SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended March 31, 1998
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 Identification Number)
of incorporation or organization)
621 Airpark Road, Napa, CA 94558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (707) 254-4200
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
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 15, 1998, there were 2,997,909 shares of the Company's voting no par
value common stock, with an aggregate market value of $32,976,999 held by
non-affiliates. (For purposes of this required presentation, the registrant has
deemed its directors, executive officers, Domaines Barons de Rothschild (Lafite)
and SFI Intermediate Ltd. to be affiliates, and has deducted the outstanding
shares held by them collectively from the total of 8,540,653 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. (the "Proxy Statement"), to be
filed with the Securities and Exchange Commission within 120 days after March
31, 1998, are incorporated by reference into Part III of this report.
<PAGE>
PART I
Item 1. Business.
a. General Development of Business.
The Company produces, markets and sells premium white and red varietal
table wines, primarily Chardonnay, Pinot Noir, Cabernet Sauvignon, Merlot and
Sauvignon Blanc. The Company operates five wineries; four are located in various
counties of California, while one is located in eastern Washington state. The
Company's California wines are made principally from grapes grown at its Chalone
Vineyard(R) and Carmenet(R) vineyard estates, at vineyards owned by the
Company's partner in the Edna Valley Vineyard(R) Joint Venture, from grapes
grown at two Company-owned vineyards adjacent to the Acacia 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, also owned by the Company.
The Company's wines are sold primarily in the premium-priced segment of the
table wine market under the labels "Chalone Vineyard", "Edna Valley Vineyard",
"Carmenet", "Acacia(TM)" and "Canoe Ridge(R) Vineyard", and, starting in April
of 1998, "Echelon(TM)".
In addition to 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, a first growth
Bordeaux region wine, and Chateau Duhart-Milon, a fourth growth Bordeaux region
wine.
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 six publicly held U.S. corporations whose sole activity
is in the production, marketing and selling of wines.
Change in Fiscal Year-End
Effective as of March 31, 1997, the Company changed its fiscal year from
one ending on December 31 to one ending on March 31. Accordingly, the Company
filed a transition report pursuant to Section 13 of the Securities Exchange Act
of 1934 for the three month period ending March 31, 1997. The Company elected to
change its fiscal year after determining that the nature of its business cycle,
with typically heavy sales activity towards the end of the calendar year,
coupled with the fall harvest of its grapes, created difficulty in efficient and
effective planning and budgeting on a calendar year basis. The period of January
through March is historically the Company's slowest quarter with respect to both
sales activity and production operations.
Significant Events
Release of Echelon Label in April of 1998: Echelon, a new wine brand
produced by the Company, was released to the market in April of 1998, shortly
following the Company's fiscal year-end. This first release consisted of 60,000
cases of 1997 California Central Coast Chardonnay. The 1997 Echelon Chardonnay
is expected to be followed in August 1998 by 20,000 cases of 1997 Pinot Noir,
and in October 1998 by 15,000 cases of 1997 Merlot. All three wines are expected
to be priced between $12 and $14 at retail outlets.
Purchase of Vintage Lane Property: In March 1998, the Company purchased 22
acres of prime vineyard land in the heart of Sonoma Valley. Located on Vintage
Lane in Glen Ellen, the property includes a winery with a 1,200-ton crush
capacity. The Company will use the winery's fermentation facility to expand
production of Carmenet's "Dynamite" wines. Carmenet is located on the north side
of Sonoma Valley on Moon Mountain, about seven miles away from the new winery
and vineyard. The Company plans to use the winery as a red-wine production
facility. Its vineyards are currently planted with approximately one-third
Cabernet Franc and two-thirds Chardonnay. Management intends to replant the
Chardonnay to Merlot, as this latter variety is an important ingredient in
Carmenet's red-wine program and will thus provide Carmenet with estate Merlot
grapes to use in its reserve wines. In addition to replanting the vineyard, the
Company is also planning to offer the facility for custom crushing beginning
with the 1998 harvest. A barrel-storage warehouse is expected to be built on the
property for use after the 1999 harvest.
Exercise of Warrants in March and April of 1998: The Company recently
received gross proceeds of $5.8 million ($4.8 million in March 1998 and $1
million in April 1998) in connection with the issuance of 828,571 shares of its
common stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued as of March 29, 1993 (the "Warrants"), which
it anticipates using for additional working capital and for the reduction of
existing short-term indebtedness. Except as set forth below, the foregoing
shares will be issued pursuant to an exemption from the registration
2.
<PAGE>
requirements of federal and state securities laws. The Company has received
notice that one institutional warrant-holder has exercised its right to demand
registration of 185,714 shares of the Company's common stock received on the
exercise of the Warrants. The Company believes that no other warrant-holders
intend to exercise such registration rights. The Company expects to file a
registration statement on Form S-3 to effect the foregoing registration on or
about June 26, 1998 at the Company's expense. The shares registered thereby may
be resold into the trading market for the common stock of the Company anytime
after the registration statement is declared effective by the Securities and
Exchange Commission, pursuant to the prospectus included therewith.
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 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 percentage of the vineyard's overall
producing acreage damaged by the fire.
As intended, the Company has completed the first stage of replanting
approximately 75% of the damaged acreage. Historically, newly planted vines will
begin to produce production-quality grapes in approximately three years,
although the vines are expected to 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 attempts to
buy suitable grapes on the open market; however, there can be no assurance that
grapes of suitable quality or variety will continue to 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. PG&E has made two advances to the Company for costs
related to the fire in the amounts of $425,000 and $4.5 million in January 1997
and April 1998, respectively. However, when making the advances, PG&E admitted
no liability and has reserved all rights with respect to such advances. 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.
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, the Company considers all of its business to be
within a single industry segment.
For the last fiscal year, as well as the two previous calendar years, sales
of wine accounted for substantially all of the Company's consolidated revenues
and operating profits.
c. Narrative Description of Business.
Overview
<TABLE>
The Company owns six wineries in the United States and France as shown in
the schedule below, either wholly or in partnership with others, all of which
have related vineyards with the exception of Edna Valley Vineyard. The specific
ownership structure is as follows:
<CAPTION>
Property Ownership Form of Ownership Location
-------- --------- ----------------- ---------
<S> <C> <C> <C>
1. Chalone 100.0% Corporation Soledad, California
2. Carmenet Vineyard 100.0% Corporation Sonoma, California
3. Acacia
Acacia Winery 100.0% Corporation Napa, California
Marina Vineyard 50.0% Partnership Napa, California
4. Edna Valley Vineyard 50.0% Partnership San Luis Obispo, California
5. Canoe RidgeVineyard 50.5% Limited liability company Walla Walla, Washington
6. Chateau Duhart-Milon 23.5% Partnership Pauillac, France
</TABLE>
3.
<PAGE>
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 is estate bottled. A vintage dated wine is one produced
wholly from grapes that 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.
For a more detailed description of the Company's properties and its
operations, see 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. Mountain vineyards, including Chalone
Vineyard and Carmenet Vineyard, normally produce lower yields of grapes than
valley vineyards. Vineyards situated closer to the floor of the valleys,
including the cool Carneros District of the Napa Valley, from which the
Company's Acacia wines are made, tend to produce higher grape yields.
The Company generally manages its vineyards to produce yields which are
lower than average for similarly situated vineyards in California and Washington
state and below the maximum yield that could be obtained. It believes that
relatively low yields enhance the varietal character of the grapes and improve
the quality of the resulting wines.
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 California vineyards, including vineyards 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. 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 become susceptible to current or new strains of
phylloxera, plant insects or diseases, any of which could adversely affect the
Company.
Winemaking Practices
The Company's winemaking practices are derived primarily from the
traditional methods of France, adapted to the particular requirements of
California. The Company believes that these methods, while requiring relatively
high amounts 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.
All of the Company's wineries are under the overall supervision of the
Company's Executive Vice President, Winegrowing. In addition, each winery is
operated as a separate profit center, with its own General Manager, who is in
most instances also the winemaker.
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 imported corks, branded with the
particular winery's name.
The Company's winemaking practices follow the principle that winemaking is
a natural process best managed with a minimum of intervention, but requiring the
attention and dedication of a winemaker. Notwithstanding the relatively high
level of hand labor utilized in the Company's winemaking processes, the Company
also makes extensive use of modern laboratory equipment and techniques to
monitor the progress of each wine through all stages of the winemaking process.
Wine Production and Wines
The following table sets forth the wine production of the Company, for the
1997, 1996 and 1995 vintages. Vintages allude to the year during which the
grapes are harvested. Consequently, as of March 31, 1998, the 1998 vintage had
not yet been harvested and cannot yet be estimated.
4.
<PAGE>
<TABLE>
The information which follows is presented in terms of "equivalent" number of
cases, as it is compiled when the related wine is still being aged in barrels,
and is therefore not yet bottled and thus converted to case goods. For the
purpose of this schedule, as well as the discussion which follows, wines
purchased by the Company for resale purposes are excluded.
<CAPTION>
VINTAGE
--------------------- ---------------------- ---------------------
1997 1996 1995
--------------------- ---------------------- ---------------------
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 243,900 59% 151,900 62% 126,500 59%
Sauvignon Blanc 7,000 2% 7,200 3% 6,000 3%
Pinot Blanc 3,100 1% 5,900 2% 7,600 4%
Other white wines 5,700 1% 2,700 1% 3,200 1%
------------ -------- ------------ --------- ------------ --------
Total white wines 259,700 63% 167,700 68% 143,300 67%
------------ -------- ------------ --------- ------------ --------
Pinot Noir 54,200 13% 35,100 14% 27,300 13%
Cabernet Sauvignon 46,900 11% 26,300 11% 25,500 12%
Merlot 47,200 12% 14,700 6% 13,200 6%
Other red wines 4,500 1% 1,400 1% 4,400 2%
------------ -------- ------------ --------- ------------ --------
Total red wines 152,800 37% 77,500 32% 70,400 33%
------------ -------- ------------ --------- ------------ --------
Total production 412,500 100% 245,200 100% 213,700 100%
============ ======== ============ ========= ============ ========
</TABLE>
The Company's wines are fermented and aged primarily in new and used oak
barrels before they are bottled. Generally, 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
generally 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, and may take longer, for the wine to
develop fully.
The Company bottles its wines primarily under the "Chalone Vineyard", "Edna
Valley Vineyard", "Carmenet", "Acacia" and "Canoe Ridge Vineyard", and beginning
in April of 1998, "Echelon" labels. See Item 1, Business, Trademarks.
Chalone Vineyard: Chalone Vineyard production represented 17% of the
consolidated sales dollars and 11% of the consolidated sales quantity for the
fiscal year ended March 31, 1998.
Chalone Vineyard has been producing Chardonnay, Pinot Blanc and Pinot Noir
(and small quantities of Chenin Blanc) since 1970. All wines sold under this
label are produced from grapes grown at the Chalone Vineyard facility or under
the Company's control at adjacent vineyards, and are estate bottled.
Carmenet: Carmenet production represented 17% of the consolidated sales
dollars and 17% of the consolidated sales quantity for the fiscal year ended
March 31, 1998.
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 Vineyard Co., Inc ("Paragon") under a grape purchase agreement and
bears the "Edna Valley" designation.
Edna Valley Vineyard: Edna Valley Vineyard production represented 25% of
the consolidated sales dollars and 27% of the consolidated sales quantity for
the fiscal year ended March 31, 1998.
Edna Valley Vineyard has been producing mostly Chardonnay and Pinot Noir
wines since 1980. The majority of wines sold under the Edna Valley Vineyard
label are produced from grapes grown by Paragon, the Company's partner in the
Edna Valley Vineyard Joint Venture, and are estate bottled.
Acacia: Acacia production represented 21% of the consolidated sales dollars
and 20% of the consolidated sales quantity for the fiscal year ended March 31,
1998.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia"
label. Most of the grapes for the production of Pinot Noir and approximately
two-thirds of the grapes for Chardonnay are acquired from various vineyards in
the Carneros region, in most cases pursuant to grape purchase contracts. The
remaining Chardonnay and Pinot Noir grapes
5.
<PAGE>
are grown on the 41-acre Marina Vineyard, a vineyard that surrounds the winery
facility, and on two vineyards owned by the Company, which are contiguous to the
Marina Vineyard.
Canoe Ridge Vineyard: Canoe Ridge Vineyard production represented 6% of the
consolidated sales dollars and 6% of the consolidated sales quantity for the
fiscal year ended March 31, 1998.
