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, 1999
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 8, 1999, there were 2,958,922 shares of the Company's voting no par
value common stock, with an aggregate market value of $27,370,029 held by
non-affiliates. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of the Registrant's
common stock and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 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, 1999, are incorporated by reference into Part III of this report.
<PAGE>
PART I
Item 1. Business.
a. General.
The Company produces, markets and sells super, ultra and super-ultra
premium white and red varietal table wines, primarily Chardonnay, Pinot Noir,
Cabernet Sauvignon, Merlot and Sauvignon Blanc. The Company operates six
wineries; four located in various counties of California, and two located in the
State of Washington. The Company's wines are made principally from grapes grown
at the Chalone Vineyard(R), Carmenet(R) Vineyard, Edna Valley Vineyard(R),
Company-owned vineyards adjacent to the Acacia(TM) Winery in California and the
Canoe Ridge(R) Vineyard in Washington State. These wines are primarily sold
under the labels "Chalone Vineyard," "Edna Valley Vineyard," "Carmenet,"
"Acacia," "Canoe Ridge Vineyard," and "Echelon(TM)".
As a result of a substantial investment in the Company by France-based Les
Domaines Barons de Rothschild (Lafite) ("DBR"), the Company receives an
allocation of DBR wines, including the wines of Chateau Lafite-Rothschild and
Chateau Duhart-Milon, first-growth and fourth-growth Bordeaux region wines,
respectively.
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. The Company became a publicly held reporting company
as the result of an initial public offering of common stock in 1984. Today, the
Company is one of only nine publicly-held U.S. corporations whose principal
business is in the production, marketing and selling of wine.
Change in Fiscal Year-End
In 1997, the Company changed its fiscal year-end from December 31 to March
31. 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.
Significant Events
Echelon Brand: The Company introduced its Echelon brand in April 1998.
Echelon brand wines are blended from small lots of wine from several of the
Company's California properties and purchased grapes and bulk wine. The
suggested retail price for the brand's various wines ranges between $12 and $14.
This price structure is intended to create wines in a lower price category than
the Company's other wines in the super and ultra-premium wine categories. The
Company expects the Echelon brand to increase the number of its wines served
by-the-glass in restaurants. This first Echelon release consisted of 60,000
cases of 1997 California Central Coast Chardonnay, followed by 26,000 cases of
1997 Pinot Noir in September 1998, and 36,400 cases of 1997 Merlot in January
1999. The Company plans to release a Syrah during the next year.
Vintage Lane Property: In April 1998, the Company purchased twenty two
acres of prime vineyard land in Sonoma Valley located approximately seven miles
from the Company's Carmenet Vineyard. The Company intends to use the property,
which includes a winery with a 1,200 ton crush capacity, to expand production of
Carmenet's Dynamite wines. In keeping with the Company's plans to use the
property as a red wine production facility, fourteen acres of existing vineyards
planted to Chardonnay were removed, most of which is expected to be replanted to
Merlot by the end of March 2000.
Exercise of Warrants: The Company received gross proceeds of $1 million in
April 1998 upon the sale of 142,857 new shares of its common stock issuable upon
exercise of the Company's outstanding $7.00 warrants issued as of March 29, 1993
(the "Warrants"). The new shares issuable upon exercise of the Warrants were
issued pursuant to an exemption from the registration requirements of federal
and state securities laws. One institutional warrant-holder, who exercised all
of its outstanding Warrants during March, 1998 also exercised its right to
demand registration of 142,857 shares of the Company's common stock received
upon exercise thereof. The Company filed a shelf registration statement on Form
S-3 in respect of the foregoing shares which became effective on May 7, 1999.
The proceeds received from Warrants exercised were used for general working
capital purposes.
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<PAGE>
Carmenet Fire: In July 1996, a wildfire damaged approximately 75% of the
producing acreage at the Carmenet Vineyard. Prior to the fire, Carmenet produced
approximately 38,000 cases of wine annually (of which a significant portion 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.
The Company has completed replanting the damaged acreage. Historically,
newly planted vines 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. Pending the return to full production levels, the Company
intends to continue to attempt to buy suitable grapes on the open market to
supplement Carmenet's reduced harvests. See Item 3(a): Settlement of Litigation
Arising from the Carmenet Fire.
Convertible Debentures: During April 1999, holders of the Company's 5%
Convertible Subordinated Debentures Due 1999 (the "Debentures") converted
Debentures with a face value of $6.5 million into 738,014 new shares of the
Company's common stock. At such time, holders of the remaining $2.0 million in
debentures elected not to exercise their conversion rights and the Company
repaid the $2.0 million using available borrowings under its line of credit.
Additional Financing: On March 31, 1999, the Company moved its borrowings
from Wells Fargo Bank to Cooperatieve Centrale Raiffeisen-Boerlenleenbank B.A.,
"Rabobank-Nederland," New York branch, In connection with this change, the
Company refinanced approximately $24 million of its outstanding secured debt
with Wells Fargo Bank. Rabobank will provide an aggregate of $70 million of
available unsecured financing, an increase of approximately $40 million and a
change from secured to unsecured financing. Copies of the credit agreement and
related promissory notes are attached hereto as Exhibits.
Canoe Ridge Expansion: In September 1998, Canoe Ridge Vineyard purchased
its leased winery facility in a recently renovated historic building in downtown
Walla Walla, Washington, together with two parcels adjacent to the winery, for a
total of $632,000. The adjacent parcels are intended for expansion of the
existing winery's production capacity.
Edna Valley Expansion: In April 1999, the Edna Valley Joint Venture
commenced a $2.1 million, 16,000 square foot construction project, at the Edna
Valley Winery. Upon completion, presently scheduled during the fall of 1999,
this expansion is expected to double Edna Valley Vineyard's production capacity.
Acacia Winery: Lease-Purchase Agreement: During January 1999, the Company
entered into a lease-purchase agreement for approximately 50 acres of vineyard
property adjacent to the Marina Vineyards surrounding the Acacia Winery. The
lease terminates on December 31, 2023, and requires annual rent payments ranging
from $74,000 per year in its first year to $121,000 per year in 2023. As of
March 31, 1999, the Company made the first of four biannual payments of $12,000
for an option to acquire this property for $1.1 million.
Subsequent Event: Acquisition of Washington State Winery and Related Grape
Contracts: On June 15, 1999, the Company purchased 100% of the outstanding
shares of SHW Equity Co., a holding company which, in turn, owns 100% of Staton
Hills Winery and its adjacent vineyards in Yakima County, Washington. The cost
of the acquisition was approximately $6.0 million and was financed with the
Company's long-term bank line of credit.
The Company intends to use the Staton Hills facility as the home of a new
Washington State wine brand featuring Merlot and Cabernet Sauvignon from these
three viticultural regions. The Company's present plan for the new brand,
expected to be named in the fall of 1999, is to initially produce 20,000 cases
for sale to the super-premium wine market.
b. Financial Information about Industry Segments.
The Company presently operates six wineries, and also distributes certain
French, Chilean 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 two fiscal years and the previous calendar year, sales of wine
accounted for substantially all of the Company's consolidated revenues and
operating profits.
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<PAGE>
c. Narrative Description of Business.
Overview
<TABLE>
The Company owns the following seven wineries in the United States and
France, 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>
Chalone 100.0% Corporation Soledad, California
Carmenet Vineyard 100.0% Corporation Sonoma, California
Acacia
Acacia Winery 100.0% Corporation Napa, California
Marina Vineyard 50.0% Partnership Napa, California
Edna Valley Vineyard 50.0% Partnership San Luis Obispo, California
Canoe Ridge Vineyard 50.5% Limited liability company Walla Walla, Washington
Chateau Duhart-Milon 23.5% Partnership Pauillac, France
Staton Hills Winery 100.0% Corporation Yakima Valley, Washington
</TABLE>
With the exception of Chateau Duhart-Milon ("Duhart-Milon"), the Company
manages and operates all of the above properties and consolidates the results of
their operations. The Company accounts for its investment in Duhart-Milon using
the equity method of accounting.
Each of the six 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 most of its primary label
wines are estate bottled. A vintage dated wine is 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 varieties of
grapes to which they have been planted. 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. 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 in recent years 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 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.
-4-
<PAGE>
Winemaking Practices
The Company's winemaking practices are derived primarily from the
traditional methods of France, adapted to the particular requirements of
California and Washington State. 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. At Canoe Ridge Vineyard in Washington State, the Company
follows the winemaking practices of the Pomerol district in the Bordeaux region
of France which emphasizes Merlot rather than Cabernet Sauvignon grapes.
All of the Company's wineries are under the overall supervision of the
Company's President and Chief Executive Officer. 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 75% of its oak barrels from Burgundy and
Bordeaux. The remainder are produced in the United States. The Company's wine
bottles are made to its 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
This table sets forth the wine production of the Company for the 1998, 1997
and 1996 vintages. The wines' vintage is the year during which the grapes are
harvested. As of March 31, 1999, the current year's vintage (1999) had not yet
been harvested and cannot yet be estimated.
The following information is presented in terms of "equivalent" number of
cases because the subject wine is still being aged in barrels and tanks. For the
purpose of this schedule and the discussion which follows, wines purchased by
the Company for resale are excluded.
VINTAGE
----------------- ------------------ -----------------
1998 1997 1996
----------------- ------------------ -----------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------- ------ ------- ------- ------- ------
Chardonnay 231,340 55% 243,900 59% 151,900 62%
Sauvignon Blanc 8,750 2% 7,000 2% 7,200 3%
Pinot Blanc 2,200 1% 3,100 1% 5,900 2%
Other white wines 1,405 0% 5,700 1% 2,700 1%
------- ------ ------- ------- ------- ------
Total white wines 243,695 58% 259,700 63% 167,700 68%
------- ------ ------- ------- ------- ------
Pinot Noir 35,100 8% 54,200 13% 35,100 14%
Cabernet Sauvignon 40,900 10% 46,900 11% 26,300 11%
Merlot 85,500 20% 47,200 12% 14,700 6%
Other red wines 16,200 4% 4,500 1% 1,400 1%
------- ------ ------- ------- ------- ------
Total red wines 177,700 42% 152,800 37% 77,500 32%
------- ------ ------- ------- ------- ------
Total production 421,395 100% 412,500 100% 245,200 100%
======= ====== ======= ======= ======= ======
The Company's wines are fermented and aged primarily in new and used oak
barrels before they are bottled. Generally, white wines are aged from six to
nine months and red wines from nine to eighteen months. The wine is then bottled
and stored for further aging. White wines are generally released between two
months and one year after bottling, while red wines are released between three
months to two years after bottling. Although the Company's wines are ready to be
consumed when sold, it generally takes from six months to two years, and may
take longer, for the wine to fully develop.
-5-
<PAGE>
Chalone Vineyard: Chalone Vineyard production represented 15% of the
Company's consolidated sales dollars and 10% of the consolidated case sales for
the fiscal year ended March 31, 1999.
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 or under the
Company's control at adjacent vineyards, and are estate bottled.
Carmenet Vineyard: Carmenet Vineyard production represented 15% of the
Company's consolidated sales dollars and 14% of the consolidated case sales for
the fiscal year ended March 31, 1999.
The Company produces 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, is estate
bottled, and bears the "Sonoma Valley" viticultural area designation. The
Company also produces red wines under the "Carmenet Dynamite" label, which are
made from Cabernet Sauvignon and Merlot 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" appellation. See Item 1, Significant Events: Carmenet Fire.
Edna Valley Vineyard: Edna Valley Vineyard production represented 23% of
the Company's consolidated sales dollars and 25% of consolidated case sales for
the fiscal year ended March 31, 1999.
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 Winery: Acacia Winery production represented 17% of the Company's
consolidated sales dollars and 15% of the consolidated case sales for the fiscal
year ended March 31, 1999.
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 are grown on approximately 134 acres
of vineyards owned and leased by the Company, which are in the vicinity of the
winery.
Canoe Ridge Vineyard: Canoe Ridge Vineyard production represented 7% of the
Company's consolidated sales dollars and 7% of the consolidated case sales for
the fiscal year ended March 31, 1999.
The Canoe Ridge Vineyard commenced operations in 1994 and 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 bear the "Columbia Valley" viticultural area designation.
Echelon: Echelon production represented 12% of the Company's consolidated
sales dollars and 18% of the consolidated case sales for the fiscal year ended
March 31, 1999.
The 1997 vintage was the first to be released under the Echelon label.
Chardonnay, Merlot and Pinot Noir are produced under the Echelon label and bear
a Central Coast appellation. The Company anticipates releasing a Syrah under the
Echelon label during the next fiscal year.
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. These custom brands are often comprised of production from other Company
wineries, for which the percentage-of-sales contributions are already stated
above.
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 relatively 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 11% of the Company's consolidated sales and
11% of case sales in the year ended March 31, 1999 were primarily comprised of
import wines and, to a lesser degree, domestic 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 DBR and
Duhart-Milon 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.
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<PAGE>
General
The principal raw materials used by the Company are oak barrels, glass,
cork and grapes. Oak barrels are purchased mostly from France (75%) and the
United States. French oak barrels are preferred due to Company tradition,
consumer taste and preferences. Cork is produced and manufactured in Portugal,
which is the primary cork-producing country in the world and is purchased in the
United States. 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 produced on the Company's own vineyards. The remaining grape
requirements are met through purchases of available grapes and bulk wine from
California and Washington growers.
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:
<PLOT POINTS TO BE SUPPLIED BY CUSTOMER>
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 Within California
Sales and the marketing of all of the Company's wines within California,
including custom brands, have historically been made through the Company's own
sales force and through a wholesale marketer, who acts as a broker. In the year
ending March 31, 1999, the Company began exclusively using a broker for all
wholesale California sales.
The Company offers its reserve wines, older wines and other special wines
to its approximately 12,000 shareholders and other consumers directly from its
centralized distribution center by telephone 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
thirteen other states which have reciprocal cross-sale arrangements with the
State of California.
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<PAGE>
Sales Outside California
The Company's wines are marketed by independent distributors outside
California in 49 states and the District of Columbia and Puerto Rico and,
internationally, in Bermuda, the British West Indies, the U.S. Virgin Islands,
Canada, England, continental Europe, Hong Kong, China and Japan. In 1993, the
Company established a sales and marketing division, operating as Chalone Wine
Estates, to supervise and coordinate sales functions of the Company's business
and its custom brands operations. The Company employs a number of regional sales
managers who work directly with distributors in a particular region and their
customers.
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, 1999, fiscal year ended 1998, and calendar
year 1996.
<CAPTION>
Year ended Year ended Year ended
March 31, March 31, December 31,
------------------ ------------------ ------------------
1999 1998 1996
------------------ ------------------ ------------------
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 210,624 56% 144,328 45% 121,403 41%
International 16,766 4% 12,306 4% 12,574 4%
------- ------- ------- ------- ------- -------
Total distributors 227,390 60% 156,634 49% 133,977 45%
------- ------- ------- ------- ------- -------
Company direct
California wholesale 99,405 26% 93,418 29% 85,378 29%
Custom brands 26,453 7% 46,840 15% 52,233 17%
Catalog and winery retail 26,679 7% 25,639 7% 27,454 9%
------- ------- ------- ------- ------- -------
Total Company direct 152,537 40% 165,897 51% 165,065 55%
------- ------- ------- ------- ------- -------
Total 379,927 100% 322,531 100% 299,042 100%
======= ======= ======= ======= ======= =======
</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, this facility serves
as a central distribution center from which all of the Company's wines are
stored prior to shipping. The Company also rents separate warehouse facilities
as needed in local markets. The central facility lease is for a 15-year initial
term, expiring in November 2008, with a five-year extension option.
Employees
On March 31, 1999, the Company had 130 full-time employees, of which 76
were in grape growing and winemaking, 16 were in sales, and 38 were in
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 65 part-time
employees are hired for the grape harvest and related 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.
Regulation; Permits and Licenses
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, which require the Company to
maintain various permits, bonds and licenses.
In addition to all 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 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 California state and federal excise
taxes (at the aggregate rate of $1.27 per gallon), and varying other state
excise taxes, payable at the time of shipment to customers.
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<PAGE>
Trademarks
CHALONE VINEYARD, CARMENET and the 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. STATON HILLS is a federally registered trademark owned by
Staton Hills Winery Company, Ltd., which is expected to be assigned to the
Company pursuant to the terms of an agreement dated June 15, 1999, among Peter
Ansdell, SHW Equity Co. and the Company. The foregoing marks, except STATON
HILLS, are also registered in Japan with the Japanese Patent Office. These
marks, and other common-law marks, 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. For example, 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 most 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. The credit amount was $.12 per share for each of the last
three years. 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. Each spring, shareholders are
invited to attend the Company's annual Shareholder Celebration. For a nominal
fee, attendees attend an all-day wine tasting, auction and luncheon, which is
typically held on the grounds of the Chalone vineyards in Monterey County,
California. In 1999, approximately 1450 shareholders and guests from 33 states
and 3 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 presently 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, 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. Due to the relatively recent acquisition of Staton Hills
Winery, data on this property is omitted.
<CAPTION>
At March 31, 1999
------------------------------------------------------
Developing
Producing & replanted Unplanted Total
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Chalone Vineyard:
Chardonnay 110 65 - 175
Pinot Noir 43 109 - 152
Pinot Blanc 30 - - 30
Chenin Blanc 8 - - 8
Other 2 37 - 39
Unplanted - - 98 98
------------ --------------- ------------ ------------
Subtotal 193 211 98 502
------------ --------------- ------------ ------------
Carmenet Vineyard:
Cabernet Sauvignon 19 32 - 51
Cabernet Franc 14 6 - 20
Merlot 4 3 - 7
Chardonnay - - - -
Other 2 5 - 7
Unplanted - 11 8 19
------------ --------------- ------------ ------------
Subtotal 39 57 8 104
------------ --------------- ------------ ------------
Acacia Winery (including leasehold interest):
Chardonnay, Viogner 36 - - 36
Pinot Noir 15 39 - 54
Unplanted - - 44 44
------------ --------------- ------------ ------------
Subtotal 51 39 44 134
------------ --------------- ------------ ------------
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon 40 8 - 48
Merlot 64 10 - 74
Chardonnay 29 - - 29
Other - 6 - 6
Unplanted - - 26 26
------------ --------------- ------------ ------------
Subtotal 133 24 26 183
------------ --------------- ------------ ------------
Total Acreage 416 331 176 923
============ =============== ============ ============
</TABLE>
Chalone Vineyard
Chalone Vineyard 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 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 48,000 cases.
-10-
<PAGE>
The Company produces primarily Chardonnay and Pinot Noir at this facility
and markets these wines under the "Chalone Vineyard" and "Gavilan(TM)" labels
(production of "Gavilan" vintages was discontinued during 1998).
Carmenet Vineyard
Carmenet 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 which were planted to Cabernet
Sauvignon, Merlot and Cabernet Franc. The Company has replanted these acres with
essentially the same varieties. See Item 1, Business, Significant Events
- -Carmenet Fire.
The vineyard is situated in the Mayacamas Mountains just north of the town
of Sonoma, at an elevation of 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 addition to the production area, the property includes 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 March 1998, the Company purchased 22 acres of vineyard land in the Glen
Ellen area of Sonoma Valley, approximately seven miles from the Carmenet Winery.
In addition to the vineyards, the Glen Ellen acquisition included a crush and
fermenting facility with a 1,200-ton capacity, which the Company plans to use to
expand production of Carmenet's "Dynamite" wines. With this recent addition, the
Carmenet winery now has the ability to crush and ferment 92,000 cases.
The Company plans to use the Glen Ellen winery facility as a red-wine
production facility, Fourteen acres of Chardonnay were removed, and three acres
were replanted to Merlot. The Company currently intends to replant nine
additional acres to Merlot later this year.
At this property, the Company principally produces Bordeaux-style red and
white wines which are marketed under the "Carmenet" brand name.
Edna Valley Vineyard
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 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"). The Company is the managing joint venture
partner and it manages and supervises the winery operations and sells and
distributes its wine.
In 1996, the property's ground lease was amended to provide additional land
for planned expansion of the winery, which subsequently was expanded from
approximately 24,000 square feet to over 32,000 square feet. The expanded
facility included a tasting room, dining facilities for private parties and
12,000 square feet of underground cellars for wine fermentation and barrel
aging. This increased the annual production capacity from approximately 60,000
cases to over 100,000 cases.
In April 1999, the Joint Venture began a separate $2.1 million, 16,000
square foot expansion project at the Edna Valley Vineyard. Upon completion,
presently scheduled during the fall of 1999, the latest expansion is expected to
double Edna Valley Vineyard's production capacity.
The Edna Valley Vineyard principally produces Chardonnay and Pinot Noir. It
also produces limited quantities of Viognier, Muscat, Pinot Blanc and Sauvignon
Blanc, all of which are marketed under the "Edna Valley Vineyard" label.
Acacia Winery
The Acacia Winery, and its related vineyards, are located on approximately
134 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 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 portion of 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 $116,361 in the year ended March 31,1999, 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 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.
-11-
<PAGE>
The Marina Vineyard is planted entirely to Chardonnay grapes on low rolling
hills in well-drained clay-loam soil. The majority of the vines were planted in
the mid-1970s, although significant replanting on new root stock was undertaken
in the early 1980s. The vineyard is not frost protected, but to date has not
experienced any significant losses due to frost damage. The average annual
rainfall is 22 inches. The vineyard is irrigated from a reservoir located on the
property.
The Company owns two vineyards adjacent to the Marina Vineyard to the east
comprising approximately 60 acres planted to Pinot Noir, of which fifteen acres
currently are producing and 45 acres are under development. During January 1999,
the Company entered into a lease-purchase agreement for approximately 50 acres
of additional vineyard property adjacent to the Marina vineyards. The new lease
expires on December 31, 2023 and provides for annual rent payments of $74,000 in
its first year and increases in various increments to $121,000 per year by 2023.
The terms of the lease also provide for the Company to purchase this property
for $1.1 million in consideration of certain biannual option payments. With the
addition of this lease, there are 42 acres of plantable land adjacent to the
Marina Vineyard to the west. The Company plans to plant this acreage to
Chardonnay and Pinot Noir over the next two years. Two reservoirs exist on these
properties and a third reservoir is in the planning stages in order to meet the
vineyards' current and future irrigation needs.
The property's current production capacity is approximately 63,000 cases.
This is expected to increase to approximately 75,000 cases in the future. The
property's principal wines are Chardonnay and Pinot Noir, which are marketed
under the "Acacia" brand.
Canoe Ridge Vineyard
The Canoe Ridge Vineyard is located in eastern Washington State, at an
altitude of approximately 800 feet on the eastern slope of the Canoe Ridge,
overlooking the Columbia River. The vineyard is in the "Columbia Valley"
viticultural area. Of the vineyard's approximately 275 acres (of which 183 acres
are plantable), 100 acres are now planted primarily to Merlot and, to a lesser
extent, to Chardonnay 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 has an average annual rainfall of 6
inches and is irrigated with water from the Columbia River under an agreement
with an adjoining farm. 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 interests of the LLC directly,
and 25.5% indirectly, through a wholly owned subsidiary of the Company.
In the fiscal year ended March 31, 1999, the LLC purchased its leased
winery facility in a recently renovated historic building which originally
served as the engine house for the Walla Walla Valley Railroad in downtown Walla
Walla. Additionally, the LLC purchased two parcels adjacent to the winery to
increase the current winery's capacity.
The Canoe Ridge Winery has an annual production capacity of approximately
27,000 cases, and produces primarily Chardonnay, Merlot and small amounts of
Cabernet Sauvignon.
Staton Hills Winery
Staton Hills Winery is located in Yakima County, Washington, on the banks
of the Yakima River. The vineyard is located in the Yakima Valley viticultural
area. The land on which the winery is located is a 22-acre parcel, of which
approximately 10 acres are planted. In addition to the vineyard area, the
property includes a 20,000 sq. ft. production and tasting facility with an
annual production capacity of 40,000 cases.
The Company plans to use the winery and related property as the core of a
new brand of red wine at the super-premium price point. The new brand, expected
to be named later this year, is expected to consist of Merlot and Cabernet
Sauvignon produced from grapes purchased under supply contracts from vineyards
in the Yakima Valley, Wahluke slopes and Walla Walla Viticultural areas. Staton
Hills Winery will continue to produce wines under this mark (which has been
assigned to the Company), with grapes produced in the Northern Yakima Valley.
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"). The remaining 76.5% interest is owned by DBR. The
property consists of approximately 166 acres of producing vineyards adjacent to
the vineyards of the world famous 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.
Duhart-Milon wines are sold under the "Chateau Duhart-Milon" and "Moulin de
Duhart" labels.
-12-
<PAGE>
Item 3. Legal Proceedings.
a. Settlement of Litigation Arising from the Carmenet Fire (the "PG&E"
Litigation).
As previously disclosed, on July 31, 1996 a wildfire damaged approximately
75% of the producing acreage at the Company's Carmenet Vineyard. Carmenet's
winery structures and barrel inventory were untouched by the blaze and no one
was injured.
An investigation revealed that the fire was caused by the electrical lines
of Pacific Gas and Electric ("PG&E"). Following these findings, PG&E 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. As discussed
previously in the Company's Form 10-K for the period ended March 31, 1997, the
Company used the proceeds of the January 1997 payment of $425,000 to offset the
write-off of inventory and vineyard assets destroyed by the fire. As discussed
previously in the Company's Forms 10-Q, the Company recorded the advance of $4.5
million as a "Settlement Advance" on its balance sheet pending the completion of
a final settlement agreement.
In the quarter ended March 31, 1999, the Company entered into a settlement
agreement with PG&E pursuant to which PG&E agreed to pay the Company a low
six-figure amount in addition to the foregoing advances. The foregoing payment
from PG&E was received by the Company during the last quarter of the fiscal year
and is expected to be the final settlement. The payments received from PG&E
during the year ended March 31, 1999 were recognized in full in the Company's
income statement for the year ended March 31, 1999, net of related legal
expenses.
-13-
<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, 1999.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward Chairman of the Board of Directors 60
Thomas B. Selfridge President, and Chief Executive 55
Officer
Francois P. Muse Chief Financial Officer1 33
Daniel E. Cohn Secretary 42
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
been a director of the Company since 1972. He has been its chairman since August
1997 and is a member of the Board's Executive Committee. Mr. Woodward served as
Vice President and Chief Financial Officer from 1972 to 1983. In 1974, he became
the Company's President and Chief Executive Officer, a position he held until
October of 1983. Mr. Woodward is a director of Domaines Barons de Rothschild
(Lafite) ("DBR") and president of The Chalone Wine Foundation.
Thomas B. Selfridge. Mr. Selfridge joined the Company as President in
January 1998 and was appointed to the Company's Board of Directors in May 1998.
On July 1, 1998, Mr. Selfridge assumed the title of Chief Executive Officer of
the Company. He also serves as a member of the Company's Operating Committee. He
also serves as a member of the Board's Operating Committee, as a director of
Edna Valley Vineyard and Canoe Ridge Winery, and secretary of The Chalone Wine
Foundation.
Francois P. Muse. Mr. Muse joined the Company as Corporate Controller in
October of 1997. From July 1998 to May 19, 1999, he held the title of (Acting)
Chief Financial Officer. He was appointed the Company's Chief Financial Officer
on May 20, 1999. Mr. Muse also serves as a director of Canoe Ridge Vineyards.
Daniel E. Cohn. Mr. Cohn has served as the Company's secretary since 1998.
He has been a partner of Farella Braun & Martell LLP since 1991 and a member of
its business practice group since 1985.
Robert B. Farver. Mr. Farver joined the Company in 1990 as the Regional
Sales Manager for the Northeast United States and has been the Company's Vice
President, Sales and Distribution since 1996. Previously, he was Director of
National Sales and Marketing. Mr. Farver also serves as a director of Canoe
Ridge Vineyards.
- ----------------------
1 Mr. Muse was appointed the Company's Chief Financial Officer on May 20, 1999.
-14-
<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, 1999 $ 10.00 $ 7.63
December 31, 1998 10.44 10.00
September 30, 1998 10.56 10.00
June 30, 1998 11.00 10.88
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 8, 1999, the closing price for the common stock was $9.25 per
share. During the year ended March 31, 1999, the average weekly trading volume
of the stock was approximately 21,700 shares.
b. Holders of Record.
As of June 8, 1999, there were approximately 5,200 holders of record of the
Company's common stock.
c. Dividends.
To date, the Company has not paid any cash dividends.
Under the terms of certain of the Company's credit facilities, the Company
is restricted from paying dividends in excess of 50% of its aggregate net
income.
-15-
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data for the years ended
March 31, 1999 and 1998, and the years ended December 31, 1996 and 1995 are
derived from the Company's audited consolidated financial statements. The
financial data for the years ended March 31, 1997, 1996 and 1995, however, are
derived from the Company's unaudited consolidated financial statements 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.
SELECTED FINANCIAL DATA
(in thousands except per-share data)
Year ended December 31,
-----------------------
1996 1995
-------- --------
Statement of Operations Data:
Net revenues $ 31,044 $ 25,032
Gross profit 12,375 8,792
Other revenues from operations 107 20
Selling, general and administrative expenses 6,283 5,374
Operating income 6,200 3,438
Other income/(expense), net (1,925) (2,701)
Equity in net income of Duhart-Milon 304 74
Minority interest (621) (357)
Net income $ 2,339 $ 207
Net income per common share $ 0.29 $ 0.04
Balance Sheet Data:
Working capital $ 23,504 $ 22,072
Total assets 80,179 72,569
Long-term obligations less current maturities 17,837 13,511
Shareholders' equity 43,246 41,382
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 42,826 $ 36,755 $ 31,188 $ 25,987 $ 20,710
Gross profit 19,625 16,216 12,811 9,243 7,530
Other revenues from operations 196 303 107 20 --
Selling, general and administrative expenses (10,805) (8,147) (6,466) (5,442) (4,754)
Operating income 9,016 8,372 6,452 3,801 2,776
Other income/(expense), net (1,763) (1,857) (1,789) (2,429) (2,584)
Settlement income 4,447 -- -- -- --
Equity in net income of Duhart-Milon 766 341 281 126 --
Minority interest (1,219) (1,125) (681) (387) (156)
Net income (loss) $ 6,636 $ 3,410 $ 2,520 $ 600 $ (26)
Net income (loss) per common share $ 0.75 $ 0.41 $ 0.31 $ 0.10 $ --
Balance Sheet Data:
Working capital $ 49,192 $ 27,794 $ 24,283 $ 22,023 $ 16,680
Total assets 103,471 90,294 75,859 68,973 70,299
Long-term obligations less current maturities 35,273 18,124 18,379 13,415 26,339
Shareholders' equity 58,291 50,405 42,835 41,098 23,931
</TABLE>
-16-
<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 Selected Financial Data presented in Item 6 hereto as qualified by the
Company's Consolidated Financial Statements and related notes presented in Item
8 hereto.
Forward Looking Statements
From time to time, information provided by the Company, statements made by
its employees, or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so called "forward looking statements" that 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 and the President's Letter to
the Shareholders, relating to projections or predictions about the Company's
future investments 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 which
could affect the Company's ability to sustain volume and revenue growth; (iii)
interest rates and other business and economic conditions which 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; (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 and (vi) the risks associated with the assimilation of
Staton Hills Winery. Each of these factors, and other risks pertaining to the
Company, the premium wine industry and general business and economic conditions,
are more fully discussed herein and from time to time in other 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, 1999 and March 31, 1998 and
consolidated statements of income for the years ended March 31, 1999, and 1998
and December 31, 1996, respectively. This Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations discusses the
Company's consolidated financial information for the years ended March 31, 1999,
1998 and 1997. See Item 6, Selected Financial Data for a schedule of the data
discussed herein.
-17-
<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,
------------------------------------ ------------------------------
1999 1998 1997 1996 1995
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues 100 % 100 % 100 % 100 % 100 %
Gross profit 46 % 44 % 41 % 40 % 35 %
Other revenues from operations 0 % 1 % 0 % 0 % 0 %
Selling, general and admin. expenses (25)% (22)% (21)% (20)% (21)%
Operating income 21 % 23 % 21 % 20 % 14 %
Other income (expense) (4)% (5)% (6)% (6)% (11)%
Settlement Income 10 % 0 % 0 % 0 % 0 %
Equity in net income of Duhart-Milon 2 % 1 % 1 % 1 % 0 %
Minority interest (3)% (3)% (2)% (2)% (1)%
Net income (loss) 15 % 9 % 8 % 8 % 1 %
</TABLE>
Wine Sales
Net revenues for the year ended March 31, 1999 increased approximately 17%
over the comparable period in the preceding year. This increase was attributable
to a 14% volume increase and a 3% average price increase.
