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, 1996
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 (I.R.S. Employer
of 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 4, 1997, there were 2,867,020 shares of the Company's voting no par
value common stock, with an aggregate market value of $32,970,730 held by
non-affiliates. (For purposes of this required presentation, the registrant has
deemed its directors, executive officers, Domaines Barons de Rothschild (Lafite)
and Hook Fiancial Inc. to be affiliates, and has deducted the outstanding shares
held by them collectively from the total of 7,648,675 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, 1996 (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. was incorporated under the laws of the State
of California on June 27, 1969. Unless otherwise indicated the term "Company",
as used in this report, refers to The Chalone Wine Group, Ltd. and its
consolidated subsidiaries. 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 three 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 one located in eastern Washington State. The Company's California
wines are made principally from grapes grown at its Chalone Vineyard and
Carmenet Vineyard facilities (see "Significant Event," below), at vineyards
owned by the Company's partner in the Edna Valley Vineyard Joint Venture (see
"Property--Edna Valley Vineyard," below), and, for the Company's Acacia Winery
facility (see "Property--Acacia Vineyard," below), from grapes principally grown
at two Company-owned vineyards adjacent to the winery, the Marina Vineyard which
is managed and one-half owned by the Company and at neighboring independent
vineyards. The wines of the Washington State winery are made from grapes grown
at a nearby vineyard, (see "Property -- Canoe Ridge Vineyard"). 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"), for sale primarily to the Company's shareholders.
Significant Event
As previously disclosed, on July 31, 1996, a wildfire damaged approximately
75% of the producing acreage at the Company's Carmenet Vineyard, located in
Sonoma, California. Carmenet's winery structures and barrel inventory were
untouched by the blaze and no people were injured. The damaged acreage was
planted to Cabernet Sauvignon, Merlot and Cabernet Franc grapes used for Estate
Bottled wines produced under the Carmenet label. Prior to the fire, Carmenet
produced approximately 38,000 cases of wine annually (of which a significant
proportion was Estate Bottled). Carmenet's 1996 grape harvest was reduced
roughly in proportion to the damage to the vineyard's overall producing acreage
caused by the blaze. The Company is currently evaluating whether the grapes
harvested from the unburned acreage sustained smoke-damage that would prevent
their use in the production of Carmenet wines.
The Company has cleared the damaged vines and expects to replant
approximately 75% of the damaged acreage in 1997, with the remainder being
replanted over the next two years. Historically, newly planted vines will begin
to produce production-quality grapes in approximately three years, though vines
typically take approximately seven years to return to the full production levels
that pre-dated the fire. Until the damaged acreage returns to full production,
Carmenet's ability to make Estate Bottled wines will be limited. In order to
supplement Carmenet's harvest, the Company will attempt to buy suitable grapes
on the open market; however, there can be no assurance that grapes of suitable
quality or variety will be available, in sufficient quantity or on terms
acceptable to the Company.
Preliminary investigation indicates that the fire was caused by the
electrical lines of Pacific Gas & Electric Company ("PG&E"). In public
statements, PG&E has acknowledged (1) that its own preliminary investigation
indicates PG&E's responsibility for the fire and (2) that PG&E is responsible
for the resulting damages. In January, 1997, PG&E made an advance to the Company
of $425,000 for costs related to the fire; however, when making the advance,
PG&E admitted no liability and has reserved all rights with respect to the
advance. The Company identified certain inventory and vineyard assets that were
destroyed by the fire and has reclassified these costs to Other Receivable as of
December 31, 1996. The Company's discussions with PG&E are on-going. The Company
believes that it will be reimbursed for losses resulting from the fire, and as a
result does not expect that the fire damage will have a material adverse effect
on the Company's financial position or operating results.
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 to be
within 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 of which have 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, California
Canoe Ridge Vineyard 50.5% Limited liability company 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. 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, Bermuda and other islands in the Caribbean, Canada,
England, continental Europe, Hong Kong and Japan; directly from its 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 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 those in Northern California, have been
infested with phylloxera, a root louse that renders a vine unproductive within a
few years following infestation. The current strain of phylloxera primarily
affects vines of a certain type. The Company's vineyard properties are primarily
planted to different rootstocks believed to be resistant to phylloxera.
3.
<PAGE>
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 primarily 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 as 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 approximately 70% of its oak barrels from Burgundy and
Bordeaux, with the remainder produced in the United States. The wine bottles
used by the Company are made to the Company's specifications in the United
States and France 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 1996, 1995 and 1994:
<CAPTION>
VINTAGE YEAR
------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
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............. 151,900 62% 126,500 59% 138,000 68%
Sauvignon Blanc........ 7,200 3% 6,000 3% 6,600 3%
Pinot Blanc............ 5,900 2% 7,600 4% 7,100 3%
Other white wines...... 2,700 1% 3,200 1% 2,500 1%
------------- -------- ------------ -------- ------------- --------
Total white wines.. 167,700 68% 143,300 67% 154,200 75%
------------- -------- ------------ -------- ------------- --------
Pinot Noir............. 35,100 14% 27,300 13% 23,000 11%
Cabernet Sauvignon..... 26,300 11% 25,500 12% 21,200 10%
Merlot................. 14,700 6% 13,200 6% 7,400 3%
Other red wines........ 1,400 1% 4,400 2% 1,100 1%
------------- -------- ------------ -------- ------------- --------
Total red wines.... 77,500 32% 70,400 33% 52,700 25%
============= ======== ============ ======== ============= ========
Total production.. 245,200 100% 213,700 100% 206,900 100%
============= ======== ============ ======== ============= ========
</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 after bottling, while red wines are released
between 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
4.
<PAGE>
purchaser for between one to five years and its red wines for between 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 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 partner in the Edna Valley Vineyard Joint Venture, and are Estate
Bottled.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia"
label. Most of the 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 and Pinot Noir grapes are grown on
the 42 acre Marina Vineyard, a vineyard that surrounds the winery facility, and
on the vineyard adjacent to the winery facility which the Company purchased in
1996.
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, which 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, 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 both in 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, for sale 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 legally permitted; and, in limited quantities, directly from its
wineries. The Company does limited advertising, relying also on word-of-mouth
recommendations, wine tastings, 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 under which the Company produces wines under the purchaser's brand.
Additionally, the Company employs a number of regional sales managers who work
directly with the distributors in the particular region and their customers.
The Company's wines are marketed, outside of California, in 49 states, the
District of Columbia, Puerto Rico, and, internationally, in Bermuda and other
Caribbean islands, Canada, England, continental Europe, Hong Kong and Japan.
Sales Within California
Sales of the Company's wines within California are made both through the
Company's own sales force and through a wholesale marketer, which acts in the
capacity of a broker.
The Company offers its reserve wines, older wines and other special wines
to its shareholders, currently numbering in excess of 11,000, as well as to
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. 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 two or three travel programs a year for shareholders to
various wine-growing regions of the world. In the past, the Company has provided
travel programs to France, Chile, Australia, Portugal, South Africa, Italy and
most recently to New Zealand.
Shareholders of the Company are afforded certain additional benefits over
those provided to mail-order 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
6.
<PAGE>
other direct purchases from the Company. The Company has also provided annual
discounts to shareholders based on their shareholdings in the form of a "Wine
Dividend Credit" which allows shareholders owning 100 or more shares to receive
a credit towards the purchase of wines during the duration of the program. The
Wine Dividend Credit may be used for up to 50% of the wine value of an order and
is generally offered in the fall of each year. In 1996, the credit amount was
$.11 per share.
Case Sales by Method of Distribution
<TABLE>
The following table sets forth case sales by the Company by distribution method for calendar years 1996,
1995 and 1994.
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
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.................. 121,403 41% 108,831 40% 82,519 39%
International.................. 12,574 4% 8,457 3% 6,057 3%
------------ -------- ------------- -------- ------------ -------
Total distributors......... 133,977 45% 117,288 43% 88,576 42%
------------ -------- ------------- -------- ------------ -------
Company direct
California wholesale........... 85,378 29% 70,330 26% 75,078 35%
Custom brands.................. 52,233 17% 63,442 24% 29,604 14%
Catalog and winery retail...... 27,454 9% 19,247 7% 19,562 9%
------------ -------- ------------- -------- ------------ -------
Total Company direct....... 165,065 55% 153,019 57% 124,244 58%
============ ======== ============= ======== ============ =======
Total............................... 299,042 100% 270,307 100% 212,820 100%
============ ======== ============= ======== ============ =======
</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 (with the exception of
Carmenet), 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, 1996, the Company had 93 full-time employees, 40 of whom
were involved in grape growing and winemaking and 53 of whom were 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. These trademarks are of significant importance to the
Company's business as label and brand recognition are important means of
competition within the wine industry.
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 activities 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, 1996
--------------------
Producing Developing Unplanted Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
Chalone Vineyard:
Chardonnay 104 -- -- 104
Pinot Noir 39 7 -- 46
Pinot Blanc 32 -- -- 32
Chenin Blanc 7 -- -- 7
Mourvedre 2 -- -- 2
Unplanted -- -- 394 394
----------------------------------------------------------
184 7 394 585
----------------------------------------------------------
Carmenet Vineyard:
Cabernet Sauvignon, Merlot, Cabernet Franc 27 38 -- 65
Unplanted -- -- 15 15
----------------------------------------------------------
27 38 15 80
----------------------------------------------------------
Acacia Winery (including leasehold interest):
Chardonnay 41 -- -- 41
Pinot Noir 15 45 -- 60
Unplanted -- -- 4 4
----------------------------------------------------------
56 45 4 105
----------------------------------------------------------
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon 32 -- -- 32
Merlot 39 -- -- 39
Chardonnay 30 -- -- 30
Unplanted -- -- 81 81
----------------------------------------------------------
101 81 182
==========================================================
Total Acreage 368 90 494 952
==========================================================
</TABLE>
Chalone Vineyard
Chalone Vineyard is located on approximately 800 acres in Monterey,
California, approximately 1,500 feet above the floor of the Salinas Valley, in a
viticultural area called "Chalone." The soil is composed of volcanic rock over a
bed of limestone, and is similar to the soil found in the Burgundy region of
France. The elevation of the vineyard provides natural protection against frost.
The area surrounding the vineyard has an average annual rainfall of 14 inches.
The Company's water needs are supplemented by a reservoir and a well, which the
Company believes will supply sufficient water for the vineyard's current and
future needs, using a drip irrigation system.
Chalone Vineyard was established in the early 1920s and is the oldest
commercial vineyard in Monterey County. The Company has produced premium wines
from the vineyard since 1969, when it acquired the vineyard from a director of
the Company, Richard H. Graff.
The winery's property includes a tasting room, dining facilities for
private parties and approximately 8,500 square feet of caves for barrel storage.
The winery's current production capacity is 50,000 cases.
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. On July 31, 1996,
a fire at the vineyard damaged approximately 75% of its producing acres. These
acres were planted to Cabernet Sauvignon, Merlot and Cabernet Franc. The Company
is currently replanting these acres with essentially the same varieties (see
"Significant Event," above).
The vineyard is situated in the Mayacamas Mountains just north of the town
of Sonoma, at an elevation of about 1,200 feet. The grapevines are grown on
steep hillsides in rocky, well-drained soil. The average rainfall is 30 inches.
The Company's water needs are supplemented by two wells, which the Company
believes will supply sufficient water for the vineyard's current and future
needs, using a drip irrigation system. As at Chalone Vineyard, the elevation of
Carmenet Vineyard provides natural protection against frost.
9.
<PAGE>
The winery contains, in addition to the production area, a reception area,
dining facilities for customers and guests, and 15,000 square feet of barrel
caves. The barrel caves are bored into a solid rock hillside adjacent to the
fermentation building and provide the proper environment for aging wine in
barrels without artificial temperature control. The winery has an annual
production capacity of approximately 38,000 cases.
The Company principally produces Bordeaux-style red and white wines at this
winery and markets these wines under the "Carmenet" label.
Edna Valley Vineyard
Edna Valley Vineyard (the "Joint Venture") operates a winery in San Luis
Obispo County, California, located in the "Edna Valley" viticultural area. The
Joint Venture is 50% owned by the Company and 50% owned by Paragon, subject to
an agreement between the Company and Paragon entered into in December 1996 (the
"Edna Valley Agreement"). Pursuant to the terms of the Edna Valley Agreement,
the Company is obligated to make certain substantial future payments in order to
maintain its 50% ownership interest in the Joint Venture and to make the term of
the Joint Venture perpetual.
The Company, as managing joint venturer, manages and supervises the winery
operations, and sells and distributes the wine. The winery, located at the site
of the Paragon Vineyards, is owned by the Joint Venture. The Joint Venture
leases the property on which the winery sits under a ground lease from Paragon.
The lease was amended as of December 1996 to include additional land necessary
for the expansion of the winery.
Under the terms of a grape purchase agreement, which was amended and
restated on January 1, 1997, Paragon sells fixed quantities of Chardonnay grapes
to the Joint Venture, at prices calculated by reference to the average prices
paid for Chardonnay grapes in Napa County during the preceding year, as reported
by the California Department of Agriculture, with adjustments depending on the
sugar content of the grapes supplied.
The Edna Valley Vineyard winery is currently being expanded from
approximately 24,000 square feet in size to over 32,000 square feet, including
12,000 square feet of underground cellars for wine fermentation and aging in
barrels. This will increase the annual production capacity from approximately
60,000 cases to over 80,000 cases. Included in the expanded facility will be a
tasting room and dining facilities for private parties.
The wines produced at this facility are principally Chardonnay and Pinot
Noir, which are marketed under the "Edna Valley Vineyard" label.
Acacia Winery
The Acacia Winery, and its related vineyards, are located in Napa County,
California, in both the "Carneros" and the "Napa Valley" viticultural areas. The
Company owns the winery building and the winemaking equipment associated with
the winery. The land on which the winery is located (the "Winery Parcel") and a
41 acre parcel of producing vineyard surrounding the winery complex (the "Marina
Vineyard") are owned pursuant to a tenancy in common agreement: one half is
owned by the Company and the remaining half is owned by Mr. and Mrs. Henry
Wright (the "Wrights"). The Company leases the Wright's half -interest in the
Winery Parcel and the Marina Vineyard pursuant to two long-term leases, which
commenced retroactively as of January 1, 1988, and expire on December 31, 2017,
subject to certain exceptions. The annual rent for the Marina Vineyard was
$82,500 in 1988, subject to an annual 5% increase through 1997. Thereafter, the
annual rent is to be determined according to a formula based on premium quality
Carneros District Chardonnay prices.
Pursuant to the terms of the tenancy in common agreement, the Wrights have
the ability at any time after January 1, 1998 to offer their half-interest in
the Winery Parcel and the Marina Vineyard to the Company, and, if the Company
declines the offer, to list the entire property for sale to a third party.
The Marina Vineyard is planted entirely to Chardonnay grapes. The majority
of the vines were planted in the mid-1970s, although significant replanting on
new root stock was undertaken in the 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 grapevines are grown on low rolling hills in well-drained
clay-loam soil. The average annual rainfall is 22 inches.
In 1996, the Company purchased two vineyards contiguous to the Marina
Vineyard for $1,850,000. These vineyards are planted to Pinot Noir, with fifteen
acres producing and 45 acres under development. These vineyards have their own
reservoir, which the Company believes has sufficient capacity to meet the
vineyards' present and future irrigation needs.
The winery has a production capacity of approximately 50,000 cases. The
winery has a tasting room and dining facilities.
The wines produced at the winery are principally Chardonnay and Pinot Noir,
which are marketed under the "Acacia" and "Caviste" labels.
10.
<PAGE>
Canoe Ridge Vineyard Properties
The Canoe Ridge Vineyard is located in Benton County, in eastern Washington
State. The vineyard consists of approximately 275 acres, approximately 100 acres
of which are now planted, in roughly equal proportions of Chardonnay, Merlot and
Cabernet Sauvignon grapes. The vineyard is located in the "Columbia Valley"
viticultural area, 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 and
easterly exposure, coupled with appropriate viticultural practices, reduce the
potential for freeze damage. The grapevines are grown in well-drained sandy-loam
soil. The vineyard is irrigated with water from the Columbia River under an
agreement with an adjoining farm and has an average annual rainfall of 6 inches.
The vineyard is owned by Canoe Ridge Vineyard L.L.C., a limited liability
company in which the Company holds a 50.5 % interest ("CRV L.L.C."). The Company
holds 25% of CRV L.L.C. directly, and 25.5% indirectly, through a 51% owned
subsidiary of the Company, which in turn holds a 50% interest in CRV L.L.C..
The winery associated with the vineyard is located in downtown Walla Walla,
Washington, in a recently renovated historic building, which originally served
as the engine house for the Walla Walla Valley Railroad. CRV L.L.C. leases the
winery building pursuant to a five-year lease agreement, which commenced in July
of 1994 and is subject to renewal for 2 five-year terms. The monthly rent is
$1,600 on a triple net basis for the first five-year term, subject to adjustment
upon renewal of the lease. An additional 900 square foot building, serving as an
office and tasting room, was constructed in 1996. CRV L.L.C shared the costs of
construction equally with the landlord. The rent will be adjusted during the
first renewal period to reflect the cost of this addition. The winery has an
annual production capacity of approximately 27,000 cases. The winery produces
primarily Chardonnay and Merlot, as well as small amounts of Cabernet Sauvignon.
Duhart-Milon
Duhart-Milon is a wine producing property located in town of Pauillac, in
the Medoc region of Bordeaux in France, in which the Company holds a 23.5%
interest. The remaining 76.5% interest is owned by DBR. The property consists of
approximately 166 acres of producing vineyards, contiguous to the vineyards of
Chateau Lafite-Rothschild, and winemaking facilities located in Pauillac. In
1855, the French Government classified the top 62 wine-producing estates in the
Medoc region, choosing from over 400 such estates. These top 62 estates were
classified into five "growths," based on their perceived quality. "First growth"
was considered the best. Under this classification system, Duhart-Milon is rated
a "fourth growth" estate. The average annual production in recent years has been
approximately 35,000 cases. The wine is sold under the "Chateau Duhart-Milon"
and "Moulin de Duhart" labels.
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 with the exception of the situation with PG&E concerning the
Carmenet fire, does the Company's management know of any such action being
contemplated.
11.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company during
the period covered by the Report.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of
March 15, 1997.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward President, Chief Executive 57
Officer, and Director
William L. Hamilton Executive Vice President, Chief 52
Financial Officer, Secretary,
and Director
Larry M. Brooks Vice President, Production, and 46
Managing Director, Acacia Winery
Robert B. Farver Vice President, Sales 40
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"),
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 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.
12.
<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 two 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
------ ---- ---
1996
First quarter........................ 10.50 9.00
Second quarter....................... 11.13 8.88
Third quarter........................ 10.00 8.00
Fourth quarter....................... 12.00 9.25
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 4, 1997, the closing price for the common stock was $11.50 per
share. During 1996, the average weekly trading volume of the stock was
approximately 18,000 shares.
b. Holders of Record.
As of March 4, 1997, there were approximately 5,238 holders of record of
the Company's common stock.
c. Dividends.
The Company has not paid any cash dividends 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.
13.
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data for the years ended
December 31, 1996, 1995, 1994, 1993, and 1992, 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.
<TABLE>
SELECTED FINANCIAL DATA
(in thousands except per-share data)
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues......................... $ 31,044 $ 25,032 $ 20,515 $ 17,824 $ 16,792
Gross profit......................... 12,375 8,792 7,504 6,395 6,309
Selling, general and administrative
expenses....................... 6,283 5,374 4,633 4,432 4,610
Operating income..................... 6,093 3,418 2,871 1,963 1,699
Other expense........................ (1,817) (2,681) (2,561) (2,482) (2,494)
Equity in net income of Duhart-Milon 304 74 -- -- --
Minority interest.................... (621) (357) (188) (372) (269)
Net earnings (loss).................. 2,339 207 20 (691) (741)
Earnings (loss) per common share..... .29 .04 .00 (.16) (.19)
Balance Sheet Data:
Working capital...................... 23,428 22,072 17,136 15,291 11,606
Total assets......................... 80,179 72,569 72,225 72,078 70,413
Long-term obligations................ 17,761 13,477 26,425 27,387 30,418
Shareholders' equity................. 43,246 41,382 24,199 22,699 17,030
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
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. Additionally, this discussion and other
information provided from time to time by the Company contain historical
information as well as forward-looking statements about the Company, the premium
wine industry and general business and economic conditions. Such forward-looking
statements include, for example, projections or predictions about the Company's
future growth, consumer demand for its wines, margin trends and the Company's
anticipated future investment in vineyards and other capital projects. Actual
results may differ materially from the Company's present expectations. Among
other things, reduced consumer spending or a change in consumer preferences
could reduce demand for the Company's wines. Similarly, competition from
numerous domestic and foreign wine producers could affect the Company's ability
to sustain volume and revenue growth. Interest rates and other business and
economic conditions could increase significantly the cost and risks of projected
capital spending. For these and other reasons, no forward-looking statement by
the Company can nor should be taken as a guarantee of what will happen in the
future.
14.
<PAGE>
Results of Operations
<TABLE>
The following table sets forth the certain financial data as a percentage
of total wine sales for the years indicated:
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100% 100% 100% 100% 100%
Gross profit..................................... 40% 35% 37% 36% 38%
Selling, general and administrative
expenses.................................... 20% 21% 23% 25% 27%
Operating income................................. 20% 14% 14% 11% 10%
Other expense.................................... (6%) (11%) (12%) (14%) (14%)
Equity in net income of Duhart-Milon 1% 0% -- -- --
Minority interest................................ (2%) (1%) (1%) (2%) (2%)
Net earnings (loss).............................. 8% 1% 0% (4%) (4%)
</TABLE>
Wine Sales
Sales for the year ended December 31, 1996, increased by 24% over the
comparable period in 1995. This increase was due to both unit and price
increases at all five wineries and in the imported wines distributed by the
Company. The custom brands program accounted for 17% of sales, a decrease from
24% for the comparable period in 1995. With a normal 1996 harvest management
believes the custom brands program will show modest growth in the future.
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. This program accounted
for 24% of the Company's unit sales and 12% of its revenues in 1995.
Sales in the California market for 1996, 1995 and 1994, respectively, were
approximately 39%, 38%, and 45% of total wholesale sales (excluding custom
brands) , and no other single market accounted for more than 10% of total sales
in these years. Management believes that unit sales in California will remain
relatively flat in the near future and that increased unit sales in markets
outside of California will be required for continued revenue growth.
During 1996 many of the Company's wines were in limited supply, resulting
in wines being allocated to customers. The Company expects many of its wines
will remain on allocation during 1997.
Gross Profit
Gross profit for the year ended December 31, 1996, was $12,375,182 as
compared to $8,791,929 in 1995. Gross profit as a percent of sales for the year
increased to 40% in 1996 from 35% in the comparable period in 1995. The increase
in gross profit during 1996 reflects an 11% increase in unit sales from 1995, as
well as price increases across all brands and a shift in the product mix of
wines sold to higher margin wines.
Gross profit was $8,791,929 for the year ended December 31, 1995, increased
from $7,503,799 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1996, increased approximately 17% from 1995. This increase was largely due
to increased selling and marketing costs associated with increased unit sales.
Selling, general and administrative expenses as a percentage of sales for the
year ended December 31, 1996, declined to 20% from 21% for the comparable period
in 1995, due to expenses increasing at a slower rate than sales during that
period.
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 decreased as a percentage of sales for the year ended
December 31, 1995, due to expenses increasing at a slower rate than sales during
that period.
15.
<PAGE>
Operating Income
Operating income for the year ended December 31, 1996, increased 78% over
1995. This increase was due to higher sales, increased gross margins, and lower
selling, general and administrative expenses as a percentage of sales, all
discussed above.
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, both discussed above.
Other Income (Expense)
Interest expense for the year ended December 31, 1996, decreased to
$1,834,546, a decrease of 34% from 1995. This was made possible by the
conversion of $12,384,000 of convertible debentures to equity in the last
quarter of 1995, and the reduction of short-term borrowings resulting from
$4,500,000 in new equity received at the end of 1995.
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.)
Equity in Net Income of Duhart-Milon
Effective October 1, 1995, the Company exchanged 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 11.3% interest in DBR, accounted
for using the cost method, 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 1996 was
$303,968, compared to $74,109 for the three months of ownership during 1995.
Minority Interest
<TABLE>
The Company currently has two ventures in which there are minority
interests. The "minority interest" (the portion of the venture's total earnings
attributable to minority owners) in earnings (losses) of these ventures for the
three years ended December 31, 1996, consisted of the following:
<CAPTION>
Twelve Months Ended December 31,
--------------------------------------------
Venture Minority Owner Minority % 1996 1995 1994
------- -------------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50.0% $ 526,929 $ 332,654 $ 219,321
Canoe Ridge Vineyard, Various 49.5% 94,055 18,766 100
LLC (CRV)
CanoeCo Partners CRVI 50.0% -- 5,687 (31,495)
------------- ------------- --------------
$ 620,984 $ 357,107 $ 187,725
============= ============= ==============
</TABLE>
The minority interest in earnings for Edna Valley Vineyard during 1996
represents an increase of 58% from 1995, and was due to higher gross margin and
lower operating expenses. Effective January 1, 1996, CanoeCo and Canoe Ridge
Winery (CRW) merged into one new company, Canoe Ridge Vineyard, LLC ("CRV"), of
which the Company owns 50.5%. The minority interest in earnings for Canoe Ridge
Vineyard during 1996 represent an increase of 285%, primarily a result of 1996
being the first full year of wine sales for Canoe Ridge Vineyard.