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, and the wines produced at this facility bear the "Columbia
Valley" viticultural area designation.
Custom Brands: Part of each winery's production is occasionally used for
bottling of custom brands in addition to the wines bottled under each winery
label. As such, these custom brands are often comprised of production from the
other Company wineries, for which the percentage of sales contributions are
already stated above.
These custom brands consist primarily of Chardonnay, Cabernet Sauvignon
and Pinot Noir. Quantities of custom brands bottling is highly dependent upon
grape supply and availability. As grapes become more scarce, the focus of the
Company's production shifts away from custom brands as they are generally lower
margin products. The Company uses custom brands primarily as a means of
marketing and selling its label wines and does not intend to focus its efforts
in this line of business.
Imports & Other: The remaining 14% of sales dollars and 19% of sales
quantities in the year ended March 31, 1998 were primarily comprised of import
wines and also include some wines purchased by the Company for resale purposes.
Under the terms of various agreements and investments among the Company,
Duhart-Milon and DBR, the Company receives an allocation of the wines of
Duhart-Milon and 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. DBR
also produces a Pauillac wine exclusively for the Company.
General
The following raw materials are utilized in the Company's production
practices: oak barrels, glass, cork and grapes. Oak barrels are purchased mostly
from France (80%) and within the United States. French oak barrels are
emphasized due to Company tradition as well as consumer taste and preference.
Cork is purchased from Portugal, which is the primary cork-producing country in
the world. Sources of cork elsewhere are relatively scarce. Glass is purchased
from a variety of different sources according to specific needs as determined by
the Company. A substantial portion of the Company's grape requirements is met
through its own vineyards. The remaining grape requirements are met through
purchases of available grapes from California growers.
The Company uses pesticides and other hazardous substances in the operation
of its business. If hazardous substances are discovered on, or emanate from, any
of the Company's properties, and their release presents a threat of harm to
public health or the environment, the Company may be held strictly liable for
the cost of remediation. Payment of such costs could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company maintains various general liability insurance policies, the
Company's insurance may not cover such perils, may not be adequate, or may not
continue to be available at a price or on terms satisfactory to the Company. The
Company is not aware of any such issues at this time which could have a material
impact on the Company's financial position or results of operations.
El Nino
The heavy spring rains experienced during the first half of 1998 as a
result of the weather phenomenon commonly referred to as "El Nino", have
resulted in colder and wetter soils than is typical during California's grape
growing season. Consequently, California vines are experiencing a delay in
flowering and fruit setting, which is expected to postpone the harvesting of
such grapes by approximately three to four weeks. At this time, it is too early
to assess, and there is currently no indication, whether the Company's 1998
harvest will be affected by El Nino in terms of quantity or quality.
6.
<PAGE>
Marketing and Distribution
The Company's wines 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:
[The following descriptive data is supplied in accordance with Rule 30(d) of
regulation S-T]
Pricing by Premium Segments (1)
Acacia $15.00 $40.00
Canoe Ridge Vineyard $12.50 $18.00
Carmenet $13.50 $40.00
Chalone Vineyard $18.00 $45.00
Edna Valley Vineyard $15.00 $23.00
Echelon $12.00 $14.50
Ch. Duhart-Milon $25.00 $40.00
(1)Super-ultrapremium is a segment not generally used by the trade, but which
the Company recognizes.
The Company sells its wines through direct sales, independent distributors,
brokers and its mailing list. These wines are then marketed through specialty
wine shops and grocery stores, selected restaurants, hotels and private clubs
across the country, in certain overseas markets and, in limited quantities,
directly from its wineries. The Company relies primarily on word-of-mouth
recommendations, wine tastings, articles in various publications and
Company-sponsored promotional activities in order to increase public awareness
of its wines.
Sales Outside California
The Company's wines are marketed outside California in 49 states and the
District of Columbia, Puerto Rico, and internationally in Bermuda and other
Caribbean islands, Canada, England, continental Europe, Hong Kong and Japan by
independent distributors. In 1993, the Company established a sales and marketing
division, operating as Chalone Wine Estates, to supervise and coordinate this
segment of the Company's business, as well as the custom brands operations under
which the Company produces wines under the purchaser's brand. The Company
employs a number of regional sales managers who work directly with the
distributors in the particular region and their customers.
Sales Within California
Sales and the marketing of all of the Company's wines within California,
including custom brands, have historically been made both through the Company's
own sales force and through a wholesale marketer, who acts in the capacity of a
broker. Starting with the upcoming fiscal year (year ending March 31, 1999), the
Company expects to use a wholesale marketer for all California sales.
The Company offers its reserve wines, older wines and other special wines
to its approximately 12,000 shareholders, 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. Due to
restrictions on direct retail sales of wines under the laws of other states, the
Company confines direct mail shipments to purchasers with addresses in
California and approximately ten other states which have reciprocal cross-sale
arrangements with the State of California.
7.
<PAGE>
Case Sales by Method of Distribution
<TABLE>
The following table sets forth case sales by the Company by distribution
method for the year ended March 31, 1998 and calendar years 1996 and 1995.
<CAPTION>
Year ended
March 31, Year ended December 31,
----------------------- ----------------------------------------------------
1998 1996 1995
----------------------- ----------------------- -----------------------
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 144,328 45% 121,403 41% 108,831 40%
International 12,306 4% 12,574 4% 8,457 3%
------- ------- ------- ------- ------- -------
Total distributors 156,634 49% 133,977 45% 117,288 43%
------- ------- ------- ------- ------- -------
Company direct
California wholesale 93,418 29% 85,378 29% 70,330 26%
Custom brands 46,840 15% 52,233 17% 63,442 24%
Catalog and winery retail 25,639 7% 27,454 9% 19,247 7%
------- ------- ------- ------- ------- -------
Total Company direct 165,897 51% 165,065 55% 153,019 57%
------- ------- ------- ------- ------- -------
Total 322,531 100% 299,042 100% 270,307 100%
======= ======= ======= ======= ======= =======
</TABLE>
Centralized Administration and Warehousing
The Company's wineries are all supported by a leased 11,500 sq. ft. central
office located in Napa County, California, at the Napa Airport Business Park. In
addition to housing the Company's central executive office, it serves as a
central distribution center from which all of the Company's wines are stored
prior to shipping into local markets. The Company also rents separate warehouse
facilities as needed in local markets, and occasionally permits storage of third
party wines in portions of its Napa warehouse for a fee. The lease has a 15-year
initial term expiring in November 2008, with a five-year extension option.
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, with the recent
addition of Echelon wines in April of 1998, consist of approximately 200
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, price, and consumer
taste. Increased plantings of vineyards occurred in the past few years
throughout California in order to meet the growing wine demand. As these
vineyards yield increasingly large harvests, and the supply and availability of
grower-produced grapes increases, price competition in the wine industry is
expected to increase proportionately. The Company believes it generally competes
favorably with respect to all other factors mentioned above. As production from
all of its wineries continues to increase, however, the Company's future sales
may be adversely affected by such factors, as well as competition from new
market entrants.
Employees
On March 31, 1998, the Company had 117 full-time employees, of which 50
were involved in grape growing and winemaking and 67 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. The Company's hiring and employment policies for both full-time and
part-time employees are believed to comply with all relevant laws, including
immigration laws.
None of the employees of the Company (including its subsidiary and joint
ventures) are represented by a union. The Company believes that its wage rates
and benefits are competitive and that its relations with the Company's employees
are excellent.
8.
<PAGE>
Regulation; Permits and Licenses
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, which requires the Company to
maintain various permits, bonds and licenses.
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 believes it is in compliance with all currently applicable federal and
state regulations.
The Company's wines are subject to a federal excise tax (since January 1,
1991, at the maximum rate of $1.07 per gallon), payable at the time of shipment
to customers, and varying state excise taxes.
Trademarks
CHALONE VINEYARD, CARMENET and ACACIA "A" logo 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. CANOE RIDGE is a federally registered trademark owned by Canoe
Ridge Vineyard, LLC. These marks are also registered in Japan, with the Japanese
Patent Office. These federally registered trademarks, and other common-law
trademarks, including, but not limited to "Echelon", are of significant
importance to the Company's business as label and brand recognition are
important means of competition within the wine industry.
Shareholder Benefits
Shareholders of the Company are entitled to benefits which are not provided
to other 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 suggested retail
prices on all mail-order or 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
the year ended March 31, 1998, the credit amount was $.12 per share, while it
was $.12 and $.11 per share in each of the years ended December 31, 1996 and
1995, respectively. The Company also offers to shareholders, at the
shareholders' expense, travel programs 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 New Zealand. Additionally, each
spring, shareholders are invited to attend the Company's annual Shareholder
Celebration. For a nominal fee, attendees attend an all-day wine tasting,
auctions and luncheon, which typically is held in the spring on the grounds of
the Chalone Vineyard in Solano County, California. In 1998, approximately 1500
shareholders (and guests thereof) from 38 states and 4 foreign countries
attended the luncheon, which featured tastings of all of the Company's new
wines, most of its best wines, and a sumptuous luncheon.
Seasonality
See Item 7, 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.
9.
<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, and vineyard acreage currently in
development, and the remaining undeveloped acreage suitable for future planting.
Acreage listed as "Developing and replanted" may consist of acreage which was
unplanted, or previously producing acreage which has been, or presently is,
being replanted.
<CAPTION>
At March 31, 1998
-------------------------------------------------
Developing
Producing & replanted Unplanted Total
--------- ----------- --------- -----
<S> <C> <C> <C> <C>
Chalone Vineyard:
Chardonnay 110 32 -- 142
Pinot Noir 43 60 -- 103
Pinot Blanc 30 -- -- 30
Chenin Blanc 8 -- -- 8
Other 2 19 -- 21
Unplanted -- -- 198 198
----- ----- ----- -----
Subtotal 193 111 198 502
----- ----- ----- -----
Carmenet Vineyard:
Cabernet Sauvignon 19 32 -- 51
Cabernet Franc 15 8 -- 23
Merlot 4 -- -- 4
Chardonnay 14 -- -- 14
Other 1 6 -- 7
Unplanted -- -- 5 5
----- ----- ----- -----
Subtotal 53 46 5 104
----- ----- ----- -----
Acacia Winery (including leasehold interest):
Chardonnay, Viogner 36 7 -- 43
Pinot Noir 15 37 -- 52
Unplanted -- -- 4 4
----- ----- ----- -----
Subtotal 51 44 4 99
----- ----- ----- -----
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon 32 16 -- 48
Merlot 39 35 -- 74
Chardonnay 29 -- -- 29
Other -- 6 -- 6
Unplanted -- -- 26 26
----- ----- ----- -----
Subtotal 100 57 26 183
----- ----- ----- -----
Total Acreage 397 258 233 888
===== ===== ===== =====
</TABLE>
Chalone Vineyard(R)
Chalone Vineyard(R) is located on approximately 950 acres in Monterey,
California (of which 502 acres are plantable), 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.
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 former
director of the Company, the late 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.
10.
<PAGE>
The Company produces primarily Chardonnay and Pinot Noir at this facility
and markets these wines under the "Chalone Vineyard" and "Gavilan" labels,
although the production of further "Gavilan" vintages has been discontinued as
of March 31, 1998.
Carmenet(R) Vineyard
Carmenet(R) Vineyard is located on approximately 300 acres in Sonoma
County, California (of which 104 acres are plantable), 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 has replanted these acres with
essentially the same varieties. See Item1, Business, Significant Events -
Carmenet Fire.
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.
In March of 1998, the Company purchased 22 acres of prime vineyard land in
the heart of Sonoma Valley. See Item 1, Business, Significant Events - Purchase
of Vintage Lane Property. Located on Vintage Lane in Glen Ellen, the property
includes a winery with a 1,200-ton crush capacity. The Company will use the
winery's fermentation facility to expand production of Carmenet's Dynamite
wines. Carmenet is located about seven miles away from the Vintage Lane
facility. The Company anticipates using the property and winery as a red-wine
production facility. The vineyard is currently planted with approximately
one-third Cabernet Franc and two-thirds Chardonnay. Management intends to
replant the Chardonnay to Merlot, as this later variety is an important
ingredient in Carmenet's red-wine program and will thus provide Carmenet with
estate Merlot grapes to use in its reserve wines. In addition to replanting the
vineyard land, the Company also is planning to offer the facility for custom
crushing beginning with the 1998 harvest, and to construct a barrel-storage
warehouse on the property for use after the 1999 harvest.
