-----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, Q8rrNpVfv9A2M+Oee3jV15g36p4damkqZygDJR4aweRAa2rVIdcO7PMHVUDuQyB5 Y2JAXQ8poN5IWSmIy71kcw== 0000927016-01-001625.txt : 20010409 0000927016-01-001625.hdr.sgml : 20010409 ACCESSION NUMBER: 0000927016-01-001625 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1588922 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 0001.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 to [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-24048 ---------------- GEERLINGS & WADE, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2935863 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 960 Turnpike Street Canton, 02021 Massachusetts (Zip Code) (Address of Principal Executive Offices) 781-821-4152 (Registrant's telephone number, including area code) ---------------- 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, par value $.01, 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 $7,229,888 on March 19, 2001. 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 19, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement relating to the registrant's 2001 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", "catalogs", "region studies" and "Huib Geerlings' letters," 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. The Company believes that it has developed a "Geerlings & Wade" image based on informative mailings and e-commerce websites, reliable wine recommendations, value pricing, ease of ordering and convenient delivery. 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. During 2000, the Company redesigned the appearance of geerwade.com and added functionality to enhance its usefulness for customers. In late spring of 2000, the Company commenced sending e-mails to its customers who have provided e-mail addresses to reinforce its mail promotions. Approximately 15% of the Company's sales in 2000 were transacted over the Internet by customers responding to offers e-mail or placing orders through one of the Company's websites. The Company seeks to comply with a myriad of applicable laws and regulations which govern the sale of wine on a federal, state and local level. The Company is required by law to operate licensed facilities or otherwise be permitted to sell wine 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 operates additional licensed facilities in Arizona, California, Colorado, Connecticut, Florida, Illinois, Michigan, Minnesota, New Jersey, New York, Ohio, Texas, Virginia, and Washington (state) and most recently opened a licensed facility in North Carolina 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 permit direct shipment of wine from out-of-state retailers, so the Company commenced shipping into Nevada in 1997 and into Louisiana in 1998. Residents of Alaska, New Hampshire, North Dakota and Rhode Island also began purchasing wine from the Company's 1 licensed facilities in 1999. The Company's active customers (customers who have made a purchase within the twelve preceding months) have decreased 7.4% from approximately 135,000 at December 31, 1999 to approximately 125,000 at December 31, 2000. All of the Company's revenues for each of the last three fiscal years have been generated from sales in the United States. 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 in the more traditional manner by placing orders with wholesalers. The Company has developed 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 independent 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 have 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 types), 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. In November 2000, the Company launched a new marketing program called "region studies" to further educate its customers about winemaking and the particular attributes of various winemaking regions around the world. These mailings are large format newsletters in which the Company discusses wine- related topics about a particular wine region and offer wines from that region. This program targets higher-end wine consumers in an effort to retain and build this segment of the Company's customer base. The Company has received positive feedback regarding these "region studies". Increasing Customer Access to Products. The Company offers its customers the convenience of ordering products in person or by telephone, facsimile, mail, e- mail, or the Internet, with delivery of each order directly to their home or office as quickly as possible to states in which the Company is permitted to ship wine. As of March 2001, the Company shipped from 16 facilities in 16 states. 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 between seven and eight times per year to acquire new 2 customers and build the list of repeat customers (the "house file"). Customers that purchase within the prior 12-month period are 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 one of Geerlings & Wade's founders and the chairman of the board, Huib Geerlings. The Company encourages its customers to respond to these e-mails by replying through e-mail or by placing orders on its e-commerce sites to reduce fulfillment and marketing 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. The Company encourages customers to use the order channel that suits their particular needs by making all channels accessible and user-friendly. Applying Computer Systems to Enhance Operations. The Company's software system, developed by Avexxis Corporation, 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. The Company has also developed a marketing and merchandising database that provides valuable information used to operate the business. In the fall of 2000 the Company began using software developed by Verbind, Inc. which is intended to assist the Company in becoming more directed in its approach to marketing and fulfilling its customers' needs. This software provides real-time analyses of customer behavior so that the Company can promptly respond with promotions based on the customer behavior. Utilizing E-commerce. The Company maintains three websites: geerwade.com (launched in 1998), WineBins.com (launched in 1999) and topwine.com (acquired as part of the Company's acquisition of Passort Wine Club in 1998). Geerwade.com features the Company's traditional wine offerings, enables customers to search the site and has real-time inventory management and shopping cart functionality. WineBins.com, which has the same features as geerwade.com, offers national wine brands to customers. Topwine.com offers continuity programs through which customers receive monthly shipments of wine. Through these websites, but primarily through geerwade.com, Internet revenue reached nearly $5,538,000, excluding shipping revenue, in 2000. Geerlings & Wade uses direct mail promotions to acquire new Internet customers, which historically have been the most effective and efficient means by which to acquire new customers. The Company plans to further develop and test customer acquisition programs using geerwade.com. The Company has advertised geerwade.com to its existing customers by including promotions in its house mailings, catalogs and e-mails. In 2000, new customers used geerwade.com to make their initial purchases at approximately the same rate as existing customers used the website to place orders. In 2000, the Company tested several online partnerships as a means to acquire new Internet customers. The Company plans to pursue other online partnerships and advertising on a limited basis in 2001 to acquire new Internet 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 and through active encouragement of referrals from existing customers. The Company believes that significant sales growth can be achieved by increasing its conversion rates of one-time buyers to multi-buyers and by retaining multi-buyers. The Company has taken steps to accomplish these objectives, including adding promotional pieces that address the demands of experienced wine consumers. Specifically, the Company launched the region study mailing series in November 2000, which offers a range of wines at different price points from a particular 3 winemaking region. Additionally, the Company has developed special promotional mail offers for new customers to encourage repeat purchases and convert these one-time buyers into frequent customers. The Company has also concentrated on integrating all of its marketing and order channels so that customers experience consistent branding and a high level of service through all channels. Finally, the Company strives to source the best wines available and believes it has met this challenge as evidenced by the 60 medals awarded to its wines over the last two years. Entering New Markets. Geerlings & Wade is licensed or otherwise authorized to sell wine to individual customers in 30 states, comprising approximately 82% of the overall United States market for table wines as of March 2001. Most recently in May 2000, the Company opened a retail facility in North Carolina. 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 and wines tasted during its selection process. Geerlings & Wade distributes primarily two types of promotional wine mailings: 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 marketing database 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 five 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. The Company mailed 18 separate brochure mailings to its customers in 2000. Not all customers receive each brochure mailing. Odds & Ends Mailings offer a large selection of previously featured or promoted wines. 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. 4 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 2000 holiday season, the Company mailed a letter from Huib Geerlings, one of the Company's founders and the chairman of the board, offering wines that recently were awarded medals to members and customers the Company had reason to believe would likely purchase some of these wines. These preferred offers, which typically are in the form of letters from Geerlings & Wade's chairman of the board, generate high responses from customers and enhance the personal touch of the Company's wine-selling service. The Company mailed 11 preferred customer mailings in 2000. Special Mailings. In 2000, Geerlings & Wade mailed special offers to its new customers to encourage repurchases and further familiarize customers with the benefits and services offered by the Company. The Company also maintains 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 four separate reactivation offers during 2000. Region Studies. In November 2000, the Company launched a marketing program called the "region study" series in the form of a newsletter to experienced wine consumers. Each region study profiles the unique attributes of a particular wine making region in the world. In these studies, the Company may focus on winemakers, climate as it relates to viticulture (the cultivation of grapes) and wine making, history, wineries, foods and wines of that region. The Company mailed two region studies 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 1.3 cases per order on average. Production. Most of Geerlings & Wade's 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, an offering brochure, an order form and a return envelope. Catalogs. During 2000, Geerlings & Wade mailed three separate wine and accessory catalogs to prospective and existing customers. One catalog was mailed in the first quarter of 2000, and two were mailed in the third and fourth quarter of 2000. 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 Company plans to continue mailing catalogs in 2001, which will focus primarily on wine. 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 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. In 2001, the Company plans to contact its Passport customers to encourage repurchases of wines delivered as part of the continuity program. 5 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, South Africa, Germany and Spain. The Company's domestic wines are sourced primarily from California, most 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, Red Brick Cellars, 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 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 2000, approximately 66% of the cases sold by the Company were imported wines and 34% were domestic. The Company's wines are generally sold within the price range of $69 to $1,000 per 12-bottle case, with average case prices of approximately $99.10 in 2000 for repeat customers. The Company offers 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. Sales of wine accounted for 91.8%, 90.9% and 91.8% of total revenues for each of 2000, 1999 and 1998, respectively. Wine Sourcing and Purchasing The Company sources imported and domestic wines through a network of producers, negociants, importers and wholesalers. In 2000, the Company sourced a 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 between five to eight 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 eight wines to be offered with each feature in the brochure mailings. 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. Wines for the Company's other mailings are sourced in a similar manner. For the preferred customer and membership 6 mailings, the Company has a specific range of wines it wants to offer but with a flexible merchandising plan that can take advantage of buying exceptional wines for this program. When buying for the Passport continuity program, the catalogs and region studies, the Company buys in smaller lots based on expected sales and circulation of mailings and strives to use wines in as many programs as possible to minimize the SKU count and maximize purchasing economies of scale. Sourcing Imported Wines. In 2000, 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. When purchasing from New Zealand, South Africa and Australia, Mr. Sanders purchases from negotiants representing wineries from those countries. Mr. Guy Davis, the Company's primary domestic buying agent, has begun sourcing South American wines for the Company. Sourcing Domestic Wines. In 2000, a 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. Mr. Davis, one of the Company's primary negociants for the United States, sources many of the California wines sold by the Company. Certain domestic negociants 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 sell 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. Inventory Management. The Company manages inventory levels and stock keeping units (SKUs) several ways. The most important inventory management technique involves accurate forecasting of each wine by promotion and by state over discrete selling time frames. Unlike many retailers who constantly repurchase products based on recent sales history of each product, Geerlings & Wade introduces hundreds of new products each year and rarely reorders products. This creates an unusual challenge since the Company does not have a sales history that can be used to determine purchase quantities. However, the Company has a high degree of control over what it sells through its promotions and has information and reporting capabilities that enable it to accurately forecast purchase quantities. The Company further manages inventory quantities by selling excess wine, which did not sell in response to its intended promotion, through special promotions. For example, the Company sells excess wine in its Odds & Ends mailing four times per year, as "back page" wines in its house brochure mailings approximately six times per year in 2001, as featured wines in approximately two "Huib Geerlings" letters each year, as upsell or cross- sell wines during telephone order taking and on its clearance page on geerwade.com. The "Odds & Ends" mailings generate approximately 16% of the Company's sales and are the primary promotions used to sell excess inventory. The Company also manages the number of SKUs it purchases by only buying wines for specific promotions and by limiting the number of SKUs it promotes since it can be uneconomical for the Company to promote a wine of which it only holds a small quantity. 