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 Company believes that Edna Valley Vineyard and Canoe Ridge Vineyard
will continue to contribute significantly to its income, and hence that this
minority interest will continue to increase in the future.
Net Earnings
Net earnings for the year ended December 31, 1996, were $2,339,237 compared
to $206,607 in 1995 and $20,184 in 1994. 1996 results reflect increased unit
sales at higher gross margins, lower interest expense and lower selling, general
and administrative expenses as a percentage of sales, all discussed above.
Seasonality
The Company's wine sales from quarter to quarter are highly variable
because of, among other things, the timing of the release of wines for sale and
changes in consumer demand. Sales are typically highest during the fourth
quarter because of heavy holiday
16.
<PAGE>
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 cash and cash equivalents totaled $207,177 at December 31,
1996, up from $31,959 at December 31, 1995. The Company also has bank lines of
credit in the aggregate amount of $16,300,000 currently available, of which
$6,494,083 was outstanding at December 31, 1996. These lines are secured by
substantially all of the Company's inventory and accounts receivable, bears
interest at LIBOR plus 1.8%, and mature in June, 1997, at which time Management
expects to renew the lines for one year.
Working capital was $23,428,287 at December 31, 1996, up 6% from
$22,072,399 at December 31, 1995. The Company's inventory, which is accounted
for on a "first-in, first-out" basis, increased approximately 5% to $28,827,670
at December 31, 1996. Borrowings on the bank lines of credit decreased by
$3,744,000 at 1996 year end when compared to 1995, which decrease was offset by
an increase of $3,684,415 in accounts payable and accrued expenses and an
increase in provision for income taxes of $1,238,387. Working capital at
December 31, 1996, also includes accounts, notes and other receivables totaling
$8,577,115, up from $7,652,717 in 1995.
Wine sales have historically provided sufficient revenues to sustain the
Company's on going operational 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
facilities or acquisition of vineyards have been funded with debt and equity
issues and bank borrowings. During 1996, the Company invested approximately
$4,600,000 for the expansion of the facilities at Edna Valley Vineyard, and the
vineyard at Acacia and Chalone Vineyard all of which was funded with long-term
borrowings.
Future capital commitments include vineyard development plans at Acacia and
Canoe Ridge Vineyard, and completion of the winery expansion at Edna Valley
Vineyard and replanting of the vineyard at Carmenet. Management believes these
projects will be funded with additional bank borrowings and proceeds from the
future exercise of outstanding warrants which expire in 1998 and 2000, and from
the expected settlement with PG&E.
17.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................... 19
Consolidated Statements of Operations.......................... 20
Consolidated Statements of Changes in Shareholders' Equity..... 21
Consolidated Statements of Cash Flows.......................... 22
Notes to Consolidated Financial Statements..................... 23
INDEPENDENT AUDITORS' REPORT.............................................. 35
18.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31,
--------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
Current assets
Cash ................................................................ $ 207,177 $ 31,959
Accounts receivable, less allowance for doubtful accounts of $70,550
and $25,550...................................................... 7,003,253 7,076,630
Notes receivable..................................................... 1,154,472 576,087
Other receivables.................................................... 419,390 --
Note receivable from officer......................................... -- 99,996
Inventories.......................................................... 28,827,670 27,499,273
Prepaid expenses..................................................... 229,091 199,210
Deferred income taxes................................................ 104,156 166,699
---------------- ----------------
Total current assets............................................. 37,945,209 35,649,854
Investment in Chateau Duhart-Milon........................................ 11,613,728 12,058,636
Notes receivable, long-term portion....................................... 491,907 500,000
Property, plant and equipment, net........................................ 24,119,591 19,864,865
Goodwill and trademarks................................................... 5,492,313 3,148,235
Other assets.............................................................. 515,850 1,346,946
---------------- ----------------
Total assets................................................ $ 80,178,598 $ 72,568,536
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit.................................................. $ 6,494,083 $ 10,238,869
Current maturities of long-term obligations........................... 535,441 773,990
Income tax payable.................................................... 1,360,329 121,942
Accounts payable and accrued liabilities.............................. 6,127,069 2,442,654
---------------- ----------------
Total current liabilities......................................... 14,516,922 13,577,455
Long-term obligations - less current maturities............................ 9,260,569 5,010,644
Convertible subordinated debentures........................................ 8,500,000 8,500,000
Deferred income taxes...................................................... 1,209,431 1,073,186
Minority interest.......................................................... 3,445,746 3,024,764
Commitments and contingencies
Shareholders' equity
Common stock - authorized 15,000,000 shares,
no par value; issued and outstanding,
7,626,150 and 7,596,398 shares................................... 41,673,622 41,557,018
Retained earnings (Deficit)........................................... 2,272,751 (66,486)
Cumulative foreign currency translation adjustment.................... (700,443) (108,045)
---------------- ----------------
Total shareholders' equity........................................ 43,245,930 41,382,487
---------------- ----------------
Total liabilities and shareholders' equity.................. $ 80,178,598 $ 72,568,536
================ ================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
19.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Gross revenues ............................. $ 31,909,339 $ 25,810,269 $ 21,132,053
Less excise taxes ..................... 865,133 778,615 616,708
------------ ------------ ------------
Net revenues ............................... 31,044,206 25,031,654 20,515,345
Cost of sales .............................. 18,669,024 16,239,725 13,011,546
------------ ------------ ------------
Gross profit ...................... 12,375,182 8,791,929 7,503,799
Selling, general and administrative expenses 6,282,503 5,373,954 4,633,499
------------ ------------ ------------
Operating income .................. 6,092,679 3,417,975 2,870,300
Other income (expense):
Interest (net of amounts capitalized) . (1,843,546) (2,778,748) (2,752,781)
Other, net ............................ 25,982 98,006 191,579
------------ ------------ ------------
(1,817,564) (2,680,742) (2,561,202)
Equity in net income of Chateau Duhart-Milon 303,968 74,109 --
Minority interest .......................... (620,984) (357,107) (187,725)
------------ ------------ ------------
Earnings before income taxes ...... 3,958,099 454,235 121,373
Income taxes ............................... 1,618,862 247,628 101,189
------------ ------------ ------------
Net earnings ...................... $ 2,339,237 $ 206,607 $ 20,184
============ ============ ============
Net earnings per common share .............. $ .29 $ .04 $ .00
============ ============ ============
Average number of shares used in
earnings per share computation ....... 8,168,627 5,299,766 4,826,094
============ ============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
20.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
Common Stock
---------------------------- Retained Foreign
Number of Earnings Currency
Shares Amount (Deficit) Translation Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Sale of common stock ....... 8,998 21,387 21,387
Options exercised(1) ....... 18,715 76,880 76,880
Profit Sharing ............. 2,039 18,337 18,337
Foreign currency translation
adjustment ............. (592,398) (592,398)
Net earnings ............... 2,339,237 2,339,237
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 .... 7,626,150 $ 41,673,622 $ 2,272,751 $ (700,443) $ 43,245,930
============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these statements.
- -----------------
(1) Includes net of 16,588 previously acquired shares surrendered for payment.
</FN>
</TABLE>
21.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................................. $ 2,339,237 $ 206,607 $ 20,184
Non-cash transactions included in earnings:
Depreciation................................................ 2,872,644 2,718,269 2,405,270
Amortization................................................ 121,139 147,036 146,178
Equity in net income of Chateau Duhart-Milon................ (303,968) (74,109) --
Minority interest........................................... 620,982 357,107 187,725
Loss (gain) from disposal of equipment...................... 86,162 (14,909) 40,439
Change in:
Deferred income taxes................................... 198,788 46,592 100,389
Accounts and other receivables (net).................... 73,376 (2,135,991) (455,314)
Inventories............................................. (1,328,397) 1,922,764 (1,236,195)
Prepaid expenses and other assets....................... (235,720) 103,104 (13,498)
Other receivables....................................... (419,390) -- --
Accounts payable and accrued liabilities................ 3,494,519 (148,248) (300,875)
--------------- -------------- ---------------
Net cash provided (used) in operating activities...... 7,519,372 3,128,222 894,303
--------------- -------------- ---------------
Cash flows from investing activities:
Capital expenditures.......................................... (6,635,057) (2,269,972) (1,706,642)
Proceeds from disposal of property and equipment.............. 361,807 145,741 144,164
Net increase in notes receivable.............................. (470,294) (1,176,083) --
Distribution from investment in Chateau Duhart Milon.......... 156,478 -- --
--------------- -------------- ---------------
Net cash used in investing activities................. (6,587,066) (3,300,314) (1,562,478)
--------------- -------------- ---------------
Cash flows from financing activities:
Net borrowings (repayments) on bank lines of credit........... (3,744,786) (3,635,197) 399,066
Distribution to minority interest (Paragon)................... (200,000) (375,718) (156,000)
Proceeds from issuance of long-term debt...................... 8,893,996 -- --
Repayment of long-term debt................................... (5,822,902) (555,831) (1,730,115)
Contributions to joint venture................................ -- -- 324,000
Proceeds from issuance of common stock........................ 116,604 4,700,816 1,480,536
--------------- -------------- ---------------
Net cash provided from financing activities........... (757,088) 134,070 317,487
--------------- -------------- ---------------
Net (decrease) increase in cash.................................. 175,218 (38,022) (350,688)
Cash at beginning of year................................... 31,959 69,981 420,669
--------------- -------------- ---------------
Cash at end of year......................................... $ 207,177 $ 31,959 $ 69,981
=============== ============== ===============
Other cash flow information:
Interest paid .............................................. $ 1,828,910 $ 2,904,582 $ 2,837,501
Income taxes paid........................................... 396,788 80,800 800
Non-cash transactions:
Conversion of convertible debentures to common stock........ $-- $ 12,384,000 $--
Investment in Edna Valley joint venture accrued at year end. 1,428,283 -- --
Debt assumed in acquisition of real property................ 940,282 -- --
Distribution receivable from Chateau Duhart-Milon........... -- 431,505 --
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
22.
<PAGE>
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND OPERATIONS
The Chalone Wine Group, Ltd. produces and sells primarily super and ultra
premium quality table wines. The Company farms its estate-owned vineyards
representing approximately 368 producing acres in Napa, Sonoma, Monterey
counties of California, and in eastern 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 4% 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 50% owned subsidiary, and its 50.5% owned joint ventures (Notes G and H,
respectively), 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 F.) All significant intercompany accounts and transactions
have been eliminated.
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.
23.
<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.
The payments made to extend the life of the Edna Valley joint venture and
acquire ownership of the continuing joint venture have been recorded as goodwill
and will be amortized over 40 years beginning in 1997. (see also Note G).
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.
Stock-based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, Accounting for Stock
Issued to Employees.
Impact of New Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation effective for the fiscal year ended
December 31, 1996. SFAS No. 123 establishes accounting and disclosure
requirements using a fair value based method of accounting for stock based
employee compensation plans. As allowed under provisions of SFAS No. 123, the
Company has chosen to continue the intrinsic value based method and provide pro
forma disclosures of net earnings and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company has elected to adopt
only disclosure requirements of SFAS No. 123; therefore such adoption has no
effect on the Company's consolidated net profit or cash flows.
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of effective for the fiscal year ended December 31, 1996. This
statement requires the Company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recovered. Implementation did not have a material impact on
the Company's financial statements.
24.
<PAGE>
NOTE C - CARMENET FIRE
As previously disclosed, on July 31, 1996, a wildfire damaged approximately
75% of the producing acreage at the Company's Carmenet Vineyard, located in
Sonoma, California. Carmenet's winery structures and barrel inventory was
untouched by the blaze and no people were injured. The damaged acreage was
planted to Cabernet Sauvignon, Merlot and Cabernet Franc grapes used for Estate
Bottled wines produced under the Carmenet label. Prior to the fire, Carmenet
produced approximately 38,000 cases (of which a signficant proportion is Estate
Bottled). Carmenet's 1996 grape harvest was reduced roughly in proportion to the
damage to the vineyard's overall producing acreage caused by the blaze. The
Company is currently evaluating whether the grapes harvested from the unburned
acreage sustained smoke-damage that would prevent their use in the production of
Carmenet wines.
The Company has cleared the damaged vines and expects to replant
approximately 75% of the damaged acreage in 1997, with the remainder being
replanted over the next two years. Historically, newly planted vines will begin
to produce production-quality grapes in approximately three years, though vines
typically take approximately seven years to achieve full production. Until the
damaged acreage returns to full production, Carmenet's ability to make Estate
Bottled wines will be limited. In order to supplement Carmenet's harvest, the
Company will attempt to buy suitable grapes on the open market; however, there
can be no assurance that grapes of suitable quality or variety will be
available, in sufficient quantity or on terms acceptable to the Company.
Preliminary investigation indicates that the fire was caused by the
electrical lines of Pacific Gas & Electric Company ("PG&E"). In public
statements, PG&E has acknowledged (1) that its own preliminary investigation
indicates PG&E's responsibility for the fire and (2) that PG&E is responsible
for the resulting damages. In January, 1997, PG&E made an advance to the Company
of $425,000 for costs related to the fire; however, when making the advance,
PG&E admitted no liability and has reserved all rights with respect to the
advance. The Company identified certain inventory and vineyard assets that were
destroyed by the fire and has reclassified these costs to Other Receivable as of
December 31, 1996. The Company's discussions with PG&E are on-going. The Company
believes that it will be reimbursed for losses resulting from the fire, and as a
result does not expect that the fire damage will have a material adverse effect
on the Company's financial position or operating results.
NOTE D - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------------
1996 1995
---------------- ---------------
Bulk and bottled wine............ $ 27,974,216 $ 26,773,298
Growing crops.................... 541,230 551,648
Other inventory.................. 120,368 54,458
Wine production supplies......... 191,856 119,869
---------------- ---------------
$ 28,827,670 $ 27,499,273
================ ===============
NOTE E - PROPERTY, PLANT AND EQUIPMENT
December 31,
----------------------------------
1996 1995
---------------- ---------------
Land............................. $ 2,513,908 $ 1,550,625
Vineyard properties.............. 8,386,518 6,248,011
Buildings........................ 14,927,158 13,515,056
Machinery and equipment.......... 13,738,650 12,127,635
---------------- ---------------
39,566,234 33,441,327
Less accumulated depreciation.... 15,446,643 13,576,462
---------------- ---------------
$ 24,119,591 $ 19,864,865
================ ===============
25.
<PAGE>
NOTE F - 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.
<TABLE>
Chateau Duhart-Milon's condensed balance sheet as of December 31, 1996 and
1995 and results of operations for the twelve months ended December 31, 1996 and
three months ended December 31, 1995 are as follows (translated into U.S.
dollars at the year end and average exchange rate for the period, respectively):
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Current assets (including inventories of $3,488,825
in 1996 and $3,654,415 in 1995 .................. $12,875,723 $16,938,735
Property and equipment, net ....................... 2,440,848 2,516,986
----------- -----------
Total assets .............................. 15,316,571 19,455,721
Current liabilities ............................... 1,786,513 6,039,294
----------- -----------
Total liabilities ......................... 1,786,513 6,039,294
----------- -----------
Equity ............................................ $13,530,058 $13,416,427
=========== ===========
</TABLE>
<TABLE>
The results of operations are summarized as follows:
<CAPTION>
Twelve months ended Three months ended
December 31,1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenues ......................................... $ 3,964,071 $ 557,438
Cost of sales .................................... 2,651,092 110,026
----------- -----------
Gross profit ................................ 1,312,979 447,412
Net operating and other expenses/(revenues) ...... (236,137) 88,305
----------- -----------
Net earnings ..................................... $ 1,549,116 $ 359,107
=========== ===========
Company's share of net earnings, less amortization
expense of $60,074 and $10,000 ............... $ 303,968 $ 74,109
============ ===========
</TABLE>
The carrying amount of the Company's investment is approximately $8,500,000
in 1996, and $8,900,000 in 1995, 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 G - 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.
In 1991, the Company and Paragon entered into an agreement ("old
agreement") to convert the Joint Venture into a "permanent partnership" of
unlimited duration. Under the old agreement the Company had made payments
totaling $1,070,000 to Paragon to have the right to expend the life of the Joint
Venture through January 1997. Under a new agreement, entered into on December
27, 1996, "new agreement", the Company agreed to a payment of $1,590,000, which
was accrued at December 31, 1996, in order to extend its life through 2060.
In addition, under the new agreement, the Company has the option to make
further payments of $1,050,000 each in 1997 and 1999 and $850,000 in 2001 to
increase its ownership in the continuing Joint Venture by increments of
12.54%,12.54% and 10.75% respectively. Concurrent with the available investment
option in 2001 the Company will also have the option to purchase 50% of the
brand name, Edna Valley, for $200,000 which is currently licensed to the Joint
Venture by Paragon.
26.
<PAGE>
NOTE G - EDNA VALLEY VINEYARD JOINT VENTURE (Continued)
The payments made to extend the life of the Joint Venture and acquire
ownership of the continuing Joint Venture have been recorded as goodwill and
will be amortized over 40 years beginning in 1997. Should the Company elect not
to exercise the next available investment option as it becomes available, its
share of the profits or losses of the Joint Venture from that point forward
would be reduced from the current 50% level to the level of ownership reached
under the new agreement.
<TABLE>
Condensed balance sheets for the Joint Venture follow:
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets (including inventories of $5,821,839
in 1996 and $5,373,644 in 1995) ................. $ 5,943,978 $ 5,945,964
Current assets eliminated in consolidation ........ 1,486,947 1,214,277
Other Assets ...................................... 89,605 --
Property and equipment, net ....................... 3,760,967 2,723,288
----------- -----------
Total assets .............................. 11,281,497 9,883,529
Current liabilities ............................... 3,379,922 4,460,195
Accrued liabilities eliminated in consolidation ... 317,087 231,640
----------- -----------
Total current liabilities ................. 3,697,009 4,691,835
Total liabilities ......................... 5,495,998 4,691,835
----------- -----------
Partners' Equity .................................. $ 5,785,499 $ 5,191,694
=========== ===========
</TABLE>
The results of operations are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues ................................. $6,463,512 $6,849,922 $5,255,232
Cost of sales ............................ 4,315,543 5,124,297 3,847,497
---------- ---------- ----------
Gross profit ........................ 2,147,969 1,725,625 1,407,735
Operating and other expenses ............. 386,459 464,863 470,873
Commissions and management fees eliminated
in consolidation .................... 767,704 655,506 558,273
---------- ---------- ----------
Net earnings ............................. 993,806 605,256 378,589
Minority interest ........................ 526,929 332,654 219,321
---------- ---------- ----------
Company's share of net earnings ..... $ 466,877 $ 272,602 $ 159,268
========== ========== ==========
</TABLE>
NOTE H - 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 50.5%
and 49.5% by the Company and a group of investors, respectively. CRW was formed
to produce, sell and distribute premium wines from grapes farmed at 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 I - BANK LINES OF CREDIT
<TABLE>
Bank lines of credit consist of the following:
<CAPTION>
December 31,
----------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Credit line of $10,000,000 bearing interest at prime(2), payable monthly, due
June, 1997.............................................................. $ 3,455,031 $ 5,334,944
Credit line of $4,800,000 bearing interest at prime(1), payable monthly, due
June, 1997 ............................................................. 1,975,566 4,167,000
Credit line of $400,000 bearing interest at 1.875% over prime, payable at
February, 1996.......................................................... -- 236,925
Credit line of $1,500,000 bearing interest at prime, payable monthly, due
June 1997............................................................... 1,063,486 --
Credit line of $500,000 bearing interest at 9.84%, payable at April, 1996.... -- 500,000
--------------- ----------------
$ 6,494,083 $ 10,238,869
=============== ================
</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 J).
<TABLE>
NOTE J - LONG-TERM OBLIGATIONS
<CAPTION>
December 31,
--------------------------
1996 1995
------------ -----------
<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 O) ................................ $ 8,500,000 $ 8,500,000
Other note payable, due May 2000 payable in annual installments of principal
and interest. Interest rate at 7%....................................... 950,000 --
Mortgage payable in monthly installments of principal and interest due August
2021. Interest at 7%.................................................... 1,827,789 --
Bank term loan, due in 2001 with monthly installments of principal and
interest. Interest rate at LIBOR plus 1.8%.............................. 5,798,495 --
Bank term loan, payable in monthly installments of principal and interest due
June 2002. Interest at LIBOR plus 2.5% .................................. 247,500 --
Bank term loan, payable in monthly installments of principal and interest paid
February 1996. Interest rates at LIBOR plus 2% .......................... -- 3,219,100
Bank term loan, payable in monthly installments of principal and interest paid
October 1996. Interest rate at prime plus 1/2% .......................... -- 2,069,200
Bank term loan, paid in June, 1996. Interest at prime plus 1% ................ -- 210,140
Joint Venture purchase option payable in annual installments of principal and
interest. Imputed interest rate of 8% (see Note G) ...................... -- 175,439
Other note payable, payable in monthly installments of principal and interest
due in June 2016. Interest rate of 7.03% (see Note O, related party).... 940,282 --
Other note payable, due in June 1996 payable in annual installments of
principal and interest. Interest rate of 10%............................ -- 59,954
Other notes payable, due in varying monthly installments through Jan 2000
bearing interest at 10.75% to 10.9%, secured by equipment ............... 31,944 50,801
------------ -----------
18,296,010 14,284,634
Less current maturities ...................................................... 535,441 773,990
------------ -----------
$ 17,760,569 $13,510,644
============ ===========
<FN>
- -----------------
(2) The Company may fix its interest rate at LIBOR plus 1.80% rather than prime
for periods up to the term of its credit line.
</FN>
</TABLE>
28.
<PAGE>
NOTE J - LONG-TERM OBLIGATIONS (Continued)
The 5% debentures are subordinate in right of payment to all senior
indebtedness of the Company. Subject to 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 $8.81 per share subject to antidilution
provisions. The Company set aside and reserved 965,100 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, 1996, maturities of long-term obligations are as follows:
1997.................................. $ 535,441
1998.................................. 558,978
1999.................................. 9,064,032
2000.................................. 565,522
2001.................................. 330,537
Thereafter............................ 7,241,500
==================
Total................................. $ 18,296,010
==================
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 1996 or fluctuate with short-term
market rates.
NOTE K- STOCK BASED COMPENSATION
Under the 1987 Employee Stock Option (the "Option Plan") the Company may
grant options to purchase up to 1,000,000 shares of common stock to employees,
directors and consultants at prices not less than the fair market value at date
of grant for incentive stock options and not less than 85% of fair market value
for nonstatutory stock options. These options generally expire 10 years from the
date of grant and become exercisable after a one-year period.
Under the 1987 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"), non-employee directors of the Company are automatically granted options
to purchase shares of common stock, based on a formula of shares outstanding, at
the fair market value at the date of grant each year that such person remains a
director of the Company. Options granted under the plan are immediately
exercisable and expire 10 years from the date of grant. Total shares authorized
under the plan is 64,870.
Option activity under the plans is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding, January 1, 1994 ...................... 569,693 $ 8.51
Granted ....................................... 58,910 5.24
Canceled ...................................... (32,189) 9.29
---------- --------------
Outstanding, December 31, 1994 (509,954 exercisable
at a weighted average price of $8.36) ....... 596,414 8.17
Granted (Weighted average fair value of $5.80) 36,210 7.09
Exercised ..................................... (27,716) 6.25
Canceled ...................................... (48,317) 0.50
---------- --------------
Outstanding, December 31, 1995 (520,381 exercisable
at a weighted average price of $ 8.20) 556,591 8.13
Granted (weighted average fair value of $7.80) 70,840 9.74
Exercised ..................................... (35,303) 6.83
Canceled ...................................... (3,585) 8.67
---------- --------------
Outstanding, December 31, 1996 .................... 588,543 $ 8.40
========== ==============
29.
<PAGE>
NOTE K- STOCK BASED COMPENSATION (Continued)
<TABLE>
Additional information regarding options outstanding as of December 31,
1996 is as follows:
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avg.
Remaining
Range of Exercise Number Contractual Life Weighted Avg. Number Weighted Avg.
Prices Outstanding (yrs) Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 5.00 - $ 7.49 221,370 5.3 $ 6.17 221,370 $ 6.17
$ 7.50 - $ 9.99 183,126 6.3 $ 9.23 119,886 $ 4.81
$10.00 - $12.38 184,047 2.4 $ 10.28 175,620 $ 10.22
================== =================== ================== ================== ===================
$5.00 - $12.38 588,543 4.7 $ 8.40 516,876 $ 8.22
================== =================== ================== ================== ===================
</TABLE>
Both the Option Plan and the Directors' Plan expired in the first quarter
of 1997. A new plan reserving 1,000,000 shares is being proposed at the 1997
Shareholder Meeting.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to have salary withholdings to purchase shares of common
stock at a price equal to 85% of the lower of the market value of the stock at
the beginning or end of each six-month offer period, subject to an annual
limitation. Stock issued under the plan was 935, 5,315 and 9,049 shares in 1994,
1995 and 1996, respectively, at weighted average prices of $4.70, $6.04 and
$6.31, respectively. The weighted average fair value of the 1996 and 1995 awards
was $9.84 and $6.99, respectively. At December 31, 1996, 26,449 shares were
reserved for future issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note B, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 102 months following
vesting; stock volatility, 17% in 1996 and 17% in 1995; risk free interest
rates, 6.0% in 1996 and 6.97% in 1995; and no dividends during the expected
term. The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the 1995 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income would have been $102,000
($.02 per share) in 1995 and $2,095,000 ($.26 per share) in 1996.
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.
30.
<PAGE>
NOTE L - 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 excercisable 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.
