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                                   FORM 10-K
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
(Mark One)
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934 (FEE REQUIRED)
 
  For the fiscal year ended December 31, 1998
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
  For the transition period from      to
 
  Commission File Number 0-24048
 
                            GEERLINGS & WADE, INC.
            (Exact name of registrant as specified in its charter)
 
                                                     04-2935863
             Massachusetts              (IRS Employer Identification Number)
    (State or other jurisdiction of
    incorporation or organization)
 
                                                        02021
 
                                                     (Zip Code)
     960 Turnpike Street, Canton,
             Massachusetts
 
    (Address of Principal Executive
               Offices)
       Registrant's telephone number, including area code: 781-821-4152
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                     NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
 
 Geerlings & Wade, Inc.'s common stock trades on The NASDAQ Stock Market under
                               the symbol GEER.
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes  X   No
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
 
  The aggregate market value of Common Stock of the registrant held by non-
affiliates of the registrant was approximately $8,580,754 on March 26, 1999.
For purposes of the foregoing sentence, the term "affiliate" includes each
director and executive officer of the registrant.
 
  3,846,550 shares of Common Stock were outstanding at March 26, 1999
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the registrant's definitive Proxy Statement relating to the
registrant's 1998 Annual Meeting of Stockholders ("Proxy Statement") to be
filed pursuant to Regulation 14A are incorporated by reference in Part III of
this Report.
 
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                                    PART I
 
                          FORWARD-LOOKING STATEMENTS
 
  This Annual Report contains forward-looking statements as defined under the
Federal Securities Laws. Actual results could vary materially. Factors that
could cause actual results to vary materially are described herein and in
other documents. Readers should pay particular attention to the considerations
described in the section of this report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors that May
Affect Future Results." Readers should also carefully review the risk factors
described in the other documents the Company files from time to time with the
Securities and Exchange Commission.
 
Item 1: Business
 
General
 
  Geerlings & Wade, Inc. ("Geerlings & Wade" or the "Company"), incorporated
in Massachusetts in 1986, is a direct marketer of premium, imported and
domestic wines and wine-related merchandise to individual consumers. Through
frequent mailings to existing and potential customers and, starting in 1998,
through e-commerce Websites, the Company offers wines selected on the basis of
their quality and price characteristics. Sales levels largely depend on
response rates to and circulation (number) of "house mailings" which are
product offerings sent via the U.S. Postal Service to existing customers and
of "acquisition mailings" which are product offerings sent via the U.S. Postal
Service to potential, new customers. Customers place orders by mail, the
telephone, facsimile, e-mail and via the Internet. In 1998, the Company
established an e-commerce Website, www.geerwade.com, through which customers
may place orders for wine. In 1999, the Company expanded its selection on this
Website by offering rare, high price point, Bordeaux wines and wine
accessories and racking. On July 7, 1998, the Company purchased Passport Wine
Club which sells wine over the telephone, fax, e-mail and the Internet.
Passport offers continuity programs in which customers receive monthly
shipments of 2 or 4 bottles of wine per shipment and sell individual orders of
wine. The Company seeks to eliminate the "intimidation factor" in the
consumer's wine purchasing decision by focusing on a relatively small number
of wines and by providing information on their selection and enjoyment. The
Company believes that it is developing a "Geerlings & Wade" image based on
informative mailings and e-commerce Websites, reliable wine recommendations,
value pricing and ease of ordering and convenient delivery. Since the Company
is in a retail industry, the sales generated in the fourth quarter are
generally expected to be higher than in the other quarters.
 
  The Company seeks to comply with the myriad of applicable laws and
regulations, which govern the sale of wine on a federal, state and local
level. The Company is required by law to operate licensed facilities or
otherwise be permitted to sell wine by reciprocal rights granted by law to
individual consumers in each state in which it operates. Geerlings & Wade
opened its first licensed facility in Massachusetts in 1988. Since then, the
Company has opened additional licensed facilities in Connecticut (June 1991),
New York (September 1991), Illinois (November 1991), Florida (April 1993),
California (May 1993), New Jersey (July 1993), Washington (December 1994),
Virginia (January 1995), Ohio (April 1995), Minnesota (July 1995), Colorado
(August 1995), Arizona (September 1995), Michigan (July 1997), Boston
Massachusetts (July 1998) and Texas (February 1999). Pursuant to reciprocal
rights it holds in a number of states in which it is licensed, the Company
ships wine to consumers in a limited number of additional states, but sales in
such states have been relatively insignificant to date. In 1997, Nevada
changed its alcoholic beverage laws to permit shipment of wine from out-of-
state retailers, and the Company commenced selling to Nevada customers in
September 1997. In 1997, Louisiana also changed its liquor laws to permit
shipment of wine from out-of-state retailers, and the Company commenced
selling to Louisiana customers in June 1998. The Company's active customers
(customers who have made a purchase within the twelve preceding months) have
increased 16.4% from approximately 110,800 at December 31, 1997 to
approximately 129,000 at December 31, 1998.
 
 
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Company Strategy
 
  The Company, as one of the leading direct marketers of premium wines, seeks
to simplify the wine-buying process, educate the wine consumer and develop a
loyal and broad customer base. The Company also offers periodically through
catalogs wine accessories such as cork screws, books, wine racks and other
products related to the enjoyment of wine. The key elements of the Company's
strategy to achieve these objectives include:
 
  Source Quality Wines and Offer Value Pricing. Geerlings & Wade primarily
sources its imported wines directly from producers and negotiants (those
persons who serve as intermediaries or agents to producers in the purchasing
process) in the countries of each wine's origin. The Company primarily sources
domestic wines through wholesale channels with domestic negotiants, certain
wineries and wine producers. In the case of both foreign and domestic wines,
the Company at times purchases wine from traditional wholesalers. The Company
strives to develop new relationships with domestic wine suppliers to improve
the quality and selection of wines for its customers and has begun to add a
greater assortment of nationally branded wines to its product mix. When
choosing non-branded wine, the Company selects only those wines that perform
well in blind comparative tastings. The Company promotes value in its
selections by offering only those wines, which the Company believes,
demonstrate a combination of superior quality and price characteristics. These
sourcing and selection techniques combined with its ability to purchase in
large quantities and manage the consolidation and transportation of its
directly-sourced products, enable Geerlings & Wade to offer premium wines at
attractive prices. The Company strives to encourage repeat purchases by
customers by providing the highest quality wine it can source at each price
point. Geerlings & Wade customers rely on the Company to select and provide
high quality wines rather than relying on brand recognition, third party
endorsements or ratings of wine. Geerlings & Wade strives to maintain this
relationship of trust, which is critical to the success of the Company.
 
  Facilitate Purchasing Decisions and Educate Consumers. Geerlings & Wade
believes that many consumers who buy wine through traditional retail channels
experience difficulty in their purchasing decisions, due to their limited
personal knowledge of wine and the general lack of dependable advice at the
time of purchase. The Company seeks to eliminate this "intimidation factor"
and facilitate the wine-buying process by focusing each offering on a
relatively small number of wines that either performed well in blind
comparative tastings or, in the case of branded wines, are highly rated by
third party wine experts. The Company offers its customers the convenience of
ordering products through numerous channels which include telephone,
facsimile, mail, e-mail, and, since May of 1998, the Internet with delivery of
each order directly to their home or office as quickly as possible. Since the
Company ships from its 15 warehouses in 15 states as of March 1999, delivery
times are relatively short. Currently the Company does not make deliveries
from its Boston, Massachusetts store. In addition to providing convenience to
busy customers, the Company continually provides its customers with
information on various wine varietals (grape type), grape-growing regions and
vintages, as well as recommendations on the selection, storage and enjoyment
of wine. By educating its customers, the Company strives to give them greater
confidence in their wine purchasing decisions.
 
  Enhance Productivity of Mailings. Geerlings & Wade seeks to improve the
productivity of mailings to its existing customers by analyzing buying
histories and tailoring the frequency and content of the Company's mailings to
existing customers ("house mailings"). The Company mails promotional offers to
potential customers between five and seven times per year to acquire new
customers and build the list of repeat customers (the "house file"). Customers
that purchase within the prior twelve-month period are counted and referred to
as the Company's 12-month buyers. The Company employs techniques designed to
enhance response rates to promotional mail, lower costs and ultimately find
new customers that will continue to place frequent and high dollar value
orders for long periods. The Company plans to better integrate the marketing
activities of its direct mail efforts and its Internet offerings in order to
optimize the effectiveness of these two marketing channels.
 
  Apply Computer Systems to Enhance Operations. Geerlings & Wade has developed
and seeks to maintain customized computer systems to integrate all major
aspects of the Company's business to promote operational efficiencies and
provide better customer service. The Company's systems integrate order
processing; inventory planning, control and management; customer list and
circulation management and analysis; and accounting and
 
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management reporting. In the third quarter of 1999, the Company plans to
replace its existing software system with a software package designed to meet
Company's unique requirements. This software system will provide an order
entry interface for our telephone sales representatives, electronic order
entry over the Internet, inventory management, warehouse fulfillment support,
purchasing, accounting, marketing analysis and management reporting.
 
  Develop e-commerce. In 1998, the Company launched its e-commerce Website
www.geerwade.com and purchased Passport Wine Club that sells cases of wine and
continuity programs (in which customers receive monthly shipments of wine)
over the telephone and the Internet from its e-commerce Website
www.topwine.com. Sales from these Websites are encouraging and have been
increasing each month since the second quarter of 1998. Due to these
encouraging signs, the Company has decided to completely redesign
www.geerwade.com to allow for more interaction between the customers and the
Company, greater product assortment and more enriched content. Hill, Holliday,
Connors Cosmopulos, Inc. ("Hill, Holliday") has been retained to redesign
www.geerwade.com. Additionally, the Company has hired Hill, Holliday to design
another e-commerce Website that will offer between 1,000 and 2,000 national
brands of fine wine as well as wine accessories. This site will also feature a
wine locator that allows the customer to place orders for "hard to find"
wines, and the Company will use its best efforts to locate that wine and sell
it to the customer. Both Websites will permit customers to view past purchase
history, check on the status of their orders and communicate with Company
through e-mail. The Company will test various advertising media including
print advertisements and radio to promote the new Website, that will offer
national brands.
 
  Expand in Existing Markets. Geerlings & Wade believes that it has penetrated
its current markets to a limited extent and that opportunities exist to
increase sales in these markets among both current and new customers. The
Company seeks to increase sales among its current customers by a variety of
means, including enhancing its customers' appreciation of wine through
education, broadening the selection of wine and purchasing options offered and
attempting to make buying wine more convenient and less intimidating. The
Company seeks to acquire new customers within existing markets through
improvements in the content, quality and circulation management of its
mailings to potential customers ("acquisition mailings"), and through direct-
response print advertising and active encouragement of referrals from existing
customers. The Company also plans to cater its product offers to match
regional preferences of its customers. For example, the Company intends to
present more domestically-produced wines to customers residing in the western
U.S., who tend to buy a higher proportion of domestic wines than imported
wines.
 
  E-commerce and Continuity Acquisitions. The Company plans to develop
customer acquisition programs using www.geerwade.com, www.topwine.com and its
new Website, which will sell nationally branded wine. To date, the Company has
advertised www.geerwade.com only to its existing customers by including
promotions in its house mailings. The Company also directs website visitors of
www.geerwade.com to Passport if they want to investigate the Company's wine
club by directly linking to www.topwine.com. Later in 1999 after the Company
launches its newest Website that will offer between 1,000 to 2,000 national
brands, the Company will test various forms of advertising using print, radio,
and Internet media. There can be no assurance that this advertising will
generate significant sales for the Company. The Company also plans to develop
marketing relationships with other companies doing business on the Internet.
 
  Enter New Markets. Geerlings & Wade is licensed or otherwise authorized to
sell wine to individual customers in twenty-seven states comprising
approximately 81% of the overall U.S. market for table wine as of March 1999.
Certain states are designated as "control" states in which the state
government owns and operates the liquor stores within its state borders. These
control states generally prohibit the sale of wine by private entities.
However, there are additional states in which the Company can sell wine by
obtaining applicable retail liquor licenses. The Company is currently
evaluating opportunities to obtain licenses in additional states in order to
serve a larger customer base, although no assurance can be given that it will
be successful in obtaining any additional licenses. The Company obtained a
retail license in Texas to sell wine in February 1999 and commenced selling
wine to Texas residents in March 1999. Additionally, New Hampshire and Rhode
Island amended their laws to allow shipment of wine from licensed retailers
located in other states. Alaska has clarified
 
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its laws by permitting the intrastate shipment of wines that are ordered over
the Internet, but orders made by mail or telephone from out-of-state retailers
are prohibited. The Company commenced selling and shipping wine to residents
in Alaska (via the Internet only), Rhode Island and New Hampshire residents in
March 1999. The entry into Texas is expected to contribute to the Company's
sales growth since Texas is about the fifth largest state in terms of wine
consumption. Those states representing markets with both high consumption of
table wine and a large number of mail-order prospects will be considered based
on the Company's ability to overcome licensing and other regulatory obstacles
to serve customers in such states.
 
Company Literature and Mailings
 
  The Company sells wine to individual consumers who are 21 years of age or
older primarily through targeted mailings. In addition to describing the
distinguishing characteristics of the featured wines, each mailing contains
general information intended to broaden the customer's knowledge of wines,
wine producers and wine-producing regions, along with the Company's "tasting
notes" and ratings. The Company's tasting notes and 100-point-scale ratings
included with the mailing provide the consumer with detailed information on
the subjective and objective qualities of each wine. The tasting notes
describe each wine's most salient qualities, including color, bouquet and
taste characteristics. The Company also recommends foods and recipes to pair
with the featured wines and compares the featured wines with nationally
branded wines. Geerlings & Wade distributes primarily two types of promotional
wine mailings: "house mailings" to its file of active customers and qualified
leads and "acquisition mailings" to prospective customers obtained from rented
mailing lists.
 
  House Mailings. Geerlings & Wade distributes house mailings to customers
(those persons who have made a purchase) and qualified leads (those persons
who have indicated an interest in being placed on the Company's mailing list
but who have not yet purchased Geerlings and Wade products). The marketing
department determines the number and timing of house mailings to be sent to
any individual based on various factors, including the wines offered, the wine
prices, wine ratings, the season and frequency and amount of customer
purchases. The Company uses the computer system to select and analyze which
customers to target and strives to optimize sales, average order value and
response rates to mailings in relation to marketing expenses. The Company
further tailors the frequency and content of each house mailing and the wines
featured to the particular market served. In addition to information on the
featured wines, each mailing includes a personalized letter, an order form and
a business reply envelope. In 1998, the Company sent approximately 2,989,000
house mailings, an increase of about 3.6% over the number of pieces mailed in
1997.
 
  The Company generally uses three types of house mailings:
 
    "Brochure Mailings" include a four-page brochure, which highlights one or
  two selected wines from a specific wine making region. These brochures
  contain detailed descriptions of the wines being offered and information on
  the region from which they were produced, the vintage and the background of
  the producer and the quantitative and qualitative results of the tastings
  from which the featured wines were selected. In addition to the featured
  wines, these brochures typically offer eight to nine additional wine
  selections, along with tasting notes and ratings for these wines. The
  Company mailed nineteen and eighteen separate brochure mailings to its
  customers in 1997 and 1998, respectively. Not all customers receive each
  brochure mailing.
 
    "Odds and Ends Mailings" offer a large selection of previously featured
  wines and some new wines available in limited quantities. These mailings
  expressly encourage customers to take advantage of what may be their last
  opportunity to purchase certain wines that they may have previously
  purchased and enjoyed. In addition, the prices of some wines are reduced.
  The Company normally mails one "Odds and Ends" mailing per quarter.
 
    Preferred Customer and Membership Mailings. Geerlings & Wade also creates
  and mails special offers to customers based on their purchasing behavior.
  For example, last holiday season, the Company mailed a special Chardonnay
  offer to customers who purchased Chardonnay from Geerlings & Wade in the
  past or whom it had reason to believe would likely purchase Chardonnay.
  These preferred offers, which typically are in the form of letters from the
  Company president, generate high responses from customers and enhance the
  personal touch of the Company's wine-selling service. The Company normally
  mails five
 
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  to seven preferred customer mailings each year. At least once a year, the
  Company mails a special mailing to its members in which it offers special
  wines at membership prices.
 