Net revenues for the year ended March 31, 1998 increased by 18% over the
prior year comparable period. This increase was attributable to a 9%
volume-increase and an 8% average price-increase.
Sales-volume in the California market comprised 26% of the Company's total
sales for the year ended March 31, 1999. Although California is the Company's
largest market (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 will continue to account for most of the
Company's future revenue growth.
Gross Profit
Gross profit for the year ended March 31, 1999 increased by approximately
21%, or $3.4 million, over the comparable period in the preceding year. This was
primarily the result of (i) increased sales volume, (ii) increased average sales
prices, and (iii) less pronounced increases in average production costs partly
due to the relative success and size of the 1997 harvest.
Gross profit for the year ended March 31, 1998 was $16.2 million,
corresponding to a 44% gross margin, as compared to $12.8 million, or 41% gross
margin, in the year ended March 31, 1997. This increase in gross profit was
mostly attributable to increased unit sales, price increases across all brands
and a shift in the product mix of wines sold to higher margin wines.
Other Revenue from Operations
Other revenue from operations consists of (i) revenue obtained from
third-party wineries, net of related expenses, for grape crushing or wine
bottling and (ii) net profit from sales of bulk wine. The Company cannot predict
the materiality of such operations with respect to future operating results, as
this source of revenue is highly unpredictable and largely contingent on other
wineries' demand for extra production capacity, which can and does vary
significantly from year to year.
The decrease of 35%, from $303,000 to $196,000, for the twelve months ended
March 31, 1999 from the comparable period in the prior year was attributable to
less custom crush demand (driven in part by the relatively lower 1998 harvest
tonnage throughout California as compared to the 1997 harvest tonnage), partly
offset by increased custom bottling demand.
The increase to $303,000 for the year ended March 31, 1998, from $107,000
in the prior period, was mostly due to the increased demand resulting from the
unusually large 1997 harvest experienced in California.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the year ended March 31,
1999 increased by 33% over the comparable period in the preceding year. This
increase is primarily the result of (i) increased selling and marketing
expenditures normally associated with increased sales quantities and also
related to the launching of the new Echelon brand-name, (ii) expenditures in the
Company's infrastructure and (iii) unusually high severance costs.
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 was primarily the result of planned increases in marketing
expenditures.
-18-
<PAGE>
Operating Income
Operating income for the year ended March 31, 1999 increased by 8% over the
comparable period in the preceding year. This increase was primarily due to
gross profits, offset by increased selling, general and administrative expenses
as discussed above. Additionally, other revenues from operations decreased to 2%
of operating income for the year ended March 31, 1999, compared to 4% in the
prior comparable period.
Operating income for the year ended March 31, 1998 increased 30% over the
prior comparable year. This increase was mostly due to higher unit sales and
gross margins per case, all discussed above.
Other Income/(Expense), Net
The decrease of 5% in net other expense between the years ending March 31,
1999 and 1998 was primarily driven by a 6% decrease in net interest expense
mostly due to lower interest rates.
Interest expense for the year ended March 31, 1998 increased to $1.9
million, an increase of 6% from $1.8 million in the prior comparable period.
This was primarily due to slightly higher borrowing levels.
Settlement Income
As discussed at Item 3(a): Settlement of Litigation Arising from the
Carmenet Fire, the Company recognized in its March 31, 1999 consolidated
statement of income, $4.4 million relating to a settlement with Pacific Gas and
Electric ("PG&E") for the July 1996 fire damage at the Carmenet vineyards.
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.
The Company experienced record results during the twelve months ended March
31, 1999 from its investment in Societe Civile Chateau Duhart-Milon
("Duhart-Milon"). The Company's 23.5% equity interest in the net income of
Duhart-Milon for the years ending March 31, 1999 and 1998, were $766,000 and
$341,000, respectively. This 125% increase is primarily attributable to
exceptionally high demand for the 1996 vintage of Bordeaux wines. The 1996
vintage is expected to be one of the Bordeaux region's most successful vintages
in the past twenty years. Due to the exceptional nature of the 1996 vintage,
this quarter's net income from the Company's investment in Duhart-Milon may not
be indicative of future results.
The Company monitors its investment in Duhart-Milon primarily through its
on-going communication with Domaines Barons de Rothschild (DBR). Such
communication is facilitated by the presence of the Company's chairman on DBR's
Board of Directors, and DBR's representation on the Company's Board of
Directors. Additionally, various key employees of the Company make frequent
visits to Duhart-Milon's offices and productions facilities.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company maintains a reserve for currency translation
which was $2,296,000 as of March 31, 1999. This reserve was reduced from
$2,459,000 as of March 31, 1998 due to the increase in the relative worth of the
French Franc when compared to the U.S. dollar during the twelve months ended
March 31, 1999. Although the transition to the "EURO" currency became effective
as of January 1, 1999, the Company does not anticipate that this transition will
have a material impact on its investment in Duhart-Milon. Currency fluctuations
are recorded in the "Cumulative foreign currency translation adjustment" in the
equity section of the Company's consolidated balance sheet, and in comprehensive
income as defined by the Statement of Financial Accounting Standards No.130
("SFAS 130") - Reporting Comprehensive Income.
Minority Interest
<TABLE>
The Edna Valley Vineyard ("EVV") and Canoe Ridge Vineyard, LLC ("CRV")
financial statements are consolidated in the Company's financial statements. The
interest in the equity and net income of EVV and CRV which belongs to parties
other than the Company is accounted for as "minority interest". The minority
interest in the net income of EVV and CRV for the three years ended March 31,
1999 consisted of the following (in thousands):
<CAPTION>
Year ended March 31,
Minority ----------------------------------------
Venture Minority Owner Percent 1999 1998 1997
- ----------- ------------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50.00% $ 909 $ 906 $ 570
Canoe Ridge Vineyard, LLC Various 49.50% 310 219 111
------------ ------------- ------------
$ 1,219 $ 1,125 $ 681
============ ============= ============
</TABLE>
The minority interest in earnings for the year ended March 31, 1999
increased 8% over the comparable period ended March 31, 1998, due to steadily
improving performance at both EVV and CRV primarily as a result of increases in
both
-19-
<PAGE>
case sales and gross margins per case.
The minority interest in earnings for EVV for the year ended March 31, 1998
represents an increase of 65% 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 Income
Net income for the year ended March 31, 1999 were $6.6 million, an increase
of $3.2 million, or 95%, over the year ended March 31, 1998. This was primarily
as a result of non-recurring settement income of $2.6 million (after tax-effect)
and increased gross profits, offset by higher selling, general and
administrative expenses.
Net income for the year ended March 31, 1998, were $3.4 million compared to
$2.5 million in the year ended March 31, 1997. This 35% increase reflects
increased unit sales at higher gross margins.
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 strongest during the fourth quarter
because of heavy holiday sales and because most wines generally are released
between the end of the third and beginning of the fourth quarters.
Year 2000
The year 2000 issue ("Y2K") is the result of computer programs being
written using two digits rather than four digits to determine the applicable
year. As presently programmed, the Company's computer programs and systems that
have time sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Unless reprogrammed, in the future 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.
The Company has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by Y2K software failures.
The Company believes that its exposure to Y2K issues remains relatively minor in
comparison to most industrial enterprises because of its relatively low reliance
on computerized systems. The Company is doing everything technologically
possible to assure its computers function properly upon the turn of the century.
Compliance is to some extent dependent upon vendor cooperation. Preliminary
estimates of the compliance-related costs, based on internal projections, are
approximately $15,000. The Company recognizes that any Y2K system related
compliance failures could result in additional expenses to the Company, the
materiality of which cannot be predicted at this time.
Liquidity and Capital Resources
Working Capital:
During the twelve months ended March 31, 1999, working capital increased by
$21.4 million, or 77%, to $49.2 million from $27.8 million as of March 31, 1998.
This was primarily due to the following: (i) $1.0 million received from the net
proceeds of warrant exercises (which resulted in a purchase of 142,857 shares of
the Company's common stock); (ii) aggregate payments of $4.7 million received
from PG&E relating to the Carmenet vineyard fire of July 1996; (iii) net
inventory increases of $6.6 million; (iv) an increase of 1.7 million in accounts
receivable; (v) a decrease of $7.1 million in outstanding lines of credit from
$11 million from $3.9 million due to debt refinancing, compounded by a change in
classification of the Company's lines of credit from short-term to long-term;
offset by; (vi) capital expenditures of $7.1 million incurred both as a result
of normal operations and selected expansion of certain Company production
facilities; and (vii) payment of $1.7 million in taxes relating to proceeds
received from Pacific Gas and Electric ("PG&E").
The Company's 5% Convertible Subordinated Debentures Due 1999, having a
face value of $8.5 million, matured in April 1999. Upon maturity, the Company
paid cash in the amount of $2.0 million to holders of debentures who elected not
to convert into common stock. Holders of debentures with a face value of $6.5
million elected to convert resulting in the issuance of 738,014 new shares of
the Company's common stock.
During the twelve months ended March 31, 1998, working capital increased by
$3.5 million or 14.5%, from $24.3 as of March 31, 1997 to $27.8 million. This
was primarily a result of (i) a $6.0 million increase in inventory levels and
(ii) capital investments of $6.3 million, which were both funded through our
lines of credit, offset by (iii) $4.8 million received from the net proceeds of
warrant exercises (which resulted in a purchase of 685,714 shares of the
Company's common stock).
-20-
<PAGE>
Cash Flows:
During the twelve months ended March 31, 1999, cash flow from operations
decreased by $1.4 million from the comparable period in the prior year. This was
primarily the result of (i) $3.0 million, after-tax, received from PG&E relating
to the aforementioned settlement income, offset by (ii) increased spending on
inventory and (iii) various timing differences in payment of payables and
collection of receivables. Cash flow from investing activities decreased by
$140,000, or 2%, from the comparable period in the prior year, due to (i) an
increase of $781,000 in capital expenditures, (ii) no dividends declared by
Duhart-Milon in the period ended March 31, 1999, offset by (iii) no option
payment made pursuant to the Edna Valley joint venture agreement during the year
ended March 31, 1999. Cash flow from financing activities was $1 million less
than in the prior year due to (i) a decrease in proceeds from issuance in common
stock largely driven by an exercise of warrants of $1.0 million in the year
ended March 31, 1999, vs. $4.8 million in prior year, offset by (ii) a net
increase in debt-financing of $4.9 million in the year ended March 31, 1999, vs.
$2.0 million in the preceding year.
During the twelve months ended March 31, 1998, cash flow from operations
decreased by $1.5 million from the comparable period in the prior year. This was
primarily the result of (i) increased spending on inventory and (ii) various
timing differences in payment of payables and collection of receivables. Cash
flow from investing activities increased by $66,000 from the comparable period
in the prior year, due to (i) a decrease of $847,000 in capital expenditures,
(ii) increased dividends declared by Duhart-Milon in the period ended March 31,
1998, offset by (iii) an option payment of $1.1 million made pursuant to the
Edna Valley joint venture agreement during the year ended March 31, 1998. Cash
flow from financing activities was $3.3 million higher than in the prior year
due to (i) an increase in proceeds from issuance in common stock largely driven
by an exercise of warrants of $4.8 million in the year ended March 31, 1998,
offset by (ii) a net increase in debt-financing of $2.0 million in the year
ended March 31, 1999, vs. $3.4 million in the preceding year.
General:
On March 31, 1999, the Company entered into a credit agreement with
Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New
York Branch ("Rabobank"). The Rabobank credit facility provides for a total of
$70 million of unsecured financing, consisting of a seven-year, $30 million term
loan and a two-year, $40 million revolving line of credit. In conjunction with
the closing of the Rabobank credit facility, the Company refinanced
approximately $24 million of its outstanding debt.
The Company is not aware of any potential impairments to its liquidity and
believes its capital resources are adequate to meet current and historic levels
of capital expenditures and its liquidity needs for the at least the next twelve
months.
-21-
<PAGE>
Disclosures About Market Risk
You should read the following disclosures in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations which
have been drafted in compliance with recently adopted regulations of the SEC
concerning the use of "Plain English." These disclosures are intended to discuss
certain material risks of the Company's business as they appear to management at
this time. However, this list is not exhaustive. Other risks may, and likely
will, arise from time to time.
Our Revenues and Operating Results Fluctuate Significantly from Quarter to
Quarter
We believe period-to-period comparisons of our operating results are not
necessarily meaningful, and cannot be relied upon as indicators of future
performance. In addition, there can be no assurance that our revenues will grow
or be sustained in future periods or that we will maintain our current
profitability in the future. Significant factors in these quarterly
fluctuations, none of which are within our control, are changes in consumer
demand for our wines, the affect of weather and other natural forces on growing
conditions and, in turn, the quality and quantity of grapes produced by us,
interest rates and other business and economic conditions. Additionally, our
sales volume tends to be affected by price increases, distributors' inventory
levels and the timing of releases for certain wines, among other factors.
Consequently, we have experienced, and expect to continue to experience,
seasonal fluctuations in revenues and operating results.
A large portion of our expenses are fixed and difficult to reduce in a
short period of time. In quarters when revenues do not meet our expectations,
our level of fixed expenses tends to exacerbate the adverse effect on net
income. In quarters when our operating results are below the expectations of
public market analysts or investors, the price of our common stock may be
adversely affected.
Our Profits Depend Largely on Sales in Certain States and on Sales of
Certain Varietals
In the twelve months ended March 31, 1999, approximately 70% of our wine
sales were concentrated in 20 states. Changes in national consumer spending or
consumer spending in these states and other regions of the country could affect
both the quantity and price level of wines that customers are willing to
purchase.
Approximately 92% of our net revenues in the twelve months ended March 31,
1999 were concentrated in our top four selling varietal wines. Specifically,
sales of Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot accounted for
58%, 11%, 16% and 7% of our net revenues, respectively, for the twelve months
ended March 31, 1999.
Competition May Harm Our Business
The premium table wine industry is intensely competitive and highly
fragmented. Our wines compete in all of the premium wine market segments with
many other premium domestic and foreign wines, with imported wines coming
primarily from the Burgundy and Bordeaux regions of France and, to a lesser
extent, Italy, Chile, Argentina, South Africa and Australia. Our wines also
compete with popular-priced generic wines and with other alcoholic and, to a
lesser degree, non-alcoholic beverages, for shelf space in retail stores and for
marketing focus by our independent distributors, many of which carry extensive
brand portfolios.
Additionally, the wine industry has experienced significant consolidation.
Many of our competitors have greater financial, technical, marketing and public
relations resources than we do. Our sales may be harmed to the extent we are not
able to compete successfully against such wine or alternative beverage
producers.
Our Business is Seasonal
Our business is subject to seasonal as well as quarterly fluctuations in
revenues and operating results. Our sales volume tends to increase during the
summer months and the holiday season and decrease after the holiday season. As a
result, our sales and earnings are typically highest during the fourth calendar
quarter and lowest in the first calendar quarter. Seasonal factors also affect
our level of borrowing. For example, our borrowing levels typically peak during
the winter when we have to pay for harvest costs and may have to make
contractual payments to grape growers. These and other factors may cause
fluctuations in the market price of our common stock.
Bad Weather, Pests and Plant Diseases Could Harm Our Business
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases and pests and extreme weather conditions can materially
and adversely affect the quality and quantity of grapes available to us. This
could reduce the quality or amount of wine we produce. A deterioration in the
quality of our wines could harm our brand name, and a decrease in our production
could reduce our sales and profits. Future government restrictions regarding the
use of certain materials used in grape growing may increase vineyard costs
and/or reduce production.
Grape growing requires adequate water supplies. We generally supply our
vineyards' water needs through wells and reservoirs located on our properties.
We believe that we have adequate water supplies to meet the needs of all of our
vineyards. However, a substantial reduction in water supplies could result in
material losses of grape crops and vines.
-22-
<PAGE>
Many California vineyards, including vineyards in Northern California, have
been infested with Phylloxera, a root louse that renders a vine economically
unproductive within a few years after infestation. The current strain of
Phylloxera primarily affects vines of a certain type. Our vineyard properties
are primarily planted to rootstocks believed to be resistant to Phylloxera.
However, we cannot be certain that our existing vineyards or the rootstocks we
are now using in our planting and replanting programs will not in the future
become susceptible to current or new strains of Phylloxera, plant insects or
diseases, any of which could harm our business.
The weather phenomenon commonly referred to as "El Nino" produced heavy
rains and cooler weather during the Spring of 1998, which resulted in colder and
wetter soils than are typical during California's grape growing season.
Consequently, the 1998 harvest was postponed by approximately four to six weeks
- - depending on the geographical location and varietals. The unusual weather
conditions resulting from El Nino impacted quantity and quality of the Company's
1998 estate harvest. The size of the Company's most significant crops ranged
from normal-sized yields to 50% of normal yields (depending on the varietal and
the particular estate).
Despite the foregoing reduction in the yield of certain crops, the
harvested estate crops, in combination with contracted grape purchases (most of
which are tonnage-based), are expected to permit the Company to meet originally
anticipated sales-projections for its 1998 vintage Chardonnay, Cabernet and
Merlot varietals which, together, have historically comprised between 80% and
85% of its aggregate annual production.
We May Not Be Able to Grow or Acquire Enough Quality Grapes for Our Wines
The adequacy of our grape supply is influenced by consumer demand for wine
in relation to industry-wide production levels. While we believe that we can
secure sufficient supplies of grapes from a combination of our own production
and from grape supply contracts with independent growers, we cannot be certain
that grape supply shortages will not occur. A shortage in the supply of wine
grapes could result in an increase in the price of some or all grape varieties
and a corresponding increase in our wine production costs.
Industry trends point to rapid plantings of new vineyards and replanting of
old vineyards to greater densities, with the expected result of significantly
increasing the supply of premium wine grapes and the amount of wine which will
be produced in the future. This expected increase in grape production could
result in an excess of supply over demand and force wineries to reduce, or not
increase, prices.
We Depend on Third Parties to Sell Our Wine
We sell our products primarily through independent distributors and brokers
for resale to retail outlets, restaurants, hotels and private clubs across the
United States and in some overseas markets. To a lesser degree, we rely on
direct sales from our wineries, our wine library and direct mail. Sales to our
largest distributor and to our nineteen largest distributors combined,
represented approximately 4% and 39%, respectively, of our net revenues during
the twelve months ended March 31, 1999. Sales to our nineteen largest
distributors are expected to continue to represent a substantial portion of our
net revenues in the future. We use a broker in order to sell our wines within
California. Such sales represent 31% of our net revenues during the twelve month
period ended March 31, 1999. The laws and regulations of several states prohibit
changes of distributors, except under certain limited circumstances, making it
difficult to terminate a distributor without reasonable cause, as defined by
applicable statutes. The resulting difficulty or inability to replace
distributors, poor performance of our major distributors or our inability to
collect accounts receivable from our major distributors could harm our business.
New Regulations or Increased Regulatory Costs Could Harm Our Business
The wine industry is subject to extensive regulation by the Federal Bureau
of Alcohol, Tobacco and Firearms and various foreign agencies, state liquor
authorities and local authorities. These regulations and laws dictate such
matters as licensing requirements, trade and pricing practices, permitted
distribution channels, permitted and required labeling, advertising and
relations with wholesalers and retailers. Any expansion of our existing
facilities or development of new vineyards or wineries may be limited by present
and future zoning ordinances, environmental restrictions and other legal
requirements. In addition, new regulations or requirements or increases in
excise taxes, income taxes, property and sales taxes or international tariffs,
could reduce our profits. Future legal or regulatory challenges to the industry,
either individually or in the aggregate, could harm our business.
We Will Need More Working Capital to Grow
The premium wine industry is a capital-intensive business which requires
substantial capital expenditures to develop and acquire vineyards and to improve
or expand wine production. Further, the farming of vineyards and acquisition of
grapes and bulk wine require substantial amounts of working capital. We project
the need for significant capital spending and increased working capital
requirements over the next several years, which must be financed by cash from
operations or additional borrowings or other financing.
-23-
<PAGE>
Adverse Public Opinion About Alcohol May Harm Our Business
A number of research studies suggest that various health benefits may
result from the moderate consumption of alcohol, but other studies suggest that
alcohol consumption does not have any health benefits and may in fact increase
the risk of stroke, cancer and other illnesses. If an unfavorable report on
alcohol consumption gains general support, it could harm the wine industry and
our business.
We Use Pesticides and Other Hazardous Substances in the Operation of Our
Business
We use pesticides and other hazardous substances in the operation of our
business. If hazardous substances are discovered on, or emanate from, any of our
properties, and their release presents a threat of harm to public health or the
environment, we may be held strictly liable for the cost of remediation. Payment
of such costs could have a material adverse effect on our business, financial
condition and results of operations. We maintain insurance against these kinds
of risks, and others, under various insurance policies. However, our insurance
may not be adequate or may not continue to be available at a price or on terms
that are satisfactory to us.
Contamination of Our Wines Would Harm Our Business
We also are subject to certain hazards and liability risks, such as
potential contamination, through tampering or otherwise, of ingredients or
products. Contamination of any of our wines could result in the need for a
product recall which could significantly damage our reputation for product
quality, which we believe is one of our principle competitive advantages. We
maintain insurance against these kinds of risks, and others, under various
general liability and product liability insurance policies. However, our
insurance may not be adequate or may not continue to be available at a price or
on terms that are satisfactory to us.
The Loss of Key Employees Would Damage Our Reputation and Business
Our success depends to some degree upon the continued services of a number
of key employees. Although some key employees are under employment contracts
with us for specific terms, the loss of the services of one or more of our key
employees could harm our business and our reputation, particularly if one or
more of our key employees resigns to join a competitor or to form a competing
company. In such an event, despite provisions in our employment contracts which
are designed to prevent the unauthorized disclosure or use of our trade secrets,
practices or procedures by such personnel under these circumstances, we cannot
be certain that we would be able to enforce these provisions or prevent such
disclosures.
Shifts in Foreign Exchange Rates or the Imposition of Adverse Trade
Regulations Could Harm Our Business
We conduct some of our import and export activity for wine, packaging
supplies and various wine production needs in foreign currencies. We purchase
foreign currency on the spot market on an as-needed basis and engage in limited
financial hedging activities to offset the risk of exchange rate fluctuations.
There is a risk that a shift in certain foreign exchange rates or the imposition
of unforeseen and adverse trade regulations could adversely impact the costs of
these items and have an adverse impact on our operating results.
In addition, the imposition of unforeseen and adverse trade regulations
could have an adverse effect on our imported wine operations. We do not believe
that our foreign exchange risk and international operations exposure is material
at this time, but the volume of international transactions is increasing and may
increase these risks in the future.
Infringement of Our Trademarks May Damage Our Brand Names or Our Business
Our wines are branded consumer products, and we distinguish our wines from
our competitors by strong and vigilant enforcement of our trademarks. There can
be no assurance that competitors will refrain from using trademarks, tradenames
or trade dress which dilute our intellectual property rights, and any such
actions may require us to become involved in litigation to protect these rights.
Litigation of this nature can be very expensive and tends to divert management's
time and attention.
-24-
<PAGE>
Our Acquisition of Staton Hills Winery and Potential Future Acquisitions
Involve a Number of Risks
Our acquisition of Staton Hills Winery (and potential future acquisitions)
involves risks which include assimilating Staton Hills into our Company;
integrating, retaining and motivating key Staton Hills personnel; integrating
and managing geographically-dispersed operations because Staton Hills is in
Washington State and our Company is headquartered in California; integrating the
technology and infrastructures of the two companies; risks inherent in the
production of wine in, and marketing of wine from, Washington State, and the
risks to our Company of the increased negative cash flow and increased operating
expenses arising from the acquisition of, and plans for, Staton Hills.
The integration of the operations, technology and personnel of our Company
and Staton Hills' is expected to be a complex, time consuming and expensive
process and may disrupt our business if not completed in a timely and efficient
manner. Staton Hills and Chalone must operate as a combined organization
utilizing common information and communications systems, operating procedures,
financial controls and human resources practices. We may encounter substantial
difficulties, costs and delays, including potential incompatibility of our
business cultures, perceived adverse changes in our business plans, potential
conflicts in our supplier and customer relationships and the loss of key
employees and diversion of the attention of management from other ongoing
business initiatives.
The Market Price of Our Common Stock Fluctuates
All of the foregoing risks, among others not known or mentioned in this
report, may have a significant effect on the market price of our shares. Stock
markets have experienced extreme price and volume trading volatility in recent
months and years. This volatility has had a substantial effect on the market
prices of securities of many companies for reasons frequently unrelated or
disproportionate to the specific company's operating performance. These broad
market fluctuations may reduce the market price of our shares.
-25-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................. 27
Consolidated Statements of Income............................ 28
Consolidated Statements of Shareholders' Equity.............. 29
Consolidated Statements of Cash Flows........................ 30
Notes to Consolidated Financial Statements................... 31
INDEPENDENT AUDITORS' REPORT....................................... 43
-26-
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
ASSETS
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,670 $ 2,232
Accounts receivable, less allowance for doubtful
accounts of $86 and $92, respectively 8,086 6,349
Notes receivable 109 262
Income tax receivable 616 248
Inventory 40,926 34,277
Prepaid expenses 492 450
Deferred income taxes 158 14
--------- ---------
Total current assets 52,057 43,832
Investment in Chateau Duhart-Milon 10,409 9,480
Notes receivable, long-term portion 119 130
Property, plant and equipment - net 33,591 30,131
Goodwill and trademarks - net 6,196 6,473
Other assets 1,099 248
--------- ---------
Total assets $ 103,471 $ 90,294
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,494 $ 3,425
Bank lines of credit -- 10,952
Other short term debt -- 952
Current maturities of long-term obligations 371 709
--------- ---------
Total current liabilities 2,865 16,038
Bank line of credit 3,938 --
Long-term obligations, less current maturities 22,835 9,624
Convertible subordinated debentures 8,500 8,500
Deferred income taxes 2,765 2,049
--------- ---------
Total liabilities 40,903 36,211
--------- ---------
Minority interest 4,277 3,678
Shareholders' equity:
Common stock - authorized 15,000,000 shares no
par value; issued and outstanding: 8,720,771 and
8,393,979 shares, respectively 48,965 46,871
Stock subscription receivable (1,007) --
Retained earnings 12,629 5,993
Cumulative foreign currency translation adjustment (2,296) (2,459)
--------- ---------
Total shareholders' equity 58,291 50,405
--------- ---------
Total liabilities and shareholders' equity $ 103,471 $ 90,294
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
-27-
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per share data)
<CAPTION>
Year ended
Year ended March 31, December 31,
----------------------------- ------------
1999 1998 1996
-------- -------- --------
<S> <C> <C> <C>
Gross revenues $ 43,973 $ 37,651 $ 31,909
Excise taxes (1,147) (896) (865)
-------- -------- --------
Net revenues 42,826 36,755 31,044
Cost of wines sold (23,201) (20,539) (18,669)
-------- -------- --------
Gross profit 19,625 16,216 12,375
Other revenues from operations 196 303 107
Selling, general and administrative expenses (10,805) (8,147) (6,282)
-------- -------- --------
Operating income 9,016 8,372 6,200
Interest expense (1,761) (1,872) (1,844)
Settlement income 4,447 -- --
Equity in Chateau Duhart-Milon 766 341 304
Minority interests (1,219) (1,125) (621)
Other, net (2) 15 (81)
-------- -------- --------
Income before income taxes 11,247 5,731 3,958
Income taxes (4,611) (2,321) (1,619)
-------- -------- --------
Net income $ 6,636 $ 3,410 $ 2,339
======== ======== ========
Net income per common share
Basic $ 0.77 $ 0.44 $ 0.31
Diluted $ 0.75 $ 0.41 $ 0.29
Average number of shares used
in income per share computation
Basic 8,669 7,786 7,641
Diluted 8,852 8,409 8,169
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
-28-
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts in thousands)
<CAPTION>
Common Stock Foreign
-------------------- Stock Retained Currency Compre-
Number of Subscription Earnings/ Translation hensive
Shares Amount Receivable (Deficit) Adjustment Total Income
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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) $ (593)
Net income -- -- -- 2,339 -- 2,339 2,339
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 7,626 $ 41,674 $ -- $ 2,273 $ (701) $ 43,246 $ 1,746
-------- -------- -------- -------- -------- -------- --------
Sale of common stock 2 14 -- -- -- 14
Options exercised 20 83 -- -- -- 83
Profit sharing 7 70 -- -- -- 70
Foreign currency
translation adjustment -- -- -- -- (888) (888) (888)
Net income -- -- -- 310 -- 310 310
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1997 7,655 $ 41,841 $ -- $ 2,583 $ (1,589) $ 42,835 $ (578)
-------- -------- -------- -------- -------- -------- --------
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) (870)
Net income -- -- -- 3,410 -- 3,410 3,410
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1998 8,394 $ 46,871 $ -- $ 5,993 $ (2,459) $ 50,405 $ 2,540
-------- -------- -------- -------- -------- -------- --------
Sale of common stock 8 80 -- -- -- 80
Warrants exercised 143 1,000 -- -- -- 1,000
Options exercised 164 882 (1,007) -- -- (125)
Profit sharing 12 132 -- -- -- 132
Foreign currency
translation adjustment -- -- -- -- 163 163 163
Net income -- -- -- 6,636 -- 6,636 6,636
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1999 8,721 $ 48,965 $ (1,007) $ 12,629 $ (2,296) $ 58,291 $ 6,799
======== ======== ======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
-29-
<PAGE>
<TABLE>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
<CAPTION>
Year ended
Year ended March 31, December 31,
-------------------- --------
1999 1998 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,636 $ 3,410 $ 2,339
Non-cash transactions included in earnings:
Depreciation 3,537 2,902 2,873
Amortization 277 236 121
Equity in net income of Chateau Duhart-Milon (766) (341) (304)
Increase in minority interest 1,219 1,125 621
Loss on sale of equipment 25 8 86
Changes in:
Deferred income taxes 572 740 199
Accounts and other receivable (1,737) (2,405) 73
Distribution receivable -- 382 (419)
Inventory (6,649) (4,860) (1,831)
Prepaid expenses and other assets (1,261) (479) (236)
Accounts payable and accrued liabilities (931) 1,624 3,494
-------- -------- --------
Net cash provided by operating activities 922 2,342 7,016
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (7,112) (6,331) (6,635)
Proceeds from disposal of property and equipment 89 105 362
Collection of notes receivable 164 194 33
Investment in Edna Valley joint venture -- (1,050) --
Distributions from Duhart-Milon -- 363 156
-------- -------- --------
Net cash used in investing activities (6,859) (6,719) (6,084)
-------- -------- --------
Cash flows from financing activities:
Borrowings on line of credit - net (7,014) 3,181 (3,745)
Repayment of short-term debt (952) -- --
Distributions to minority interests (619) (638) (200)
Proceeds from new long-term debt 25,182 -- 8,894
Repayment of long-term debt (12,309) (1,210) (5,823)
Proceeds from issuance of common stock 1,087 5,030 117
-------- -------- --------
Net cash provided by financing activities 5,375 6,363 (757)
-------- -------- --------
Net increase (decrease) in cash (562) 1,986 175
Cash at beginning of period 2,232 246 32
-------- -------- --------
Cash at end of period $ 1,670 $ 2,232 $ 207
======== ======== ========
Other cash flow information:
Interest paid $ 1,779 $ 1,895 $ 1,829
Income taxes paid 4,271 2,610 397
Non-cash transactions:
Accrued investment in Edna Valley joint venture -- -- 1,428
Debt assumed in acquisition of real property -- 1,974 940
Profit sharing stock contribution 132 -- 18
Stock issued and subscribed (1,007) -- --
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
-30-
<PAGE>
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND OPERATIONS
The Chalone Wine Group, Ltd. ("the Company") produces and sells primarily
super and ultra-premium quality table wines. The Company farms its estate-owned
vineyards representing approximately 416 producing acres in Napa, Sonoma,
Monterey counties of California and in eastern Washington state. Approximately
75% of its annual grape requirements for the year ended March 31, 1999 were
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 accounted for approximately 4% of total revenue for the
year ended March 31, 1999. 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. At March 31, 1999, Domaines Barons de Rothschild
(Lafite) ("DBR"), a French company, owned approximately 40% 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.
