-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UzYOOaH87eXWqREdmhggAxSSOfOCxacL5rZmUtdXTUEu1j6hNFITmQRv2dOdnYkh rSsaPfDA+s6W7Ta7ez1QLQ== 0000927016-00-001099.txt : 20000331 0000927016-00-001099.hdr.sgml : 20000331 ACCESSION NUMBER: 0000927016-00-001099 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEERLINGS & WADE INC CENTRAL INDEX KEY: 0000922810 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 042935863 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24048 FILM NUMBER: 588583 BUSINESS ADDRESS: STREET 1: 960 TURNPIKE ST CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 6178214152 MAIL ADDRESS: STREET 1: 960 TURNPIKE ST CITY: CANTON STATE: MA ZIP: 02021 10-K 1 FORM 10-K 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. 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 - ------- 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 2 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 - ----------------- 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 3 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 4 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 - ------------------------------- 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. 5 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 - ------------- 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 6 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 - ---------------------------- 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 7 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 - ---------------------------------- 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 8 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 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 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 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 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.
Approximate ----------- FACILITY LOCATION SQUARE FOOTAGE EXPIRATION -------- -------- -------------- ---------- 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
* 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 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.
1998 1999 -------------------------- --------------------------- High Low High Low ------------ ------------ ------------ ------------- 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
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 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.
Years Ended December 31, -------------------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (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
As of December 31, ------------------ 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (in thousands) Balance sheet data: 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
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 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:
Years Ended December 31, ---------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 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) Years Ended December 31, ----------------------------------------------------------- Market 1995 1996 1997 1998 1999 - ------ ---------- --------- ---------- -------- -------- (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 ======= ======= ======= ======= =======
- --------------- (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 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 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 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 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 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 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 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 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.
EXHIBIT ------- NO. DESCRIPTION --- ----------- 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)
24
EXHIBIT ------- NO. DESCRIPTION --- ----------- 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)
25
EXHIBIT ------- NO. DESCRIPTION --- ----------- 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)*
26
EXHIBIT ------- NO. DESCRIPTION --- ----------- 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.
27
EXHIBIT ------- NO. DESCRIPTION --- ----------- 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
(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 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.
Signature Title Date - ------------------------------ -------------------------------- ----------------- /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
29 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 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 GEERLINGS & WADE, INC. Balance Sheets
DECEMBER 31, 1998 1999 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 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 GEERLINGS & WADE, Inc. Statements of Operations
YEARS ENDED DECEMBER 31, 1997 1998 1999 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 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 GEERLINGS & WADE, INC. Statements of Stockholders' Equity
Common Stock Additional RETAINED TOTAL Number of $0.01 Paid-in Capital EARNINGS STOCKHOLDERS' SHARES PAR VALUE (DEFICIT) EQUITY 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 ========= ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 GEERLINGS & WADE, INC. Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1997 1998 1999 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 $ - ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 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 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 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 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 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 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 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 1999 (Continued) A reconciliation of basic and diluted shares outstanding is as follows:
YEARS ENDED DECEMBER 31, 1997 1998 1999 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 ========= ========= =========
(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 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 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:
1997 1998 1999 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 $ - ========= ======== =========
Due to the uncertainty of the realization of its deferred tax assets, the Company has provided a valuation allowance. F-15 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:
1997 1998 1999 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 % ==== ==== ====
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 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 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 1999 (Continued) Activity under the Option Plan and Director Plan is summarized as follows:
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 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 ======== ===== ============= ====== ===== =============
F-18 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:
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) $ 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 ======= ===== ======= =====
The following table summarizes information about stock options outstanding and exercisable at December 31, 1999 under the Director Plan:
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) $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 ====== ===== ====== ======
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 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:
December 31, ------------------------------------------------------------- 1997 1998 1999 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%
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:
December 31, ----------------------------------------------- 1997 1998 1999 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)
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 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 EX-10.43 2 LEASE AGREEMENT BETWEEN GERLINGS & WADE AND ENVI 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 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 EX-10.44 3 LEASE AGREEMENT WENDOVER BUSINESS PARK 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 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- 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- 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- 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 -5- 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 -6- 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. -7- 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 -8- 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 -9- 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. -10- 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. -11- 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. ------------- 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 -12- 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 -13- 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. ------------------- A. Time is of the essence. -14- 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. -15- 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. -16- 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 -17- 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. _________ --------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------- 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. ---------------------------------------------------------------------------- Name:_____________________ Signature:________________ Date:_______ Name:_____________________ Signature:________________ Date:_______ -18- 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 -19- WENDOVER BUSINESS PARK [SITE PLAN] -20- 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. -21- 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. -22- 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 -23- 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. -24- EX-10.45 4 COMMERCIAL/INDUSTRIAL STANDARD LEASE 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 --------------- 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 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. 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 ------------------------------ 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 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 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. 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 ------- 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 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 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 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 /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. 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 _____________ EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,624,990 0 1,395,305 0 9,481,779 15,896,529 2,442,285 1,326,174 17,755,459 5,842,544 0 0 0 38,491 10,188,218 17,755,459 36,866,403 36,866,403 18,940,024 18,940,024 0 0 0 (1,494,471) 0 (1,494,471) 0 0 0 (1,494,471) (0.39) (0.39)
-----END PRIVACY-ENHANCED MESSAGE-----