  Acquisition Mailings. The Company's primary method of acquiring new
customers is its acquisition-mailing program. A typical acquisition mailing
explains the Company's selling concept, describes the particular wine being
offered and contains an order form to purchase the wine. Potential customer
names are obtained by renting lists, which are screened with a demographic
profile consistent with the Company's existing customers and rented more than
once based on historical performance. The Company generally presents
prospective customers with an offer to buy six bottles of wine for their first
purchase. After the customer purchases from the Company, they are encouraged
to buy a minimum of 6 bottles per order, and the repeat buyers purchase 1.2
cases per order on average.
 
  Production. Most of Geerlings & Wade promotional mailings are created and
designed in-house on a desktop publishing system. The in-house creation and
design of house and acquisition mailings allows flexibility for editorial
changes and results in significant cost and timesavings. Printing, production
and fulfillment (collating, folding, inserting and mailing) are performed
commercially off-site. The Company seeks to reduce creative, printing and
mailing costs to maximize the availability of funding for the purpose of
acquiring new customers. Mailings generally include a personalized letter, the
offering brochure, an order form and a return envelope.
 
  Catalog. During 1998, Geerlings & Wade mailed a 16-page wine catalog and a
24-page wine accessories catalog during the holiday season. The wine catalog
featured wines from around the world and offered wine gift samplers to
facilitate customer's gift buying needs. Additionally, some wine accessories
were offered throughout this catalog. The Company mailed the catalogs to both
prospective and existing customers. The wine accessories catalog, which was
mailed after Thanksgiving, offered only wine accessories and, therefore, was
also mailed to customers living states in which the Company is not licensed to
deliver wine. The Company plans to further research the development of its
catalog market and test different product offerings and mailing schedules in
1999. The Company believes there is an opportunity to enhance sales to
existing customers and expand its customer base through catalog mailings, but
there is no assurance that this marketing vehicle will provide sales growth
for the Company. In February 1999, the Company began offering wine accessories
on its e-commerce Website.
 
  Passport Wine Club Mailings. The Company began selling continuity programs
in the fall of 1997 and sent out promotional mailings to generate these sales.
Continuity programs entail delivering monthly shipments of 2, 4, or 6 bottles
of wine for 3, 6 or 12 months or for an open-ended period until the customer
cancels. In July of 1998, the Company acquired Passport Wine Club that sells
much of its wine as part of its various continuity programs. Passport closely
ties its marketing concept to written discussions of trips to the wine growing
regions and wineries from which it offers wine. Passport sales representatives
also sell individual purchases to its customers as well. Due to low response
rates to mailings promoting continuity programs, the Company has decided to
promote Passport programs through Passport's Website www.topwine.com and
through www.geerwade.com by linking to www.topwine.com Website.
 
Merchandising
 
  Geerlings & Wade offers its customers premium imported and domestic wines.
Imported wines are sourced primarily from France, Italy, Australia and Chile.
The Company's domestic wines are sourced primarily from California, many of
which are sold under private labels, including the Company's own brands: Glass
Ridge, J. Krant Cellars, Hamilton Estates, Alazar Winery, Amsbury Winery,
Bryan Woods Winery, Devina Estates, Foxtail Vineyards & Winery, Domaine Paul,
Jack Canyon Cellars, Lapis Lazuli Winery & Vineyards, Marc Cellars, Mariel
Winery, Mira Luna, Mischler Estates, Penstemon, Rock Rabbit, Avalon, Rose
Valley, San Valencia Winery and St. Carolyne Winery. The Company intends to
promote its best-selling brands and build a long-term merchandising program
that builds brand equity for these brands. By reinforcing brand recognition
vintage after vintage by selling quality wines, the Company intends to
encourage a strong demand for these brands among its customers and generate
strong sales growth for these brands.
 
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  The wines offered by the Company are selected based on consumption patterns
and the Company's prior experience with wines from particular wine-producing
regions and varietals. In 1998, approximately 68% of the cases sold by the
Company were imported wines and 32% were domestic. The Company's wines are
generally sold within the price range of $69 to $1,000 per 12-bottle case,
with average case prices of approximately $99.60 in 1998.
 
Wine Sourcing and Purchasing
 
  The Company sources imported and domestic wines through a network of
producers, negotiants, importers and wholesalers. In 1998, the Company sourced
directly from producers or negotiants a substantial majority of the cases it
sold.
 
  The Company's sourcing methods differ from typical sourcing methods of wine
retailers. The Company's sourcing techniques are more typical of a
wholesaler/importer, in that it actively searches for and identifies wines
from producers or negotiants. Through its active role in the sourcing
decision, the Company makes its own determination as to the quality and price
characteristics of the wine it sells, and thereby is assured of its ability to
offer its customers wines of quality and value. Following selection and
sourcing, the Company purchases both domestic and imported wines from licensed
wholesalers located in each state where the Company maintains licensed
facilities.
 
  The Company generally selects wines several months in advance of offering
them for sale to coordinate availability, shipping and promotional mailing
schedules. Management develops an annual merchandising plan for each wine to
be featured in its house mailings ("feature" or "wine feature(s)"). This plan
specifies wine varietals, producing region of origin and price point for each
of these features. Then, the Merchandising Department develops and purchases a
complementary product mix of 7 to 9 wines that will be offered with each
feature. These complementary wines are referred to as "I.D. wines" by the
Company. The Company selects most of these feature and I.D. wines based on
blind comparative tastings of samples judged on overall quality and price
characteristics. The Company often tastes over fifty wines prior to selecting
a wine feature and currently rates each wine on a 100-point scale. In order to
foster movement of inventory, the majority of wine is specifically purchased
to meet the Company's promotional mailing schedule. Purchase quantities are
based on sales forecasts for the particular promotions in which the wine will
be offered.
 
  Sourcing Imported Wines. In 1998, the vast majority of imported wines sold
by the Company were sourced directly from the countries of origin. The Company
uses consultants for sourcing certain imported wines. Many European wines are
purchased using the services of Mr. Peter van Hoof, a consultant to the
Company, who visits European growers and negotiants and administers blind
comparative tastings from his office in Rotterdam, The Netherlands. At the
Company's headquarters, samples, including wine submitted by Mr. Van Hoof, are
tasted, compared and selected on a blind comparison basis by the Company's
Wine Director, Mr. Francis Sanders. Mr. Sanders also compares the samples
against widely available, brand name wines.
 
  Sourcing Domestic Wines. In 1998, a substantial majority of the Company's
domestic wines were sourced through wholesale channels with domestic
negotiants and certain wineries and wine producers, and the remaining wines,
national brands, were purchased from licensed wholesalers. The Company sources
many wines through its domestic negotiant, Codera Wine Group, Inc. ("Codera")
of Grayton, California. Codera sources wines in the United States from many
high-quality producers and makes and sells its own national wine brands.
Codera continuously reviews wines at various stages of production and forwards
selected samples to the Company. After the Company has selected a particular
wine from among the samples forwarded by Codera, Codera coordinates finish
vinification and bottling of the wine under a number of private labels,
including the Company's own brands. In addition, Codera has occasionally
identified branded products for purchase by the Company.
 
  The Company also sources wines directly from various California wineries. As
a high-volume purchaser, the Company is directly approached by wineries and
wine producers with offers to purchase wine lots of various sizes. These wines
are reviewed based on their quality and price characteristics.
 
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  Wines Sourced by Others. Geerlings & Wade also purchases wines which have
been sourced independently for the Company by negotiants, importers and
wholesalers. Due to the Company's ability to purchase in large quantities, it
is frequently approached by importers and wholesalers. Wines forwarded to the
Company are reviewed according to the same quality and price standards as
other wines sourced by the Company. The Company believes that by maintaining
these relationships with quality wine suppliers, it can enhance its
opportunity of uncovering wines of high quality at attractive prices.
 
Information Systems and Technology
 
  The Company seeks to maintain computer-based systems to integrate all major
aspects of the Company's business, including order processing, warehouse
fulfillment, inventory planning and management, merchandising, customer list
and circulation management and analysis, and financial and management
reporting. The Company's present system was developed in-house and is based on
client-server software purchased by the Company. The Company's current
customized order processing system provides integrated order entry with each
of the Company's licensed facilities for telephone orders to be captured on-
line and mail orders to be efficiently processed. It provides customer service
representatives with access to an array of product and customer information
during order processing, tracking of customer order history and real-time
inventory management. It also provides the capability to target the Company's
marketing programs to specific segments of its customer base and extensive
reporting capabilities that allow the Company to evaluate the effectiveness of
its mailings and assist the Company in its business planning. In 1998, the
Company upgraded much of its computer hardware to improve processing time and
reliability.
 
  The Company has recently selected an integrated, direct marketing software
package named Catman from Avexxis Corporation of Avon, Connecticut. Geerlings
& Wade plans to convert from its current software system to the Catman system
early in the third quarter of 1999. This package will replace the Company's
present internally designed software system and provide all of the
functionality that the current system provides as well as enhance the
Company's capability to generate reports and manage its resources and data.
Additionally, Avexxis Corporation has represented that the Catman software and
the Universe database are year 2000 ready ("Y2K Ready"). This means that the
software will not fail to function partially or totally as a result of using
dates beyond December 31, 1999. Catman will provide telephonic and direct mail
order-entry via data entry or order entry from electronic submissions over
Internet, warehouse fulfillment management including inventory control and
management, merchandising forecasting and purchasing, accounts payable,
account receivable and general ledger modules for accounting and marketing
analysis and circulation management. This integrated, enterprise-wide software
package relies on the Universe database sold by Ardent Software of
Westborough, Massachusetts. Ardent Software represents that Universe database
is Y2K Ready.
 
  The Catman order processing system will integrate order entry with each of
the Company's licensed facilities and provide the on-line, real-time
information processing capabilities necessary for prompt fulfillment and
delivery to customers and resolution of customer service issues. The Catman
software will allow telephone orders to be captured on-line and mail orders to
be efficiently processed through data entry. Internet orders will be
electronically submitted to the Catman system from the Company's interactive
e-commerce Websites that are under development. The names and addresses of
individuals who have responded to mailings by ordering or by requesting
inclusion in the Company's mailing list will be entered in the Company's
database and assigned an "import number" which appears on all customer
correspondence and will be used to track account activity against each
marketing promotion that is sent to a customer. The Catman system will provide
the Company's customer service representatives access to an array of product
and customer information during order processing. The Company believes the
customer information to be provided by the system, including tasting notes,
purchasing and billing histories, delivery instructions and prospective
shipping dates, will enhance the quality of service to its customers.
 
  The Catman system will provide real-time inventory management. The Company
will maintain access to running totals of case sales by market, warehouse
inventory, products in transit to each warehouse and customer delivery logs,
all designed to arrange for prompt and convenient delivery to customers.
Regulatory requirements
 
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<PAGE>
 
will be incorporated into the Catman software to allow the Company to manage
centrally inventory for each of its licensed facilities.
 
  The Company continually updates its current database of customer names and
purchasing histories to maximize the productivity of house and acquisition
mailings. The Catman system will provide the Company with a flexible system
that offers highly sophisticated data manipulation which will enable the
Company to target its marketing programs to specific segments of its customer
base. The system also will provide extensive reporting capabilities that will
allow the Company to evaluate the effectiveness of its mailings and assist the
Company in its business planning.
 
  The Company's computerized telephone system allows the Company to monitor
the volume of incoming calls, monitor customer service representatives and
record other useful information. The system is expandable, permitting the
Company to add lines as necessary to increase its customer service
capabilities. The warehouse personnel in the Company's 15 facilities located
throughout the country and sales representatives serving Passport Wine
customers from our California facility, communicate via the Internet on a
virtual private network with our computer software and hardware system in
Canton, Massachusetts. The Catman software will employ the same communication
links with the Company's facilities located outside of Massachusetts. To
support the Catman software implementation, the Company has purchased a new
server, which will run the Catman, and Universe database.
 
  The Company has also retained Hill, Holliday to design, program and
implement a new Websites from which customers can purchase Geerlings & Wade
products (the " e-commerce solution"). One of these new Websites will replace
the Company's current Website, located at www.geerwade.com, the other will
provide nationally branded wines as previously discussed. These Websites will
allow for interactive queries and orders between our customers and the Catman
software and Universe database. For instance, customers will be able to query,
indirectly, the Universe database to determine which inventory is available
for sale, their order fulfillment status and their order shipping status.
Orders, including regulatory compliance verification data, will be
electronically entered via the Catman system and e-mails will be sent back to
customers notifying them of order receipt and status. Inventory updates will
be performed automatically based on order status in the Catman system. The
Company expects this e-commerce solution to generate strong customer
satisfaction and allow the Company to keep its Websites current with minimal
cost to the Company. This will allow the Company to focus on the Website
content and on marketing initiatives to increase e-commerce sales.
 
  The entire capital investment for the Catman software, associated
integration costs, new computer hardware and the e-commerce solution will be
approximately $800,000 to $1,000,000.
 
Marketing
 
  The goal of the Company's marketing program is to increase the size of the
Company's customer base through acquisition, retention, repurchase, and upsell
programs delivered through targeted, high-value marketing communications that
offer quality wines at competitive prices. Marketing communications are
delivered primarily through the mail, with increasing use of both
telemarketing and Internet channels.
 
  The Company's ongoing marketing programs are also designed to generate
information concerning existing and new customers. This information is
incorporated into the Company's database and is used to target and acquire new
customers, increase the average order value of customer purchases and enhance
the Company's customer service capabilities. Increasingly, this data, along
with customer purchase behavior and buying preferences, will be leveraged to
define differentiated customer contact strategies.
 
  The Company monitors its progress in attaining its goals by tracking new and
existing customer purchase behaviors, customer retention statistics, and
individual marketing campaign performance. A primary focus is placed on
repurchase behaviors of first- and second-time buyers, high-value customers,
and multi-order customers who have not purchased in the last 12 months.
 
                                       8
<PAGE>
 
  New Marketing Programs. In addition to its present direct-mail formats, in
1998 the Company continued testing alternative channels of direct marketing to
enhance sales and increase its customer base. These alternatives included
promoting a "wine-of-the-month" continuity program in which customers or their
gift recipients receive two (or four) bottles of wines each month. After
purchasing Passport Wine Club in July 1998, the Company merged its continuity
business with Passport's continuity programs. The Company will promote
continuity programs primarily over the Internet in the near future.
Additionally, the Company continued several "affinity" marketing programs with
corporate partners such as America West, Brookstone, American Express, Brooks
Brothers and Skymall. Each of these programs are unique but generally are
designed to market Geerlings & Wade wines to the customer base of each
corporate partner. Some programs are presented either as wine clubs sponsored
by the corporate partner or as Geerlings & Wade offers endorsed by the
corporate partner. The Company experienced various degrees of success with
these programs and intends to further test this marketing channel. Overall,
Company marketing efforts will increasingly seek to enhance the return on
program and campaign investments aimed at existing Geerlings & Wade customers.
 
  Electronic Commerce. In 1998, Geerlings & Wade launched a new Website
www.geerwade.com through which customers can learn about the Company, its
products and, most importantly, order wine and wine accessories
electronically. Additionally, the Company purchased Passport Wine Club on July
7, 1998. Passport Wine Club sells monthly subscriptions of wine from its
Website www.topwine.com. Customers can access the www.topwine.com directly or
through www.geerwade.com. While e-commerce is still in a development stage,
the Company believes that the potential may exist for selected customers to
migrate their purchasing of products to this on-line channel over time. In
1998, the level of sales placed over the Company's Website was encouraging.
The Company intends to continue testing this interactive channel by expanding
its wine and wine accessories available through its Website. In addition, the
Company has announced a major redesign of its current Website,
www.geerwade.com and a new Website offering nationally branded wine. These
Websites are targeted for completion in the third quarter of 1999.
 
  Membership. To increase customer loyalty, Geerlings & Wade offers customers
the opportunity to purchase one- or three-year memberships. The Company offers
memberships in all states in which it operates and where such offers are
legally permissible. Members receive a personalized membership card, are
uniquely maintained on mailing lists, and, realize savings on each case of
wine purchased during the term of the membership. (In order to comply with
regulatory restrictions in Massachusetts, the Company offers its members free
delivery on their 12-bottle case purchases). On occasion, the membership
program has generated regulatory scrutiny, and there is no assurance that the
Company will be able to continue its membership programs in their current
forms in existing jurisdictions or those jurisdictions in which the Company
may become licensed in the future. As of December 31, 1998, the Company had
approximately 40,700 members, and of the 12-month customers, approximately 25%
were members.
 