The Company has reserved as of December 31, 1996 3,320,318 shares of common
stock in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
NOTE M - 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 $73,000 for 1996 and $20,000 for 1995. There were no
Plan contributions in 1994. At December 31, 1996, the plan held 9,051 shares of
the Company's common stock.
NOTE N - INCOME TAXES
The provision for income taxes is summarized as follows:
Year-ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Federal
Current ....................... $1,055,915 $ 136,641 $ --
Deferred ...................... 183,497 24,634 61,588
---------- ---------- ----------
1,239,412 161,275 61,588
State
Current ....................... 364,159 64,394 800
Deferred ...................... 15,291 21,959 38,801
---------- ---------- ----------
379,450 86,353 39,601
---------- ---------- ----------
$1,618,862 $ 247,628 $ 101,189
========== ========== ==========
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,
---------------------------
1996 1995
------------ -------------
Deferred tax liability:
Difference between book and tax basis of
property, plant and equipment............ $ 2,090,605 $ 2,249,693
Deferred tax assets:
Operating loss carryforwards............... -- 688,281
Difference between book and tax basis of
inventory................................ 104,156 166,699
Tax credit carryforwards................... 762,534 418,004
Other...................................... 202,275 157,644
------------ -------------
1,068,965 1,430,628
Valuation allowance........................ (83,635) (87,422)
------------ -------------
985,330 1,343,206
------------ -------------
Net deferred tax liability ................ $ 1,105,275 $ 906,487
============ =============
31.
<PAGE>
NOTE N - INCOME TAXES (Continued)
<TABLE>
The provision for income taxes differs from amounts computed at the
statutory rate as follows:
<CAPTION>
Year-ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $ 1,394,165 $ 90,452 $ 15,130
State tax net of federal benefit ........ 230,437 56,993 26,137
Reconciling items:
Other ............................... (38,919) 67,004 26,743
Effect of acquisitions, net ......... 33,179 33,179 33,179
----------- ----------- -----------
$ 1,618,862 $ 247,628 $ 101,189
=========== =========== ===========
</TABLE>
At December 31, 1996, the Company had investment tax credit carryovers
available to reduce future taxable income which would otherwise be taxable for
income tax purposes as follows:
Expiration date Investment Tax
December 31, Credit
------------------ ----------------
1997................................ $ 59,637
1998................................ 58,835
1999................................ 107,767
2000................................ 19,555
2001................................ 128,746
2002................................ 27,001
2003................................ 21,115
2004................................ --
2005................................ --
Indefinite.......................... 339,878
----------------
$ 762,534
================
32.
<PAGE>
NOTE O - 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,
------------------------------
1996 1995 1994
-------- -------- ---------
<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
Interest on convertible debentures held by a related
party of the Company ................................. 166,667 516,000 619,200
Interest on note payable to director ................... 38,611
Interest on notes payable to joint venture partner
(Paragon) ............................................ 2,498 36,076 54,072
Interest revenue:
Interest on note receivable from director of the Company 2,626 -- --
Interest on note receivable from officer of the Company 1,258 -- --
Interest on note receivable from joint venture partner . 47,500 -- --
Lease expense for land and facilities ....................... 10,240 10,240 10,000
Consulting fee to officer of the Company .................... 32,500 65,000 79,750
</TABLE>
<TABLE>
The balance sheet includes the following amounts resulting from
transactions with related parties:
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Accounts receivable
Accounts receivable from a director of the Company ... $ 27,106 $ 85,426
Note receivable from a director of the Company ....... 70,128 --
Note receivable from officer of the Company .......... -- 99,996
Distribution receivable from Duhart-Milon ............. -- 431,505
Inventory
Wine purchases from related parties ................... 1,119,881 443,047
Grape purchases from related parties .................. 2,135,654 1,520,872
Goodwill
Investment in joint venture (see Note G) .............. 2,445,457 --
Other asset
Option to extend term of joint venture ................ -- 1,017,174
Note receivable from joint venture partner (Paragon) .. 500,000 500,000
Property, plant & equipment, net
Building contributed to joint venture by the partners . 1,304,313 1,394,266
Accounts Payable and accrued liabilities
Investment payable .................................... 1,603,722 --
Payables for inventory purchases to related parties ... 1,308,805 --
Long-term obligations
Payable for purchase of option to extend term of joint
venture (see Notes F and I) ......................... -- 175,439
Note payable to joint venture partner (see Note I) .... -- 59,954
Note payable to director of the Company .............. 940,282 --
Convertible debentures held by a related party of the
Company (see Note I and K) .......................... 5,000,000 --
</TABLE>
33.
<PAGE>
NOTE P - 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
----------------- ------------------
1997.................................... 585,372
1998.................................... 457,372
1999.................................... 457,372
2000.................................... 457,372
2001.................................... 457,372
Thereafter.............................. 4,395,430
------------------
Total................................... $ 6,810,290
==================
Rental expense charged to operations was as follows: $658,195, $832,962,
and $637,343 for the years ended December 31, 1996, 1995, and 1994,
respectively. Future lease commitments include $10,240 per year until 2052 for
land leased by Paragon to the Edna Valley Joint Venture (see Note G).
NOTE Q - QUARTERLY DATA (Unaudited)
<TABLE>
The Company's quarterly operating results for years ended December 31,
1996, 1995, and 1994, 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>
1996 Quarters:
Fourth Quarter.............. $ 9,857 $ 4,100 $ 888 $ .11
Third Quarter............... 8,207 3,157 668 .08
Second Quarter.............. 8,449 3,170 653 .08
First Quarter............... 5,396 1,948 130 .02
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)
</TABLE>
34.
<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,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 20, 1997
35.
<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 relating to the 1997 Annual Meeting
of Shareholders under the heading "Election of Directors" and the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement relating to the 1997 Annual Meeting of
Shareholders under the heading "Board Meetings and Compensation," and under the
heading "Executive Compensation," with the exception of the information under
the subheadings "Performance Graph" and "Compensation Committee Report on
Compensation of Executive Officers," to be filed with the Securities and
Exchange Commission within 120 days after December 31, 1996.
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 relating to the 1997 Annual Meeting of
Shareholders under the headings "Shareholding by Other Owners of More Than Five
Percent" and "Shareholding Information as to Directors, Director Nominees and
Management" to be filed with the Securities and Exchange Commission within 120
days after December 31, 1996.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is hereby incorporated by
reference to the Company's Proxy Statement relating to the 1997 Annual Meeting
of Shareholders under the heading "Certain Relationships and Related
Transactions," to be filed with the Securities and Exchange Commission within
120 days after December 31, 1996. Reference is also made to the information
contained in Note O of Notes to Consolidated Financial Statements of this Report
under the caption "Transactions with Related Parties."
36.
<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............................ 19
Consolidated Statements of Operations.................. 20
Consolidated Statements of Changes in
Shareholders' Equity................................. 21
Consolidated Statements of Cash Flows.................. 22
Notes to Consolidated Financial
Statements........................................... 23
Independent Auditors' Report............................... 35
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.
37.
<PAGE>
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<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>
38.
<PAGE>
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<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>
39.
<PAGE>
<TABLE>
EXHIBIT INDEX
--------------
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<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>
40.
<PAGE>
<TABLE>
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
------- -------------------
<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>
41.
<PAGE>
<TABLE>
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
------- -------------------
<S> <C> <C>
10.28 Omnibus Agreement between the Company, DBR, and Summus
Financial, dated August 22, 1995. (i)
10.29 Credit Agreement between the Company and Wells Fargo Bank, (ii)
dated December 29, 1995.
10.30 Credit Agreement between Edna Valley Vineyard and Wells
Fargo Bank, dated July 31, 1995.
10.31 Purchase Agreement between the Company, Richard H. Graff,
Trustee, Graff 1993 Trust Dated June 10, 1993, a trust
and Richard H. Graff an individual, dated July 1, 1996.
10.32 Promissory Note between the Company and Richard H. Graff,
dated July 1, 1996.
10.33 Secured Purchase Money Promissory Note between the Company
and Richard H. Graff, Trustee, Graff 1993 Trust, dated
July 1, 1996.
10.34 Residential Lease between the Company and Richard H. Graff,
dated July 1, 1996.
10.35 Consulting and Non-Competition Agreement between the Company
and Richard H. Graff, dated July 1, 1996.
10.36 Credit Agreement between the Canoe Ridge Vineyard, L.L.C.
and Wells Fargo Bank dated August 15, 1996.
10.37 Credit Agreement between the Company and Wells Fargo Bank, dated
September 25, 1996.
10.38 Amendment To Joint Venture Agreement of Edna Valley Vineyard
between Paragon Vineyard Co., Inc., and the Company,
dated December 23, 1996.
11 Statement re Computation of Earnings Per Share for the periods
ended December 31, 1996, 1995, and 1994.
24 Consent of Deloitte & Touche LLP to incorporation by reference
dated March 24, 1997.
27 Financial Data Schedule
<FN>
- ------------------------------
(i) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(ii) Incorporated by reference to Exhibit No. 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
</FN>
</TABLE>
42.
<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 15, 1997
<TABLE>
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.
<CAPTION>
<S> <C> <C>
/s/ W. Philip Woodward President, Chief March 15, 1997
-------------------------------------------- Executive Officer,
W. Philip Woodward and Director (Principal
Executive Officer)
/s/ Richard H. Graff Chairman of the Board March 15, 1997
-------------------------------------------- of Directors
Richard H. Graff
/s/ William L. Hamilton Executive Vice President, March 15, 1997
-------------------------------------------- Chief Financial Officer,
William L. Hamilton and Director (Principal
Financial and Principal
Accounting Officer)
/s/ Wendy W. Bentson Controller March 15, 1997
--------------------------------------------
Wendy W. Bentson
43.
<PAGE>
/s/ C. Richard Kramlich Director March 15, 1997
--------------------------------------------
C. Richard Kramlich
/s/ William G. Myers Director March 15, 1997
--------------------------------------------
William G. Myers
/s/ James H. Niven Director March 15, 1997
--------------------------------------------
James H. Niven
/s/ Eric de Rothschild Director March 15, 1997
--------------------------------------------
Eric de Rothschild
/s/ Christophe Salin Director March 15, 1997
--------------------------------------------
Christophe Salin
/s/ Mark Hojel Director March 15, 1997
--------------------------------------------
Mark Hojel
/s/ Yves-Andre Istel Director March 15, 1997
--------------------------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director March 15, 1997
--------------------------------------------
Phillip M. Plant
</TABLE>
44.
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of the 31st day of July, 1995, by and
between EDNA VALLEY VINEYARD ("Borrower"), a joint venture between THE CHALONE
WINE GROUP, LTD. ("Chalone") and PARAGON VINEYARD CO., INC. ("Paragon"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
R E C I T A L
Borrower has requested from Bank the credit accommodations described below
(collectively the "Credits"), and Bank has agreed to provide the Credits to
Borrower on the terms and conditions contained herein. As of the date first
written above, this Agreement shall cancel and supersede that certain Agreement
between Borrower and Bank dated July 15, 1994.
NOW, THEREFORE, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. 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 15, 1996, not to exceed at any time the aggregate principal
amount of FOUR MILLION EIGHT HUNDRED THOUSAND AND NO/1OO DOLLARS ($4,800,000.00)
("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 a promissory note substantially in the form of
Exhibit A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(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 shall not at any time exceed the maximum principal amount
available thereunder, as set forth above.
(c) Borrowing Base. Notwithstanding any other provision of this Agreement,
the aggregate amount of all outstanding borrowings 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 of bulk wine determined in accordance with Bank's crush report; plus
(iii) fifty percent (50%) of the average FOB price of domestic bottled wine (but
not to exceed $50.00 per case); plus (iv) fifty percent (50%) of the lower of
cost or market value of imported wine; less (v) amounts due growers; 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.
1
<PAGE>
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 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
reasonable 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 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, other than Chalone;
(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, other than
Chalone, which represents the amount by which Borrower's total accounts from
said account debtor except for Pasternak Wine Imports during the months of May
through December exceeds twenty-five percent (25%) of Borrower's total accounts,
and during the month of May through December (inclusive) that portion of the
account from Pasternak Wine Imports which represents the amount by which
Borrower's total accounts from Pasternak Wine Imports exceeds fifty percent
(50*) of Borrower's total accounts;
(ix) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition of the account
debtor, or the industry in which the account debtor is engaged, to be
unsatisfactory.
2
<PAGE>
SECTION 1.2. TERM LOAN.
(a) Term Loan. Bank has made a loan to Borrower in the original principal
amount of TWO HUNDRED FIFTY FOUR THOUSAND NINE HUNDRED EIGHTY-EIGHT AND N0/100
DOLLARS ($254,988.00) ("Term Loan"), with the outstanding principal balance as
of the date hereof is TWO HUNDRED TWENTY-TWO THOUSAND THREE HUNDRED FIFTY-TWO
AND NO/100 DOLLARS ($222,352.00). Borrower's obligation to repay the Term Loan
is evidenced by a promissory note in the form of Exhibit B attached hereto
("Term Note"), 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 remains in full force and effect.
(b) Repayment. The principal amount of the Term Loan shall be repaid in
accordance with the provisions of the Term Note.
(c) Prepayment. Borrower may prepay principal on the Term Loan at any time,
in any amount and without penalty. All prepayments of principal shall be applied
on the most remote principal installment(s) then unpaid.
SECTION 1.3. INTEREST/FEES.
(a) interest. The outstanding principal balance of the Line of Credit and
Term Note shall bear interest at the respective rates of interest set forth in
the Line of Credit Note and Term Note.
(b) Computation and Payment. Interest on the Credits shall be computed on
the basis of a 360-day year, actual days elapsed. Interest shall be payable at
the times and places set forth in the Line of Credit Note and the Term Note
(collectively, the "Notes").
(c) Line of Credit Fees. Borrower shall pay to Bank a fee for the Line of
Credit in the amount of $12,000.00 payable at the time of execution hereof.
Borrower shall additionally pay to Bank on demand all costs for the accounts
receivable and inventory audits.
SECTION 1.4. 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.
SECTION 1.5. COLLATERAL. As security for all indebtedness of Borrower to
Bank, Borrower grants to Bank security interests of first priority in all
Borrower's inventory, accounts receivable, general intangibles, other rights to
payment, equipment, fixtures, all Borrower's right, title and interest in and to
the trade name "Edna Valley Vineyard" and any and all trade name rights and/or
proprietary labels with respect thereto, and all proceeds of the foregoing.
As security for all indebtedness of Borrower to Bank, Borrower shall cause
Paragon Vineyard Co., Inc. ("Paragon") to consent to the granting to Bank by
Borrower of a security interest of first priority in Borrower's rights to the
Edna Valley Vineyard tradename and trademark.
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 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 audits.
3
<PAGE>
ARTICLE II
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 discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a joint venture 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.
SECTION 2.2. AUTHORIZATION AND VALIDITY. 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 (with all of the foregoing referred to
herein collectively as 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.
SECTION 2.3. 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 joint venture agreement, 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.
SECTION 2.4. LITIGATION. There are no pending or threatened actions, claims,
investigations, suits or proceedings before any governmental authority, court or
administrative agency which may adversely affect the financial condition or
operation of Borrower other than those heretofore disclosed by Borrower to Bank
in writing.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated March 31, 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 permitted by this Agreement.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
SECTION 2.7. 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.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, memberships, franchises, 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.
4
<PAGE>
SECTION 2.9. ERISA. Borrower is in compliance in all material respects with
all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended from time to time (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/or 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.
SECTION 2.10. 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.
SECTION 2.11. 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 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.
ARTICLE III
CONDITIONS PRECEDENT
SECTION 3.1. 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) Such other documents as Bank may require
under any other section of this Agreement.
(c) 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.
SECTION 3.2. 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.
(b) Documentation. Bank shall have received all additional documents which
may be required in connection with such extension of credit.
5
<PAGE>
ARTICLE IV
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:
SECTION 4.1. 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, any fees or other liabilities due under any
of the Loan Documents at the times and place and in the manner specified
therein.
SECTION 4.2. 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.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in
form and detail satisfactory to Bank:
(a) not later than 60 days after and as of the end of each quarter, a
financial statement of Borrower, prepared by Borrower, to include balance sheet
and income statement;
(b) not later than 120 days after and as of the end of each fiscal year, an
audited financial statement of the Chalone Wine Group, Ltd., prepared by a
certified public accountant, to include balance sheet, income statement,
statement of cash flows, and notes to financial statements;
(c) not later than 120 days after and as of the end of each fiscal year, a
reviewed financial statement of Borrower, prepared by a certified public
accountant, to include balance sheet, income statement, statement of cash flow
and all footnotes;
(d) not later than 120 days after and as of the end of each fiscal year, a
reviewed financial statement of Paragon vineyard Co., Inc., prepared by a
certified public accountant to include a balance sheet, income statement,
statement of cash flow and all footnotes;
(e) not later than 30 days after and as of the end of each month, an aged
listing of accounts receivable and accounts payable, and a reconciliation of
accounts (Bank form CMS-505) together with an inventory designation statement;
and
(f) from time to time such other information as Bank may reasonably request.
SECTION 4.4. 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.
SECTION 4.5. 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.
SECTION 4.6. 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.
SECTION 4.7. 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.
6
<PAGE>
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower in excess of $100,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as
follows using generally accepted accounting principles consistently applied and
used consistently with prior practices, except to the extent modified by the
following definitions:
(a) Ratio of Total Debt to Tangible Net Worth (defined as the aggregate of
current liabilities and non-current liabilities less subordinated debt divided
by Tangible Net Worth) not at any time greater than 1.25 to 1.0 Tangible Net
worth shall mean joint venturers, equity in Borrower plus subordinated debt less
the aggregate of any intangible assets and any obligations due from joint
venturers, employees and/or affiliates.
(b) Profitability on a year-to-date basis, determined as of each fiscal
quarter end.
(c) Inventory Turnover Ratio (defined as ending inventory divided by cost of
goods sold for the most recent four (4) fiscal quarters) not greater than 2.0 to
1.0, determined as of each fiscal quarter end. Cost of goods sold to include any
depreciation expense allocated according to generally accepted accounting
principles, consistently applied.
(d) EBITDA Coverage Ratio (defined as EBITDA divided by the aggregate of
interest expense, plus the current portion of long-term debt) not less than 2.20
to 1.0, determined as of each fiscal year end. EBITDA shall mean income from
operations plus depreciation, amortization and any interest expense included in
operating expense.
SECTION 4.10. 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 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 $100,000.00.
ARTICLE V
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:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed
assets in excess of an aggregate of $1,450,000.00 in fiscal year ending in 1995,
$575,000-00 in fiscal year ending in 1996 and $460,000.00 for each fiscal year
thereafter.
SECTION 5.3. LEASE EXPENDITURES. Incur new obligations for the lease or hire
of real or personal property requiring payments in any fiscal year in excess of
an aggregate of $75,000.00.
7
<PAGE>
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except the liabilities of Borrower to Bank and any other
liabilities of Borrower existing as of the date of this Agreement and disclosed
in the financial statement delivered to Bank pursuant to section 2.5.
SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any corporation or other entity; make any substantial change in
the nature of Borrower's business; acquire all or substantially all of the
assets of any corporation or other entity; nor sell, lease, transfer or
otherwise dispose of all or a substantial or material part of its assets except
in the ordinary course of business.
SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the-ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity.
SECTION 5.7. NEGATIVE PLEDGE. Borrower shall not mortgage, pledge, grant or
permit to exist a security interest in, or lien upon, any asset of Borrower, now
owned or hereafter acquired, except any of the foregoing in favor of Bank.
SECTION 5.8. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or
investments in any person or entity.
SECTION 5.9. DISTRIBUTIONS. Make any distributions either in cash or other
property to any partner or partners in Borrower; nor redeem, retire, repurchase
or otherwise acquire any partnership interest in Borrower except, so long as no
default under this Agreement exist, distributions to Joint Venturers which shall
be limited to forty percent (40%) of net income up to and including the first
$500,000.00 of net income per year plus an additional amount equal to sixty
percent (60%) of the amount by which net income for the year exceeds
$500,000.00; which distributions shall be determined and paid quarterly within
ninety (90) days after the end of quarter provided the cumulative distributions
determined in any fiscal year do not exceed the maximum limitation hereunder.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any representation or warranty made by Borrower hereunder shall prove to
be incorrect in any material respect when 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.
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(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 any joint venturer
in Borrower 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 any joint
venturer in Borrower; or the recording of any abstract of judgment against
Borrower or any joint venturer in Borrower in any county in which Borrower or
such general partner has an interest in real property; or the service of a
notice of levy and/or of a writ of attachment or execution, or other like
process, against the assets of Borrower or any joint venturer in Borrower; or
the entry of a judgment against Borrower or any joint venturer in Borrower.
(g) Borrower or any joint venturer in 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 or any joint venturer in 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 Reform Act, Title 11 of the United States Code, as amended or
recodified from time to time ("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 said 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 any joint venturer
in Borrower, or Borrower or any such joint venturer shall file an answer
admitting the jurisdiction of the court and the material allegations of any
involuntary petition; or Borrower or any such joint venturer shall be
adjudicated a bankrupt, or an order for relief shall be entered by any court of
competent jurisdiction under said 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.
(i) The dissolution or liquidation of Borrower or any joint venturer in
Borrower; or Borrower or any such joint venturer, or any of their directors,
stockholders or members, shall take action seeking to effect the dissolution or
liquidation of Borrower or such joint venturer; or the withdrawal from Borrower
of any joint venturer.
(j) The resignation or expulsion during the term of this Agreement of any
one or more of the joint venturers in Borrower with an aggregate ownership
interest in Borrower of twenty-five percent (25%) or more.
(k) Chalone shall cease to be the managing joint venturer of Borrower.
(1) Paragon Vineyard Company shall sell, transfer or assign, or grant,
suffer or permit to exist, a security interest in or lien upon, the "Edna
Valley" tradename or trademark, whether voluntarily or involuntarily.
(m) Borrower's right to use the "Edna Valley" tradename or trademark shall
be lost or impaired for any reason.
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SECTION 6.2. 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.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. 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.
SECTION 7.2. 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:
BORROWERS: c/o The Chalone Wine Group, Ltd.
Managing Joint Venturer
621 Airpark Road
Napa, CA 94558-6272
EDNA VALLEY VINEYARD
c/o Paragon Vineyard Co., Inc.
Joint Venturer
5880 Edna Road
San Luis Obispo, CA 93401
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
San Francisco Commercial Banking Office
420 Montgomery Street, 1st Floor
San Francisco, CA 94163
Attn: Brian Sorrick, Vice President
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 the date of receipt or five (5) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. 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.
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SECTION 7.4. 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 acquire relating to any of the Credits, Borrower or its business,
or any collateral required hereunder.
SECTION 7.5. 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. As of the date first written above, this letter
shall cancel and supersede that certain Credit Agreement between Borrower and
Bank dated April 15, 1992.
SECTION 7.6. 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.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. 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.
SECTION 7.9. 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 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,
EDNA VALLEY VINEYARD NATIONAL ASSOCIATION
By: THE CHALONE WINE GROUP, LTD. By: /s/ Brian Sorrick
Managing Joint Venturer -------------------------
Brian Sorrick
By: /s/ William L. Hamilton Vice President
------------------------------
William L. Hamilton
Chief Financial Officer/
Executive Vice President
11
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT ("Agreement") is entered into as of July 1,
1996, between THE CHALONE WINE GROUP, LTD., a California corporation
("Chalone"), RICHARD H. GRAFF, TRUSTEE, GRAFF 1993 TRUST DATED JUNE 10, 1993, a
trust ("Graff Trust"), and RICHARD H. GRAFF, an individual ("Graff").
Background
The Graff Trust owns approximately 160 acres of property and a
single-family house situated on such property generally known as 101 Stonewall
Canyon Road, Soledad, California which is more completely described below.
Graff will have the right to use portions of the property pursuant to
the Residential Lease entered into between Chalone and Graff as of the date
above written.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations, and warranties contained in this Agreement, the parties agree
as follows:
1. Agreement of Sale. The Graff Trust hereby agrees to sell to Chalone,
and Chalone hereby agrees to purchase from the Graff Trust that certain real
property (the "Land") located in Monterey County, California which is more
particularly described in Exhibit 1.1 (Description of the Land), together with
all improvements located upon the Land including the house, vines, posts,
fencing, and irrigation facilities ("Improvements"), all appurtenant rights
related to the Land including easements and water rights (the "Appurtenant
Rights"), the farm equipment located on the Land ("Equipment") as listed in
Exhibit 1.2 (List of Farm Equipment), and all approvals from any governmental or
quasi-governmental authority with respect to the Land or Improvements including
permits, variances, and licenses ("Approvals"). The Land, the Improvements, the
Appurtenant Rights, the Equipment, and the Approvals are referred to
collectively in this Agreement as the "Property."
2. Purchase Price. The purchase price for the Property is One Million
One Hundred Ninety-Two Thousand Five Hundred Three Dollars ($1,192,503) plus the
amount of the liability assumed or paid off as described in Section 2.4 (the
"Purchase Price") and will be paid by Chalone as follows:
2.1. A bank cashier's check payable to or a wire transfer to
the Graff Trust in the amount of $250,000 at the Closing (as defined in Section
5.1 (Closing Date) below).
2.2. Chalone's promissory note in the principal amount of Nine
Hundred Forty-Two Thousand Five Hundred Three Dollars ($942,503) bearing
interest at seven and three one-hundredths of a percent (7.03%) per year, with
monthly installments of principal and interest in the amounts as described in
Exhibit 2.2.1 (Schedule of Mortgage Payments) and providing for a right of
setoff, substantially in the form of Exhibit 2.2.2 (the "Note").