7 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. The Company's 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 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. In 2000, the Company developed another database for marketing analyses and reporting. The Company exports data from the order management system to this marketing database for data manipulation. This marketing database enables the Company to target its marketing programs to specific segments of its customer base. The marketing database 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 order management computer system also provides merchandising forecasting and purchasing, links to accounts payable and accounts receivable, and general ledger modules for accounting analysis and circulation management. 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. In the fall of 2000 the Company began using software developed by Verbind, Inc. which is intended to assist the Company in becoming more directed in its approach to marketing and fulfilling its customers' needs. The new software provides real-time analyses of customer behavior so that the Company can promptly respond with promotions based on customer behavior. For example, while a customer is placing an order through the call center, the system provides call center representatives a list of recommended wines from inventory that the 8 customer is likely to prefer based on his or her past purchase history. The representative then offers these wines to customers as potential additional purchases after the initial order. During 2001, the Company plans to further integrate this software system into all of its marketing communications channels. 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 2000, the Company continued to develop its direct mail and e-mail marketing campaigns, but, for the most part, limited its use of online and print 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. 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. Through WineBins.com, the Company offers nationally branded wines at competitive prices. The 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. The Company continues to sell from WineBins.com but has limited the promotion of this site. The Company has attracted new customers to its websites and converted direct mail customers to Internet customers. In 2000, more than 15% of the Company's sales were placed through its websites. In 2001 and beyond, the Company plans to promote 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. The Company seeks to arrange affiliations with e- tailers and advertising with other online companies to promote the awareness of the Company and generate additional Internet sales. The Company plans to continue developing and testing 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, 2000, the Company had approximately 33,800 members. 9 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, availability and deliveries. The customer service group responds to an average of approximately 800 telephone calls each day. 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 1% and 2% of net sales for 1999 and 2000, respectively. The customer service group is divided between sales and service representatives. The sales group receives inbound calls for orders, recommends additional wines during the order and calls existing customers to obtain reorders. The customer service group responds to all issues related to orders and deliveries for all order channels including e-mail, facsimile, U.S. mail, inbound calls, e-commerce and in store orders. The Company has strived to enhance the level of customer service to improve customer satisfaction and retention. 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 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 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 allows 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 10 importation laws from the Company's licensed facilities. Sales to consumers in Alaska, Missouri, Montana 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 Arizona, Colorado, Connecticut, Florida, Massachusetts, New Jersey, North Carolina or Texas. 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 most of its own products in New Jersey and Massachusetts and contracts with licensed, local couriers in Alaska, Arizona, Colorado, Connecticut, Florida, Minnesota, Nevada, New Hampshire, North Carolina, North Dakota and Texas to deliver orders to the Company's customers. In New Jersey and Massachusetts, the Company also contracts with local couriers to deliver some orders to its customers. Company Licensing and Regulatory Matters. As of December 31, 2000, the Company held retail licenses in the 16 states where it maintains 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 2000 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 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 11 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 and New Jersey, third party couriers also deliver wine for the Company. Orders from customers in the states into which UPS or other delivery companies are permitted to ship wine are retrieved as soon as possible during the regular work week by Company employees at 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, North Carolina, 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 retail facility in such 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 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. 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, Brava Terra, Lapis Lazuli Winery & Vineyards, St. Carolyne Winery, San Valencia Winery, Mariel Winery, Jack Canyon Cellars, Redbrick Cellars, Bryan Woods Winery, Mischler Estates, Hamilton Estates, Mira Luna, Passport Wine Club, Passport Wine Club and Design, 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: 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 its private label product line. 12 Employees As of December 31, 2000, the Company employed a total of 79 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. Nasdaq Listing The Company has been notified by Nasdaq that the Company fails to comply with the minimum market value of public float requirement for continued listing under Maintenance Standard 1 as set forth in Marketplace Rule 4450(a)(2), and that its common stock is, therefore, subject to delisting from The Nasdaq National Market. The Company requested an oral hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination and seek continued listing. The Company appeared at this hearing on March 8, 2001 and provided information supporting its position that its common stock should continue to be listed on The Nasdaq National Market. The Panel's determination is expected to be released by early April 2001. There can be no assurance the Panel will grant the Company's request for continued listing. Pending a determination of the Panel, the Company's common stock will continue to trade on The Nasdaq National Market. In the event the Panel determines to discontinue the listing of the Company's securities on The Nasdaq National Market, the Company believes, based on indications at the hearing, that there is a strong likelihood that the Company's listing will be transferred to The Nasdaq SmallCap Market. Item 2: Properties As of December 31, 2000, Geerlings & Wade operated 17 licensed facilities located in 16 states. The Company leases all of these facilities. Each facility is centrally located with easy access to major routes for delivery efficiencies. As of February 2001, the Company closed the Boston, MA retail facility due to limited sales growth opportunities and did not renew its lease that expired in March 2001.
Approximate Square Facility Location Footage Expiration -------- --------------- ----------- ---------- Executive offices, customer service and licensed facility... Canton, MA 32,000 2005 Licensed facility................ Carmel, NY 10,600 2003 Licensed facility................ Somers, CT 4,500 2001 Licensed facility................ Waukegan, IL 9,600 2004 Licensed facility................ Tampa, FL 10,000 2005 Licensed facility................ South River, NJ 4,000 * Licensed facility................ Petaluma, CA 10,900 2004 Licensed facility................ Kent, WA 5,000 2003 Licensed facility................ Chantilly, VA 4,800 2002 Licensed facility................ Miamisburg, OH 5,900 2004 Licensed facility................ Denver, CO 6,800 2005 Licensed facility................ Tempe, AZ 6,600 2001 Licensed facility................ Bloomington, MN 4,700 2002 Licensed facility................ Ann Arbor, MI 5,300 2002 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 None. 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.
1999 2000 ----------- ----------- High Low High Low ----- ----- ----- ----- First Quarter..................................... $9.09 $4.00 $8.25 $4.59 Second Quarter.................................... 8.25 4.63 4.97 3.00 Third Quarter..................................... 9.00 5.50 3.20 1.89 Fourth Quarter.................................... 9.63 5.69 2.31 1.50
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 19, 2001, there were approximately 142 holders of record of the Company's common stock. Cede & Co., a nominee of the Depository Trust Company ("DTC"), owned of record 2,313,241 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 19, 2001, 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 19, 2001, 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, ------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- (in thousands, except per share data) Statements of operations data: Sales............................ $32,139 $35,247 $36,626 $38,863 $37,153 Cost of sales.................... 17,188 18,185 18,160 18,940 17,304 ------- ------- ------- ------- ------- Gross profit................... 14,951 17,062 18,466 19,923 19,849 Selling, general and administrative expenses......... 15,080 15,618 16,712 20,578 21,314 Merger related expenses.......... -- -- -- 825 49 ------- ------- ------- ------- ------- (Loss) income from operations.. (129) 1,444 1,754 (1,480) (1,514) Gain (Loss) on disposal of fixed asset........................... 16 6 -- (59) (69) Purchase price advance from Liquid Holdings................. -- -- -- -- 1,250 Interest (expense) income, net... (257) (23) (10) 45 (138) ------- ------- ------- ------- ------- (Loss) income before income taxes......................... (370) 1,427 1,764 (1,494) (471) (Benefit) provision for income taxes........................... (152) 604 751 --- ---- ------- ------- ------- ------- ------- Net (loss) income.............. $ (218) $ 823 $ 1,013 $(1,494) $ (471) ======= ======= ======= ======= ======= Net (loss) income per share Basic.......................... $ (0.06) $ 0.22 $ 0.27 $ (0.39) $ (0.12) ======= ======= ======= ======= ======= Diluted........................ $ (0.06) $ 0.22 $ 0.27 $ (0.39) $ (0.12) ======= ======= ======= ======= ======= Weighted average common shares outstanding Basic.......................... 3,776 3,780 3,786 3,843 3,855 Diluted........................ 3,776 3,796 3,801 3,843 3,855 As of December 31, ------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- (in thousands) Balance sheet data: Working capital.................. $ 8,045 $ 9,303 $ 9,977 $10,054 $ 8,745 Total assets..................... 12,952 16,124 17,205 17,755 18,158 Total stockholders' equity....... 9,526 10,362 11,405 10,227 9,788
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 15 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. 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, ------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- Sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................. 53.5 51.6 49.6 48.7 46.6 Gross profit................... 46.5 48.4 50.4 51.3 53.4 Selling, general and administrative expenses....... 46.9 44.3 45.6 53.0 57.4 Merger related expenses........ -- -- -- 2.1 0.1 (Loss) income from operations.. (0.4) 4.1 4.8 (3.8) (4.1) Loss on disposal of fixed asset......................... -- -- -- -- 0.2 Purchase price advance from Liquid Holdings............... -- -- -- -- 3.4 Interest (expense) income, net........................... (0.8) (0.1) -- 0.1 (0.4) (Loss) income before income taxes......................... (1.2) 4.0 4.8 (3.8) (1.3) (Benefit) provision for income taxes......................... (0.5) 1.7 2.1 -- -- Net (loss) income ............. (0.7) 2.3 2.7 (3.8) (1.3) Years Ended December 31, ------------------------------------------- Market (excludes shipping revenue) 1996 1997 1998 1999 2000 ------------------------- ------- ------- ------- ------- ------- (in thousands) Massachusetts(1)............... $ 5,685 $ 6,310 $ 5,960 $ 6,553 $ 5,780 Connecticut (2)................ 2,186 2,025 2,079 2,257 2,135 New York....................... 5,078 4,929 5,061 5,065 4,775 Illinois(2).................... 2,563 2,702 2,805 2,939 2,726 Florida........................ 2,810 3,066 3,194 3,413 3,177 California(2).................. 3,466 3,530 3,833 3,943 3,883 New Jersey..................... 3,637 3,658 3,559 3,634 3,592 Washington..................... 1,017 1,093 1,049 1,043 840 Virginia....................... 1,707 1,963 1,996 1,889 1,795 Ohio........................... 2,017 2,401 2,566 2,622 2,265 Minnesota (2).................. 338 413 436 494 511 Colorado....................... 566 713 718 769 780 Arizona........................ 431 542 601 639 668 Michigan (June 1997)........... -- 356 917 1,126 1,234 Texas (March 1999)............. -- -- -- 480 781 North Carolina (May 2000)...... 359 ------- ------- ------- ------- ------- Totals....................... $31,501 $33,701 $34,774 $36,866 $35,301 ======= ======= ======= ======= =======