The Company owns 50% of Edna Valley Vineyard ("EVV"), a winery operation in
San Luis Obispo County, California, under a joint venture with the other 50%
owner,Paragon Vineyard Company, Inc. ("Paragon"). The Company, as the managing
joint venturer, manages and supervises EVV's winery operations, and sells and
distributes the wine and is deemed to control the EVV operations for accounting
purposes. The Company has certain commitments related to its continuing
ownership of EVV (see Note M).
The Company also owns 50.5% of, and manages, Canoe Ridge Vineyard LLC
("Canoe Ridge"), a Washington State winery and vineyard operation.
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-end from December 31 to March 31,
effective March 31, 1998. Accordingly, the Company reported a three-month
transition period ending March 31, 1997. See Note O 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,
EVV and Canoe Ridge, since they are controlled and managed by the Company. All
significant intercompany accounts and transactions have been eliminated in
consolidation. 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.
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 financial statement amounts and related
disclosures at the date of the financial statements. Actual results could differ
from these estimates.
-31-
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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
in amounts sufficient to allocate the cost of depreciable assets to operations
over their estimated useful lives. The straight-line method is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for income tax purposes.
The different ranges of useful lives used in computing depreciation are (i)
15 to 35 years for vineyard development costs, (ii) 80 years for caves, (iii) 15
to 40 years for buildings and (iv) 3 to 20 years for machinery and equipment.
Capitalized costs of planting new vines and ongoing cultivation costs for
vines not yet bearing, including interest, are classified as vineyard
development. Depreciation commences in the initial year the vineyard yields a
commercial crop, generally in the third or fourth year after planting.
Costs attributable to caves represent improvements to the land incurred to
dig into hillsides and structurally reinforce underground tunnels where to store
and age the Company's wines.
Goodwill and Trademarks
The excess of the purchase price paid over acquired net assets is amortized
over 40 years on a straight-line basis. Trademarks are amortized over their
estimated useful lives from the date they are put into use.
The payments made to extend the life of the EVV 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 Note M).
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. As of March
31, 1999, the Company had three outstanding forward exchange contracts totaling
650,000 French Francs, all three of which matured prior to May 31, 1999, with no
significant exchange gain or loss.
-32-
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net income per Share
Basic net income per share ("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, EPS amounts for the year ended December 31,
1996 have been restated to conform to the new standard. For all periods
presented, the difference between basic and diluted EPS for the Company reflects
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:
<CAPTION>
(in thousands, except per share data)
Basic EPS Diluted EPS
---------------- ---------------
Income
Effect of dilutive securities available to
Income ----------------------------- common
available to stockholders
common Stock and assumed
stockholders Warrants options conversion
---------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Year ended March 31, 1999:
Income $ 6,636 -- -- $ 6,636
Shares 8,669 183 -- 8,852
---------------- ---------------
EPS $ 0.77 $ 0.75
================ ===============
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
================ ===============
</TABLE>
Recently Issued Accounting Standards
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. The components of comprehensive income are shown in
the Consolidated Statements of Shareholders' Equity.
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. This statement establishes a management approach
to segment reporting and requires reporting of selected segment information
quarterly and entity-wide disclosures about products and services and major
customers. The Company's business is managed on the basis of multiple products
and brands within one segment, the wine industry.
-33-
<PAGE>
NOTE C - CARMENET FIRE
A wildfire damaged approximately 75% of the producing acreage at the
Company's Carmenet Vineyard, located in Sonoma, California, on July 31, 1996.
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.
The Company has completed the final stage of replanting the remaining 25%
of the damaged acreage. Historically, newly planted vines produce
production-quality grapes in approximately three years, although the vines are
expected to take approximately seven years to return to full production levels
prior to 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 indicated that the fire was caused by the
electrical lines of Pacific Gas and Electric ("PG&E"). In conjunction with these
findings, PG&E 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. The Company used the proceeds of the January 1997 payment of
$425,000 to offset the write-off of inventory and vineyard assets destroyed by
the fire. The Company recorded the advance of $4.5 million as a "Settlement
Advance" on its balance sheet, until such time that a final settlement agreement
would be reached.
In the quarter ended March 31, 1999, a final settlement agreement was
reached with PG&E. As part of the settlement, PG&E agreed to pay the Company an
additional $150,000, which was received by the Company as of March 31, 1999. The
payments of $4.5 million and $150,000 were recognized in the Company's income
statement for the year ended March 31, 1999, net of related legal expenses.
NOTE D - INVENTORY
Inventory consists of the following at March 31 (in thousands):
1999 1998
----------- -------------
Bulk wine $ 25,802 $ 21,800
Bottled wine 14,387 11,493
Wine packaging supplies 417 769
Other 320 215
----------- -------------
$ 40,926 $ 34,277
=========== =============
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31 (in
thousands):
1999 1998
------------- -------------
Land $ 5,216 $ 3,376
Vineyard development 10,910 11,589
Caves 1,678 1,678
Buildings 17,335 15,082
Machinery and equipment 18,888 16,311
------------- -------------
54,027 48,036
Accumulated depreciation (20,436) (17,905)
------------- -------------
$ 33,591 $ 30,131
============= =============
-34-
<PAGE>
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 which were subsequently exercised.
Effective October 1, 1995, the Company exchanged essentially all of its
existing ownership in DBR for a 23.5% interest in Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"). The remaining 76.5% of Duhart-Milon is owned by
DBR.
Duhart-Milon's condensed balance sheet as of March 31 are as follows
(translated into U.S. dollars at the year-end) (in thousands):
1999 1998
------------ -------------
Inventory $ 3,223 $ 3,200
Short-term note receivable 10,110 6,914
Other current assets 730 340
------------ -------------
Current assets 14,063 10,454
------------ -------------
Property and equipment, net 2,524 2,327
------------ -------------
Total assets $ 16,587 $ 12,781
============ =============
Current liabilities $ 3,111 $ 2,876
Equity 13,476 9,905
------------ -------------
Total liabilities and equity $ 16,587 $ 12,781
============ =============
The results of operations are summarized as follows (translated into U.S.
dollars at the average exchange rate for the period) (in thousands):
Year ended
---------------------------------
March 31, March 31, December 31,
1999 1998 1996
------- ------- -------
Revenues $ 5,941 $ 3,912 $ 3,964
Cost of sales (2,626) (2,337) (2,651)
------- ------- -------
Gross profit 3,315 1,575 1,313
------- ------- -------
Net operating/other (expenses)/revenues 154 112 236
------- ------- -------
Net earnings $ 3,469 $ 1,687 $ 1,549
======= ======= =======
Company's share of net earnings $ 815 $ 396 $ 364
Other (49) (55) (60)
------- ------- -------
Equity in net earnings of Duhart-Milon $ 766 $ 341 $ 304
======= ======= =======
The carrying amount of the Company's investment in Duhart-Milon is greater
than the amount arrived at by multiplying the Company's 23.5% ownership interest
by the historical cost basis of Duhart-Milon's equity by approximately $7.2
million at March 31, 1999 (the "basis difference"). This basis difference is
primarily attributable to the difference between the historical cost of
Duhart-Milon's land holdings versus the fair value of such land that was used as
part of the basis to record the Company's initial investment under the equity
method of accounting. Because land is not a depreciable asset, the original
basis difference attributable to land of $8.5 million is not being amortized by
the Company. The remaining basis difference reflects other fair value versus
book value differences at the date of the Company's initial investment that are
being amortized over the life of the underlying assets.
The Company experienced record results during the year ended March 31, 1999
from its investment in ("Duhart-Milon) primarily due to exceptionally high
demand for the 1996 vintage of Bordeaux wines. Due to the exceptional nature of
the 1996 vintage, the Company's share of Duhart-Milon's net earnings may not be
indicative of future results.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company recognizes currency translation adjustments
in shareholders' equity which totaled $2,296,000 as of March 31, 1999. This
amount was reduced from $2,459,000 as of March 31, 1998 due to the increase in
the relative worth of the French Franc when compared to the U.S. dollar during
the twelve months ended March 31, 1999.
-35-
<PAGE>
<TABLE>
NOTE G - BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following at March 31 (in thousands):
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Credit line of $40,000,000 bearing interest at LIBOR+0.875%, payable
monthly, due March 31, 2001 $ 3,938 $ -
Credit line of $10,300,000 bearing interest at LIBOR+1%, payable monthly,
repaid on March 31, 1999 - 4,000
Credit line of $5,500,000 bearing interest at LIBOR+1%, payable monthly,
repaid on March 31, 1999 - 4,677
Credit line of $2,500,000 bearing interest at LIBOR+1%, payable monthly,
repaid on March 31, 1999 - 2,275
Convertible subordinated debentures due in 1999, bearing interest at 5%
Interest payments on the debentures are due semiannually
(including amounts due to related party - see Note L) 8,500 8,500
Bank term loan, due in March 2006, bearing interest at LIBOR + 1.2%
payable in monthly installments commencing on April 30, 1999, with
principal payable in quarterly installments commensing on December 31, 2000 20,000 -
Note payable, due May 2000 payable in annual installments of principal
and interest. Interest rate of 7% 475 713
Mortgage payable in monthly installments of principal and interest due August
2021. Interest rate of 7% 1,740 1,776
Bank term loan, due in 2001 with monthly installments of principal and interest.
Interest rate of LIBOR plus 1.8%, repaid on March 31, 1999 - 5,516
Bank term loan, payable in monthly installments of principal and interest due
June 2002. Interest rate of LIBOR plus 2.5%, repaid on March 31, 1999 - 215
Note payable, payable in monthly installments of principal and interest due
June 2016. Interest rate of 7.03% (see Note L, related party) 926 934
Note payable, due in August 1999 payable in monthly installments of principal
and interest. Interest rate of 7.85%, repaid on August 3, 1998 - 1,021
Other notes payable, due in varying monthly installments through January 2000,
bearing interest from 6.5% to 10.9%, some of which are secured by equipment 65 158
------------ -------------
35,644 29,785
------------ -------------
Less current maturities (371) (11,661)
------------ -------------
$ 35,273 $ 18,124
============ =============
</TABLE>
The credit line and bank term loan effective as of March 31, 1999, are
unsecured. Restrictive covenants, however, 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; changes in control of the Company; and
declaration or payment of dividends.
The $8.5 million of 5% debentures, convertible to 965,098 shares of the
Company's common stock as of March 31, 1999, were subordinate in right of
payment to all senior indebtedness of the Company. On April 20, 1999, such
debentures, matured. At such time, holders of $2.0 million in debentures elected
not to exercise their conversion rights and the Company repaid the $2.0 million
using available borrowings under its long-term bank line of credit. The holders
of the remaining $6.5 million of debentures elected to exercise the conversion
rights and exchanged their debentures for 738,016 shares of the Company's common
stock.
-36-
<PAGE>
NOTE G - BORROWING ARRANGEMENTS (Continued)
Since the $8.5 million of convertible debt was either refinanced with a
long-term bank line of credit or was converted to common stock, this amount was
classified as long-term debt in the Company's March 31, 1999 balance sheet.
Maturities of borrowing arrangements for each of the next five years ending
March 31, are as follows (in thousands):
2000 $ 371
2001 7,771
2002 3,295
2003 3,515
2004 3,750
Thereafter 16,942
--------
Total $ 35,644
========
Company management believes that the fair value of its principal short and
long term borrowings are equal to the book value since the terms were recently
negotiated with the lenders. Interest rates on the Company's mortgage and other
notes payable are not significantly different from current market rates.
As of April 9, 1999, the Company entered into an interest-rate swap
contract for a notional amount of $20 million. This contract effectively
converts the variable LIBOR rate which would otherwise be paid by the Company on
its $20 million bank term-loan balance into a fixed-rate obligation over a
period which corresponds to that of the underlying loan agreement. During that
time, the rate which the Company will be obligated to pay, after including the
lending institution's additional mark-up (which is based on financial ratios,
and varies accordingly) will be fixed between 6.95% and 7.12%.
NOTE H - STOCK BASED COMPENSATION
<TABLE>
On February 10, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of stock options to officers
and other key employees of the Company, as well as non-employee directors and
consultants, for an aggregate of up to 1,000,000 shares of common stock, plus
any shares under the Company's 1987 Stock Option Plan, which expired in February
1997, or 1988 Non-Discretionary Stock Option Plan, which expired in December
1996, that become available for issuance as a result of forteitures 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. Option
activity under the plans is as follows:
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------ --------------
<S> <C> <C>
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 -- n/a
-------- ---------
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
-------- ---------
Granted (weighted average fair value of $5.70) 172,520 11.40
Exercised (308,004) 8.90
Canceled (37,500) 11.23
-------- ---------
Outstanding, March 31, 1999 608,109 $ 10.39
======== =========
</TABLE>
-37-
<PAGE>
NOTE H - STOCK BASED COMPENSATION (Continued)
<TABLE>
Additional information regarding options outstanding as of March 31, 1999
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 90,900 5.2 years $ 6.50 83,070 $ 6.37
$ 8.00-$ 9.99 93,200 4.5 years 9.28 93,200 9.28
$10.00-$12.38 424,009 7.5 years 11.47 267,129 11.33
------- --------- --------- ------- ---------
608,109 6.7 years $ 10.39 443,399 $ 10.08
======= ========= ========= ======= =========
</TABLE>
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
Purchase Plan start (27 months), subject to an annual limitation. Stock issued
under the plan was 7,734 shares, 11,005 shares and 9,049 shares in the years
ended March 31, 1999, 1998, and December 31, 1996, respectively, at weighted
average prices of $9.09, $6.82, and $6.31, respectively. The weighted average
fair value of the awards for each of the years ended March 31, 1999, 1998, and
December 31, 1996 awards was $10.69, $10.48, and $9.84, respectively. At March
31, 1999, 20,607 shares were reserved for future issuances under the Purchase
Plan.
Additional Stock Plan Information
The Company continues to account for its employee 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 of 21.53% and 24.1% in the years
ended March 31, 1999 and 1998, respectively and 17% in the year ended December
31, 1996; risk-free interest rates of 6.49% and 6.59% for the years ended March
31, 1999 and 1998, respectively, and 6.0% in the year ended December 31, 1996;
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, 1999, March 31,
1998 and December 31, 1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been $5,727,000 ($.65 per
share), $2,895,000 ($.26 per share) and $2,095,000 ($.26 per share),
respectively.
NOTE I - COMMON STOCK
The Company has reserved 1.5 million shares of common stock as of March 31,
1999, in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
On April 20, 1999, convertible subordinated debentures (convertible to
965,098 shares of the Company's common stock as of March 31, 1999) matured. At
such time, holders of $2.0 million in debentures elected not to exercise their
conversion rights and the Company repaid the $2.0 million using available
borrowings under its line of credit. The holders of the remaining $6.5 million
of debentures elected to exercise the conversion rights and exchanged their
debentures for 738,016 shares of the Company's common stock. The Company
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").
-38-
<PAGE>
NOTE J - 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 $154,000 for the year ended March 31, 1999, $143,000
for the year ended March 31, 1998, and $73,000 for the year ended December 31,
1996. At March 31, 1999, the plan held 18,603 shares of the Company's common
stock.
NOTE K - INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
Year ended
Year ended March 31, December 31,
---------------------- ------------
1999 1998 1996
------ ------ ------
Federal
Current $3,121 $1,261 $1,056
Deferred 471 585 184
------ ------ ------
3,592 1,846 1,240
------ ------ ------
State
Current 920 319 364
Deferred 99 156 15
------ ------ ------
1,019 475 379
------ ------ ------
$4,611 $2,321 $1,619
====== ====== ======
The composition of the Company's net deferred tax liability is as follows
at March 31 (in thousands):
1999 1998
------ ------
Deferred tax liability:
Property, plant and equipment $2,561 $2,105
Other 204 10
------ ------
2,765 2,115
------ ------
Deferred tax assets:
Inventory 158 14
Tax credit carryforwards -- 66
------ ------
158 80
------ ------
Net deferred tax liability $2,607 $2,035
====== ======
The provision for income taxes differs from amounts computed at the
statutory rate as follows (in thousands):
Year ended
Year ended March 31, December 31,
------------------ -----------
1999 1998 1996
------- ------- -------
U.S. federal income tax at statutory rate $ 3,824 $ 1,949 $ 1,395
State tax net of federal benefit 655 334 230
Reconciling items:
Effect of acquisitions, net 33 33 33
Other 99 5 (39)
------- ------- -------
$ 4,611 $ 2,321 $ 1,619
======= ======= =======
-39-
<PAGE>
NOTE L - TRANSACTIONS WITH RELATED PARTIES
<TABLE>
The consolidated statements of income include the following amounts
resulting from transactions with related parties (in thousands):
<CAPTION>
Year ended
Year ended March 31, December 31,
------------------ ------------
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Interest expense:
Interest on convertible debentures held by Company owners
and directors $325 $325 $325
Interest on note payable to director -- 49 39
Interest on notes payable to joint venture partner -- -- 2
Interest income:
Interest on notes receivable from Company officers and directors -- 2 4
Interest on note receivable from joint venture partner 31 40 48
Amortization expense for joint venture agreement 124 64 --
Lease expense for land and facilities to joint venture partner 20 12 10
Consulting fee to officer of the Company -- -- 33
Consulting fee to affiliate of an officer 270 -- --
</TABLE>
<TABLE>
The balance sheet includes the following amounts resulting from
transactions with related parties at March 31 (in thousands):
<CAPTION>
Receivables 1999 1998
---- ----
<S> <C> <C>
Note receivable from Company officer $ -- $ 65
Inventory
Wine purchases from related parties 2,651 1,717
Grape purchases from related parties 3,093 2,483
Goodwill - investment in joint venture (see Note M) 3,287 3,619
Notes receivable - joint venture partner (Paragon) 228 327
Property, plant & equipment contributed by joint venture partners (net) 1,102 1,192
Long-term obligations
Note payable to director of the Company -- 934
Convertible debentures held by Company owners and Directors
(see Note G and I) 6,500 6,500
</TABLE>
NOTE M - COMMITMENTS AND CONTINGENCIES
As of March 31, 1999, 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,
--------
2000 $ 853
2001 860
2002 827
2003 834
2004 826
Thereafter 9,289
--------
Total $ 13,489
========
-40-
<PAGE>
NOTE M - COMMITMENTS AND CONTINGENCIES (Continued)
Rental expense charged to operations was as follows $788,000 and $635,000
for the years ended March 31, 1999 and 1998, respectively, and $658,000 for the
year ended December 31, 1996.
In 1991, the Company and Paragon entered into an agreement ("old
agreement") to provide the Company with the option to convert the EVV Joint
Venture ("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 extend 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 further payments of (i) $1,590,000 in
November of 1996, (ii) $1,050,000 in December of 1997 and December of 1999, and
(iii) $850,000 in December of 2001. Required payments through March 31, 1999
have all been made pursuant to the new agreement. The completion of all further
payments will guarantee the Company's 50% ownership throughout the remaining
life of the Joint Venture. Should the Company fail to make any further payments,
however, its ownership in the Joint Venture would be reduced to 26.71% as of
December 1999 (the due date of the next payment). Concurrent with the available
investment option in 2001, the Company will also have the option to purchase 50%
of the brand name, Edna Valley, for $200,000 which is currently licensed to the
Joint Venture by Paragon. 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 are being amortized over 40 years.
The Company has contracted with various growers and certain wineries to
supply a large portion of its future grape requirements and a smaller portion of
its future bulk wine requirements. While most of these contracts call for prices
to be determined by market conditions, several long-term contracts provide for
minimum grape or bulk wine prices.
NOTE N - 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 $ 310
EPS $ 0.04
Total assets $ 75,859
NOTE O - QUARTERLY DATA (Unaudited)
The Company's quarterly operating results for the fiscal year ended March
31, 1999, March 31, 1998, the three-month transition period ended March 31, 1997
and the year ended December 31, 1996, are summarized below:
(All amounts in thousands, except per share data)
Gross Gross Net EPS
Quarter ended revenues profit loss/income (diluted)
------------- -------- ------ ----------- ---------
March 31, 1999 $11,024 $ 5,095 $ 3,587 $ 0.40
December 31, 1998 12,573 5,607 1,352 0.16
September 30, 1998 11,361 4,831 977 0.11
June 30, 1998 9,015 4,092 720 0.08
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
-41-
<PAGE>
NOTE P - SUBSEQUENT EVENT
On June 15, 1999, the Company purchased 100% of the outstanding shares of
SHW Equity Co., a holding company which, in turn, owns 100% of Staton Hills
Winery and its adjacent vineyards in Yakima County, Washington. The cost of the
acquisition was approximately $6.0 million and was financed with the Company's
long-term bank line of credit.
The Company intends to use the Staton Hills facility as the home of a new
Washington State wine brand featuring Merlot and Cabernet Sauvignon from these
three viticultural regions. The Company's present plan for the new brand,
expected to be named in the fall of 1999, is to initially produce 20,000 cases
for sale to the super-premium wine market.
-42-
<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,
1999 and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for the two years ended March 31, 1999 and for year 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, 1999 and 1998 and the consolidated results of its
operations and its cash flows for the two years ended March 31, 1999 and for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
May 14, 1999
(June 15, 1999, as to Note P)
-43-
<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 incorporated herein by reference to the
Company's Proxy Statement relating to the 1999 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 1999.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 1999.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 1999.
-44-
<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..................................... 27
Consolidated Statements of Income............................... 28
Consolidated Statements of Shareholders' Equity................. 29
Consolidated Statements of Cash Flows........................... 30
Notes to Consolidated Financial Statements...................... 31
INDEPENDENT AUDITORS' REPORT............................................... 43
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 first 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.
-45-
<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)
- ------------------------------
(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.
-46-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
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)
- ------------------------------
(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.
-47-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
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)
- ------------------------------
(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.
-48-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
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 (iv)
Vineyard, LLC, 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.
- ------------------------------
(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.
-49-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
10.39 Credit Agreement between the Company and Wells Fargo Bank, (i)
dated July 30, 1997.
10.40 Credit Agreement between Edna Valley Vineyard and (i)
Wells Fargo Bank, dated July 30, 1997.
10.41 Credit Agreement between Canoe Ridge Vineyard, LLC, (i)
and Wells Fargo Bank, dated July 30, 1997.
10.42 First Amendment to Credit Agreement between the Company (i)
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
January 5, 1998.
10.43 Second Amendment to Credit Agreement between the Company (i)
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
June 9, 1998.
10.44 First Amendment to Credit Agreement between Edna Valley (i)
Vineyard and Wells Fargo Bank incorporated as Exhibit 10.40,
dated June 9, 1998.
10.45 First Amendment to Credit Agreement between Canoe Ridge (i)
Vineyard, LLC and Wells Fargo Bank incorporated as Exhibit 10.41,
dated June 9, 1998.
10.46 Lease-Purchase Agreement between the Company and Frances
Goodwin, Trustee of Lois Martinez Trust, dated December 30,
1999.
10.47 Credit Agreement by and between Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York
Branch and the Company, dated March 31, 1999.
10.48 Term Loan Promissory Note between Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York
Branch and the Company, dated March 31, 1999.
10.49 Revolving Loan Promissory Note between Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York
Branch and the Company, dated March 31, 1999.
10.50 Purchase Agreement among Peter Ansdell, SHW Equity Co., and the
Company, and SHW Equity Co., dated June 15, 1999.
- ------------------------------
(i) Incorporated by reference to Exhibit Nos. 10.39 through 10.45,
respectively, to the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
</TABLE>
-50-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
24 Consent of Deloitte & Touche LLP to incorporation by
reference, dated June 28, 1999.
27 Financial Data Schedule
-51-
<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/ Thomas B. Selfridge
---------------------------------------
Thomas B. Selfridge
Chief Executive Officer
(Principal Executive Officer)
By /s/ Francois P. Muse
---------------------------------------
Francois P. Muse
Chief Financial Officer (Principal
Financial and Principal Accounting Officer)
Dated: June 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Thomas B. Selfridge President, and Chief June 28, 1999
------------------------------ Executive Officer
Thomas B. Selfridge
/s/ W. Philip Woodward Director, and Chairman June 28, 1999
----------------------------- of the Board
W. Philip Woodward
/s/ Christophe Salin Vice Chairman of the June 28, 1999
-----------------------------
Christophe Salin Board
/s/ C. Richard Kramlich Director June 28, 1999
-----------------------------
C. Richard Kramlich
-52-
<PAGE>
/s/ Cristina G. Banks Director June 28, 1999
-----------------------------
Cristina G. Banks
Director
-----------------------------
William G. Myers
/s/ James H. Niven Director June 28, 1999
-----------------------------
James H. Niven
/s/ Eric de Rothschild Director June 28, 1999
-----------------------------
Eric de Rothschild
/s/ Mark Hojel Director June 28, 1999
-----------------------------
Mark Hojel
/s/ Yves-Andre Istel Director June 28, 1999
-----------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director June 28, 1999
-----------------------------
Phillip M. Plant
-53-
L E A S E
THIS LEASE is made and entered into on December 31, 1998, between
FRANCES GOODWIN, Trustee of the Lois Martinez Trust, hereinafter called
Landlord, and CHALONE WINE GROUP, LTD., a California Corporation, hereinafter
called Tenant.
Landlord does hereby lease to Tenant, and Tenant does hereby lease from
Landlord the real property commonly known as Napa County APN 47-272-011,
together with all improvements thereon, in the County of Napa, State of
California, described in Exhibit "A" attached hereto, which is hereinafter
called "the premises".
THIS LEASE is made upon the following terms and conditions:
1. Term. The term of said Lease shall be for a period of twenty-five
(25) years, commencing on January 1, 1999, and ending on December 31, 2023. Each
"lease year" shall run from January 1 through the succeeding December 31.
2. Purpose and Negation of Partnership. Tenant shall use or occupy the
premises for the purpose of planting, maintaining and operating wine grape
vineyards, and no other use shall be made by Tenant without Landlord's prior
written consent. Landlord shall not become or be deemed to be a partner or a
joint venturer with Tenant by reason of the provisions of this Lease.
3. Rent.
A. Base Annual Rent. For the first two (2) lease years, Tenant shall
pay a base annual rental for the premises of $74,250, payable in advance in
semi-annual installments of $37,125 each on December 31, 1998, July 1, 1999,
December 31, 1999 and July 1, 2000. For the third (3rd) through tenth (10th)
lease years, Tenant shall pay a base annual rental of $99,000, payable in
advance in semi-annual installments of $49,500 each on December 31 and July 1 of
each year, commencing on December 31, 2000. For the eleventh (11th) through
twenty-fifth (25th) lease years, Tenant shall pay a base annual rental of
$113,850, payable in advance in semi-annual installments of $56,925 each on
December 31 and July 1 of each year, commencing on December 31, 2008, together
with the adjustments provided in Subparagraph B.
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B. Adjustment of Base Annual Rent. The base annual rental shall be
subject to adjustment commencing on January 1, 2010, and on January 1 every
lease year thereafter, by multiplying the preceding year's annual rental by
1.03. For example, the adjustments for the twelfth (12th) and thirteenth (13th)
lease years shall be as follows:
Effective on Jan. 1, 2010: 113,850 x 1.03 = $117,265.50/annum
Effective on Jan. 1, 2011: 117,265.50 x 1.03 = $120,783.46/annum
C. All rent shall be paid to Landlord or Landlord's designee at
World Savings Bank, Account No. 70118813-8, 1310 Second Street, Napa, California
94559, or any other address specified by Landlord in writing. Rent not paid when
due shall bear interest from the date due at the rate of 10% per annum.
4. Taxes.
A. Personal Property Taxes: Tenant shall pay before delinquency all
taxes, assessments, license fees and other charges that are levied and assessed
against Tenant's personal property installed or located in or on the premises
and that become payable during the term. On demand by Landlord, Tenant shall
furnish Landlord with satisfactory evidence of such payments.
B. Real Property Taxes: Tenant shall pay all real property taxes and
general and special assessments (including all taxes imposed upon or measured by
gross rentals which are hereinafter enacted to supplement or replace any portion
of State, County, City, School District or other local governmental real
property taxes or assessments) which are levied and assessed against the
premises for all land and improvements and for all assessments against the
premises resulting from the inclusion of any valuation placed upon Tenant's
personal property.
Each year Landlord shall furnish Tenant a copy of the tax bills within
twenty (20) days after Landlord's receipt of said bills. Tenant shall pay said
taxes directly to the Napa County Tax Collector or other authorized taxing
authority semi-annually not later than two (2) days preceding the taxing
authority's delinquency date. The 1998-1999 taxes and the taxes for the final
fiscal tax year of the lease term shall be prorated.
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<PAGE>
5. Improvements. Tenant shall plant wine grape vineyards on any
unplanted usable areas, which shall be planted, maintained and operated
according to the reasonable and customary standards practiced in Napa County.
Tenant may remove from the usable unplanted portions of the premises any
vegetation or improvements which are not useful in or are harmful to the
planting, maintenance and operation of vineyards. Tenant may construct such
improvements (including drainage facilities, water wells, irrigation facilities,
frost control systems, roads and fences, but excluding any buildings) as are
reasonably necessary for the maintenance and operation of the vineyards. No
underground storage tanks for fuels, chemicals, hazardous or toxic substances
shall be installed or maintained by Tenant on the premises.
All planting, maintenance, farming and replacements of vineyards and
installation of related improvements on the premises shall be at Tenant's
expense. The varieties and spacing of the vines planted, the methods of budding
and trellising the plants, and all other farming decisions shall be within the
discretion of the Tenant, provided that Tenant conforms to reasonable and
customary standards in Napa County.
All improvements planted, constructed or installed on the premises by
Tenant shall be owned by Tenant until the termination of the Lease. All
improvements on the premises at the expiration or termination of the Lease term
shall, without compensation to Tenant, then become Landlord's property free and
clear of all claims to or against them by Tenant, subject to the provisions of
Paragraph 13.
6. Removal of Existing House and Maintenance and Replacement of Other
Improvements.
A. Prior to the commencement of the term, Landlord shall remove the
existing residence and shed from the premises at Landlord's cost. Other than
said removal of the house and shed by Landlord, Tenant accepts the premises in
"AS IS" condition, and Landlord shall not be required to furnish any services,
perform any corrective work, or to make any repairs or replacements of any kind
in or upon the premises and the improvements thereon.
3
<PAGE>
B. Throughout the Lease term, the Tenant at its sole cost shall
diligently maintain, repair and replace the premises and all improvements
thereon in good condition and repair and in conformance with all applicable
laws, rules, ordinances, orders and regulations of all governmental agencies
having jurisdiction. Tenant may determine the manner in which the vineyard
improvements are maintained, repaired, replaced and operated in its reasonable
discretion, provided that Tenant shall conform with all reasonable and customary
standards then in effect in Napa County. Tenant shall promptly and diligently
replant all missing, diseased or dead vines. If the Tenant determines in its
sole discretion that it can no longer continue to replant missing vines and to
farm the vineyards with an economic return satisfactory to Tenant, the Tenant
may terminate this Lease. Upon such termination, Landlord in its sole discretion
shall instruct Tenant to either leave all vineyard improvements in their
existing condition or to remove any portions or all of the vineyard improvements
which Landlord designates, and Tenant shall at its sole cost diligently perform
Landlord's instructions.
7. Compliance with Laws. Tenant at its sole cost shall comply with all
laws applicable to the premises or Tenant's use of the premises and shall alter,
repair, or restore the premises as required to comply with such laws. Tenant
shall not cause or permit to be stored, used or disposed upon the premises any
toxic or hazardous substances as such substances are defined under any federal,
state or local laws or regulations. Notwithstanding the foregoing, Tenant may
utilize all reasonable and ordinary farm chemicals, pesticides and fertilizers
for the vineyards planted, farmed and maintained on the premises, whether or not
said chemicals are toxic, provided that said chemicals are utilized only in
reasonable amounts and in conformity with all laws and regulations existing from
time to time regarding the use of such materials and are not stored on the
premises. Tenant shall indemnify and hold Landlord harmless against any claims,
damages, losses, fines, liabilities and required remediation costs for any
contamination resulting from Tenant's causing or allowing the storage, use or
dispensing of any hazardous or toxic substances on or about the premises.
4
<PAGE>
8. No Warranties or Representations By Landlord; Tenant's Prior
Inspection.
A. Landlord makes no warranties, either express or implied,
concerning the condition of the premises or any improvements thereon, the
dimensions, boundaries or acreage, either gross or net plantable, the
possibilities that any encroachments or prescriptive use rights of other parties
might exist, the zoning or potential uses, the suitability of the premises and
any improvements thereon for any uses Tenant may intend to make of the same, the
soil types, conditions or percolation rates, the sufficiency of or availability
of water sources or public utilities services, the surface waters drainage onto
and off of the premises, the possibilities that hazardous substances have
contaminated any portion of the premises, or any other material facts whatsoever
concerning the premises.
