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
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-13406
The Chalone Wine Group, Ltd.
(Exact Name of Registrant as Specified in Its charter)
California 94-1696731
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
621 Airpark Road, Napa, CA 94558
(Address of Principal Executive Offices) (Zip Code)
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 9, 2000 there were 2,984,065 shares of the Company's voting no par
value common stock, with an aggregate market value of $24.7 million 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. This
determination is not intended to be conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2000 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, 2000, 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 premium, ultra premium, and
luxury-priced white and red varietal table wines, primarily Chardonnay, Pinot
Noir, Cabernet Sauvignon, Merlot, Syrah and Sauvignon Blanc. The Company owns
and operates wineries in various counties of California and Washington State.
The Company's wines are made partially from grapes grown at the Carmenet Winery,
Edna Valley Vineyard, Chalone Vineyard, Company-owned vineyards adjacent to the
Acacia(TM) Winery in California and the Canoe Ridge Vineyard in Washington
State, as well as from purchased grapes. The wines are primarily sold under the
labels "Chalone Vineyard(R)," "Edna Valley Vineyard(R)," "Carmenet(R),"
"Acacia(TM)," "Canoe Ridge Vineyard(R)," "Jade Mountain(R)," "Sagelands
Winery(R)," and "Echelon(TM)".
In France, the Company owns a minority interest in fourth-growth Bordeaux
estate Chateau Duhart-Milon ("Duhart-Milon") in partnership with Les Domaines
Barons de Rothschild (Lafite) ("DBR"). The vineyards of Duhart-Milon are located
adjacent to the world-renowned Chateau Lafite-Rothchild in the town of Pauillac.
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.
SIGNIFICANT EVENTS
ISSUANCE OF COMMON STOCK UPON EXERCISE OF CERTAIN CONVERSION RIGHTS
WARRANTS: In April 2000, the Company received gross proceeds of
$6,208,335 from the sale of 833,334 new shares of its common stock issuable upon
exercise of the outstanding warrants issued on October 25, 1995 (the
"Warrants").
The original holders of the Warrants were DBR and Hook Financial, Inc., an
affiliate of SFI Intermediate, Ltd. ("SFI"). DBR and SFI are affiliates of the
Company. The Warrants provided for the sale of 833,334 shares of the Company's
common stock at an exercise price of $8.00 per share at any time up to and
including October 25, 2000. The Company agreed to change the exercise price of
the Warrants from $8.00 to $7.45 to induce the warrantholders to exercise the
warrants in advance of the October 25, 2000 termination date. The early exercise
of the warrants at the new exercise price permitted the Company to avoid further
borrowing to finance acquisitions. The proceeds received from the Warrant
exercises were used primarily to fund the acquisitions of the Jade Mountain
brand and the Suscol Ranch property (see below) and for general working capital
purposes.
CONVERTIBLE DEBENTURES: In April 1999, holders of the Company's 5%
Convertible Subordinated Debentures (the "Debentures") converted Debentures with
a face value of $6.5 million into 738,014 new shares of the Company's common
stock.
PROPERTY ACQUISITIONS
HEWITT RANCH PROPERTY: In January, 2000, the Company purchased two
adjacent parcels of land in Rutherford, California comprising 69 acres for $16.6
million. The parcels contain two private homes and an historic cabernet
sauvignon vineyard. The vineyard presently consists of 57 planted and three
unplanted acres and is believed to be among the finest vineyard land in the Napa
Valley's notable Rutherford bench. The Company's new vineyard is situated close
to the vineyards of well-known Cabernet Sauvignon wines, such as "Georges de
Latour Private Reserve" from Beaulieu Vineyards, "Rubicon" from Neibaum-Coppola
Estate Winery and "Cabernet Bosche" from Freemark Abbey. The Company intends to
use the property to produce a luxury-priced single vineyard cabernet wine. The
new wine is expected to debut in 2003 with an estimated initial release of
approximately 1,500 cases. Ultimately, the Company expects the 57-acre vineyard
to produce up to 20,000 cases of luxury quality wine.