Customer Service
 
  Customers send the Company orders by e-mail, mail, telephone (1-800-782-
WINE) and fax (1-800-FAX-8466) and over the Internet (www.geerwade.com and
www.topwine.com). The Company accepts orders and makes sales in accordance
with applicable law. Sales are consummated in the appropriate Company licensed
facility. The Company's customer service representatives assist customers in
purchasing decisions, process product orders and respond to customer inquiries
on wine information, pricing and availability. As described above, the new
Catman software is designed to provide, at a minimum, the same functionality
for Company sales and customer service representatives as the current system.
The customer service group responds to approximately 1,000 telephone calls
each day on average. Through the Company's on-line systems, customer service
representatives can quickly access a customer's complete transaction history,
including all prior purchases, payment and delivery information. When
processing orders, customer service representatives have complete listings of
all available products, as well as tasting notes and ratings. When the offices
of the Company are closed, customers may leave orders on a voice messaging
system. The Company accepts the return of unopened bottles from dissatisfied
customers and credits a customer for all returns. Returns and credits were
approximately two percent of net sales for each of the last three fiscal
years.
 
                                       9
<PAGE>
 
Competition
 
  The retail wine business is highly competitive. The Company competes with
supermarkets, wine specialty stores, retail liquor stores, wine merchants
which advertise delivery of products in specialty publications and an
increasingly larger number of companies specializing in direct marketing of
wine at retail, including companies which are presently marketing on the
Internet. Many of these competitors have significantly greater resources than
the Company and sell mostly branded products many of which are not offered by
the Company.
 
  The Company believes that by providing quality wines at competitive prices
coupled with a high level of service, the ability to source wines directly
from producers and the convenience of direct delivery, it can achieve a
competitive advantage over supermarkets, retail liquor stores, wine specialty
stores and other wine merchants. The Company believes that it has achieved a
competitive advantage over current direct delivery or direct marketing
competitors and potential new entrants by successfully obtaining retail
licenses in each of its markets, being an early entrant in many of its
markets, exploiting computer technology in the management of its operations
and its direct marketing programs and creating a loyal customer base of repeat
customers. In addition, the Company believes that it distinguishes itself from
its direct mail or Internet competitors by seeking to operate its highly
regulated business in adherence to applicable law and regulation. However,
there can be no assurance that the Company will be able to continue to compete
effectively against existing competitors or new competitors that may enter the
market in the future.
 
Company Operations Within Regulatory Framework
 
  Regulatory Framework. The alcoholic beverage industry is highly regulated
and subject to change. Extensive and complex regulation at the federal and
state levels has resulted in what is known as the "three-tier licensing
system." At the first tier are wine makers, manufacturers, and importers who
are licensed to sell wine to the second tier, licensed wholesalers.
Wholesalers in turn supply the third tier, licensed retailers, who ultimately
sell wine to the public for personal use and not for resale. Each tier is
subject to various restrictions on its activities. Geerlings and Wade operates
in the third tier. In virtually all states, retailers are granted a license
that enables them to sell products solely to consumers within that state. A
small number of states allow interstate sales to those states having
reciprocal licensing arrangements (for example, a retailer may ship from
California to Oregon, Idaho and New Mexico). Additionally, some states such as
Nevada, Louisiana, Rhode Island and New Hampshire have amended their beverage
alcohol laws so that licensed retailers can ship into their state as long as
certain procedures are followed by the shipper. In addition, regulatory
restrictions prohibit a retailer with licensed facilities in multiple states
from transferring inventories between its facilities. In order to acquire and
maintain a retail license to sell within a particular state, a retailer must
have a physical presence (for example, own or lease a warehouse or other
licensed facility) in that state. A retailer engaged in direct marketing is
further limited in its ability to sell alcoholic beverages by restrictions
imposed by various state laws on the method of delivery to consumers. For
example, United Parcel Service (UPS) is not licensed to provide intrastate
delivery of alcoholic beverages sold by the Company in Massachusetts, New
Jersey or Colorado. In addition, some states, including Alabama, South
Carolina, Tennessee and Georgia prohibit the retail delivery of alcoholic
beverages altogether. For this reason, the Company delivers its own products
in New Jersey and most of its orders in Massachusetts and contracts with local
couriers in Arizona, Colorado, Minnesota and New Hampshire to deliver orders
to the Company's customers. In Massachusetts, the Company also contracts with
local couriers to deliver some orders to its customers.
 
  Company Licensing and Regulatory Matters. The Company holds retail licenses
in the fifteen states where it maintains sixteen licensed facilities, which
are typically renewed on a yearly basis. The Company is also permitted, from
its California or Illinois facilities, to sell and ship to consumers in
Oregon, Idaho, New Mexico, Missouri and West Virginia under these states'
"reciprocal shipment" laws. In addition, without obtaining additional
facilities, the Company is permitted to sell and/or ship to consumers in
Alaska, Iowa, Louisiana, Nebraska, Nevada, New Hampshire and Rhode Island.
Sales to consumers in Missouri and West Virginia to date have been relatively
insignificant because of regulatory restrictions asserted against direct
marketing and consumer advertising in those states.
 
                                      10
<PAGE>
 
  Most of the states where the Company is licensed have legal barriers against
the Company also engaging in licensed wholesaler activities in that or any
other state. As such, the Company holds only retail licenses. All domestic and
imported inventories are sold and delivered by independent licensed
wholesalers directly to each of the Company's licensed facilities. Because of
the relatively unique nature of the Company's mail order and Internet
operations within this regulatory framework, the Company occasionally receives
inquiries from state regulators regarding its business practices. To date,
such inquiries made during or prior to 1998 have not resulted in any actions
by any such regulators that would have a material effect on the Company's
business. The Company believes that it is in compliance in all material
respects with all applicable licensing and other governmental regulations and
that any failure in the past to comply with such regulations has not had, and
is not expected to have, a material adverse impact on the Company's business.
 
  Customer Order Processing and Delivery. All customer orders are processed
centrally and forwarded to an appropriate licensed facility for acceptance and
fulfillment. The Company has developed extensive proprietary software to
manage the process of ordering, order fulfillment and accounting for its
inventory and plans to not only maintain this capability with new Catman
software system, but improve this area of data management. Through computer
software and systems, the Company has real-time access to running totals of
case sales by state, warehouse inventory, in-transit wine purchases and
customer deliveries, all designed to arrange for prompt delivery of wine to
customers. The Company's software also ensures that customer orders are
processed for acceptance by the proper licensed facility.
 
  The Company's facilities maintain regular hours and sales are made to
customers who visit the licensed facility. However, most of the Company's
sales are made through home or office delivery. The Company ships wine
directly to a customer from its licensed facility located in the state in
which the customer resides (except with respect to those states to which the
Company is authorized to ship from out-of-state licensed facilities such as
from California to its Nevada customers). An adult's signature is required for
deliveries of wine in all states and in all states where required, and in
general, customer payments are received prior to the delivery of product.
 
  In Massachusetts, and in New Jersey, where UPS is not currently licensed to
provide delivery of alcoholic beverages for retailers, the Company uses its
own licensed vehicles and delivery personnel to make deliveries. The Company
coordinates these deliveries from its Massachusetts headquarters, placing each
order as it is received into a delivery route. The Company has established
delivery routes covering each state and, depending on the frequency and
concentration of orders, completes each route at least once a week. In certain
circumstances, if a customer requires more prompt delivery, the order will be
placed in an alternate route for delivery on an earlier day. The drivers in
the course of their normal routes perform pickup of returns. In Massachusetts,
third party couriers deliver wine for some of the Company's more distant
routes.
 
  In Alaska, California, Connecticut, Florida, Idaho, Illinois, Iowa,
Louisiana, Missouri, Nebraska, New Mexico, New York, Nevada, Ohio, Oregon,
Rhode Island, Texas, Virginia, Washington and West Virginia, the Company uses
UPS to make deliveries. In Arizona, Colorado, Minnesota, New Hampshire and
Texas, the Company uses licensed delivery companies to make deliveries. Orders
from customers in the states in which UPS or other delivery companies are
permitted to ship wine are transmitted on the day they are received to the
appropriate licensed facility. Orders are packed into specially designed
shipping containers and picked up by the delivery company daily. Most of these
orders are shipped within 48 hours of receipt. Returns are picked up by the
delivery company pursuant to issuance of a delivery company call tag request
by a Company customer service representative and returned to the appropriate
licensed facility.
 
Sales or Use Tax
 
  The Company presently collects sales tax in each of the states in which it
operates a facility and which apply a sales tax to the sale of wine and wine
accessories. These states are Arizona, California, Colorado, Connecticut,
Florida, Illinois, Michigan, Minnesota, New York, New Jersey, Ohio, Texas,
Virginia and Washington. Massachusetts does not impose sales tax on wine but
does so on wine accessories. Additionally, certain states have enacted
legislation permitting the delivery of wine to residents of their states by
licensed, out-
 
                                      11
<PAGE>
 
of-state shippers on the condition certain sales, wine excise and/or other
taxes are imposed on the customer and remitted to the state by the shipper and
or the customer. These states include Louisiana, Nevada, New Hampshire and
Rhode Island. Since 1993, the Company has shipped wine to Oregon, Idaho, New
Mexico, Missouri and West Virginia under "reciprocity laws" without collecting
a sales or use tax or notifying consumers that a use tax payment may be
required. Various states have attempted to impose on direct marketers the
burden of collecting use taxes on the sale of products shipped to state
residents. In 1992, the United States Supreme Court affirmed that it is
unconstitutional for a state to impose use tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of advertising materials through the mail and subsequent delivery
of purchased goods by parcel post and interstate common carriers. However,
this decision acknowledged that Congress has the authority to enact
legislation authorizing states to impose such obligations. On March 13, 1995,
legislation was introduced in the United States Senate, which would authorize
collection of certain state and local taxes with respect to mail order sales,
delivery and use of tangible personal property. Although it has not yet become
law, this legislation was reintroduced on January 29, 1998. The Company cannot
predict whether or when this legislation will be enacted. Given the Company's
ability to collect sales tax in the jurisdictions indicated above, the Company
does not believe the collection of use taxes would present an undue burden
upon the Company in the event that it were determined that the Company was
obligated to collect such taxes, and would have no significant impact on the
administrative expenses of the Company or the prices charged to customers.
 
Trademarks
 
  The following are registered trademarks or service marks of the Company:
Geerlings & Wade Personal Wine Service, J. Krant Cellars, Glass Ridge, Alazar
Winery, Amsbury Winery, Lapis Lazuli Winery & Vineyards, St. Carolyne Winery,
San Valencia Winery, Mariel Winery, Jack Canyon Cellars, Bryan Woods Winery,
Mischler Estates, Hamilton Estates, Mira Luna, Passport Wine Club,
International Beer and Ale Society, Devina Estates and Domaine Paul. The
Company has filed trademark or service mark applications with the United
States Patent and Trademark Office for the following names: Expeditions,
Vintage Impressions Plus, They'll Remember You Not Once But Every Month,
Vintage Rewards and Bestwinebuys.com. The Company believes that its trademarks
or service marks have significant value and are an important factor in the
marketing of its products and the development of house brands.
 
Employees
 
  As of December 31, 1998, the Company employed a total of 79 individuals on a
full-time basis. The Company also uses part time employees on a regular basis
at each of its licensed facilities and at its corporate headquarters.
 
 
                                      12
<PAGE>
 
Item 2: Properties
 
  As of December 31, 1998, Geerlings & Wade operated fifteen licensed
facilities. The Company leases all of these facilities. Each facility is
centrally located with easy access to major routes for delivery efficiencies.
Since December 31, 1997, the Company has renewed its leases in Arizona,
Colorado, Minnesota and Ohio and has entered into a lease in Boston,
Massachusetts and Stafford, Texas each with a term of three years. The Company
obtained its license to sell wine from its Texas facility in February 1999 and
commenced selling wine to Texas customers in March 1999. The addition of Texas
brings the total number of retail, licensed facilities for the Company to 16.
 
<TABLE>
<CAPTION>
                                                      Approximate
              Facility                  Location     Square Footage Expiration
              --------                  --------     -------------- ----------
<S>                                  <C>             <C>            <C>
Executive offices, customer service
 and licensed facility.............. Canton, MA          32,000        2000
Licensed facility................... Carmel, NY          10,000        2000
Licensed facility................... Somers, CT           4,500        2001
Licensed facility................... Waukegan, IL         9,600        2001
Licensed facility................... Tampa, FL           10,000        2000
Licensed facility................... South River, NJ      4,000           *
Licensed facility................... Petaluma, CA        13,800        1999
Licensed facility................... Kent, WA             5,000        2001
Licensed facility................... Chantilly, VA        4,800        1999
Licensed facility................... Miamisburg, OH       5,900        2000
Licensed facility................... Denver, CO           6,800        2001
Licensed facility................... Tempe, AZ            6,600        2001
Licensed facility................... Bloomington, MN      4,700        2001
Licensed facility................... Ann Arbor, MI        5,300        1999
Licensed facility................... Boston, MA           1,400        2001
Licensed facility................... Stafford, TX         5,700        2001
</TABLE>
--------
* The Company presently rents the facility on a month-to-month basis and
  intends to negotiate a long-term lease.
 
  The Company believes that its facilities are adequate for its current needs
and that suitable additional space will be available as needed.
 
Item 3: Legal Proceedings
 
  In the ordinary course of business, the Company normally both asserts claims
and defends claims asserted by others against it. The Company believes that
its obligations, if any, with respect to all of such claims would have no
material adverse effect on the financial position of the Company.
 
Item 4: Submission of Matters to a Vote of Security Holders
 
  None.
 
 
                                      13
<PAGE>
 
                                    PART II
 
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
 
  The Company's common stock trades on The NASDAQ Stock Market under the
symbol GEER. The following table sets forth, for the periods indicated, the
high and low per share sales prices for the common stock as reported on The
NASDAQ Stock Market.
 
<TABLE>
<CAPTION>
                                                   1997            1998
                                                 -----------     -------------
                                                 High    Low     High      Low
                                                 ----    ---     ----      ---
   <S>                                           <C>     <C>     <C>       <C>
   First Quarter................................  5 3/8   4 1/8   5 3/8      4
   Second Quarter...............................  5 7/8   3 1/4   6 7/16     4
   Third Quarter................................  5 7/8    4      4 13/16   2 7/8
   Fourth Quarter...............................  5 1/2   3 9/16 12 3/16    2 11/16
</TABLE>
 
  Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, markdown or commissions and may not necessarily represent
actual transactions.
 
  As of March 26, 1999, there were approximately 126 holders of record of the
Company's common stock.
 
  The Company's capital stock consists of 10,000,000 authorized shares of
common stock, par value $.01 per share, of which, as of March 26, 1999,
3,846,550 shares were issued and outstanding; and 1,000,000 authorized shares
of preferred stock, par value $.01 per share, of which, as of March 26, 1999,
no shares were issued and outstanding.
 
  The Company has never declared a cash dividend on its common stock. The
Board of Directors of the Company has no present intention to pay dividends on
common stock and does not anticipate doing so within the next several years.
It is the present policy of the Company to retain earnings, if any, to provide
for growth and working capital needs.
 