B. Tenant acknowledges that Landlord and its attorneys and other
representatives have made no representations of facts nor warranties, express or
implied, concerning the premises, nor has Tenant relied upon Landlord and such
representatives to make any disclosures of material facts nor provide any
relevant information. Tenant owns property adjacent to the premises and has
better knowledge than Landlord of the conditions of the property which are
relevant to Tenant.
C. Prior to signing this Lease, Tenant conducted an initial
inspection of the premises and all improvements thereon. Within 90 days after
signing this Lease, Tenant shall complete its inspection of the premises and all
improvements thereon and of all public regulations and land use planning matters
relating to the same and of all facts material to Tenant relating to the
premises, including, but not limited to, the matters described above concerning
which Landlord has disclaimed any warranties. If Tenant is dissatisfied with any
matters discovered from Tenant's inspection for any reasons whatsoever in
Tenant's sole and unrestricted discretion, Tenant shall give written notice to
Landlord on or before March 31, 1999 that this Lease is terminated, and all
rights and obligations of all parties to this Lease shall thereupon terminate,
and Landlord shall refund both the $37,125 rental payment and the $12,375 option
payment to Tenant on or before May 31, 1999 with no interest charged. If Tenant
does not so terminate, Tenant shall be deemed to have thoroughly examined and to
have approved all conditions of the premises and to have accepted the premises
in their "AS IS" condition.
5
<PAGE>
9. Inspection. Landlord or its agents may enter the premises at all
reasonable times after giving Tenant reasonable prior notice to examine the
premises and for all other lawful purposes.
10. Destruction. If, during the term, the premises or Tenant's vineyard
improvements on the premises are totally or partially damaged or destroyed by
fire, flood, earthquake, disease, blight, infestation, or any other casualty
(whether or not covered by insurance) rendering the premises totally or
partially unusable, unproductive or inaccessible, Tenant shall restore the
premises to substantially the same condition as they were in immediately before
such damage or destruction. Tenant may elect to terminate this lease if
substantial damage or destruction occurs any time which is not caused by
Tenant's negligence, breach or failure to farm or maintain the vineyards in
conformance with customary standards. If Tenant terminates the lease, Tenant
shall at Tenant's sole cost remove the damaged or destroyed improvements in
compliance with Landlord's reasonable instructions. If Tenant does not terminate
the lease, there shall be no abatement or reduction of rent.
11. Condemnation. Condemnation actions are unlikely against the
premises, which are located in an agricultural portion of Napa County. If a
portion of the premises is condemned by a condemning authority taking possession
of said portion pursuant to an order for immediate possession, judgment or other
order in a condemnation action, the Lease shall continue with respect to the
remaining portion of the premises not condemned until expiration of the lease
term. The parties agree that the Base Annual Rent, as adjusted pursuant to
Paragraph 3.B, shall be proportionately reduced to adjust for the number of
actual plantable acres taken by such condemnation, but no other rent abatement
shall be allowed.
The entire amount of any condemnation award shall belong to and be paid
solely to Landlord, except Tenant shall receive from the award that portion
awarded to compensate Tenant for the vineyards and other leasehold improvements
constructed by Tenant and for Tenant's reasonable removal and relocation
expenses for relocatable personal property and equipment. Tenant shall not
receive any portion of said award as compensation for Tenant's business good
will, the value to Tenant of this Lease, or any other intangible property
interests of Tenant.
6
<PAGE>
12. Indemnification and Insurance Provided by Tenant.
Tenant shall indemnify Landlord and save Landlord harmless in every way from any
and all loss and liability for damage to property or injury to life that may
arise by reason of Tenant's occupation or use of the premises, including all
offsite roadways which are used by Tenant for access to and from the premises,
other than by Landlord's gross negligence or willful misconduct. Tenant shall
also reimburse Landlord for all costs, charges and expenses (including
reasonable attorneys' fees) incurred by Landlord as a result of any such damage
to property or injury to person, including, but not limited to, persons who are
employed or are performing labor or services upon the premises. In this
connection, Tenant shall, at its own expense, provide and maintain public
liability and property damage insurance with a single combined liability limit
of TWO MILLION DOLLARS ($2,000,000) for each occurrence, which shall protect
Tenant as named insured and Landlord as an additional insured. Said insurance
shall be with companies and in form reasonably satisfactory to Landlord, and
duplicate policies and certificates of insurance shall be furnished to Landlord,
with Landlord guaranteed advance written notice of cancellation.
Tenant waives all claims against Landlord for injury to life and damage
to goods, wares, merchandise or other property in or upon the said premises,
whether belonging to Tenant or third persons, resulting from any cause
whatsoever, other than by gross negligence or willful misconduct of Landlord.
Tenant shall indemnify Landlord and save Landlord harmless in every way
from any and all loss and liability from mechanics' and materialmen's liens and
from any and all other liens, judgments or encumbrances created or suffered by
Tenant and shall reimburse Landlord for all costs, charges and expenses
(including reasonable attorneys' fees) incurred by Landlord as a result of any
such liens, judgments and encumbrances so created.
Tenant, at its cost, may maintain a tenant's policy of standard and
extended coverage insurance, with any vandalism and special form endorsements
desired by Tenant, on its vineyards and other improvements, equipment and
personal property. Said insurance shall contain provisions in form reasonably
satisfactory to Landlord waiving all rights of subrogation against Landlord with
7
<PAGE>
respect to losses payable by said insurance, other than losses caused by
Landlord's gross negligence or willful misconduct.
Tenant shall maintain at its own cost and expense during the term of
this Lease all workmen's compensation insurance coverage required by the State
of California, and shall require all parties hired by Tenant as independent
contractors who perform labor or services upon the premises to procure the
workmen's compensation insurance required by the State of California prior to
commencing any labor or services upon the premises and to maintain such
insurance coverage at all times during the performance of labor or services upon
the premises.
13. Termination Upon Default. If Tenant defaults in the payment of the
rent, or any part thereof, or if Tenant shall at any time fail or neglect to
perform or observe any of the covenants, conditions and agreements herein
contained, and said default shall continue for a period of thirty (30) days
after Landlord has given Tenant written notice of such default, or if Tenant
abandons, vacates or surrenders the premises, then Landlord may, at Landlord's
election: (a) immediately terminate this Lease, and Landlord, or Landlord's
agents, may thereupon demand possession of and enter upon the premises, or (b)
without terminating this Lease, re-let the premises or any part thereof for the
account of Tenant at such rent and for such time and upon such terms as Landlord
may see fit, and Tenant shall pay any deficiency by which said rental falls
short of satisfying all rent provided in Paragraphs 3.A and 3.B. In the event of
a re-entry by Landlord as herein provided, Landlord may harvest all crops and
remove all property on the premises, whether belonging to Tenant or third
persons, and may store the same in any public warehouse or elsewhere and may
sell all harvested crops at the cost and for the account of Tenant.
The waiver by Landlord of any breach of any term, covenant or condition
of this Lease shall not be deemed a waiver of such term, covenant or condition
or of any subsequent breach of the same or any other term, covenant or
condition. Acceptance of rental by Landlord subsequent to any breach hereof
shall not be deemed a waiver of any preceding breach other than the failure to
pay the particular rental so accepted, regardless of Landlord's knowledge of any
breach at the time of such acceptance of rental. Landlord shall not be deemed to
have waived any term, covenant or condition unless Landlord gives Tenant written
notice of such waiver.
8
<PAGE>
Landlord is not limited to the remedies herein enumerated, but may
likewise assert any other or additional remedies available to Landlord at law or
in equity.
14. Obligation of Tenant Upon Termination. Tenant agrees to deliver up
the premises with all improvements to Landlord without demand or notice at the
expiration of the term of this Lease, or upon the sooner termination thereof.
Should Tenant hold over after the expiration of this Lease or any extension or
renewals thereof, Tenant shall be deemed to hold the premises as a tenant from
year to year under the same terms and conditions as in this Lease set forth,
except all rents provided in Paragraphs 3.A and 3.B shall be increased by
twenty-five percent (25%).
15. Notices. Notices and demands by either of the parties hereto may be
given by hand delivery, facsimile transmission, or certified, registered or
express mail, postage prepaid, addressed to the other party at the addresses
hereinafter set forth. Notices given by hand delivery shall be effective upon
receipt. Notice sent by facsimile shall be effective one (1) day after the
sender receives confirmation that the facsimile has been received by the
recipient. Notices sent by certified, registered or express mail shall be
effective three (3) days after the date mailed, provided, however, that if
return receipt is requested, the notice shall be effective when the return
receipt is signed by the recipient. Either of the parties may from time to time
designate other addresses and facsimile numbers by notice in writing to the
other. The addresses and facsimile numbers are:
Landlord: Frances Goodwin, Trustee of the
Lois Martinez Revocable Trust
dated January 9, 1991
211 E. Spring Street
Napa, California 94559
Facsimile: c/o Jeff Salsman
(707) 257-5137
Tenant: Chalone Wine Group, Ltd.
Attention: W. Phillip Woodward
621 Airpark Road
Napa, California 94558-6272
Facsimile: (707) 254-4204
16. Landlord's Sale, Assignment or Transfer. Subject to the provisions
of Paragraph 22, if Landlord sells, conveys, assigns or transfers this Lease or
the real property and improvements which comprise the premises, Landlord shall
be released and discharged from any liabilities
9
<PAGE>
thereafter accruing under this Lease, including any obligations with respect to
Tenant's prepaid rent, if Landlord's successor in right, title or interest has
assumed in writing, for the benefit of Tenant, all obligations of Landlord under
this Lease and the option provided in Paragraph 21.
17. Tenant's Assignment. Tenant shall not assign this Lease, nor any
interest therein, nor sublet the premises or any part thereof, either
voluntarily or by operation of law, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. Upon any
such assignment or subletting, Tenant shall remain jointly and severally liable
for all obligations of the Tenant set forth in this Lease. Notwithstanding this
limitation, Tenant may assign, transfer or convey this Lease or any partial
interest therein to any joint-venture, partnership, corporation, or limited
liability company in which Tenant maintains at least one-half (1/2) ownership as
a joint-venturer, partner, shareholder, or member.
18. Subordination and Estoppel Certificate. This Lease is and shall be
subordinate to any deed of trust or other encumbrance executed and recorded by
Landlord after the date of this Lease affecting the premises securing loans with
an aggregate total not exceeding $500,000 (collectively the "Deed of Trust"),
provided that each such loan shall be limited to those sums which are reasonably
necessary for the care and benefit of Lois Martinez or the payment of estate
taxes due after her death.
Each subordination agreement shall contain the following provisions:
(a) If the Deed of Trust beneficiary (the "Beneficiary") or any other
transferee (collectively the "Successor") acquires the title or interests of the
Landlord in the Lease or the premises by foreclosure sale under such deed of
trust or by deed in lieu of foreclosure (collectively the "foreclosure"), the
Lease and all rights of Tenant thereunder shall remain in full force and effect
and shall not be terminated nor shall Tenant's rights to possession of the
premises be disturbed by the Successor, so long as Tenant fully performs all
provisions of the Lease and is not in default under any provision beyond any
grace or cure period therein.
(b) Beneficiary shall not be bound by any modifications or amendments
to the Lease made without Beneficiary's written consent.
10
<PAGE>
(c) Beneficiary shall give Tenant prompt written notice of the
recordation of the encumbrance so that Tenant may record a request for notice of
default and notice of sale pursuant to Civil Code Section 2924b, or any
amendments to or recodifications of Section 2924b,
(d) If Beneficiary gives Tenant written notice that Landlord is in
default under the Deed of Trust or the note secured thereby and demands that
Tenant pay rent, taxes or other sums due under the Lease to Beneficiary, Tenant
shall pay such sums directly to Beneficiary,
(e) Tenant shall attorn to any Successor upon foreclosure under the
Deed of Trust.
(f) Successor shall not be subject to any claims, defenses or offsets
which Tenant might have against Landlord under the Lease which accrue prior to
foreclosure, nor be bound by any prepaid rent paid more than thirty (30) days
preceding the payment date provided in the Lease for such rent.
(g) Successor shall assume and perform all duties of the Landlord under
the Lease accruing after the date of foreclosure.
The loan terms and documents for each loan secured by a Deed of Trust
shall be subject to Tenant's prior review to determine that such terms and
documents are commercially reasonable and to Tenant's prior written consent,
which consent shall not be unreasonably withheld. Tenant shall cooperate with
Landlord and shall reasonably approve and execute any subordination agreement or
any modification to the non-disturbance provisions herein which are required by
a Beneficiary as a condition of making a secured loan to Landlord, provided that
such subordination agreement and modifications are reasonable and provide Tenant
comparable protection to the provisions herein.
Tenant may encumber or grant a security interest in this lease or the
crops grown on the premises for any period, but not extending beyond the term of
this lease.
Tenant and Landlord shall, within ten (10) days after receiving a
written request from the other, execute and deliver to the requesting party an
estoppel certificate stating that this Lease is unmodified and in full force and
effect, or in full force and effect as modified, and stating the modifications.
The estoppel certificate also shall state the amount of the current base annual
and
11
<PAGE>
any adjustment pursuant to Paragraph 3.B, the dates to which the rents have been
paid, and the amount of any security deposit or prepaid rent.
19. No Security Deposit. No security deposit shall be required from
Tenant as a security for the performance by Tenant of the provisions of this
Lease.
20. Miscellaneous.
A. Time shall be of the essence of this agreement and the
performance of all the terms thereof.
B. This agreement shall be binding upon and inure to the benefit of
all successors in right, title or interest and all permitted assignees or
subtenants of the parties hereto.
C. The obligations of all of the parties hereto are joint and
several.
D. This agreement shall be interpreted and enforced according to the
laws of the State of California.
21. Tenant's Option To Purchase.
A. Grant Of Option. Landlord hereby grants to Tenant an option to
purchase from Landlord, for the purchase price specified in subparagraph D, the
real property and improvements thereon described as the "premises" on Page 1 and
in Exhibit "A" attached hereto, which is called the "Option Property" for the
purposes of this Paragraph 21.
B. Option Consideration. The total option consideration is the sum
of $49,500, which shall be paid in four installments of $12,375 each payable on
December 31, 1998, July 1, 1999, December 31, 1999 and July 1, 2000. None of the
option consideration payments shall be credited against the purchase price
provided in subparagraph E.
C. Term Of Option. The term of this option shall commence on the
first day of the thirty-sixth (36th) month following the month of the death of
Lois Martinez or on the first day of the one hundred twentieth (120th) month of
the lease term, whichever first occurs, and shall
12
<PAGE>
terminate at 5:00 p.m. on the Thirtieth (30th) calendar day following the date
of commencement of the option term. This option may not be extended by Tenant
for any successive option term whatsoever. Landlord shall give Tenant written
notice of the date of death of Lois Martinez within thirty (30) days after her
death.
D. Exercise Of Option. Tenant may exercise this option by giving
Landlord written notice of exercise of this option at any time after
commencement of the option term and on or before 5:00 p.m. on the thirtieth
(30th) day following the commencement of the option term. Paragraph 22 below
provides Tenant additional rights to exercise the Option.
E. Purchase Price. Upon exercise by Tenant of this option, the total
purchase price of the Option Property described in subparagraph A shall be the
sum of $1,100,000.00, with no credit given for any part of the option and rental
payments. The purchase price shall be reduced by the principal amount (excluding
all costs, attorney's fees, interest and other non-principal amounts) of any
condemnation award paid to Landlord as described in Paragraph 11.
F. Escrow.
(1) Tenant has obtained a preliminary title report from First
American Title Company of Napa for the option property and has approved all
title matters disclosed by said preliminary title report. Title to the Option
Property shall be free of encumbrances, easements, restrictions, rights and
conditions of record or caused by Landlord, other than such items as existed on
the date of the commencement of the term of this Lease and the lien for current
real property taxes and assessments which are not due at the time of close of
escrow.
(2) Landlord shall furnish Tenant, at Tenant's expense, a
standard California Land Title Association policy insuring title in Tenant to
the Option Property subject only to the liens, encumbrances, easements,
restrictions, rights and conditions as described in subparagraph (1) above.
(3) Subject to the provisions of subparagraph H below, escrow
instructions signed by Landlord and Tenant shall be delivered to First American
Title Company of Napa, or another escrow company of Tenant's choice, which shall
provide for the closing of escrow thirty
13
<PAGE>
(30) calendar days after Tenant's exercise of this option. The rental accruing
pursuant to this Lease shall be prorated as of the date of close of escrow.
Tenant is responsible for all real property taxes accrued but unpaid through the
date of close of escrow. Tenant shall pay all costs of escrow, including the
County of Napa and any other applicable transfer taxes. The entire purchase
price shall be paid in cash on close of escrow.
(4) Landlord and Tenant shall cooperate with each other in
accomplishing a tax deferred exchange by the other, provided that the party for
whose benefit the exchange is accomplished shall pay all additional fees and
costs resulting from their exchange, and such exchange shall not delay the close
of escrow.
G. Risk Of Loss From Partial Or Total Destruction of Premises. If
Tenant exercises this option, Tenant shall bear the entire risk of all damages
or losses from any partial or total destruction of the Option Property from any
and all causes which have already accrued prior to or which occur after the
exercise of the option, but Tenant may rescind its exercise of the option in the
event that substantial uninsured casualty losses occur before the close of
escrow.
H. Noticed Foreclosure Proceedings. If Landlord's title or interests
in the Option Property are at any time subject to a noticed foreclosure sale
pursuant to any encumbrance executed or suffered by Landlord, Tenant shall have
the option, but shall not be required, to pay off the full amount of the
encumbrance required to be paid to cancel any such foreclosure sale which has
been noticed and to credit said payment in full against the purchase price
specified in subparagraph E, in which event the term of the option described in
subparagraph C shall be modified to commence upon the date of such payment by
Tenant to cancel such sale, and the time within which Tenant may exercise the
modified option pursuant to subparagraph D shall expire on the thirtieth (30th)
day following such payment by Tenant.
I. Quitclaim Deed. If Tenant fails to exercise this option within
the time required by subparagraph C or G or fails to tender into escrow complete
performance of all provisions of this Paragraph 24 required to be performed on
Tenant's part within the 30 day escrow closing period required by subparagraph
F(3), this option shall fully and finally terminate, and Tenant shall promptly
execute and record a quitclaim deed of the Option Property to Landlord.
14
<PAGE>
22. Right of First Offer. If Landlord makes the decision to sell all or
any part of Landlord's interests in the premises, Landlord shall first give
written notice to Tenant of Landlord's decision to sell, and Tenant shall have
thirty (30) days after receipt of such notice from Landlord to exercise its
Option to purchase the entire premises by giving Landlord written notice of
exercise as provided in Paragraph 21.D. If Tenant fails to exercise its option
to purchase within said thirty (30) day period, Tenant's option shall continue
as provided in Paragraph 21, and Landlord may offer and sell any part or all of
such interests to any other parties upon any terms Landlord in its sole
discretion determines are acceptable to Landlord, subject however to this Lease
and Tenant's option rights under Paragraph 21.
23. Arbitration and Attorneys Fees.
A. All Claims and causes of action to enforce the provisions or to
recover damages or other relief for breach of the Lease shall be resolved by
binding arbitration conducted pursuant to the Commercial Arbitration Rules and
all applicable procedures of the American Arbitration Association then in effect
with a single arbitrator who is an attorney with substantial real estate
practice experience. The arbitrator shall have the same powers as a Superior
Court Judge to order in the award all injunctive, declaratory or other relief or
remedies which could be entered in an action filed in the Napa County Superior
Court upon the same causes of action, and the arbitrator may retain continuing
jurisdiction when appropriate to make further determinations or to enforce the
award. If the American Arbitration Association ceases to exist or its
arbitration services become unavailable within 50 miles of the City of Napa, a
comparable arbitration service and its procedural rules shall be utilized.
B. The prevailing party in any such arbitration proceedings to
enforce the provisions of this Lease or to recover damages for any breach
thereof and any court action to enforce any arbitration award or order or for
other relief shall be awarded their reasonable attorneys fees and costs
incurred, with the reasonable amount thereof to be fixed by the arbitrator or
Court rendering the award, order, determination or judgment.
NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE
15
<PAGE>
"ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED
BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE
DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW
YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE
RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTE" PROVISION. IF
YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE
COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISIONS IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION TO NEUTRAL ARBITRATION.
/s/ FG /s/ WPW
------------ ------------
Landlord Tenant
24. Trustee's Warranty of Authority. Without modifying or waiving any
provisions of Paragraph 8, Frances Goodwin warrants to Tenant that she is the
sole qualified and acting trustee of the Lois Martinez Revocable Trust dated
January 9, 1991, as set forth in the Certificate of Trust attached hereto as
Exhibit "B", which remains in effect unmodified through this date, and as such
Trustee has the power and authority to execute this Lease on behalf of said
trust and has not caused the Trust to enter into any agreement or other
obligation and has no knowledge of any obligation of the Trust that is
inconsistent with the rights granted to Tenant hereunder.
25. Integration. Landlord and Tenant agree that this Lease supersedes
all of their prior oral and written agreements and negotiations, including those
of their respective agents, attorneys, accountants, employees or other
representatives concerning this lease, that this written Lease shall constitute
the sole and only agreement between them, that no other oral or written
agreements concerning this Lease shall remain or exist, and that no
modifications or amendments to this Lease
16
<PAGE>
shall be enforceable unless and until the same are reduced to a written
amendment signed by both Landlord and Tenant.
DATED: December 30, 1998 LANDLORD:
/s/ Frances Goodwin
- ---------------------------------------------
Frances Goodwin, Trustee of the Lois Martinez
Revocable Trust dated January 9, 1991
DATED: December 31, 1998 TENANT:
----------- -------
CHALONE WINE GROUP, LTD.,
A California corporation
By: /s/ W. Philip Woodward
------------------------------------
Its: Chairmain
-----------------------------------
Attest: /s/ Daniel E. Cohn
--------------------------------
Daniel E. Cohn, Secretary
17
-------------------------------------
CREDIT AGREEMENT
between
CHALONE WINE GROUP, LTD.
and
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND," NEW YORK BRANCH
March 31, 1999
-------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION I. GENERAL MATTERS....................................................1
1.1 Definitions.................................................1
1.2 Accounting Terms............................................9
SECTION II. THE LOAN..........................................................9
2.1 The Loans...................................................9
2.2 Evidence of the Loans......................................10
2.3 Interest Rates; Commitment Fee.............................10
2.4 Conversion and Continuation Elections......................11
2.5 Repayment of the Loans.....................................12
2.6 Prepayments and Commitment Reductions......................13
2.7 Payments to the Bank.......................................14
2.8 Illegality.................................................14
2.9 Increased Costs and Reduction of Return....................15
2.10 Funding Losses.............................................15
2.11 Inability to Determine Rates...............................16
2.12 Reserves on Offshore Rate Loans............................16
2.13 Certificates of Bank.......................................16
2.14 Survival...................................................17
SECTION III. CONDITIONS PRECEDENT............................................17
3.1 Conditions Precedent to Loan...............................17
SECTION IV. REPRESENTATIONS AND WARRANTIES...................................19
4.1 Representations and Warranties.............................19
SECTION V. COVENANTS OF BORROWER.............................................23
5.1 Affirmative Covenants......................................23
5.2 Negative Covenants.........................................24
5.3 Financial Covenants........................................26
SECTION VI. DEFAULT..........................................................27
6.1 Events of Default..........................................27
6.2 Effect of Event of Default.................................28
SECTION VII. MISCELLANEOUS...................................................29
7.1 Amendments and Waivers.....................................29
7.2 Notices....................................................29
7.3 No Waiver; Cumulative Remedies.............................29
7.4 Costs and Expenses; Indemnification; Other Charges.........29
7.5 Survival...................................................31
7.6 Benefits of Agreement......................................31
7.7 Governing Law..............................................31
7.8 Waiver of Jury Trial.......................................31
i.
<PAGE>
7.9 Entire Agreement...........................................32
7.10 Severability...............................................32
7.11 Counterparts...............................................32
EXHIBITS
- --------
Exhibit A Form of Revolving Loan Note
Exhibit B Form of Term Loan Note
Exhibit C Form of Notice of Conversion/Continuation
Exhibit D Form of Opinion of Borrower's Counsel
Exhibit E Form of Borrowing Base Certificate
Exhibit F Form of Compliance Certificate
Exhibit G Form of Guaranty
ii.
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is entered into as of March 31, 1999, by
and between CHALONE WINE GROUP, LTD., a California corporation ("Borrower"), and
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND," NEW
YORK BRANCH (the "Bank").
RECITALS
This Agreement is made and delivered on the basis of the
following facts and understandings of the parties:
A Borrower has requested from the Bank a term loan in the
maximum aggregate principal amount of $30,000,000.
B Borrower has requested from the Bank a revolving loan
facility in the maximum aggregate principal amount of $40,000,000.
C Subject to the terms and conditions stated in this
Agreement, the Bank has agreed to make the term loan and the revolving loan
facility available to Borrower.
AGREEMENT
NOW, THEREFORE, in consideration of the promises contained in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION I. GENERAL MATTERS
1.1 Definitions.
"Agreement" means this Credit Agreement.
"Acquisition" means any transaction or series of related
transactions for the purpose of, or resulting, directly or indirectly, in (a)
the acquisition of all or substantially all of the assets of a Person, or any
line or segment of business or division of a Person, (b) the acquisition of in
excess of 50% of the capital stock, partnership interests, membership interests
or equity of any Person, or otherwise causing any Person to become a Subsidiary,
or (c) a merger or consolidation or any other combination with another Person
(other than a Person that is a Subsidiary) provided that (i) the Borrower or a
Subsidiary is the surviving entity or (ii) after giving effect to such merger or
consolidation, such other Person has become a Subsidiary of a Borrower.
"Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy."
1.
<PAGE>
"Borrowing Base" means, in respect of the Borrower at any
time, the aggregate sum of (i) 100% of Eligible Inventory at such time plus (ii)
80% of Eligible Receivables at such time minus (iii) Grower Payables at such
time.
"Borrowing Base Certificate" means a certificate of a
Responsible Officer of the Borrower in substantially the form of EXHIBIT E, with
such changes thereto as the Bank may from time to time reasonably request.
"Business Day" means a day other than a Saturday, a Sunday, or
a day on which commercial banks in New York City, New York, are authorized to
close and, if the applicable day relates to any LIBOR Rate Loan, means such a
day on which dealings are carried on in the applicable offshore U.S. Dollar
interbank market.
"Canoe Ridge Intercompany Loan Amount" means the sum of (i)
$10,000,000 plus (ii) on each anniversary of the Closing Date, 10% of the Canoe
Ridge Intercompany Loan Amount then in effect.
"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other law,
rule or regulation, whether or not having the force of law, in each case,
regarding capital adequacy of any bank or of any corporation controlling a bank.
"Change of Control" means (a) any "person" (as such term is
used in subsections 13(d) and 14(d) of the Exchange Act) or group of persons on
or after the Closing Date other than "affiliates" (as such term is used in Rule
405 of the Securities Act of 1933), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 51% or more of the combined voting power of the
Company's then-outstanding voting securities, or (b) the existing directors for
any reason cease to constitute a majority of the Company' board of directors.
"Existing directors" means (x) individuals constituting the Company's board of
directors on the Closing Date, and (y) any subsequent director whose election by
the board of directors or nomination for election by the Company's shareholders
was approved by a vote of at least a majority of the directors then in office,
which directors either were directors on the Closing Date or whose election or
nomination for election was previously so approved.
"Closing Date" has the meaning given to such term in Section
3.1 of this Agreement.
"Compliance Certificate" means a certificate of a Responsible
Officer of the Borrower, in substantially the form of EXHIBIT F, with such
changes thereto as the Bank may from time to time reasonably request.
"Conversion/Continuation Date" means each date on which a
Revolving Loan is continued as or converted into a Reference Rate Loan or a
LIBOR Rate Loan, as the case may be, in accordance with Section 2.4.
2.
<PAGE>
"Drawdown Expiration Date" means the date which is 18 months
after the Closing Date.
"EBIT" means, in respect of the Borrower for any period, net
income plus Interest Expense plus income tax expense, in each case which were
deducted in determining net income, determined in accordance with GAAP on a
consolidated basis.
"EBITDA" means, in respect of the Borrower for any period, net
income plus Interest Expense plus income tax expense plus depreciation and
amortization expense, in each case which were deducted in determining net
income, determined in accordance with GAAP on a consolidated basis.
"Eligible Inventory" means, at any time, the aggregate amount
of such Borrower's bulk wine, cased wine, separately bottled wine and Wine
Bottling Inventory. Eligible Inventory shall be valued (A) in the case of bulk
wine, at 65% of the book value at the date of determination, (B) in the case of
cased wine or separately bottled wine, at 60% of the book value at the date of
determination, and (C) in the case of Wine Bottling Inventory, at 60% of book
value at the date of determination.
"Eligible Receivables" means, at any time, the aggregate
amount of the Borrower's Receivables, payable in cash in U.S. dollars, net of
applicable allowances, reserves, discounts, returns, credits or offsets
(including allowances or reserves for doubtful accounts), excluding Receivables
that are 90 days or more past due.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes, together
with all administrative orders, directives, requests, licenses, authorizations
and permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters, including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid
Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the
Toxic Substances Control Act, the Emergency Planning and Community Right-to-Know
Act, the California Hazardous Waste Control Law, the California Solid Waste
Management, Resource Recovery and Recycling Act, the California Water Code and
the California Health and Safety Code.
"Edna Valley Intercompany Loan Amount" means the sum of (i)
$15,000,000 plus (ii) on each anniversary of the Closing Date, 10% of the Edna
Valley Intercompany Loan Amount then in effect.
"Event of Default" has the meaning given to such term in
Section 6.1 of this Agreement.
"Existing Subordinated Notes" means the Borrower's Convertible
Subordinated Debentures due in 1999, bearing interest at 5% per annum, in the
original principal amount of $8,500,000.
3.
<PAGE>
"Fixed Rate Term Loan" means, at any time, the unpaid
principal balance of the Term Loan equal to the lesser of (i) $20,000,000 and
(ii) the unpaid principal balance of the Term Loan outstanding at such time.
"GAAP" means generally accepted accounting principles in the
United States as in effect from time to time.
"Governmental Authority" means any federal, state, county,
local or other governmental department, commission, board, bureau, agency,
central bank, court, tribunal or other instrumentality, domestic or foreign.
"Grower Payables" means, in respect of the Borrower, the
aggregate amount due from the Borrower to any other Person on account of any
crops, produce, or raw materials supplied by such Person to the Borrower as to
which crops, produce or raw materials such Person has statutory lien rights.
"Guaranty" means a Guaranty in substantially the form of
EXHIBIT G.
"Hazardous Substances" means any toxic or hazardous
substances, materials or wastes, contaminants or pollutants, including asbestos,
PCBs, petroleum products and byproducts, substances defined or listed as
"hazardous substances," "hazardous materials" or "toxic substances" or similarly
identified in or pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Hazardous Materials Transportation
Act and the Resource Conservation and Recovery Act, any chemical substance or
mixture regulated under the Toxic Substances Control Act of 1976, any "toxic
pollutants" under the Federal Water Pollution Control Act of 1972, any hazardous
air pollutant under the Clean Air Act, any hazardous or toxic substance, waste
or pollutant regulated under any other applicable Environmental Law, or any
other substance or material which may cause or be claimed to cause any liability
of any owner or operator of any property to any Person, any owner of any other
property, or any Governmental Authority in connection with any Environmental
Law.
"Indebtedness" means, for any Person:
a. All indebtedness or other obligations of
such Person for borrowed money or for the
deferred purchase price of property or
services;
b. All indebtedness created or arising under
any conditional sale or other title
retention agreement with respect to
property acquired by such Person (even
though the rights and remedies of the
seller or lender under such agreement in
the event of default are limited to
repossession or sale of such property);
c. All obligations under capital leases;
4.