In addition to the production area, the winery holds 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 an ideal environment for aging wine in barrels
without artificial temperature control. In the past, the winery had an annual
production capacity of approximately 38,000 cases. However, with the addition of
the Vintage Lane facility, the winery now has the ability to crush and ferment
up to an additional 100,000 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(R)
Paragon Vineyard is located on approximately 1,100 acres in San Luis Obispo
County, California, in the "Edna Valley" viticultural area. The property is
operated by Paragon Vineyard Company, which leases the winery to the Edna Valley
Vineyard(R) joint venture (the "Joint Venture"). 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 on January 1, 1991 as amended on December 27,
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
indefinitely extend its term, among other things. The Company, as the managing
joint venture partner, manages and supervises the winery operations, and sells
and distributes the wine.
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.
In 1996, the ground lease was amended to provide additional land for
planned expansion of the winery, which subsequently was expanded from
approximately 24,000 square feet in size to over 32,000 square feet. This area
includes 12,000 square feet of underground cellars for wine fermentation and
aging in barrels. The expansion increased the annual production capacity from
approximately 60,000 cases to over 100,000 cases. The expanded facility includes
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 on approximately
101 acres 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
11.
<PAGE>
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 $130,000 in the
year ended March 31,1998, subject to an annual increase 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 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 on low rolling
hills in well-drained clay-loam soil. The majority of the vines was 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 average annual
rainfall is 22 inches. The vineyard is irrigated from a reservoir located on the
property.
Additionally, the Company owns two vineyards contiguous to the Marina
Vineyard. These vineyards are planted to Pinot Noir, with fifteen acres
producing and 45 acres under development (for a total of 101 acres; 15 + 45 + 41
for the Marina Vineyard, of which 99 acres are plantable). 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
wines produced at the winery are principally Chardonnay and Pinot Noir, which
are marketed under the "Acacia" and "Caviste" labels, although the production of
further "Caviste" vintages has been discontinued as of March 31, 1998. The
Acacia "A" logo is a federally registered trademark.
Canoe Ridge(R) Vineyard Properties
The Canoe Ridge(R) Vineyard is located in eastern Washington state, on the
eastern slope of the Canoe Ridge, overlooking the Columbia River at an altitude
of approximately 800 feet. The vineyard is in the "Columbia Valley" viticultural
area. Of the vineyard's approximately 275 acres (of which 183 acres are
plantable), a total of 100 acres of which are now planted, in roughly equal
proportions of Chardonnay, Merlot and Cabernet Sauvignon grapes. Although
temperatures during the winter months can fall below freezing, the vineyard's
altitude and easterly exposure, coupled with the Company's viticultural
practices, are believed to 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, LLC, a limited liability company in which the Company holds a 50.5 %
interest (the "LLC"). The Company holds 25% of the membership interest of the
LLC directly and 25.5% indirectly, through a wholly owned subsidiary of the
Company.
The winery associated with the vineyard is located in a recently renovated
historic building in downtown Walla Walla, Washington, which originally served
as the engine house for the Walla Walla Valley Railroad. The LLC leases the
winery building pursuant to a five-year lease agreement, which commenced in July
of 1994 and is subject to renewal for two 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. 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, and produces
primarily Chardonnay, Merlot and small amounts of Cabernet Sauvignon.
Duhart-Milon
Duhart-Milon is located in the Medoc region of Bordeaux, France, in the
town of Pauillac. The Company holds a 23.5% interest in Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"), while 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 its related
winemaking facilities. 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 further 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 the
foregoing is subject. With the exception of the possible litigation arising out
of the Carmenet fire (see Item 1, Business, Significant Events - Carmenet Fire),
the Company's management knows of no other action being contemplated.
12.
<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 this Report.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of
March 31, 1998.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward(1) Chief Executive Officer 58
and Director
Thomas B. Selfridge(1) President and Director 54
William L. Hamilton Executive Vice President, Chief 53
Financial Officer, Secretary,
and Director
Larry M. Brooks Executive Vice President, Winegrowing 47
Robert B. Farver Vice President, Sales and Distribution 42
b.Business Experience of Executive Officers
W. Philip Woodward. Mr. Woodward is a co-founder of the Company and has
served as the Company's Chief Executive Officer since 1974. He has been a
director of the Company since 1972 and its chairman since 1997 and he is a
member of the Board Executive Committee. He 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. Mr. Woodward is a director of Domaines Barons de Rothschild
(Lafite) ("DBR"), the Northern Trust Company of California, and Hog Island
Oyster Company, Inc., and President and a director of the Marin Theatre Company.
He is also a board member of the Wine Institute and the American Vintners'
Association.
Thomas B. Selfridge. Mr. Selfridge joined the Company as President in
January 1998. He was appointed to the Company's Board of Directors in May 1998
and is a director of Edna Valley Vineyard and Canoe Ridge Winery. He also serves
as an ex officio member of the Company's Executive Committee. On July 1, 1998,
Mr. Selfridge is expected to assume the title of Chief Executive Officer of the
Company and become a member of the Board's Executive Committee. Prior to joining
the Company, Mr. Selfridge was Executive Vice President of Kendall-Jackson
Winery, Ltd. Since joining Kendall-Jackson in 1990 as Vice President of
Production, he had wide ranging responsibilities over the areas of brand
marketing, creative services, hospitality, public relations, winemaking,
bottling, grower management, quality control and warehouse operations. In all,
Mr. Selfridge has over 25 years experience in the wine industry, initially as a
winemaker at Beaulieu Vineyard where he became president in 1983. He holds a
Master's Degree in enology from San Francisco State University and he has done
doctoral studies at the University of Pennsylvania's Wharton School of Business.
William L. Hamilton. Mr. Hamilton has served the Company as Executive Vice
President and Chief Financial Officer since 1990 and 1986, respectively. He was
also a director of the Company from 1986 to May 1998. 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.
Mr. Hamilton resigned effective July 1, 1998 to pursue other interests. He also
serves as a trustee of the Marin Community Foundation.
Larry M. Brooks. Mr. Brooks was appointed Executive Vice President,
Winegrowing in 1997. Mr. Brooks joined the Company 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 include Managing Director and
Winemaker of Acacia Winery. In 1993 his title was changed to include Vice
President - Production.
Robert B. Farver. Mr. Farver has served the Company as Vice President,
Sales and Distribution since 1996. Since joining the Company in 1990, he has
served as the Regional Sales Manager for the Northeast United States. In 1994
his title was changed to Director of National Sales and Marketing.
- ----------------
(1) As of July 1, 1998, Mr. Woodward is expected to relinquish the title of
Chief Executive Officer. Mr. Selfridge has been designated as his successor in
this post.
13.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on May 18, 1984, and is listed in
the Nasdaq National Market System, under the symbol "CHLN." The following table
sets forth the high and low closing quotations for the stock for each quarter
during the past 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.
Quarter ended High Low
------------- ---- ---
March 31, 1998 11.75 10.13
December 31, 1997 12.00 9.75
September 30, 1997 12.75 10.50
June 30, 1997 12.75 10.50
March 31, 1997 12.00 10.00
December 31, 1996 12.00 9.25
September 30, 1996 10.00 8.00
June 30, 1996 11.13 8.88
March 31, 1996 10.50 9.00
On June 15, 1998, the closing price for the common stock was $11.00 per
share. During the year ended March 31, 1998, the average weekly trading volume
of the stock was approximately 2,400 shares.
b. Holders of Record.
As of June 15, 1998, there were approximately 5,202 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 terms of the Company's 5% Convertible Subordinated Debentures,
which are redeemable in their entirety (unless sooner converted) not later than
April 19, 1999, the Company is restricted from paying dividends in excess of 50%
of its aggregate net income.
14.
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data for the year ended March
31, 1998 and the years ended December 31, 1996, 1995, 1994 and 1993 are derived
from the audited consolidated financial statements of the Company. The financial
data for the twelve months ended March 31, 1997, 1996 and 1995, however, are
derived from the unaudited consolidated financial statements of the Company and
are furnished with a view to providing the reader with comparative results for
the prior twelve-month periods which coincide with the Company's current fiscal
year-end (March 31). 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
-------- -------- -------- --------
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues $ 31,044 $ 25,032 $ 20,515 $ 17,824
Gross profit 12,375 8,792 7,504 6,395
Other revenues from operations 107 20 -- --
Selling, general and administrative expenses 6,283 5,374 4,633 4,432
Operating income 6,200 3,438 2,870 1,963
Other income/(expense), net (1,925) (2,701) (2,561) (2,482)
Equity in net income of Duhart-Milon 304 74 -- --
Minority interest (621) (357) (188) (372)
Net earnings (loss) $ 2,339 $ 207 $ 20 $ (691)
Earnings (loss) per common share $ 0.29 $ 0.04 $ -- $ (0.16)
Balance Sheet Data:
Working capital $ 23,504 $ 22,072 $ 17,136 $ 15,291
Total assets 80,179 72,569 72,225 71,921
Long-term obligations less current maturities 17,837 13,511 26,425 27,387
Shareholders' equity 43,246 41,382 24,199 22,698
Year ended March 31,
-----------------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
Statement of Operations Data:
Net revenues $ 36,755 $ 31,188 $ 25,987 $ 20,710
Gross profit 16,216 12,811 9,243 7,530
Other revenues from operations 303 107 20 --
Selling, general and administrative expenses (8,147) (6,466) (5,442) (4,754)
Operating income 8,372 6,452 3,801 2,776
Other income/(expense), net (1,857) (1,789) (2,429) (2,584)
Equity in net income of Duhart-Milon 341 281 126 --
Minority interest (1,125) (681) (387) (156)
Net earnings (loss) $ 3,410 $ 2,520 $ 600 $ (26)
Earnings (loss) per common share $ 0.41 $ 0.31 $ 0.10 $ --
Balance Sheet Data:
Working capital $ 27,794 $ 24,283 $ 22,023 $ 16,680
Total assets 90,294 75,859 68,973 70,299
Long-term obligations less current maturities 18,124 18,379 13,415 26,339
Shareholders' equity 50,405 42,835 41,098 23,931
</TABLE>
15.
<PAGE>
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.
Forward Looking Statements
From time to time, information provided by the Company, statements made by
is employees or information included in its filings with the Securities and
Exchange Commission (including the Form 10-K) may contain statements which are
not historical facts, so called "forward looking statements" which involve risks
and uncertainties. Forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. When
used in this Form 10-K, the terms "anticipates", "expects", "estimates",
"intends", "believes" and other similar terms as they relate to the Company or
its management are intended to identify such forward looking statements. In
particular, statements made in this Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, relating to projections or
predictions about the Company's future investment in vineyards and other capital
projects are forward looking statements. The Company's actual future results may
differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to (i)
reduced consumer spending or a change in consumer preferences, which could
reduce demand for the Company's wines; (ii) competition from numerous domestic
and foreign wine producers could affect the Company's ability to sustain volume
and revenue growth; (iii) interest rates and other business and economic
conditions could increase significantly the cost and risks of projected capital
spending; (iv) the price and availability in the marketplace of grapes meeting
the Company's quality standards and other requirements; and (v) the effect of
weather and other natural forces on growing conditions and, in turn, the quality
and quantity of grapes produced by the Company. Each of these factors, and
others about the Company, the premium wine industry and general business and
economic conditions, is discussed from time to time in the Company's filings
with the Securities and Exchange Commission.
Change in Fiscal Year-End
Effective with the fiscal year ending March 31, 1997, the Company changed
its fiscal year from one ending on December 31 to one ending on March 31.
Accordingly, the Company reported a three-month transition period ending March
31, 1997. The Company determined that the nature of its business cycle, with
typically heavy sales activity towards the end of the calendar year, coupled
with the fall harvest of its grapes, created difficulty in efficient and
effective planning and budgeting on a calendar year basis. A fiscal year ending
March 31 occurs at the end of what is historically the least active quarter with
respect to sales activity and operations in the production of wine.
The Company elected to file audited financial statements for the transition
period referred to above. In accordance with applicable regulations, this Report
includes consolidated balance sheets as of March 31, 1998 and December 31, 1996
and consolidated statements of operations for the twelve months ended March 31,
1998 and December 31, 1996 and 1995, respectively. With a view to providing
comparative information which more effectively highlights significant trends in
the Company's financial condition and results of operations, this Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial information for the
twelve-month periods ending March 31, 1998 and March 31, 1997, unless otherwise
indicated. See Item 6, Selected Financial Data for schedule discussed herein.