- -------- (1) Includes sales from catalog accessories and from the Newbury Street, Boston store. (2) Includes authorized sales into additional states. 16 Years Ended December 31, 2000, 1999 and 1998 Sales. The Company's revenues are derived from the sale of wine, wine- related accessories, delivery income and memberships. In 2000, sales decreased $1,710,000 or 4.4%, from $38,863,000 in 1999 to $37,153,000 in 2000. From 1998 to 1999, sales increased by $2,237,000, or 6.1%, from $36,626,000 in 1998. Revenues declined in 2000 as a result of several decisions the Company made to improve marketing efficiencies. In 2000, the Company decided to terminate outbound telemarketing, which resulted in a sales decline of $728,000, and decided not to mail accessory only catalogs. Accessory sales were lower in 2000 by $438,000, due to this decision and due to weaker responses to the holiday catalogs, especially in December 2000. Additionally, sales from wine futures and delivery income were lower by approximately $170,000 and $146,000, respectively. Futures decreased primarily due to higher pricing and to lower quality wines from that vintage. Delivery income declined as a result of greater use of free shipping offers in 2000 as compared to 1999. Acquisition sales declined by $138,000 as a result of significantly weaker response rates to these mailings. The Company plans to continue testing new lists and creative formats and offers to increase these response rates. Internet sales and catalog sales contributed to the sales increase from 1998 to 1999. Internet sales, excluding shipping revenue, accounted for 14.2% of Geerlings & Wade's 2000 revenues compared to only 5.3% in 1999. Membership revenue increased $96,000 from $574,000 in 1999 to $670,000 in 2000, or 16.7%. The number of cases (12 bottles) of wines sold by the Company decreased by 27,794 or 7.6%, from 364,624 cases in 1999 to 336,830 cases in 2000. From 1998 to 1999, the number of cases sold increased by 27,929 from 336,695 in 1998 to 364,624 in 1999, a 8.3% 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 2000, the average number of cases purchased per customer decreased to 2.59. 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. All markets that were operating in 1999 and 2000 except Arizona, Colorado, Michigan and Texas reflect sales declines between 1999 and 2000. Between 1998 and 1999 all markets except New York, Virginia and Washington reflected sales growth. Sales from memberships were 1.6%, 1.8% and 1.8% of overall revenues in 1998, 1999 and 2000, respectively. Sales from wine related accessories were 1.5%, 2.4% and 1.8% of overall revenues in 1998, 1999 and 2000, respectively. Sales from delivery income were 5.1%, 5.0% and 5.1% in 1998, 1999 and 2000, respectively. The average case price for cases sold by the Company increased from $96.55 in 1999 to $100.02 in 2000, a 3.6% increase. Average case price decreased in 1999 to $96.55 or 3.1% below the 1998 average price of $99.64 per case. 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. The Company does not believe that it will need to lower prices 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 2000, Geerlings & Wade continued discounting selected products to reduce inventory and maintain a manageable number of stock keeping units. Gross Profit. Gross profit declined in 2000 as compared to 1999 due to lower sales. In 2000, gross profit decreased $76,000, or 0.37%, from $19,923,000 in 1999 to $19,849,000 in 2000. From 1998 to 1999, gross profit increased $1,457,000 from $18,466,000 in 1998 to $19,923,000 in 1999, a change of 7.9%. During these periods, gross profit as a percentage of sales increased from 50.4% in 1998 to 51.3% in 1999 to 53.4% in 2000. The increase in gross profit as a percentage of sales resulted primarily from favorable exchange rates and from improved purchasing by the Company in 1999 and 2000. Gross profits for all sales per case of wine sold increased $4.29 per case during 2000 to $58.93 per case from $54.64 per case in 1999. In 1998, the gross profit per case was $54.84. There are several factors that cause the Company's gross margins to vary. Fluctuations in foreign currency exchange rates influence the cost at which the Company is able to buy wine. In addition, the Company sells its 17 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. Nationally branded wines, sold on WineBins.com and geerwade.com, are sold at gross margins which are significantly lower than the average gross margins for the Company's privately sourced wine. Therefore, if the Company materially increased the sale of nationally branded wine, its gross margin percentage would be adversely affected. There are no plans to materially change the mix between privately sourced and nationally branded wines. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $736,000 from $20,578,000 in 1999 to $21,314,000 in 2000, or 3.5%. From 1998 to 1999, selling, general and administrative expenses increased 23.1%, from $16,712,000 to $20,578,000. As a percentage of sales, selling, general and administrative expenses equaled 57.4% in 2000, 53.0% in 1999 and 45.6% in 1998. Selling, general and administrative costs increased in several areas in 2000 as compared to 1999. The largest contributor to the increase was delivery expense, which rose $218,000. This increase was the result of using couriers other than UPS for all of 2000 in Nevada, Florida and Connecticut and to increasing sales in high cost delivery states such as Texas and North Carolina. The Company continues to devote considerable efforts in an attempt to lower delivery expenses. Costs are also impacted by the Company's need to comply with laws and regulations related to the retail sale of wine. In 2000, the Company operated from 17 licensed facilities in 16 separate states. Operating these separate locations forced the Company to incur unusually high overhead expenses as a percentage of sales. Rent expense increased by $90,000 in 2000 due to the addition of the North Carolina retail facility and to increased rents in various states. In 2000, the Company also expensed $305,000 related to a severance agreement with Jay Essa, who resigned as Chief Executive Officer in April 2000. Other minor increases for overhead and variable costs contributed to the remaining selling, general and administrative expense increase for 2000. Marketing expenses increased marginally between 2000 and 1999. Marketing expenses, which are referred to as advertising costs in the financial statement footnotes, increased $8,000 from $7,123,000 in 1999 to $7,131,000 in 2000. This increase includes the $667,000 additional expense the Company recognized as a result of a change in accounting estimate for the amortization of acquisition mailing expenses. Expenses for acquisition mailings were higher by an additional $537,000 as a result of mailing more acquisition mail in 2000 than in 1999. However, response rates to these mailings were lower in 2000 and generated fewer sales and new customers than in 1999. The increase in acquisition mailing expenses was offset by mailing fewer catalogs, curtailing space and radio advertising for its websites and terminating outbound telemarketing. Marketing costs increased $1,891,000 or 36.1%, from $5,238,000 in 1998 to $7,129,000 in 1999. 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, the Company spent only $27,000 to promote its Internet site. In 2000, the Company spent $140,000 on Internet marketing expenses. In 2000, the Company increased the circulation of house mailings and acquisition mailings. The Company sent approximately 4,519,000 and 5,008,000 house mailings in 1999 and 2000, respectively, representing an increase of approximately 10.8% from 1999 to 2000. In mid-1999, the Company increased the frequency with which it mailed to its older buyers in an attempt to retain these buyers. In 2000, the Company mailed to older buyers less frequently but with special offers to encourage repeat purchases. This practice seeks to maximize the response rates to these mailings while minimizing costs for marketing to these lower performing segments. Additionally, in 2000, the Company launched a promotional program for new customers to increase the conversion rates of one-time buyers to frequent buyers. This program entails special mailings and, in 2001, contacts by sales representatives. Response rates to acquisition mailings weakened in 2000 due to increased competition from Internet and direct mail wine retailers, deeper circulation in which weaker buyers are mailed and rental list fatigue. The Company plans to focus on increasing response rates to acquisition mailings in 2001. 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 save significant per unit printing 18 expenses in 2000. However, to manage inventory better by selling previously promoted wines, the Company plans to remarket wines promoted on the back page of about one-third of its house mailing brochures. The Company expects that this will add to printing costs but facilitate inventory management. The Company anticipates that its marketing expenses in connection with its e-commerce sites will be marginally higher in 2001 than in 2000. The Company plans to use its traditional acquisition mailings to acquire new customers in 2001 but intends to distribute such mailings to a lower number of prospective customers than it did in 2000. The Company plans to further develop its catalogs devoted primarily to wine with mailings scheduled for spring and several mailings for the holiday season of 2001. In 2001, Geerlings & Wade plans to mail 18 brochures and four Odds & Ends mailings, 12 preferred customer and member mailings, seven region studies and one futures mailing to its customers. As described above, the Company plans throughout the year to mail regular special offers to new customers and customers who have not purchased for some time. 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 terminated pursuant to its terms in February 2000 because 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 2000, the Company incurred interest expense of $153,000 due to increased borrowings under the credit facility with Citizens Bank of Massachusetts. 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. Interest income decreased in 2000 by $29,000 from $45,000 in 1999 to $16,000 in 2000. Interest income in 1999 increased by $14,000 to $45,000 from $31,000 in 1998. The net effect is that Geerlings & Wade had net interest expense of $138,000 in 2000 and net interest income of $45,000 in 1999 and $10,000 in 1998. Provision for Income Taxes. Although the Company incurred a net loss in 1999 and 2000, the Company decided not to book a benefit in 1999 due to the uncertainty regarding the ultimate realization of the related deferred tax asset. The Company provided for income taxes of 42.5% in 1998. Net (Loss) Income. The Company recognized a net loss of $471,000 and $1,494,000 in 2000 and 1999, respectively, after earning net income of $1,013,000 in 1998. This reduction in net loss between 2000 and 1999 resulted from recognition of a purchase price advance related to the termination of a merger agreement with Liquid Holdings, Inc. in February 2000, lower merger related costs in 2000 and improved gross margins as a percentage of sales. These savings were offset by higher delivery expenses and severance expenses in 2000. Liquidity and Capital Resources In 2000, the Company's primary capital needs were for funding the marketing expenses in connection with advertising the Company's 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, 2000, the Company had cash and cash equivalents totaling $1,872,000, compared to $2,625,000 as of December 31, 1999. On April 13, 2000, the Company entered into a credit agreement with Citizens Bank of Massachusetts. The amount borrowed under this facility bears interest at the prime rate and is collateralized by substantially all of the assets of the Company. The Company is required to comply with certain financial covenants as part of 19 the terms and conditions of the line of credit. The Company was in default under its credit agreement at the end of the second, third and fourth quarters of fiscal 2000 as a result of the Company's failure to meet certain financial covenants at the end of these quarters and to obtain certain landlords' consent and subordination agreements. The Company has received waivers from the bank for each period. In connection with the waiver for the most recent period, the Company and the bank amended the credit agreement to provide for a reduction in the principal amount available for borrowing under the facility to $1.9 million and to provide that the Company repay amounts outstanding under the facility in $50,000 increments on the 1st and 15th of each calendar month, beginning March 15, 2001, until such time as the Company can certify its compliance with the financial covenants. In 2000, the Company used $1,537,000 in cash from operating activities compared to $2,450,000 in 1999. The cash used in operating activities in 2000 resulted primarily from a net loss of $471,000; an increase in inventory of $3,008,000; a decrease in accounts payable of $261,000 and accrued sales taxes and expenses of $157,000. These cash needs were offset by a decrease in prepaid mailing costs of $806,000, a decrease in accounts receivable of $307,000, and an increase in deferred revenue of $285,000. The Company had working capital of $10,054,000 and $8,745,000 at December 31, 1999 and 2000, respectively. Under the Company's merchandising plan for 2000, the Company committed to purchasing large quantities of wine. The Company was unable to sell all this wine at the same turn rate as it had in 1999, which resulted in higher inventories. 