One of two private residences on the property was acquired subject to a
two-year, rent-free lease between the Company and the current occupant. Upon the
termination of the foregoing tenancy, the Company intends to use the dwelling as
a guesthouse or for another similar marketing purpose. The second residence is
expected to be sold together with approximately four acres of land for continued
use as a private residence.
SUSCOL RANCH PROPERTY: In March 2000, the Company purchased 164 acres
of land in Napa County for approximately $5.9 million. The property presently
consists of a 50-acre vineyard and 40 unplanted (but plantable) acres of
vineyard land and is a possible site for a new winery, which will produce a new
Napa red wine brand.
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<PAGE>
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. for $6.0 million. SHW Equity Co. is a holding company that owns
100% of Staton Hills(R) Winery and its adjacent vineyards in Yakima County,
Washington. In addition to the real property assets, the purchase price included
grape contracts covering approximately 90 acres in Washington State's Yakima
Valley and Horse Heaven Hills.
The Company also entered into long-term grape contracts for a total of 350
acres in Yakima Valley, the Wahluke slopes, Walla Walla and Horse Heaven Hills.
The Staton Hills facilities, renamed "Sagelands Winery," will produce a new
Washington State wine brand featuring Merlot and Cabernet Sauvignon from these
four viticultural regions. Initially, the Company expects this property to
produce approximately 11,000 cases of super-premium quality red wine. Long-term,
it is believed to have the capacity to produce approximately 125,000 cases. The
Company will retain the Staton Hills Winery brand and continue to produce wines
under this mark.
ACQUISITION OF THE ASSETS OF THE JADE MOUNTAIN BRAND AND RELATED
CAPITAL ASSETS: In April 2000, The Company purchased substantially all of the
assets of Jade Mountain Winery from its sole shareholder. The purchase price of
approximately $3.5 million was paid in cash. The purchased assets included all
of Jade Mountain's trade names, trademarks and related intellectual property
rights and inventory (bulk wine and cased goods).
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. The expansion was completed in fall of 1999 and is expected to
almost double Edna Valley Vineyard's production capacity and significantly
increase its red wine production.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company produces and sells super premium to luxury quality table wines
and has determined that its product line operating segments although consisting
of multiple products and brands all share similar long-term financial
performance, production processes, customer types, distribution methods and
other economic characteristics. Accordingly, these operating segments have been
aggregated as a single operating segment in the consolidated financial
statements.
C. NARRATIVE DESCRIPTION OF BUSINESS.
OVERVIEW
The Company owns the following properties 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:
<TABLE>
<CAPTION>
PROPERTY OWNERSHIP FORM OF OWNERSHIP LOCATION
<S> <C> <C> <C>
Chalone Vineyard 100.0% Corporation Soledad, California
Carmenet Winery 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
Sagelands Winery 1/ 100.0% Corporation Yakima Valley, Washington
-
Napa Program 2/ 100.0% Corporation Napa, California
-
<FN>
1/ Formerly known as Staton Hills Winery
-
2/ As used herein, the Napa Program refers to the Company's plans for the Hewitt Ranch and Suscol Ranch properties.
- See "Item 2. Properties" for additional information.
</FN>
</TABLE>
With the exception of 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 "American Viticultural
Area" ("AVA"). AVA 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. Wines may
display an AVA on a bottle label only if 85% or more of the grapes used to
produce the wine were grown in that viticultural area.
For a more detailed description of the Company's properties and its opera-
tions, see "Item 2. Properties."
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<PAGE>
VINEYARD PRACTICES
The Company believes that the soils and climates of the vineyards from
which it obtains its grapes are particularly suitable for the particular
varieties of grapes to which they have been or, are being, planted.
The Company generally manages its vineyards to produce yields that are
lower than average for similarly situated vineyards in California and Washington
State and below the maximum yield that could be obtained. It believes that
relatively low yields enhance the varietal character of the grapes and improve
the quality of the resulting wines.
AGRICULTURAL RISKS
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases, pests, fungi, viruses, 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 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 including Pierce's Disease, any of which
could adversely affect the Company.
WINEMAKING PRACTICES
The Company's winemaking practices follow the general 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. All of the Company's wineries are operated under the overall
supervision of the Company's Chief Executive Officer. However, each winery has
its own General Manager who, in most instances, is also a winemaker.