                                      14
<PAGE>
 
Item 6: Selected Financial Data
 
  The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements, including the
notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
 
<TABLE>
<CAPTION>
                                            Years Ended December 31,
                                     ------------------------------------------
                                      1994    1995     1996     1997     1998
                                     ------- -------  -------  -------  -------
                                      (in thousands, except per share data)
<S>                                  <C>     <C>      <C>      <C>      <C>
Statements of Income Data:
Sales..............................  $20,292 $29,718  $31,501  $33,701  $34,774
Cost of sales......................   10,780  16,138   17,188   18,185   18,160
                                     ------- -------  -------  -------  -------
Gross profit.......................    9,512  13,580   14,313   15,516   16,614
Selling, general and administrative
 expenses..........................    7,849  14,690   14,426   14,066   14,860
                                     ------- -------  -------  -------  -------
Income (loss) from operations......    1,663  (1,110)    (113)   1,450    1,754
Interest income (expense), net.....       36     (37)    (257)     (23)      10
                                     ------- -------  -------  -------  -------
Income (loss) before income taxes..    1,699  (1,147)    (370)   1,427    1,764
Provision (benefit) for income
 taxes.............................      403    (470)    (152)     604      751
                                     ------- -------  -------  -------  -------
Net income (loss)..................  $ 1,296 $  (677) $  (218) $   823  $ 1,013
                                     ======= =======  =======  =======  =======
Pro Forma Statements of Income
 Data(1):
Income (loss) before taxes, as
 reported..........................  $ 1,699 $(1,147) $  (370) $ 1,427  $ 1,764
Provision (benefit) for income
 taxes.............................      636    (470)    (152)     604      751
                                     ------- -------  -------  -------  -------
Net income (loss)..................  $ 1,063 $  (677) $  (218) $   823  $ 1,013
                                     ======= =======  =======  =======  =======
Net income (loss) per share
  Basic............................  $  0.34 $ (0.18) $ (0.06) $  0.22  $  0.27
                                     ======= =======  =======  =======  =======
  Diluted..........................  $  0.34 $ (0.18) $ (0.06) $  0.22  $  0.27
                                     ======= =======  =======  =======  =======
Common shares and equivalents
  Basic............................    3,123   3,755    3,776    3,780    3,786
  Diluted..........................    3,135   3,755    3,776    3,796    3,801
 
<CAPTION>
                                                  December 31,
                                     ------------------------------------------
                                      1994    1995     1996     1997     1998
                                     ------- -------  -------  -------  -------
                                                 (in thousands)
<S>                                  <C>     <C>      <C>      <C>      <C>
Balance Sheet Data:
Working capital....................  $ 9,666 $ 8,694  $ 8,045  $ 9,303  $ 9,977
Total assets.......................   13,529  16,717   12,952   16,124   17,205
Long-term debt, less current
 portion...........................      --      --       --       --       --
Total stockholders' equity.........   10,060   9,733    9,526   10,362   11,405
</TABLE>
--------
  No cash dividends have been declared per common share for each year shown.
 
(1) Net income and net income per share is reported on a pro forma basis for
    1994 to reflect what comparative results would have been had the Company
    been taxed as a C corporation for the entirety of 1994. Results for 1995,
    1996, 1997 and 1998 are reported on an actual basis.
 
 
                                      15
<PAGE>
 
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
General
 
  Geerlings & Wade is a direct marketer of premium, imported and domestic
wines and wine-related merchandise to individual consumers. In 1998, sales
increased $1,072,000, or 3.2%, from $33,701,000 in 1997 to sales of
$34,774,000 in 1998. The increase in revenues did not meet the Company's
expectation due to weaker-than-expected response rates to house mailings
during the first eight months of 1998. However, the Company achieved its
primary goal for 1998, which was to increase net income from 1997. The Company
earned $1,764,000 in operating income in 1998 as compared to $1,450,000 in
1997. This marked improvement in operating income resulted from higher sales
and increased gross profit margin by 180 basis points. Selling, general and
administrative expenses were higher in 1998 than in 1997 by $794,000.
Marketing expense, which is referred to as advertising costs in the financial
statement footnotes, increased $482,000 from $4,756,000 in 1997 to $5,238,000
in 1998. As a percentage of sales, marketing expense was 15.1% of sales in
1998 and 14.1% of sales in 1997. The majority of the increase in market
expense resulted from mailing more acquisition and continuity promotional
pieces to potential customers in 1998. General and administrative expenses
increased because of increased staffing as a result of the acquisition of
Passport Wine Club in July 1998, opening of the Newbury Street store in Boston
and several additions to the support staff. Delivery expense also increased
during 1998 primarily as a result of rate increases by courier services. In
1998, the Company focused on improving the balance sheet, and did so by
lowering inventory by yearend from $10,985,000 in 1997 to $8,214,000 in 1998.
The Company was also able to improve terms from certain suppliers during 1998
and thereby leverage its working capital. The Company's cash balance as of
December 31, 1998 was $4,290,000 as compared to $358,000 with an outstanding
balance under its line of credit of $982,000 at December 31, 1997. The Company
operated in 1998 from 15 licensed facilities in 14 separate states to comply
with laws and regulations related to the retail sale of wine. Operating these
separate locations forces the Company to incur unusually high overhead expense
as a percentage of sales. The Company continuously looks to lower these fixed
costs and manage variable costs to improve operating margins.
 
  The Company opened its first licensed facility in 1986, three additional
licensed facilities in each of 1991 and 1993, one facility in 1994, five
facilities in 1995, one in 1997, one (a retail store) in 1998 and one in 1999.
From these 16 facilities, the Company is able to serve customers in 28 states.
Louisiana and Nevada changed their state laws in 1997 to allow for shipments
into their states from out-of-state retailers. The Company commenced shipping
to Nevada residents in late 1997 and Louisiana residents in the second quarter
of 1998. New Hampshire and Rhode change their respective state laws to allow
for out of state shipment of wine by licensed retailers in 1998. Alaska has
clarified its laws and has affirmed that only sales placed over the Internet
to out-of-state retailers are permissible. Mail order and telephone sales from
out-of-state retailers are prohibited in Alaska. The Company commenced
shipping to residents of these three states in March 1999. In February 1999,
the Company obtained a permit to sell wine from the Texas Alcoholic Beverage
Commission ("TABC"). The Company opened a facility in Stafford, Texas and
commenced shipping wine to Texas residents in March 1999. In order to meet
TABC laws, the Company created Geerlings & Wade of Texas, Inc., a Texas
corporation, and Geerlings & Wade of Texas, Inc. will sell and deliver wine to
Texas customers. The Company considers each area served by a licensed
facility, excluding the Newbury Street store and the Canton, MA facility, to
be a separate market.
 
  In 1998, the Company continued testing various new marketing programs to
find ways to increase revenues including continuity ("wine of the month")
programs, corporate affinity marketing programs ("affinity programs") and
outbound telemarketing programs. In July 1998, the Company purchased the
assets of Passport Wine Club, which offers both continuity programs and
individual cases of wine to customers. In 1999, the Company plans to continue
operating this separate business as Passport Wine and to direct Geerlings &
Wade customers or potential customers to Passport Wine in order to increase
sales for this business. The Company has determined that affinity programs
offered in stores or direct mail pieces of its partners do not warrant further
investment by the Company. However, the Company plans to explore partnering
with companies in attempt to market wine over the Internet. Telemarketing, on
the other hand, has proved successful, and the Company plans
 
                                      16
<PAGE>
 
to significantly increase its outbound telemarketing to its customer base. As
part of this program, the Company plans to curtail mailings to these customers
that are called so as to reduce mailing expense. Holiday catalogs offering
wine and wine-related accessories were mailed in 1998. Sales results from
these marketing pieces encourage further development of the catalog in an
effort to make it a significant contributor to revenues in the future. The
Company has mailed, for the first time, three separate catalogs in the first
quarter of 1999 and plans to mail Holiday catalogs in the fall of 1999.
 
  In May of 1998, the Company commenced selling wine from its Website at
www.geerwade.com. This Website was revamped in October 1998 and will be
completely redesigned with interactive elements by Hill, Holliday, Connors,
Cosmopulos, Inc. ("Hill, Holliday"). The Company plans to launch the new
Website in the third quarter of 1999. Since the third quarter of 1998, sales
from this Website continue to grow each month even though the fourth quarter
has produced historically the largest percentage of sales for the Company
compared to the next three quarters. In addition to redesigning the existing
Website, www.geerwade.com, the Company plans to launch later in the third
quarter of 1999 a totally separate Website, which offers a broad selection of
nationally branded wines that will only be marketed on the Website. A new
image will be developed for this e-commerce business, and the Company will
market this e-commerce Website separately and test new forms of advertising
such as space advertisements, radio and Internet banner advertising as well as
develop relationship with other Websites and companies. Both the new Website
and www.geerwade.com will be interactive with the Company's main computer
system and database and allow customers to view only inventory that is
available for sale, check the status of their orders and receive UPS tracking
numbers when applicable to track the location of their packages. This new
computer system will replace the existing computer system that supports the
majority of the Company's information requirements. The Company plans to
convert to this new system in the summer of 1999.
 
  The Company's revenues are derived from the sale of wine, wine-related
accessories and memberships. Sales from memberships and wine-related
accessories were approximately 4% of overall revenues in 1997 and in 1998. The
Company's sales growth between 1997 and 1998 reflects increased comparative
state sales for all states ("markets") except Massachusetts, New Jersey and
Washington. Comparative sales were down 6% for Massachusetts, 3% for New
Jersey and 4% for Washington. Comparative sales increased by 3% in Connecticut
and New York, 4% in Illinois and Florida, 9% in California, 2% in Virginia, 7%
in Ohio, 6% in Minnesota, 1% in Colorado, 11% in Arizona and 158% in Michigan.
The Company hopes to increase sales in all markets in 1999.
 
  The following table sets forth total sales by market for the periods
indicated:
 
<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                        ---------------------------------------
   Market                                1994    1995    1996    1997    1998
   ------                               ------- ------- ------- ------- -------
                                                    (in thousands)
<S>                                     <C>     <C>     <C>     <C>     <C>
Massachusetts(1)....................... $ 4,746 $ 5,970 $ 5,685 $ 6,310 $ 5,960
Connecticut............................   2,010   2,246   2,186   2,025   2,079
New York...............................   4,469   5,297   5,078   4,929   5,061
Illinois(2)............................   1,603   2,418   2,563   2,702   2,805
Florida................................   1,941   2,679   2,810   3,066   3,194
California(2)..........................   2,707   3,541   3,466   3,530   3,833
New Jersey.............................   2,742   3,795   3,637   3,658   3,559
Washington (December 1994).............      74     884   1,017   1,093   1,049
Virginia (January 1995)................           1,398   1,707   1,963   1,996
Ohio (April 1995)......................           1,123   2,017   2,401   2,566
Minnesota (July 1995)..................             134     338     413     436
Colorado (July 1995)...................             151     566     713     718
Arizona (September 1995)...............              82     431     542     601
Michigan (June 1997)...................                             356     917
                                        ------- ------- ------- ------- -------
  Totals............................... $20,292 $29,718 $31,501 $33,701 $34,774
                                        ======= ======= ======= ======= =======
</TABLE>
--------
(1) Includes sales from catalog accessories and from the Newbury Street,
    Boston store.
(2) Includes authorized sales into additional states.
 
                                      17
<PAGE>
 
  The Company believes that if customers develop trust in the Company's
ability to select and deliver quality wines at attractive prices, they tend to
make more wine purchases from the Company, including more expensive
selections. In general, the Company sells its more expensive wines at a lower
gross margin percentage than its less expensive wines. Consequently, the
Company's gross profit as a percentage of sales diminishes if the average
price point of the Company's product mix increases. The Company seeks to
manage its gross profit through management of the average price point of its
wines and overall product mix. The Company expects that its gross profit as a
percentage of sales will continue to fluctuate depending upon the average
price point of its product mix in each period, which in turn will be affected
by the number of new customers generated by acquisition mailings and other
marketing programs under development. The price point for initial purchases by
new customers is normally under the Company's average price point; therefore,
increased orders by new customers lowers the average price point for the
Company.
 
  The Company sent 23 house mailings in 1997 and 22 in 1998 and plans to mail
the 22 house mailings in 1999 to its active customers. By keeping the number
of mailings relatively constant, the marketing cost per customer remains
nearly constant. The Company is focusing its efforts to increase the average
order size and order frequency to leverage its marketing costs and improve
profitability. Although, the average case price was lower in 1998, the Company
does not intend to adjust prices in the immediate future to encourage sales.
 
  In 1996, the Company sold its wine in quantities of 3, 6 and 12 bottles, and
allowed customers to select a mix of any wines available in stock. In the fall
of 1996, the Company decided to discontinue 3-bottle purchases due to the high
cost of fulfilling each order measured as a percentage of sales. However, the
Company intends to continue to offer 2- or 3-bottle shipments as part of gift
packages offered in its catalogs or as part of the subscription or continuity
programs in which the ability to pre-package shipments affords operating
efficiencies that warrant promoting these types of offers. The Company uses
the term "case" as an operating characteristic to describe any twelve-bottle
equivalent unit.
 
Results of Operations
 
  For the periods indicated, the following table sets forth as a percentage of
total sales certain items reflected in the Company's statements of income for
the years ended December 31, 1995, 1996, 1997 and 1998 and pro forma
statements of income for the year ended December 31, 1994:
 
<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                            ---------------------------------
                                            1994   1995   1996   1997   1998
                                            -----  -----  -----  -----  -----
<S>                                         <C>    <C>    <C>    <C>    <C>
Sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..............................  53.1   54.3   54.6   54.0   52.2
Gross profit...............................  46.9   45.7   45.4   46.0   47.8
Selling, general and administrative
 expenses..................................  38.7   49.4   45.8   41.7   42.7
Income (loss) from operations..............   8.2   (3.7)  (0.4)   4.3    5.1
Interest (expense) income, net.............   0.2   (0.2)  (0.8)  (0.1)   0.0
Income (loss) before income taxes..........   8.4   (3.9)  (1.2)   4.2    5.1
Provision (benefit) for income taxes.......   2.0   (1.6)  (0.5)   1.8    2.2
Net income (loss)..........................   6.4   (2.3)  (0.7)   2.4    2.9
Pro forma income before taxes..............   8.4    --     --     --     --
Pro forma income taxes.....................   3.1    --     --     --     --
Pro forma net income.......................   5.3    --     --     --     --
</TABLE>
 
Years Ended December 31, 1998, 1997 and 1996
 
 Sales
 
  Sales increased $1,072,000 or 3.2%, from $33,701,000 in 1997 to $34,774,000
in 1998. This increase was attributable to a 1.5% sales increase for all 13
markets opened prior to 1997 and a 158% sales increase for
 
                                      18
<PAGE>
 
Michigan, which opened in 1997. Included in the $34,774,000 of sales for 1998
were sales of $1,499,000 generated from the Company's 1998 catalogs, which is
nearly the same as the catalog sales of $1,498,000 in 1997. Sales increased
$2,200,000, or 7.0%, from $31,501,000 in 1996 to $33,701,000 in 1997. This
increase resulted from the combination of a 3.3% sales increase for markets
opened prior to 1995 and an 18.6% increase for markets opened during 1995.
 
  The number of cases sold by the Company increased by 15,300, or 4.8%, from
321,395 in 1997 to 336,695 in 1998. From 1996 to 1997, the number of cases
sold increased from 278,247 to 321,395, a 15.5% increase. The average case
price for cases sold by the Company decreased from $100.44 in 1997 to $99.64
in 1998, which is a 0.8% decrease. This decrease is due to the combination of
maintaining case prices consistent with 1997 and the effects of mailing
substantially more acquisition pieces which resulted in more first time
customers in 1998 than in 1997. The average price per case for the Company was
skewed downward by the lower price point for these first time customers. The
average price per case for sales to repeat customers actually increased about
1% from 1997 to 1998. The Company does not see the need to lower prices
further to compete in the market place. This does not preclude price
adjustments that may be necessary to track price trends in the marketplace
that may be precipitated by market factors such as a drop in the price of wine
from suppliers or major changes in foreign currency exchange rates. In 1997,
Geerlings & Wade changed the product mix to lower-priced products and began
periodic discounting on selected products to reduce inventory and maintain a
manageable number of stock keeping units. The average case price for cases
sold by the Company decreased from $110.19 in 1996 to $100.44 in 1997, which
is an 8.8% decrease. This average price decrease was primarily due to a
decision to offer wines at lower price points to generate higher sales and
response rates to promotional mailings.
 
  The average number of cases purchased per 12-month customer decreased from
2.91 per year in 1997 to 2.61 per year in 1998. The increase in sales to first
time buyers, who buy less than one case on average for their first purchase,
was the major factor in reducing the annual, average number of cases
purchased. While the average case purchased per 12-month buyer decreased 10.3%
from 1997 to 1998, the average number of cases purchased by repeat buyers
decreased 8.8% from 1997 to 1998 from 4.66 cases per repeat buyer in 1997 to
4.25 cases in 1998. The average number of cases purchased per customer each
year increased from 2.82 in 1996 to 2.91 in 1997. This increase was
attributable, in part, to lower price points in 1997 than in 1996 which
permits customers to purchase larger quantities without increasing their
average order.
 
