-----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, E8yDtDKsfknHIR5OGOmoGKYaJ6sn15T/HUlJXzf7tZqcmrtbyAVwjd9GFKmSYsDn cj31Bc6RrHHLIw5+YpiAHw== 0000927016-03-001391.txt : 20030327 0000927016-03-001391.hdr.sgml : 20030327 20030326201201 ACCESSION NUMBER: 0000927016-03-001391 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 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: 1934 Act SEC FILE NUMBER: 000-24048 FILM NUMBER: 03619269 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 d10k.htm FORM 10-K FORM 10-K

 


FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

(Mark One)

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

¨   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
incorporation or organization)

 

(IRS Employer
Identification Number)

     

960 Turnpike Street,

Canton, Massachusetts

 

02021

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: 781-821-4152

 


 

Securities registered pursuant to Section 12(b) of the Act: NONE

 

Securities registered pursuant to Section 12(g) of the Act:

 

Geerlings & Wade, Inc.’s common stock, par value $.01,

trades on The NASDAQ SmallCap Market® under the symbol GEER.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     X     No           

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes            No     X    

 

 

The aggregate market value of Common Stock of the registrant held by non-affiliates of the registrant was approximately $2,000,000 on June 28, 2002, the last business day of the registrant’s most recently completed second quarter. For purposes of the foregoing sentence, the term “affiliate” includes each director and executive officer of the registrant.

 

3,879,450 shares of Common Stock were outstanding at March 17, 2003.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement relating to the registrant’s 2003 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 mail and Internet retailer of premium, imported and domestic wines and wine-related merchandise to individual consumers. Through frequent promotions to existing and potential customers and through an 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” 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 promotions,” which are product offerings presented through various advertising media 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 promotions and an e-commerce website, reliable wine recommendations, value pricing, ease of ordering and convenient delivery.

 

Since 1998, through the Company’s e-commerce website, geerwade.com, customers have been able to place orders for wine and wine related merchandise. The geerwade.com website provides real-time inventory, electronic transfers of orders and order status and dynamic page generation to keep the website current. Approximately 16.1% of the Company’s sales in 2002 were transacted over the Internet by customers responding to e-mail, mail or other promotional offers via e-mail or by placing orders through geerwade.com.

 

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 is otherwise 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, North Carolina, Ohio, Virginia and Washington state. The Company closed its Texas operations during October 2002 due to inadequate revenues from customers in the state. The Company plans to dissolve its Texas subsidiary, Geerlings and Wade of Texas, Inc., in 2003. 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, such as Nevada and Louisiana, 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 and North Dakota also began purchasing wine from the Company’s licensed facilities in 1999. The Company’s active customers (customers who have made a purchase within the twelve preceding months) have decreased 18.7% from approximately 111,500 at December 31, 2001 to approximately 90,700 at December 31, 2002. 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 mail and Internet retailers 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:

 

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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 sources wine in the more traditional manner by placing orders with wholesalers. The Company has developed relationships with domestic wine suppliers to improve the quality and selection of wines for its customers and has added 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 believes its 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. Since 1999, the Company has submitted its wines to independent wine tasting competitions and analytical labs. Its wines have been awarded over 500 medals, favorable reviews or high marks from these third parties. Geerlings & Wade strives to maintain this relationship of trust with its customers, 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, vintages and wine makers, as well as recommendations on the selection, storage and enjoyment of wine. By educating its customers, the Company strives to give them greater confidence in their wine purchasing decisions.

 

Increasing Customer Access to Products.    The Company offers its customers the convenience of ordering products in person or by telephone, facsimile, mail, e-mail, 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 2003, the Company shipped from 15 facilities in 15 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 through the first half of 2002 mailed promotional offers at optimal times to acquire new customers and build the list of repeat customers (the “house file”). During the second half of 2002 the Company broadened its customer acquisition programs to include more direct response channels in addition to direct mail. The Company has also converted to a new customer segmentation strategy to select to which customers it will send promotions. The Company benefited from this new strategy by lowering house mailing circulation with minimal reductions in sales as it eliminated mailing to less likely 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, president and chief executive officer, Huib Geerlings. The Company, in the fall of 2002, renamed these types of mailings as “connoisseur letters.” The Company encourages its customers to respond to these e-mails 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.

 

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Applying Computer Systems to Enhance Operations.    The Company’s software system provides an order entry interface for the Company’s telephone sales representatives, electronic order entry over the Internet, inventory management, facilities fulfillment support, purchasing, accounting, marketing analysis and management reporting. All customer orders are entered in the system and accepted and processed at one of 15 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, which provides valuable information used to operate the business. The Company plans to further develop its reporting capabilities and order processing functionality by using these new databases.

 

Utilizing E-commerce.    The Company maintains its website, geerwade.com (launched in 1998). Geerwade.com features the Company’s wine offerings, offers continuity programs through which customers receive monthly shipments of wine, enables customers to search the site and has real-time inventory management and shopping cart functionality. The Company ceased hosting, WineBins.com, which offered national wine brands to customers and has redirected traffic to geerwade.com. Customer traffic to topwine.com, a website acquired as part of the Company’s acquisition of Passport Wine Club in 1998, is automatically redirected to geerwade.com as well. Through geerwade.com, Internet revenue was approximately $4,210,000, excluding shipping revenue, in 2002. A certain percentage of customers that respond to Geerlings & Wade’s acquisition promotions will order directly from geerwade.com and continue to use the online channel as their preferred channel. The Company has advertised geerwade.com to its existing customers by including promotions in its house mailings, catalogs and e-mails. In 2002, the Company tested and used affiliate marketing and keyword searching to acquire a limited number of Internet customers. The Company plans to pursue other online partnerships and advertising to acquire new Internet customers to the extent its costs are comparable to other forms of customer acquisition.

 

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 channels. The Company believes that 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. The Company’s marketing team invested significant resources during the first half of 2002 to test and develop new promotional channels, creative concepts, offers, segmentation, product pricing and customer contact strategies. The first step of the marketing plan called for developing and testing new creative formats of its mailing promotions. Creative changes include changes in offers, merchandising, pricing, copy images and format of the promotions used to generate sales. These new creative formats, developed in response to its customer research and new modeling techniques, are designed to attract new customer segments and increase conversion rates from first time to frequent buyers. The Company has incorporated the new creative strategies that generated the highest responses yet focused on minimizing the cost to produce and mail each promotional campaign during the second quarter of 2002.

 

As the second part of the plan, the Company tested new tactics to increase the number of new Internet customers. The Company identified several methods to add customers, but determined to direct more of its acquisition resources to other more successful acquisition channels.

 

The third point in its growth plan called for developing wine tasting seminars to introduce potential customers to the Company’s wine offerings and its services. The Company has had success in developing this marketing channel and expects to continue to invest in its development.

 

The fourth growth initiative entailed, and continues to entail, building the Company’s existing continuity club program, under which customers are shipped wine monthly – its Passport Wine Club. The Company tested several different customer acquisition methods for its club business in 2002 and plans to continue developing these marketing strategies in 2003 and beyond to grow this element of its business.

 

4


 

In 2002, the Company as a result of its intensive development and testing of new marketing techniques found new ways to acquire, at substantially lower costs, new customers. The Company hopes that these techniques can be scaled sufficiently to find enough new buyers to increase its active customer base and increase overall sales.

 

Market Presence.    Geerlings & Wade is licensed or otherwise authorized to sell wine to individual customers in 28 states, comprising approximately 76% of the overall United States market for table wines as of March 2003. In October 2002, the Company stopped shipping wine to Texas consumers from its Texas due to inadequate revenues generated from customers residing in Texas. The Company does not expect to open facilities in any new states in the near term. The Commonwealth of Pennsylvania passed legislation in the first quarter of 2002 authorizing certain limited sales of wine over the Internet by retail licensees to residents of Pennsylvania. The Company has decided the complexity of complying with the new legislation makes entering Pennsylvania uneconomical.

 

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 to its customers are delivered primarily through the mail, with increasing use of Internet channels. In 2002, the Company continued to develop its direct mail and e-mail marketing campaigns and invested heavily to develop alternative customer acquisition methods.

 

The Company sells wine to individual consumers who are 21 years of age or older mainly through targeted media direct response promotions, mailings and e-mails. In addition to describing the distinguishing characteristics of the featured wines, each promotion contains general information intended to broaden the customer’s knowledge of wines, wine producers, winemakers and wine-producing regions, along with the Company’s “tasting notes” and ratings. The Company reinforces its value proposition by noting any medals or awards given to a particular wine. 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 markets its wine using primarily two types of promotions: house mailings to its file of active customers and qualified leads, and acquisition promotions to prospective customers using various channels.

 

Geerlings & Wade distributes house mailings to its current customers. These mailings take the form of direct response letters ranging from only a single wine offered to multi-page catalogs with as many as 70 wines offered. The Company mails as many as forty-five different promotional pieces annually. The Company’s 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’s historically has acquired new customers to its base business and to its Passport Wine Club by mailing acquisition promotions to rented lists. The Passport Wine Club entails delivering monthly shipments of two, four, or six bottles of wine for three, six or 12 months or for an open-ended period. The Company undertook extensive research and analysis of its acquisition programs and tested many new concepts to increase responses to these mailings and other promotions during the first and second quarters of 2002. As a result of this research, the Company found additional methods to promote its offerings to prospective customers. The Company retested its updated customer acquisition strategy in the second half of 2002. The Company plans to further expand this strategy in 2003 to increase its customer base.

 

5


 

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 timesavings. Printing, production and fulfillment (collating, folding, inserting and mailing) are performed commercially off-site. The Company seeks to reduce creative, printing and mailing costs to maximize the availability of funding for the purpose of acquiring new customers.

 

To increase customer loyalty, Geerlings & Wade offers customers the opportunity to purchase one- or three-year memberships where such offers are legally permissible. Members realize savings on each case of wine purchased during the term of the membership. 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.

 

Merchandising

 

Geerlings & Wade offers its customers premium imported and domestic wines. Imported wines are sourced primarily from France, Italy, Australia and Spain. The Company also sources a few wines each year from Argentina, New Zealand, South Africa, Germany and Chile. 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, Hamilton Estates, Alazar Winery, Bryan Woods Winery, Jack Canyon Cellars, Lapis Lazuli Winery & Vineyards, Mira Luna, Red Brick Cellars, San Valencia Winery and Brava Terra. 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 signature brands among its customers and strong sales growth for these brands. In 2002, the Company promoted Red Brick Cabernet, Brava Terra Cabernet, Hamilton Estates Merlot, Glass Ridge Chardonnay, Mira Luna Chardonnay, Alazar Winery Pinot Noir and San Valencia Chardonnay as its signature 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 2002, approximately 60% of the cases sold by the Company were imported wines and 40% 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 $112.40 in 2002.

 

The Company offers a limited selection of nationally branded wines to its customers through its house mailings and on its website. The Company has increasingly used nationally branded wines for wines above $15 per bottle.

 

Sales of wine accounted for 92.5%, 92.3% and 91.8% of total revenues for each of 2002, 2001 and 2000, respectively.

 

Wine Sourcing and Purchasing

 

The Company sources imported and domestic wines through a network of producers, negociants, importers and wholesalers. In 2002, the Company sourced a majority of the cases it sold directly from producers or negociants.

 

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.

 

 

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The Company generally selects wines between five to eight months in advance of offering them for sale to coordinate availability, shipping and promotional 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 Company’s merchandising department then develops and purchases a complementary product mix to be offered with each feature in its house 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 connoisseur letter mailings, the Company has a specific range of wines it intends 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 and the catalogs, the Company buys in smaller lots based on expected sales and strives to use wines in as many programs as possible to minimize the stock keeping unit (SKU) count and maximize purchasing economies of scale. The Company sources specific wines to be used in its acquisition programs and is developing a flexible shipping program that allows it to react to changes in demand so that it can match the supply and still minimize inventory.

 

Sourcing Domestic Wines.    In 2002, 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. The Company maintains a consulting relationship to source 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 provide wine lots of various sizes. These wines are reviewed based on their quality and price characteristics.

 

Sourcing Imported Wines.    In 2002, 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, who visits European growers and negociants and administers blind comparative tastings in Europe. At the Company’s headquarters, wine samples, including those submitted by its European sourcing consultant, are tasted, compared and selected on a blind comparison basis by the Company’s Wine Director. When purchasing from Spain, New Zealand, South Africa and Australia, the Company’s Wine Director purchases from negociants representing wineries from those countries. Our domestic sourcing consultant also sources South American wines for the Company.

 

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 and Order Processing.

 

The Company manages inventory levels and SKUs several ways. The most important inventory management technique involves accurate forecasting the sales demand of each wine by promotion 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 by wine label that can be used

 

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to determine repurchase 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, not sold in response to its intended promotions, through special promotions.

 

The Company has begun in 2003 to manage its inventory supply chain on a more just-in-time basis. This means it schedules the receipt of wine deliveries as close as possible to when wine is needed to fulfill customer orders. A third party prepares orders for shipping at separate facilities. Wine is shipped from these facilities to licensed wholesalers and then shipped to the Company’s licensed retail locations for completion of fulfillment and sale to its retail customers. Geerlings & Wade formed a new subsidiary, CFN Logistics, Inc., a Delaware corporation, in 2002 to facilitate our new inventory management system. As a result of this change in logistics, the Company hopes to efficiently operate on current inventory levels and increase its inventory turn rate in 2003.

 

Customers can make purchases in person at the Company’s licensed facilities or send to the Company order information by e-mail, mail, telephone (1-800-782-WINE) and facsimile (1-800-FAX-8466) and through the Internet at geerwade.com. The Company accepts orders and makes sales in accordance with applicable law. 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. As the Company further develops its fulfillment operations, it hopes to promote sales from customers visiting its licensed stores. Under this model, the Company may attract customers unwilling to buy through its direct channels and thereby expand its customer base and sales. 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.

 

The Company uses its own licensed vehicles and delivery personnel to make many of its deliveries in Massachusetts and New Jersey. In all other states, the Company uses third party couriers, which are licensed or authorized to deliver wine, to ship wine to its customers. 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.

 

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. Personnel at the facilities 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

 

8


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 mailings. In 2000, the Company developed another database for marketing and merchandising analyses and reporting. The Company exports data from the order management system to this marketing and merchandising 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. In 2002 the Company stopped using software developed by Verbind, Inc.

 

The Company’s order management computer system also provides data used in merchandising forecasting and purchasing, links to accounts payable and accounts receivable, and general ledger modules for accounting analysis.

 

The Company’s computerized telephone system allows the Company to monitor the volume of incoming calls, monitor customer service representatives and report on productivity of call center representatives. The system is expandable, permitting the Company to add lines as necessary to increase its customer service capabilities

 

The Company’s website, geerwade.com, allows 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. Inventory updates to the website 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 website 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. The Company sends e-mails to its existing customer base in coordination with the mailing of its house brochures. This serves to increase the response rates from customers that wish to receive promotional e-mails along with house brochure mailings. In 2002, the Company tested e-mail campaigns to prospective customers from outside lists with varying degrees of success. The Company plans to continue testing e-mails, with different offers and to different list, to find effective programs to acquire Internet customers in 2003. A portion of the prospective customers chose to make their first, and follow on, purchases through the Internet even though they are responding to off-line promotions.

 

Competition

 

The retail wine business is highly competitive. The Company competes with supermarkets, discount clubs, 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 that are supported and advertised by the producing wineries, many of which are not offered by the Company.

 

9


 

The Company believes that by providing quality wines at competitive prices as well as by providing a high level of service, coupled with its ability to source wines directly from producers and the convenience of direct delivery, it can achieve a competitive advantage over supermarkets, discount clubs, 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 allow interstate sales to those states having reciprocal licensing arrangements. The Company is permitted from its California or Illinois facilities to sell and ship to consumers in Idaho, New Mexico, Missouri and West Virginia under these states’ “reciprocal shipment” laws. In addition, without obtaining additional facilities, the Company is permitted to sell and/or ship into Alaska, Iowa, Louisiana, Nebraska, Nevada, New Hampshire, North Dakota, and Oregon. Montana residents purchase wine under Montana’s personal importation laws from the Company’s licensed facilities. Sales to consumers in Alaska, Missouri, Montana, Wyoming 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 or North Carolina. 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 for delivery of orders to the Company’s customers living in Alaska, Arizona, Colorado, Connecticut, Florida, Minnesota, Nevada, New Hampshire, North Carolina, North Dakota, West Virginia and Texas. 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, 2002, the Company held retail licenses in the 15 states where it maintains licensed facilities, which are typically subject to renewal on a yearly basis. The Company closed its facility in Texas in October 2002 as a result of poor economics. 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 2002 have not resulted in any actions by any

 

10


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.

 

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, 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 North Dakota. 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, Wyoming and Nebraska. 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. Additionally, state governments are supporting legislative efforts to impose taxes on sales over the Internet. In November 2002, 31 governors endorsed a uniform list of taxable items, and in late February 2003, South Dakota became the first to enact it into law. If a streamlined list of taxable items is approved by 10 or more states representing 20% of the U.S. population, the states can ask Congress to require Internet tax collections. The Company cannot predict whether or when legislation regarding taxation of Internet sales, mail order sales and/or delivery and use of tangible property 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 believes it 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: J. Krant Cellars, Glass Ridge, Alazar Winery, Amsbury Winery, Brava Terra, Bryan Woods Winery, Lapis Lazuli Winery & Vineyards, St. Carolyne Winery, San Valencia Winery, Mariel Winery, Jack Canyon Cellars, Redbrick Cellars, Hamilton Estates, Mira Luna, Mischler Estates, Passport Wine Club, Passport Wine Club and Design, Devina Estates, Domaine Paul, Expeditions, Vintage Impressions Plus and Wine Society of America. The Company has filed trademark or service mark applications with the United States Patent and Trademark Office for the following names: Benedetta, Seranza and Lamarette. 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 product line of signature wines.

 

Employees

 

As of December 31, 2002, the Company employed a total of 98 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. None of the Company’s employees is covered by a collective bargaining agreement. The Company believes that it maintains good relations with its employees.

 

11


 

NASDAQ Listing

 

On August 30, 2002, Nasdaq Staff notified the Company that its common stock failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive trading days as required by The NASDAQ SmallCap Marketplace Rule 4310 (c)(8)(D) and that it had 180 calendar days in which to regain compliance. On December 5, 2002, Nasdaq Staff notified the Company that its common stock had regained compliance since its common stock’s closing bid price had been above $1.00 per share for at least 10 consecutive trading days.

 

On February 4, 2003, Nasdaq Staff notified the Company that its common stock failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive trading days as required by The NASDAQ SmallCap Marketplace Rule 4310 (c)(8)(D) and that it had 180 calendar days in which to regain compliance. On March 5, 2003, Nasdaq Staff notified the Company that its common stock had regained compliance since its common stock’s closing bid price had been above $1.00 per share for at least 10 consecutive trading days.

 

Item 2:    Properties

 

As of December 31, 2002, Geerlings & Wade operated 15 licensed facilities located in 15 states. The Company leases all of these facilities. Each facility is centrally located with easy access to major routes for delivery efficiencies. The Company leased a new facility in Carmel, New York in December 2002, obtained approval to transfer its existing retail license in March 2003 to the new premises and began operations at the new premises in March 2003. The Company allowed its lease of the old premises in New York to expire in February 2003 and ceased operations at that facility in March 2003.

 

Facility


  

Location


  

Expiration


Executive offices, customer service and licensed facility

  

Canton, MA

  

2005

Licensed facility

  

Carmel, NY

  

2003

Licensed facility

  

Somers, CT

  

2004

Licensed facility

  

Waukegan, IL

  

2004

Licensed facility

  

Tampa, FL

  

2005

Licensed facility

  

South River, NJ

  

*

Licensed facility

  

Petaluma, CA

  

2004

Licensed facility

  

Kent, WA

  

2003

Licensed facility

  

Chantilly, VA

  

2005

Licensed facility

  

Miamisburg, OH

  

2004

Licensed facility

  

Denver, CO

  

2005

Licensed facility

  

Tempe, AZ

  

2004

Licensed facility

  

Bloomington, MN

  

2005

Licensed facility

  

Ann Arbor, MI

  

2003

Licensed facility

  

Greensboro, NC

  

2005


*   The Company presently rents such 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 in each location and that suitable additional space will be available as needed.

 

Item 3:    Legal Proceedings

 

In the ordinary course of business, the Company normally both asserts claims and defends claims asserted by others against it. The Company believes that its obligations, if any, with respect to all of such claims would have no material adverse effect on the results of operation or financial position of the Company.

 

Item 4:    Submission of Matters to a Vote of Security Holders

 

None.

 

12


 

PART II

 

Item 5:    Market for Registrant’s Common Equity and Related Stockholder Matters

 

The Company’s common stock trades on The NASDAQ SmallCap Market® under the symbol GEER. On March 17, 2003, the Company’s common stock closed at $1.57 per share and had a high price of $1.66 and low price of $1.57 on that date. 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.

 

    

2001


  

2002


    

High


  

Low


  

High


  

Low


First Quarter

  

$

2.41

  

$

1.42

  

$

4.11

  

$

0.40

Second Quarter

  

 

2.24

  

 

1.50

  

 

1.49

  

 

0.99

Third Quarter

  

 

1.70

  

 

1.10

  

 

1.10

  

 

0.47

Fourth Quarter

  

 

1.30

  

 

0.54

  

 

1.35

  

 

0.41

 

In April 2001, the listing of the Company’s common stock was transferred from the NASDAQ National Market to the NASDAQ SmallCap Market.

 

As of March 17, 2002, there were approximately 128 holders of record of the Company’s common stock. Cede & Co., a nominee of the Depository Trust Company (“DTC”), owned of record 2,449,604 shares of the Company’s common stock, or approximately 63%. 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 17, 2002, 3,879,450 shares were issued and outstanding; and 1,000,000 authorized shares of preferred stock, par value $.01 per share, of which, as of March 17, 2002, 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.

 

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.

 

13


 

    

Years Ended December 31,


 
    

1998


    

1999


    

2000


    

2001


    

2002


 
    

(in thousands, except per share data)

 

Statements of operations data:

                                            

Sales

  

$

36,626

 

  

$

38,863

 

  

$

37,153

 

  

$

32,672

 

  

$

27,869

 

Cost of sales

  

 

18,160

 

  

 

18,940

 

  

 

17,304

 

  

 

15,021

 

  

 

12,638

 

    


  


  


  


  


Gross profit

  

 

18,466

 

  

 

19,923

 

  

 

19,849

 

  

 

17,651

 

  

 

15,231

 

Selling, general and administrative expenses

  

 

16,712

 

  

 

20,578

 

  

 

21,314

 

  

 

18,621

 

  

 

17,555

 

Merger related expenses

  

 

—  

 

  

 

825

 

  

 

49

 

  

 

—  

 

  

 

—  

 

    


  


  


  


  


(Loss) income from operations

  

 

1,754

 

  

 

(1,480

)

  

 

(1,514

)

  

 

(970

)

  

 

(2,324

)

Gain (Loss) on disposal of fixed asset

  

 

—  

 

  

 

(59

)

  

 

(69

)

  

 

—  

 

  

 

24

 

Purchase price advance from Liquid Holdings

  

 

—  

 

  

 

—  

 

  

 

1,250

 

  

 

—  

 

  

 

—  

 

Interest (expense) income, net

  

 

(10

)

  

 

45

 

  

 

(138

)

  

 

(123

)

  

 

(21

)

    


  


  


  


  


(Loss) income before income taxes

  

 

1,764

 

  

 

(1,494

)

  

 

(471

)

  

 

(1,093

)

  

 

(2,369

)

(Benefit) provision for income taxes

  

 

751

 

  

 

—  

 

  

 

—  

 

  

 

411

 

  

 

(700

)

    


  


  


  


  


Net (loss) income

  

$

1,013

 

  

$

(1,494

)

  

$

(471

)

  

$

(1,504

)

  

$

(1,669

)

    


  


  


  


  


Net (loss) income per share

                                            

Basic

  

$

0.27

 

  

$

(0.39

)

  

$

(0.12

)

  

$

(0.39

)

  

$

(0.43

)

    


  


  


  


  


Diluted

  

$

0.27

 

  

$

(0.39

)

  

$

(0.12

)

  

$

(0.39

)

  

$

(0.43

)

    


  


  


  


  


Weighted average common shares outstanding

                                            

Basic

  

 

3,786

 

  

 

3,843

 

  

 

3,855

 

  

 

3,862

 

  

 

3,875

 

Diluted

  

 

3,801

 

  

 

3,843

 

  

 

3,855

 

  

 

3,862

 

  

 

3,875

 

                                    
    

As of December 31,


 
    

1998


    

1999


    

2000


    

2001


    

2002


 
    

(in thousands)

 

Balance sheet data:

                                            

Working capital

  

$

9,977

 

  

$

10,054

 

  

$

8,745

 

  

$

7,966

 

  

$

6,435

 

Total assets

  

 

17,205

 

  

 

17,755

 

  

 

18,158

 

  

 

15,154

 

  

 

10,864

 

Total stockholders’ equity

  

 

11,405

 

  

 

10,227

 

  

 

9,788

 

  

 

8,306

 

  

 

6,645

 

 

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 forecasts, become inaccurate. Factors that could affect the Company’s actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company include, but are not limited to, those discussed below under the heading “Risk Factors That May Affect Future Results,” other one-time events and other important factors disclosed previously and from time to time disclosed in the Company’s other filings with the Securities and Exchange Commission.

 

14


 

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,


 
    

1998


    

1999


    

2000


    

2001


    

2002


 

Sales

  

 

    100.0

%

  

 

    100.0

%

  

 

    100.0

%

  

 

    100.0

%

  

 

    100.0

%

Cost of sales

  

 

49.6

 

  

 

48.7

 

  

 

46.6

 

  

 

46.0

 

  

 

45.3

 

Gross profit

  

 

50.4

 

  

 

51.3

 

  

 

53.4

 

  

 

54.0

 

  

 

54.7

 

Selling, general and administrative expenses

  

 

45.6

 

  

 

53.0

 

  

 

57.4

 

  

 

57.0

 

  

 

63.0

 

Merger related expenses

  

 

—  

 

  

 

2.1

 

  

 

0.1

 

  

 

—  

 

  

 

—  

 

(Loss) income from operations

  

 

4.8

 

  

 

(3.8

)

  

 

(4.1

)

  

 

(3.0

)

  

 

(8.5

)

Loss on disposal of fixed asset

  

 

—  

 

  

 

—  

 

  

 

(0.2

)

  

 

—  

 

  

 

0.1

 

Purchase price advance from Liquid Holdings

  

 

—  

 

  

 

—  

 

  

 

3.4

 

  

 

—  

 

  

 

—  

 

Interest (expense) income, net

  

 

—  

 

  

 

0.1

 

  

 

(0.4

)

  

 

(0.4

)

  

 

(0.1

)

(Loss) income before income taxes

  

 

4.8

 

  

 

(3.8

)

  

 

(1.3

)

  

 

(3.3

)

  

 

(8.5

)

(Benefit) provision for income taxes

  

 

2.1

 

  

 

—  

 

  

 

—  

 

  

 

1.3

 

  

 

(2.5

)

Net (loss) income

  

 

2.7

 

  

 

(3.8

)

  

 

(1.3

)

  

 

(4.6

)

  

 

(6.0

)

                                    
    

Years Ended December 31,


 

Market (excludes shipping revenue)


  

1998


    

1999


    

2000


    

2001


    

2002


 
    

(in thousands)

 

Massachusetts (1)

  

$

5,960

 

  

$

6,553

 

  

$

5,780

 

  

$

5,013

 

  

$

4,135

 

Connecticut (2)

  

 

2,079

 

  

 

2,257

 

  

 

2,135

 

  

 

1,889

 

  

 

1,712

 

New York

  

 

5,061

 

  

 

5,065

 

  

 

4,775

 

  

 

4,159

 

  

 

3,684

 

Illinois (2)

  

 

2,805

 

  

 

2,939

 

  

 

2,726

 

  

 

2,426

 

  

 

2,152

 

Florida …

  

 

3,194

 

  

 

3,413

 

  

 

3,177

 

  

 

2,799

 

  

 

2,491

 

California (2)

  

 

3,833

 

  

 

3,943

 

  

 

3,883

 

  

 

3,383

 

  

 

2,822

 

New Jersey

  

 

3,559

 

  

 

3,634

 

  

 

3,592

 

  

 

3,273

 

  

 

2,769

 

Washington

  

 

1,049

 

  

 

1,043

 

  

 

840

 

  

 

649

 

  

 

493

 

Virginia

  

 

1,996

 

  

 

1,889

 

  

 

1,795

 

  

 

1,505

 

  

 

1,143

 

Ohio

  

 

2,566

 

  

 

2,622

 

  

 

2,265

 

  

 

2,124

 

  

 

1,822

 

Minnesota (2)

  

 

436

 

  

 

494

 

  

 

511

 

  

 

444

 

  

 

386

 

Colorado

  

 

718

 

  

 

769

 

  

 

780

 

  

 

587

 

  

 

538

 

Arizona…

  

 

601

 

  

 

639

 

  

 

668

 

  

 

656

 

  

 

566

 

Michigan

  

 

917

 

  

 

1,126

 

  

 

1,234

 

  

 

1,050

 

  

 

877

 

Texas (Opened March 1999)(3)

  

 

—  

 

  

 

480

 

  

 

781

 

  

 

620

 

  

 

439

 

North Carolina (Opened May 2000)

  

 

—  

 

  

 

—  

 

  

 

359

 

  

 

653

 

  

 

566

 

    


  


  


  


  


Totals

  

$

34,774

 

  

$

36,866

 

  

$

35,301

 

  

$

31,230

 

  

$

26,595

 

    


  


  


  


  



(1)   Includes sales from catalog accessories and from the Newbury Street, Boston store. The Newbury Street, Boston store was closed in February 2001.
(2)   Includes authorized sales into additional states.
(3)   The Texas facility was closed in October 2002.

 

Years Ended December 31, 2002, 2001 and 2000

 

Sales.    The Company’s revenues are derived from the sale of wine, wine-related accessories, delivery income and memberships. In 2002, sales decreased $4,802,000, or 14.7%, from $32,672,000 in 2001 to $27,869,000 in 2002. From 2000 to 2001, sales decreased $4,481,000, or 12.1%, from $37,153,000 in 2000 to $32,672,000 in 2001. Revenues declined in 2002 as a result of the Company’s decision to reduce the number of

 

15


mail promotions (circulation) sent to less active customers. In addition, the Company’s active customer base has declined over the past two years as a result of reduced customer acquisition activity, which has led to a decline in sales. The Company curtailed its customer acquisition efforts in 2000 and 2001 as compared to prior years because of the high cost of acquiring each customer. During the first half of 2002, however, the Company invested heavily to develop and test new customer acquisition concepts and achieved success with several concepts. In the second half of 2002, the Company retested its new customer acquisition techniques but on a limited basis. Sales, in 2002, from first time customers, including sales from new Passport Club members were approximately even with sales from first time customers in 2001. Due to the smaller customer base and somewhat smaller average order sizes, sales to existing customers accounted for all of the sales decline of $4,802,000 in 2002 as compared to 2001. Accessories sales and membership sales in 2002 were $305,000 and $629,000, respectively. These results represented a $137,000 reduction in accessory sales and a $104,000 reduction in membership sales from 2001. Delivery income declined by $167,000 from 2001 to 2002 resulting from a decrease in sales, but as a percentage of sales delivery income increased due to a higher portion of Passport Club sales, which have higher delivery fees than the average sale. Delivery income as percentage of sales was 5.1%, 4.4% and 4.6% in 2000, 2001 and 2002, respectively.

 

The number of cases (12 bottles) of wines sold by the Company decreased by 52,400, or 18.7%, from 280,400 cases in 2001 to 228,000 cases in 2002. The number of cases sold decreased by a greater percentage (18.7%) than did sales (14.7%) because the average bottle price increased on sales to existing customers. From 2000 to 2001, the number of cases sold decreased by 56,200, or 16.7%, from 336,600 cases in 2000 to 280,400 cases in 2001. The average number of cases purchased per customer remained the same in 2002 at 2.52 as in 2001. The average number of cases purchased per customer decreased from 2.59 in 2000 to 2.52 in 2001. All markets that were operating in 2001 and 2002 reflect sales declines between 2001 and 2002. Between 2000 and 2001 all markets except North Carolina reflect sales declines. Sales from memberships were 1.8%, 1.9% and 1.9% of overall revenues in 2000, 2001 and 2002, respectively. Sales from wine related accessories were 1.4%, 1.4% and 1.1% of overall revenues in 2000, 2001 and 2002, respectively. In 2002, the Company promoted fewer accessory items and less often in its mailings than during the two prior years.

 

The average case price for cases sold by the Company increased by $5.66 from $106.74 in 2001 to $112.40 in 2002, a 5.3% increase. The average case price for cases sold by the Company increased from $100.02 in 2000 to $106.74 in 2001, a 6.7% increase The increase in 2002 can be attributed to selling more wines under the Passport Club, which bear a higher price point than the Company’s average price and selective price increases on wines and other promotions. At this time, the Company does not believe that it will need to lower prices to compete in the marketplace. In 2002, Geerlings & Wade did discount selected products to reduce inventory and maintain a manageable number of SKUs.

 

Gross Profit.    Gross profit declined in 2002 as compared to 2001 due to lower sales. In 2002, gross profit decreased $2,419,000, or 13.7%, from $17,651,000 in 2001 to $15,232,000 in 2002. From 2000 to 2001, gross profit decreased $2,198,000, or 11.1%, from $19,849,000 in 2000 to $17,651,000 in 2001. Gross profit as a percentage of sales increased from 53.4% in 2000 to 54.0% in 2001 to 54.7% in 2002. The increase in gross profit as a percentage of sales resulted primarily from favorable exchange rates in 2001, from improved purchasing by the Company in 2001 and 2002 and from selective price increases in 2002. Gross profits for all sales per case of wine sold increased $3.87 per case during 2002 to $66.76 per case from $62.89 per case in 2001. In 2000, the gross profit per case was $58.93.

 

Several factors 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 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 points of the Company’s product mix increases. Nationally branded wines are sold at gross margins that 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. The Company does not expect to materially change the mix between privately sourced and nationally branded wines.

 

16


 

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1,067,000 from $18,622,000 in 2001 to $17,555,000 in 2002, or 5.7%. From 2000 to 2001, selling, general and administrative expenses decreased $2,692,000 from $21,314,000 in 2000 to $18,622,000 in 2001, or 12.6%. As a percentage of sales, selling, general and administrative expenses equaled 63.0% in 2002, 57.0% in 2001 and 57.4% in 2000. Selling, general and administrative costs decreased in most areas except staffing in 2002 as compared to 2001.

 

Lower marketing expense, which is referred to as “advertising costs” in the financial statement footnotes, provided the most savings of any category in selling, general and administrative expenses in 2002. Marketing expense was $397,000 less in 2002 as compared to 2001. Overall, the Company reduced circulation of its mail promotions by 5,239,000 pieces in 2002, a 15% volume decrease as compared to 2001. The Company reduced the amount it spent to acquire customers in 2002 by $198,000 from $3,080,000 in 2001 to $2,882,000 in 2002. The Company accomplished this savings, even though extensive research and testing was conducted in 2002, by developing more cost effective customer acquisition programs. The Company reduced the cost of marketing to its existing customers by $200,000 in 2002. Marketing expense for existing customers was $2,629,000 in 2001 and $2,429,000 in 2002. The Company accomplished this primarily by reducing circulation to less active customers and was still able to bear the added expense for research and testing to develop new marketing programs intended for existing customers.

 

Lower marketing expense also provided the most savings of any category in selling, general and administrative expenses between 2001 and 2000. Marketing expense was $1,416,000 less in 2001 as compared to 2000. Overall, the Company reduced circulation of its mail promotions by 3,252,000 pieces in 2001, a 21% volume decrease as compared to 2000. The Company reduced the amount it spent to acquire customers in 2001 by $1,272,000 from $4,352,000 in 2000 to $3,080,000 in 2001. The Company reduced the cost of marketing to its existing customer by $149,000 in 2001. Marketing expense for existing customers was $2,778,000 in 2000 and $2,629,000 in 2001. The Company accomplished this primarily by reducing circulation to less active customers and to prospective customers.

 

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 expenses starting in 2000. However, to manage inventory better by selling previously promoted wines, the Company remarketed wines promoted throughout its promotions during the first six months of 2002.

 

In 2002, the Company had increased delivery expense of $10,000 over delivery expense in 2001 but lower fulfillment expense. Delivery expense increased due to increased rates by third party couriers, shipping fewer bottles per shipment and additional packaging. As the number of bottles shipped per shipment decreases, the delivery cost as a percentage of sales increases since delivery costs have minimum charges per shipment and delivery charges become linear, in general, only above a certain minimum charge. The Company continues to attempt to lower delivery expenses. Fulfillment expense was lower due to lower sales and to management of staffing expense. As a percentage of sales, delivery costs were 12.9% in 2002 compared to 11.0% in 2001.

 

In 2001, the Company had decreased delivery expense of $910,000 compared to 2000 and lower fulfillment expense. These improvements were a result in large part from lower sales and shipments, but delivery expense was lower as a percentage of sales due to improved business practices and better freight rates. As a percentage of sales, delivery costs were 11.0% in 2001 compared to 12.1% in 2000.

 

Variable fulfillment costs, comprised of credit card fees and fulfillment decreased by $333,000 in 2002. Another $322,000 in overhead, including salaries and $269,000 in goodwill amortization, contributed to the remaining selling, general and administrative expense decrease for 2002. Minor decreases in overhead and fulfillment costs made up the difference in the remainder of the 2000 to 2001 decrease in selling, general and administrative costs.

