SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-13406
The CHALONE Wine Group, Ltd.
(Exact name of registrant as specified in its charter)
California 94-1696731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
621 Airpark Road
Napa, CA 94558
(Address of principal executive offices) (Zip Code)
(707) 254-4200
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
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 (17 CFR ss.229.405) 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 [ ].
As of March 15, 1996, there were 2,795,278 shares of the Company's voting (no
par value common) stock, with an aggregate market value of $25,506,912 held by
non-affiliates. (For purposes of this required presentation, the registrant has
deemed its directors, executive officers, and Domaines Barons de Rothschild
(Lafite)to be affiliates, and has deducted the outstanding shares held by them
collectively from the total of 7,590,246 shares issued and outstanding.)
Documents Incorporated By Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders of The Chalone Wine Group, Ltd. to be filed within 120 days after
the end of registrant's fiscal year ended December 31, 1995 (the "Proxy
Statement") are incorporated by reference into Part III of this report.
<PAGE>
PART I
Item 1. Business.
a. General Development of Business.
The Chalone Wine Group, Ltd. (the "Company"), was incorporated under the
laws of the State of California on June 27, 1969. It became a publicly-held
reporting company as the result of an initial public offering in May of 1984.
The Company is, to its knowledge, one of only two publicly-held U.S.
corporations whose sole activity is in the production, marketing, and selling of
premium-priced wines in the $10 per bottle and up categories.
The Company produces, markets and sells premium white and red varietal
table wines, primarily Chardonnay, Pinot Noir, Cabernet Sauvignon and Sauvignon
Blanc. The Company operates five wineries, four located in different counties of
California and the fifth located in eastern Washington State. The Company's
California wines are made principally from grapes grown at its Chalone Vineyard
and Carmenet Vineyard facilities, at vineyards owned by the Company's partner in
the Edna Valley Vineyard joint venture, and, for the Company's Acacia Winery
facility, from grapes principally grown at neighboring independent vineyards,
plus a small vineyard one-half owned and managed by the Company. The Washington
State winery's wines are made from grapes grown at a nearby vineyard one-half
owned by the Company. The Company's wines are sold primarily in the
premium-priced segment of the table wine market under the labels "Chalone
Vineyard," "Edna Valley Vineyard," "Carmenet," "Acacia," and "Canoe Ridge
Vineyard."
In addition and as a result of an investment in the Company by Domaines
Barons de Rothschild (Lafite) ("DBR"), the Company receives an allocation of the
wines of DBR, including the wines of Chateau Lafite-Rothschild and Chateau
Duhart-Milon ("Duhart-Milon"), to sell primarily to the Company's shareholders.
Significant Event
On April 26, 1995, the Company reached agreement in principle with its two
largest shareholders, DBR and an affiliate of Richard C. Hojel, Summus
Financial, Inc. ("Summus"), for the infusion of substantial new equity into the
Company and a restructuring of the Company's operational relationship with DBR
and its affiliated group of companies. On October 25, 1995, the transaction was
approved at a Special Meeting of the Shareholders. The principal terms of the
Agreement may be summarized as follows:
1. DBR converted its $12.4 million principal amount of the Company's
convertible debentures, at a conversion price of $7.00, into 1,769,143 shares of
common stock
2. The Company received a total of $4.5 million, net of expenses, in cash,
contributed in equal amounts of $2.5 million by DBR and Summus, in return for
the issuance to each of 416,667 units, each unit consisting of one share of
common stock and one warrant for the purchase of one share of common stock, at a
per-unit price of $6.00. The warrants, which have a five-year term, are
exercisable at $8.00/share.
3. The Company exchanged essentially all of its existing ownership in DBR
for a 23.5% interest in Duhart-Milon, a Bordeaux wine-producing estate located
in Pauillac, France, and an affiliated company of DBR. The effect of this
element of the overall transaction was to convert an essentially passive 11.3%
interest in DBR into an interest in an active, operating vineyard and winery
operation.
4. The Company retained one share of stock in DBR and will continue to hold
one seat on DBR's board of directors (Conseil de Surveillance), with the
Company's President continuing to fill that seat. DBR will review the Company's
nomination to that seat on an annual basis.
5. The Company's Board of Directors was increased from the current nine to
eleven positions, with each of DBR and Summus given the right to designate a
nominee to one of the newly created positions.
6. DBR was released from its existing "standstill" restriction on
increasing its ownership position in the Company, but with a commitment not to
increase that position to over 49.9% of total shares outstanding, on a fully
diluted basis, through December 31, 1999.
b. Financial Information about Industry Segments.
Although the Company operates five different wineries, and also distributes
certain French, Chilean, Portuguese and Mexican wines and small quantities of
domestic wines of other producers in the United States, the marketing and sales
of all of the wines are handled on a consolidated basis, in all of the Company's
distribution channels. Hence all of the Company's business is considered a
single industry segment.
2.
<PAGE>
c. Narrative Description of Business.
Overview
<TABLE>
The Company owns, either wholly or in partnership with others, six
wineries, five with related vineyards, in the United States and France. The
specific ownership is as follows:
<CAPTION>
%
Property Ownership Form of Ownership Location
-------- --------- ----------------- --------
<S> <C> <C> <C>
Chalone Vineyard 100.0% Chalone Wine Group, Ltd. Soledad, California
Carmenet Winery 100.0% Chalone Wine Group, Ltd. Sonoma, California
Acacia Winery 100.0% Chalone Wine Group, Ltd. Napa, California
Marina Vineyard (Acacia) 50.0% Partnership Napa, California
Edna Valley Vineyard 50.0% Partnership San Luis Obispo
Canoe Ridge Vineyard 50.5% Limited liability corporation (LLC) Walla Walla, Washington
(effective January 1, 1996)
Chateau Duhart-Milon 23.5% Partnership Pauillac, France
</TABLE>
With the exception of Chateau Duhart-Milon (Duhart-Milon), the Company manages
and operates all of the above properties, and consolidates the results of their
operations. Unless otherwise indicated the term "Company", as used in this
report, refers to The Chalone Wine Group, Ltd. and its consolidated
subsidiaries. The Company accounts for its investment in Duhart-Milon using the
equity method of accounting.
Each of the five domestic wineries is in a separate "viticultural area."
Viticultural areas are designations granted by the federal Bureau of Alcohol,
Tobacco and Firearms to identify grape-growing areas distinguishable by their
specific and definable geographic and climatic characteristics. Wineries may
indicate a viticultural area on a bottle label only if 85% or more of the grapes
used to produce the wine were grown in that viticultural area.
All of the Company's wines are vintage-dated and the majority of its
primary label wines are Estate Bottled. A vintage-dated wine is one produced
wholly from grapes which were harvested, crushed and fermented in the calendar
year shown on the label. The Estate Bottled designation may be applied only to
wines made exclusively by one winery from grapes grown on land owned or
controlled by the winery, all within a single viticultural area.
The Company markets its wines, through specialty wine shops and grocery
stores, fine restaurants, hotels and private clubs in 50 States, the District of
Columbia, Puerto Rico and other islands in the Caribbean, Canada, England,
continental Europe, Hong Kong and Japan, and directly from the wineries and
through direct mail order sales in California and other states where legally
permitted. In addition, the Company sells custom branded wines where the brand
is owned by the purchaser.
By growing and purchasing its grapes and producing its wines at five
separate locations, the Company lessens the potential impact of any interruption
or disruption of wine production at any one facility.
A detailed description of the Company's properties and the operations at
each is set forth at Item 2, Properties.
Vineyard Practices
The Company believes that the soils and climates of the vineyards from
which it obtains its grapes are particularly suitable for the particular
varieties of grapes grown at each of them. Like most mountain vineyards, Chalone
Vineyard and Carmenet Vineyard typically produce lower yields of grapes than
valley vineyards. The yield of grapes per acre from the Edna Valley vineyards of
the Company's Joint Venture partner, which are located in a coastal valley, and
the yields from the vineyards in the cool Carneros District of the Napa Valley,
from which the Acacia wines are made, tend to be higher than at Chalone Vineyard
and Carmenet Vineyard, but are still significantly lower than average for
California. The Canoe Ridge Vineyard is being managed for a lower than average
yield for Washington State.
The Company believes that relatively low yields tend to enhance the
varietal character of the grapes and improve the quality of the resulting wines.
Chalone Vineyard and Carmenet Vineyard are farmed, pruned and drip-irrigated so
as to produce a lower yield of grapes than the maximum which could be obtained.
Similarly, the yields from the vineyards providing grapes to the Edna Valley,
Acacia and Canoe Ridge wineries are maintained at lower levels than is typical
of many other similarly situated vineyards.
Agricultural Risks; Phylloxera
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases, pests, drought, frosts and certain other weather
conditions can materially and adversely affect the quality and quantity of
grapes available to the Company, thereby materially and adversely affecting the
supply of the Company's products and its profitability.
Many vineyards particularly in the Northern California area have been
infested with phylloxera, a root louse that
3.
<PAGE>
renders a vine unproductive within a few years following infestation. The
current strain of phylloxera primarily affects vines of a certain type (referred
to as "AXR1"). The Company's vineyard properties, with the exception of Carmenet
Vineyard, are primarily planted to different and resistant varieties. Carmenet
Vineyard does have a portion of its vineyard planted on AXR1 but, due to its
isolated location, only a small area of the vineyard is presently affected and
the Company expects to replant on resistant rootstock over the next five to ten
years. However, there can be no assurance that the Company's existing vineyards
or the rootstocks the Company is now using in its planting and replanting
programs will not in the future become susceptible to current or new strains of
phylloxera, plant insects, or diseases, any of which could adversely affect the
Company.
Winemaking Practices
The winemaking practices used by the Company are derived from the
traditional methods of France, adapted to the particular requirements of
California. The Company believes that these methods, requiring a substantial
amount of hand labor, produce the best wines. At the Chalone Vineyard and Edna
Valley Vineyard facilities, the Company follows the traditional winemaking
practices of the Cote d'Or in the Burgundy region of France. The wines are made
from single grape varieties, principally Pinot Noir and Chardonnay. The
winemaking practices at Acacia Winery, although differing in some degree from
those at Chalone Vineyard and Edna Valley Vineyard, also follow Burgundian
winemaking practices and produce wines from single grape varieties. At Carmenet
Vineyard the Company follows the practices of the Medoc and Graves districts in
the Bordeaux region of France, whose wines are generally made from a blend of
varieties. The red wine made by Carmenet is a blend of Cabernet Sauvignon and
varying amounts of Merlot and Cabernet Franc, and the Carmenet white wine is a
blend of Sauvignon Blanc and Semillon. The wines produced at the Canoe Ridge
Vineyard facility are Merlot, Cabernet Sauvignon and Chardonnay. The Canoe Ridge
Merlot is a blend of 85% Merlot and 15% Cabernet Sauvignon, principally
utilizing state of the art techniques with the goal of producing the finest
Washington State wines.
Each of the Company's wineries is directed and managed by its own winemaker
Each of the wineries is designated a separate profit center, each with its own
General Manager, who is in most instances the winemaker. All five wineries,
including Canoe Ridge Vineyard, operate under the overall supervision of the
Company's Vice President, Production.
The Company imports 70% of its oak barrel requirements from both Burgundy
and Bordeaux and are supplemented with oak barrels produced in the United
States. The wine bottles used by the Company are made in the United States and
France to the Company's specifications, and are closed with the finest quality
imported corks, branded with the particular winery's name.
The Company operates on the principle that winemaking is a natural process
best managed with a minimum of intervention, but requiring the attention and
dedication of the winemaker. The Company uses modern laboratory equipment and
techniques to monitor the progress of each wine through all stages of the
winemaking process.
Wine Production and Wines
<TABLE>
The following table sets forth the wine production of the Company, for
calendar years 1995, 1994, and 1993:
<CAPTION>
VINTAGE YEAR
---------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------------- -------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Chardonnay............. 126,500 59% 138,000 68% 126,800 65%
Sauvignon Blanc........ 6,000 3% 6,600 3% 7,100 4%
Pinot Blanc............ 7,600 4% 7,100 3% 6,700 4%
Other white wines...... 3,200 1% 2,500 1% 3,500 2%
------------- -------- ------------ -------- ------------- --------
Total white wines.. 143,300 67% 154,200 75% 144,100 75%
------------- -------- ------------ -------- ------------- --------
------------- -------- ------------ -------- ------------- --------
Pinot Noir............. 27,300 13% 23,000 11% 23,300 12%
Cabernet Sauvignon..... 25,500 12% 21,200 10% 16,600 9%
Merlot................. 13,200 6% 7,400 3% 2,300 1%
Other red wines........ 4,400 2% 1,100 1% 6,100 3%
------------- -------- ------------ -------- ------------- --------
Total red wines.... 70,400 33% 52,700 25% 48,300 25%
------------- -------- ------------ -------- ------------- --------
============= ======== ============ ======== ============= ========
Total production.. 213,700 100% 206,900 100% 192,400 100%
============= ======== ============ ======== ============= ========
</TABLE>
The Company's wines are fermented and aged primarily in new and used
barrels, before they are bottled. White wines are aged for between six and nine
months and red wines for between nine and eighteen months after harvest. The
wine is then bottled and stored for further aging. White wines are released
between three months and two years
4.
<PAGE>
after bottling, while red wines are released from one to three years after
bottling.
Although the Company's wines are ready to be consumed when sold, it
generally takes from one to two years, or longer, for the wine to develop fully.
The Company usually recommends that its white wines be cellared by the purchaser
for one to five years, and its red wines from two to ten years, depending on the
vintage and variety.
The Company bottles its wines primarily under the "Chalone Vineyard," "Edna
Valley Vineyard," "Carmenet," "Acacia," and "Canoe Ridge Vineyard" labels.
The "Chalone Vineyard" label is known primarily for Chardonnay, Pinot Blanc
and Pinot Noir. The Company has sold Chalone Vineyard Chardonnay , Pinot Blanc,
and Pinot Noir since 1970. In addition, the Company bottles small quantities of
Chenin Blanc under the Chalone Vineyard label. All wines sold under this label
are produced from grapes grown by the Company at the Chalone Vineyard facility
or under the Company's control at adjacent vineyards, and are Estate Bottled.
The Company produces Chardonnay and Pinot Noir wines for the Joint Venture
under the "Edna Valley Vineyard" label. The Company's first release of wines
under the Edna Valley Vineyard label was approximately 359 cases of 1979 vintage
Chardonnay, released in 1980. The majority of wines sold under the Edna Valley
Vineyard label are produced from grapes grown by Paragon Vineyard Co., Inc.
("Paragon"), the Company's co-venturer in the Edna Valley Vineyard Joint
Venture, and are Estate Bottled.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia"
label. All grapes for the production of the Pinot Noir and approximately
two-thirds of the grapes for the Chardonnay are acquired at competitive prices
from various vineyards in the Napa Valley, in most cases pursuant to grape
purchase contracts. The remaining Chardonnay grapes are grown on the 42 acre
Marina Vineyard, a vineyard that surrounds the winery facility.
The Company produces and markets Bordeaux-style "Meritage" red and white
wines under the "Carmenet" label. The Carmenet red wine is made from Cabernet
Sauvignon, Merlot and Cabernet Franc grapes grown at the Carmenet Vineyard
facility, is Estate Bottled, and bears the "Sonoma Valley" viticultural area
designation. Additionally, the Company produces a red wine under the "Carmenet
Dynamite" label and is made from Cabernet Sauvignon grapes and bulk wine
purchased from various vineyards in the North Coast area of California. The
Carmenet white wine is made from Sauvignon Blanc and Semillon grapes purchased
from Paragon under a grape purchase agreement and bears the "Edna Valley"
designation.
The Canoe Ridge Vineyard subsidiary, which commenced operations in 1994,
produces Merlot, Cabernet Sauvignon and Chardonnay wines under the "Canoe Ridge
Vineyard" label. The grapes for these wines are grown at the Company's vineyard
in Benton County, Washington. The wines produced at this facility will, at least
for the near future, bear the "Columbia Valley" viticultural area designation.
In addition to its primary label wines, the Company bottles Chardonnay,
Cabernet Sauvignon, and Pinot Noir under various custom brands.
Imported Wines
As a result of the Company's investment in Duhart-Milon of the Pauillac
region of Bordeaux the Company receives an allocation of the wines of
Duhart-Milon for sale in both the wholesale market and to the Company's
shareholders. Additionally and as a result of investments by DBR in the Chalone
Wine Group, which commenced in 1989, the Company receives an allocation of the
wines of DBR, including the wines of Chateau Lafite-Rothschild and Chateau
L'Evangile of the Pauillac and Pomerol regions of Bordeaux, respectively, and of
Chateau Rieussec of the Sauternes region of Bordeaux, to sell primarily to the
Company's shareholders. DBR also produces a Pauillac wine exclusively for the
Company.
Other Domestic Wines
The Company markets the wines of Woodward Canyon, located in Washington
State's Columbia Valley, and also markets the Rhone-Valley style wines of Jade
Mountain, located in the Napa Valley.
Marketing and Distribution
The Company's five wineries, coupled with the wines of Duhart-Milon, are
positioned in the higher end of the premium category (wines selling over $3 per
bottle at retail.) The table below presents the price positioning of its labels
across those categories:
5.
<PAGE>
<TABLE>
{The following descriptive data is suppplied in accordance with Rule 304(d) of
Regulation S-T}
<CAPTION>
Average Retail Price
Winery Per Bottle Price Range Per Bottle Pricing By Premium Segments(1)
------ --------------------- ---------------------- ------------------------------
<S> <C> <C> <C>
Acacia $16.00 $10.00 to $40.00 Super to SuperUltra
Canoe Ridge Vineyard $15.00 $13.00 to $18.00 Super to Ultra
Carmenet $18.00 $14.00 to $35.00 Super to SuperUltra
Chalone Vineyard $22.00 $15.00 to $45.00 Ultra to SuperUltra
Edna Valley Vineyard $15.00 $15.00 to $23.00 Ultra to SuperUltra
Chateau Duhart-Milon $26.00 $25.00 to $40.00 SuperUltra
<FN>
- ---------------
(1) Super-ultrapremium is a segment not generally used by the trade, but which
the Company recognizes.
SuperUltra $20+
Ultra $14-$20
Super $7-$14
Popular $3-$7
</FN>
</TABLE>
The Company's wines are marketed through specialty wine shops and grocery
stores, selected restaurants, hotels and private clubs across the country and in
certain overseas markets, through mailing list sales within California and
elsewhere as permitted, and, in limited quantities, directly from the wineries.
The Company does limited advertising, relying also on word-of-mouth
recommendations, wine tastings and articles in various publications, and
promotional activities by the Company to increase public awareness of its wines.
The Company sells its wines through direct sales, independent distributors,
brokers, and its mailing list. These various channels are employed as follows:
Sales Outside California
Sales of the Company's wines outside California, in other States and in the
international market, are handled by carefully selected independent
distributors. In 1993 the Company established a sales and marketing division,
operating as Chalone Wine Estates, headed by the Company's Vice President,
Sales, to supervise and coordinate this major component of the Company's
business, as well as the Company's increasingly-important custom brands
operations. Additionally, the Company employs, under the Chalone Wine Estates
Vice President, a number of regional sales managers, working directly with the
distributors in the particular region and their customers, on a regular,
continuous basis.
The Company's wines are marketed, outside of California, in 50 States,
Puerto Rico, and the District of Columbia, and, internationally, in Bermuda and
other Caribbean islands, Canada, England, continental Europe, Hong Kong and
Japan. In 1995,
Sales Within California
Northern California Sales. Since January of 1988, Chambers & Chambers,
Inc., Wine Merchants ("Chambers & Chambers"), has handled essentially all of the
wholesale marketing of the Company's wines in Northern California, under an
arrangement in which Chambers & Chambers acts in the capacity of broker.