16.
<PAGE>
Results of Operations
<TABLE>
The following table represents financial data as a percentage of net
revenues for the indicated periods:
<CAPTION>
Year ended March 31, Year ended December 31,
------------------------------ ------------------------------------
1998 1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100% 100% 100% 100%
Gross profit 44% 41% 36% 40% 35% 37% 36%
Other revenues from operations 1% 0% 0% 0% 0% 0% 0%
Selling, general and admin. expenses 22% 21% 21% 20% 21% 23% 25%
Operating income 23% 21% 15% 20% 14% 14% 11%
Other income (expense) (5%) (6%) (9%) (6%) (11%) (12%) (14%)
Equity in net income of Duhart-Milon 1% 1% 0% 1% 0% 0% 0%
Minority interest (3%) (2%) (1%) (2%) (1%) (1%) (2%)
Net earnings (loss) 9% 8% 2% 8% 1% 0% (4%)
</TABLE>
Wine Sales
Net revenues for the year ended March 31, 1998 increased approximately 18%
over the comparable period in the preceding year. This increase was due to a 9%
increase in the number of cases, as well as a similar 8% increase in the average
sales price per case.
Net revenues for the year ended March 31, 1997 increased by 20% over the
prior year comparable period. This increase was due to both unit and price
increases at all five wineries and in the imported wines distributed by the
Company.
Unit sales in the California market have remained relatively flat over each
of the three years ended March 31, 1998, 1997 and 1996 (excluding custom brands)
and comprise 29% of total unit sales for the year ended March 31, 1998. Although
California is the largest market for the Company (no single market outside of
California accounted for more than 10% of total sales in these years),
management believes that increased unit sales in markets outside of California
continue to account for most of future revenue growth.
Gross Profit
Gross profit for the year ended March 31, 1998 increased by approximately
27%, or $3.4 million over the comparable period in the preceding year, resulting
primarily from the increases in sales quantities and sales price per case
mentioned above, combined with a relatively low 2% increase in cost of sales per
case.
Gross profit for the year ended March 31, 1997 was $12.8 million as
compared to $9.2 million in the year ended March 31, 1996. For those two
periods, gross profit as a percent of net revenues for the year increased to 41%
for the year ended March 31, 1997 from 36%. This increase in gross profit is
attributable to both an 11% increase in unit sales, as well as price increases
across all brands and a shift in the product mix of wines sold to higher margin
wines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the year ended March 31,
1998 increased by 26% over the comparable period in the preceding year. This
increase is primarily the result of planned increases in marketing expenditures.
Selling, general and administrative expenses for the year ended March 31,
1997 increased approximately 19% from prior comparable period. 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 each of the two years ended March 31, 1997 and 1996 remained flat at
21% for the comparable period in 1995, due to expenses increasing at a slower
rate than sales during that period.
Operating Income
Operating income for the year ended March 31, 1998 increased by 30% over
the comparable period in the preceding year. This increase was due to higher
unit sales and gross margins per case as discussed above. Additionally, crushing
fees received from third party wineries has consistently increased over the past
three years, and comprised 4% of the operating income for the year ended March
31, 1998 compared to 2 % in the prior comparable period.
Operating income for the year ended March 31, 1997 increased 70% over the
prior comparable year. 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.
17.
<PAGE>
Other Income/(Expense), Net
The increase of 4% in net other expense between the years ending March 31,
1998 and 1997 was primarily driven by a 6% increase in net interest expense, due
to slightly higher borrowing levels.
Interest expense for the year ended March 31, 1997 decreased to $1.8
million, a decrease of 28% from $2.5 million in the prior comparable period.
This was made possible by the conversion of $12.4 million of convertible
debentures to equity in November of 1995 and the reduction of short-term
borrowings resulting from $4.5 million in new equity received at the same time.
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 interests in Duhart-Milon's net income for the
years ending March 31, 1998 and 1997 were $341,000 and $281,000, respectively.
This increase of 21% is primarily attributable to exceptionally strong demand
for the Bordeaux wines and corresponding increases in prices of the wines.
Minority Interest
<TABLE>
The Edna Valley Vineyard ("EVV") and Canoe Ridge Vineyard, LLC ("CRV")
individual financial statements are consolidated in full within the Company's
financial statements. The interest in the net earnings of EVV and CRV which thus
belongs to parties other than the Company is accounted for as "minority
interest". This "minority interest" in earnings (losses) of these ventures for
the three years ended March 31, 1998 consisted of the following (in thousands):
<CAPTION>
Year ended March 31,
Minority ----------------------------------
Venture Minority Owner Percent 1998 1997 1996
- ------- -------------- ------- ------ ------ ------
<S> <C> <C> <C> <C>
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50.00% $ 906 $ 570 $ 371
Canoe Ridge Vineyard, LLC Various 49.50% 219 111 7
CanoeCo Partners CRVI 50.00% -- -- 9
------ ------ ------
$1,125 $ 681 $ 387
====== ====== ======
</TABLE>
The minority interest in earnings for the year ended March 31, 1998
increased 65% over the comparable period ended March 31, 1997, due to steadily
improving performance at both EVV and CRV primarily as a result of increases in
gross margins per case.
The minority interest in earnings for EVV for the year ended March 31, 1997
represents an increase of 54% from the prior comparable period. Similarly, the
minority interest for CRV increased significantly. Both increases were due to
improved performance at both EVV and CRV.
Company management believes that EVV and, to a lesser degree CRV, will both
continue to contribute significantly to the Company's consolidated income
statement.
Net Earnings
Net earnings for the year ended March 31, 1998 was $3.4 million, an
increase of 35% over the comparable year ended March 31, 1997, primarily as a
result of increased sales revenue, as discussed above.
Net earnings for the year ended March 31, 1997, were $2.5 million compared
to $600,000 in the year ended March 31, 1996. This 317% increase reflects
increased unit sales at higher gross margins, lower interest expense and lower
selling, general and administrative expenses as a percentage of sales, all of
which are discussed above.
Seasonality
The Company's wine sales from quarter to quarter are highly variable due
to, 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 sales and because most wines are released around the
end of the third and beginning of the fourth quarters.
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to determine the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
miscalculations causing disruptions of operations, including, among other
things, temporary inefficiencies in processing transactions, sending invoices,
or engaging in similar normal business activities.
18.
<PAGE>
The Company has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by Year 2000 software
failures. While the Company believes it is doing everything technologically
possible to assure Year 2000 compliance, it is to some extent dependent upon
vendor cooperation. The Company also recognizes that any Year 2000 compliance
failures could result in additional expenses to the Company, the materiality of
which cannot be predicted at this time.
Liquidity and Capital Resources
The Company's working capital increased $3.5 million during the year ended
March 31, 1998 to $27.8, primarily as a result of increased inventory levels as
of March 31, 1998, in light of anticipated increased sales activity for the
upcoming year. As of January 1998, the Company obtained an increase of $2
million to $18.3 in aggregate available bank lines of credit, of which $11.0
million was outstanding as of March 31, 1998. These lines are secured by
substantially all of the Company's inventory and accounts receivable, bear
interest at LIBOR plus 1.0% and mature in June, 1999 at which time Management
expects to renew the lines for one to two years.
The Company's cash and cash equivalents totaled $207,000 as of March 31,
1997, up from $2,000 as of March 31, 1996. As of March 31, 1997, the Company
also had bank lines of credit in the aggregate amount of $16.3 million
available, of which $7.8 million was outstanding, as compared to $7.9 million
outstanding as of March 31, 1996.
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 expansion of
facilities or acquisition of vineyards have been funded with debt and equity
issues and bank borrowings. For example, the Company invested approximately
$4,600,000 in the year ended March 31, 1997 for the expansion of the facilities
at Edna Valley Vineyard and the vineyards at Acacia and Chalone Vineyard, all of
which were funded with long-term borrowings.
Future capital commitments include general vineyard development at all of
the Company's vineyards, as well as the planned building of a barrel-storage
facility on the site of the recently purchased Vintage Lane property. Management
intends to fund such projects with additional bank borrowings and the proceeds
obtained from the exercises of warrants which occurred in March and April of
1998 (see discussion below), as well as from the anticipated settlement with
PG&E. See Item 1, Business, Significant events - Carmenet Fire.
The Company recently received net proceeds of $5.8 million ($4.8 million in
March 1998, and $1 million in April 1998) from the issuance of 828,571 shares of
its common stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued on March 29, 1993 (the "Warrants"), which it
anticipates using for the reduction of existing short-term indebtedness, working
capital and the foregoing capital projects.
19.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................... 21
Consolidated Statements of Operations .......................... 22
Consolidated Statements of Changes in Shareholders' Equity ..... 23
Consolidated Statements of Cash Flows .......................... 24
Notes to Consolidated Financial Statements ..................... 25
INDEPENDENT AUDITORS' REPORT .............................................. 38
20.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
ASSETS
<CAPTION>
March 31, December 31,
1998 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,232 $ 207
Accounts receivable, less allowance for doubtful
accounts of $92 and $71, respectively 6,597 7,003
Notes receivable 197 78
Other receivables -- 419
Note receivable from officer 65 --
Inventory 34,277 29,905
Prepaid expenses 450 229
Deferred income taxes 14 104
-------- --------
Total current assets 43,832 37,945
Investment in Chateau Duhart-Milon 9,480 11,614
Notes receivable, long-term portion 130 492
Property, plant and equipment - net 30,131 24,120
Goodwill and trademarks - net 6,473 5,618
Other assets 248 390
-------- --------
Total assets $ 90,294 $ 80,179
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,425 $ 6,051
Bank lines of credit 10,952 6,494
Other short term debt 952 --
Current maturities of long-term obligations 709 536
Income tax payable -- 1,360
-------- --------
Total current liabilities 16,038 14,441
Long-term obligations, less current maturities 9,624 9,337
Convertible subordinated debentures 8,500 8,500
Deferred income taxes 2,049 1,209
-------- --------
Total liabilities 36,211 33,487
-------- --------
Minority interest 3,678 3,446
Shareholders' equity:
Common stock 46,871 41,674
Retained earnings 5,993 2,273
Cumulative foreign currency translation adjustment (2,459) (701)
-------- --------
Total shareholders' equity 50,405 43,246
-------- --------
Total liabilities and shareholders' equity $ 90,294 $ 80,179
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
21.
<PAGE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
Year ended
March 31, Year ended December 31,
-------- ---------------------
1998 1996 1995
-------- -------- --------
Gross revenues $ 37,651 $ 31,909 $ 25,810
Excise taxes (896) (865) (778)
-------- -------- --------
Net revenues 36,755 31,044 25,032
Cost of wines sold (20,539) (18,669) (16,240)
-------- -------- --------
Gross profit 16,216 12,375 8,792
Other revenues from operations 303 107 20
SG&A expenses (8,147) (6,282) (5,374)
-------- -------- --------
Operating income 8,372 6,200 3,438
Other income (expense)
Interest expense (1,872) (1,844) (2,779)
Other, net 15 (81) 78
-------- -------- --------
(1,857) (1,925) (2,701)
Equity in Chateau Duhart-Milon 341 304 74
Minority interests (1,125) (621) (357)
-------- -------- --------
Income before income taxes 5,731 3,958 454
Income tax expense (2,321) (1,619) (247)
-------- -------- --------
Net income $ 3,410 $ 2,339 $ 207
======== ======== ========
Net income per common share
Basic $ 0.44 $ 0.31 $ 0.04
Diluted $ 0.41 $ 0.29 $ 0.04
Average number of shares used
in income per share computation
Basic 7,786 7,641 5,300
Diluted 8,409 8,169 5,300
The accompanying notes are an integral part of these statements.