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2.3. Security for this Note in the form of a deed of trust on
the Property ("Second Deed of Trust") substantially in the form of Exhibit 2.3
("Second Deed of Trust").
2.4. Chalone will assume or pay-off the liability owed to
Wells Fargo Bank N.A. which is evidenced by a promissory note dated as of March
2, 1996 made payable to the order of First Interstate Bank of California in an
original loan amount of $456,000 ("Assumed Note") and secured by a deed of trust
encumbering the Property ("First Deed of Trust").
3. Title.
3.1. Permitted Title Exceptions. The Graff Trust will deliver
good and marketable title to the Property to Chalone subject only to those
exceptions as may be approved in writing by Chalone pursuant to Section 4.1.2
(Objections to Preliminary Title Report) below ("Permitted Title Exceptions").
3.2. Owner's Policy. Evidence of title will be the issuance at
the Closing by the Title Company of a CLTA Standard Coverage Owner's Policy of
Title Insurance in a form acceptable to Chalone insuring that fee title in the
Property is vested in Chalone, subject only to the Permitted Title Exceptions,
together with such endorsements as Chalone may reasonably request (the "Title
Policy").
4. Conditions to Closing.
4.1. Chalone's Conditions. Chalone's obligation to purchase
the Property is conditioned upon the satisfaction of each of the following
conditions:
4.1.1. Performance of Obligations and Accuracy of
Representations and Warranties. The performance by the Graff Trust of every
obligation it has under this Agreement, and the accuracy of each representation
and warranty made in this Agreement by Graff and the Graff Trust at the time the
representation or warranty was made and as of the Closing.
4.1.2. Objections to Preliminary Title Report.
Chalone's review and approval of the Preliminary Title Report and all title
exceptions. Chalone will be deemed to have accepted title unless it notifies the
Graff Trust of its reasonable disapproval of the condition of title within seven
(7) business days from the execution of this Agreement. If Chalone reasonably
disapproves of any item(s) in the Preliminary Title Report before the end of
this seven (7) business day period, within five (5) business days after
Chalone's disapproval of any of these items, the Graff Trust may elect to remove
such item(s) or may elect not to remove such item(s). If the Graff Trust elects
not to remove such item(s), Chalone may terminate this Agreement or may proceed
to Closing and will be deemed to have accepted the disapproved item(s).
4.1.3. Third Party Consents. All consents, approvals
and waivers from any governmental authorities and other third parties necessary
to permit The Graff Trust to transfer the Property to Chalone as contemplated by
this Agreement will have been obtained, including the consent of Wells Fargo
Bank N.A. to the assignment of the liability if the liability is assumed by
Chalone, pursuant to Section 2.3 of this Agreement.
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4.1.4. No Governmental Proceeding or Litigation. No
suit, action, investigation, inquiry or other proceeding by any governmental
authority or other party has been instituted or threatened which questions the
validity or legality of the transactions contemplated by this Agreement.
4.1.5. Residential Lease. A Residential Lease entered
into between Chalone and Graff whereby Chalone will lease to Graff the
single-family house situated on the Land and approximately 160 acres surrounding
the house ("Residential Lease"). The Residential Lease will be in the form of
Exhibit 4 (Residential Lease).
4.1.6. Promissory Note. A Promissory Note made by
Graff to Chalone in the principal amount of Seventy-Six Thousand Six Hundred
Fifty-Two Dollars and Eighty-Seven Cents ($76,652.87) bearing interest at seven
percent (7%) per year, with equal quarterly installments of principal and
interest in the amount of Four Thousand Five Hundred Seventy-Five Dollars and
Fifty Cents ($4,575.50), substantially in the form of Exhibit 4.1.6 (the "Graff
Note").
4.1.7. Consulting Agreement. A Consulting and
Non-Competition Agreement entered into between Chalone and Graff whereby Chalone
will engage Graff to assist Chalone on an as needed part-time basis during the
term of which Graff will not compete with Chalone's business ("Consulting
Agreement"). The Consulting and Non-Competition Agreement will be in the form of
Exhibit 4.1.7 (Consulting and Non-Competition Agreement).
4.2. Access. The Graff Trust will afford authorized
representatives of Chalone reasonable access to the Property for the purposes of
satisfying Chalone with respect to the representations, warranties and covenants
of Graff and the Graff Trust contained in this Agreement and the conditions
precedent to the Closing.
4.3. Graff Trust's Conditions.
4.3.1. Performance of Obligations and Accuracy of
Representations and Warranties. The performance by Chalone of every obligation
it has under this Agreement, and the truth of each representation and warranty
made in this Agreement by Chalone at the time the representation or warranty was
made and as of the Closing.
4.3.2. Third Party Consents. All consents, approvals
and waivers from any governmental authorities and other third parties necessary
to permit the Graff Trust to transfer the Property to Chalone as contemplated by
this Agreement will have been obtained.
4.3.3. Residential Lease. A Residential Lease entered
into between Chalone and Graff whereby Chalone will lease to Graff the
single-family house situated on the Land and approximately 160 acres surrounding
the house. The Residential Lease will be in the form of Exhibit 4 (Residential
Lease).
4.3.4. Consulting Agreement. A Consulting and
Non-Competition Agreement entered into between Chalone and Graff whereby Chalone
will engage Graff to assist
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Chalone on an as needed part-time basis during the term of which Graff will not
compete with Chalone's business. The Consulting and Non-Competition Agreement
will be in the form of Exhibit 4.1.7 (Consulting and Non-Competition Agreement).
4.4. Waiver. Either party may, at any time or times before the
Closing, waive one or more of the foregoing conditions, without affecting its
rights and remedies with respect to the remaining conditions. Any waiver must be
in writing and signed by the waiving party.
5. Closing.
5.1. Closing Date. The consummation of the purchase and sale
of the Property (the "Closing") will be held no later than September 30, 1996,
or on such other date agreed to in writing by Chalone and the Graff Trust.
5.2. Graff Trust's Deposits IntoEscrow. The Graff Trust must
deposit the following documents and items into escrow:
5.2.1. a duly executed and acknowledged grant deed
conveying the Land and Improvements to Chalone, subject only to the Permitted
Title Exceptions;
5.2.2. a duly executed assignment reasonably
acceptable to Chalone assigning to Chalone all of the Graff Trust's interest in
all Approvals;
5.2.3. an affidavit in the form of attached Exhibit
5.2.3. stating that the Graff Trust is not a "foreign person" under IRC Section
1445(f)(3).
5.2.4. a certificate from the Graff Trust certifying
that there has been no change in or damage to the Property (or specifying such
change or damage) from the date of this Agreement and that the representations
and warranties described in Section 6.1 (Representations and Warranties of the
Graff Trust) are complete and accurate as of the Closing date;
5.2.5. The Graff Trust's share of the closing costs
as described in Section 5.5 (Closing Costs) below;
5.2.6. An assignment of the Assumed Note, properly
executed and acknowledged by Graff, and accompanied by all consents of Wells
Fargo Bank N.A. required by the Assumed Note and the First Deed of Trust, in a
form acceptable to Chalone, if the liability is assumed by Chalone and not paid
off; and
5.2.7. such other documents as may reasonably be
required to complete the Closing.
5.3. Chalone's Deposits Into Escrow. Chalone must deposit the
following into escrow:
5.3.1. a bank cashier's check payable to or a wire
transfer to the Graff Trust in the amount of $250,000 and a Note, substantially
in the form of Exhibit 2.2.2;
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5.3.2. a Second Deed of Trust substantially in the
form of Exhibit 2.3 (Second Deed of Trust);
5.3.3. Chalone's share of the closing costs as
described in Section 5.5. (Closing Costs) below; and
5.3.4. such other documents as may reasonably be
required to complete the Closing.
5.4. Prorations. All expenses for the Property will be
prorated as of the Closing date (the "Proration Date") and the Purchase Price
will be adjusted on the following basis:
5.4.1. Accounts Payable. All sums due for accounts
payable which were owing or accrued by the Property prior to the Proration Date
and for all agreements and contracts not assumed by Chalone will be paid by
Graff, and Graff agrees to indemnify and hold Chalone harmless with respect to
those agreements and contracts.
5.4.2. Property Taxes. To the extent not included
above, all real and personal property ad valorem taxes and special assessments,
if any, will be prorated to the Proration Date, based on the latest available
tax rate and assessed valuation.
5.4.3. Post Closing. If the amount of any proration
cannot be determined at the Closing, the adjustments will be made between the
parties as soon after Closing as possible.
5.5. Closing Costs. The Graff Trust and Chalone will each pay
their respective shares of all Closing costs for this transaction, including all
escrow and recording fees, transfer taxes, and the cost of Chalone's title
insurance policy, pursuant to the custom in Monterey County.
5.6. Closing. Pursuant to Section 5.1 (Closing Date) above,
the Title Company will close the escrow for this transaction when it is in a
position to issue the Title Policy and has received from the Graff Trust and
Chalone the items required of each in Sections 5.2 (Graff Trust's Deposits Into
Escrow) and 5.3 (Chalone's Deposits Into Escrow) above. Title Company will close
escrow by doing the following:
5.6.1. Recording the grant deed in the Official
Records of Monterey County Recorder;
5.6.2. Recording the Second Deed of Trust in the
Official Records of Monterey County Recorder;
5.6.3. Delivering to Chalone the Title Policy, the
original documents and items listed in Section 5.2 (Graff Trust's Deposits Into
Escrow) above, and a closing statement
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for the escrow consistent with this Agreement and satisfactory to Chalone and
the Graff Trust (the "Closing Statement"), and any refund due Chalone; and
5.6.4. Delivering to the Graff Trust the Promissory
Note and the Graff Trust's closing statement.
5.6.5. Delivering to the Graff Trust the payment
described in Section 5.3.1.
5.7 Possession. The Graff Trust will deliver possession of the
Property to Chalone on the Closing date subject to Graff's retained rights under
the Residential Lease.
6. Representations and Warranties.
6.1. Representations and Warranties of Graff and of the Graff
Trust. Graff and the Graff Trust hereby makes the following representations and
warranties to Chalone, which representations and warranties will survive the
Closing and all of which (i) are material and are being relied upon by Chalone,
and (ii) are complete and accurate as of the date of this Agreement and will be
complete and accurate at the Closing date:
6.1.1. Neither Graff nor the Graff Trust knows of any
facts nor has Graff or the Graff Trust failed to disclose any fact which may
affect the value of the property or the viability of the vineyard located on the
Property to continue as a first class vineyard. There are no material physical
or mechanical defects of the Property, and except as otherwise disclosed, all
Equipment and Improvements are in good operating condition and repair as of the
Closing date and in compliance with all applicable governmental requirements;
6.1.2. Except as disclosed to Chalone in writing,
neither Graff nor the Graff Trust has any knowledge of any condemnation
proceedings or any land-use or development regulations or proceedings existing
or proposed, which would affect the use and operation of the Property, nor has
Graff or the Graff Trust received notice of any special assessment proceedings
or other matters affecting the use, occupancy or value of the Property;
6.1.3. For purposes of this Agreement, the term
"Hazardous Materials" means materials regulated under any federal, state or
local law or regulation, as amended from time to time, as a toxic, hazardous,
contaminated or similarly harmful or dangerous material or substance. To the
best of Graff's and the Graff Trust's knowledge, there are no Hazardous
Materials being stored or otherwise held on, under or about the Property by
Graff or the Graff Trust or to Graff's or the Graff Trust's knowledge after due
inquiry by any other party;
6.1.4. Neither Graff nor the Graff Trust has received
any written report, notice or other information, or to their knowledge otherwise
been advised under the California Health and Safety Code or any other applicable
local, state or federal law regarding Hazardous Materials on, under or affecting
the Property or requiring the removal of any Hazardous Materials from the
Property;
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6.1.5. All documents executed by Graff or the Graff
Trust which are to be delivered to Chalone at the Closing are, or at the time of
Closing will be, duly authorized, executed, and delivered by Graff or the Graff
Trust, whichever is applicable, and are, or at the Closing will be, legal,
valid, and binding obligations of Graff or the Graff Trust, whichever is
applicable, and do not, and at the time of Closing will not, violate any
provision of any agreement to which either Graff or the Graff Trust is a party
or to which they are subject or any law, judgment or order applicable to Graff
or the Graff Trust; and
6.1.6. To the best of Graff's and the Graff Trust's
knowledge, there is no claim, litigation, or governmental investigation or
proceeding, actual or potential, that may affect the Property and no unrecorded
easements, unrecorded mechanics' lien claims, unrecorded taxes and assessments,
claims of encroachment or prescriptive easements affecting the Land or
Improvements.
6.2. Representations and Warranties of Chalone. Chalone hereby
makes the following representations and warranties to the Graff Trust, which
representations and warranties will survive the Closing and all of which (i) are
material and are being relied upon by the Graff Trust, and (ii) are complete and
accurate in all respects as of the date of this Agreement and will be complete
and accurate as of the Closing date:
6.2.1. Chalone is a corporation duly organized,
validly existing and in good standing under the laws of the State of California;
and
6.2.2. This Agreement and all documents executed by
Chalone which are to be delivered to either Graff or the Graff Trust, whichever
is applicable, at the Closing are, or at the time of Closing will be, duly
authorized, executed, and delivered by Chalone, and are, or at the Closing will
be, legal, valid, and binding obligations of Chalone, and do not, and at the
time of Closing will not, violate any provisions of any agreement to which
Chalone is a party or to which it is subject or any law, judgment or order
applicable to Chalone.
7. The Parties' Obligations After Closing.
7.1. Organic Farming. During the term that the Consulting
Agreement is in effect, Chalone will exercise its reasonable efforts to
organically farm the vineyard that is part of the Property ("Vineyard") and to
investigate and, if appropriate, obtain and maintain the required certification
of that Vineyard as an organic farm from the appropriate governmental or
quasi-governmental authorities; provided, however, that if (i) the physical
integrity of the grapes or vines is endangered, (ii) the quality of the
resulting wine is affected, or (iii) the economic competitiveness of the
Vineyard is threatened relative to the Chalone Vineyard, as determined in
Chalone's sole discretion, Chalone will have the right to employ non-organic
materials to combat specific grape pests and diseases on a case-by-case basis,
but only when necessary in Chalone's sole discretion, and Chalone agrees to
minimize the use of any such non-organic materials and to revert to fully
organic materials as soon as possible thereafter.
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7.2. Vineyard Name. Chalone will name the Vineyard the
"Richard Graff Vineyard;" provided, however, that if Chalone sells or transfers
the Vineyard, the purchaser or the transferee will not be bound by this
obligation.
7.3. Vineyard Management. During the term that the Consulting
Agreement is in effect, Graff may advise Chalone with respect to the management
of the Vineyard, excluding the day to day management of the Vineyard, but Graff
may not make any decisions which affect the Vineyard in any way; Chalone will
make all such decisions.
7.4. Winemaking. During the term that the Consulting Agreement
is in effect, Chalone will use its reasonable efforts to cause the grapes from
the Vineyard to be made into wine at the Chalone Winery and to allow Graff to
advise Chalone with respect to the making of the wine; provided, however, that
if Chalone sells or transfers the Vineyard, the purchaser or the transferee will
not be bound by this obligation. Under no circumstances will Graff make any
decisions which affect the process of the winemaking in any way, except in the
case of those barrels of wine that have been set aside for Graff's personal use
as provided in the Consulting Agreement. If the grapes from the Vineyard are
made into wine at the Chalone Winery, Chalone will bottle such wine.
7.5. Subordination. Graff and the Graff Trust shall
subordinate, on the terms reasonably requested by Chalone's Lender, the liens
evidenced by the Second Deed of Trust and the Residential Lease to that of a
commercial lender who from time to time may provide Chalone, or its successors
and assigns, with financing secured by the Property and to attorn to such
commercial lender and shall execute such documents as may be required by such
lender to evidence this subordination and attornment; provided, that, the amount
of financing secured by the Property shall not exceed $500,000.
All obligations described in this Article VII shall survive the
Closing.
8. Indemnification. Each party hereby agrees to indemnify the other
party and hold the other party harmless from and against any and all claims,
demands, liabilities, costs and damages, including without limitation,
reasonable attorneys' fees, resulting from any misrepresentations or breach of
warranty or covenant made by such party in this Agreement or in any document,
certificate, or exhibit given or delivered to the other party pursuant to or in
connection with this Agreement. Graff and the Graff Trust further agree to
indemnify Chalone and hold Chalone harmless from and against any claims,
demands, liabilities, costs and damages asserted against or suffered by Chalone
and resulting from or arising out of the ownership, use or construction of the
Property prior to the conveyance of the Property to Chalone, including, without
limitation, claims arising from the presence, prior to Closing, of any Hazardous
Materials on the Property and reimbursement of cleanup or remedial action costs
under any law or regulation regarding the generation, use, storage, or disposal
of such Hazardous Materials. All of these indemnifications will survive the
Closing and conveyance of the Property to Chalone.
9. Risk of Loss; Insurance Proceeds; Condemnation.
8
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9.1. Damage or Destruction. In the event of damage or
destruction of the Improvements prior to the Closing date, Chalone may elect to
either (a) terminate this Agreement upon written notice to the Graff Trust or
(b) consummate this Agreement as scheduled, in which event the Graff Trust will
pay to Chalone any and all insurance proceeds payable with respect to such
damage or destruction for costs of repair and restoration of the Property, plus
such additional amount if any as may be required to repair or restore the
Improvements to their condition immediately prior to such damage or destruction.
9.2. Insurance. The Graff Trust agrees to maintain any
insurance policy with respect to the Property currently in effect through the
Closing date.
9.3. Eminent Domain. If, prior to the Closing, all of the Land
and Improvements are taken by eminent domain, this Agreement will be deemed
canceled. If only part of the Land or Improvements are taken by eminent domain,
Chalone will have the option of (a) proceeding with the Closing and acquiring
the Property as affected by the taking, together with all compensation and
damage awarded or the right to receive same, or (b) canceling this Agreement.
10. Graff Trust's Covenants During Contract Period. Between the Graff
Trust's execution of this Agreement and the Closing, or earlier termination of
this Agreement as permitted under this Agreement, the Graff Trust will (i)
maintain the Property in good order, condition and repair, reasonable wear and
tear excepted, (ii) not make any physical changes to the Improvements, (iii)
continue to manage the Property (including the cultivation of the vines) in the
manner in which it is being managed, and (iv) not enter into any lease,
amendment of lease, grape contract, or other agreement pertaining to the
Property, without Chalone's prior consent which may be withheld at Chalone's
sole discretion.
11. Assignment. Neither party may assign its rights or delegate its
obligations under this Agreement without the prior written consent of the other
party. Subject to the foregoing, this Agreement will be binding upon and inure
to the benefit of the parties to this Agreement and their successors and
assigns. In connection with any approved assignment, the assignee must assume
the assignor's obligations under this Agreement, but assignor will nevertheless
remain liable for those obligations.
12. Miscellaneous.
12.1. Notice. All notices and any other communications
permitted or required under this Agreement must be in writing and will be
effective (i) immediately upon delivery in person, or (ii) 24 hours after
deposit with a commercial courier or delivery service for overnight delivery,
(iii) seven days after deposit with the United States Postal Service, certified
mail, return receipt requested, postage prepaid, or (iv) upon receipt, if
transmitted by facsimile with confirmed receipt between 9:00 a.m. and 5:00 p.m.
on a business day, otherwise, on the following business day. All notices must be
properly addressed and delivered to the parties at the addresses set forth
below, or at such other addresses as either party may subsequently designate by
written notice given in the manner provided in this Section:
9
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Graff Trust: Richard H. Graff, Trustee, Graff 1993 Trust
Dated June 10, 1993
c/o The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558
Phone: (707) 254-4200
Fax: (707) 254-4201
Graff: Richard H. Graff
c/o The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558
Phone: (707) 254-4200
Fax: (707) 254-4201
Chalone: The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558
Phone: (707) 254-4200
Fax: (707) 254-4201
Attn.: W. Philip Woodward
12.2. Covenant of Further Assurances. The parties hereby agree
to execute such other documents and perform such other acts as may be necessary
or desirable to carry out the purposes of this Agreement.
12.3. Entire Agreement. This document represents the entire
agreement between the parties with respect to the subject matter and supersedes
all other prior agreements. This Agreement may only be modified by a written
instrument signed by both parties.
12.4. No Waiver. No consent or waiver by either party to or of
any breach of any representation, covenant or warranty will be construed as a
consent to or waiver of any other breach of the same or any other
representation, covenant, or warranty.
12.5. Attorneys' Fees. In the event of any breach of this
Agreement that results in arbitration or litigation between the parties, the
prevailing party shall be entitled to its reasonable attorney's fees, expert
witness fees and costs of suit. The prevailing party shall be determined by the
court or arbitrator, as applicable, based upon an assessment of which party's
major arguments or positions taken in the proceedings could fairly be said to
have prevailed over the other party's major arguments or positions on major
disputed issues in the court's or arbitrator's decision.
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12.6. Brokers and Finders. Neither party has had any contact
or dealings regarding the Property, through any licensed real estate broker or
other persons who can claim a right to a commission or finder's fee in
connection with this transaction. In the event that any other party claims a
commission or finder's fee in this transaction, the party through whom the party
makes his claim will be responsible for the commission or fee and will indemnify
the other against all costs and expenses (including reasonable attorneys' fees)
incurred in defending against the same.
12.7. Time of the Essence. Time is of the essence of this
Agreement.
12.8. Governing Law. This Agreement is entered into and will
be governed by and construed in accordance with the laws of the State of
California.
12.9. Interpretation. All parties have been represented by
counsel in the preparation and negotiation of this Agreement, and this Agreement
is to be interpreted as if it were drafted by all and not any one or more
parties. The words "include" and "including" mean "including without
limitation." The headings used in this Agreement are for purposes of convenience
only and should not be used in construing the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
GRAFF TRUST: RICHARD H. GRAFF, TRUSTEE, GRAFF 1993
TRUST DATED JUNE 10, 1993,
a trust
By: /s/ RICHARD H. GRAFF
-----------------------------
Title: Trustee
-----------------------------
GRAFF:
/s/ RICHARD H. GRAFF
------------------------------------
RICHARD H. GRAFF
CHALONE: THE CHALONE WINE GROUP, LTD.,
a California corporation
By: /s/ W. PHILIP WOODWARD
-----------------------------
Title: President
-----------------------------
11
Promissory Note
$76,652.87 Napa, California
July 1, 1996
For value received, Richard H. Graff, an individual ("Graff"), promises
to pay to The Chalone Wine Group, Ltd., a California corporation ("Chalone"),
the principal sum of Seventy Six Thousand Six Hundred Fifty Two Dollars and
Eighty-Seven Cents ($76,652.87) plus interest thereon at the rate set forth in
Section 1 (Interest) from the date set forth above until paid on or before April
30, 2001 as set forth below.
1. Interest. Interest on the unpaid principal balance of this Note will accrue
from the date of this Note until paid at the rate of seven percent (7%) per
annum ("Loan Rate"). Interest is to be calculated on the basis of a 365-day year
and the actual number of days elapsed. Interest is to accrue and compound on an
annual basis.
2. Payments. This Note will be paid in twenty (20) quarterly installments of
principal and interest in the amount of Four Thousand Five Hundred Seventy-Five
Dollars and Fifty Cents ($4,575.50) each, commencing on July 31, 1996 and on the
last day of each July, October, January, and April thereafter through and
including April 30, 2001, at which time the remaining principal balance and all
accrued and unpaid interest and all other charges due hereunder will be due and
payable in full.
3. Prepayment. This Note may be prepaid in whole or in part, at any time,
without penalty or premium, on any date that a payment of interest is due
hereunder, upon ten (10) days prior written notice to Chalone.
4. Default Interest. If Graff fails to make a payment of interest or principal
on this Note within five (5) days after the date the payment was due, interest
will accrue on the entire loan balance at the rate of nine percent (9%) per
annum (the "Default Rate") commencing on the date the payment was due and
continuing until the delinquent payment is received by Chalone.
5. Application of Payments. All payments received by Chalone in payment of this
Note will be applied first to accrued interest, then to other charges due with
respect to this Note, and then to the unpaid principal balance.
6. Default and Remedies.
a. Default. Graff will be in default under this Note if (i) Graff fails
to make a payment of principal, interest, or other charge when due or (ii) Graff
breaches any other covenant or agreement under this Note.
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b. Remedies. Upon a default as described in subparagraph 6.a (Default),
Chalone may (i) immediately accelerate the obligations under this Note and all
sums owing with respect to this Note will immediately become due and payable and
(ii) exercise any and all of the remedies provided in this Note.
7. Waivers. Graff, and any endorsers or guarantors of this Note, severally waive
presentment and notice of dishonor and agrees that Chalone may, without notice
and without releasing the liability of any of them, grant extensions or
renewals, add or release one or more parties, acquire additional security or
release any security. No extension of time for the payment of this Note, or any
installment of this Note, made by agreement by Chalone with any person, other
than Graff, now or hereafter liable for the payment of this Note, will affect
the original liability of Graff under this Note, even if that person is not a
party to such agreement. Chalone may waive its right to require performance of
or compliance with any term, covenant or condition of this Note only be express
written waiver.