Chambers & Chambers also markets the Company's wines in Hawaii as a distributor.
Southern California Sales. Utilizing its own sales force, the Company has
direct responsibility for the sale of all of its wines in the large Southern
California market.
Shareholder Services. The Company offers its reserve wines, older wines and
other special wines to its shareholders, currently numbering in excess of
10,000, as well as other consumers, directly from its centralized distribution
center by phone or mail order. The Company sends two major offerings to all
mail-order customers each year and frequent additional catalogs exclusively to
and for our shareholders. Shareholders of the Company are afforded certain
additional benefits, over those provided to mailing-list customers at large.
Certain wines of limited production are offered only to shareholders. Beneficial
owners of 100 shares or more of the Company's common stock are entitled to a
20%-30% discount from retail prices on all mail-order or other direct purchases
from the
6.
<PAGE>
Company. The Company has also provided annual discounts to shareholders based on
their sharholdings in the form of a Wine Dividend Credit. The Company confines
direct mail shipments to purchasers with addresses in California and a handful
of other States which have reciprocal cross-sale arrangements with the State of
California, because of legal restrictions on direct retail sales in other
States. Additionally, the Company typically provides for shareholders two or
three travel programs a year to various wine-growing regions of the world.
Recent trips have been to France, Chile, Australia, Portugal, and most recently
to South Africa.
<TABLE>
Case Sales by Method of Distribution
The following table sets forth case sales by the Company, by distribution
method, for calendar years 1995, 1994, and 1993.
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------------ -------- ------------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Independent distributors
United States.................. 108,831 40% 82,519 39% 62,300 36%
International.................. 8,457 3% 6,057 3% 9,015 5%
------------ -------- ------------- -------- ------------ -------
Total distributors......... 117,288 43% 88,576 42% 71,315 41%
------------ -------- ------------- -------- ------------ -------
Company direct
California wholesale........... 70,330 26% 75,078 35% 76,028 43%
Custom brands.................. 63,442 24% 29,604 14% 12,616 7%
Catalog and winery retail...... 19,247 7% 19,562 9% 15,407 9%
------------ -------- ------------- -------- ------------ -------
Total Company direct....... 153,019 57% 124,244 58% 104,051 59%
------------ -------- ------------- -------- ------------ -------
Total............................... 270,307, 100% 212,820 100% 175,366 100%
============ ======== ============= ======== ============ =======
</TABLE>
Centralized Administration and Warehousing
The five wineries operated by the Company are all supported by a central
executive office which coordinates financial planning, administration,
distribution and marketing. In February of 1993, the Company entered into a
contract for the construction and long-term lease of a new building, of
approximately 71,500 square feet, located in the Napa Airport Business Park,
Napa County, California, to house both the Company's executive offices and a
centralized distribution center from which all of the Company's wines are staged
prior to being shipped into local markets. The Company utilizes a portion of the
warehouse space for the storage of third-party wines. The lease has a 15-year
term expiring November 2008, with a five-year extension option. Additionally,
the Company utilizes warehouse facilities as needed in local markets.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all beverages, including non-alcoholic beverages.
However, the Company believes that its primary competitors consist of
approximately 160 wineries in California, as well as a number of wineries in
Washington and Oregon, which produce wines in the premium-priced segment of the
table wine market. The Company's wines, including the wines of DBR, and others,
distributed by the Company, also compete with imported wines, particularly those
from the Burgundy and Bordeaux regions of France and, to a lesser extent, those
of Italy, Chile, and Australia.
The Company believes that the principal competitive factors in its wine
industry segment are label recognition, product quality and price. The Company
believes it generally competes favorably with respect to these factors. As
production from all of its wineries continues to increase, however, the
Company's future sales may be adversely affected by the competition described
above and by competition from new market entrants.
Employees
On December 31, 1995, the Company had 85 full-time employees, of whom 40
were involved in grape-growing and winemaking and 45 in sales and
administration. During the spring and summer, the Company adds approximately 11
to 16 part-time employees for vineyard care and maintenance and 70 to 90
part-time employees for the spring bottling. In the autumn, up to 50 additional
part-time employees are hired for the grape harvest and another 15 for winery
work.
None of the employees of the Company, its subsidiary, or of either of the
joint ventures are represented by a union. The Company believes that its and the
joint ventures' wage rates and benefits are competitive with those of other
companies in the industry and that its and the joint ventures' relations with
their respective employees are excellent.
7.
<PAGE>
Regulation; Permits and Licenses
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, and the Company is required to
maintain various permits, bonds and licenses to comply with the regulations of
such agencies.
In addition to the required winery permits and licenses, the Company holds
federal importer's and wholesaler's permits and California importer's, beer and
wine wholesale, and beer and wine retail (off-sale) licenses. Under these
permits and licenses, the Company is authorized to import wines into the United
States from foreign countries, to import wines into California from other
states, and to warehouse and sell wines other than those of its own production.
The Canoe Ridge Vineyard subsidiary holds its own winery permit and license.
The Company's wines are subject to a federal excise tax, payable at the
time of shipment to customers. This tax, which had for many years been $0.17 per
gallon, was increased, effective January 1, 1991, to a maximum of $1.07 per
gallon. In addition, all states in which the Company's products are sold impose
varying excise taxes on alcoholic beverages.
The Company believes it is in compliance with all currently applicable
federal and state regulations.
Trademarks
CHALONE VINEYARD, CARMENET, and the ACACIA "A" plus DESIGN are federally
registered trademarks owned by the Company. EDNA VALLEY VINEYARD is a federally
registered trademark owned by Paragon and licensed exclusively to the Edna
Valley Vineyard Joint Venture. In December of 1994 the Company received a
Certificate of Registration for the CANOE RIDGE mark, and in January of 1995
filed an assignment of that federal registration to the Washington State
subsidiary. The Company's principal marks are also registered in Japan, with the
Japanese Patent Office.
Seasonality
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a discussion of the seasonal nature of the
Company's business.
8.
<PAGE>
Item 2. Properties.
<TABLE>
The Company's principal winemaking are conducted at five locations, four in
California and one in eastern Washington. The following table shows the
producing acreage, by grape variety, at the various vineyards owned, in whole or
in part, by the Company:
<CAPTION>
At December 31, 1995
-----------------------------------
Producing Unplanted Total
-------- --------- -----
<S> <C> <C> <C>
Chalone Vineyard:
Chardonnay............................................ 101 -- 101
Pinot Noir............................................ 37 -- 37
Pinot Blanc........................................... 30 -- 30
Chenin Blanc.......................................... 7 -- 7
Unplanted............................................. -- 361 361
-------------------------------------
175 361 536
-------------------------------------
Carmenet Vineyard:
Cabernet Sauvignon, Merlot, Cabernet Franc............ 52 -- 52
Unplanted............................................. -- 25 25
-------------------------------------
52 25 77
-------------------------------------
Acacia Winery (including leasehold interest):
Chardonnay............................................ 41 -- 41
Unplanted............................................. -- 4 4
-------------------------------------
41 4 44
-------------------------------------
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon.................................... 32 -- 32
Merlot................................................ 39 -- 39
Chardonnay............................................ 30 -- 30
Unplanted............................................. -- 81 81
-------------------------------------
101 81 182
-------------------------------------
Total Acreage.................................... 369 471 840
=====================================
</TABLE>
Chalone Vineyard
Chalone Vineyard is located on approximately 800 acres in Monterey County,
California, approximately 1,500 feet above the floor of the Salinas Valley, in
an 8,000-acre viticultural area called "Chalone." The soil is sparse, reddish
volcanic rock underlain by limestone, and is similar to the soil found in
Burgundy. The elevation of the vineyards provides natural protection against
frost.
The average annual rainfall in the area is 14 inches. The Company
supplements the annual rainfall with a drip-irrigation system fed by a
ten-million gallon reservoir. The Company's reservoir was historically filled
from wells drilled by the Company, by water piped from an adjoining parcel of
land under an oral agreement with the property owner, and in occasional
exceptionally dry years by water piped, by temporary pipeline, from the Salinas
Valley Floor. In 1987 the Company completed installation of a permanent
waterline from the Salinas Valley floor to the vineyard premises, and in 1988
concluded the necessary easements and successfully drilled a well with
sufficient water for the vineyard's current and anticipated future needs.
In 1985, the Company installed an electrical power line from a Pacific Gas
& Electric Co. ("PG&E") terminus outside of Soledad on the Salinas Valley floor
to the Chalone Vineyard premises. The Company owns the approximately
seven-mile-long line and holds recorded easements from each of the traversed
landowners for the power line right-of-way. The Company has undertaken to
maintain the line at its expense, but has reserved the right to enter into
discussions with the traversed landowners regarding a possible annual user fee
if maintenance costs are disproportionately high. PG&E has an option to purchase
the line at its fair market value.
Chalone Vineyard was originally established in the early 1920's and is the
oldest commercial vineyard in Monterey County. The Company has produced premium
wines from Chalone Vineyard since 1969, when it acquired the property from a
predecessor corporation which had produced wines since 1966 under the direction
of Richard H. Graff, the Company's Chairman of the Board.
The present Chalone Vineyard winery was constructed in 1974 with
approximately 13,000 square feet of space, including 5,000 square feet of
underground cellars for wine fermentation and aging in barrels, and with an
annual production capacity of approximately 15,000 cases of wine. Through a
succession of expansions commenced in 1985, including the addition of
approximately 3,500 square feet of caves for barrel storage, the winery's
current production capacity has been brought to approximately 35,000 cases. The
winery also includes a tasting-room and dining
9.
<PAGE>
facilities for private parties.
The Company produces primarily Chardonnay and Pinot Noir at this facility
and markets these wines under the "Chalone Vineyard" and "Gavilan" labels.
Carmenet Vineyard
Carmenet Vineyard consists of approximately 300 acres in Sonoma County,
California, located in the "Sonoma Valley" viticultural area. Approximately 52
acres are producing vineyard, planted to Cabernet Sauvignon (44 acres), Merlot
(five acres) and Cabernet Franc (two acres).
The vineyards are situated in the Mayacamas Mountains just north of the
town of Sonoma, at an elevation of about 1,200 feet. The grapevines grow on
steep hillsides in rocky, well-drained soil, and range up to 12 years in age.
The average annual rainfall is 30 inches. The Company has drilled two wells
which provide sufficient water to supplement the annual rainfall. All of the
vines are drip-irrigated. As at Chalone Vineyard, the elevation of Carmenet
Vineyard provides natural protection against frost.
The barrel-storage caves, comprising approximately 15,000 square feet,
consist of four large chambers with interconnecting passageways, all bored into
the solid rock hillside behind the fermentation building. The caves at Carmenet
provide the proper environment for aging wine in barrels without artificial
temperature control. The winery has an annual production capacity of
approximately 32,000 cases. The upper story of the winery tower contains a
reception area and dining facilities for customers and guests.
The Company principally produces Bordeaux-style red and white wines at this
winery and markets these wines under the "Carmenet" label.
Edna Valley Vineyard
The Edna Valley Vineyard Joint Venture was established in April 1980
between the Company and Paragon. Initially established for a 10-year first term
with a 10-year renewal option, effective January 1, 1991, the Company and
Paragon entered into a set of agreements to convert the Joint Venture into a
"permanent partnership" of unlimited duration. A significant element of the
transaction was the purchase by the Company of an option for $1,017,174 (with
$175,439 remaining due in 1997) giving it the right to convert the limited-term
venture into the permanent relationship upon final payments to Paragon of
$200,000 in 1998 and 1999 and $4,500,000 in 2000. At this time, the Company
plans to exercise this option and make all payments required through 1997. The
Company believes that the cash-flow from the Venture will be sufficient to fund
most, if not all, of the option and additional payments through 1999, as well as
a portion of the final payment in 2000. The Company is continuing to monitor the
Joint Venture's performance and evaluate whether expected future profitability
and cash flows are sufficient to warrant continued investment in the venture and
ultimate exercise of the option. Should the Joint Venture's performance
deteriorate, management may decide not to make the additional payments required
under the option.
The Company produces and markets wines for the Joint Venture from grapes
purchased from Paragon under the terms of a grape purchase agreement between
Paragon and the Joint Venture. The winery, located at the site of the Paragon
vineyards, was built by Paragon and, until 1991, was leased to the Joint
Venture. With the Company's purchase of a half-interest in the winery, in 1991,
the winery lease was terminated. The parties lease the property on which the
winery sits under a ground lease from Paragon.
The Edna Valley Vineyard winery is situated in San Luis Obispo County, in
the "Edna Valley" viticultural area, a coastal valley bounded to the north and
south by low mountain ridges. The area has a cooler climate than surrounding
areas, and the vineyards have well-drained alluvial soil. Paragon has installed
frost-protection equipment in its vineyards.
As was true previously, under the terms of the 1991 Joint Venture Agreement
the Company has responsibility for managing the operations of the Joint Venture,
and receives a management fee to cover administrative costs. The Company also
receives a commission on all sales of Edna Valley Vineyard wines.
Paragon and the Company share equally (after adjustment for Partners'
varying bases in an asset contributed to the Joint Venture) in the net profits
and losses of the Joint Venture. A six-member review committee (three
representatives from each Joint Venture partner) decides whether profits will be
distributed and whether further contributions of capital are required. Any
further contributions of capital, if required, are to be borne equally by
Paragon and the Company.
Under the terms of the grape purchase agreement, Paragon sells fixed
quantities of Chardonnay and Pinot Noir grapes, and occasionally small
quantities of other varieties, to the Joint Venture, at prices calculated by
reference to the average of the prices paid for those varieties in Napa, Sonoma
and Mendocino Counties during the preceding year, as reported by the California
Department of Agriculture, with adjustments depending on the sugar content of
the grapes supplied. The grape purchase agreement provides that the grapes
supplied by Paragon are to be harvested
10.
<PAGE>
from areas of Paragon's Edna Valley vineyards which are jointly selected by
Paragon and the Company.
Paragon's Edna Valley vineyards comprise approximately 600 acres, planted
to several varieties of grapes. Approximately 150 acres are planted to
Chardonnay and 45 acres to Pinot Noir. The Joint Venture purchases the majority
of the annual harvest of these two varieties. Paragon also grows Sauvignon Blanc
and Semillon grapes, most of which are purchased by the Company under a separate
grape purchase agreement, for the production of Carmenet white wine at the
Carmenet Vineyard winery. The grapevines were planted in 1972 and all are
drip-irrigated. The average annual rainfall at Edna Valley Vineyard is 24
inches. Paragon has drilled seven wells to supplement the annual rainfall.
Although the water from the wells tends to be high in dissolved salts, it is
satisfactory for use in drip-irrigation during years of normal rainfall.
The Edna Valley Vineyard winery is approximately 24,000 square feet in
size, including 10,000 square feet of underground cellars for wine fermentation
and aging in barrels. The winery has an annual production capacity of
approximately 58,000 cases. In the 1991 agreements the Joint Venture partners
undertook to consider increasing the winery capacity, over time, and to increase
the volume of grape purchases from Paragon and the Joint Venture's annual wine
production proportionately. That process scheduled to commence in 1996.
The wines produced at this facility are principally Chardonnay and Pinot
Noir, which are marketed under the "Edna Valley Vineyard" label.
Acacia Winery
In July of 1986, the Company acquired substantially all of the operating
assets of Acacia Winery, located in the Carneros District of the Napa Valley, in
Napa County, California. The purchase included the winery building and
winemaking equipment previously owned by Lakeside Winery ("Lakeside"), a
California limited partnership which had owned and operated Acacia Winery since
its inception in 1979, and included a ground lease for the land on which the
winery is situated, obtained from Vista de los Vinedos ("Vista"), a partnership
whose partners were Lakeside and two individuals, Mr. and Mrs. Henry Wright
("the Wrights"). The ground lease has an initial term ending December 31, 1996,
and is renewable for two additional ten-year terms.
Vista also owned, at the time of the Acacia Winery purchase, approximately
41 acres of producing vineyard surrounding the Acacia Winery complex, known as
the Marina Vineyard. As a part of the Acacia purchase, the Company entered into
long-term contracts with Vista for the management of the Marina Vineyard and for
the purchase of its annual grape crop. The Company also obtained rights of first
refusal for the purchase of the Vista assets and alternatively for the purchase
of Lakeside's 50% interest in Vista.
In July of 1988, the Company exercised its right of first refusal for
Lakeside's interest in Vista, acquiring that interest for approximately $1.174
million, in cash. In cooperation with the Wrights, the Vista partnership was
then dissolved and the real property (the Marina Vineyard plus the acreage under
the winery) conveyed into co-tenancy, pursuant to a tenancy in common agreement.
The grape purchase and vineyard management agreements were extinguished and
replaced by a long-term vineyard lease of the Wrights' half-interest in the
Marina Vineyard, effective retroactively to January 1, 1988. The ground lease
for the winery parcel was also modified to reflect the new ownership structure,
with a similar effective date.
Under the terms of the tenancy in common agreement the Wrights have the
right at any time on or after January 1, 1998, to "put" their half-interest in
the real property to the Company and, if the Company declines to purchase, to
have the entire property listed for sale to a third party.
The vineyard lease is for a single thirty-year term, expiring December 31,
2017 (subject to a 5-year "tail-off" period in the event of a sale of the
property to a third party). The annual rental, which was fixed with regard to
the price of premium quality Carneros District Chardonnay grapes, was $82,500
for 1988, increasing by 5 per cent per annum through 1997, and thereafter fixed
according to a formula similarly based on Carneros Chardonnay grape prices.
The Marina Vineyard is planted entirely to Chardonnay grapes. The majority
of the vines were planted in the mid-1970's, although significant replanting on
new root-stock was undertaken in early 1980s. The vineyard is not
frost-protected but to date has not experienced any significant losses due to
frost damage. The vineyard is irrigated from a 22-acre-foot reservoir located on
the property. The vineyard and winery are within both the "Carneros" and the
"Napa Valley" viticultural areas.
As a result of expansion completed in 1991, the Acacia Winery has an annual
production capacity of approximately 50,000 cases. The winery has modest
tasting-room and dining facilities.
The wines produced at Acacia Winery are principally Chardonnay and Pinot
Noir, which are marketed under the "Acacia" and "Caviste" labels.
11.
<PAGE>
Canoe Ridge Vineyard Properties
In September of 1990, the Company acquired a 50% interest in a small
vineyard located on what is called "Canoe Ridge," in eastern Washington State
(Benton County), through the formation of a joint venture ("CanoeCo Partners")
with a small, privately-held company known as CRVI. The CanoeCo property
consists of approximately 275 acres, of which approximately 100 acres are now
planted, in roughly equal proportions of Merlot, Chardonnay, and Cabernet
Sauvignon grapes. The vineyard is located at an altitude of approximately 800
feet on the eastern slope of the Canoe Ridge overlooking the Columbia River.
Although temperatures during the winter months can fall below freezing, the
vineyard's altitude, easterly exposure, and appropriate viticultural practices
reduce the potential of freeze damage. The vineyard is irrigated with water from
the nearby Columbia River under an agreement with an adjoining farm that is
owned by several of the CRVI shareholders, one of whom is the on-site vineyard
manager.