22.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(All amounts in thousands)
<CAPTION>
Common Stock
------------------------ Retained Foreign
Number of Earnings/ Currency
Shares Amount (Deficit) Translation Total
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,961 $ 24,472 $ (273) $ 24,199
Sale of common stock - net 838 4,532 4,532
Conversion of convertible debentures 1,769 12,384 12,384
Options exercised 28 169 169
Foreign currency translation adjustment $ (108) (108)
Net earnings 207 207
-------- -------- -------- -------- --------
Balance, December 31, 1995 7,596 $ 41,557 $ (66) $ (108) $ 41,383
-------- -------- -------- -------- --------
Sale of common stock 9 22 22
Options exercised 19 77 77
Profit Sharing 2 18 18
Foreign currency translation adjustment (593) (593)
Net earnings 2,339 2,339
-------- -------- -------- -------- --------
Balance, December 31, 1996 7,626 $ 41,674 $ 2,273 $ (701) $ 43,246
-------- -------- -------- -------- --------
Sale of common stock 2 14 14
Options exercised 20 83 83
Profit Sharing 7 70 70
Foreign currency translation adjustment (888) (888)
Net earnings 310 310
-------- -------- -------- -------- --------
Balance, March 31, 1997 7,655 $ 41,841 $ 2,583 $ (1,589) $ 42,835
-------- -------- -------- -------- --------
Sale of common stock 11 75 75
Warrants exercised 686 4,800 4,800
Options exercised 42 155 155
Profit Sharing --
Foreign currency translation adjustment (870) (870)
Net earnings 3,410 3,410
-------- -------- -------- -------- --------
Balance, March 31, 1998 8,394 $ 46,871 $ 5,993 $ (2,459) $ 50,405
======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
23.
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
<CAPTION>
Year ended
March 31, Year ended December 31,
-------- --------------------------
1998 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,410 $ 2,339 $ 207
Non-cash transactions included in earnings:
Depreciation 2,902 2,873 2,718
Amortization 236 121 147
Equity in net income of Chateau Duhart-Milon (341) (304) (74)
Increase in minority interest 1,125 621 357
Loss (gain) on sale of equipment 8 86 (15)
Changes in:
Deferred income taxes 740 199 46
Accounts and other receivable (2,653) 73 (2,136)
Distribution receivable 382 -- --
Inventory (4,860) (1,831) 1,349
Prepaid expenses and other assets (231) (236) 103
Other receivables -- (419) --
Accounts payable and accrued expense 1,624 3,494 (148)
-------- -------- --------
Net cash provided by operating activities 2,342 7,016 2,554
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,331) (6,635) (2,270)
Proceeds from disposal of property and equipment 105 362 146
Net increase (decrease) in notes receivable 194 33 (602)
Investment in Edna Valley joint venture (1,050) -- --
Investment in Duhart-Milon 363 156 --
-------- -------- --------
Net cash used in investing activities (6,719) (6,084) (2,726)
-------- -------- --------
Cash flows from financing activities:
Net change under line of credit agreement 3,181 (3,745) (3,635)
Distribution to minority interest (638) (200) (376)
Proceeds from issuance of long-term debt -- 8,894 --
Repayment of long-term debt (1,210) (5,823) (556)
Proceeds from issuance of common stock 5,030 117 4,701
-------- -------- --------
Net cash provided by financing activities 6,363 (757) 134
-------- -------- --------
Net increase (decrease) in cash 1,986 175 (38)
Cash at beginning of period 246 32 70
-------- -------- --------
Cash at end of period $ 2,232 $ 207 $ 32
======== ======== ========
Other cash flow information:
Interest paid 1,895 1,829 2,905
Income taxes paid 2,610 397 81
Non-cash transactions:
Conversion of convertible debentures to common stock -- -- 12,384
Investment in Edna Valley joint venture accrual -- 1,428 --
Debt assumed in acquisition of real property 1,974 940 --
Distribution receivable from Chateau Duhart-Milon -- -- 432
Profit sharing stock contribution -- 18 --
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
24.
<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 397 producing acres in Napa, Sonoma, Monterey
counties of California and in eastern Washington state. Approximately 30% of its
annual grape requirements is 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.
Change in Fiscal Year-End
The Company changed its fiscal year from one ended on December 31 to one
ended on March 31, effective with the fiscal year ending March 31, 1998.
Accordingly, the Company reported a three month transition period ending March
31, 1997. See Note Q for financial data relating to the three-month period ended
March 31, 1997.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its 50% owned joint venture and its 50.5% owned subsidiary (Notes G and H,
respectively), which are controlled and managed by the Company. All significant
intercompany accounts and transactions have been eliminated as part of the
consolidation process. Additionally, the Company has a 23.5% investment in
Chateau Duhart-Milon which is accounted for using the equity method (Note F).
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.
Cash and Cash Equivalents
Cash equivalents are highly liquid instruments purchased with original
maturities of three months or less.
Inventory
Inventory is 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.
25.
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The range of useful lives used in computing depreciation is as follows:
Years
-----
Vineyard properties 5-35
Buildings and caves 15-80
Machinery and equipment 3-20
Costs of planting new vines and ongoing 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.
Earnings per Share
During the most recent fiscal year, the Company adopted Statement of
Financial Accounting No.128 ("SFAS 128"), Earnings per Share, which requires
dual presentation of two earnings per share ("EPS") amounts, basic EPS and
diluted EPS, on the face of all income statements. Basic EPS excludes dilution
and is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (e.g. stock options) were exercised and
converted into stock. As a result of the adoption of SFAS 128, earnings per
share amounts for the years ended December 31, 1996 and 1995 have been restated
to conform to the new standard. For all periods presented, the difference
between basic and diluted earnings per share for the Company is the inclusion of
dilutive stock options and stock warrants, the effect of which is calculated
using the treasury stock method as shown below. The Company's convertible
debentures are excluded from the computation, as these have had, and continue to
have, an antidilutive effect.
<TABLE>
The following is a reconciliation of the figures used in deriving basic EPS
and those used in calculating diluted EPS:
(in thousands, except per share data)
<CAPTION>
Basic EPS Diluted EPS
---------------- ---------------
Effect of dilutive securities Income
----------------------------- available to
Income common
available to stockholders
common Stock and assumed
stockholders Warrants options conversion
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Year ended March 31, 1998:
Income $ 3,410 -- -- $ 3,410
Shares 7,786 457 166 8,409
---------------- ---------------
EPS $ 0.44 $ 0.41
================ ===============
Year ended December 31, 1996:
Income $ 2,339 -- -- $ 2,339
Shares 7,641 425 103 8,169
---------------- ---------------
EPS $ 0.31 $ 0.29
================ ===============
Year ended December 31, 1995:
Income $ 207 -- -- $ 207
Shares 5,300 -- -- 5,300
---------------- ---------------
EPS $ 0.04 $ 0.04
================ ===============
</TABLE>
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.
26.
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 are being amortized over 40 years beginning in January 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 and
disclosures 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.
Reclassifications
Certain prior period amounts have been reclassified in order to conform
with the current period presentation.
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 has chosen to account for stock-based awards to employees using
the intrinsic value based method in accordance with APB No.25, Accounting for
Stock Issued to Employees.
Forward Exchange Contracts
The Company has only a limited involvement with forward exchange contracts
and does not use them for trading purposes. Forward exchange contracts are used
to manage exchange rate risks on certain purchase commitments, generally French
oak barrels, denominated in foreign currencies. Gains and losses relating to
firm purchase commitments are deferred and are recognized as adjustments of
carrying amounts or in income when the hedged transaction occurs. The Company
had no forward exchange contracts outstanding as of March 31, 1998.
Recently Issued Accounting Standard
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes that this will have no
significant impact on the Company's financial position or results of operations.
SFAS No. 131, Disclosures about Segment Reporting of an Enterprise and
Related Information, establishes standards for reporting information about
operating segments in annual financial statements and requires that those
enterprises report selected information about segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
Adoption of this statement will not impact the Company's financial position,
results of operations or cash flows, and its effect, if any, will be limited to
the form and content of its disclosures. This statement is effective for years
beginning after December 15, 1997.
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 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 percentage of the vineyard's overall producing
acreage damaged by the fire.
As intended, the Company has completed the first stage of replanting
approximately 75% of the damaged acreage. Historically, newly planted vines will
begin to produce production-quality grapes in approximately three years,
although the vines are expected to 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 attempts to
buy suitable grapes on the open market; however, there can be no
27.
<PAGE>
NOTE C - CARMENET FIRE (Continued)
assurance that grapes of suitable quality or variety will continue to 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. PG&E has made two advances to the Company for costs
related to the fire in the amounts of $425,000 and $4.5 million in January 1997
and April 1998, respectively. However, when making the advances, PG&E admitted
no liability and has reserved all rights with respect to such advances. 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 - INVENTORY
Inventory consists of the following (in thousands):
March 31, December 31,
1998 1996
------- -------
Bulk and bottled wine $32,436 $29,051
Growing crops 824 542
Other inventory 248 120
Wine production supplies 769 192
------- -------
$34,277 $29,905
======= =======
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
March 31, December 31,
1998 1996
-------- --------
Land $ 3,376 $ 2,514
Vineyard Development 11,589 8,387
Buildings 16,760 14,927
Machinery and equipment 16,311 13,739
-------- --------
48,036 39,567
Accumulated depreciation (17,905) (15,447)
-------- --------
$ 30,131 $ 24,120
======== ========
NOTE F - INVESTMENT IN CHATEAU DUHART-MILON
During the period of April 1989 to June 1993, the Company purchased
approximately 11% of the outstanding ordinary shares of Domaines Barons de
Rothschild ("DBR") in exchange for a combination of 5% convertible subordinated
debentures and warrants, subsequently exercised.
Effective October 1, 1995, the Company exchanged essentially all of its
existing ownership in DBR for a 23.5% interest in Duhart-Milon. The remaining
76.5% of Duhart-Milon is owned by DBR.
Chateau Duhart-Milon's condensed balance sheet as of March 31, 1998 and
December 31, 1996 and results of operations for the twelve months ended March
31, 1998, the twelve months ended December 31, 1996 and the 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) (in thousands):
28.
<PAGE>
NOTE F - INVESTMENT IN CHATEAU DUHART-MILON (Continued)
March 31, December 31,
1998 1996
------- -------
Inventory $ 3,200 $ 3,489
Other current assets 7,254 9,387
------- -------
Current assets 10,454 12,876
------- -------
Property and equipment, net 2,327 2,441
------- -------
Total assets $12,781 $15,317
======= =======
Current liabilities $ 2,876 $ 1,787
Equity 9,905 13,530
------- -------
Total liabilities and equity $12,781 $15,317
======= =======
<TABLE>
The results of operations are summarized as follows (in thousands):
<CAPTION>
Three Months
Year ended Year ended ended
March 31, December 31, March 31,
--------- ------------ ---------
1998 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues $ 3,912 $ 3,964 $ 557
Cost of sales (2,337) (2,651) (110)
------- ------- -------
Gross profit 1,575 1,313 447
------- ------- -------
Net operating/other (expenses)/revenues 112 236 (88)
------- ------- -------
Net earnings $ 1,687 $ 1,549 $ 359
======= ======= =======
Company's share of net earnings $ 396 $ 364 $ 84
Less: amortization expense (55) (60) (10)
------- ------- -------
Equity in investment in Duhart-Milon $ 341 $ 304 $ 74
======= ======= =======
</TABLE>
The carrying amount of the Company's investment is greater than the amount
of its share of the underlying equity in net assets of Duhart-Milon by
approximately $7.2 million as of March 31, 1998, $8.5 million as of December 31,
1996 and $8.9 million as of December 31, 1995. This difference relates primarily
to the underlying value of the land owned by Duhart-Milon and, accordingly, is
not 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%
owned 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 in
order to extend its life through 2060.
Under the new agreement, the Company made a further payment of $1,050,000
during the year ended March 31, 1998, in order to increase the Company's
ownership in the continuing Joint Venture by 12.54%. Other payments of
$1,050,000 in 1999 and $850,000 in 2001 are required in order to further
increase the Company's ownership by increments of 12.54% and 10.75%,
respectively. Concurrent with the available investment option in 2001, the
Company will also have the option
29.
<PAGE>
NOTE G - EDNA VALLEY VINEYARD JOINT VENTURE (Continued)
to purchase 50% of the brand name, Edna Valley, for $200,000 which is currently
licensed to the Joint Venture by Paragon.
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 has
been amortized over 40 years starting 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.