 

17


 

Interest Income (expense).    In 2002, the Company incurred interest expense of $61,000, a decrease of $84,000 from interest incurred in 2001 of $145,000, as a result of borrowings under the Company’s credit facility with Citizens Bank of Massachusetts. In 2000, the Company incurred interest expense of $153,000 as a result of borrowings under the facility. Interest income increased in 2002 by $18,000 from $22,400 in 2001 to $40,400 in 2002 as a result of investing higher cash balances in overnight instruments. Interest income decreased in 2001 by $6,700 from $15,700 in 2000 to $22,400 in 2001. The net effect is that the Company had net interest expense of $20,600 in 2002, $122,600 in 2001 and $137,300 in 2000.

 

Provision (Benefit) for Income Taxes.    The Company recorded a tax benefit of $700,000 in 2002 that represents expected tax refunds for loss carry back claims resulting from changes in the tax laws. The Company expects to receive these refunds in 2003. Although the Company incurred a net loss in 2000 and 2001, the Company decided not to book a benefit in 2001 due to the uncertainty regarding the ultimate realization of the related deferred tax asset. In addition, the Company determined that it needed to provide a valuation reserve for its deferred tax assets and, as a result, recorded a tax provision of $411,000 in 2001.

 

Net (Loss).    The Company recognized a net loss of $1,669,000, $1,504,000 and $471,000 in 2002, 2001 and 2000, respectively. The larger loss in 2002 as compared to the loss in 2001 resulted from a decline in sales without the same or better reductions in expenses measured as a percentage of sales, particularly in staffing, facility costs and marketing. The lower loss in 2000 as compared to 2002 and 2001 resulted from recognition of the $1,250,000 purchase price advance related to the termination of a merger agreement with Liquid Holdings, Inc. in February 2000. Once adjusted for this significant amount, the 2002 and 2001 losses were comparable to the loss in 2000.

 

Liquidity and Capital Resources

 

In 2002, the Company’s primary capital needs were for funding the research and development of marketing programs. As of December 31, 2002, the Company had cash and cash equivalents totaling $2,098,000, compared to $3,382,000 as of December 31, 2001. During 2002, the Company generated $3,649,000 from inventory reductions.

 

In 2002, the Company borrowed working capital at the prime rate plus two percent from Citizens Bank of Massachusetts under a credit agreement. This facility terminated pursuant to its terms on December 27, 2002. The Company and the bank amended the credit agreement in March 2002 and December 2002 to waive certain defaults, to adjust certain financial covenants, to provide for a reduction in the principal amount available for borrowing and to modify the maturity date. The Company repaid all amounts outstanding under the facility in December 2002.

 

On February 24, 2003, the Company closed a credit facility for $800,000 extended by all of its outside directors. The credit facility bears interest at the greater of the prime rate plus 3% or 6%, terminates on March 31, 2004, and the loan agreement has terms the Company believes to be more favorable than terms and conditions the Company could obtain from unaffiliated lending sources. Substantially all of the assets of the Company serve as collateral under this agreement. In connection with entering into this loan, the Company issued 10-year warrants to the lenders as an inducement for extending this credit facility. The lenders were issued, in the aggregate, warrants to purchase 42,104 shares of the Company’s common stock at an exercise price of $2.375 per share. The exercise price of the warrants was 125% of the closing price of the Company’s common stock on the closing date of the credit facility. As of March 26, 2003, the Company had $300,000 outstanding under this facility. Based on the Company’s cash flow projections and on securing the new loan, the Company believes that it has adequate liquidity to operate its business in 2003.

 

In 2002, the Company generated $1,048,000 in cash from operating activities compared to generating $1,695,000 in 2001. The cash generated by operating activities in 2002 resulted primarily from a decrease in inventory of $3,649,000, a decrease in prepaid mailing costs of $88,000, and an increase in accounts payable of

 

18


$145,000. These activities were partially offset by a net loss of $1,669,000, a decrease in prepaid and other expenses, which includes refundable taxes, of $647,000, an increase in accounts receivable of $349,000, a decrease in deferred revenue of $383,000 and accrued sales taxes and expenses of $141,000.

 

The Company had working capital of $7,966,000 and $6,435,000 at December 31, 2001 and 2002, 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. To reduce inventory to historical levels, the Company purchased lower quantities in 2001 and 2002 than it purchased for 2000 and used wines from existing stock in its mail promotions. The Company was able to reduce inventory by $3,809,000 in 2001 as a result of this curtailed buying. During the first six months of 2002, the Company continued selling from existing inventory as much as possible and was able to further reduce inventories. Although the Company purchased new wines for promotions in the third and fourth quarters of 2002, it was able to reduce its inventory balance by $3,649,000 for all of 2002, a reduction of 38% since December 31, 2001. The Company plans to operate at or around the inventory levels recorded at December 31, 2002 throughout 2003 with variations for seasonal selling.

 

As the Company adapts its just-in-time order fulfillment system, it expects to use inventory more efficiently since most inventory will be supplied only where it is demanded by customers.

 

During 2002, net cash of $87,000 was used in investing activities. Purchases included approximately $41,000 in connection with the Company’s computer system and software enhancements, $11,000 in property and equipment and $7,000 for furniture and fixture purchases and leasehold improvements. Net cash of $234,000 was used in investing activities in 2001, $137,000 in connection with the Company’s computer system and software enhancements, $19,000 in property and equipment and $68,000 for furniture and fixture purchases and leasehold improvements.

 

Total cash used in financing activities in 2002 was $2,243,000, of which $2,250,000 represented repayments under the line of credit. This was offset by $8,000 which was generated from issuance of stock under the Company’s Employee Stock Purchase Plan.

 

The Company had the following contractual obligations at December 31, 2002:

 

    

Less than 1 year


  

1-3 years


  

Total


Long-term debt

  

$

—  

  

$

—  

  

$

—  

Purchase commitments

  

 

4,417,000

  

 

633,000

  

 

5,050,000

Operating leases

  

 

763,000

  

 

879,000

  

 

1,642,000

Total contractual obligations

  

$

5,180,000

  

$

1,512,000

  

$

6,692,000

 

The Company’s ability to meet its scheduled obligations 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 expected revenue, the Company believes that cash flow from operations and available cash will be adequate to meet the Company’s working capital needs for 2003. The Company’s liquidity sources will not be sufficient to permit the Company to grow 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.

 

19


 

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 As of December 31, 2002, the Company had $243,000 in foreign exchange contracts outstanding.

 

Critical Accounting Policies and Estimates

 

In May 2002, the SEC proposed disclosure rules that would require registrants to include in Management’s Discussion and Analysis a separate section regarding the application of critical accounting policies that discloses the critical accounting estimates that are made by a registrant in applying its accounting policies and information concerning the initial adoption of certain accounting policies that have a material impact on a registrant’s financial presentation. Note 2 of the Notes to the Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used the Company.

 

The financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions. On an on-going basis, the Company evaluates its estimates related to Allowance for Obsolete and Excess Inventory inventories. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue from merchandise sales is recognized at the time of shipment to the customer. The Company offers 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 are not material. Mailing list rental revenue is recognized when the list is fulfilled. Delivery revenue is recognized at the time of shipment to the customer.

 

The cost of certain direct advertising materials mailed to existing customers is 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. The Company amortizes these advertising costs for a period of up to three months. Actual results may differ from these estimates under different assumptions or conditions.

 

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. The deferred tax provision (benefit) results from the net change during the year of deferred tax assets and liabilities. The Company has recorded a valuation allowance against its deferred tax assets due to the uncertainty regarding their realizability. During 2002 certain tax laws were changed to allow the Company to carryback losses five years instead of the previous two year carryback. As a result of this change in tax law, the Company was able to carryback previous and current year losses, which resulted in a $700,00 tax benefit.

 

New Accounting Pronouncements

 

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds Statement No. 4, Reporting Gains and Losses from Extinguishments of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS No. 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative

 

20


pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision of SFAS No.145 related to the rescission of Statement No. 4 shall be applied in fiscal year beginning after May 15, 2002. The provisions of SFAS No. 145 related to Statement No. 13 should be for transactions occurring after May 15, 2002. Early application of the provisions of this Statement is encouraged. The Company does not expect that the adoption of SFAS No. 145 will have a significant impact on its results of operations, financial position or cash flows.

 

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities. This statement superseded EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provision of this statement is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company does not expect that the adoption of SFAS No. 146 will have a significant impact on its results of operations, financial position or cash flows.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements and the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim requirements are effective for interim periods beginning after December 15, 2002. The Company does not plan to transition to the fair value method of accounting for its stock-based employee compensation. The Company had adopted the disclosure requirements of this provision for the year ended December 31, 2002.

 

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

 

21


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.

 

From time to time, the Company may introduce new marketing initiatives, which may be expected to undergo regulatory scrutiny. There can be no assurance that such initiatives will not be stymied by regulatory criticism.

 

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, 2000, 2001 and 2002, 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 growth, should it occur. The Company’s ability to manage any growth effectively would require it to continue to implement and improve its operational and financial systems and to hire and train new employees. These demands would require additional management resources and the development of additional expertise by existing management. The failure to manage any 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 of liquidity, but there can be no assurance that the Company will obtain alternate sources of liquidity on commercially reasonable terms or at all.

 

Limitations Due to the Company’s Indebtedness.    At December 31, 2002, Geerlings and Wade had no of indebtedness outstanding and had terminated its credit facility with Citizens Bank. On February 24, 2003, the Company entered into a credit facility of up to $800,000 with all of its outside directors, under which the Company had $300,000 outstanding as of March 26, 2003. This debt could have adverse consequences for its business, including:

 

  ·   The Company may be more vulnerable to adverse general economic conditions;

 

  ·   The Company will be required to dedicate a substantial portion of its cash flow from operations to repayment of debt, which limits the availability of cash for other purposes;

 

  ·   The Company may have reduced flexibility in planning for, or reacting to, changes in its business and market; and

 

  ·   The Company may be unable to comply with the covenants under which it borrowed amounts, which would result in an event of default. If an event of default occurs and is not cured or waived, it would result in all amounts outstanding, together with accrued interest, becoming immediately due and payable. If the Company were unable to repay such amounts, the Company’s lenders could proceed against the collateral granted to it as security for the indebtedness. There can be no assurance that the Company will maintain compliance with the covenants under its credit agreement.

 

The Company’s ability to pay principal and interest on its indebtedness, to meet covenants and to satisfy other obligations will depend largely upon its future operating performance, which will be impacted by economic conditions and financial, business and other factors, certain of which are beyond the Company’s control.

 

Substantially all of the Company’s assets are pledged as collateral under its credit facility.

 

Issues Related to Mailings.    The Company solicits orders from existing customers through direct mail marketing campaigns. Direct mail marketing campaigns are capital-intensive and the cost-effectiveness of such

 

22


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 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. Public reaction anthrax or other scares through the U.S. mail system may result in a reduction of the utility of our direct mail marketing campaigns, which may impact the Company’s revenues.

 

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

 

23


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 were to terminate delivery services for alcoholic beverages in certain states, as it did in 1999 in Florida, Nevada and Connecticut, the Company would likely incur significantly higher shipping rates that would have a material adverse effect on the Company’s business and its results of operations. If any state prohibits or limits intrastate shipping of alcoholic beverages by third party couriers, the Company would likely incur significantly higher shipping rates that would 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.    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, such as the fluctuations occurring in the months after the terrorist attacks of September 11, 2001 or in reaction to a weakening economy, in both the national and regional economies may affect both the quantity and the price of wines that consumers choose to purchase.

 

Competition; Changes in Consumer Tastes.    The Company competes with a broad range of wine specialty stores, retail liquor stores, discount clubs, online wine retailers, other direct-mail wine merchants and certain supermarket stores, many of which may have significantly greater resources than the Company. Additionally, the Company’s wines compete with other alcoholic and non-alcoholic beverages. There can be no assurance that the Company will be able to successfully compete with its current or future competition. Although consumption of premium wines in the United States has increased, there can be no assurance that changes in consumer preferences or tastes will not have a material adverse effect on the Company’s business and results of operations.

 

Health Issues.    Since 1989, federal law has required health-warning labels on all alcoholic beverages. Although an increasing number of research studies suggest that health benefits may result from the moderate consumption of wine, these suggestions have been widely challenged and a number of groups advocate increased governmental action to restrict consumption of alcoholic beverages. Restrictions on the sale and consumption of wine or increases in the taxes imposed on wine in response to concerns regarding health issues may have a material adverse effect on the Company’s business and operating results. There can be no assurance that there will not be legal or regulatory challenges to the industry as a whole, and any such legal or regulatory challenge may have a material adverse effect on the Company’s business and results of operations.

 

Exchange Rates; Currency Fluctuations.    The Company sources many of its wines from certain European countries and Australia and makes payment for such purchases in local currencies. From time to time, the Company engages in currency-hedging activities related to firm commitments for the purchase of inventories in an effort to fix costs and manage the impact of exchange rate fluctuations. Changes in exchange rates or currency fluctuations that disfavor the U.S. dollar could have a material adverse effect on the Company’s business and results of operations.

 

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 2002, approximately 60% 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.

 

24


 

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 no gains or losses related to these contracts in 2002. Losses related to these instruments for fiscal 2002 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.

 

Item 9:    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Effective July 1, 2002, the Company dismissed Arthur Andersen as its independent public accountants and thereafter appointed BDO Seidman, LLP as its new independent accountants. The decision to dismiss Arthur Andersen LLP and to retain BDO Seidman was approved by the Company’s Audit Committee. The Company signed a formal engagement letter with BDO Seidman on August 12, 2002.

 

Arthur Andersen’s reports on the Company’s financial statements as of and for the fiscal years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

 

During the Company’s two most recent fiscal years ended December 31, 2001 and the subsequent interim period through July 1, 2002, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports.

 

None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Company’s two most recent fiscal years ended December 31, 2001 and the subsequent interim period through July 1, 2002.

 

25


 

The Company provided Arthur Andersen with a copy of the foregoing disclosures. A copy of Arthur Andersen’s letter, dated July 1, 2002, stating their agreement with these statements is attached as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2002.

 

During the Company’s two most recent fiscal years ended December 31, 2001 and through the date on which the Audit Committee authorized the engagement of BDO Seidman, the Company did not consult BDO Seidman with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, or any other matters or reportable events required to be disclosed under Item 304(a)(2)(i) and (ii) of Regulation S-K.

 

26


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 Directors,” “Executive Compensation; Certain Arrangements” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement for use in connection with the Company’s 2003 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 And Related Stockholder Matters

 

The information required by this Item is included under the captions “Securities Ownership of Certain Beneficial Owners and Management” and “Approval of Increase in Shares Reserved for Issuance Under the Company’s Stock Option Plan – Securities Authorized for Issuance Under Equity Compensation Plans” 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 under the captions “Re-Election of Directors – Directors’ Compensation” and “Related Party transactions” in the Proxy Statement and is incorporated herein by reference.

 

Item 14.    Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of filing this report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms.

 

(b) Changes in Internal Controls and Procedures. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation of these controls by the Company’s Chief Executive Officer and Chief Financial Officer, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

27


PART IV

 

Item 15:    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.

 

Accompanying this Annual Report on Form 10-K are the certificates of the Chief Executive Officer and Chief Financial Officer required by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, copies of which are furnished as exhibits to this report.

 

Exhibit

No.


  

Description


  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

  

California Public Warehouse Letter Agreement. (1)

10.3

  

Form of Employment Agreement for Huib E. Geerlings. (1)*

10.4.1

  

Agreement dated as of April 7, 2000 between the Company and David Pearce. (17)*

10.4.2

  

Letter Agreement by and between the Company and David R. Pearce dated July 2, 2002. (23)*

10.5.1

  

Credit Agreement dated as of April 13, 2000 between the Company and Citizens Bank of Massachusetts (17)

10.5.2

  

Post-Closing Agreement dated as of April 13, 2000 between the Company and Citizens Bank of Massachusetts. (17)

10.5.3

  

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. (18)

10.5.4

  

Second Amendment to the Credit Agreement dated as of March 5, 2001 between the Company and Citizens Bank of Massachusetts. (18)

10.5.5

  

Waiver dated May 15, 2001 between the Company and Citizens Bank of Massachusetts.

10.5.6

  

Third Amendment to Credit Agreement and Related Agreements Between Citizens Bank of Massachusetts, Geerlings & Wade, Inc. and Geerlings & Wade of Texas, Inc. dated March 26, 2002. (22)

10.5.7

  

Fourth Amendment to Credit Agreement and Related Agreements Between Citizens Bank of Massachusetts, Geerlings & Wade, Inc. and Geerlings & Wade of Texas, Inc. dated December 6, 2002.

10.6

  

Stock Option Plan, as amended. (9)(13)(14)

10.7

  

Non-Employee Director Stock Option Plan, as amended. (1)(12)

10.8

  

Employee Stock Purchase Plan. (1)

 

 

28


 

Exhibit

No.


  

Description


10.9

  

Lease Agreement between the Company and Pacific Realty Associates, L.P. dated July 18, 1994. (3)

10.10

  

Lease Agreement between the Company and Flint Lee Limited Partnership dated August 31, 1994. (3)

10.11

  

Lease Agreement between the Company and 47th Avenue Industrial Properties dated
October 6, 1994. (3)

10.12

  

Lease Agreement between the Company and Mehland Developers dated October 31, 1994. (3)

10.13

  

Lease Agreement between the Company and Hohokam Realty Condominiums dated
October 31, 1994. (4)

10.14

  

Lease Agreement between the Company and Bruce K. and Gayle J. Hoyt dated November 23, 1994. (5)

10.15

  

Lease Agreement between the Company and Cole Taylor Bank dated August 23, 1995. (6)

10.16

  

Lease Agreement between the Company and Debra Campbell dated July 15, 1996. (7)

10.17

  

Lease Agreement between the Company and Simon Champagne dated July 24, 1996. (7)

10.18

  

Lease Agreement between the Company and Enviro-zyme International, Incorporated dated
January 6, 1997. (8)

10.19

  

Lease Agreement between the Company and William Eddy dated January 24, 1997. (8)

10.20

  

Lease Amendment between the Company and 47th Avenue South Properties, LLC dated
February 1, 1998. (10)

10.21

  

Lease Addendum between the Company and Mehland Developers dated January 13, 1998. (10)

10.22

  

Lease Amendment between the Company and PBP-N, Inc. dated October 9, 1997. (10)

10.23

  

Lease Amendment between the Company and Bruce K. Hoyt dated March 18, 1998. (10)

10.24

  

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)

10.25

  

Lease Amendment between the Company and Jerry L. Ivy dated April 21, 1998. (13)

10.26

  

Lease Agreement between the Company and Corporate Exchange Limited Partnership dated
October 9, 1998. (13)

10.27

  

Lease Amendment between the Company and Flint Lee Limited Partnership dated June 22, 1999. (15)

10.28

  

Lease Amendment between the Company and William Eddy dated October 1, 1999. (15)

10.29

  

Lease Agreement between the Company and Cader Lane Associates dated September 27, 1999. (15)

10.30

  

Lease Amendment between the Company and Enviro-zyme International, Inc. dated
December 18, 1999. (16)

10.31

  

Lease Agreement between the Company and Wengreen, LLC dated November 1, 1999. (16)

10.32

  

Lease Agreement between the Company and Naughton Company dated March 13, 2000. (16)

10.33

  

Lease Agreement dated as of April 24, 2000 between the Company and Tampa Tri-County Flexxspace, Ltd. (17)

10.34

  

Lease Amendment dated November 29, 2000 between the Company and M&T Partners, Inc. (18)

10.35

  

Indenture of lease dated February 16, 2000 between the Company and Foxford Business Center,
LLC. (18)

10.36

  

Lease Agreement dated January 22, 2001 between the Company and East 47th Business Center
LLC. (19)

10.37

  

Commercial Lease dated January 12, 2001 between the Company and George and Bonnie Ramsey. (19)

10.38

  

Lease Extension Agreement #1 dated October 9, 2000 between the Company and Rothbart Realty Company. (19)

 

 

29


 

Exhibit

No.


  

Description


10.39

  

Second Amendment to Extend Lease dated February 28, 2001 between the Company and
Bruce K. Hoyt. (19)

10.40

  

Addendum to Lease dated October 23, 2000 between the Company and Mehland Developers. (19)

10.41

  

Extension of Lease dated May 2001, between the Company and Jerry L. Ivy. (20)

10.42.1

  

Employment Offer Letter from the Company to Mr. Richard E. Libby dated
September 12, 2001. (21)*

10.42.2

  

Letter Agreement between the Company and Richard E. Libby dated September 16, 2002. (24)*

10.43

  

Lease Agreement dated November 18, 2002 between the Company and Flint Lee Road, LLC.

10.44

  

Employment Offer Letter from the Company to Mr. Huib E. Geerlings dated November 15, 2002. *

10.45

  

Lease Agreement dated December 20, 2002 between the Company and Durkin Water Realty, LLC.

10.46

  

Credit Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

10.47

10.48

  

Security Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

Warrant Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

21.1

  

Subsidiaries of the Company.

23

  

Consent of BDO Seidman, LLP.

99.1

  

Certification of Huib E. Geerlings, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 26, 2003.

99.2

  

Certification of David R. Pearce, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 26, 2003.


(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.
(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.

 

30


(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 Registration Statement on Form S-8 filed on August 19, 1999 (File No. 333-85557) and incorporated by reference herein.
(15)   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.
(16)   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.
(17)   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.
(18)   Filed as an Exhibit to the Company’s Form 10-K for the year ended December 31, 2000 filed on April 2, 2001 (File No. 0-24048) and incorporated by reference herein.
(19)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2001 filed on May 15, 2001 (File No. 0-24048) and incorporated by reference herein.
(20)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2001 filed on August 14, 2001 (File No. 0-24048) and incorporated by reference herein.
(21)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2001 filed on November 13, 2001 (File No. 0-24048) and incorporated by reference herein.
(22)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2002 filed on May 14, 2002 (File No. 0-24048) and incorporated by reference herein.
(23)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2002 filed on August 14, 2002 (File No. 0-24048) and incorporated by reference herein.
(24)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2002 filed on November 15, 2002 (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 2002.

 

31


EXHIBIT INDEX

 

Exhibit

No.


  

Description


  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

  

California Public Warehouse Letter Agreement. (1)

10.3

  

Form of Employment Agreement for Huib E. Geerlings. (1)*

10.4.1

  

Agreement dated as of April 7, 2000 between the Company and David Pearce. (17)*

10.4.2

  

Letter Agreement by and between the Company and David R. Pearce dated July 2, 2002. (23)*

10.5.1

  

Credit Agreement dated as of April 13, 2000 between the Company and Citizens Bank of Massachusetts (17)

10.5.2

  

Post-Closing Agreement dated as of April 13, 2000 between the Company and Citizens Bank of Massachusetts. (17)

10.5.3

  

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. (18)

10.5.4

  

Second Amendment to the Credit Agreement dated as of March 5, 2001 between the Company and Citizens Bank of Massachusetts. (18)

10.5.5

  

Waiver dated May 15, 2001 between the Company and Citizens Bank of Massachusetts.

10.5.6

  

Third Amendment to Credit Agreement and Related Agreements Between Citizens Bank of Massachusetts, Geerlings & Wade, Inc. and Geerlings & Wade of Texas, Inc. dated March 26, 2002. (22)

10.5.7

  

Fourth Amendment to Credit Agreement and Related Agreements Between Citizens Bank of Massachusetts, Geerlings & Wade, Inc. and Geerlings & Wade of Texas, Inc. dated December 6, 2002.

10.6

  

Stock Option Plan, as amended. (9)(13)(14)

10.7

  

Non-Employee Director Stock Option Plan, as amended. (1)(12)

10.8

  

Employee Stock Purchase Plan. (1)

10.9

  

Lease Agreement between the Company and Pacific Realty Associates, L.P. dated July 18, 1994. (3)

10.10

  

Lease Agreement between the Company and Flint Lee Limited Partnership dated August 31, 1994. (3)

10.11

  

Lease Agreement between the Company and 47th Avenue Industrial Properties dated
October 6, 1994. (3)

10.12

  

Lease Agreement between the Company and Mehland Developers dated October 31, 1994. (3)

10.13

  

Lease Agreement between the Company and Hohokam Realty Condominiums dated
October 31, 1994. (4)

10.14

  

Lease Agreement between the Company and Bruce K. and Gayle J. Hoyt dated November 23, 1994. (5)

10.15

  

Lease Agreement between the Company and Cole Taylor Bank dated August 23, 1995. (6)

10.16

  

Lease Agreement between the Company and Debra Campbell dated July 15, 1996. (7)

10.17

  

Lease Agreement between the Company and Simon Champagne dated July 24, 1996. (7)

10.18

  

Lease Agreement between the Company and Enviro-zyme International, Incorporated dated
January 6, 1997. (8)

10.19

  

Lease Agreement between the Company and William Eddy dated January 24, 1997. (8)

10.20

  

Lease Amendment between the Company and 47th Avenue South Properties, LLC dated
February 1, 1998. (10)


Exhibit

No.


  

Description


10.21

  

Lease Addendum between the Company and Mehland Developers dated January 13, 1998. (10)

10.22

  

Lease Amendment between the Company and PBP-N, Inc. dated October 9, 1997. (10)

10.23

  

Lease Amendment between the Company and Bruce K. Hoyt dated March 18, 1998. (10)

10.24

  

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)

10.25

  

Lease Amendment between the Company and Jerry L. Ivy dated April 21, 1998. (13)

10.26

  

Lease Agreement between the Company and Corporate Exchange Limited Partnership dated
October 9, 1998. (13)

10.27

  

Lease Amendment between the Company and Flint Lee Limited Partnership dated June 22, 1999. (15)

10.28

  

Lease Amendment between the Company and William Eddy dated October 1, 1999. (15)

10.29

  

Lease Agreement between the Company and Cader Lane Associates dated September 27, 1999. (15)

10.30

  

Lease Amendment between the Company and Enviro-zyme International, Inc. dated
December 18, 1999. (16)

10.31

  

Lease Agreement between the Company and Wengreen, LLC dated November 1, 1999. (16)

10.32

  

Lease Agreement between the Company and Naughton Company dated March 13, 2000. (16)

10.33

  

Lease Agreement dated as of April 24, 2000 between the Company and Tampa Tri-County Flexxspace, Ltd. (17)

10.34

  

Lease Amendment dated November 29, 2000 between the Company and M&T Partners, Inc. (18)

10.35

  

Indenture of lease dated February 16, 2000 between the Company and Foxford Business Center,
LLC. (18)

10.36

  

Lease Agreement dated January 22, 2001 between the Company and East 47th Business Center
LLC. (19)

10.37

  

Commercial Lease dated January 12, 2001 between the Company and George and Bonnie Ramsey. (19)

10.38

  

Lease Extension Agreement #1 dated October 9, 2000 between the Company and Rothbart Realty Company. (19)

10.39

  

Second Amendment to Extend Lease dated February 28, 2001 between the Company and
Bruce K. Hoyt. (19)

10.40

  

Addendum to Lease dated October 23, 2000 between the Company and Mehland Developers. (19)

10.41

  

Extension of Lease dated May 2001, between the Company and Jerry L. Ivy. (20)

10.42.1

  

Employment Offer Letter from the Company to Mr. Richard E. Libby dated
September 12, 2001. (21)*

10.42.2

  

Letter Agreement between the Company and Richard E. Libby dated September 16, 2002. (24)*

10.43

  

Lease Agreement dated November 18, 2002 between the Company and Flint Lee Road, LLC.

10.44

  

Employment Offer Letter from the Company to Mr. Huib E. Geerlings dated November 15, 2002. *

10.45

  

Lease Agreement dated December 20, 2002 between the Company and Durkin Water Realty, LLC.

10.46

  

Credit Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

10.47

10.48

  

Security Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

Warrant Agreement Among John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer, Robert L. Webb and Geerlings & Wade, Inc. dated February 24, 2003.

21.1

  

Subsidiaries of the Company.

23

  

Consent of BDO Seidman, LLP.


Exhibit

No.


  

Description


99.1

  

Certification of Huib E. Geerlings, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 26, 2003.

99.2

  

Certification of David R. Pearce, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 26, 2003.


(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.
(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 Registration Statement on Form S-8 filed on August 19, 1999 (File No. 333-85557) and incorporated by reference herein.
(15)   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.
(16)   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.
(17)   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.
(18)   Filed as an Exhibit to the Company’s Form 10-K for the year ended December 31, 2000 filed on April 2, 2001 (File No. 0-24048) and incorporated by reference herein.
(19)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2001 filed on May 15, 2001 (File No. 0-24048) and incorporated by reference herein.
(20)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2001 filed on August 14, 2001 (File No. 0-24048) and incorporated by reference herein.
(21)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2001 filed on November 13, 2001 (File No. 0-24048) and incorporated by reference herein.


(22)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2002 filed on May 14, 2002 (File No. 0-24048) and incorporated by reference herein.
(23)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2002 filed on August 14, 2002 (File No. 0-24048) and incorporated by reference herein.
(24)   Filed as an Exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2002 filed on November 15, 2002 (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 2002.

 

4


 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

GEERLINGS & WADE, INC.

By:

 

/s/    HUIB E. GEERLINGS         


   

(Huib E. Geerlings)

President and Chief Executive Officer

 

Date: March 26, 2003

 

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.

 

Name


  

Title


 

Date


/s/    HUIB E. GEERLINGS         


Huib E. Geerlings

  

Chairman of the Board and Director

    President and Chief Executive Officer

 

May 26, 2003

/s/    DAVID R. PEARCE         


David R. Pearce

  

Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

 

May 26, 2003

/s/    JAMES C. CURVEY        


James C. Curvey

  

Director

 

May 26, 2003

/s/    JOHN M. CONNORS, JR.


John M. Connors, Jr.

  

Director

 

May 26, 2003


John J. Remondi

  

Director

 

May 26, 2003

/s/    GORDON ROMER


Gordon Romer

  

Director

 

May 26, 2003

/s/    ROBERT L. WEBB


Robert L. Webb

  

Director

 

May 26, 2003

 

32


 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Huib E. Geerlings, certify that:

 

1. I have reviewed this annual report on Form 10-K of Geerlings & Wade, Inc.;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 26, 2003

 

/s/ Huib E. Geerlings

 

Huib E. Geerlings

President and Chief Executive Officer

 

33


 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, David R. Pearce, certify that:

 

1. I have reviewed this annual report on Form 10-K of Geerlings & Wade, Inc.;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 26, 2003

 

/s/ DAVID R. PEARCE

David R. Pearce

Chief Financial Officer

 

34


 

    

Page


Report of Independent Certified Public Accountants

  

F-2

Report of Independent Public Accountants

  

F-3

Balance Sheets as of December 31, 2001 and 2002

  

F-4

Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002

  

F-5

Statements of Stockholders’ Equity for the Years Ended December 31, 2000, 2001 and 2002

  

F-6

Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002

  

F-7

Notes to Financial Statements

  

F-8

 

F-1


 

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

 

To the Directors and Shareholders of Geerlings & Wade, Inc.:

 

We have audited the accompanying balance sheet of Geerlings & Wade, Inc. as of December 31, 2002 and the related statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of Geerlings & Wade, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Geerlings & Wade, Inc. as of December 31, 2001 and for the years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated March 26, 2002.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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, 2002 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/    BDO SEIDMAN, LLP

 

Boston, Massachusetts

February 13, 2003, except Note 4,

which is as of February 24, 2003

 

F-2


 

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Geerlings & Wade, Inc.’s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K, as Arthur Andersen LLP ceased providing audit services as of August 31, 2002. The balance sheet as of December 31, 2000 and the statements of operations, stockholders’ equity and cash flows for the year ended December 31, 1999 referred to in this report have not been included in the accompanying financial statements.

 

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, 2000 and 2001, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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, 2000 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

 

/s/    ARTHUR ANDERSEN LLP

 

Boston, Massachusetts

March 26, 2002

 

F-3


GEERLINGS & WADE, INC.

 

BALANCE SHEETS

December 31, 2001 and 2002

 

    

December 31,


 
    

2001


    

2002


 

ASSETS

                 

Current Assets:

                 

Cash and cash equivalents

  

$

3,380,068

 

  

$

2,097,671

 

Accounts receivable, net of allowance for doubtful accounts of $38,657 and $85,480 at December 31, 2001 and 2002

  

 

262,853

 

  

 

612,318

 

Inventory

  

 

9,631,165

 

  

 

5,981,807

 

Prepaid mailing costs

  

 

122,515

 

  

 

34,495

 

Prepaid expenses and other current assets

  

 

948,078

 

  

 

938,279

 

Refundable income taxes

  

 

102,494

 

  

 

749,919

 

    


  


Total current assets

  

 

14,447,173

 

  

 

10,414,489

 

    


  


Property and Equipment, at cost:

                 

Office and computer equipment

  

 

2,062,634

 

  

 

2,088,218

 

Motor vehicles

  

 

59,138

 

  

 

37,999

 

Furniture and fixtures

  

 

257,663

 

  

 

258,315

 

    


  


    

 

2,379,435

 

  

 

2,384,532

 

Less—Accumulated depreciation

  

 

1,765,464

 

  

 

2,039,729

 

    


  


    

 

613,971

 

  

 

344,803

 

    


  


Other Assets

  

 

93,030

 

  

 

104,374

 

    


  


    

$

15,154,174

 

  

$

10,863,666

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Current Liabilities:

                 

Line of credit

  

$

2,250,000

 

  

$

—  

 

Accounts payable

  

 

1,772,280

 

  

 

1,916,875

 

Current portion of deferred revenue

  

 

1,407,336

 

  

 

1,153,055

 

Accrued sales, income and payroll taxes

  

 

366,026

 

  

 

256,552

 

Accrued expenses

  

 

685,058

 

  

 

653,447

 

    


  


Total current liabilities

  

 

6,480,700

 

  

 

3,979,929

 

    


  


Deferred Revenue, less current portion

  

 

367,729

 

  

 

239,214

 

    


  


Commitments and Contingencies (Note 5)

                 

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—3,870,113 and 3,879,450 shares in 2001 and 2002, respectively

  

 

38,701

 

  

 

38,795

 

Additional paid-in capital

  

 

10,128,580

 

  

 

10,136,026

 

Retained earnings (deficit)

  

 

(1,861,536

)

  

 

(3,530,298

)

    


  


Total stockholders’ equity

  

 

8,305,745

 

  

 

6,644,523

 

    


  


    

$

15,154,174

 

  

$

10,863,666

 

    


  


 

The accompanying notes are an integral part of these financial statements.

 

 

F-4


GEERLINGS & WADE

 

STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2000, 2001 and 2002

 

    

Years Ended December 31,


 
    

2000


    

2001


    

2002


 

Sales

  

$

37,153,075

 

  

$

32,671,898

 

  

$

27,869,471

 

Cost of Sales

  

 

17,304,275

 

  

 

15,020,668

 

  

 

12,637,683

 

    


  


  


Gross profit

  

 

19,848,800

 

  

 

17,651,230

 

  

 

15,231,788

 

Selling, General and Administrative Expenses

  

 

21,313,979

 

  

 

18,621,633

 

  

 

17,555,425

 

Merger Related Expenses

  

 

48,981

 

  

 

—  

 

  

 

—  

 

    


  


  


Loss from operations

  

 

(1,514,160

)

  

 

(970,403

)

  

 

(2,323,637

)

Loss on Disposal of Fixed Assets

  

 

(68,886

)

  

 

—  

 

  

 

(24,453

)

Purchase Price Advance from Liquid Holdings (Note 1)

  

 

1,250,000

 

  

 

—  

 

  

 

—  

 

Interest Income

  

 

15,735

 

  

 

22,398

 

  

 

40,420

 

Interest Expense

  

 

(153,351

)

  

 

(145,191

)

  

 

(61,092

)

    


  


  


Loss before provision for income taxes

  

 

(470,662

)

  

 

(1,093,196

)

  

 

(2,368,762

)

Provision (benefit) for Income Taxes

  

 

—  

 

  

 

410,617

 

  

 

(700,000

)

    


  


  


Net loss

  

$

(470,662

)

  

$

(1,503,813

)

  

$

(1,668,762

)

    


  


  


Net Loss per Share—Basic and Diluted

  

$

(0.12

)

  

$

(0.39

)

  

$

(.43

)

    


  


  


Weighted Average Common Shares Outstanding—Basic and Diluted

  

 

3,855,071

 

  

 

3,861,697

 

  

 

3,874,871

 

    


  


  


 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

F-5


GEERLINGS & WADE, INC.

 

STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2000, 2001 and 2002

 

    

Common Stock


                  
    

Number of Shares


  

$0.01 par Value


  

Additional

Paid-in Capital


  

Retained

Earnings (Deficit)


    

Total

Stockholders’ Equity


 

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

 

Issuance of stock under employee stock purchase plan

  

14,173

  

 

142

  

 

21,472

  

 

—  

 

  

 

21,614

 

Net loss

  

—  

  

 

—  

  

 

—  

  

 

(1,503,813

)

  

 

(1,503,813

)

    
  

  

  


  


Balance, December 31, 2001

  

3,870,113

  

 

38,701

  

 

10,128,580

  

 

(1,861,536

)

  

 

8,305,745

 

Issuance of stock under employee stock purchase plan

  

9,337

  

 

94

  

 

7,446

  

 

—  

 

  

 

7,540

 

Net loss

  

—  

  

 

—  

  

 

—  

  

 

(1,668,762

)

  

 

(1,668,762

)

    
  

  

  


  


Balance, December 31, 2002

  

3,879,450

  

$

38,795

  

$

10,136,026

  

$

(3,530,298

)

  

$

6,644,523

 

    
  

  

  


  


 

 

The accompanying notes are an integral part of these financial statements.

 

 

F-6


GEERLINGS & WADE, INC.