In the summer of 1994 the Company established the Canoe Ridge Vineyard
winery, in the historic "Walla Walla Valley Railroad" engine-house building,
recently renovated for the purpose. Subsequently the Company formed a Washington
State subsidiary corporation, Canoe Ridge Winery, Inc., dba Canoe Ridge Vineyard
(CRW), to become the winemaking entity. The Company holds a 51% interest in this
new corporation and a group of some 40 Washington residents collectively holds
the remaining 49%. The subsidiary acquired from the Company all of the
winemaking equipment and supplies, all interest in the trade name CANOE RIDGE,
and, consistent with regulatory requirements, all inventory on hand. It also
assumed the lease for the winery building.
The lease is for a five-year term, with two five-year renewal options. The
monthly rent is $1,600 on a triple net basis, for the first five-year term,
subject to ordinary escalation for the renewal terms. The landlord is a small
partnership which is also one of the shareholders of the winery company. The
building itself, located in downtown Walla Walla, is approximately 9,000 square
feet in dimension. An additional small building, which will in due course serve
as office and tasting-room, is currently under construction. Ultimate annual
wine production is projected to be 25,000 cases, divided between Merlot and
Chardonnay, with small amounts of Cabernet Sauvignon.
The vineyard and winery are both located in the "Columbia Valley"
viticultural area. At a future point in time it is contemplated that an
application will be made to the Bureau of Alcohol, Tobacco and Firearms, jointly
with the owner of the remainder of the Canoe Ridge vineyard locale, to establish
a smaller viticultural area called "Canoe Ridge."
In early 1996, both vineyard and winery operations were merged into a new,
Washington State limited liability company, Canoe Ridge Vineyard, L.L.C. As a
result of its prior holdings in CanoeCo Partners and CRW, the Company holds a
50.5% membership interest in the new company, 25% directly and 25.5% indirectly
through CRW, which in the reorganization process became a wholly-owned
subsidiary of the Company. The remaining membership interests are held by the
Company's partner in CanoeCo, CRVI (25%), and the former individual shareholders
of CRW (now formed into another, separate limited liability company) (24.5%).
Management of Canoe Ridge Vineyard, L.L.C., is reposed in a group of nine Member
Delegates, five designated by the Company and four by the 49.5% minority
interests.
Applications for requisite alcoholic beverage permits and licenses, to
permit the new company to operate as a bonded winery in its own right, are
pending.
Duhart-Milon
As described above, effective October 1, 1995, the Company exchanged all of
its existing ownership in DBR for a 23.5% interest in Duhart-Milon. The
remaining 76.5% of Duhart-Milon is owned by DBR. Duhart-Milon is a wine
producing property located in Paulliac in the Medoc region of Bordeaux in
France. The property consists of approximately 166 acres of producing vineyards,
contiguous to the vineyards of Chateau Lafite-Rothschild, and winemaking
facilities located in the town of Paulliac. In 1855 the French Government
classified the top 62 wine-producing estates in the medoc region of Bordeaux
(out of over 400 such estates) into five growths based on their perceived
quality, with first growth being the best. Under the classification system
Duhart-Milon is rated as a fourth growth estate. The average annual production
has in recent years been approximately 35,000 cases and is sold under the
Chateau Duhart-Milon and Moulin de Duhart labels. Duhart-Milon employs
approximately 24 employees. DBR purchased the property in 1962. Financial
Statements for Duhart-Milon are included as an Exhibit to this report.
Item 3. Legal Proceedings.
There are no material legal proceedings pending to which the Company or
either of the Joint Ventures is a party nor to which any property of any of them
is subject, nor does the Company's management know of any such action being
contemplated.
12.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held a special Meeting of Shareholders at the Company's
executive offices, 621 Airpark Road, Napa, California, on October 25, 1995. In
attendance, in person or by proxy, were 3,261,468 shares, or, approximately
65.6% of total shares outstanding. The only matter voted upon at the Special
Meeting was the approval of transactions with Domaines Barons de Rothschild
(Lafite) and Summus Financial, Inc., et al., pursuant to the terms of an Omnibus
Agreement dated August 22, 1995 (see Item 1(a) Significant Event), with
2,247,416 shares voting for, 86,977 shares voting against and 927,075 shares
abstaining or subject to broker non-votes.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of
March 27, 1996.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward President, Chief Executive 56
Officer, and Director
William L. Hamilton Executive Vice President, Chief 51
Financial Officer, Assistant
Secretary, and Director
Larry M. Brooks Vice President, Production, and 45
Managing Director, Acacia Winery
Robert B. Farver Vice President, Sales 39
b. Business Experience of Executive Officers
W. Philip Woodward. Mr. Woodward joined the Company as Vice President
and Chief Financial Officer in 1972 and in December of 1974 became its President
and Chief Executive Officer. He continued as Chief Financial Officer until
October of 1983. He has overall responsibility for all aspects of the Company's
operations. He is a director of Domaines Barons de Rothschild (Lafite) ("DBR"),
in which the Company holds an interest, a director of the Northern Trust Company
of California, director of Hog Island Oyster Company, Inc., and President and a
director of the Marin Theatre Company. He was a purchaser in the 1994 private
placement of the Company's stock referred to under "Significant Event" in Item 1
and in the 1993 private placement transaction referred to under Item 13, Certain
Relationships and Related Transactions. He has been a director of the Company
since October of 1972.
William L. Hamilton. Mr. Hamilton joined the Company as Chief Financial
and Administrative Officer in September of 1985. In November of 1986 his title
was changed to Vice President, Finance and Administration, and he was also
appointed Assistant Secretary. In February of 1996 he was appointed Secretary.
In September of 1990, he was appointed Executive Vice President of the Company.
He is a trustee of the Marin Community Foundation. He has been a director of the
Company since April of 1986.
Larry M. Brooks. Mr. Brooks joined the Company in 1986 as Winemaker of
Acacia Winery following the acquisition of Acacia Winery in 1986, where he had
been the Winemaker since Acacia's founding in 1979. In 1992 his title was
changed to Managing Director and Winemaker of Acacia Winery. In 1993 his title
was changed to include Vice President, Production.
Robert B. Farver. Mr. Farver joined the Company in 1990 as the Regional
Sales Manager for the Northeast United States. In 1994 his title was changed to
Director of National Sales and Marketing. In February of 1996 his title was
changed to Vice President, Sales.
13.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on May 18, 1984, and is listed in
the NASDAQ National Market System, under the symbol "CHLN." The following table
sets forth the high and low closing quotations for the stock for each quarter
during the past three years, as reported by NASDAQ. The prices reflect
inter-dealer quotations without retail mark-ups, mark-downs or commissions, and
do not necessarily represent actual transactions.
Period High Low
------ ---- ---
1994
First quarter........................ 6.50 4.75
Second quarter....................... 6.00 4.75
Third quarter........................ 6.50 5.25
Fourth quarter....................... 6.50 5.83
1995
First quarter........................ 8.00 5.75
Second quarter....................... 7.88 6.63
Third quarter........................ 7.75 6.50
Fourth quarter....................... 9.38 6.25
On March 15, 1996, the closing price for the common stock was $9.13 per
share. During 1995, the average weekly trading volume of the stock was
approximately 18,000 shares.
b. Holders of Record.
As of March 15, 1996, there were approximately 5,184 holders of record of
the Company's common stock.
c. Dividends.
The Company has not paid any cash dividends to and does not anticipate
declaring or paying cash dividends in the immediate future.
Under the Company's loan agreements with its bank, the Company may not,
without the bank's consent, pay dividends while indebtedness under the
agreements remains outstanding. Under the terms of the Company's convertible
subordinated debentures, the Company is restricted from paying dividends in
excess of 50% of its aggregate net income.
14.
<PAGE>
<TABLE>
Item 6. Selected Financial Data.
The following selected consolidated financial data for the years ended
December 31, 1995, 1994, 1993, 1992, and 1991, are derived from the audited
financial statements of the Company. This data should be read in conjunction
with the financial statements and notes thereto included at Item 8 of this
Report.
<CAPTION>
SELECTED FINANCIAL DATA
(in thousands except per-share data)
Year Ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues......................... $ 25,032 $ 20,515 $ 17,824 $ 16,792 $ 14,951
Gross profit......................... 8,792 7,504 6,395 6,309 6,855
Selling, general and administrative
expenses....................... 5,374 4,633 4,432 4,610 4,119
Operating income..................... 3,418 2,871 1,963 1,699 2,736
Other expense........................ (2,681) (2,561) (2,482) (2,494) (2,144)
Equity in net income of Duhart-Milon 74 -- -- -- --
Minority interest.................... (357) (188) (372) (269) (429)
Net earnings (loss).................. 207 20 (691) (741) 58
Earnings (loss) per common share..... .04 .00 (.16) (.19) .02
Balance Sheet Data:
Working capital...................... 22,072 17,136 15,291 11,606 13,349
Total assets......................... 72,569 72,225 72,078 70,413 67,928
Long-term obligations................ 13,477 26,425 27,387 30,418 31,944
Shareholders' equity................. 41,382 24,199 22,699 17,030 17,081
</TABLE>
15.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related notes presented at
Item 8 of this report and in conjunction with the Selected Financial Data
presented under the preceding Item 6. The discussion of results, causes or
trends should not be construed to imply that such results, causes or trends will
necessarily continue in the future.
Results of Operations
<TABLE>
The following table sets forth the selected financial data as a percentage
of total wine sales for the years indicated:
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100% 100% 100% 100% 100%
Gross profit..................................... 35% 37% 36% 38% 46%
Selling, general and administrative
expenses.................................... 21% 23% 25% 27% 28%
Operating income................................. 14% 14% 11% 10% 18%
Other expense.................................... (11%) (12%) (14%) (14%) (15%)
Equity in net income of Duhart-Milon 0% -- -- -- --
Minority interest................................ (1%) (1%) (2%) (2%) (3%)
Net earnings (loss).............................. 1% 0% (4%) (4%) 0%
</TABLE>
Wine Sales
Sales for the year ended December 31, 1995, increased by 22% over the
comparable period in 1994, representing the twelfth consecutive year of
increased sales. This increase was due to unit increases at all five of the
Company's properties as well as from wines imported and distributed by the
Company. As in 1994 sales outside of California showed the most robust activity,
with California sales again remaining essentially flat. The Company's custom
brands program also contributed to the increase in sales in 1995 with an
increase of over 114% over the comparable period in 1994. Management believes
this program, which accounted for 24% of the Company's unit sales and 12% of its
revenues in 1995, will not increase in the foreseeable future, due to a shortage
of acceptable fruit, primarily due to a state-wide small harvest in 1995.
Sales for the year ended December 31, 1994, increased by 15% over the
comparable period in 1993, representing the eleventh consecutive year of
increased sales. This increase was due to unit increases at all four of the
Company's California properties as well as from wines imported and distributed
by the Company. Geographically, sales outside of California showed the most
robust activity, with California sales remaining essentially flat. The addition
of two sales representatives in January, 1994, covering territory outside of
California, had a positive effect on sales activity in these areas in 1994, and
management believes that trend will continue in 1995 and beyond.
Sales in the California market have historically represented approximately
38%, 45%, and 52% of total wholesale sales (excluding custom brands) for 1995,
1994, and 1993, respectively, while 40% would be considered more typical for the
industry during these periods. For that reason management believes that unit
sales in California will remain relatively flat with most future growth
occurring in markets outside of California.
Gross Profit
Gross profit was $8,791,929 for the year ended December 31, 1995, increased
from $7,503, in 1994. This increase of 17% was due to the increased sales
activity discussed above. Gross profit as a percent of sales for the twelve
month period ended December 31, 1995 declined to 35% from 37% in the comparable
period in 1994. This decrease is attributable to the change of product mix to
lower margin wines, most notably the custom brands program discussed above.
Gross profit of $7,503,799 for the year ended December 31, 1994, increased
from $6,395,104 in the comparable period in 1993. This increase of 17% was due
to the increased sales activity discussed above, and enhanced, in part, by
higher realizations at Acacia, Edna Valley Vineyard and Chalone Vineyard.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1995, increased approximately 16% from 1994. This increase was largely
attributable to increases in sales and marketing expenses and employee
compensation associated with increased sales levels. Selling, general and
administrative expenses as a percentage of
16.
<PAGE>
sales for the year ended December 31, 1995, declined to 21%, the lowest level in
the Company's history, from 22% in 1994, due to expenses increasing at a slower
rate than sales during that period, a trend management believes will continue in
the future.
Selling, general and administrative expenses for the year ended December
31, 1994, increased approximately 5% from the comparable period in 1993. This
increase was largely attributable to increases in sales and marketing expenses,
including the full-year expenses of a head of the sales and marketing division
of the Company, Chalone Wine Estates, added in July, 1993. These increases were
offset in part by the reduction in administrative overhead including facilities
costs and a decrease in personnel costs. Selling, general and administrative
expenses as a percentage of sales for the year ended December 31, 1994, declined
to 22% from 24% for the comparable period of 1993, due to expenses increasing at
a slower rate than sales during that period.
Operating Income
Operating income for the year ended December 31, 1995 increased 19% over
1994. This increase was due to higher gross profits and lower selling, general
and administrative expenses, as a percentage of sales, over 1994, both discussed
above.
Operating income for the period ended December 31, 1994 increased 46% over
the comparable period in 1993, the largest increase in operating profit ever
recorded by the Company. This increase was due to higher gross profits and lower
selling, general and administrative expenses, as a percentage of sales, over the
comparable period in 1993, both discussed above.
Other Income (Expense)
Interest expense for the year ended December 31, 1995 remained essentially
unchanged at $2,778,748 from 1994. Interest on higher short-term borrowings
during the first nine months of 1995 was offset by the reduction in both
short-term and long-term borrowing in the fourth quarter of 1995, made possible
by the addition of $4,500,000 in new equity and the conversion of $12,384,000 of
convertible debentures to equity at the end of October, 1995 (see Liquidity and
Capital Resources, below.)
Interest expense for the year ended December 31, 1994 increased to
$2,752,781, an increase of 3% from 1993. This increase resulted primarily from
higher interest rates on the short-term borrowings, offset, in part, by the
reduction in both short-term and long-term borrowing made possible by the
addition of $1,476,217 in new equity during 1994.
Equity in Net Income of Duhart-Milon
Effective October 1, 1995, the Company exchanged essentially all of its
11.3% ownership interest in DBR for a 23.5% interest in Societe Civile Chateau
Duhart-Milon. The effect of this transaction was to convert an essentially
passive 11.3% interest in DBR into an interest in an active, operating vineyard
and winery operation accounted for using the equity method of accounting. The
Company's 23.5% equity interest in Duhart-Milon's net income for the three
months ended December 31, 1995, was $74,109.
<TABLE>
Minority Interest
The Company currently has three ventures in which there is a minority
interest. The "minority interest" in earnings (losses) of these ventures for
three years ended December 31, 1995, consisted of the following:
<CAPTION>
Twelve Months Ended December 31,
--------------------------------------------
Venture Minority Owner Minority % 1995 1994 1993
------- -------------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50% $ 332,654 $ 219,321 $ 372,386
CanoeCo Partners CRVI 50% 5,687 (31,495) --
CRW Various 49% 18,766 100 --
------------- ------------- --------------
$ 357,107 $ 187,725 $ 372,386
============= ============= ==============
</TABLE>
The minority interest in earnings for Edna Valley Vineyard during 1995
represents an increase of 52% from 1994, and was due to higher unit sales and
the resulting higher profits for the period. The minority interest earnings at
CanoeCo result from the 1995 harvest being the first with average vineyard
yields levels. CRW had its first complete year of operation in 1995, but had
only limited amounts of wine to sell, resulting in a small profit.
The minority interest in earnings for Edna Valley Vineyard in 1994 a
decrease of 30% from 1993, and was due to lower unit sales and the resulting
lower profits for the period. The "minority interest" in net losses at CanoeCo
for 1994 represent the losses incurred due to the lower-than-average vineyard
yields levels, and the resulting higher costs per ton of grapes yielded, typical
in the early years of a vineyard's development. CRW only operated in the
17.
<PAGE>
last two months of 1994, and consequently had a small loss.
The Company believes that Edna Valley Vineyard will continue to contribute
significantly to its income, and hence that this minority interest will continue
to increase in the future. Effective January 1, 1996, CanoeCo and CRW merged
into one new Company, Canoe Ridge Vineyard LLC, which the Company owns 50.5%.
Management believes that the merged entity will contribute significantly to its
income, and that the minority interest will, therefore, continue to increase.
Net Earnings
The net earnings for the year ended December 31, 1995, of $206,607
represents a 924% increase over the comparable period in 1994. This improvement
was due to higher operating income, and the addition of equity in the earnings
of Duhart-Milon, both discussed above.
The net earnings for the year ended December 31, 1994, of $20,184
represents a $710,963 improvement over the loss incurred in 1993. This
improvement was due to higher operating income, discussed above.
Seasonality
The Company's wine sales from quarter to quarter are highly variable
because the exact dates when wines are released for sale vary from year to year.
Sales are typically highest during the fourth quarter, because of heavy holiday
sales and because most wines are released around the end of the third and
beginning of the fourth quarters.
Liquidity and Capital Resources
The Company's working capital increased by $4,936,000 in the year ended
December 31, 1995. This increase was primarily due to the sale in October 1995,
of 833,333 restricted shares of its common stock and a like number of warrants
for consideration, net of expenses, of $4.5 million. This new equity and the
conversion of $12.4 million in convertible debentures into equity in 1995
reduced the Company's total debt by approximately $17.0 million.
Wine sales have historically provided sufficient revenues from operations
to sustain the Company's on-going operational financial requirements except
during grape harvesting, when the Company has relied on short-term borrowings to
finance grape purchases and the increased seasonal payroll. Major capital
projects such as the expansion of the facilities at Chalone Vineyard, Carmenet
Winery, and Acacia Winery, and the acquisition of Marina and Canoe Ridge
Vineyards, have been funded with proceeds from two public offerings of the
Company's common stock, sale of 49% of the equity in the Canoe Ridge Winery
corporation, debenture issuances in 1985 and 1989, and various bank borrowings.
As more fully discussed in Notes I and F to the Company's Consolidated
Financial Statements, the Company's presently anticipated long term capital
requirements include $5,498,400 principal amounts of term loans due during 1996,
$4,500,000 to be paid in 2000 in connection with the expected exercise of the
Edna Valley Vineyard option and repayment of the remaining $8,500,000 principal
amount of debentures due in April 1999 (as reduced by the principle amount of
debentures converted into common stock at the applicable conversion price prior
to that time). The Company expects to renew its term loans during 1996 for a
period of one year from the current maturities, with interest rate basis, spread
and principal payments to remain unchanged and, depending on market conditions
at maturity, to fund the Edna Valley Vineyard option and debenture payments from
cash flow, additional bank borrowings, debt or equity placements, asset sales or
other means.
The Company currently has operating lines of credit of $15,700,000. As
of March 15, 1996, $8,637,157 was drawn on those lines.
18.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................... 20
Consolidated Statements of Operations......................... 21
Consolidated Statements of Changes in Shareholders' Equity.... 22
Consolidated Statements of Cash Flows......................... 23
Notes to Consolidated Financial Statements.................... 24
INDEPENDENT AUDITORS' REPORT........................................ 34
19.
<PAGE>
THE CHALONE WINE GROUP, LTD.
