low High Low
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
First Quarter............................. $ 5.38 $4.00 $9.09 $4.00
Second Quarter............................ 6.44 4.00 8.25 4.63
Third Quarter............................. 4.81 2.88 9.00 5.50
Fourth Quarter............................ 12.81 2.69 9.63 5.69
</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 28, 2000, there were approximately 130 holders of record of the
Company's common stock. Cede & Co., a nominee of the Depository Trust Company
("DTC"), owned of record 2,306,409 shares of the Company's common stock, or
approximately 60%. DTC is a securities depository for brokers, dealers and
other institutional investors. Securities are deposited with the DTC for the
purposes of permitting book entry transfers of securities among such investors.
The Company does not know the names of beneficial owners of shares that have
been deposited at the DTC.
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 28, 2000, 3,855,940
shares were issued and outstanding; and 1,000,000 authorized shares of preferred
stock, par value $.01 per share, of which, as of March 28, 2000, 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,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statements of operations data:
Sales ......................................... $ 29,718 $ 31,501 $ 33,701 $34,774 $36,866
Cost of sales ................................. 16,138 17,188 18,185 18,160 18,940
-------- -------- -------- -------- --------
Gross profit ........................... 13,580 14,313 15,516 16,614 17,926
Selling, general and administrative expenses .. 14,690 14,426 14,066 14,860 18,581
Merger related expenses ....................... -- -- -- -- 825
-------- -------- -------- -------- --------
Income (loss) from operations .......... (1,110) (113) 1,450 1,754 (1,480)
Loss on disposal of fixed asset ............... -- -- -- -- 59
-------- -------- -------- -------- --------
Interest income (expense), net ................ (37) (257) (23) 10 45
-------- -------- -------- -------- --------
Income (loss) before income taxes ...... (1,147) (370) 1,427 1,764 (1,494)
Provision (benefit) for income taxes .......... (470) (152) 604 751 --
-------- -------- -------- -------- --------
Net income (loss) ...................... $ (677) $ (218) $ 823 $ 1,013 $(1,494)
======== ======== ======== ======== ========
Net income (loss) per share
Basic ................................... $ (0.18) $ (0.06) $ 0.22 $ 0.27 $ (0.39)
======== ======== ======== ======= ========
Diluted ................................. $ (0.18) $ (0.06) $ 0.22 $ 0.27 $ (0.39)
======== ======== ======== ======= ========
Weighted average common shares outstanding
Basic ................................... 3,755 3,776 3,780 3,786 3,843
Diluted ................................. 3,755 3,776 3,796 3,801 3,843
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
Balance sheet data:
<S> <C> <C> <C> <C> <C>
Working capital ............................... $ 8,694 $ 8,045 $ 9,303 $ 9,977 $10,054
Total assets .................................. 16,717 12,952 16,124 17,205 17,755
Total stockholders' equity .................... 9,733 9,526 10,362 11,405 10,227
</TABLE>
No cash dividends have been declared per common share for each year shown.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
contains forward-looking statements, including statements about the Company's
earnings, expenses, strategies and objectives. Any such statements are subject
to risks and uncertainties that could cause the Company's actual results to
differ materially from those discussed in such forward-looking statements.
Prospective information is based on management's then current expectations or
forecasts. Such information is subject to the risk that such expectations or
forecasts, or the assumptions underlying such expectations or forecast, become
inaccurate. Factors that could affect the Company's actual results and could
cause such results to differ materially from those contained in forward-looking
statements made by or on behalf of the Company include, but are not limited to,
those discussed below under the heading "Risk Factors That May Affect Future
Results," other one-time events and other important factors disclosed previously
and from time to time disclosed in the Company's other filings with the
Securities and Exchange Commission.
15
<PAGE>
Results of Operations
- ---------------------
The following tables set forth the percentage which certain items in the
Company's statements of income for the periods indicated bear to total sales and
the Company's sales by market for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales ......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................. 54.3 54.6 54.0 52.2 51.4
Gross profit .................................. 45.7 45.4 46.0 47.8 48.6
Selling, general and administrative expenses .. 49.4 45.8 41.7 42.7 50.4
Merger related expenses ....................... -- -- -- -- 2.2
Income (loss) from operations ................. (3.7) (0.4) 4.3 5.1 (4.0)
Loss on disposal of fixed asset ............... -- -- -- -- 0.2
Interest (expense) income, net ................ (0.2) (0.8) (0.1) -- 0.1
Income (loss) before income taxes ............. (3.9) (1.2) 4.2 5.1 (4.1)
Provision (benefit) for income taxes .......... (1.6) (0.5) 1.8 2.2 --
Net income (loss) ............................. (2.3) (0.7) 2.4 2.9 (4.1)
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
Market 1995 1996 1997 1998 1999
- ------ ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands)
Massachusetts(1) .............................. $ 5,970 $ 5,685 $ 6,310 $ 5,960 $ 6,553
Connecticut (2) ............................... 2,246 2,186 2,025 2,079 2,257
New York ...................................... 5,297 5,078 4,929 5,061 5,065
Illinois(2) ................................... 2,418 2,563 2,702 2,805 2,939
Florida ....................................... 2,679 2,810 3,066 3,194 3,413
California(2) ................................. 3,541 3,466 3,530 3,833 3,943
New Jersey .................................... 3,795 3,637 3,658 3,559 3,634
Washington .................................... 884 1,017 1,093 1,049 1,043
Virginia (January 1995) ....................... 1,398 1,707 1,963 1,996 1,889
Ohio (April 1995) ............................. 1,123 2,017 2,401 2,566 2,622
Minnesota (July 1995) (2) ..................... 134 338 413 436 494
Colorado (July 1995) .......................... 151 566 713 718 769
Arizona (September 1995) ...................... 82 431 542 601 639
Michigan (June 1997) .......................... -- -- 356 917 1,126
Texas (March 1999) ............................ 480
.................. -----
Totals....................................... $29,718 $31,501 $33,701 $34,774 $36,866
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes sales from catalog accessories and from the Newbury Street, Boston
store.
(2) Includes authorized sales into additional states.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------
Sales. The Company's revenues are derived from the sale of wine, wine-related
accessories and memberships. In 1999, sales increased $2,092,000 or 6.0%, from
$34,774,000 in 1998 to $36,866,000 in 1999. From 1997 to 1998, sales increased
by $1,072,000, or 3.2%, from $33,701,000 in 1997. As a result of Geerlings &
Wade's focus on the Internet during 1999, a major contributor to 1999 sales
growth were sales through the Company's websites. Internet sales accounted for
5.3% of Geerlings & Wade's 1999 revenues compared to only 0.7% in 1998, the year
that the Company began selling wine through online ordering via its website. In
addition, the Company was able to grow its revenue from catalog sales during
1999, generating sales of $3,146,000 from its 1999 catalogs, a 39% increase over
sales of $2,256,000 from its 1998 catalogs. 1997 catalogs generated sales of
$1,498,000. Sales from the Passport Wine Club and the Newbury Street store in
Boston increased, as 1999 was the first full year of operation for both. Sales
from house mailings increased marginally in 1999 as compared to 1998. In 1998,
sales from house mailings fell marginally from 1997. Sales from acquisition
mailings fell $512,000 in 1999 as compared to 1998. This was due to
lower circulation of acquisition mailings in 1999 and to weaker response rates
to these mailings in the first half of 1999 compared to 1998. Sales from
acquisition mailings increased $735,000 between 1997 and 1998.
The number of cases sold by the Company increased by 27,929, or 8.3%, from
336,695 cases in 1998 to 364,624 cases in 1999. From 1997 to 1998, the number
of cases sold increased by 15,300 from 321,395, a 4.8%
16
<PAGE>
increase. The average number of cases purchased per customer increased from 2.61
cases per year in 1998 to 2.70 cases per year in 1999. In large part, the
increase in 1999 in the average, annual number of cases purchased was a result
of fewer sales in 1999 to first time buyers, who generally buy less than one
case at the time of their first purchase. Conversely, the decrease in the
average number of cases purchased in 1998 from 2.91 cases per year in 1997 to
2.61 cases per year in 1998 was due to the fact that there was an increase in
first-time buyers in 1998. While the average, annual number of cases purchased
per customer increased from 1998 to 1999, the average, annual number of cases
purchased by repeat buyers decreased 20.1% from 1998 to 1999, from 4.66 cases
per repeat buyer in 1998 to 3.72 cases in 1999. In 1997, repeat buyers annually
purchased an average of 4.35 cases each.
All markets except New York, Virginia and Washington reflected sales growth
between 1998 and 1999. Comparative sales between 1998 and 1999 were flat in New
York and down 5% for Virginia and 1% for Washington. Between 1997 and 1998,
sales decreased in Massachusetts (5%), New Jersey (3%) and Washington (4%).
Sales from memberships and wine-related accessories were 3.8%, 3.3% and 4.1%
of overall revenues in 1997, 1998 and 1999, respectively.
GROSS PROFIT. Gross profit has continued to grow. In 1999, gross profit
increased $1,312,000, or 7.9%, from $16,614,000 in 1998 to $17,926,000 in 1999.
From 1997 to 1998, gross profit increased as well: from $15,517,000 in 1997, a
change of 7.1%. During these periods, gross profit as a percentage of sales
increased from 46.0% in 1997 to 47.8% in 1998 to 48.6% in 1999. In both 1998 and
1999, the increase in gross profit resulted from improved purchasing by the
Company. In addition, in 1999, the Company was able to take advantage of
favorable changes in foreign currency exchange rates, which also increased gross
profits. Gross profits for all sales per case (12 bottles) of wine sold
decreased $0.18 per case during 1999 to $49.16 per case from $49.34 per case in
1998. In 1997, the gross profit per case was $48.28. 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.
The average case price for cases sold by the Company decreased from $100.44 in
1997 to $99.64 in 1998, a 0.8% decrease, and then to $96.55 in 1999, a 3.1%
decrease. The decrease in case price between 1998 and 1999 is due to lower
average prices of about 5% for wines sold to existing customers, attributable
primarily to a shift in product mix offered by the Company and to more price
mark downs for wines offered in the Odds & Ends mailings from 1999 to 1998.
From 1997 to 1998, the decrease primarily resulted from increased sales to
first-time customers who buy wines at a lower price point. The Company does not
believe that it will need to lower prices further to compete in the market
place. However, this does not preclude price adjustments that may be necessary
to track price trends in the marketplace precipitated by market factors such as
a drop in the price of wine from suppliers or major changes in foreign currency
exchange rates. In 1999, Geerlings & Wade continued discounting selected
products to reduce inventory and maintain a manageable number of stock keeping
units.
There are several factors which cause the Company's gross margins to vary. 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. However, depending on the number of factors, including the number of new
customers generated by acquisition mailings and other marketing programs under
development and the addition of more nationally branded wines to the product
mix, the gross margin will continue to fluctuate. On the one hand, the price
point for 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. On the other hand, however, nationally branded
wines sold on WineBins.com and from the house mailing brochures are sold at
gross margins which are significantly lower than the average gross margins for
the Company's privately sourced wine. Therefore, a significant sales increase
in nationally branded wines will cause the Company's average gross margin to
decrease.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $14,860,000 in 1998 to $18,581,000 in
1999, or 25.0%. From 1997 to 1998, however, selling, general and
17
<PAGE>
administrative expenses increased only 5.6%, from $14,066,000 to $14,860,000. As
a percentage of sales, selling, general and administrative expenses equaled
50.4% in 1999, 42.7% in 1998 and 41.7% in 1997. Marketing expenses, which are
referred to as advertising costs in the financial statement footnotes, were the
largest contributor to the increased expenses. Marketing costs increased
$1,891,000 or 36%, from $5,238,000 in 1998 to $7,129,000 in 1999. From 1997 to
1998, marketing expenses increased 10.1%, from $4,756,000 in 1997. As a
percentage of sales, marketing expense was 19.3% of sales in 1999 compared to
15.1% of sales in 1998. In 1997, marketing expense represented 14.1% of sales.
The majority of the increase in marketing expenses resulted from spending
approximately $1,000,000 for advertising to promote Geerlings & Wade's Internet
sites, particularly in connection with the November 1999 launch of the
WineBins.com site. In 1998, the first year the Company had a website through
which customers could enter order information, the Company spent only $27,000 to
promote its Internet site.
In addition, increases in the circulation of house mailings, catalogs and
acquisition mailings contributed equally to the remaining marketing expense
increase for 1999. In 1999, the Company sent approximately 4,346,000 house
mailings, including, in the second half of 1999, to customers who had not
purchased within the past two to three years. This represented an increase of
about 33.8% over the 3,246,000 pieces mailed in 1998. Also in 1999, the Company
mailed approximately 3,726,000 brochures and Odds & Ends mailings, an increase
of about 24.7% over the 2,989,000 pieces mailed in 1998. In 1997, the Company
mailed approximately 2,947,000 house mailings and 2,885,000 brochures and Odds &
Ends mailings. The Company's decision to mail to its inactive customers in 1999
was driven both by the desire to reactivate these customers and to advertise the
opportunity to purchase wine through the Internet at geerwade.com. Although
responses rates to mailings to inactive customers decline as the Company mails
to customers who have not purchased for increasingly longer periods, the Company
mails to its inactive customers to the extent that the cost to reactivate them
as purchasers on average equals the cost to acquire a new customer. In this
way, the Company is able to optimize the return of the marketing dollars devoted
to customer acquisition. Following the Company's decision in the second quarter
of 1999 to standardize the wines it sells in each state, the Company has been
able to standardize its customer mailings and anticipates that it will save
significant per unit printing expenses in 2000 as a result.
The Company also anticipates that its marketing expenses in connection with
its e-commerce sites will be significantly lower in 2000 than in 1999. The
Company plans to acquire new customers in 2000 through its traditional
acquisition mailings. However, in an effort to also reduce the cost of
circulating the Company's house mailings and catalogs, the Company plans to
convert as many new customers as possible to Internet purchasers so that the
Company is able to communicate with them and the existing Internet customers via
e-mail advertising campaigns rather than through mailings. The Company plans to
further develop its catalogs devoted primarily to wine, which were first mailed
in the holiday season of 1998 and delivered encouraging sales results. In 2000,
Geerlings & Wade plans to mail 22 brochures, Odds & Ends mailings and the
holiday catalog to its active customers.
Selling, general and administrative costs are also impacted by the Company's
need to comply with laws and regulations related to the retail sale of wine. In
1999, the Company operated from 16 licensed facilities in 15 separate states.
Operating these separate locations forces the Company to incur unusually high
overhead expenses as a percentage of sales. Additional lease expenses were
incurred as a result of operating the Michigan and Texas facilities and the
Boston, MA retail store for their first full years and consolidating the
Company's San Jose, California facility with Passport Wine's Novato, California
facility at a new location in Petaluma, California. In 1999, the Company also
absorbed increased staffing expenses as a result of hiring personnel to develop
and operate Geerlings & Wade's e-commerce sites; staffing the new Texas
facility; hiring additional call center personnel to deal with increased sales,
particularly during the fourth quarter; and devoting personnel to oversee and
facilitate the integration of the Company's new computerized order management
system.
Increased delivery expenses in 1999 also contributed to the growth in the
selling, general and administrative expenses. In 1999, UPS notified the Company
that it would no longer be able to deliver packages containing alcoholic
beverages in the states of Connecticut, Florida and Nevada. As a result, the
Company uses non-UPS couriers in each of these states and in Texas, which is
also outside of UPS's delivery area for packages containing
18
<PAGE>
alcoholic beverages. In 2000, the Company plans to devote considerable efforts
to an attempt to lower delivery expenses.