 

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2000, 2001 and 2002

 

    

Years Ended December 31,


 
    

2000


    

2001


    

2002


 

Cash Flows from Operating Activities:

                          

Net loss

  

$

(470,662

)

  

$

(1,503,813

)

  

$

(1,668,762

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities—

                          

Depreciation and amortization

  

 

510,524

 

  

 

689,572

 

  

 

320,856

 

Deferred income taxes

  

 

110,930

 

  

 

470,617

 

  

 

—  

 

Loss on disposal of property and equipment

  

 

68,886

 

  

 

—  

 

  

 

24,453

 

Changes in current assets and liabilities

                          

Accounts receivable

  

 

83,761

 

  

 

(37,616

)

  

 

(349,465

)

Inventory

  

 

(2,784,968

)

  

 

3,721,889

 

  

 

3,649,358

 

Prepaid mailing costs

  

 

806,088

 

  

 

(29,203

)

  

 

88,020

 

Prepaid expenses and other current assets

  

 

271,408

 

  

 

(69,014

)

  

 

9,799

 

Refundable income taxes

  

 

—  

 

  

 

—  

 

  

 

(647,425

)

Accounts payable

  

 

(261,326

)

  

 

(1,321,367

)

  

 

144,595

 

Deferred revenue

  

 

284,922

 

  

 

(117,469

)

  

 

(382,796

)

Accrued sales, income and payroll taxes

  

 

(8,073

)

  

 

—  

 

  

 

(109,474

)

Accrued expenses

  

 

(148,735

)

  

 

(108,274

)

  

 

(31,611

)

    


  


  


Net cash (used in) provided by operating activities

  

 

(1,537,245

)

  

 

1,695,322

 

  

 

1,047,548

 

    


  


  


Cash Flows from Investing Activities:

                          

Purchases of property and equipment, net

  

 

(225,404

)

  

 

(235,481

)

  

 

(77,141

)

(Increase) decrease in other assets

  

 

3,029

 

  

 

1,346

 

  

 

(11,344

)

Proceeds from sale of fixed assets

  

 

—  

 

  

 

—  

 

  

 

1,000

 

    


  


  


Net cash used in investing activities

  

 

(222,375

)

  

 

(234,135

)

  

 

(87,485

)

    


  


  


Cash Flows from Financing Activities:

                          

Borrowings under line of credit

  

 

2,750,000

 

  

 

1,000,000

 

  

 

—  

 

Repayments under line of credit

  

 

(525,000

)

  

 

(975,000

)

  

 

(2,250,000

)

Purchase price advance from Liquid Holdings

  

 

(1,250,000

)

  

 

—  

 

  

 

—  

 

Proceeds from issuance of stock under the Employee Stock Purchase Plan

  

 

11,022

 

  

 

21,614

 

  

 

7,540

 

Proceeds from exercise of stock options

  

 

20,875

 

  

 

—  

 

  

 

—  

 

    


  


  


Net cash provided by (used in) financing activities

  

 

1,006,897

 

  

 

46,614

 

  

 

(2,242,460

)

    


  


  


Net (Decrease) Increase in Cash and Cash Equivalents

  

 

(752,723

)

  

 

1,507,801

 

  

 

(1,282,397

)

Cash and Cash Equivalents, beginning year

  

 

2,624,990

 

  

 

1,872,267

 

  

 

3,380,068

 

    


  


  


Cash and Cash Equivalents, end of year

  

$

1,872,267

 

  

$

3,380,068

 

  

$

2,097,671

 

    


  


  


Supplemental Disclosure of Cash Flow Information:

                          

Cash paid during the year for—

                          

Interest

  

$

153,351

 

  

$

145,191

 

  

$

61,092

 

    


  


  


Income taxes

  

$

11,460

 

  

$

23,100

 

  

$

29,600

 

    


  


  


 

The accompanying notes are an integral part of these financial statements.

 

 

F-7


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

 

(1)    Operations

 

Geerlings & Wade, Inc. (the Company) is a direct marketer of premium wines and wine-related merchandise to retail consumers in the United States. The Company maintains 15 licensed facilities in 15 states. Federal, state and local laws strictly govern the sale of wine in each market served by the Company.

 

For the years ended December 31, 2000, 2001 and 2002, the Company reported losses from operations of approximately $1,514,000, $970,000 and $2,324,000, respectively. During 2002, the Company repaid its bank line and in 2003 obtained a new line of credit for $800,000 from certain of its directors (see Note 4). Management has initiated plans to reduce its operating expenses and increase its cash flow to obtain profitable operations. Failure to achieve these plans could have a material effect on the Company’s results of operations and financial condition. However, management believes that the Company’s current cash balances and available credit facilities are sufficient to maintain operations for the next 12 months.

 

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.

 

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. 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.

 

(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 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 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 are not material. Mailing list rental revenue is recognized when the list is fulfilled. Delivery revenue is recognized at the time of shipment to the customer.

 

F-8


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(c)    Shipping and Handling Fees and Costs

 

The Company has included shipping and handling revenue of approximately $1,851,000, $1,442,000 and $1,274,589 in sales in the accompanying statements of operations for the years ended December 31, 2000, 2001 and 2002, respectively. The Company has included shipping and handling fees of approximately $4,506,000, $3,596,000 and $3,606,010 in selling, general and administrative expenses in the accompanying statements of operations for the years ended December 31, 2000, 2001 and 2002, 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, 2001 and 2002, cash equivalents consisted 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 $949,000, $806,000 and $677,827 for the years ended December 31, 2000, 2001 and 2002, respectively, and are included in selling, general and administrative expenses in the accompanying statements of operations.

 

(f)    Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are customer obligations for the sale of wine and accessories or mailing list rental due under normal trade terms. The Company sells its products to consumers. The Company performs continuing credit evaluations of its customers’ financial condition and generally does not require collateral.

 

Senior management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to the Company, it believes the allowance for doubtful accounts as of December 31, 2002 is adequate. However, actual write-offs might exceed the recorded allowance.

 

(g)    Inventory

 

The Company values inventory, which consists entirely of finished goods, 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 $400,000 and $347,000 of reservations of certain vintage wines as of December 31, 2001 and 2002, respectively. The Company shipped approximately $197,000 and $126,000 of such reserves to its customers during 2001 and 2002, respectively. The Company bears the ultimate liability for the wine reservations until delivered and accepted by the customers, at which time revenue is recognized.

 

Inventory in transit at December 31, 2001 and 2002 totaled $951,007 and $694,955, respectively. As of December 31, 2002, the Company had purchase commitments for the upcoming year of approximately $4,417,000 for wine inventory. As of December 31, 2002, purchase commitments for wine inventory for fiscal years 2004 and 2005 totaled $633,000.

 

F-9


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(h)    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

 

(i)    Long-Lived Assets

 

Long-lived assets, such as intangible assets, property and equipment and certain sundry assets, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets are written down to fair value.

 

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets:” This statement supersedes Statement of Financial Accounting Standards No. 121 (SFAS 121), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 retained the fundamental provisions of SFAS 121 for recognition and measurement of impairment, but amended the accounting and reporting standards for segments of a business to be disposed of. SFAS 144 was adopted effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company’s financial position or results of operations.

 

(j)    Intangibles

 

In connection with the Company’s July, 1998 purchase of Passport Gift Company, Inc. (Passport), the Company recorded goodwill of approximately $319,000. This goodwill was being amortized over 15 years. In the fourth quarter of 2001, based on the Company’s assessment of future cash flows from customers acquired as a part of its purchase of Passport, the Company wrote off the remaining goodwill associated with that acquisition of $195,000.

 

(k)    Advertising Costs

 

Advertising expense was $7,130,837, $5,713,269 and $5,400,058 for the years ended December 31, 2000, 2001 and 2002, respectively.

 

Costs of direct advertising materials mailed to 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. The Company amortizes these advertising costs for a period of up to three months. Total amounts of direct advertising to prospective customers capitalized as of December 31, 2001 and 2002 are $123,000 and $34,000, respectively.

 

F-10


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(l)    Self-Insurance

 

The Company is self-insured for employee health benefits and has purchased stop-loss insurance, which limits the annual aggregate and annual per-employee health insurance claims expense. The Company records an accrual for claims which have been reported but not paid (“RBNP”) by the third-party claims administrator and for claims which have been incurred but not reported (“IBNR”) to the third-party claims administrator. The liabilities for RBNP claims and IBNR claims are included in other current liabilities, and the deposit required by the third-party claims and IBNR claims are included in other current liabilities, and the deposit required by the third-party claims administrator, representing estimated RBNP and IBNR claims, is classified in other assets in the accompanying balance sheets. The Company expects that it will continue to be able to purchase stop-loss insurance at commercial rates.

 

(m)    Deferred Revenue

 

Deferred revenue represents customer prepayments, payments for wine reservations and deferred membership revenue. The components of deferred revenue as of December 31, 2001 and 2002 are as follows:

 

    

2001


  

2002


Customer prepayments

  

 

957,199

  

 

809,927

Deferred membership revenue

  

 

817,866

  

 

582,342

    

  

Deferred revenue

  

$

1,775,065

  

$

1,392,269

    

  

 

(n)    Stock-Based Compensation

 

The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for the plans. Under APB Opinion 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized.

 

The Company provides proforma disclosures of compensation expense under the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.

 

The weighted average assumptions used for the years ended December 31, 2000, 2001 and 2002 are as follows:

 

    

December 31,


 
    

2000


    

2001


    

2002


 

Risk-free interest rate

  

6.05 to 6.69

%

  

4.13 to 5.14

%

  

3.64 to 4.9

%

Expected dividend yield

  

—  

 

  

—  

 

  

—  

 

Expected lives

  

8 years

 

  

7 years

 

  

7 years

 

Expected volatility

  

78

%

  

155

%

  

183

%

 

F-11


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

Had compensation cost for the Company’s option plans been determined using the fair value method at the grant dates, the effect on the Company’s net loss and loss per share for the years ended December 31, 2002, 2001 and 2000 would have been as follows:

 

    

2000


    

2001


    

2002


 

Net loss as reported

  

$

(470,662

)

  

$

(1,503,813

)

  

$

(1,668,762

)

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

  

 

—  

 

  

 

—  

 

  

 

—  

 

Deduct: Total stock-based employee compensation determined under fair value method for all awards, net of related tax effects

  

 

(758,447

)

  

 

(535,489

)

  

 

(168,908

)

    


  


  


Pro forma net loss

  

$

(1,229,109

)

  

$

(2,039,302

)

  

$

(1,837,670

)

    


  


  


Basis and diluted loss per share

                          

As reported

  

$

(0.12

)

  

$

(0.39

)

  

$

(0.43

)

Pro forma

  

$

(0.32

)

  

$

(0.52

)

  

$

(0.47

)

 

(o)    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. Foreign exchange contracts are accountd for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities. “ At December 31, 2001, the Company had no foreign exchange contracts outstanding.

 

As of December 31, 2002, the Company had futures contracts to partially hedge the effects of fluctuations in the Euro, which is the currency in which it purchases a majority of its imported wines. Futures contracts are marked to market with current recognition of gains and losses on such positions since the Company’s positions are not considered hedges for financial reporting purposes. The Company’s accounting for futures contracts may have the effect of increasing earnings volatility in any particular period. The Company does not hold or issue derivative instruments for speculative purposes. As of December 31, 2002 the Company has purchased forward contracts to hedge approximately $234,000 of Euro purchase commitments. The change in value related to these forward contracts was not recorded as it was immaterial to these financial statements.

 

(p)    Financial Instruments

 

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, requires disclosure about fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable, investment in wine futures, and accounts payable approximate their fair value at December 31, 2001 and 2002, due to their short-term nature. The fair value of debt approximates carrying value because the debt bears interest at a variable market rate.

 

(q)    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 2001 or 2002.

 

F-12


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(r)    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.

 

(s)    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 primarily operates in one industry segment and provides one service function. The Company’s revenues are wholly derived from customers within the United States.

 

(t)    Recently Issued Accounting Standards

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements” SFAS Nos. 4, 44 and 64, “Amendment of FASB Statement No. 13 and Technical Corrections.” SFAS No. 145 rescinds Statement No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision of SFAS No.145 related to the rescission of Statement No. 4 shall be applied in fiscal year beginning after May 15, 2002. The provisions of SFAS No. 145 related to Statement No. 13 should be for transactions occurring after May 15, 2002. Early application of the provisions of this Statement is encouraged. The Company does not expect that the adoption of SFAS No. 145 will have a significant impact on its results of operations, financial position or cash flows.

 

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement superseded EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provision of this statement is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company does not expect that the adoption of SFAS No. 146 will have a significant impact on its results of operations, financial position or cash flows.

 

F-13


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements and the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim requirements are effective for interim periods beginning after December 15, 2002. The Company does not plan to transition to the fair value method of accounting for its stock-based employee compensation. The Company has adopted the disclosure requirements of this provision for the year ended December 31, 2002.

 

F-14


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(u)    Reclassifications

 

Certain balances in prior year financial statements have been reclassified to conform to the presentation in the current year.

 

(3)    Net Loss per Share

 

The Company applies the provisions of SFAS No. 128, “Earnings per Share.” Accordingly, basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share in 2000, 2001 and 2002 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, 2000, 2001 and 2002, 371,849, 380,363 and 344,363 of antidilutive shares, respectively, have been excluded from the weighted average number of common and common equivalent shares outstanding.

 

(4)    Line of Credit

 

The Company had a line of credit agreement with a bank. Until March 31, 2002, the borrowings under the line of credit bore interest at the bank’s prime rate. Thereafter, the borrowings under the line of credit bore interest at the bank’s prime rate plus 2%. The Company was required to maintain certain financial covenants, including a minimum consolidated debt service ratio and a minimum consolidated leverage ratio. This agreement terminated pursuant to its terms on December 27, 2002. The Company repaid all amounts outstanding under the facility on or before December 27, 2002. At December 31, 2001, the Company had $2,250,000 outstanding under the line of credit.

 

On February 24, 2003, the Company obtained a credit facility for $800,000 from its outside directors. The loan has a term of approximately one year and contains terms and conditions the Company believes to be more favorable than terms and conditions the Company could obtain from unaffiliated lending sources. In connection with entering into this loan, the Company issued warrants to purchase 42,104 shares at $2.375 per share. The exercise price of the warrants was 125% of the closing price of the Company’s common stock on the closing date of the credit facility. To the directors as an inducement for extending this credit facility, the value of these warrants, based upon the black-scholes option pricing model, of $79,730 will be amortized as interest expense over the term of the credit facility.

 

(5)    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, 2002 are approximately as follows:

 

Fiscal Year


  

Amount


2003

  

$

763,000

2004

  

 

584,000

2005

  

 

294,000

    

    

$

1,641,000

    

 

Total rental expense under these agreements included in the accompanying statements of operations is approximately $1,172,000, $1,179,000 and $1,155,000 for the years ended December 31, 2000, 2001 and 2002, respectively.

 

F-15


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(b) Litigation

 

In the ordinary course of business, the Company is party to various types of litigation. The Company believes it has meritorious defenses to all claims and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company’s financial position or results of operations.

 

(6)    Income Taxes

 

Income taxes are provided for in accordance with SFAS No. 109, Accounting for Income Taxes. Accordingly, a deferred tax asset or liability is recorded based on the differences between the financial reporting and tax bases of assets and liabilities, as measured by the enacted tax rates. The deferred tax provision (benefit) results from the net change during the year of deferred tax assets and liabilities.

 

The components of the provision (benefit) for income taxes are as follows:

 

    

2000


    

2001


    

2002


 

Current (benefit) expense—

                          

Federal

  

$

(84,000

)

  

$

(60,000

)

  

$

(700,000

)

State

  

 

(26,000

)

  

 

—  

 

  

 

—  

 

    


  


  


    

 

(110,000

)

  

 

(60,000

)

  

 

(700,000

)

    


  


  


Deferred (benefit) expense—

                          

Federal

  

 

(313,000

)

  

 

(261,000

)

  

 

203,000

 

State

  

 

(113,000

)

  

 

(80,000

)

  

 

(199,000

)

    


  


  


    

 

(426,000

)

  

 

(401,000

)

  

 

4,000

 

    


  


  


Valuation allowance

  

 

536,000

 

  

 

872,000

 

  

 

(4,000

)

    


  


  


    

$

—  

 

  

$

411,000

 

  

$

(700,000

)

    


  


  


 

The Company has recorded a valuation allowance against its deferred tax assets due to the uncertainty regarding their realizability. In the fourth quarter of 2001, management increased the valuation allowance to reserve for its remaining deferred tax asset balance. The Company reached this determination based on its operating performance, which includes three consecutive years of net losses. During 2002 certain tax laws were changed to allow the Company to carryback tax losses five years instead of the previous two year carryback. As a result of this change in tax law, the Company was able to carryback previous and current year losses, which resulted in a $700,000 tax benefit.

 

As of December 31, 2002, the Company has estimated net operating losses available of approximately $2,800,000 and $3,700,000 for a federal and state income tax purposes, respectively. Approximately $2.0 million of the federal loss will be carried back to offset previously reported income. The remaining $800,000 begin to expire in 2020 and are subject to review and possible adjustment by the Internal Revenue Service. The majority of the state income tax losses begin to expire in 2007. The United States Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available to be used in any given year under certain circumstances, including significant changes in ownership interests.

 

F-16


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

The reconciliation of the federal statutory rate to the effective tax rate for income taxes for the years ended December 31,2000, 2001 and 2002 is as follows:

 

    

2000


    

2001


    

2002


 

Income tax benefit at federal statutory rate

  

(34.0

)%

  

(34.0

)%

  

(34.0

)%

State taxes, net of federal benefit

  

(6.0

)

  

(6.0

)

  

—  

 

Non deductible merger costs

  

(75.0

)

  

—  

 

  

—  

 

Increase in valuation allowance

  

112.9

 

  

76.2

 

  

—  

 

Other, net

  

2.1

 

  

1.4

 

  

4.4

 

    

  

  

    

0.0

%

  

37.6

%

  

(29.6

)%

    

  

  

 

Deferred income taxes relate to the following temporary differences as of December 31, 2001 and 2002:

 

    

2001


    

2002


 

Deferred revenue

  

$

335,000

 

  

$

240,000

 

Capitalized inventory costs

  

 

246,000

 

  

 

287,000

 

Nondeductible reserves

  

 

322,000

 

  

 

268,000

 

Depreciation and amortization

  

 

270,000

 

  

 

326,000

 

Net operating loss carryforward

  

 

522,000

 

  

 

600,000

 

Deferred costs

  

 

(33,000

)

  

 

(63,000

)

Valuation allowance

  

 

(1,662,000

)

  

 

(1,658,000

)

    


  


Total deferred taxes

  

$

—  

 

  

$

—  

 

    


  


 

(7)    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-17


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

Activity under the Option Plan and the Director Plan is summarized as follows:

 

    

Option Plan


    

Number of Shares


      

Weighted Average Price per Share


  

Exercise Price per Share


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

Granted

  

92,000

 

    

 

1.14

  

 

0.95–1.88

Terminated

  

(98,486

)

    

 

5.56

  

 

2.06–8.00

    

    

  

Outstanding, December 31, 2001

  

310,363

 

    

 

3.43

  

 

0.95–8.00

Granted

  

50,000

 

    

 

1.21

  

 

1.21

Terminated

  

(98,500

)

    

 

1.75

  

 

1.00–4.38

    

    

  

Outstanding, December 31, 2002

  

261,863

 

    

$

3.64

  

$

0.95–$8.00

    

    

  

Exercisable, December 31, 2002

  

183,026

 

    

$

4.25

  

$

0.95–$8.00

    

    

  

Exercisable, December 31, 2001

  

130,024

 

    

$

4.66

  

$

1.88–$8.00

    

    

  

Exercisable, December 31, 2000

  

132,180

 

    

$

5.58

  

$

3.00–$8.00

    

    

  

    

Director Plan


    

Number of Shares


      

Weighted Average Price per Share


  

Exercise Price per Share


Outstanding, December 31, 1999

  

60,000

 

    

$

6.28

  

$

4.31–15.25

Granted

  

15,000

 

    

 

3.48

  

 

3.38–3.50

Terminated

  

(17,500

)

    

 

5.05

  

 

4.00–4.38

    

    

  

Outstanding, December 31, 2000

  

57,500

 

    

 

6.04

  

 

3.38–15.25

Granted

  

12,500

 

    

 

1.62

  

 

1.00–1.78

    

    

  

Outstanding, December 31, 2001

  

70,000

 

    

 

5.11

  

 

1.00–15.25

Granted

  

12,500

 

    

 

1.03

  

 

.80–1.15

    

    

  

Outstanding, December 31, 2002

  

82,500

 

    

$

4.49

  

$

.80–15.25

    

    

  

Exercisable, December 31, 2002

  

57,495

 

    

$

5.75

  

$

1.00–$15.25

    

    

  

Exercisable, December 31, 2001

  

45,829

 

    

$

6.27

  

$

2.06–$15.25

    

    

  

Exercisable, December 31, 2000

  

34,996

 

    

$

6.74

  

$

4.31–$15.25

    

    

  

 

F-18


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

The following table summarizes information about stock options outstanding and exercisable at December 31, 2002 under the Option Plan:

 

Options Outstanding


    

Options Exercisable


Exercise Price/

Range of Exercise Prices


    

Number

Outstanding as of December 31, 2002


    

Weighted Average Remaining Contractual Life (in Years)


    

Weighted Average Exercise Price


    

Number Exercisable at December 31, 2002


    

Weighted Average Exercise Price


$0.95–1.10

    

70,000

    

8.7

    

$

1.06

    

23,332

    

$

1.06

  1.88–2.06

    

12,500

    

7.7

    

 

1.99

    

8,333

    

 

1.99

  2.56–3.00

    

14,000

    

6.2

    

 

2.88

    

12,666

    

 

2.91

  4.00–4.75

    

107,500

    

6.6

    

 

4.27

    

80,832

    

 

4.27

           5.25

    

35,000

    

3.8

    

 

5.25

    

35,000

    

 

5.25

  7.31–8.00

    

22,863

    

5.3

    

 

7.49

    

22,863

    

 

7.49

      
           

    
    

      

261,863

           

$

3.64

    

183,026

    

$

4.25

      
           

    
    

 

The following table summarizes information about stock options outstanding and exercisable at December 31, 2002 under the Director Plan:

 

Options Outstanding


    

Options Exercisable


Exercise Price/

Range of Exercise Prices


    

Number

Outstanding as of December 31, 2002


    

Weighted Average Remaining Contractual Life (in Years)


    

Weighted Average Exercise Price


    

Number Exercisable at December 31, 2002


    

Weighted Average Exercise Price


$.80–$1.15

    

15,000

    

9.4

    

$

1.02

    

833

    

$

1.00

  1.75–1.78

    

10,000

    

8.4

    

 

1.77

    

3,332

    

 

1.77

           2.06

    

2,500

    

7.8

    

 

2.06

    

1,666

    

 

2.06

  3.38–3.5

    

10,000

    

7.4

    

 

3.47

    

6,664

    

 

3.47

  4.31–4.63

    

25,000

    

4.6

    

 

4.43

    

25,000

    

 

4.43

  6.81–8.00

    

15,000

    

4.8

    

 

7.36

    

15,000

    

 

7.36

  15.25

    

5,000

    

2.4

    

 

15.25

    

5,000

    

 

15.25

      
           

    
    

      

82,500

           

$

4.49

    

57,495

    

$

5.75

      
           

    
    

 

The weighted average fair value of options granted during the years ended December 31, 2000, 2001 and 2002 under these plans is $2.85, $1.16 and $1.17, respectively. As of December 31, 2000, 2001 and 2002, the weighted average remaining contractual life of outstanding options under these plans is 8.0, 7.9 and 6.6 years, respectively.

 

(c)    Employee Stock Purchase Plan

 

The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors and the stockholders on April 8, 1994 to allow eligible employees, as defined in the Purchase Plan, to purchase shares of common stock during one or more six-month periods through payroll deductions. A total of 50,000 shares of common stock have been reserved for purchase under the Purchase Plan. As of December 31, 2001 and 2002, a cumulative total of 36,285 and 45,622 shares of common stock have been purchased by employees under the Purchase Plan, respectively.

 

F-19


GEERLINGS & WADE, INC.

 

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

 

(8)    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. The Company matched 50% of individual contributions, up to 6% of compensation in 2001. Employee contributions vest immediately, while Company matching contributions fully vest after four years of service. During fiscal 2001, the Plan was amended to allow employees to participate after six months of service. The plan was further amended effective January 1, 2002, where the Company matches 100% of individual contribution up to 3% of compensation and 50% for 4% and 5% of compensation. For the fiscal years ended December 31, 2000, 2001 and 2002, the Company’s contribution expense was $27,454, $51,718 and $56,704, respectively, under the Plan.

 

(9)    Related Party

 

During 2000, the Company paid Hill, Holiday approximately $266,000 for services provided in the development and enhancement of its web sites 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 were at an arm’s-length basis. The Company also made payments to Verbind, a company formerly managed by the current CEO of the Company, for marketing software development and maintenance fees and hardware purchases of $66,000 in 2002 and 2001 and $10,000 in 2000.

 

(10)    Summary of quarterly data (unaudited)

 

A summary of quarterly data follows (in thousands, except per share data):

 

    

2001 Quarter Ended


 
    

March 31


    

June 30


    

September 30


    

December 31


 

Net sales

  

$

7,153

 

  

$

7,846

 

  

$

6,901

 

  

$

10,772

 

Gross profit

  

 

3,786

 

  

 

4,285

 

  

 

3,827

 

  

 

5,753

 

Operating (loss) profit

  

 

(138

)

  

 

(94

)

  

 

(269

)

  

 

(469

)

Net (loss) income

  

 

(174

)

  

 

(128

)

  

 

(293

)

  

 

(909

)

(Loss) earnings per share:

                                   

Basic

  

 

(0.05

)

  

 

(0.03

)

  

 

(0.08

)

  

 

(0.23

)

Diluted

  

 

(0.05

)

  

 

(0.03

)

  

 

(0.08

)

  

 

(0.23

)

    

2002 Quarter Ended


 
    

March 31


    

June 30


    

September 30


    

December 31


 

Net sales

  

$

7,364

 

  

$

6,208

 

  

$

6,033

 

  

$

8,264

 

Gross profit

  

 

3,985

 

  

 

3,349

 

  

 

3,321

 

  

 

4,577

 

Operating (loss) profit

  

 

(728

)

  

 

(2,306

)

  

 

13

 

  

 

697

 

Net (loss) income

  

 

(741

)

  

 

(2,331

)

  

 

1

 

  

 

1,402

 

(Loss) earnings per share:

                                   

Basic

  

 

(.19

)

  

 

(.60

)

  

 

—  

 

  

 

.36

 

Diluted

  

 

(.19

)

  

 

(.60

)

  

 

—  

 

  

 

.36

 

 

During the fourth quarter of 2002, the Company recorded a $700,000 tax benefit related to a change in tax law, which allowed the Company to carryback current and previous year tax losses further than previously allowed.

 