<TABLE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current assets
Cash $ 31,959 $ 69,981
Accounts receivable, less allowance for doubtful accounts of $25,550
and $17,450...................................................... 7,652,717 4,509,134
Note receivable from officer......................................... 99,996 --
Inventories.......................................................... 27,499,273 29,422,037
Prepaid expenses..................................................... 199,210 209,321
Deferred income taxes................................................ 166,699 311,540
----------- -----------
Total current assets............................................. 35,649,854 34,522,013
Investment in Chateau Duhart-Milon................................... 12,058,636 --
Investment in Domaines Barons de Rothschild (Lafite)................. -- 12,524,077
Property, plant and equipment - net.................................. 19,864,865 20,443,994
Goodwill and trademarks, less amortization of $955,050 and $853,671 3,148,235 3,251,526
Other assets......................................................... 1,846,946 1,483,684
----------- -----------
Total assets................................................ $72,568,536 $72,225,294
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit.................................................. $10,238,869 $13,874,066
Current maturities of long-term obligations........................... 773,990 799,168
Accounts payable and accrued liabilities.............................. 2,564,596 2,712,844
----------- ------------
Total current liabilities......................................... 13,577,455 17,386,078
Long-term obligations - less current maturities............................ 5,010,644 5,541,297
Convertible subordinated debentures........................................ 8,500,000 20,884,000
Deferred income taxes...................................................... 1,073,186 1,171,435
Minority interest.......................................................... 3,024,764 3,043,375
Commitments and contingencies
Shareholders' equity
Common stock - authorized 15,000,000 shares,
no par value; issued and outstanding,
7,596,398 and 4,962,010 shares................................... 41,557,018 24,472,202
Deficit ............................................................. (66,486) (273,093)
Cumulative foreign currency translation adjustment.................... (108,045) --
----------- -----------
Total shareholders' equity........................................ 41,382,487 24,199,109
----------- -----------
Total liabilities and shareholders' equity.................. $72,568,536 $72,225,294
=========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year ended December 31,
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Gross revenues..................................... $25,810,269 $21,132,053 $18,325,182
Less excise taxes............................. 778,615 616,708 500,854
----------- ----------- -----------
Net revenues....................................... 25,031,654 20,515,345 17,824,328
Cost of sales...................................... 16,239,725 13,011,546 11,429,224
----------- ----------- -----------
Gross profit.............................. 8,791,929 7,503,799 6,395,104
Selling, general and administrative expenses....... 5,373,954 4,633,499 4,432,519
----------- ----------- -----------
Operating income.......................... 3,417,975 2,870,300 1,962,585
Other income (expense):
Interest (net of amounts capitalized) (2,778,748) (2,752,781) (2,685,290)
Other, net.................................... 98,006 191,579 203,764
----------- ----------- -----------
(2,680,742) (2,561,202) (2,481,526)
Equity in net income of Chateau Duhart-Milon 74,109 -- --
Minority interest.................................. (357,107) (187,725) (372,386)
----------- ----------- -----------
Earnings (loss) before income taxes....... 454,235 121,373 (891,327)
Income taxes (benefit)............................. 247,628 101,189 (200,548)
----------- ----------- -----------
Net earnings (loss) ...................... $ 206,607 $ 20,184 $ (690,779)
=========== =========== ===========
Net earnings (loss) per common share............... $ .04 $ .00 $ (.16)
======= ======= ======
Average number of shares used in
earnings per share computation.... 5,299,766 4,826,094 4,383,209
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
21.
<PAGE>
THE CHALONE WINE GROUP, LTD.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
Common Stock
---------------------------- Foreign
Number of Currency
Shares Amount Deficit Translation Total
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992..... 3,701,510 $16,632,696 $ 397,502 $ -- $17,030,198
Sale of common stock - net.. 835,446 5,738,980 -- 5,738,980
Exercise of warrants........ 61,000 610,000 -- 610,000
Options exercised........... 3,000 9,990 -- 9,990
Net (loss).................. -- -- (690,779) (690,779)
---------- ----------- --------- --------- -----------
Balance, December 31, 1993..... 4,600,956 $22,991,666 $(293,277) -- $22,698,389
Sale of common stock - net.. 360,004 1,480,536 -- 1,480,536
Net earnings................ -- -- 20,184 20,184
---------- ----------- --------- --------- -----------
Balance, December 31, 1994..... 4,960,960 $24,472,202 $(273,093) -- $24,199,109
Sale of common stock - net.. 838,579 4,532,070 -- 4,532,070
Conversion of convertible
debentures.............. 1,769,143 12,384,000 12,384,000
Options exercised........... 27,716 168,746 -- 168,746
Foreign currency translation
adjustment.............. (108,045) (108,045)
Net earnings................ -- -- 206,607 206,607
---------- ----------- --------- --------- -----------
Balance, December 31, 1995..... 7,596,398 $41,557,018 $ (66,486) $(108,045) $41,382,487
========== =========== ========= ========= ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
22.
<PAGE>
THE CHALONE WINE GROUP, LTD.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year ended December 31,
-----------------------------------------------
1995 1994 1993
---------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................... $ 206,607 $ 20,184 $ (690,779)
Non-cash transactions included in earnings:
Depreciation................................................ 2,718,269 2,405,270 2,621,095
Amortization................................................ 147,036 146,178 146,178
Equity in net income of Chateau Duhart-Milon................ (74,109) -- --
Minority interest........................................... 357,107 187,725 372,386
Gain (loss) from sale of equipment.......................... (14,909) 40,439 (8,667)
Change in:
Deferred income taxes................................... 46,592 100,389 (269,885)
Accounts and other receivables.......................... (2,712,078) (455,314) (417,279)
Inventories............................................. 1,922,764 1,236,195) (2,094,778)
Prepaid expenses and other assets....................... 103,104 (13,498) (80,177)
Accounts payable and accrued liabilities................ (148,248) (300,875) (508,703)
----------- ------------ -----------
Net cash provided (used) in operating activities...... 2,552,135 894,303 (930,609)
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures.......................................... (2,269,972) (1,706,642) (1,732,623)
Proceeds from sale of property and equipment.................. 145,741 144,164 246,550
Increase in notes receivable ................................ (599,996) -- --
Option payment to extend joint venture........................ -- -- --
----------- ------------ -----------
Net cash used in investing activities................. (2,724,227) (1,562,478) (1,486,073)
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) on bank lines of credit........... (3,635,197) 399,066 (626,000)
Distribution to minority interest (Paragon)................... (375,718) (156,000) (100,000)
Proceeds from issuance of long-term debt...................... 41,273
Repayment of long-term debt................................... (555,831) (1,730,115) (2,910,866)
Contributions to joint venture................................ -- 324,000 --
Proceeds from issuance of common stock........................ 4,700,816 1,480,536 6,358,970
----------- ------------ -----------
Net cash provided from financing activities........... 134,070 317,487 2,763,377
----------- ------------ -----------
Net (decrease) increase in cash.................................. (38,022) (350,688) 346,695
Cash at beginning of year................................... 69,981 420,669 73,974
----------- ------------ -----------
Cash at end of year......................................... $ 31,959 $ 69,981 $ 420,669
=========== ============ ===========
Other cash flow information:
Interest paid .............................................. $ 2,904,582 2,837,501 $3,031,406
Income taxes paid........................................... $ 80,800 $ 800 $ 41,142
Non-cash transactions:
Conversion of convertible debentures to common stock........ $12,384,000 $ -- --
Distribution receivable from Chateau Duhart-Milon........... 431,505 -- --
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
23.
<PAGE>
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND OPERATIONS
The Chalone Wine Group, Ltd. ("the Company") produces and sells primarily
super and ultra premium quality table wines. The Company farms its estate-owned
vineyards representing approximately 369 producing acres in Napa, Sonoma,
Monterey counties of California, and in southeastern Washington State.
Approximately 30% of its annual grape requirements are purchased from
independent growers.
The Company sells the majority of its products to wholesale distributors,
restaurants, and retail establishments throughout the United States, Canada and
Europe. Export sales account for approximately 3% of total revenue. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations. Domaines Barons de
Rothschild (Lafite) ("DBR"), a French Company, owns approximately 41% of the
Company's outstanding common stock and the Company is DBR's partner in Societe
Civile Chateau Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate
located in Pauillac, France.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its 51% owned subsidiary, and its 50% owned joint ventures (Notes F and G) which
are controlled and managed by the Company. The Company has a 23.5% investment in
Chateau Duhart-Milon which is accounted for using the equity method (Note E.)
All significant intercompany accounts and transactions have been eliminated.
Certain 1994 and 1993 balances have been reclassified to conform with current
year presentation.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 requires the Company to compute deferred income taxes based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Inventories
Inventories are stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. Growing crops consist primarily of farming costs, which are
deferred and recognized when the related crop is harvested. Wine production
supplies are stated at FIFO (first-in, first-out) cost. All bulk and bottled
wine inventories are classified as current assets in accordance with recognized
industry practice, although a portion of such inventories will be aged for
periods longer than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
for in amounts sufficient to allocate the cost of depreciable assets to
operations over their estimated useful lives. The straight-line method is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for income tax purposes.
The range of useful lives used in computing depreciation is as follows:
Years
-----
Vineyard properties 5-35
Buildings 15-80
Machinery and equipment 5-20
Costs of planting new vines and on-going cultivation costs for vines
not yet bearing, including interest, are capitalized. Depreciation commences in
the initial year the vineyard yields a commercial crop, generally in the third
or fourth year after planting.
24.
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Share
Earnings per share have been computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods.
Goodwill and Trademarks
The excess of the purchase price paid over the net assets acquired is being
amortized over 40 years on a straight-line basis. Trademarks are amortized over
their estimated useful lives from the date they are put into use.
Other Assets
Other assets include the cost of the option to extend the term of the Edna
Valley Joint Venture calculated as the present value of the payments required to
maintain the rights under the option. The payments required to exercise the
option will be applied to the cost of extending the term of the venture when it
is exercised (see also Note F).
Accounting Estimates
The presentation of the 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 at the
date of the financial statements and the reported amounts of revenues and
expenses for the year. Actual results could differ from these estimates.
Foreign Currency Translation
The functional currency of the Company's investee, Duhart-Milon, is the
French Franc and as a result, the Company records the effect of exchange gains
and losses on its equity in Duhart-Milon as a component of shareholders' equity.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" was issued in March 1995, with implementation required for
fiscal years beginning after December 15, 1995. SFAS 121 will require that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. While
the Company has not completed the process of evaluating the impact that will
result from adopting SFAS 121, the Company does not believe the adoption of SFAS
121 will have a material impact on its financial position and results of
operations when such statement is adopted.
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------------
1995 1994
------------- -------------
Bulk and bottled wine............. $ 26,773,298 $ 28,871,794
Growing crops..................... 551,648 407,125
Wine production supplies.......... 174,327 143,118
------------- -------------
$ 27,499,273 $ 29,422,037
============= =============
NOTE D - PROPERTY, PLANT AND EQUIPMENT
December 31,
----------------------------------
1995 1994
------------- -------------
Land.............................. $ 1,550,625 $ 1,550,625
Vineyard properties............... 6,248,011 6,182,639
Buildings......................... 13,515,056 13,374,182
Machinery and equipment........... 12,127,635 11,022,067
------------- -------------
33,441,327 32,129,512
Less accumulated depreciation..... 13,576,462 11,685,518
------------- -------------
$ 19,864,865 $ 20,443,994
============= =============
25.
<PAGE>
NOTE E - INVESTMENT IN CHATEAU DUHART-MILON
During the period April 1989 to June 1993, the Company purchased
approximately 11% of the outstanding ordinary shares of DBR, in exchange for a
combination of 5% convertible subordinated debentures and warrants, subsequently
exercised.
Effective October 1, 1995, the Company exchanged essentially all of its
existing ownership in DBR for a 23.5% interest in Duhart-Milon. The remaining
76.5% of Duhart-Milon is owned by DBR.
Chateau Duhart-Milon's condensed balance sheet as of December 31, 1995 and
results of operations for the the three months then ended are as follows
(translated into U.S. dollars at the year end and average exchange rate for the
period, respectively):
December 31, 1995
-----------------
Current assets, including inventories of $3,654,415.... $16,938,735
Property and equipment, net............................ 2,516,986
-----------
Total assets........................................ 19,455,721
Current liabilities.................................... 6,039,294
-----------
Total liabilities................................... 6,039,294
-----------
Equity................................................. $13,416,427
===========
The results of operations are summarized as follows:
Three months ended
December 31, 1995
-----------------
Revenues............................................... $ 557,438
Cost of sales.......................................... 110,026
-----------
Gross profit........................................ 447,412
Operating and other expenses........................... 88,305
-----------
Net earnings........................................... $ 359,107
===========
Company's share of net earnings, net of $10,000
amortization..................................... $ 74,109
===========
The carrying amount of the Company's investment is approximately $8,900,000
greater than the amount of its share of the underlying equity in net assets of
Duhart-Milon. This difference relates primarily to the underlying value of the
land owned by Duhart-Milon and accordingly, will not be amortized
NOTE F - EDNA VALLEY VINEYARD JOINT VENTURE
Edna Valley Vineyard ("the Joint Venture") operates a winery in San Luis
Obispo County, California. The Joint Venture is 50% owned by the Company and 50%
by Paragon Vineyard Company, Inc. ("Paragon"). The Company, as the managing
joint venturer, manages and supervises the winery operations, and sells and
distributes the wine. Paragon built a winery which was leased to the Joint
Venture under an operating lease through May 1991, at which time Paragon sold a
one-half interest in the winery to the Company. Thereafter, Paragon and the
Company contributed the winery to the Joint Venture. The allocation of profits
subsequent to this transaction are being adjusted due to the Partners' varying
bases in this asset. The Joint Venture purchases its grapes from Paragon under a
grape purchase agreement, which specifies fixed quantities of grapes to be
acquired at market prices.
The Company has purchased an option, with $175,439 remaining due in 1997,
to modify the Joint Venture relationship. The option is exercisable in 1997 and
requires additional payments of $200,000 in 1998 and 1999 and $4,500,000 in
2000. The exercise of this option will extend the term of the joint venture
agreement in perpetuity and license the Edna Valley brand name on an exclusive
basis to the Joint Venture. At this time, the Company plans to exercise this
option and make all payments required through 1997. The Company believes that
the cash-flow from the Venture will be sufficient to fund most, if not all, of
the option and additional payments through 1999, as well as a portion of the
final payment in 2000. The Company is continuing to monitor the Joint Venture's
performance and evaluate whether expected future profitability and cash flows
are sufficient to warrant continued investment in the venture and ultimate
exercise of the option. Should the Joint Venture's performance deteriorate,
management may decide not to make the additional payments required under the
option. Condensed balance sheets for the Joint Venture follow:
26.
<PAGE>
<TABLE>
NOTE F - EDNA VALLEY VINEYARD JOINT VENTURE (Continued)
<CAPTION>
December 31,
---------------------------
1995 1994
------------ ----------
<S> <C> <C>
Current assets (including inventories of $5,373,644
in 1995 and $6,925,079 in 1994)................... $ 5,945,964 $7,249,923
Current assets eliminated in consolidation.......... 1,214,277 831,491
Property and equipment, net......................... 2,723,288 2,688,516
----------- -----------
Total assets................................ 9,883,529 0,769,930
Current liabilities................................. 4,460,195 5,221,124
Accrued liabilities eliminated in consolidation..... 231,640 210,932
----------- -----------
Total current liabilities................... 4,691,835 5,432,056
Total liabilities........................... 4,691,835 5,432,056
----------- -----------
Partners' Equity.................................... $ 5,191,694 $ 5,337,874
=========== ===========
</TABLE>
<TABLE>
The results of operations are summarized as follows:
<CAPTION>
Year ended December 31,
---------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................. $6,849,922 $5,255,232 $4,579,054
Cost of sales............................. 5,124,297 3,847,497 3,018,060
---------- ---------- ----------
Gross profit......................... 1,725,625 1,407,735 1,560,994
Operating and other expenses.............. 464,863 470,873 331,587
Commissions and management fees
eliminated in consolidation.......... 655,506 558,273 543,539
---------- ---------- ----------
Net earnings.............................. 605,256 378,589 685,868
Minority interest......................... 332,654 219,321 372,960
---------- ---------- ----------
Company's share of net earnings...... $ 272,602 $ 159,268 $ 312,908
========== ========== ==========
</TABLE>
NOTE G - INVESTMENT IN CANOE RIDGE VINEYARD
On December 31, 1990, the Company entered into a joint venture agreement
with Canoe Ridge Vineyard Incorporated (CRVI) for the formation and operation of
the Canoe Ridge Vineyard (CanoeCo). CanoeCo is 50% owned by the Company and 50%
by CRVI. The purpose of the joint venture is to own, develop and maintain
vineyard property in Benton County, Washington. The Company, as managing joint
venturer, manages and supervises the vineyard operations.
In 1994 Canoe Ridge Winery, Inc. (CRW), was formed which is owned 51%
and 49% by the Company and a group of investors, respectively. CRW was formed to
produce, sell and distribute premium wines from grapes farmed by CanoeCo.
Effective January 1, 1996, the Company exchanged its ownership interests in
CanoeCo and CRW for a 50.5% ownership interest in a newly formed company, Canoe
Ridge Vineyard LLC, which will carry on the combined operations of the
predecessor entities, CanoeCo and CRW. To date, operations of these entities
have not been significant to the Company.
27.
<PAGE>
NOTE H - BANK LINES OF CREDIT
<TABLE>
Bank lines of credit consist of the following:
<CAPTION>
December 31,
----------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
Credit line of $10,000,000 bearing interest at prime1, payable monthly, due
June, 1997.............................................................. $ 5,334,944 $ 8,915,000
Credit line of $4,800,000 bearing interest at prime1, payable monthly, due
June, 1996 ............................................................. 4,167,000 4,700,000
Credit line of $400,000 bearing interest at 1.875% over prime, payable at
February, 1996.......................................................... 236,925 259,066
Credit line of $500,000 bearing interest at 9.84%, payable at April, 1996.... 500,000 --
--------------- ----------------
$ 10,238,869 $ 13,874,066
=============== ================
</TABLE>
The notes to bank are collateralized by substantially all inventories and
accounts receivable. Significant restrictive covenants include provisions
regarding: maintenance of certain financial ratios; mergers or acquisitions;
loans, advances or debt guarantees; additional borrowings; annual lease
expenditures; annual fixed asset expenditures; and declaration or payment of
dividends (see Note I).
NOTE I - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
Convertible subordinated debentures due in 1999, bearing interest at 5%.
Interest payments on the debentures are due semiannually (including
amounts due to related party-see Note N) ............................... $ 8,500,000 $ 20,884,000
Mortgages paid in June, 1995................................................. -- 11,139
Bank term loan, payable in monthly installments of principal and interest due
February 1996. Interest rates at LIBOR plus 2%.......................... 3,219,100 3,383,500
Bank term loan, payable in monthly installments of principal and interest due
October 1996. Interest rate at prime plus 1/2%.......................... 2,069,200 2,214,400
Bank term loan, payable in June, 1996. Interest at prime plus 1%............. 210,140 240,973
Joint Venture purchase option payable in annual installments of principal and
interest. Imputed interest rate of 8% (see Note F)...................... 175,439 347,629
Other note payable, due in June 1996 payable in annual installments of
principal and interest. Interest rate of 10% (including amounts due to
related party-see Note N)............................................... 59,954 114,458
Other notes payable, due in varying monthly installments through Jan 2000
bearing interest at 10.75% to 10.9%, secured by equipment............... 50,801 28,366
--------------- ----------------
14,284,634 27,224,465
Less current maturities...................................................... 773,990 799,168
--------------- ----------------
$ 13,510,644 $ 26,425,297
=============== ================
</TABLE>
Bank term loans of $3,219,000 and $2,069,200 at December 31, 1995, have
been reflected as long term obligations because the Company entered into an
agreement with the Bank on March 7, 1996, that allows the Company the option to
renew the term loans for a period of one year from the current maturities of the
term notes subject to certain terms and conditions. The agreement calls for
interest rate basis, spread and principle payments to remain unchanged from the
existing agreements. The agreement also calls for a renewal fee of .2% of the
amounts renewed due on the signing of the renewal notes. Management believes
that the Company will comply with the terms and conditions of the March 7, 1996
agreement and will exercise its option to renew the terms for a period of one
year from the current maturity dates.