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 opened a licensed facility in Greensboro, North Carolina. The inventory for this facility added to the overall inventory levels. To reduce inventory to historical levels, the Company plans to purchase lower quantities in 2001 than it purchased for 2000 and will more frequently use wines from existing stock in its mail promotions. During 2000, net cash of $222,000 was used in investing activities. These purchases included approximately $203,000 in connection with the Company's computer system and software enhancements, $12,000 in property and equipment and $10,000 for furniture and fixture purchases and leasehold improvements. Net cash of $782,000 was used in investing activities in 1999. The Company used these funds to acquire new order management software as well as software enhancements to the website development. Total cash provided by financing activities in 2000 was $1,007,000, of which $2,750,000 represented borrowings and $525,000 represented repayments under the line of credit. An additional $11,000 was generated from issuance of stock under the Employee Stock Purchase Plan and $21,000 represented exercise proceeds from stock options issued under the Company's Stock Option Plan. The cash provided from these activities was offset by the purchase price advance from Liquid Holdings of $1,250,000, which was received in 1999. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations, anticipated cost savings and revenue growth, the Company believes that cash flow from operations and available cash will be adequate to meet the Company's working capital needs for 2001. The Company's liquidity sources will not be sufficient to permit the Company to grow in the manner it would like to unless the Company pursues alternative sources of liquidity. However, there can be no assurance that the Company will be able to obtain alternate sources of liquidity on commercially reasonable terms or at all. 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 Fleet National Bank that allows the Company to enter into forward currency exchange contracts of up to $500,000 maturing on any one day. As of December 31, 2000, the Company had no foreign exchange contracts outstanding. 20 New Accounting Pronouncements In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of Accounting Principles Board (APB), Opinion No. 25. The interpretation clarifies the application of APB Opinion No. 25 in certain situations, as defined. The interpretation is effective July 1, 2000. The adoption of this interpretation did not have any effect on the accompanying financial statement. In September 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs, which provides guidance on classification of amounts billed to a customer and amounts incurred for shipping and handling fees related to a sale of product. The EITF reached the consensus that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The EITF also concluded that the classification of shipping and handling costs is an accounting policy decision. Geerlings & Wade has elected to classify shipping costs in Selling, General and Administrative Expenses. 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, 1999 and 2000 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. Liquidity. The Company's current liquidity sources are not sufficient to permit the Company to grow in a manner that would be most advantageous for stockholders. The Company intends to pursue alternative sources 21 of liquidity, but there can be no assurance that the Company will obtain alternate sources of liquidity on commercially reasonable terms or at all. Effectiveness and Cost of Mailings; Cost of Paper. The Company targets potential new customers and solicits orders from existing customers through direct mail marketing campaigns. Direct mail marketing campaigns are capital- intensive and the cost-effectiveness of such campaigns depends, to a large extent, upon the accuracy of assumptions and judgments made by the Company. There can be no assurance that such direct marketing campaigns will be completed on a cost-effective basis. The failure of any such marketing campaign to identify new customers or to generate new purchases from existing customers on a cost-effective basis may have a material adverse effect on the Company's business and results of operations. Increases in the cost of paper or printing could have a negative impact on the Company's business and results of operations to the extent that the Company is unable to pass on such increases directly to customers. The Company relies on the services of outside vendors to prepare and distribute its mailings in accordance with Company specifications and schedules. The failure of such outside vendors to perform such services according to Company specifications or to adhere to Company mailing schedules may have a material adverse effect on the Company's business and results of operations. 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, such as 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. 22 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. 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 2000, approximately 66% 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 a material adverse effect on the Company's operations, sales and profitability. 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. The Company realized $321,000 in gain related to these contracts in 2000. Losses related to these instruments for fiscal 2000 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-20. 23 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 "Re- election of Director," "Executive Compensation; Certain Arrangements" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the proxy statement for use in connection with the Company's 2001 Annual Meeting of Stockholders (the "Proxy Statement"), and is incorporated herein by reference. Item 11: Executive Compensation The information required by this Item is included under the captions "Executive Compensation; Certain 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 Director--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 Sequential No. Description Page No. ------- ----------- ---------- 3.1 Form of Amended and Restated Articles or Organization of the Company. (1) 3.2 Amended and Restated By-laws of the Company. (1) 4.1 Specimen Certificate of Common Stock. (1)(2) 4.2 Registration Rights Agreement by and among certain Stockholders and the Company. (1) 10.1 Lease Agreement between the Company and Naughton Company dated April 11, 1994. (1) 10.2 Lease Agreement between the Company and John Hancock Mutual Life Insurance Company dated July 31, 1992. (1) 10.3 California Public Warehouse Letter Agreement. (1) 10.4 Form of Employment Agreement for Phillip D. Wade. (1)
24
Exhibit Sequential No. Description Page No. ------- ----------- ---------- 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 Agreement dated as of April 7, 2000 between the Company and David Pearce. (18)* 10.8.1 Credit Agreement dated as of April 13, 2000 between the Company and Citizens Bank of Massachusetts (18) 10.8.2 First Amendment to the Credit Agreement dated as of December 4, 2000 between the Company and Citizens Bank of Massachusetts, including the Amended and Restated Post- Closing Agreement. 10.8.3 Second Amendment to the Credit Agreement dated as of March 5, 2001 between the Company and Citizens Bank of Massachusetts. 10.10 Stock Option Plan, as amended. (9)(13)(15) 10.11 Non-Employee Director Stock Option Plan, as amended. (1)(12) 10.12 Employee Stock Purchase Plan. (1) 10.13 Lease Agreement between the Company and Pacific Realty Associates, L.P. dated July 18, 1994. (3) 10.14 Lease Agreement between the Company and Flint Lee Limited Partnership dated August 31, 1994. (3) 10.15 Lease Agreement between the Company and 47th Avenue Industrial Properties dated October 6, 1994. (3) 10.16 Lease Agreement between the Company and Mehland Developers dated October 31, 1994. (3) 10.17 Lease Agreement between the Company and Hohokam Realty Condominiums dated October 31, 1994. (4) 10.18 Lease Agreement between the Company and Bruce K. and Gayle J. Hoyt dated November 23, 1994. (5) 10.19 Master Agreement dated as of June 9, 1995 by and between the Company and Chemical Bank, a New York banking corporation. (5) 10.20 Lease Agreement between the Company and The Naughton Company dated August 16, 1995. (6) 10.21 Lease Agreement between the Company and Cole Taylor Bank dated August 23, 1995. (6) 10.22 Lease Agreement between the Company and Debra Campbell dated July 15, 1996. (7) 10.23 Lease Agreement between the Company and Simon Champagne dated July 24, 1996. (7) 10.24 Lease Agreement between the Company and Enviro-zyme International, Incorporated dated January 6, 1997. (8) 10.25 Lease Agreement between the Company and William Eddy dated January 24, 1997. (8) 10.26 Lease Amendment between the Company and 47th Avenue South Properties, LLC dated February 1, 1998. (10) 10.27 Lease Addendum between the Company and Mehland Developers dated January 13, 1998. (10) 10.28 Lease Amendment between the Company and PBP-N, Inc. dated October 9, 1997. (10)
25
Exhibit Sequential No. Description Page No. ------- ----------- ---------- 10.29 Lease Agreement between the Company and 216-218 Newbury Street Realty Trust dated January 20, 1998. (10) 10.30 Lease Amendment between the Company and Bruce K. Hoyt dated March 18, 1998. (10) 10.31 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. (11) 10.32 Lease Amendment between the Company and Jerry L. Ivy dated April 21, 1998. (13) 10.33 Lease Agreement between the Company and Corporate Exchange Limited Partnership dated October 9, 1998. (13) 10.34 Severance Agreement dated April 2, 1999 between the Company and Jay L. Essa. (14) 10.35 Lease Amendment between the Company and Flint Lee Limited Partnership dated June 22, 1999. (16) 10.36 Lease Amendment between the Company and William Eddy dated October 1, 1999. (16) 10.37 Lease Agreement between the Company and Cader Lane Associates dated September 27, 1999. (16) 10.38 Lease Amendment between the Company and Enviro-zyme International, Inc. dated December 18, 1999. (17) 10.39 Lease Agreement between the Company and Wengreen, LLC dated November 1, 1999. (17) 10.40 Lease Agreement between the Company and Naughton Company dated March 13, 2000. (17) 10.41 Lease Agreement dated as of April 24, 2000 between the Company and Tampa Tri-County Flexxspace, Ltd. (18) 10.42 Lease Amendment dated November 29, 2000 between the Company and M&T Partners, Inc. 10.43 Indenture of lease dated February 16, 2000 between the Company and Foxford Business Center, LLC. 21 Subsidiaries of the Company. (13) 23 Consent of Arthur Andersen LLP.
- -------- (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-K for the year ended December 31, 1994 (File No. 0-24048) and incorporated by reference herein. (4) 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. (5) 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. (6) 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. (7) 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. 26 (8) 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. (9) 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. (10) 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. (11) 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. (12) 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. (13) 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. (14) 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. (15) 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. (16) 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. (17) Filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 1999 filed on March 30, 2000 (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 June 30, 2000 filed on August 14, 2000 (File No. 0-24048) and incorporated by reference herein. * Management contract or compensatory plan (b) No reports on Form 8-K were filed by the Company during the fourth quarter of 2000. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Geerlings & Wade, Inc. /s/ David R. Pearce By: _________________________________ (David R. Pearce) President and Chief Executive Officer Date: March 30, 2001 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, 2001 ______________________________________ Director Huib E. Geerlings /s/ David R. Pearce President, Chief Executive March 30, 2001 ______________________________________ Officer, Chief Financial David R. Pearce Officer and Treasurer (Principal Financial and Accounting Officer) /s/ James C. Curvey Director March 30, 2001 ______________________________________ James C. Curvey /s/ John M. Connors, Jr. Director March 30, 2001 ______________________________________ John M. Connors, Jr. /s/ John J. Remondi Director March 30, 2001 ______________________________________ John J. Remondi /s/ Robert L. Webb Director March 30, 2001 ______________________________________ Robert L. Webb
28 Report of Independent Public Accountants F-2 Balance Sheets as of December 31, 1999 and 2000 F-3 Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000 F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000 F-5 Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000 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, 1999 and 2000 and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 1999 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Boston, Massachusetts March 5, 2001 F-2 GEERLINGS & WADE, INC. Balance Sheets December 31, 1999 and 2000
DECEMBER 31, ASSETS 1999 2000 Current Assets: Cash and cash equivalents $ 2,624,990 $ 1,872,267 Accounts receivable 1,395,305 1,088,660 Inventory 9,481,779 12,489,631 Prepaid mailing costs 899,400 93,312 Prepaid expenses and other current assets 1,265,916 986,127 Deferred income taxes, net 229,139 171,455 ----------- ----------- Total current assets 15,896,529 16,701,452 ----------- ----------- Property and Equipment, at cost: Office and computer equipment 1,986,810 2,025,483 Motor vehicles 77,875 77,875 Furniture and fixtures 377,600 326,487 ----------- ----------- 2,442,285 2,429,845 Less--Accumulated depreciation 1,326,174 1,632,938 ----------- ----------- 1,116,111 796,907 ----------- ----------- Deferred Income Taxes, net 352,408 299,162 ----------- ----------- Other Assets 390,411 360,962 ----------- ----------- $17,755,459 $18,158,483 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit $ - $ 2,225,000 Accounts payable 3,354,972 3,093,647 Current portion of deferred revenue 1,171,406 1,478,648 Accrued sales, income and payroll taxes 319,318 311,245 Accrued expenses 996,848 848,113 ----------- ----------- Total current liabilities 5,842,544 7,956,653 ----------- ----------- Deferred Revenue, less current portion 436,206 413,886 ----------- ----------- Purchase Price Advance from Liquid Holdings (Note 1) 1,250,000 - ----------- ----------- Commitments and Contingencies (Note 6) Stockholders' Equity: Preferred stock, $0.01 par value- Authorized--1,000,000 shares Outstanding--none - - Common stock, $0.01 par value Authorized--10,000,000 shares Issued and outstanding--3,849,071 shares and 3,855,940 shares in 1999 and 2000, 38,491 38,559 respectively Additional paid-in capital 10,075,279 10,107,108 Retained earnings (deficit) 112,939 (357,723) ----------- ----------- Total stockholders' equity 10,226,709 9,787,944 ----------- ----------- $17,755,459 $18,158,483 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 GEERLINGS & WADE, INC. Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000