<PAGE>
d. All reimbursement or other obligations of
such Person under or in respect of letters
of credit, bankers acceptances, interest
rate swaps, caps, floors and collars,
currency swaps, or other similar financial
products;
e. All indebtedness of another Person of the
types referred to in clause (a), (b), (c)
or (d) above, guaranteed directly or
indirectly in any manner by the Person for
whom Indebtedness is being determined, or
in effect guaranteed directly or
indirectly by such Person through an
agreement (1) to pay or purchase such
Indebtedness or to advance or supply funds
for the payment or purchase of such
Indebtedness, (2) to purchase, sell or
lease (as lessee or lessor) property, or
to purchase or sell services, primarily
for the purpose of enabling the debtor to
make payment of such Indebtedness or to
assure the holder of such Indebtedness
against loss, (3) to supply funds to or in
any other manner invest in the debtor
(including any agreement to pay for
property or services irrespective of
whether or not such property is received
or such services are rendered), or (4)
otherwise to assure a creditor against
loss; and
f. All indebtedness of another Person of the
types referred to in clause (a), (b), (c)
or (d) above secured by (or for which the
holder of such indebtedness has an
existing right, contingent or otherwise,
to be secured by) any Lien upon or in
property (including accounts and contract
rights) owned by the Person for whom
Indebtedness is being determined, even
though such Person has not assumed or
become liable for the payment of such
indebtedness of such other Person.
"Indemnified Liabilities" has the meaning given to such term
in Section 7.4(B) of this Agreement.
"Indemnified Person" has the meaning given to such term in
Section 7.4(B) of this Agreement.
"Interest Expense" means, in respect of the Borrower for any
period, interest expense (including that attributable to capital leases) of the
Borrower, including all commissions, discounts and other fees and charges owed
with respect to standby letters of credit, determined in accordance with GAAP on
a consolidated basis.
"Interest Period" means the period commencing on the borrowing
date of a LIBOR Rate Loan or on the Conversion/Continuation Date on which a Loan
is converted into or
5.
<PAGE>
continued as a LIBOR Rate Loan, and ending on the date one, two or three months
thereafter as selected by Borrower in its borrowing notice or Notice of
Conversion/Continuation; provided that:
(i) if any Interest Period would otherwise end
on a day that is not a Business Day, that Interest Period shall be extended
to the following Business Day unless the result of such extension would be
to carry such Interest Period into another calendar month, in which event
such Interest Period shall end on the preceding Business Day;
(ii) any Interest Period that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of the calendar month
at the end of such Interest Period; and
(iii) no Interest Period shall extend beyond
the Revolving Loan Maturity Date.
"LIBOR Margin" means, with respect to LIBOR Rate Loans, the
amount set forth opposite the indicated Level below the heading "LIBOR Margin"
in the pricing grid set forth on Annex I in accordance with the parameters for
calculations of such amounts also set forth on Annex I.
"LIBOR Rate" shall mean the interest per annum at which
deposits in dollars are offered to the Cayman Branch of Bank in the London
eurodollar market two business days before the first day of the applicable
Interest Period for the LIBOR Rate Loan for a period equal to such Interest
Period and in the amount of the LIBOR Rate Loan.
"LIBOR Rate Loan" means a Loan at such times as it bears
interest at a rate determined by reference to the LIBOR Rate.
"Lien" means any mortgage, deed of trust, pledge, security
interest, assignment, deposit arrangement, charge or encumbrance, lien
(statutory or other), or other preferential arrangement (including any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing or any agreement
to give any security interest).
"Loans" means, collectively, the Term Loan and the Revolving
Loans.
"Loan Documents" means this Agreement, the Term Loan Note, the
Revolving Loan Note, the Guaranties and all other documents, agreements and
instruments delivered to the Bank under or in connection with this Agreement.
"Maximum Intercompany Loan Amount" means the sum of (i)
$20,000,000 plus (ii) on each anniversary of the Closing Date, 10% of the
Maximum Intercompany Loan Amount then in effect.
6.
<PAGE>
"Net Worth" means, in respect of the Borrower on any date of
determination, total assets of the Borrower on such date minus total liabilities
of the Borrower on such date, determined in accordance with GAAP on a
consolidated basis.
"Notes" means, collectively, the Term Loan Note and the
Revolving Loan Note.
"Notice of Conversion/Continuation" means a notice in
substantially the form of EXHIBIT C.
"Opinion of Counsel to Borrower" means that certain opinion of
legal counsel to Borrower, substantially in the form of EXHIBIT D.
"Permitted Liens" means:
a. Liens in favor of the Bank securing
Borrower's Indebtedness to Bank;
b. Liens in existence as of the Closing Date
and listed on Schedule 1.1, or renewals or
extension of such liens (other than any
renewal or extension of the Wells Fargo
Bank Liens);
c. Additional Liens on the assets of one or
more Subsidiaries of the Borrower securing
Indebtedness which, together with all
Indebtedness secured by Liens referenced
in the preceding clause (b), does not
exceed in the aggregate $3,000,000 at any
time outstanding; and
d. The following, if the validity or amount
thereof is being contested in good faith
by appropriate and lawful proceedings, so
long as levy and execution thereon have
been stayed and continue to be stayed and
they do not, in the aggregate, materially
detract from the value of the Borrower's
assets, or materially impair Borrower's
financial condition: (1) Claims or liens
for taxes, assessments, or charges due and
payable and subject to interest or
penalty; and(2) Adverse judgments on
appeal.
"Person" means an individual, corporation, partnership, joint
venture, limited liability company, trust, unincorporated organization or any
other juridical entity.
"Receivable Debtor" means any Person obligated on a
Receivable.
"Receivables" means all rights to payment arising out of the
sale or lease of goods or the performance of services in the ordinary and usual
course of business, however evidenced.
7.
<PAGE>
"Reference Rate" means the rate of interest periodically
established by the Bank as its "Reference Rate," as such rate may change, from
time to time. The Reference Rate is not necessarily the lowest or best rate of
interest made available by the Bank to its most creditworthy customers, and no
representation, express or implied, is made with respect thereto.
"Reference Rate Loan" means a Loan at such times as it bears
interest at a rate determined by reference to the Reference Rate.
"Requirement of Law" means, as to any Person, any law
(statutory or common), treaty, rule or regulation or determination of an
arbitrator or of a Governmental Authority, in each case applicable to or binding
upon the Person or any of its property or to which the Person or any of its
property is subject.
"Responsible Officer" means, with respect to any Person, the
chief executive officer, the manager, the president, the chief financial
officer, any vice president or the treasurer of such Person, or any other senior
officer of such Person having substantially the same authority and
responsibility; or, with respect to compliance with financial covenants, the
chief financial officer or the treasurer of any such Person, or any other senior
officer of such Person involved principally in the financial administration or
controllership function of such Person and having substantially the same
authority and responsibility.
"Revolving Loan" has the meaning assigned to such term in
Section 2.1(B) of this Agreement.
"Revolving Loan Facility" has the meaning assigned to such
term in Section 2.1(B) of this Agreement.
"Revolving Loan Facility Commitment" means the commitment of
the Bank to make Revolving Loans to the Borrower in accordance with and subject
to the terms hereof in an aggregate principal amount not to exceed $40,000,000
at any time outstanding, as the same may be reduced from time to time in
accordance with the terms hereof.
"Revolving Loan Maturity Date" means March 31, 2001.
"Revolving Loan Note" means that certain promissory note from
Borrower to the order of the Bank substantially in the form of EXHIBIT A.
"Subsidiary" means any corporation, association, partnership,
joint venture, limited liability company or other business entity of which 50%
or more of the voting stock or other equity interest is owned directly or
indirectly by any Person or one or more of the other Subsidiaries of such Person
or a combination thereof. Unless the context otherwise clearly requires, all
references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Tangible Net Worth" means, in respect of the Borrower as of
any date of determination, total assets minus total liabilities, measured on a
consolidated basis for the
8.
<PAGE>
Borrower and its Subsidiaries in accordance with GAAP; provided, however, that
there shall be excluded from total assets all assets which would be classified
as intangible assets in accordance with GAAP, including goodwill, organizational
expense, research and development expense, patent applications, patents,
trademarks, trade names, brands, copyrights, trade secrets, customer lists,
licenses, franchises and covenants not to compete.
"Term Loan" has the meaning assigned to such term in Section
2.1(A) of this Agreement.
"Term Loan Commitment" means the commitment of the Bank to
make the Term Loan to the Borrower in accordance with and subject to the terms
hereof in an aggregate principal amount not to exceed $30,000,000 at any time
outstanding, as the same may be reduced from time to time in accordance with the
terms hereof.
"Term Loan Maturity Date" means March 31, 2006.
"Term Loan Note" means that certain promissory note from
Borrower to the order of the Bank substantially in the form of EXHIBIT B.
"Upfront Fee" means the sum of $75,000, payable by Borrower to
the Bank at closing.
"Wells Fargo Bank Debt" means the total amount of Indebtedness
owing by the Borrower and its Subsidiaries to Wells Fargo Bank, N.A.. (As of
March 26, 1999, the principal amount of the Wells Fargo Bank Debt was
$23,866,335).
"Wells Fargo Bank Liens" means those Liens granted by Borrower
and its Subsidiaries on certain of their assets in favor of Wells Fargo Bank,
N.A., which Liens secure the Wells Fargo Bank Debt.
"Wine Bottling Inventory" means Borrower's bottles, corks and
other supplies used in its wine production.
1.2 Accounting Terms. Accounting terms used and not otherwise
defined in this Agreement have the meanings determined by GAAP. Unless otherwise
provided in this Agreement, all calculations with respect to accounting or
financial matters shall be computed in accordance with GAAP, consistently
applied.
SECTION II. THE LOAN
2.1 The Loans
(A) The Term Loan. Subject to the terms of this Agreement,
the Bank agrees to make loans to Borrower from time to time on any Business Day
during the period from the Closing Date through the Drawdown Expiration Date in
an amount not to exceed the Term
9.
<PAGE>
Loan Commitment (such loans, as the aggregate outstanding principal amount
thereof may be reduced from time to time by scheduled payment, prepayment or
otherwise, the "Term Loan"). Any amount of the Term Loan that is repaid may not
be reborrowed.
(B) The Revolving Loan Facility. Subject to the terms of
this Agreement, the Bank agrees to make available to Borrower during the period
from the Closing Date to the Revolving Maturity Date a revolving loan facility
in an aggregate amount outstanding not to exceed at any time the lesser of (i)
$40,000,000, and (ii) the Borrowing Base then in effect (the "Revolving Loan
Facility"). Each revolving loan made to Borrower pursuant to the Revolving Loan
Facility shall be a "Revolving Loan." Amounts borrowed under the Revolving Loan
Facility may be repaid and reborrowed in accordance with the terms of this
Agreement.
(C) Wells Fargo Bank Payoff. Borrower hereby agrees that
the first advances under the Term Loan and the Revolving Loan Facility shall be
made for the sole purpose of repaying in full the Wells Fargo Bank Debt existing
on the Closing Date. Borrower hereby authorizes and directs the Bank to pay
directly to Wells Fargo Bank, N.A. such proceeds of the Loans as are necessary
to pay in full the Wells Fargo Bank Debt owing on the Closing Date.
2.2 Evidence of the Loans.
(A) Notes. As additional evidence of the Loans, Borrower
shall execute and deliver to the Bank the Notes.
(B) Recordkeeping. The Bank shall record in its internal
records the date and amount of each disbursement of proceeds under the Loans,
the amount of principal and interest due and payable hereunder from time to
time, each payment thereof and the resulting unpaid principal balance of each of
the Loans. Any such recordation shall be rebuttable presumptive evidence of the
accuracy of the information so recorded. Any failure to so record or any error
in doing so shall not, however, limit or otherwise affect the obligations of
Borrower hereunder and under the Notes to pay the Indebtedness owing under the
Loans.
2.3 Interest Rates; Commitment Fee.
(A) Term Loan. The unpaid principal balance of the Term
Loan shall bear interest as follows:
(i) at all times prior to the Drawdown Expiration
Date, the unpaid principal balance of the Term Loan shall bear interest
calculated at a fluctuating rate per annum equal to, at the Borrower's option
(except as otherwise provided herein) (I) the LIBOR Rate plus 1.20% during any
Interest Period or (II) the Reference Rate plus 0%; and
(ii) at all times from and after the Drawdown
Expiration Date, the unpaid principal balance of the Term Loan shall bear
interest calculated at a fluctuating rate per annum equal to, at the Borrower's
option (except as otherwise provided herein) (1) the
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LIBOR Rate plus the LIBOR Margin during any Interest Period or (2) the Reference
Rate plus 0%.
(B) Revolving Loans. The unpaid principal balance of each
Revolving Loan shall bear interest calculated at a fluctuating rate per annum
equal to, at Borrower's option (except as otherwise provided herein), (i) the
LIBOR Rate plus 0.875% during any Interest Period, (ii) the Reference Rate plus
0%, or (iii) such other interest rates for such other interest periods as shall
be mutually agreed upon from time to time by the Borrower and the Bank.
(C) Commitment Fee The Borrower agrees to pay to the Bank
a commitment fee on the average daily unused portion of the Revolving Loan
Facility Commitment as in effect from time to time from the Closing Date until
the Revolving Loan Maturity Date at the rate of 0.125% per annum, payable
quarterly in arrears on the last Business Day of each calendar quarter,
commencing on the first such date after the Closing Date, and terminating on the
earlier of the date the Revolving Loan Facility Commitment is terminated
hereunder or the Revolving Loan Maturity Date.
(D) Default Rate; Calculation Period. During the
continuance of an Event of Default, Borrower shall pay interest on all unpaid
amounts due and owing in connection with the Loans and the Loan Documents
calculated at a fluctuating rate per annum equal to the Reference Rate plus
three percent (3%). All interest, for any period, shall be calculated on the
basis of a 360-day year and the actual number of days elapsed during the
relevant period.
2.4 Conversion and Continuation Elections.
(A) The Borrower may, upon irrevocable written notice to
the Bank in accordance with subsection (B) below:
a. elect, as of any Business Day, in the case
of a Reference Rate Loan, or as of the
last day of the applicable Interest
Period, in the case of a LIBOR Rate Loan,
to convert such Reference Rate Loan or
LIBOR Rate Loan into the other; or
b. elect, as of the last day of the
applicable Interest Period, to continue a
LIBOR Rate Loan having an Interest Period
expiring on such day.
(B) The Borrower shall deliver a Notice of
Conversion/Continuation to be received by the Bank not later than 11:00 a.m.
(California time) at least (i) three Business Days in advance of the
Conversion/Continuation Date, if the Loan is to be converted into or continued
as a LIBOR Rate Loan; and (ii) one Business Day in advance of the
Conversion/Continuation Date, if the Loan is to be converted into a Reference
Rate Loan, specifying:
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a. the proposed Conversion/Continuation Date;
b. whether the proposed conversion or
continuation will result in a Reference
Rate Loan or a LIBOR Rate Loan; and
c. other than in the case of conversion into
a Reference Rate Loan, the duration of the
requested Interest Period.
(C) If upon the expiration of any Interest Period
applicable to a LIBOR Rate Loan, the Borrower has failed to select timely a new
Interest Period to be applicable to the LIBOR Rate Loan, or if any Event of
Default then exists, the Borrower shall be deemed to have elected to convert the
LIBOR Rate Loan into a Reference Rate Loan effective as of the expiration date
of such Interest Period.
(D) Unless the Bank otherwise consents, during the
existence of an Event of Default, the Borrower may not elect to have the Loans
converted into or continued as a LIBOR Rate Loan.
(E) Unless the Bank otherwise consents, after giving
effect to any continuation or conversion of Loans, there shall not be more than
ten Interest Periods in effect.
2.5 Repayment of the Loans.
(A) Term Loan. Prior to the Term Loan Maturity Date,
accrued interest shall be due and payable on the unpaid principal balance of the
Term Loan in arrears on the last day of each calendar month, commencing on April
30, 1999. The unpaid principal balance of the Term Loan shall be repaid in
twenty-two substantially equal consecutive installments (based on a ten-year
amortization schedule) due and payable on the last day of each calendar quarter
and commencing on December 31, 2000, plus a final principal installment equal to
the unpaid principal balance of the Term Loan then outstanding, together with
all accrued and unpaid interest thereon, due and payable on the Term Loan
Maturity Date.
(B) Revolving Loans. Prior to the Revolving Loan Maturity
Date, accrued interest shall be due and payable on the Revolving Loans in
arrears on the last day of each calendar month, commencing on April 30, 1999.
The Revolving Loans shall be due and payable in full on the Revolving Loan
Maturity Date.
2.6 Prepayments and Commitment Reductions.
(A) Optional Prepayments. Upon at least ten (10) Business
Days' written notice to the Bank, Borrower may, subject to Section 2.10, prepay
the outstanding principal amount of the Loans in whole or in part, and from time
to time, without premium or penalty.
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(B) Mandatory Prepayments. If at any time the aggregate
principal amount of the outstanding Revolving Loans shall exceed the Borrowing
Base then in effect, the Borrower, upon becoming aware of such excess, shall,
not later than three Business Days after becoming so aware, prepay the
outstanding principal amount of the Revolving Loans in an amount equal to such
excess, subject to Section 2.10.
(C) Effect of Prepayments. All partial prepayments of any
kind shall not relieve Borrower of its obligation to make regularly scheduled
payments of principal, interest or other Indebtedness as required by this
Agreement or any other Loan Document.
(D) Optional Reduction or Termination of Commitments. The
Borrower may, upon not less than ten (10) Business Days' prior written notice to
the Bank, terminate or voluntarily reduce the Revolving Loan Facility Commitment
and/or the Term Commitment by an aggregate minimum amount, in each case, of
$1,000,000 or any multiple of $1,000,000 in excess thereof. Once reduced in
accordance with this subsection 2.6(D), the Revolving Loan Facility Commitment
or the Term Commitment, as the case may be, may not be increased. All accrued
and unpaid commitment fees to the effective date of any reduction or termination
of the Revolving Loan Facility Commitment shall be paid on the effective date of
such reduction or termination. If after giving effect to any such reduction or
termination of the Revolving Loan Facility Commitment the aggregate principal
amount of the Revolving Loans then outstanding would exceed the Revolving Loan
Facility Commitment then in effect, the Borrower shall concurrently with the
effectiveness of such reduction or termination prepay the outstanding principal
amount of the Revolving Loans in an amount equal to such excess, subject to
Section 2.10. If after giving effect to any such reduction or termination of the
Term Commitment the aggregate principal amount of the Term Loan then outstanding
would exceed the Term Commitment then in effect, the Borrower shall concurrently
with the effectiveness of such reduction or termination prepay the outstanding
principal amount of the Term Loan in an amount equal to such excess, subject to
Section 2.10. Any reduction or termination of the Revolving Loan Facility
Commitment or the Term Commitment effective on or prior to the date that is
twenty-three months after the Closing Date shall be subject to a prepayment fee
equal to 2% of the aggregate principal amount of such reduction or termination,
which prepayment fee shall be due and payable concurrently with the
effectiveness of such reduction or termination.
2.7 Payments to the Bank.
All payments of interest on, principal of, and all other
amounts payable to the Bank in respect of or in connection with the Loans shall
be paid directly to the Bank in immediately available funds on the dates
specified under this Agreement, or if any such date is not a Business Day, then
on the next succeeding Business Day (and all such extensions of time shall be
included in the computation of the amount of interest to be paid by Borrower),
in immediately available funds. The Bank shall send Borrower statements of all
amounts due under this Agreement for interest, principal, fees and expenses.
Those statements shall be considered prima facie evidence of the accuracy of the
amounts due, absent manifest error, and shall be
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binding on Borrower unless Borrower notifies the Bank to the contrary within ten
(10) days of receipt of any statement that Borrower deems to be incorrect.
2.8 Illegality.
(A) If the Bank determines that the introduction after the
date hereof of any Requirement of Law, or any change in any Requirement of Law,
or in the interpretation or administration of any Requirement of Law, has made
it unlawful, or that any central bank or other Governmental Authority has
asserted that it is unlawful, for the Bank or its applicable lending office to
make any LIBOR Rate Loan, then, on notice thereof by the Bank to the Borrower,
any obligation of the Bank to make a LIBOR Rate Loan shall be suspended until
the Bank notifies the Borrower that the circumstances giving rise to such
determination no longer exist.
(B) If the Bank determines that it is unlawful to maintain
any LIBOR Rate Loan, the Borrower shall be deemed to have elected to convert
such LIBOR Rate Loan to a Reference Rate Loan effective upon the earlier of (i)
the last day of the Interest Period thereof, if the Bank may lawfully continue
to maintain such LIBOR Rate Loan to such day, or (ii) immediately, if the Bank
may not lawfully continue to maintain such LIBOR Rate Loan. The Borrower shall
be required to pay to the Bank upon demand any amounts payable under Section
2.10 resulting from any such mandatory conversion from a LIBOR Rate Loan to a
Reference Rate Loan.
2.9 Increased Costs and Reduction of Return.
(A) If the Bank determines that, due to either (i) the
introduction of or any change in or in the interpretation by a Governmental
Authority, of competent jurisdiction, in each case after the date hereof, of any
law or regulation or (ii) the compliance by the Bank with any guideline or
request from any central bank or other Governmental Authority (whether or not
having the force of law), which introduction, change or interpretation, imposes
or modifies any reserve, special deposit or similar requirement or changes the
basis on which taxes (other than taxes imposed on or measured by the net income
of Bank or its applicable lending office) relating to the extension of the Loans
hereunder, there shall be any increase in the cost to the Bank of agreeing to
make or making, funding or maintaining any LIBOR Rate Loan, then the Borrower
shall be liable for, and shall from time to time, upon demand, pay to the Bank
additional amounts as are sufficient to compensate the Bank for such increased
costs.
(B) If the Bank shall have determined that (i) the
introduction after the date hereof of any Capital Adequacy Regulation, (ii) any
change after the date hereof in any Capital Adequacy Regulation, (iii) any
change after the date hereof in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its applicable lending office) or any corporation controlling the
Bank with any Capital Adequacy Regulation after the date hereof, affects or
would affect the amount of capital required
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or expected to be maintained by the Bank or any corporation controlling the Bank
and (taking into consideration the Bank's or such corporation's policies with
respect to capital adequacy and the Bank's desired return on capital) determines
that the amount of such capital is increased as a consequence of its Loan or
obligations under this Agreement, then, upon demand by the Bank to the Borrower,
the Borrower shall pay to the Bank, from time to time as specified by the Bank,
additional amounts sufficient to compensate the Bank for such increase.
2.10 Funding Losses. The Borrower shall reimburse the Bank and
hold the Bank harmless from any loss or expense which the Bank may sustain or
incur as a consequence of:
(A) the failure of the Borrower to make on a timely basis
any payment of principal required hereunder of any LIBOR Rate Loan;
(B) the failure of the Borrower to borrow, continue or
convert any of the Loans after the Borrower has given (or is deemed to have
given) a borrowing notice or a Notice of Conversion/ Continuation;
(C) the failure of the Borrower to make any prepayment in
accordance with any notice delivered under Section 2.6;
(D) the prepayment (including pursuant to Section 2.6) or
other payment of a LIBOR Rate Loan on a day that is not the last day of the
relevant Interest Period; or
(E) the automatic conversion under Section 2.8 of any
LIBOR Rate Loan to a Reference Rate Loan on a day that is not the last day of
the relevant Interest Period;
including (without limitation) any such loss or expense arising from (i) the
liquidation or reemployment of funds obtained by it to maintain its LIBOR Rate
Loans or fixed rate loans, (ii) fees payable to terminate the deposits,
contracts or other arrangements from which such LIBOR funds or fixed rate funds
were obtained, and (iii) all other costs, expenses and fees of any kind incurred
by the Bank as a result of such prepayment.
2.11 Inability to Determine Rates. If the Bank determines that
for any reason adequate and reasonable means do not exist for determining the
LIBOR Rate for any requested Interest Period with respect to a proposed LIBOR
Rate Loan, or that the LIBOR Rate applicable pursuant to Section 2.3 for any
requested Interest Period with respect to a proposed LIBOR Rate Loan does not
adequately and fairly reflect the cost to the Bank of funding or maintaining
such LIBOR Rate Loan, the Bank will promptly so notify the Borrower. Thereafter,
the obligation of the Bank to make or maintain any LIBOR Rate Loan hereunder
shall be suspended until the Bank revokes such notice in writing. Upon receipt
of such notice, the Borrower may revoke any borrowing notice or Notice of
Conversion/Continuation then submitted by it. If the Borrower does not revoke
such Notice, the Bank shall make, convert or continue the Revolving Loan, as
proposed by the Borrower, but the Revolving Loan shall be made, converted or
continued as a Reference Rate Loan instead of a LIBOR Rate Loan.
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2.12 Reserves on Offshore Rate Loans. The Borrower shall pay
to the Bank, as long as the Bank shall be required under regulations of the
Board of Governors of the Federal Reserve System to maintain reserves with
respect to liabilities or assets consisting of or including Eurocurrency funds
or deposits (currently known as "Eurocurrency liabilities"), additional costs on
the unpaid principal amount of any LIBOR Rate Loan equal to the actual costs of
such reserves allocated to such LIBOR Rate Loan by the Bank (as determined by
the Bank in good faith, which determination shall be conclusive), payable on
each date on which interest is payable on the Loan, provided the Borrower shall
have received at least 15 days' prior written notice of such additional interest
from the Bank. If the Bank fails to give notice 15 days prior to the relevant
interest payment date, such additional interest shall be payable 15 days from
receipt of such notice.
2.13 Certificates of Bank. If the Bank claims any
reimbursement or compensation under any of Sections 2.8, 2.9, 2.10, 2.11 or
2.12, it shall deliver to the Borrower a certificate setting forth in reasonable
detail the reasons for and calculation of the amount payable to the Bank
hereunder and a statement that Borrower is being treated no worse than any
similarly situated customer. Such certificate shall be conclusive and binding on
the Borrower in the absence of manifest error. The Bank will notify the Borrower
of any event occurring after the date of this Agreement which would entitle the
Bank to compensation under such Sections (a "Compensable Event") as soon as
practicable after it obtains knowledge of such Compensable Event and determines
to request compensation therefor. The Bank shall not be entitled to compensation
under such Sections for any amounts of which the Bank has knowledge incurred
more than 180 days before the Bank makes demand on Borrower therefor. The Bank
shall, if so requested by the Borrower, designate a different applicable lending
office for LIBOR Rate Loans if such designation will avoid the need for or
reduce the amount of such compensation and will not, in the reasonable opinion
of the Bank, cause the Bank to incur any unreimbursed cost or otherwise be
materially disadvantageous to the Bank. No assignee of the Bank shall be
entitled to claim any greater amount of compensation under such Sections than
the Bank would have been entitled to receive in respect of the interest so
assigned had no such assignment been made, unless the event or circumstances
giving rise to such right to compensation did not exist at the time such
assignment was made. The Bank shall not be entitled to claim on behalf of any
participant any greater amount of compensation under such Sections than the Bank
would have been entitled to receive in respect of the participation had no such
participation been transferred. If the obligation of the Bank or any assignee
thereof to make LIBOR Rate Loans is suspended under any of Sections 2.8 through
2.12 or any Compensable Event occurs, the Borrower shall have the right to seek
a substitute lender or lenders through satisfactory to the Borrower and any
remaining lenders, to purchase the Notes and assume the commitment of the
affected lender and such affected lender shall sell its Notes and execute and
deliver appropriate assignment and assumption agreements reasonably satisfactory
to the Borrower and any remaining lenders and take such other steps as may be
reasonably necessary to effect the assumption of the rights and obligations of
such substitute lender or lenders.
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2.14 Survival. The agreements and obligations of the Borrower
in Sections 2.8, 2.9, 2.10, 2.11 and 2.12 shall survive the payment of all other
Indebtedness of the Borrower to the Bank hereunder.
SECTION III. CONDITIONS PRECEDENT
3.1 Conditions Precedent to Loan. The obligation of the Bank
to make the Loans under this Agreement on the date of the initial disbursement
of the Loans hereunder (the "Closing Date") is subject to the satisfaction of
each of the following conditions precedent:
(A) Fees and Expenses. Borrower shall have paid the
Upfront Fee and all fees, expenses and attorneys fees incurred by the Bank in
connection with the Loan.
(B) Documents Relating to Loan. The Bank shall have
received the following Loan Documents:
a. a counterpart of this Agreement, executed
and delivered by Borrower;
b. the Notes, executed and delivered by
Borrower;
c. the Guaranties, executed and delivered by
each Subsidiary of the Borrower; and
d. a completed Borrowing Base Certificate
signed by a Responsible Officer of the
Borrower for the calendar month ended
February 28, 1999.
(C) Additional Closing Documents. The Bank shall have
received evidence that all (1) authorizations or approvals of any Governmental
Authority or (2) approvals or consents of any other Person required in
connection with the execution, delivery and performance of the Loan Documents
shall have been obtained.
(D) Corporate Documents. The Bank shall have received the
following, in form and substance satisfactory to it:
a. Certified copies of the articles of
incorporation of Borrower, together with a
good standing certificate, from the
Secretary of State of the State of
California, each dated as of a recent date
prior to the Closing Date; and
b. A certificate of the corporate secretary
of Borrower, dated the Closing Date,
certifying (a) copies of the by-laws of
Borrower and the resolutions of the board
of directors of Borrower authorizing the
execution, delivery and
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performance of the Loan Documents, and (b)
the incumbency, authority and signatures
of each officer of Borrower who will
execute and deliver the Loan Documents on
behalf of Borrower.
(E) Legal Opinion. The Bank shall have received the
Opinion of Counsel to Borrower.
(F) Wells Fargo Bank Payoff Letter. The Bank shall have
received a copy of a letter from Wells Fargo Bank, N.A. (1) specifying the total
amount of the Wells Fargo Bank Debt owing as of the Closing Date, and (2)
stating that, once Wells Fargo Bank, N.A. has received payment of the Wells
Fargo Bank Debt, it will release the Wells Fargo Bank Liens.
SECTION IV. REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties. Borrower represents and
warrants to the Bank that:
(A) Organization and Powers. Borrower and each Subsidiary
is a corporation, general partnership or limited liability company, as the case
may be, duly organized, validly existing and in good standing under the law of
the jurisdiction of its incorporation or formation, is qualified to do business
and is in good standing in each jurisdiction in which the failure so to qualify
or be in good standing would have a material adverse effect on Borrower and has
all requisite power and authority to own its assets and carry on its business
and to execute, deliver and perform its obligations under the Loan Documents.
(B) Authorization; No Conflict. The execution, delivery
and performance by Borrower and each Subsidiary of the Loan Documents to which
they are a party have been duly authorized by all necessary corporate action of
Borrower and each Subsidiary and do not and will not:
a. Result in a breach of or constitute a
default under any indenture or loan or
credit agreement or any other agreement,
lease or instrument to which Borrower or
such Subsidiary is a party or by which it
or its properties may be bound or
affected;
b. Violate any provision of any law, rule,
regulation, order, writ, judgment,
injunction, decree or the like binding on
or affecting Borrower or such Subsidiary;
or
c. Except as contemplated by this Agreement,
result in, or require, the creation or
imposition of any Lien upon or with
respect to any of the properties of
Borrower or such Subsidiary.
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(C) Binding Obligation. The Loan Documents constitute, or
when delivered under this Agreement will constitute, legal, valid and binding
obligations of Borrower and its Subsidiaries, enforceable against Borrower and
its Subsidiaries in accordance with their respective terms, subject to judicial
discretion regarding specific performance or other equitable remedies and except
as may be limited by bankruptcy, reorganization, insolvency, moratorium or other
laws relating to or affecting the enforcement of creditors' rights and remedies
generally.
(D) Governmental Consents. No authorization, consent,
approval, license, exemption of, or filing or registration with, any
Governmental Authority is required for the due execution, delivery or
performance by Borrower and its Subsidiaries of any of the Loan Documents to
which they are a party.
(E) No Defaults. Neither Borrower nor any of its
Subsidiaries is in default under any material contract, lease, agreement,
judgment, decree or order to which it is a party or by which it or its
properties may be bound.
(F) Title to Properties; Liens. Borrower and each
Subsidiary has good and marketable title to its properties and assets, and there
is no Lien upon or with respect to any of such properties or assets, which
secures Indebtedness of any Person, except as contemplated herein and except for
Permitted Liens.
(G) Litigation. There are no actions, suits or proceedings
pending or, to the best of Borrower's knowledge, threatened against or affecting
Borrower or any of its Subsidiaries or the properties of Borrower or any of its
Subsidiaries before any Governmental Authority or arbitrator which (1) if
determined adversely to Borrower or any such Subsidiaries may materially
adversely affect the operations, properties, business or condition (financial or
otherwise) of Borrower, or (2) purport to affect the legality, validity or
enforceability of any of the Loan Documents.