The 5% debentures are subordinate in right of payment to all senior
indebtedness of the Company. Subject to
- --------------------
(1) The Company may fix its interest rate at LIBOR plus 2% rather than prime for
periods up to the term of its credit line.
28.
<PAGE>
NOTE I - LONG-TERM OBLIGATIONS (Continued)
the market price of the Company's stock, the Company may redeem these
debentures, without premium. The Company must redeem the entirety of the issue
not later than April 19, 1999. The debentures are convertible into shares of the
Company's stock at any time from and after April 19, 1991, at a conversion rate
of $9.60 per share subject to antidilution provisions. The Company set aside and
reserved 967,301 shares of its common stock for issuance upon conversion of
these debentures.
Substantially all of the Company's property and equipment is pledged as
collateral for long-term obligations. Significant restrictive covenants include
provisions regarding: maintenance of certain financial ratios; mergers or
acquisitions; loans, advances or debt guarantees; additional borrowings; annual
lease expenditures; annual fixed asset expenditures; and declaration or payment
of dividends.
At December 31, 1995, maturities of long-term obligations are as follows:
1996...................................... $ 773,990
1997...................................... 4,992,324
1998...................................... 7,439
1999...................................... 8,507,439
2000...................................... 3,442
-----------
Total..................................... $14,284,634
===========
Company management believes that the fair value of the bank lines of credit
and long term obligations are substantially equal to the book value since
interest rates on loans were negotiated during 1995 or fluctuate with short-term
market rates.
NOTE J- STOCK OPTIONS
The Company has an Incentive Stock Option Plan (the 1982 Plan), and a Stock
Option Plan (the 1987 Plan) (collectively, the Plans). The 1982 Plan provided
for the issuance of incentive stock options within the meaning of Section 422A
of the Internal Revenue Code, and the 1987 Plan provides for the issuance of
incentive stock options or non-statutory options on essentially identical terms.
The 1982 Plan was terminated in 1987, except for outstanding, unexercised
options. At December 31, 1995, there were issued and outstanding options under
both Plans totaling 495,022 shares, and shares in a like amount had been
reserved for issuance upon exercise thereof. In addition to options granted
pursuant to these two Plans, there were outstanding at December 31, 1995,
non-statutory options covering an additional 61,569 shares. Options generally
vest within one to two years, and are exercisable during the ten years,
following date of grant. The table below summarizes all stock option activity
for the three-year period ended December 31, 1995:
Exercise Price
-------------------
Shares From To
------- ------ -------
Balance at December 31, 1992.......... 486,867 $ 3.33 $ 12.38
Granted.......................... 93,960 6.00 6.50
Exercised........................ (3,000) 3.33 3.33
Lapsed........................... (8,134) 8.13 9.50
------- ------ -------
Balance at December 31, 1993.......... 569,693 $ 5.50 $ 12.38
Granted.......................... 58,910 5.00 6.75
Lapsed........................... (32,189) 5.63 11.00
------- ------ -------
Balance at December 31, 1994.......... 596,414 $ 5.00 $ 12.38
Granted.......................... 36,210 6.75 9.38
Exercised........................ (27,716) 6.00 6.88
Lapsed........................... (48,317) 6.00 10.13
------- ------ -------
Balance at December 31, 1995.......... 556,591 $ 5.00 $ 12.38
======= ====== =======
Total options exercisable at
December 31, 1995 ............... 520,381
========
In September, 1995, an officer of the Company exercised options for 16,666
shares for $99,996 and the Company received a note secured by the stock in
payment of the exercise price. The note was paid in March, 1996. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value method of accounting for stock options and other
equity instruments. The Company is required to adopt SFAS No. 123 in fiscal
1996. Under the new standard, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is generally the vesting period. The new standard does not
29.
<PAGE>
NOTE J- STOCK OPTIONS (Continued)
impact cash flows. Companies are not required to adopt SFAS No. 123 and are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to
Employees." The Company has decided not to adopt SFAS No. 123. The Company will
be required to disclose in a note to the financial statements proforma net
income and earnings per share as if the new method of accounting had been
applied.
NOTE K - COMMON STOCK
In October of 1995, in a private-placement transaction, the Company issued
a total of 833,334 units, each unit consisting of one share of common stock and
one warrant for the purchase of one share of common stock, for a per-unit price
of $6.00 and a net sale price of approximately $4.5 million. The warrants, which
have a five year term, are excerscisable at $8.00 per share. Also on that date
the Company converted approximately $12.4 million of convertible debentures, at
a conversion price of $7.00, into 1,769,143 shares of common stock.
In April of 1994, in a private-placement transaction, the Company issued a
total of 358,128 shares of its common stock, for a per-share price of $4.50 and
a net sale price of approximately $1.5 million.
In March and July of 1993, in a private-placement transaction ratified by
the shareholders at the 1993 Annual Meeting, the Company issued a total of
828,571 shares of its common stock plus five-year warrants entitling the holders
to purchase an additional 828,571 shares at an exercise price of $7.00 per
share, for a unit price of $7.00 and an aggregate sale price of $5.8 million.
The Company has an Employee Stock Purchase Plan and 50,000 common shares
are reserved for issuance under the Plan. During 1995, 1994 and 1993, employees
purchased approximately 5,315 shares for $31,978, 935 shares for $4,390, and
8,252 shares for $48,178, respectively, through payroll deductions.
The Company has reserved as of December 31, 1995 3,195,857 shares of common
stock in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
NOTE L - EMPLOYEE BENEFIT PLANS
The Company has a Qualified Profit-Sharing Plan which provides for Company
contributions, as determined annually by the Board of Directors, based on the
Company's previous year performance. These contributions may be in the form of
common stock or cash as determined by the Board of Directors. The Board has
approved a contribution of $20,000 for 1995. There were no Plan contributions in
1994 or 1993. At December 31, 1995, the plan held 7,255 shares of the Company's
common stock.
NOTE M - INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
Year-ended December 31,
-----------------------------------------
1995 1994 1993
-------- -------- --------
Federal
Current................ $136,641 $ -- $ 68,537
Deferred............... 24,634 61,588 (239,975)
-------- -------- ---------
161,275 61,588 (171,438)
State
Current................ 64,394 800 800
Deferred............... 21,959 38,801 (29,910)
-------- -------- ---------
86,353 39,601 (29,110)
-------- -------- --------
$247,628 $101,189 $(200,548)
======== ======== =========
30.
<PAGE>
NOTE M - INCOME TAXES (Continued)
The tax effects of the items comprising the Company's net deferred tax
liability in the Company's balance sheets are as follows:
December 31,
-----------------------
1995 1994
---------- ----------
Deferred tax liability:
Difference between book and tax basis of
property, plant and equipment............ $2,249,693 $2,437,057
Deferred tax assets:
Operating loss carryforwards............... 688,281 973,759
Difference between book and tax basis of
inventory................................ 166,699 311,540
Tax credit carryforwards................... 418,004 296,399
Other...................................... 157,644 105,464
---------- ----------
1,430,628 1,687,162
Valuation allowance........................ (87,422 (110,000)
---------- ----------
1,343,206 1,577,162
---------- ----------
Net deferred tax liability $ 906,487 $ 859,895
========== ==========
The provision (benefit) for income taxes differs from amounts computed at
the statutory rate as follows:
Year-ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
U.S. federal income tax (benefit) at
statutory rate ..................... $147,445 $ 41,267 $(303,051)
Reconciling items:
Other............................... 67,004 26,743 69,324
Effect of acquisitions, net......... 33,179 33,179 33,179
-------- -------- ---------
$247,628 $101,189 $(200,548)
======== ======== =========
At December 31, 1995, the Company had net operating loss and investment tax
credit carryovers available to reduce future taxable income which would
otherwise be taxable for income tax purposes as follows:
Expiration date Net Operating Investment
December 31, Loss Tax Credit
------------------ ------------ -----------
1996.................................... $ -- $ 14,000
1997.................................... 313,000 60,000
1998.................................... 438,000 59,000
1999.................................... 311,000 105,000
2000................................... -- 17,000
2001.................................... -- 7,000
2003.................................... -- 156,000
2007.................................... 847,000 --
2008.................................... 825,000 --
2009.................................... 12,000 --
----------- ----------
$ 2,746,000 $ 418,000
============ ===========
At December 31, 1995, the Company had significant deferred tax assets
related to operating losses available for carryforward. These deferred tax
assets have been recorded under the guidelines of SFAS No. 109, Accounting for
Income Taxes, on the premise that future taxable income will more likely than
not be adequate to realize future tax benefits of the available net operating
loss carryforwards. Under tax regulations, realization of tax benefits per
period will be limited and full realization will depend on future taxable income
over a number of years.
31.
<PAGE>
NOTE N - TRANSACTIONS WITH RELATED PARTIES
<TABLE>
The consolidated statements of operations include the following amounts
resulting from transactions with related parties:
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Interest expense:
Interest on notes payable to a partnership in which an
officer of the Company is a partner.................. $ -- $ 2,448 $ 6,107
Interest on convertible debentures held by a related
party of the Company................................. 516,000 619,200 619,200
Interest on notes payable to joint venture partner
(Paragon)............................................ 36,076 54,072 71,180
Lease expense for land and facilities....................... 10,240 10,000 18,000
Consulting fees paid to officer of the Company 65,000 79,750 --
</TABLE>
<TABLE>
The balance sheet includes the following amounts resulting from
transactions with related parties:
<CAPTION>
December 31,
-----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Accounts receivable
Accounts receivable from a dirctor of the Company...... $ 85,426 $ --
Note receivable from officer of the Company............ 99,996 --
Distribution receivable from Duhart-Milon.............. 431,505 --
Inventory
Wine purchases from related parties.................... 443,047 776,562
Grape purchases from related parties................... 1,520,872 2,028,981
Due to related parties................................. -- 270,411
Other asset
Option to extend term of joint venture (see Note F).... 1,017,174 1,017,174
Note receivable from joint venture partner (Paragon)... 500,000 --
Property, plant & equipment
Building contributed to joint venture by the partners.. 1,799,053 1,799,053
Long-term obligations
Payable for purchase of option to extend term of joint
venture (see Notes F and I).......................... 175,439 347,629
Note payable to joint venture partner (see Note I)..... 59,954 114,458
Convertible debentures held by a related party of the
Company (see Note I and K)........................... -- 12,384,000
</TABLE>
NOTE O - COMMITMENTS AND CONTINGENCIES
Future minimum lease payments required under noncancelable operating leases
with terms in excess of one year are as follows:
Year-ending
December 31, Total
---------------- ------------------
1996...................................... 542,360
1997...................................... 585,372
1998...................................... 457,372
1999...................................... 457,372
2000...................................... 457,372
Thereafter................................ 4,852,802
------------------
Total..................................... $ 7,352,650
==================
Rental expense charged to operations was as follows: $832,962, $637,343,
and $511,351 for the years ended December 31, 1995, 1994, and 1993,
respectively. Future lease commitments include $10,240 per year until 2052 for
land leased by Paragon to the Edna Valley Joint Venture (see Note F).
32.
<PAGE>
NOTE P - QUARTERLY DATA (Unaudited)
<TABLE>
The Company's quarterly operating results for years ended December 31,
1995, 1994, and 1993, are summarized below:
<CAPTION>
(In thousands, except per share data)
Gross Gross Net Net (Loss)Earnings
Revenues Profit (Loss) Earnings per Common Share
<S> <C> <C> <C> <C>
1995 Quarters:
Fourth Quarter.......... $ 8,596 $ 3,115 $ 429 $ .07
Third Quarter........... 5,380 1,935 (29) (.01)
Second Quarter.......... 7,411 2,245 70 .01
First Quarter........... 4,423 1,497 (263) (.05)
1994 Quarters:
Fourth Quarter.......... 6,555 2,286 164 $ .03
Third Quarter........... 4,998 1,885 15 .00
Second Quarter.......... 5,512 1,862 57 .01
First Quarter........... 4,067 1,471 (216) (.05)
1993 Quarters:
Fourth Quarter.......... 6,055 2,065 219 .05
Third Quarter........... 4,140 1,468 (411) (.09)
Second Quarter.......... 4,251 1,470 (189) (.04)
First Quarter........... 3,879 1,392 (309) (.08)
</TABLE>
33.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The CHALONE Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Chalone
Wine Group, Ltd. (the Company) (a California corporation), as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company, at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 11, 1996
34.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None; not applicable.
PART III
Item 10. Directors and Executive Officers.
a. Directors, Executive Officers, and Significant Employees.
See "Executive Officers of the Registrant" in Part I of this Report.
b. Business Experience of Directors and Management; Other Directorships.
The information required by this Item is hereby incorporated by
reference to the Company's Proxy Statement under the heading "Election of
Directors" and the caption "Compliance with Section 16(a) of the Securities and
Exchange Act of 1934" filed with the Securities and Exchange Commission.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement under captions "Executive Compensation," and
"Compensation Committee Report on Compensation of Executive Officers."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement under the headings "Election of Directors" and
"Shareholding Information as to Directors, Director Nominees and Management."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is hereby incorporated by
reference to the Company's Proxy Statement under the heading "Certain
Relationships and Related Transactions." Reference is also made to the
information contained in Note N of Notes to Consolidated Financial Statements on
page 32 of this Report under the caption "Transactions with Related Parties."
35.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a(1). Financial Statements.
The following financial statements of the Company are included in Part II,
Item 8:
Page
Financial Statements:
Consolidated Balance Sheets................................. 20
Consolidated Statements of Operations....................... 21
Consolidated Statements of Changes in
Shareholders' Equity...................................... 22
Consolidated Statements of Cash Flows....................... 23
Notes to Consolidated Financial
Statements................................................ 24
Independent Auditors' Report.................................... 34
a(2). Financial Statement Schedules.
Schedules are omitted because they are not applicable, not required, were
filed subsequent to the filing of the Form 10-K, or because the information
required to be set forth therein is included in the consolidated financial
statements or in notes thereto.
b. Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed during the last
quarter of the period covered by this Report.
c. Exhibits.
A copy of any exhibits (at a reasonable cost) or the Exhibit Index will be
furnished to any shareholder of the Company upon receipt of a written request
therefor. Such request should be sent to The Chalone Wine Group, Ltd., 621
Airpark Road, Napa, California 94558, Attention: Investor Relations.
36.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993 (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
(Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement between the Company
and DBR, dated September 30, 1991. (vi)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 3.1 and 3.2, respectively, to
the Company's Registration Statement on Form S-1 (File No. 33-8666),
filed September 11, 1986.
(ii) Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988, dated March 11,
1989.
(iii) Incorporated by reference to Exhibit No. 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, dated March 25,
1992.
(iv) Incorporated by reference to Exhibit Nos. 3.4 and 3.6, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31,
1993, dated March 26, 1994.
(v) Incorporated by reference to Exhibit Nos. 1, 4 and 5, respectively, to
the Company's Current Report on Form 8-K dated April 28, 1989.
(vi) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the
Company's Current Report on Form 8-K dated September 30, 1991.
</FN>
</TABLE>
37.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (i)
4.7 Form of Warrant for the purchase in the aggregate of up to 828,571
shares of the Company's common stock, issued to certain designed
investors, effective July 14, 1993. (ii)
4.8 Voting Agreement, between Richard H. Graff, William L. Hamilton,
John A. McQuown, W. Philip Woodward, DBR, Richard C. Hojel,
and Summus Financial, Inc., dated March 29, 1993. (ii)
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (iii)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (iv)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (iv)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (v)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (v)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (v)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (v)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
(ii) Incorporated by reference to Exhibits 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
(iii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(iv) Incorporated by reference to Exhibit D to Appendix I to the Company's
Proxy Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(v) Incorporated by reference to Exhibit Nos. 1, 3, 4 and 2, respectively, to
the Company's Current Report on Form 8-K dated May 30, 1991.
</FN>
</TABLE>
38.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (i)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (ii)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (ii)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (ii)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (iii)
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (iv)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (v)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (v)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (v)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit No. 10.10 to the Company's
Registration Statement on Form S-1 (File No. 33-8666), filed September
11, 1986.
(ii) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iii) Incorporated by reference to Exhibit Nos. 10.16, 10.17 and 10.24,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iv) Incorporated by reference to Exhibit Nos. 10.17 and 10.18, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1989, dated March 27, 1990.
(v) Incorporated by reference to Exhibit Nos. 10.23, 10.24 and 10.25,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, dated March 25, 1992.
</FN>
</TABLE>
39.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (i)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (ii)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (iii)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (iii)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (iii)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (i)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (iv)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (iv)
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (iv)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington State investors, dated
November 30, 1994. (iv)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (iv)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 10.22 and 10.29, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1993, dated March 26, 1994.
(ii) Incorporated by reference to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, dated March 26,
1991.
(iii) Incorporated by reference to Exhibit Nos. 10.24 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, dated March 29, 1993.
(iv) Incorporated by reference to Exhibit Nos. 10.23 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, dated March 27, 1995.
</FN>
</TABLE>
40.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (i)
10.30 Credit Agreement between the Company and Wells Fargo Bank, 49
dated December 29, 1995.
11 Statement re Computation of Earnings Per Share for the
periods ended December 31, 1995, 1994, and 1993. 93
24 Consent of Deloitte & Touche to incorporation by reference dated
March 27, 1995. 94
99 Financial Statements of Chateau Duhart Milon 95
27 Financial Data Schedule 104
- ------------------------------
<FN>
(i) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.
</FN>
</TABLE>
41.
<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.
THE CHALONE WINE GROUP, LTD.
By /s/ W. Philip Woodward
--------------------------------------------------
W. Philip Woodward
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ William L. Hamilton
--------------------------------------------------
William L. Hamilton
Executive Vice President (Principal Financial
and Principal Accounting Officer)
By /s/ Wendy W. Bentson
--------------------------------------------------
Wendy W. Bentson
Controller
Dated: March 20, 1996
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 dates indicated.
/s/ W. Philip Woodward President, Chief March 20, 1996
-------------------------- Executive Officer,
W. Philip Woodward and Director (Principal
Executive Officer)
/s/ Richard H. Graff Chairman of the Board March 20, 1996
-------------------------- of Directors
Richard H. Graff
/s/ William L. Hamilton Executive Vice President, March 20, 1996
-------------------------- Chief Financial Officer,
William L. Hamilton and Director (Principal
Financial and Principal
Accounting Officer)
/s/ Wendy W. Bentson Controller March 20, 1996
--------------------------
Wendy W. Bentson
42.
<PAGE>
/s/ C. Richard Kramlich Director March 20, 1996
--------------------------
C. Richard Kramlich
/s/ J. A. McQuown Director March 20, 1996
--------------------------
J. A. McQuown
/s/ James H. Niven Director March 20, 1996
--------------------------
James H. Niven
/s/ Eric de Rothschild Director March 20, 1996
--------------------------
Eric de Rothschild
/s/ Christophe Salin Director March 20, 1996
--------------------------
Christophe Salin
/s/ Mark Hojel Director March 20, 1996
--------------------------
Mark Hojel
/s/ Yves-Andre Istel Director March 20, 1996
--------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director March 20, 1996
--------------------------
Phillip M. Plant
43.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993 (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
(Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement between the Company
and DBR, dated September 30, 1991. (vi)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 3.1 and 3.2, respectively, to
the Company's Registration Statement on Form S-1 (File No. 33-8666),
filed September 11, 1986.