F-20

EX-10.5.7 3 dex1057.txt FOURTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.5.7 FOURTH AMENDMENT TO CREDIT AGREEMENT AND RELATED AGREEMENTS BETWEEN CITIZENS BANK OF MASSACHUSETTS, GEERLINGS & WADE, INC. AND GEERLINGS & WADE OF TEXAS, INC. This Fourth Amendment to Credit Agreement and Related Agreements (hereinafter the "Fourth Amendment") is made as of the 6/th/ day of December, 2002 by and among Citizens Bank of Massachusetts (the "Lender"), a banking institution with offices at 28 State Street, Boston, Massachusetts; Geerlings & Wade, Inc. ("Borrower"), a Massachusetts corporation with an address of 960 Turnpike Street, Canton, Massachusetts; and Geerlings & Wade of Texas, Inc., a Texas corporation, with an address of 12502 Exchange Boulevard, Suite 412, Stafford, Texas (the "Guarantor"). Background and Recitals A. Reference is hereby made to a certain Credit Agreement (the "Credit Agreement") between the Borrower and the Lender and a certain Revolving Credit Note by Borrower to the Lender in the original face amount of $5,000,000.00 (the "Note"). The obligations of the Borrower to the Lender under the Credit Agreement and the Note are secured by or subject to, among other things: a certain Borrower Security Agreement-All Assets by Borrower in favor of the Lender (the "Borrower Security Agreement"); a certain Borrower Security Agreement (Trademarks) by Borrower in favor of the Lender (the "Borrower Trademarks Security Agreement"); a certain Collateral Assignment of Lease by Borrower in favor of the Lender (the "Collateral Assignment"); a certain Subsidiary Guaranty by the Guarantor in favor of the Lender guaranteeing the obligations of Borrower to the Lender (the "Guaranty"); a certain Subsidiary Security Agreement-All Assets by Guarantor in favor of the Lender securing the obligations of Guarantor to the Lender (the "Subsidiary Security Agreement"); and a certain Post-Closing Agreement between the Borrower and the Lender. All of the foregoing Agreements, Note and Guaranty are dated April 13, 2000. The Lender and the Borrower are also parties to a certain First Amendment to Credit Agreement and a certain First Amended and Restated Post-Closing Agreement, both dated December 4, 2000 (the "First Amendments"); a certain Second Amendment to Credit Agreement dated March 5, 2001 (the "Second Amendment"); a certain Waiver dated May 15, 2001 (the "Waiver"); and a certain Third Amendment to Credit Agreement dated as of March 26, 2002 (the "Third Amendment"). B. The Credit Agreement, the Note, the Borrower Security Agreement, the Borrower Trademarks Security Agreement, the Collateral Assignment, the Guaranty, the Subsidiary Security Agreement, the First Amendments, the Second Amendment, the Waiver and the Third Amendment are sometimes collectively referred to herein as the "Financing Documents." All capitalized terms used in this Fourth Amendment shall have the same meaning as in the Financing Documents to the extent that they appear therein unless otherwise indicated herein. The term "Obligors" as used herein means both the Borrower and 1 Guarantor, collectively or individually, as the context may require. The term "and" when used herein means "and/or." This Fourth Amendment shall be deemed to amend the Financing Documents, but only to the extent expressly provided herein. C. The Lender has, prior to the date of this Fourth Amendment made loans and advances (collectively the "Loans") and granted other financial accommodations in favor of the Borrower under the Financing Documents. D. All Loans, letter of credit reimbursement obligations and banker's acceptances, overdrafts and overadvances, if any, and any and all interest thereon and other sums now or hereafter owed to Lender under the Financing Documents, this Fourth Amendment or otherwise, including without limitation, the Amendment Fee, as defined herein, any other fees or costs payable to the Lender and reasonable attorneys fees and costs of collection incurred by the Lender in connection with the preparation of this Fourth Amendment or the enforcement of the Lender's rights hereunder or under the Financing Documents are referred to herein collectively as the "Obligations." E. An Event of Default under the Financing Documents has occurred and is continuing. As of the date of this Fourth Amendment, Borrower has breached Section 6.1 of the Credit Agreement. The Borrower has requested that the Lender approve an amendment to Section 6.1 of the Credit Agreement that will enable the Borrower to comply with that Section. The Borrower has requested that the Lender waive the existing Event of Default under Section 6.1 provided Borrower agree that the Maturity Date of the Loans under the Credit Agreement shall now be December 27, 2002. The Borrower has requested that, notwithstanding the continuing existence of an Event of Default under the Financing Documents, the Lender continue to make Loans to the Borrower under the Financing Documents. F. The Lender has agreed, under the terms and conditions of this Fourth Amendment and provided there occurs no further Default under the Financing Documents or the Fourth Amendment to waive the existing Event of Default under Section 6.1 of the Credit Agreement, to continue to make certain Loans to the Borrower and to amend the Maturity Date of the Loans to be December 27, 2002 (the "New Maturity Date"). Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed by and among the Lender, the Borrower and the Guarantor as follows: 1. Acknowledgment of Events of Default; Waiver. (a) The Obligors acknowledge and agree that Events of Default under the Financing Documents have occurred and are continuing. Specifically, (i) based upon financial information recently provided to the Lender by the Borrower, the Borrower has defaulted under the debt service coverage ratio covenant, the current ratio covenant and the quick ratio covenant set forth in Section 6.1(a) of the Credit Agreement; and (ii) Borrower has defaulted 2 under Section 7.1(d) of the Credit Agreement due to its failure to obtain Lender's prior written consent in connection with the transfer of inventory from Guarantor to Borrower; and (iii) Borrower has defaulted under Sections 5.4 and 7.1(f)(ix) of the Credit Agreement due to Guarantor's cessation of active business and its pending dissolution as disclosed to Lender (collectively, the "Current Defaults"). The Obligors hereby represent that they are aware of no other Events of Default under the Financing Documents which have not already been expressly waived in writing by the Lender. (b) As a result of the occurrence of the Current Defaults: (i) the Lender, pursuant to the Financing Documents, is entitled to accelerate and receive immediate payment of all of the Obligations; (ii) the Lender is entitled to immediately exercise all other collection and enforcement rights and remedies available to it under the Financing Documents and applicable law; and (iii) the Lender has no obligation under the Financing Documents to make any additional Loans or any other extensions of credit to the Borrower. (c) Pursuant to the terms of this Fourth Amendment the Lender hereby waives the Current Defaults described in Section 1(a) above. (d) The Borrower shall comply with the Financing Documents until payment in full of the Obligations. Any terms, conditions and waivers of other Defaults or Events of Default contained in the First Amendment, Second Amendment, the Waiver and the Third Amendment shall remain in full force and effect, except to the extent that they are expressly modified by this Fourth Amendment. (e) The Lender hereby waives the Current Defaults described in Section 1(a) above and agrees to make further Loans to the Borrower in accordance with the terms of the Fourth Amendment and the Financing Documents and forbears from exercising its rights described in Section 1(b) above under the Financing Documents only upon the terms described herein. Other than as expressly provided in this Fourth Amendment and the Financing Documents, the Lender is not subject to any agreement or obligation, either express or implied, to make Loans to the Borrower or to forbear from exercising any of its rights and remedies under this Fourth Amendment the Financing Documents or applicable law. Each Obligor expressly acknowledges and agrees that from and after the date of this Fourth Amendment, it is not entitled to any grace periods and/or notice with respect to Defaults or Events of Default which may occur hereafter under this Fourth Amendment or the Financing Documents, notwithstanding any terms to the contrary in the Financing Documents. 2. Acknowledgment of Indebtedness. The Obligors hereby acknowledge and agree that, as of October 28, 2002, they were liable to the Lender under the Note and Guaranty as follows: principal: $886,981.76; interest: $3,297.50. The Obligors further acknowledge and agree that, in addition to the foregoing amounts due with respect to principal and interest, they are liable to the Lender for all fees and expenses described in Recital D above which are presently due to the Lender under the Financing Documents including, without limitation, reasonable attorneys fees and expenses incurred as of this date in connection with the 3 preparation of this Fourth Amendment. Pursuant to this Fourth Amendment the Obligors shall pay the Amendment Fee (as hereinafter defined). 3. Ratification of Financing Documents; Security and Further Assurances. (a) Each of the Obligors hereby ratifies, confirms and reaffirms all and each of the terms and conditions of the Financing Documents, as modified herein, except to the extent they apply to the Guarantor. The Obligors further acknowledge and agree that, except as expressly modified or amended in this Fourth Amendment all of the terms and conditions of the Financing Documents shall remain in full force and effect, except to the extent they apply to the Guarantor. (b) The Obligors acknowledge, confirm and agree that the liens, security interests and assignments granted under the Financing Documents in favor of the Lender secure all of the Obligations now existing or hereafter arising or accruing under this Fourth Amendment, the Note, the Guaranty and the other Financing Documents, and are valid and perfected first priority liens, security interests, and assignments, to the extent provided under the Financing Documents, in and on the Obligors' property including, without limitation, accounts, inventory, chattel paper, instruments, general intangibles (including tax refunds and Intellectual Property as defined herein, material contracts and leases), goods, machinery, equipment, and fixtures, now existing or hereafter arising or acquired and in the proceeds thereof, (collectively the "Collateral") and that the Obligors shall take no action to impair, invalidate or render un-perfected such liens, security interests and assignments. Said liens, security interests, and assignments in favor of the Lender are and shall continue to have the same priority in the Collateral as is provided for under the Financing Documents. (c) Each Obligor, at its sole expense, shall promptly execute and deliver such further documents, instruments (including, without limitation, any original promissory notes from any party in favor of the Obligors) amendments of agreements and take such further action as the Lender may request to effect the purposes of this Fourth Amendment and the Financing Documents, including, but not limited to, the execution and delivery of all documents required to ensure that the Lender has perfected liens on all property of the Obligors to the extent contemplated under the Financing Documents. (d) The Obligors shall pay the cost of any audit or inspection by the Lender of the Obligors' books and records under Section 5.6 of the Credit Agreement within fifteen days of invoicing to the Obligors and the Obligors' failure to pay such sums or to cooperate with such audit or inspection shall constitute an Event of Default hereunder. (e) The Obligors shall hereafter continue to comply with all of the financial covenants, conditions, terms, representations and warranties contained in the Financing Documents except to the extent they apply to the Guarantor. 4 4. Loans, Repayment Terms, Interest Rate, Fees, Reporting and Other Terms. (a) Provided that there has occurred no Event of Default hereunder or under the Financing Documents (except for the Current Defaults expressly waived in Section 1(e) above or previously waived in writing under the Financing Documents), the Lender, pursuant to the terms of this Fourth Amendment, the Note and the Credit Agreement, will continue to make Loans to the Borrower until the New Maturity Date but such Loans shall not exceed the Maximum Amount, as modified by this Fourth Amendment. The Maximum Amount shall hereafter be as follows: (i) from the date hereof until December 9, 2002, the Maximum Amount shall not exceed One Million and 00/100 Dollars ($1,000,000.00); and (ii) From December 9, 2002 until the New Maturity Date, the Maximum Amount shall not exceed Seven Hundred Thousand and 00/100 Dollars ($700,000.00). Borrower may continue to request that the Lender make Loans up to said Maximum Amount assuming Borrower's compliance with the terms of the Credit Agreement for such advances. The Borrower shall continue to make all regularly scheduled payments of interest in accordance with terms of the Financing Documents. (b) The definition of Maturity Date set forth in Appendix A to the Credit Agreement is hereby amended to be 3:00 p.m. on December 27, 2002 (the "New Maturity Date"). Upon the New Maturity Date, the Obligations shall be due and payable in full. (c) The Borrower shall be liable to the Lender for an Amendment Fee in the amount of $12,500.00 (the "Amendment Fee") on the date of execution of this Fourth Amendment which Amendment Fee shall be deemed fully earned by the Lender as of that date. The Borrower hereby acknowledges that payment of the Amendment Fee by the Borrower is a primary inducement for Lender to enter into this Fourth Amendment. The Borrower further acknowledges that it is receiving good and valuable consideration from the Lender in exchange for the Amendment Fee and that the Borrower has voluntarily and willingly agreed to pay the Amendment Fee upon the terms set forth in this Fourth Amendment. Borrower hereby authorizes Lender as of the date hereof to debit Borrower's account with Lender in the amount of $12,500.00 to pay the Amendment Fee. (d) It shall be a continuing condition of the Loan that Borrower retain Argus Management Company (or some other management consultant reasonably acceptable to Lender) during the remaining term of the Loan to perform periodic performance reviews upon request by Lender. 5 (e) The Borrower shall also pay the Lender all reasonable attorneys fees and expenses which the Lender incurs in connection with the preparation of this Fourth Amendment such payment to be made on the date of execution of this Fourth Amendment. (f) "Collections" for the purposes of this Fourth Amendment shall include all payments and remittances on and proceeds of the Borrower's accounts, tax refunds or other indebtedness due to the Borrower and all proceeds of the sale, liquidation or other disposition, other than in the ordinary course of business, of any Collateral or any other property of the Obligors. The Borrower shall immediately cause all Collections to be deposited in or transferred to the Borrower's existing accounts maintained with the Lender. The Lender shall apply the proceeds of such Collections on a daily basis to reduce the then outstanding Obligations to $0.00 and shall deposit any excess funds of the Borrower into the Borrower's operating account at the Lender. (g) All Collections, other than payments and remittances on the Borrower's accounts in the ordinary course of the Borrower's business, shall be applied in permanent reduction of the Obligations and shall permanently reduce the Maximum Amount, as amended by this Fourth Amendment by the amount of such Collections. The Obligors' failure to immediately deliver all Collections directly to the Lender as provided above shall constitute an Event of Default hereunder and under the Financing Documents. The Obligors shall not conduct any sales of Collateral other than in the ordinary course of their business without the prior written consent of Lender. 5. Representations and Warranties. The Obligors represent and warrant that, to the best of their present knowledge, all of the representations and warranties made by the Obligors in the Financing Documents were true and correct when made. The Obligors further represent and warrant, to the best of their present knowledge, as follows: (a) Places of Business and Location of Property. All of the Obligors' tangible and intangible property, including, without limitation, goods, inventory and other Collateral is located at the same premises where the Obligors represented it was located in the Financing Documents except with respect to any property owned or held by the Guarantor which has been transferred to Borrower's previously disclosed locations. The Obligors shall not have any other place of business or place where any of their tangible or intangible property is or may be deemed to be located . (b) Intellectual Property. All copyrights, patents, applications for patents, service marks, trademarks, service mark and trademark registrations, pending registration applications, trade names, styles and other intellectual property (collectively, "Intellectual Property") of the Obligors is free and clear of any lien or encumbrances except those in favor of the Lender. 6 (c) Other Information. All information provided by the Obligors to the Lender pursuant to this Fourth Amendment shall be, as of the date provided, complete, true and accurate in all respects to the best of the Obligors' knowledge, information and belief. (d) Authorization. The Obligors have the legally required authorization and authority to execute and perform this Fourth Amendment all necessary corporate and stockholder actions to so authorize the execution and performance of this Fourth Amendment having been duly taken and are in full force and effect. This Fourth Amendment is a valid and binding obligation of the Obligors, enforceable against the Obligors in accordance with its terms. (e) Pending Dissolution of Geerlings & Wade of Texas, Inc. Lender hereby acknowledges that Borrower has disclosed to Lender that Borrower has commenced proceedings to voluntarily dissolve the Guarantor and that Guarantor has transferred all inventory to Borrower. The Obligors hereby acknowledge that Lender's security interest in the assets of Guarantor shall continue and remain unimpaired by such dissolution or any transfer of assets. 6. Events of Default. Any failure by Borrower and Guarantor to comply with the terms and provisions of the Credit Agreement, as previously amended and as amended by this Fourth Amendment or any failure of any warranty, covenant or representation of Borrower and Guarantor under this Fourth Amendment including, without limitation, any misrepresentation by Borrower and Guarantor with respect to Borrower's and Guarantor's financial condition, shall constitute a default under this Fourth Amendment and the Credit Agreement as previously amended which shall also constitute a default under the Loans. Lender hereby agrees that the pending dissolution and transfer of assets as set forth in Section 5(e) above shall not constitute an Event of Default under the Financing Documents during the pendency of this Agreement prior to the New Maturity Date. 7. Indemnification. The Obligors hereby indemnify and save the Lender harmless to the same extent as provided in Section 9.6 of the Credit Agreement. This indemnity shall survive the repayment of the Obligations, the New Maturity Date and the termination of any agreement by the Lender to make Loans to the Borrower. 8. No Waiver. Except as otherwise expressly provided for in this Fourth Amendment nothing in this Fourth Amendment shall extend to or affect in any way any of the Obligations or any of the rights and remedies of the Lender arising under the Financing Documents, and the Lender shall not be deemed to have waived any or all of such rights and remedies with respect to any Event of Default or event or condition which, with notice or the lapse of time, would become an Event of a Default (except to the extent that the Lender has expressly waived compliance in whole or in part pursuant to Section 1(c) herein) under the Financing Documents and which, upon the Obligors' execution and delivery of this Fourth Amendment might otherwise exist or which might hereafter occur. 7 9. Release of Lender. For good and valuable consideration, each of the Obligors, (hereinafter collectively, the "Releasors") acknowledge and confirm that they do not have any offsets, defenses or claims against the Lender, or any of its officers, directors, employees, agents, attorneys and representatives, whether asserted or un-asserted. To the extent that the Releasors may nevertheless have such offsets, defenses or claims, each and all of the Releasors and their respective successors, assigns, as applicable, jointly and severally, release and forever discharge the Lender and its officers, directors, employees, agents, attorneys, representatives, predecessors, successors and assigns, both present and former (collectively, the "Released Parties") of and from any and all manner of action and actions, cause and causes of action, suits, debts, controversies, damages, judgments, executions, claims and demands whatsoever, asserted or un-asserted, known or unknown, in law or in equity which against the Released Parties they ever had, now have or which any of each such Releasors' successors and assigns, as applicable, both present and former, ever had or now have, upon or by reason of any manner, cause, causes or thing whatsoever, from the beginning of the world to the date hereof including, without limitation, any presently existing claims or defenses, whether or not presently suspected, contemplated or anticipated which arise out of or are related in any way to the Obligations, the Financing Documents and/or this Fourth Amendment and any acts and conduct with respect thereto. 10. Bankruptcy Proceedings. In the event that any Obligor shall: (i) file with any bankruptcy court of competent jurisdiction or be the subject of any petition under the Bankruptcy Code; or (ii) be the subject of any order for relief issued under the Bankruptcy Code or similar relief under any present or future federal or state act or law relating to bankruptcy, insolvency or other relief for debtors, then, subject to court approval, on two business days notice, Lender shall thereupon, upon Bankruptcy Court approval and, subject to the right of other creditors of the Obligor to object, be entitled and each Obligor irrevocably consents to relief from any automatic stay imposed by Section 362 of the Bankruptcy Code, or otherwise, on or against the exercise of the rights and remedies otherwise available to the Lender as provided in the Financing Documents and this Fourth Amendment and as otherwise provided by law, and each Obligor hereby irrevocably waives its rights to object to such relief in favor of the Lender. 11. Entire Agreement; Binding Effect. In the event of any inconsistency between the provisions of this Fourth Amendment and any other document (including, without limitation, any Financing Document), instrument, or agreement entered into by and between the Lender and any Obligor, the provisions of this Fourth Amendment shall govern and control. This Fourth Amendment shall be binding upon the Lender and the Obligors and their representatives, successors, and assigns, and shall inure to the benefit of the Lender and the Obligors and their respective successors and assigns. This Fourth Amendment incorporates all of the discussions and negotiations between the Obligors and the Lender, either expressed or implied, concerning the matters included herein, any statute, custom, or usage to the contrary notwithstanding. No modification, amendment, or waiver of any provision of this 8 Fourth Amendment or any provision of any other Financing Document, instrument, or agreement between the Obligors and the Lender shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Lender, then by a duly authorized officer thereof. 12. Severability. If any clause or provision of this Fourth Amendment is determined to be illegal, invalid or unenforceable under any present or future law by the final judgment of a court of competent jurisdiction, the remainder of this Fourth Amendment will not be affected thereby. It is the intention of the parties that if any such provision is held to be invalid, illegal or unenforceable, there will be added in lieu thereof an enforceable provision as similar in terms to such provision as is possible, and that such added provision will be legal, valid and enforceable. 13. Construction and Governing Law. This Fourth Amendment is delivered to Lender in the Commonwealth of Massachusetts and it is the desire and intention of the parties that this Fourth Amendment and the Financing Documents be in all respects interpreted according to the laws of the Commonwealth of Massachusetts (notwithstanding any inconsistent provisions in the Financing Documents). Each Obligor specifically and irrevocably consents to the personal and subject matter, jurisdiction and venue of the federal and state courts of the Commonwealth of Massachusetts and such courts shall have exclusive jurisdiction with respect to all matters concerning this Fourth Amendment or the Financing Documents or the enforcement of any of the foregoing. 14. Counterparts. This Fourth Amendment may be executed in one or more counterparts, each of which will be deemed an original document, but all of which will constitute a single document. This Fourth Amendment will not be binding on or constitute evidence of a contract between the parties until such time as a counterpart of this Fourth Amendment has been executed by each of the parties and delivered to the Lender. 15. Opportunity to Seek Advice From an Attorney. All parties hereto warrant and represent that they each have had the opportunity to seek or have sought advice from independent counsel concerning their rights and obligations hereunder. 9 IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to be executed under seal as of the first date written above. Witness: CITIZENS BANK OF MASSACHUSETTS By: /s/ Steven C. Petrarca ------------------------------------ Steven C. Petrarca, Vice President Witness: GEERLINGS & WADE, INC., By: /s/ Huib Geerlings ------------------------------------ Huib Geerlings, President Witness: GEERLINGS & WADE OF TEXAS, INC. By: /s/ Huib Geerlings ------------------------------------ Huib Geerlings, President 10 EX-10.43 4 dex1043.txt DEED OF LEASE Exhibit 10.43 Flint Lee Road, LLC Chantilly, Virginia DEED OF LEASE BETWEEN Flint Lee Road, LLC a Virginia Limited Liability Company (Landlord) AND Geerlings and Wade, Inc. (Tenant) TABLE OF CONTENTS 1. Terms and Definitions ........................................ 1 2. Uses ......................................................... 2 3. Rent ......................................................... 4 4. Tenant's Prepaid Rent and Security Deposit ................... 5 5. Utilities .................................................... 6 6. Building Services ............................................ 6 7. Insurance; Indemnity ......................................... 6 8. Waiver of Subrogation ........................................ 7 9. Repairs ...................................................... 8 10. Tenant's Property ............................................ 8 11. Improvements and Alterations by Tenant ....................... 8 12. Casualty ..................................................... 9 13. Subletting and Assignment .................................... 9 14. Liens and Insolvency ......................................... 10 15. Condemnation ................................................. 10 16. Construction of Leased Premises and Occupancy ................ 11 17. Construction Conditions ...................................... 11 18. Rules and Regulations ........................................ 11 19. Parking ...................................................... 11 20. Access ....................................................... 12 21. Signs ........................................................ 12 22. Tenant's Default ............................................. 12 23. Removal of Property .......................................... 13 24. Quiet Enjoyment, Inability to Perform ........................ 14 25. Hold Over Tenancy ............................................ 14
2 26. Attorneys' Fees and Waiver of Jury Trial ....................... 14 27. Notices and Rent Payments ...................................... 15 28. Limitation of Landlord's Liability ............................. 15 29. Landlord's Reserved Rights ..................................... 15 30. Estoppel Certificates .......................................... 15 31. Accord and Satisfaction ........................................ 16 32. Waiver ......................................................... 16 33. Subordination .................................................. 16 34. Time ........................................................... 17 35. Broker's Indemnification ....................................... 17 36. Anticipatory Repudiation ....................................... 17 37. Applicable Law ................................................. 17 38. Severability ................................................... 17 39. Binding Effect ................................................. 17 40. Addendum ....................................................... 18 41. Entire Agreement; Amendment .................................... 18 42. Counterparts ................................................... 18
EXHIBIT A: DESCRIPTION OF LEASED PREMISES EXHIBIT B: IMPROVEMENTS EXHIBIT C: RULES AND REGULATIONS EXHIBIT D: ADDENDUM EXHIBIT E: CONFIRMATION OF COMMENCEMENT DATE 3 DEED OF LEASE THIS DEED OF LEASE (the "Lease") is made by and between Flint Lee Road, LLC, a Virginia Limited Liability Company ("Landlord"), and Geerlings and Wade, Inc. ("Tenant"), whose address is 960 Turnpike Street, Canton, MA 02021, as of the 29th of October, 2002. WHEREAS, Landlord is the owner of a building (the "Building") and land (the "Land") located at 14701 and 14725 Flint Lee Road, Chantilly, VA 20151 (together, the "Project"); and WHEREAS, Tenant desires to lease a portion of the Building, and Landlord is willing to lease to Tenant such portion of the Building upon the terms, conditions, covenants and agreements set forth herein; NOW, THEREFORE, the parties hereto, for valuable consideration, the receipt of which is hereby acknowledged, intending legally to be bound hereby, covenant and agree as follows: 1. TERMS AND DEFINITIONS A. "Leased Premises" shall mean approximately 4,815 square feet of space on the first level of the Building having an address of 14701-C Flint Lee Road, Chantilly, VA 20151, and more specifically described in Exhibit A attached hereto and made a part hereof by reference. B. "Lease Commencement Date" shall mean November 1, 2002, as that date may be adjusted pursuant to Section 16 below. C. "Lease Term" shall mean thirty six (36) months from the Lease Commencement Date, plus the addition of the number of days necessary for the Lease to terminate on the last day of a month, unless the Lease Term is terminated earlier or extended pursuant to the provisions of this Lease. D. "Base Rent" shall mean Thirty Four Thousand One Hundred Eight Six and 50/100 Dollars ($34,186.50) per year, payable each month in installments of Two Thousand Eight Hundred Forty Eight and 88/100 Dollars ($2848.88), as adjusted in accordance with the provisions of Paragraph 3.B hereof. E. "Additional Rent" shall mean Tenant's Share of Common Area Maintenance Expenses, Tenant's Share of Insurance Costs and Tenant's Share of Real Estate Tax Expenses, as those terms are defined in Paragraph 3.C, and all other sums that Tenant is required to pay to Landlord in addition to Base Rent, including late penalty charges as defined in Paragraph 3.A. Monthly Additional Rent is Nine Hundred Seventy One and 03/100 Dollars ($971.03), subject to adjustment pursuant to the terms of Paragraph 3. F. "Tenant's Total Square Footage" shall mean 4,815 square feet; "Total Building Square Footage" shall mean 94,415 square feet; "Tenant's Share" shall mean 5.10%%. G. "Deposit" shall mean One Thousand Eight Hundred Twenty Five and 69/100 Dollars ($1,825.69) as currently existing; "Tenant's Prepaid Rent" shall mean Three Thousand Eight Hundred Nineteen and 91/100 Dollars ($3819.91); which represents the first monthly payment of Base Rent and Additional Rent. H. "Permitted Purpose" shall mean use of the Leased Premises for office and warehouse use. I. "Broker(s) of Record" shall mean None. J. "Authorized Number of Parking Spaces" shall mean five (5) spaces. 1 K. "Lease Year" shall mean a period of twelve (12) consecutive months, commencing on the first day of the month immediately following the month in which the Lease Commencement Date occurs, and each successive twelve (12) month period thereafter. In addition, the first Lease Year shall also include the period from the Lease Commencement Date until the first day of the following month; provided, however, that the first Lease Year shall begin on the Lease Commencement Date if the Lease Commencement Date occurs on the first day of the month. 2. USES A. Tenant agrees to continuously use and occupy the Leased Premises for the Permitted Purpose only and for no other purpose. Tenant covenants to comply with the provisions of all recorded covenants, conditions and restrictions, and all building, zoning, fire and other governmental laws, ordinances, regulations or rules applicable to the Leased Premises and all requirements of the carriers of insurance covering the Project. Tenant shall not do or permit anything to be done in or about the Leased Premises or bring or keep anything in the Leased Premises that may in Landlord's judgment (1) increase the insurance premiums for the Project, (2) injure the Project, (3) constitute damage or waste, or (4) be a nuisance (public or private) or menace. B. Tenant agrees that it has determined to Tenant's satisfaction that the Leased Premises can be used for the Permitted Purpose and waives any right to terminate this Lease if the Leased Premises cannot be used for such purposes or for any reason may not be used for such purposes during the Lease Term. C. Tenant will not use or permit the Leased Premises or any part thereof to be used for any disorderly, unlawful or hazardous purpose. Tenant will not use or permit the Leased Premises to be used for any purpose that interferes with the use and enjoyment of the Building by other tenants. Tenant shall refrain from and discontinue any such use immediately upon receipt of notice from Landlord. D. By taking possession hereunder on the Lease Commencement Date, Tenant acknowledges that it has examined the Leased Premises and accepts the same as being in the condition called for by this Lease, except for items on the Punch List as defined in Paragraph 16.E. E. (1) For purposes of this Lease, the following definitions shall apply: (i) Environmental Law: Any federal, state or local law, ordinance, rule, regulation, requirement, guideline, code, resolution, order or decree (including consent decrees and administrative orders) from time to time in effect that regulates the use, generation, handling, storage, treatment, transportation, discharge, decontamination, clean-up, removal, encapsulation, enclosure, abatement or disposal of any Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601 et seq., the Clean Water Act, 33 U.S.C. (S)(S) 1251 et seq., the Safe Drinking Water Act, 452 U.S.C. (S)(S) 300f et seq., the Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. (S)(S) 5101 et seq., their state analogs, and any other federal, state or local statute, law, ordinance, resolution, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any Hazardous Materials. (ii) Hazardous Materials: Any flammable, explosive, radioactive or reactive materials; any asbestos (whether friable or non-friable); any pollutants, contaminants or other hazardous, dangerous or toxic chemicals, materials or substances; any petroleum products or substances or compounds 2 containing petroleum products, including gasoline, diesel fuel and oil; any polychlorinated biphenyls or substances or compounds containing polychlorinated biphenyls; and any other material or substance defined as a "hazardous substance," "extremely hazardous substance," "hazardous material," "hazardous waste," "toxic materials," "contamination" and/or "pollution" within the meaning of any Environmental Law. (2) Tenant shall not use, generate, manufacture, produce, store, dispose, release, or discharge on, in, or under the Leased Premises or the Project, or transport to or from the Leased Premises or the Project, any Hazardous Materials or allow any other person or entity to do so except with the consent of Landlord. Tenant covenants that its use of and activities on the Leased Premises or Building will be and remain in full compliance with the conditions of Landlord's consent and all Environmental Laws. (3) Tenant shall promptly notify Landlord if Tenant receives notice of, or otherwise becomes aware of, any: (a) pending or threatened environmental regulatory action against Tenant, the Leased Premises or the Project; (b) claims made or threatened by any third party relating to any loss or injury resulting from any leak, spill, release, disposal or discharge of Hazardous Materials; or (c) release or discharge, or threatened release or discharge, of any Hazardous Materials in, on, under or about the Leased Premises or the Project. (4) Tenant agrees to indemnify, defend and hold Landlord, the manager and their respective agents and employees harmless from and against any and all liabilities, claims, demands, costs and expenses of every kind and nature (including reasonable attorneys' fees) directly or indirectly attributable to Tenant's failure to comply with these provisions, including without limitation: (a) all consequential damages, and (b) the costs of any required or necessary repair, cleanup or remediation of the Leased Premises and/or the Project, and the preparation and implementation of any closure, remediation or other required plan. This indemnity shall survive the termination or expiration of this Lease. (5) Tenant shall be responsible for and shall clean up a release or discharge of any Hazardous Materials caused solely by Tenant, or its agents, employees or invitees on, under or about the Leased Premises, the Project or any part thereof. F. Compliance with Applicable Laws. (1) Compliance by Tenant. Notwithstanding anything in this Lease to the contrary, Tenant shall, at its sole cost and expense, cause all repairs and alterations made to the Leased Premises (whether structural or nonstructural) on or after the Lease Commencement Date, to comply with all laws, ordinances, orders, rules, regulations and requirements (including, without limitation, the Americans With Disabilities Act, 42 U.S.C. (S)(S) 12101 et seq., and all regulations promulgated there under, and the Virginians With Disabilities Act, Va. Code Ann. (S)(S) 51.5 et seq., and all regulations promulgated there under) now or hereafter enacted, by any federal, state or local government, board, commission, office, or any other governmental body or bodies exercising jurisdiction over the Leased Premises (collectively, the "Applicable Laws"). (2) Compliance by Landlord. Notwithstanding anything in this Lease to the contrary, Landlord shall cause (i) the Land; (ii) the structural portions of the Building (including the structural portions of the Leased Premises and the premises of other tenants of the Building, but excluding the structural portions of the Leased Premises for which Tenant is responsible pursuant to Paragraph 2.F(1) above); (iii) all nonstructural portions of the Building (excluding the nonstructural portions of the Leased Premises and the premises of other tenants of the Building); (iv) all means of access from the Land to the Building; and (v) all means of passage within the Building (excluding the means of passage inside the Leased Premises, means of passage inside other tenants' premises, entrances to the Leased Premises, and entrances to the premises of other tenants of the Building) to comply with Applicable Laws. Notwithstanding anything in Paragraph 3.C hereof to the contrary, the cost of the foregoing shall be included within the Common 3 Area Maintenance Expenses. If Tenant's use or occupancy of the Leased Premises requires unusual or extraordinary expenditures (as compared to the reasonable and customary expenditures required for other tenants of the Building) in order to cause the Land, Building, means of access and passages to comply with any or all Applicable Laws, Tenant alone shall be responsible for the amount by which such cost of compliance exceeds such reasonable and customary expenditures for tenants of comparable size in comparable buildings. Such excess shall be paid by Tenant to Landlord within thirty (30) days after Landlord submits to Tenant an invoice therefore. (3) Indemnification by Tenant.Tenant shall indemnify and defend Landlord and hold Landlord harmless from and against any and all injuries, losses, damages, lawsuits, fines, actions, causes of action, judgments, claims and expenses (including reasonable attorneys' fees and costs) of every nature whatsoever arising from or in any way related to the failure of Tenant, its employees, agents or contractors to comply with Paragraph 2.F(1). (4) Conflict. If any of the provisions of Paragraphs 2.F(1), (2) or (3) conflict with any other provision of this Lease, then the provisions of Paragraphs 2.F(1), (2) or (3) shall control. 3. RENT A. Tenant covenants and agrees to pay to Landlord during the Lease Term (at the place specified for notice in Section 27 below) the Base Rent and Additional Rent without demand, deduction, set-off or counterclaim, payable each month in advance on or before the first day of each calendar month. Base Rent and Additional Rent, together with other amounts that are payable by Tenant to Landlord under this Lease, are collectively referred to herein as the "Rent." Rent for any fractional calendar month at the beginning of the Lease Term shall be that proportion of the monthly installment, which the number of days during such month bears to the total number of days in the month. Rent not paid within five (5) days after the due date shall be subject to a ten percent (10%) late charge, which late charge shall be deemed Additional Rent. Any payment of Rent or any other sum due hereunder which is not paid within thirty (30) days of the date such payment is due shall thereafter bear interest at a rate equal to the lesser of (i) five percent (5%) above the prime rate of interest published on the 30th day after the payment was due, or the closest business day thereto in the Wall Street Journal, or (ii) the maximum rate of interest permitted by law (the "Default Rate"). B. The Base Rent set forth in Paragraph 1.D shall be increased on the first anniversary date of the Lease Commencement Date (beginning of the second Lease Year) by an amount equal to 3% of the Base Rent and thereafter on each anniversary date of the Lease Commencement Date by an amount equal to 3% of the Base Rent as previously adjusted upward on the immediately preceding anniversary date of the Lease Commencement Date. C. (1) In addition to the Base Rent, Tenant shall pay Tenant's Share of "Common Area Maintenance Expenses," which, for purposes of this Lease, shall be defined as all reasonable expenses relating to the Project including, but not limited to, Building Services as set forth in Paragraph 6 below, utilities not separately metered to individual tenants, maintenance, the cost of all service and maintenance contracts (except where otherwise provided), repairs, operating supplies, snow removal, landscape maintenance (including upgrades and replacements), litter removal, tools, materials, labor for maintenance, resurfacing, repainting, car stops on-site, security services, re-striping of parking areas, management expenses, the portion of capital expenditures amortized over its useful life attributable to each Lease Year under generally accepted accounting procedures, legal and accounting fees incurred in connection with the operation and maintenance of the Building, Landlord's general and administrative expenses, reasonable reserves for replacements ( Landlord agrees that it will not reserve for capital expenditure items as defined by Generally Accepted Accounting Principles) , repairs and contingencies, charges of any kind imposed by any governmental authority in connection with the use and occupancy of the Project or Leased Premises (including, without limitation, any and all license, permit and inspection fees), any other costs and expenses incurred by Landlord in owning, maintaining or operating the Project, and the costs of any additional services not provided to the Project on the Lease Commencement Date but thereafter 4 obtained or provided by Landlord. Common Area Maintenance Expenses shall not include any duplicate charges for expenses and shall not include interest expenses or depreciation. In addition to the foregoing, Tenant shall also pay Tenant's Share of "Insurance Costs" (as hereinafter defined) and "Real Estate Tax Expenses" (as hereinafter defined). For purposes of this Lease, "Insurance Costs" shall be defined as all insurance expenses relating to the Project including, but not limited to, the insurance identified in Paragraph 7.A hereof. For purposes of this Lease, "Real Estate Tax Expenses" shall be defined as all taxes and assessments, including, but not limited to, any B.P.O.L., rental, sales, use or business tax (general or special, ordinary or extraordinary, foreseen or unforeseen) assessed, levied or imposed upon the Project, or assessed, levied or imposed upon the fixtures, machinery, equipment or systems in, upon or used in connection with the operation of the Building, whether or not based on or measured by the receipts of revenues from the Project (including all taxes and assessments for public improvements or any other purpose). Real Estate Tax Expenses shall also include all expenses incurred by Landlord in obtaining or attempting to obtain a reduction of such taxes, rates or assessments, including, but not limited to, reasonable legal fees. Upon written request by Tenant, Landlord agrees to furnish Tenant with a copy of the paid real estate tax bill. The foregoing, Common Area Maintenance Expenses, Insurance Costs and Real Estate Tax Expenses, are hereinafter sometimes referred to collectively as "Expenses," which Expenses shall be payable at the minimum rate of Two and 42/100 Dollars ($2.42) per square foot of Tenant's Total Square Footage, one twelfth (1/12) of which shall be paid each month as Additional Rent with the Base Rent, which amount is subject to adjustment pursuant to the terms of Paragraph 3.C (2). (2) Annually or from time to time, the Landlord may adjust the monthly Expenses to reflect more accurately anticipated monthly Expenses. Landlord shall give Tenant at least thirty (30) days advance notice of any such adjustment. Payments are due on the first day of the month following the issuance to Tenant of the revision notice at the new rate. (3) Following the close of each calendar year, Landlord will, as soon as reasonably practicable, determine if there is a deficiency in the amount collected for Expenses. If it is determined that a deficiency exists, Landlord shall deliver to Tenant notice of the amount of the deficiency, if any, between the Expenses paid and the actual Expenses incurred. Tenant shall reimburse Landlord within thirty (30) days after notice of such deficiency. D. Tenant's liability for any and all Expenses, in addition to any other expenses, charges or costs as defined in the Lease, shall survive the expiration of the Lease Term. E. Any statement of Expenses shall be provided by Landlord to Tenant and shall be conclusive and binding upon Tenant except in the event that Tenant, within sixty (60) days after receipt of the statement, notifies Landlord that it disputes the correctness of the statement and specifies the respects in which the statement is alleged to be incorrect or unreasonable. Tenant shall thereafter have thirty (30) days to inspect Landlord's records upon at least ten (10) business days' notice to Landlord. Within fifteen (15) days of such inspection, Tenant shall notify Landlord of its finding in detail. Pending the determination of any dispute, Tenant shall pay all amounts due pursuant to the disputed statement, but such payments shall be without prejudice to Tenant's position. Any such inspection shall be at Tenant's expense. F. No payment by Tenant or receipt by Landlord of lesser amounts of Rent than those herein stipulated shall be deemed to be other than on account of the earliest unpaid Rent. No endorsement or statement on any check or any letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy provided under this Lease. 4. TENANT'S PREPAID RENT AND SECURITY DEPOSIT On or before the execution of this Lease, Tenant shall pay to Landlord the Deposit and Tenant's Prepaid Rent (which shall be applied to the Rent due in the first month or months of the 5 Lease Term) as security for the faithful performance by Tenant of all of the terms, covenants and conditions of this Lease. If Tenant fully complies with all of the terms and conditions required of Tenant under this Lease, the Deposit shall be refunded to Tenant upon expiration of this Lease. Landlord may, but is not obligated to, apply a portion of the Deposit to cure any default hereunder, and Tenant, within five (5) days following notice from Landlord, shall replenish the amount necessary to restore the Deposit to its full amount. 5. UTILITIES Tenant shall be solely responsible for and shall promptly pay all charges for gas, electricity, and other utilities used or consumed and metered on the Leased Premises. Landlord shall not be liable to Tenant for any interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute a constructive eviction or grounds for rental abatement in whole or in part. 6. BUILDING SERVICES Landlord agrees to maintain all parking and exterior areas and to maintain and repair the exterior, the structural portions and the roof of the Building (collectively, the "Building Services"). Landlord shall not be liable in any event, nor shall Rent be abated, because of an interruption in Building Services. 