 Gross Profit
 
  In 1998, gross profit increased $1,098,000, or 7.1%, from $15,517,000 in
1997 to $16,614,000 in 1998 and increased as a percentage of sales from 46.0%
in 1997 to 47.8% in 1998. This increase in gross profit resulted from improved
purchasing by the Company and by favorable changes in foreign currency
exchange rates. Gross profit increased $1,203,000, or 8.4%, from $14,313,000
in 1996 to $15,517,000 in 1997, while increasing as a percentage of sales from
45.4% in 1995 to 46.0% in 1997. This increase in gross profit as a percentage
of sales resulted from improved purchasing by the Company as well. Gross
profit for all sales (including accessory sales) per case of wine sold was
$49.34 in 1998, which is an increase of $1.06 per case from $48.28 per case in
1997. In 1996, the gross profit per case was $51.44 per case. This decrease
from 1996 to 1997 resulted from lowering the average price paid for each case
of wine sold by the Company in 1997. The Company hopes to improve gross margin
as a percentage of sales by improving purchasing in 1999 but can make no
guarantee that it will achieve this goal. Adding more nationally branded wines
to the product mix tends to lower the overall gross profit percentage since
these wines generate much lower margins than the present selection of wines
sold by the Company. So if the Company sells a higher percentage of these
nationally branded wines in the future, the gross profit percentage will
decrease. The Company plans to increase the proportion of nationally-branded
products if it can successfully offset a lower gross profit with savings in
marketing and by increasing response rates to the Company's various
advertising programs.
 
 Selling, General and Administrative Expenses
 
  Selling, general and administrative expenses increased $793,000, or 5.6%,
from $14,067,000 in 1997 to $14,860,000 in 1998, while increasing as a
percentage of sales from 41.7% in 1997 to 42.7% in 1998. This
 
                                      19
<PAGE>
 
increase in selling, general, and administrative expenses was attributable to
both fixed and variable costs. For variable costs, advertising costs, which
are mostly comprised of direct mail that the Company sends to prospective and
repeat customers increased 10.1% from 1997 to 1998. In 1997, advertising costs
were $4,756,000 and in 1998 were $5,238,000, which is an increase of $482,000.
Most of this increase is attributable to the Company mailing about one million
more pieces of promotional mail to prospective customers ("acquisition
mailings") in 1998 than in 1997. Additionally, the Company amortizes the cost
of these acquisition mailings over five months and in the fall of 1997, the
Company increased significantly the number of these mailings. Therefore, some
of the increased costs were capitalized and expensed in the first four months
of 1998 thereby adding to 1998 advertising expense. Credit card fees increased
due to higher rates charged by credit card companies, compounded by higher
sales and higher shipping and handling fees charged by the Company. The
Company does not include shipping and handling revenue that it charges
customers in its sales but nets this revenue against delivery expense;
therefore, whenever, the Company increases its shipping and handling fees to
customers, the Company incurs higher credit card fees which results in higher
credit card fees as a percentage of sales. This affect is magnified when the
prices for the Company's products remain stable.
 
  As for fixed costs, in 1998 the Company operated and incurred the related
costs of operating its Michigan retail facility for a full year as compared to
1997 when the Company opened that facility in the second quarter. The Company
also opened the Newbury Street store in Boston in the second quarter of 1998
and incurred the cost of opening and operating that store. Also, the Company
acquired the assets of Passport Wine Club in July 1998 and consolidated its
existing California operations located in San Jose with the Passport
operations by relocating both groups to a new retail facility in Petaluma,
California. The Petaluma facility is a much larger facility than the one in
San Jose that was operated by the Company in 1997. Additionally, five people
were hired as part of the Passport acquisition, and this significantly
increased the general and administrative expense for 1998. Finally, the
Company entered into a lease in Stafford, Texas in October 1998 in preparation
of opening a retail facility in Texas. In total, rent expense for 1998 was
$1,003,000 in 1998 and $862,000 in 1997 which is an increase of $141,000. The
Company has also hired personnel for the sales and customer service department
to improve customer service and in the marketing department to increase the
productivity of its marketing programs and expand into the wine accessory
catalog and wine and accessory sales over the Internet. The Company launched
its e-commerce Website in May 1998 and continually upgraded it throughout
1998.
 
  Selling, general and administrative expenses decreased by $360,000, or 2.5%,
from $14,426,000 in 1996 to $14,066,000 in 1997, while decreasing as a
percentage of sales from 45.8% in 1996 to 41.7% in 1997. This decrease in
selling, general, and administrative expenses was primarily attributable to
increasing shipping and handling fees charged to customers, reducing salaries
and lowering the cost per piece of mail for acquisition mailing campaigns. The
opening of the Michigan facility added to the Company's fulfillment expense as
did increased staffing in the customer service and sales departments which was
done to improve the level of customer service. Marketing costs increased by
$181,000 in 1997 from $4,575,000 in 1996 to $4,756,000 in 1997, which is a
4.0% increase. Most of the increase resulted from mailing the additional wine
and wine accessories catalog in the spring of 1997.
 
 Interest Income (expense)
 
  In 1998, interest expense decreased $23,000 or 52.3% from $44,000 in 1997 to
$21,000 in 1998. Interest income increased $10,000 from $21,000 in 1997 to
$31,000 in 1998. The net effect was that the company had a net interest
expense of $23,000 in 1997 and net interest income of $10,000 in 1998. This
was an improvement of $33,000 between 1997 and 1998. This dramatic change in
net interest was due to paying down the line of credit with cash generated
from operations. For 1997, net interest expense decreased $234,000, or 91.1%,
from net interest expense of $257,000 in 1996 to a net interest expense of
$23,000 in 1997. This decrease in net interest expense was due to reduced
borrowings under the Company's line of credit to support working capital needs
throughout 1997.
 
 Provision for Income Taxes
 
  The Company was subject to corporate level income taxes for the entirety of
1996, 1997 and 1998. Income taxes were benefited at approximately 41% in 1996
and income taxes were provided at 42% in 1997 and 42.5%
 
                                      20
<PAGE>
 
in 1998. These tax rates are reflective of the Company's effective C
Corporation income tax rates in each of these periods.
 
 Liquidity and Capital Resources
 
  The Company's primary capital needs continue to be funding the cost of
acquisition mailings and purchases of inventory to support sales growth. As of
December 31, 1998, the Company had cash and cash equivalents totaling
$4,290,000. In addition, the Company has a credit facility with The First
National Bank of Boston ("BankBoston") comprised of a revolving discretionary
demand line of credit in the maximum principal amount equal to the lesser of
50% of qualifying inventory or $5.0 million (the "Line of Credit"). The Line
of Credit bears interest at BankBoston's base rate (which approximates the
prime rate) plus one half of one percent ( 1/2%), and is collateralized by
substantially all of the assets of the Company. As of December 31, 1998, the
Company had no borrowings under the Line of Credit.
 
  In 1998, the Company generated $5,396,000 in cash from operating activities
compared to generating $42,000 in 1997. The increase in cash generated from
operations resulted primarily from net income of $1,013,000, a decrease in
inventory of $2,930,000 and increases in accounts payable of $1,501,000 and in
deferred revenue of $345,000. This cash flow increases were offset by
increases in prepaid mailing costs of $372,000 and decreases in accrued
expenses of $209,000 and accrued sales, income and payroll tax of $536,000.
 
  At December 31, 1998 and December 31, 1997 the Company had working capital
of $9,977,000 and $9,303,000, respectively. The Company lowered inventory
levels in 1998 and expects to maintain these lower inventory levels in the
future. Inventory levels will fluctuate with seasonal demand and overall sales
growth. As a result of the alcoholic beverage regulatory scheme within which
the Company operates, the Company is required to maintain separate inventories
in each of the markets in which it operates a licensed facility and is not
permitted to transfer inventory between such facilities. As a result, the
Company believes that its overall inventory levels are necessarily higher than
would be required if the Company were not subject to such regulatory
requirements. In the first quarter of 1999, the Company opened the Texas
licensed facility. The inventory for this facility adds to the overall
inventory levels.
 
  During 1998, net cash of $512,000 was used in investing activities. The
Company used cash from operations and borrowings under its Line of Credit to
invest approximately $112,000 in property and equipment. These purchases
included approximately $93,000 in computer and telephone hardware and software
enhancements and $19,000 of leasehold improvements and furniture and fixture
purchases. The Company received $90,000 from a vendor in exchange for
returning an asset previously paid for by the Company. On July 7, 1998, the
Company purchased the assets of Passport Gift Company, Inc. d/b/a Passport
Wine Club for cash consideration of $434,453. An additional $30,890 was used
for acquisitions costs.
 
  During 1998, total cash used for financing activities was $953,000 of which
$1,651,000 represented borrowings under the Line of Credit and $2,634,000 was
used for repayment of Line of Credit borrowings.
 
  The Company believes that cash flows from operations and current cash
balances, together with the availability under its Line of Credit, will be
sufficient to meet the Company's working capital needs and capital expenditure
requirements for the foreseeable future.
 
 Exchange Rates
 
  The Company engages in currency-hedging activities related to firm
commitments for the purchase of inventories in an effort to fix costs and
manage the impact of exchange rate fluctuations. The Company maintains two
separate foreign exchange lines with BankBoston and The Chase Manhattan Bank,
each of which allow the Company to enter into forward currency exchange
contracts of up to $500,000 maturing on any one day. As of December 31, 1998,
the Company had foreign exchange contracts outstanding to purchase 7.8 million
French francs (equivalent to approximately $1,436,000 at December 31, 1998).
 
                                      21
<PAGE>
 
 Factors That May Affect Future Results
 
  This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Federal Securities Laws. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain risk factors, including but not limited to those set forth below,
other one-time events and other important factors disclosed previously and
from time to time in the Company's other filings with the Securities and
Exchange Commission.
 
  Regulation. The alcoholic beverage industry is subject to extensive
specialized regulation under state and federal laws and regulations, including
the following matters: licensing; the payment of excise taxes; advertising,
trade and pricing practices; product labeling; sales to minors and intoxicated
persons; changes in officers, directors, ownership or control; and,
relationships among product producers, importers, wholesalers and retailers.
While the Company believes that it is in material compliance with all
applicable law and regulation, in the event that it should be determined that
the Company is not in compliance with any applicable laws or regulations, the
Company could become subject to cease and desist orders, injunctive
proceedings, civil fines, license revocations and other penalties which could
have a material adverse effect on the Company's business and its results of
operations. In addition, the alcoholic beverage industry is subject to
potential legislation and regulation on a continuous basis including in such
areas as direct and Internet sales of alcohol. There can be no assurance that
new or revised laws or regulations, increased licensing fees, specialized
taxes or other regulatory requirements will not have a material adverse effect
on the Company's business and its results of operations. While to date the
Company has been able to obtain and retain licenses necessary to sell wine at
retail, the failure to obtain renewals or otherwise retain such licenses in
one or more of the states in which the Company operates would have a material
adverse effect on the Company's business and its results of operations. The
Company's growth strategy includes expansion of its business into additional
states; however, there can be no assurance that the Company will be successful
in obtaining licenses in any additional states. Geerlings & Wade offers its
customers the opportunity to purchase one- and three-year memberships. This
membership program has from time to time generated regulatory scrutiny, and
there can be no assurance that the Company will be able to continue its
membership program in its current form in existing markets or that markets in
which the Company may become licensed in the future will allow the sale of
memberships, which could have a material adverse effect on the Company's
business and results of operations.
 
  Limited Operating History; Management of Growth. Geerlings & Wade has a
limited operating history upon which investors may evaluate its performance.
Although the Company was profitable in 1997 and 1998, the Company was not
profitable in 1995 and 1996 and there can be no assurance that it will operate
profitably in the future. In addition, the Company has only limited
management, operational and financial resources to accommodate continued
growth, should it occur. The Company's ability to manage growth effectively
will require it to continue to implement and improve its operational and
financial systems and to hire and train new employees. These demands are
expected to require additional management resources and the development of
additional expertise by existing management. The failure to manage growth
effectively would have a material adverse effect on the Company. There can be
no assurance that Geerlings & Wade will be able successfully to attract and
retain the skilled and experienced personnel required to manage its business.
 
  Effectiveness and Cost of Mailings; Cost of Paper. The Company targets
potential new customers and solicits orders from existing customers through
direct mail marketing campaigns. Direct mail marketing campaigns are capital-
intensive and the cost-effectiveness of such campaigns depends, to a large
extent, upon the accuracy of assumptions and judgments made by the Company.
There can be no assurance that such direct marketing campaigns will be
completed on a cost-effective basis. The failure of any such marketing
campaign to identify new customers or to generate new purchases from existing
customers on a cost-effective basis may have a material adverse effect on the
Company's business and results of operations. Increases in the cost of paper
or printing could have a negative impact on the Company's business and results
of operations to the extent that the Company is unable to pass on such
increases directly to customers. The Company relies on the services of outside
vendors to prepare and distribute its mailings in accordance with Company
specifications and schedules. The failure of such outside vendors to perform
such services according to Company specifications or to adhere
 
                                      22
<PAGE>
 
to Company mailing schedules may have a material adverse effect on the
Company's business and results of operations.
 
  Increases in Postage Rates; Dependence on Shippers. The Company's marketing
efforts have traditionally been conducted through direct mail campaigns. As a
result, increases in postage rates may have a material adverse effect on the
Company's business and its results of operations. Except in Massachusetts and
New Jersey, the Company is dependent upon delivery services provided by UPS or
other licensed delivery companies. A work stoppage, strike or other
interruption in service experienced by UPS or other delivery companies, like
the UPS driver strike in 1997, may have a material adverse effect on the
Company's business and its results of operations. Additionally, increases in
shipping rates may have a material adverse effect on the Company's business
and its results of operations.
 
  Dependence on Wine Selection and Sourcing. To a large extent, the Company's
success depends upon its wine selection and sourcing capabilities. There can
be no assurance that the Company will be able to consistently develop a
selection of wines that will enable the Company to maintain or expand its
customer base. Most of the Company's wine is sourced by Mr. Van Hoof, one of
the Company's primary negotiants for Europe, and Codera Wine Group, Inc., one
of the Company's primary negotiants for the U.S. The loss of services of
either of these parties could have a material adverse effect on the Company
and its results of operations. In the event that a wine proves to be unpopular
for any reason, or the Company orders an excessive quantity of one or more
wines, it may encounter liquidity problems under these circumstances which may
have a material adverse effect on the Company and its results of operations.
 
  Dependence on Consumer Spending; Geographic Concentration of Customers. The
success of Geerlings and Wade depends upon a number of factors related to the
level of consumer spending, including the general state of the economy,
federal and state tax rates and consumer confidence. Changes in consumer
spending in both the national and regional economies can affect both the
quantity and the price of wines that consumers are willing to purchase.
 
  Competition; Changes in Consumer Tastes. The Company competes with a broad
range of wine specialty stores, retail liquor stores, other direct-mail wine
merchants and certain supermarket stores, many of which may have significantly
greater resources than the Company. Additionally, the Company's wines compete
with other alcoholic and non-alcoholic beverages. There can be no assurance
that the Company will be able to successfully compete with its current or
future competition. Although consumption of premium wines in the United States
has increased, there can be no assurance that changes in consumer preferences
or tastes will not have a material adverse effect on the Company's business
and results of operations.
 
  Health Issues. Since 1989, federal law has required health warning labels on
all alcoholic beverages. Although an increasing number of research studies
suggest that health benefits may result from the moderate consumption of wine,
these suggestions have been widely challenged and a number of groups advocate
increased governmental action to restrict consumption of alcoholic beverages.
Restrictions on the sale and consumption of wine or increases in the taxes
imposed on wine in response to concerns regarding health issues may have a
material adverse effect on the Company's business and operating results. There
can be no assurance that there will not be legal or regulatory challenges to
the industry as a whole, and any such legal or regulatory challenge may have a
material adverse effect on the Company's business and results of operations.
 
  Exchange Rates; Currency Fluctuations. The Company sources many of its wines
from certain European countries and Australia and makes payment for such
purchases in local currencies. From time to time, the Company engages in
currency-hedging activities related to firm commitments for the purchase of
inventories in an effort to fix costs and manage the impact of exchange rate
fluctuations. Changes in exchange rates or currency fluctuations that disfavor
the U.S. dollar could have a material adverse effect on the Company's business
and results of operations.
 
 
                                      23
<PAGE>
 
  Excise Taxes, Customs Duties and Tariffs. The federal government and various
states impose excise taxes, duties and tariffs on wine. Increases in the
federal excise tax on wine, such as the 500% increase which was imposed in
1991, or increases in state excise tax levels, may have a material adverse
effect on the Company's business and its results of operations. In 1998,
approximately 68% of the total cases of wine sold by the Company were
imported. Increases in duty or tariff levels may have a material adverse
effect on the Company's business and results of operations.
 