(ii) Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988, dated March 11,
1989.
(iii) Incorporated by reference to Exhibit No. 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, dated March 25,
1992.
(iv) Incorporated by reference to Exhibit Nos. 3.4 and 3.6, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31,
1993, dated March 26, 1994.
(v) Incorporated by reference to Exhibit Nos. 1, 4 and 5, respectively, to
the Company's Current Report on Form 8-K dated April 28, 1989.
(vi) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the
Company's Current Report on Form 8-K dated September 30, 1991.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (i)
4.7 Form of Warrant for the purchase in the aggregate of up to 828,571
shares of the Company's common stock, issued to certain designed
investors, effective July 14, 1993. (ii)
4.8 Voting Agreement, between Richard H. Graff, William L. Hamilton,
John A. McQuown, W. Philip Woodward, DBR, Richard C. Hojel,
and Summus Financial, Inc., dated March 29, 1993. (ii)
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (iii)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (iv)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (iv)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (v)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (v)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (v)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (v)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
(ii) Incorporated by reference to Exhibits 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
(iii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(iv) Incorporated by reference to Exhibit D to Appendix I to the Company's
Proxy Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(v) Incorporated by reference to Exhibit Nos. 1, 3, 4 and 2, respectively, to
the Company's Current Report on Form 8-K dated May 30, 1991.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (i)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (ii)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (ii)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (ii)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (iii)
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (iv)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (v)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (v)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (v)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit No. 10.10 to the Company's
Registration Statement on Form S-1 (File No. 33-8666), filed September
11, 1986.
(ii) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iii) Incorporated by reference to Exhibit Nos. 10.16, 10.17 and 10.24,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iv) Incorporated by reference to Exhibit Nos. 10.17 and 10.18, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1989, dated March 27, 1990.
(v) Incorporated by reference to Exhibit Nos. 10.23, 10.24 and 10.25,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, dated March 25, 1992.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (i)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (ii)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (iii)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (iii)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (iii)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (i)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (iv)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (iv)
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (iv)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington State investors, dated
November 30, 1994. (iv)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (iv)
- ------------------------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 10.22 and 10.29, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1993, dated March 26, 1994.
(ii) Incorporated by reference to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, dated March 26,
1991.
(iii) Incorporated by reference to Exhibit Nos. 10.24 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, dated March 29, 1993.
(iv) Incorporated by reference to Exhibit Nos. 10.23 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, dated March 27, 1995.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
<S> <C> <C>
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (i)
10.30 Credit Agreement between the Company and Wells Fargo Bank, 49
dated December 29, 1995.
11 Statement re Computation of Earnings Per Share for the
periods ended December 31, 1995, 1994, and 1993. 93
24 Consent of Deloitte & Touche to incorporation by reference dated
March 27, 1995. 94
99 Financial Statements of Chateau Duhart Milon 95
27 Financial Data Schedule 104
- ------------------------------
<FN>
(i) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.
</FN>
</TABLE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of the 29th day of December, 1995, by
and between THE CHALONE WINE GROUP, LTD. (formerly known as CHALONE
INCORPORATED), a California corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITAL
Bank has provided certain credit accommodations to Borrower pursuant to
the terms and conditions contained in a credit agreement dated July 31, 1995, as
amended from time to time (the "Prior Agreement").
Borrower and Bank have agreed to amend and restate the Prior Agreement
pursuant to the terms and conditions that follow.
NOW, THEREFORE, Bank and Borrower hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth after each, with such meanings to be equally applicable to the
singular and plural forms of the terms defined:
"Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of the
United States Code, as amended or recodified from time to time.
"Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under federal or California statute or regulation.
-1-
<PAGE>
"Credits" means the Line of Credit, Term LoanA, Term LoanB, and Term
LoanC.
"Current Ratio" means total current assets, divided by total current
liabilities excluding the final balloon installments of Term LoanA, Term LoanB
and Term LoanC to the extent that such installments exceed the required monthly
principal payment(s) in the month prior to the maturity(ies) times 12 and are
due within one (1) year following the date as of which the Current Ratio is
being determined.
"EBITDA Coverage Ratio" means the aggregate of net income after taxes
plus minority interests, depreciation, amortization and other non-cash expenses
plus interest expense plus tax provision divided by the aggregate of the current
portion of long-term debt plus interest expense. For the purpose of determining
the current portion of long term debt for Term Loan A, Term Loan B and Term Loan
C to the extent that such loans become due within one (1) year following the
date as of which EBITDA Coverage Ratio is being determined, the current portion
to be used for this covenant calculation shall be equal to the required monthly
principal payment in the month prior to the maturity times 12.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time.
"Events of Default" has the meaning set forth in Section7.1 hereof.
-2-
<PAGE>
"Fixed Rate Term" means (i) with respect to Term LoanA and Term LoanB,
initially, the period commencing on the date of disbursement of each such Credit
and terminating on August20, 1991, and thereafter each period commencing on (a)
each August21 and terminating on each February20, and (b) commencing on each
February21 and terminating on each August20, up to and including the period
commencing on February21, 1996 and terminating on August 15, 1996; and (ii) with
respect to the Line of Credit, a period of not less than thirty (30) days nor
more than one hundred eighty (180) days in 30-day increments; provided however
that no Fixed Rate Term under the Line of Credit may be selected for a principal
amount of less than $100,000.00, and provided further that no Fixed Rate Term
under the Line of Credit shall extend beyond the scheduled maturity date of the
Line of Credit.
"Letter of Credit" shall have the meaning ascribed to in Section2.7(c).
"Letter of Credit Agreement" means Bank's standard form Letter of
Credit Agreement.
"LIBO Rate" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) determined by Bank pursuant to the following
formula:
Base LIBO Rate
------------------------------
LIBO Rate = 100% - LIBO Reserve Percentage
(a) "Base LIBO Rate" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest
-3-
<PAGE>
for loans making reference thereto, on the first day of a Fixed Rate Term for
delivery of funds on such day, for a period of time approximately equal to the
number of days in such Fixed Rate Term and in an amount approximately equal to
the principal amount to which such Fixed Rate Term applies. Borrower understands
and agrees that Bank may base its quotation of the Inter-Bank Market Offered
Rate upon such offers or other market indicators of the Inter-Bank Market as
Bank in its sole discretion deems appropriate.
(b) "LIBO Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
"Line of Credit" means a revolving credit accommodation in the maximum
principal amount of $10,000,000.00 as more fully described in Section2.7.
"Line of Credit Note" means the promissory note which
evidences the Line of Credit, in the form and content of Exhibit
A, attached hereto.
"Loan Documents" means this Agreement, the Notes and each other
document, contract and instrument required by or at any time delivered to Bank
in connection with this Agreement.
"Loan Rate" has the meaning ascribed to it in Section2.3.
-4-
<PAGE>
"Notes" means the Line of Credit Note, Term Note A, Term Note B, and
Term Note C.
"Prime Rate" means at any time the rate of interest most recently
announced within the Bank at its principal office in SanFrancisco as its Prime
Rate, with the understanding that the Bank's Prime Rate is one of its base rates
and serves as the basis upon which effective rates of interest are calculated
for those loans making reference thereto, and is evidenced by the recording
thereof in such internal publication or publications as the Bank may designate.
"Subordinated Debt" means indebtedness owed by Borrower or a third
party, which indebtedness has been subordinated to Borrower's obligations to
Bank pursuant to agreement in form and content acceptable to Bank.
"Tangible Net Worth" means the aggregate of total stockholders' equity
(including minority interests) less the aggregate of any treasury stock, any
acquisition intangibles or other intangible assets and any obligations due from
stockholders, employees and/or affiliates.
"Term LoanA" means a credit accommodation in the original principal
amount of $2,900,000.00, as more fully described in Section2.1 hereof.
"Term LoanB" means a credit accommodation in the original principal
amount of $1,100,000.00, as more fully described in Section2.2 hereof.
-5-
<PAGE>
"Term LoanC" means a credit accommodation in the original principal
amount of $4,150,000.00, as more fully described in Section2.6.
"Term Note A" means a promissory note executed by Borrower to evidence
Term LoanA, substantially in the form of ExhibitB, attached hereto.
"Term Note B" means a promissory note executed by Borrower to evidence
Term LoanB, substantially in the form of ExhibitC, attached hereto.
"Term Note C" means the promissory note executed by Borrower to
evidence Term LoanC, in the form and content of ExhibitD, attached hereto.
ARTICLE II
THE CREDITS
Section2.1. Term LoanA.
(a) Term LoanA. Bank has made a Term LoanA to Borrower in the original
principal amount of TWO MILLION NINE HUNDRED THOUSAND DOLLARS ($2,900,000.00),
on which the outstanding principal balance as of the date hereof is
$2,333,876.00.
Borrower's obligation to repay Term LoanA shall be evidenced by Term Note A,
all terms of which are incorporated herein by this reference. Subject to the
terms and conditions of this Agreement, Bank hereby confirms that the Term Loan
A remains in full force and effect. Concurrently until the execution of this
Agreement,
-6-
<PAGE>
Bank and Borrower are executing a letter whereby the maturity of Term Loan A is
being extended to August 15, 1996.
All references in Term Note A to a credit agreement shall be deemed
references to this Agreement.
(b) Repayment. The principal amount of Term LoanA shall be repaid in
accordance with the provisions of Term Note A.
Section2.2. Term LoanB.
(a) Term LoanB. Bank has made a Term LoanB to Borrower in the original
principal amount of ONE MILLION ONE HUNDRED THOUSAND DOLLARS ($1,100,000.00), on
which the outstanding principal balance as of the date hereof is $885,224.00.
Borrower's obligation to repay Term LoanB shall be evidenced by Term Note B, all
terms of which are incorporated herein by this reference. Subject to the terms
and conditions of this Agreement, Bank hereby confirms that the Term Loan B
remains in full force and effect. Concurrently until the execution of this
Agreement, Bank and Borrower are executing a letter whereby the maturity of Term
Loan B is being extended to August 15, 1996.
All references in Term Note B to a credit agreement shall be deemed
references to this Agreement.
(b) Relevant. The principal amount of Term LoanB shall be repaid in
accordance with the provisions of Term Note B.
Section2.3. INTEREST/FEES - Term LoanA and Term LoanB.
(a) Definitions. As used in Sections 2.3 and 2.4, the following terms
shall have the following definitions:
-7-
<PAGE>
"All-Inclusive Rate" means a rate of interest equal to the sum of the
Loan Rate plus the Cap Rate Fee Percentage, but in no event shall the
All-Inclusive Rate exceed the Cap Rate.
"Cap Rate" means twelve percent (12%) per annum, (computed on the basis
of a 360-day year, actual days elapsed).
"Cap Rate Fee" means a non-refundable fee in the amount of $46,000.00
paid by Borrower to Bank, by means of the inclusion of the Cap Rate Fee
Percentage in the All-Inclusive Rate in consideration of Bank's agreement to cap
the All Inclusive Rate at the Cap Rate.
"Cap Rate Fee Percentage" means a rate equal to thirty-two
one-hundredths percent (0.32%) per annum, which rate has been determined by Bank
to be the rate required to be added to the Loan Rate in order to amortize
payment of the Cap Rate Fee over the full term of Term LoanA and Term LoanB.
"Cap Rate Fee Prepayment Amount" means, with respect to each of Term
LoanA and Term LoanB the amount arrived at in accordance with the following
formula:
Cap Rate Fee Prepayment Amount = $959.00 per month, multiplied by the
number of months (including fractions thereof) remaining from the date of
prepayment to February 20, 1996, multiplied by the percentage of principal being
prepaid. Such percentage is arrived at by dividing the amount being prepaid by
the outstanding principal balance of the applicable Term Loanat the time of
prepayment.
"Loan Rate" means the LIBO Rate in effect on the first day of each
Fixed Rate Term, plus one and eight-tenths percent (1.8%).
-8-
<PAGE>
(b) Interest. The outstanding principal balances of each of Term LoanA
and Term LoanB shall bear interest at a rate per annum equal to the applicable
All-Inclusive Rate in effect on the first day of each Fixed Rate Term up to and
including February 20, 1996, and at the Loan Rate thereafter.
(c) Term LoanA Commitment Fee. Borrower has paid to Bank a
non-refundable commitment fee for Term LoanA equal to TWENTY-NINE THOUSAND
DOLLARS ($29,000.00), which commitment fee was due and payable in full on the
date of funding. An additional fee of $2,275.00 for the extension from February
20, 1996 to August 15, 1996 is due on execution of this Agreement.
(d) Term LoanB Commitment Fee. Borrower has paid to Bank a
non-refundable commitment fee for Term LoanB equal to ELEVEN THOUSAND DOLLARS
($11,000.00), which commitment fee was due and payable in full on the date of
funding. An additional fee of $863.00 for the extension from February 20, 1996
to August 15, 1996 is due on execution of this Agreement.
Section2.4. PREPAYMENT - Term LoanA AND Term LoanB.
(a) Interest Rate Differential Term LoanA and Term
Loan B. Borrower may prepay principal on either Term LoanA or Term LoanB in the
minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however,
that if the outstanding principal balance of the Term Loanbeing prepaid is less
than said amount, the minimum prepayment amount shall be the entire outstanding
principal balance thereof. In consideration of Bank providing this prepayment
option to Borrower, or if the outstanding principal balance of either Term
Loan shall become due and payable
-9-
<PAGE>
prior to the maturity date of a Fixed Rate Term by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:
(i) Determine the amount of interest which would have accrued each
month on the amount prepaid at the Loan Rate applicable to
such amount had it remained outstanding until the scheduled
maturity date of the Fixed Rate Term.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would accrue for the same month on the amount
prepaid for the remaining term of the Fixed Rate Term at the
LIBO Rate in effect on the date of prepayment for new loans
made for such term and in a principal amount equal to the
amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by the LIBO Rate used in (ii)
above.
Borrower acknowledges that prepayment of such amount will result in
Bank incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment
-10-
<PAGE>
costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed).
(b) Application of Prepayments. All prepayments of principal shall be
applied on the most remote principal installment or installments then unpaid on
the Term Loanbeing prepaid.
(c) Cap Rate Fee Prepayment Amount. In addition to payment of the fee
described in Paragraph2.4(a) hereinabove with respect to Term LoanA and Term
LoanB, Borrower shall pay to Bank, as a condition precedent to and at the time
of each prepayment under Term LoanA or Term LoanB, an amount equal to the Cap
Rate Fee Prepayment Amount. In order to establish the Cap Rate and perform its
obligations with respect thereto, it may be necessary or advisable for Bank to
"hedge" an amount equal to the principal amounts of each of Term LoanA and Term
LoanB in the financial market or otherwise make arrangements or take actions to
permit it to carry out its obligations with respect to the Cap Rate. Such
actions may impose various costs and risks on Bank beyond those which would
otherwise be incurred by Bank. Accordingly, Bank is willing to enter into this
agreement upon the condition that the entire Cap Rate Fee is paid to Bank as
compensation to Bank for Bank's incurring these additional costs and risks
whether or not this Agreement is terminated for any reason prior to, with
respect to Term LoanA or Term LoanB, February 20, 1996. Borrower agrees
-11-
<PAGE>
that the Cap Rate Fee is a reasonable pre-estimate of the additional costs as
well as reasonable compensation for Bank incurring such additional risks and
that in the event of any termination of this Agreement or prepayment of
principal, Bank's costs, expenses and damages would be difficult to ascertain
and that the Cap Rate Fee Prepayment Amount is a reasonable pre-estimate of such
costs, expenses and damages and that the amount is payable as liquidated damages
and not as a penalty.
Section2.5. ADDITIONAL LIBO RATE PROVISIONS.
(a) Inability to Determine Rate. In the event Bank shall
have determined (which determination shall be conclusive and binding) that for
any reason, including without limitation circumstances affecting the interbank
Eurodollar market, adequate and reasonable means do not exist for ascertaining
the LIBO Rate, Bank shall forthwith give written notice to Borrower. If such
notice is given and until such notice has been withdrawn in writing by Bank,
then no LIBO advance shall be made, no outstanding LIBO advance shall be renewed
at the end of the Fixed Rate Term relating thereto, and the interest rate on
such LIBO advance for subsequent Fixed Rate Terms during the pendency of such
notice shall accrue at a rate per annum equal to two percent (2%) above the
Bank's six (6) month Money Market Funds Rate, to be adjusted on the first day of
each Fixed Rate Term.
(b) Illegality; Termination of Commitment. Notwithstanding any other
provisions herein, if any law, treaty, rule, regulation or determination of a
court or other governmental authority or any
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change therein or in the interpretation or application thereof shall make it
unlawful for Bank (i) to make LIBO advances or (ii) to maintain LIBO advances,
then in the former event, the obligation of Bank hereunder to make such unlawful
LIBO advances shall forthwith be canceled, and in the latter event, any such
unlawful LIBO advances then outstanding shall at the option of Bank be converted
into Prime Rate advances; provided however, if any such law, treaty, rule,
regulation or determination of a court or other governmental authority or any
change therein or in the interpretation thereof shall permit a LIBO advance
until the expiration of the Fixed Rate Term relating thereto, then such
permitted LIBO advance shall continue as such until the end of such Fixed Rate
Term. In the event any outstanding LIBO advance is converted to a lower rate in
accordance with the foregoing terms, Borrower shall pay to Bank immediately upon
demand such amount or amounts as may be necessary to compensate Bank for any
loss in connection therewith.
(c) Charges: Illegality. Upon the occurrence of any event described in
(b) above, Borrower shall pay to Bank, immediately upon demand, such amount or
amounts as may be necessary to compensate Bank for any fines, fees, charges,
penalties or other amounts payable by Bank as a result thereof and which are
attributable to LIBO advances made to Borrower hereunder. In determining which
amounts payable by Bank and/or losses incurred by Bank are attributable to LIBO
advances made to Borrower hereunder, any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
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(d) Charges: Legal Restrictions. In the event that any law, treaty,
rule, regulation or determination of a court or governmental authority or any
change therein or in the interpretation or application thereof or compliance by
Bank with any request or directive (whether or not having the force of law) from
any central bank or other governmental authority:
(i) shall subject Bank or its foreign office to any tax of any
kind whatsoever with respect to this or any LIBO advance, or
change the basis of taxation of payments to Bank of principal,
commitment fee, interest, or any other amount payable
hereunder (except for changes in the rate of tax on the
overall net income of Bank); or
(ii) shall impose, modify, or hold applicable any reserve, special
deposit, compulsory loan, or similar requirement against
assets held by, or deposits or other liabilities in or for the
account of, advances or loans by, or other credit extended by,
or any other acquisition of funds by, any office of Bank; or
(iii) shall impose on Bank any other condition; and the result of
any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining LIBO advances or extensions of
credit and/or to reduce any amount receivable by Bank in
connection therewith; then in any such case, Borrower shall
pay to Bank, immediately upon demand, such amount
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or amounts as may be necessary to compensate Bank for any
additional costs incurred by Bank and/or reductions in amounts
received by Bank which are attributable to LIBO advances made
to Borrower hereunder. In determining which costs incurred by
Bank and/or reductions in amounts received by Bank are
attributable to LIBO advances made to Borrower hereunder, any
reasonable allocation made by Bank among its operations shall
be conclusive and binding upon Borrower.
Section2.6. Term LoanC.
(a) Term LoanC. Bank has made a loan to Borrower in the original
principal amount of FOUR MILLION ONE HUNDRED FIFTY THOUSAND DOLLARS
($4,150,000.00) ("Term LoanC"), on which the outstanding principal balance as of
the date hereof is $2,069,200.00. Borrower's obligation to repay Term LoanC
shall be evidenced by Term Note C, all terms of which are incorporated herein by
this reference. Subject to the terms and conditions of this Agreement, Bank
hereby confirms that the Term Loan C remains in full force and effect.