7. INSURANCE; INDEMNITY A. Landlord shall secure and maintain throughout the Lease Term insurance in amounts and form within Landlord's reasonable discretion and customary for landlords of similar projects to carry including: (1) Fire and casualty insurance, with extended coverage endorsement attached, in the amount of the full replacement value of the Building; (2) Commercial general liability insurance (including bodily injury and property damage insurance) with respect to the Project but not to the Leased Premises or other tenant occupied space; (3) Rental Abatement Insurance against loss of rent in case of fire or other casualty. Landlord may, but is not obligated to, purchase such other insurance customarily purchased from time to time by owners and managers of similar buildings in the Northern Virginia area. Notwithstanding the provisions of Paragraph 7.A(2) above, Landlord may charge Tenant any excess cost of the insurance described in this Paragraph 7.A charged by the insurance carrier due to the particular use of the Leased Premises by Tenant. B. Tenant shall, at its own expense, procure and maintain throughout the term of this Lease: (1) Commercial general liability insurance without deductible insuring Tenant's activities with respect to the Leased Premises against loss, damage or liability for personal injury or death, damage to property or commercial loss occurring on or about the Leased Premises, in amounts no less than: (a) One Million and 00/100 Dollars ($1,000,000) with respect to personal injury or death to any one person; (b) Five Million and 00/100 Dollars ($5,000,000) with respect to personal injury or death arising out of any one occurrence; 6 (c) One Million and 00/100 Dollars ($1,000,000) with respect to property damage arising out of any one occurrence; (2) Workers' compensation insurance in at least the statutory amounts with respect to any work or other operations in or about the Leased Premises; (3) Any other form or forms of insurance that Landlord or any mortgagee of Landlord may reasonably require and such other insurance in form, amounts and for insurance risks as a prudent tenant operating a similar business would maintain to protect itself. Landlord and Landlord's mortgagee, if required by the Mortgagee, shall be named as additional insureds under such insurance and such insurance shall be primary and non-contributing with any insurance carried by Landlord. The liability insurance policy shall contain endorsements requiring thirty (30) days notice to Landlord prior to any policy cancellation or any reduction in the amount of coverage of such insurance. Tenant shall deliver to Landlord, as a condition precedent to its taking occupancy of the Leased Premises (but not to its obligation to pay Rent), a certificate (or certificates) evidencing such insurance. Tenant, as a material part of the consideration to be rendered to Landlord under this Lease, hereby waives all claims against Landlord for injury to Tenant, its agents, employees, invitees or third persons in or about the Leased Premises from any cause arising at any time, except those which arise because of the gross negligence or willful misconduct of Landlord, its agents or employees. C. Tenant shall indemnify, defend and hold harmless Landlord, its members, partners, shareholders, officers, agents, employees and assigns, from and against any and all injuries, losses, damages, lawsuits, actions, causes of action, judgments, claims and expenses (including reasonable attorneys' fees and costs, whether or not suit is actually brought) of every nature whatsoever arising from Tenant's use of the Leased Premises, or the Project; the conduct of Tenant's business therein; the addition by Tenant of any improvements thereto; any activity, work or action done, permitted or suffered by Tenant in or about the Leased Premises, or the Project; any breach or default in the performance of any of Tenant's obligations under this Lease; or any act, neglect, fault or omission of Tenant or of its agents, employees, invitees or licensees (collectively, "Tenant's Invitees"). This indemnity shall survive the termination or expiration of this Lease. D. All personal property of Tenant located in the Leased Premises or in the Project shall be at the sole risk of Tenant. Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof, unless such damage, theft or misappropriation is directly attributable to the gross negligence or willful misconduct of Landlord, its agents or employees. Except as otherwise provided herein, Tenant hereby expressly releases Landlord from any liability incurred or claimed by reason of damage to Tenant's property. Landlord shall not be liable in any manner, nor shall this Lease be affected, for conditions arising or resulting from construction on contiguous premises. E. Landlord shall not be liable in any manner to Tenant or Tenant's employees, agents and invitees for any injury or damage to them or their property caused by the criminal or intentional misconduct of third parties and all claims against Landlord for any such damage or injury are hereby expressly waived by Tenant except in the case of Landlord's gross negligence or willful misconduct. Tenant hereby agrees to hold harmless and indemnify Landlord from all damages and expenses of defending claims made by Tenant's invitees arising out of acts by third parties. 8. WAIVER OF SUBROGATION Tenant and Landlord each releases and relieves the other and waives its entire right of recovery against the other for loss or damage arising out of or incident to the perils of fire, explosion or any other perils or casualty whether due to the negligence of either party, their agents, employees, invitees or others, except for loss or damage caused by a violation of an Environmental Law or by Hazardous Materials or loss covered by Workers Compensation Insurance. 7 9. REPAIRS Tenant agrees to maintain the Leased Premises in a neat, clean and sanitary condition and to keep the Leased Premises in good repair. Such maintenance and repair shall be at the sole cost of Tenant and shall include, but not be limited to, the maintenance and repair of heating, ventilation, air conditioning, electrical, lighting and plumbing systems, floor coverings, ceilings, walls, front and rear doors, and all glass at the Leased Premises. Tenant shall maintain a full service parts and labor maintenance contract through a reputable heating, ventilation and air conditioning contractor during the Lease Term and any and all extensions thereof and shall provide copies to the Landlord of all such maintenance contracts within thirty (30) days of the Lease Commencement Date and upon each renewal or commencement of a new contract. If Tenant fails to maintain or keep the Leased Premises in good repair, and Tenant fails to promptly commence and diligently pursue such repair following notice from Landlord, Landlord may perform maintenance and repairs, and the cost thereof shall constitute Additional Rent payable by Tenant within ten (10) days of notice by Landlord to Tenant that such Additional Rent is due and payable. 10. TENANT'S PROPERTY A. Furnishings, fixtures and equipment installed by Tenant shall be the property of Tenant, subject to Section 23 below. Upon termination of this Lease, if Tenant is not in default, Tenant may remove any such property, and, regardless of default, Tenant shall remove any property if so directed by Landlord. If Tenant fails to remove such property by the date of termination or expiration of the Lease, the remaining personal property and fixtures of Tenant shall be deemed abandoned. Thereafter, Landlord may remove such property of Tenant and Landlord shall not be liable for any loss or damage to such property, which may occur during Landlord's removal thereof. Tenant shall be liable for all expenses incurred by Landlord by removal, storage, sale and/or disposal of Tenant's personal property and fixtures and agrees to indemnify and hold harmless Landlord from all such expenses. At the termination or expiration of the Lease, Tenant shall repair the Leased Premises to the same condition as when the Lease Term commenced, ordinary wear and tear excepted, or reimburse Landlord for the cost of so repairing the Leased Premises. B. Tenant shall be liable for and shall pay before delinquency all taxes levied against any personal property or fixtures placed by Tenant in or about the Building or the Leased Premises. If any such taxes on Tenant's personal property or fixtures are levied against Landlord or Landlord's property or if the assessed value of the Project is increased by the inclusion therein of a value placed upon personal property or fixtures of Tenant, Tenant shall, upon demand, reimburse Landlord for the amount of the taxes levied against Landlord or Landlord's Property resulting from such increase in the assessment. Tenant shall have the right, at Tenant's sole cost and expense, to bring suit to recover the amount of any such taxes paid under protest, and any amount recovered to the extent previously paid by Tenant shall belong to Tenant. 11. IMPROVEMENTS AND ALTERATIONS BY TENANT On and after the Commencement Date, Tenant may not make any improvements or alterations to the Leased Premises without Landlord's prior written approval. All improvements or alterations by Tenant shall be performed, at Tenant's expense, in compliance with applicable building codes and local ordinances and must be in conformity with plans and specifications approved by Landlord. If requested by Landlord, Tenant will post a bond or other security satisfactory to Landlord to protect Landlord against liens arising from work performed for Tenant. All work shall be performed in a good and workmanlike manner with materials (where not specifically described in the specifications) of the quality and appearance comparable to those in the Building, and such work shall become the property of the Landlord. If Tenant desires to improve or alter the Leased Premises and Landlord gives its written consent to such improvements or alterations, then, at Landlord's option, Tenant shall contract with Landlord for the construction of such improvements or alterations. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, costs, damages, expenses, claims and judgments 8 including, without limitation, reasonable attorneys' fees incurred by Landlord due to mechanics' liens encumbering the Project or the Leased Premises or by reason of the performance of work on the Leased Premises at any time by Tenant or Tenant's agents, employees or contractors. Tenant represents and warrants that Tenant will maintain sufficient insurance to cover Tenant's indemnification under this Section 11. The comprehensive general liability insurance for Tenant or Tenant's agents or contractors shall be written on an occurrence basis with liability of not less than One Million and 00/100 Dollars ($1,000,000) per occurrence. Tenant shall notify its contractors and agents (i) to maintain without interruption liability insurance covering their actions and the actions of their employees and agents and (ii) that any work performed at the request of Tenant relating to the Leased Premises shall not be regarded as work performed for the owner of the Leased Premises and shall not entitle the person performing such work to place any mechanics' liens on the Leased Premises or create any other rights for such third parties against Landlord. 12. CASUALTY If the Leased Premises or the Building are destroyed or damaged by fire, earthquake or other casualty in whole or in part, then Landlord shall give notice to Tenant, within forty five days of the damage or destruction of the Building and/or the Leased Premises, of Landlord's intention to restore the Leased Premises. If Landlord decides not to rebuild and restore the Building, this Lease shall be terminated as of the date of such notice. If Landlord decides to rebuild the Building, Landlord shall proceed with reasonable diligence to rebuild and restore the Leased Premises or such part thereof, which has been destroyed or damaged. During the period of such rebuilding and restoration, the Rent shall be abated from the date of casualty in the same ratio as the square footage in the portion of the Leased Premises that is untenantable bears to the entire Leased Premises. If Landlord reasonably determines that such destruction or damage cannot be repaired within two hundred seventy (270) days from the date of notice, Landlord shall inform Tenant of that determination in the aforesaid notice. In such event, either Landlord or Tenant may, within twenty (20) days after such notice, terminate this Lease. If neither party terminates the Lease during the twenty (20) day period, this Lease shall remain in effect and Landlord shall diligently proceed to repair or reconstruct the Leased Premises and Rent shall abate as set forth above. 13. SUBLETTING AND ASSIGNMENT A. Tenant will not sublet all or any part of the Leased Premises or transfer possession or occupancy thereof to any person, firm or entity or transfer or assign this Lease without the prior written consent of Landlord, which consent may not be withheld unreasonably by Landlord. No subletting or assignment hereof shall be effected by operation of law or in any other manner except with the prior written consent of Landlord. If Tenant is a corporation, other than a public corporation (one whose voting stock is listed on a national securities exchange as defined in the Securities Exchange Act of 1934), then the sale, issuance or transfer of any voting capital stock of Tenant, by the person, persons or entities owning a controlling interest therein as of the date of this Lease or which results in a change in the voting control of Tenant, shall be deemed to be an assignment of this Lease within the meaning of this Section 13. If Tenant is a partnership or a limited liability company, the sale or transfer of all or a part of the partnership share of any general partner or a member's interest shall be deemed to be an assignment of this Lease within the meaning of this Section 13. Tenant further agrees that any permitted subletting of the Leased Premises shall be subject to the provisions of Paragraph 13.C below. Tenant shall promptly pay to Landlord at the time consent is requested the estimated amount of Landlord's reasonable costs and expenses to be incurred in connection with the review of the assignment or sublease including, but not limited, to reasonable attorneys' fees and costs and Tenant shall be responsible for payment of all such actual and reasonable costs upon completion of such review. Any subletting or assignment consented to by Landlord shall be evidenced in writing in a form reasonably acceptable to Landlord. Consent by Landlord to any assignment or subletting by Tenant shall not operate as a waiver of the necessity for obtaining Landlord's consent in writing to any subsequent assignment or subletting nor shall the collection or acceptance of rent from any such assignee, subtenant or occupant constitute a waiver or release of Tenant of any covenant or obligation contained in this Lease. Tenant hereby assigns to Landlord the rent due from any subtenant of Tenant and hereby authorizes each such subtenant to 9 pay such rent directly to Landlord upon notice from Landlord that Tenant is in default of this Lease. B. Tenant shall give to Landlord notice of Tenant's desire to sublease or assign the Lease together with relevant financial and general information about the potential subtenant or assignee and an assignment or sublease executed by all parties but Landlord in order to secure Landlord's written consent. Within thirty (30) days of receipt of said notice, Landlord shall have the right (i) to consent to the proposed sublease or assignment with or without conditions, (ii) to reject the proposed sublease or assignment, (iii) to terminate this Lease and to enter into a new lease with Tenant for the portion of the Leased Premises Tenant retains upon terms to be mutually agreed upon, or (iv) to sublease from Tenant at the same rental rate and subsequently to re-let that portion of the Leased Premises that Tenant desires to relinquish. If Landlord exercises its right to terminate this Lease, Tenant agrees that Landlord shall have access to the applicable portion of the Leased Premises at least thirty (30) days prior to the effective date of termination for remodeling or redecorating purposes. C. If Landlord does not exercise its right to terminate this Lease and Landlord has granted its written consent, then Tenant may sublet all or a portion of the Leased Premises. Any rent accruing to Tenant as a result of such sublease which exceeds the proportionate share of Rent then being paid by Tenant for the area of the Leased Premises being sublet, shall be paid by Tenant to Landlord monthly, as Additional Rent. D. In the event of any subletting of the Leased Premises or assignment of this Lease by Tenant, with or without Landlord's consent, Tenant shall remain liable to Landlord for payment of the Rent stipulated herein and all other covenants and conditions contained herein. 14. LIENS AND INSOLVENCY Tenant shall keep the Leased Premises, and the Project free from liens arising from work performed for, materials furnished to, or obligations incurred by Tenant. If at any time a lien or encumbrance is filed or recorded against the Leased Premises, or the Project as a result of the Tenant's failure to pay any obligations, Tenant shall promptly discharge such lien or encumbrance. If such lien or encumbrance has not been removed within fifteen (15) days from the date it is filed or recorded against the Leased Premises, or the Project, Tenant agrees to post a bond or other security satisfactory to Landlord to discharge the lien, or deposit with Landlord funds in an amount equal to one hundred fifty percent (150%) of the amount of the lien until such lien is discharged. If Tenant becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, assignee or other liquidating officer is appointed for Tenant or to supervise any of Tenant's property, then Landlord shall have the right to terminate this Lease at any time by thirty (30) day notice to Tenant. 15. CONDEMNATION If the whole or any part of the Leased Premises shall be taken under the power of eminent domain or sold under threat thereof to any public authority or private entity having such power, this Lease shall terminate as to the part of the Leased Premises so taken or sold, effective as of the date possession is delivered to such authority or entity. Rent for the remainder of the Lease Term shall be reduced in the proportion that the total square footage of the Leased Premises that is taken bears to the remainder of the Leased Premises that is not taken. If a partial taking or sale (i) substantially reduces the area of the Leased Premises, resulting in a substantial inability of the Tenant to use the Leased Premises for Tenant's business purposes, or (ii) renders the Building unviable commercially to Landlord (in such case as determined by Landlord in its sole but reasonable judgment), Tenant (in the case of (i)) and Landlord (in the case of (ii)) may terminate this Lease by notice to the other party within thirty (30) days after the terminating party receives a written notice of the portion to be taken or sold. Such termination shall be effective at the time when the property is taken or sold. Tenant shall have no claim against Landlord or the condemning authority for any portion of the condemnation award or settlement paid for the value of any unexpired term of this Lease. All such condemnation awards and similar payments shall be paid to and belong to Landlord. Tenant may make a separate claim against the condemning authority for a separate award or payment for the 10 value of Tenant's fixtures, for relocation costs, and for consequential damages allowed by law (except for the loss of the leasehold interest), provided that such awards do not reduce Landlord's award. 16. CONSTRUCTION OF LEASED PREMISES AND OCCUPANCY A. Landlord shall tender the Leased Premises to Tenant on the Lease Commencement Date in its currently existing condition (hereafter "AS IS"). Tenant shall be responsible for obtaining all permits or licenses necessary for its lawful occupancy of the Leased Premises, including the non-residential use permit. On or immediately following the Lease Commencement Date, Landlord and Tenant shall execute a declaration of delivery acknowledging the Lease Commencement Date and the expiration date in the form attached hereto as Exhibit E. B. If Landlord is unable to tender possession of the Leased Premises on the Lease Commencement Date because (i) the Leased Premises are located in a building that is being constructed but is not sufficiently completed to make the Leased Premises ready for occupancy; (ii) repairs, improvements or decoration of the Leased Premises have not been completed; (iii) a tenant is holding over or has otherwise retained possession beyond lease termination; or (iv) any other reason beyond the control of Landlord, Landlord shall not be subject to any liability for the failure to tender possession of the Leased Premises to Tenant on the Lease Commencement Date. In the case of holding over, provided Landlord shall promptly institute suit for recovery of the Leased Premises and diligently pursue the same, Landlord shall have no responsibility for any delay in tendering possession of the Leased Premises to Tenant. Under such circumstances the Rent shall not commence until possession of the Leased Premises is tendered to Tenant. No such failure to give possession on the Lease Commencement Date shall in any other respect affect the validity of this Lease or the obligation of Tenant hereunder, or be construed to extend or reduce the Lease Term. If permission is given to Tenant to enter into the possession of the Leased Premises prior to the Lease Commencement Date, Tenant covenants and agrees that such occupancy shall be under all the terms, covenants, conditions and provisions of this Lease except those specifically excluded by Landlord. 17. CONSTRUCTION CONDITIONS With respect to construction of the Tenant Improvements, the parties agree that: A. If Landlord does not construct the Tenant Improvements, Landlord will tender possession of the Leased Premises to Tenant "AS IS" and the Lease Commencement Date and the commencement of the obligation to begin paying Rent shall be immediately upon the tender of possession of the Leased Premises. All improvements and alterations constructed on or after the Lease Commencement Date must comply with Section 11 of this Lease. B. Tenant, its employees, contractors, agents and invitees shall not have any claim against Landlord for any personal injury or property damage arising during or from construction. 18. RULES AND REGULATIONS Tenant covenants that Tenant and its agents, employees, invitees, or those claiming under Tenant will at all times observe, perform and abide by the Rules and Regulations attached to this Lease as Exhibit C or such other rules and regulations as may be reasonably promulgated by Landlord from time to time. 19. PARKING Tenant and its employees, agents and invitees shall have the non-exclusive right to use the Authorized Number of Parking Spaces (set forth in Paragraph 1.J) during the Lease Term, pursuant to the rules and regulations relating to parking adopted by Landlord from time to time. Tenant agrees to cooperate with Landlord and other tenants in the use of parking facilities. Landlord may, at 11 its own discretion, change the location and nature of the parking spaces available to Tenant, its employees, agents and invitees, and Landlord may restrict Tenant parking to specific parking spaces, provided that after such change there shall be available to Tenant and its employees, agents and invitees the same number of spaces as available before the change. Tenant shall not allow parking, standing, or unloading of vehicles which blocks traffic in the common driveway that services the Leased Premises and other adjoining premises owned by the Landlord. In the event that a vehicle owned by the Tenant, Tenant's employees, agents, or invitees, a supplier of the Tenant, or an independent freight carrier company making delivery to Tenant, blocks the common driveway, Tenant irrevocably authorizes Landlord to have these vehicles or other obstructions removed at Tenant's expense, and, in addition, Tenant agrees to indemnify and hold harmless Landlord from any claim made by any party in connection with such removal. Any vehicle on the parking lot that is unlicensed or in a state of disrepair will be towed at the owner's expense, and Tenant agrees to indemnify and hold harmless Landlord from any claim made by any party in connection with such removal. Vehicle repairs are not permitted in the parking areas of the Project. The parking lot shall be utilized only for business parking related to tenants' occupancy. Tenant shall not store any items in the parking facilities or dispose of any trash therein. Any such storage or trash for which Tenant, its employees, invitees, or agents are responsible will be removed by Landlord at Tenant's expense. 20. ACCESS Tenant shall permit Landlord, upon reasonable advance notice, to enter the Leased Premises at reasonable times for the purpose of inspecting, altering and repairing the Leased Premises and for ascertaining compliance by Tenant with the provisions of this Lease. Notwithstanding the aforesaid, Landlord may enter the Leased Premises in case of emergency. With advance notice, Landlord may show the Leased Premises to prospective purchasers, lenders or tenants at reasonable times, provided that Landlord shall not unreasonably interfere with Tenant's business operations. 21. SIGNS Signs and symbols shall not be placed in the doors or windows or elsewhere upon or about the Leased Premises or the Building without the prior written approval of the Landlord. Any signs or symbols, which have been placed upon or about the Leased Premises or the Building by or on behalf of Tenant without such approval, may be removed by Landlord at Tenant's expense. Upon termination of Tenant's tenancy, all signs installed by or on behalf of Tenant shall be removed, and any damage resulting there from shall be promptly repaired at Tenant's expense. 22. TENANT'S DEFAULT It shall be an "Event of Default" if (i) Tenant fails to pay within ten (10) days of when due any Rent or any other charge or payment required of Tenant hereunder (although no legal or formal demand has been made therefore); (ii) Tenant violates or fails to perform any of the conditions, covenants, terms or agreements in this Lease except those described in (i) and such violation or failure continues for a period of fifteen (15) days after notice thereof to Tenant by Landlord; (iii) Tenant makes a general assignment for the benefit of its creditors, or files a petition for bankruptcy or other reorganization, liquidation, dissolution or similar relief; (iv) a proceeding is filed against Tenant seeking any relief mentioned in (iii) above; (v) a trustee, receiver or liquidator is appointed for Tenant or a substantial part of its property; (vi) Tenant vacates or abandons the Leased Premises and does not continue to pay Rent currently (an absence of substantial activity by Tenant in the Leased Premises for more than seven (7) consecutive days shall constitute such abandonment); or (vii) Tenant mortgages, assigns or otherwise encumbers its leasehold interest without the prior written consent of Landlord. If an Event of Default occurs, at the option of Landlord, the Lease shall continue, or the Lease shall cease and terminate. This Lease shall operate as a notice to quit, or of 12 Landlord's intention to reenter the Leased Premises, such notices being hereby expressly waived, and Landlord may proceed to recover possession under and by virtue of the provisions of the laws of Virginia or by such other proceedings, including reentry and possession, that may be available to Landlord. If Landlord elects to terminate this Lease, the obligations herein to be performed by Landlord shall cease without prejudice, subject, however, to the right of Landlord to recover from Tenant all Rents and other charges accrued up to the time of termination or recovery of possession by Landlord, whichever is later. If this Lease is terminated before the expiration of the Lease Term by reason of an Event of Default, the Leased Premises may be re-let by Landlord for such rent and upon such terms as Landlord is able to reasonably obtain, and, if the full Rent is not realized by Landlord, Tenant shall be liable for all damages sustained by Landlord, including, without limitation, the deficiency in Rent, reasonable attorneys' fees, collection and repossession costs and all expenses of placing the Leased Premises in rentable condition and leasing the Leased Premises (including commissions, tenant improvements and concessions, etc.). If the Landlord takes possession of the Leased Premises pursuant to this Lease, Landlord may in its own name but, as agent for Tenant, re-let the Leased Premises for such term or terms and on such conditions as Landlord, in its discretion may determine. Upon any re-letting by Landlord, the amount of rent and other terms and conditions of such re-letting shall be deemed prima facie fair and reasonable. Any damage or loss sustained by Landlord may be recovered by Landlord, at Landlord's option, (i) at anytime; (ii) in separate actions, from time to time, as said damage shall have been made more easily ascertainable by re-letting or otherwise; (iii) be deferred until the expiration of the Lease Term, in which event the cause of action shall not be deemed to have accrued until the date of expiration of said Lease Term; or (iv) if Landlord after attempting to get a new tenant is unable to find a new tenant for the Leased Premises within one hundred twenty (120) days from termination of this Lease, Tenant shall pay Landlord the present value (discounted at 10%) of all the Base Rent due for the remainder of the Lease Term (as if there had been no termination for cause) as liquidated damages and not as a penalty subject to a credit or credits for all net income (income less expenses) received by Landlord from a tenant for occupancy during the Lease Term of Tenant. The provisions contained in this Section 22 shall be in addition to and shall not prevent the enforcement of any claim Landlord may have against Tenant. All rights and remedies of Landlord under this Lease shall be cumulative and shall not be exclusive of any other rights and remedies provided to Landlord under applicable law. 23. REMOVAL OF PROPERTY A. Upon termination or expiration of the Lease, Landlord has the option to require Tenant to remove any or all of the improvements or alterations made for and by Tenant, including any made during the period from execution of this Lease through the Lease Term including the Tenant Improvements. B. Any improvements to the Leased Premises installed by Tenant shall, at Landlord's election upon any default of Tenant hereunder or the termination or expiration of this Lease, become the property of Landlord. C. In the event of removal by Tenant of any improvements and/or alterations, Tenant is obligated to repair the Leased Premises to its condition prior to the improvements and/or alterations, less wear and tear. D. If, upon default by Tenant or termination or expiration of this Lease, Landlord enters or takes possession of the Leased Premises, Landlord shall have the right, but not the obligation, to remove from the Leased Premises all personal property of Tenant located therein and to store such property in any place selected by Landlord, including, but not limited to, a public warehouse, at the expense and risk of the owners thereof. 24. QUIET ENJOYMENT, INABILITY TO PERFORM A. For so long as Tenant pays all Rent and performs each and every agreement, covenant and condition required of Tenant under this Lease, Tenant shall quietly enjoy the Leased Premises subject to the terms, covenants and conditions of this Lease and the Superior Instruments 13 (as defined in Section 33 below). B. This Lease and the obligation of Tenant to pay Rent and to perform all of the agreements, covenants and conditions shall not be affected, impaired or excused because Landlord, due to unavoidable delay, is unable to fulfill any of its obligations under this Lease, unable to supply or is delayed in supplying any service or product expressly or impliedly to be supplied, or unable to make or is delayed in making any repairs, replacements, additions, alterations or decorations. 25. HOLD OVER TENANCY If Tenant fails to surrender possession of the Leased Premises upon the expiration or earlier termination of the Lease Term, Tenant shall become a tenant at sufferance, at a rental rate equal to one and one-half (1 1/2) times the annual Base Rent in effect on the date of the expiration of the Lease Term and subject to the agreement, covenants and conditions of this Lease. Occupancy for one day or more in any month shall create an obligation upon Tenant to pay Rent and Additional Rent for the entire month. The occupancy will terminate on the last day of the month, which is at least thirty (30) days after the date upon which notice is given. Acceptance by Landlord of Rent after such expiration or earlier termination date shall not constitute a renewal of the Lease Term. If Tenant fails to surrender the Leased Premises upon the expiration of this Lease, Tenant shall be liable to Landlord for all resulting damages, including consequential damages, and Tenant agrees to indemnify and hold Landlord harmless from all injury, loss, claims, expenses and liability, including without limitation any claims made by any succeeding tenant (including reasonable attorneys' fees) resulting from such failure to surrender. If Landlord re-lets the Leased Premises to a new lessee and the term of such new lease commences during the period for which Tenant holds over, Landlord shall be entitled to recover from Tenant any and all costs, expenses, legal expenses, attorneys' fees and costs, damages, loss of profits or any other costs incurred by Landlord as a result of Tenant's failure to deliver possession of the Leased Premises to Landlord when required under this Lease. 26. ATTORNEYS' FEES AND WAIVER OF JURY TRIAL A. If, because of a breach of this Lease, Landlord refers this Lease to an attorney or if Landlord brings suit for the possession of the Leased Premises and/or for the recovery of any sum due under this Lease or for any other relief against Tenant hereunder, then all costs and expenses (including reasonable attorneys' fees and costs) incurred by Landlord in connection therewith shall be paid by Tenant, which obligation shall be deemed to have accrued on the date of referral to such attorney and shall be enforceable whether or not any action is prosecuted to judgment. B. If Landlord is named as a defendant in any suit brought in connection with, arising out of, or related to Tenant's occupancy of the Building or the Leased Premises, Tenant shall pay to Landlord all of Landlord's costs and expenses incurred in such suit, including reasonable attorneys' fees and costs. C. Landlord and Tenant each hereby waive trial by jury in any action, proceeding or counterclaim brought against the other in connection with any matter arising out of or in any way related to this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use or occupancy of the Leased Premises, and/or any claim of injury or damage occurring on the Land or within the Building. 27. NOTICES AND RENT PAYMENTS All notices required by this Lease shall be in writing and shall be sent by certified mail or registered mail, return receipt requested, or by personal or overnight delivery with receipt of 14 delivery, to Landlord, Flint Lee Road, LLC, c/o Cecil Pruitt, Jr., Manager, P.O. Box 179, White Post, Virginia, 22663, with a copy to Maitresse Management Company, 14101-D Willard Road, Chantilly, Virginia 20151 and to Tenant at 960 Turnpike Street, Canton, MA 02021 to the attention of Mr. Greg Kober, or to such other addresses as may hereafter be designated by either party by notice. Notices shall be deemed to have been received as of the date of receipt or refusal if by personal or overnight delivery. In addition, all Rent and such other sums as required to be paid to Landlord pursuant to the terms of this Lease shall be made payable to Flint Lee Road, LLC and ;mailed, U.S. Mail, to Maitresse Management Company, 14101-D Willard Road, Chantilly, Virginia 20151, or such other address as designated by Landlord. 28. LIMITATION OF LANDLORD'S LIABILITY The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, members, directors, officers or shareholders of Landlord, and Tenant agrees to seek recourse, if any, solely against Project, which is the subject of this Lease. Actions against other assets of the Landlord or its partners, members, directors, officers, or shareholders for satisfaction of any liability with respect to this Lease constitutes a breach of the Lease. Tenant agrees not to seek recourse against the individual partners, members, directors, officers or shareholders of Landlord or any of their personal assets for claims arising from this Lease. Landlord shall not be liable for any damage, delay or default which results from any cause outside the reasonable control of Landlord including, but not limited to, floods, hurricanes, strikes, labor troubles and other acts of God. 29. LANDLORD'S RESERVED RIGHTS Without notice and without liability to Tenant except as otherwise provided herein, Landlord shall have the right to: A. Change the name or street address of the Building. B. Install and maintain signs on the exterior of the Building in a reasonable manner. C. Make reasonable rules and regulations as, in the judgment of Landlord, may from time to time be needed for the safety of tenants, the care and cleanliness of the Building and the preservation of good order in the Building and on the Land. Tenant shall be notified promptly of changes to the rules and regulations. D. Grant utility or other easements or re-plat, subdivide or make such other changes in the legal status of the Land, as Landlord shall deem necessary, provided such grant or changes do not materially interfere with Tenant's use of the Leased Premises as provided under this Lease. E. Sell the Project and assign this Lease and the Deposit to the purchaser and upon such assignment be released from all of its obligations hereunder. 30. ESTOPPEL CERTIFICATES Within ten (10) days after request therefore by Landlord, its agents, successors, or assigns, Tenant shall deliver, in recordable form, a certificate to any proposed mortgagee or purchaser, or to Landlord, together with a true and correct copy of this Lease, certifying that this Lease is in full force and effect with or without modification as the case may be, the amount (if any) of Tenant's Prepaid Rent and Deposit, that Landlord has performed all of its obligations under this Lease and that there are no defenses, counterclaims, deductions, offsets or other excuses for Tenant's non-performance under this Lease, and any other fact reasonably requested by Landlord or such proposed mortgagee or purchaser. If Tenant fails to execute and deliver to Landlord an Estoppel certificate as and when required by this Section 30, Landlord shall be entitled to execute such certificate on Tenant's behalf, and Tenant hereby appoints Landlord as Tenant's attorney-in-fact for such purpose, 15 with full power and authority to execute, acknowledge, certify and deliver such certificate on behalf of Tenant, stating that: (i) this Lease is in full force and effect, without modification except as may be represented by Landlord; (ii) there are no uncured defaults in Landlord's performance and Tenant has no right to offset, counterclaim, defenses or deduction against Rent or the Landlord hereunder; (iii) no more than one month's Rent has been paid in advance; and (iv) the amount of the Deposit held by Landlord is as represented by Landlord. 31. ACCORD AND SATISFACTION No receipt and retention by Landlord of any payment tendered by Tenant in connection with this Lease will give rise to or support or constitute an accord and satisfaction, notwithstanding any accompanying statement, instrument or other assertion to the contrary (whether by notation on a check or in a transmittal letter or otherwise). Landlord may receive or retain, absolutely and for itself, any and all payments so tendered, notwithstanding any accompanying instructions by Tenant to the contrary. Landlord will be entitled to treat any such payments as being received on account of any item or items of Rent, interest, expense or damage due in connection herewith, in such amounts and in such order as Landlord may determine in its reasonable opinion. 32. WAIVER No assent or consent to changes in or waiver of any part of this Lease shall be deemed or taken as made, unless in writing and attached hereto and endorsed by the Landlord. No covenant or term of this Lease stipulated in favor of the Landlord shall be waived, except by express written consent of the Landlord, whose forbearance or indulgence in any regard whatsoever shall not constitute a waiver of the covenant, agreement or condition to be performed by the Tenant. Until complete performance by the Tenant of such covenant, agreement or condition, the Landlord shall be entitled to invoke any remedies available under this Lease or by law despite such forbearance or indulgence. 33. SUBORDINATION A. The rights of Tenant hereunder are and shall be subject and subordinate to the lien of any mortgage or deed of trust or the lien resulting from any other method of financing or refinancing, now or hereafter in force or placed against the Building and Lease of which the Leased Premises are a part, and to all advances made or hereafter to be made upon the security thereof and to any and all renewals, modifications, consolidations, replacements, extensions or substitutions of any such mortgage or deed of trust (the "Superior Instruments"). Such subordination shall be automatic, without the execution of any further subordination agreement by Tenant. If, however, a written subordination agreement, consistent with this provision, is required by a mortgagee or beneficiary of a deed of trust, Tenant agrees to execute, acknowledge and deliver the same. B. In the event of (a) a transfer of Landlord's interest in the Project, (b) the termination of any ground or underlying lease of the Project, or (c) the purchase or other acquisition of the Project or Landlord's interest therein in a foreclosure sale of by deed in lieu of foreclosure under any mortgage or pursuant to a power of sale contained in any mortgage, then in any of such events Tenant shall, at the request of Landlord or Landlord's successor in interest, attorn to and recognize the transferee or purchaser of Landlord's interest or the lessor under the terminated ground or underlying lease, as the case may be, as Landlord under this Lease for the balance of the Lease Term, and thereafter this Lease shall continue as a direct lease between such person, as "Landlord", and Tenant, as "Tenant", except that such lessor, transferee or purchaser shall not be liable for any act or omission of Landlord before such lease termination or before such person's succession to title, nor be subject to any offset, defense or counterclaim accruing before such lease termination or before such person's succession to title, nor be bound by any payment of Rent or Additional Rent for more than one month in advance of such lease termination or before such person's succession to title. Tenant shall, within ten (10) days after request by Landlord or the transferee or purchaser of Landlord's interest or the lessor under the terminated ground or underlying lease, as the case may be, execute and deliver an instrument or instruments confirming the foregoing provisions of the Section. 16 Tenant hereby waives the provisions of any present or future law or regulation which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease, or the obligations of Tenant hereunder, upon or as a result of the termination of any such ground or underlying lease or because of any foreclosure, deed in lieu or similar sale. C. Any mortgagee of Landlord, or purchaser of the Leased Premises, or beneficiary of a deed of trust, shall be relieved and released from any obligation to return a security deposit in the event such mortgagee, beneficiary of a deed of trust, or purchaser comes into possession of the Leased Premises by reason of foreclosure or trustee's sale (including deed in lieu thereof). Such release does not relieve Landlord of any obligation to return the security deposit. 34. TIME Time is of the essence hereof. 35. BROKER'S INDEMNIFICATION As part of the consideration for the granting of this Lease, the Tenant represents and warrants to the Landlord that no broker or agent negotiated or was instrumental in negotiating or consummating this Lease except the Broker of Record, and Tenant agrees to indemnify Landlord against any loss, expense, cost or liability incurred by Landlord as a result of a claim by any other broker or finder claiming through Tenant. Landlord agrees to compensate the Broker of Record in accordance with a separate agreement. 36. ANTICIPATORY REPUDIATION If, prior to the commencement of the Lease Term, Tenant notifies Landlord of or otherwise unequivocally demonstrates an intention to repudiate this Lease, Landlord may, at its option, consider such anticipatory repudiation a breach of this Lease. In addition to any other remedies available to it hereunder or at law or in equity, Landlord may retain all Rent paid upon execution of the Lease including the Deposit, if any, and apply it to damages of Landlord incurred as a result of such repudiation including, without limitation, reasonable attorneys' fees and costs, brokerage fees, costs of re-letting and/or loss of rent. 37. APPLICABLE LAW This Lease shall be governed by and construed according to the laws of the Commonwealth of Virginia. 38. SEVERABILITY The parties intend this Lease to be legally valid and enforceable in accordance with all of its terms to the fullest extent permitted by law. If any term of this Lease is finally held to be invalid or unenforceable, the parties agree that such term shall be stricken from this Lease, as if it never had been contained herein. Such invalidity or unenforceability shall not extend to or otherwise affect any other term of this Lease, and the unaffected terms hereof shall remain in full force and effect to the fullest extent permitted by law. 39. BINDING EFFECT Subject to the provisions of Section 13, this Lease shall be binding upon and inure to the benefit of the parties and their successors and assigns. It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and pronouns in the singular number are uniformly used throughout this Lease regardless of gender, number or fact of incorporation of the parties hereto. 40. ADDENDUM 17 Exhibits A-E attached hereto are made a part of this Lease by reference and the terms thereof shall control over any inconsistent provisions in the Lease. 41. ENTIRE AGREEMENT; AMENDMENT This Lease sets forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises and the Project, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than as are herein set forth. This Lease is the entire agreement between the parties. This Lease shall not be amended or modified except by a writing duly signed by both parties. Failure to exercise any right in one or more instances shall not be construed as a waiver of the right to strict performance or as an amendment to this Lease. 42. COUNTERPARTS This Lease may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same document. Executed as of the date noted below. WITNESS: LANDLORD: Flint Lee Road, LLC, a Virginia Limited Liability Company By: /s/ Cecil Pruitt, Jr. - ----------------------------- ----------------------- Cecil Pruitt, Jr. Title: Manager Date: November 18, 2002 WITNESS/ATTEST: TENANT: Geerlings and Wade, Inc. /s/ Gregg Kober By: /s/ David R. Pearce - ----------------------------- ----------------------- Title: Vice President Date: November 7, 2002 18 SCHEDULE OF EXHIBITS Exhibit A: Description of Leased Premises Exhibit B: Improvements Exhibit C: Rules and Regulations Exhibit D: Addendum Exhibit E: Confirmation of Commencement Date EXHIBIT A DESCRIPTION OF LEASED PREMISES (SEE ATTACHED FLOOR PLAN) EXHIBIT B IMPROVEMENTS Tenant accepts the Premises in the condition existing at Lease execution. EXHIBIT C RULES AND REGULATIONS Reference is made to the Lease dated the 6th of September, 2002 (the "Lease"), to which these Rules and Regulations are attached. Definitions of terms are set forth in the Lease. The following rules and regulations have been promulgated for the safety and well-being of all tenants of the Building and to insure compliance with all governmental requirements. Strict adherence to these rules and regulations is necessary to guarantee that each and every tenant will enjoy a safe occupancy in the Project without hindrance by Landlord, or anyone claiming through Landlord, in accordance with the Lease. Any continuing violation of these rules and regulations by Tenant, after notice from Landlord, shall be deemed to be an Event of Default under the Lease. Landlord may, upon request by any tenant, waive the compliance by such tenant to any of these rules and regulations, provided that (i) no waiver shall be effective unless signed by Landlord or Landlord's authorized agent; (ii) any such waiver shall not relieve such tenant from the obligation to comply with such rule or regulation in the future; (iii) no waiver granted to any tenant shall relieve any other tenant from the obligation of complying with the rules and regulations unless such other tenant has received a waiver in writing from the Landlord; and (iv) any such waiver by Landlord shall not relieve such tenant from any obligation or liability of such tenant to Landlord pursuant to the Lease for any loss or damage occasioned as a result of tenant's failure to comply with any such rule or regulation. 1. The Common Areas, including sidewalks, entrance passages, courts, vestibules, stairways, corridors, halls or other parts of the Project shall remain unencumbered to provide safe and unobstructed ingress and egress to and from each tenant's premises, and Tenant, at Tenant's own expense, shall keep the sidewalks directly in front of the premises clean and free from snow, ice, dirt and debris. Landlord shall have the right to control and operate the public portions of the Project for common use of the tenants in such manner as Landlord deems best for the benefit of the tenants generally. No tenant shall permit its employees, agents, or invitees to interfere with the use and enjoyment by other tenants of the Common Areas and other public portions or facilities of the Project. 2. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld or conditioned. No drapes, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the premises, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or conditioned. Such awnings, projections, curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner, approved by Landlord. 3. No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or Common Areas without the prior written consent of Landlord, which consent shall not be unreasonably withheld or conditioned. 4. All plumbing fixtures shall be used only for the purposes for which they are designed and constructed. No sweepings, rubbish, rags, chemicals, paints, cleaning fluids or other substances shall be thrown in the sinks or other plumbing fixtures. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, invitees, contractors, assignees, guests, visitors or licensees, shall have caused the same. 5. There shall be no marking, painting, drilling into or any defacing of the Building or any part of the Leased Premises visible from public areas of the Building. Tenant shall not construct, maintain, use or operate within the Leased Premises any electrical device, wiring or apparatus in connection with a loud speaker system or other sound system, except as reasonably required for its communication system and as approved prior to the installation thereof by Landlord, which approval shall not be unreasonably withheld. No loud speaker or sound system shall be constructed, maintained, used or operated outside of the Leased Premises. 6. No vehicles or animals, birds or pets of any kind shall be brought into or kept in or about the premises, and no cooking (except for hot-plate and microwave cooking by any tenant's employees for their own consumption, the equipment for and location of which are first approved by Landlord) shall be done or permitted by any tenant on the premises. No tenant shall cause or permit any unusual or objectionable odors to be produced upon or permeate from the premises. Notwithstanding the foregoing, such vehicles and animals as are actually utilized by disabled persons due to their disability shall be allowed on the premises upon prior written notice to Landlord. 7. The use of the premises by each tenant has been approved by Landlord prior to execution of the Lease and such use may not be changed without the prior approval of Landlord. 8. No tenant shall make any disturbing noises or disturb or interfere with occupants of the Building or neighborhood buildings or premises or those having business with them. No tenant shall throw anything out of the doors or windows or down the corridors or stairs. 9. Only office trash may be disposed of or placed in the container specified by Landlord. Said trash shall be placed outside of the Leased Premises and prepared for collection in the manner and at the time and place specified by Landlord. Each tenant is responsible for removing from the Leased Premises and the Project any other items of its refuse, garbage, debris, pallets or trash. Under no circumstances shall any tenant burn any refuse, garbage, debris, pallets or trash of any kind in or about the Leased Premises. Tenant shall not place any refuse, garbage, debris or non-office trash outside of the Leased Premises or anywhere in the Project that is unsightly or blocks access to any other tenant or to the containers placed by Landlord for office trash collection. Any refuse, garbage, debris or non-office trash so placed shall be removed by each tenant at its expense within twelve (12) hours of notification to do so by Landlord. If any tenant fails to respond in a timely and workmanlike manner, Landlord shall arrange removal at the offending tenant's risk and expense. 10. No flammable, combustible or explosive fluid chemical or Hazardous Materials shall be brought or stored upon the premises except with the consent of Landlord, and in accordance with Environmental Laws. Tenant may store and use minimal quantities of cleaning agents and other substances that are customarily used in offices for operation of equipment provided that such substances are used and stored in accordance with Environmental Laws. 11. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any tenant, nor shall any changes be made in the existing locks or the mechanism thereof without the prior written consent of Landlord. The doors leading to the corridors or main halls shall be kept closed during business hours except when in use for ingress or egress. Each tenant shall, upon the termination of his tenancy, return to the Landlord all keys either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys so furnished, such tenant shall pay to Landlord the cost thereof. 12. Landlord reserves the right to exclude from the Project any person who is not known or does not properly identify himself to the Building management, security guard on duty or security system monitor. Each tenant shall be responsible for all persons for whom he authorizes entry into or exit out of the Building. 13. The premises shall not, at any time, be used for lodging, sleeping or any immoral or illegal purpose. 14. Each tenant, before closing and leaving the premises at night, shall see that all windows are closed and all lights turned off, except those left on for security purposes. 15. Tenant shall not request that Landlord's employees perform any work or do anything outside of their regular duties, unless under special instruction from the management of the Building. The requirements of tenants will be attended to only upon application to Landlord and all special requirements will be billed to each tenant (and paid with the next installation of Rent due) at the schedule of charges maintained by Landlord from time to time or at such charge as is agreed upon in advance by Landlord and each tenant. 16. Canvassing, soliciting and peddling in the Project are prohibited and each tenant shall cooperate to prevent them. 17. No hand trucks shall be used in any space or in the Common Areas of the Building except those equipped with rubber tires and side guards. Tenant shall be responsible to Landlord for any loss or damage resulting from any deliveries for Tenant to the Building. 18. Mats, trash, or other objects shall not be placed in the public corridors. EXHIBIT D ADDENDUM None EXHIBIT E CONFIRMATION OF COMMENCEMENT DATE Flint Lee Road, LLC ("Landlord"), and Geerlings and Wade, Inc. ("Tenant"), have entered into a certain Deed of Lease Agreement dated as of the 6th of September, 2002 (the "Lease"). Landlord and Tenant hereby agree that for all Lease purposes, the "Lease Commencement Date" is November 1, 2002 and the expiration date is October 31, 2005. DATE: September 6, 2002 LANDLORD: Flint Lee Road, LLC, a Virginia Limited Liability Company By: /s/ Cecil Pruitt ------------------------------- Name: Cecil Pruitt, Jr. ----------------------------- Title: Manager ---------------------------- TENANT: Geerlings and Wade, Inc. By: /s/ David R. Pearce ------------------------------- Name: David R. Pearce ----------------------------- Title: Vice President ----------------------------