  Agricultural Conditions; Grape Supply. Winemaking and grape growing are
subject to a variety of agricultural risks. Various diseases and pests,
drought, frosts and certain other weather conditions may have a material
adverse effect on the quality and quantity of grapes available to producers,
thereby having a material adverse effect on the cost of domestic or imported
wines available to the Company and on the prices of wine established by the
Company's competition.
 
  Year 2000 Compliance.  The year 2000 issue relates to computer programs and
systems that recognize dates using two digit year data rather than four digit
year data. As a result, such programs and systems may fail or provide
incorrect information when using dates after December 31, 1999. If the year
2000 issue were to cause disruptions to the Company's internal information
technology systems or to the information technology systems of entities with
whom the Company has commercial relationships, material adverse effects to the
Company's operations could result.
 
  The Company's internal computer programs and operating systems consist of
programs and systems relating to virtually all segments of the Company's
business, including merchandising, customer database management and marketing,
order-processing, fulfillment, inventory management, customer service and
financial reporting. These programs and systems are primarily comprised of:
 
    "Front-end" systems. These systems automate and manage business functions
  such as order-taking and order-processing, inventory, management,
  fulfillment operations as the Company's retail facilities and financial
  reporting. Users within the Company interface with these systems through
  personal computers via a local area network and from distant locations
  through a private network using the Internet. These users also use and
  access through their personal computers off-the-shelf e-mail, work
  processing, spreadsheet and other commercial software applications.
 
    Customer database management systems. These systems facilitate the
  storage of customer data and direct response and catalog mailings for the
  Company. Currently, the Company's internal customer database management
  system is integrated with the existing front-end system of the Company.
 
    Telecommunications systems. These systems enable the Company to manage
  their order-taking and customer service functions.
 
    Voicemail systems. These systems are used for receiving and storing
  messages to employees at various Company facilities.
 
    Ancillary services systems. These include such systems as heating,
  ventilation and air conditioning control systems and security systems.
 
  The Company has completed preliminary reviews of its internal front-end
systems, its customer database management systems, and its personal computers
and local area networks, to assess the potential impact of the year 2000
issue. These preliminary reviews were completed by the Company's existing
workforce at no identifiable incremental cost. Based upon these reviews, the
Company believes that all of these systems and equipment will operate
correctly when processing data that include dates after December 31, 1999
except for its front-end processing system. The Company believes that minor
remediation or expenditures are required to ensure continued proper operation
of such systems and equipment other than the front-end processing system. The
Company has purchased a replacement software system for front-end processing
and a new production database that are year 2000 compliant. This system
includes the Catman Catalog software that is developed and sold by Axexxis
Corporation and runs on the Universe data base that is sold by Ardent
Software, Inc. Both of these systems process dates based on a system that adds
or subtracts days from a starting date, which is time
 
                                      24
<PAGE>
 
zero. Therefore, the system does not rely on years stored as either 2 or 4
digit number such as "99" or "1999" and, as represented to the Company, will
not fail to function when January 1, 2000 arrives. The Company has also
purchased a new server for this software which the vendor represents is Year
2000 compliant. In addition to addressing the year 2000 issue, this new
software and hardware system will enhance the functionality and capability of
the Company's entire computer system. The Company plans to conduct further
reviews and tests of its systems and equipment to insure that all potential
year 2000 issues have been addressed. The approximate cost to purchase this
new system, including any necessary hardware, and to program the new Websites
planned for the Company will be between $800,000 and $1,000,000.
 
  The Company has not yet completed reviews of its internal telecommunications
systems and its internal voicemail and ancillary services systems. Based on
its preliminary reviews, the Company has been advised by its telephone system
vendor that a $3,000 software update can be purchased to bring the Company's
telephone system into compliance. The Company intends to purchase such
software. The Company does not anticipate that upon further reviews that any
remediation relating to such other systems that might be necessary will cause
the Company to incur material costs or present implementation challenges that
cannot be addressed prior to the end of calendar year 1999. The Company
expects to complete its reviews of these systems in the first half of calendar
year 1999.
 
  The computer programs and operating systems used by entities with whom the
Company has commercial relationships also pose potential problems relating to
the year 2000 issue, which may affect the Company's operations in a variety of
ways. These risks are more difficult to assess than those posed by internal
programs and systems, and the Company has not yet completed a plan for
assessing them. The Company believes that the programs and operating systems
used by entities with which it has commercial relationships generally fall
into two categories:
 
  First, the Company relies on programs and systems used by providers of
services necessary to it to reach and communicate with its customers. Examples
of such providers include the United States Postal Service, UPS, telephone
companies, customer list processors and rental agencies, printers and banks.
Services provided by such entities affect almost all facets of the Company's
operations, including processing of orders, printing and mailing of direct
response mail and catalogs, shipping of goods and certain financial services
(e.g., credit card processing). Programs and services in this first category
generally are not specific to the Company's business and disruptions in their
availability would likely have a negative impact on most enterprises within
the direct marketing industry and on many enterprises outside the direct
marketing industry. The Company believes that all of the most reasonably
likely worst case scenarios involving disruptions to its operations stemming
from the year 2000 issue relate to programs and systems in this first
category. The Company intends to include an evaluation of such scenarios in
its plan for assessing the programs and systems of the entities with which it
has commercial relationships.
 
  Second, the Company relies on programs and systems used by a variety of
vendors of the products it markets (in 1998, the Company purchased goods from
many vendors). In the case of risks posed by the year 2000 issue relating to
programs and systems in this second category that are used by product vendors,
such risks are minimal and correctable since these vendors are relatively
small companies and generally rely on off-the-shelf software programs and
hardware. The Company intends to include in its plan for assessing the
programs and systems of the entities with whom it has commercial relationships
the solicitation of assurances of year 2000 compliance from each vendor that
is significant to the Company.
 
  The Company expects to complete its plan for assessing the programs and
systems of the entities with whom it has commercial relationships by the end
of May 1999 and the identification of related risks and uncertainties by the
end of the second quarter of fiscal 1999. Once such identification has been
completed, the Company intends to resolve any material risks and uncertainties
that are identified by communicating further with the relevant vendors, by
working internally to identify alternative sourcing and by formulating
contingency plans to deal with such matters. The Company expects the
resolution of such matters to continue until all year 2000 problems are
resolved satisfactorily.
 
                                      25
<PAGE>
 
  Dependence on Computers. The Company relies on software, hardware, the
Internet and telecommunications equipment and services to transact, process,
record keep, analyze and manage all aspects of its business. In the event any
of these major components or services fail for an extended period of time,
this could have an adverse material effect on the Company's operations, sales
and profitability. Additionally, the Company plans to begin using the new
Catman computer system in the third quarter 1999. In the event this system
conversion is delayed, this will have an adverse material affect on the
Company, and the Company will have to take extraordinary measures to remediate
its present computer system so that it is Year 2000 compliant.
 
  Market Risk. The Company does not engage in any activity involving market
risk sensitive instruments other than foreign exchange forward contracts
described herein that are material to the business.
 
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
 
  The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk related to foreign currency exchange rates. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company enters into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on vendor accounts payable denominated in
foreign currencies. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on the Company's operating
results. The gains and losses on these contracts are included in earnings when
the underlying foreign currency denominated transaction is recognized. Gains
and losses related to these instruments for fiscal 1998 were not material to
the Company. Looking forward, the Company does not anticipate any material
adverse effect on its financial position, results of operations or cash flows
resulting from the use of these instruments. However, there can be no
assurance that these strategies will be effective or that transaction losses
can be minimized or forecasted accurately.
 
Item 8: Financial Statements and Supplementary Data
 
  The information called for by this item is indexed on page F-1 of this
Report and is contained on the pages following said page F-1.
 
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None.
 
                                   PART III
 
Item 10: Directors and Executive Officers of the Registrant
 
  Certain information required by this Item is included under the captions
"Executive Compensation--Executive Officers of the Company", "Election of
Directors--Nominees for Election as Director at the Annual Meeting",
"Directors Whose Terms Expire in 2000," "Director Whose Terms Expire in 2001"
and "Information Concerning the Board and Its Committees" in the Proxy
Statement for use in connection with the Company's 1999 Annual Meeting of
Stockholders (the "Proxy Statement"), and is incorporated herein by reference.
 
Item 11: Executive Compensation
 
  The information required by this Item is included under the captions
"Executive Compensation--Summary Compensation Table," "Compensation Committee
Report" and "Employment Arrangements" in the Proxy Statement, and is
incorporated herein by reference.
 
 
                                      26
<PAGE>
 
Item 12: Security Ownership of Certain Beneficial Owners and Management
 
  The information required by this Item is included under the caption
"Ownership of Common Stock" in the Proxy Statement, and is incorporated herein
by reference.
 
Item 13: Certain Relationships and Related Transactions
 
  N/A
 
                                    PART IV
 
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
  (a) The financial statements and financial statement schedules filed as part
of this Report are listed and indexed at Page F-1.
 
  Listed below are all Exhibits filed as part of this Report. Certain Exhibits
are incorporated herein by reference to (i) the Company's Registration
Statement on Form S-1 originally filed on May 5, 1994 (File No. 33-78624), and
(ii) documents previously filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended and the
Securities Exchange Act of 1934, as amended.
 
<TABLE>
<CAPTION>
 Exhibit                                                            Sequential
   No.                          Description                          Page No.
 -------                        -----------                         ----------
 <C>     <S>                                                        <C>
   3.1   Form of Amended and Restated Articles or Organization of
         the Company.(1)
 
   3.2   Amended and Restated By-laws of the Company.(1)
 
   4.1   Specimen Certificate of Common Stock.(1)(2)
 
   4.2   Registration Rights Agreement by and among certain
         Stockholders and
         the Company.(1)
 
  10.1   Lease Agreement between the Company and Naughton Company
         dated
         April 11, 1994.(1)
 
  10.2   Lease Agreement between the Company and John Hancock
         Mutual Life
         Insurance Company dated July 31, 1992.(1)
 
  10.3   California Public Warehouse Letter Agreement.(1)
 
  10.4   Form of Employment Agreement for Phillip D. Wade.(1)*
 
  10.5   Form of Employment Agreement for Huib E. Geerlings.(1)*
 
  10.6   Consulting Agreement between the Company and Peter van
         Hoof effective
         as of April 1, 1994.(1)
 
  10.7   $2,500,000 demand Discretionary Line of Credit dated
         January 7, 1994, as
         amended by letter agreement dated April 27, 1994,
         between the Company and
         The First National Bank of Boston.(1)
 
  10.8   Promissory Note of the Company in favor of The First
         National Bank of
         Boston dated January 7, 1994.(1)
 
  10.9   Security Agreement between the Company and The First
         National Bank
         of Boston dated January 7, 1994.(1)
 
  10.10  Stock Option Plan, as amended.
 
  10.11  Non-Employee Director Stock Option Plan, as
         amended.(1)(13)
 
  10.12  Employee Stock Purchase Plan.(1)
 
  10.13  Lease Agreement between the Company and Pacific Realty
         Associates, L.P.
         dated July 18, 1994.(4)
</TABLE>
 
                                      27
<PAGE>
 
<TABLE>
 
<CAPTION>
 Exhibit                                                            Sequential
   No.                          Description                          Page No.
 -------                        -----------                         ----------
 <C>     <S>                                                        <C>
  10.14  Lease Agreement between the Company and Flint Lee
         Limited Partnership
         dated August 31, 1994.(4)
 
  10.15  Lease Agreement between the Company and 47th Avenue
         Industrial Properties
         dated October 6, 1994.(4)
 
  10.16  Lease Agreement between the Company and Mehland
         Developers dated
         October 31, 1994.(4)
 
  10.17  Letter Agreement dated as of March 15, 1995 between the
         Company and
         the First National Bank of Boston.(4)
 
  10.18  Lease agreement between the Company and Hohokam Realty
         Condominiums
         dated October 31, 1994.(5)
 
  10.19  Lease agreement between the Company and Bruce K. and
         Gayle J. Hoyt dated November 23, 1994.(6)
 
  10.20  Master Agreement dated as of June 9, 1995 by and between
         the Company and Chemical Bank, a New York banking
         corporation.(6)
 
  10.21  Lease Agreement between the Company and The Naughton
         Company dated August 16, 1995.(7)
 
  10.22  Lease Agreement between the Company and Cole Taylor Bank
         dated August 23, 1995.(7)
 
  10.23  $5,000,000 demand Discretionary Line of Credit dated
         January 7, 1994, as amended by letter agreement dated
         October 13, 1995, between the Company and The First
         National Bank of Boston.(7)
 
  10.24  Lease Agreement between the Company and Debra Campbell
         dated July 15, 1996.(8)
 
  10.25  Lease Agreement between the Company and Simon Champagne
         dated July 24, 1996.(8)
 
  10.26  Employment letter agreement between the Company and Jay
         L. Essa dated September 9, 1996.(8)*
 
  10.27  Lease Agreement between the Company and Enviro-zyme
         International, Incorporated dated January 6, 1997.(9)
 
  10.28  Lease Agreement between the Company and William Eddy
         dated January 24, 1997.(9)
 
  10.29  Employment letter agreement between the Company and
         David R. Pearce dated November 8, 1996.(9)*
 
  10.30  Lease Amendment between the Company and 47th Avenue
         South Properties, LLC dated February 1, 1998.(11)
 
  10.31  Lease Addendum between the Company and Mehland
         Developers dated January 13, 1998.(11)
 
  10.32  Lease Amendment between the Company and PBP-N, Inc.
         dated October 9, 1997.(11)
 
  10.33  Lease Agreement between the Company and 216-218 Newbury
         Street Realty Trust dated January 20, 1998.(11)
 
  10.34  Lease Amendment between the Company and Bruce K. Hoyt
         dated March 18, 1998.(11)
 
  10.35  Sublease Agreement between the Company and Fishman
         Supply Co. dated June 12, 1998 and Lease Agreement
         between the Fishman Supply Co. and Charles R. Stephens
         dated September 1, 1989. (12)
</TABLE>
 
                                       28
<PAGE>
 
<TABLE>
 
<CAPTION>
 Exhibit                                                        Sequential
   No.                        Description                        Page No.
 -------                      -----------                       ----------
 <C>     <S>                                                    <C>
  10.36  Lease Amendment between the Company and Jerry L. Ivy
         dated April 21, 1998.
 
  10.37  Lease Agreement between the Company and Corporate
         Exchange Limited Partnership dated October 9, 1998.
 
  10.38  Letter agreement, amending $5,000,000 demand
         Discretionary Line of Credit, dated August 28, 1998,
         between the Company and The First National Bank of
         Boston.
 
  21     Subsidiaries of the Company
 
  23     Consent of Arthur Andersen LLP.
</TABLE>
--------
 (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
     filed on May 5, 1994 (File No. 33-78624) and incorporated by reference
     herein.
 (2) Filed as an Exhibit to Amendment No. 1 to the Company's Registration
     Statement on Form S-1 filed on June 9, 1994 (File No. 33-78624) and
     incorporated by reference herein.
 (3) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
     ended July 1, 1994 filed on August 15, 1994 (File No. 0-24048) and
     incorporated by reference herein.
 (4) Filed as an Exhibit to the Company's Form 10-K for the year ended
     December 31, 1994 (File No. 0-24048) and incorporated by reference
     herein.
 (5) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
     ended March 31, 1995 filed on May 15, 1995 (File No. 0-24048) and
     incorporated by reference herein.
 (6) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
     ended June 30, 1995 filed on August 14, 1995 (File No. 0-24048) and
     incorporated by reference herein.
 (7) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
     December 31, 1995 filed on March 29, 1996 (File No. 0-24048) and
     incorporated by reference herein.
 (8) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
     ended September 28, 1996 filed on November 12, 1996 (File No. 0-24048)
     and incorporated by reference herein.
 (9) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
     December 31, 1996 filed on March 31, 1997 (File No. 0-24048) and
     incorporated by reference herein.
(10) Filed as an Exhibit to the Company's Registration Statement on Form S-8
     filed on September 30, 1997 (File No. 333-36741) and incorporated by
     reference herein.
  * Management Contract or Compensation Plan
(11) Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended
     December 31, 1997 filed on March 30, 1998 (File No. 0-24048) and
     incorporated by reference herein.
(12) Filed as an Exhibit to the Company's Form 10-Q for the quarterly period
     ended June 30, 1998 filed on August 14, 1998 (File No. 0-24048) and
     incorporated by reference herein.
(13) Filed as an Exhibit to the Company's Registration Statement on Form S-8
     filed on October 20, 1998 (File No. 333-65907) and incorporated by
     reference herein.
 