MERGER RELATED EXPENSES. Geerlings & Wade entered into a merger agreement
(the "Merger Agreement") with Liquid Holdings, Inc. and its wholly-owned
subsidiary, Liquid Acquisition Corp., in September 1999, pursuant to which
Liquid Holdings agreed to acquire all the outstanding shares of common stock of
the Company for $10 per share. The merger agreement, however, terminated
pursuant to its terms in February 2000 because the financing needed by Liquid
Holdings was not obtained. At the time of the Merger Agreement, Liquid Holdings
paid the Company a $1,250,000 fee which was refundable under certain limited
circumstances. Under the terms of the Merger Agreement, this fee could be used
by the Company for general corporate purposes. Upon the termination of the
Merger Agreement in February 2000, the Company recorded the $1,250,000 fee as
other income in the first quarter of 2000.
INTEREST INCOME (EXPENSE). In 1999, the Company incurred no interest expense
since it did not draw on its line of credit with BankBoston, N.A. (which
terminated in July 1999). In 1998, the Company's interest expense was $21,000
and in 1997 the Company's interest expense was $45,000. Interest income in 1999
increased by $14,000 to $45,000 from $31,000 in 1998. Interest income in 1997
was $21,000. The net effect is that Geerlings & Wade had net interest income of
$45,000 in 1999 and $10,000 in 1998 and net interest expense of $24,000 in 1997.
Therefore, a higher average cash balance was available in 1999 for investing.
PROVISION FOR INCOME TAXES. The Company provided for income taxes of 42% in
1997 and 42.5% in 1998. Although the Company incurred a net loss in 1999, the
Company decided not to book a benefit in 1999 due to the uncertainty regarding
the ultimate realization of the related deferred tax asset.
NET (LOSS) INCOME. Despite the Company's increase in sales, the Company
recognized a net loss of $1,494,000 in 1999 after earning net income of
$1,013,000 in 1998 and $823,000 in 1997. This reduction in income resulted from
major investments in e-commerce technology and advertising, higher operating
expenses and expenses related to entering into a merger agreement with Liquid
Holdings, Inc. in September 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In 1999, the Company's primary capital needs were for funding the marketing
expenses in connection with advertising the Company's e-commerce websites and
acquisition mailings, purchases of software and hardware, Internet site
development and purchases of inventory to support sales growth and the Company's
increasingly varied product offerings. As of December 31, 1999, the Company had
cash and cash equivalents totaling $2,625,000, compared to $4,290,000 as of
December 31, 1998.
In the first half of 1999, the Company did not borrow under its revolving
discretionary demand line of credit with BankBoston, N.A. This line expired on
July 31, 1999. The Company has received a commitment from a bank to provide a
line of credit and expects to complete documentation for this line of credit in
April 2000. The proposed line of credit provides for a maximum principal amount
equal to the lesser of 50% of qualifying inventory or $5.0 million, bears
interest at the prime rate and will be collateralized by substantially all of
the assets of the Company. The Company will be required to comply with certain
financial covenants as part of the terms and conditions of the line of credit.
In 1999, the Company used $2,450,000 in cash from operating activities
compared to generating $5,396,000 in 1998. The cash used in operating
activities in 1999 resulted primarily from a net loss of $1,494,000; an increase
in accounts receivable of $785,000, the majority of which represented a
receivable from one vendor which the Company collected after December 31; an
increase in inventory of $1,268,000; an increase in prepaid expenses of
$434,000, mostly attributable to prepaid and refundable taxes; and a decrease in
accounts payable of $46,000 and accrued sales taxes of $76,000. These cash
needs were offset by a decrease in prepaid mailing costs of $459,000 which was
due to lower circulation of acquisition mailings in the fourth quarter of 1999
as compared to the fourth quarter of 1998, an increase in accrued expenses of
$468,000 and an increase in deferred revenue of $133,000.
19
<PAGE>
The Company had working capital of $9,977,000 and $10,054,000 at December 31,
1998 and 1999, respectively. The Company increased inventory levels in 1999 in
order to stock the additional wines offered through the Company's new website,
WineBins.com, in the brochures, through the Passport Wine Club and in the wine
catalogs, and expects to maintain these higher inventory levels in the future.
In addition, as a result of the alcoholic beverage regulatory framework 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. In the second
quarter of 2000, the Company plans to open a licensed facility in Greensboro,
North Carolina. The inventory for this facility will add to the overall
inventory levels. Inventory levels will fluctuate with seasonal demand and
overall sales growth.
During 1999, net cash of $782,000 was used in investing activities. The
Company invested approximately $795,000 in property and equipment. These
purchases included approximately $392,000 in connection with the Company's new
order management computer system and software enhancements, $375,000 for the
development of WineBins.com and geerwade.com and $28,000 for furniture and
fixture purchases. Net cash of $512,000 was used in investing activities in
1998. The Company used $465,000 of these funds to acquire the assets of
Passport Wine. The Company also invested approximately $112,000 in property and
equipment in 1998.
Total cash provided by financing activities in 1999 was $1,567,000, of which
$289,000 represented exercise proceeds and associated tax benefits from stock
options issued under the Company's Stock Option Plan. An additional $27,000 was
generated from issuance of stock under the Employee Stock Purchase Plan. The
Company also received a fee of $1,250,000 from Liquid Holdings, Inc. at the time
the Company entered into the merger agreement with Liquid Holdings. In 1998,
the Company used $953,000 of cash for financing activities to repay its line of
credit.
The Company believes that cash flows from operations, current cash balances,
together with a new line of credit, will be sufficient to meet the Company's
working capital needs and capital expenditure requirements for 2000.
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 a
foreign exchange line with BankBoston, NA which allows the Company to enter into
forward currency exchange contracts of up to $500,000 maturing on any one day.
As of December 31, 1999, the Company had foreign exchange contracts outstanding
to purchase approximately 5 million French francs (equivalent to approximately
$783,000 at December 31, 1999).
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which 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.
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB No. 133, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not anticipate the adoption of this statement to have a
material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101, as amended by SAB No. 101(a), is effective for all periods
beginning after March 15, 2000. Adoption of SAB No. 101 is not expected to have
a material impact on the Company's financial position or results of operations.
20
<PAGE>
IMPACT OF YEAR 2000
- -------------------
The Company experienced no significant disruptions in its internal computer
programs and operating systems and believes its systems successfully responded
to the Year 2000 date change. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems
or the products and services of third parties. The Company will continue to
monitor its internal computer programs and operating systems and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------
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
laws and regulations, in the event that it should be determined that the Company
is not in compliance with any applicable laws or regulations, the Company could
become subject to cease and desist orders, injunctive proceedings, civil fines,
license revocations and other penalties which could have a material adverse
effect on the Company's business and its results of 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.
In addition, 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, 1996 and 1999 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
21
<PAGE>
such services according to Company specifications or to adhere to Company
mailing schedules may have a material adverse effect on the Company's business
and results of operations.
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.
Finally, if UPS terminates delivery services for alcoholic beverages in certain
states, as it did in 1999 in Florida, Nevada and Connecticut, the Company will
incur significantly higher shipping rates that 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.
Many of the Company's wines are sourced by Mr. Peter Van Hoof, one of the
Company's primary negociants for Europe, and Mr. Guy Davis, one of the Company's
primary negociants 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 & 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, online wine retailers,
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.
22
<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 or increases in state excise tax levels, may have a material
adverse effect on the Company's business and its results of operations. In 1999,
approximately 67% 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.
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 material adverse effect on the Company's operations, sales and
profitability.
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 contains
forward-looking statements. Actual results could differ materially from those
contained in 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 1999 were not material to the Company. Looking forward,
the Company does not anticipate any material adverse effect on its financial
position, results of operations or cash flows resulting from the use of these
instruments. However, there can be no assurance that these strategies will be
effective or that transaction losses can be minimized or forecasted accurately.
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 pages F-2 through F-21.
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
The information required by this Item is included under the captions
''Executive Compensation; Certain Arrangements'' and ''Re-election of
Directors'' in the proxy statement for use in connection with the Company's 2000
Annual Meeting of Stockholders (the ''Proxy Statement''), and is incorporated
herein by reference.
23
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
''Executive Compensation; Certain Arrangements," ''Employment Arrangements'' and
''Compensation Committee Report'' in the Proxy Statement, and is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
''Securities Ownership of Certain Beneficial Owners and Management'' in the
Proxy Statement and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the caption "Re-Election
of Directors - Directors' Compensation" in the Proxy Statement and is
incorporated herein by reference.
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
-------
NO. DESCRIPTION
--- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated September 27, 1999 by and among Geerlings & Wade, Inc., Liquid
Holdings Inc. and Liquid Acquisition Corp., and the exhibits thereto.(17)(19)
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)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
<S> <C>
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. (14)(16)
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)
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)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
<S> <C>
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)*
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
<S> <C>
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)
10.36 Lease Amendment between the Company and Jerry L. Ivy dated April 21, 1998.(14)
10.37 Lease Agreement between the Company and Corporate Exchange Limited Partnership dated October 9,
1998.(14)
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.(14)
10.39 Severance Agreement dated April 2, 1999 between the Company and Jay L. Essa.(15)
10.40 Lease Amendment between the Company and Flint Lee Limited Partnership dated June 22, 1999.(18)
10.41 Lease Amendment between the Company and William Eddy dated October 1, 1999.(18)
10.42 Lease Agreement between the Company and Cader Lane Associates dated September 27, 1999.(18)
10.43 Lease Amendment between the Company and Enviro-zyme International, Inc. dated December 18, 1999.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
<S> <C>
10.44 Lease Agreement between the Company and Wengreen, LLC dated November 1, 1999.
10.45 Indenture of Lease between the Company and Foxford Business Center, LLC dated February 16, 2000
21 Subsidiaries of the Company.(14)
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
</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.
(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.
(14) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1998 filed on March 30, 1999 (File No. 0-24048) and
incorporated by reference herein.
(15) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
ended March 31, 1999 filed on May 14, 1999 (File No. 0-24048) and
incorporated by reference herein.
(16) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on August 19, 1999 (File No. 333-85557) and incorporated by reference
herein.
(17) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
September 28, 1999 (File No. 0-24048) and incorporated by reference herein.
(18) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
ended September 30, 1999 filed on November 15, 1999 (File No. 0-24048) and
incorporated by reference herein.
(19) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 23, 1999 (File No. 0-24048) and incorporated by reference herein.
* Management Contract or Compensation Plan
(b) A current report on Form 8-K was filed by the Company on December 28, 1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Geerlings & Wade, Inc.
By: /s/ Jay L. Essa
-------------------
(JAY L. ESSA)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 30, 2000
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 30, 2000
- ------------------------------ Director
HUIB E. GEERLINGS
/s/ Jay L. Essa President, Chief Executive March 30, 2000
- ------------------------------ Officer and Director
JAY L. ESSA (Principal Executive Officer)
/s/ David R. Pearce Vice President, Chief Financial March 30, 2000
- ------------------------------ Officer and Treasurer
DAVID R. PEARCE (Principal Financial and
Accounting Officer)
/s/ Phillip D. Wade Director March 30, 2000
- ------------------------------
PHILLIP D. WADE
/s/ James C. Curvey Director March 30, 2000
- ------------------------------
JAMES C. CURVEY
/s/ John M. Connors, Jr. Director March 30, 2000
- ------------------------------
JOHN M. CONNORS, JR.
/s/ Gordon R. Cooke Director March 30, 2000
- ------------------------------
GORDON R. COOKE
</TABLE>
29
<PAGE>
INDEX
PAGE
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1998 and 1999 F-3
Statements of Operations for Each of the Three Years
in the Period Ended December 31, 1999 F-4
Statements of Stockholders' Equity for Each of the
Three Years in the Period Ended December 31, 1999 F-5
Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 1999 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Geerlings & Wade, Inc.:
We have audited the accompanying balance sheets of Geerlings & Wade, Inc. (a
Massachusetts corporation) as of December 31, 1998 and 1999 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 1, 2000 (except with respect to the
matter discussed in Note 1, as to which the
date is February 22, 2000 and Note 5, as to which
the date is March 28, 2000)
F-2
<PAGE>
GEERLINGS & WADE, INC.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,289,646 $ 2,624,990
Accounts receivable 610,382 1,395,305
Inventory 8,213,801 9,481,779
Prepaid mailing costs 1,357,950 899,400
Prepaid expenses and other current assets 833,376 1,265,916
Deferred income taxes, net 87,119 229,139
----------- -----------
Total current assets 15,392,274 15,896,529
----------- -----------
Property and Equipment, at cost:
Office and computer equipment 2,066,480 1,986,810
Motor vehicles 77,875 77,875
Furniture and fixtures 369,944 377,600
----------- -----------
2,514,299 2,442,285
Less--Accumulated depreciation 1,646,580 1,326,174
----------- -----------
867,719 1,116,111
----------- -----------
Deferred Income Taxes, net 493,436 352,408
----------- -----------
Other Assets 451,799 390,411
----------- -----------
$17,205,228 $17,755,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,401,392 $ 3,354,972
Current portion of deferred revenue 1,089,659 1,171,406
Accrued sales, income and payroll taxes 395,692 319,318
Accrued expenses 528,869 996,848
----------- -----------
Total current liabilities 5,415,612 5,842,544
----------- -----------
Deferred Revenue, less current portion 384,940 436,206
----------- -----------
Purchase Price Advance from Liquid Holdings (Note 1) - 1,250,000
----------- -----------
Commitments and Contingencies (Notes 1 and 6)
Stockholders' Equity:
Preferred stock, $.01 par value-
Authorized--1,000,000 shares
Outstanding--none - -
Common stock, $0.01 par value
Authorized--10,000,000 shares
Issued and outstanding--3,789,495 shares and 3,849,071 shares in 1998 and 1999, 37,895 38,491
respectively
Additional paid-in capital 9,759,371 10,075,279
Retained earnings 1,607,410 112,939
----------- -----------
Total stockholders' equity 11,404,676 10,226,709
----------- -----------
$17,205,228 $17,755,459
=========== ===========
</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,
1997 1998 1999
<S> <C> <C> <C>
Sales $33,701,832 $34,774,173 $36,866,403
Cost of Sales 18,185,364 18,159,912 18,940,024
----------- ----------- -----------
Gross profit 15,516,468 16,614,261 17,926,379
Selling, General and Administrative Expenses 14,066,529 14,860,043 18,581,083
Merger Related Expenses - - 824,838
----------- ----------- -----------
Income (loss) from operations 1,449,939 1,754,218 (1,479,542)
Loss on Disposal of Fixed Asset - - 59,459
Interest Income 20,975 31,038 44,530
Interest Expense (44,319) (20,616) -
----------- ----------- -----------
Income (loss) before provision for income taxes 1,426,595 1,764,640 (1,494,471)
Provision for Income Taxes 604,000 751,310 -
----------- ----------- -----------
Net income (loss) $ 822,595 $ 1,013,330 $(1,494,471)
=========== =========== ===========
Net Income (Loss) per Share:
Basic $ 0.22 $ 0.27 $ (0.39)
=========== =========== ===========
Diluted $ $0.22 $ 0.27 $ (0.39)
=========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic 3,779,538 3,786,400 3,842,742
=========== =========== ===========
Diluted 3,796,460 3,800,601 3,842,742
=========== =========== ===========
</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 $0.01 Paid-in Capital EARNINGS STOCKHOLDERS'
SHARES PAR VALUE (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
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
Issuance of stock under employee stock
purchase plan 5,991 60 26,885 - 26,945
Exercise of common stock options 53,585 536 249,816 - 250,352
Tax benefit from exercise of common
stock options - - 39,207 - 39,207
Net loss - - - (1,494,471) (1,494,471)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1999 3,849,071 $38,491 $10,075,279 $ 112,939 $10,226,709
========= ======= =========== =========== ===========
</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,
1997 1998 1999
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 822,595 $ 1,013,330 $(1,494,471)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities-
Depreciation and amortization 536,301 524,494 535,159
Deferred income taxes (214,910) 134,355 -
Loss (gain) on disposal of property and equipment (5,707) - 59,459
Changes in current assets and liabilities, net of assets
acquired of Passport Gift Co. in 1998-
Accounts receivable (251,637) (19,760) (784,923)
Inventory (2,624,824) 2,930,301 (1,267,978)
Prepaid mailing costs (144,275) (372,191) 458,550
Prepaid expenses and other current assets (699,486) 85,030 (433,532)
Accounts payable 1,258,818 1,500,630 (46,420)
Deferred revenue 196,382 345,044 133,018
Accrued sales, income and payroll taxes 690,515 (536,168) (76,374)
Accrued expenses 478,295 (208,948) 467,979
----------- ----------- -----------
Net cash (used in) provided by operating activities 42,067 5,396,117 (2,449,533)
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment, net (192,769) (112,040) (794,736)
Proceeds from sale or return of property and equipment 56,550 90,000 -
Acquisition of Passport Gift Company, Inc., net of cash - (465,343) -
acquired
Decrease (increase) in other assets, exclusive of goodwill 93,211 (24,409) 13,109
----------- ----------- -----------
Net cash used in investing activities (43,008) (511,792) (781,627)
----------- ----------- -----------
Cash Flows From Financing Activities:
Bank overdraft (472,469) - -
Borrowings under line of credit 4,943,349 1,651,091 -
Repayments under line of credit (4,899,973) (2,633,486) -
Purchase price advance from Liquid Holdings - - 1,250,000
Proceeds from issuance of stock under the Employee Stock 13,563 29,673 26,945
Purchase Plan
Tax benefit from exercise of stock options - - 39,207
Proceeds from exercise of stock options - - 250,352
----------- ----------- -----------
Net cash provided by (used in) financing activities (415,530) (952,722) 1,566,504
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (416,471) 3,931,603 (1,664,656)
Cash and Cash Equivalents, beginning of year 774,514 358,043 4,289,646
----------- ----------- -----------
Cash and Cash Equivalents, end of year $ 358,043 $ 4,289,646 $ 2,624,990
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 44,939 $ 20,616 $ -
=========== =========== ===========
Income taxes $ 259,650 $ 1,095,131 $ 594,300
=========== =========== ===========
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, 1999
(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 16 licensed facilities in 15 states. Federal, state and
local laws strictly govern the sale of wine in each market served by the
Company.