Years Ended December 31, 1998 1999 2000 Sales $36,625,661 $38,863,425 $37,153,075 Cost of Sales 18,159,912 18,940,024 17,304,275 ----------- ----------- ----------- Gross profit 18,465,749 19,923,401 19,848,800 Selling, General and Administrative Expenses 16,711,531 20,578,105 21,313,979 Merger Related Expenses - 824,838 48,981 ----------- ----------- ----------- Income (loss) from operations 1,754,218 (1,479,542) (1,514,160) Loss on Disposal of Fixed Asset - (59,459) (68,886) Purchase Price Advance from Liquid Holdings - - 1,250,000 Interest Income 31,038 44,530 15,735 Interest Expense (20,616) - (153,351) ----------- ----------- ----------- Income (loss) before provision for income taxes 1,764,640 (1,494,471) (470,662) Provision for Income Taxes 751,310 - - ----------- ----------- ----------- Net income (loss) $ 1,013,330 $(1,494,471) $ (470,662) =========== =========== =========== Net Income (Loss) per Share: Basic $ 0.27 $ (0.39) $ (0.12) =========== =========== =========== Diluted $ 0.27 $ (0.39) $ (0.12) =========== =========== =========== Weighted Average Common Shares Outstanding: Basic 3,786,400 3,842,742 3,855,071 =========== =========== =========== Diluted 3,800,601 3,842,742 3,855,071 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 GEERLINGS & WADE, INC. Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000
Common Stock Additional Retained Total Number of $0.01 par Paid-in Earnings Stockholders' Shares Value Capital (Deficit) Equity 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 Issuance of stock under employee stock purchase plan 1,869 18 11,004 - 11,022 Proceeds from exercise of stock options 5,000 50 20,825 - 20,875 Net loss - - - (470,662) (470,662) --------- ------- ----------- ----------- ----------- Balance, December 31, 2000 3,855,940 $38,559 $10,107,108 $ (357,723) $ 9,787,944 ========= ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 GEERLINGS & WADE, INC. Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000
Years Ended December 31, 1998 1999 2000 Cash Flows from Operating Activities: Net income (loss) $ 1,013,330 $(1,494,471) $ (470,662) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 524,494 535,159 510,523 Deferred income taxes 134,355 - 110,930 Loss on disposal of property and equipment - 59,459 68,886 Changes in current assets and liabilities, net of assets acquired of Passport Gift Co. in 1998- Accounts receivable (19,760) (784,923) 306,645 Inventory 2,930,301 (1,267,978) (3,007,852) Prepaid mailing costs (372,191) 458,550 806,088 Prepaid expenses and other current assets 85,030 (433,532) 271,408 Accounts payable 1,500,630 (46,420) (261,325) Deferred revenue 345,044 133,018 284,922 Accrued sales, income and payroll taxes (536,168) (76,374) (8,073) Accrued expenses (208,948) 467,979 (148,735) ----------- ----------- ----------- Net cash provided by (used in) operating activities 5,396,117 (2,449,533) (1,537,245) ----------- ----------- ----------- Cash Flows From Investing Activities: Purchases of property and equipment, net (112,040) (794,736) (225,404) Proceeds from sale or return of property and equipment 90,000 - - Acquisition of Passport Gift Company, Inc., net of cash acquired (465,343) - - (Increase) decrease in other assets, exclusive of goodwill (24,409) 13,109 3,029 ----------- ----------- ----------- Net cash used in investing activities (511,792) (781,627) (222,375) ----------- ----------- ----------- Cash Flows From Financing Activities: Borrowings under line of credit 1,651,091 - 2,750,000 Repayments under line of credit (2,633,486) - (525,000) Purchase price advance from Liquid Holdings - 1,250,000 (1,250,000) Proceeds from issuance of stock under the Employee Stock Purchase Plan 29,673 26,945 11,022 Tax benefit from exercise of stock options - 39,207 - Proceeds from exercise of stock options - 250,352 20,875 ----------- ----------- ----------- Net cash (used in) provided by financing activities (952,722) 1,566,504 1,006,897 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 3,931,603 (1,664,656) (752,723) Cash and Cash Equivalents, beginning year 358,043 4,289,646 2,624,990 ----------- ----------- ----------- Cash and Cash Equivalents, end of year $ 4,289,646 $ 2,624,990 $ 1,872,267 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for- Interest $ 20,616 $ - $ 153,351 =========== ============ =========== Income taxes $ 1,095,131 $ 594,300 $ 11,460 =========== =========== =========== 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, 2000 (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 16 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 as of December 31, 1999. On February 22, 2000, the Merger Agreement automatically terminated. The Company recorded the $1.25 million fee as other income in the first quarter of 2000. For the years ended December 31, 1999 and 2000, the Company reported losses from operations of approximately $1.5 million and used $2.4 and $1.5 million, respectively, of cash in operations. The Company was in default under its line of credit agreement at the end of the third and fourth quarters of fiscal 2000 as a result of the Company's failure to meet the required interest service ratio at the end of these quarters. The Company has received waivers from the bank for both periods. In connection with the grant of each waiver, the Company and the bank amended the credit agreement to provide for the reduction in the principal amount available for borrowing under the facility to $1.9 million and to provide that the Company repay amounts outstanding under the facility on a fixed schedule. Management has initiated plans to reduce its operating expenses and increase its cash flow from operations to meet the financial covenants under the amended line of credit. Failure to achieve these plans or comply with the covenants under the amended line of credit could have a material adverse effect on the Company's results of operations and financial condition. 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 estimates described in this note and elsewhere in the accompanying notes to financial statements. (A) USE OF 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 F-7 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 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. 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 did not have a material impact on the Company's financial position or results of operations. (C) SHIPPING AND HANDLING FEES AND COSTS In September 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs, which provides guidance on classification of amounts billed to a customer and amounts incurred for shipping and handling fees related to a sale of product. The EITF reached the consensus that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company has included shipping and handling revenue of approximately $1,851,000, $1,997,022 and $1,851,000 in sales in the accompanying statements of operations for the years ending December 31, 1998, 1999 and 2000, respectively. The Company has included shipping and handling fees of approximately $3,525,000, $4,288,000 and $4,500,000 in selling, general and administrative expenses in the accompanying statements of operations for the years ending December 31, 1998, 1999 and 2000, respectively. (D) 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, 1999 and 2000, cash equivalents consist primarily of investments in money market accounts. (E) 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 $808,000, $916,000 and $949,000 for the years ended December 31, 1998, 1999 and 2000, respectively, and are included in F-8 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 selling, general and administrative expenses in the accompanying statements of operations. (F) 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 $719,000 and $715,000 of reservations of certain vintage wines as of December 31, 1999 and 2000, respectively. The Company shipped approximately $397,000 and $195,000 of such reserves to its customers during 1999 and 2000, respectively. The Company bears the ultimate liability for the wine reservations until delivered and accepted by the customers, at which time revenue is recognized. (G) 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: ASSET CLASSIFICATION ESTIMATED USEFUL LIFE Office and computer equipment 3-5 years Motor vehicles 3 years Furniture and fixtures 5 years (H) 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 $53,000 of accumulated amortization as of December 31, 2000. (I) LONG-LIVED ASSETS The Company applies the provisions of Statement of Financial Accounting Standards (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, 1999 and 2000, the Company determined that there was no impairment of long-lived assets. F-9 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 (J) ADVERTISING COSTS Advertising expense was $5,237,893, $7,123,499 and $7,130,837 for the years ended December 31, 1998, 1999 and 2000, 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. Revenue estimates are used to determine the cost recovery period of prepaid mailing costs. During 2000, the Company reduced the amortization period for these advertising costs from up to five months to up to three months. Total amounts of direct advertising to prospective customers capitalized as of December 31, 1999 and 2000 are $899,000 and $93,000, respectively. (K) DEFERRED REVENUE Deferred revenue represents customer prepayments, payments for wine reservations and deferred membership revenue. The components of deferred revenue as of December 31, 1999 and 2000 are as follows: 1999 2000 Customer prepayments $ 659,751 $ 954,139 Deferred membership revenue 947,861 938,395 ---------- ---------- Deferred revenue $1,607,612 $1,892,534 ========== ========== (L) 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, 2000, the Company had no foreign exchange contracts outstanding. The Financial Accounting Standards Board (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 Nos. 137 and 138, 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 adopted this statement effective January 1, 2000 and the adoption did not have an impact on its financial position or results of operations. F-10 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 (M) FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure about fair value of financial instruments. Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and bank debt. The estimated fair value of these financial instruments approximates their carrying value at December 31, 1999 and 2000, due to their short-term nature. (N) CONCENTRATION OF CREDIT RISK SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash equivalents. The Company places its cash and cash equivalents in highly rated financial institutions. No single supplier constituted a significant percentage of the Company's purchases during 1999 or 2000. (O) 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. (P) SEGMENT REPORTING SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes 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. (Q) RECENTLY ISSUED ACCOUNTING STANDARDS In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation--An Interpretation of APB Opinion No. 25. This interpretation provides guidance on the application of Accounting Principles Board (APB) Opinion No. 25, including (i) the definition of an employee, (ii) the criteria for determining whether a plan qualifies as a F-11 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 noncompensatory plan, (iii) the accounting consequence of various modifications to the terms of a previously fixed stock option or award and (iv) the accounting for an exchange of stock compensation awards in a business combination. This interpretation was effective July 1, 2000 and the effects of applying the interpretation were recognized on a prospective basis. The adoption of this interpretation did not have a material impact on the Company's results of operations or financial condition. (R) RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1999 financial statements to conform to the 2000 presentation. (3) ACQUISITION On July 7, 1998, pursuant to an asset purchase agreement with Passport Gift Company, Inc. (Passport), the Company acquired certain assets and assumed certain liabilities for consideration of $465,343 in cash, including acquisition costs. This transaction was accounted for as a purchase in accordance with APB No. 16, Accounting for Business Combinations, and, accordingly, the results of Passport since July 7, 1998 have been included in the accompanying statement of operations. The results of Passport's operations are not material to the financial statements as a whole. The purchase price was allocated to the acquired assets as follows: 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 and 2000 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, 1998, 1999 and 2000, 245,468, 414,067 and 371,849 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, 2000 A reconciliation of basic and diluted shares outstanding is as follows:
Years Ended December 31, 1998 1999 2000 Basic weighted average shares 3,786,400 3,842,742 3,855,071 outstanding Weighted average common equivalent shares from options 14,201 - - --------- --------- --------- Diluted weighted average shares outstanding 3,800,601 3,842,742 3,855,071 ========= ========= =========