All references in the Term Loan C to a credit agreement shall be deemed
references to this Agreement.
(b) Repayment. The principal amount of Term LoanC shall be repaid in
accordance with the provisions of Term Note C.
(c) Interest. The outstanding principal balance of Term LoanC shall
bear interest at a rate per annum at all times equal to one-half percent (1/2%)
above the Prime Rate in effect from time to time; but in no event at a rate
greater than twelve and
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one-half percent (12 1/2%) per annum for a period of two
(2) years from the date of disbursement of Term LoanC.
Section2.7. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including June 30, 1997, not to exceed at any time the aggregate
principal amount of TEN MILLION DOLLARS ($10,000,000.00) ("Line of Credit"), the
proceeds of which shall be used to assist with working capital requirements.
Borrower's obligation to repay advances under the Line of Credit shall be
evidenced by the Line of Credit Note.
(b) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all the limitations, terms and conditions
contained herein; provided however, that the total outstanding borrowings under
the Line of Credit (whether as advances, Letters of Credit or Foreign Exchange
Contracts) shall not at any time exceed the maximum principal amount available
thereunder, as set forth in this Agreement. In the event of acceleration by Bank
of the indebtedness owed to Bank by Edna Valley Vineyard, Borrower hereby
authorizes and instructs Bank to advance under the Line of Credit an amount
equal to the amount due from Borrower to Edna Valley Vineyard (the "EVV
Payable") and apply such amount to such indebtedness.
(c) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time up to and including June 30, 1997, to
issue for the account of Borrower commercial
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letters of credit for the purpose of financing imported wine inventory and wine
barrels (each individually a "Letter of Credit" and collectively "Letters of
Credit"); provided however, that the form and substance of each Letter of Credit
shall be subject to approval by Bank, in its sole discretion; and provided
further that the aggregate principal amount of all outstanding Letters of Credit
shall at no time exceed TWO HUNDRED SEVENTY FIVE THOUSAND AND NO/100 DOLLARS
($275,000.00). Each Letter of Credit shall be issued for a term as designated by
Borrower; provided however, that no Letter of Credit shall have an expiration
date subsequent to September 30, 1997. The outstanding amount of all Letters of
Credit shall be reserved under the Line of Credit and shall not be available for
advances thereunder. Each Letter of Credit shall be subject to the terms and
conditions of this Agreement, the Letter of Credit Agreement and related
documents, if any, required by Bank in connection with the issuance of such
Letter of Credit. Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if the Line of Credit is not available, for any
reason whatsoever, at the time any draft is paid by Bank, then the full amount
of such draft shall be immediately due and payable, together with interest
thereon, from the date such amount is paid by Bank to the date such amount is
fully repaid by Borrower, at the rate of interest applicable to advances under
the Line of Credit. In such event, Borrower agrees that Bank, at Bank's sole
discretion, may debit
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Borrower's deposit account with Bank for the amount of any such draft.
(d) Borrowing Base. Notwithstanding any other provision of this
Agreement, the aggregate amount of all outstanding borrowings (whether as
advances or Letters of Credit) under the Line of Credit shall not at any time
exceed a maximum of (i)eighty percent (80%) of Borrower's assigned eligible
accounts receivable, as determined by Bank upon receipt and review of such
collateral reports and other documents as Bank may require; plus (ii) fifty-five
percent (55%) of the value of Borrower's bulk wine inventory with value
determined in accordance with Bank's crush report; plus (iii) fifty percent
(50%) of the average FOB price of bottled domestic wine, but not to exceed
$50.00 per case; plus (iv) fifty percent (50%) of the value of bottled imported
wine, with such value limited to not more than $1,500,000.00 and defined as the
lower of cost or market value (in all instances, exclusive of work in process
and inventory which is obsolete, unsalable or damaged, as determined by Bank
upon receipt and review of said collateral reports and other documents); less
(v) the amount from time to time owed by Borrower to Edna Valley Vineyard. In no
event shall the outstanding principal balance of advances against inventory
exceed NINE MILLION THREE HUNDRED THOUSAND DOLLARS ($9,300,000.00).
Borrower acknowledges that the foregoing advance rate against eligible
accounts receivable was established by Bank with the understanding that, among
other items, the aggregate of all returns, rebates, discounts, credits and
allowances for the
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immediately preceding three (3) months at all times shall be less than five
percent (5%) of Borrower's gross sales for said period. If such dilution of
Borrower's accounts for the immediately preceding three (3) months at any time
exceeds five percent (5%) of Borrower's gross sales for said period, or if there
at any time exists any other matters, events, conditions or contingencies which
Bank reasonably believes may affect payment of any portion of Borrower's
accounts, Bank, in its sole discretion, may reduce said advance rate to a
percentage appropriate to reflect such additional dilution and/or establish
additional reserves against Borrower's eligible accounts receivable.
As used herein, "eligible accounts receivable" shall consist solely of
trade accounts which have been created in the ordinary course of Borrower's
business and upon which Borrower's right to receive payment is absolute and not
contingent upon the fulfillment of any condition whatsoever, and shall not
include:
(i) any account which is past due more than twice Borrower's
standard selling terms;
(ii) any account for which there exists any right of setoff,
defense or discount (except regular discounts allowed in the
ordinary course of business to promote prompt payment) or for
which any defense or counterclaim has been asserted;
(iii) any account which represents an obligation of any state or
municipal government or of the United States government or any
political subdivision thereof (except accounts which represent
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obligations of the United States government and for which
Bank's forms N-138 and N-139 have been duly executed and
acknowledged);
(iv) any account which represents an obligation of an account
debtor located in a foreign country;
(v) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of,
an employee, affiliate, partner, parent or subsidiary of
Borrower;
(vi) that portion of any account which represents interim or
progress billings or retention rights on the part of the
account debtor;
(vii) any account which represents an obligation of any account
debtor when twenty percent (20%) or more of Borrower's
accounts from such account debtor are not eligible pursuant to
(i) above;
(viii) that portion of any account from an account debtor which
represents the amount by which Borrower's total accounts from
said account debtor exceeds twenty-five percent (25%) of
Borrower's total accounts; except for accounts from Pastornak
Wine Imports which represents the amount by which Borrower's
total accounts from Pastornak Wine Imports exceeds fifty
percent (50%) of Borrowers total accounts;
(ix) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or
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financial condition of the account debtor, or the industry in
which the account debtor is engaged, to be unsatisfactory.
Section2.8. INTEREST/FEES - LINE OF CREDIT.
(a) Line of Credit. The outstanding principal balance of
the Line of Credit, or such portions thereof as Borrower shall designate, shall
bear interest determined (i) at a fluctuating rate per annum equal to the Prime
Rate in effect from time to time, or (ii) at a fixed rate per annum equal to two
percent (2%) above the LIBO Rate in effect on the first day of each Fixed Rate
Term.
(b) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one quarter of one percent (.25%) per annum (computed on the basis of a 360 day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a monthly basis by Bank and shall be
due and payable by Borrower in arrears within five (5) days after each billing
is sent by Bank.
(c) Charges; Illegality. Borrower shall pay to Bank all costs for the
accounts receivable and inventory audits.
(d) Audit Fees. Borrower shall pay to Bank all costs for accounts
receivable and inventory audits.
(e) Selection of Interest Options. At any time the Line of Credit bears
interest determined in relation to the LIBO Rate, it may be continued from time
to time by Borrower at the end of any Fixed Rate Term applicable thereto so that
such portion bears interest determined in relation to the Prime Rate or in
relation
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to the LIBO Rate for a new Fixed Rate Term designated by Borrower. At any time
any portion of the Line of Credit bears interest determined in relation to the
Prime Rate, Borrower may convert all or a portion of the outstanding principal
balance thereof so that it bears interest determined in relation to the LIBOR
Rate for a Fixed Rate Term designated by Borrower. At the time each advance is
made under the Line of Credit, and at the end of each Fixed Rate Term, Borrower
shall give Bank notice specifying (i) the interest rate option selected for such
Advance, and (ii)if said interest rate is to be determined in relation to the
LIBO Rate, the principal amount and the length of the Fixed Rate Term. Any such
notice may be given by telephone. If Bank has not received the appropriate
notice from Borrower at the time any advance is requested under the Line of
Credit, or by the last day of any Fixed Rate Term, Borrower shall be deemed to
have made a Prime Rate interest option selection for such new advance, or for
the amounts to which such LIBO Rate would have been or had been applicable.
(f) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance or amendment of each Letter of Credit and upon the payment by Bank of
each draft under any Letter of Credit determined in accordance with Bank's
standard fees and charges in effect at the time any Letter of Credit is issued
or amended or any draft is paid.
(g) Prepayment
(i) Prime Rate. Borrower may from time to time, in any amount and
without penalty, prepay principal on any portion of the
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Line of Credit which bears interest determined in relation to the Prime Rate.
(ii) Fixed Rate. Borrower may from time to time prepay principal in
the minimum amount of One Hundred Thousand Dollars ($100,000.00) on any portion
of the Line of Credit which bears interest determined in relation to the LIBO
Rate. In consideration of Bank providing this prepayment option to Borrower, or
if any such portion of the Line of Credit shall become due and payable prior to
the last day of the Fixed Rate Term applicable thereto by acceleration or
otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the
sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:
(a) Determine the amount of interest which would have accrued each
month on the amount prepaid at the interest rate applicable to such amount had
it remained outstanding until the last day of the applicable Fixed Rate Term.
(b) Subtract from the amount determined in (a) above the amount of
interest which would accrue for the same month on the amount prepaid for the
remaining term of such Fixed Rate Term at the LIBO Rate applicable to the amount
being prepaid in effect on the date of prepayment for new loans made for such
term and in a principal amount equal to the amount prepaid.
(c) If the result obtained in (b) for any month is greater than zero,
discount that difference by the LIBO Banking Fixed Rate used in (b) above.
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Borrower acknowledges that prepayment of such amount will result in
Bank incurring additional costs, expenses and/or liabilities. Borrower,
therefore, agrees to pay the above-described prepayment fee and agrees that said
amount represents a reasonable estimate of the prepayment costs, expenses and/or
liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the
amount of such prepayment fee shall thereafter bear interest until paid at a
fluctuating rate per annum equal to one percent (2%) above the Prime Rate in
effect from time to time (computed on the basis of a 360-day year, actual days
elapsed).
Section2.9. COMPUTATION OF INTEREST. Interest on the Credits shall be
computed on the basis of a 360-day year, actual days elapsed and shall be
payable at the times and places set forth in the Notes.
Section2.10. PAYMENT OF PRINCIPAL/INTEREST/FEES. Bank shall, and
Borrower hereby authorizes Bank to, debit any demand deposit account of Borrower
with Bank for all payments of principal, interest and fees as they become due on
any of the Credits. Should, for any reason whatsoever, the funds in any such
demand deposit account be insufficient to pay all principal, interest and/or
fees when due, Borrower shall immediately upon demand remit to Bank the full
amount of any such deficiency.
Section2.11. COLLATERAL. As security for all indebtedness of Borrower
to Bank pursuant to this Agreement, Borrower grants to Bank (i) security
interests of first priority in all Borrower's crops, farm products, equipment,
accounts receivable, general intangibles (including without limitation,
trademarks and trade
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names), other rights to payment, inventory and fixtures and all proceeds of the
foregoing; (ii) a lien of first priority on that certain real property on the
Chalone Winery located at Stone Wall Canyon Road, Monterey, California; (iii) a
lien of a first priority on Borrower's leasehold estate on the Acacia Winery
located at 2750 Las Amigas Road, Napa, California and ownership interest in the
improvements thereon; and (iv) a lien of first priority on the Carmenet Vineyard
located at 1700 Moon Mountain Road, Sonoma, California. All of the foregoing
shall be evidenced by and subject to the terms of such documents as Bank shall
reasonably require, all in form and substance satisfactory to Bank. Borrower
shall execute such further documentation as Bank may from time to time require
to further evidence or perfect any security interest or lien on the collateral
hereinabove described. Borrower shall reimburse Bank, immediately upon demand,
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation filing and recording fees and
costs of appraisals, audits and title insurance.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and
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discharge, of all obligations of Borrower to Bank subject to this Agreement.
Section3.1. LEGAL STATUS. Borrower is a corporation duly organized and
existing and in good standing under the laws of the State of California, and is
qualified or licensed to do business, and is in good standing as a foreign
corporation, if applicable, in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
Section3.2. AUTHORIZATION AND VALIDITY. The Loan Documents have been
duly authorized, and upon their execution and delivery in accordance with the
provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms.
Section3.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of its Articles of Incorporation or
By-laws, or result in a breach of or constitute a default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
Section3.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings before any governmental authority, arbitrator, court or
administrative agency which may adversely affect the financial condition or
operation of Borrower
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other than those disclosed by Borrower to Bank in writing prior to the date
hereof.
Section3.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated September 30, 1995 heretofore delivered by Borrower to Bank is
complete and correct and presents fairly the financial condition of Borrower;
discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent; and has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of such financial statement there has been no material adverse
change in the financial condition of Borrower, nor has Borrower mortgaged,
pledged or granted a security interest or encumbered any of its assets or
properties except as disclosed by Borrower to Bank in writing prior to the date
hereof or as permitted by this Agreement.
Section3.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
Section3.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
Section3.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, memberships, franchises,
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contracts and licenses required and all trademark rights, trade names, trade
name rights, patents, patent rights and fictitious name rights necessary to
enable it to conduct the business in which it is now engaged without conflict
with the rights of others.
Section3.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of ERISA; Borrower has not violated any provision
of any defined employee pension benefit plan (as defined in ERISA) maintained or
contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in
ERISA has occurred and is continuing with respect to any Plan initiated by
Borrower; Borrower has met its minimum funding requirements under ERISA with
respect to each Plan; and each Plan will be able to fulfill its benefit
obligations as they come due in accordance with the Plan documents and under
generally accepted accounting principles.
Section3.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
Section3.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable environmental, hazardous waste, health and
safety statutes and regulations governing its operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA), the Superfund
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Amendments and Reauthorization Act of 1986 (SARA), the Federal Resource
Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act
and the California Health and Safety Code. None of the operations of Borrower is
the subject of any federal or state investigation evaluating whether any
remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
Section 3.12. REAL PROPERTY COLLATERAL. Except as disclosed by Borrower
to Bank in writing prior to the date hereof, with respect to any real property
collateral required hereby: (a) All taxes, governmental assessments, insurance
premiums, and water, sewer and municipal charges, and rents (if any) which
previously became due and owing in respect thereof have been paid as of the date
hereof.
(b) There are no mechanics' or similar liens or claims which have been
filed for work, labor or material (and no rights are outstanding that under law
could give rise to any such lien) which affect all or any interest in any such
real property and which are or may be prior to or equal to the lien thereon in
favor of Bank.
(c) None of the improvements which were included for purpose of
determining the appraised value of any such real property lies outside of the
boundaries and/or building restriction lines thereof, and no improvements on
adjoining properties materially encroach upon any such real property.
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(d) There is no pending, or to the best of Borrower's knowledge
threatened, proceeding for the total or partial condemnation of all or any
portion of any such real property, and all such real property is in good repair
and free and clear of any damage that would materially and adversely affect the
value thereof as security and/or the intended use thereof.
ARTICLE IV
CONDITIONS
Section4.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to counsel of Bank.
(b) Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Acknowledgment of Security Interest.
(iii) Waiver of Landlord.
(iv) Security Agreement (Equipment & Fixtures).
(v) Security Agreement (Farm Products & Timber).
(vi) Security Agreement - Rights to Payment and Inventory.
(vii) Consent by Lessor of Real Property.
(viii) Amended and Restated Deed of Trust.
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(ix) Such other documents as Bank may require under any other
section of this Agreement.
(c) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, covering risks, in amounts,
issued by companies and in form and substance satisfactory to Bank, and where
required by Bank, with loss payable endorsements in favor of Bank.
(d) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.
Section4.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained herein
shall be true on and as of the date of the signing of this Agreement and on the
date of each extension of credit by Bank pursuant hereto, with the same effect
as though such representations and warranties had been made on and as of each
such date, and on each such date, no Event of Default as defined herein, and no
condition, event or act which with the giving of notice or the passage of time
or both would constitute such an Event of Default, shall have occurred and be
continuing or shall exist.
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(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrower covenants that so long as any of the Credits remain available
or any liabilities (whether direct or contingent, liquidated or unliquidated) of
Borrower to Bank under any of the Loan Documents remain outstanding, and until
payment in full of all obligations of Borrower subject hereto, Borrower shall:
Section5.1. PUNCTUAL PAYMENTS. Punctually pay the interest and
principal on each of the Loan Documents requiring any such payments at the times
and place and in the manner specified therein, and any fees or other liabilities
due under any of the Loan Documents at the times and place and in the manner
specified therein.
Section5.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
Section5.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal
year, an audited, unqualified financial statement of
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Borrower, prepared by a certified public accountant acceptable to Bank, to
include balance sheet, income statement and statement of cash flow and all
footnotes;
(b) not later than 45 days after and as of the end of each month, a
financial statement of Borrower, prepared by Borrower and signed by either the
Chief Financial Officer or the Controller, to include balance sheet, income
statement and statement of cash flows, all in form and substance acceptable to
Bank;
(c) not later than 30 days after and as of the end of each month, an
aged listing of accounts receivable and accounts payable, and of reconciliation
of accounts (Bank form CMS-505), together with an inventory designation
statement;
(d) not later than 45 days after and as of the end of each quarter, an
inventory report listing inventory by winery;
(e) from time to time such other information as Bank may reasonably
request.
Section5.4. COMPLIANCE. Maintain all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of its
business; conduct its business in an orderly and regular manner; and comply with
the provisions of all documents pursuant to which Borrower is organized and/or
which govern Borrower's continued existence and with the requirements of all
laws, rules, regulations and orders of any governmental authority applicable to
Borrower or its business.
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<PAGE>
Section5.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to
Borrower's, including but not limited to fire, extended coverage, public
liability, property damage and workers, compensation, carried with companies and
in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's
request schedules setting forth all insurance then in effect.
Section5.6. FACILITIES. Keep all Borrower's properties useful or
necessary to Borrower's business in good repair and condition, and from time to
time make necessary repairs, renewals and replacements thereto so that
Borrower's properties shall be fully and efficiently preserved and maintained.
Section5.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal
and including federal and state income taxes, except such as Borrower may in
good faith contest or as to which a bona fide dispute may arise, provided
provision is made to the satisfaction of Bank for eventual payment thereof in
the event that it is found that the same is an obligation of Borrower.
Section5.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower in excess of $500,000.00.
Section5.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting
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<PAGE>
principles consistently applied and used consistently with prior practices,
except to the extent otherwise set forth in this Agreement:
(a) Current Ratio not at any time less than 1.50 to 1.0, with "Current
Ratio" defined as in Article I.
(b) Tangible Net Worth plus Subordinated Debt not at any time less than
$48,000,000.00, with "Tangible Net Worth" and "Subordinated Debt" defined as in
Article I
(c) Total Liabilities divided by Tangible Net Worth plus Subordinated
Debt not at any time greater than .65 to 1.0, with "Total Liabilities" defined
as the aggregate of current liabilities and non-current liabilities less
subordinated debt, and with "Tangible Net Worth" defined as in Article I.
(d) EBITDA Coverage Ratio not less than 1.5 to 1.0 on a rolling four
(4) quarter basis, determined as of each fiscal quarter end with EBITDA Coverage
Ratio defined as in Article I.