The principal raw materials used by the Company are grapes, oak barrels,
glass, and cork. Oak barrels are purchased mostly from the Burgundy and Bordeaux
regions of France (75%) and the remainder from the United States. The Company
favors French oak barrels due to Company tradition and consumer tastes and
preferences. Cork is produced and manufactured in Portugal, is the primary
cork-producing country in the world. Glass is purchased from a variety of
different sources according to specific needs as determined by the Company. A
significant portion of the Company's grape requirements are met by production
from the Company's own vineyards. The remaining grape requirements are met
through purchases of available grapes from California and Washington State
growers.
WINE PRODUCTION AND WINES
This table sets forth the wine production of the Company for the 1999, 1998
and 1997 vintages. The wines' vintage is the year during which the grapes are
harvested. As of March 31, 2000, the current year's vintage (2000) had not yet
been harvested and cannot yet be estimated. The following information is
presented in terms of "equivalent" number of cases. The precise number of cases
is not known at this time because a material amount of the wines of these
vintages is still being aged in barrels and tanks. For the purpose of this
schedule and the discussion that follows, wines purchased by the Company for
resale purposes are excluded.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
Equivalent Equivalent Equivalent
Number of Number of Number of
Cases % of Total Cases % of Total Cases % of Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Chardonnay 187,500 36% 231,300 55% 243,900 59%
Savignon Blanc 6,000 1% 8,800 2% 7,000 2%
Pinot Blanc 5,200 1% 2,200 1% 3,100 1%
Other white wines 10,000 2% 1,400 0% 5,700 1%
---------- ---------- ---------- ---------- ---------- ----------
Total white wines 208,700 40% 243,700 58% 259,700 63%
Pinot Noir 44,600 9% 35,100 8% 54,200 13%
Cabernet Sauvignon 114,200 22% 40,900 10% 46,900 11%
Merlot 110,400 21% 85,500 20% 47,200 12%
Syrah 35,200 7% 6,000 2% - 0%
Other red wines 5,500 1% 10,200 2% 4,500 1%
---------- ---------- ---------- ---------- ---------- ----------
Total red wines 309,900 60% 177,700 42% 152,800 37%
---------- ---------- ---------- ---------- ---------- ----------
Total production 518,600 100% 421,400 100% 412,500 100%
========== ========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
The Company's wines are aged primarily in new and used oak barrels before
they are bottled. Generally, white wines are aged for between six and nine
months, and red wines for between nine and eighteen months, after harvest. The
wine is then bottled and stored for further aging.
CHALONE VINEYARD: Chalone Vineyard sales represented 12% of the Company's
consolidated revenues and 7% of its consolidated case sales for the fiscal year
ended March 31, 2000.
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 and are estate
bottled.
CARMENET WINERY: Carmenet Winery sales represented 17% of the Company's
consolidated revenues and 15% of its consolidated case sales for the fiscal year
ended March 31, 2000.
The Company produces Bordeaux-style 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 Winery, is estate bottled, and
bears the "Sonoma Valley" AVA 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.
On July 31, 1996, a wildfire damaged approximately 75% of the producing
acreage at Carmenet Winery. Prior to this fire, Carmenet Winery produced
approximately 38,000 cases of wine annually, a significant portion of which was
estate bottled. The fire was caused by the electrical lines of Pacific Gas &
Electric Company. PG&E publicly acknowledged its responsibility for the fire
and, in 1999, settled a lawsuit on terms that the Company believes will fully
reimburse its fire-related losses. The Company has replanted the damaged
acreage. Historically, newly planted vines will begin to produce
production-quality grapes after three years, although the new vines are expected
to take approximately five years to return to the full production levels that
pre-dated the fire. Until the fire-damaged acreage returns to full production,
Carmenet's ability to make estate bottled wines will be limited. The Company
attempts to purchase suitable grapes on the open market to supplement Carmenet's
harvest. However, there can be no assurance that grapes of suitable quality or
variety will be available in sufficient quantity or on terms acceptable to the
Company.
EDNA VALLEY VINEYARD: Edna Valley Vineyard sales represented 21% of the
Company's consolidated revenues and 23% of consolidated case sales for the
fiscal year ended March 31, 2000.