8. Maximum Legal Rate of Interest. All agreements between Graff and Chalone
whether now existing or hereafter arising, are hereby limited so that in no
event will the interest charged under this Note or agreed to be paid to Chalone
exceed the maximum amount permissible under applicable law. If interest
otherwise payable to Chalone would exceed the maximum lawful amount, the
interest payable will be reduced to the maximum amount permitted under
applicable law. If Chalone ever received interest or anything deemed interest in
excess of the maximum lawful amount, an amount equal to the excessive interest
will be applied to the reduction of the principal, and if it exceeds the unpaid
balance of principal of this Note, the excess will be refunded to Graff. Chalone
will be entitled to amortize, prorate and spread throughout the full term of
this Note all interest paid or payable so that the interest paid does not exceed
the maximum amount permitted by law. This paragraph will control all agreements
between Graff and Chalone in connection with the indebtedness evidenced by this
Note.
9. Miscellaneous.
a. Costs. Graff will pay all costs, including, without limitation,
reasonable attorneys' fees, costs and expert fees incurred by Chalone in
collecting the sums due under this Note.
b. Modification. This Note may be modified only by a written agreement
executed by the person against whom the change, modification or waiver is to be
enforced.
c. Law. This Note will be governed by California law.
d. Successors. The terms of this Note will inure to the benefit of and
bind Graff and Chalone and their respective heirs, legal representations and
successors and assigns.
e. Time. Time is of the essence with respect to all matters set forth
in this Note.
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f. Destroyed Note. If this Note is destroyed, lost or stolen, Graff
will deliver a new Note to Chalone on the same terms and conditions as this Note
with a notation of the unpaid principal and accrued and unpaid interest in
substitution of the prior Note. Chalone will furnish to Graff reasonable
evidence that the Note was destroyed, lost or stolen and any security or
indemnity that may be reasonably required by Graff in connection with the
replacement of this Note.
In witness whereof, Graff has duly executed and delivered this Note to
Chalone as of the date and year first above written.
"GRAFF"
/s/ RICHARD H. GRAFF
-----------------------------------
RICHARD H. GRAFF
3
Secured Purchase Money Promissory Note
(Secured by Deed of Trust)
$942,503.00 Napa, California
July 1, 1996
For value received, The Chalone Wine Group, Ltd., a California corporation
("Chalone"), promises to pay to Richard H. Graff, Trustee, Graff 1993 Trust
Dated June 10, 1993, a trust ("Graff Trust"), the principal sum of Nine Hundred
Forty-Two Thousand Five Hundred Three Dollars ($942,503.00) plus interest
thereon at the rate set forth in Section 1 (Interest) from the date set forth
above until paid on or before June 30, 2016.
1. Interest. Interest on the unpaid principal balance of this Note will
accrue from the date of this Note until paid at the rate of seven and three
one-hundredths of a percent (7.03%) per annum ("Loan Rate"). Interest is to be
calculated on the basis of a 365-day year and the actual number of days elapsed.
Interest is to accrue and compound on an annual basis.
2. Payments. Commencing on July 31, 1996 and on the last day of each
month thereafter through and including June 30, 2016, this Note will be paid in
monthly installments of principal and interest per the attached Schedule 1
(Monthly Mortgage Payments).
3. Prepayment. This Note may be prepaid in whole or in part, at any
time, without penalty or premium, on any date that a payment of interest is due
hereunder, upon ten (10) days prior written notice to the Graff Trust.
4. Right of Setoff. Chalone will have a right of setoff with respect to
the obligation owed to it by Graff under the promissory note made by Graff to
Chalone as of the above date ("Graff Note"). If Graff fails to pay the amounts
due under the Graff Note when due, Chalone will have the right to set off its
obligations to pay the amounts due under this Note against the sums due from
Graff to Chalone under the Graff Note.
5. Default Interest. If Chalone fails to make a payment of interest or
principal on this Note within five (5) days after the date the payment was due,
interest will accrue on the entire loan balance at the rate of nine percent (9%)
per annum (the "Default Rate") commencing on the date the payment was due and
continuing until the delinquent payment is received by the Graff Trust.
6. Security. This Note is secured by a Deed of Trust dated as of the
same date as this Note between Chalone and the Graff Trust (the "Deed of
Trust"), encumbering the real property located in Monterey County, California
sometimes referred to as 101 Stonewall Canyon Road, Soledad, California (the
"Property"), which is the subject of the Purchase Agreement dated as of the same
date as this Note between Chalone and the Graff Trust.
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7. Application of Payments. All payments received by the Graff Trust in
payment of this Note will be applied first to accrued interest, then to other
charges due with respect to this Note, and then to the unpaid principal balance.
8. Default and Remedies.
a. Default. Chalone will be in default under this Note if (i)
Chalone fails to make a payment of principal, interest, or other charge when due
or (ii) Chalone breaches any other covenant or agreement under this Note.
b. Remedies. Upon a default as described in subparagraph 8.a
(Default), the Graff Trust may (i) immediately accelerate the obligations under
this Note and all sums owing with respect to this Note will immediately become
due and payable and (ii) exercise any and all of the remedies provided in this
Note.
9. Waivers. Except as otherwise provided in the Deed of Trust, Chalone,
and any endorsers or guarantors of this Note, severally waive presentment and
notice of dishonor and agrees that the Graff Trust may, without notice and
without releasing the liability of any of them, grant extensions or renewals,
add or release one or more parties, acquire additional security or release any
security. No extension of time for the payment of this Note, or any installment
of this Note, made by agreement by the Graff Trust with any person, other than
Chalone, now or hereafter liable for the payment of this Note, will affect the
original liability of Chalone under this Note, even if that person is not a
party to such agreement. The Graff Trust may waive its right to require
performance of or compliance with any term, covenant or condition of this Note
only by express written waiver.
10. Maximum Legal Rate of Interest. All agreements between the Graff
Trust and Chalone whether now existing or hereafter arising, are hereby limited
so that in no event will the interest charged under this Note or agreed to be
paid to the Graff Trust exceed the maximum amount permissible under applicable
law. If interest otherwise payable to the Graff Trust would exceed the maximum
lawful amount, the interest payable will be reduced to the maximum amount
permitted under applicable law. If the Graff Trust ever received interest or
anything deemed interest in excess of the maximum lawful amount, an amount equal
to the excessive interest will be applied to the reduction of the principal, and
if it exceeds the unpaid balance of principal of this Note, the excess will be
refunded to Chalone. The Graff Trust will be entitled to amortize, prorate and
spread throughout the full term of this Note all interest paid or payable so
that the interest paid does not exceed the maximum amount permitted by law. This
paragraph will control all agreements between the Graff Trust and Chalone in
connection with the indebtedness evidenced by this Note.
11. Miscellaneous.
a. Costs. Chalone will pay all costs, including, without
limitation, reasonable attorneys' fees, costs and expert fees incurred by the
Graff Trust in collecting the sums due under this Note, enforcing the Deed of
Trust or in connection with the release of any security for this Note.
2
<PAGE>
b. Modification. This Note may be modified only by a written
agreement executed by the person against whom the change, modification or waiver
is to be enforced.
c. Law. This Note will be governed by California law.
d. Successors. The terms of this Note will inure to the
benefit of and bind the Graff Trust and Chalone and their respective heirs,
legal representatives and successors and assigns.
e. Time. Time is of the essence with respect to all matters
set forth in this Note.
f. Destroyed Note. If this Note is destroyed, lost or stolen,
Chalone will deliver a new Note to the Graff Trust on the same terms and
conditions as this Note with a notation of the unpaid principal and accrued and
unpaid interest in substitution of the prior Note. The Graff Trust will furnish
to Chalone reasonable evidence that the Note was destroyed, lost or stolen and
any security or indemnity that may be reasonably required by Chalone in
connection with the replacement of this Note.
In witness whereof, Chalone has duly executed and delivered this Note
to the Graff Trust as of the date and year first above written.
"CHALONE"
THE CHALONE WINE GROUP, LTD.,
a California corporation
By: /s/ W. PHILIP WOODWARD
-----------------------------------
Its: President
-----------------------------------
3
RESIDENTIAL LEASE
This Residential Lease ("Lease") is entered into on July 1, 1996, by
and between The Chalone Wine Group, Ltd., a California corporation ("Chalone"),
and Richard H. Graff, an individual ("Graff").
Chalone hereby leases to Graff and Graff hereby leases from Chalone the
single-family house ("House") and surrounding acreage, which is more
particularly described in Exhibit A (together referred to as the "Leased
Premises"), subject to the following terms and conditions. Graff will have the
exclusive use of the Leased Premises, except for any use that Chalone deems is
necessary, in Chalone's sole discretion, for the operations of Chalone's
vineyard property. Graff hereby acknowledges that the legal rights created by
this Lease are personal to him and are and will remain his separate property.
1. Term. The term will commence as of July 1, 1996, and will continue
thereafter until the occurrence of one of the following: (i) Graff's termination
of the Lease by giving Chalone at least 60 days' advance written notice, (ii)
Graff's death, or (iii) the termination of the Lease under a provision contained
in the Lease. Rent will be due and payable up to and including the date of
termination.
2. Rent. The rent for the use and occupancy of the Leased Premises will
be $833.33 per month for the first five years of the Lease ("Initial Term"),
$1,000 per month for the subsequent five years of the Lease ("Intermediate
Term"), and $1,166.67 per month for the remaining term of the Lease ("Final
Term"). The rent will also include all costs of Ordinary Maintenance and Repairs
as provided in Section 6 (Condition of Leased Premises). The rent is payable in
advance on or before the first day of each month; provided that, the rent
payment will not be deemed overdue if payment is made by the 10th of the month.
Payments will commence on August 1, 1996, and will be sent to the address
specified in Section 15 (Notices) of this Lease. Rent for any partial month at
the beginning or end of the Lease term will be prorated based on the actual
number of days in the month.
3. Utilities. Chalone agrees to supply Graff with electricity and two
(2) telephone lines diverted from Chalone's electrical and telephone systems, so
long as Chalone is operating an electrical and telephone system on its property
within five miles of the House. Graff's usage on the Leased Premises of the
electrical and telephone systems will be separately metered and billed. Graff
agrees to pay all charges for all utilities relating to the Leased Premises,
including, without limitation, electricity, gas, water, garbage, and telephone
charges. Graff will make all payments for these charges directly to the utility
companies or to Chalone, to the extent that Chalone will be providing the
services.
4. Use of Leased Premises. Graff agrees that the Leased Premises are to
be used exclusively as a single-family residence, except as otherwise requested
by Chalone pursuant to Section 5 (Chalone's Use of Leased Premises). In Graff's
use of the Leased Premises, Graff will have access to and the use of the roads
located on the property contiguous to the Leased Premises
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acquired by Chalone pursuant to a Purchase Agreement entered into between Graff
and Chalone as of July 1, 1996. Graff will not: (i) do or permit anything to be
done in or about the Leased Premises that will injure, annoy or interfere with
the rights of the neighbors, (ii) use or allow the Leased Premises to be used
for any improper, unlawful, or objectionable purpose, (iii) cause, maintain, or
permit any nuisance in, on, or about the Leased Premises, (iv) commit any waste
in or on the Leased Premises, (v) do or permit anything to be done that may
increase the existing rate of or affect any fire or other insurance on the House
or any of its contents, or cause a cancellation of any insurance policy covering
the House or any part of it or any of its contents, or (vi) violate any local
zoning ordinances or any other law applicable to the Leased Premises.
5. Chalone's Use of Leased Premises. Upon three (3) months prior
written notice by Chalone to Graff and Graff's concurrence, Graff will
entertain, or permit Chalone to entertain, Chalone's management and its guests
and host, at Chalone's expense, a business event, on the Leased Premises not to
exceed three (3) separate events per year. Upon Chalone's request, Graff's
entertainment of Chalone's guests may include overnight stays of such guests at
the House.
6. Condition of Leased Premises, Maintenance and Repairs. Graff
acknowledges that he has inspected the Leased Premises, including all equipment
and personal property subject to this Lease, and agrees that they are in
satisfactory condition and good working order.
As partial consideration for the rights granted Graff under
this Lease, Graff will be responsible, at his sole cost and expense, for all
"Ordinary Maintenance and Repairs" (as defined below) with respect to the Leased
Premises and will surrender the Leased Premises at termination of this Lease in
as good condition as received, normal wear and tear excepted. For the purpose of
this Lease, the term "Ordinary Maintenance and Repairs" means: (i) maintaining
and repairing the Leased Premises, including all fixtures, equipment,
appliances, furniture and furnishings in the Leased Premises, (ii) keeping the
Leased Premises in a clean and sanitary manner and in good working order at all
times, and (iii) if something cannot be repaired in accordance with this
section, replacing the damaged item. Graff's responsibility for Ordinary
Maintenance and Repairs includes, but is not limited to, all landscaping and the
painting of the exterior trim of the House every seven (7) years; provided,
however, that Graff will not paint the trim of the House a color other than the
existing color without the prior written consent of Chalone. Graff's
responsibility for Ordinary Maintenance and Repairs of the Leased Premises does
not include any repairs related to the structural integrity or the roof of the
House and any repairs the cost of which is covered by Chalone's insurance;
provided, however, that Graff will give Chalone prompt notice of any defect or
breakage in the structure that is part of the Leased Premises.
7. Alterations.
(a) Graff will pay for any improvements or alterations
(collectively, "Alterations") to the Leased Premises desired by Graff and
allowed pursuant to subsection (b) of this Section 7 (Alterations). Graff will
pay the invoices for such Alterations directly to the applicable vendors,
contractors and other third party providers within thirty (30) days of Graff's
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receipt of invoices showing the costs actually incurred for the purpose of any
Alteration. Chalone will not, under any circumstances, be obligated to pay for
any Alterations or repairs.
BY PLACING HIS INITIALS BELOW, GRAFF ACKNOWLEDGES THAT, UNDER
SECTION 2 (RENT) AND SECTION 6 (CONDITION OF PREMISES), AS CONSIDERATION FOR HIS
RIGHTS OF POSSESSION OF THE LEASED PREMISES UNDER THIS LEASE, GRAFF WILL BE
SOLELY RESPONSIBLE FOR ALL REPAIRS REQUIRED TO MAINTAIN THE CONDITION OF THE
LEASED PREMISES INCLUDING LANDSCAPING. GRAFF FURTHER ACKNOWLEDGES AND AGREES
THAT CHALONE ONLY HAS AN OBLIGATION FOR ANY AND ALL EXPENDITURES RELATING TO THE
STRUCTURAL INTEGRITY AND THE ROOF OF THE LEASED PREMISES.
GRAFF: /s/ RHG
(b) Graff will make no Alterations to the Leased Premises,
except for any furniture and other decorative materials that will not be affixed
to the House, without the prior written consent of Chalone, which consent may be
withheld in Chalone's sole discretion. Before making any Alterations which
involve changes to the structure of the Leased Premises or which are otherwise
significant alterations, Graff will submit to Chalone reasonably detailed final
plans and specifications prepared by a licensed architect or engineer. Any such
Alteration made to the Leased Premises by Graff after Chalone's consent has been
given, and any fixtures installed as a part of that work, will at Chalone's
option become Chalone's property on the expiration or earlier termination of
this Lease. Chalone will have the right to require that Graff remove any such
Alteration or fixture at Graff's sole cost and expense on termination of this
Lease as long as Chalone has given notice of the required removal at the time
Chalone gives consent to the Alternation.
(c) It is hereby acknowledged that Graff is providing, at his
sole expense and as his personal property, a washer and dryer, free-standing
stove, refrigerator, freezer and microwave oven, and that said personal property
will not become part of the Leased Premises; provided, however, that such
personal property will become part of the Leased Premises if the Lease is
terminated by Graff's death.
8. Liens. Graff will at all times keep the Leased Premises free and
clear of all liens arising out of any work performed, materials furnished or
obligations incurred by Graff. Graff's violation of his obligations under this
section will constitute an Event of Default, as defined in Section 14 (Default
by Graff).
9. Damage to Leased Premises. If at any time all or any part of the
Leased Premises is completely or partially destroyed by fire, earthquake, flood
or other unavoidable casualty or otherwise becomes unsuitable for occupancy,
then Chalone will be required to rebuild the Leased Premises, and Chalone shall
bear the cost, not to exceed the applicable rent, of alternative living quarters
for Graff, and Graff shall not be liable for rent prior to the time the repairs
are completed.
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10. Insurance. During the term of this Lease, Chalone shall maintain
insurance policies with respect to the Leased Premises with Chalone as the named
beneficiary. Chalone will not maintain any insurance covering any personal
property in the Leased Premises, including personal property of Graff. Graff
may, at his option, maintain insurance policies with respect to the personal
property on the Leased Premises, including Graff's personal property, with Graff
as the named beneficiary. Graff will have the sole responsibility of replacing
or repairing all personal property in the Leased Premises which is damaged or
destroyed.
11. Entry by Chalone. Chalone may enter the Leased Premises only under
the following circumstances:
(a) pursuant to Section 5 (Chalone's Use of Leased Premises);
(b) in case of emergency;
(c) to inspect, or exhibit the Leased Premises to prospective
or actual purchasers, mortgagees, tenants, workers, or contractors;
(d) if Graff abandons or surrenders the Leased Premises;
(e) if Chalone reasonably believes Graff has not met his
repair obligations under Section 6 (Condition of Leased Premises);
(f) pursuant to court order.
Chalone will give Graff at least three (3) months' notice when Chalone requests
that Graff entertain Chalone's guests and host an event on the Leased Premises.
Under the other circumstances, Chalone will give Graff at least 24 hours' notice
of Chalone's intent to enter unless (i) an emergency exists, (ii) Graff has
abandoned or surrendered the Leased Premises, or (iii) it is impracticable to do
so. Further, Chalone will enter only during normal business hours unless (i)
Chalone has requested that Graff entertain or permit Chalone to entertain
Chalone's management and guests as overnight guests at the House pursuant to
Section 5 (Chalone's Use of Leased Premises), (ii) an emergency exists, (iii)
Graff has abandoned or surrendered the Leased Premises, or (iv) Graff consents.
12. Assignment and Subletting. Graff may not assign or otherwise
transfer this Lease or sublet all or any portion of the Leased Premises at any
time to any person or entity for any purpose or for any reason. Any such
transfer will terminate this Lease.
13. Chalone's Liability. In the event Chalone conveys the Leased
Premises to an unrelated third party, Chalone will be relieved of all liability
with respect to Chalone's obligations to be performed under this Lease after the
date of such conveyance. Notwithstanding any other term or provision of this
Lease, the liability of Chalone for its obligations under this Lease is limited
solely to Chalone's interest in the Leased Premises as the same may from time to
time be encumbered, and no personal liability will at any time be asserted or
enforceable against any other assets of Chalone or against Chalone's directors,
officers, managers or shareholders on
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account of any of Chalone's obligations or actions under this Lease. In no event
will Chalone be liable to Graff for any punitive or consequential damages.
14. Default by Graff. The occurrence of any of the following will
constitute an "Event of Default" by Graff: (i) Graff fails to make any payment
of rent when due, if payment in full is not received by Chalone within thirty
(30) days after written notice that it is due, (ii) Graff fails to occupy the
Leased Premises for a period of six (6) continuous months, (iii) Graff violates
the restrictions on liens set forth in Section 8 (Liens), (iv) the restrictions
on transfer set forth in Section 12 (Assignment and Subletting) are violated,
(v) Graff fails to perform or comply with any provision of this Lease other than
those described in (i) through (iv) above, and does not fully cure such failure
within thirty (30) days after notice to Graff or, if such failure cannot be
cured within such thirty (30) day period, Graff fails within such thirty (30)
day period to commence, and thereafter diligently proceed with, all actions
necessary to cure such failure as soon as reasonably possible but in all events
within ninety (90) days of such notice.
Upon the occurrence of an Event of Default, Chalone will have the
following remedies, which will not be exclusive but will be cumulative and will
be in addition to any other remedies now or hereafter allowed by law:
(a) Chalone may unilaterally convert the term of this Lease to
a periodic month to month tenancy by written notice to Graff.
(b) Chalone may terminate Graff's right to possession of the
Leased Premises by written notice to Graff. Upon termination in writing of
Graff's right to possession of the Leased Premises, as provided in this Lease,
this Lease will terminate and Chalone will be entitled to recover damages from
Graff as provided in California Civil Code Section 1951.2 and any other
applicable existing or future law providing for recovery of damages for such
breach.
15. Notices. Except as otherwise expressly provided by law, any and all
notices or other communications required or permitted by this Lease or by law
must be in writing and will be effective (i) immediately upon delivery in
person, or (ii) 24 hours after deposit with a commercial courier or delivery
service for overnight delivery, or (iii) five (5) days after deposit with the
United States Postal Service, certified mail, return receipt required, postage
prepaid. All notices must be properly addressed and delivered to the parties at
the addresses set forth below, or at such other addresses as either party may
subsequently designate by written notice given in the manner provided in this
Section:
Chalone: The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558
Attn.: W. Philip Woodward
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Graff: Richard H. Graff
c/o The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558
16. Waiver. The waiver by Chalone of any breach by Graff of any of the
provisions of this Lease will not constitute a continuing waiver or a waiver of
any subsequent breach by Graff either of the same or of another provision of
this Lease. Chalone's acceptance of rent following a breach by Graff of any
provision of this Lease, with or without Chalone's knowledge of the breach, will
not be deemed to be a waiver of Chalone's right to enforce any provision of this
Lease.
17. Attorneys' Fees. In the event of any breach of this Agreement that
results in arbitration or litigation between the parties, the prevailing party
shall be entitled to its reasonable attorney's fees, expert witness fees and
costs of suit. The prevailing party shall be determined by the court or
arbitrator, as applicable, based upon an assessment of which party's major
arguments or positions taken in the proceedings could fairly be said to have
prevailed over the other party's major arguments or positions on major disputed
issues in the court's or arbitrator's decision.
18. Sale, Condemnation, Eminent Domain. Chalone will have the right to
sell the Leased Premises at anytime in its sole discretion under the following
conditions: (i) if the Leased Premises are to be sold (under which
circumstances, this Lease shall survive), Chalone will give Graff at least three
(3) months' advance written notice of the sale, or (ii) if the Leased Premises
are condemned or sold under threat of condemnation at any time, then the term of
this Lease will be limited to the date of such sale or taking and all of Graff's
rights in this Lease will end without any payment, allowance, damages or award
to Graff, except Graff will be entitled to any portion of the award made for the
value of the leasehold interest created by this Lease and moving and relocation
expenses. Graff will permit Chalone to post a "For Sale" sign and to show the
Leased Premises at reasonable hours to prospective purchasers.
19. Exculpation and Indemnification. Except for acts or omissions
arising out of Chalone's permitted entries pursuant to Section 11 (Entry by
Chalone), Chalone will not be liable for any damage or injury to Graff or any
person or to any property occurring on any part of the Leased Premises from any
cause, including, but not limited to: (i) defects in the Leased Premises or in
any equipment on the Leased Premises, (ii) fire, explosion, earthquake or other
casualty occurring on the Leased Premises, (iii) bursting, rupture, leakage or
overflow of any plumbing or other pipes or lines, sprinklers, tanks, drains or
washstands in, above, or about the Leased Premises, or (iv) acts of others in,
above, about or affecting the Leased Premises. Graff hereby waives all claims
against Chalone for any such damage and the cost and expense of defending
against claims relating to such damage, unless such damage is the proximate
result of the negligence or unlawful act of Chalone, its agents, or its
employees ("Claims"). Graff hereby agrees to indemnify, defend, and hold Chalone
harmless from any such Claims, no matter how caused, except for injury or
damages caused by willful act or negligence of Chalone, its agents or employees.
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20. Time of Essence. Time is expressly declared to be of the essence in
this Lease.
21. Sole and Only Agreement. This instrument constitutes the sole and
only agreement between Chalone and Graff respecting the Leased Premises and the
Lease term created under this Lease, and correctly sets forth the obligations of
Chalone and Graff to each other as of this date. Any agreements or
representations respecting the Leased Premises not expressly set forth in this
instrument are null and void.
22. Legal Fees; Brokers. Chalone and Graff agree that they will each
pay their own legal fees attributable to the drafting and negotiation of this
Lease. Neither party has had any contact or dealings regarding the Lease through
any licensed real estate broker or other persons who can claim a right to a
commission or finder's fee in connection with this Lease. In the event that any
other party claims a commission or finder's fee in this Lease, the party through
whom the party makes his claim will be responsible for the commission or fee and
will indemnify the other against all costs and expenses (including reasonable
attorneys' fees) incurred in defending against the same.
In witness whereof, Chalone and Graff have entered into this Lease as
of the date first above written.
CHALONE
The Chalone Wine Group, Ltd.,
a California corporation
By: /s/ W. PHILIP WOODWARD
-----------------------------------------
Its: President
-----------------------------------------
GRAFF
/s/ RICHARD H. GRAFF
-----------------------------------------
Richard H. Graff
NOTE: GRAFF MUST INITIAL THE LEASE IN SECTION 7.
CONSULTING AND NON-COMPETITION AGREEMENT
This Consulting and Non-Competition Agreement ("Agreement"), dated as
of July 1, 1996, is made between The Chalone Wine Group, Ltd., a California
corporation ("Chalone") and Richard H. Graff, an individual ("Graff").
BACKGROUND
Chalone is engaged in the business of growing grapes and producing wine
in California and the marketing and distribution of such wine throughout the
United States. Graff is experienced in the California wine industry.
Graff is a founding shareholder of Chalone and has significant
expertise and experience in the California wine industry. Chalone desires to
engage Graff to assist Chalone on an as needed part-time basis with wine
marketing and shareholder relations. During the term of this Agreement, Graff
has agreed not to compete with Chalone's business.