On September 27, 1999, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Liquid Holdings Inc. (Liquid Holdings).
The Merger Agreement called for all stockholders to receive $10.00 in cash
for each share of the Company's stock held by such stockholder. At the time
of the Merger Agreement, Liquid Holdings paid the Company a fee, refundable
under certain limited circumstances, of $1.25 million. This fee would be a
component of the purchase price if the merger was consummated or offset the
Company's merger related costs if the merger was not consummated. This amount
has been recorded in the accompanying balance sheet as a liability. On
February 22, 2000, the Merger Agreement automatically terminated. The Company
will record the $1.25 million fee as other income in the first quarter of
2000.
The Company is subject to a number of risks and uncertainties similar to
those of companies of the same size within its industry, including, without
limitation, federal and state laws and regulations, dependence on wine
selection and sourcing, customer demographics and competition.
(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 ratably over
the related membership period. Sales returns, which are not material,
are recorded in the period of return.
F-7
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(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, 1998 and 1999, 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 being shipped. Credit card
processing fees amounted to approximately $723,000, $808,000 and $916,000
for the years ended December 31, 1997, 1998 and 1999, 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).
Included in the Company's inventory are approximately $164,000 and
$719,000 of paid reservations of certain vintage wines as of December 31,
1998 and 1999, respectively. The Company sold approximately $247,000 and
$397,000 of such reserves to its customers during 1998 and 1999,
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-8
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(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:
Estimated
ASSET CLASSIFICATION Useful Life
Office and computer equipment 3-5 years
Motor vehicles 3 years
Furniture and fixtures 5 years
(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 $32,000 of accumulated amortization as of
December 31, 1999.
(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, 1998 and
1999, the Company determined that there was no impairment of long-lived
assets.
(i) Advertising Costs
Advertising expense was $4,756,042, $5,237,893 and $7,128,975 for the
years ended December 31, 1997, 1998 and 1999, 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 of direct advertising to
prospective customers capitalized as of December 31, 1998 and 1999 are
$1,145,000 and $710,000, respectively.
F-9
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(j) Deferred Revenue
Deferred revenue represents customer prepayments, payments for wine
reservations and deferred membership revenue. The components of deferred
revenue as of December 31, 1998 and 1999 are as follows:
1998 1999
Payments for wine reservations $ 239,889 $ 209,195
Customer prepayments 460,649 450,556
Deferred membership revenue 774,061 947,861
---------- ----------
Deferred revenue $1,474,599 $1,607,612
========== ==========
(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, 1999, the Company had three contracts
to purchase approximately 5.0 million French francs (FF) (equivalent to
approximately $783,000 as of December 31, 1999). These contracts mature
at varying dates through April 2000 as the Company's accounts payable in
French francs are due.
(l) 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, foreign exchange contracts and accounts
payable. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 1998 and 1999.
F-10
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(m) 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. No single supplier constituted a significant
percentage of the Company's purchases during 1999.
(n) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of all components of comprehensive income (loss) on
an annual and interim basis. Comprehensive income (loss) is defined as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
The Company's comprehensive income (loss) is equal to net income (loss)
for all periods presented.
(o) 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.
(p) Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which 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. SFAS No. 133, as amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB No. 133, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not anticipate the adoption of this statement to have a
material impact on its financial position or results of operations.
F-11
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB No. 101, as amended by SAB No. 101(a), is effective for
all periods beginning after March 15, 2000. Adoption of SAB No. 101 is
not expected to have a material impact on the Company's financial
position or results of operations.
(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:
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
========
(4) Net Income (Loss) per Share
The Company applies the provisions of SFAS No. 128, Earnings per Share.
Accordingly, basic net income (loss) per common share is computed by dividing
net income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted net loss per
share in 1999 is computed in the same way as basic, as all common equivalent
shares are considered antidilutive. Diluted net income 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, 1997, 1998 and 1999, 227,902, 245,468 and 414,067 of
antidilutive shares, respectively, have been excluded from the weighted
average number of common and common equivalent shares outstanding.
F-12
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
A reconciliation of basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
<S> <C> <C> <C>
Basic weighted average shares outstanding 3,779,538 3,786,400 3,842,742
Weighted average common equivalent shares 16,922 14,201 -
--------- --------- ---------
Diluted weighted average shares outstanding 3,796,460 3,800,601 3,842,742
========= ========= =========
</TABLE>
(5) Line of Credit
The Company had a demand line of credit with a bank that allowed 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%.
No commitment fees applied to the unutilized portion of the line of credit.
The line of credit expired on July 31, 1999.
On March 28, 2000, the Company received a commitment from a bank for a
secured revolving line of credit that will allow borrowings up to the lesser
of $5,000,000 or 50% of certain inventories, as defined. Interest will be
payable based on the prime rate.
The Company maintains separate foreign exchange facilities with a bank, 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, 1999, there were three
outstanding forward exchange contracts in French francs for a total of
approximately FF 5.0 million (approximately $783,000 at December 31, 1999).
These contracts expire at different periods from March through April 2000.
F-13
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(6) Commitments and Contingencies
(a) Lease Commitments
The Company leases facilities under operating lease agreements expiring
through September 2005. Future minimum rental payments due under these
agreements as of December 31, 1999 are as follows:
AMOUNT
Fiscal year
2000 $1,126,215
2001 667,098
2002 538,547
2003 395,445
2004 366,630
Thereafter 191,766
----------
$3,285,701
==========
Total rental expense under these agreements included in the accompanying
statements of operations is approximately $862,000, $1,003,000 and
$1,081,000 for the years ended December 31, 1997, 1998 and 1999,
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-14
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(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 provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Current-
Federal $ 647,000 $486,955 $ -
State 172,000 130,000 -
--------- -------- ---------
819,000 616,955 -
--------- -------- ---------
Deferred (benefit) expense-
Federal (168,000) 105,355 (245,000)
State (47,000) 29,000 (69,000)
--------- -------- ---------
(215,000) 134,355 (314,000)
--------- -------- ---------
Valuation allowance - - 314,000
--------- -------- ---------
$ 604,000 $751,310 $ -
========= ======== =========
</TABLE>
Due to the uncertainty of the realization of its deferred tax assets, the
Company has provided a valuation allowance.
F-15
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
The reconciliation of the federal statutory rate to the effective tax rate
for the years ended December 31, 1997, 1998 and 1999 for income taxes are as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Income tax provision (benefit) at 34% 34% (34)%
federal statutory rate
State taxes, net of federal benefit 6 6 (6)
Non deductible merger costs - - 22
Increase in valuation allowance - - 16.5
Other, net 2 2.5 1.5
---- ---- ----
42% 42.5% 0.0 %
==== ==== ====
</TABLE>
Deferred income taxes relate to the following temporary differences as of
December 31, 1998 and 1999:
1998 1999
Deferred revenue $ 482,000 $ 466,000
Capitalized inventory 133,000 186,000
Nondeductible reserves 199,000 242,000
Depreciation and amortization 18,000 91,000
Net operating loss carryforward - 68,000
Tax benefit from disqualifying
dispositions - 39,000
Deferred costs (251,000) (197,000)
Valuation allowance - (314,000)
--------- ---------
Total deferred taxes $ 581,000 $ 581,000
========= =========
(8) Stockholders' Equity
(a) Preferred Stock
The Company has authorized 1,000,000 shares of $0.01 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.
F-16
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
(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 600,000 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.
F-17
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
Activity under the Option Plan and Director Plan is summarized as
follows:
<TABLE>
<CAPTION>
OPTION PLAN DIRECTOR PLAN
--------------------------------------------- ----------------------------------------------
NUMBER WEIGHTED AVERAGE EXERCISE PRICE NUMBER WEIGHTED AVERAGE EXERCISE PRICE
OF SHARES PRICE PER SHARE PER SHARE OF SHARES PRICE PER SHARE PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, December 31, 235,119 $5.26 $3.63- $8.00 22,500 $8.92 $ 4.50- $15.25
1996 -------- ----- ------------- ------ ----- -------------
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, 213,890 4.84 3.78- 8.00 30,000 6.85 4.38- 15.25
1997 -------- ----- ------------ ------ ----- -------------
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, 335,027 4.37 3.00- 8.00 45,000 6.04 4.31- 15.25
1998 -------- ----- ------------ ------ ----- -------------
Granted 207,000 6.68 5.56- 7.63 15,000 7.02 6.81- 7.13
Terminated (134,375) 5.85 3.00- 8.00 - - -
Exercised (53,585) 4.67 4.00- 8.00 - - -
-------- ----- ------------ ------ ----- -------------
Outstanding, December 31, 354,067 $5.11 $3.00- $8.00 60,000 $6.28 4.31- $15.25
1999 ======== ===== ============= ====== ===== =============
Exercisable, December 31, 149,011 $4.36 $3.00- $8.00 29,944 $6.85 4.31- $15.25
1999 ======== ===== ============= ====== ===== =============
Exercisable, December 31, 156,250 $4.57 $3.78- $8.00 18,330 $8.38 4.38- $15.25
1998 ======== ===== ============= ====== ===== =============
Exercisable, December 31, 93,867 $5.66 $3.78- $8.00 9,998 $9.83 $4.50- $15.25
1997 ======== ===== ============= ====== ===== =============
</TABLE>
F-18
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1999 under the Option Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------ -----------------------------
EXERCISE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
PRICE/RANGE OF OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES OF DECEMBER REMAINING EXERCISE PRICE DECEMBER 31, EXERCISE PRICE
31, 1999 CONTRACTUAL 1999
LIFE (IN
YEARS)
<S> <C> <C> <C> <C> <C> <C>
$ 3.00 10,000 8.7 $3.00 2,500 $3.00
3.78 - 4.75 164,600 7.1 3.98 111,044 3.92
5.25 - 8.00 179,467 8.6 6.26 35,467 5.83
------- ----- ------- -----
354,067 $5.11 149,011 $4.36
======= ===== ======= =====
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1999 under the Director Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------ --------------------------------
EXERCISE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
PRICE/RANGE OF OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES OF DECEMBER REMAINING EXERCISE PRICE DECEMBER 31, EXERCISE PRICE
31, 1999 CONTRACTUAL 1999
LIFE (IN
YEARS)
<S> <C> <C> <C> <C> <C> <C>
$4.31 - 4.63 35,000 7.7 $4.44 19,994 $ 4.46
4.64 - 15.25 25,000 7.6 8.86 10,000 11.63
------ ----- ------ ------
60,000 $6.28 29,994 $ 6.85
====== ===== ====== ======
</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
1997, 1998 and 1999 have been valued using the Black-Scholes option
pricing model prescribed by SFAS No. 123.
F-19
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
The weighted average assumptions used for the years ended December 31,
1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Risk-free interest rate 6.3 to 6.61% 4.76 to 5.7% 4.77 to 6.0%
Expected dividend yield - - -
Expected lives 5 years 9 years 8 years
Expected volatility 86% 96% 93%
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997, 1998 and 1999 under these plans is $2.37, $3.83 and
$5.71 respectively. As of December 31, 1997, 1998 and 1999, the weighted
average remaining contractual life of outstanding options under these
plans is 8.4, 8.4 and 7.9 years, respectively.
Had compensation cost for the Company's stock option plans and Employee
Stock Purchase Plan been determined consistent with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have
been the following pro forma amounts:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net income (loss)-
As reported $822,595 $1,013,330 $(1,494,471)
Pro forma 661,277 690,050 (2,042,038)
Basic net income (loss) per share-
As reported $ 0.22 $ 0.27 $ (0.39)
Pro forma 0.18 0.18 (0.53)
</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
F-20
<PAGE>
GEERLINGS & WADE, INC.
Notes to Financial Statements
December 31, 1999
(Continued)
deductions. A total of 50,000 shares of common stock have been reserved
for purchase under the Purchase Plan. As of December 31, 1998 and 1999,
a cumulative total of 14,252 shares and 20,243 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, 1997, 1998 and 1999, the
Company's contribution expense was $56,500, $31,500 and $36,600,
respectively, under the Plan.
(10) Related Party
During 1999, the Company paid Hill, Holiday approximately $1,305,000 for
services provided in the development and enhancement of its websites and for
certain advertising services. The Chief Executive Officer of Hill, Holiday
is a member of the Company's Board of Directors. The Company believes these
transactions are at arm's length basis.
F-21
<PAGE>
Exhibit 10.43
960 Turnpike Street
Canton, MA 02021
(781) 821-4152
December 14, 1999
Via Facsimile Federal Express
- -----------------------------
Mr. Jay Silverstein
Enviro-zyme International, Inc.
P.O. Box 169
Stormville Mountain Road
Stormville, NY 12582
Dear Mr. Silverstein:
Pursuant to the option to renew and extend the lease agreement dated
January 6, 1997 between Geerlings & Wade, Inc. ("Tenant") and Enviro-zyme
International, Inc. (the "Lease"), Tenant hereby renews and extends the Lease
for a period of three (3) years at the annual rent as defined in the Lease.
Please acknowledge acceptance of this exercise of the option to renew and extend
the Lease by signing and dating below and sending me back an original.