Edna Valley Vineyard has been producing mostly Chardonnay and Pinot Noir
wines since 1980. The majority of wines sold under the Edna Valley Vineyard(R)
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 sales represented 17% of the Company's
consolidated revenues and 15% of its consolidated case sales for the fiscal year
ended March 31, 2000.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia(TM)"
label. Most of the grapes for the production of Pinot Noir and Chardonnay come
from the Carneros region. Approximately 80% of this production comes from
company-leased vineyards and the remainder coming from Company-owned vineyards.
CANOE RIDGE VINEYARD: Canoe Ridge Vineyard sales represented 7% of the
Company's consolidated revenues and 7% of its consolidated case sales for the
fiscal year ended March 31, 2000.
The Canoe Ridge Vineyard commenced operations in 1994 and produces Merlot,
Cabernet Sauvignon and Chardonnay wines under the "Canoe Ridge Vineyard(R)"
label. Most of the grapes for these wines are grown at the Company's vineyard in
Benton County, Washington. The wines bear the "Columbia Valley" AVA designation.
ECHELON: Echelon sales represented 15% of the Company's consolidated
revenues and 23% of the consolidated case sales for the fiscal year ended March
31, 2000.
The 1997 vintage was the first to be released under the Echelon label. The
Company presently produces Chardonnay, Merlot, Viognier, Pinot Noir and Syrah
under the Echelon label. Most have a Central Coast appellation.
CUSTOM BRANDS: Custom brands consist primarily of Chardonnay, Cabernet
Sauvignon and Merlot. Quantities of custom brands bottling are 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: Eleven percent of the Company's consolidated revenues and
12% of its consolidated case sales in the year ended March 31, 2000 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
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<PAGE>
L'Evangile in the Pauillac and Pomerol regions of Bordeaux, respectively, and of
Chateau Rieussec in the Sauternes region of Bordeaux. DBR also produces a
Pauillac wine exclusively for the Company.
MARKETING AND DISTRIBUTION
The Company's wines are positioned in the higher end of the premium
category. All our wines are in the super premium to luxury segments of the
market, priced at $7 per bottle and above.
The Company sells its wines through direct sales, independent distributors,
brokers, its own mailing list and, in limited quantities, directly from the
wineries. Distributors generally remarket the wines through specialty wine shops
and grocery stores, selected restaurants, hotels and private clubs across the
country, and in certain overseas markets. 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 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 one or more wholesalers. In March 1999, the Company began using
a single 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 frequently makes
special offerings exclusively to and for its shareholders. Due to restrictions
on direct retail sales of wines under state laws, the Company must confine
direct wine shipments by mail to purchasers with addresses in California and
thirteen other states which have reciprocal cross-sale arrangements with the
State of California.
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 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
The following table sets forth case sales by the Company by distribution
method for the fiscal years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ----------------------- -----------------------
Number of Number of Number of
Cases % of Total Cases % of Total Cases % of Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Independent distributors
United States 238,600 53% 210,600 55% 144,300 45%
International 23,700 5% 16,800 4% 12,300 4%
---------- ---------- ---------- ---------- ---------- ----------
Total distributors 262,300 58% 227,400 60% 156,600 49%
---------- ---------- ---------- ---------- ---------- ----------
Company direct
California wholesale 124,700 28% 99,400 26% 93,400 29%
Custom brands 25,000 6% 26,500 7% 46,800 15%
Catalog and winery retail 35,500 8% 26,700 7% 25,600 7%
---------- ---------- ---------- ---------- ---------- ----------
Total Company direct 185,200 42% 152,600 40% 165,800 51%
---------- ---------- ---------- ---------- ---------- ----------
Total 447,500 100% 380,000 100% 322,400 100%
========== ========== ========== ========== ========== ==========
</TABLE>
CENTRALIZED ADMINISTRATION AND WAREHOUSING
The Company's wineries are all supported by a leased 22,000 square foot
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 includes a 64,000 square foot 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 and occasionally
permits storage of third party wines for a fee. The central facility lease is
for a 15-year initial term, expiring in November 2008, with a five-year
extension option.