Now, therefore, in consideration of the foregoing Background and the
mutual agreements of the parties contained herein, Chalone hereby engages Graff,
and Graff hereby accepts an engagement with Chalone on the following terms:
1. Term. Chalone engages Graff, and Graff accepts an engagement with
Chalone for the period commencing July 1, 1996 and continuing through Graff's
lifetime, unless Graff's engagement is sooner terminated in accordance with this
Agreement. The obligations of Chalone and Graff set forth in Paragraph 7
(Confidentiality) and Paragraph 9 (Termination) will survive the termination of
Graff's engagement.
2. Duties. Graff will perform those marketing duties for Chalone,
consistent with his training and experience, as Chalone from time to time
directs (the "Work"). Chalone will endeavor to give Graff not less than two (2)
weeks notice before any assignment, and the time required of Graff will not
exceed two (2) days per month. Graff agrees that to the best of his ability and
experience he will at all times conscientiously perform all of the duties and
obligations required of him either expressly or implicitly under the terms of
this Agreement.
3. Compensation. Graff will receive Ten Thousand Dollars ($10,000) per
year over the first five (5) years of this Agreement ("Initial Term"). Graff
will receive Twelve Thousand Dollars ($12,000) per year over the subsequent five
(5) years of this Agreement ("Intermediate Term"). Graff will receive Fourteen
Thousand Dollars ($14,000) per year over the remaining term of this Agreement
("Final Term"). Graff will be paid on a quarterly basis on the last day of each
July, October, January, and April.
4. Employee Benefits. Graff will not be entitled to receive from
Chalone insurance, vacation and other benefits.
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5. Reimbursement of Business Expenses. Chalone will, in accordance with
Chalone's policy in effect from time to time, reimburse Graff for all reasonable
business expenses incurred by Graff in connection with the performance of his
duties under this Agreement, provided that they have been preapproved in writing
by Chalone.
6. Supply of Wine. Chalone shall reserve one barrel of wine made from
each grape variety grown on the vineyard located at 101 Stonewall Canyon Road,
Soledad, California ("Vineyard"), for Graff's personal use and not for resale.
Such wine shall include the Mourvedre Vin Gris so long as such grape variety is
grown on the Vineyard. In the case of any variety that Chalone intends to blend
with other wine, such barrel shall be bottled separately for Graff, and Graff
shall pay Chalone $12.00 per case, or as mutually agreed to by both Chalone and
Graff if such costs are higher, to cover Chalone's incidental bottling costs,
and Graff shall be responsible for providing the necessary labels at his own
expense. In the case of any variety that Chalone intends to bottle as a
separate, unblended lot, Graff shall be entitled to have twenty (20) cases
labeled for his personal use, and not for resale, except for the July Muscat and
the Viogner, of which Graff shall be entitled to five (5) cases each, and, as
above, Graff shall pay $12.00 per case, or as mutually agreed to by both Chalone
and Graff if such costs are higher, to cover Chalone's incidental bottling
costs, and Graff shall be responsible for providing the necessary labels.
Chalone agrees that it will bottle such wine for Graff under the Richard Graff
Vineyard label or under such other label as shall be mutually agreed to by Graff
and Chalone.
7. Confidentiality. Graff recognizes and acknowledges that Chalone' s
trade secrets and proprietary information and processes (including information
and materials received in confidence by Chalone from third parties), as they may
exist from time to time, are valuable, special and unique assets of Chalone's
business, access to and knowledge of which are essential to the performance of
Graff's duties hereunder. Graff will not, during or after the term of his
engagement with Chalone, in whole or in part, disclose such secrets, information
or processes to any person, firm, corporation, association or other entity for
any reason or purpose whatsoever, nor shall Graff make use of any such
information or property for his own purposes or for the benefit of any other
person under any circumstances during or after the term of his engagement. After
the term of his engagement these restrictions shall not apply to such secrets,
information and processes which are then in the public domain provided that
Graff was not responsible, directly or indirectly, for such secrets, information
or processes entering the public domain without Chalone's consent.
Graff acknowledges that all customer and client lists, files, records,
documents equipment or similar items relating to Chalone, whether prepared by
Graff or others, are and remain exclusively the property of Chalone and that all
such items will be returned to Chalone upon the termination of this Agreement.
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8. Agreement Not to Compete.
(a) Non-compete. During the term of this Agreement, Graff will
not without the prior written consent of Chalone, which may be withheld in its
sole discretion, directly or indirectly, individually or as an employee,
partner, officer, director or shareholder or in any other capacity whatsoever of
or for any person, firm, partnership or corporation, own, manage, operate, sell,
control or participate in the ownership, management, operation, sales or control
of, or be connected in any manner with, any business engaged in the growing of
grapes and the production, marketing, or sales of California or Washington wine
(the "Chalone Business").
This Agreement includes within its scope any business
or activity in the cities and counties of California, and any other states of
the United States, the District of Columbia and such foreign jurisdictions in
which Chalone has engaged in sales or otherwise conducted business or selling at
any time during the two years prior to the date hereof or during the term of
this Agreement. Graff acknowledges that the period of restrictions and the
geographical area to which the restrictions imposed in this Paragraph 8(a)
(Non-Compete) will apply are fair and reasonable and are reasonably required for
the protection of Chalone and that the definition of the Chalone Business used
herein accurately describes the business to which the restrictions are intended
to apply. Chalone acknowledges that Graff's sale of the Richard Graff Vineyard
wines that Graff has in his inventory as of the effective date of this Agreement
will not be construed as competition with the Chalone Business.
(b) Remedies. Graff acknowledges that any breach of the
covenants of this Paragraph 8(a) (Non-Compete) will result in immediate and
irreparable injury to Chalone and, accordingly, consents to the application of
injunctive relief and such other equitable remedies for the benefit of Chalone
as may be appropriate in the event such a breach occurs or is threatened. The
foregoing remedies shall be in addition to all other legal remedies to which
Chalone may be entitled hereunder, including, without limitation, monetary
damages.
9. Termination.
(a) For Cause. Chalone may terminate Graff's consulting
agreement at any time with "cause" effective immediately upon written notice to
Graff without prejudice to any other remedy which Chalone may be entitled under
law, in equity, or under this Agreement. As used in this Agreement, "cause" will
mean an intentional tort or material act of fraud or dishonesty against Chalone,
the commission of a felony involving dishonesty, moral turpitude or intentional
injury to a third party, the deliberate disregard of Chalone's policies in such
a manner as to cause material loss, damage or injury to the property, reputation
or employees of Chalone or any other material breach of this Agreement including
without limitation a breach of Paragraph 7 (Confidentiality) or Paragraph 8
(Agreement Not to Compete). Graff will receive compensation under Paragraph 3
(Compensation) until the date of termination. All other compensation from and
after the date of termination will cease, and Chalone will have no obligation to
pay any severance pay whatsoever. Graff will have no further obligations under
this Agreement except as set forth in Paragraph 7 (Confidentiality) and this
Paragraph 9 (Termination).
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(b) Voluntary Termination. In the event Graff terminates his engagement
of his own volition, prior to the termination date of this Agreement under
Paragraph 1, Graff will be subject to the same obligations as provided in
connection with a termination for "cause" under Paragraph 9(a).
10. Miscellaneous.
(a) Notices. Any and all notices permitted or required under
this Agreement must be in writing. Notices will be deemed given (i) when
delivered personally, (ii) one business day after having been sent by commercial
overnight courier with written verification of receipt, or (iii) five (5) days
after having been sent by registered or certified mail from a location on the
United States mainland, return receipt requested, postage prepaid or upon actual
receipt thereof, whichever first occurs at the addresses set forth below:
If to Chalone: The Chalone Wine Group, Ltd.
621 Airpark Road
Napa, California 94558
Phone: (707) 254-4200
Fax: (707) 254-4201
Attn.: W. Philip Woodward
If to Graff: Richard H. Graff
c/o Chalone Wine Group, Ltd.
621 Airpark Road
Napa, California 94558
Phone: (707) 254-4200
Fax: (707) 254-4201
(b) Amendments. This Agreement may not be changed or modified
in whole or in part except in writing signed by the party against whom
enforcement of the change or modification is sought.
(c) Successors and Assigns. This Agreement will not be
assignable by either Graff or Chalone, except that the rights and obligations of
Chalone under this Agreement will be assigned to and assumed by any corporation
which becomes the successor to Chalone as the result of the sale of
substantially all of the assets of, a merger or other corporate reorganization
and which continues the business of Chalone.
(d) Governing Law. This Agreement will be governed by and
interpreted according to the laws of the State of California without regard to
such state's conflicts law.
(e) No Waiver. The failure of either party to insist on strict
compliance with any of the terms of this
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Agreement will not be deemed to be a waiver of any term of this Agreement or of
that party's right to require strict compliance with the terms of this Agreement
in any other instance.
(f) Severability. If for any reason a court of competent
jurisdiction finds any provision of this Agreement, or the application thereof,
to be unenforceable, the remaining provisions of this Agreement will be
interpreted so as best to reasonably effect the intent of the parties. The
parties further agree to replace any such invalid or unenforceable provisions
with valid and enforceable provisions designed to achieve, to the extent
possible, the business purposes and intent of such unenforceable provisions.
(g) Attorney's Fees. In the event of any breach of this
Agreement that results in arbitration or litigation between the parties, the
prevailing party shall be entitled to its reasonable attorney's fees, expert
witness fees and costs of suit. The prevailing party shall be determined by the
court or arbitrator, as applicable, based upon an assessment of which party's
major arguments or positions taken in the proceedings could fairly be said to
have prevailed over the other party's major arguments or positions on major
disputed issues in the court's or arbitrator's decision.
(h) Counterparts. This Agreement may be executed in
counterparts. Any copy of this Agreement with the original signatures of all
parties appended shall constitute an original.
In Witness Whereof, this Agreement is made and effective as of the day
and year first above written.
GRAFF:
/s/ RICHARD H. GRAFF
---------------------------------------
RICHARD H. GRAFF
Chalone:
THE CHALONE WINE GROUP, LTD.,
a California corporation
By: /s/ W. PHILIP WOODWARD
---------------------------------------
Its: President
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of August 15, 1996, by and between
CANOE RIDGE VINEYARD, L.L.C., a Washington limited liability company
("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described
below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. 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 One Million Five Hundred Thousand Dollars ($1,500,000.00)
("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 a promissory note substantially in the form of
Exhibit A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) Limitation on Borrowings. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of (i) eighty percent (80%) of Borrower's eligible
assigned accounts receivable; plus (ii) fifty-five percent (55%) of the value of
Borrower's bulk wine inventory; with value of bulk wine determined in accordance
with Bank's crush report for California Coastal Region; plus (iii) fifty percent
(50%) of the average FOB price of domestic bottled wine (but not to exceed
$50.00 per case); plus (iv) fifty percent (50)%) of the lower of cost or market
value of imported wine; less (v) amounts due growers; 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
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documents, as Bank may require. Borrower acknowledges that said borrowing base
was established by Bank with the understanding that, among other items, the
aggregate of all returns, rebates, discounts, credits and allowances for the
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 the foregoing advance rate
against eligible accounts receivable 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 created in the ordinary course of Borrower's business, upon which
Borrower's right to receive payment is absolute and not contingent upon the
fulfillment of any condition whatsoever, and in which Bank has a perfected
security interest of first priority, and shall not include:
(i) any account which is past due more than twice Borrower's
standard selling terms;
(ii) that portion of 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
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, member, 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;
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(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, other
than Chalone Wine Group, Ltd., which represents the amount by which
Borrower's total accounts from said account debtor except for Pasternak
Wine Imports during the months of May through December exceeds
twenty-five percent (25%) of Borrower's total accounts, and during the
month of May through December (inclusive) that portion of the account
from Pasternak Wine Imports which represents the amount by which
Borrower's total accounts from Pasternak Wine Imports exceeds fifty
percent (50%) of Borrower's total accounts ;
(ix) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition of the
account debtor, or the industry in which the account debtor is engaged,
to be unsatisfactory.
(c) 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 of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
SECTION 1.2. TERM COMMITMENT.
(a) Term Commitment. 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 the aggregate principal amount of
Six Hundred Thousand Dollars ($600,000.00) ("Term Commitment"), the proceeds of
which shall be used to finance Borrower's purchase of equipment, and which shall
be converted on July 1, 1997, to a term loan, as described more fully below.
Borrower's obligation to repay advances under the Term Commitment shall be
evidenced by a promissory note substantially in the form of Exhibit B attached
hereto ("Term Commitment Note"), all terms of which are incorporated herein by
this reference.
(b) Limitation on Borrowings. Notwithstanding any other provision of
this Agreement, the principal amount of each borrowing under the Term Commitment
shall not exceed a maximum of seventy-five percent (75%) of the appraisal
liquidation appraisal
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<PAGE>
value of used equipment, as evidenced by appraisal satisfactoy to Bank, and
eighty percent (80%) of cost of new equipment, as evidence by seller's invoice.
(c) Borrowing and Repayment. Borrower may from time to time during the
period in which Bank will make advances under the Term Commitment borrow and
partially or wholly repay its outstanding borrowings, provided that amounts
repaid may not be reborrowed, subject to all the limitations, terms and
conditions contained herein; provided however, that the total outstanding
borrowings under the Term Commitment shall not exceed the maximum principal
amount available thereunder, as set forth above. The principal amount of the
Term Commitment shall be repaid in accordance with the provisions of the Term
Commitment Note.
(d) Prepayment. Borrower may prepay principal on the Term Commitment
solely in accordance with the provisions of the Term Commitment Note.
SECTION 1.3. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit
and Term Commitment shall bear interest at the respective rates of interest set
forth in the Line of Credit Note and Term Commitment Note, (collectively, the
"Notes").
(b) Computation and Payment. Interest shall be computed on the basis of
a 360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Notes.
(c) Commitment Fee. Borrower shall pay to Bank a non-refundable
commitment fee for the Term Commitment equal to $3,000.00, which fee shall be
due and payable in full on upon execution of this agreement.
(d) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one-quarter 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.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees due under each Credit by charging
Borrower's demand deposit account number ___________ with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
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SECTION 1.5. COLLATERAL. As security for all indebtedness of Borrower
to Bank subject hereto, Borrower hereby grants to Bank security interests of
first priority in all Borrower's accounts receivable and other rights to
payment, general intangibles (including the tradenames), inventory and
equipment. All of the foregoing shall be evidenced by and subject to the terms
of such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. 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.
SECTION 1.6. GUARANTIES. All indebtedness of Borrower to Bank shall be
guaranteed by The Chalone Wine Group, Ltd. in the principal amount of Two
Million Eight Hundred Thousand Dollars ($2,800,000.00), as evidenced by and
subject to the terms of guaranty in form and substance satisfactory to Bank.
SECTION 1.7. SUBORDINATION OF DEBT. All obligations of Borrower to The
Chalone Wine Group, Ltd. shall be subordinated in right of repayment to all
obligations of Borrower to Bank, as evidenced by and subject to the terms of
subordination agreements in form and substance satisfactory to Bank.
ARTICLE II
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 discharge, of all obligations of Borrower to Bank
subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a limited liability company,
duly organized and existing and in good standing under the laws of the state of
Washington, 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.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument
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required hereby or at any time hereafter delivered to Bank in connection
herewith (collectively, 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.
SECTION 2.3. 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 the Articles of Organization or
Operating Agreement of Borrower, or result in any breach of or default under any
contract, obligation, indenture or other instrument to which Borrower is a party
or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated December 31, 1995, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) 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 (c) 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, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7. 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.
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SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("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.
SECTION 2.10. 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.
SECTION 2.11. 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 federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. 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 2.12. LIMITED LIABILITY COMPANY. To the best of Borrower's
knowledge, after reasonable investigation, Borrower qualifies for tax treatment
as if it were a partnership for federal and state income tax purposes, and
Borrower has no knowledge of any pending action, claim, investigation, suit or
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proceeding by or before any governmental authority, arbitrator, court or
administrative agency challenging or denying such qualification.
ARTICLE III
CONDITIONS
SECTION 3.1. 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 Bank's counsel.
(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) Limited Liability Company Borrowing Certificate.
(iii) Articles of Organization and the LLC's Operating
Agreement.
(iv) Security Agreement: Equipment.
(v) Continuing Security Agreement: Rights to Payment and
Inventory.
(vi) UCC Financing Statement.
(vii) Subordination Agreement.
(viii) Resolution Authorizing Execution of Subordination
Agreement.
(ix) Trade Mark agreement.
(x) Such other documents as Bank may require under any other Section of
this Agreement.
(c) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any guarantor hereunder, 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 or any such guarantor.
(d) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank.
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SECTION 3.2. 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 and
in each of the other Loan Documents 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.
(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, 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, unless Bank otherwise consents in
writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein, and immediately upon demand by Bank,
the amount by which the outstanding principal balance of any of the Credits at
any time exceeds any limitation on borrowings applicable thereto.
SECTION 4.2. 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.
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SECTION 4.3. 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 financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, income statement,
statement of cash flows and all footnotes;
(b) not later than 45 days after and as of the end of each fiscal
quarter, a financial statement of Borrower, prepared by Borrower, signed by
either Chief Financial Officer or Controller to include a balance sheet, income
statement and statement of cash flow;
(c) not later than 120 days after and as of the end of each fiscal
year, an audited financial statement of The Chalone Wine Group, Ltd., prepared
by a certified public accountant acceptable to Bank, to include a balance sheet,
income statement, statement of cash flows and all footnotes;
(d) not later than 45 days and as of the end of each fiscal quarter, an
inventory listing report by winery.
(e) not later than 30 days after and as of the end of each month, an
aged listing of accounts receivable and accounts payable, and a reconciliation
of accounts (Bank form CMS-505) together with an inventory designation
statement;
(f) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; 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 and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance 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.
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SECTION 4.6. FACILITIES. Keep all 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 such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower with a claim in excess of
$500,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles consistently
applied and used consistently with prior practices (except to the extent
modified by the definitions herein):
(a) Tangible Net Worth not at any time less than $1,300,000.00, with
"Tangible Net Worth" defined as the aggregate of total members' equity plus
subordinated debt less any intangible assets.
(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than 2.0 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" as defined above.
(c) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end.
(d) EBITDA Coverage Ratio not less than 1.50 to 1.0 from December 31,
1996 through December 31, 1997; 1.75 to 1.0 from January 1, 1998 through
December 31, 1998; and 2.0 to 1.0 at all times thereafter, determined as of each
fiscal year end, with "EBITDA" defined as net profit before tax plus interest
expense (net of capitalized interest expense), depreciation expense and
amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided
by the aggregate of total interest expense plus the prior period current
maturity of long-term debt and the prior period current maturity of subordinated
debt.
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SECTION 4.10. 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 passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower, or any action, claim, investigation,
suit or proceeding pending or asserted by or before any governmental authority,
arbitrator, court or administrative agency challenging or denying Borrower's
qualification for tax treatment as if it were a partnership for income tax
purposes; (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 V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, 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 Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the
Credits except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $200,000.00
commencing January 1, 1997 and at all times thereafter.
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
(b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof, and (c)a real estate loan not to exceed $800,000.00
in principal secured by Borrower's vineyard.
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SECTION 5.4. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except any of the foregoing existing
as of, and disclosed to Bank prior to, the date hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(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, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading 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 or in any other Loan
Document (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 any guarantor
hereunder has incurred any debt or other liability to any person or entity,
including Bank.
(e) The filing of a notice of judgment lien against Borrower or any
guarantor hereunder; or the recording of any abstract of judgment against
Borrower or any guarantor hereunder in any county in which Borrower or such
guarantor has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower or any guarantor hereunder; or the entry of a judgment
against Borrower or any guarantor hereunder.
(f) Borrower or any guarantor hereunder 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 or any guarantor hereunder
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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 Reform Act, Title 11 of the United States Code, as amended
or recodified from time to time ("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 any guarantor
hereunder, or Borrower or any such guarantor shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or
an order for relief shall be entered against Borrower or any such guarantor 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.
(g) 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.
(h) The dissolution or liquidation of Borrower or any guarantor
hereunder; or Borrower or any such guarantor, or any of its directors,
stockholders or members, shall take action seeking to effect the dissolution or
liquidation of Borrower or such guarantor.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the members' equity in
Borrower.
(j) Borrower's right to use the "Canoe Ridge Vineyard, L.L.C."
tradename shall be lost or impaired for any reason.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each 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 each Borrower;
(b) the obligation, if any, of Bank to extend any further credit under any of
the Loan Documents 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 may
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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.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. 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.
SECTION 7.2. 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: CANOE RIDGE VINEYARD
621 Airpark Road
Napa, CA 94558-6272
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
East Bay RCBO #2677
One Kaiser plaza
Oakland, CA 94612
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 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.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents, Bank's continued administration hereof
and thereof,
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and the preparation of any 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, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any of
the foregoing incurred in connection with any bankruptcy proceeding (including
without limitation, any adversary proceeding, contested matter or motion brought
by Bank or any other person) relating to any Borrower or any other person or
entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon 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 Bank's prior
written consent. 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
acquire relating to any of the Credits, Borrower or its business, [any guarantor
hereunder or the business of such guarantor,] or any collateral required
hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
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 in writing signed by each party
hereto.
SECTION 7.6. 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.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. 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
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remainder of such provision or any remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank
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of the protections afforded to it under 12 U.S.C. ss.91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions
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of law are not erroneous under the substantive law of the state of California,
and (iii) the parties shall have in addition to the grounds referred to in the
Federal Arbitration Act for vacating, modifying or correcting an award the right
to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of
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any of the Loan Documents or any relationship between the parties.
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,
CANOE RIDGE VINEYARD, L.L.C. NATIONAL ASSOCIATION
By: /s/ William L. Hamilton By: /s/ Brian O'Melveny
---------------------------- --------------------------
William L. Hamilton Brian O'Melveny
Vice President/Chief
Financial Officer
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CREDIT AGREEMENT
THIS AGREEMENT is entered into as of the 25th day of September, 1996,
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.
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"Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under federal or California statute or regulation.
"Credits" means the Line of Credit and the Term Loan.
"Current Ratio" means total current assets, divided by total current
liabilities excluding the final balloon installment of the Term Loan to the
extent that such installment 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 the Term Loan 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 Section 7.1 hereof.
"Letter of Credit" shall have the meaning ascribed to in Section
2.7(c).
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"Letter of Credit Agreement" means Bank's standard form Letter of
Credit Agreement.
"Line of Credit" means a revolving credit accommodation in the maximum
principal amount of $10,000,000.00 as more fully described in Section 2.7.
"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.
"Notes" means the Line of Credit Note, and the Term Note.
"Prime Rate" means at any time the rate of interest most recently
announced within the Bank at its principal office in San Francisco 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
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other intangible assets and any obligations due from stockholders, employees
and/or affiliates.
"Term Loan" means a credit accommodation in the original principal
amount of $5,855,000.00, as more fully described in Section 2.1 hereof.
"Term Note" means a promissory note executed by Borrower to evidence
the Term Loan, substantially in the form of Exhibit B, attached hereto.
ARTICLE II
THE CREDITS
Section 2.1. Term Loan.
(a) Term Loan. Bank agrees to make the Term Loan to Borrower in the
original principal amount of FIVE MILLION EIGHT HUNDRED FIFTY-FIVE THOUSAND
DOLLARS ($5,855,000.00), the proceeds of which shall be used to consolidate and
refinance the outstanding principal balances of Term Loans A, B and C granted
under the Prior Agreement.
Borrower's obligation to repay the Term Loan shall be evidenced by the
Term Note, all terms of which are incorporated herein by this reference.
(b) Repayment. The principal amount of the Term Loan shall be repaid in
accordance with the provisions of the Term Note.
(c) Prepayment. Borrower may prepay principal on the Term Loan solely
in accordance with the provisions of the Term Note.
(d) Interest. The outstanding principal balance of the Term Loan shall
bear interest at a rate(s) per annum as set forth in the Term Note.
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(e) Term Loan Commitment Fee. Borrower shall pay to Bank a
non-refundable commitment fee for the Term Loan equal to one-percent (1.00%) of
the original principal amount of the Term Loan, which commitment fee shall be
due and payable in full on the date of execution hereof.
Section 2.2. 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.
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(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 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
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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 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
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the understanding that, among other items, the aggregate of all returns,
rebates, discounts, credits and allowances for the 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
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States government or any political subdivision thereof (except
accounts which represent 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;
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(ix) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition
of the account debtor, or the industry in which the account
debtor is engaged, to be unsatisfactory.
Section 2.3. 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 at the rate(s) of interest set forth in the Line of Credit Note.
(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) 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.
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Section 2.4. 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.
Section 2.5. 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.
Section 2.6. 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 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. In addition, Borrower shall grant Bank a lien of second priority on
real property located at Los Amigos Vineyard, purchased in April, 1996 from
Beckstoffer Vineyards and
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located adjacent to the Acacia Winery. 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 discharge, of all obligations of Borrower to Bank
subject to this Agreement.
Section 3.1. 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.
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Section 3.2. 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.
Section 3.3. 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.
Section 3.4. 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 other than those disclosed by Borrower to Bank in writing
prior to the date hereof.
Section 3.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated June 30, 1996 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
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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.
Section 3.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
Section 3.7. 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.
Section 3.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, memberships, franchises, 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.
Section 3.9. 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
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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.
Section 3.10. 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.
Section 3.11. 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 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
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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.
(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
Section 4.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to grant any of the Credits is subject to
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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.
(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.
Section 4.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by
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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.
(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:
Section 5.1. 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
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any of the Loan Documents at the times and place and in the manner specified
therein.
Section 5.2. 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.
Section 5.3. 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 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;
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(e) from time to time such other information as Bank may reasonably
request.
Section 5.4. 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.