EX-10.44 5 dex1044.txt AGREEMENT Exhibit 10.44 Execution Copy AGREEMENT This Agreement is made and entered into in Canton, Massachusetts, by and between Geerlings & Wade, Inc. (the "Company") and Huib Geerlings, of Boston, Massachusetts (the "Executive"), effective as of the 15th day of November, 2002 (the "Effective Date"). WHEREAS, the operations of the Company are a complex matter requiring direction and leadership in a variety of arenas, including financial, strategic planning, regulatory and others; WHEREAS, the Executive is possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company; and WHEREAS, subject to the terms and conditions hereinafter set forth, the Company therefore wishes to employ the Executive as its President and Chief Executive Officer and the Executive wishes to accept such employment; NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby offers and the Executive hereby accepts employment. 2. Capacity and Performance. a. The Executive shall serve the Company as its President and Chief Executive Officer, subject to approval of this agreement by the Board of Directors of the Company (the "Board") as a condition precedent to the effectiveness of this Agreement, or in such other executive position as the Board may designate from time to time. In addition, and without further compensation, the Executive shall serve as a director and/or officer of one or more of the Company's Affiliates, if any, and if so elected or appointed from time to time. b. During the term hereof, the Executive shall be employed by the Company on a full-time basis and shall perform such duties and responsibilities on behalf of the Company and any of its Affiliates as may be designated from time to time by the Board or by its designees. c. During the term hereof, the Executive shall devote his full business time and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and any of its Affiliates and to the discharge of his duties and responsibilities hereunder. The Executive shall not engage in any other business activity or serve in any industry, trade, professional, governmental or academic position during the term of this Agreement, except as may be expressly approved in advance by the Board in writing. 3. Compensation and Benefits. As compensation for all services performed by the Executive under and during the term hereof and subject to performance of the Executive's duties and of the obligations of the Executive to the Company and any of its Affiliates, pursuant to this Agreement or otherwise: a. Base Salary. During the term hereof, the Company shall pay the Executive a base salary at the rate of Two Hundred Thousand Dollars ($200,000) per annum, payable in accordance with the payroll practices of the Company and subject to adjustment from time to time by the Board, in its sole discretion. Such base salary, as from time to time adjusted, is hereafter referred to as the "Base Salary". b. Vacation. The Executive shall be entitled to three weeks of paid vacation per year, subject to Company policies as in effect from time-to-time. c. Eligibility for Bonus Compensation. The Executive shall be eligible to be considered for a bonus annually during the term hereof. The amount of such bonus, if any, shall be determined by the Board in its sole discretion. d. Business Expenses. The Company shall pay or reimburse the Executive for all reasonable, customary and necessary business expenses incurred or paid by the Executive in the performance of his duties and responsibilities for the Company, subject to Company reimbursement policies as in effect from time to time. e. Other Benefits. During the term hereof and subject to any contribution therefor generally required of employees of the Company, the Executive shall be entitled to participate in any and all employee benefit plans from time to time in effect for employees of the Company generally. Such participation shall be subject to (i) the terms of the applicable plan documents, (ii) generally applicable Company policies and (iii) the discretion of the Board or any administrative or other committee provided for in or contemplated by such plan. The Company may alter, modify, add to or delete its employee benefit plans at any time as it, in its sole judgment, determines to be appropriate, without recourse by the Executive. f. Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 4. Termination By the Company for Cause. The Company may terminate the Executive's employment hereunder for Cause at any time upon notice to the Executive. The following, as determined by the Board in its judgment, shall constitute Cause for termination: -2- i. The Executive's material failure to perform, or gross negligence in the performance of, his duties and responsibilities to the Company or any of its Affiliates; ii. Material breach by the Executive of any provision of this Agreement; or iii. Other conduct by the Executive that is materially harmful to the business, interests or reputation of the Company or any of its Affiliates. Upon the giving of notice of termination of the Executive's employment hereunder for Cause, the Company shall have no further obligation or liability to the Executive, other than for Base Salary earned and unpaid at the date of termination. 5. Termination By the Company Other than for Cause. a. The Company may terminate the Executive's employment hereunder other than for Cause at any time upon notice to the Executive. In the event of such termination, and provided that no benefits are payable to the Executive under a separate severance agreement or an executive severance plan as a result of such termination or under Section 5b. below, then the Executive shall receive a severance payment of Fifty Thousand Dollars ($50,000) for a period of three (3) months following the date of termination (the "Severance Period") payable in equal monthly installments. For the duration of the Severance Period, the Company shall continue to contribute to the premium cost of the Executive's participation in the Company's group medical and dental insurance plans in the same amount that it contributes for its active full-time employees, provided that the Executive is entitled to continue such participation under applicable law and plan terms and provided the Executive pays the remainder of the premium cost by authorized payroll deduction. b. If a Change of Control of the Company, as defined in Section 10 below, occurs and the Executive's employment hereunder is terminated other than for Cause upon or at any time after such Change of Control, an amount of One Hundred Thousand Dollars ($100,000) shall become immediately due and payable to the Executive on the date of the Executive's termination as a lump sum severance payment in lieu of any amounts payable under Section 5a. above. Further, for a period of six (6) months following any such termination under this Section 5b. (the "Benefits Period"), the Company shall continue the Executive's participation in its group health and dental plans and shall continue to contribute to the premium cost of such participation in the same amount as it did prior to the Executive's termination. If the Company does not survive such Change of Control, the Company shall use its best efforts to ensure the Executive's participation for the duration of the Benefits Period in commensurate plans maintained by the successor entity in such Change of Control and shall provide for the contribution to the cost of such participation in the same amount as it would have under Company plans for the remainder of such Benefits Period. 6. Termination By the Executive. The Executive may terminate his employment hereunder at any time upon sixty (60) days' notice to the Company, unless such termination would violate any obligation of the Executive to the Company under a separate severance -3- agreement. In the event of termination of the Executive pursuant to this Section 6, the Board may elect to waive the period of notice, or any portion thereof, and, if the Board so elects, the Company will pay the Executive his Base Salary for the notice period (or for any remaining portion of the period). 7. Confidential Information. a. The Executive acknowledges that the Company and its Affiliates, if any, continually develop Confidential Information, that the Executive may develop Confidential Information for the Company or its Affiliates, if any, and that the Executive may learn of Confidential Information during the course of employment. The Executive will comply with the policies and procedures of the Company and any of its Affiliates for protecting Confidential Information and shall never disclose to any Person (except as required by applicable law or for the proper performance of his duties and responsibilities to the Company and any of its Affiliates), or use for his own benefit or gain, any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Affiliates. The Executive understands that this restriction shall continue to apply after his employment terminates, regardless of the reason for such termination. b. All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or any of its Affiliates and any copies, in whole or in part, thereof (the "Documents"), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Affiliates, if any. The Executive shall safeguard all Documents and shall surrender to the Company at the time his employment terminates, or at such earlier time or times as the Board or its designee may specify, all Documents then in the Executive's possession or control. c. The Executive also agrees to assign to the Company any Intellectual Property, as defined below, which the Executive creates or develops during employment (alone or with others, on or off Company premises) which relates to the business of the Company or any of its Affiliates or which utilizes the Confidential Information, facilities or equipment of the Company or any of its Affiliates. 8. Restricted Activities. The Executive agrees that some restrictions on his activities during and after his employment are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and any of its Affiliates. While the Executive is employed by the Company and for three (3) months after his employment terminates, the Executive shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the Company or any of its Affiliates or undertake any planning for any business competitive with the Company or any of its Affiliates; provided, however, that if the Executive's employment is terminated under Section 5b. hereof, the Executive shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the Company or any of its Affiliates or undertake any planning for any business competitive with the Company or any of its Affiliates for six (6) months after his employment terminates. Specifically, but without limiting the -4- foregoing, the Executive agrees not to engage in any manner in any activity that is directly or indirectly competitive or potentially competitive with the business of the Company or any of its Affiliates, if any, as conducted or under consideration at any time during the Executive's employment, including, without limitation, any activity that involves the retail sale of wine or wine accessories via the mails or the Internet. 9. Enforcement of Covenants. The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Sections 7 and 8 hereof. The Executive agrees that said restraints are necessary for the reasonable and proper protection of the Company and its Affiliates, if any, and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic area. The Executive further acknowledges that, were he to breach any of the covenants contained in Sections 7 and 8 hereof, the damage to the Company would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond. The parties further agree that, in the event that any provision hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law. 10. Definitions. Words or phrases which are initially capitalized or are within quotation marks shall have the meanings provided in this Section 10 and as provided elsewhere herein. For purposes of this Agreement, the following definitions apply: a. "Affiliates" means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by either management authority or equity interest. b. "Change of Control" means the occurrence of: a merger, consolidation, reorganization, recapitalization or any other transaction (or any series of such transactions) in which the stockholders, immediately prior to such transaction (or series of transactions) receive, in exchange for the stock owned by them, cash, property or securities of the resulting or surviving entity or any Affiliate thereof, and, as a result thereof, persons who, individually or in the aggregate, were holders of 50% or more of the voting stock of the Company immediately prior to such transaction (or series of transactions) hold less than 50% of the voting stock of the resulting or surviving entity or such Affiliate thereof, calculated on a fully diluted basis; or a sale, transfer or other disposition of all or substantially all of the assets of the Company. c. "Confidential Information" means any and all information of the Company and any of its Affiliates that is not generally known by others with whom they compete or do business, or with whom they plan to compete or do business and any and all information, publicly known in whole or in part or not, which, if disclosed by the Company or any of its Affiliates would assist in competition against them. Confidential Information includes without limitation such information relating to (i) the development, research, testing, -5- manufacturing, marketing and financial activities of the Company and any of its Affiliates, (ii) the Products, (iii) the costs, sources of supply, financial performance and strategic plans of the Company and any of its Affiliates, (iv) the identity and special needs of the customers of the Company and any of its Affiliates and (v) the people and organizations with whom the Company and any of its Affiliates have business relationships and those relationships. Confidential Information also includes comparable information that the Company or any of its Affiliates have received belonging to others or which was received by the Company or any of its Affiliates with any understanding that it would not be disclosed. d. "Intellectual Property" means all inventions, discoveries, compositions, concepts, ideas and the like (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by the Executive (alone or with others, on or off Company premises) during the term of this Agreement that relate in any way to the business, products or services of the Company or any of its Affiliates or to any prospective activity of the Company or any of its Affiliates. e. "Person" means an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization, other than the Company or any of its Affiliates. f. "Products" means all products planned, researched, developed, tested, manufactured, sold, licensed, leased or otherwise distributed or put into use by the Company or any of its Affiliates, together with all services provided or planned by the Company or any of its Affiliates, during the Executive's employment. 11. Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 12. Assignment. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement without the consent of the Executive in the event that the Company shall hereafter affect a reorganization, consolidate with, or merge into, any other Person or transfer all or substantially all of its properties or assets to any other Person. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 13. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. -6- 14. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 15. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive's employment. 16. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a expressly authorized representative of the Company. 17. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants or any court order or other legal obligation that would affect the performance of his obligations hereunder. The Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party's consent. 18. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement. 19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 20. Governing Law. This is a Massachusetts contract and shall be construed and enforced under and be governed in all respects by the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by the Executive, as of the date first above written. THE EXECUTIVE: GEERLINGS & WADE, INC. /s/ Huib E. Geerlings By: /s/ John J. Remondi - -------------------------------- -------------------------- Title: Director -7- EX-10.45 6 dex1045.txt AGREEMENT DATED DEC 20TH 2002 Exhibit 10.45 This Agreement dated as of the 20/th/ day of December, 2002, between DURKIN WATER REALTY, LLC., having its principal place of business at 97 Old Route 6, Carmel, NY 10512 and mailing address: PO Box 372, Brewster, NY 10509, as Landlord, and GEERLINGS and WADE, INC., having its principal place of business at 960 Turnpike Street, Canton, MA 02021, as Tenant. Witnesseth: The Landlord hereby leases to the Tenant who hereby rents from the Landlord, the following described premises, storefront premises on street level, known and designated as Unit # 13 in the Carmel Business Center located on the north side of US Route 6, and having an address of 97 Old Route 6, Carmel, New York ("Demised Premises") for a term of three (3) years to commence from the 1st day of February 1, 2003 and to end on the 31st day of January, 2006, to be used and occupied only for an office and business premises of a wine retailer in the business of selling wine through delivery and in store sales, and for no other purpose, upon the conditions and covenants following: 1st. That Tenant shall pay to the Landlord the base annual rent as set forth in the Schedule of Rents attached hereto and made a part hereof and such additional rent as may be provided for herein, said rent and additional rent to be paid in monthly installments, in advance, on the first day of each and every month of the term aforesaid, in such amounts as set forth herein. All such rent and additional rent as herein set forth shall be paid without offset, deduction and/or prior demand. 2nd. That the Tenant shall take good care of the premises and shall, at the Tenant's own cost and expense make all repairs to the interior of the demised premises, except those of a structural nature and to the exterior thereof, if caused by the acts or negligence of the Tenant, its servants, agents, employees and/or business invitees, and at the end or other expiration of the term, deliver up the demised premises in good order or condition, damages by the elements and reasonable wear and tear, excepted. 3rd. The Tenant shall promptly execute and comply with all statutes, ordinances, rules, orders, regulations and requirements of the Federal, State and Local Governments and of any and all their Departments and Bureaus applicable to said premises, for the correction, prevention, and abatement of nuisances or other grievances, in, or connected with said premises during said term; and shall also promptly comply with and execute all rules, orders and regulations of the New York Board of Fire Underwriters, or any other similar body, and at Tenant' s own cost and expense. 4th Tenant, its successors, heirs, executors or administrators shall not assign this agreement, or underlet or underlease the demised premises, or any part thereof, or make any alterations on or to the demised premises, without the Landlord's consent in writing, which consent, the Landlord will not unreasonably withhold; or occupy, or permit or suffer the same to be occupied for any business or purpose deemed disreputable or extra-hazardous on account of fire, under the penalty of damages and forfeiture, and in the event of a breach thereof, the term herein shall immediately cease and determine at the option of the Landlord as if it were the expiration of the original term. 5th Tenant must give Landlord prompt notice of fire, accident, damage or dangerous or defective condition. If the demised premises cannot be used because of fire or other casualty, Tenant is not required to pay rent for the time the demised premises are unusable. If part of the demised premises cannot be used, Tenant must pay rent and additional rent for the usable part. Landlord shall have the right to decide which part of the demised premises is reasonably usable. Landlord need only repair the damaged structural parts of the demised premises. Landlord is not required to repair or replace any equipment, fixtures, furnishings or decorations unless originally installed by Landlord. Landlord is not responsible for delays due to settling insurance claims, obtaining estimates, labor and supply problems or any other cause not fully under Landlord's control. If the fire or other casualty is caused by an act or neglect of the Tenant, Tenant's servants, agents, employees or business invitees, then all repairs will be made at Tenant's expense and Tenant must pay the full rent without adjustment. The cost of the repairs will be additional rent. The Landlord's obligations to repair or replace the demised premises or any part thereof shall be governed by the provisions of paragraphs 32nd, 33rd and 34th hereof. 6th. Tenant agrees that Landlord and Landlord's agents and other representatives shall have the right to enter into and upon the demised premises upon twenty-four (24) hours notice, oral or written, to Tenant, or any part thereof, at all reasonable hours for the purpose of examining the same, or making such repairs or alterations therein as may be necessary for the safety and preservation thereof. 7th. Tenant agrees to permit Landlord or Landlord's agents to show the demised premises to persons wishing to hire or purchase the same; and Tenant further agrees that on and after the sixth (6th) month next preceding the expiration of the term hereby granted, Landlord or Landlord's agents shall have the right to place notices on the front of said demised premises, or on any part thereof, offering the demised premises "To Let" or "For Sale", and Tenant hereby agrees to permit the same to remain thereon without hindrance or molestation. 8th. If the demised premises or any part thereof shall be deserted or become vacant during said term, or if any default be made in the payment of the rent or additional rent or any part thereof, or if any material default be made in the performance of any of the covenants herein contained, Landlord or its representatives may re-enter the demised premises by force, summary proceedings or otherwise, and remove all persons therefrom, without being liable to prosecution therefor, and Tenant hereby expressly waives the service of any notice in writing of the Landlord's intention to re-enter, and Tenant shall pay at the same time as the rent and additional rent becomes payable under the terms hereof a sum equivalent to the base rent and additional rent reserved herein, and the Landlord, shall use its best efforts to rent the demised premises on behalf of the Tenant at market rates, reserving the right to rent the demised premises for a longer period of time than fixed in the original lease without releasing the Tenant from any liability, applying any moneys collected, first to the expense of resuming or obtaining possession, second to restoring the demised premises to a rentable condition, and then to the payment of the rent and additional rent and all other charges due and to grow due to Landlord, any surplus to be paid to the Tenant, who shall remain liable for any deficiency. 9th. Landlord may replace, at the expense of the Tenant less any insurance claim proceeds, all broken glass in and immediately about the demised premises. Landlord may insure and keep insured, all plate glass in the demised premises for and in the name of the Landlord. Bills for the premiums therefor shall be rendered by the Landlord to the Tenant at such times as Landlord may elect, and shall be due from and payable by the Tenant, as additional rent, when rendered. 10th. Tenant shall neither encumber nor obstruct the side walk in front of entrance to or halls and stairs of the demised premises or of the building of which the demised premises form a part, nor allow the same to be obstructed or encumbered in any manner. 11th. Intentionally Omitted. 12th. Tenant agrees that the Landlord is exempt from any and all liability for any damage or injury to persons or property caused by or resulting from electricity, gas, water, rain, ice or snow, or any leak or flow from or into any part of the demised premises or of the building or other property of which the demised premises form a part, or from any damage or injury resulting or arising from any other cause or happening whatsoever unless said damage or injury be caused by or be due to the negligence of the Landlord. Tenant agrees to fully and unconditionally indemnify and hold the Landlord free and fully harmless from any and all claims for damages defined hereunder in this paragraph. 13th. If material default be made in any of the covenants or conditions of this Lease on the part of the Tenant to be performed, then it shall be lawful for the Landlord to enter the demised premises and to repossess the same. 14th This Lease shall not be a lien against the demised premises or against the premises of which the demised premises form a part in respect to any mortgages that are now on or that hereafter may be placed against the said premises, and that the recording of such mortgage or mortgages shall have preference and precedence and be superior and prior in lien to this Lease, irrespective of the date of recording and the Tenant agrees to execute without cost, on demand, any such instrument which may be deemed reasonably necessary or desirable to further effect the subordination of this Lease to any such mortgage or mortgages, and a refusal to execute such instrument shall entitle the Landlord, or the Landlord's assigns and legal representatives to the option of canceling this Lease without incurring any expense or damage and the term hereby granted is expressly limited accordingly. 15th. The Tenant has this day deposited with the Landlord the sum of $1,382.58 dollars as security for the full and faithful performance by the Tenant of all of the terms, covenants and conditions of this Lease upon the Tenant's part to be performed, which said sum shall be returned to the Tenant, without interest thereon, withing 30 days after the time fixed as the expiration of the term here, provided the Tenant has fully and faithfully carried out all of the said terms, covenants and conditions on Tenant's part to be performed. In the event of a bona fide sale, subject to this Lease, the Landlord shall have the right to transfer the security to the vendee for the benefit of the Tenant and the Landlord shall be considered released from all liability for the return of such security; and the Tenant agrees to look to the new Landlord solely for the return of the said security, and it is agreed that this shall apply to every transfer or assignment made of the security to a new Landlord. 16th. The security deposited under this Lease shall not be mortgaged, assigned or encumbered by the Tenant without the written consent of the Landlord. 17th. It is expressly understood and agreed that in case the demised premises shall be deserted or vacated, or if default be made in the payment of the rent, additional rent or any part thereof as herein specified, or if, without the consent of the Landlord, the Tenant shall sell, assign or mortgage this Lease or if default be made in the performance of any of the material covenants and agreements in this Lease contained on the part of the Tenant to be kept and performed, or if the Tenant shall fail to comply with any of the statutes ordinances, rules, orders regulations and requirements of the Federal, State or Local Governments or of any and all of their Departments and Bureaus, applicable to said demised premises, or if the Tenant shall file or there be filed against the Tenant a petition in bankruptcy or arrangement, or Tenant be adjudicated a bankrupt or make an assignment for the benefit of creditors or take advantage of any insolvency act, the Landlord may, if the Landlord so elects, at any time thereafter terminate this Lease and the term hereof, on giving the Tenant thirty (30) days' notice in writing of the Landlord's intentions to do, and this Lease and the term hereof shall expire and come to an end on the date fixed in such notice as if the said date were the date originally fixed in this Lease for the expiration hereof. Such notice may be given by overnight or registered mail addressed to the Tenant addressed to HUIB GEERLINGS, GEERLINGS and WADE, INC., 960 Turnpike Street, Canton , MA 02021. The Tenant shall be given five (5) business days after written notice to cure any of these defaults and prevent termination of the Lease by the Landlord. 18th. Intentionally Omitted. 19th. Intentionally Omitted. 20th. The failure of the Landlord to insist upon a strict performance of any of the terms, conditions and covenants herein, shall not be deemed a waiver of any right or remedies that the Landlord may have, and shall not be deemed a waiver of any subsequent breach or default in the terms, covenants and conditions herein contained. This Lease may not be changed, modified, discharged or terminated orally. 21st. Provided the Tenant is not in default in the payment of the rent, additional rent or in violation of the terms covenants and conditions of this Lease on its part to be performed, the Landlord does covenant that the Tenant shall and may peacefully and quietly have hold and enjoy the demised premises for the term aforesaid. 22nd. If after default in the payment of rent, additional rent or part thereof as herein provided, or upon any material violation of any other provision of this Lease, or upon the expiration of the term of this Lease, the Tenant moves out or is dispossessed and fails to remove any trade fixtures or other property prior to such said default, removal, expiration of the term of this Lease, or prior to the issuance of the final order or execution of the warrant of possession, then and in that event, the said fixtures and property shall be deemed abandoned by the Tenant and shall be come the property of the Landlord. 23rd. In the event that the relation of the Landlord and Tenant may cease or terminate by reason of the re-entry of the Landlord under the terms and covenants contained in this Lease or by the ejectment of the Tenant by summary proceedings or otherwise, or after the abandonment of the demised premises by the Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in monthly payment the rent, additional rent and any other charge herein provided for which accrues subsequent to the re-entry by the Landlord, and the Tenant expressly agrees to pay as damages for the breach of the covenants herein contained, the difference between the aggregate of the rent, additional rent and other charges herein provided, and the rent collected and received, if any, by the Landlord during the remainder of the unexpired term, such difference or deficiency between the aggregate of the said rent, additional rent and other charges herein provided and the rent collected, if any, shall become due and payable in monthly payments, during the remainder of the unexpired term, as the amounts of such difference or deficiency shall from time to time be ascertained; and it is mutually agreed between the Landlord and the Tenant that the respective parties hereto shall and hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties against the other on any matters whatsoever arising out of or in any way connected with this Lease, the Tenant's use or occupancy of the demised premises and/or any claim of injury or damage. The Tenant expressly waives the right to raise any counterclaims against the Landlord in any summary proceeding commenced by the Landlord against the Tenant for the non-payment of rent or additional rent. 24th. Intentionally Omitted. 25th. This lease and the obligation of the Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on the part of the Tenant to be performed shall in no way be affected, altered, or excused because the Landlord is unable to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repairs, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from doing so by reason of governmental preemption in connection with a national emergency, or in connection with any rule, order or regulation of any department or subdivision thereof of any governmental agency or by reason of the condition of supply and demand which have been or are affected by war or other emergency, or by reason of an "Act of God". 26th. No diminution or abatement of rent, additional rent or other charges as herein provided, shall be claimed or allowed for inconvenience or discomfort arising from the making of repairs or improvements to the building of which the demised premises form a part or to the property surrounding the same as long as the Tenant can use demised premises for its intended use. In respect to the various "services," if any, herein expressly or impliedly agreed to be furnished by the Landlord to the Tenant, it is agreed that there shall be no diminution or abatement of the rent, additional rent or such other charge as herein provided for interruption or curtailment of such "service." No such interruption or curtailment of such "services" shall be deemed a constructive eviction. The Landlord shall not be required to furnish, and the Tenant shall not be entitled to receive, any of such "services" during any period wherein the Tenant shall be in default in respect to the payment of rent, additional rent or such other charges as herein provided, or any part or portion thereof. 27th. Landlord shall not be liable for the failure to give possession of the demised premises to the Tenant upon the commencement date of the term hereof by reason of the fact that the demised premises are not ready for occupancy or because a prior Tenant or any other person is wrongfully holding over or in wrongful possession, or for any other reason. The base rent, additional rent and such other charges as herein provided shall not commence until possession is given or is available, but the term herein shall not be extended thereby. 28th. The Landlord agrees to keep the building of which the demised premises form a part, during the entire term of this lease and any renewal thereof, insured to the full insurable value of said building, against loss or damage by fire or other related casualty. All payments on account of any loss shall be paid to the Landlord and be applied in accordance with the provisions contained in paragraph 33rd hereof. As further consideration for the granting of this lease, the Tenant covenants and agrees to pay to the Landlord, as additional rent and in addition to all other rents, during the demised term and any renewal thereof, SIX AND FIVE HUNDRED THIRTY THOUSANDS (6.530%) percent of the basic insurance premium applicable to the entire building of which the demised premises form a part. In addition thereto, if by reason of the use of the demised premises by the Tenant, the rates for insurance against loss by fire or other related casualty are increased as compared with the basic insurance premium, the Tenant agrees to pay as additional rent ONE HUNDRED (100%) percent of any excess premiums caused thereby, such additional rent to become due immediately upon effecting the insurance by the Landlord and payable with the next succeeding installment of rent. 29th. The Tenant covenants to provide and keep in force during the term of this lease, for the benefit of the Landlord, general liability policies of insurance in standard forms, naming and protecting the Landlord against any liability whatsoever, occasioned by accident or disaster on or immediately about the demised premises or any appurtenances thereto. Such policies are to be written by good and solvent insurance companies rated no less than "A" by A. M. Best & Co. or any similar rating organization and satisfactory to the Landlord in the single limit amount of $1.0 million for each accident and $500,000.00 in respect to damages in personal property and an umbrella amount of $10 million. Copies of such policies shall be delivered to the Landlord, prior to the time that the tenant shall take possession of the demised premises. The policies herein provided for shall contain the following endorsements; a) That such policies may not be canceled or amended with respect to the Landlord or any of its designees, except upon thirty (30) days prior written notice to the Landlord or such designee sent by certified or registered mail; b) That the Tenant shall be solely responsible for the payment of all premiums under such policies and that the Landlord or its designee shall have no obligation for the payment thereof; c) That in the event of payment of any loss covered by such policies, the loss occasioned by the Landlord shall be paid first by the insurance company; and d) An express waiver of any right of subrogation by the insurance company against the Landlord. Tenant hereby expressly waiving any such right of subrogation for any reason or occurrence whatsoever. 30th. a) The Landlord covenants and agrees that it will make prompt and timely payment of any and all real estate taxes or assessments levied against the demised premises, including water, sewer, fire and ambulance district charges, except that Landlord may withhold such payments and thereafter take such steps or proceedings as it may deem advisable or necessary to contest taxes or assessments against the property. As further consideration for the granting of this lease, the Tenant covenants that it will during the demised term or any renewal thereof, pay to the Landlord as additional rent and in addition to all other rents or charges above specified, SIX AND FIVE HUNDRED THIRTY THOUSANDS (6.530%) percent of all real estate taxes and assessments, general and special, ordinary and extraordinary, by virtue of or under any present and future law or requirement of any governmental authority, and all municipal and other governmental charges which are or may thereafter be or become a lien on the demised premises, which may become due or payable or which may be levied, assessed or imposed at any time after the Tenant shall take possession of the demised premises and until the expiration of the term or any renewal thereof. b) Upon receipt of each paid bill or copy of such paid bill for real estate taxes assessed against the demised premises, the Landlord shall advise Tenant of the amount thereof payable by Tenant and Tenant shall pay said amount to Landlord upon demand. Landlord shall provide copies of the invoices upon request by Tenant. If the term of this lease shall terminate at a time other than the last day of a lease year, except in the case of a termination pursuant to any provisions of this lease, a proper apportionment shall be made. c) Permission is granted to the Tenant herein to institute any action or proceeding on its part to determine the correctness of the assessment levied against the premises of which the demised premises are a part at its sole cost and expense without any indemnification therefor by the Landlord. 31st. Landlord shall operate, manage, equip, police, light, repair and maintain the common areas of the building of which the demised premises form a part for their intended purposes in such a manner as Landlord shall, it its sole discretion, deem appropriate, and may from time to time change the size, location, nature and use of any common area, and make installations therein and move and remove the same. The Tenant shall pay to Landlord, as additional rent SIX AND FIVE HUNDRED THIRTY THOUSANDS (6.530%) percent of all costs and expenses of every kind and nature as may be paid or incurred by Landlord during the term of this lease including, but not limited to, appropriate and reasonable reserves in operating, managing, equipping, cleaning, lighting, repairing, replacing, and maintaining the common areas, parking areas, common facilities and related services, including the affording of protection against fire; snow plowing, sanding, lighting and striping the parking areas; the costs and expenses of planting, replanting and replacing flowers and landscaping; water and sewer charges, worker's compensation insurance; wages, unemployment taxes; social security taxes; fees for required licenses and permits; supplies for the operation and maintenance of the common areas; reasonable depreciation of equipment used in the operation, repair and maintenance of the common areas and common facilities and related services, and administrative costs equal to fifteen (15%) of the total costs paid or incurred by Landlord, all as determined in accordance with generally accepted accounting principals and allocated to any particular lease year on the accrual method of accounting, but there shall be excluded therefrom depreciation of the original cost of constructing, erecting and installing the building of which the demised premises form a part, the common areas, the common facilities and related services. 32nd. Wherever it is provided herein that the Tenant shall pay as additional rent its proportionate cost of items payable by the Landlord, the annual charge therefor payable by the Tenant shall be payable in monthly installments on the first day of each calendar month of the demised term, in advance, in an amount, for the first lease year of the demised term, as estimated by the Landlord and for each subsequent year, based upon the actual cost thereof as paid by the Landlord during the prior year. Within sixty (60) days after the Landlord shall receive an actual bill or statement for each of the items payable by the Tenant to the Landlord, and with respect to the Common Charges provided for in Article 31st hereof, no later than March 15 of any year during the demised term, the Landlord shall furnish to the Tenant a copy thereof, and thereupon there shall be an adjustment between the Landlord and the Tenant. For the purposes of the first year of the term herein demised, the Tenant's share of the basic insurance premium as provided in paragraph 28th herein is estimated to be $588.00; the Tenant's share of the basic real estate taxes and sewer charges as provided in paragraph 30th herein, in the aggregate, are herein estimated to be $3,476.00 and the Tenant's share of the basic common charges as provided in paragraph 31st herein, are estimated to be $980.00 for a total of $5,044.00 ($420.33 per month). 33rd. If the demised premises and/or the building in which they are located should be damaged or destroyed during the term hereof by any casualty insurable under the standard fire and extended coverage insurance policies, the Landlord shall, subject to any unavoidable delay, repair and/or rebuild the same substantially to the condition in which the same were immediately prior to such damage or destruction, unless the Landlord shall elect not to rebuild as hereinafter provided in paragraphs 34th and 35th in this lease. The Landlord's obligation under this paragraph shall be limited to the lesser of either (a) the scope of the work to be done by the Landlord in order to restore the premises and/or buildings to the condition aforesaid, or (b) the proceeds of any such insurance policy if the Landlord keeps the building and the demised premises insured against loss or damage by such fire and extended coverage insurance to the extent of at least eighty (80%) percent of the insurable value of the building if reasonably obtainable from responsible insurance companies licensed to do business in the state where the demised premises is located. 34th. If the demised premises should be damaged or destroyed to the extent of fifty (50%) percent or more of the then monetary value thereof, by any cause, or should be damaged or destroyed as a result of a risk which is not covered by the fire and extended coverage insurance then carried by the Landlord thereon, then and in any of said events, the Landlord may either terminate this lease or elect to repair or restore the damage or destruction to the demised premises, in which latter event the Landlord shall repair and/or rebuild the same as provided in paragraph 33rd of this lease. If such destruction or damage occurs and this lease is not so terminated by the Landlord, this lease shall remain in full force and effect, and the parties waive the provisions of any law to the contrary. The Landlord's obligation under this paragraph shall in no event exceed the scope of the work to be done by the Landlord in the original construction of said building and the demised premises. If the demised premise is not usable for Tenant's intended use for more than sixty (60) days after damage occurs, then Landlord shall suspend the collection of rent or additional rent until the Tenant can use the demised premises again. If the Landlord does not rebuild the demised premises within six (6) months of damage, then this lease shall be deemed terminated as of the date of the happening of the damage or destruction, and the rent shall be ratably apportioned and any prepaid minimum rent refunded. 