(H) Compliance with Laws.
a. Environmental Laws. Borrower and each
Subsidiary is in material compliance with
all Environmental Laws, whether in
connection with the ownership, use,
maintenance or operation of its property
or the conduct of any business thereon, or
otherwise. Neither Borrower nor any of its
Subsidiaries nor to the best of Borrower's
knowledge, after due and diligent inquiry
and investigation, any previous owner,
tenant, occupant, user or operator of
their respective properties, or any
present tenant or other present occupant,
user or operator of their respective
properties has used, generated,
manufactured, installed, treated,
released, stored or disposed of any
Hazardous Substances on, under, or at any
of such properties, except in compliance
with all
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applicable Environmental Laws. After due
and diligent inquiry and investigation,
Borrower has determined, to the best of
Borrower's knowledge, that no Hazardous
Substances have at any time been spilled,
leaked, dumped, deposited, discharged,
disposed of or released on, under, at or
from any of such properties, nor have any
of such properties been used at any time
by any Person as a landfill or waste
disposal site. There are no actions,
suits, claims, notices of violation,
hearings, investigations or proceedings
pending or, to the best of Borrower's
knowledge, threatened against or affecting
Borrower or any of its Subsidiaries or
with respect to the ownership, use,
maintenance and operation of their
respective properties, relating to
Environmental Laws or Hazardous
Substances.
b. All Other Laws. Borrower, its Subsidiaries
and their respective properties are in
full compliance with all other applicable
laws (including, without limitation, the
Americans with Disabilities Act). All
improvements to, and other construction or
building projects on, such properties will
be at all times in full compliance with
all applicable laws (including, without
limitation, the Americans with
Disabilities Act).
(I) Governmental Regulation. Borrower is not subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Investment Company Act of 1940, the Interstate Commerce Act, any
state public utilities code or any other federal or state statute or regulation
limiting its ability to incur Indebtedness.
(J) Subsidiaries. Borrower has no Subsidiaries except as
set forth on Schedule 4.1(J).
(K) Margin Regulations. Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying "margin
stock" (within the meaning of Regulations G or U of the Board of Governors of
the Federal Reserve System of the United States). No part of the proceeds of the
Loans will be used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying any margin stock.
(L) Taxes. Borrower and each Subsidiary has duly filed all
tax and information returns required to be filed, and has paid all taxes, fees,
assessments and other governmental charges or levies that have become due and
payable, except to the extent such taxes or other charges are being contested in
good faith and are adequately reserved against in accordance with GAAP.
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(M) Patents and Other Rights. Borrower and each Subsidiary
possesses all permits, franchises, licenses, patents, trademarks, trade names,
service marks, copyrights and all rights with respect thereto, free from
burdensome restrictions, that are necessary for the ownership, maintenance and
operation of its business and neither Borrower nor any of its Subsidiaries is in
violation of any rights of others with respect to the foregoing.
(N) Insurance. The properties of Borrower and its
Subsidiaries are insured, with financially sound and reputable insurance
companies, in such amounts, with such deductibles and covering such risks as is
customarily carried by companies engaged in similar businesses and owning
similar properties in the localities where Borrower or any such Subsidiary
operates.
(O) Year 2000. Borrower has reviewed the areas within its
business and operations which could be adversely affected by, and has developed
or is developing a program to address on a timely basis, the "Year 2000 Problem"
(that is, the risk that computer applications used by Borrower may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date on or after December 31, 1999), and will make related
appropriate inquiry of material suppliers and vendors. Based on such review and
program, Borrower believes that the "Year 2000 Problem" will not have a material
adverse effect on Borrower.
(P) Liabilities. Borrower and its Subsidiaries have no
material liabilities, fixed or contingent, other than those owing to Bank and
those disclosed on Schedule 5.2(D).
(Q) Disclosure. None of the representations or warranties
made by Borrower or any Subsidiary in the Loan Documents as of the date of such
representations and warranties, and none of the statements contained in each
exhibit or report furnished by or on behalf of Borrower or any of its
Subsidiaries to the Bank in connection with the Loan Documents, contains any
untrue statement of a material fact or omits any material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they are made, not misleading.
(R) Acknowledgments. The Bank's activities in connection
with this Agreement, all other Loan Documents and the Borrower are not "outside
the scope of the activities of a lender of money" within the meaning of Section
3434 of the California Civil Code. The Bank shall not be liable or responsible
for any acts, omissions or decisions of the Borrower. The Bank is not, and shall
not be construed as, a partner of, joint venturer with or controlling person of
the Borrower.
SECTION V. COVENANTS OF BORROWER
5.1 Affirmative Covenants. Borrower hereby covenants and
agrees with the Bank that, so long as any of the Indebtedness owing to the Bank
under this Agreement or any other
21.
<PAGE>
Loan Document remain unsatisfied, or any other commitment under this Agreement
remains outstanding, Borrower shall comply at all times with the following
affirmative covenants:
(A) Within 45 days following the conclusion of each fiscal
quarter, Borrower shall provide the Bank with consolidated financial statements
that (1) have been prepared by Borrower internally, and (2) are in a form and
format reasonably satisfactory to the Bank. Within 90 days following the end of
each fiscal year, Borrower shall provide the Bank with audited consolidated
financial statements.
(B) Within 30 days after the end of each calendar month
(commencing with May 1999), the Borrower shall provide the Bank with a completed
Borrowing Base Certificate for such preceding calendar month signed by a
Responsible Officer of the Borrower.
(C) Within 45 days after the end of each fiscal quarter,
the Borrower shall provide the Bank with a completed Compliance Certificate for
such preceding fiscal quarter signed by a Responsible Officer of the Borrower.
(D) Following reasonable notice by the Bank, Borrower
shall provide representatives of the Bank reasonable access to its books and
records. In addition, Borrower shall furnish the Bank any information regarding
Borrower's or any Subsidiary's business affairs and financial condition that is
reasonably requested by the Bank within a reasonable time after written request
for such information.
(E) Borrower and its Subsidiaries shall pay when due (or
within applicable grace periods) all material Indebtedness due to any Person.
(F) Borrower shall notify the Bank immediately if Borrower
becomes aware of the occurrence of any Event of Default, or of any fact,
condition, or event that with the giving of notice or passage of time, or both,
would become an Event of Default, or if it becomes aware of any material adverse
change in its financial condition (including, without limitation, proceedings in
bankruptcy, insolvency, reorganization, or the appointment of a receiver or
trustee), or of the failure of Borrower or any Subsidiary to observe any of its
undertakings under this Agreement, the Guaranties or any other Loan Documents.
(G) Borrower shall use its best efforts to ensure that the
Wells Fargo Bank Liens are released or terminated to the satisfaction of the
Bank.
5.2 Negative Covenants. Borrower hereby covenants and agrees
with the Bank that, so long as any of the Indebtedness owing to the Bank under
this Agreement or any other Loan Document remains unsatisfied, or any other
commitment under this Agreement remains outstanding, Borrower shall not and
shall not permit any Subsidiary to:
(A) Mortgage, pledge, grant, or permit to exist a security
interest in or a Lien upon any of its assets, now owned or hereafter acquired,
except for Permitted Liens.
22.
<PAGE>
(B) Furnish the Bank any certificate or other document
that will contain any untrue statement of material fact or that, taken together
with all other information furnished, will omit to state a material fact
necessary to make it not misleading in light of the circumstances under which it
was furnished.
(C) Pay any dividends or make any distributions to its
shareholders or equity owners (other than to the Borrower) in excess of 50% of
net income in any fiscal year; provided that no Event of Default then exists or
would result therefrom.
(D) Incur any Indebtedness to any person or entity other
than the Bank, other than (i) trade debt incurred in the ordinary course of
Borrower's or any Subsidiary's business, (ii) Indebtedness existing on the
Closing Date and listed on Schedule 5.2(D), (iii) intercompany Indebtedness
permitted under Section 5.2(F) below, (iv) any renewal, extension or refinancing
of the Existing Subordinated Notes; provided that any such renewal, extension or
refinancing shall be on terms substantially similar to the terms which govern
the Existing Subordinated Notes on the date hereof or on terms which are more
favorable to the Borrower than such governing terms existing on the date hereof;
and provided further that the aggregate principal amount thereof shall not at
any time outstanding exceed $8,500,000, and (v) other Indebtedness of the
Borrower's Subsidiaries which, together with all Indebtedness listed on Schedule
5.2(D), does not exceed in the aggregate $3,000,000 at any time outstanding.
(E) Take any action that materially and adversely affects,
or, with the giving of notice or passage of time, or both, would materially and
adversely affect Borrower's or any Subsidiary's ability to perform its
obligations to the Bank pursuant to this Agreement or any other Loan Document.
(F) Purchase or otherwise acquire the capital stock,
assets (constituting a business unit), obligations or other securities of or any
interest in any Person, or otherwise extend any credit to, guarantee the
obligations of or make any additional investments in any Person, other than in
connection with:
a. extensions of credit in the nature of
notes receivable arising from the sales of
goods or services in the ordinary course
of business;
b. investments in cash equivalents and
short-term marketable securities;
c. investments existing on the Closing Date
in Subsidiaries;
d. extensions of credit by the Borrower to
its Subsidiary Canoe Ridge Vineyard LLC
and/or its Subsidiary Edna Valley Vineyard
on or after the Closing Date in an
aggregate amount for all such extensions
of credit not to exceed, without the prior
written consent of the Bank in its
23.
<PAGE>
sole discretion, the Maximum Intercompany
Loan Amount; provided that all such
extensions of credit by the Borrower (i)
to Canoe Ridge Vineyard LLC shall not at
any time outstanding exceed the Canoe
Ridge Intercompany Loan Amount, and (ii)
to Edna Valley Vineyard shall not at any
time outstanding exceed the Edna Valley
Intercompany Loan Amount; and provided
further that no Event of Default shall
exist at the time of making any such
credit extension or would result
therefrom.
e. employee loans and guarantees in
accordance with such Borrower's usual and
customary practices with respect thereto;
f. guaranty obligations of the Borrower in
respect of the Indebtedness of its
Subsidiaries, which Subsidiary
Indebtedness is permitted under subsection
5.2(D) above; and
g. Acquisitions by the Borrower on and after
the Closing Date; provided that (i) such
Acquisitions are undertaken in full
compliance with all applicable
Requirements of Law (ii) no Event of
Default shall exist at the time of or
immediately after giving effect to any
such Acquisition and (iii) the aggregate
cash consideration for any single such
Acquisition shall not exceed $5,000,000.
(G) Allow a Change of Control.
(H) Sell more than ten percent (10%) of its total assets
in any one year. In the event of all asset sales (other than sales of inventory
in the ordinary course), the proceeds of such asset sales shall be paid to the
Bank and be applied against the Term Loans.
(I) Forgive, cancel, discount or otherwise reduce the
principal amount owing in respect of any extension of credit by the Borrower to
Canoe Ridge Vineyard LLC or Edna Valley Vineyard, without the prior written
consent of the Bank.
5.3 Financial Covenants.
(A) The Borrower shall maintain, for each fiscal quarter
period, a ratio of (i) current assets to (ii) current liabilities, in each case
determined in accordance with GAAP on a consolidated basis, of not less than
1.35 to 1.00, measured as of the last day of each fiscal quarter.
24.
<PAGE>
(B) The Borrower shall maintain, for each rolling
4-quarter period, a ratio of (i) EBIT for such 4-quarter period to (ii) Interest
Expense for such 4-quarter period, in each case determined in accordance with
GAAP on a consolidated basis, of not less than 2.00 to 1.00, measured as of the
last day of each fiscal quarter.
(C) The Borrower will maintain a ratio of (i) EBITDA to
(ii) the sum of (A) the current portion of long term Indebtedness plus (B)
Interest Expense, in each case determined in accordance with GAAP for the
Borrower and its Subsidiaries on a consolidated basis for the rolling 4-quarter
period then most recently ended, of not less than 1.75 to 1.00, measured as of
the last day of each fiscal quarter.
(D) The Borrower shall maintain a ratio of (i) senior long
term indebtedness plus the current portion of all other long term debt to (ii)
senior long term indebtedness plus the current portion of all other long term
indebtedness plus Net Worth plus up to $8,500,000 in principal amount of the
Existing Subordinated Notes then outstanding, in each case determined in
accordance with GAAP on a consolidated basis, of not more than 0.65 to 1.00,
measured as of the last day of each fiscal quarter.
(E) The Borrower shall not permit its Tangible Net Worth
to be less than (i) $45,000,000 plus (ii) 50% of net income earned in each
quarterly accounting period commencing after the Closing Date (without deduction
for losses), determined in accordance with GAAP on a consolidated basis,
measured as of the last day of each fiscal quarter.
SECTION VI. DEFAULT
6.1 Events of Default. The occurrence of any one or more of
the following events shall constitute an Event of Default under this Agreement:
(A) Payments. Borrower shall fail to pay (i) any amount of
principal of the Loans when due, or (ii) interest on the Loans when due, or
(iii) any fee or other amount payable hereunder or under any of the other Loan
Documents within three (3) Business Days after the same shall become due.
(B) Representations and Warranties. Any representation or
warranty by Borrower or any of its Subsidiaries under or in connection with this
Agreement or the other Loan Documents shall prove to have been incorrect in any
material respect when made or deemed made.
(C) Failure by Borrower to Perform Covenants. Borrower
shall fail in any material respect to perform or observe any term, covenant or
agreement contained in this Agreement or any other Loan Document on its part to
be performed or observed.
(D) Bankruptcy. Borrower or any Subsidiary shall admit in
writing its inability to, or shall fail generally or be generally unable to, pay
its debts (including its payrolls) as such debts become due, or shall make a
general assignment for the benefit of creditors; or
25.
<PAGE>
Borrower or any Subsidiary shall file a voluntary petition in bankruptcy or a
petition or answer seeking reorganization, to effect a plan or other arrangement
with creditors or any other relief under the Bankruptcy Code or under any other
state or federal law relating to bankruptcy or reorganization granting relief to
debtors, whether now or hereafter in effect, or shall file an answer admitting
the jurisdiction of the court and the material allegations of any involuntary
petition filed against Borrower or any Subsidiary pursuant to the Bankruptcy
Code or any such other state or federal law; or Borrower or any Subsidiary shall
be adjudicated a bankrupt, or shall make an assignment for the benefit of
creditors, or shall apply for or consent to the appointment of any custodian,
receiver or trustee for all or any substantial part of Borrower's or such
Subsidiary's property, or shall take any action to authorize any of the actions
set forth above in this subsection; or an involuntary petition seeking any of
the relief specified in this subsection shall be filed against Borrower or any
Subsidiary and shall not be dismissed within 30 days; or any order for relief
shall be entered against Borrower or any Subsidiary in any involuntary
proceeding under the Bankruptcy Code or any such other state or federal law.
(E) Default Under Other Indebtedness. Borrower or any
Subsidiary shall (1) fail to make any payment of any principal of, or interest
or premium on, any Indebtedness when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in the agreement
or instrument relating to such Indebtedness; or (2) fail to perform or observe
any term, covenant or condition on its part to be performed or observed under
any agreement or instrument relating to any such Indebtedness, when required to
be performed or observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such failure to perform or observe is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any such Indebtedness
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof.
(F) Material Adverse Change. A material adverse change in
the business, results of operations or condition (financial or otherwise) of
Borrower shall have occurred which gives reasonable grounds to conclude, in the
reasonable judgment of the Bank, that Borrower may not, or will be unable to,
perform or observe in the normal course of its obligations under the Loan
Documents.
(G) Invalidity of Loan Documents. Any of the Loan
Documents, after delivery thereof, shall for any reason be revoked or
invalidated, or otherwise cease to be in full force and effect, or Borrower, any
Subsidiary or any other Person shall contest in any manner the validity or
enforceability thereof, or Borrower, any Subsidiary or any other Person shall
deny that it has any further liability or obligation thereunder.
6.2 Effect of Event of Default. If any Event of Default shall
occur, the Bank may, without limitation, (A) cease making disbursements of the
Loan proceeds, (B) declare the entire unpaid principal amount of the Loans and
the Notes, all interest accrued and unpaid thereon and all other amounts payable
under or in connection with this Agreement and the other Loan
26.
<PAGE>
Documents to be forthwith due and payable, whereupon the Loans and the Notes,
all such accrued interest and all such other amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by Borrower, (C)
exercise any or all of the Bank's rights and remedies under the Loan Documents,
and (D) proceed to enforce all other rights and remedies available to the Bank
under applicable law. All of the Bank's rights and remedies hereunder are
cumulative and not exclusive.
SECTION VII. MISCELLANEOUS
7.1 Amendments and Waivers. The Bank and Borrower may from
time to time enter into a written amendment to any provision of this Agreement
and the other Loan Documents, and the Bank may from time to time execute and
deliver to Borrower a written instrument waiving any provision of this Agreement
or any other Loan Document, or consenting to any departure by Borrower
therefrom. Any such amendment, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
7.2 Notices. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including by
telex or telecopier) and mailed, sent or delivered to the respective parties
hereto at or to their respective addresses or telex or telecopier numbers set
forth below their names on the signature pages hereof, or at or to such other
address or telex or telecopier number as shall be designated by any party in a
written notice to the other parties hereto. All such notices and communications
shall be effective (1) if delivered by hand, upon delivery; (2) if sent by mail,
upon the earlier of the date of receipt or five Business Days after deposit in
the mail, first class, postage prepaid; and (3) if sent by telecopy, upon
receipt.
7.3 No Waiver; Cumulative Remedies. No failure on the part of
the Bank to exercise, and no delay in exercising, any right, remedy, power or
privilege hereunder or under any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, remedy,
power or privilege preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights and remedies
under this Agreement and the other Loan Documents are cumulative and not
exclusive of any rights, remedies, powers and privileges that may otherwise be
available to the Bank.
7.4 Costs and Expenses; Indemnification; Other Charges.
(A) Costs and Expenses. Borrower agrees to pay on demand,
whether or not the transactions contemplated hereby shall be consummated:
a. the reasonable out-of-pocket costs and
expenses of the Bank, and the reasonable
fees and disbursements of counsel to the
Bank (including allocated costs of
internal counsel), in connection with the
negotiation, preparation, execution,
delivery and administration of the Loan
Documents, and
27.
<PAGE>
any amendments, modifications or waivers
of the terms thereof; and
b. all costs and expenses of the Bank and
fees and disbursements of counsel
(including allocated costs of internal
counsel) in connection with (a) any
default or Event of Default, (b) the
enforcement or attempted enforcement of,
and preservation of any rights under, the
Loan Documents, (c) any out-of-court
workout or other refinancing or
restructuring or any bankruptcy case or
insolvency proceeding, and (d) the
preservation of, and realization upon, any
collateral, including any losses, costs
and expenses sustained by the Bank as a
result of any failure by Borrower to
perform or observe its obligations
contained in the Loan Documents.
(B) Indemnification. Whether or not the transactions
contemplated hereby shall be consummated, Borrower hereby agrees to indemnify
the Bank and its directors, officers, employees, agents, counsel and other
advisors (each an "Indemnified Person"), against and hold each of them harmless
from any and all liabilities, obligations, losses, claims, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever, including the reasonable fees and disbursements of counsel to
an Indemnified Person (including allocated costs of internal counsel), which may
be imposed on, incurred by, or asserted against any Indemnified Person, in
connection with any investigation, litigation or other proceeding, irrespective
of whether the Indemnified Person shall be designated a party thereto, in any
way relating to or arising out of this Agreement or any other Loan Document, the
use or intended use of the proceeds of the Loans or the transactions
contemplated hereby or thereby (the "Indemnified Liabilities"); provided that
Borrower shall not be liable for any portion of such Indemnified Liabilities
resulting from an Indemnified Person's gross negligence or willful misconduct.
If and to the extent that the foregoing indemnification is for any reason held
unenforceable, Borrower agrees to make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law.
(C) Other Charges. Borrower agrees to indemnify the Bank
against and hold it harmless from any and all present and future stamp,
transfer, documentary and other such taxes, levies, fees, assessments and other
charges made by any jurisdiction by reason of the execution, delivery,
performance and enforcement of the Loan Documents.
7.5 Survival. All covenants, agreements, representations and
warranties made in any Loan Document and in any certificates, documents or other
instruments delivered pursuant thereto shall, except to the extent otherwise
provided therein, survive the execution and delivery of this Agreement, the
making of the Loans and the execution and delivery of the Notes and shall
continue in full force and effect so long as the Bank has any obligations under
the Loan Documents, any Loan remains outstanding or any obligation to make any
payment hereunder or
28.
<PAGE>
under the Notes remains outstanding and unpaid, or any obligation to perform any
other act hereunder or under any other Loan Document remains unsatisfied.
Without limiting the generality of the foregoing, the obligations of Borrower
under Section 7.4 of this Agreement shall survive the repayment of the Loans and
the termination of the Bank's obligations under this Agreement.
7.6 Benefits of Agreement. This Agreement and the other Loan
Documents are entered into for the sole protection and benefit of the parties
hereto and their successors and assigns, and no other Person shall be a direct
or indirect beneficiary of, or shall have any direct or indirect cause of action
or claim in connection with, this Agreement or any other Loan Document.
(A) Binding Effect. This Agreement shall be binding upon,
inure to the benefit of and be enforceable by Borrower, the Bank and their
respective permitted successors and assigns.
(B) Assignment. Borrower shall not have the right to
assign its rights and obligations hereunder or under the other Loan Documents or
any interest herein or therein without the prior written consent of the Bank.
The Bank may sell, assign, transfer or grant participations in all or any
portion of the Bank's rights and obligations hereunder and under the other Loan
Documents.
7.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
7.8 Waiver of Jury Trial. BORROWER AND THE BANK HEREBY AGREE
TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT
CLAIMS, OR OTHERWISE. BORROWER AND THE BANK HEREBY AGREE THAT ANY SUCH CLAIM OR
CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY
WAY LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE
RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY
ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS. A COPY OF THIS SECTION 7.8 MAY BE FILED WITH ANY
COURT AS
29.
<PAGE>
WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND CONSENT TO
TRIAL BY COURT.
7.9 Entire Agreement. This Agreement and the other Loan
Documents reflect the entire agreement between Borrower and the Bank with
respect to the matters set forth herein and therein and supersede any prior
agreements, commitments, discussions and understandings, oral or written, with
respect thereto.
7.10 Severability. If one or more provisions contained in this
Agreement or the other Loan Documents shall be invalid, illegal or unenforceable
in any respect in any jurisdiction or with respect to any party, such
invalidity, illegality or unenforceability in such jurisdiction or with respect
to such party shall, to the fullest extent permitted by applicable law, not
invalidate or render illegal or unenforceable any such provision in any other
jurisdiction or with respect to any other party, or any other provisions of this
Agreement or the other Loan Documents.
7.11 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement.
30.
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have duly
executed this Agreement as of the date first above written.
CHALONE WINE GROUP, LTD. Address for Notices:
621 Airpark Road
Napa, CA 94558
By /s/ Francois Muse Attn: Mr. Francois Muse
----------------------------------- Fax: (707) 254-4203
Title (Acting) Chief Financial Officer Tel: (707) 254-4200
--------------------------------
COOPERATIEVE CENTRALE Address for Notices:
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND," Rabobank International
NEW YORK BRANCH c/o Rabobank Support Services, Inc.
10 Exchange Place
16th Floor
By /s/ W. Jeffrey Vollack Jersey City, NJ 07302
------------------------------------ Attn: Nilsa Ware
Title Senior Credit Officer Fax: (201) 499-5317
Senior Vice President Tel: (201) 499-5326
---------------------------------
By /s/ John McHuch
------------------------------------
Title Vice President
---------------------------------
31.
<PAGE>
ANNEX I
to Credit Agreement
-------------------
<TABLE>
PRICING MATRIX
<CAPTION>
- ------------------------- -------------------------------------- --------------------------------------------
TEST I Basis Points Per Annum
-------------------------------------- --------------------------------------------
Level Debt Service Ratio LIBOR Margin
- ------------------------- -------------------------------------- --------------------------------------------
<S> <C> <C>
Level I less than or equal to 2.50 to 1.00 137.0
- ------------------------- -------------------------------------- --------------------------------------------
Level II greater than 2.50 to 1.00 but less 128.5
than or equal to 3.00 to 1.00
- ------------------------- -------------------------------------- --------------------------------------------
Level III greater than 3.00 to 1.00 120.0
- ------------------------- -------------------------------------- --------------------------------------------
</TABLE>
The LIBOR Margin shall be determined on any date of
determination by reference to the Level set forth in the above Pricing Matrix
corresponding to the Level corresponding to the Borrower's Debt Service Ratio as
set forth in the Compliance Certificate then most recently delivered to the Bank
pursuant to Section 5.1(D) of the Credit Agreement. Each change, if any, in the
LIBOR Margin shall become effective on the date on which the Borrower delivers a
completed Compliance Certificate to the Bank pursuant to Section 5.1(D). If at
any time the Borrower fails to deliver a completed Compliance Certificate to the
Bank within the applicable time period after each fiscal quarter set forth in
Section 5.1(D), the LIBOR Margin shall be deemed to be fixed at Level I above
until such time as the Borrower delivers a completed Compliance Certificate
pursuant to Section 5.1(D).
As used herein, the "Debt Service Ratio" shall mean the ratio
of (i) EBITDA to (ii) the sum of (A) the current portion of long term
Indebtedness plus (B) Interest Expense, in each case determined in accordance
with GAAP for the Borrower and its Subsidiaries on a consolidated basis for the
rolling 4-quarter period then most recently ended, measured as of the last day
of each fiscal quarter.
32.
TERM LOAN NOTE
PROMISSORY NOTE
---------------
San Francisco, California
March 31, 1999
FOR VALUE RECEIVED, the undersigned, Chalone Wine Group, Ltd.
(the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New
York Branch (the "Bank"), the principal sum of the Term Loan advanced to the
Borrower under the Credit Agreement referenced below. The outstanding principal
sum hereof shall be payable in 22 substantially equal consecutive installments
(based on a ten-year amortization schedule) due and payable on the last day of
each calendar quarter and commencing on December 31, 2000, plus a final
principal installment equal to the unpaid principal balance of the Term Loan
then outstanding, together with all accrued and unpaid interest thereon, due and
payable on the Term Loan Maturity Date.
The Borrower further promises to pay interest on the Term Loan
outstanding hereunder from time to time at the interest rates, and payable on
the dates, set forth in the Credit Agreement referred to below.
Both principal and interest are payable in lawful money of the
United States of America and in same day or immediately available funds to the
Bank under the Credit Agreement as provided therein.
The Bank shall record the date and amount of the Term Loan
made, each conversion to a different interest rate, each relevant Interest
Period, the amount of principal and interest due and payable from time to time
hereunder, each payment thereof, and the resulting unpaid principal balance
hereof, in the Bank's internal records, and any such recordation shall be
rebuttable presumptive evidence of the accuracy of the information so recorded;
provided, however, that the Bank's failure so to record shall not limit or
otherwise affect the obligations of the Borrower hereunder and under the Credit
Agreement to repay the principal of and interest on the Term Loan.
This promissory note is the Term Loan Note referred to in, and
is subject to and entitled to the benefits of, the Credit Agreement dated as of
March 31, 1999 (as amended, modified, renewed or extended from time to time, the
"Credit Agreement") between the Borrower and the Bank. Capitalized terms used
herein shall have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides, among other things, for
acceleration (which in certain cases shall be automatic) of the maturity hereof
upon the occurrence of certain stated events, in each case without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived.
<PAGE>
This promissory note is subject to prepayment in whole or in
part as provided in the Credit Agreement.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.
CHALONE WINE GROUP, LTD.
By /s/ Francois Muse
---------------------------------------
Title: (Acting) Chief Financial Officer
2
REVOLVING LOAN NOTE
PROMISSORY NOTE
---------------
San Francisco, California
$ 40,000,000 March 31, 1999
------------------------------
FOR VALUE RECEIVED, the undersigned, Chalone Wine Group, Ltd.
(the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New
York Branch (the "Bank") on the Revolving Loan Maturity Date the principal sum
of FORTY MILLION DOLLARS ($40,000,000) or, if less, the aggregate outstanding
principal amount of the Revolving Loans made by the Bank to the Borrower
pursuant to the Credit Agreement referred to below.
The Borrower further promises to pay interest on the Revolving
Loans outstanding hereunder from time to time at the interest rates, and payable
on the dates, set forth in the Credit Agreement.
Both principal and interest are payable in lawful money of the
United States of America and in same day or immediately available funds to the
Bank under the Credit Agreement as provided therein.
The Bank shall record the date and amount of each Revolving
Loan made, each conversion to a different interest rate, each relevant Interest
Period, the amount of principal and interest due and payable from time to time
hereunder, each payment thereof and the resulting unpaid principal balance
hereof, in the Bank's internal records, and any such recordation shall be
rebuttable presumptive evidence of the accuracy of the information so recorded;
provided, however, that the Bank's failure so to record shall not limit or
otherwise affect the obligations of the Borrower hereunder and under the Credit
Agreement to repay the principal of and interest on the Revolving Loans.
This promissory note is the Revolving Loan Note referred to
in, and is subject to and entitled to the benefits of, the Credit Agreement
dated as of March 31, 1999 (as amended, modified, renewed or extended from time
to time, the "Credit Agreement") between the Borrower and the Bank. Capitalized
terms used herein shall have the respective meanings assigned to them in the
Credit Agreement.
The Credit Agreement provides, among other things, for
acceleration (which in certain cases shall be automatic) of the maturity hereof
upon the occurrence of certain stated events, in each case without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived.
This promissory note is subject to prepayment in whole or in
part as provided in the Credit Agreement.
<PAGE>
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
CHALONE WINE GROUP, LTD.
By: /s/ Francois Muse
---------------------------------------
Title: (Acting) Chief Financial Officer
2
PURCHASE AGREEMENT
between
PETER ANSDELL
("Seller")
CHALONE WINE GROUP LTD.
("Buyer")
and
SHW EQUITY CO.
("SHW")
DATED: June 15, 1999
<PAGE>
Page No.
PURCHASE AGREEMENT............................................................1
RECITALS OF FACT..............................................................1
ARTICLE I - PURCHASE AND SALE.................................................2
1.1 Stock Purchase............................................................2
1.2 SHW Equity Purchase Price.................................................2
1.3 Payoff Amount............................................................2
1.4 Hokuriku Amount...........................................................2
1.5 Ansdell Amount............................................................2
ARTICLE II - CLOSING..........................................................2
2.1 Closing...................................................................2
2.2 Sale and Purchase Agreement...............................................2
REPRESENTATIONS AND WARRANTIES OF SELLER......................................3
3.1 Capitalization of SHW.....................................................3
3.2 Stock Ownership of SHW....................................................3
3.3 Organization of SHW.......................................................3
3.4 Capitalization of the Company.............................................3
3.5 Stock Ownership of the Company............................................4
3.6 Organization of the Company...............................................4
3.7 Authority.................................................................4
3.8 Sale and Purchase Agreement...............................................5
3.9 Financial Statements......................................................5
3.10 Absence of Undisclosed Liabilities of SHW................................5
3.11 Absence of Undisclosed Liabilities of the Company........................5
3.12 Absence of Changes.......................................................5
3.13 Title to and Sufficiency of the Assets...................................5
3.14 Real Property............................................................6
3.15 Condition of Tangible Assets.............................................7
3.16 Agreements...............................................................7
3.17 Litigation...............................................................7
3.18 Compliance; Governmental Authorization...................................7
3.19 Employee Benefit Plans...................................................9
3.20 Customers and Suppliers..................................................9
3.21 Intellectual Property....................................................9
3.22 Insurance................................................................9
3.23 Inventories.............................................................10
3.24 Tax Matters.............................................................10
3.25 Books and Records.......................................................10
3.26 Transactions with Certain Persons.......................................11
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3.27 Accounts and Notes Receivable...........................................11
3.28 Year 2000 Compliance....................................................11
3.29 Brokers.................................................................11
3.30 Disclosure..............................................................12
3.31 Insurance...............................................................12
3.32. Survival...............................................................12
3.33 Best Knowledge of Seller................................................12
3.34 Current Operations of the Company.......................................12
3.35 Limit of Liability......................................................12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER.........................12
4.1 Organization, Standing and Power.........................................13
4.2 Authority................................................................13
4.3 Investment Intent........................................................13
4.4 Brokers..................................................................13
4.5 Survival.................................................................13
ARTICLE V - COVENANTS OF SELLER..............................................13
5.1 Conduct of Business until Closing Date...................................14
5.2 Access to Properties and Records.........................................15
5.3 Advise of Changes........................................................16
5.4 Conduct..................................................................16
5.5 Approvals, Consents......................................................16
5.6 Insurance................................................................16
5.7 Further Assurances.......................................................16
5.8 Satisfaction of Conditions...............................................17
5.9 Confidentiality..........................................................17
ARTICLE VI - COVENANTS OF BUYER..............................................17
6.1 Confidentiality; Return of Documents.....................................17
6.2 Satisfaction of Conditions...............................................17
6.3 Advice of Changes........................................................17
6.4 Conduct..................................................................18
6.5 Approvals, Consents......................................................18
ARTICLE VII - CONDITIONS TO OBLIGATIONS OF BUYER.............................18
7.1 Accuracy of Representations and Warranties...............................18
7.2 Performance of Agreements................................................18
7.3 Performance of Sale and Purchase Agreement...............................18
7.4 Seller and SHW's Certificates............................................18
7.5 Opinion of Counsel.......................................................18
7.6 Consents, Authorizations.................................................19
7.7 Legislation..............................................................19
7.8 Corporate Records........................................................19
7.9 Good Standing Certificate................................................19
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<PAGE>
7.10 Lien Releases...........................................................19
7.11 Interim Financials......................................................19
7.12 Due Diligence Inspection................................................19
7.13 Transfer Documents......................................................20
7.14 Title Report............................................................20
7.15 CLTA Owner's Policy.....................................................20
7.16 No Material Adverse Change..............................................20
7.17 Release.................................................................20
7.18 Resignation of Directors and Officers...................................20
ARTICLE VIII - CONDITIONS TO OBLIGATIONS OF SELLER...........................20
8.1 Accuracy of Representations and Warranties...............................20
8.2 Performance of Agreements................................................20
8.3 Officer's Certification..................................................21
ARTICLE IX - TERMINATION.....................................................21
9.1 Termination..............................................................21
ARTICLE X - INDEMNIFICATION..................................................21
10.1 Obligation of Seller to Indemnify.......................................21
10.2 Obligation of Buyer to Indemnify........................................23
10.3 Claims..................................................................23
ARTICLE XI - MISCELLANEOUS...................................................24
11.1 Expenses................................................................24
11.2 Binding Effect..........................................................24
11.3 Entire Agreement; Amendments............................................24
11.4 Headings................................................................24
11.5 Notices.................................................................24
11.6 Publicity...............................................................25
11.7 Counterparts............................................................25
11.8 Governing Law...........................................................25
11.9 Waivers.................................................................25
11.10 Attorneys' Fees........................................................25
11.11 Arbitration of Disputes................................................25
iii
<PAGE>
PURCHASE AGREEMENT
This PURCHASE AGREEMENT ("Agreement") is entered into as of June 15,
1999 (the "Effective Date") by and between Peter Ansdell, an individual
("Seller"), SHW Equity Co., a Washington corporation ("SHW") and Chalone Wine
Group, Ltd., a California corporation ("Buyer").