(5) LINE OF CREDIT On April 13, 2000, the Company entered into a two-year line-of-credit agreement with a bank that allows the Company to borrow the lesser of $5,000,000 or 50% of certain inventories, as defined. The borrowings under the line of credit bear interest at the bank's prime rate (9.5% at December 31, 2000). The Company is required to maintain certain financial covenants, including a minimum consolidated debt service ratio and a minimum consolidated leverage ratio. The Company was not in compliance with these covenants as of December 31, 2000. At December 31, 2000, the Company had $2,225,000 outstanding under the line and there was no amount available for future borrowings. On March 5, 2001, the line of credit was amended to waive the default of the financial covenants for the fiscal quarter ended December 31, 2000. The amendment also reduced the maximum borrowing amount to $1,900,000, as of March 5, 2001, and automatically reduces the maximum borrowing amount by $50,000 on the first and fifteenth of each calendar month, until the events of default have been cured. The Company expects to be in compliance with the covenants as of the end of the fiscal quarter ended March 31, 2001. 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. 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 expired at different periods from March through April 2000. There were no forward foreign exchange contracts outstanding at December 31, 2000. F-13 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 (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, 2000 are approximately as follows: FISCAL YEAR AMOUNT 2001 $ 898,000 2002 803,000 2003 666,000 2004 527,000 2005 251,000 ---------- $3,145,000 ========== Total rental expense under these agreements included in the accompanying statements of operations is approximately $1,003,000, $1,081,000 and $1,172,000 for the years ended December 31, 1998, 1999 and 2000, respectively. (B) LITIGATION In the ordinary course of business, the Company is party to various types of litigation. The Company believes it has meritorious defenses to all claims and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company's financial position or results of operations. (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. F-14 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 The components of the provision (benefit) for income taxes are as follows: 1998 1999 2000 Current- Federal $486,955 $ - $ (84,000) State 130,000 - (26,000) -------- --------- --------- 616,955 - (110,000) -------- --------- --------- Deferred (benefit) expense- Federal 105,355 (245,000) (313,000) State 29,000 (69,000) (113,000) -------- --------- --------- 134,355 (314,000) (426,000) -------- --------- --------- Valuation allowance - 314,000 536,000 -------- --------- --------- $751,310 $ - $ - ======== ========= =========
The valuation allowance against a portion of the Company's deferred tax asset is due to uncertainty as to when the benefits of the favorable tax attributes in future income tax returns will be realized. Realization of the remaining deferred tax asset is dependent on generating sufficient taxable income during the carryforward period. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset, net of the valuation allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. In reaching this determination, management reviewed the Company's historical performance and projections of future results. These projections provide positive evidence of future probable realization of the future remaining tax asset within the prescribed carryforward timeframe. The reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 1998, 1999 and 2000 for income taxes are as follows: 1998 1999 2000 Income tax provision (benefit) at federal 34.0% (34.0)% (34.0)% statutory rate State taxes, net of federal benefit 6.0 (6.0) (6.0) Non deductible merger costs 0.0 22.0 (75.0) Increase in valuation allowance 0.0 16.5 113.9 Other, net 2.5 1.5 1.1 ---- ------ ------ 42.5% 0.0% 0.0% ==== ====== ======
F-15 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 Deferred income taxes relate to the following temporary differences as of December 31, 1999 and 2000: 1999 2000 Deferred revenue $ 466,000 $ 384,000 Capitalized inventory 186,000 244,000 Nondeductible reserves 242,000 398,000 Depreciation and amortization 91,000 255,000 Net operating loss carryforward 68,000 16,000 Tax benefit from disqualifying dispositions 39,000 - Deferred costs (197,000) 24,000 Valuation allowance (314,000) (850,000) --------- --------- Total deferred taxes $ 581,000 $ 471,000 ========= =========
(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. (B) STOCK OPTION PLANS The Employee Stock Option Plan (the 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 (the 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-16 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 Activity under the Option Plan and the Director Plan is summarized as follows:
Option Plan Number of Weighted Exercise Shares Average Price Price per per share share Outstanding, December 31, 1997 213,890 $4.84 $ 3.78-8.00 Granted 196,500 4.31 3.00-4.50 Terminated (75,363) 5.55 4.00-8.00 -------- ----- ------------ Outstanding, December 31, 1998 335,027 4.37 3.00-8.00 Granted 207,000 6.68 5.56-7.63 Terminated (134,375) 5.85 3.00-8.00 Exercised (53,585) 4.67 4.00-8.00 -------- ----- ------------ Outstanding, December 31, 1999 354,067 5.11 3.00-8.00 Granted 151,500 3.59 2.06-4.44 Terminated (183,718) 4.49 2.06-8.00 Exercised (5,000) 4.18 4.00-4.38 -------- ----- ------------ Outstanding, December 31, 2000 316,849 $4.76 $ 2.06-$8.00 ======== ===== ============ Exercisable, December 31, 2000 132,180 $5.58 $ 3.00-$8.00 ======== ===== ============ Exercisable, December 31, 1999 149,011 $4.36 $ 3.00-$8.00 ======== ===== ============ Exercisable, December 31, 1998 156,250 $4.57 $ 3.78-$8.00 ======== ===== ============
Director Plan Weighted Exercise Number of Average Price Price Per Shares per share share Outstanding, December 31, 1997 30,000 $6.85 $4.38-$15.25 Granted 15,000 4.41 4.31-4.59 -------- ----- ------------ Outstanding, December 31, 1998 45,000 6.04 4.31-15.25 Granted 15,000 7.02 6.81-7.13 -------- ----- ------------ Outstanding, December 31, 1999 60,000 6.28 4.31-15.25 Granted 12,500 3.48 3.38-3.50 Terminated (17,500) 5.05 3.50-7.13 -------- ----- ------------ Outstanding, December 31, 2000 55,000 $6.04 $3.38-$15.25 ======== ===== ============ Exercisable, December 31, 2000 34,996 $6.74 $4.31-$15.25 ======== ===== ============ Exercisable, December 31,1999 29,944 $6.85 $4.31-$15.25 ======== ===== ============ Exercisable, December 31,1998 18,330 $8.38 $4.38-$15.25 ======== ===== ============
F-17 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 The following table summarizes information about stock options outstanding and exercisable at December 31, 2000 under the Option Plan:
Options Outstanding Number Weighted Options Exercisable Exercise Outstanding as Average Remaining Weighted Average Number Exercisable Weighted Average Price/Range of of December 31, Contractual Life Exercise at December 31, Exercise Exercise Prices 2000 (In Years) Price 2000 Price $ 2.06-3.00 59,000 9.2 $2.47 5,000 $3.00 4.00-5.25 164,000 8.0 4.45 60,666 4.83 6.06-8.00 93,849 7.4 6.74 66,514 6.45 ------- ----- ------- ----- 316,849 $4.76 132,180 $5.58 ======= ===== ======= =====
The following table summarizes information about stock options outstanding and exercisable at December 31, 2000 under the Director Plan:
Options Outstanding Number Weighted Options Exercisable Exercise Outstanding as Average Remaining Weighted Average Number Exercisable Weighted Average Price/Range of of December 31, Contractual Life Exercise at December 31, Exercise Exercise Prices 2000 (In Years) Price 2000 Price $ 3.38-4.63 35,000 7.4 $ 4.15 21,664 $ 4.44 6.81-8.00 15,000 6.8 7.36 8,332 7.62 15.25 5,000 4.4 15.25 5,000 15.25 ------ ------ ------ ------ 55,000 $ 6.04 34,996 $ 6.74 ====== ====== ====== ======
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 APB Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. Options granted in 1998, 1999 and 2000 have been valued using the Black- Scholes option pricing model prescribed by SFAS No. 123. F-18 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 The weighted average assumptions used for the years ended December 31, 1998, 1999 and 2000 are as follows:
December 31, 1998 1999 2000 Risk-free interest rate 4.76 to 5.7% 4.77 to 6.0% 6.05 to 6.69% Expected dividend yield - - - Expected lives 9 years 8 years 8 years Expected volatility 96% 93% 78%
The weighted average fair value of options granted during the years ended December 31, 1998, 1999 and 2000 under these plans is $3.83, $5.71 and $2.85, respectively. As of December 31, 1998, 1999 and 2000, the weighted average remaining contractual life of outstanding options under these plans is 8.4, 7.9 and 8.0 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, 1998 1999 2000 Net income (loss)- As reported $1,013,330 $(1,494,471) $ (470,662) Pro forma 690,050 (2,042,038) (1,229,109) Basic net income (loss) per share- As reported $ 0.27 $ (0.39) $ (0.12) Pro forma 0.18 (0.53) (0.32)
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. (C) EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors and the stockholders on April 8, 1994 to allow eligible employees, as defined in the Purchase Plan, to purchase shares of common stock during one or more six-month periods through payroll deductions. A total of 50,000 shares of common stock have been reserved for purchase under the F-19 GEERLINGS & WADE, INC. Notes to Financial Statements December 31, 2000 Purchase Plan. As of December 31, 1999 and 2000, a cumulative total of 20,243 shares and 22,112 shares, respectively, of common stock have been purchased by employees under the Purchase Plan. (D) NASDAQ DELISTING The Company has been notified by NASDAQ that the Company fails to comply with the minimum market value of public float requirement for continued listing, and that its securities are, therefore, subject to delisting from The NASDAQ National Market. The Company requested an oral hearing before a NASDAQ Listing Qualifications Panel to review the Staff Determination and seek continued listing. The Company appeared at this hearing on March 8, 2001 and provided information supporting its position that its common stock should continue to be listed on The NASDAQ National Market. The Panel's determination is expected to be released by the end of March or early April. There can be no assurance the Panel will grant the Company's request for continued listing. Pending a determination of the Panel, the Company's common stock will continue to trade on The NASDAQ National Market. In the event the Panel determines to discontinue the listing of the Company's securities on The NASDAQ National Market, the Company intends to seek listing on The NASDAQ SmallCap Market. However, there is no assurance that any such actions will be effective or that listing will not cease after the Panel's determination. (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 are immediately eligible to participate in the Plan subject to entry dates of January 1 and July 1.. 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. During fiscal 2000, the Plan was amended to allow employees to participate immediately and to change the vesting of company matching contributions to four years. For the fiscal years ended December 31, 1998, 1999 and 2000, the Company's contribution expense was $31,500, $36,600 and $27,454, respectively, under the Plan. (10) RELATED PARTY During 2000, the Company expensed approximately $266,000 for services provided by Hill, Holiday in connection with 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 an arm's-length basis. (11) SUMMARY OF QUARTERLY DATA (UNAUDITED) A summary of quarterly data follows (in thousands, except per share data):
1999 Quarter Ended March 31 June 30 September 30 December 31 ------------------- ------------------ ------------------- ------------------- Net Sales 9,055 9,040 7,740 13,029 Gross Profit 4,627 4,637 4,088 6,572 Operating (loss) profit (502) 362 (408) (932) Net (loss) Income (282) 217 (262) (1,167) (Loss) Earnings per share: Basic (0.07) 0.06 (0.07) (0.30) Diluted (0.07) 0.06 (0.07) (0.30)
2000 Quarter Ended March 31 June 30 September 30 December 31 ------------------- ------------------- ------------------- ------------------ Net Sales 8,529 9,363 7,252 12,009 Gross Profit 4,407 4,774 3,583 7,085 Operating (Loss) Profit (1,601) (317) (162) 565 Net (Loss) Income (412) (357) (210) 509 Earnings per share: Basic (0.11) (0.09) (0.05) 0.13 Diluted (0.11) (0.09) (0.05) 0.13
F-20 EX-10.8.2 2 0002.txt FIRST AMENDMENT TO CREDIT AGREEMENT Exhibit 10.8.2 EXECUTION --------- FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "FIRST AMENDMENT") is entered into as of December 4, 2000, by and between GEERLINGS & WADE, INC., a Massachusetts corporation (the "BORROWER") and CITIZENS BANK OF MASSACHUSETTS, a Massachusetts bank (the "LENDER"). All capitalized terms not defined herein but defined in that certain Credit Agreement, dated as of April 13, 2000 (the "CREDIT AGREEMENT"), by and between the Borrower and the Lender, shall have the meanings given to such terms in the Credit Agreement. Preliminary Statements: ---------------------- A. Pursuant to the Credit Agreement and the other Financing Documents, the Lender has made or agreed to make certain Loans to the Borrower; and B. The Borrower has requested that the Lender grant certain financial accommodations for the benefit of the Borrower with respect to the Loans, all as more particularly described herein; and C. The Lender is unwilling to comply with the foregoing request of the Borrower, unless and until the Borrower has entered into, and agreed to, all of the terms and conditions of, this First Amendment; NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Waiver of Certain Events of Default. At the request of the Borrower, the Lender hereby waives, for the Borrower's fiscal quarter ended September 30, 2000 only, any Default or Event of Default which has occurred or may have occurred as a result of the failure of the Borrower to comply with (a) any of the financial covenants contained in subsection 6.1 of the Credit Agreement; or (b) any of the covenants contained in Section 3 of the Post-Closing Agreement, dated as of April 13, 2000 (the "EXISTING POST-CLOSING AGREEMENT"), by and between the Borrower and the Lender. The foregoing waiver shall operate solely with respect to the matters and period of time described herein, and shall not impair any right or power accruing to the Lender upon the occurrence or continuance of any other Default or Event of Default under the Credit Agreement and the other Financing Documents, nor shall the waiver contained herein be construed as a waiver of any such other Default or Event of Default or as an acquiescence thereto. 