  (b) No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1998.
 
                                      29
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          Geerlings & Wade, Inc.
 
                                                    /s/ Jay L. Essa
                                          By: _________________________________
                                                        Jay L. Essa
                                               President and Chief Executive
                                                          Officer
 
Date: March 26, 1998
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
 
<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
      /s/ Huib E. Geerlings            Chairman of the Board and    March 26, 1998
______________________________________  Director
          Huib E. Geerlings
 
         /s/ Jay L. Essa               President, Chief Executive   March 26, 1998
______________________________________  Officer and Director
             Jay L. Essa                (Principal Executive
                                        Officer)
 
       /s/ David R. Pearce             Vice President, Chief        March 26, 1998
______________________________________  Financial Officer and
           David R. Pearce              Treasurer (Principal
                                        Financial and Accounting
                                        Officer)
 
       /s/ Phillip D. Wade             Director                     March 26, 1998
______________________________________
           Phillip D. Wade
 
       /s/ James C. Curvey             Director                     March 26, 1998
______________________________________
           James C. Curvey
 
     /s/ John M. Connors, Jr.          Director                     March 26, 1998
______________________________________
         John M. Connors, Jr.
 
       /s/ Gordon R. Cooke             Director                     March 26, 1998
______________________________________
           Gordon R. Cooke
 
         /s/ Robert Webb               Director                     March 26, 1998
______________________________________
             Robert Webb
</TABLE>
 
                                      30
<PAGE>
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-2
 
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998.......................... F-3
 
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
 DECEMBER 31, 1998....................................................... F-4
 
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE
 PERIOD ENDED DECEMBER 31, 1998.......................................... F-5
 
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
 DECEMBER 31, 1998....................................................... F-6
 
NOTES TO FINANCIAL STATEMENTS............................................ F-7
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Geerlings & Wade, Inc.:
 
  We have audited the accompanying balance sheets of Geerlings & Wade, Inc. (a
Massachusetts corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Geerlings & Wade, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
 
                                          /s/ Arthur Andersen LLP
 
Boston, Massachusetts
January 29, 1999
 
                                      F-2
<PAGE>
 
                             GEERLINGS & WADE, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                           1997        1998
                                                        ----------- -----------
<S>                                                     <C>         <C>
                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents............................ $   358,043 $ 4,289,646
  Accounts receivable..................................     559,046     610,382
  Inventory............................................  10,984,590   8,213,801
  Prepaid mailing costs................................     957,483   1,357,950
  Prepaid expenses and other current assets............     987,034     833,376
  Deferred income taxes, net...........................     714,910      87,119
                                                        ----------- -----------
    Total current assets...............................  14,561,106  15,392,274
                                                        ----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
  Office and computer equipment........................   2,103,555   2,066,480
  Motor vehicles.......................................      77,875      77,875
  Furniture and fixtures...............................     369,216     369,944
                                                        ----------- -----------
                                                          2,550,646   2,514,299
  Less--Accumulated depreciation.......................   1,240,777   1,646,580
                                                        ----------- -----------
                                                          1,309,869     867,719
                                                        ----------- -----------
DEFERRED INCOME TAXES, NET.............................         --      493,436
                                                        ----------- -----------
OTHER ASSETS...........................................     112,367     451,799
                                                        ----------- -----------
                                                        $15,983,342 $17,205,228
                                                        =========== ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit....................................... $   982,395 $       --
  Accounts payable.....................................   1,900,761   3,401,392
  Current portion of deferred revenue..................     766,392   1,089,659
  Accrued sales, income and payroll taxes..............     931,860     395,692
  Accrued expenses.....................................     677,098     528,869
                                                        ----------- -----------
    Total current liabilities..........................   5,258,506   5,415,612
                                                        ----------- -----------
DEFERRED REVENUE, LESS CURRENT PORTION.................     363,163     384,940
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value--
   Authorized--1,000,000 shares
   Outstanding--none...................................         --          --
  Common stock, $.01 par value Authorized--10,000,000
   shares
   Issued and outstanding--3,781,343 shares and
   3,789,495 shares in 1997 and 1998, respectively.....      37,813      37,895
  Additional paid-in capital...........................   9,729,780   9,759,371
  Retained earnings....................................     594,080   1,607,410
                                                        ----------- -----------
    Total stockholders' equity.........................  10,361,673  11,404,676
                                                        ----------- -----------
                                                        $15,983,342 $17,205,228
                                                        =========== ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-3
<PAGE>
 
                             GEERLINGS & WADE, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                        -------------------------------------
                                           1996         1997         1998
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
SALES.................................. $31,501,236  $33,701,832  $34,774,173
COST OF SALES..........................  17,187,877   18,185,364   18,159,912
                                        -----------  -----------  -----------
    Gross profit.......................  14,313,359   15,516,468   16,614,261
SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES..............................  14,426,514   14,066,529   14,860,043
                                        -----------  -----------  -----------
    (Loss) income from operations......    (113,155)   1,449,939    1,754,218
INTEREST INCOME........................         --        20,975       31,038
INTEREST EXPENSE.......................    (257,259)     (44,319)     (20,616)
                                        -----------  -----------  -----------
    (Loss) income before provision
     (benefit) for income taxes........    (370,414)   1,426,595    1,764,640
(BENEFIT) PROVISION FOR INCOME TAXES...    (152,000)     604,000      751,310
                                        -----------  -----------  -----------
    Net (loss) income.................. $  (218,414) $   822,595  $ 1,013,330
                                        ===========  ===========  ===========
NET (LOSS) INCOME PER SHARE:
  Basic................................ $     (0.06) $      0.22  $      0.27
                                        ===========  ===========  ===========
  Diluted.............................. $     (0.06) $      0.22  $      0.27
                                        ===========  ===========  ===========
WEIGHTED AVERAGE COMMON AND COMMON
 EQUIVALENT SHARES OUTSTANDING (Note
 4):
  Basic................................   3,776,376    3,779,538    3,786,400
                                        ===========  ===========  ===========
  Diluted..............................   3,776,376    3,796,460    3,800,601
                                        ===========  ===========  ===========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-4
<PAGE>
 
                             GEERLINGS & WADE, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                            Common Stock
                         ------------------- Additional  Retained       Total
                         Number of   $.01     Paid-in    Earnings   Stockholders'
                          Shares   Par Value  Capital   (Deficit)      Equity
                         --------- --------- ---------- ----------  -------------
<S>                      <C>       <C>       <C>        <C>         <C>
BALANCE, DECEMBER 31,
 1995................... 3,775,243  $37,752  $9,705,327 $  (10,101)  $ 9,732,978
  Issuance of stock
   under employee stock
   purchase plan........     2,282       23      10,928        --         10,951
  Net loss..............       --       --          --    (218,414)     (218,414)
                         ---------  -------  ---------- ----------   -----------
BALANCE, DECEMBER 31,
 1996................... 3,777,525   37,775   9,716,255   (228,515)    9,525,515
  Issuance of stock
   under employee stock
   purchase plan........     3,818       38      13,525        --         13,563
  Net income............       --       --          --     822,595       822,595
                         ---------  -------  ---------- ----------   -----------
BALANCE, DECEMBER 31,
 1997................... 3,781,343   37,813   9,729,780    594,080    10,361,673
  Issuance of stock
   under employee stock
   purchase plan........     8,152       82      29,591        --         29,673
  Net income............       --       --          --   1,013,330     1,013,330
                         ---------  -------  ---------- ----------   -----------
BALANCE, DECEMBER 31,
 1998................... 3,789,495  $37,895  $9,759,371 $1,607,410   $11,404,676
                         =========  =======  ========== ==========   ===========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-5
<PAGE>
 
                             GEERLINGS & WADE, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                         --------------------------------------
                                             1996         1997         1998
                                         ------------  -----------  -----------
<S>                                      <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss) income.....................  $   (218,414) $   822,595  $ 1,013,330
 Adjustments to reconcile net income
  (loss) to net cash provided by
  operating activities--
  Depreciation and amortization, net of
   acquisition.........................       570,605      536,301      524,494
  Deferred income taxes................      (152,000)    (214,910)     134,355
  Gain on disposal of property and
   equipment...........................       (16,102)      (5,707)         --
  Changes in current assets and
   liabilities--
   Accounts receivable.................      (245,439)    (251,637)     (19,760)
   Inventory...........................     3,673,800   (2,624,824)   2,930,301
   Prepaid mailing costs...............       (13,120)    (144,275)    (372,191)
   Prepaid expenses and other current
    assets.............................       785,691     (699,486)      85,030
   Accounts payable....................    (2,082,918)   1,258,818    1,500,630
   Deferred revenue....................       100,422      196,382      345,044
   Accrued expenses....................       138,138      478,295     (208,948)
   Accrued sales, income and payroll
    taxes..............................      (108,538)     690,515     (536,168)
                                         ------------  -----------  -----------
    Net cash provided by operating
     activities........................     2,432,125       42,067    5,396,117
                                         ------------  -----------  -----------
CASH FLOWS USED IN INVESTING
 ACTIVITIES:
 Purchases of property and equipment,
  net..................................      (775,820)    (192,769)    (112,040)
 Proceeds from sale or return of
  property and equipment...............        30,893       56,550       90,000
 Acquisition of Passport Gift Company,
  Inc., net of cash acquired...........           --           --      (465,343)
 (Increase) decrease in other assets,
  exclusive of goodwill................      (129,539)      93,211      (24,409)
                                         ------------  -----------  -----------
    Net cash used in investing
     activities........................      (874,466)     (43,008)    (511,792)
                                         ------------  -----------  -----------
CASH FLOWS USED IN FINANCING
 ACTIVITIES:
 Bank overdraft........................       472,469     (472,469)         --
 Borrowings under line of credit.......     8,960,890    4,943,349    1,651,091
 Repayments under line of credit.......   (11,037,283)  (4,899,973)  (2,633,486)
 Proceeds from issuance of stock under
  the Employee Stock Purchase Plan.....        10,951       13,563       29,673
                                         ------------  -----------  -----------
    Net cash used in financing
     activities........................    (1,592,973)    (415,530)    (952,722)
                                         ------------  -----------  -----------
NET (DECREASE) INCREASE IN CASH AND
 CASH EQUIVALENTS......................       (35,314)    (416,471)   3,931,603
CASH AND CASH EQUIVALENTS, BEGINNING OF
 YEAR..................................       809,828      774,514      358,043
                                         ------------  -----------  -----------
CASH AND CASH EQUIVALENTS, END OF
 YEAR..................................  $    774,514  $   358,043  $ 4,289,646
                                         ============  ===========  ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
 Cash paid during the year for--
  Interest.............................  $    275,107  $    44,939  $    20,616
                                         ============  ===========  ===========
  Income taxes.........................  $        --   $   259,650  $ 1,095,131
                                         ============  ===========  ===========
ACQUISITION OF PASSPORT GIFT COMPANY,
 INC.
 Fair value of assets acquired.........  $        --   $       --   $   206,160
 Liabilities assumed...................           --           --       (60,719)
 Cash paid.............................           --           --       434,453
 Acquisition costs incurred............           --           --        30,890
                                         ------------  -----------  -----------
 Goodwill..............................  $        --   $       --   $   319,902
                                         ============  ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-6
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               December 31, 1998
 
(1) Operations
 
  Geerlings & Wade, Inc. (the Company) is a direct marketer of premium wines
and wine-related merchandise to retail consumers in the United States. The
Company maintains 15 licensed facilities in 14 states. Federal, state and
local laws strictly govern the sale of wine in each market served by the
Company.
 
(2) Summary of Significant Accounting Policies
 
  The accompanying financial statements reflect the application of certain
accounting policies and use of management's estimates described in this note
and elsewhere in the accompanying notes to financial statements.
 
 (a) Management Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 (b) Revenue Recognition
 
  Revenue from merchandise sales is recognized at the time of shipment to the
customer. The Company offers one and three-year membership programs to
customers, which provide them with certain preferred customer privileges.
Revenue derived from memberships is recognized over the related membership
period. Sales returns, which are not material, are recorded in the period of
return.
 
 (c) Cash and Cash Equivalents
 
  The Company considers all highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents. As of
December 31, 1997 and 1998, cash equivalents consist primarily of investments
in money market accounts.
 
 (d) Credit Card Policy
 
  The Company's agreement with a credit card processing company provides for
the electronic processing of credit approvals and electronic submission of
transactions. Payment is transmitted to the Company's bank account within two
to four days of the order transaction. Credit card processing fees amounted to
approximately $634,000, $723,000 and $808,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and are included in selling, general and
administrative expenses in the accompanying statements of operations.
 
 (e) Inventory
 
  The Company values inventory at the lower of cost (first-in, first-out) or
net realizable market value (estimated proceeds upon sale, net of fulfillment
expenses).
 
  During 1997 and 1998, the Company purchased approximately $3,223,000 and
$2,078,000, respectively, of inventory through wholesale channels with a
single supplier. Total or partial loss of the business relationship with this
supplier could result in a temporary near-term disruption of the Company's
ability to source domestically produced wine product. Management believes that
alternative sources of supply are readily available to mitigate the Company's
potential loss exposure.
 
  Included in the Company's inventory are approximately $106,000 and $164,000
of paid reservations of certain vintage wines as of December 31, 1997 and
1998, respectively. The Company sold approximately
 
                                      F-7
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
$283,000 and $247,000 of such reserves to its customers during 1997 and 1998,
respectively. The Company bears the ultimate liability for the wine
reservations sold until delivered and accepted by the customers, at which time
revenue is recognized.
 
 (f) Depreciation
 
  The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of the assets over
their estimated useful lives as follows:
 
<TABLE>
<CAPTION>
                                                                      Estimated
           Asset Classification                                      Useful Life
           --------------------                                      -----------
        <S>                                                          <C>
        Office and computer equipment...............................  3-5 years
        Motor vehicles..............................................    3 years
        Furniture and fixtures......................................    5 years
</TABLE>
 
 (g) Other Assets
 
  Other assets primarily consist of the long-term portion of deposits and
goodwill of approximately $320,000 resulting from the acquisition of Passport
Gift Company in 1998 (see Note 3). Goodwill is amortized on the straight-line
basis over 15 years, the estimated useful life, and is shown net of
approximately $10,700 of accumulated amortization as of December 31, 1998.
 
 (h) Long-Lived Assets
 
  The Company applies the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of.
SFAS No. 121 requires that long-lived assets, including intangible assets, be
reviewed for impairment by comparing the fair value of assets with their
carrying amounts at each reporting period. Accordingly, the Company evaluates
the possible impairment of long-lived assets based on projected cash flows of
the related asset. At both December 31, 1997 and 1998, the Company determined
that there was no impairment of long-lived assets.
 
 (i) Advertising Costs
 
  Advertising expense was $4,575,253, $4,756,042 and $5,237,893 for the years
ended December 31, 1996, 1997 and 1998, respectively.
 
  Costs of direct advertising materials mailed to prospective customers are
capitalized. These costs are expensed as advertising costs in relation to the
revenues that are derived from the mailings for up to five months. Revenue
estimates are used to determine the cost recovery period of prepaid mailing
costs. Total amounts capitalized as of December 31, 1997 and 1998 are $957,483
and $1,357,950, respectively.
 
 (j) Deferred Revenue
 
  Deferred revenue represents customer prepayments, payments for wine
reservations and deferred membership revenues. The components of deferred
revenue as of December 31, 1997 and 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                             1997       1998
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Payments for wine reservations...................... $  211,459 $  239,889
     Customer prepayments................................    320,031    460,649
     Deferred membership revenues........................    598,065    774,061
                                                          ---------- ----------
       Deferred revenues................................. $1,129,555 $1,474,599
                                                          ========== ==========
</TABLE>
 
                                      F-8
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
 
 (k) Foreign Currency Transactions
 
  Periodically, the Company may enter into foreign exchange contracts to hedge
currency exposure on firm inventory purchase commitments. The Company charges
foreign currency gains or losses to operations in accordance with SFAS No. 52,
Foreign Currency Translation. Gains and losses are included in cost of sales,
as these amounts have historically not been material. At December 31, 1997,
the Company did not have any foreign exchange contracts outstanding. At
December 31, 1998 the Company had five contracts to purchase approximately 7.8
million French francs (FF) (equivalent to approximately $1.4 million as of
December 31, 1998). These contracts mature at varying dates through April 1999
as the Company's accounts payable in French francs are due.
 