Please do not hesitate to call me at (781) 821-4152 ext. 3026 if you have
any questions.
Very truly yours,
/s/ David Pearce
David Pearce
Vice President and Chief
Financial Officer
Agreed and acknowledged by:
Enviro-zyme International, Inc.
/s/ Jay Silverstein 12/17/99
- ------------------- Date
Jay Silverstein
President
<PAGE>
ENVIRO-ZYME INTERNATIONAL, Incorporated
P.O. BOX 169
STORMVILLE, NEW YORK 12582
December 18, 1999
Mr. David Pearce
Vice President and Chief Financial Officer
Geerlings & Wade
960 Turnpike Street
Canton, MA 02021
Dear Mr. Pearce:
As per the lease agreement dated between Geerlings & Wade Incorporated
("Tenant") and Enviro-Zyme International, Incorporated ("Leasee") does hereby
accept the Tenants option to rent such lease. Furthermore, as per such lease,
item #1(b), states that the annual rent will be increased by the "cumulative
increase calculated by taking the increase in the New York/New Jersey Consumer
Price Index". From March l, 1997 through November 30, 1999 the Consumer Price
Index has risen 4.7%, which converts to an annual rent increase of $4,573.38.
The annual rent will be adjusted on March l, 2000 from $97,305.94 to
$101,879.32. The annual rent will be paid in 12 monthly installments of
$8,489.94. Please acknowledge your understanding and confirmation of this rent
increase no later than December 27, 1999.
Very truly yours,
/s/ Jay Silverstein
Jay Silverstein
President
JS/ts
<PAGE>
NORTH CAROLINA
GUILFORD COUNTY
Exhibit 10.44
LEASE AGREEMENT
WENDOVER BUSINESS PARK- PHASE I
THIS LEASE, is made the 1st day of November, 1999, by and WENGREEN,
LLC, (hereinafter referred to as "Landlord") and Geerlings & Wade, Inc.,
(hereinafter referred to as "Tenant"). Landlord hereby leases to Tenant and
Tenant leases from Landlord at the WENDOVER BUSINESS PARK, PHASE I, (hereinafter
referred to as the "Center"), Office/Warehouse space at 3408 M & N West Wendover
Avenue, Greensboro, NC as appears on the Site Plan referred to hereinafter.
CERTAIN LEASE PROVISIONS
1.0 TERM: Tenant is permitted use of the premises for a term of
Sixty-three (63) months commencing November 1, 1999 and ending at 12:00 midnight
December 31, 2004.
2.0 MINIMUM RENT: The Tenant covenants to pay Landlord, without
prior demand, and without deduction or setoff, the following sum, payable
monthly, in advance, of the first day of each month of the term of this Lease to
Landlord's agent at address in Item 6.0 below.
Annual Base Rent/Lease Term: $46,303(00/100 Dollars)
Year 1 - (February 1, 2000 - January 31, 2001) - $46,303.00
Year 2 - (February 1, 2001 - January 31, 2002) - $47,500.00
Year 3 - (February 1, 2002 - January 31, 2003) - $48,696.00
Year 4 - (February 1, 2003 - January 31, 2004) - $49,963.00
Year 5 - (February 1, 2004 - January 31, 2005) - $51,229.00
Base Rent/Monthly Installments: $3,858(58/100 Dollars)
3.0 SECURITY DEPOSIT: Tenant shall pay, at the commencement of this
Lease, a deposit in the amount of $3,858.52 to be held by Landlord as security
for any default hereunder.
4.0 PREMISES: The premises are 7,037 square feet; the Center is
67,982 square feet. See Article 2 of the Special Conditions attached hereto as
Exhibit D.
5.0 EXHIBITS AND ADDENDUMS: The Lease consists of 29 articles on
twelve (12) pages, plus Exhibits A (Plans and/or Specifications), B (Site Plan),
C (Rules & Regulations), and D (Special Conditions).
6.0 NOTICES: Notices sent pursuant to this Lease shall be
delivered personally, or
<PAGE>
by certified mail, return receipt requested, and addressed to:
IF TO LANDLORD: IF TO TENANT:
WENGREEN, LLC Geerlings & Wade, Inc.
c/o Insignia/ESG (Property Management) David Pearce, CFO
3348 Peachtree Road NE, Suite 900 960 Turnpike Street
Atlanta, GA 30326-1078 Canton, MA 02021
In witness whereof this Lease Agreement has been executed as of the date set for
the above.
Signed in the presence of: Lessor:
_________________________ WENGREEN, LLC, a Delaware limited liability
company
_________________________ By: BRG Properties, LLC, a Delaware limited
liability company
By: /s/ Sam Rosenwald (SEAL)
-------------------------
Its: Manager
Signed in the presence of: TENANT:
/s/ Gregg Kober Geerlings & Wade, Inc.
- --------------------------
- -------------------------- ---------------------------
By: /s/ Jay L. Essa
------------------------
ITS: President
DATE:_____________________
-2-
<PAGE>
NORTH CAROLINA
GUILFORD COUNTY
WENDOVER BUSINESS PARK - PHASE I
OFFICE/WAREHOUSE LEASE AGREEMENT
This Lease Agreement, made this 1st day of November 1999, by and
between WENGREEN, LLC (hereinafter referred to as "Landlord") and Geerlings &
Wade, Inc. (hereinafter referred to as "Tenant").
WITNESSETH:
----------
In consideration of the covenants and agreements hereinafter set out,
Landlord hereby leases and demises to the Tenant and Tenant leases from Landlord
on the terms, conditions and covenants hereinafter set forth:
1. UTILITIES & CLEANING SERVICES. Tenant shall promptly pay all gas,
water, electricity, fuel, light, heat and power bills and all other charges and
deposits in connection with such utilities and shall pay for cleaning Services
used for the premises, or any premises used by Tenant in connection therewith.
Tenant shall pay all charges for garbage collection services or other sanitary
services rendered to the leased premises. If Tenant does not pay the same,
Landlord may pay the same and such payments shall be added to the rental of the
premises. Landlord shall not be liable for any interruption whatsoever in
utility services.
2. USE. The premises shall be used as office/warehouse or distribution
facility for the retail sale of alcoholic beverages and other related Products
for consumption off premises as allowed in Light Industrial zoning per
Greensboro zoning ordinance and for no other purpose. The premise shall not be
used for any illegal purposes, nor in violation of any regulation of any
governmental body, nor in any manner to increase the rate of insurance on the
premises.
3. MAINTENANCE BY LANDLORD. Tenant shall accept the premises upon
completion of construction as set forth in Article 29 herein. Landlord shall at
its expense maintain only the roof, foundation, and the structural soundness of
the exterior walls (excluding all windows, window glass, plate glass, special
store front, and all doors) of the building in good repair and condition, except
for reasonable wear and tear and except for repairs rendered necessary by the
negligence of Tenant, its agents, employees to invitees. Landlord further agrees
to care for the grounds around the building, including the mowing of grass, care
of shrubs and general landscaping and to maintain the parking areas, driveways
and alleys. Tenant shall make reasonable effort to give immediate written notice
to Landlord
-3-
<PAGE>
of the need for repairs of corrections (which are the responsibility of the
Landlord), and failure to report such defects shall make Tenant responsible to
Landlord for any liability incurred by Landlord by reason of such defects.
Landlord shall proceed with reasonable diligence to make such repairs or
corrections. But it is expressly understood and agreed that Landlord shall not
be liable to Tenant for any damage it may sustain to its merchandise or
equipment in or on the demised premises unless such damage is caused by the
willful negligence of the landlord or its agents and the Landlord's liability
hereunder shall be limited to the cost of such repairs or corrections.
-4-
<PAGE>
4. MAINTENANCE BY TENANT. Tenants shall at its own expense keep all
other parts of the premises (including but not limited to windows, glass and
plate glass, doors, any special store front, interior walls and finish work,
floors and floor covering, gutters, heating and air conditioning systems, dock
bumpers and plumbing work and fixtures) in good order and repair except those
repairs expressly required to be made by Landlord. Tenant accepts the lease
premises in their present condition and as suited for the uses intended by
Tenant and agrees to return said premises to Landlord at the expiration or prior
termination of the Lease Agreement and all renewals thereof in as good condition
and repair as when first received, natural wear and tear, damage by storm, fire,
lightning, earthquake, or other casualty alone excepted. In the event Tenant
should neglect reasonably to maintain the demised premises, Landlord shall have
the right (but not the obligation) to cause repairs or corrections to be made.
Any reasonable costs therefore shall be payable by Tenant to Landlord as
additional rental on the next rental installment date. Tenant agrees to maintain
and pay for a maintenance contract for the heating and air conditioning system
serving the premises. Such contract must provide that upon cancellation, written
notice of the same shall be given to Landlord by both parties and shall include
at least semi-annual service for the filters, motor and belts. Tenant agrees to
provide Landlord at all times with a copy of the then currently effective
service contract. If Tenant properly maintains the heating and air conditioning
system, Landlord shall replace the compressor, fan motor, housing or heat
exchanger of said equipment if necessary.
5. ALTERATIONS. Tenant shall not make any major alterations,
additions, or improvements to the premises without the prior written consent of
the Landlord. Tenant may, without the consent of the Landlord but at its own
cost and expense and in a good workmanlike manner, make such minor alterations,
additions, or improvements or erect, remove or alter such partitions, or erect
such shelves, bins, machinery and trade fixtures as it may deem advisable
without altering the basic character of the building or improvements and without
overloading or damaging such building or improvement and in each case complying
with all applicable governmental laws, ordinances, regulations, and other
improvements.
At the termination of this Lease, Tenant shall, if Landlord so elects, remove
all alterations, additions, improvements and partitions erected by Tenant and
restore the premises to their original condition; otherwise such improvements
shall be delivered to Landlord with the premises. All shelves, bins, machinery
and trade fixtures installed by Tenant will be removed by Tenant at the
termination of this Lease, provided Tenant is not in default. All such removals
and restoration shall be accomplished in a good workmanlike manner so as not to
damage the primary structure or aesthetic qualities of the building or other
improvements situated on the premises.
6. FIRE OR OTHER CASUALTY. In the event that before or during the
term of this lease, the Premises shall be damaged by fire of other casualty
which in the opinion of Landlord does not render the premises or a part thereof
untenantable and
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which shall not have been occasioned by the act of Tenant of or its servants,
agents, visitors, invitees or licensees, Landlord with at its option (subject to
the other provisions of this Article 6) repair the same with reasonable dispatch
upon receipt of written notice of the damage from Tenant and there shall be no
abatement of the rent.
In the event that before or during the term of this lease the premises of the
Building shall be damaged by fire or other casualty which in the opinion of the
Landlord renders the Building, the premises or any part of the Building of
premises untenantable and which shall not have been occasioned by the act of
Tenant or of its servants, agents, visitors, invitees or licensees, Landlord
within thirty (30) days written notice of such fire or casualty or of receipt of
written notice from Tenant of such damage (whichever shall last occur) shall
have the right to and shall either (i) serve written notice upon tenant of
Landlord's intent to repair said damage or (ii) if in Landlord's opinion said
damage renders so much of either of the premises or of the Building untenantable
that repair would not be feasible, serve written notice upon Tenant that this
lease is terminated. If landlord shall elect to repair such damage, during the
period of repair the total amount of the rent shall be reduced to an amount
which in Landlord's opinion bears the same ratio as the portion of the premises
then available for use bears to the entire premises. Upon completion of such
repair, the rent shall thereafter be paid as if no fire or other casualty had
occurred.
In the event that before or during the term of this lease the premises of the
Building shall be damaged by fire or other casualty which shall have been
occasioned by the act of Tenant or of its servants, agents, visitors, invitees
of licensees there shall be no apportionment of abatement of the rent and
without prejudice to any other rights and remedies of Landlord and without
prejudice to any rights or subrogation of any insurer of Landlord, Landlord
shall have the right but shall have no obligation to repair the premises or the
Building and Tenant shall reimburse and compensate Landlord within five (5) days
of rendition of any statement to Tenant by Landlord for any expenditures made by
Landlord in making any such repairs.
The other provisions of this Article 6 notwithstanding, Landlord shall have no
obligation to replace or repair any property in the Building of on the premises
belonging to Tenant or to anyone claiming through or under Tenant nor shall
Landlord have any obligation hereunder to replace or repair any property on the
premises which landlord may require Tenant to remove from the premises.
7. INSURANCE AND INSURANCE RATES. Tenant shall carry fire, casualty
and liability insuring its interest, if any, in improvements to or in the
premises and its interest in its office furniture, equipment, supplies, store
front glass, and other property and Tenant hereby waives any claim or right of
action which it may have against Landlord for loss or damage covered by such
insurance except in the case of Landlord's gross negligence, and Tenant
covenants and agrees that it will obtain a
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<PAGE>
waiver from the carrier of such insurance releasing such carrier's subrogation
rights as against Landlord. (See Article 14 for further insurance requirements.)
Tenant shall not do or cause to be done or permit on the premises or in the
Building anything deemed hazardous on account of fire, and Lessee shall not use
the premises of the Building in a manner which will cause an increase in the
premium rate for any insurance in effect on the Building of a part thereof. If,
because of anything done, the premium rate for any kind of insurance in effect
on the Building or any part thereof shall be raised, Tenant shall pay Landlord
the amount of any such increase in premium rate, and if Landlord shall demand
that Tenant remedy the condition which caused any such increase in an insurance
premium rate, Tenant shall remedy such condition within five (5) days after
receipt of such demand.
If after the commencement date of this Lease, the insurance premiums incurred by
Landlord shall exceed the premium for such insurance for the first full lease
year of the term hereof, Tenant shall pay to Landlord on demand Tenant's
proportionate share of such increase, calculated in the same manner as
Impositions in Article 15 herein below, and the failure to pay such
proportionate share upon demand shall be treated in the same manner as a default
in the payment of rent.
8. ASSIGNMENTS AND SUBLETTING. Tenant may not assign, pledge, transfer
or sublet the premises or any part thereof without having first obtained the
prior written consent of Landlord. Landlord acknowledges and consents to
Tenant's assignment of this Lease as a result of a merger between Liquid
Acquisition Corp. announced on September 28, 1999 in which Geerlings & Wade
survives as a wholly-owned subsidiary of Liquid Holdings, Inc. Any such
assignment, pledge, transfer, or subletting shall not release Tenant from the
performance of any of the terms, covenants and conditions of this lease.
9. DEFAULT BY TENANT. The following events shall be deemed to be
events of default by Tenant under this Lease:
A. Tenant shall fail to pay any installment of the rent on the date
that same is due and such failure shall continue for a period of ten (10) days.
B. Tenant shall fail to comply with any term, condition, or covenant
of this Lease, other than the payment of rent and shall not cure such failure
cannot be thirty (30) days after written notice thereof to Tenant, or, if such
failure cannot be reasonably cured within the said thirty (30) days, Tenant
shall not have commenced to cure such failure within said thirty (30) days and
shall not thereafter with reasonable diligence and good faith proceed to cure
such failure.
C. Tenant shall become insolvent, shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
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D. Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or statute of the
United States or any State thereof; of Tenant shall be adjudged bankrupt of
insolvent if proceedings filed against Tenant thereunder.
E. A receiver or trustees shall be appointed for all or substantially
all of the assets of Tenant.