Condensed balance sheets for the Joint Venture are as follows (in
thousands):
March 31, December 31,
1998 1996
------- -------
Inventory $ 5,940 $ 5,822
Current assets eliminated in consolidation 1,364 1,487
Other current assets 11 122
Property and equipment, net 5,476 3,761
Other assets 61 89
------- -------
Total assets $12,852 $11,281
======= =======
Current liabilities $ 5,084 $ 3,380
Current liabilities eliminated in consolidation 239 317
Other liabilities 1,776 1,799
------- -------
Total liabilities 7,099 5,496
------- -------
Total equity 5,753 5,785
------- -------
Total liabilities and equity $12,852 $11,281
======= =======
The results of operations are summarized as follows (in thousands):
Year ended
March 31, Year ended December 31,
------- -----------------------
1998 1996 1995
------- ------- -------
Revenues $ 8,673 $ 6,464 $ 6,850
Cost of sales (5,296) (4,316) (5,124)
------- ------- -------
Gross profit 3,377 2,148 1,726
------- ------- -------
Operating and other expenses (740) (386) (465)
Commissions and management fees
eliminated in consolidation (949) (768) (656)
------- ------- -------
Net earnings 1,688 994 605
Less: Minority interest 906 527 333
------- ------- -------
Company's share of net earnings $ 782 $ 467 $ 272
======= ======= =======
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% owned 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
Canoe Ridge Winery, Inc. ("CRW") was formed in 1994, and was owned 50.5% by
the Company, and 49.5% by a group of investors. 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).
30.
<PAGE>
NOTE I - BANK LINES OF CREDIT
Bank lines of credit consist of the following (in thousands):
March 31, December 31,
1998 1996
------- -------
o Credit line of $10,300,000 bearing interest $ 4,000 $ 3,455
at LIBOR +1%, payable monthly due June, 1999
o Credit line of $5,500,000 bearing interest at 4,677 1,976
LIBOR+1%, payable monthly, due June, 1999
o Credit line of $2,500,000 bearing interest at 2,275 1,063
LIBOR+1%, payable monthly, due June, 1999
------- -------
$10,952 $ 6,494
======= =======
The notes to bank are collateralized by substantially all inventories and
accounts receivable. 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).
NOTE J - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
March 31, December 31,
1998 1996
------ ------
o Convertible subordinated debentures due in $ 8,500 $ 8,500
1999, bearing interest at 5%. Interest
payments on the debentures are due
semiannually (including amounts due to
related party-see Note O)
o Note payable, due May 2000 payable in annual 713 950
installments of principal and interest.
Interest rate at 7%
o Mortgage payable in monthly installments of 1,776 1,828
principal and interest due August 2021.
Interest at 7%
o Bank term loan, due in 2001 with monthly 5,516 5,798
installments of principal and interest.
Interest rate at LIBOR plus 1.8%
o Bank term loan, payable in monthly 215 248
installments of principal and interest due
June 2002. Interest at LIBOR plus 2.5%
o Note payable, payable in monthly installments 934 940
of principal and interest due in June 2016.
Interest rate of 7.03% (see Note O, related
party)
o Note payable, due in August 1999 payable in 1,021 --
monthly installments of principal and
interest. Interest rate of 7.85%
o Other notes payable, due in varying monthly 158 109
installments through January 2000 bearing
interest from 6.5% to 10.9%, some of which
are secured by equipment
------ ------
Less current maturities 18,833 18,373
------ ------
(709) (536)
------ ------
$18,124 $17,837
======= =======
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
31.
<PAGE>
NOTE J - LONG-TERM OBLIGATIONS (Continued)
acquisitions; loans, advances or debt guarantees; additional borrowings; annual
lease expenditures; annual fixed asset expenditures; and declaration or payment
of dividends.
At March 31, 1998, maturities of long-term obligations are as follows:
Twelve months
ending March 31,
----------------
1999 $ 709
2000 9,064
2001 566
2002 4,965
2003 80
Thereafter 3,449
=============
Total $ 18,833
=============
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
On February 10, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "Plan"), subject to shareholder approval. The Plan provides for the
grant of stock options to officers and other key employees of the Company
(including the Edna Valley Vineyard Joint Venture, so long as the Company is the
managing joint venturer of that entity), as well as non-employee directors and
consultants, for an aggregate of up to 1,000,000 shares of common stock, plus
any shares subject to issuance under the Company's expired 1987 Stock Option
Plan or 1988 Non-Discretionary Stock Option Plan that are forfeited to the
Company under the terms of such plans. These options generally expire 10 years
from the date of grant and become exercisable after a one-year period.
<TABLE>
Option activity under the plans is as follows:
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
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) 10.50
-------- ------
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
-------- ------
Granted (weighted average fair value of $5.09) 71,930 10.41
Exercised (25,416) 5.57
Canceled --
-------- ------
Outstanding, March 31, 1997 635,057 8.61
-------- ------
Granted (weighted average fair value of $5.95) 229,150 11.65
Exercised (82,638) 7.79
Canceled (476) 9.50
-------- ------
Outstanding, March 31, 1998 781,093 $ 9.62
======== ======
</TABLE>
32.
<PAGE>
NOTE K- STOCK BASED COMPENSATION (Continued)
<TABLE>
Additional information regarding options outstanding as of March 31, 1998 is as
follows:
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Weighted Avg.
exercise Number Remaining Weighted Avg. Number Weighted Avg.
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$5.00-$8.00 168,708 5.1 years $ 6.27 168,720 $ 6.27
$8.00-$9.99 168,845 5.1 years 9.25 168,845 9.25
$10.00-$12.38 443,540 6.3 years 11.04 227,390 11.04
------- --------- ------ ------- ------
781,093 5.8 years $ 9.62 564,955 $ 9.08
======= ========= ====== ======= ======
</TABLE>
The Option Plan expired on February 20, 1997, and the Directors' Plan
expired on December 31, 1996. A new plan reserving 1,000,000 shares was adopted
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 three-month offer period or beginning of the Plan
start (27 months), subject to an annual limitation. Stock issued under the plan
was 11,005 shares, 9,049 shares and 5,315 shares in the years ended March 31,
1998, December 31, 1996 and 1995, respectively, at weighted average prices of
$6.82, $6.31 and $6.04, respectively. The weighted average fair value of the
awards for each of the years ended March 31, 1998, December 31, 1996 and 1995
awards was $10.48, $9.84 and $6.99, respectively. At March 31, 1998, 13,106
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. No compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS 123, Accounting for Stock-Based Compensation, 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 year 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, 24.1% in the twelve-month period
ended March 31, 1998 and 17% in 1996 and 1995; risk-free interest rates, 6.59%
for the twelve months ended March 31, 1998, 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 for the years ended March 31, 1998, December 31,
1996 and December 31, 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been $2,895,000 ($.26 per
share), $2,095,000 ($.26 per share) and $102,000 ($ .02 per share),
respectively.
NOTE L - COMMON STOCK
As of March 31, 1998 and December 31, 1996, 15,000,000 shares were
authorized, while 8,393,979 and 7,262,150 shares were authorized were issued,
respectively.
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 exercisable 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.
33.
<PAGE>
NOTE L - COMMON STOCK (Continued)
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 March 31, 1998, 3,519,676 shares of common
stock in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
The Company recently received gross proceeds of $5.8 million ($4.8 million
in March of 1998 and $1 million following the year ended March 31, 1998, in
April of 1998) in connection with the issuance of 828,571 shares of its common
stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued on March 29, 1993 (the "Warrants"), which it
anticipates using for additional working capital and for the reduction of
existing short-term indebtedness. Except as set forth below, the foregoing
shares will be issued pursuant to an exemption from the registration
requirements of federal and state securities laws. The Company has received
notice that one institutional warrant-holder has exercised its right to demand
registration of 185,714 shares of the Company's common stock received on the
exercise of the Warrants. The Company believes that no other warrant-holders
intend to exercise such registration rights. The Company filed a registration
statement on Form S-3 to effect the foregoing registration on June 26, 1998 at
the Company's expense. The shares registered thereby may be resold into the
trading market for the common stock of the Company anytime after the
registration statement is declared effective by the Securities and Exchange
Commission, pursuant to the prospectus included therewith.
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 $143,000 for the year ended March 31, 1998, $73,000
for the year ended December 31, 1996 and $20,000 for the year ended December 31,
1995. At March 31, 1998, the plan held 15,088 shares of the Company's common
stock.
NOTE N - INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
Year ended
March 31, Year ended December 31,
--------- -----------------------
1998 1996 1995
------ ------ ------
Federal
Current $1,261 $1,056 $ 136
Deferred 585 184 25
------ ------ ------
1,846 1,240 161
------ ------ ------
State
Current 319 364 64
Deferred 156 15 22
------ ------ ------
475 379 86
------ ------ ------
$2,321 $1,619 $ 247
====== ====== ======
34.
<PAGE>
NOTE N - INCOME TAXES (Continued)
<TABLE>
The tax effects of the items comprising the Company's net deferred tax
liability in the Company's balance sheets are as follows (in thousands):
<CAPTION>
March 31, December 31,
1998 1996
------- -------
<S> <C> <C>
Deferred tax liability:
Difference between book and tax basis of property, plant and equipment $ 2,105 $ 2,090
Other 10 --
------- -------
Deferred tax assets: 2,115 2,090
------- -------
Difference between book and tax basis of inventory -- --
Tax credit carryforwards
Other 14 104
66 763
Valuation allowance -- 202
------- -------
Net deferred tax liability 80 1,069
------- -------
-- (84)
------- -------
80 985
------- -------
$ 2,035 $ 1,105
======= =======
</TABLE>
The provision for income taxes differs from amounts computed at the
statutory rate as follows (in thousands):
Year ended
March 31, Year ended December 31,
------- -----------------------
1998 1996 1995
------- ------- -------
U.S. federal income tax at statutory rate $ 1,949 $ 1,395 $ 91
State tax net of federal benefit 334 230 57
Reconciling items:
Other 5 (39) 66
Effect of acquisitions, net 33 33 33
------- ------- -------
$ 2,321 $ 1,619 $ 247
======= ======= =======
NOTE O - TRANSACTIONS WITH RELATED PARTIES
<TABLE>
The consolidated statements of operations include the following amounts
resulting from transactions with related parties (in thousands):
<CAPTION>
Year ended
March 31, Year ended December 31,
--------- -----------------------
1998 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest expense:
Interest on convertible debentures held by a related party of the Company $ 167 $ 167 $ 516
Interest on note payable to director 49 39 -
Interest on notes payable to joint venture partner - 2 36
Interest revenue:
Interest on note receivable from director of the Company - 3 -
Interest on note receivable from officer of the Company 2 1 -
Interest on note receivable from joint venture partner 40 48 -
Amortization expense for joint venture agreement 64 - -
Lease expense for land and facilities 12 10 10
Consulting fee to officer of the Company - 33 65
</TABLE>
35.
<PAGE>
NOTE O - TRANSACTIONS WITH RELATED PARTIES (Continued)
<TABLE>
The balance sheet includes the following amounts resulting from
transactions with related parties (in thousands):
<CAPTION>
March 31, December 31,
1998 1996
----- -----
<S> <C> <C>
Receivables
Accounts receivable from a director of the Company $ -- $ 27
Note receivable from a director of the Company 70
Note receivable from officer of the Company 65 --
Inventory
Wine purchases from related parties 1,717 1,120
Grape purchases from related parties 2,483 2,136
Goodwill - investment in joint venture (see Note G) 3,619 2,445
Notes receivable - joint venture partner (Paragon) 327 500
Property, plant & equipment, net
Building contributed to joint venture by the partners 1,192 1,304
Accounts Payable and accrued liabilities
Payables for inventory purchases to related parties -- 1,309
Long-term obligations
Note payable to director of the Company -- 940
Convertible debentures held by a related party of the 5,000 5,000
Company (see Note I and K)
</TABLE>
NOTE P - COMMITMENTS AND CONTINGENCIES
As of March 31, 1998, future minimum lease payments (excluding the effect
of future increases in payments based on indexes which cannot be estimated at
the present time) required under noncancelable operating leases with terms in
excess of one year are as follow (in thousands):
Year ending
March 31,
---------
1999 $ 687
2000 674
2001 666
2002 649
2003 654
Thereafter 5,074
-------
Total $ 8,404
=======
Rental expense charged to operations was as follows: $635,000 for the year
ended March 31, 1998 and $658,000 and $833,000 for the two years ended December
31, 1996 and 1995, respectively. Future lease commitments include $16,000 per
year until 2052 for land leased by Paragon to the Edna Valley Joint Venture (see
Note G).