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 AMENDMENT TO APPENDIX A. (a) The definition of the term "Maximum Amount" contained in Appendix A of the Credit Agreement is hereby amended, replaced and superseded in its entirety with the following definition: "'MAXIMUM AMOUNT': (a) $2,600,000.00 from November 22, 2000 to and including December 5, 2000, (b) $2,425,000.00 from December 6, 2000 to and including December 19, 2000; (c) $2,225,000.00 from December 20, 2000 to and including January 2, 2001; and (d) $2,000,000.00 from January 3, 2001 to the date on which the Lender receives, in accordance with the provisions of subsection 5.2(b), a Compliance Certificate for the Borrower's fiscal quarter ending December 31, 2000, whereupon on and after such date, the Maximum Amount shall be either (i) $5,000,000.00 if no Event of Default has occurred and is continuing as of such date or (ii) $2,000,000.00 if any Event of Default has occurred and is continuing as of such date." (b) The definition of the term "Prime Rate" contained in Appendix A of the Credit Agreement is hereby amended, replaced and superseded in its entirety with the following definition: "'PRIME RATE': for any day, a rate equal to the variable rate of interest per annum, most recently announced by the Lender at its headquarters in Boston, Massachusetts, as its "prime rate," with the understanding that the Lender's "prime rate" is one of its interest rates and serves as a basis upon which effective rates of interest are calculated for loans making reference thereto and may not be the lowest of the Lender's interest rates. Any change in the Prime Rate shall be effective as of the effective date stated in the announcement by the Lender of such change." 2.2 Amendment to Subsection 2.1(a). The first sentence of subsection 2.1(a) of the Credit Agreement is hereby amended, restated and superseded in its entirety as follows: "Subject to the terms and conditions hereof, the Lender agrees to make revolving credit loans (hereinafter referred to collectively as the `LOANS' and each singly as a `LOAN') to the Borrower from time to time during the Revolving Credit Period in the aggregate principal amount of up to the Maximum Amount." 2 2.3 Amendment to Subsection 6.1(a). Subsection 6.1(a) of the Credit Agreement is hereby amended, restated and superseded in its entirety as follows: "(a) Consolidated Debt Service Ratio. On the last day of each fiscal quarter of the Borrower, commencing with the fiscal quarter ending June 30, 2000, the Borrower shall not permit, and shall cause each of its Subsidiaries not to permit, the Consolidated Debt Service Ratio to be less than 1.25 to 1.00 for the fiscal quarter ending on such date." 3. First Amended and Restated Post-Closing Agreement. The Borrower shall execute and deliver contemporaneously herewith to the Lender a certain First Amended and Restated Post-Closing Agreement (the "RESTATED POST-CLOSING AGREEMENT"), by and between the Borrower and the Lender, which amends, restates and supersedes in its entirety the Existing Post-Closing Agreement and shall be in the form attached hereto as EXHIBIT A. All references contained in the Credit Agreement and the other Financing Documents to the Existing Post-Closing Agreement shall now mean and refer to the Restated Post-Closing Agreement. 4. Representations and Warranties. The Borrower hereby acknowledges and confirms that all of its representations and warranties contained in the Credit Agreement and in all of the other Financing Documents are and remain true, correct and complete as of the date hereof as if made as of the date hereof, except as the same may expressly relate to an earlier date. 5. No Events of Default. The Borrower hereby represents and warrants to the Lender that except as otherwise provided in Section 1 of this First Amendment, no Event of Default has occurred and is now continuing under the Credit Agreement or under any of the other Financing Documents, and there does not now exist any circumstance or set of facts, which with the passage of time or the giving of notice or both would constitute or result in an Event of Default under the Credit Agreement or under any of the other Financing Documents. 6. Ratification of Financing Documents. Subject to the amendments expressly set forth in Section 2 of this First Amendment and in the Restated Post-Closing Agreement, the Borrower hereby ratifies and reaffirms all of the terms and provisions of the Financing Documents and hereby expressly acknowledges and confirms that the terms and provisions of each thereof, as amended hereby, shall and do remain in full force and effect. Any reference to the Credit Agreement contained in any of the Financing Documents shall now mean and refer to the Credit Agreement, as amended by this First Amendment. 7. Conditions Precedent. The effectiveness of this First Amendment and the obligations of the Lender hereunder are subject to the satisfaction of each of the following conditions precedent, all of which shall be in form, scope and substance satisfactory to the Lender in all respects: (a) First Amendment; Restated Post-Closing Agreement. The Lender shall have received this First Amendment and the Restated Post-Closing Agreement, each as executed by a duly authorized officer of the Borrower, with the signature of such officer duly witnessed and notarized hereon. 3 (b) Authority Documents. The Lender shall have received a Certificate of Assistant Clerk of the Borrower, dated of even date herewith, certifying: (i) the adoption by all of the Board of Directors of the Borrower of resolutions authorizing and approving the transactions contemplated by this First Amendment and the Restated Post-Closing Agreement; (ii) since April 13, 2000, there have been no amendments, modifications or changes to the Articles of Organization or By-Laws of the Borrower, and that said Articles of Organization and By-Laws continue to remain in full force and effect; and (iii) the name and signatures of the officers of the Borrower authorized to sign, for and on behalf of the Borrower, this First Amendment. (c) Incumbency Certificate. The Lender shall have received a certificate of the Borrower, dated as of the date hereof, as to the incumbency and signature of the officers of the Borrower executing this First Amendment, in form and substance reasonably satisfactory to the Lender, as executed by the Assistant Clerk of the Borrower. (d) Certificate of Corporate Good Standing. The Lender shall have received a Certificate of Corporate Legal Existence and Good Standing for the Borrower, as issued by the Massachusetts Secretary of State. (e) Fees, Costs and Expenses. The Lender shall have received payment or reimbursement from the Borrower for all of the fees, costs and expenses (including reasonable legal fees, costs and expenses) incurred by the Lender in connection with the transactions contemplated by this First Amendment and the Restated Post-Closing Agreement. (f) Other. The Borrower shall have delivered to the Lender such other documents and instruments as the Lender may reasonably require. 8. Miscellaneous. 8.1 No Other Amendments; No Waiver. Except as expressly set forth herein, nothing contained herein shall be construed to modify, amend or otherwise alter any of the terms or provisions of any of the Financing Documents; nothing contained herein shall constitute a waiver of or bar to any rights or remedies available to the Lender, or a waiver of any Event of Default under the Financing Documents on any occasion, other than as expressly set forth herein; and nothing contained herein shall constitute an agreement by the Lender or obligate the Lender to take or refrain from taking any action. 8.2 Execution; Counterparts. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears hereon, and all of which shall together constitute one and the same instrument. This First Amendment shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 4 8.3 Successors and Assigns. This First Amendment shall be binding upon and inure to the benefit of the parties hereto, and their respective representatives, successors and assigns. 8.4 Governing Law. This First Amendment and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, notwithstanding any conflict-of-law provisions to the contrary. [THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY] -------------------------------------------------------- 5 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered under seal by their proper and duly authorized officers as of the date first above written. WITNESS: GEERLINGS & WADE, INC. /s/ Gregg A. Kober By: /s/ David R. Pearce - ------------------------- ------------------------- Name: Gregg A. Kober David R. Pearce, President WITNESS: CITIZENS BANK OF MASSACHUSETTS /s/ Christine Mattuchio By: /s/ Michael T. Bulman - -------------------------- -------------------------- Name: Christine Mattuchio Michael T. Bulman, Senior Vice President 6 COMMONWEALTH OF MASSACHUSETTS Norfolk County, ss. December 4, 2000 Then personally appeared the above-named David A. Pearce, as President of Geerlings & Wade, Inc., and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Geerlings & Wade, Inc., before me. /s/ Iveta Estrella ------------------ Notary Public My commission expires: 6/21/07 [AFFIX NOTARIAL SEAL] COMMONWEALTH OF MASSACHUSETTS Plymouth County, ss. January 3, 2001 Then personally appeared the above-named Michael T. Bulman, as Senior Vice President of Citizens Bank of Massachusetts, and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Citizens Bank of Massachusetts, before me. /s/ Christine Mattuchio ----------------------- Notary Public My commission expires: August 27, 2004 [AFFIX NOTARIAL SEAL] 7 EXHIBIT A FIRST AMENDED AND RESTATED POST-CLOSING AGREEMENT This FIRST AMENDED AND RESTATED POST-CLOSING AGREEMENT (this "AGREEMENT") is made as of December 4, 2000, by and between GEERLINGS & WADE, INC., a Massachusetts corporation (the "BORROWER") and CITIZENS BANK OF MASSACHUSETTS, a Massachusetts bank (the "LENDER"). All capitalized terms not defined herein but defined in the Credit Agreement, dated as of April 13, 2000, by and between the Borrower and the Lender, as amended by a certain First Amendment to Credit Agreement, dated of even date herewith (the "FIRST AMENDMENT TO CREDIT AGREEMENT"), by and between the Borrower and the Lender (said Credit Agreement, as so amended, is hereinafter referred to collectively as the "CREDIT AGREEMENT"), shall have the meanings given to such terms in the Credit Agreement. Preliminary Statements: ----------------------- WHEREAS, the Borrower has requested that the Lender enter into the First Amendment to Credit Agreement in order to grant certain financial accommodations for the benefit of the Borrower with respect to the Loans, all as more particularly described therein; and WHEREAS, it is a condition precedent to the effectiveness of the First Amendment to Credit Agreement and to the obligation of the Lender thereunder that the Borrower enter into this Agreement which amends, restates and supersedes in its entirety that certain Post-Closing Agreement, dated as of April 13, 2000 (the "EXISTING POST-CLOSING AGREEMENT"), by and between the Borrower and the Lender; NOW, THEREFORE, in order to induce the Lender to enter into the First Amendment to Credit Agreement, and in consideration thereof and in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Existing Post-Closing Agreement is hereby amended, restated and superseded in its entirety as follows: 1. Post-Closing Item. By WEDNESDAY, MARCH 31, 2001, the Borrower shall deliver (or cause to be delivered) to the Lender the Acknowledgment and Consent attached to the Collateral Assignment of Lease for the Canton, Massachusetts real estate, as executed the landlord of such real estate. The Lender shall have the right to exclude from the Borrowing Base any Eligible Inventory which is stored or otherwise kept on the Canton, Massachusetts real estate, until such time as the Borrower delivers the document described herein. 2. Event of Default. Notwithstanding any provision contained in any of the Financing Documents to the contrary, any failure of the Borrower to punctually perform, observe, comply with or satisfy the covenant contained in the first sentence of Section 1 of this Agreement shall constitute an Event of Default under the Credit Agreement. 8 3. Further Assurances. The Borrower will do all such acts, and will furnish to the Lender all such agreements, instruments, filings, certificates, legal opinions and other documents and will do or cause to be done all such other things as the Lender may reasonably request from time to time in order to effectuate the transactions contemplated in this Agreement. 4. Miscellaneous. 4.1 Counterparts. This Agreement may be executed in more than one counterpart, each of which taken together shall constitute one and the same instrument. This Agreement shall become effective only upon execution by all parties hereto. 4.2 Headings. Headings appearing in this Agreement are intended for convenience only and do not constitute, and shall not be interpreted to be, a part of this Agreement. 4.3 Notices. All notices required or permitted hereunder shall be in writing and delivered in accordance with the provisions of the Credit Agreement. 4.4 Fees, Costs and Expenses. The Borrower agrees to pay, or to reimburse the Lender, as the case may be, on demand, for all fees, costs and expenses (including reasonable legal fees, costs and expense) incurred or paid by the Lender in connection with consummating the transactions contemplated by this Agreement. 4.5 Successors and Assigns. The provisions of this Agreement shall be binding upon the respective heirs, successors and assigns of the parties hereto. This Agreement and any rights and remedies of the Lender hereunder may be assigned in whole or in part by the Lender at the Lender's discretion. 4.6 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. 