10. REMEDIES. Upon the occurrence of any of such events of default
described in Article 9 above, Landlord shall have the option to pursue any one
of more of the following remedies without any notice or demand whatsoever:
A. Terminate this Lease, in which event, Tenant shall immediately
surrender the premises to Landlord, and, if Tenant fails to so, Landlord may
without prejudice to any other remedy which it may have for possessions of
arrearages in rent, enter upon and take possession of the premises and expel or
remove Tenant and any other person who may be occupying such premises or any
part thereof, by force if necessary, without being liable for prosecution or any
other claim of damages therefor; and Tenant agrees to pay to Landlord on demand
the amount of all loss and damage which Landlord may suffer by reason of such
termination, whether through liability to relet the premises on satisfactory
terms or otherwise.
B. Enter upon and take possession of the premises and expel or remove
Tenant and any other person who may be occupying such premises or any part
thereof, by force if necessary, without being liable for prosecution of any
claim for damages therefor, and relet the premises and receive the rent therefor
and apply the rental first to the cost of preparing the property for reletting
and to the cost of reletting, if any; and Tenant agrees to pay to the Landlord
on demand any deficiency that may arise by reason of such reletting.
C. Enter upon the premises, by force if necessary, without being
liable for prosecution of any claim for damages for damages therefor, and do
whatever Tenant is obligated to do under the terms of this Lease; and Tenant
agrees to reimburse Landlord on demand for any expense which Landlord may incur
in thus effecting compliance with Tenant's obligations under this Lease; and
Tenant further agrees that Landlord shall not be liable for any damage resulting
to the Tenant for such action.
Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies herein provided or any other remedies provided by law,
nor shall pursuit of any remedy herein provided constitute a forfeiture of
waiver of any amounts due to Landlord hereunder or of any damages occurring to
Landlord by reason of the violation of any of the terms, provisions, and
covenants herein contained. No waiver by
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Landlord of any violation or breach of any of the terms, provisions, and
covenants herein contained shall be deemed or construed a waiver of any other
violation or breach of any of the terms, provisions and covenants herein
contained. Landlord's acceptance of rental or other payments hereunder after the
occurrence of an event of default shall not be construed as a waiver of such
default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord
to enforce one or more of the remedies herein provided upon an event of default
shall not be deemed or construed to constitute a waiver of default. If, on
account of any breach or default by Tenant in Tenant's obligations under the
terms and conditions of this Lease, it shall become necessary or appropriate for
Landlord to employ or consult with an attorney concerning Landlord's rights or
to enforce or defend any of Landlord's rights of remedies hereunder, Tenant
agrees to pay attorneys' fees and expenses. No act or thing done by the Landlord
or its agents during the term hereby granted shall be deemed an acceptance of
the surrender of the premises, and no agreement to accept a surrender of said
premises shall be valid unless in writing signed by Landlord. The receipt by
Landlord of rent with knowledge of the breach of any covenant or other provision
contained in this Lease shall not be deemed or construed to constitute a waiver
of any other violation or breach of any of the terms, provisions, and covenants
contained herein.
11. LATE CHARGES. Tenant shall be liable for and Landlord may collect
a late charge of Five percent (5%) of any monthly installment of rent or other
sums due hereunder in the event Tenant should fail to pay the same within ten
(10) days after the date that such installment is due. Such charge to be in
addition to and not in lieu of any other remedy of Landlord hereunder.
12. SIGNAGE. No sign, advertisement or notice shall be inscribed,
painted or affixed on any part of the outside of the building, doors of offices,
or any area of the Center, except as approved by Landlord. Door signs and signs
on front of building will be at the expense of the Tenant and shall be of the
size, color, and style as the Landlord shall determine, and written approval
must be obtained in advance from the Landlord. All signs will be uniform in
style and type.
13. ENTRY BY LANDLORD. Landlord and its authorized agents shall have
the right, but not the duty, to enter with reasonable notice to Tenant the
demised premises during normal working hours for the following purposes: (1)
inspecting the general conditions and state of repair of the premises; (2)
making of repairs required by Landlord; (3) showing of the premises to any
prospective purchaser; (4) any other reasonable purpose. If Tenant shall not
have renewed or extended this Lease prior to the final one hundred twenty (120)
day period of the Lease term, Landlord and its authorized agents shall have the
right to erect on or about the demised premises a customary sign advertising the
property for lease or sale. During said one hundred twenty (120) day period
Landlord and its authorized agents shall have the right to enter
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the demised premises during normal working hours for the showing of the
premises to prospective tenants or purchasers.
14. INDEMNITY The Tenant agrees to indemnify and save harmless the
Landlord from and against any and all claims and demands whether from injury to
person, loss of life, of damage to property, occurring within the leased
premises. Tenant shall furnish Landlord, upon execution of this Lease, a
certificate of Legal Liability Insurance having limits not less than $500,000
combined single limits, Fire Legal Liability Insurance not less than $100,000,
shall name the Landlord as an additional insured, and shall have insurer to
notify Landlord of change of cancellation of said policy a minimum of thirty
(30) days prior to cancellation. A copy of the policy or a certificate of
insurance shall be delivered to Landlord.
15. TAXES. Tenant shall pay, as additional rental, Tenant's
proportionate share of any increase in assessments or charges (hereafter
sometimes call "Impositions") paid or incurred by Landlord during each calendar
year for public betterments or improvements, ad valorem taxes, real estate
taxes, or any other tax on rents or real estate as such (other than income taxes
thereon) from time to time directly or indirectly assessed or imposed upon the
building (a) and/or the portion of the land upon which it is situated to the
extent such impositions exceed those paid or incurred by Landlord during the
"base year". The "base year" for the purposes of this paragraph shall be the
calendar year in which this Lease commences.
Tenant's proportionate share of the increase in said impositions
shall be computed by multiplying the total increase in said impositions for the
applicable year over those for the base year, if any, by a fraction, the
numerator of which shall be the number of square feet herein above stated to be
the approximate area of the premises and the denominator of which shall be the
total square feet of floor space within the Center.
The amount, if any, obtained as result of such computation for the
first calendar year following the base year shall be paid to Landlord within
thirty (30) days as additional rent pursuant to this subparagraph, the amount of
such payment shall be divided by twelve (12) and the quotient resulting from
such division shall be added to the monthly rental installments to be paid by
Tenant during each month of the next ensuing calendar year commencing with the
partial payment due on January 1st of each such calendar year. In the event the
total additional rent paid monthly pursuant to this paragraph is less than the
Tenant's proportionate share of any increase in impositions for any year, then
Tenant shall pay the deficiency to Landlord within thirty (30) days after
receiving a statement thereof from Landlord and the minimum rental installments
being paid monthly shall be adjusted as above provided.
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If the term of this lease shall end on a date other than the first
or last day of a calendar year, the final annual charges to Tenant with respect
to the aforesaid impositions shall be prorated on a daily basis on the basis of
a three hundred sixty-five (365) day calendar year.
The foregoing provisions to the contrary notwithstanding, it is
understood and agreed that any and all assessments or charges for public
betterments or improvements, ad valorem real estate taxes or other taxes on
business or personal property or any other tax on real estate or business or
personal property as such from time to time directly or indirectly assessed or
imposed upon or with respect to any alterations, additions or improvements made
to the premises by Tenant or under its direction or with respect to any property
of Tenant therein shall be borne and paid entirely by Tenant shall reimburse
Landlord for the same immediately upon receipt by Tenant of written demand
thereof from Landlord.
16. COMMON AREA MAINTENANCE. Landlord has provided at its cost,
water, sewer and electricity into the premises and has provided telephone
service connections to the rear of the premises. Tenant shall pay as additional
rent a monthly common area maintenance charge which will be used for payment of,
but not limited to: landscape maintenance, and electricity for common area
lighting. For the term of the lease, Tenant shall pay its prorata share of
common area maintenance and utilities estimated for that year. The Tenant's
prorata share shall be defined as the ratio of the number for that year. The
Tenant's prorata share shall be defined as the ratio of the number of square
feet in the leased premises to the number of square feet in the Center (67,982
square feet). Estimated expenses shall be derived from a Common Area Budget for
the Center to be prepared and made available by Landlord before December 15 of
the year preceding the year to be estimated. Landlord estimates the common area
maintenance charge for the first lease year to be $.32 per square foot.
On or after the 15th day of January of each year, or if the figures are not
available on said date, then as soon thereafter as the information is readily
available, Landlord shall make adjustment by notifying the Tenant in writing of
Tenant's prorata share (as defined above) of any surplus or deficit comparing
the previous year's Common Area Budget for the Center with actual common area
expenditures. If a surplus has occurred, Tenant's pro rata share of such surplus
shall be credited against future common area payments due from Tenant until much
credit is discharged. If a deficit has occurred, Tenant's prorata share of such
credit is discharged. If a deficit has occurred, Tenant's prorata share of such
deficit shall be payable to the Landlord as additional rent within thirty (30)
days after notification and documentation showing calculation of such deficit
are presented to Tenant.
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Should the lease begin on a day other than January 1, or end on a
day other than December 31, the above adjustment shall be prorated on a 365
day per year basis.
For the purpose of this adjustment, this paragraph shall survive the
termination of this lease, for as long as necessary for such adjustment to be
made.
17. HOLDING OVER. If Tenant shall continue to occupy the premises
after expiration or sooner termination of this Lease, Tenant shall pay, as
liquidated damages, for each month of continued occupancy an amount equal to
one and one-half times the rent being paid for the last full month of the
Lease term. No receipt of money by the Landlord from Tenant after expiration
or termination of this Lease shall reinstate or extend this Lease or affect
any prior notice given by Landlord to Tenant.
18. CONDEMNATION.
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A. If the whole or any substantial part of the premises should be
taken for any public or quasi-public use under governmental law, ordinance,
or regulation, or by right of eminent domain, or by private purchase in lieu
thereof, this Lease shall terminate effective when the physical taking of
said premises shall occur and Tenant shall have no right to any portion of
the condemnation award except as reimbursement for Tenant's fixture or
leasehold improvements and Tenant will no longer owe rent after termination.
B. If less than a substantial part of the premises shall be taken
for any public or quasi-public use under any governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu,
thereof, this Lease shall not terminate but a just proportion of the rent shall
abate, such just proportion to be in the same proportion to the total rent as
the value of the premises taken bears to the aggregate total value of the entire
premises as finally determined in the condemnation proceedings. but, if there be
no determination of total value, then the just proportion of the rent to abate
shall be determined on a basis that is fair and reasonable under all of these
circumstances.
19. SUBORDINATION. Tenant's rights shall be subject to any bona fide
mortgage or deed to secure debt which is now, or may hereafter be, placed
upon the premises by Landlord. If any mortgagee or holder of any such
security instrument shall so require, Tenant will, at any time hereafter, on
demand, execute and deliver any instruments, releases, or other documents
which may be required by any mortgagee or security instrument holder for the
purpose of subjecting and subordinating this lease to the lien and/or
security title of any such mortgage, deed to secure debt, or similar security
instrument. Within ten (10) days after request therefor by Landlord, Tenant
shall furnish to Landlord a statement detailing the status of rental
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payments upon the Lease, setting forth the fact that landlord is not in default
in the performance of the Lease on his part to be performed, if such be the
case, or detailing any default by Landlord, if such be claimed by Tenant. If
Tenant fails to comply with such request, Landlord shall have the right to
submit such requested documents in Tenant's name and same shall have the same
force and effect as if Tenant has sent them.
20. MECHANIC'S LIENS. Tenant shall have no authority, expressed or
implied, to create or place any lien or encumbrance of any kind or nature
whatsoever upon, or in any manner to bind, the interest of Landlord in the
premises or to charge the rentals payable hereunder for any claim in favor of
any person dealing with Tenant, repairs, and each such claim shall affect and
each such lien shall attach to, if at all, only the leasehold interest granted
to Tenant by this instrument. Tenant covenants and agrees that it will pay or
cause to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
premises on which any lien is or can be validly and legally asserted against its
leasehold interest in the premises or the improvements there of and that it will
save and hold Landlord harmless from any and all loss, cost or expenses based on
or arising out of asserted claims or liens against the leasehold estate or
against the rights, titles, and interest of the Landlord in the premises or
under the terms of this Lease.
21. QUITE ENJOYMENT. Landlord agrees that Tenant, keeping and
performing the covenants herein contained on the part of Tenant to be kept and
performed, shall at all times during the term of this Lease peaceably and
quietly have, hold, and enjoy the leased premises.
22. PARTIAL INVALIDITY. If any term, covenant, condition or provision
of this Lease is held by a court of competent jurisdiction to be invalid, void,
or unenforceable, the remainder of the provisions hereof shall remain in full
force and effect and shall in no way be affected, impaired or invalidated
thereby.
23. SUCCESSORS. Except as otherwise specifically provided, the terms,
covenants and conditions contained in this Lease shall apply to and bind the
heirs, successors, executors, administrators, and assigns of the parties to this
Lease.
24. NOTICES. Any notice given pursuant to this Lease shall be in
writing and sent by certified mail to the respective party at an address set
forth above for such party, or such other address as may be designated by such
party by notice.
25. PRIOR AGREEMENTS. This Lease instrument contains the entire
understanding and agreement of the parties, and any previous agreements in
regard to the premises, whether oral or in writing, are hereby rescinded,
canceled and rendered
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null and void. This Lease cannot be modified, unless said modification is
reduced to writing and signed by both parties.
26. ATTORNMENT. Tenant shall attorn to any successor to Landlord's
interest in the Center, whether the succession is by sale, foreclosures,
deed-in-lieu of foreclosure, assignment or otherwise, and shall purchaser an
offset statement and an Estoppel certificate if requested by Landlord, and in
the event Tenant fails to deliver hereby constitutes and appoints Landlord as
Tenant's attorney-in-fact to execute said statement and certificate.
27. ATTORNEY'S FEES. In the event Landlord intervenes in or becomes
a party or is made a party to any action or proceeding arising in connection
with this Lease in order to protect its rights, then Tenant shall pay to
Landlord the fees of Landlord's attorneys therein as fixed by the court.
28. CONSTRUCTION. Construction, if any, to be completed by Landlord
will be in accordance with the plans, specifications, and agreements approved by
both parties. Landlord will not be obligated to construct or install any
improvements or facilities of any kind other than those called for on the Plans
And/Or Specifications attached hereto as Exhibit A. Tenant agrees that Landlord
may make any changes to such Plans And/Or Specifications which may become
reasonably necessary or desirable, other than substantial changes, without the
written approval of Tenant. Landlord agrees to commence and complete such
construction with reasonable diligence. If Tenant, it's contractors or labor
cause delay in Landlord's completion of the work pursuant to Plans And/Or
Specifications, thereby delaying Tenant's occupancy of the Leased premises shall
be deemed "substantially completed" when Landlord has completed the work
contemplated in the Plans and Specifications to the extent that only minor
details of construction and mechanical adjustments remain to be done in the
Leased premises and that the elevators, if any, plumbing, heating or air
conditioning, and electric facilities are substantially available to Tenant.
Upon delivery of the Leased premises into Tenant's possession, Tenant, by
occupying the same, shall be deemed to (a) have accepted the Leased premises, b)
have acknowledged that Landlord has completed the work required of it in
accordance with the Plans and Specifications, and that the same are in condition
called for hereunder, and (c) have agreed that Landlord is not then in default
of any of its obligations under this Article. All such improvements are to be
the property of the Landlord, and upon termination of this Lease, Tenant shall
deliver the Leased premises to Landlord in good condition and repair, broom
clean, normal wear and tear excepted.
29. SPECIAL PROVISIONS.
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A. Time is of the essence.
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B. Tenant shall provide blinds at glass front of space leased by
Tenant ("Levelor" or equal) to be installed upon occupancy. (Color to match
aluminum store front.) Or, if it is agreed, nothing will be put in front of
glass. If Tenant does not install blinds, Landlord shall have the option to
provide same, at Tenant's expense, in order that all spaces shall conform.