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<PAGE>
EMPLOYEES
On March 31, 2000, the Company had 156 full-time employees, of which 66
were in grape growing and winemaking, 18 were in sales, and 72 were in
administration. During the spring and summer, the Company adds approximately 12
to 17 part-time employees for vineyard care and maintenance and 60 to 80
part-time employees for the spring bottling. In the autumn, up to 70 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. 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. The Company believes it is in
compliance with all currently applicable federal and state regulations.
TRADEMARKS
CHALONE VINEYARD, SAGELANDS, JADE MOUNTAIN, CARMENET, GAVILAN, ACACIA 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 was 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 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 for 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 $.25 per share for the last year. 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. In addition, shareholders' interests are given a
priority in the Chalone Wine Foundation's donation program. 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 typically is held on the grounds of the Chalone Vineyard in
Monterey County, California. In 2000, approximately 1400 shareholders and guests
from 40 states and 5 foreign countries attended the luncheon, which featured
tastings of all of the Company's wines and a luncheon.
SEASONALITY
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the seasonal nature of
the Company's business.
ITEM 2. PROPERTIES.
The Company's principal winemaking activities presently are conducted at
six locations, four in California and two in eastern Washington.
CHALONE VINEYARD
Chalone Vineyard is located on approximately 950 acres in Monterey,
California (of which 403 acres are plantable), approximately 1,500 feet above
the floor of the Salinas Valley, in an AVA called "Chalone." The Company
produces primarily Chardonnay and Pinot Noir at this facility and markets these
wines under the "Chalone Vineyard" label.
The soil is volcanic rock over a bed of limestone, 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.
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<PAGE>
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.
CARMENET WINERY
Carmenet Winery is located on approximately 300 acres in Sonoma County,
California (of which 130 acres are plantable), located in the "Sonoma Valley"
AVA. The Company primarily produces Bordeaux-style red and white wines on this
property which are marketed under the "Carmenet" brand name.
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, Wine Production and Wines".
The vineyard is situated in the Mayacamas Mountains just north of the town
of Sonoma, at an elevation of 1,200 feet. The vines are 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. The elevation of Carmenet Winery 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.
The Company also owns 22 acres of vineyard land in the Glen Ellen area of
Sonoma Valley, approximately seven miles from the Carmenet Winery. The Glen
Ellen property includes a separate winery with a 125,000 case capacity. The
Company is using this asset generally as a red wine producing facility and
specifically to expand production of Carmenet's "Dynamite" wines. Accordingly,
fourteen acres of Chardonnay have been removed during the last two years and
replanted to Cabernet Sauvignon.
EDNA VALLEY VINEYARD
Paragon Vineyard is located on approximately 1,100 acres in San Luis Obispo
County, California, in the "Edna Valley" AVA. 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.
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 expansion
included a tasting room, dining facilities for private parties and 12,000 square
feet of underground cellars for wine fermentation and barrel aging and increased
the annual production capacity from approximately 60,000 cases to over 100,000
cases.
In April 1999, the Joint Venture undertook a $2.1 million, 16,000 square
foot red wine expansion project at the Edna Valley Vineyard. This expansion,
which was completed in the fall of 1999, is expected to nearly double the Edna
Valley Vineyard's production capacity.
ACACIA WINERY
The Acacia Winery, and its related vineyards, are located on approximately
198 acres in Napa County, California, in both the "Carneros" and the "Napa
Valley" AVA. The property's principal wines are Chardonnay and Pinot Noir, which
are marketed under the "Acacia" brand. 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 Wrights' 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, 2000, 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.
The Marina Vineyard is planted to Chardonnay and Pinot Noir 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 rootstock was
undertaken in the early 1980s and continues today. The vineyard is not frost
protected, but to date has not experienced any significant
-8-
<PAGE>
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 47 acres of land adjacent to the Marina
Vineyard to the west. The Company is currently planting this acreage to Pinot
Noir. 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 90,000 cases in the future.
NAPA PROGRAM
The Napa Program consists of the Hewitt Ranch and Suscol Ranch properties.