4.7 Governing Law; Jurisdiction. This Agreement is executed and delivered under seal and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts, without giving effect to the conflict of law provisions thereof. The Borrower submits itself to the non-exclusive jurisdiction of the Courts of The Commonwealth of Massachusetts for all purposes with respect to the Financing Documents and the Borrower's relationship with the Lender. [THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY] -------------------------------------------------------- 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered under seal by their proper and duly authorized officers as of the day and year first above written. WITNESS: GEERLINGS & WADE, INC. /s/ Gregg A. Kober By: /s/ David R. Pearce - ----------------------------- ---------------------------- Name: Gregg A. Kober David R. Pearce, President WITNESS: CITIZENS BANK OF MASSACHUSETTS /s/ Christine Mattuchio By: /s/ Michael T. Bulman - ----------------------------- ---------------------------- Name: Christine Mattuchio Michael T. Bulman, Senior Vice President 10 COMMONWEALTH OF MASSACHUSETTS Norfolk County, ss. December 4, 2000 Then personally appeared the above-named David R. Pearce as President of Geerlings & Wade, Inc., and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Geerlings & Wade, Inc., before me. /s/ Iveta Estrella ------------------------------------- Notary Public My commission expires: 6/21/07 [AFFIX NOTARIAL SEAL] COMMONWEALTH OF MASSACHUSETTS Plymouth County, ss. January 3, 2001 Then personally appeared the above-named Michael T. Bulman as Senior Vice President of Citizens Bank of Massachusetts, and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Citizens Bank of Massachusetts, before me. /s/ Christine Mattuchio -------------------------------------- Notary Public My commission expires: August 27, 2004 [AFFIX NOTARIAL SEAL] 11 EX-10.8.3 3 0003.txt SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 10.8.3 EXECUTION --------- SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT (this "SECOND AMENDMENT") is entered into as of March 5, 2001, by and between GEERLINGS & WADE, INC., a Massachusetts corporation (the "BORROWER") and CITIZENS BANK OF MASSACHUSETTS, a Massachusetts bank (the "LENDER"). All capitalized terms not defined herein but defined in that certain Credit Agreement, dated as of April 13, 2000, by and between the Borrower and the Lender, as amended by a certain First Amendment to Credit Agreement, dated as of December 4, 2000, by and between the Borrower and the Lender (said Credit Agreement, as so amended, is hereinafter referred to collectively as the "CREDIT AGREEMENT"), shall have the meanings given to such terms in the Credit Agreement. Preliminary Statements: ---------------------- A. Pursuant to the Credit Agreement and the other Financing Documents, the Lender has made or agreed to make certain Loans to the Borrower; and B. The Borrower has requested that the Lender grant certain financial accommodations for the benefit of the Borrower with respect to the Loans, all as more particularly described herein; and C. The Lender is unwilling to comply with the foregoing request of the Borrower, unless and until the Borrower has entered into, and agreed to, all of the terms and conditions of, this Second Amendment; NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Waiver of Certain Events of Default. At the request of the Borrower, the Lender hereby waives, for the Borrower's fiscal quarter ended December 31, 2000 only, any Default or Event of Default which has occurred or may have occurred as a result of the failure of the Borrower to comply with any of the financial covenants contained in subsection 6.1 of the Credit Agreement. The foregoing waiver shall operate solely with respect to the matters and period of time described herein, and shall not impair any right or power accruing to the Lender upon the occurrence or continuance of any other Default or Event of Default under the Credit Agreement and the other Financing Documents, nor shall the waiver contained herein be construed as a waiver of any such other Default or Event of Default or as an acquiescence thereto. 2. Amendments to Credit Agreement. The definition of the term "Maximum Amount" contained in Appendix A of the Credit Agreement is hereby amended, replaced and superseded in its entirety with the following definition: "'MAXIMUM AMOUNT': $1,900,000.00, which amount shall automatically and without notice be reduced by $50,000.00 on the 1st and the 15th of each calendar month, commencing as of March 15, 2001 and continuing thereafter until such time as the Lender receives, in accordance with the provisions of subsection 5.2(b), a Compliance Certificate which indicates that (a) the Borrower is in compliance with all of the financial covenants contained in subsection 6.1 of this Agreement, and (b) no Event of Default has occurred and is continuing hereunder, and there does not now exist any circumstance or set of facts, which with the passage of time or the giving of notice or both would constitute or result in any such Event of Default." 3. Representations and Warranties. The Borrower hereby acknowledges and confirms that all of its representations and warranties contained in the Credit Agreement and in all of the other Financing Documents are and remain true, correct and complete as of the date hereof as if made as of the date hereof, except as the same may expressly relate to an earlier date. 4. No Events of Default. The Borrower hereby represents and warrants to the Lender that except as otherwise provided in Section 1 of this Second Amendment, no Event of Default has occurred and is now continuing under the Credit Agreement or under any of the other Financing Documents, and there does not now exist any circumstance or set of facts, which with the passage of time or the giving of notice or both would constitute or result in an Event of Default under the Credit Agreement or under any of the other Financing Documents. 5. Ratification of Financing Documents. Subject to the amendments expressly set forth in Section 2 of this Second Amendment, the Borrower hereby ratifies and reaffirms all of the terms and provisions of the Financing Documents and hereby expressly acknowledges and confirms that the terms and provisions of each thereof, as amended hereby, shall and do remain in full force and effect. Any reference to the Credit Agreement contained in any of the Financing Documents shall now mean and refer to the Credit Agreement, as amended by this Second Amendment. 6. Conditions Precedent. The effectiveness of this Second Amendment and the obligations of the Lender hereunder are subject to the satisfaction of each of the following conditions precedent, all of which shall be in form, scope and substance satisfactory to the Lender in all respects: (a) Second Amendment. The Lender shall have received this Second Amendment, as executed by a duly authorized officer of the Borrower, with the signature of such officer duly witnessed and notarized hereon. (b) Authority Documents. The Lender shall have received a Certificate of Assistant Clerk of the Borrower, dated of even date herewith, certifying: (i) the adoption by all of the Board of Directors of the Borrower of resolutions authorizing and approving the transactions contemplated by this Second Amendment; (ii) since April 13, 2000, there have been no amendments, modifications or changes to the Articles of Organization or By-Laws of the Borrower, and that said Articles of Organization and By-Laws continue to remain in full force and effect; and (iii) the name and signatures of the officers of the Borrower authorized to sign, for and on behalf of the Borrower, this Second Amendment. (c) Incumbency Certificate. The Lender shall have received a certificate of the Borrower, dated as of the date hereof, as to the incumbency and signature of the officers of the Borrower executing this Second Amendment, in form and substance reasonably satisfactory to the Lender, as executed by the Assistant Clerk of the Borrower. (d) Certificate of Corporate Good Standing. The Lender shall have received a Certificate of Corporate Legal Existence and Good Standing for the Borrower, as issued by the Massachusetts Secretary of State. (e) Fees, Costs and Expenses. The Lender shall have received payment or reimbursement from the Borrower for all of the fees, costs and expenses (including reasonable legal fees, costs and expenses) incurred by the Lender in connection with the transactions contemplated by this Second Amendment. (f) Other. The Borrower shall have delivered to the Lender such other documents and instruments as the Lender may reasonably require. 7. Miscellaneous. 7.1 No Other Amendments; No Waiver. Except as expressly set forth herein, nothing contained herein shall be construed to modify, amend or otherwise alter any of the terms or provisions of any of the Financing Documents; nothing contained herein shall constitute a waiver of or bar to any rights or remedies available to the Lender, or a waiver of any Event of Default under the Financing Documents on any occasion, other than as expressly set forth herein; and nothing contained herein shall constitute an agreement by the Lender or obligate the Lender to take or refrain from taking any action. 7.2 Execution; Counterparts. This Second Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears hereon, and all of which shall together constitute one and the same instrument. This Second Amendment shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 7.3 Successors and Assigns. This Second Amendment shall be binding upon and inure to the benefit of the parties hereto, and their respective representatives, successors and assigns. 7.4 Governing Law. This Second Amendment and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, notwithstanding any conflict-of-law provisions to the contrary. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered under seal by their proper and duly authorized officers as of the date first above written. WITNESS: GEERLINGS & WADE, INC. /s/ Dodie Clasen By: /s/ David R. Pearce - --------------------------- ---------------------------- Name: Dodie Clasen David R. Pearce, President WITNESS: CITIZENS BANK OF MASSACHUSETTS /s/ Stephen C. Brooks By: /s/ Michael T. Bulman - --------------------------- ---------------------------- Name: Stephen C. Brooks Michael T. Bulman, Senior Vice President COMMONWEALTH OF MASSACHUSETTS Norfolk County, ss. March 21, 2001 Then personally appeared the above-named David A. Pearce, as President of Geerlings & Wade, Inc., and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Geerlings & Wade, Inc., before me. /s/ Iveta Estrella ------------------------------- Notary Public My commission expires: 6/21/07 [AFFIX NOTARIAL SEAL] COMMONWEALTH OF MASSACHUSETTS Plymouth County, ss. March 21, 2001 Then personally appeared the above-named Michael T. Bulman, as Senior Vice President of Citizens Bank of Massachusetts, and acknowledged the foregoing instrument to be his free act and deed and the free act and deed of Citizens Bank of Massachusetts, before me. /s/ Christine Mattuchio ----------------------- Notary Public My commission expires: Aug. 27, 2004 [AFFIX NOTARIAL SEAL] EX-10.42 4 0004.txt LEASE AGREEMENT Exhibit 10.42 LEASE AMENDMENT DATED: November 29, 2000 BETWEEN: M&T PARTNERS, INC. LANDLORD a Delaware Corporation AND: GEERLINGS AND WADE TENANT A Massachusetts corporation By written Lease dated July 18, 1994, Tenant leased from Landlord approximately 5,000 square feet of warehouse and office space located in Building No. 5, Pacific Business Park, 7012 South 220th Street, Kent Washington 98032 (hereinafter referred to as "the Premises"). Effective April 1, 1997, the Landlord Pacific Realty Associates, L.P., transferred ownership of the Property to PBP-N, Inc. By Lease Amendment, dated October 9, 1997, the Lease term was extended. Effective November 24, 1999, the Landlord PBP-N, Inc. merged into M&T Partners, Inc. The Lease expires November 30, 2000. Tenant now wishes to extend the term of the Lease. NOW, THEREFORE, the parties agree as follows: 1. The Lease shall be extended for an additional 36 months commencing December 1, 2000 and continuing through November 30, 2003. 2. The base rent shall increase to $2,210.00 per month for the period December 1, 2000 through November 30, 2001. Effective December 1, 2001 through November 30, 2002 the base rent shall increase to $2,320.00 per month. Effective December 1, 2002 through November 30, 2003 the base rent shall increase to $2,412.00 per month. 3. Tenant has deposited $2,060.00 with Landlord under the terms of the Lease. Tenant shall now deposit with Landlord an additional $352.00, bringing its total security deposit to $2,412.00. 4. Except as expressly modified hereby, all terms of the Lease shall remain in full force and effect and shall continue through the extended term. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first written above. M & T PARTNERS, INC. GEERLINGS AND WADE a Delaware Corporation a Massachusetts corporation By /s/ Leon M. Hartvickson By /s/ David R. Pearce ----------------------- ------------------- Leon M. Hartvickson David R. Pearce ------------------- --------------- Vice President President -------------- --------- (Acknowledgment by Individual) STATE OF MASSACHUSETTS ) ) ss County of NORFOLK ) On this 4th day of December, 2000, before me, personally appeared David Pearce to me known to be the individual described in and who executed the foregoing instrument, and acknowledged to me that he signed the said instrument as his free and voluntary act and deed for the uses and purposes therein mentioned. /s/ Iveta Estrella ------------------ Notary Public for ----------------------------- My Commission Expires: 6/21/07 ------- (Acknowledged by M&T Partners, Inc.) STATE OF OREGON ) ) ss County of WASHINGTON ) On this 21st day of December, 2000 before, me personally appeared Leon M. Hartvickson, who, being first duly sworn, did say that he is the Vice President of M&T Partners, Inc. WITNESS my hand and official seal /s/ Cindy A. Carden --------------------------------------- Notary Public for the State of Oregon ------------------- My Commission Expires: 5/25/04 ---------------- EX-10.43 5 0005.txt INDENTURE OF LEASE DATED FEBRUARY 16, 2000 Exhibit 10.43 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 1 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. 2 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 3 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. 4 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. 5 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. 6 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". 7 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 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. 9 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 By: /s/ John G. Naughton /s/ Paddy Moran ---------------------------------- --------------------------------- John G. Naughton WITNESS Geerlings & Wade, Inc. - ----------------------------------- --------------------------------- (LESSEE) WITNESS By: /s/ Jay Essa /s/ Gregg Kober ---------------------------------- --------------------------------- WITNESS Its: President Duly Authorized 10 COMMONWEALTH OF MASSACHUSETTS ss. COUNTY OF PLYMOUTH March 13, 2000 Then personally appeared John Naughton to me known to be the individual who acknowledged (her/him) self to be the Manager of The Naughton Company, 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 13th day of March, 2000. Notary Public /s/ Carolyn T. Lyons -------------------------------------------- My commission expires September 8, 2006 COMMONWEALTH OF MASSACHUSETTS ss. COUNTY OF BRISTOL March 8, 2000 Then personally appeared Jay Essa to me known to be the individual who acknowledged (her/him) self to be the President of Geerlings & Wade, Inc., 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 8th day of March, 2000. Notary Public /s/ Sharon J. Read ---------------------------------------- My commission expires December 1, 2000 11 -----END PRIVACY-ENHANCED MESSAGE-----