C. Tenant Improvements: Landlord shall provide 30 tons of HVAC
installed, new paint, carpet, VCT in restrooms, rubber base, and mini blinds
only after the premises have been approved for licensing by the appropriate
governmental authorities.
D. Permit Period: Tenant shall have ninety (90) days following the
date of full execution hereof to obtain any and all necessary licenses and
permits from the appropriate authorities (the "Licenses"). If Tenant is unable
to obtain said Licenses within this ninety (90) day period, Tenant may request
and, upon a showing that all required Licenses have been applied for and
diligently pursued, shall be granted a thirty (30) days extension. If for any
reason Tenant is unable to obtain the required Licenses and Permits within the
ninety (90) day period (or 120 day period if so extended) then Tenant may
terminate this Lease in which event neither Party shall have any further
obligation to the other but, Landlord shall retain the Deposit as a termination
fee. Notwithstanding any Provisions hereof, Tenant's obligation to pay rent
hereunder shall commence on the Rent Commencement Date.
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WENDOVER BUSINESS PARK - PHASE I
Exhibit A - Floor Plan
To Office/Warehouse Lease
BETWEEN WENGREEN, LLC, LANDLORD
AND GEERLINGS & WADE, INC., TENANT
See Attached Plans And/Or Specifications of Suite #3408 M & N
Which Includes all of Landlord's obligations.
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CHARLES & COMPANY
Greensboro, NC 27419
Telephone: (336) 349-4654
Fax: (336) 6l6-lll9
P.O. Box 49237
Wine Distributor (old American Racing)
3408 -N Wendover Ave.
Greensboro N.C. 27407
Carpet 12 X 75 $1075.
Cove Base 196.
Remove Carpet 75.
Patch Walls 75.
Paint Unit 650.
Paint Trim, Doors 175.
New Min, Blinds 2500.
Electrical 4 rec, 2 sw 300.
VCT. Flooring Baths 250.
Paint Bathrooms 150.
Lights 1 case 85.
Electrical Covers 25.
Clean Unit 250.
Tint Door, Panel 185.
Total $5806.00
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Naylor Heating And Air Conditioning
P.O. Box 19795
Greensboro. NC 27419
Tel. (336) 668-9517
Pager (336) 316-7871
Equipment Installation Proposal
Customer: Job Location:
Weaver, Grubar, & Black 3408 W. Wendover
Attn: Lydia Whitley
Date: 08/31/99
We respectfully submit the following specifications and estimates for Install
(3) Trane 10 Ton gas package units with concentric duct lay out. Provide gas
piping and electrical.
Guarantee with all systems operating that space will not rise above 73
degrees providing that doors and windows are not opened frequently and/or
left open 1 Year parts and labor limited warranty
We offer to furnish materials and labor and complete the above in accordance
with the above specifications for the sum of:
Dollars ($30,000.00)
Payments as follows: _60% Upon Rough, Remainder upon completion. _________
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All material is guaranteed to be as specified. All work to be completed in a
workmanlike manner according to standard practices. Any alterations or
deviation from the above specifications involving extra cost will be charged
as an extra cost over and above the cost of the estimate. All agreements
contingent upon the suppliers ability to provide materials as quoted,
accidents, and delays beyond our control. Owners to carry fire and other
necessary insurance. Our workers are fully covered by workman's compensation
insurance.
Authorized Signature:_____ John Naylor____________
Offer May Be Withdrawn If Not Excepted Within _____ Days
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Acceptance: the above prices, specifications and conditions are satisfactory
and are hereby accepted. You are authorized to do the work as specified.
Payment will be as outlined above.
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Name:_____________________ Signature:________________ Date:_______
Name:_____________________ Signature:________________ Date:_______
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WENDOVER BUSINESS PARK - PHASE I
Exhibit B - Site Plan
To Office/Warehouse Lease
BETWEEN WENGREEN, LLC, LANDLORD
AND GEERLINGS & WADE, INC., TENANT
*See Attached Site Plan
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WENDOVER BUSINESS PARK
[SITE PLAN]
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WENDOVER BUSINESS PARK- PHASE I
Exhibit C - Rules and Regulations
To Office/Warehouse Lease
BETWEEN WENGREEN, LLC, LANDLORD
AND GEERLINGS & WADE, INC., TENANT
Tenants use of the premises and the common areas surrounding the
premises shall be subject at all times during the term of this Lease to
reasonable rules and regulations adopted by Landlord not in conflict with any of
the express provisions hereof governing the use of the parking areas, driveways,
passageways, signs, exteriors of buildings, lighting and other such matters
affecting other tenants in and the general management and appearance of the
premises. Tenant agrees to comply with all such rules and regulations upon
notice to Tenant from Landlord. Tenant expressly agrees as follows:
1. The sidewalks, entries, passages, and stairways shall not be
obstructed by the Tenant or its agents, or used by them for any purpose other
than ingress and egress to and from their premises.
2. Truck traffic shall be allowed in the service areas only for
pickup and delivery.
3. Garbage and refuse shall be kept in the kind of container
specified by Landlord and shall be placed at the location within the premises
designated by Landlord, for collection at the times specified by Landlord.
Tenant shall store soiled or dirty linen in approved fire rated containers.
4. Tenant shall keep the premises at a temperature sufficiently high
to prevent freezing of water in pipes and fixtures.
5. The outside areas immediately adjoining the premises shall be
kept clean and free from snow, ice, dirt and rubbish by Tenant and Tenant shall
not place, suffer or permit and obstruction or merchandise in such areas.
6. Tenant shall not use the public or common areas in the premises
for business purposes.
7. Plumbing facilities shall not be used for any other purpose than
that for which they are constructed and no foreign substance of any kind will be
thrown therein.
8. It is the Tenant's responsibility and obligation to contract with
a pest exterminator to remove any pests which are found within the demised
premises.
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9. If Tenant desires blinds or window coverings of any kind, the
same must be of such shape, color and materials as prescribed by Landlord and
shall be erected with Landlord's consent but at the expense of Tenant. No awning
shall be placed on said buildings. No radio or television serial or other device
shall be erected on roof or the exterior walls of the building in which the
premises are located. No, radio phonograph, or similar device shall be used in a
manner so as to be heard or seen outside the premises.
10. The Tenant shall have cleaned, at their expense, not less than
semiannually, the carpet that has been provided by the Landlord for Tenant's
use, utilizing the cleaning company normally employed by the Landlord to do this
work.
11. The Tenant shall not perform or permit any act nor carry on or
permit any practice which may damage, mar or deface the premises or any other
part of the premises.
12. Tenant shall not place a load on any floor in the premises
exceeding the floor load limit which such floor was designed to carry nor shall
Tenant install, operate or maintain in the premises any heavy item or equipment
except in such manner as to achieve a proper distribution of weight. Landlord
acknowledges and approves the use of a forklift on the floor, and the storage of
wine on the same floor.
13. Tenant shall not install, operate or maintain in the premises or
in any other area of the premises any electrical equipment which does not bear
the underwriter's approval, or which would overload the electrical system or any
part thereof beyond its capacity for proper and safe operation as determined by
Landlord.
14. No additional lock or locks shall be placed by the Tenant on any
door in the building unless written consent of the Landlord shall first be
obtained. Each Tenant must, upon the termination of the within Lease, return all
keys to suites and mechanical rooms to the offices of the Landlord.
15. The use of oil, gas or inflammable liquids for heating,
lighting, or any other purpose in expressly prohibited. Explosives or other
articles deemed extra hazardous shall not be brought into the building. Vehicles
are not to be stored in the buildings.
16. The Landlord shall at all times have the right by its officers
or agents to enter with reasonable notice the demised premises to inspect and
examine the same and to show the same to persons wishing to lease, purchase, or
mortgage them.
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WENDOVER BUSINESS PARK - PHASE I
Exhibit D - Special Conditions
BETWEEN WENGREEN, LLC, LANDLORD
AND GEERLINGS & WADE, INC., TENANT
1. "PHASE I" AND "PHASE II" ISSUE. Prior to September 8, 1999, the
aforementioned "PHASE I" "PHASE II" was owned by separate entities.
On September 8, 1999 the Landlord purchased both PHASE I and
PHASE II of the Center and the separate ownership merged under the
single ownership of the Landlord. For purposes of continuity the
separate designation of PHASE I and PHASE II will initially be
maintained in this Lease and this PHASING ISSUE shall be subject to
the provisions of Article 2 below.
2. LANDLORD'S RIGHT TO COMBINE PHASE I WITH PHASE II.
Due to the recent merging of the ownership entities of PHASE I and
PHASE II, the Landlord is hereby reserving unto itself the right, at
some time in the future, to commence accounting for expenses on an
aggregated basis (combining PHASE I with PHASE II). Currently the
existing leases are written on the basis of PHASE I and PHASE II
only. In the future, at the election of the Landlord, the Landlord
may combine the two PHASES into one for the purposes of combining
the total expenses and computing each Tenant's proportionate share
while utilizing the greater square footage as the new denominator.
In that event, PHASE I which currently contains 67,950 square feet
(and is shown as Buildings 3408 and 3410 on Exhibit B attached
hereto) and PHASE II which currently contains 80,140 square feet
(and is shown as Buildings 3400, 3402 and 3404 on Exhibit B attached
hereto) will be combined. The total square footage of both PHASES is
148,090. For the purposes of this Lease, this change, if and when
instituted, will impact the following:
(1) The term Center as used throughout this Lease will refer
to the new total square footage of 148,090 and not to the
above referenced respective square footages of PHASE I and
PHASE II;
(2) The Tenant's proportionate share of increases for Insurance
and Real Estate taxes will then be computed using the new
total square footage of 148,090 as the denominator of a
fraction and the numerator of which shall be the number of
square feet herein above stated to be the approximate area of
the Premises. This newly formed fraction would be applied to
any Insurance
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increase in excess of the premium for such Insurance for the
first full lease year of the term hereof;
(3) The Tenant's proportionate share of increases for Common
Area Maintenance will then be computed by using the new
total square footage of 148,090 as the denominator of a
fraction and the numerator of which shall be the number of
square feet herein above stated to be the approximate area
of the Premises. This newly formed fraction would be applied
to the Common Area Budget for the Center.
3. INTERRUPTION OF UTILITIES. The last sentence of Article 1 states
"Landlord shall not be liable for any interruption whatsoever in
utility services". Due to the nature of Tenants business, it is a
condition of this Lease that the Landlord install additional Heating
Ventilation & Air Conditioning equipment to heat and cool the
balance of the Premises. Further to the above referenced sentence
concerning interruption of utility services. Tenant is placed on
notice that:
(1) the Landlord specifically states it is not now nor will it be
in the future liable for the interruption of utility services
whether it is the provision of (and shall not to be limited
to) water, electricity, sewer, telephone, storm water
drainage or any other utility or service now provided or
provided in the future;
(2) the electric service is provided by Duke Power and that any
concerns that the Tenant may have in regards to the
interruption of electrical services should be addressed with
Duke Power directly;
(3) the Tenant may want to consider the installation of a
portable generating system to provide electricity in the
event electric services are in fact interrupted.
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Exhibit 10.45
The Naughton Company
3 Summer Street
Hingham, MA 02043
617-740-1222
COMMERCIAL/INDUSTRIAL STANDARD LEASE
This Indenture of Lease made this 16th day of February, 2000 by Foxford Business
Center, LLC (Norfolk County, Massachusetts, (hereinafter called "Lessor") and
Geerlings & Wade, Inc. (hereinafter called "Lessee".)
Witnesseth that
In consideration of the rent and covenants herein set forth and contained, on
the part of Lessee to be paid, performed and observed, Lessor does hereby demise
and lease unto Lessee approximately 25,000 square feet of floor area which shall
include 12,932 square feet of office area within the Building (the "Building",
which term shall be construed to mean the Building as originally constructed and
expanded) on 960 Turnpike Street, Canton, MA 02021 which Lot and Building are
shown on Exhibit A attached hereto and made a part hereof, and which floor area
is shown on Exhibit A, said premises being crosshatched in Red on Exhibit A
hereinafter called the "Premises", together with the right to use in common with
Lessor and others from time to time entitled, the appurtenances to the Building
and Lot, including the right to use the driveways and parking area adjacent to
the Building.
To have and to hold the Premises for a term of 5 year(s) beginning on October 1,
2000 and terminating on September 30, 2005, unless sooner terminated as herein
provided.
ARTICLE I
Payment of Rent
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Lessee covenants and agrees with Lessor to pay as rent during the term hereof
and so long thereafter as Lessee or anyone claiming under Lessee occupies the
Premises;
1.1 A fixed rental at the annual rate of $ 250,000.00 during the term hereof,
said rental to be payable in equal installments of $20,833.00 in advance on the
first day of each month of the term, and at that rate for any fraction of a
month beginning of any term, any fraction payable with respect to a portion of a
month at the beginning of the term to be paid on the Commencement Date. Rental
installments not received by the fifth day of the respective month(s) are
subject to the highest interest rate allowed by law.
1.2 Lessee shall pay all utility charges directly to the entity charged with
the collection thereof. Lessee shall pay its proportionate share of taxes,
betterment assessments, insurance costs and maintenance costs with respect to
the Demised Premises as provided in this Section 1.2 as follows:
1.2.1 Lessee shall pay, as additional rent to Lessor, Lessee's proportionate
share of taxes levied or assessed or becoming payable for or in respect to the
Lot on which the Building of which the Premises are a part is located, and the
Building and other improvements located on the Lot, for each tax period included
in the term at the beginning and end thereof, Lessee's proportionate share of
the fraction of such taxes which is allocable to such included period.
If at any time during the term, under the Laws of the United States or any State
or political subdivision thereof in which the Premises are situated, there shall
be adopted some other method of taxation on real estate as a substitute in whole
or in part for taxes on real estate as now constituted, such as tax on the fixed
rent, additional rent or the other charges payable by Lessee hereunder by
whatever name called, which is levied, assessed or imposed against Lessor or the
rent or other charges payable hereunder to Lessor, (which substitute tax on the
fixed rent, additional rent, or other charges or other substitute method of
taxation are hereinafter collectively referred to as "Substitute Taxes"),
Lessee, to the extent that such Substitute Taxes are means of raising revenue
from or with respect to the Premises, shall pay Substitute Taxes as soon as the
same shall become due and payable. In the event that any such Substitute Taxes
shall be based upon the income of Lessor, then Lessee's obligation with respect
to the
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aforesaid Substitute Taxes shall be limited to the amount thereof as computed at
the rates that would be payable if the same were the sole taxable net Income of
Lessor but without deduction or provision for any deductions, exemptions or
credits to which Lessor may be entitled in computing the tax, Lessor would so
bear on account of the fixed rent, additional rent or other charges then due or
thereafter becoming due from Lessee for the taxable period under the terms of
this Lease, all as if Lessor were not entitled to any such deductions,
exemptions or credits. Provided, however, that the taxation of Lessor's income
by the United States and the Commonwealth of Massachusetts, presently referred
to as the "Federal Income Tax" and "State Income Tax" or similar methods of
taxation are not intended to be herewith applicable and are specifically
excluded.
1.2.2 Lessee shall pay to Lessor Lessee's proportionate share of each
installment of any public, special or betterment assessment levied or assessed
or becoming payable for or in respect of the Lot or Building, or both for each
installment period wholly included in the term, and for any fraction of an
installment period included in the term at the beginning or end thereof,
Lessee's proportionate share of the fraction of such installment allocable to
such included period; provided only in the case of each respective assessment
that Lessor shall have elected to pay such assessment in installments over the
longest period permitted by law and not otherwise.