RECITALS OF FACT
A. SHW owns 100% of the authorized, issued, and outstanding capital
stock (the "Winery Stock") of Staton Hills Winery Company Limited, a Washington
corporation (the "Company").
B. Seller owns 100% of the outstanding capital stock of SHW (the
"Ansdell Stock") and has acted as the President and Chief Executive Officer of
the Winery (defined below) since approximately May 1992.
C. The Company presently owns and operates a winery known as the Staton
Hills Winery located at 71 Gangl Road, Wapato, Washington 98951 (the "Winery").
The improvements located at the Winery include the vineyards, a building housing
an office, tasting room and production area, a service and tool shed and all
other improvements and fixtures located at the Winery (such buildings and
structures are collectively referred to herein as the "Improvements"). The
Winery is located on approximately 21 acres of real property located in the
county of Yakima, in the State of Washington, which is more particularly
described on Exhibit A attached hereto (the "Land"). The Land and the
Improvements are collectively referred to herein as the "Real Property." The
Company also owns or leases equipment, fixtures, motorized vehicles, tools,
supplies, inventory (including bulk wine and case goods), accounts receivable,
trade names, trademarks, books, records, permits, and all other tangible and
intangible personal property located on the Land or owned or used in connection
with the Company's operations (collectively the "Assets").
D. Buyer is willing to purchase of Seller, and Seller is willing to
sell to Buyer, the Ansdell Stock, and SHW is willing to issue to Buyer 48,000
additional shares of SHW's common stock ("the New Issue"), pursuant to the terms
of this Agreement. The Ansdell Stock and the New Issue are referred to
collectively herein as the "SHW Stock."
NOW THEREFORE, incorporating the Recitals of Fact, and in consideration
of the mutual covenants and considerations set forth in this Agreement, the
parties hereby agree to enter into this Agreement on the terms set forth herein.
1
<PAGE>
ARTICLE I
PURCHASE AND SALE
1.1 Stock Purchase. Upon the terms and subject to the conditions of
this Agreement, on the Closing Date (as defined below), Seller shall sell,
assign, transfer and deliver to Buyer, and Buyer shall purchase and accept from
Seller, the Ansdell Stock in exchange for payment by Buyer of the Ansdell
Amount, and SHW shall issue and assign to Buyer, and Buyer shall purchase and
accept from SHW, the SHW Stock in exchange for payment by Buyer of the SHW
Equity Purchase Price, the Payoff Amount and the Hokuriku Amount, each as set
forth below. The total purchase price hereunder for the Ansdell Stock and the
SHW Stock shall be Six Million One Hundred Twenty Five Thousand Dollars
($6,125,000) (the "Stock Purchase Price").
1.2 SHW Equity Purchase Price. Simultaneously with payment of the Stock
Purchase Price, SHW shall pay, or, at SHW's option, Buyer shall pay and deduct
from the Stock Purchase Price, the Payoff Amount and the Hokuriku Amount by wire
transfer to the accounts designated on Schedule 1, attached hereto.
1.3 Payoff Amount. SHW shall pay Three Million Dollars ($3,000,000)
(the "Pay-off Amount") to the Bank of Tokyo-Mitsubishi by wire transfer to the
account designated on Schedule 1, attached hereto.
1.4 Hokuriku Amount. SHE shall pay Three Hundred Thousand Dollars
($300,000) (the "Hokuriku Amount") to the Hokuriku Coca-Cola Bottling Co. Ltd.
("Hokuriku") by wire transfer to the account designated on Schedule 1, attached
hereto.
1.5 Ansdell Amount. One Hundred Thousand Twenty Five Dollars ($125,000)
(the "Ansdell Amount") shall be retained by the Buyer and applied towards any
indemnification obligations of Seller pursuant to Article X of this Agreement.
Any remaining portion of the Ansdell Amount shall be delivered to Seller upon
the expiration of Seller's indemnification obligations.
ARTICLE II
CLOSING
2.1 Closing. If each party's preconditions to closing hereunder have
been satisfied or waived, the closing of the stock purchase contemplated hereby
("Closing") shall take place at the offices of R. Corbin Houchins, 3600 Columbia
Center, 701 Fifth Avenue, Seattle, Washington 98104 on June 11, 1999 or such
other time and/or place as may be agreed by the parties. The date on which
Closing occurs is herein referred to as the "Closing Date."
2.2 Sale and Purchase Agreement. Closing hereunder shall occur
simultaneously with transfer of all outstanding shares of the Company to SHW, as
contemplated by that certain Agreement for Sale and Purchase of Shares of Stock,
dated December 21, 1998, by and between Hokuriku and SHW, as amended (the "Sale
and Purchase Agreement"), provided, however, that
2
<PAGE>
the transfer of shares contemplated under the Sale and Purchase Agreement shall
be deemed to have occurred immediately prior to Closing hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth in the disclosure schedule ("Disclosure Schedule")
attached hereto as Exhibit B, Seller and SHW represent and warrant to Buyer as
follows, and such representations and warranties shall be true as of the date
hereof and as of the Closing Date:
3.1 Capitalization of SHW. Upon completion of Closing, the SHW Stock
shall consist of 49,000 shares, and all SHW Stock shall be duly authorized,
validly issued, fully paid, and non-assessable, and there shall be no
outstanding security convertible into or exchangeable for SHW Stock, option,
warrant, put, call, or other right to purchase or subscribe to SHW Stock, or
contract, commitment, agreement, understanding, or arrangement of any kind
relating to the issuance or disposition of SHW Stock or the issuance or
disposition of any security convertible into or exchangeable for SHW Stock.
3.2 Stock Ownership of SHW. All of the Ansdell Stock shall be directly
owned by Seller as of the Closing Date. All of the SHW Stock shall be free and
clear of all liens, encumbrances, security interests, charges, pledges, options,
restrictions on transfer, rights of refusal, or other adverse claims of any
kind. No person shall own or have any beneficial interest in any of the SHW
Stock except Seller. Seller shall have good and marketable title to the Ansdell
Stock. Neither Seller nor SHW has transferred, issued, or assigned, or entered
into any agreement or understanding to transfer, issue, or assign, any of the
SHW Stock or any of the voting rights pertaining thereto, except for the issue
of the Ansdell stock to Seller and the undertakings of Seller and SHW hereunder
to transfer, issue, or assign the SHW stock to Buyer.
3.3 Organization of SHW. SHW is a corporation duly organized, validly
existing and in good standing under the laws of the State of Washington and has
all requisite power and corporate authority to own, lease, and operate its
properties and to carry on its business as now being conducted. SHW is duly
qualified and in good standing to do business in every jurisdiction in which
such qualification is necessary because of the nature of the business conducted
by SHW. Seller has delivered or shall deliver prior to the Closing to Buyer
complete and correct copies of the Articles of Incorporation and Bylaws
(collectively, the "Organizational Documents") of SHW as amended to the date
thereof. SHW has no ownership interest in any other corporation, partnership,
limited liability company, or any other entity.
3.4 Capitalization of the Company. As of the Closing Date, the Winery
Stock shall consist of 12,000 shares of common stock of the Company, all of
which shall be duly authorized, validly issued, fully paid, and non-assessable,
and there shall exist no outstanding security convertible into or exchangeable
for Winery Stock; no option, warrant, put, call or other right to purchase or
subscribe to Winery Stock; no contract, commitment, agreement, understanding, or
arrangement of any kind, other than this Agreement and the Sale and Purchase
Agreement,
3
<PAGE>
affecting the issuance or disposition of Winery Stock; and no contract,
commitment, agreement, understanding, or arrangement of any kind calling for the
creation or issuance of any security convertible into or exchangeable for Winery
Stock.
3.5 Stock Ownership of the Company. All of the issued and outstanding
Winery Stock shall be directly owned by SHW upon completion of Closing, free and
clear of all liens, encumbrances, security interests, charges, pledges, options,
restrictions on transfer, rights of refusal or other adverse claims of any kind.
No person shall own or have any beneficial interest in the Winery Stock except
SHW. SHW shall have good and marketable title to the Winery Stock. Except as
expressly set forth in the Disclosure Schedule, SHW has not transferred or
assigned, or entered into any agreement or understanding to transfer or assign,
any of the Winery Stock or any of the voting rights pertaining thereto.
3.6 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington and has all requisite power and corporate authority to own, lease and
operate its properties and to carry on its business as now being conducted. The
Company is duly qualified and in good standing to do business in every
jurisdiction in which such qualification is necessary because of the nature of
the business conducted by it. Seller has delivered or shall deliver prior to the
Closing to Buyer complete and correct copies of the Articles of Incorporation
and Bylaws (collectively, "the Organizational Documents") of the Company as
amended to the date thereof. The Company has no ownership interest in any other
corporation, partnership, limited liability company, or other entity.
3.7 Authority. Seller and SHW have the power, corporate authority, and
capacity to enter into, and consummate the sale and other transactions
contemplated by, this Agreement. The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action, as
applicable, on the part of Seller and SHW. This Agreement has been duly and
validly executed and delivered by Seller and SHW and is a valid and binding
obligation of Seller and SHW, enforceable in accordance with its terms. Neither
the execution, delivery and performance of this Agreement by Seller and SHW, the
consummation by Seller or SHW of the transactions contemplated hereby, nor
compliance by Seller or SHW with any of the provisions hereof will (i) conflict
with or result in a breach of any provision of the Organizational Documents or
SHW's Articles of Incorporation or Bylaws, (ii) cause a default (or give rise to
any right of termination, cancellation, or acceleration) under any of the terms,
conditions or provisions contained in any note, bond, lease, mortgage,
indenture, license, warranty or other instrument or agreement to which the SHW
or the Company is a party that would affect Buyer or the operations of SHW or
the Company, or by which SHW or the Company or any of its properties or assets
is or may be bound or benefited, or (iii) violate any law, statute, rule or
regulation or any order, writ, judgment, injunction or decree applicable to SHW,
Seller, the Company or any of their properties or assets. No consent or approval
by, or any notification of or filing with, any public body or authority is
required in connection with the execution, delivery and performance by Seller or
SHW of this Agreement, or the consummation by Seller or SHW of the transactions
contemplated hereby.
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<PAGE>
3.8 Sale and Purchase Agreement. Seller has delivered a true and
complete copy of the Sale and Purchase Agreement to Buyer. There is no existing
default, no event has occurred that after notice or lapse of time, or both, will
constitute default, under the Sale and Purchase Agreement.
3.9 Financial Statements.
3.9.1 Exhibit C attached hereto contains copies of the
financial statements of the Company as of the conclusion of each of the
Company's three most recently completed fiscal years and the balance sheet of
the Company for the first four calendar months of 1999 ("the Balance Sheet").
The term "Balance Sheet Date" means 30 April 1999. The materials set forth in
said Exhibit C are referred to herein collectively as "the Financial
Statements."
3.9.2 Except as otherwise noted in the Financial Statements,
the Financial Statements are in all material respects accurate and complete, and
fairly present the financial position of the Company and the results of its
operations as of the dates thereof and for the periods set forth therein, in
conformity with generally accepted accounting principles applied on a consistent
basis.
3.10 Absence of Undisclosed Liabilities of SHW. As of the Closing Date
SHW has no liabilities or obligations of any nature.
3.11 Absence of Undisclosed Liabilities of the Company. At the Balance
Sheet Date and at the Closing Date (i) the Company has no material liabilities
or obligations of any nature (matured or not matured, fixed or contingent) that
were not provided for or disclosed in the Disclosure Schedule or in the
Financial Statements, except for those not required under generally accepted
accounting principles to be stated therein, (ii) all reserves and allowances
provided on the Balance Sheet were adequate for the purposes indicated therein,
and there were no loss contingencies, as that term is used in Statement of
Financial Accounting Standards No. 5, issued by the Financial Accounting
Standards Board ("FASB"), that were not adequately provided for in the Balance
Sheet. For purposes of this Agreement, "material" shall mean involving over
$10,000.00 or materially affecting the ongoing business or prospects of the
Company.
3.12 Absence of Changes. Since the Balance Sheet Date, the Company's
business has been operated in the ordinary course and there has not been any
material adverse change in the condition (financial or otherwise) of the
Company, any other assets of the Company, liabilities, earnings or business of
the Company, and the Company has not paid any dividends, made any distributions,
or paid any directors' fees.
3.13 Title to and Sufficiency of the Assets. Except as disclosed in the
Financial Statements and the Disclosure Schedule, Company has good and
marketable title to all of the Assets, free and clear of all mortgages, liens,
pledges, charges, security interests, easements, licenses, rights of way,
options, rights of first refusal, conditions, restrictions or encumbrances of
any kind or character, whether or not relating to the extension of credit or the
borrowing of money (collectively, "Encumbrances"). The Assets comprise all
personal property and rights necessary for the operations of the Company as
currently operated. The Company has performed
5
<PAGE>
all the obligations required to be performed by it with respect to all Assets
leased by it through the Closing Date.
3.14 Real Property. Except as otherwise described on the Disclosure
Schedule or the Title Insurance Report to Buyer by First American Title Company
("the Title Insurance Company") order number K-108573DR ("the Title Insurance
Report") with respect to the Real Property:
3.14.1 The Company owns all of the Real Property in fee simple
and such Real Property is free and clear of any Encumbrance, and the Company has
adequate rights of ingress and egress to the Real Property for all purposes
necessary for its operations.
3.14.2 There are no pending, or to the Best Knowledge of
Seller (as defined in Section 3.33) condemnation proceedings, lawsuits, claims
of violation of applicable law, or administrative actions relating to the Real
Property or other matters affecting adversely the current use, occupancy, or
value of the Real Property.
3.14.3 The Real Property does not serve any adjoining real
property for any purpose inconsistent with the current use of the Land by the
Company, and the Real Property is not located within any flood plain or to the
Best Knowledge of Seller, is subject to any similar type of restriction, any
permits or licenses necessary for the use of which have not been obtained.
3.14.4 There are no leases, subleases, licenses, concessions,
or other agreements, written or oral, granting to any person the right of use or
occupancy of any portion of the Real Property.
3.14.5 There are no outstanding options or rights of first
refusal to purchase or lease the Real Property, any portion thereof, or any
interest therein.
3.14.6 No person or entity other than the Company is in
possession of the Real Property.
3.14.7 The Company is not restricted in any adverse way in the
current use of its water rights, water supply, or mineral rights, and such water
rights and supply are sufficient for the current operations of the Company.
3.14.8 The Improvements have received all approvals of
governmental authorities (including certificates of occupancy, permits, and
licenses) required in connection with the ownership and operations of the
Company and have been operated and maintained in substantial compliance with all
applicable legal requirements.
3.14.9 To the Best Knowledge of the Seller, the Improvements
are structurally sound with no defects;
3.14.10 The Improvements are supplied with utilities and other
services reasonably necessary for the current operations of the Company with
respect thereto, including
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any necessary gas, electricity, water (including without limitation, the use and
right to a water supply sufficient for the current operations of the Company),
irrigation, sanitary and wastewater disposal;
3.14.11 Neither Seller nor SHW has observed evidence of
material infestation by phylloxera or material effects of other diseases or
pests on the Land.
3.15 Condition of Tangible Assets. The Disclosure Schedule contains a
listing of all fixed assets and tangible personal property, other than
inventories, owned by the Company and a list of all leases or other material
agreements under which the Company is lessee of or holds or operates any items
of machinery, equipment, motor vehicles, office furniture, computer software,
fixtures or other tangible personal property owned by any third party. All such
personal property (both owned and leased) is in good operating condition and
repair, normal wear and tear excepted, and is adequate and suitable to permit
the Company to continue operating the Company in the ordinary course.
3.16 Agreements. The Company has delivered to Buyer true and accurate
copies of all material contracts, agreements and instruments to which the
Company or SHW is a party , or materially complete descriptions of oral
agreements. The Company and SHW are not in material default under any material
contract, and Seller has no knowledge of any default by other parties under such
contracts.
3.17 Litigation. There are (i) no audits, inspections, actions, suits,
claims, investigations or legal, administrative or arbitration proceedings
pending or, to the Best Knowledge of Seller, threatened against the Company or
SHW whether at law or in equity, whether civil or criminal in nature or whether
before or by any Federal, state, municipal, or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, nor,
to the Best Knowledge of Seller, does any basis exist therefor; (ii) no
judgments, decrees, injunctions or orders of any court, governmental department,
commission, agency, instrumentality or arbitrator against the Company or SHW; or
(iii) no proceedings under any bankruptcy or insolvency laws have been commenced
by or against the Company, Seller or SHW which has not been terminated; no
general assignment for the benefit of creditors has been made by the Company,
Seller or SHW; and no trustee or receiver of the Company, Seller or SHW's
property has been appointed.
3.18 Compliance; Governmental Authorization.
3.18.1 In all material respects, the Company and Seller have
complied and are currently in compliance with all Federal, state, territorial
and local laws, ordinances, regulations or orders applicable to the Real
Property, and the Company, including, by way of description, and not limitation,
matters relating to the environment, usage of the Real Property, the production,
storage and marketing of any wine, anti-competitive practices, discrimination,
employment, health and safety, state, federal and local taxes, issuance of
securities, customs duties and requirements and foreign practices. The Company
has all Federal, state, territorial, local and foreign governmental licenses and
permits necessary in the conduct of its business as presently conducted, which
licenses and permits are in full force and effect. No violations are
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outstanding or uncured with respect to any such licenses or permits and no
proceeding is pending or, to the Best Knowledge of Seller, threatened to revoke
or limit any of the licenses or permits.
3.18.2 (b) Seller has delivered to Buyer a true and accurate
list of all of the aforesaid governmental licenses and permits, consents,
orders, decrees and other compliance agreements under which the Company is
operating or bound, and the Seller has furnished to Buyer true, complete and
correct copies thereof.
3.18.3 (c) Seller has furnished to Buyer copies of all reports
of inspections of the Company from 1 January 1996, through the date hereof under
OSHA, U.S. EPA and under all other applicable Federal, state and local health
and safety or environmental laws and regulations. The deficiencies, if any,
noted on such reports have been corrected.
3.18.4 As used in this Agreement:
"Hazardous Substance" shall mean any substance: that
now is defined as a hazardous or toxic waste or substance or is regulated,
governed by, or the handling of which requires investigation or remediation by
any governmental authority or instrumentality or under any law, regulation, rule
or order, or any amendment thereto, including the Comprehensive Environmental
Response Compensation and Liability Act, 42 U.S.C. ss.9601 et seq.; the Resource
Conservation and Recovery Act, 42 U.S.C. ss.6901 et seq.; and any applicable law
of the State of Washington or that is otherwise toxic, explosive, ignitable,
corrosive, reactive, flammable, infectious, mutagenic, radioactive,
carcinogenic, a pollutant or contaminant, dangerous or otherwise hazardous,
including gasoline, diesel, petroleum hydrocarbons, polychlorinated biphenyls
(PCBs), asbestos, radon, urea formaldehyde or underground storage tanks
associated with any Hazardous Substance.
"Environmental Laws" shall mean all present laws,
regulations, rules, policies, orders, permits, licenses, approvals,
authorizations and other requirements of any kind applicable to Hazardous
Substances, including common law tort principles (such as public and private
nuisance and strict liability for conducting abnormally dangerous activities)
and covenants, conditions and restrictions.
3.18.5 No asbestos-containing materials have been or are
installed or exposed in any of the Improvements, through demolition, renovation
or otherwise, at any time during or prior to the Company's occupancy of the Real
Property, (ii) no electrical transformers or other equipment containing PCB's
are or have been located on the Real Property at any time during or prior to the
Company's occupancy of the Real Property, (iii) no above-ground or underground
storage tanks for gasoline, heating oil or diesel fuel or any other substances
are or have been located on or under the Real Property at any time during or
prior to the Company's occupancy of the Real Property, (iv) except as set forth
in the Disclosure Schedule, no Hazardous Substances have been or are presently
located on, in or under the Real Property or have affected the Real Property or
any surface waters or ground waters on or under the Real Property at any time
during or prior to the Company's occupancy of the Real Property, and (v) the
Real Property has not been designated as "hazardous waste property" or "border
zone property" under the provisions of the environmental laws of the State of
Washington or any regulation adopted in accordance
8
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therewith, and to the Best Knowledge of Seller there has been no occurrence or
condition on any real property adjoining or in the vicinity of the Real Property
that could cause the Real Property or any part thereof to be designated as
"hazardous waste property" or "border zone property." To the extent that the
representations and warranties set forth in this Section 3.13(e) relate to
periods of time prior to the Company's ownership of the Real Property, such
representations and warranties shall be to the Best Knowledge of Seller.
3.19 Employee Benefit Plans. Seller has furnished to the Buyer lists of
all "employee pension benefit" plans (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), all "employee
welfare benefit" plans (as defined in Section 3(1) of ERISA) and any other
qualified or non-qualified plans, programs or letters of commitment promising
current or future benefits or deferred compensation maintained by the Company as
well as any oral or written employment contract between the Company and its
employees.
3.20 Customers and Suppliers. Seller has furnished to Buyer a true and
complete list of the grape and bulk wine suppliers (in dollar volume, tonnage
and variety) of the Company's operations during the calendar years 1997 and
1998, including the amount purchased from each during such period, plus the ten
largest other suppliers to the Company (in dollar volume). All market reports,
product surveys and customer surveys, which have been conducted by or for the
Company since 1 January 1996, if any, have been provided to Buyer.
3.21 Intellectual Property. The Seller has furnished to Buyer a list of
all material intellectual property rights used by the Company or used in
connection with the Company's operations, including without limitation all such
patents, patent applications, trade names, fictitious or assumed names,
trademarks, trademark applications, service marks, service mark applications,
copyrights, copyright applications, patterns, inventions, trade secrets,
proprietary processes and formulae, license agreements, and all other similar
proprietary rights, whether patentable or unpatentable (collectively, the
"Intellectual Property"). The Company owns or possesses adequate licenses or
other rights to use all Intellectual Property necessary to conduct its business
as now operated. All of such Intellectual Property is owned outright by the
Company except as is otherwise specifically noted in said list. To the Best
Knowledge of Seller, there is no infringement, misappropriation or other misuse
being made by any other party of the Intellectual Property. No claim is pending,
or, to the Best Knowledge of Seller, threatened to the effect that the present
or past operations of the Company infringes or conflicts with the asserted
rights of others in respect of any Intellectual Property, and no claim is
pending or, to the Best Knowledge of Seller, threatened to the effect that any
of such Intellectual Property is invalid or unenforceable.
3.22 Insurance. Seller has furnished to Buyer a list of all policies of
liability, theft, fidelity, life, fire, product liability, worker's
compensation, health and other forms of insurance held by the Company
(specifying the insurer, insured, amount of coverage, type of insurance, policy
number and any pending claims thereunder). The Company has not, during the last
three fiscal years, been denied or had revoked or rescinded any policy of
insurance.
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3.23 Inventories. contains a true and complete list of the case goods
and bulk wine inventory of the Company as of the Balance Sheet Date. The
inventory value as shown on the Balance Sheet has been determined in accordance
with the normal valuation policy of the Company, consistently applied and in
accordance with generally accepted accounting principles but without LIFO
adjustment. The inventories (and items of inventory acquired or manufactured
subsequent to the Balance Sheet Date) consist only of items of quality and
quantity commercially usable and salable in the ordinary course of business,
except for any items of obsolete material or material below standard quality,
all of which have been written down to realizable market value, or for which
adequate reserves have been provided, and the present quantities of all
inventories are reasonable in the present circumstances of the Company.
3.24 Tax Matters.
3.24.1 For purposes of this Agreement, the term "Taxes" means
all taxes of any kind or nature, including but not limited to U.S., state, local
and foreign income taxes, wine taxes, withholding taxes, branch profit taxes,
gross receipts taxes, franchise taxes, sales and use taxes, business and
occupation taxes, property taxes, VAT, custom duties or imposts, stamp taxes,
excise taxes, payroll taxes, intangible taxes and capital taxes and any
penalties or interest thereon.
3.24.2 The Company has filed within the time and in the manner
prescribed by law all tax returns and reports required to be filed by it under
the laws of the United States and each state or other jurisdiction, domestic or
foreign, in which it conducts business activities requiring the filing of tax
returns or reports. The Company has established adequate accruals in the Balance
Sheet with respect to all Taxes.
3.24.3 Except as set forth in the Disclosure Schedule, there
are no tax liens, whether imposed by the United States, any state, local,
foreign or other taxing authority, outstanding against the Company or any of the
Assets.
3.24.4 Except as set forth in the Disclosure Schedule, all
Taxes and assessments that the Company is required to withhold or to collect
have been duly withheld or collected and all withholdings and collections have
either been duly and timely paid over to the appropriate governmental
authorities or are, together with the payments due or to become due in
connection therewith, duly reflected on the Balance Sheet in accordance with
generally accepted accounting principles.
3.24.5 Seller is not a "foreign person" within the meaning of
IRC Section 1445(f)(3).
3.25 Books and Records. The books of account and other corporate
financial records of the Company are in all material respects complete and
correct, have been maintained in accordance with good business practices and
matters contained therein are appropriately and accurately reflected in the
Financial Statements. All historical records, including, without limitation,
records concerning sales, production, vineyards, grape purchases and regulatory
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matters, are in all material respects complete and correct and have been
maintained in accordance with good business practices.
3.26 Transactions with Certain Persons. Except as set forth in the
Disclosure Schedule, neither any officer, director, shareholder, or employee of
the Company or SHW nor any member of any such person's immediate family is
presently a party to any transaction with the Company relating to the Company's
operations, including without limitation, any contract, agreement or other
arrangement (i) providing for the furnishing of services by, (ii) providing for
the rental of real or personal property from, or (iii) otherwise requiring
payments to (other than for services as officers, directors or employees of the
Company) any such person or corporation, partnership, trust or other entity in
which any such person has a substantial interest as a shareholder, officer,
director, trustee or partner. Except as set forth in the Disclosure Schedule,
all such contracts, agreements or other arrangements are arms-length.
3.27 Accounts and Notes Receivable. Seller has furnished to the Buyer a
true aged list of unpaid accounts and notes receivable owing to the Company from
third parties as of the Balance Sheet Date. All unpaid accounts and notes
receivable outstanding at the date hereof constitute, and those outstanding at
the Closing Date will constitute, valid and enforceable claims arising in bona
fide transactions in the ordinary course of business, except to the extent of
returns and disputes arising in the ordinary course of business and except as
enforceability is limited by applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance or similar laws affecting the enforcement of
creditors rights generally. There is (i) no account or note debtor who has
refused or, to the Best Knowledge of Seller, threatened to refuse to pay its
obligations or who has, to the Best Knowledge of Seller, threatened to set-off
such obligations for any reason, (ii) no account or note debtor who is, to the
Best Knowledge of Seller, insolvent or bankrupt and (iii) no account or note
receivable is, to the Best Knowledge of Seller, pledged to any third party.
3.28 Year 2000 Compliance. The Information Technology (as defined
below) of the Company is Year 2000 Compliant. "Year 2000 Compliant" means with
respect to the Company's Information Technology, the Information Technology is
designed to be used prior to, during and after the calendar year 2000 A.D., and
the Information Technology used during each such time period will accurately
receive, provide and process date/time data (including but not limited to,
calculating, comparing and sequencing) from, into and between the 20th and 21st
centuries, including the years 1999 and 2000, and leap year calculations and
will not malfunction, cease to function or provide invalid or incorrect results
as a result of date/time data, to the extent that other Information Technology,
used in combination with the Information Technology being acquired, properly
exchanges date/time data with it. "Information Technology" shall include
computer software, computer firmware, computer hardware (whether general or
specific purpose), and other similar or related items of automated,
computerized, or software system(s) that are use or relied on by the Company in
the conduct of its operations.
3.29 Brokers. Seller has not employed any broker or finder in
connection with the transactions contemplated by this Agreement. Seller shall
indemnify, defend and hold Buyer harmless from any and all claims or losses
relating to brokerage fees, commissions or finder's,
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fees owed or claimed to be owed to any broker or finder engaged or claimed to be
engaged by Seller.
3.30 Disclosure. Neither this Agreement (including the Disclosure
Schedule) nor any other document, certificate or written statement furnished to
Buyer by or on behalf of Seller or SHW in connection with the transactions
contemplated hereby, when considered in the aggregate with all other such
documents, certificates or statements, contains any misstatement of a material
fact or omission of a material fact necessary in order to make the statements
contained herein and therein not misleading.
3.31 Insurance. Seller represents to Buyer that the Improvements are
presently insured in an amount reflected on the policies designated in the
Disclosure Schedule.
3.32. Survival. All representations and warranties contained herein
shall survive the Closing and shall terminate on the first anniversary of the
Closing. After termination, no indemnity, representation or warranty shall be
the basis of any cause of action or any excuse for nonperformance of an
undertaking.
3.33 Best Knowledge of Seller. Seller represents and warrants that each
time a representation and warranty is based on "Best Knowledge" that means to
the knowledge of a reasonable person in Seller's position, in each case after
reasonable inquiry as to the subject matter involved.
3.34 Current Operations of the Company. Seller represents and warrants
that each time a representation and warranty references the current or continued
operations of the Company, such operations of the Company shall include
cultivation of the Company's vineyards.
3.35 Limit of Liability. Neither SHW, nor Seller shall be liable for
any breach of warranty, representation, covenant or other promise except to the
extent the damage to Buyer as a result from such breach and all other breaches
exceeds, cumulatively, $10,000.00. Seller's liability for breaches of
representations and warranties, whether as party hereto, as principal, as agent,
arising from the holding of any office, directorship, shares of stock, or other
rights related to SHW or the Company, as fiduciary, as indemnitor, derivative,
or on any other basis whatsoever, shall not exceed the Ansdell Amount. Without
limiting the generality of the foregoing, neither SHW nor Seller shall be liable
for any misstatement or omission with respect to any fact that is actually known
to Buyer in its correct and complete form or that would have been known to Buyer
but for Buyer's negligence.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
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4.1 Organization, Standing and Power. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to enter into
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby.