(e) Fiscal year end pre-tax income not less than $100,000.00 determined
as of each fiscal year end.
(f) 12 Month Sales (defined as bona fide arms length sales of finished
cased goods on a trailing twelve (12) month basis) not less than 200,000 cases,
determined as of the last day of each month.
Section5.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of:
(a) the occurrence of any Event of Default, or any condition, event or
act which with the giving of notice or the
-35-
<PAGE>
passage of time or both would
constitute such an Event of Default; (b) any change in the name or the
organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d)any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property in
excess of an aggregate of $500,000.00.
ARTICLE VI
NEGATIVE COVENANTS
Borrower further covenants that so long as any of the Credits remains
available or any liabilities (whether direct or contingent, liquidated or
unliquidated) of Borrower to Bank under any of the Loan Documents remain
outstanding, and until payment in full of all obligations of Borrower subject
hereto, Borrower will not without the prior written consent of Bank:
Section6.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article II hereof.
Section6.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in excess of an aggregate of $2,700,000.00 in fiscal year.
Section6.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from
-36-
<PAGE>
borrowings, loans or advances, whether secured or unsecured, matured or
unmatured, liquidated or unliquidated, joint or several, except liabilities of
Borrower to Bank and any other liabilities of Borrower existing as of, and
disclosed to Bank in writing prior to, the date hereof, and except for financing
for Canoe Ridge Winery, Inc. and CanoeCo Partners not to exceed $1,500,000.00 in
aggregate.
Section6.4. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except for Borrower's investments to
date in Edna Valley Vineyards, CanoeCo Partners, Canoe Ridge Winery, Inc.,
Borrower's investment in Duhart-Milon and loans, advances or investments
required in accordance with Joint Venture Agreements of Edna Valley Vineyards
and CanoeCo Partners existing as of the date hereof.
Section 6.5. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof, and liens granted in connection with capitalized leases entered
into by Borrower in the ordinary course of business.
ARTICLE VII
EVENTS OF DEFAULT
Section7.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
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<PAGE>
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with this Agreement or any representation or warranty made by
Borrower hereunder shall prove to be false, incorrect or incomplete in any
material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein (other than those
referred to in subsections (a) and (b) above), and with respect to any such
default which by its nature can be cured, such default shall continue for a
period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or Edna Valley
Vineyards has incurred any debt or other liability to any person or entity,
including Bank.
(e) Any default in the payment or performance of any obligation, or any
defined event of default, under any of the Loan Documents other than this
Agreement.
(f) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of
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<PAGE>
attachment or execution, or other like process, against the assets of Borrower;
or the entry of a judgment against Borrower.
(g) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Code, or under any state or federal law
granting relief to debtors, whether now or hereafter in effect; or any
involuntary petition or proceeding pursuant to the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Borrower, or Borrower shall
file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower shall be adjudicated a
bankrupt, or an order for relief shall be entered by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors.
(h) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.
-39-
<PAGE>
(i) The dissolution or liquidation of Borrower; or Borrower, or any of
its directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
Section7.2. REMEDIES. If an Event of Default shall occur, (a) any
indebtedness of Borrower under any of the Loan Documents, any term thereof to
the contrary notwithstanding, shall at Bank's option and without notice become
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are hereby expressly waived by Borrower; (b) the
obligation, if any, of Bank to permit further borrowings hereunder shall
immediately cease and terminate; and (c) Bank shall have all rights, powers and
remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for any
of the Credits and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies of
Bank in connection with each of the Loan Documents may be exercised at any time
by Bank and from time to time after the occurrence of an Event of Default, are
cumulative and not exclusive, and shall be in addition to any other rights,
powers or remedies provided by law or equity.
-40-
<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section8.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
Section8.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: THE CHALONE WINE GROUP, LTD.
621 Airport Road
Napa, CA 94558
Attention: William Hamilton, EVP & CFO
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
420 Montgomery St., 1st Floor
SanFrancisco, CA 94163
Attention: Brian Sorrick, VP
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of
-41-
<PAGE>
the date of receipt or three (3) days after deposit in the U.S. mail, first
class and postage prepaid; and (c) if sent by telecopy, upon receipt.
Section8.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys, fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel), incurred by Bank in connection with
(a) the negotiation and preparation of this Agreement and each other of the Loan
Documents, Bank's continued administration hereof and thereof, and the
preparation of amendments and waivers hereto and thereto, (b) the enforcement of
Bank's rights and/or the collection of any amounts which become due to Bank
under any of the Loan Documents, and (c) the prosecution or defense of any
action in any way related to any of the Loan Documents, including without
limitation any action for declaratory relief.
Section8.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding on
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without the prior
written consent of Bank. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has or
may hereafter
-42-
<PAGE>
acquire relating to any of the Credits, Borrower or its business, or any
collateral required hereunder.
Section8.5. ENTIRE AGREEMENT, AMENDMENT. This Agreement and each other
of the Loan Documents constitute the entire agreement between Borrower and Bank
with respect to the Credits and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only by a written instrument
executed by each party hereto.
Section8.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
Section8.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
Section8.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
Section8.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, except to the
extent that Bank has greater rights or remedies under Federal law, whether as a
national bank or
-43-
<PAGE>
otherwise, in which case such choice of California law shall not be deemed to
deprive Bank of such rights and remedies as may be available under Federal law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
THE CHALONE WINE GROUP, LTD. NATIONAL ASSOCIATION
By: /s/ William L. Hamilton By: /s/ Brian Sorrick
-------------------------------- -----------------------------
William L. Hamilton Brian Sorrick
Chief Financial Officer/ Vice President
Executive Vice President
-44-
<TABLE>
THE CHALONE WINE GROUP, LTD.
Exhibit 11 - Statement re Computation of Earnings Per Share
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net (loss) income......................... $ 206,607 $ 20,184 $ (690,779)
Adjustment for interest expense (net of
income tax):
Convertible Debentures: 1
5% due 1999........................ 659,000 727,000 727,000
---------------- ---------------- ----------------
Adjusted net (loss) income................ $ 865,607 $ 747,184 $ 36,221
Weighted average shares outstanding:
Common shares......................... 5,299,766 4,826,094 4,383,209
Common equivalent shares:
Stock options and warrants, net of
treasury stock purchases........ -- -- --
---------------- ---------------- ----------------
Weighted average shares outstanding
as adjusted (primary earnings
per share)...................... 5,299,766 4,826,094 4,383,209
Contingent issuances:
Convertible Debentures: 1
5% due 1999 .................... 967,301 1,997,555 1,997,555
---------------- ---------------- ----------------
Weighted average shares outstanding
as adjusted (fully diluted
earnings per share)............. 6,267,067 6,823,649 6,380,764
Net income (loss) per common and common
equivalent share...................... $ .04 $ .00 $ (.16)
Net income (loss) per common share
assuming full dilution................ $ .14 $ .11 $ .01
<FN>
- --------
1 This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083 although it is contrary to paragraph 40 of APB
Opinion No. 15 because it produces an anti-dilutive result.
</FN>
</TABLE>
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-38070, 33-46966 and 33-77086 on Form S-8 and Registration Statement No.
33-89030 on Form S-3, of the CHALONE Wine Group, Ltd., of our report dated March
11, 1996 appearing in and incorporated by reference in the Annual Report on Form
10-K of the CHALONE Wine Group, Ltd. for the year ended December 31, 1995.
San Francisco, California
March 11, 1996
- --------------------------------------------------------------------------------
SOCIETE CIVILE
CHATEAU DUHART-MILON
Balance Sheets as of December 31, 1995 and 1994,
and Related Statements of Income and Retained Earnings,
and Cash Flows for Each of the Three Years in the Period
Ended December 31, 1995
and Independent Auditors' Report
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Management of
SOCIETE CIVILE
CHATEAU DUHART-MILON
We have audited the accompanying balance sheets of SOCIETE CIVILE CHATEAU
DUHART-MILON (the Company) (a subsidiary of Domaines Barons de Rothschild
S.C.A.) (Lafite) as of December 31, 1995 and 1994, and the related statements of
income and retained earnings, and cash flows for each of the three years in the
period ended December 31, 1995 (all expressed in French Francs). 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
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles in the United States of America.
As discussed in Notes A and B to the financial statements, the Company is
operated on a dependant basis with other operations of its parent company, and
accordingly, the Company has significant transactions with related parties.
Deloitte Touche Tohmatsu
/S/ Jean-Paul Picard
- ------------------------
Jean-Paul Picard
Neuilly-sur-Seine, France
February 28, 1996
<PAGE>
SOCIETE CIVILE CHATEAU DUHART-MILON
BALANCE SHEETS
(All amounts in thousands of French Francs)
December 31
------------------------
1995 1994
----------- -----------
ASSETS
Cash FF 1,423 FF 106
Accounts receivable (no allowance for doubtful
accounts at either date) 976 902
Inventories:
Bulk and bottled wine 15,375 16,378
Wine production supplies 2,495 2,410
Intercompany receivable from parent 40,295
Other current assets 442 342
----------- -----------
Total current assets 61,006 20,138
Property, plant and equipment - net 12,403 13,004
=========== ===========
TOTAL ASSETS FF 73,409 FF 33,142
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank borrowings FF FF 87
Accounts payable 902 1,602
Customer deposits 2,032 1,570
Social charges and taxes, other than income 1,883 1,542
Other current liabilities 161 217
Intercompany accounts:
Interest bearing 2,136 14,199
Non-interest bearing 591 1,061
----------- -----------
Total current liabilities 7,705 20,278
Stated value of common equity parts 13 10
Additional equity contribution 58,885
Undistributed earnings 6,806 12,854
----------- -----------
Total shareholders' equity 65,704 12,864
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY FF 73,409 FF 33,142
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
SOCIETE CIVILE CHATEAU DUHART-MILON
<TABLE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
(All amounts in thousands of French Francs)
<CAPTION>
Year ended December 31
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Wine sales to unrelated parties FF 13,213 FF 7,332 FF 2,652
Intercompany wine sales 8,295 7,406 9,379
------------ ---------- ---------
Total sales 21,508 14,738 12,031
Cost of sales (13,360) (10,003) (9,144)
------------ ---------- ---------
Gross profit 8,147 4,735 2,887
Selling, general and administrative
expenses - Intercompany (1,415) (1,267) (888)
------------ ---------- ---------
Operating income 6,732 3,468 1,999
Interest expense:
Bank loans (2) (5) (41)
Intercompany (872) (988) (824)
Other income 564 592 375
------------ ---------- ---------
Net earnings 6,422 3,067 1,509
Undistributed earnings, beginning of year 12,854 12,543 16,899
Less: Dividends (12,470) (2,756) (5,865)
------------ ---------- ---------
Undistributed earnings, end of year FF 6,806 FF 12,854 FF 12,543
============= ============ ============
</TABLE>
<PAGE>
SOCIETE CIVILE CHATEAU DUHART-MILON
<TABLE>
STATEMENTS OF CASH FLOWS
(All amounts in thousands of French Francs)
<CAPTION>
Year ended December 31
--------------------------------------
Source (use) of cash 1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings FF 6,422 FF 3,067 FF 1,509
Non cash transactions included in earnings:
Depreciation 2,137 2,215 1,970
Other (65) (292) 82
Change in:
Accounts receivable (74) (218) (284)
Inventories 918 (1,859) (1,933)
Other current assets (100) (84) 67
Accounts payable (700) 531 27
Customer deposits 462 1,476 (145)
Social charges and taxes, other than income 341 396 (209)
Other current liabilities (56) (607) 370
------------ ------------ ------------
Net cash provided by operating activities 9,285 4,625 1,454
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (2,005) (1,831) (1,712)
Proceeds from sale of assets 537 479 519
------------ ------------ ------------
Net cash used in investing activities (1,468) (1,352) (1,193)
------------ ------------ ------------
Cash flows from financing activities:
Bank borrowings (repayments) (87) (170) (401)
Change in intercompany accounts 6,057 (264) 5,974
Dividends to shareholders 12,470) (2,756) (5,865)
------------ ------------ ------------
Net cash used in financing activities (6,500) (3,190) (292)
------------ ------------ ------------
Net increase (decrease) in cash 1,317 83 (31)
Cash at beginning of year 106 23 54
============ ============ ============
Cash at end of year FF 1,423 FF 106 FF 23
============ ============ ============
Other cash flow information:
Interest paid FF 874 FF 1,016 FF 675
============ ============ ============
</TABLE>
<PAGE>
SOCIETE CIVILE CHATEAU DUHART-MILON
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
(All amounts in thousands of French Francs)
Note A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. Societe Civile Chateau Duhart-Milon (The Company),
formerly Societe Civile de Duhart-Milon-Rothschild, produces and sells French
premium quality wines. The Company farms its vineyards in the Bordeaux region of
France. All wine produced is from its owned land.
The Company sells the majority of its products through distributers in France
and other countries.
The Company is organised under the laws of the Republic of France. The company
was controlled 76.4%, 99.9% and 99.9% by Domaines Barons de Rothschild S.C.A.
(Lafite) (DBR), a company incorporated under the laws of the Republic of France,
at December 31, 1995, 1994 and 1993 respectively. These financial statements are
prepared using United States generally accepted accounting principles. Interest
charges are provided on intercompany accounts with DBR.
Inventories. Inventories are stated at the lower of cost or market. Cost for
bulk and bottled wines is determined on an accumulated weighted average basis
and includes farming and harvesting costs, winery, and bottling costs. Farming
and related costs are deferred as growing crops and are recognized when the
related crop is harvested. Wine production supplies are stated at FIFO
(first-in, first-out) cost. All bulk and bottled wine inventories are classified
as current assets in accordance with recognized industry practice, although a
portion of such inventories will be aged for periods longer than one year.
Property, Plant and Equipment. Property, plant and equipment are stated at cost.
Depreciation is calculated over the estimated useful life of the asset.
Buildings are depreciated over 20 to 40 years, building improvements over 10
years, and producing vines over 25 to 33 years, primarily using the
straight-line method. Barrels and other equipment are depreciated over 2 to 10
years, primarily using accelerated methods.
<PAGE>
Revenue Recognition. Revenues are recognised either when the customer accepts
delivery of the wines or when the customer fully pays for the wines, whichever
occurs first. In accordance with industry practices, customers often will leave
their merchandise on the winery premises, perhaps for many years, prior to
accepting delivery. In such circumstances it is the Company's practice not to
charge storage fees to its customers. Partial payments by customers for wine
purchases prior to bottling and shipment are recorded as deposits and are shown
as current liabilities.
Income Taxes. The Company, as a SociEtE Civile under French law, has the status
of a pass-through entity whose profits are taxable to its owner(s). Accordingly,
no income taxes have been provided in the accompanying financial statements.
Concentration of Credit Risk. The Company sells the majority of its products to
long-time customers, predominantly in France, many of whom place substantial
advance deposits on the product.
Accounting estimates. The presentation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the year. Actual results could differ from these
estimates.
Note B - RELATED PARTY TRANSACTIONS
The Company often sells its wine through a centralized sales staff which is part
of another DBR operating business. Such wine may be sold to independent third
parties or to other operations of DBR. Intercompany sales to other DBR
operations were FF 8,295, FF 7,406, and FF 9,379, in the years ended December
31, 1995, 1994 and 1993, respectively, which generated gross profit related to
the intercompany sales of approximately FF 5,400, FF 4,800, and FF 6,100,
respectively.
The Company obtains certain technical and administrative services, including
certain sales activities discussed above, from other DBR operating business.
Intercompany expense charges (classified as selling, general and administrative
expenses) for such services were FF 1,415, FF 1,267 and FF 888 in the years
ended December 31, 1995, 1994 and 1993 respectively.
The Company purchases the barrels used to store and age its wine from another
DBR business. Such barrels are capitalized and depreciated (as a cost of sales)
over their useful life of three years. Such depreciation expense was FF 1,235,
FF 1,197 and FF 804, in the years ended December 31, 1995, 1994 and 1993,
respectively. Capital expenditures for barrels were FF 786, FF 340 and FF 937
during the years ended December 31, 1995, 1994 and 1993, respectively.
<PAGE>
In a 1995 non-cash transaction, the Company issued a 23,5% ownership interest to
Chalone Wine Group Ltd. (Chalone), and received common shares of DBR as payment
from Chalone. The shares of DBR were recorded at the agreed value between
Chalone and DBR of KF 58,885. In accordance with the contract between DBR and
Chalone, DBR agreed to sell such shares to others or to repurchase such shares
at an amount that is not less than this price by December 31, 1995. Effective
December 31, 1995, the Company recorded an interest-bearing receivable from DBR
in this amount, which is classified in the balance sheet at December 31, 1995,
net of other interest bearing amounts to DBR. By agreement of Chalone and DBR,
proceeds to the Company from the KF 58,885 receivable are restricted for the use
of (1) repaying debt of the company, (2) for rateable distributions to the
shareholders, (3) for retention as working capital, or (4) for making
investments. At December 31, 1995, the Company had an intercompany liability to
Chalone at an interest rate of 6%.
The Company has interest-bearing intercompany accounts with DBR. Such
intercompany accounts accrued interest at 6% and 7% at December 31, 1995 and
1994, respectively. Such interest rates are established so as not to exceed
rates permitted under French fiscal (tax) requirements. Intercompany interest
expense was FF 872, FF 988 and FF 824 in the years ended December 31, 1995, 1994
and 1993, respectively. Additionally, there were non-interest-bearing advances
related to future purchases of wine and other current accounts with other DBR
subsidies at December 31, 1995 and 1994, of FF 591 and FF 1,061, respectively.
As a component part of a dependent group of business within DBR, the Company
from time-to-time shares its personnel and assets (such as transportation
equipment or farming machinery) with other DBR operations, and also receives the
use of personnel and assets from other such operations. The costs or benefits of
such transactions have not been measured by the Company. Accordingly, these
financial statements may not reflect the costs and expenses which would be
recorded if the Company were operated on a stand-alone basis, although
management believes the substance of the recorded amounts reflect a reasonable
determination of shared transactions related to the Company.
Note C - PROPERTY, PLANT AND EQUIPMENT
December 31
-----------------------------------
1995 1994
---------------- -----------------
Land FF 1,440 FF 1,440
Buildings and buildings improvements 9,185 9,006
Producing and immature vines 5,608 5,578
Barrels 3,837 3,928
Other equipment 6,475 6,324
---------------- -----------------
26,545 26,276
Less: accumulated depreciation (14,142) (13,272)
================ =================
FF 12,403 FF 13,004
================ =================
<PAGE>
Note D - SIGNIFICANT CUSTOMER
In addition to intercompany sales, the sales to one customer aggregated 20%, 14%
and 10% of total sales in the years ended December 31, 1995, 1994 and 1993
respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000742685
<NAME> CHALONE WINE GROUP, LTD.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 31,959
<SECURITIES> 0
<RECEIVABLES> 7,752,713
<ALLOWANCES> 0
<INVENTORY> 27,499,273
<CURRENT-ASSETS> 35,649,854
<PP&E> 33,441,327
<DEPRECIATION> (13,576,462)
<TOTAL-ASSETS> 72,568,536
<CURRENT-LIABILITIES> 13,577,455
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 41,382,487
<TOTAL-LIABILITY-AND-EQUITY> 72,568,536
<SALES> 25,810,269
<TOTAL-REVENUES> 25,031,654
<CGS> 16,239,725
<TOTAL-COSTS> 5,373,954
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,778,748
<INCOME-PRETAX> 454,235
<INCOME-TAX> 247,628
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,607
<EPS-PRIMARY> 0
<EPS-DILUTED> .04
</TABLE>