1.2.2.1. If Lessee deems itself aggrieved by any tax or assessment as to which
Lessee is required to pay LESSEE'S proportionate share under Section 1.2.1 or
1.2.2 hereof, Lessee may at Lessee's expense, without delaying the payment of
such proportionate share, seek an abatement thereof, and Lessor shall cooperate
with Lessee to the extent reasonably necessary to enable Lessee to do so. If
such abatement is granted, Lessee's proportionate share of such taxes and
assessments shall be adjusted accordingly.
All taxes levied on the personal property of Lessee, including but not limited
to pallets or skids, fork lift trucks or other hoisting equipment, etc., shall
be the obligation and be paid by Lessee whether the same is assessed to Lessee
or Lessor and whether the same shall be considered part of the realty or
personalty and further that Lessee agrees to indemnify and hold harmless the
Lessor from any loss, damage, debt or claim resulting therefrom.
1.2.3 Lessee shall as additional rent, on the first day of each month of the
term, make tax fund payments to Lessor. "Tax Fund payments" refer to such
payments, as Lessor shall reasonably determine to be sufficient to provide in
the aggregate a fund adequate to pay Lessee's proportionate share of all tax and
assessments referred to in subsection 1.2 when they become due and payable.
Lessor shall on or before the last day on which the same may be paid without
interest or penalty, pay to the proper authority charge with the collection
thereof all taxes and assessments referred to in said subsection 1.2.1 and
1.2.2, provided that Lessee shall have made the aforesaid tax fund payments. If
the aggregate of said tax refund payments is not adequate to pay Lessee's
proportionate share of all said taxes and assessments, Lessee shall pay to
Lessor the amount by which such aggregate is less than the amount equal to
lessee's proportionate share of all said taxes and assessments, such payment to
be made on or before the later of (a) 10 days after receipt by Lessee of written
notice from Lessor of such amount, or (b) the 30th day prior to the last day on
which such taxes and assessments may be paid without interest or penalty. Any
balance remaining after such payment by Lessor shall be accounted for to Lessee
annually. The amount of the monthly tax payments shall equal 1/12 of lessee's
proportionate share of the prior year's tax plus, 10% of said 1/2 of prior
year's payment.
1.2.4 Lessee shall pay to Lessor in advance on the first day of each month, in
equal monthly installments, Lessee's proportionate share of the cost to Lessor
of taking out and maintaining throughout the term of this Lease the following
insurance protecting Lessor:
1.2.4.1 Fire Insurance and extended perils on an All Risk Basis in an amount at
least equal to the replacement cost of the Building, and insurance for Loss of
rents, protecting the Lessor against abatement or loss of rent in an amount
equal to at least all rent and additional rent payable for one year under this
Article 1.
1.2.4.2 Comprehensive liability insurance indemnifying Lessor and Lessee
against all claims and demands for any injury to person or property which may be
claimed to have occurred on the Premises or on the sidewalks or ways adjoining
the Premises, in amounts which shall, at the beginning, of the term, be not less
than $1,500,000 for property damage, $1,500,000 for injury or death of one
person, and $1,500,000 for injury or death of more than one person in any single
accident, and, from time to time during the term, shall be, in such higher
amounts, if any, as are customarily carried in the metropolitan Boston area on
property similar to the Premises and used for similar purposes.
1.2.4.2a Lessee shall obtain, at Lessee's own expense, similar Comprehensive
Liability Insurance, protecting Lessee from all claims and demands for any
injury to person or property which may be claimed to have occurred on the Leased
Premises, as well as any sidewalks or ways adjoining the Premises, such
insurance to indemnify the Lessor as well as the Lessee.
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1.2.4.3 Lessee shall obtain insurance against loss or damage from sprinklers,
and if applicable, from leakage or explosion or cracking of boilers, pipes
carrying steam) or water, or both, pressure vessels or similar apparatus, in the
so-called "broad form", and in such amounts as Lessor may reasonably require.
Also insurance against such other hazards as may from time to time be required
by any bank, insurance company or other lending institution holding a first
mortgage on the Premises, provided that such insurance is customarily carried in
the Metropolitan Boston area on property similar to the Premises and used for
similar purposes.
1.2.4.3a Lessor and Lessee should maintain Business Interruption Insurance in
amounts adequate to protect their individual interest.
1.2.4.4 Policies for insurance required under the provisions of Section 1.2.4.1
and 1.2.4.3 shall, in case of loss, be first payable to the holders of any
mortgages on the Premises and shall be deposited with the holder of any mortgage
or with Lessor, as Lessor may elect.
1.2.4.5 All insurance which is carried by either party with respect to the
Premises, whether or not required; if either party so requests and it can be so
written, and if it does not result in additional premium, or if the requesting
party agrees to pay any additional premium, shall include provisions which
either designate the requesting party as one of the insured or deny to the
insurer acquisition by subrogation of rights of recovery against the requesting
party to the extent such rights have been waived by the insured party prior to
occurrences of loss or injury. The requesting party shall be entitled to have
duplicates or certificates of any policies containing such provisions. Each
party hereby waives all rights of recovery against the other for loss or injury
against which the waiving party is protected by insurance containing said
provision, reserving, however, any rights with respect to any excess of loss or
injury over the amount recovered by such insurance. Lessee shall not acquire as
insured under any insurance carried on the Building any right to participate in
the adjustment of loss or to receive insurance proceeds and agrees upon request
promptly to endorse and deliver to Lessor any checks or other instrument in
payment of loss in which Lessee is named payee.
1.2.5 Lessee shall pay to Lessor in advance on the first day of each month, in
equal monthly installments, Lessee's proportionate share for maintenance costs
incurred with respect to the Building, the common facilities therein, and the
Lot. Such costs shall include, without limitation, the cost of keeping all
surface driveways, parking and loading areas within the Lot in good repair and
reasonably free of ice and snow,(snow plowing is billed separately, and in
addition to the monthly charge) of maintaining in good condition all lawns and
planted areas within the Lot and of keeping the exterior Building reasonably
neat and clean. Under no circumstances will Lessee store, keep, or temporarily
place any pallets, equipment (with the exception of approved dumpster in
approved location), fixtures, or other objects outside Lessee's demised
premises. In the event Lessee does not immediately remove same, Lessor may, at
Lessor's discretion remove same and such removal will be charged by Lessor to
Lessee, and will be due immediately from Lessee upon receipt of Lessor invoice.
No dormant vehicles shall be left on the property.
1.2.6 Lessor has or will cause to be installed separate gas and electric meters
to serve the Premises exclusively. Lessee shall pay directly to the proper
authorities charged with the collection thereof of all charges for the
consumption of utilities and other services on the Premises, whether called
charge, tax, assessment, fee or otherwise, including, without limitation, water
and sewer use and charges and taxes, if any, all such charges to be paid as
the same from time to time become due.
1.2.7 The term Lessee's "Proportionate Share" as used herein shall mean that
proportion which 25,000 square feet bears to the total ground floor area of the
Building.
ARTICLE II
Additional Covenants of Lessee
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Lessee further covenants and agrees:
2.1 To keep the Premises, including without limitation, both the inside and
outside of all doors and windows therein, in the same order and repair as they
are in on the Commencement Date, reasonable wear and damage by fire or casualty
only excepted; and to keep all fixtures and equipment on the Premises,
including, without limitation, all heating, plumbing, electrical, air
conditioning, mechanical fixtures, and equipment serving only the Premises in
the same order and repair as they in on the Commencement Date, damage by fire or
casualty only excepted; and to make all repairs and replacements and to do all
other work necessary for the foregoing purposes. It is further agreed that the
exception of reasonable use and wear shall not apply so as permit Lessee to keep
the Premises in anything less than suitable, tenant-like and efficient and
usable condition considering the nature of the
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Premises and the use reasonably made thereof, or in less than good and tenant-
like repair, and that except in case of fire there is no exception to the rule
that all glass must be kept good by Lessee. Lessee shall also make all repairs
to the Building, (including, without limitation, the structure and roof thereon
and common areas therein) and the Lot; if the same are occasioned by Lessee's
improper or untenantlike use thereof. Lessee's interior repairs should not
include the outer walls, roof, or structural repairs. However, the Lessee shall
be obligated to compensate Lessor for repairs to the exterior walls, roof or
structural repairs only if such repairs are necessitated by the intentional acts
or negligence of Lessee, its agents, invitees or employees and if such repairs
are not reimbursable by insurance carriers. Lessee shall in no way permit any
roof penetrations, additions or work of any type to the exterior, roof membrane,
or structural components of building without express written consent of Lessor.
Lessor shall maintain and repair the exterior, roof, common areas and structural
elements of the Building, as well as the Building systems, in good condition,
and Lessee shall pay its proportionate share of the cost of such maintenance and
repairs (except that Lessor shall not be obligated to make repairs which are
necessitated by Lessee's improper or untenantlike use thereof).
2.2 To assume exclusive control of the Premises, and the adjacent sidewalks
serving exclusively the Premises, if any, and all tort liabilities incident to
the control or leasing thereof, and to save the Lessor harmless from all claims
or damage arising on account of any injury or damage to any person or property
on Premises or sidewalks, or ways adjacent thereto, or otherwise resulting from
the use and maintenance and occupancy of the Premises or any thing or facility
kept or used thereon. Lessor shall be saved harmless by Lessee from any
liability on account of any accident or injury to Lessee, or to any of Lessee's
servants, employees, agents, visitors or licensees, or to any person or persons
in or about the Premises or said adjacent sidewalks or ways adjacent thereto.
All merchandise, furniture, fixtures, effects and Property of every kind, nature
and description of Lessee and of all persons claiming through or under Lessee,
except as herein otherwise provided, which may be on the Premises during the
continuance of this Lease or any occupancy by Lessee thereof, shall be at the
sole risk and hazard of Lessee, and if the whole or any part thereof shall be
destroyed or damaged by fire, water or otherwise, or by the leakage or bursting
of water pipes, steam pipes or other pipes, by theft or from any other cause, no
part of said loss or damage is to be charged to or be borne by Lessor.
Notwithstanding any provision of this Lease, Lessor shall in no event be
indemnified or held harmless or exonerated from any liability to Lessee, or to
any person, for any injury, loss, damage or liability arising from any omission,
fault, negligence or other misconduct of Lessor or its agents or employees on or
about the Premises or on or about any stairways, hallways or other
appurtenances, including sidewalks, used in connection with the Premises and not
within the exclusive control of Lessee.
2.3 Not to assign or sublet this Lease without first obtaining on each occasion
the consent in writing of Lessor and to reimburse Lessor promptly for reasonable
legal expenses incurred by Lessor in connection with any request by Lessee for
such consent.
Lessee may, without Lessor's consent, assign this Lease to a corporation owning
a, controlling interest in the voting capital stock of Lessee, to a corporation
into which Lessee is merged provided such corporation assumes in writing all of
Lessee's obligations hereunder, or sublet to a subsidiary corporation of which
Lessee owns a majority of the voting stock. No assignments or subletting shall
in any way impair the continuing primary liability of Lessee hereunder, and no
consent to any assigning or subletting in a particular instance shall be deemed
to be a waiver of the obligation to obtain the Lessor's approval in the case of
any other assignment or subletting.
2.4 To conform to and comply with all state and municipal laws and with all
requirements of any public body or officers having jurisdiction of the Premises
and with the requirements or regulations of any Board of Fire Underwriters or
Insurance company insuring the Premises at the time with respect to the care,
maintenance, manner of use and non-structural alteration of the Premises, all at
Lessee's own expense without reimbursement from Lessor.
2.5 To permit Lessor and Lessor's representatives to enter into and examine
the Premises and show them to prospective purchasers and mortgagees, and during
the six months prior to the expiration of the term to show them also to
prospective tenants and to keep affixed in suitable places notices for letting
and selling.
2.6 If Lessee shall at any time default in the performance of any Lessee
obligation under this Lease, Lessor, shall have the right, after first giving
Lessee ten (10) days written notice of such default (unless such default
endangers the Premises or Lessor's interest therein, in which case no such
notice shall be required), to perform such obligation notwithstanding the fact
that no provision for
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such substituted performance by Lessor is made in this Lease with respect to
such default. In performing such Lessee obligation, Lessor may make any
reasonable payment of money or perform any other reasonable act. All sums so
paid by Lessor and all necessary incidental costs and expenses in connection
with the performance of any such act by Lessor shall be deemed to be additional
rent under this Lease and shall be payable to Lessor immediately on demand.
Lessor may exercise the foregoing rights without waiving or releasing Lessee
from any of its obligations under this Lease.
2.7 Upon the expiration or other termination of the term of this Lease, Lessee
shall quit and surrender to Lessor the Demised Premises, broom clean, in good
order and condition, ordinary wear expected, and Lessee shall remove all of its
property, including at Lessor's request, any alterations or additions made by
Lessee. Lessee's obligations to observe or perform this covenant shall survive
the expiration or other termination of the term of this Lease. If the last day
of the term of this Lease or any renewal thereof falls on Sunday, this Lease
shall expire on the business day immediately proceeding. If Lessor elects to
treat Lessee as a holdover for a further term of one year, any concession of
rent or agreement in respect of decorations or the like in the initial term
shall not apply to such holdover term. Rent during such holdover term shall be
twice the amount paid during the last preceding term.
2.8 Lessee further covenants and agrees:
(a) To use the Premises for:
Office and warehouse functions as they relate to the wine
distribution industry not involving the emission of objectionable
odors, fumes, noise or vibration, and for no other use, and from
time to time to procure all licenses and permits necessary
therefore.
(b) Not to make or permit any alterations or additions to the Premises
without prior written consent of Lessor which shall not be
unreasonably withheld.
(c) To use reasonable diligence to prevent Lessee's employees and
customers and other persons visiting the Premises from using any
street abutting the Lot for parking.
(d) Not to permit the use of the Lot for trucking of the character and
volume greater than that customarily employed by other occupants
of or any use permitted under clause (a) of this Section 2.8 for
which trucking of such character and volume is customary. So far
as possible, truck loading and unloading shall be carried on at
parts of the Building not facing on any abutting street.
(e) Not to place on the Premises any placard or sign of advertising
that the Premises or any part thereof may be sublet. Not to place
any other sign or placard on the Premises which is visible from
the exterior of the Premises without the written consent of
Lessor.
(f) Not to place on the Premises any draperies, venetian blinds,
curtains or similar furnishings visible from the exterior of the
Premises without the written consent of Lessor.
(g) Not to injure, overload, deface or permit to be injured,
overloaded or defaced, the Building, and not to permit any holes
to be made in the outside stone or brickwork, of any awnings to be
placed on or suspended from the Building except such and in such
places as Lessor shall in writing first approve; and not to make,
allow or suffer any waste or any unlawful, improper or offensive
use of the Premises or any occupation or unoccupied space thereof
that shall be injurious to any person or property or invalidate
any insurance on the building or increase the premium thereof.
2.9 Lessee agrees from time to time, upon not less than fifteen (15) days prior
written request by Lessor, to execute, acknowledge and deliver to Lessor a
statement in writing certifying that this Lease is unmodified and in full force
and effect and that Lessee has no defenses, offsets or counterclaims against its
obligations to pay the fixed and additional rent and any other charges and to
perform its other covenants under this Lease (or, if there have been any
modifications that the same is in full force and effect as modified and stating
the modifications and, if there are any defenses, offsets, or counterclaims,
setting them forth in reasonable detail), and the dates to which the fixed and
additional rent and other charges have been laid. Any such statement delivered
pursuant to this Section 2.9 may be relied upon by any prospective purchaser or
mortgagee of the Premises, Building and Lot or one or more of them, or any
prospective assignee of any such mortgage.