 (l) Fiscal Year
 
  The Company's fiscal year ends on December 31. For interim reporting
purposes, the Company closes its books on the last day of each interim fiscal
quarter.
 
 (m) Financial Instruments
 
  SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash and cash equivalents, accounts receivable,
investment in wine futures and notes payable. The estimated fair value of
these financial instruments approximates their carrying value.
 
 (n) Concentration of Credit Risk
 
  SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash equivalents. The Company
places its cash equivalents in highly rated financial instruments.
 
 (o) Comprehensive Income
 
  In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement established standards for reporting and display of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the years ended December 31, 1996,
1997 and 1998 the Company did not have any components of comprehensive income.
 
 (p) Segment Reporting
 
  In December 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that enterprises report selected information about operating segments
in interim financial reports issued to stockholders.
 
  SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
operates in one industry segment and provides one service function. The
Company's revenues are wholly derived from customers within the United States.
It is currently impracticable for the Company to report the revenues from
external customers for each group of similar products.
 
                                      F-9
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
 
 (q) Recently Issued Accounting Standards
 
  In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company does not anticipate the adoption of this statement to have a
material impact on its financial position or results of operations.
 
 (r) Reclassification
 
  The Company has reclassified certain prior year information to conform to
the current year's presentation.
 
(3) Acquisition
 
  On July 7, 1998, pursuant to an asset purchase agreement with Passport Gift
Company, Inc. (Passport), the Company acquired certain assets and assumed
certain liabilities for consideration of $465,343 in cash, including
acquisition costs. This transaction was accounted for as a purchase in
accordance with APB No. 16, Accounting for Business Combinations, and
accordingly, the results of Passport since July 7, 1998 have been included in
the accompanying statement of operations. The results of Passport's operations
are not material to the financial statements as a whole. The purchase price
was allocated to the acquired assets as follows:
 
<TABLE>
        <S>                                                            <C>
        Accounts receivable........................................... $  1,576
        Inventory.....................................................  159,513
        Prepaid mailing expenses......................................   28,276
        Property and equipment........................................   13,076
        Other assets..................................................    3,719
        Goodwill......................................................  319,902
        Liabilities assumed...........................................  (60,719)
                                                                       --------
                                                                       $465,343
                                                                       ========
</TABLE>
 
(4) Net Income (Loss) Per Share
 
  The Company adopted SFAS No. 128, Earnings per Share, effective for the
fiscal year ended December 31, 1997, which replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. Prior period
amounts have been restated to conform to the current period's presentation.
Under SFAS No. 128, basic net income (loss) per common share is computed based
on net income (loss) available to common stockholders and the weighted average
number of common shares outstanding during the period. The diluted net income
(loss) per share is computed by adding the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued to the weighted average number of common shares outstanding. For
the years ended December 31, 1996, 1997 and 1998, 257,619, 227,902 and 245,468
of anti-dilutive shares, respectively, have been excluded from the weighted
average number of common and common equivalent shares outstanding.
 
                                     F-10
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
 
  A reconciliation of basic and diluted shares outstanding, is as follows:
 
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                  -----------------------------
                                                    1996      1997      1998
                                                  --------- --------- ---------
   <S>                                            <C>       <C>       <C>
   Basic weighted average shares outstanding..... 3,776,376 3,779,538 3,786,400
   Weighted average common equivalent shares.....       --     16,922    14,201
                                                  --------- --------- ---------
   Diluted weighted average shares outstanding... 3,776,376 3,796,460 3,800,601
                                                  ========= ========= =========
</TABLE>
 
(5) Line of Credit
 
  The Company has a demand line of credit with a bank that allows the Company
to borrow the lesser of $5,000,000 or 50% of certain inventories, as defined.
The line of credit was amended in August 1998, modifying the interest rate
charged from the bank's base rate plus 3/4% to the bank base rate plus 1/2%.
The bank's base rate as of December 31, 1998 was 7.75%. No commitment fees
apply to the unutilized portion of the line of credit. The line of credit is
subject to annual reviews by the bank. Borrowings under the line of credit are
collateralized by all assets of the Company. There were no amounts outstanding
under this line-of-credit agreement at December 31, 1998. The weighted average
borrowing rate for 1998 was 9.25%.
 
  The Company maintains separate foreign exchange facilities with two banks,
each of which allows the Company to enter into forward exchange contracts of
up to $500,000, maturing on any one day, for the hedging of future foreign
currency needs. As described in Note 2(k), at December 31, 1998, there were
five outstanding forward exchange contracts in French francs for a total of
FF7,864,000 (approximately $1.4 million at December 31, 1998). These contracts
expire at different periods from January through April 1999.
 
(6) Commitments and Contingencies
 
 (a) Lease Commitments
 
  The Company leases facilities under operating lease agreements expiring
through October 2001. Future minimum rental payments due under these
agreements as of December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
        Fiscal Year                                                     Amount
        -----------                                                   ----------
        <S>                                                           <C>
        1999......................................................... $  861,452
        2000.........................................................    564,284
        2001.........................................................     92,019
                                                                      ----------
                                                                      $1,517,755
                                                                      ==========
</TABLE>
 
  Total rental expense under these agreements included in the accompanying
statements of operations is approximately $799,000, $862,000 and $1,003,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
 
 (b) Litigation
 
  In the ordinary course of business, the Company is party to various types of
litigation. The Company believes it has meritorious defenses to all claims,
and, in its opinion, all litigation currently pending or threatened will not
have a material effect on the Company's financial position or results or
operations.
 
 
                                     F-11
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
(7) Income Taxes
 
  Income taxes are provided for in accordance with SFAS No. 109, Accounting
for Income Taxes. Accordingly, a deferred tax asset or liability is recorded
based on the differences between the financial reporting and tax bases of
assets and liabilities, as measured by the enacted tax rates expected to be in
effect when these differences reverse. The deferred tax provision (benefit)
results from the net change during the year of deferred tax assets and
liabilities.
 
  The components of the (benefit) provision for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                    1996       1997       1998
                                                  ---------  ---------  --------
     <S>                                          <C>        <C>        <C>
     Current--
       Federal................................... $     --   $ 647,000  $486,955
       State.....................................       --     172,000   130,000
                                                  ---------  ---------  --------
                                                        --     819,000   616,955
                                                  ---------  ---------  --------
     Deferred--
       Federal...................................  (119,000)  (168,000)  105,355
       State.....................................   (33,000)   (47,000)   29,000
                                                  ---------  ---------  --------
                                                   (152,000)  (215,000)  134,355
                                                  ---------  ---------  --------
                                                  $(152,000) $ 604,000  $751,310
                                                  =========  =========  ========
</TABLE>
 
  The reconciliation of the federal statutory rate to the effective tax rate
for the years ended December 31, 1996, 1997 and 1998 for income taxes are as
follows:
 
<TABLE>
<CAPTION>
                                                            1996   1997  1998
                                                            ----   ----  ----
     <S>                                                    <C>    <C>   <C>
     Income tax (benefit) provision at federal statutory
      rate................................................. (34)%   34%    34%
     State taxes, net of federal benefit...................  (6)     6      6
     Other, net............................................  (1)     2    2.5
                                                            ---    ---   ----
                                                            (41)%   42%  42.5%
                                                            ===    ===   ====
</TABLE>
 
  Deferred income taxes relate to the following temporary differences as of
December 31, 1997 and 1998:
 
<TABLE>
<CAPTION>
                                                              1997      1998
                                                            --------  ---------
     <S>                                                    <C>       <C>
     Deferred revenue...................................... $366,000  $ 482,000
     Capitalized inventory.................................   80,000    133,000
     Nondeductible reserves................................  202,000    199,000
     Depreciation and amortization.........................  (35,000)    18,000
     Deferred costs........................................  102,000   (251,000)
                                                            --------  ---------
       Total deferred taxes................................ $715,000  $ 581,000
                                                            ========  =========
</TABLE>
 
                                     F-12
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
 
(8) Stockholders' Equity
 
 (a) Preferred Stock
 
  The Company has authorized 1,000,000 shares of $.01 par value preferred
stock. The Board of Directors has full authority to issue this stock and to
fix the voting powers, preferences, rights, qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, redemption
privileges and liquidation preferences and the number of shares constituting
any series or designation of such series. With regard to dividends, redemption
privileges and liquidation preferences, any particular series of preferred
stock may rank junior to, on parity with or senior to any other series of
preferred stock or the common stock.
 
 (b) Stock Option Plans
 
  The Employee Stock Option Plan (Option Plan), provides for the granting of
options to employees, consultants and advisers of the Company. The exercise
price of each option is determined by the Board of Directors, but in the case
of incentive stock options, as defined in the Internal Revenue Code, shall be
no less than 100% of the fair market value of the common stock on the date of
grant. Options are exercisable within 10 years of the original date of grant.
A total of 450,000 shares of common stock has been reserved for options to be
granted under the Option Plan.
 
  The Nonemployee Directors' Stock Option Plan (Director Plan) was adopted by
the Board of Directors and the stockholders on April 8, 1994 to provide for
the granting of nonqualified options to directors of the Company. The options
under the Director Plan are granted at fair market value on the date of grant.
Such options are subject to vesting over three years and carry a 10-year term.
A total of 125,000 shares of common stock have been reserved for options to be
granted under the Director Plan.
 
  Activity under the Option Plan and Director Plan is summarized as follows:
 
<TABLE>
<CAPTION>
                                     Option Plan                         Director Plan
                         ------------------------------------ ------------------------------------
                          Number     Weighted      Exercise               Weighted      Exercise
                            of     Average Price  Price per    Number   Average Price  Price per
                          Shares     per Share      Share     of Shares   per Share      Share
                         --------  ------------- ------------ --------- ------------- ------------
<S>                      <C>       <C>           <C>          <C>       <C>           <C>
Outstanding, December
 31, 1995...............   97,089     $12.20     $8.48-$16.00  15,000      $11.13     $8.00-$15.25
                         --------     ------     ------------  ------      ------     ------------
  Granted...............  255,953       5.37      3.63-  8.00   7,500        4.50             4.50
  Terminated............ (117,923)     11.24      4.13- 16.00     --          --               --
                         --------     ------     ------------  ------      ------     ------------
Outstanding, December
 31, 1996...............  235,119       5.26      3.63-  8.00  22,500        8.92      4.50- 15.25
                         --------     ------     ------------  ------      ------     ------------
  Granted...............   75,900       4.42      4.00-  5.13  15,000        4.46      4.38-  4.63
  Terminated............  (97,129)      5.52      3.63-  8.00  (7,500)       9.33      4.50- 15.25
                         --------     ------     ------------  ------      ------     ------------
Outstanding, December
 31, 1997...............  213,890       4.84      3.78-  8.00  30,000        6.85      4.38- 15.25
                         --------     ------     ------------  ------      ------     ------------
  Granted...............  196,500       4.31      3.00-  4.50  15,000        4.41      4.31-  4.59
  Terminated............  (75,363)      5.55      4.00-  8.00     --          --               --
                         --------     ------     ------------  ------      ------     ------------
Outstanding, December
 31, 1998...............  335,027     $ 4.37     $3.00-$ 8.00  45,000      $ 6.04     $4.31-$15.25
                         ========     ======     ============  ======      ======     ============
Exercisable, December
 31, 1998...............  156,250     $ 4.57     $3.78-$ 8.00  18,330      $ 8.38     $4.38-$15.25
                         ========     ======     ============  ======      ======     ============
</TABLE>
 
                                     F-13
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
 
  The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998 under the Option Plan:
 
<TABLE>
<CAPTION>
                            Options Outstanding           Options Exercisable
                     ---------------------------------- -----------------------
                        Number      Weighted
                     Outstanding    Average    Weighted     Number     Weighted
      Exercise          as of      Remaining   Average  Exercisable at Average
   Price/Range of    December 31, Contractual  Exercise  December 31,  Exercise
   Exercise Prices       1998     Life (Years)  Price        1998       Price
   ---------------   ------------ ------------ -------- -------------- --------
   <S>               <C>          <C>          <C>      <C>            <C>
     $3.00- 3.78       115,000        7.9       $ 3.68      60,000      $ 3.78
     $4.00- 4.75       173,232        9.1       $ 4.41      63,445      $ 4.44
     $5.25- 8.00        46,795        7.2       $ 5.94      32,795      $ 6.24
                       -------                  ------     -------      ------
                       335,027                  $ 4.37     156,250      $ 4.57
                       =======                  ======     =======      ======
 
  The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998 under the Director Plan:
 
<CAPTION>
                            Options Outstanding           Options Exercisable
                     ---------------------------------- -----------------------
                        Number      Weighted
                     Outstanding    Average    Weighted     Number     Weighted
      Exercise          as of      Remaining   Average  Exercisable at Average
   Price/Range of    December 31, Contractual  Exercise  December 31,  Exercise
   Exercise Prices       1998     Life (Years)  Price        1998       Price
   ---------------   ------------ ------------ -------- -------------- --------
   <S>               <C>          <C>          <C>      <C>            <C>
     $4.31- 4.63        35,000        8.7       $ 4.44       8,330      $ 4.48
     $8.00-15.25        10,000        5.9       $11.63      10,000      $11.63
                       -------                  ------     -------      ------
                        45,000                  $ 6.04      18,330      $ 8.38
                       =======                  ======     =======      ======
</TABLE>
 
  In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock
options or warrants to be included in the statement of operations or disclosed
in the notes to the financial statements. The Company has determined that it
will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. Options granted in 1996, 1997 and 1998 have
been valued using the Black-Scholes option pricing model prescribed by SFAS
No. 123.
 
  The weighted average assumptions used for the years ended December 31, 1996,
1997 and 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                     ---------------------------
                                                      1996     1997      1998
                                                     ------- --------- ---------
     <S>                                             <C>     <C>       <C>
     Risk-free interest rate........................    6.5% 6.3-6.61% 4.76-5.7%
     Expected dividend yield........................     --        --        --
     Expected lives................................. 5 years   5 years   9 years
     Expected volatility............................     68%       86%       96%
</TABLE>
 
  The weighted average grant date fair value of options granted during the
years ended December 31, 1996, 1997 and 1998 under these plans is $2.51, $2.37
and $3.83 respectively. As of December 31, 1996, 1997 and 1998, the weighted
average remaining contractual life of outstanding options under these plans is
9.1, 8.4 and 8.4 years, respectively.
 
 
                                     F-14
<PAGE>
 
                            GEERLINGS & WADE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
                               December 31, 1998
 
  Had compensation cost for the Company's stock option plans and Employee
Stock Purchase Plan been determined consistent with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                         December 31,
                                                 ------------------------------
                                                   1996       1997      1998
                                                 ---------  -------- ----------
   <S>                                           <C>        <C>      <C>
   Net income (loss)--
     As reported................................ $(218,414) $822,595 $1,013,330
     Pro forma..................................  (325,799)  661,277    690,050
   Basic net income (loss) per share--
     As reported................................ $   (0.06) $   0.22 $     0.27
     Pro forma..................................     (0.09)     0.18       0.18
</TABLE>
 
  The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
 
 (c) Employee Stock Purchase Plan
 
  The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Board of Directors and the stockholders on April 8, 1994 to allow eligible
employees, as defined in the Purchase Plan, to purchase shares of common stock
during one or more six-month periods through payroll deductions. A total of
50,000 shares of common stock have been reserved for purchase under the
Purchase Plan. As of December 31, 1997 and 1998, a cumulative total of 6,100
shares and 14,252 shares, respectively, of common stock have been purchased by
employees under the Purchase Plan.
 
(9) Employee Savings Plan
 
  The Geerlings & Wade, Inc. 401(k) Employee Savings Plan (the Plan) allows
for tax-deferred employee benefits under section 401(k) of the Internal
Revenue Code. Employees of the Company may participate in the Plan after one
year of service. The Company matches 50% of individual contributions, up to 6%
of compensation, as defined. Employee contributions vest immediately, while
Company matching contributions fully vest after five years of service, as
defined. For the fiscal years ended December 31, 1996, 1997 and 1998, the
Company's contribution expense was $47,000, $56,500 and $31,500, respectively,
under the Plan.
 
                                     F-15