35th. If, during the demised term of this lease or of any renewal term, the demised premises are so damaged or destroyed so that Landlord determines not to rebuild the same, Landlord shall not be obliged to restore the demised premises and, in such event, any notice given to the Tenant not later than sixty (60) days after such damage or destruction, this lease shall be deemed terminated as of the date of the happening of the damage or destruction, and the rent shall be ratably apportioned and any prepaid minimum rent refunded. 36th. a) If more than twenty (20%) percent of the area of the demised premises shall be taken under power of eminent domain, the Landlord or Tenant, may, by written notice to the other, terminate this lease, such termination to be effective on the date set forth in said notice. b) If this lease is terminated as provided in this paragraph, the rent shall be paid up to the day that possession is so taken by the public authority and the Landlord shall make an equitable refund of any rent and additional rent paid by the Tenant in advance and not yet earned. c) Each party agrees to execute and deliver to the other all instruments necessary or desirable in connection with the provisions hereof. d) Notwithstanding anything herein contained, permission is granted to the Tenant to prosecute its own claim for damages arising by reason of said condemnation proceedings. 37th. a) If any mechanic's or other liens or order for the payments of money or any notice of intention to file a lien shall be filed against the demised premises, or the building or improvement of which said premises form a part, by reason of or arising out of any labor or material furnished or alleged to have been furnished or to be furnished to or for the demised premises or any occupant thereof; at the instance and request of the Tenant, its agents, servants and/or employees, or for or by reason of any change, alteration or addition or the cost or expense thereof, or any contract relating thereto, or against the interest of the Landlord, the Tenant shall cause the same to be canceled and discharged of record by bond or otherwise as allowed by law at the expense of the Tenant within five (5) business days after the filing thereof, and the Tenant shall also defend on behalf of Landlord, at Tenant's sole cost and expense, any action, suit or proceeding which may be brought thereon or for the enforcement of such lien, liens or orders, and Tenant will pay any damages and satisfy and discharge any judgment entered thereon and save harmless Landlord from any claim or damage resulting therefrom. b) Nothing herein contained shall be construed as a consent on the part of the Landlord to subject the estate of the Landlord to liability under the applicable Mechanic's Lien Law, it being expressly understood that the Landlord's estate shall not be subject to such liability. 38th. If any term, covenant or condition of this lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant and condition of this lease shall be valid and be enforced to the fullest extent permitted by law. 39th. The Tenant covenants and agrees that it will maintain for Tenant's use only covered receptacles for garbage and other refuse and will cause the said garbage and other refuse to be removed at its sole cost and expense. 40th. Notwithstanding anything herein contained in paragraph 3rd to the contrary, the Landlord represents to its knowledge that there are no violations against the said building filed either by the Department of Labor of the State of New York and/or the Building Department of the Town of Carmel, County of Putnam. The Landlord further agrees that in the event there are any pre-existing violations against the said building by either of the said municipal departments then the Landlord agrees to remove the said violations. Nothing herein, however, is intended to require the Landlord to remove any violations occasioned by the use and occupancy of the demised premises by the Tenant herein named. 41st. The use of "reasonable hours" in paragraph 6/th/ of this lease is intended to mean those hours when the premises herein demised are open for business by the Tenant. 42nd. Wherever herein there is a requirement upon the Tenant to correct any violations, it is understood and agreed between the parties hereto that such requirement shall be deemed to be a requirement wherein such violation has been caused by the Tenant, its agents or servants, either by omission or commission. 43rd. Intentionally Omitted 44th. Non-exclusive permission is granted to the Tenant, its agents, servants, employees and business invitees to use the parking area surrounding the building of which the demised premises forms a part, jointly with all of the other Tenants of the building, for the purpose of parking motor vehicles in connection with the business to be operated by the Tenant, provided that none of the parking of the said motor vehicles shall be in violation of the Zoning Ordinances of the Town of Carmel, County of Putnam and State of New York, the Vehicle and Traffic Law of the State of New York, nor shall it interfere with parking of motor vehicles by the other Tenants of the building of which the demised premises form a part, their agents, servants, employees and invitees. 45th. a) Landlord agrees to provide and maintain the necessary mains and conduits in order that water, sewer, gas (if any) and electricity may be furnished to the demised premises. The Landlord shall not be required to furnish to the Tenant any gas, heat, electricity, light, power, air conditioning, telephone or any other facilities or services of any kind whatsoever and the Tenant shall pay for and indemnify and hold harmless the Landlord against any liability on account of charges for water, gas, heat, light, power, air conditioning, telephone or other communication, service or other utility used, rendered or supplied to, upon or in connection with the demised premises. Landlord shall not be liable in the event of any interruption in the supply of any such utilities to the demised premises. The Tenant agrees that it will not install, without the consent of the Landlord in writing, any equipment which will exceed the capacity of the utility lines leading into the demised premises and that if any equipment so installed or to be installed shall require additional utility facilities to be brought into the premises, the same shall be installed at Tenant's expense in accordance with the plans and specifications to be approved in writing by the Landlord. The Landlord agrees to furnish to the Tenant cold water for domestic use only. b) The sole obligation of the Landlord herein shall be to furnish the premises "AS IS" subject to the representations on the Specifications Sheet attached hereto. c) In the event there shall be installed by the Landlord at the demised premises heating, ventilating, air conditioning and/or hot water equipment servicing the demised premises only, all of which is herein collectively called "equipment", then the Tenant, during the entire term hereof or any renewals thereof, shall maintain, keep in good order and repair and replace, if required, at its own cost and expense, such equipment installed in the demised premises and at the expiration of said term, return the same to the Landlord in good order and repair, ordinary wear and tear and natural deterioration due to the elements, excepted. In furtherance of the Tenant's obligation of repair as herein provided, the Tenant shall obtain and maintain during the entire term of this lease and any renewals or extensions thereof, maintenance and service agreements on each of the items of equipment located at the demised premises, copies of which shall be filed with the Landlord. 46th. The Landlord represents that the water and sewer services are in good working order. 47th. a) If the Tenant refuses or neglects to repair the demised premises properly as required hereunder and to the reasonable satisfaction of Landlord as soon as reasonably possible after written demand, Landlord may make such repairs. If the Tenant refuses or neglects to perform any work required to be performed by Tenant in accordance with any of the provisions of this lease, the Landlord shall have the right (but shall not be obligated) to perform by its own contractors or sub-contractors on behalf of and for the account of the Tenant, any of Tenant's work which the Landlord determines should be so performed. In such event, such work shall be paid for by Tenant promptly upon receipt of a bill therefor stating the cost of such repair to the Landlord, plus fifteen (15%) percent of such cost for overhead and supervision. The amount due to Landlord shall bear interest at the rate of prime plus one (1%) percent the from date of completion of such work or repairs by the Landlord, and shall be deemed to be additional rent hereunder. b) In the event the Tenant shall notify the Landlord that there are items to be repaired by the Landlord as required hereunder, said notification shall be in writing addressed to the Landlord and mailed certified mail, return receipt requested, specifying in detail the item(s) to be repaired. If the Landlord fails or refuses to correct or repair the same within fifteen (15) business days after receipt, the Tenant shall have the same rights and remedies of the Landlord as herein above specifically set forth in the immediately preceding sub-paragraph of this paragraph 47th. Notwithstanding the foregoing, the Landlord shall have the right to dispute the said item of repair by mailing a notice to the Tenant to such effect by certified mail, return receipt requested, within such fifteen (15) business day period and upon receipt of such notice disputing the repair, the said Tenant shall not have the right to perform the Landlord's repair until such time as the dispute is resolved. 48th. Wherever herein stated there is reference to a termination of this lease, which termination shall be occasioned by any act other than a breach of any of the terms, covenants and conditions of this lease, and/or event requiring an apportionment of rent, it is understood and agreed that the security herein deposited shall be refunded to the Tenant in accordance with provision 15th of this lease. 49th. The term Tenant as used herein, shall mean the Tenant, its agents, servants, employees. 50th. Any sign to be installed upon the subject premises shall be furnished and installed upon the subject premises at the sole cost and expense of the Tenant and shall be installed only after Tenant has complied with all of the rules, regulations, laws and ordinances of the Town of Carmel, County of Putnam and the form and appearance of the sign has been approved by the Landlord. It is the intent of this paragraph that all of the signs to be used by all Tenants of the building of which the demised premises form a part be similar in style and material. 51st. a) The Tenant may make any alteration, repairs or additions necessary for the proper conduct of its business provided that such alterations, repairs and/or additions do not injure the structure of the building or render it unfit for general use. No alterations or additions shall be made by the Tenant to the exterior of the building of which the demised premises form a part. No alterations and/or additions to the demised premises shall be commenced prior to the time that the Landlord has approved the plans therefor, which approval will not be unreasonably withheld and the Tenant has complied with all of the rules and regulations of the Town of Carmel, Putnam County, NY. The Tenant agrees that the demised premises will be restored to its present state, if the Landlord so demands, a reasonable time before the expiration of the term of this lease. b) The Tenant shall promptly comply with all orders, ordinances and laws of all municipal, state and federal authorities, boards and commissions with respect to the demised premises or the sidewalks, roadways, street or alleys thereabout, under all rules and regulations as they in substances now or hereafter exist, and the Tenant shall promptly execute any and all such orders involving alterations of or additions to the demised premises. The Tenant shall also carry out all orders, rules, regulations and recommendations of the New York Board of Fire Underwriters or any similar organization, no matter when made. c) The Tenant shall be solely responsible for obtaining, at its sole cost and expense, any and all permits, licenses or other approvals required by the Tenant for the orderly operation of its business, including but not limited to the alteration, repair and/or addition to the demised premises as herein above provided. The Landlord agrees to cooperate with the Tenant in obtaining the same and agrees to execute, on request, all documents reasonable and necessary to obtain such permits, licenses or approvals. d) Landlord agrees to construct as soon as practicable a directory sign in conformance with the Zoning Code of the Town of Carmel. Upon erection of the sign, Landlord agrees to place Tenant's name and business description at the top position of the sign. 52nd. The Tenant has fully inspected the demised premises and is familiar with its physical condition and state of repair and is entering into this lease based upon Tenant's own inspections and investigations thereof and not upon any of Landlord's information, data, statements, representations or promises ( written or oral ) in respect to said to the demised premises or the building of which the demised premises form a part, except for those contained herein and those, if any, contained in some written communication to the Tenant, signed by the Landlord. Except as otherwise stated herein, the Tenant agrees to accept possession of the demised premises in the same "AS IS" condition and state of repair as it exists on the date hereof. This instrument contains the full understanding of the parties hereto and may not be changed, modified, discharged or terminated orally. 53rd If the Tenant shall at any time be in default hereunder, or if the Landlord shall institute an action or summary proceeding against the Tenant based upon such default, or if the Tenant shall commence an action for a declaratory judgment against the Landlord, and in which said action it shall be determined that the Tenant's position cannot be upheld, then and in any such event, the Tenant will reimburse the Landlord for the expense of attorneys' fees and disbursements thereby incurred by the Landlord, so far as the same are reasonable in amount. Also, so long as the Tenant shall be a Tenant hereunder the amount of such expenses shall be deemed to be "additional rent" hereunder and shall be due from the Tenant to the Landlord on the first day of the month following the incurring of such respective expenses. 54th. Anything contained in this lease to the contrary notwithstanding, Tenant agrees that it shall look solely to the estate and property of Landlord in the land and building of which the Demised Premises forms a part for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms or provisions of this lease to be observed and/or performed by Landlord, subject, however, to the prior rights of any ground and underlying lessors or the holder of any mortgage covering the said land and buildings or any interest therein. No other assets of the Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenants claim. In the event Landlord conveys or transfers its interest in the subject premises or in this lease, except as collateral security for a loan, upon such conveyance or transfer, Landlord (and in the case of any subsequent conveyances or transfers, the then grantor or transferor) shall be entirely relieved from all liability with respect to the performance of any covenants and obligations on the part of Landlord to be performed hereunder from and after the date of such conveyance or transfer, provided that any amounts then due and payable to Tenant by Landlord (or by the then grantor or transferor) or any other obligation then to be performed by Landlord (or by the then grantor or transferor) for Tenant under any provisions of this lease, shall either be paid or performed by Landlord (or by the then grantor or transferor) or such payment or performance assumed by the grantee or transferee; it being intended hereby that the covenants and obligations on the part of Landlord to be performed hereunder shall be binding on Landlord, its successors and assigns, only during and in respect of their respective periods of ownership of an interest in the said premises or in this lease. This provision shall not be deemed, construed or interpreted to be an agreement, express or implied, between Landlord and Tenant that Landlord's interest hereunder and the said premises shall be subject to impressment of an equitable lien or otherwise. 55th All notices or demands by either party to the other, other than a statement, bill, or notice and demand for the payment of rent or additional rent shall be given by certified mail, return receipt requested, addressed, if to the Landlord, to the address set forth above or to such other address as the Landlord shall designate, from time to time, by written notice, and if to the Tenant, to Geerlings and Wade, Inc., 960 Turnpike Street, Canton, MA 02021. All such notices shall be deemed served on the date of mailing and shall be deemed received four (4) business days thereafter. 56th Provided the Tenant is not in default hereunder, the Tenant shall have the right to renew this lease for one (1) additional term of three (3) years to commence on the 1st day of February, 2006 and to end on the 31st day of January, 2009, upon the terms contained herein, except for the payment of rent, which shall become due and payable, as follows: Year Annual Rent Monthly Rent - ----- ------------ ------------ First Renewal Year $18,130.00 $1,510.83 Second Renewal Year $18,673.90 $1,556.16 Third (final) Renewal Year $19,234.12 $1,602.84 Notice of the Tenant's election to renew this lease as herein provided for shall be made in writing and delivered to the Landlord no later than 60 days before the expiration of this lease term to be effective. IN WITNESS WHEREOF, the parties have duly executed this agreement on the date first above written. GEERLINGS and WADE, INC. BY: __/s/ David Pearce______________________ DURKIN WATER REALTY, LLC BY: __/s/ Raymond C. Durkin____________________ SCHEDULE & PAYMENT OF RENT The Tenant shall pay the annual and monthly rent during the term herein demised as set forth below: YEAR ANNUAL RENT MONTHLY RENT - ----- ----------- ------------ First $16,591.00 $1,382.58 Second $17,089.00 $1,424.08 Third Final Year $17,602.00 $1,466.84 Notwithstanding anything to the contrary herein contained, it is hereby mutually agreed that the said premises are leased for an aggregate rental of FIFTY-ONE THOUSAND TWO HUNDRED EIGHTY-TWO AND NO/100 ($51,282.00) dollars for the entire term, payable at the time of the making of this lease, and that the provisions herein contained for the payment of said rent in installments are for the convenience of the Tenant only, and that, upon default in payment of the rent in installments as herein allowed, then the whole of the rent hereby reserved for the whole of the said term and then remaining unpaid shall at once become due and payable, without any notice or demand. GEERLINGS and WADE, INC. BY: _____/s/ David Pearce ___________________ DURKIN WATER REALTY, LLC BY: ______/s/ Raymond C. Durkin __________________ SPEC SHEET OFFICE SPACE fully sheet rocked walls primed and finish painted off white pre-wired for future alarm system 1 phone jack drop ceiling 2 - 4 foot fluorescent light fixtures full HV/AC system with 1 thermostat Glass storefront with 3 foot door 1 fire extinguisher REAR AREA 2 outlets 1 light switch sheet rocked and taped walls walls primed to the 10 foot height finished concrete floor 1 handicapped bathroom including sink, toilet, 2 switches and 1 outlet 1 utility room including hot water heater, HV/AC unit, and 200 amp. 3 phase electrical panel 1 exit sign/emergency light 2 - 8 foot hanging fluorescent lights 3 - 3 foot pass doors 1 - 12 foot insulated garage door Landlord represents that the mechanical system, i.e. HVAC Unit, electrical, wiring for the phone jack, lighting system, hot water heater, toilet and sink all are in good working order as they presently exist on the premises. IT IS UNDERSTOOD AND AGREED that Tenant takes the premises in its present state of completion and any further work to finish the space such as finishing the drop ceiling to meet the rear wall, installing a rear demising wall with door, additional HVAC ducts, lighting and tile floor shall be considered Tenant's work and may be done to Tenant's own specifications. Notwithstanding anything to the contrary contained herein the following rider shall control over the printed form. Tenant shall have until April 1, 2003 to obtain any and all necessary licenses and permits from the appropriate authorities to operate a wine store license at the demised premise, (the "Licenses"). If Tenant is unable to obtain said Licenses by this date, Tenant may request and, upon a showing that all required License have been applied for and diligently pursued, shall be granted a thirty (30) day extension. If for any reason Tenant is unable to obtain the Licenses within the above period(s), the Tenant may terminate this Lease, in which event neither party shall have any further obligation to the other, except as provided below, and Tenant shall forfeit its Deposit as a termination fee. Notwithstanding any provisions hereof, Tenant's obligation to pay rent hereunder shall commence on the Rent Commencement Date (February 1, 2003). Tenant shall also have the right, at its sole discretion and for no reason, to terminate this lease one year after commencement, January 31, 2004 ("Early Termination"), by giving notice in writing to Landlord within thirty (30) days of Early Termination. In the event Tenant elects to exercise its right of Early Termination, the Tenant shall have no further obligation to pay rent, additional rent or other consideration except as provided below. Upon Early Termination, the Tenant shall pay Landlord three (3) months of Rent and Additional Rent of ($1,229) on January 31, 2004. GEERLINGS and WADE, INC. BY: ____/s/ David Pearce ___________________ DURKIN WATER REALTY, LLC BY: ____/s/ Raymond C. Durkin ___________________ EX-10.46 7 dex1046.txt CREDIT AGREEMENT Exhibit 10.46 ------------------------------------------------------------ ------------------------------------------------------------ GEERLINGS & WADE, INC. CREDIT AGREEMENT Dated as of February 24, 2003 with THE PARTIES LISTED ON SCHEDULE 1 HERETO ------------------------------------------------------------ ------------------------------------------------------------ TABLE OF CONTENTS
Page 1. Definitions; Certain Rules of Construction ................................ 1 2. Revolving Credit Facility ................................................. 5 2.1. Revolving Loan ....................................................... 5 2.2. Maximum Amount of Credit ............................................. 5 2.3. Borrowing Requests ................................................... 5 2.4. Notes ................................................................ 5 2.5. Use of Proceeds ...................................................... 5 3. Interest; Commitment Fees, etc. ........................................... 6 3.1. Interest ............................................................. 6 3.2. Unused Line Fee ...................................................... 6 3.3. Default Rate ......................................................... 6 3.4. Computations of Interest ............................................. 6 3.5. Warrants ............................................................. 6 4. Payment ................................................................... 7 4.1. Payment at Maturity .................................................. 7 4.2. Mandatory Prepayments ................................................ 7 4.3. Voluntary Prepayments of Loan ........................................ 7 4.4. Reborrowing .......................................................... 7 4.5. Cash Collection System ............................................... 7 5. Conditions to Extending Credit ............................................ 7 5.1. Officer's Certificate ................................................ 7 5.2. Notes ................................................................ 7 5.3. Security Agreement ................................................... 8 5.4. Perfection of Security ............................................... 8 5.5. Lenders' Expenses .................................................... 8 5.6. Insurance ............................................................ 8 5.7. Compliance ........................................................... 8 5.8. Proper Proceedings ................................................... 8 5.9. Legality, etc. ....................................................... 8 5.10. General ............................................................. 9 6. General Covenants ......................................................... 9 6.1. Conduct of Business .................................................. 9 6.2. Payment of Taxes and Other Amounts ................................... 9 6.3. Compliance with Laws ................................................. 9 6.4. Insurance ............................................................ 9 6.4.1. Property Insurance ....................................... 9 6.4.2. Liability Insurance ...................................... 9 6.5. Financial Statements and Reports ..................................... 9 6.5.1. Annual Reports ........................................... 10 6.5.2. Quarterly Reports ........................................ 10
-i- 6.5.3. Monthly Calculations ..................................... 10 6.5.4. Notice of Litigation, Defaults, etc. ..................... 10 6.5.5. Other Information ........................................ 11 6.6. Current Ratio ........................................................ 11 6.7. Quick Ratio .......................................................... 11 6.8. EBIT ................................................................. 12 6.9. Capital Expenditures ................................................. 12 6.10. Indebtedness and Liens ............................................... 12 6.11. Distributions ........................................................ 13 6.12. Investments and Acquisitions ......................................... 13 6.13. Merger; Sale of Assets; Share Issuance ............................... 13 6.14. Sales and Leasebacks ................................................. 13 6.15. Transactions with Affiliates ......................................... 13 6.16. Management Fees ...................................................... 14 7. Representations and Warranties ............................................ 14 7.1. Organization and Business ............................................ 14 7.2. Financial Statements and Other Information ........................... 14 7.3. Litigation ........................................................... 14 7.4. No Legal Obstacle to Agreements ...................................... 14 7.5. Taxes ................................................................ 15 8. Defaults .................................................................. 15 8.1. Events of Default .................................................... 15 8.1.1. Payment .................................................. 15 8.1.2. Covenant Compliance ...................................... 15 8.1.3. Representations and Warranties ........................... 15 8.1.4. Cross-Default ............................................ 16 8.1.5. Judgments ................................................ 16 8.1.6. Material Adverse Change .................................. 16 8.1.7. Change in Control ........................................ 16 8.1.8. Bankruptcy ............................................... 16 8.2. Certain Actions Following an Event of Default ........................ 17 8.2.1. No Obligation to Extend Credit; Acceleration ............. 17 8.2.2. Exercise of Rights ....................................... 17 8.2.3. Bankruptcy Default ....................................... 17 8.2.4. Setoff ................................................... 17 8.2.5. Cumulative Remedies ...................................... 17 8.3. Waivers .............................................................. 17 9. Expense Indemnity ......................................................... 18 9.1. Expenses ............................................................. 18 9.2. General Indemnity .................................................... 18 10. Successors and Assigns .................................................... 18 11. Notices ................................................................... 19 12. Course of Dealing, Amendments and Waivers ................................. 20 13. Venue; Service of Process; Certain Waivers ................................ 20
-ii- 14. WAIVER OF JURY TRIAL ...................................................... 20 15. General ................................................................... 21
-iii- SCHEDULES 1. Commitment Amounts 2. Tranche I Percentages 3. Tranche II Percentages 4. Fee Percentages 5. Warrants EXHIBITS 2.4 - Form of Note 5.1 - Officer's Certificate and Borrowing Request 5.3 - Security Agreement 6.10 - Existing Indebtedness and Liens 7.1 - Subsidiaries -i- GEERLINGS & WADE, INC. CREDIT AGREEMENT This Agreement, dated as of February 24, 2003, is among Geerlings & Wade, Inc., a Massachusetts corporation (the "Company"), and John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer and Robert L. Webb (each a "Lender", and collectively the "Lenders"). The parties agree as follows: 1. Definitions; Certain Rules of Construction. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to "$" and "Dollars" are to United States dollars, (d) the word "including" shall be construed as "including without limitation", (e) accounting terms not otherwise defined herein have the meaning provided under GAAP, (f) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, regulation or rules, in each case as from time to time in effect, and (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement and the other Credit Documents. References to "the date hereof" mean the date first set forth above. "Affiliate" means as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise: provided, that with respect to any Person, the term "Affiliate" shall include each officer, director, employee and general partner of such Person, the Members of the Immediate Family of each such officer, director, employee and general partner and each Affiliate of each of the foregoing. "Banking Day" means any day (other than Saturday or Sunday) on which banks are open to conduct business in Boston, Massachusetts. "Bankruptcy Code" means Title 11 of the United States Code (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. "Base Rate" means, on any date, the greater of (a) the rate of interest announced by Citibank, N.A. as its prime rate plus three percent (3.0%) or (b) six percent (6.00%). "Borrowing Request" is defined in Section 2.3. "Capital Expenditures" means, for any fiscal quarter, the sum (without duplication) of all expenditures (whether paid in cash or accrued as liabilities) during such fiscal quarter that are or should be treated as capital expenditures under GAAP. -1- "Change of Control" means (a) a majority of the board of directors of the Company shall be neither (i) directors of the Company as of the date hereof nor (ii) nominated, appointed or approved by directors of the Company as of the date hereof nor (iii) nominated, appointed or approved by directors described in clause (ii) above; (b) any Person, together with "affiliates" and "associates" of such Person within the meaning of Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any "group" including such Person under sections 13(d) and 14(d) of the Exchange Act shall acquire after the date hereof (i) beneficial ownership within the meaning of Rule 13d-3 of the Exchange Act of 33% or more of either the voting stock or total equity capital of the Company or (ii) direct or indirect control of the Company through a shareholder, voting or similar agreement or arrangement; or (c) the Company shall initiate any action to dissolve, liquidate or otherwise terminate its existence. "Closing Date" means the date on which any extension of credit is made pursuant to Section 2. "Closing Price" means the closing price of the Company's common stock, par value $.01 per share, as quoted on the Nasdaq SmallCap Market on the Initial Closing Date. "Common Stock" means the Company's common stock, par value $.01 per share. "Connors" means John M. Connors, Jr., a Lender hereunder. "Company" is defined in the Preamble. "Credit Documents" means: (a) this Agreement, the Security Agreement and the Notes, each as from time to time in effect; and (b) any other present or future agreement or instrument from time to time entered into by the Lenders, on one hand, and the Company on the other hand, relating to, amending or modifying this Agreement or any other Credit Document referred to above or which is stated to be a Credit Document, each as from time to time in effect. "Credit Obligations" means all present and future liabilities, obligations and indebtedness of the Company under or in connection with this Agreement, the Notes or any other Credit Document, including obligations in respect of principal, interest, amounts provided for in Section 3.2 and other fees, charges, indemnities and expenses from time to time owing hereunder or under any other Credit Document. "Curvey" means James C. Curvey, a Lender hereunder. "Default" means any Event of Default and any event or condition which with the passage of time or giving of notice, or both, would become an Event of Default. -2- "EBIT" means, for any period, the total of: (a) Net Income; plus (b) all amounts deducted in computing such Net Income in respect of: (i) interest expense, and (ii) taxes based upon or measured by net income; minus (c) all amounts included in such Net Income in respect of non-cash income. "End Date" is defined in Section 3.2. "Event of Default" is defined in Section 8.1. "Final Maturity Date" means March 31, 2004. "GAAP" means generally accepted accounting principles as from time to time in effect, including the statements and interpretations of the United States Financial Accounting Standards Board, consistently followed. "Indemnified Party" is defined in Section 9.2. "Initial Closing Date" means February 24, 2003. "Lender" and "Lenders" are defined in the Preamble, and for the avoidance of doubt includes both the Tranche I Only Lenders and the Tranche II Lenders. "Loan" is defined in Section 2.4. "Majority of Lenders" means, as of any date of determination, the Lenders holding an aggregate of 51% or more of all amounts outstanding under the Loan. "Margin Stock" means "margin stock" within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System. "Material Adverse Change" means a material adverse change in the business, operations, assets, financial condition, income or prospects of the Company. "Maximum Amount of Credit" is defined in Section 2.2. "Members of the Immediate Family" means, with respect to any individual, each spouse, sibling or child of such individual, each trust created solely for the benefit of one or more of the aforementioned Persons and each custodian or guardian of any property of one or more of the aforementioned Persons in his capacity as such custodian or guardian. -3- "Net Income" means, for any period, the net income (or loss) of the Company, determined in accordance with GAAP on a consolidated basis; provided, however, that Net Income shall not include extraordinary and non-recurring gains and losses as determined in accordance with GAAP. "Notes" is defined in Section 2.4. "Payment Date" means the last Banking Day in each March, June, September and December. "Person" means any present or future natural person or any corporation, association, partnership, joint venture, limited liability company, business trust, trust, organization, business, individual or government or any governmental agency or political subdivision thereof. "Remondi" means John J. Remondi, a Lender hereunder. "Romer" means Gordon Romer, a Lender hereunder. "SEC" is defined in Section 6.5.1. "Security Agreement" is defined in Section 5.3. "Subsidiary" means any Person of which the Company (or other specified Person) shall at the time, directly or indirectly through one or more of its Subsidiaries, (a) own more than 50% of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally, (b) hold more than 50% of the partnership, joint venture or similar interests or (c) be a general partner or joint venturer. "Tranche I" is defined in Section 2.1. "Tranche II" is defined in Section 2.1. "Tranche I Only Lenders" means Connors and Romer. "Tranche II Lenders" means Curvey, Remondi and Webb. "Unused Line" is defined in Section 3.2. "Unused Line Fee" is defined in Section 3.2. "Warrant Agreement" means the Warrant Agreement dated as of the Initial Closing Date by and among the Company and the Lenders. "Warrants" means the warrants issued to the Lenders pursuant to the Warrant Agreement. "Webb" means Robert L. Webb, a Lender hereunder. -4- 2. Revolving Credit Facility. 2.1. Revolving Loan. Subject to all the terms and conditions of this Agreement and so long as no Default exists, from time to time on and after the Initial Closing Date and prior to the Final Maturity Date, each Tranche I Only Lender and each Tranche II Lender will make loans to the Company up to the amount set forth opposite his name on Schedule 1 hereto and in such amounts as may be requested by the Company in accordance with Section 2.3; provided, however, that the Lenders agree, and the Company acknowledges, that (a) for any portion of the Loan up to or equal to $500,000 of the Maximum Amount of Credit ("Tranche I"), the Lenders shall make loans to the Company, on a pro rata basis as set forth on Schedule 2 hereto, upon the Company's request in accordance with Section 2.3 and (b) for any amount of the Loan in excess of $500,000 ("Tranche II"), the Tranche II Lenders shall make loans to the Company, on a pro rata basis as set forth on Schedule 3 hereto, upon the Company's request in accordance with Section 2.3. The Company acknowledges and agrees that each Lender's obligation hereunder to loan such amounts to the Company is several and not joint. The sum of the aggregate principal amount of loans made under this Section 2.1 at any one time outstanding shall in no event exceed the Maximum Amount of Credit. 2.2. Maximum Amount of Credit. The term "Maximum Amount of Credit" means, on any date, the lesser of (a) $800,000 or (b) the amount (in an integral multiple of $10,000) to which the then applicable amount set forth in clause (a) above shall have been irrevocably reduced from time to time by notice from the Company to the Lenders. 2.3. Borrowing Requests. The Company may from time to time request a loan under Section 2.1 by providing to each applicable Lender a written notice at least five (5) Banking Days prior to the requested Closing Date. Such notice must specify the aggregate amount of the requested revolving loan (which shall be not less than $100,000 and an integral multiple of $10,000), set forth each applicable Lender's pro rata share of the requested revolving loan determined in accordance with Schedule 2 or Schedule 3 hereto, as applicable, and be in substantially the form of Exhibit 5.1 (a "Borrowing Request"). Each such loan will be made by depositing the amount thereof to the general account of the Company at Citizens Bank, or such other account at any bank of which the Company has provided notice to each Lender. 2.4. Notes. The aggregate principal amount of the loans outstanding from time to time under this Section 2 is referred to as the "Loan". The Company shall keep a record of the Loan and shall include a copy of such record in each Borrowing Request delivered to the applicable Lenders pursuant to Section 2.3. The Company's obligations to pay the Loan shall be evidenced by the Company's notes in substantially the form of Exhibit 2.4 (the "Notes"), payable to the Lenders. 2.5. Use of Proceeds. The proceeds of the sale by the Company of the Notes hereunder shall be used for general corporate purposes and to pay closing costs. -5- 3. Interest; Commitment Fees, etc. 3.1. Interest. The Loan shall accrue and bear interest at a rate per annum which shall at all times equal the Base Rate. The Company will pay the accrued and unpaid interest on the Loan on each Payment Date and on any stated or accelerated maturity of the Loan to each Lender on the basis of the principal amount owing to such Lender as of such date. 3.2. Unused Line Fee. Until the full performance and irrevocable payment in full of the Loan and the termination date of this Agreement (the "End Date"), the Company shall pay to the Lenders, on a pro rata basis as set forth on Schedule 4 hereto, an unused line fee (the "Unused Line Fee") in an amount equal to 1.5% of the difference derived by subtracting (a) the daily average amount of the balances under the Loan outstanding during the preceding month, from (b) the Maximum Amount of Credit (the "Unused Line"); provided; however; that if the Unused Line is equal to or less than $300,000 for a given month, only the Tranche II Lenders shall be entitled to receive the Unused Line Fee, and in such event the Company shall pay to the Tranche II Lenders the Unused Line Fee on a pro rata basis as set forth on Schedule 3 hereto. The Unused Line Fee shall be payable monthly in arrears on the first day of each successive calendar month (starting with the month in which the Initial Closing Date occurs). The Unused Line Fee shall be prorated for the month in which the Initial Closing Date occurs and the month in which the End Date occurs. 3.3. Default Rate. Notwithstanding any provision contained in this Agreement or any other Credit Document to the contrary, for each day during any period that there shall have occurred and be continuing any Event of Default, the interest rate on the unpaid principal amount of the Loan shall be increased to a rate per annum (the "Default Rate") which is equal to the Base Rate plus two percent (2.00%). 3.4. Computations of Interest. For purposes of this Agreement, interest (and any amount expressed as interest) shall be computed on the basis of the actual number of days elapsed in a 360-day year. 3.5. Warrants. As additional consideration for the extensions of credit hereunder and as more fully described in the Warrant Agreement, the Company shall issue and deliver to the Lenders, on a pro rata basis as set forth on Schedule 5 hereto, on the Initial Closing Date, Warrants to purchase an aggregate amount of shares of Common Stock equal to (a) the Maximum Amount of Credit multiplied by ten percent (10%) and (b) divided by the Closing Price. The Warrants shall be exercisable at a price per share equal to 1.25 multiplied by the Closing Price and shall bear an expiration date of ten (10) years from the Initial Closing Date. The Warrants shall be subject to various rights in favor of the holders thereof as set forth in the Warrant Agreement. -6- 4. Payment. 4.1. Payment at Maturity. On the Final Maturity Date, the Company will pay to the Lenders an amount equal to the Loan, together with all accrued and unpaid interest thereon and all other Credit Obligations then outstanding. 4.2. Mandatory Prepayments. If the Company or any of its Subsidiaries (a) sells any of its material assets or other properties (other than in the ordinary course of business and other than sales of assets that are promptly replaced), (b) receives any property damage insurance award which is not used to repair or replace the property covered thereby, (c) receives any cash proceeds in connection with any issuance after the Initial Closing Date of any shares of its capital stock, other equity interests or options, warrants or other purchase rights to acquire such capital stock or (d) receives any cash proceeds from the incurrence by the Company or any of its Subsidiaries after the Initial Closing Date of indebtedness other than indebtedness permitted under Section 6.10(a) and indebtedness between the Company and any of its Subsidiaries, then not later than ten (10) calendar days following such sale, award, issuance or incurrence, as applicable, the Company shall apply 100% of the proceeds of any such sale, award, issuance or incurrence, net of expenses incurred in relation thereto, to the prepayment of the Notes on a pro rata basis. 4.3. Voluntary Prepayments of Loan. The Company may from time to time prepay all or any portion of the Loan (in a minimum amount of $50,000 and an integral multiple of $5,000), without premium; provided, however, that the Company may not prepay any portion of any Note that has been outstanding for less than three months as of the proposed prepayment date. 4.4. Reborrowing. The amounts of the Loan prepaid may be reborrowed in accordance with Section 2, subject to the limitations thereof. 4.5. Cash Collection System. If requested by a Majority of Lenders, the Company will put into place a cash collection system reasonably satisfactory to such Lenders. 5. Conditions to Extending Credit. The obligation of the Lenders to make any extension of credit pursuant to Section 2 shall be subject to the satisfaction, on or before the Closing Date therefor, of the following conditions: 5.1. Officer's Certificate. The representations and warranties contained in Section 7 shall be true and correct on and as of the Closing Date with the same force and effect as though originally made on and as of such date; no Default shall exist on the Closing Date prior to or immediately after giving effect to the requested extension of credit; as of the Closing Date, no Material Adverse Change shall have occurred; and the Company shall have furnished to the Lender on the Closing Date a certificate to these effects, in substantially the form of Exhibit 5.1. 5.2. Notes. On the Initial Closing Date, the Company shall have executed the Notes and delivered each Note to the Lender in whose name it has been executed. -7- 5.3. Security Agreement. The Company shall have duly authorized, executed and delivered to the Lenders a Security Agreement substantially in the form of Exhibit 5.3 (the "Security Agreement"). 5.4. Perfection of Security. The Company shall have duly authorized, executed, acknowledged, delivered, filed, registered and recorded such security agreements, notices, financing statements and other instruments as the Lenders may have reasonably requested in order to perfect the liens purported or required to be created pursuant to the Credit Documents and shall have paid all filing or recording fees or taxes required to be paid in connection therewith, including any recording, mortgage, documentary, transfer or intangible taxes. 5.5. Lenders' Expenses. On the Initial Closing Date, the Company shall have paid the reasonable expenses and legal fees of the Lenders, not to exceed $15,000 in the aggregate, incurred in connection with the negotiation of this Agreement and the other Credit Documents and the transactions contemplated hereby and thereby. 5.6. Insurance. The Company shall have provided to the Lenders copies of all insurance policies, and original certificates therefor confirming that such policies are in effect and that the premiums due and owing with respect thereto have been paid in full, evidencing that the Company has adequately insured its and its Subsidiaries' properties, business and assets in all material respects against losses, damages and hazards as are customarily insured against by businesses engaging in activities similar to those of the Company and its Subsidiaries or owning assets or properties similar to those of the Company and its Subsidiaries; maintains general public liability insurance at all times against liability on account of damage to persons and property having such limits, deductibles, exclusions and co-insurance and other provisions as are customary for a business engaged in activities similar to those of the Company and its Subsidiaries; and maintains insurance under all applicable workers' compensation laws. 5.7. Compliance. The Company and its Subsidiaries shall each (a) be in compliance in all material respects, with all, and not in violation in any material respect of any, applicable federal, state, foreign and local laws, statutes and regulations and (b) not be the subject of any governmental investigation, evaluation or any remedial action which could reasonably be expected to have or result in a Material Adverse Change. 5.8. Proper Proceedings. This Agreement, each other Credit Document and the Warrant Agreement and the transactions contemplated hereby and thereby shall have been authorized by all necessary proceedings of the Company. All necessary consents, approvals and authorizations of any governmental or administrative agency or any other Person of any of the transactions contemplated hereby, by the Warrant Agreement or by any Credit Document shall have been obtained and shall be in full force and effect. 5.9. Legality, etc. The making of the requested extension of credit shall not (a) subject the Lenders to any penalty or special tax or (b) be prohibited by any law or governmental order or regulation applicable to the Lenders. -8- 5.10. General. All instruments and legal and corporate proceedings, in connection with the transactions contemplated by this Agreement, the Warrant Agreement and each Credit Document shall be satisfactory in form and substance to the Lenders, and the Lenders shall have received copies of all documents, including records of corporate proceedings, which the Lenders may have reasonably requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. 6. General Covenants. The Company covenants that, until all of the Credit Obligations shall have been paid in full and until each Lender's commitment to extend credit under this Agreement and any other Credit Document shall have been terminated, the Company will comply with the following provisions: 6.1. Conduct of Business. The Company shall engage only in the business of retail sales of wine and wine-related merchandise and activities reasonably related thereto. 6.2. Payment of Taxes and Other Amounts. The Company will pay (a) all taxes, assessments and governmental charges imposed upon it or upon its property and (b) all accounts payable in conformity with customary trade terms, in each case unless the validity or amount thereof is being contested in good faith by appropriate proceedings, and the Company has established adequate reserves in accordance with GAAP. 6.3. Compliance with Laws. The Company will comply with all applicable laws, rules, regulations and orders, and duly observe all valid requirements of governmental authorities, except where failure so to comply would not result, and would not create a material risk of resulting, in a Material Adverse Change. The Company will not own any Margin Stock. 