<PAGE>
ARTICLE III
Damage or Destruction by Eminent Domain, Fire or Casualty
---------------------------------------------------------
3.1 In the event that the Premises, or any material part thereof, shall be
taken by any public authority or for any public use, or shall be destroyed or
damaged by fire or unavoidable casualty, or by the action of any public
authority, then this Lease may be terminated at the election of Lessor. Such
election shall be made by the giving of written notice by Lessor to Lessee
within thirty (30) days after the right of election accrues. If by such taken
Lessee is deprived of the use of more than thirty percent (30%) of the floor
area of the Premises, or if by such fire or other casualty more than fifty
percent (50%) of the floor area shall be rendered untenantable, or if the
Premises are so damaged as to create a material risk that Lessee's property will
be subject to loss, and if Lessor does not within a reasonable time after notice
from Lessee commence and diligently pursue repairs sufficient to protect
Lessee's property, Lessee may at its option terminate this Lease by notice in
writing to Lessor within thirty (30) days after the date of such damage or
destruction, or within thirty (30) days after it has received notice of such
taking, as the case may be. If Lessee exercises such option, this Lease shall
terminate, in the case of a taking, when the Lessee is required to vacate such
portion of the Premises, and in the case of such damage or destruction, on that
date designated in its notice of termination, which shall be not less than
fifteen (15) nor more than thirty (30) days after the date of such notice.
3.2 If this Lease is not terminated pursuant to the provisions of Section 3.1,
this Lease shall continue in force and a just proportion of the rent reserved,
according to the nature and extent of the damages, sustained by the Premises,
shall be suspended or abated until the Premises, or what may remain thereof,
shall be put by Lessor in proper condition for use, which Lessor covenants to do
with reasonable diligence and subject to zoning and building laws then in
existence. Notwithstanding the foregoing sentence, if Lessor shall not have
restored the Premises in proper condition for use and in the same condition the
Premises were in immediately before such fire, or taking (subject to alterations
required by such a taking and which are reasonably acceptable to Lessee) within
such 150 day period, then Lessee on not less than 5 days' prior notice to Lessor
may terminate this Lease, in which event the date of termination set forth in
such notice shall be deemed to be the expiration date of the term hereof. In
the case of a taking, which permanently reduces the floor area of the Premises,
the rent shall be abated for the remainder of the term in proportion to the
amount by which the floor area has been reduced.
3.3 Irrespective of the form in which recovery may be had by law, all rights to
damages or compensation shall belong to Lessor in all cases, except for damages
to Lessee's fixtures, property or equipment, provided that the same shall not
reduce the damages or compensation which Lessor would otherwise recover. Lessee
hereby grants to Lessor all of Lessee's rights to such damages and covenants to
deliver such further assignments thereof as Lessor may from time to time
request.
ARTICLE IV
Default
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4.1 (a) If Lessee shall default in the performance of any of its obligations
set forth in Article I hereof, and if such default shall continue for ten (10)
days after written notice from Lessor to Lessee specifying any other default or
defaults, Lessee has not commenced diligently to correct the default or defaults
so specified or has not thereafter diligently pursued such correction to
completion, or (b) if any assignment shall be made by Lessee for the benefit of
creditors, or (c) If the Lessee's leasehold interest shall be taken on
execution, or (d) a petition is filed by Lessee for adjudication as a bankrupt,
or for reorganization or an arrangement under any provision of the Bankruptcy
Act as then in force and effect, or (e) any involuntary petition under any of
the provisions of the said Bankruptcy Act is filed against Lessee and such
involuntary petition is not dismissed within thirty (30) days thereafter, then
and in any of such cases Lessor may lawfully, immediately or at any time
thereafter, and without further notice or demand, and without prejudice to any
other remedies either enter into and upon the Premises or any part thereof, in
the name of the whole, or mail a notice of termination addressed to Lessee at
the Premises, and upon such entry or mailing, this Lease shall terminate, cease
and be at an end. In the event that this Lease is terminated under any of the
foregoing provisions contained in this Article IV, or otherwise for breach of
Lessee's obligations hereunder, Lessee covenants to pay forthwith to Lessor as
compensation the excess of the total rent reserved for the residue of the term
over the fair rental value of the Premises for said residue. This covenant shall
run with the land and in calculating the rent reserved there shall be included
the value of all other considerations agreed to be paid or performed by Lessee
for such residue of the term, and Lessee further covenants as an additional and
cumulative obligation after any such ending to pay punctually to Lessor all the
sums and perform all the obligations which Lessee covenants in this Lease to pay
and to perform in the same manner and to the same extent and at the same times
as if this Lease had not been terminated. In calculating the amounts to be paid
by Lessee under the foregoing covenant, Lessee shall be credited with any amount
actually paid to Lessor as compensation as hereinbefore provided and also with
any additional rent actually obtained by Lessor by reletting the Premises, after
deducting the expenses of collecting the same.
Nothing therein contained shall, however, limit or prejudice the right of Lessor
to prove for and obtain in proceedings for bankruptcy or insolvency or
arrangement with creditors as liquidated damages by reason of such determination
an amount equal
<PAGE>
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amounts referred to
above. The term "Lessee" as used in this Article IV shall be deemed to include
the Guarantor, if any, of Lessee's obligations hereunder.
ARTICLE V
Miscellaneous
-------------
5.1 Any consent or permission by Lessor to any act or omission which otherwise
would be a breach of any covenant or condition herein, or any waiver by Lessor
of the breach of any covenant or condition herein, shall not in any way be held
or construed (unless expressly so declared) to operate so as to impair the
continuing obligation of any covenant or condition herein, or otherwise, except
as to the specific instance, operate to permit similar acts or omissions.
5.2 Lessee agrees at the request of Lessor to subordinate this Lease to any
mortgage placed upon the Premises, the Building and the Lot or any one or more
of them by Lessor, provided that the holder of such mortgage enters into an
agreement with Lessee binding upon the successors and assigns of the parties
thereto by the terms of which such holder agrees not to disturb the possession
and other rights of Lessee under this Lease so long as Lessee continues to
perform its obligations hereunder and in the event of acquisition of title by
said holder through foreclosure proceedings or otherwise, to accept Lessee as
Lessee of the Premises under the terms and conditions of this Lease and to
perform the Lessor's obligations hereunder (but only while owner of the
Premises), and Lessee agrees to recognize such holder or any other person
acquiring title to the Premises as Lessor.
Lessee and Lessor agree to execute and deliver any appropriate instruments
necessary to carry out the agreements in this section 5.2 contained. Any such
mortgage to which this Lease shall be subordinated may contain such terms,
provisions and conditions, as the mortgagor deems usual or customary.
5.3 It is agreed that the agreements and conditions in this Lease contained on
the part of Lessee to be performed and observed shall be binding upon Lessee and
its successors and assigns and shall inure to the benefit of Lessor and its
successors and assigns, and the agreements and conditions in this Lease
contained on the part of Lessor to be performed and observed shall be binding
upon Lessor and its successors and assigns and shall inure to the benefit of
Lessee and its successors and assigns. If at any time or times during the term
Lessor shall be the trustee of a trust, Lessee agrees that only the trust estate
of Lessor shall be liable for the performance of Lessor's obligations hereunder,
and that in no event shall any trustee or beneficiary of such trust be
individually liable hereunder, and Lessee further agrees that the Lessor named
herein and subsequent Lessor shall be liable hereunder only for obligations
accruing while owner of the Premises. No holder of a mortgage of the Lessor's
interest shall be deemed to be the owner, of the Premises until such holder
shall have acquired indefeasible title to the Premises, Lessor warrants that it
is lawfully in possession of the Premises and that it has full right and lawful
authority to execute this Lease for the term, in the manner and upon the
conditions and provisions herein contained.
5.4 Brokerage Lessee warrants that it has had no dealings with broker or agent
in connection with the Lease and covenants to defend with counsel approved by
Lessor, hold harmless and indemnify Lessor from and against any and all cost,
expense or liability for any compensation, commission and charges claimed by any
broker or agent with respect to Lessee's dealings in connection with this Lease
or the negotiation thereof.
5.5 Lease not to be Recorded Lessee agrees that it will not record this Lease.
Both parties shall, upon the request of either, execute and deliver a notice or
short form of this Lease in such form, if any, as may be permitted by applicable
statute. If this Lease is terminated before the term expires, the parties shall
execute, deliver and record an instrument acknowledging such fact and the actual
date of termination of this Lease, and Lessee hereby appoints Lessor its
attorney-in-fact in its name and behalf to execute such instrument.
5.6 Acts of God In any case where either party hereto is required to do any
act, delays caused by or resulting from Acts of God, war, civil commotion, fire
or other casualty, labor difficulties, shortages of labor, materials or
equipment, government regulations or other causes beyond such party's reasonable
control shall not be counted in determining the time during which work shall be
completed, whether such time, be designated by a fixed date, a fixed time or "a
reasonable time".
5.7 Severability It is agreed that if any provision of this Lease shall be
determined to be void by any court of competent jurisdiction, then such
determination shall not affect any other provision of this Lease, all of which
other provisions shall remain in full force and effect; and it is the intention
of the parties hereto that if any provision of this Lease are capable of two
<PAGE>
constructions, one of which would render the provision void and the other of
which would render the provision valid, then the provision shall have the
meaning which renders it valid.
5.8 Submission Not an Option The submission of this Lease or a summary of some
or all of its provisions for examination does not constitute a reservation of or
option for the Premises, or an offer to lease, it being understood and agreed
that this Lease shall not bind Lessor in any manner whatsoever until it has been
approved and executed by Lessor and delivered to Lessee.
5.9 Security Lessee has deposited with Lessor the sum of 20,833.00 as
security for the faithful performance and observance by Lessee of the terms,
provisions and conditions of this Lease; it is agreed that in the event Lessee
defaults in respect of any of the terms, provisions and conditions of this
Lease, including but not limited to, the payment of rent and additional rent,
Lessor may use, apply or retain the whole or any part of the security so
deposited to the extent required for the payment of any rent and additional rent
or any other sum as to which Lessee is in default or for any sum which Lessor
may expend or may be required to expend by reason of Lessee's default in respect
of any of the terms, covenants, and conditions of this Lease, including but not
limited to, any damages or deficiency accrued before or after summary
proceedings or other reentry by Lessor. In the event that Lessee shall fully
and faithfully comply with all of the terms, provisions, covenants, and
conditions of this Lease, the security shall be returned to the Lessee after the
date fixed as the end of the Lease and after delivery of entire possession of
the Demised Premises to Lessor. In the event of a sale of the land and building
or leasing of the building, of which the Demised Premises form a part, Lessor
shall have the right to transfer the security to the vendee or Lessee and Lessor
shall thereupon be released by Lessee from all liability for the return of such
security; and Lessee agrees to look to the new Lessor solely for the return of
said security; and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Lessor. Lessee further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Lessor nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
ARTICLE VI
Quiet Enjoyment
---------------
It is agreed that Lessee paying the rent reserved and performing and observing
the agreements and conditions herein on its part to be performed and observed,
shall and may peaceably and quietly have, hold and enjoy the Premises during the
term hereof without any manner of hindrance or molestation from Lessor.
ARTICLE VII
Notices
-------
All notices for Lessor shall be addressed to Lessor at 3 Summer St., Hingham, MA
02043 or to such other place as may be designated by written notice to Lessee;
and all notices for Lessee shall be addressed to Lessee at: 960 Turnpike St.,
Canton, MA 02021 or to such other places as may be designated by written notice
to Lessor. Any notice shall be deemed duly served if addressed to the
respective party as aforesaid and mailed postage prepaid registered or certified
mail, recognized overnight carrier, or delivered by hand. Unless otherwise
directed in writing all rents shall be payable to Lessor at the Lessor's address
above stated.
ARTICLE VIII
Status
------
8.1.1 Lessor represents that plumbing, heat, air-conditioning, and the electric
system are in good repair and working order at the commencement of the Lease,
and that the Premises are zoned for limited industrial use and may be used for
the use described in Section 2.8 hereof.
8.1.2 Lessor or, Lessor's agents have made no other representations or promises
with respect to the said Building, the land upon which it is erected or Demised
Premises except herein expressly set forth in the provisions of this Lease. The
taking of possession of the Demised Premises by Lessee shall be conclusive
evidence, as against Lessee, that Lessee accepts the Premises "as is" and that
said Premises and the building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken.
8.13 Lessor represents and warrants to Lessee that, to the best of Lessor's
knowledge, no part of the Building or the Lot are contaminated by a Hazardous
Substance (hereinafter defined). If, during the term hereof, Lessor knows that
there has been a spill
<PAGE>
or release of a Hazardous Substance, in, on or under any part of the Building
and/or the Lot, Lessor will give Lessee prompt written notice thereof, which
notice will provide Lessee with such information as Lessor possesses concerning
the nature and extent of such spill or release.
If, during the term hereof, Lessee knows that there has been a spill or release
of a Hazardous Substance in, on or under any part of the Building and/or the Lot
Lessee will give Lessor prompt written notice thereof, which notice will provide
Lessor with such information as Lessee possesses concerning the nature and
extent of such spill or release. As used herein, "Hazardous Substance" means
any product, substance, chemical, material or waste whose presence, nature,
quantity and/or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or combination with
other materials expected to be in the vicinity, is either: (a) potentially
injurious to the public health, safety or welfare, the environment or the
Premises; (b) regulated or monitored by any governmental authority having
jurisdiction over the Premises; or (c) a basis for potential liability of Lessor
to any governmental agency or third party under any applicable statute or common
law theory.
IN WITNESS WHEREOF, the LESSOR and LESSEE have hereunto set their hands and
common seals this 13th day of March 2000.
Foxford Business Center, LLC
- -------------------------------- __________________________________
(LESSOR) WITNESS
<PAGE>
/s/ John G. Naughton /s/ Paddy Moran
By: ---------------------------- ----------------------------------
John G. Naughton WITNESS
Geerlings & Wade, Inc.
- -------------------------------- ----------------------------------
(LESSEE) WITNESS
/s/ Jay L. Essa /s/ Gregg Kober
By: ---------------------------- ----------------------------------
WITNESS
President
Its: --------------------------- ----------------------------------
Duly Authorized
COMMONWEALTH OF MASSACHUSETTS
ss.
COUNTY OF _______________________________
______________, 20 ______
Then personally appeared ______________ to me known to be the individual who
acknowledged (her/him) self to be
the _____________________________ of __________________________________, LESSOR
and that (she/he), as such, being authorized to do so, executed and foregoing
instrument and acknowledge the execution thereof to be (her/his) free act and
deed for the purposes therein contained.
<PAGE>
IN WITNESS WHEREOF, I hereunto set my hand and official seal at Plymouth
County, ______________________________________________________ , Massachusetts,
this ________________________ day of _______________ , 20____________________.
Notary Public
_____________________________
My commission expires
COMMONWEALTH OF MASSACHUSETTS
ss.
COUNTY OF _____________________________________
, 20
Then personally appeared _____________________________ to me known to be the
individual who acknowledged (her/him) self to be the __________________________
of ______________________________, LESSEE and that (she/he), as such, being
authorized to do so, executed and foregoing instrument and acknowledge the
execution thereof to be (her/his) free act and deed for the purposes therein
contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal at Norfolk
County, ______________________________________________________ , Massachusetts,
this ________________________ day of _________, 20________________________.
Notary Public
------------------------------------
My commission expires _____________
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 1, 2000 (except with respect to Note 1, as to which the
date is February 22, 2000 and Note 5, as to which the date is March 28, 2000)
included in this Form 10-K, into the Company's previously filed Registration
Statements on Form S-8 File No. 333-85557, File No. 333-36741, File No.
333-45311 and File No. 333-65907.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 28, 2000
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<PAGE>
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