Additionally, in April of 1998, the Company entered into a three-year lease
agreement (starting May 1998) for a barrel storage facility in Sonoma,
California. Total lease payments under this agreement will be $118,000. These
payments are excluded from the schedule featured above, as this lease was
effective following the end of the fiscal year.
36.
<PAGE>
NOTE Q - SELECTED FINANCIAL INFORMATION -THREE MONTHS ENDED MARCH 31, 1997
The Company changed its fiscal year from December 31 to March 31, effective
with the fiscal year beginning April 1, 1997. Selected financial information
derived from the consolidated statement of operations for the three months ended
March 31, 1997 and from the consolidated balance sheet at that date, as
previously reported in the Company's transition report on Form 10-K for the
three months ended March 31, 1997, is as follows (in thousands, except per share
data):
Net revenues $ 5,390
Net Income $ 311
EPS $ 0.04
Total assets $75,859
NOTE R - QUARTERLY DATA (Unaudited)
The Company's quarterly operating results for the fiscal year ended March
31, 1998, the three-month transition period ended March 31, 1997 and the years
ended December 31, 1996, 1995 are summarized below:
(All amounts in thousands, except per share data)
Gross Gross Net EPS
Quarter ended revenues profit loss/income (diluted)
------------- -------- ------ ----------- ---------
March 31, 1998 $ 8,936 $ 4,137 $ 535 $ 0.06
December 31, 1997 11,178 4,878 1,404 0.17
September 30, 1997 9,250 3,783 804 0.10
June 30, 1997 8,287 3,418 667 0.08
March 31, 1997 5,520 2,384 311 0.04
December 31, 1996 9,857 4,100 888 0.11
September 30, 1996 8,207 3,157 668 0.08
June 30, 1996 8,449 3,170 653 0.08
March 31, 1996 5,396 1,948 130 0.02
December 31, 1995 8,596 3,115 429 0.08
September 30, 1995 5,380 1,935 (29) (0.01)
June 30, 1995 7,411 2,245 70 0.01
March 31, 1995 4,423 1,497 (263) (0.04)
37.
<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 March 31,
1998 and December 31, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended March 31,
1998 and for each of the two 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 as of March 31, 1998 and December 31, 1996 and the consolidated
results of its operations and its cash flows for the year ended March 31, 1998
and for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
May 14, 1998
38.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
See Part I, Item 4 - Executive Officers of the Registrant. Additional
information required by this Item is hereby incorporated by reference to the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 1998. See "Director Nominees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" therein.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the Proxy Statement relating to the 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after March
31, 1998. Please see "Board Meetings and Compensation", "Executive
Compensation", "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph".
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 1998 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 1998. Please see "Shareholding Information as to Directors,
Director Nominees and Management".
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is hereby incorporated by reference
to the Company's Proxy Statement relating to the 1998 Annual Meeting to be filed
with the Securities and Exchange Commission within 120 days after March 31,
1998. Please see "Certain Relationships and Related Transactions". 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."
39.
<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
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................. 21
Consolidated Statements of Operations ........................ 22
Consolidated Statements of Changes in Shareholders' Equity ... 23
Consolidated Statements of Cash Flows ........................ 24
Notes to Consolidated Financial Statements ................... 25
INDEPENDENT AUDITORS' REPORT ............................................ 38
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.
The Company filed one report on Form 8-K during the last quarter of the
period covered by this Report, dated May 8, 1998, covering the issuance of
shares upon the exercise of the Company's 1993 warrants.
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.
40.
<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)
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (vii)
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. (viii)
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. (viii)
<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.
(vii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
(viii) Incorporated by reference to Exhibits 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
</FN>
</TABLE>
41.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C> <C>
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (i)
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. (ii)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (ii)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (iii)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (iii)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (iii)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (iii)
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. (iv)
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. (v)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (v)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (v)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (vi)
<FN>
- ------------------------------
(i) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) 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.
</FN>
</TABLE>
42.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C> <C>
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (i)
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. (iii)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (iii)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (iii)
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (iv)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (v)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (vi)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (vi)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (vi)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (iv)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (vii)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (vii)
<FN>
- ------------------------------
(i) 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.
(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. 10.23, 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.
(iv) 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.
(v) 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.
(vi) 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.
(vii) 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>
43.
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C> <C>
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (i)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington state investors, dated
November 30, 1994. (i)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (i)
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (ii)
10.29 Credit Agreement between the Company and Wells Fargo Bank, (iii)
dated December 29, 1995.
10.30 Credit Agreement between Edna Valley Vineyard and (iv)
Wells Fargo Bank, dated July 31, 1995.
10.31 Purchase Agreement between the Company, (iv)
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, (iv)
dated July 1, 1996.
10.33 Secured Purchase Money Promissory Note between the Company (iv)
and Richard H. Graff, Trustee, Graff 1993 Trust,
dated July 1, 1996.
10.34 Residential Lease between the Company and Richard H. Graff, (iv)
dated July 1, 1996.
10.35 Consulting and Non-Competition Agreement between the Company (iv)
and Richard H. Graff, dated July 1, 1996.
10.36 Credit Agreement between the Canoe Ridge
Vineyard, LLC, (iv) and Wells Fargo Bank, dated
August 15, 1996.
10.37 Credit Agreement between the Company and Wells Fargo Bank, (iv)
dated September 25, 1996.
10.38 Amendment To Joint Venture Agreement
of Edna Valley Vineyard between Paragon Vineyard Co., Inc., (iv)
and the Company, dated December 23, 1996.
<FN>
- ------------------------------
(i) 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.
(ii) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(iii) 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.
(iv) Incorporated by reference to Exhibit Nos. 10.30 through 10.38,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
</FN>
</TABLE>
44.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
10.39 Credit Agreement between the Company and Wells Fargo
Bank, dated July 30, 1997.
10.40 Credit Agreement between Edna Valley Vineyard and Wells
Fargo Bank, dated July 30, 1997.
10.41 Credit Agreement between Canoe Ridge Vineyard, LLC, and
Wells Fargo Bank, dated July 30, 1997.
10.42 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39,
dated January 5, 1998.
10.43 Second Amendment to Credit Agreement between the
Company and Wells Fargo Bank incorporated as Exhibit
10.39, dated June 9, 1998.
10.44 First Amendment to Credit Agreement between Edna Valley
Vineyard and Wells Fargo Bank incorporated as Exhibit
10.40, dated June 9, 1998.
10.45 First Amendment to Credit Agreement between Canoe Ridge
Vineyard, LLC and Wells Fargo Bank incorporated as
Exhibit 10.41, dated June 9, 1998.
45.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
24 Consent of Deloitte & Touche LLP to incorporation by
reference, dated June 26, 1998.
27 Financial Data Schedule
46.
<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
Chief Executive Officer
(Principal Executive Officer)
By /s/ William L. Hamilton
------------------------------------
William L. Hamilton
Executive Vice President (Principal Financial
and Principal Accounting Officer)
Dated: June 26, 1998
<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 June 26, 1998
-------------------------------------------- Executive Officer,
W. Philip Woodward Director, and Chairman
of the Board (Principal
Executive Officer)
/s/ Thomas B. Selfridge President and Director June 26, 1998
--------------------------------------------
Thomas B. Selfridge
/s/ C. Richard Kramlich Director June 26, 1998
--------------------------------------------
C. Richard Kramlich
/s/ William G. Myers Director June 26, 1998
--------------------------------------------
William G. Myers
47.
<PAGE>
/s/ James H. Niven Director June 26, 1998
--------------------------------------------
James H. Niven
/s/ Eric de Rothschild Director June 26, 1998
--------------------------------------------
Eric de Rothschild
/s/ Christophe Salin Director June 26, 1998
--------------------------------------------
Christophe Salin
/s/ Mark Hojel Director June 26, 1998
--------------------------------------------
Mark Hojel
/s/ Yves-Andre Istel Director June 26, 1998
--------------------------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director June 26, 1998
--------------------------------------------
Phillip M. Plant
</TABLE>
48.
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of the 30th day of July, 1997, by and
between THE CHALONE WINE GROUP, LTD., 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 September 25,
1996, 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.
<PAGE>
"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.
-2-
<PAGE>
"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).
"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 $8,300,000.00 as more fully described in Section 2.2.
"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.
-3-
<PAGE>
"Subordinated Debt" means indebtedness owed by Borrower or a third
party, which indebtedness has been subordinated to Borrower's obligations to
Bank pursuant to agreement in form and content acceptable to Bank.
"Tangible Net Worth" means the aggregate of total stockholders' equity
(including minority interests) less the aggregate of any treasury stock, any
acquisition intangibles or other intangible assets and any obligations due from
stockholders, employees and/or affiliates.
"Term 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 has previously made the Term Loan to Borrower. As
of the date hereof, the outstanding principal balance of the Term Loan is
$5,685,485.00. Borrower's obligation to repay the Term Loan is evidenced by the
Term Note, all terms of which are incorporated herein by this reference. Any
reference
-4-
<PAGE>
in the Term Note to the Prior Agreement shall be deemed a reference to this
Agreement.
(b) Repayment. The principal amount of the Term Loan shall continue to
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, as modified.
(e) Term Loan Commitment Fee. Borrower has paid 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.
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 August 1, 1999, not to exceed at any time the aggregate
principal amount of EIGHT MILLION THREE HUNDRED THOUSAND DOLLARS ($8,300,000.00)
("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.
-5-
<PAGE>
(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 or Canoe Ridge
Vineyard, LLC ("Canoe") or upon the maturity date thereof, 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 or Canoe, as
applicable, and apply such amount to such indebtedness.
(c) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time up to and including August 1, 1999, 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
-6-
<PAGE>
Letters of Credit shall at no time exceed TWO HUNDRED SEVENTY-FIVE THOUSAND
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 November 1, 1999. The outstanding amount of all
Letters of Credit shall be reserved under the Line of Credit and shall not be
available for advances thereunder. Each Letter of Credit shall be subject to the
terms and conditions of this Agreement, the Letter of Credit Agreement and
related documents, if any, required by Bank in connection with the issuance of
such Letter of Credit. Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if the Line of Credit is not available, for any
reason whatsoever, at the time any draft is paid by Bank, then the full amount
of such draft shall be immediately due and payable, together with interest
thereon, from the date such amount is paid by Bank to the date such amount is
fully repaid by Borrower, at the rate of interest applicable to advances under
the Line of Credit. In such event, Borrower agrees that Bank, at Bank's sole
discretion, may debit Borrower's deposit account with Bank for the amount of any
such draft.
Section 2.3. INTEREST/FEES - LINE OF CREDIT.
-7-
<PAGE>
(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-half percent (0.50%) 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) 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.
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
-8-
<PAGE>
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 has granted to Bank (and hereby
reaffirms such grant of)(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 to Bank, on or before October 1, 1997, a lien of second priority on
real property located at Los Amigos Vineyard, purchased in April, 1996 from
Beckstoffer Vineyards and located adjacent to the Acacia Winery. All of the
foregoing shall be evidenced by and subject
-9-
<PAGE>
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
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required or in which the failure to so qualify or to be so licensed could have a
material adverse effect on Borrower.
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 March 31, 1997, heretofore
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delivered by Borrower to Bank is complete and correct and presents fairly the
financial condition of Borrower; discloses all liabilities of Borrower that are
required to be reflected or reserved against under generally accepted accounting
principles, whether liquidated or unliquidated, fixed or contingent; and has
been prepared in accordance with generally accepted accounting principles
consistently applied. Since the date of such financial statement there has been
no material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged or granted a security interest or encumbered any of
its assets or properties except as disclosed by Borrower to Bank in writing
prior to the date hereof or as permitted by this Agreement.
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
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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 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
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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 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
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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 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.
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(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 Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
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(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 fiscal
quarter, 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 45 days after and as of the end of each fiscal
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.
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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, 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 2.00 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 0.60 to 1.0, with "Total Liabilities" defined
as the aggregate of current
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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 2.00 to 1.0 on a rolling four
(4) quarter basis, determined as of each fiscal quarter end, with EBITDA
Coverage Ratio defined as in Article I.
(e) Fiscal year end pre-tax income not less than $100,000.00,
determined as of each fiscal year end.
(f) 12 Month Sales (defined as bona fide arms length sales of finished
cased goods on a trailing twelve (12) month basis) not less than 200,000 cases,
determined as of the last day of each month.