6.4. Insurance. 6.4.1. Property Insurance. The Company shall keep its, and its Subsidiaries', properties, business and assets which are of an insurable character insured by financially sound and reputable insurers against losses, damages and hazards insured against by extended coverage to the extent, in amounts and with deductibles at least as favorable as those generally maintained by businesses of similar size engaged in similar activities. 6.4.2. Liability Insurance. The Company shall maintain with financially sound and reputable insurers insurance against liability for hazards, risks and liability to persons and property to the extent, in amounts and with deductibles at least as favorable as those generally maintained by businesses of similar size engaged in similar activities; provided, however, that it may effect workers' compensation insurance or similar coverage with respect to operations in any particular state or other jurisdiction through an insurance fund operated by such state or jurisdiction or by meeting the self-insurance requirements of such state or jurisdiction. 6.5. Financial Statements and Reports. -9- 6.5.1. Annual Reports. The Company shall furnish to each Lender, within three (3) Banking Days after its filing with the Securities and Exchange Commission (the "SEC"), its Annual Report on Form 10-K for each fiscal year of the Company containing the consolidated balance sheet of the Company as of the end of such fiscal year, the consolidated statements of income, of changes in shareholders' equity and of cash flows of the Company for such fiscal year and comparative figures for the immediately preceding fiscal year, accompanied by a certificate of the Company to the effect that the Company has no knowledge of any Default as of the date of such certificate, or if the Company has such knowledge, specifying such Default and the nature thereof, and what action the Company has taken, is taking or proposes to take with respect thereto. 6.5.2. Quarterly Reports. The Company shall furnish to each Lender, within three (3) Banking Days after its filing with the SEC, its Quarterly Report on Form 10-Q for each fiscal quarter of the Company (except for the fourth fiscal quarter) containing the internally prepared consolidated balance sheet of the Company as of the end of such fiscal quarter, the consolidated statements of income, of changes in shareholders' equity and of cash flows of the Company for such fiscal quarter and for the portion of the fiscal year then ended and comparative figures for the same period in the preceding fiscal year, accompanied by: (a) A certificate of the Company to the effect that such financial statements have been prepared in accordance with GAAP and present fairly, in all material respects, the financial position of the Company at the dates thereof and the results of its operations for the periods covered thereby, subject only to normal year-end audit adjustments and the addition of footnotes, and (b) A certificate of the Company to the effect that the Company has no knowledge of any Default as of the date of such certificate, or if the Company has such knowledge, specifying such Default and the nature thereof and what action the Company has taken, is taking or proposes to take with respect thereto. 6.5.3. Monthly Calculations. The Company shall furnish to each Lender, within twenty-eight (28) calendar days after the last calendar day of each month, calculations showing, as of the last day of such month ended, the Company's compliance with Sections 6.6, 6.7 and 6.8. 6.5.4. Notice of Litigation, Defaults, etc. The Company shall promptly furnish to each Lender notice of any litigation or any administrative or arbitration proceeding (a) which creates a reasonable risk of resulting, after giving effect to any applicable insurance, in the payment by the Company of more than $100,000 or (b) which results, or creates a reasonable risk of resulting, in a Material Adverse Change. Promptly upon acquiring knowledge thereof, the Company shall notify each Lender of the existence of any Default or Material Adverse Change, specifying the nature thereof and what action the Company has taken, is taking or proposes to take with respect thereto. -10- 6.5.5. Other Information. From time to time at reasonable intervals upon written request of any Lender, the Company shall furnish to each Lender such other information regarding the business, assets, financial condition, income or prospects of the Company as such Lender may reasonably request, including copies of all tax returns, licenses, agreements, leases and instruments to which the Company is party. Each Lender and its authorized representatives shall have the right during normal business hours upon reasonable notice and at reasonable intervals (a) to examine the books and records of the Company for the purpose of ascertaining compliance with or obtaining enforcement of this Agreement or any other Credit Document and (b) to inspect the inventory of the Company and its Subsidiaries and perform any valuation thereupon. 6.6. Current Ratio. The Company's current ratio (current assets over current liabilities), calculated in accordance with GAAP, shall not be less than the following amounts at the following monthly intervals: Month Ending Ratio ------------ ----- February 28, 2003 2.29 March 31, 2003 2.29 April 30, 2003 2.30 May 31, 2003 2.31 June 30, 2003 2.36 July 31, 2003 2.38 August 31, 2003 2.38 September 30, 2003 2.38 October 31, 2003 2.34 November 30, 2003 2.49 December 31, 2003 2.60 January 31, 2004 2.74 February 29, 2004 2.83 6.7. Quick Ratio. The Company's quick ratio (current assets less inventory over current liabilities), calculated in accordance with GAAP, shall not be less than the following amounts at the following monthly intervals: Month Ending Ratio ------------ ----- February 28, 2003 0.94 March 31, 2003 0.94 April 30, 2003 1.18 May 31, 2003 1.18 June 30, 2003 1.18 July 31, 2003 0.95 August 31, 2003 0.95 September 30, 2003 0.95 October 31, 2003 0.96 -11- November 30, 2003 1.07 December 31, 2003 1.18 January 31, 2004 1.33 February 29, 2004 1.33 6.8. EBIT. The Company's EBIT, calculated in accordance with GAAP, shall not be less than the following amounts at the following intervals measured monthly on a trailing three-month basis: Period Ending Amount ------------- ------ February 28, 2003 ($115,376) March 31, 2003 ($450,000) April 30, 2003 ($289,697) May 31, 2003 ($ 47,569) June 30, 2003 ($200,000) July 31, 2003 ($73,937) August 31, 2003 $ 72,054 September 30, 2003 $ 200,000 October 31, 2003 ($33,085) November 30, 2003 $ 41,535 December 31, 2003 $ 400,000 January 31, 2004 $ 436,981 February 29, 2004 $ 317,403 6.9. Capital Expenditures. The aggregate amount of Capital Expenditures for any fiscal quarter of the Company ending on or after December 31, 2002 shall not exceed $100,000. 6.10. Indebtedness and Liens. Neither the Company nor any of its Subsidiaries will: (a) create, incur or otherwise become or remain liable with respect to, any indebtedness for borrowed money, evidenced by notes or other instruments or for the deferred purchase price of goods or services, other than (i) the Credit Obligations, (ii) the Company's presently existing indebtedness (including committed lease facilities) listed on Exhibit 6.10, (iii) purchase money indebtedness and capitalized leases incurred in the ordinary course of business not exceeding $20,000 in the aggregate at any one time outstanding, (iv) unsecured indebtedness incurred in the ordinary course of business not exceeding $5,000 in the aggregate and (v) trade accounts payable in the ordinary course of business. (b) create or incur or permit to exist any consensual lien, charge, mortgage, pledge or other security interest of any kind upon any of its property or assets of any character, whether now owned or hereafter acquired, other than (i) liens securing the Credit Obligations, (ii) purchase money liens and capitalized leases incurred in the ordinary course of business not exceeding $20,000, (iii) deposits or pledges made in -12- connection with, or to secure payment of, indemnity, performance or similar bonds in the ordinary course of business, and (iv) presently existing liens listed on Exhibit 6.10; provided, however, that the Company shall undertake to terminate all security interests listed on Exhibit 6.10 granted in favor of Citizens Bank in the Company's property as soon as reasonably practicable following the Initial Closing Date. 6.11. Distributions. Neither the Company nor any of its Subsidiaries shall pay any direct or indirect dividend or other distribution of any kind in respect of, or purchase or redeem, any of its shares of capital stock (other than distributions to the Company from any of its Subsidiaries). 6.12. Investments and Acquisitions. Neither the Company nor any of its Subsidiaries shall make any investments in capital stock, partnership interests or loans, or purchase or otherwise acquire any business or material assets unrelated to the business of selling wine at retail in the United States. 6.13. Merger; Sale of Assets; Share Issuance. Neither the Company nor any of its Subsidiaries shall become a party to any merger or consolidation, or in a single transaction or series of related transactions sell, lease or otherwise dispose of a material amount of its assets (except that wholly owned Subsidiaries of the Company may be merged or liquidated into the Company or one or more of its wholly owned Subsidiaries), or in the case of the Company's Subsidiaries, issue any capital stock or rights to acquire capital stock. 6.14. Sales and Leasebacks. The Company shall not, and shall not permit any of its Subsidiaries to, enter into any arrangement with any Person providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Company or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Company or such Subsidiary. 6.15. Transactions with Affiliates. The Company shall not, and shall not permit any of its Subsidiaries to, enter into any transaction (including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service) with any Affiliate unless such transaction is (a) otherwise permitted under this Agreement; (b) in the ordinary course of the Company's or such Subsidiary's business; and (c) upon fair and reasonable terms no less favorable to the Company or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate; provided, however, that the foregoing restriction shall not prohibit (i) transactions pursuant to this Agreement; (ii) any employment agreement entered into by the Company or any of its Subsidiaries in the ordinary course of business; (iii) any issuance of securities in connection with (x) the Warrant Agreement or (y) employment arrangements, stock options and stock ownership plans of the Company entered into in the ordinary course of business; and (iv) transactions between the Company and its Subsidiaries. -13- 6.16. Management Fees. The Company shall not, and shall not permit any of its Subsidiaries to, pay any management fee. 7. Representations and Warranties. In order to induce the Lenders to extend credit to the Company hereunder, the Company represents and warrants that: 7.1. Organization and Business. The Company is a duly organized and validly existing corporation, in good standing under the laws of The Commonwealth of Massachusetts, with all power and authority necessary (a) to enter into and perform this Agreement and each other Credit Document to which it is party, and (b) to own its properties and carry on the business now conducted or proposed to be conducted by it. The Company has taken all corporate action required to execute, deliver and perform this Agreement and each other Credit Document to which it is party. Copies of the restated articles of organization and the amended and restated by-laws of the Company have been previously delivered to the Lenders and are correct and complete. The Company has no Subsidiaries, except as set forth in Exhibit 7.1, which Subsidiaries are each duly organized, validly existing and in good standing under the laws of the jurisdiction of their respective incorporation. 7.2. Financial Statements and Other Information. The Company has previously furnished to the Lenders copies of the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statement of earnings, stockholders' equity and cash flows for the fiscal year of the Company then ended, accompanied by the preliminary review of the Company's accountants. The financial statements (including the notes thereto) referred to in the preceding sentence have been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Persons covered thereby at the dates thereof and the results of their operations for the periods covered thereby, subject to the case of interim statements only to normal year-end audit adjustments and the addition of footnotes. 7.3. Litigation. No litigation, at law or in equity, or any proceeding before any federal, state, provincial or municipal court, board or other governmental or administrative agency or any arbitrator is pending or to the knowledge of the Company threatened which may reasonably involve any material risk of any final judgment or liability not adequately covered by insurance or which is otherwise reasonably likely to result in any Material Adverse Change. Other than as disclosed in the financial statements, no judgment, decree, or order of any federal, state, provincial or municipal court, board or other governmental or administrative agency or arbitrator has been issued against the Company which has resulted, or creates a material risk of resulting, in any Material Adverse Change. 7.4. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowings hereunder, nor the consummation of any transaction referred to in or contemplated by this Agreement or any other Credit Document, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed or lease referred to in this Agreement or any other Credit Document, has constituted or resulted in or will constitute or result in: -14- (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which the Company is a party or by which it is bound, or of the charter or by-laws of the Company; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to the Company; (c) the creation under any agreement, instrument, deed or lease of any lien upon any of the assets of the Company; or (d) any redemption, retirement or other repurchase obligation of the Company under any charter, bylaw, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by the Company in connection with the execution, delivery and performance of this Agreement or any other Credit Document, the transactions contemplated hereby or thereby or the making of any borrowing by the Company hereunder. 7.5. Taxes. The Company has filed (or obtained extensions to file) required tax returns and paid taxes due except such taxes as are being contested in good faith and as to which adequate reserves have been set aside in conformity with GAAP. 8. Defaults. 8.1. Events of Default. The following events are herein referred to as "Events of Default": 8.1.1. Payment. The Company shall fail to make any payment in respect of: (a) interest or any fee on or in respect of any of the Credit Obligations owed by it as the same shall become due and payable, and such failure shall continue for a period of three (3) Banking Days, or (b) principal of any of the Credit Obligations owed by it as the same shall become due, whether at maturity or by acceleration or otherwise. 8.1.2. Covenant Compliance. The Company shall fail to perform or observe any of the other provisions of the Credit Documents required to be performed or complied with by it and such failure continues for a period of ten (10) calendar days after written notice thereof is given by any Lender to the Company. 8.1.3. Representations and Warranties. Any representation or warranty of or with respect to the Company in, pursuant to or in connection with this Agreement or any other Credit Document, or in any certificate, notice, financial statement or other report furnished to any Lender in connection therewith, shall be materially false on the date as of which it was made. -15- 8.1.4. Cross-Default. A default shall exist under any instrument or agreement of the Company under which indebtedness of $100,000 or more is outstanding and, by reason of such default, the holder or holders of such indebtedness would be permitted under the terms of such instrument or agreement to accelerate the maturity of such indebtedness. 8.1.5. Judgments. A final judgment (a) which, with other outstanding final judgments against the Company, exceeds an aggregate of $100,000 in excess of applicable insurance coverage shall be rendered against the Company, or (b) which grants injunctive relief that results, or creates a material risk of resulting, in a Material Adverse Change and in either case if (i) within sixty (60) calendar days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal or (ii) within sixty (60) calendar days after the expiration of any such stay, such judgment shall not have been discharged. 8.1.6. Material Adverse Change. A Material Adverse Change occurs or threatens to occur that jeopardizes the Company's ability to discharge its obligations to any Lender under this Agreement, the Notes or any other Credit Document. 8.1.7. Change in Control. There shall have occurred a Change of Control. 8.1.8. Bankruptcy. The Company shall: (a) commence a voluntary case under the Bankruptcy Code or authorize, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (b) have filed against it a petition commencing an involuntary case under the Bankruptcy Code which shall not have been dismissed within sixty (60) calendar days after the date on which such petition is filed; or file an answer or other pleading within such 60-day period admitting or failing to deny the material allegations of such a petition or seeking, consenting to or acquiescing in the relief therein provided; (c) have entered against it an order for relief in any involuntary case commenced under the Bankruptcy Code; (d) seek relief as a debtor under any applicable law, other than the Bankruptcy Code, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (e) have entered against it an order by a court of competent jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or -16- (iii) assuming custody of, or appointing a receiver or other custodian for, all or a substantial portion of its property; or (f) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint, or consent to the appointment of, or suffer to exist a receiver or other custodian for, all or a substantial portion of its property. 8.2. Certain Actions Following an Event of Default. If any one or more Events of Default shall occur and be continuing, then in each and every such case: 8.2.1. No Obligation to Extend Credit; Acceleration. Upon notice by a Majority of Lenders to the Company, the obligations of the Lenders to make any extension of credit hereunder shall automatically terminate and the Credit Obligations shall become immediately due and payable. 8.2.2. Exercise of Rights. Any of the Lenders may proceed to protect and enforce their rights by suit in equity, action at law and/or other appropriate proceeding, either for specific performance of any covenant or condition contained in this Agreement or any other Credit Document. 8.2.3. Bankruptcy Default. Upon the occurrence of an Event of Default under Section 8.1.8, the unpaid balance of the Credit Obligations shall automatically become immediately due and payable. 8.2.4. Setoff. Each Lender may offset and apply toward the payment of such balance or part thereof (and/or toward the curing of any Event of Default) any indebtedness from such Lender to the Company, regardless of the adequacy of any security for the Credit Obligations, and the Lenders shall have no duty to determine the adequacy of any such security in connection with any such offset. 8.2.5. Cumulative Remedies. To the extent not prohibited by applicable law that cannot be waived, all of the Lenders' rights hereunder and under each other Credit Document shall be cumulative. 8.3. Waivers. The Company hereby waives to the extent not prohibited by applicable law: (a) all presentments, demands for performance, notices of nonperformance (except to the extent required by the provisions of this Agreement or any other Credit Document), protests, notices of protest and notices of dishonor; (b) any requirement of diligence or promptness on the part of any Lender in the enforcement of its rights under this Agreement, the Notes or any other Credit Document; and -17- (c) any and all notices of every kind and description which may be required to be given by any statute or rule of law. 9. Expense Indemnity. 9.1. Expenses. The Company will pay: (a) all transfer and documentary stamp and similar taxes at any time payable in respect of this Agreement or the Loan and (b) all other reasonable expenses incurred by the Lenders in connection with the enforcement of any rights hereunder or under any other Credit Document upon the occurrence and during the continuance of a Default, including costs of collection and reasonable attorneys' fees and expenses. 9.2. General Indemnity. The Company shall indemnify each Lender and each such Lender's employees, agents, attorneys, accountants and consultants (each Lender and each of such employees, agents, attorneys, accountants and consultants is referred to as an "Indemnified Party") and hold each of them harmless from and against any and all claims, damages, liabilities and reasonable expenses (including reasonable fees and disbursements of counsel with whom any Indemnified Party may consult in connection therewith and all reasonable expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party in connection with (a) the Indemnified Party's compliance with or contest of any subpoena or other process issued against it in any proceeding involving the Company or any of its Subsidiaries or their affiliates, (b) any litigation or investigation involving the Company, any of its Subsidiaries or their affiliates, or any officer, director or employee thereof, (c) the existence or exercise of any security rights with respect to the collateral under the Credit Documents, or (d) this Agreement, any other Credit Document or any transaction contemplated hereby or thereby; provided, however, that the foregoing indemnity shall not apply to litigation commenced by the Company against a Lender that seeks enforcement of any of the rights of the Company hereunder or under any other Credit Document and is determined adversely to such Lender in a final nonappealable judgment or to the extent such claims, damages, liabilities and expenses result from the Indemnified Party's own gross negligence or willful misconduct. 10. Successors and Assigns. Any reference in this Agreement to any of the parties hereto shall be deemed to include the successors and assigns of such party, and all covenants and agreements by or on behalf of the Company or each Lender that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns; provided, however, that the Company may not assign its rights or obligations under this Agreement under any circumstances and each Lender may assign its rights or obligations under this Agreement only as follows: each Lender may from time to time grant participations in its pro rata share of the Loan and its Note, or assign all or part of its pro rata share of the Loan and its Note, upon such terms as such Lender may determine, to affiliates of such Lender, to any other Lender or, with the consent of the Company which shall not be unreasonably withheld, to banks or financial institutions. -18- 11. Notices. Except as otherwise specified in this Agreement, any notice required to be given pursuant to this Agreement shall be given in writing. Any notice, demand or other communication in connection with this Agreement shall be deemed to be given if given in writing (including telex, telecopy (confirmed by telephone or writing) or similar teletransmission) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor), and if either (a) actually delivered in fully legible form to such address (evidenced in the case of a telex by receipt of the correct answer back) or (b) in the case of a letter, five (5) calendar days shall have elapsed after the same shall have been deposited in the United States mails, with first-class postage prepaid and registered or certified. If to the Company, to it at the following address: GEERLINGS & WADE, INC. 960 Turnpike Street Canton, MA 02021 Attn: Chief Executive Officer T: 781-821-4152 F: 781-830-6941 If to the Lenders, to each Lender at its respective address: John M. Connors, Jr. 71 Sears Road Brookline, MA 02445 T: 617-232-9408 James C. Curvey Le Jardin, 250 Boylston Street Boston, MA 02116 John J. Remondi 300 Boylston Street, Suite 507 Boston, MA 02116 T: 617-542-8663 Gordon Romer 10 Hillcrest Road Tiburon, CA 94920 T: 415-435-9561 F: 415-435-9571 -19- Robert L. Webb 52 Pine Ridge Road Westford, MA 01886 T: 978-692-4595 12. Course of Dealing, Amendments and Waivers. No course of dealing between the Lenders and the Company or any affiliate of the Company shall operate as a waiver of any of the Lenders' rights under this Agreement or any other Credit Document or with respect to the Credit Obligations. No delay or omission on the part of any Lender in exercising any right under this Agreement or any other Credit Document or with respect to the Credit Obligations shall operate as a waiver of such right or any other right hereunder or thereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No waiver, consent or amendment with respect to this Agreement or any other Credit Document shall be binding unless it is in writing and signed by at least a Majority of the Lenders. 13. Venue; Service of Process; Certain Waivers. Each of the Company and each Lender: (a) Irrevocably submits to the nonexclusive jurisdiction of the state courts of The Commonwealth of Massachusetts and to the nonexclusive jurisdiction of the United States District Court for the District of Massachusetts for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or any other Credit Document or the subject matter hereof or thereof; (b) Waives to the extent not prohibited by applicable law that cannot be waived, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding brought in any of the above-named courts, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that such proceeding is brought in an inconvenient forum, that the venue of such proceeding is improper, or that this Agreement or any other Credit Document, or the subject matter hereof or thereof, may not be enforced in or by such court; (c) Consents to service of process in any such proceeding in any manner at the time permitted by Chapter 223A of the General Laws of The Commonwealth of Massachusetts and agrees that service of process by registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 11 is reasonably calculated to give actual notice; and (d) Waives to the extent not prohibited by applicable law that cannot be waived any right it may have to claim or recover in any such proceeding any special, exemplary, punitive or consequential damages. 14. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH OF THE COMPANY AND -20- EACH LENDER WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR IN ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS OR THE COMPANY IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. Any of the Lenders or the Company may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the Company and the Lenders to the waiver of their rights to trial by jury. 15. General. All covenants, agreements, representations and warranties made in this Agreement or any other Credit Document or in certificates delivered pursuant hereto or thereto shall be deemed to have been material and relied on by the Lenders, notwithstanding any investigation made by the Lenders, and shall survive the execution and delivery to the Lenders hereof and thereof. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforced to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit, alter or otherwise affect the meaning hereof. This Agreement and the other Credit Documents constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral. This Agreement may be executed in any number of counterparts which together shall constitute one instrument. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. [The Remainder Of This Page Is Intentionally Blank] -21- Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. THE COMPANY: GEERLINGS & WADE, INC. By /s/ Huib E. Geerlings ---------------------------------- Name: Huib E. Geerlings Title: Chief Executive Officer THE LENDERS: /s/ John M. Connors, Jr. ------------------------------------ John M. Connors, Jr. /s/ James C. Curvey ------------------------------------ James C. Curvey /s/ John J. Remondi ------------------------------------ John J. Remondi /s/ Gordon Romer ------------------------------------ Gordon Romer /s/ Robert L. Webb ------------------------------------ Robert L. Webb SCHEDULE 1-Commitment Amounts Tranche I Only Lenders Commitment Amount John M. Connors, Jr. $100,000 Gordon Romer $100,000 Tranche II Lenders Commitment Amount James C. Curvey $200,000 John J. Remondi $200,000 Robert L. Webb $200,000 SCHEDULE 2-Tranche I Percentages Lenders Tranche I Commitment Percentage John M. Connors, Jr. 20% James C. Curvey 20% John J. Remondi 20% Gordon Romer 20% Robert L. Webb 20% SCHEDULE 3-Tranche II Percentages Tranche II Lenders Tranche II Commitment Percentage James C. Curvey 33.33% John J. Remondi 33.33% Robert L. Webb 33.33% SCHEDULE 4-Fee Percentages Lenders Percentage John M. Connors, Jr. 12.5% James C. Curvey 25.0% John J. Remondi 25.0% Gordon Romer 12.5% Robert L. Webb 25.0% SCHEDULE 5-Warrants Lender Name Warrants Number John M. Connors, Jr. 5,263 W-1 James C. Curvey 10,526 W-2 John J. Remondi 10,526 W-3 Gordon Romer 5,263 W-4 Robert L. Webb 10,526 W-5
EX-10.47 8 dex1047.txt SECURITY AGREEMENT Exhibit 10.47 SECURITY AGREEMENT This Agreement, dated as of February 24, 2003, is between Geerlings & Wade, Inc., a Massachusetts corporation (the "Company"), and John M. Connors, Jr., James C. Curvey, John J. Remondi, Gordon Romer and Robert L. Webb (each a "Lender", and collectively the "Lenders"). The parties agree as follows: 1. Security. 1.1. Grant of Collateral. As security for the payment and performance of the Credit Obligations described in Section 1 of the Credit Agreement (the "Secured Obligations"), the Company hereby creates a security interest in favor of the Lenders and the holders from time to time of the Secured Obligations in all of the Company's right, title and interest in and to (but none of its obligations or liabilities with respect to) the items and types of present and future property described below in this Section 1.1, whether now owned or hereafter acquired: Accounts receivable, contract rights, documents, instruments, general intangibles, inventory, goods, equipment, patents, copyrights, trademarks, domain names, goodwill, investment property, stock or other evidences of ownership, chattel paper, instruments, leases, commercial tort claims, cash, cash equivalents, deposit accounts, books, records, insurance proceeds, dividends, all other property, assets and items of value and proceeds and products of the foregoing (all of the above being included in the term "Collateral"). 1.2. Perfection of Collateral. Upon the Lenders' reasonable request from time to time, the Company will, and hereby authorizes the Lenders on the Company's behalf to, execute and deliver, and file and record in the proper filing and recording places, all such instruments, including Uniform Commercial Code financing statements, control statements, collateral assignments of copyrights, trademarks, patents, cash agency agreements, documents providing for direct collection of accounts receivable, mortgages or deeds of trust and notations on certificates of title, and take all such other action, as the Lenders deem reasonably necessary for perfecting or otherwise confirming to them their security interest in the Collateral. 1.3. No Liens or Dispositions. All Collateral shall be free and clear of any liens and restrictions on the transfer thereof, including contractual provisions which prohibit the assignment of rights under contracts, except for nonconsensual liens imposed by law and liens and restrictions on transfer approved by the Lenders in writing. Except with the Lenders' consent, the Company will not sell, lease or otherwise dispose of any of the Collateral or modify or terminate any contracts or contractual rights included in the Collateral, except in each case in the ordinary course of business, consistent with past practice and on arm's length terms. 2. Right to Realize upon Collateral. Except to the extent prohibited by applicable law that cannot be waived, this Section shall govern the Lenders' rights to realize upon the Collateral. The provisions of this Section are in addition to any rights and remedies available at law or in equity. 2.1. Assembly of Collateral; Receiver. The Company shall, upon the Lenders' request, assemble the Collateral and otherwise make it available to the Lenders. The Lenders may have a receiver appointed for all or any portion of the Company's assets or business which constitutes the Collateral in order to manage, protect, preserve, sell and otherwise dispose of all or any portion of the Collateral. 2.2. Waiver. To the extent it may lawfully do so, the Company waives and relinquishes the benefit and advantage of, and covenants not to assert against the Lenders, any valuation, stay, appraisement, extension, redemption or similar laws now or hereafter existing which, but for this provision, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Agreement, or otherwise. 2.3. Foreclosure Sale. All or any part of the Collateral may be sold for cash or other value in any number of lots at public or private sale, without demand, advertisement or notice; provided, however, that unless the Collateral to be sold threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Lenders shall give the Company 10 days' prior written notice of the time and place of any public sale, or the time after which a private sale may be made, which notice each of the Company and the Lenders agree to be reasonable. At any sale or sales of Collateral, the Lenders or any of their assigns may bid for and purchase all or any part of the property and rights so sold and may use all or any portion of the Secured Obligations owed to the Lenders as payment for the property or rights so purchased, all without further accountability to the Company, except for the proceeds of such sale or sales pursuant to Section 2.4(c). 2.4. Application of Proceeds. The proceeds of all sales and collections in respect of any Collateral or other assets of the Company, all funds collected from the Company and any cash contained in the Collateral, the application of which is not otherwise specifically provided for herein, shall be applied as follows: (a) First, to the payment of the costs and expenses of such sales and collections, the reasonable expenses of the Lenders and the reasonable fees and expenses of the Lenders' counsel; (b) Second, any surplus then remaining to the payment of the Secured Obligations in such order and manner as the Lenders may in their reasonable discretion determine; and (c) Third, any surplus then remaining shall be paid to the Company, subject, however, to the rights of the holder of any then existing lien for which the Lenders have received a proper demand for proceeds prior to making such payment to the Company. -2- 3. Custody of Collateral. Except as provided by applicable law that cannot be waived, the Lenders will have no duty as to the custody and protection of the Collateral, the collection of any part thereof or of any income thereon or the preservation or exercise of any rights pertaining thereto, including rights against prior parties, except for the use of reasonable care in the custody and physical preservation of any Collateral in its possession. 4. Reimbursement of Expenses. The Company shall promptly pay on demand all reasonable expenses of the Lenders (including reasonable attorney fees and expenses) in connection with the preparation of this Agreement, operations hereunder and enforcement and collection hereof, whether before or after bankruptcy or similar proceedings (and whether or not allowed as a claim therein). 5. General. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Company may not assign its rights or obligations hereunder. Notices shall be furnished in writing to each party at its address appearing in Section 11 of the Credit Agreement or as it may otherwise direct in writing actually received by the other party. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforceable to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit, alter or otherwise affect the meaning hereof. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior and current understandings and agreements, whether written or oral. This Agreement and all actions in connection herewith shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the Commonwealth of Massachusetts, except as may be required by the Uniform Commercial Code of other jurisdictions with respect to matters involving the perfection of the Lender's lien on the Collateral located in such other jurisdictions. Terms defined in the Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -3- Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first written above. THE COMPANY: GEERLINGS & WADE, INC. By /s/ Huib E. Geerlings ----------------------------------- Name: Huib E. Geerlings Title: Chief Executive Officer THE LENDERS: /s/ John M. Connors, Jr. -------------------------------------- John M. Connors, Jr. /s/ James C. Curvey -------------------------------------- James C. Curvey /s/ John J. Remondi -------------------------------------- John J. Remondi /s/ Gordon Romer -------------------------------------- Gordon Romer /s/ Robert L. Webb -------------------------------------- Robert L. Webb -4- EX-10.48 9 dex1048.txt WARRANT AGREEMENT Exhibit 10.48 WARRANT AGREEMENT THIS AGREEMENT (the "Agreement") is made as of the 24th day of February, 2003, among Geerlings & Wade, Inc., a Massachusetts corporation (the "Company"), and the parties listed on Exhibit A hereto as warrantholders (each a "Warrantholder" and collectively, the "Warrantholders"). WHEREAS, the Company entered into a certain Credit Agreement dated February 24, 2003 with the Warrantholders pursuant to which the Warrantholders have committed to provide a revolving credit facility to the Company (as from time to time amended and in effect, the "Credit Agreement"). WHEREAS, in accordance with the Credit Agreement, the Company is obligated to issue to each lender participating in such credit facility warrants exercisable for the Company's common stock, $0.01 par value per share (the "Common Stock"), and the Warrantholders constitute all of such lenders. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1. ISSUANCE OF WARRANTS. Subject to the terms of this Agreement, in consideration of the Warrantholders becoming party to the Credit Agreement, the Company agrees to issue to each of the Warrantholders a warrant to purchase the number of shares of Common Stock set forth opposite such Warrantholder's name on Exhibit A hereto, each such Warrant to be in the form attached hereto as Exhibit B (each a "Warrant", and collectively, the "Warrants"). The shares of Common Stock issuable upon exercise of the Warrant are referred to herein as the "Warrant Shares". The issuance of the Warrants shall take place simultaneously with the closing being held this day under the Credit Agreement. The Company will comply with all applicable provisions of federal and state securities laws in connection with the issuance of the Warrant Shares. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each of the Warrantholders as follows: 2.1. Organization; Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. The Company has the corporate power and authority to execute and deliver this Agreement and the Warrants, and to perform its obligations hereunder and thereunder. 2.2. Authorization, etc. All corporate action on the part of the Company necessary for the authorization, execution, delivery and performance of this Agreement by the Company and the performance of the Company's obligations hereunder, including -1- the issuance and delivery of the Warrants and the reservation of the Warrant Shares issuable upon exercise of the Warrants has been taken. This Agreement and the Warrants, when executed and delivered by the Company, shall constitute legal, valid and binding obligations of the Company enforceable in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws and general principles of equity (regardless of whether considered in a proceeding at law or in equity). The Warrant Shares, when issued in compliance with the provisions of this Agreement and the Warrants, will be duly authorized, validly issued, fully paid and nonassessable and free of any liens or encumbrances; provided, however, that the Warrant Shares may be subject to restrictions on transfer under state and/or federal securities laws. 2.3. Capitalization. On the date hereof, the authorized capital stock of the Company consists solely of 10,000,000 shares of Common Stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock"), of which 3,879,450 shares of Common Stock and zero shares of Preferred Stock are issued and outstanding, and all such outstanding shares are duly authorized, validly issued, fully paid and nonassessable and have been or will have been offered, issued and sold in compliance with applicable federal and state securities laws. 2.4. Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Warrants will not (a) contravene, result in any breach of, or constitute a default under, the corporate charter or by-laws of the Company or any of its subsidiaries or any material agreement or instrument to which the Company or any of its subsidiaries is bound or by which the Company or any of its subsidiaries or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to the Company or any of its subsidiaries or (c) violate any provision of any statute or other rule or regulation of any governmental authority applicable to the Company or any of its subsidiaries. The Company will comply with all applicable provisions of federal and stated securities laws in connection with the issuance of the Warrants and the Warrant Shares. 3. REPRESENTATIONS AND WARRANTIES OF THE WARRANTHOLDERS. 3.1. Investment Intent. Each Warrantholder represents that it is acquiring its Warrant and Warrant Shares (collectively, the "Securities") for its own account and not with a view to the distribution thereof, provided that the disposition of such Warrantholder's property shall at all times be within such Warrantholder's control. Each Warrantholder understands that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may be transferred only in compliance with the Securities Act and all other applicable securities laws, or pursuant to exemptions therefrom. -2- 3.2. Information and Sophistication. Each Warrantholder acknowledges that it has received all the information it has requested from the Company and considers necessary or appropriate for deciding whether to acquire the Warrants. Each Warrantholder represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Warrants. Each Warrantholder further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of this investment. 3.3. Restricted Securities; Limitation on Disposition. Each Warrantholder understands that the Securities it is receiving are considered restricted securities under applicable federal and state securities laws and are thus subject to restrictions on transfer as further described in the Stockholders Agreement. Each Warrantholder understands that certificates evidencing the Securities may bear the following legend and/or any legend imposed or required pursuant to applicable state securities laws: "[THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OR CONVERSION OF THIS WARRANT]/[THESE SHARES] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF SUCH ACT AND LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND LAWS." 4. REPORTING REQUIREMENTS. The Company shall deliver to each holder of Warrants the following financial information, provided that any delivery requirement set forth in this section shall be deemed satisfied if such delivery is made to the holder of a Warrant in its capacity as a party to the Credit Agreement in accordance with the requirements of Section 6.4 of the Credit Agreement: 4.1. The annual financial reports specified in section 6.5.1 of the Credit Agreement as in effect on the date hereof; 4.2. The quarterly financial reports specified in section 6.5.2 of the Credit Agreement as in effect on the date hereof; 4.3. The monthly calculations specified in section 6.5.3 of the Credit Agreement as in effect on the date hereof; and 4.4. All other information specified in sections 6.5.4 and 6.5.5 of the Credit Agreement as in effect on the date hereof, as and when required to be delivered pursuant to such sections. The requirements of this Section 4 shall not be affected by any amendment, modification or termination of the Credit Agreement. -3- 5. RULE 144 REPORTING. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations adopted by the Securities and Exchange Commission (the "SEC") thereunder (or, if it is not required to file such reports, it will, upon the request of any Warrantholder, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will take such further action as any Warrantholder may reasonably request, all to the extent required from time to time to enable such Warrantholder to sell his Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Warrantholder, the Company will deliver to such holder a written statement as to whether it has complied with such information and filing requirements. 6. PIGGYBACK REGISTRATION. If the Company proposes to register any shares of Common Stock pursuant to an effective registration statement under the Securities Act for sale to the public, for its own account and/or for the account of any stockholder for sale in a public offering of common stock for cash (a "Public Offering") on a form that would permit registration of Warrant Shares, the Company will give notice to all Warrantholders of its intention to do so. Any such holder may, by written request delivered to the Company within 20 days after such notice, request that all or a specified part of the Warrant Shares (a) held by such holder or (b) issuable to such holder upon exercise of Warrants held by such holder be included in such registration. The Company thereupon will use its reasonable efforts to cause to be included in such registration under the Securities Act all Warrant Shares which the Company has been so requested to register by such holders, to the extent required to permit the disposition (in accordance with the methods to be used by the Company or other holders of shares of common stock in such Public Offering) of the Warrant Shares to be so registered. The Company will pay all expenses associated with such registration of Warrant Shares including, without limitation, all registration and filing fees, listing fees, all fees and expenses of complying with securities or blue sky laws, all printing expenses, fees and disbursements of counsel for the Company and its independent public accountants and fees and disbursements of one counsel for the Warrantholders, but excluding underwriting discounts, selling commissions, applicable transfer taxes, if any, and fees of more than one counsel for the Warrantholders. 7. GENERAL. 7.1. Binding Effect; Assignment. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted transferees and assigns, heirs, administrators and legal representatives. The Company may not assign its rights or obligations hereunder. No Warrantholder may assign any portion of its rights, obligations or liabilities under this Agreement, except to an affiliate or any other Warrantholder, without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. 7.2. Amendment; Waiver. No amendment, modification or waiver of any provision of this Agreement shall be effective unless in writing and approved by the -4- Company and the holders of at least a majority of the aggregate number of Warrant Shares (on an as-exercised basis). 7.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. 7.4. Credit Document; Counterparts. This Agreement is a Credit Document (as defined in the Credit Agreement) and may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and same instrument. [The remainder of this page is intentionally blank] -5- The parties have duly executed this Agreement as of the date first written above. THE COMPANY: ----------- GEERLINGS & WADE, INC. By /s/ Huib E. Geerlings ---------------------------------- Name: Huib E. Geerlings Title: Chief Executive Officer THE WARRANTHOLDERS: ------------------ /s/ John M. Connors, Jr. -------------------------------- John M. Connors, Jr. /s/ James C. Curvey -------------------------------- James C. Curvey /s/ John J. Remondi -------------------------------- John J. Remondi /s/ Gordon Romer -------------------------------- Gordon Romer /s/ Robert L. Webb -------------------------------- Robert L. Webb EX-21.1 10 dex211.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 Subsidiaries of the Registrant Jurisdiction of Name Incorporation - ---- ------------- CFN Logistics, Inc. Delaware Geerlings & Wade of Texas, Inc. Texas EX-23 11 dex23.htm CONSENT OF CERTIFIED PUBLIC ACCOUNTS CONSENT OF CERTIFIED PUBLIC ACCOUNTS

 

Exhibit 23

 

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

 

Geerlings & Wade, Inc.

Canton, Massachusetts

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-85557, No. 333-36741, No. 333-45311 and No. 333-65907) of Geerlings & Wade, Inc. of our report dated February 13, 2003, except Note 4, which is as of February 24, 2003, appearing in this Annual Report on Form 10-K for the year ended December 31, 2002.

 

/s/ BDO SEIDMAN, LLP

 

Boston, Massachusetts

March 26, 2003

EX-99.1 12 dex991.txt CERTIFICATION OF HUIB GEERLINGS Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief executive officer of Geerlings & Wade, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's annual report on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's annual report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Huib E. Geerlings ---------------------------- Huib E. Geerlings President and Chief Executive Officer Dated: March 26, 2003 EX-99.2 13 dex992.txt CERTIFICATION OF DAVID PEARCE Exhibit 99.2 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as chief financial officer of Geerlings & Wade, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's annual report on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's annual report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David R. Pearce ---------------------------- David R. Pearce Chief Financial Officer Dated: March 26, 2003
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