Section 5.5. 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.
Section 5.6. 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.
Section 5.7. 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,
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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.
Section 5.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower in excess of $500,000.00.
Section 5.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting 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)
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not less than 200,000 cases, determined as of the last day of each month.
Section 5.10. 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 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:
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Section 6.1. USE OF FUNDS. Use any of the proceeds of any of the
Credits except for the purposes stated in Article II hereof.
Section 6.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in excess of an aggregate of $5,800,000.00 in fiscal year ending
December 31, 1996 and $2,700,000.00 in any fiscal year thereafter.
Section 6.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) liabilities of Borrower to Bank; (b)
any other liabilities of Borrower existing as of, and disclosed to Bank in
writing prior to, the date hereof; (c) financing for Canoe Ridge Winery, LLC and
CanoeCo Partners not to exceed $1,500,000.00 in aggregate; and (d) indebtedness
in the principal amount of $1,000,000.00 incurred to purchase land contiguous to
the Acacia Vineyard.
Section 6.4. 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, LLC,
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,
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except (a) any of the foregoing in favor of Bank; (b) any of the foregoing which
is existing as of, and disclosed to Bank in writing prior to, the date hereof;
(c) liens granted in connection with capitalized leases entered into by Borrower
in the ordinary course of business; and (d) a lien on the land contiguous to the
Acacia Vineyard to secure the indebtedness described in 6.3(d) above.
ARTICLE VII
EVENTS OF DEFAULT
Section 7.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(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
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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 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
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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.
(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.
Section 7.2. 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
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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.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. 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.
Section 8.2. 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
One Kaiser Plaza, Suite 850
Oakland, CA 94612
Attention: Brian O'Melveny, VP
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and
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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 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.
Section 8.3. 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.
Section 8.4. 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
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acquire relating to any of the Credits, Borrower or its business, or any
collateral required hereunder.
Section 8.5. 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.
Section 8.6. 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.
Section 8.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
Section 8.8. 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.
Section 8.9. 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
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rights or remedies under Federal law, whether as a national bank or 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.
SECTION 8.10. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, this Agreement and the other Loan
Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to this Agreement or any of the Loan Documents, including without
limitation, any of the foregoing arising in connection with the exercise of any
self-help, ancillary or other remedies pursuant to this Agreement or any of the
Loan Documents. Any party may by summary proceedings bring an action in court to
compel arbitration of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All
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Disputes submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the Documents. The arbitration
shall be conducted at a location in California selected by the AAA or other
administrator. If there is any inconsistency between the terms hereof and any
such rules, the terms and procedures set forth herein shall control. All
statutes of limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may be entered in any court having jurisdiction;
provided however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
ss.91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
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(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in
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controversy exceeds $25,000,000, the arbitrators shall be required to make
specific, written findings of fact and conclusions of law. In such arbitrations
(A) the arbitrators shall not have the power to make any award which is not
supported by substantial evidence or which is based on legal error, (B) an award
shall not be binding upon the parties unless the findings of fact are supported
by substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of California, and (C) the parties shall have in
addition to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (1) whether the
findings of fact rendered by the arbitrators are supported by substantial
evidence, and (2) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported by
substantial evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all
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mortgages, liens and security interests securing such indebtedness and
obligations, shall remain fully valid and enforceable. If any such Dispute is
not submitted to arbitration, the Dispute shall be referred to a referee in
accordance with California Code of Civil Procedure Section 638 et seq., and this
general reference agreement is intended to be specifically enforceable in
accordance with said Section 638. A referee with the qualifications required
herein for arbitrators shall be selected pursuant to the AAA's selection
procedures. Judgment upon the decision rendered by a referee shall be entered in
the court in which such proceeding was commenced in accordance with California
Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Documents or the subject matter of the Dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of this Agreement and the Loan Documents or any relationship
between the parties.
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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 O'Melveny
---------------------------- ------------------------
William L. Hamilton Brian O'Melveny
Chief Financial Officer/ Vice President
Executive Vice President
35
AMENDMENT TO
JOINT VENTURE AGREEMENT
OF
EDNA VALLEY VINEYARD
THIS AMENDMENT (the "Amendment") is made and entered into as of this
23rd day of December, 1996, by and between Paragon Vineyard Co., Inc., a Nevada
corporation ("Paragon"), and Chalone Wine Group, Ltd., a California corporation
("Chalone").
RECITALS
A. Paragon and Chalone entered into a Joint Venture Agreement on April
18, 1980, pursuant to which the parties established the Edna Valley Vineyard
Joint Venture. The original Joint Venture Agreement was amended and restated as
of January 1, 1991 (hereinafter, the "1991 Joint Venture Agreement"). The 1991
Joint Venture Agreement, as amended herein, is referred to hereinafter as the
"Joint Venture Agreement," and the joint venture established thereby is referred
to hereinafter as the "Joint Venture."
B. Paragon and Chalone desire to amend the 1991 Joint Venture Agreement
in those respects specified herein, and only in those respects specified herein.
IN CONSIDERATION of the foregoing and the mutual covenants set forth
herein, Paragon and Chalone agree as follows:
1. Amendments to Article I (Defined Terms)
The terms defined in Article I of the 1991 Joint Venture Agreement are
hereby revised to read as follows:
"Amended Grape Purchase Agreement" refers to the Revised Grape Purchase
Agreement by and between Paragon and the Joint Venture, dated January 1, 1991,
as amended by that Amended and Restated Grape Purchase Agreement substantially
in the form of Exhibit A hereto.
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<PAGE>
"Amended Ground Lease" refers to the Ground Lease by and between
Paragon and the Joint Venture, dated as of June 1, 1991, as amended by that
Amendment to Ground Lease substantially in the form of Exhibit B hereto.
"Brand Name LLC" refers to Edna Valley Brand Name LLC, a California
limited liability company, to be organized pursuant to the provisions of Section
6.1 of the Joint Venture Agreement.
"Chalone" refers to Chalone Wine Group, Ltd., a California corporation.
"Change in Control" refers to (i) the acquisition, directly or
indirectly, by a single Person or a group of Affiliated Persons, even if such
Person or group of Affiliated Persons is or are, as of the date of the 1991
Joint Venture Agreement, shareholders of Chalone, of more than fifty percent
(50%) of the outstanding shares of voting capital stock of a Joint Venture
Partner (or of securities convertible into more than fifty percent (50%) of the
outstanding shares of voting capital stock of a Joint Venture Partner), or (ii)
the consummation of any merger or reorganization of a Joint Venture Partner or
any sale of or other disposition, in one transaction or in a series of related
transactions, of all or substantially all of its assets, if, as a result of such
merger, reorganization, or disposition of assets, the holders (excluding
therefrom any holder or holders that, directly or through Affiliates, control
the surviving, reorganized, or acquiring corporation or entity) of the shares of
voting capital stock of the Joint Venture Partner, immediately before
consummation of such transaction, own, immediately after consummation of such
transaction, equity securities (other than options, warrants, or rights to
acquire equity securities) possessing less than fifty percent (50%) of the
voting power of the surviving, reorganized, or acquiring corporation (or any
corporation in control of the surviving, reorganized, or acquiring corporation).
"Change in Control" shall also refer to any acquisition of the outstanding
shares of voting capital stock of a Joint Venture Partner or the consummation of
any merger or reorganization of a Joint Venture Partner or any sale of or other
disposition of all or substantially all of its assets that is part of a plan or
scheme to avoid the precise definitions of the term "Change in Control" as
specified in clauses (i) or (ii) above. Notwithstanding any of the foregoing, no
Change in Control of Paragon shall be deemed to have occurred solely by reason
of a sale by Paragon of the Vineyard or other assets pursuant to the provisions
of Article XI hereof, and no change in control of Chalone shall be deemed to
have occurred if one or any combination of W. Philip Woodward, Domaines Barons
de Rothschild (Lafite) Summus Financial, Inc., Hook Financial, Inc., or Ojai
Ranch and Investment Company, Inc., acquires control of Chalone, or controls a
corporation or entity into which Chalone is merged or to which Chalone sells all
or
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substantially all of its assets, or acquires control of Chalone as a result of
any reorganization of Chalone. In addition, for purposes of this definition,
there shall be disregarded transfers by a shareholder of a Joint Venture Partner
to the shareholder's lineal descendants and ancestors, to the shareholder's
brothers, sisters, nephews, nieces, spouses, former spouses, and issue of
spouses or former spouses, and to trusts established for the shareholder or for
any of the foregoing.
"Joint Venture" refers to the joint venture created under the Old
Agreement and modified and continued by the 1991 Joint Venture Agreement, as
amended by the Amendment.
"Option" is deleted as a definition of Article I.
"Revised License Agreement" refers to the License Agreement by and
between Paragon and the Joint Venture, dated as of January 1, 1991, as amended
by that Revised License Agreement substantially in the form of Exhibit C-1
hereto.
"Substantial Change in Management" is deleted as a definition of
Article I.
2. Amendments to Article II of the 1991 Joint Venture Agreement
(Formation, Name, Place of Business, and Purpose)
Article II of the 1991 Joint Venture Agreement is hereby amended in its
entirety to read as follows:
2.1 Formation
The parties entered into this Joint Venture on April 18, 1980,
and by the 1991 Joint Venture Agreement, as amended by this Amendment, wish to
define their rights and obligations. The Joint Venture shall be governed by the
Uniform Partnership Act of the State of California, as from time to time
amended, except as expressly provided herein to the contrary.
2.2 Name, Place of Business
The Joint Venture shall be conducted under the name "EDNA
VALLEY VINEYARD." Unless and until changed by the Review Committee, the
principal executive office of the Joint Venture shall be 621 Airpark Road, Napa,
California 94558."
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<PAGE>
3. Amendments to Article III of the 1991 Joint Venture Agreement (Term)
Article III of the 1991 Joint Venture Agreement is hereby amended in
its entirety to read as follows:
3.1 Term
The Joint Venture commenced on April 18, 1980, and shall
continue indefinitely until dissolution pursuant to the provisions hereof.
3.2 Chalone's Deposit and Application Thereof
Pursuant to Section 3.3 of the 1991 Joint Venture Agreement,
Chalone has deposited with Paragon One Million Seventy Thousand Dollars
($1,070,000) (hereinafter, the "Deposit") for the purpose of ensuring Chalone's
right to extend the term of the Joint Venture from December 31, 1999 to an
indefinite term. Chalone shall apply one-third of the Deposit to reduce each of
the payments required by Sections 3.4, 3.5, and 3.6 hereof.
3.3 Chalone's Purchase of a 14.1711% Vested Interest in the Joint
Venture
For the purpose of acquiring a 14.1711% vested interest in the
Joint Venture, and subject to the provisions of Section 3.9 hereof, Chalone
shall pay to Paragon, on or before November 15, 1996, One Million Five Hundred
Ninety Thousand Dollars ($1,590,000). If the aforesaid payment is not paid on or
before November 15, 1996, then the aforesaid amount shall be paid by Chalone to
Paragon, within three (3) days after the date of execution of this Amendment,
together with interest thereon at the Compound Rate from November 15, 1996.
3.4 Chalone's Purchase of An Additional 12.5371% Vested Interest
in the Joint Venture
For the purpose of acquiring an additional 12.5371% vested
interest in the Joint Venture, and subject to the provisions of Section 3.9
hereof, Chalone shall pay to Paragon, on or before December 15, 1997, One
Million Four Hundred Six Thousand Six Hundred Sixty-Seven Dollars ($1,406,667),
$1,050,000 in cash and $356,667 by application of one-third of the Deposit.
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3.5 Chalone's Purchase of An Additional 12.5371% Vested Interest
in the Joint Venture
For the purpose of acquiring an additional 12.5371% vested
interest in the Joint Venture, and subject to the provisions of Section 3.9
hereof, Chalone shall pay to Paragon, on or before December 15, 1999, One
Million Four Hundred Six Thousand Six Hundred Sixty-Seven Dollars ($1,406,667),
$1,050,000 in cash and $356,667 by application of one-third of the Deposit.
3.6 Chalone's Purchase of An Additional 10.7547% Vested Interest
in the Joint Venture
For the purpose of acquiring an additional 10.7547% vested
interest in the Joint Venture, and subject to the provisions of Section 3.9
hereof, Chalone shall pay to Paragon, on or before December 15, 2001, One
Million Two Hundred Six Thousand Six Hundred Sixty-Seven Dollars ($1,206,666),
$850,000 in cash and $356,666 by application of one-third of the Deposit.
3.7 Chalone's Purchase of a 50% Interest in Brand Name LLC
Concurrently with its payment for an additional 10.7547%
vested interest in the Joint Venture pursuant to Section 3.6 hereof, and subject
to the provisions of Section 3.9 hereof, Chalone shall pay to Paragon Two
Hundred Thousand Dollars ($200,000) for 50% of the issued and outstanding
membership interests in Brand Name LLC, pursuant to an Option to Purchase
Membership Interest substantially in the form of Exhibit C-5 hereto.
3.8 Grace Period for Payments Called For by Section 3.4, 3.5, 3.6,
and 3.7 Hereof
Chalone shall have a ten (10) day grace period beyond the due
date of any payment called for by Sections 3.4, 3.5, 3.6, or 3.7 hereof or, if
later, three (3) days after notice by Paragon to Chalone demanding any payment
called for by Sections 3.4, 3.5, 3.6, or 3.7 hereof, during which it may make
the payment called for thereunder, without interest.
3.9 Paragon's Rights in the Event that Chalone Fails to Make Any
Payment Called for by Section 3.4, 3.5, 3.6 or 3.7 Hereof
(a) In the event that Chalone elects not to make any payment
called for by Section 3.4, 3.5, 3.6 or 3.7 hereof, and such failure continues
beyond the grace period provided for by Section 3.8 hereof (hereinafter, a "No
Payment Election"), then and in such event Chalone shall have no right to
acquire an additional vested interest in the Joint Venture pursuant to the
provisions of Section 3.4, 3.5, or 3.6 hereof, as the case may be,
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shall have no right to acquire an interest in Brand Name LLC pursuant to the
provisions of Section 3.7 hereof, shall forfeit to Paragon the unallocated
portion of the Deposit, shall have no right to receive any portion of the
proceeds of sale of the Brand Name pursuant to the provisions of Section 6.2 of
the Joint Venture Agreement, and, in addition, Paragon, by written notice to
Chalone, may remove Chalone as Managing Joint Venture Partner of the Joint
Venture and appoint one or more persons to act as Chalone's successor (which
persons may include Paragon), which person(s) shall assume those duties and
responsibilities and be entitled to those rights and benefits of the Managing
Joint Venture Partner under the Joint Venture Agreement.
(b) In the event that Chalone makes a No Payment Election,
then and in such event, from and after the effective date of the No Payment
Election, the procedures of the Review Committee shall be modified in the
following respects, and in the following respects only:
(i) All decisions made by the Review Committee shall
be by approval of a "majority in interest" of the members of the
Review Committee. For this purpose, the members of the Review
Committee appointed by Chalone shall have, in the aggregate, a
voting interest on matters subject to Review Committee decision or
approval equal to the vested interest in the Joint Venture
actually paid for by Chalone pursuant to the foregoing provisions
of this Article III of the Joint Venture Agreement (not taking
into account, in the amount considered paid for by Chalone, that
portion of the Deposit forfeited by Chalone pursuant to the
provisions of Section 3.9 hereof), and the members of the Review
Committee appointed by Paragon shall have, in the aggregate, a
voting interest on matters subject to the decision or approval of
the Review Committee equal to 100% minus the voting interest of
the members of the Review Committee appointed by Chalone,
determined as aforesaid.
(ii) Notice of regular and special meetings of the
Review Committee shall be provided as set forth in Section 8.2(d)
and (e) of the 1991 Joint Venture Agreement.
(iii) The attendance at a meeting of the Review
Committee of one or more members possessing a majority in interest
of the voting power of the Review Committee shall constitute a
quorum of the Committee for the transaction of business.
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(iv) The transaction of any meeting of the Committee,
however called and noticed and wherever held, shall be as valid as
though had at a meeting duly held after regular call or notice if
a quorum be present and if, either before or after the meeting,
the members possessing a majority in interest of the voting power
of the members of the Review Committee sign a written waiver of
notice, a consent to holding such a meeting, or an approval of the
minutes thereof. All such waivers, consents, or approvals shall be
filed with the records of the Committee and made part of the
minutes of the meeting.
(v) Any action required or permitted to be taken by
the Review Committee may be taken without a meeting and without
prior notice if all members of the Committee shall individually or
collectively consent in writing to such action. Such consent or
consents shall have the same effect as a unanimous vote of the
Committee and shall be filed with the minutes of the proceedings
of the Committee.
(vi) The members of the Committee may participate in
meetings of the Committee as permitted by Section 8.2(g) of the
1991 Joint Venture Agreement.
(vii) The Review Committee shall possess the power to
hire and discharge the winemaker of the Winery: the provisions of
Section 8.1(c) of the Joint Venture Agreement shall be of no
further force or effect, and Chalone shall no longer have the
power, granted by Section 8.1(c) of the Joint Venture Agreement,
to force a discharge of the general manager of the Winery or, if
there is no general manager of the Winery, the winemaker of the
Winery by an expression of 'no confidence.'
3.10 Revision of Article VII of Joint Venture Agreement
(a) In the event that Chalone makes a No Payment Election,
then and in such event, from and after the effective date of the No Payment
Election, all distributions of Available Cash made pursuant to Section 7.1 of
the Joint Venture Agreement shall be allocated and distributed to Chalone in an
amount equal to the vested interest in the Joint Venture actually paid for by
Chalone pursuant to the foregoing provisions of this Article III of the Joint
Venture Agreement (not taking into account, in the amount considered paid for by
Chalone, that portion of the Deposit forfeited by Chalone pursuant to the
provisions of Section 3.9 hereof), with the balance of the distributions of
Available Cash allocated and distributed to Paragon. The relative percentages of
distributions of Available Cash,
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determined as aforesaid, shall also be used in allocating any "remaining gain"
to be allocated to the Joint Venture Partners pursuant to the provisions of
Section 7.2(b) of the Joint Venture Agreement, and in allocating between the
Partners all income, gains, losses, deductions, and credits, and each item
thereof, to be allocated between the Joint Venture Partners pursuant to the
provisions of Section 7.2(c) of the Joint Venture Agreement."
4. Amendments to Article IV of the 1991 Joint Venture Agreement (Chalone's
Purchase of a One-half Interest in the Winery and the Expansion
Thereof)
Article IV of the 1991 Joint Venture Agreement is hereby amended in the
following respects and in the following respects only.
Section 4.7 is hereby added to Article IV to read in its entirety as
follows:
4.7 Amended Ground Lease
The Joint Venture shall, concurrently with this Amendment,
enter into an Amended Ground Lease with Paragon, substantially in the form of
Exhibit B hereto. Pursuant to the Amended Ground Lease, the Joint Venture shall
lease additional acreage from Paragon, and shall pay increased rent to Paragon
under the Amended Ground Lease equal to the rent called for under the Ground
Lease for any applicable period multiplied by a fraction, the numerator of which
is the acreage included in the Amended Ground Lease and the denominator of which
is the acreage included in the Ground Lease."
5. Amendments to Article V of the 1991 Joint Venture Agreement (Supply of
Grapes by Paragon to the Joint Venture)
Article V of the 1991 Joint Venture Agreement is hereby amended in its
entirety to read as follows:
5.1 Revision of Grape Purchase Agreement
(a) Paragon and the Joint Venture shall, concurrently with the
execution of this Amendment, enter into an Amended and Restated Grape Purchase
Agreement, substantially in the form of Exhibit A hereto. The Joint Venture may,
upon Review Committee approval, purchase and resell, or vint as bulk wine, a
portion of the grapes required to be purchased by the Joint Venture from
Paragon.
(b) The obligation of Paragon to use its best reasonable
efforts to supply the Joint Venture with Chardonnay grapes pursuant to the
Amended Grape Purchase
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Agreement shall be subject to Paragon's obligations to customers other than the
Joint Venture (as said customers may be replaced by new customers from time to
time). By way of illustration and not limitation, should weather conditions or
other circumstances beyond Paragon's control limit the harvest in any one year,
then the grapes sold to the Joint Venture by Paragon would be reduced pro-rata
based upon the Joint Venture's share of the year's projected harvest, as
determined in good faith by Paragon. It is agreed that because of the fact that
different customers of Paragon may purchase grapes for delivery at different
times during the harvest, any good faith allocation made by Paragon of its
harvest among its customers on or prior to September 1st of each year shall be
binding and conclusive upon the Joint Venture.
(c) Other than as expressly contemplated by Article XI hereof,
by the Amended Grape Purchase Agreement, or as expressly provided by the
business plan adopted pursuant to the provisions of Section 8.5(a) hereof, as
the same may be amended from time to time, or as permitted by Paragon's written
consent, the Joint Venture shall not purchase bulk wine or vint grapes from any
source other than Paragon."
6. Amendments to Article VI of the 1991 Joint Venture Agreement (License
of Brand Name)
Article VI of the 1991 Joint Venture Agreement is hereby amended in its
entirety to read as follows:
6.1 Ownership of the Brand Name
The brand name "Edna Valley Vineyard" (the "Brand Name") is
currently the property of Paragon. The Brand Name is licensed to the Joint
Venture pursuant to that certain License Agreement by and between Paragon and
the Joint Venture, dated as of January 1, 1991 (the "License Agreement").
Concurrently with the execution of this Amendment, the Joint Venture and Paragon
shall enter into a Revised License Agreement substantially in the form of
Exhibit C-1 hereto. On December 12, 1996, Paragon organized a California limited
liability company with the name "Edna Valley Brand Name, LLC" (hereinafter,
"Brand Name LLC") pursuant to Articles of Organization and an Operating
Agreement in the form of C-2 and C-3 hereto. The two members of Brand Name LLC
are Paragon and James H. Niven. Mr. Niven shall withdraw as a member of Brand
Name LLC at such time as Chalone acquires an interest in and becomes a member of
Brand Name LLC pursuant to the provisions of Section 3.7 of the Joint Venture
Agreement. Concurrently with the execution of this Amendment, Paragon shall
contribute all of its right, title, and interest in and to the Brand Name to
Brand Name LLC, in exchange for substantially all of the membership interests in
Brand Name LLC. Concurrently with the
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execution of this Amendment, Paragon shall assign all of its right, title, and
interest as licensor under the Revised License Agreement to Brand Name LLC, and
Brand Name LLC shall assume all rights and obligations of Paragon, as licensor,
under the Revised License Agreement pursuant to an Assignment and Assumption
Agreement, substantially in the form of Exhibit C-4 hereto. No member of Brand
Name LLC may transfer its interest in Brand Name LLC without the prior written
consent of the other member, which consent may be withheld in the member's sole
and absolute discretion; provided, however, that the aforesaid restriction shall
not prevent a transfer of the interest in Brand Name LLC by a member pursuant to
a Change in Control of the member, as the term Change in Control is defined by
the Joint Venture Agreement.
6.2 Sharing of Proceeds From Any Sale of the Brand Name
(a) Should Brand Name LLC, during the term of the Joint
Venture Agreement, sell its rights to the Brand Name, whether by themselves or
as a part of the sale by Paragon of the Vineyard, and, at the time of such sale,
Chalone has not yet exercised the option granted to it by the Option to Purchase
Membership Interests, then and in such event Paragon (on its own behalf and on
behalf of Brand Name LLC) agrees that Chalone shall be entitled to 50% of the
proceeds from any such sale attributable to the Brand Name; provided, however,
that Chalone's entitlement to 50% of the proceeds as aforesaid is conditional
upon Chalone's having timely made all payments called for by Sections 3.4, 3.5,
and 3.6 hereof theretofore falling due, and upon its prompt payment of such sums
as remain to be paid under said Sections in full to Paragon; provided further,
however, that Chalone's entitlement to 50% of the proceeds as aforesaid is
further conditioned upon Chalone's purchasing a 50% membership in Brand Name LLC
pursuant to the provisions of 3.7 hereof. In addition, if Chalone has timely
made all payments called for by Sections 3.4, 3.5, and 3.6 hereof, theretofore
falling due, any sale, assignment, encumbrance, or other transfer by Paragon of
its rights to the Brand Name occurring prior to the time that Chalone becomes a
members of Brand Name LLC shall require the consent of Chalone, which consent
shall not be unreasonably withheld or delayed.
(b) If, at the time of sale, Chalone has not yet exercised the
option granted to it by the Option to Purchase Membership Interests, and the
sale of the Brand Name by Brand Name LLC is to a third party not Affiliated with
Paragon, and such sale consists only of the Brand Name, then the proceeds from
sale of the Brand Name shall be conclusively established by the agreement of
sale entered into by Brand Name LLC and said third party. If the Brand Name is
sold as part of other assets to a third party not Affiliated with Paragon, and
the agreement of sale does not allocate that portion of the
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purchase price allocable to the Brand Name, then and in such event Paragon and
Chalone shall attempt to apportion the purchase price of the assets sold by
Paragon between the Brand Name and the other assets sold. If the parties are
unable to agree on an allocation, then the proceeds of the sale attributable to
the Brand Name shall be determined by arbitration pursuant to the provisions of
Article XVIII hereof. If the Agreement of Sale does apportion the proceeds of
sale to the Brand Name and the other assets sold by Paragon to the third party,
then said allocation shall conclusively establish the proceeds from sale of the
Brand Name for purposes of this Section 6.2. If Brand Name LLC sells its rights
to the Brand Name to a party Affiliated with Paragon, and Paragon and Chalone
are not able to agree upon the portion of the proceeds from sale attributable to
the Brand Name, then the proceeds from sale thereof shall likewise be determined
by arbitration pursuant to the provisions of Article XVIII hereof. Chalone's
rights under this Section 6.2 shall terminate and be of no further force or
effect upon the occurrence of any Event of Default committed by it under the
provisions of Article XVII hereof or any election by Chalone not to make any
payment called for by Sections 3.4, 3.5, 3.6, or 3.7 hereof and the continuation
of any such election for a period of five (5) or more days beyond the due date
of any payment called for by any such Section.