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
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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:
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 any fiscal year in excess of an aggregate of $3,300,000.00,
excluding capital expenditures reasonably required to replace fixed assets
destroyed or damaged in the 1996 PG&E fire.
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
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other liabilities of Borrower existing as of December 31, 1996, and disclosed to
Bank in writing prior to, the date hereof; and (c) purchase money indebtedness
(inclusive of capitalized leases) in the maximum aggregate principal amount of
$750,000.00 incurred to purchase equipment.
Section 6.4. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except for (a) Borrower's existing
investments in Edna Valley Vineyards, CanoeCo Partners, Canoe Ridge Winery, LLC,
(b) Borrower's existing investment in Duhart-Milon, (c) loans, advances or
investments required in accordance with Joint Venture Agreements of Edna Valley
Vineyards and CanoeCo Partners existing as of the date hereof, and (d) loans or
advances to Morro Bay not to exceed the principal amount of $1,700,000.00
outstanding at any time.
Section 6.5. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except (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
existing indebtedness.
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Section 6.6. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business.
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
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cured, such default shall continue for a period of twenty (20) days from its
occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or Edna Valley
Vineyards has incurred any debt or other liability to any person or entity,
including Bank.
(e) Any default in the payment or performance of any obligation, or any
defined event of default, under any of the Loan Documents other than this
Agreement.
(f) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of 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
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arrangement with creditors or any other relief under the Bankruptcy Code, or
under any state or federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower, or Borrower shall file an answer admitting the jurisdiction of
the court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered by any
court of competent jurisdiction under the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors.
(h) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.
(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
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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 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
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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 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
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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 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
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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.
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(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 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
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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 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
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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 (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
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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.
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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.
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
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By: /s/ William L. Hamilton By: /s/ Brian O'Melveny
----------------------------- -------------------------
William L. Hamilton Brian O'Melveny
Chief Financial Officer/ Vice President
Executive Vice President
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CREDIT AGREEMENT
THIS AGREEMENT is entered into as of the 30th day of July, 1997, 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 accommodation described
below, and Bank has agreed to provide such credit to Borrower on such 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 31, 1995.
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 August 1, 1999, not to exceed at any time the aggregate
principal amount of FIVE MILLION FIVE HUNDRED THOUSAND AND NO/1OO DOLLARS
($5,500,000.00) ("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
<PAGE>
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.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit
shall bear interest at the rate(s) of interest set forth in the Line of Credit
Note.
(b) Computation and Payment. Interest on the Line of Credit 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.
(c) Line of Credit Fees. Borrower shall pay to Bank a fee equal to
one-half percent (0.50%) 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 1.3. 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
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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 1.4. 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, 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 of second priority in equipment and fixtures, and all
proceeds of the foregoing.
As security for all indebtedness of Borrower to Bank, Borrower shall
(a) 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; and (b) cause Chalone Wine
Group, Limited to grant to Bank security interest of first priority all its
inventory, accounts receivable, general intangibles (including tradenames and
trademarks), other rights to payment, equipment and fixtures and liens in all
real estate securing Chalone Wine Group, Limited's obligations to Bank and of
the same priority.
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
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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.
SECTION 1.5. SUBORDINATION. Certain obligations of Borrower owing to
Chalone Wine Group and to Paragon Vineyard have been subordinated to the
obligations of Borrower to Bank, as evidence by subordination agreements
previously delivered 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 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 Line of
Credit Note, and each other document, contract and
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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, 1997, 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,
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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.
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)
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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
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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 the Line of Credit 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 the Line of Credit 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 Line of Credit Note;
(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:
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(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 IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as the Line of Credit 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.
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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 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 (may be consolidated with Chalone Wine Group statement with a
footnote containing separate financial statement);
(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;
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(e) 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
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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.
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.
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(d) EBITDA Coverage Ratio not less than 2.50 to 1.0 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.
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
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Borrower further covenants that so long as the Line of Credit 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 $1,500,000.00 in fiscal year ending in
1997, and $1,000,000.00 in 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.
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
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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.
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.
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(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein (other than those
referred to in subsections (a) and (b) above), and with respect to any such
default which by its nature can be cured, such default shall continue for a
period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or 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
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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.
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(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.
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
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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.
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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
East Bay Regional Commercial Banking Office
One Kaiser Plaza, Suite 850
Oakland, CA 94612
Attn: Brian O'Melveny, 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
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action in any way related to any of the Loan Documents, including without
limitation any action for declaratory relief.
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 the Line of Credit, 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 Line of Credit 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
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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.
SECTION 7.10. 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
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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
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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.
(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
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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 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
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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
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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 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,
EDNA VALLEY VINEYARD NATIONAL ASSOCIATION
By: THE CHALONE WINE GROUP, LTD. By: /s/ Brian O'Melveny
Managing Joint Venturer ------------------------
Brian O'Melveny
Vice President
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By: /s/ William L. Hamilton
-------------------------
William L. Hamilton
Chief Financial Officer/
Executive Vice President
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CREDIT AGREEMENT
THIS AGREEMENT is entered into as of July 30, 1997, 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.
This Agreement amends, replaces and restates the Credit Agreement dated August
15, 1996 (the "Prior Agreement")
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 August 1, 1999, not to exceed at any time the aggregate
principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00)
("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) 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.
<PAGE>
(a) Term Commitment. Bank has extended a credit accommodation to
Borrower under the Prior Agreement, which was converted on July 1, 1997, to a
term loan (the "Term Commitment") As of the date hereof the outstanding
principal balance of the Term Commitment is $247,500.00. Borrower's obligation
to repay the Term Commitment is evidenced by a promissory note in the form of
Exhibit B attached hereto ("Term Commitment Note"), all terms of which are
incorporated herein by this reference.
(b) Repayment. The principal amount of the Term Commitment shall
continue to be repaid in accordance with the provisions of the Term Commitment
Note.
(c) 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) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one-half percent (0.50) 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 4103-137121 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.
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 tradenames), inventory and equipment.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements and other documents as Bank shall
reasonably require, all in form and
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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. ("Guarantor") 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.
Said guaranty shall be secured by security interests in all personal and real
property of Guarantor pursuant to Security Agreements and Deeds of Trust in form
and content acceptable to Bank, which security interests and liens shall be of
the same priority as the security interests securing Guarantor's obligations to
Bank under the Credit Agreement between Guarantor and 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 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,
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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 March 31, 1997, 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.
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
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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
proceeding by or before any governmental authority, arbitrator, court or
administrative agency challenging or denying such qualification.
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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) Trademark Mortgage Agreement.
(x) Such other documents as Bank may require under any other
Section of this Agreement, including a guaranty from
Guarantor.
(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.
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
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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.
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 (may be consolidated with Chalone with
footnote containing separate financials disclosure);
(b) not later than 45 days after and as of the end of each fiscal
quarter, a financial statement of Borrower, prepared by
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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 report.
(e) 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.
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.
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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 1.50 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 2.50 to 1.0, 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.
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.
-9-
<PAGE>
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 with fiscal year beginning April 1, 1997.
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,
and (b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof.
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.
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<PAGE>
(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 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.
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<PAGE>
(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 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:
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<PAGE>
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, 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.
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<PAGE>
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 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
-14-
<PAGE>
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 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
-15-
<PAGE>
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 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
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<PAGE>
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 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
-17-
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of January 5, 1998, by and between THE CHALONE WINE GROUP, LTD., a
California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 30, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. The third full paragraph, page 3, is hereby deleted in its entirety
and the following substituted therefor:
"Line of Credit" means a revolving credit accommodation in the
maximum principal amount of $10,300,000.00 as more fully described in
Section 2.2."
2. Section 2.2(a) is hereby amended by deleting "Eight Million Three
Hundred Thousand Dollars ($8,300,000.00)" as the maximum principal amount
available under the Line of Credit, and by substituting for said amount "Ten
Million Three Hundred Thousand Dollars ($10,300,000.00)," with such change to be
effective upon the execution and delivery to Bank of a promissory note
substantially in the form of Exhibit A attached hereto (which promissory note
shall replace and be deemed the Line of Credit Note defined in and made pursuant
to the Credit Agreement) and all other contracts, instruments and documents
required by Bank to evidence such change.
3. Section 6.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets in any fiscal year in excess of an aggregate
of $4,600,000.00, excluding capital expenditures reasonably required to
<PAGE>
replace fixed assets destroyed or damaged in the 1996 PG&E fire."
4. Borrower shall remit to Bank a non-refundable commitment fee in the
amount of $10,000.00, which fee shall be due and payable upon execution of this
Amendment.
5. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
6. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment 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
----------------------- --------------------
Brian O'Melveny
Title: CFO Vice President
-------------------
-2-
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of June 9, 1998, by and between THE CHALONE WINE GROUP, LTD., a
California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 30, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. The following is hereby added to the Credit Agreement as Section
5.11:
"SECTION 5.11. YEAR 2000 COMPLIANCE. Perform all acts
reasonably necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all customers,
suppliers and vendors that are material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall include,
without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity,
that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance
<PAGE>
with the terms hereof as Bank may from time to time require."
2. Section 6.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 6.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets in the fiscal year ending March 31, 1998 in
excess of an aggregate of $4,900,000.00 excluding capital expenditures
reasonably required to replace fixed assets destroyed or damaged in the
1996 PG&E fire and $3,000,000.00 thereafter per annum."
3. Section 6.3 is hereby deleted in its entirety, and the following
substituted therefor:
"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 December 31, 1997, and disclosed to Bank in writing
prior to, the date hereof; (c) purchase money indebtedness (inclusive
of capitalized leases) in the maximum aggregate principal amount of
$750,000.00 incurred to purchase equipment; and (d) $1,100,000.00 of
assumed debt for the acquisition of Vintage lane during March 1998."
4. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment 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
------------------------ --------------------
Brian O'Melveny
Title: CFO Vice President
--------------------
-3-
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of June 9, 1998, 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").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 30, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. The following is hereby added to the Credit Agreement as Section
4.11:
"SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts
reasonably necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all customers,
suppliers and vendors that are material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall include,
without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity,
that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance
<PAGE>
with the terms hereof as Bank may from time to time require."
2. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets in the fiscal year ending March 31, 1998 in
excess of an aggregate of $1,750,000.00 and $1,000,000.00 thereafter
per annum."
3. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
4. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment 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 O'Melveny
Managing Joint Venturer --------------------
Brian O'Melveny
Vice President
By: /s/ William L. Hamilton
----------------------------
William L. Hamilton
Chief Financial Officer/
Executive Vice President
-2-
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of June 9, 1998, by and between CANOE RIDGE VINEYARD, L.L.C., a
Washington limited liability company ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 30, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. The following is hereby added to the Credit Agreement as Section
4.11:
"SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts
reasonably necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all customers,
suppliers and vendors that are material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall include,
without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity,
that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance
<PAGE>
with the terms hereof as Bank may from time to time require."
2. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets in the fiscal year ending March 31, 1998 in
excess of an aggregate of $500,000.00 and $200,000.00 thereafter per
annum."
3. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
4. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment 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 Vice President
Financial Officer
-2-
[Deloitte & Touche LLP Letterhead]
Exhibit 24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-38070, 33-38038, 33-38037, 33-46966 and 33-77086 on Forms S-8 and
Registration Statement No. 33-89030 on Forms S-3 of The Chalone Wine Group,
Ltd., of our report dated May 14, 1998 appearing in the Annual Report on Form
10-K of The Chalone Wine Group, Ltd. for the year ended March 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------------
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 03/31/98
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000742685
<NAME> THE CHALONE WINE GROUP, LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,232
<SECURITIES> 0
<RECEIVABLES> 6,689
<ALLOWANCES> 92
<INVENTORY> 34,277
<CURRENT-ASSETS> 43,832
<PP&E> 48,036
<DEPRECIATION> 17,905
<TOTAL-ASSETS> 90,294
<CURRENT-LIABILITIES> 16,038
<BONDS> 8,500
0
0
<COMMON> 46,871
<OTHER-SE> 3,534
<TOTAL-LIABILITY-AND-EQUITY> 90,294
<SALES> 36,755
<TOTAL-REVENUES> 38,310
<CGS> 20,539
<TOTAL-COSTS> 28,686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,872
<INCOME-PRETAX> 5,731
<INCOME-TAX> 2,321
<INCOME-CONTINUING> 3,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,410
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.41
</TABLE>