4.2 Authority. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of
Buyer. This Agreement has been duly and validly executed and delivered by Buyer
and is a valid and binding obligation of Buyer, enforceable in accordance with
its terms. Neither the execution, delivery and performance of this Agreement,
nor the consummation of the transactions contemplated hereby, nor compliance by
Buyer with any of the provisions hereof will (a) conflict with or result in a
breach of any provision of its Articles of Incorporation or By-laws, (b) cause a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any agreement, instrument or
obligation to which Buyer is a party, or by which any of its properties or
assets may be bound, or (c) violate any statute, rule or regulation or judgment,
order, writ, injunction or decree of any court, administrative agency or
governmental body, in each case applicable to Buyer or any of its properties or
assets. No filing with, and no permit, authorization, consent or approval of,
any public body or authority is necessary for the consummation by Buyer of the
transactions contemplated by this Agreement.
4.3 Investment Intent. Buyer is acquiring the Winery Stock for
investment without a view to the sale, distribution, subdivision, transfer or
fractionalization thereof. Buyer acknowledges that the Winery Stock has not been
registered under the Securities Act of 1933 or any state securities law and
there is no commitment to register the Winery Stock, and (b) cannot be resold,
unless it is subsequently registered or an exemption from registration is
available.
4.4 Brokers. Buyer has not employed any broker or finder in connection
with the transactions contemplated by this Agreement. Buyer shall indemnify,
defend and hold Seller harmless from any and all claims or losses relating to
brokerage fees, commissions or finder's fees owed or claimed to be owed to any
broker or finder engaged or claimed to be engaged by Buyer.
4.5 Survival. All representations and warranties of Buyer contained
herein shall survive the Closing and shall terminate on the first anniversary of
the Closing.
ARTICLE V
COVENANTS OF SELLER
Seller hereby covenants and agrees with Buyer as set forth below. The
covenants of Seller affect the operations of the Company prior to Closing.
5.1 Conduct of Business until Closing Date. Except as permitted or
required hereby or as Buyer may otherwise consent in writing, between the date
hereof and the Closing Date, Seller shall or shall use his best efforts to cause
the Company to:
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(a) operate the business of the Winery only in the usual,
regular and ordinary manner as such business was conducted prior to the Balance
Sheet Date and, to the extent consistent with such operation, use its best
efforts to (i) preserve the present business organizations of the Winery intact,
and (ii) preserve the present business relationship of the Winery with
customers, suppliers, and others having business dealings with it; provided,
however, that the Company shall not enter into or terminate any material
contracts, including grape purchase agreements, and shall not sell any of its
inventory in bulk without the prior written consent of Buyer;
(b) maintain all properties necessary for the conduct of the
business of the Winery, whether owned or leased, in substantially the same
condition as they now are (reasonable wear and tear which are not such as to
materially adversely affect the operations of the Company and damage due to
unavoidable casualty excepted) and, in the event that any Asset is damaged by
any casualty prior to the Closing Date, Seller shall, at his option to the
extent such damage is not covered by insurance, restore such asset to its
condition prior to such damage, or replace it with another item of like quality
and condition or reduce the Stock Purchase Price, as the case may be, by the
amount of such loss;
(c) maintain the books, records and accounts of the Company
and the Winery in the usual, regular and ordinary manner, on a basis consistent
with prior periods;
(d) duly comply in all material respects with all laws
applicable to the conduct of the Company's business;
(e) perform all of the material obligations of the Company
(including the payment of tax liabilities) without default;
(f) unless it first receives Buyer's written consent, which
may be withheld in Buyer's sole discretion, not (i) encumber, mortgage, or
voluntarily subject to lien any of the Assets; (ii) convey, transfer or acquire
any material asset or property or any portion thereof other than in the usual
and ordinary course of business, provided that any capital expenditure in excess
of $5,000 shall be deemed outside the ordinary course of business; (iii) incur
any material fixed or contingent obligation other than in the usual and ordinary
course of business or increase any such obligation; (iv) issue any equity in the
Company; nor (v) enter into any lease or other obligation which is not
terminable on thirty (30) days' notice without penalty or payment;
(g) promptly give Buyer written notice of any damage,
individually or in the aggregate, in an amount greater than $5,000 to the
Assets;
(h) unless it first receives Buyer's written consent, not
adopt, announce nor implement any promotional programs, except for any in
progress as of the date hereof;
(i) not grant any power of attorney with respect to the
business, properties or assets of the Company; and
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(j) not make any distribution or dividends to its
shareholders, or value any payments of any kind to directors or make any bonus,
pension, retirement or insurance payment or arrangement to or with any employee
or consultant except those that may have been accrued as of the Balance Sheet
Date or increase the level of compensation payable to any employee or
consultant.
5.2 Access to Properties and Records. Seller shall give to Buyer and to
its counsel, accountants, and other representatives reasonable access during
normal business hours to the properties, personnel, books, tax returns,
contracts, commitments and records of the Company and the right to make copies
thereof. Seller will furnish to Buyer and such representatives all such
additional documents and financial and other information as Buyer or its
representatives may from time to time reasonably request and permit Buyer and
such representatives to examine all records and working papers relating to the
preparation, review and audits of the financial statements and tax returns of
the Company.
Buyer shall have the right to inspect and investigate the Real Property
and all improvements thereon as well as the bulk and bottled wine and the
condition of the vineyards included in the Assets, including roof, plumbing,
soils tests, electrical, sprinkler, water, sewer, engineering studies, heating
and air conditioning system or systems, and structural integrity of the
Improvements (including structural pest control reports), measurement of the
square footage of the Real Property (including land and any improvements), legal
status and requirements pertaining to the Real Property (including building
codes, zoning, environmental, public health and fire safety laws), hazardous
substance inspections including preparation of an environmental assessment,
suitability of the Real Property for Buyer's purposes and all other matters of
significance to Buyer. Buyer will provide Seller a copy of any assessment or
report promptly upon receipt. Buyer agrees to keep the results of such testing
and inspections confidential, except to the extent that disclosure is required
by law (in which case, Buyer will notify Seller prior to making any such
disclosure). Buyer shall order and pay all costs and expenses with respect to
such inspections and investigations.
Seller shall promptly provide Buyer with a copy of each:
(a) Copies of all service, maintenance, farming, management
and other contracts and agreements, if any, related to the operation and
management of the Winery or Real Property.
(b) Copies of all soils, engineering and environmental reports
relating to the Real Property, if any, in the Seller's possession.
(c) Copies of all equipment leases and all material amendments
thereto.
(d) Any document referenced in the Disclosure Schedule.
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5.3 Advise of Changes. Between the date hereof and the Closing Date,
Seller shall advise Buyer promptly in writing of any fact of which they become
aware, which, if known at the date hereof, would have been required to be set
forth or disclosed in or pursuant to this Agreement.
5.4 Conduct. Except as permitted or required hereby or as Buyer may
otherwise consent in writing, Seller shall not enter into any transaction, take
any action, or fail to take any action, which would result in any of the
representations and warranties contained in this Agreement not being true and
correct at and as of the time immediately after such transaction has been
entered into or such event has occurred and on the Closing Date. From the date
of this Agreement until either the Closing or the termination of this Agreement,
Seller agrees that he shall not solicit, negotiate, encourage, initiate or
otherwise participate in any discussions, or provide information to any third
party, with respect to the sale of any of the Winery Stock, or any merger,
business combination, or similar transaction involving the Company.
5.5 Approvals, Consents. Except as otherwise disclosed in the
Disclosure Schedule, Seller shall obtain in writing prior to the Closing Date
all approvals, consents and waivers, required to be obtained by him in order to
effectuate the transactions contemplated hereby, and shall deliver to Buyer
copies thereof, reasonably satisfactory in form and substance to Buyer.
Approvals required of Seller cannot, without the written consent of Buyer, be
obtained at a cost or other adverse consequence to Buyer or the Company.
5.6 Insurance. Seller agrees to maintain the insurance policies in
effect for the Improvements through the Closing Date, and upon Buyer's request,
to provide Buyer a certificate of such insurance.
5.7 Further Assurances. Seller shall at any time and from time to time,
both before and after the Closing, upon the request of Buyer but at no cost or
expense to Seller, (a) do, execute, acknowledge and deliver, and cause to be
done, executed, acknowledged or delivered, all such further acts, deeds,
assignments, transfers, conveyances, powers of attorney or assurances as may be
reasonably required for the better transferring, assigning, conveying, granting,
assuring and confirming to Buyer, or for aiding and assisting in the collection
of or reducing to possession by Buyer, of the SHW Stock or to vest in Buyer
good, valid and marketable title to the SHW Stock and otherwise to consummate
the transactions contemplated by this Agreement; (b) cooperate and assist Buyer
or the Winery in connection with any tax, environmental or other governmental
audit and any litigation or claims related to the business or assets of the
Company through the Closing Date; and (c) promptly convey to Buyer after receipt
of any payments, correspondence or notices relating to the Winery or any of the
Real Property; provided that Seller shall be entitled to be reimbursed for any
material expense and to be compensated for material amounts of time resulting
directly from Buyer's request.
5.8 Satisfaction of Conditions. Seller shall take all actions and
execute all documents required for the satisfaction, to the extent within the
control of Seller, of the conditions to Closing set forth in Articles VII and
VIII below.
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5.9 Confidentiality. Seller will keep in confidence all proprietary and
financial information of Buyer or the Company all information concerning the
terms and conditions of this Agreement and will not, except to the extent
required by law or to the extent any such information is otherwise publicly
available, without the prior written consent of Buyer, reveal any such financial
or proprietary information to any third party other than counsel, accountants or
experts retained by Buyer who shall be bound by the same restrictions. If the
transactions contemplated by this Agreement are not consummated, Seller shall
return to Buyer, at Buyer's request, all documents supplied to Seller by Buyer
pursuant to the provisions of this Agreement. This covenant shall survive the
Closing and shall terminate on the one year anniversary of the Closing Date or
the one year anniversary of the termination date of this Agreement.
ARTICLE VI
COVENANTS OF BUYER
6.1 Confidentiality; Return of Documents. Unless and until the
transactions contemplated by this Agreement are consummated, Buyer will keep in
confidence all proprietary and financial information of Seller and the Company
and will not, except to the extent required by law or to the extent any such
information is otherwise publicly available, without the prior written consent
of the Seller reveal any such financial or proprietary information to any third
party other than counsel, accountants or experts retained by Buyer who shall be
bound by the same restrictions. If the transactions contemplated by this
Agreement are not consummated, Buyer shall return to Seller, at Seller's
request, all documents supplied to Buyer by Seller pursuant to the provisions of
this Agreement, and Buyer shall continue to be bound to respect its
confidentiality undertaking following any termination of this Agreement.
6.2 Satisfaction of Conditions. Buyer shall take all actions and
execute all documents required for the satisfaction, to the extent within the
control of Buyer, of the covenants and conditions to Closing set forth in
Articles V, VII and VIII.
6.3 Advice of Changes. Between the date hereof and the Closing Date,
Buyer shall advise Seller promptly in writing of any fact of which Buyer becomes
aware, which, if known at the date hereof, would have been required to be set
forth or disclosed in or pursuant to this Agreement.
6.4 Conduct. Except as permitted or required hereby or as Seller may
otherwise consent in writing, Buyer shall not enter into any transaction, take
any action, or fail to take any action, which would result in any of the
representations and warranties of Buyer contained in this Agreement not being
true and correct at and as of the time immediately after such transaction has
been entered into or such event has occurred and on the Closing Date.
6.5 Approvals, Consents. Buyer shall use its best efforts to obtain in
writing prior to the Closing Date all governmental approvals, consents and
waivers, required to be obtained by Buyer in order to effectuate the
transactions contemplated hereby, and shall deliver to Seller copies thereof.
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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligation of Buyer to perform its obligations under this Agreement
is subject to the satisfaction at or prior to the Closing Date (unless otherwise
specifically indicated to the contrary) of the following conditions unless
waived by Buyer in its sole discretion.
7.1 Accuracy of Representations and Warranties. The representations and
warranties of Seller contained in this Agreement and the Disclosure Schedule
shall be true and accurate in all material respects on the Closing Date, with
the same force and effect as if made on such Closing Date, except as affected by
transactions required or permitted hereby, and except that any such
representation or warranty made as of a specified date (other than the date of
this Agreement) shall have been true and accurate in all material respects on
and as of such date.
7.2 Performance of Agreements. Seller shall have performed and complied
with all covenants, obligations and agreements to be performed or complied with
by them on or before the Closing Date pursuant to this Agreement.
7.3 Performance of Sale and Purchase Agreement. All obligations of SHW
and Hokuriku pursuant to the Sale and Purchase Agreement shall have been
performed and fulfilled on or before the Closing Date, except for obligations to
pay funds that will be paid pursuant to this Agreement.
7.4 Seller and SHW's Certificates. Buyer shall have received an
accurate certificate of Seller, certifying as to the fulfillment of the matters
specified in Sections 7.1, and 7.2 and an accurate certificate of SHW,
certifying as to the fulfillment of the matters specified in Section 7.3, each
dated as of the relevant Closing Date and in a form and substance satisfactory
to Buyer and its counsel.
7.5 Opinion of Counsel. Buyer shall have received an opinion of counsel
for SHW in the form attached hereto as Exhibit D and for the Company in the form
attached hereto as Exhibit E.
7.6 Consents, Authorizations. Except as disclosed in the Disclosure
Schedule, all consents, authorizations, permits, licenses, orders or approvals
of, and filings or registrations with and the expiration of all waiting periods
imposed by, any third party, including, without limitation, any Federal, state
or local commission, board or other regulatory body, lessor, lender, licensor or
supplier which are required for or in connection with (a) the execution and
delivery of this Agreement by Seller and the consummation of the transactions
contemplated hereby, and (b) in order to permit or enable Buyer and the Company
to conduct the Winery's business after the Closing as conducted by Seller as of
the date hereof shall have been duly obtained or made and shall be in full force
and effect.
7.7 Legislation. No federal, state or local statute, rule or regulation
shall have been enacted after the date of this Agreement which prohibits,
restricts, delays or materially adversely
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affects the business of the Company or the consummation of the transactions
contemplated by this Agreement or any of the conditions to the consummation of
such transactions. No temporary restraining order or injunction shall be in
effect, or threatened by a governmental agency, restraining the consummation of
the transactions contemplated hereby.
7.8 Corporate Records. Buyer shall have received copies of the minute
books, stock ledgers and financial records of the Company and SHW.
7.9 Good Standing Certificate. Buyer shall have received certificates
dated within ten days before the Closing Date from the Secretary of State of (a)
Washington, certifying that SHW and the Company are in good standing under the
laws of such jurisdiction and a certified copy of the Articles of Incorporation
and all amendments, and (b) each jurisdiction in which SHW and the Company are
qualified to do business as a foreign corporation, certifying that SHW and the
Company are so qualified and in good standing.
7.10 Lien Releases. All Encumbrances other than Encumbrances permitted
hereunder shall have been released with respect to the Assets.
7.11 Interim Financials. Buyer shall have received the unaudited
balance sheet of the Company as of the month-end immediately preceding the
Closing Date (or the prior month-end if the Closing occurs prior to the
fifteenth day of a month), and all available related unaudited statements
prepared by the Company, but without a LIFO adjustment, which such financial
statements shall be deemed Financial Statements for purposes of Section 3.5.
7.12 Due Diligence Inspection. Buyer shall have completed to its sole
and absolute satisfaction the review and inspections described in Section 5.2,
and a satisfactory inspection with respect to the operating condition and
capacity of the Winery, the Assets and the Real Property.
7.13 Transfer Documents. All transfer documents and actions in
connection with such transfers shall be satisfactory in form and substance to
Buyer and shall have been received by Buyer.
7.14 Title Report. Buyer shall have reviewed and approved the Title
Report, and shall have received a commitment satisfactory in form to it that at
the Closing, the Title Company will issue the Title Policy referred to in
Section 7.15 below.
7.15 CLTA Owner's Policy. Evidence of title in the Company shall be
confirmed by the issuance at the Final Closing by a title company reasonably
acceptable to Buyer of its CLTA Owner's Policy of Title Insurance insuring that
fee title in the Land is vested in the Company, subject to obligations for local
real estate taxes and assessments not yet due or payable; and such other
exceptions as may be approved in writing by Buyer (the "Title Policy"). The
Title Policy shall include such endorsements as Buyer may reasonably request
prior to the Closing Date.
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7.16 No Material Adverse Change. Prior to the Closing, the business of
the Company and the condition of the Real Property will not have suffered any
material adverse change from the date hereof.
7.17 Release. Seller shall have provided Buyer with a release of each
of Seller, Hokuriku and the sellers of the Winery Stock to Hokuriku of any and
all claims against the Company in substantially the form attached as Exhibit F
hereto.
7.18 Resignation of Directors and Officers. Seller shall have caused
the Company and SHW to provide resignations for all officers and directors
effective on Closing.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligation of Seller to perform its obligations under this
Agreement is subject to the satisfaction at or prior to the Closing Date of the
following conditions unless waived by Seller in its sole discretion:
8.1 Accuracy of Representations and Warranties. The representations and
warranties of Buyer contained in this Agreement shall be true and accurate in
all material respects on and as of the Closing Date, with the same force and
effect as if made on the Closing Date, except as affected by transactions
required or permitted hereby, and except that any such representation or
warranty made as of a specified date (other than the date of this Agreement)
shall have been true and accurate in all material respects on and as of such
date.
8.2 Performance of Agreements. Buyer shall have performed and complied
in all material respects with all covenants, obligations and agreements to be
performed or complied with by it on or before the Closing Date pursuant to this
Agreement, and Buyer shall have executed and delivered all other documents and
agreements referred to herein.
8.3 Officer's Certification. Seller shall have received an accurate
certificate, dated the Closing Date, of a duly authorized officer of Buyer,
satisfactory in form and substance to Seller and its counsel, certifying as to
the fulfillment of the matters specified in Sections 8.1 and 8.2.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date upon the following terms and conditions:
(a) by Buyer, if a condition set forth in Article VII has not
been satisfied or if there has been a violation or breach by Seller of any
material agreement, representation or warranty of Seller contained in this
Agreement, which such failure, violation or breach has not
20
<PAGE>
been cured to the reasonable satisfaction of Buyer within fifteen (15) days of
written notice to Seller; or
(b) by Seller, if there has been a violation or breach by
Buyer of any material agreement, representation or warranty of Buyer contained
in this Agreement or if a condition set forth in Article VIII has not been
satisfied, which such failure, violation or breach has not been cured to the
reasonable satisfaction of Seller within fifteen (15) days of written notice to
Buyer; or
(c) by Seller or Buyer at any time after the later of the
Closing Date or any extension thereof as provided in Section 2 or after July 30,
1999 in all events.
In the event of termination of this Agreement and abandonment of the
transactions contemplated hereby pursuant to this Section 9.1 prior to the
Closing, written notice thereof shall forthwith be given to the other party and
this Agreement shall terminate and the transactions contemplated hereby shall be
abandoned, without further action by any of the parties hereto, except for any
promise which expressly survives any termination of this Agreement.
ARTICLE X
INDEMNIFICATION
10.1 Obligation of Seller to Indemnify. Seller shall indemnify Buyer
and hold harmless and, upon Buyer's request, defend Buyer, its affiliates,
subsidiaries, directors, officers, employees, agents and assigns of each from
and against any claims, demands, causes of action, proceedings, losses,
liabilities, damages, deficiencies, interest, penalties, expenses, judgments and
costs (including reasonable attorneys', consultants' and accountants' fees and
disbursements, court costs, amounts paid in settlement and expenses of
investigation) incurred by Buyer (collectively, "Losses") provided, however,
that Seller's obligations to indemnify Buyer pursuant to this Section, combined
with any claims based on representations or warranties under this Agreement,
shall be limited to an aggregate of $125,000, based upon, arising out of or
otherwise in respect of:
(i) The breach of any representation, warranty, covenant or
agreement of Seller contained in this Agreement or in any
document or other writing delivered pursuant to this
Agreement;
(ii) Any liability of Seller for personal injury, real
property damage or other loss arising from any act or omission
occurring on or prior to the Closing Date related in any way
to any product manufactured or distributed by the Winery to
the extent that such losses exceed any insurance proceeds
actually received by Buyer or the Company or by any party for
the benefit of Buyer;
(iii) To the extent of Seller's Best Knowledge (x) Hazardous
Substances existing on, in or under the Real Property prior to
or as of the Closing Date due to the acts or omissions of the
Company, Seller or their affiliates, directors, officers,
21
<PAGE>
employees, agents, contractors, or invitees ("Preexisting
Hazardous Substances"), (y) Preexisting Hazardous Substances
which have migrated or migrate at anytime (whether before or
after the Closing Date) from the Real Property, and (z)
liabilities arising out of or related to Preexisting Hazardous
Materials removed from the Real Property after the same have
been removed from the Real Property;
(iv) To the extent of Seller's Best Knowledge, Compliance with
and/or violation or breach of any Environmental Law occurring
at anytime (whether before or after the Closing Date) with
respect to Preexisting Hazardous Substances; and
(v) All taxes imposed on Seller or the Company regardless of
when imposed for any period prior to and including the Closing
Date, including any taxes arising from either the purchase and
sale of the Winery Stock or the Assets to the extent such
taxes are not reserved for on the Interim Balance Sheet;
including, without limitation, consequential damages, damages for personal or
bodily injury, property damage, damage to natural resources occurring on or off
the Real Property, encumbrances, liens, defense costs of any claims (whether or
not such claim is ultimately defeated), good faith settlements, losses
attributable to the diminution of value or loss of use or use of any portion of
the Real Property, and the cost of any reasonable remedial, removal, response,
abatement, clean-up, investigative and monitoring costs and any other reasonable
related costs and expenses, whether or not such Losses are known or unknown as
of the date of this Agreement, contingent or otherwise, matured or unmatured,
foreseeable or unforeseeable. Any action taken or expense incurred by Buyer at
the direction of any governmental authority shall be deemed reasonable for
purposes of this Section 10.1.
10.2 Obligation of Buyer to Indemnify. Buyer shall indemnify, defend
and hold harmless Seller and his spouse, its partners, employees, agents and
assigns of each from and against any Losses (as the term "Losses" is defined in
Section 10.1 above), provided, however, that Buyer's obligations to indemnify
Seller pursuant to this Section shall be limited to an aggregate of $100,000,
based upon, arising out of or otherwise in respect of (i) a breach of any
representation, warranty, covenant or agreement of Buyer contained in this
Agreement or in any document or other papers delivered pursuant to this
Agreement, or (ii) any liability for personal injury, property damage or other
loss arising from any act, or omission of Buyer or its agents in connection with
the operation of the Winery after the Closing (including acts or omissions by
Buyer after Closing with respect to violation of environmental laws), and its
due diligence investigation pursuant to Section 5.2 (Access to Property and
Records) including, without limitation, consequential damages, damages for
personal or bodily injury, property damage, damage to natural resources
occurring on or off the Real Property, encumbrances, liens, defense costs of any
claims (whether or not such claim is ultimately defeated), good faith
settlements, losses attributable to the diminution of value or loss of use or
use of any portion of the Real Property, and the cost of any reasonable
remedial, removal, response, abatement, clean-up, investigative and monitoring
costs and any other reasonable related costs and expenses, whether or not such
Losses are known or unknown as of the date of this Agreement, contingent or
22
<PAGE>
otherwise, matured or unmatured, foreseeable or unforeseeable. Any action taken
or expense incurred by Seller at the direction of any governmental authority
shall be deemed reasonable for purposes of this Section 10.2.
10.3 Claims. If any party (the "Indemnitee") receives notice of
circumstances that would give rise to a claim by such party or notice of any
claim or the commencement of any action or proceeding with respect to which any
other party (or parties) is obligated to provide indemnification (the
"Indemnifying Party") pursuant to Section 10.1 or 10.2 (a "Claim"), the
Indemnitee shall promptly give the Indemnifying Party notice thereof. Within 30
days after such notice, the Indemnifying Party will notify the Indemnitee
whether it irrevocably elects to make payment of the amount claimed or, with
respect to third party claims, to contest such claim by appropriate legal
proceedings. The failure of the Indemnifying Party to notify the Indemnitee of
its intention within such 30 days shall constitute an irrevocable election by
them that it will pay the amount claimed. Any defense of a claim shall be
conducted by counsel of good standing chosen by Indemnitee and satisfactory to
Indemnifying Party. Such defense shall be conducted at the expense of
Indemnifying Party, except that if any proceeding involves both claims against
which indemnity is granted hereunder and other claims for which indemnification
is not granted hereunder, the expenses of defending against such claims shall be
borne by the Indemnifying Party and the Indemnitee in respective proportions to
the dollar amount of the claims for which they may be liable based on the
aggregate dollar amount of the claims.
This indemnification obligations of the parties under this Article X
shall survive the Closing and shall expire one (1) year after the Closing Date.
ARTICLE XI
MISCELLANEOUS
11.1 Expenses. All fees, costs and expenses incurred by a party in
connection with, relating to or arising out of the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, including, without limitation, legal and accounting fees
and expenses, shall be borne by such party unless this Agreement terminates due
to a breach by the other party in which case the breaching party (in addition to
any liquidated damages to be paid by such party) shall reimburse the
non-breaching party for all of such expenses, provided, however, that the
Company shall bear any expenses incurred by Seller in connection with completing
the transactions contemplated by the Sale and Purchase Agreement described in
Section 2.2, and may, in its discretion, bear any or all such costs and expenses
of SHW.
11.2 Binding Effect. This Agreement shall not be assignable by either
Buyer or Seller without the prior written consent of the other, except that
without relieving Buyer of any of its obligations under this Agreement, Buyer
may assign this Agreement to an entity which is under common control with Buyer.
Subject to the foregoing, this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors, heirs, legal
representatives, and assigns of the parties hereto. This Agreement constitutes
an agreement
23
<PAGE>
among the parties hereto and none of the agreements, covenants, representations
or warranties contained herein shall be for the benefit of any third party not a
party to this Agreement.
11.3 Entire Agreement; Amendments. This Agreement (including the
Disclosure Schedules and Exhibits attached hereto and the ancillary agreements
referred to herein), and the other writings referred to herein or delivered
pursuant hereto contain the entire understanding of the parties with respect to
its subject matter. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof.
This Agreement may be amended only by a written instrument duly executed by the
parties, and any condition to a party's obligations hereunder may only be waived
in writing by such party. Whenever the term "including" is used in this
document, it shall be deemed to mean including without limitation the matters
following thereafter.
11.4 Headings. The article and section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
11.5 Notices. The terms "Notice" and "Notify" means all notices,
claims, certificates, requests, demands and other communications hereunder which
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail, return receipt requested and postage prepaid,
or sent by facsimile to the parties at the addresses and facsimile numbers set
forth on Exhibit G hereto, provided that if a party has a facsimile terminal,
Notice must include facsimile transmission.
Notice or other communication shall be deemed to have been given on the date of
receipt.
11.6 Publicity. The parties agree that, except as otherwise required by
law, the issuance of any reports, statements or releases pertaining to this
Agreement or the transactions contemplated hereby prior to Closing is subject to
mutual consent.
11.7 Counterparts. This Agreement may be executed in counterparts, and
each such counterpart hereof shall be deemed to be an original instrument, but
all such counterparts together shall constitute but one agreement.
11.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California
11.9 Waivers. Any provision of this Agreement may be waived only by a
written instrument executed by the party to be charged with such waiver. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
11.10 Attorneys' Fees. If there is any litigation or arbitration
between the parties related to this Agreement or the transactions contemplated
by this Agreement, the prevailing
24
<PAGE>
party shall be entitled to recover all reasonable costs and expenses (including,
without limitation, reasonable attorneys', accountants' and other professional
fees and expenses).
11.11 Arbitration of Disputes. Any dispute arising from, or relating
to, this Agreement shall be resolved at the request of either party through
binding arbitration. Within 14 business days after demand for arbitration has
been made by either party, the parties, and/or their counsel, shall meet to
discuss the issues involved, to discuss a suitable arbitrator and arbitration
procedure, and to agree on arbitration rules particularly tailored to the matter
in dispute, with a view to the dispute's prompt, efficient, and just resolution.
Upon the failure of the parties to agree upon arbitration rules and procedures
within a reasonable time (not longer than thirty (30) days from the demand), the
Commercial Arbitration Rules of the American Arbitration Association shall be
applicable. Likewise, upon the failure of the parties to agree upon an
arbitrator within a reasonable time (not longer than thirty (30) days from the
demand), there shall be a panel comprised of one (1) arbitrator, to be appointed
by the American Arbitration Association. At least thirty (30) days before the
arbitration hearing, the parties shall allow each other reasonable written
discovery including the inspection and copying of documents and other tangible
items relevant to the issues which are to be presented at the arbitration
hearing. The arbitrator shall be empowered to decide any disputes regarding the
scope of discovery. Fees for the arbitrator shall be divided equally between the
parties, and the parties will be individually responsible for the payment of the
fees. The prevailing party in any arbitration, proceeding or legal action
arising out of, or in connection with, this Agreement shall be entitled to
recover its reasonable attorneys' fees and costs incurred in connection with
such arbitration, proceeding or legal action. The arbitrator shall determine who
the prevailing party is for this purpose.
The award rendered by the arbitrator shall be final and binding upon
both parties. The arbitration shall be conducted in San Francisco, California.
The California State Superior Court located in San Francisco, California shall
have exclusive jurisdiction over disputes between the parties in connection with
such arbitration and the enforcement thereof. The parties consent to the
jurisdiction and venue of the California State Superior Court located in San
Francisco, California. Notwithstanding the fact that the parties have agreed to
have any disputes arising from, or related to, this Agreement resolved by
binding arbitration, such arbitration provision shall not prevent the parties
from seeking ancillary or equitable relief in connection therewith from the
California State Superior Court, including lis pendens and specific performance.
"NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE `ARBITRATION OF
DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO
HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN
THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND
APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
`ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO
ARBITRATION
25
<PAGE>
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE
UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY."
BUYER: ___________________________ SELLER: __________________________
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on the date first above written.
Buyer: CHALONE WINE GROUP LTD.,
- ------ a California corporation
By: /s/ Thomas B. Selfridge
--------------------------
--------------------------
Its: President & CEO
--------------------------
SELLER: /s/ Peter Ansdell
- ------- --------------------------
PETER ANSDELL
SHW: SHW EQUITY CO.,
- ---- a Washington corporation
By: /s/ Peter Ansdell
--------------------------
Peter Ansdell
Its: President
27
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A The Land
Exhibit B Disclosure Schedule
Exhibit C Financial Statements
Exhibit D Opinion of Counsel of SHW
Exhibit E Opinion of Counsel of the Company
Exhibit F Release of Seller, Hokuriku and the sellers of the Winery Stock
to Hokuriku
Exhibit G Notices
28
<PAGE>
Exhibit G
Notices
If to the Company or Seller to: Peter Ansdell
71 Gangl Road
Wapato, WA 98951
With a copy to: R. Corbin Houchins
701 Fifth Avenue, Suite 3600
Seattle, WA 98104-7081
If to Buyer to: Tom Selfridge
Chalone Wine Group, Ltd.
621 Airpark Road
Napa, CA 94558-6272
Telephone: 707-254-4200
Facsimile: 707-254-4204
With a copy to: Daniel E. Cohn, Esq.
Farella Braun & Martel LLP
235 Montgomery Street, Suite 3000
San Francisco, CA 94104
Telephone: 415-954-4400
Facsimile: 415-954-4480
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
LEGEND THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
3/31/99 BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. LEGEND
</LEGEND>
<CIK> 0000742685
<NAME> THE CHALONE WINE GROUP, LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,670
<SECURITIES> 0
<RECEIVABLES> 8,281
<ALLOWANCES> 86
<INVENTORY> 40,926
<CURRENT-ASSETS> 52,057
<PP&E> 33,591
<DEPRECIATION> 3,537
<TOTAL-ASSETS> 103,471
<CURRENT-LIABILITIES> 8,803
<BONDS> 8,500
0
0
<COMMON> 48,965
<OTHER-SE> 9,326
<TOTAL-LIABILITY-AND-EQUITY> 103,471
<SALES> 43,973
<TOTAL-REVENUES> 44,935
<CGS> 23,201
<TOTAL-COSTS> 34,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 53
<INTEREST-EXPENSE> 1,761
<INCOME-PRETAX> 11,247
<INCOME-TAX> 4,611
<INCOME-CONTINUING> 6,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,636
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.75
</TABLE>