6.3 Purchase of Brand Name by Joint Venture in the Event of Sale
of the Assets of the Joint Venture
Should both of the Joint Venture Partners agree to sell all or
substantially all of the assets of the Joint Venture, then and in such event,
pursuant to the Revised License Agreement with Brand Name LLC, the Joint Venture
shall have the option, but not the obligation, to acquire Brand Name LLC's
entire interest in the Brand Name for a payment of Four Hundred Thousand Dollars
($400,000) to Brand Name LLC. The foregoing option shall not be exercisable by
the Joint Venture unless and until Chalone has made all payments to Paragon
called for by Sections 3.4, 3.5, 3.6, and 3.7 hereof. The payment of $400,000 by
the Joint Venture to Brand Name LLC shall be made concurrently with the closing
of the sale of all or substantially all of the assets of the Joint Venture.
Other than as contemplated by this Section 6.3, the Joint Venture shall have no
right to acquire the interest of Brand Name LLC as licensor of the Brand Name
under the Revised License Agreement."
7. Amendments to Article VIII of the 1991 Joint Venture Agreement
(Management of the Joint Venture)
Article VIII of the 1991 Joint Venture Agreement is hereby amended in
the following respects, and in the following respects only.
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Section 8.1(b)(iv) is hereby amended in its entirety to read as
follows:
"(iv) Select or discharge the winemaker of the Winery or
select or discharge the general manager of the Winery;"
Section 8.1(c) is hereby amended in its entirety to read as follows:
"(c) The selection of a winemaker and any general manager of
the Winery shall be made on the recommendation of the Managing Joint
Venture Partner and approved by the Review Committee as provided by
subsection (b)(iv) above; any dispute regarding the selection of a
winemaker or the general manager of the Winery may not be taken to
arbitration. Either Joint Venture Partner may, at any time, in its sole
discretion, by notice to the other Joint Venture Partner, express "no
confidence" in the general manager of the Winery or, if there is no
general manager of the Winery, in the winemaker. Upon any such
expression of no confidence, the Review Committee shall promptly meet
to discuss the no confidence notice of the Joint Venture Partner. If,
after such meeting, the Joint Venture Partner continues to express no
confidence in the general manager or winemaker, as the case may be,
then the Joint Venture shall proceed to discharge the general manager
or the winemaker, as the case may be. In such event, the Managing Joint
Venture Partner shall proceed to search for and recommend a successor
to the Review Committee. The officer of the Managing Joint Venture
Partner to whom the general manager of the Winery or, if there is no
general manager, the winemaker of the Winery, shall report to and act
under the supervision of shall be as designated from time to time by
the Review Committee. If the Review Committee cannot agree upon the
selection of such officer, then the individual to whom the general
manager or the winemaker, as the case may be, shall report to and act
under the supervision of shall be the Managing Director of the
Committee as determined under Section 8.3(d) of the Joint Venture
Agreement."
Section 8.3(d) is hereby amended in its entirety to read as follows:
"(d) The Managing Director of the Committee shall be W. Philip
Woodward, so long as Mr. Woodward serves as an officer of Chalone
primarily responsible for the conduct of Chalone's day-to-day business
and as long as Chalone remains the Managing Joint Venture Partner of
the Joint Venture. In the event that Mr. Woodward is no longer
qualified or is unable to serve, at a point in time when Chalone is the
Managing Joint Venture Partner of
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the Joint Venture, then the position of Managing Director of the
Committee shall be filled as follows: Chalone shall, by written notice
to Paragon, identify three candidates each of whom is an officer or
director of Chalone and each of whom, by reason of his or her
education, training, experience, and knowledge of the wine business and
the business of the Joint Venture, is qualified to serve as Managing
Director of the Committee. The written notice shall specify, in
reasonable detail, the qualifications of each candidate to serve as
Managing Director of the Committee. Within thirty (30) days of receipt
of the aforesaid notice from Chalone, Paragon shall notify Chalone, in
writing, of its agreement to the selection of one of the three
candidates identified by Chalone to serve as Managing Director of the
Committee, and such person shall thereafter serve as Managing Director
of the Committee pursuant to the terms and provisions of the Joint
Venture Agreement. If Paragon does not notify Chalone, in writing, of
its agreement to the selection of one of the three candidates
identified by Chalone within thirty (30) days of Paragon's receipt of
the notice from Chalone as aforesaid, then Chalone may, by notice to
Paragon, select one of the three candidates identified by Chalone as
the Managing Director of the Committee. In the event that Chalone
ceases to be the Managing Joint Venture Partner of the Joint Venture,
then the position of Managing Director of the Committee shall forthwith
become vacant and the individual who shall serve as Managing Director
of the Committee shall be determined by the Review Committee. The
Managing Director of the Committee shall preside at all meetings of the
Committee and shall exercise and perform such other powers and duties
as may from time to time be assigned to him by the Committee."
Section 8.3(f) is hereby added to the Joint Venture Agreement to read
in its entirety as follows:
"(f) The general manager of the Winery or, if there is no
general manager of the Winery, the winemaker of the Winery, shall
attend all meetings of the Review Committee for the purpose of
reporting on the business and activities of the Joint Venture under his
or her supervision."
Section 8.5(a) is hereby amended in its entirety to read as follows:
"(a) As long as it remains a Joint Venture Partner of the
Joint Venture, and subject to the provisions of Section 3.9 and Article
XVII of the Joint Venture Agreement and of this Section 8.5, Chalone
shall serve as the Managing Joint Venture Partner of the Joint Venture.
Chalone may be removed
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at any time as Managing Joint Venture Partner by the Review Committee.
In addition, should there occur at any time a Change in Control of
Chalone, then and in such event the position of Managing Joint Venture
Partner shall forthwith become vacant, and the Review Committee shall
select its successor; provided, however, that, if at the time of a
Change in Control of Chalone, there has previously occurred a Change in
Control of Paragon, then and in such event the position of the Managing
Joint Venture Partner shall not become vacant, and Chalone shall
continue as Managing Joint Venture Partner, notwithstanding a Change in
Control of Chalone; provided further, however, that notwithstanding any
Change in Control of Chalone, if the following procedure is followed,
then the position of Managing Joint Venture Partner shall not become
vacant, and Chalone shall continue as Managing Joint Venture Partner of
the Joint Venture, to serve as such pursuant to the terms and
provisions of the Joint Venture Agreement:
(i) Attached hereto as Exhibit D is a business plan for the
Joint Venture for the three years ending December 31, 1999. The
business plan establishes objectives for the Joint Venture in terms of
case sales, by category of varietal wine to be produced and marketed by
the Joint Venture, pricing, gross margins, and related matters. Each
year thereafter, on or before December 31 of each year, the Review
Committee shall revise and update the business plan. For the year ended
December 31, 1997, the business plan shall be revised to address the
three years ended December 31, 2000, and for the year ended December
31, 1998, the business plan shall be expanded to address the four years
ended December 31, 2002. The business plan shall be updated thereafter
to address the four years following adoption of the revision by the
Review Committee.
(ii) A Change in Control of Chalone shall not result in the
position of Managing Joint Venture Partner becoming vacant if, by no
later than thirty (30) days after the effective date of a Change in
Control of Chalone, the Person(s) acquiring control of Chalone
(hereinafter, the "Acquiror") provides written notice to Paragon
specifying each of the following: (A) that the Acquiror adopts and
agrees to the terms and provisions of the business plan most recently
adopted by the Review Committee prior to the effective date of a Change
in Control of Chalone (hereinafter, the "Benchmark Plan"); and (B) that
the Acquiror agrees to take no steps to cause Chalone not to use
Chalone's best reasonable efforts, as Managing Joint Venture Partner of
the Joint Venture, to implement fully the terms and provisions of the
Benchmark Plan.
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In the event that there occurs at any time a Change in Control of
Chalone, and the Acquiror does not provide the written notice
called for by paragraph (ii) above, then and in such event the
position of Managing Joint Venture Partner shall forthwith become
vacant, and the Review Committee shall select its successor. If
the members of the Review Committee cannot agree upon a successor
to the Managing Joint Venture Partner or cannot agree upon the
duties and responsibilities of the successor, or if the position
of Managing Joint Venture Partner remains vacant for 60 or more
days after a Change in Control of Chalone, then and in such event
Paragon (if it is still then a Joint Venture Partner and is not in
default under this Agreement) shall have the right to appoint, in
its sole discretion, the successor (which may be Paragon) to
Chalone as Managing Joint Venture Partner, which successor shall
assume all duties and responsibilities of Managing Joint Venture
Partner of the Joint Venture, including, without limitation, the
right and power, upon ninety (90) days notice, to remove Chalone
as distributor of the Winery's wine in the State of California,
and to appoint one or more persons to act as Chalone's successor
(which persons may include Paragon), which person(s) shall assume
those duties and responsibilities of Chalone as distributor of the
Winery's wine in the State of California as are delegated to them
by the Managing Joint Venture Partner, and shall be entitled to
those rights and benefits of the distributor under the Joint
Venture Agreement as are assigned to them by the Managing Joint
Venture Partner; and the right and power to appoint one or more
distributors (which may include Paragon) of the Winery's wine for
jurisdictions outside of the State of California, pursuant to such
terms and conditions as the Managing Joint Venture Partner
determines. Any disagreement between the members of the Review
Committee with respect to the appointment of a successor to the
Managing Joint Venture Partner or with respect to the duties and
responsibilities of any such successor shall not be subject to
resolution by arbitration pursuant to the provisions of Article
XVIII of the Joint Venture Agreement."
Section 8.5(b) is hereby amended in its entirety to read as follows:
"(b) Subject to the provisions of this subsection 8.5(b),
Chalone may also be removed, for cause, by Paragon (assuming Paragon is
then a Joint Venture Partner and is not in default under this
Agreement). A ground for removal for cause of Chalone by Paragon shall
include, without limitation, in the event that there has been a Change
in Control of Chalone and the Acquiror (Section 8.5(a) hereof), has
provided the written notice called for by Section
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8.5(a)(ii) hereof, the subsequent failure by Chalone to use its best
reasonable efforts, as Managing Joint Venture Partner of the Joint
Venture, to implement fully the terms and provisions of the then
applicable business plan adopted by the Review Committee. If Paragon
elects to remove Chalone for cause, it shall give written notice to
Chalone of its election to remove Chalone as Managing Joint Venture
Partner, specifying its reasons for the election. Chalone shall have
thirty (30) days within which to satisfy the concerns expressed by
Paragon. If, at the end of said 30-day period, Chalone has not
satisfied Paragon's concerns and if Chalone disputes Paragon's
election, then the Joint Venture Partners shall submit the question of
whether sufficient grounds exist to remove Chalone, for cause, as
Managing Joint Venture Partner of the Joint Venture, to dispute
resolution pursuant to the provisions of Article XVIII hereof. Until
resolution of the dispute pursuant to Article XVIII, Chalone shall
continue to serve as Managing Joint Venture Partner of the Joint
Venture. If, pursuant to the dispute resolution mechanisms of Article
XVIII, Paragon's election to remove Chalone as Managing Joint Venture
Partner of the Joint Venture for cause is confirmed, then and in such
event Paragon shall have the right to nominate and appoint the
successor (which may be Paragon) to Chalone as Managing Joint Venture
Partner or as manager of the Joint Venture without being a Partner of
the Joint Venture. If Chalone does not agree with Paragon's nominee to
serve as Managing Joint Venture Partner or manager of the Joint
Venture, then either party may submit the dispute to resolution
pursuant to the provisions of Article XVIII hereof, with the sole issue
to be determined whether or not Paragon's nominee is fit to serve as
Managing Joint Venture Partner or manager of the Joint Venture. Unless
both parties agree otherwise, the aforesaid proceeding shall be brought
as a separate proceeding from any proceeding brought to determine the
validity of Paragon's election to remove Chalone for cause."
Section 8.5(d)(iv) is hereby amended in its entirety to read as
follows:
"(iv) Supervising the general manager of the Winery or, if
there is no general manager of the Winery, the winemaker;"
8. Clarification of Article IX of the 1991 Joint Venture Agreement
(Transfer of Joint Venture Interests)
The Joint Venture Partners hereby confirm that the interest of a Joint
Venture Partner subject to the provisions of Article IX of the 1991 Joint
Venture Agreement
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<PAGE>
includes the interest of the Joint Venture Partner as a member of Brand Name LLC
to the extent, and only to the extent, that the Joint Venture Partner is a
member of Brand Name LLC. For purposes of Section 17.2 of the Joint Venture
Agreement, the interest of a Joint Venture Partner in the Joint Venture shall
include the interest of the Joint Venture Partner as a member of Brand Name LLC
only from and after such time as Chalone becomes a member of Brand Name LLC by
the exercise of the option granted to it pursuant to the provisions of Section
3.7 of the Joint Venture Agreement. Prior to Chalone's becoming a member of
Brand Name LLC, the interest of neither Joint Venture Partner of the Joint
Venture shall, for purposes of Section 17.2 of the Joint Venture Agreement,
include the interest of the Joint Venture Partner as a member of Brand Name LLC.
From and after the date that Chalone becomes a member of Brand Name LLC, then,
for the purposes of Section 17.2 of the Joint Venture Agreement, the interest of
a Joint Venture Partner in the Joint Venture shall include the Joint Venture
Partner's membership in Brand Name LLC and, for purposes of Section 17.2, there
shall be credited to the "Capital Account" of a Joint Venture Partner,
attributable to the Partner's membership interest in Brand Name LLC, Two Hundred
Thousand Dollars ($200,000).
9. Amendment to Article X of the 1991 Joint Venture Agreement (Right of
Purchase Upon Change in Control)
Article X of the 1991 Joint Venture Agreement is hereby deleted in its
entirety. From and after the effective date of this Amendment, the provisions of
Article X shall have no further force or effect and, upon any "Change in
Control" of a Joint Venture Partner, the other Joint Venture Partner shall have
no right or option to purchase the Joint Venture Partner's interest in the Joint
Venture. A Change in Control of Chalone, however, may result in the position of
the Managing Joint Venture Partner becoming vacant (Section 8.5(a) of the Joint
Venture Agreement), and a Change in Control of Chalone shall trigger payment of
the Escalated Purchase Price Credit (Section 12.2(vii) of the Joint Venture
Agreement).
10. Amendments to Article XII of the 1991 Joint Venture Agreement
(Escalated Purchase Price Credit for Paragon)
Article XII of the 1991 Joint Venture Agreement is hereby amended in
the following respects, and in the following respects only.
"12.2 Events Calling for Payment or Credit of Escalated Purchase
Price Credit
The Escalated Purchase Price Credit shall be paid to
or credited for the benefit of Paragon upon the occurrence of any
of the following events:
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<PAGE>
(i) A purchase by Chalone of Paragon's interest in
the Joint Venture pursuant to the provisions of Article IX
hereof;
(ii) A purchase by Paragon of Chalone's interest in
the Joint Venture pursuant to the provisions of Article IX
hereof;
(iii) A sale of all or any portion of the Joint
Venture as an entity or all or any portion of its assets not
in the ordinary course of business;
(iv) A sale by Paragon of the Brand Name under
circumstances pursuant to which Chalone is entitled to share
in the proceeds from the sale of the Brand Name pursuant to
Section 6.2 hereof but, in such event, Chalone shall pay to
Paragon the lesser of the Escalated Purchase Price Credit or
its share of the proceeds from sale of the Brand Name (with
the balance of the Escalated Purchase Price Credit, if not
paid in full, payable upon the occurrence of any of the other
events specified in this Section 12.2 or in this Agreement);
(v) A sale by Chalone of its interest in the Joint
Venture pursuant to the provisions of Article IX hereof;
(vi) The admission to the Joint Venture of one or
more third-party Joint Venture Partners; or
(vii) A Change in Control of Chalone.
If the event calling for payment or credit of the Escalated
Purchase Price Credit represents a sale of less than all of a Joint
Venture Partner's interest in the Joint Venture (clauses (i) or (ii)
above) or a sale of less than the entire business of the Joint Venture
or less than all of its assets not in the ordinary course of business
(clause (iii) above), then an appropriate pro ration of the Escalated
Purchase Price Credit shall be made. In all events, a pro ration of the
Escalated Purchase Price Credit shall be made upon any event described
in clause (vi) above equal to the percentage obtained by dividing (i)
the percentage interest in the Joint Venture obtained by the new Joint
Venture Partner or Partners in the Joint Venture by (ii) 50%. If the
event calling for payment or credit of the Escalated Purchase Price
Credit is a Change in Control of Chalone (clause (vii) above), then and
in such event Chalone shall pay to Paragon an amount equal to the
Escalated Purchase Price Credit within thirty (30) days after the
effective date of the Change in Control of Chalone."
-18-
<PAGE>
11. Amendments to Article XIII of the 1991 Joint Venture Agreement
(Emergency Loan Assistance)
Article XIII of the 1991 Joint Venture Agreement is hereby amended in
its entirety to read as follows:
"13.1 Termination of Emergency Loan Facility; Revision of December
28, 1995 Promissory Note
Pursuant to the provisions of Section 13.1 of the 1991 Joint
Venture Agreement, Paragon, on or about November 2, 1995, requested
emergency loan assistance from Chalone in the amount of Five Hundred
Thousand Dollars ($500,000). Chalone granted this request and on or
about December 28, 1995, loaned Paragon this sum. The loan is evidenced
by Paragon's Promissory Note in the amount of $500,000, dated December
28, 1995, a copy of which is attached hereto as Exhibit E-1. The
obligations of Paragon pursuant to said Promissory Note are secured by
that certain Pledge Agreement, dated December 28, 1995, a copy of which
is attached hereto as Exhibit E-2. Paragon shall have no right to make
a further request of Chalone for emergency loan assistance from and
after the date of this Amendment."
12. Amendments to Article XVII of the 1991 Joint Venture Agreement (Default
and Dissolution)
Article XVII of the 1991 Joint Venture Agreement is hereby amended in
the following respects, and in the following respects only.
(a) Subsection (i), and only subsection (i), of Section 17.1
is deleted.
(b) Nothing in Section 17.2(a) of the 1991 Joint Venture
Agreement shall require Chalone, upon any payment by Chalone for
Paragon's interest in the Joint Venture, if Paragon is the "Defaulting
Partner" under Section 17.2, to include, in the amount payable by
Chalone to Paragon, the Escalated Purchase Price Credit twice.
(c) Section 17.7 is hereby added to read in its entirety as
follows:
"17.7 Rules of Construction
All references in this Article, after the effective
date of the Amendment, to Sections 3.3 or 3.4 of the Joint
Venture Agreement shall be deemed to refer instead to Section
3.4, 3.5, 3.6 and 3.7 of the Joint Venture
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<PAGE>
Agreement, as the context requires. In addition, all
references to the components of a buy-out price in Section
17.2(a) of the Joint Venture Agreement (other than the
component consisting of the Capital Account balance of a Joint
Venture Partner) shall, to the extent not explicitly stated
therein, be calculated to the extent that such item is not
then reflected in the Joint Venture Partner's Capital
Account."
13. Amendments to Article XVIII of the 1991 Joint Venture Agreement
(Arbitration)
Article XVIII of the 1991 Joint Venture Agreement is hereby amended in
its entirety to read as follows:
"18.1 Scope; Dispute Resolution Forum
(a) The parties agree that all disputes arising under
this Agreement, and all matters specifically to be submitted
to arbitration under this Agreement, shall be determined as
provided for in this Article XVIII. Notwithstanding the
foregoing, it is not the intent of the parties hereby to
mediate or arbitrate disputes that may arise from time to time
among members of the Review Committee, such as matters to be
decided by the Review Committee pursuant to the provisions of
Section 8.1(b) hereof. Any such dispute shall not be within
the scope of this Article XVIII.
(b) Should any dispute within the scope of subsection
(a) of this Section 18.1 arise between the Joint Venture
Partners that the Partners are incapable of resolving
themselves through good faith negotiation, then such dispute
or controversy shall first be submitted for mediation by
J.A.M.S./ENDISPUTE ("JAMS") in San Francisco, California,
pursuant to the mediation services provided by JAMS. Should
the dispute between the Joint Venture Partners not be
successfully mediated by JAMS within 60 days of its submission
(subject to any extension agreed to by the Partners) then and
in such event the dispute shall be submitted for binding
arbitration, not by JAMS (unless the Partners explicitly agree
to arbitration by JAMS), but in accordance with the following
procedure:
(i) Within thirty (30) days of the date that the
Partners determine to resolve their dispute by arbitration,
each Partner shall notify the other of an arbitrator
designated by the Partner. The two arbitrators shall promptly
meet and confer in an attempt to resolve the dispute. If the
two arbitrators so named are unable to resolve the dispute,
they shall appoint a third arbitrator. The decision of two of
the three arbitrators shall be conclusive and binding upon the
-20-
<PAGE>
parties and may be confirmed as provided by Sections 1285 et
seq. of the Code of Civil Procedure. The arbitrators shall
consider such evidence and follow such procedures as they may
deem relevant or appropriate to resolve the dispute submitted
to them.
18.2 Costs; Submission to Jurisdiction
It is agreed that the prevailing party in any
arbitration brought pursuant to this Article XVIII or other
action arising from or relating to this Agreement shall be
entitled to reimbursement of its reasonable costs and
expenses, including attorneys' fees. Each Joint Venture
Partner consents to the exercise over it of personal
jurisdiction by the arbitrator(s) selected by the Partners to
resolve any dispute hereunder."
14. Due Execution and Validity of This Amendment
(a) Chalone represents and warrants to Paragon that this Amendment has
been duly authorized and executed by it pursuant to all necessary corporate
action and, upon its due execution by Paragon, this Amendment shall be a valid
and binding agreement of Chalone, enforceable against it in accordance with its
terms and conditions.
(b) Paragon hereby represents and warrants to Chalone that this
Amendment has been duly authorized and executed by it pursuant to all necessary
corporate action and, upon its due execution by Chalone, shall be a valid and
binding agreement of Paragon, enforceable against it in accordance with its
terms and conditions.
15. Continued Validity of the 1991 Joint Venture Agreement
Other than as expressly amended hereby, the terms and provisions of the
1991 Joint Venture Agreement shall remain in full force and effect, binding upon
Chalone and Paragon and their respective successors and assigns.
- --------------------------------
-21-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment of the
1991 Joint Venture Agreement as of the day and year first above written.
PARAGON VINEYARD CO., INC.
By /s/ James H. Niven
___________________________________
James H. Niven
President
CHALONE WINE GROUP, LTD.
By /s/ W. Philip Woodward
___________________________________
W. Philip Woodward
President
EXHIBIT 11
<TABLE>
THE CHALONE WINE GROUP, LTD.
Exhibit 11 - Statement re Computation of Earnings Per Share
<CAPTION>
Year ended December 31,
------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net (loss) income ................................................ $2,339,237 $ 206,607 $ 20,184
Adjustment for interest expense (net of
income tax):
Convertible Debentures: (1)
5% due 1999 ............................................... 425,000 659,000 727,000
---------- ---------- ----------
Adjusted net (loss) income ....................................... $2,764,237 $ 865,607 $ 747,184
Weighted average shares outstanding:
Common shares ................................................ 8,168,627 5,299,766 4,826,094
Common equivalent shares:
Stock options and warrants, net of
treasury stock purchases ............................... -- -- --
---------- ---------- ----------
Weighted average shares outstanding
as adjusted (primary earnings
per share) ............................................. 8,168,627 5,299,766 4,826,094
Contingent issuances:
Convertible Debentures: (1)
5% due 1999 ............................................ 965,099 967,301 1,997,555
---------- ---------- ----------
Weighted average shares outstanding
as adjusted (fully diluted
earnings per share) .................................... 9,133,726 6,267,067 6,823,649
Net income (loss) per common and common
equivalent share ............................................. $ .29 $ .04 $ .00
Net income (loss) per common share
assuming full dilution ....................................... $ .30 $ .14 $ .11
<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>
EXHIBIT 24
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-38070, 33-46966 and 33-77086 on Form S-8, of the CHALONE Wine Group, Ltd., of
our report dated February 20, 1997 appearing in the Annual Report on Form 10-K
of the CHALONE Wine Group, Ltd. for the year ended December 31, 1996.
/s/Deloitte & Touche LLP
- --------------------------
San Francisco, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
</LEGEND>
<CIK> 0000742685
<NAME> Chalone Wine Group, Ltd.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 207,177
<SECURITIES> 0
<RECEIVABLES> 8,577,115
<ALLOWANCES> 0
<INVENTORY> 28,827,670
<CURRENT-ASSETS> 37,945,209
<PP&E> 39,566,234
<DEPRECIATION> (15,446,643)
<TOTAL-ASSETS> 80,178,598
<CURRENT-LIABILITIES> 14,516,922
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 43,245,930
<TOTAL-LIABILITY-AND-EQUITY> 80,178,598
<SALES> 31,909,339
<TOTAL-REVENUES> 31,044,206
<CGS> 18,669,024
<TOTAL-COSTS> 6,282,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,843,546
<INCOME-PRETAX> 3,958,099
<INCOME-TAX> 1,618,862
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,339,237
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.29
</TABLE>