The Hewitt Ranch is located in Rutherford, California and consists of 57 planted
and 3 unplanted acres, and is believed to be among the finest vineyard land in
the Napa Valley's noted Rutherford bench. The Company intends to use the
property to produce a luxury-priced single vineyard Cabernet wine.
The Suscol Ranch is located in Napa County and consists of 50 planted and
40 unplanted acres of vineyard land and is a possible site for a new winery
which will produce a new Napa red wine 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" AVA.
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.
Of the vineyard's approximately 275 acres (of which 146 acres are
plantable), 100 acres are now planted to Merlot, Cabernet Sauvignon and
Chardonnay 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.
During 1999, the LLC purchased its winery facility, which is located in a
recently renovated historic building that originally served as the engine house
for the Walla Walla Valley Railroad in downtown Walla Walla. The winery facility
is currently undergoing an expansion, which will double its production capacity.
SAGELANDS WINERY
Sagelands Winery, formerly Staton Hills Winery, is located in Yakima
County, Washington, on the banks of the Yakima River. The vineyard is located in
the Columbia Valley AVA. The land on which the winery is located is a 121-acre
parcel, of which approximately 11 acres are planted. In addition to the vineyard
area, the property includes a 20,000-square foot 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 in the super-premium price category. The new brand, to be
marketed under the Sagelands name, is expected to consist of Merlot and Cabernet
Sauvignon produced from grapes purchased under supply contracts from vineyards
in the Yakima Valley, Wahluke slopes, Walla Walla and Horse Heaven Hills AVA.
The Company will retain the Staton Hills Winery brand and continue to produce
wines under this mark.
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 renowned 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.
-9-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
ALLEGED VIOLATION OF SECTION 25502(A)(2) OF THE CALIFORNIA BUSINESS AND
PROFESSIONS CODE
The Company received notice dated August 28, 1998 from the California
Department of Alcoholic Beverage Control ("ABC") that it was accused, along with
36 other companies (most of them wineries) of violations of Section 25502(a)(2)
of the California Business and Professions Code which prohibits wine growers and
others from giving "something of value" to retailers. The accusation arises from
the appearance of paid advertisements of the Company and other wineries in
catalogues distributed by a certain retailer. The notice of violation requested
each of the noticed companies who agreed to the accusation to stipulate to a ten
(10) day suspension of its license or, consent to the payment of a fine in lieu
of the suspension. The matter was tried to an administrative law judge appointed
by the ABC on July 14, 1999. The judge found for the ABC and the ABC adopted the
judge's decision. The Company, together with 16 other wine companies, has filed
an appeal with the Alcoholic Beverage Control Appeals Board, an independent body
that hears appeals from ABC decisions. The date for the appeal has not been set.
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, 2000.
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
<S> <C> <C>
W. Philip Woodward Chairman 61
Thomas B. Selfridge President, and Chief Executive Officer 56
Daniel E. Cohn Secretary 43
Robert B. Farver Vice President, Sales and Distribution 43
</TABLE>
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 Operating Committee. From 1974 to July 1998,
Mr. Woodward was the Company's Chief Executive Officer. Mr. Woodward is a
director of DBR (Lafite), the Northern Trust Bank of California, the Wine
Institute, the American Vintners' Association, the American Center for Wine,
Food and the Arts, The Marin Theatre Company, Edna Valley Vineyard and Canoe
Ridge Winery. He also is a director and member of the compensation committee of
the board of Hog Island Oyster Company. Mr. Woodward also serves as president
and as a director of The Chalone Wine Foundation.
THOMAS B. SELFRIDGE. Mr. Selfridge joined the Company as President on
January 1, 1998 and was appointed the Company's Chief Executive Officer as of
July 1, 1998. He has been a director of the Company since May 1998 and is a
member of the Board's Operating Committee. Mr. Selfridge also is a director of
Edna Valley Vineyard and Canoe Ridge Winery. Before joining the Company, Mr.
Selfridge was Vice President-Production of Kendall-Jackson Winery, Ltd. He also
serves as secretary and as a director of The Chalone Wine Foundation.
DANIEL E. COHN,ESQ. Mr. Cohn has served as the Company's secretary since
1998. He has been a partner of Farella Braun & Martel LLP since 1991 and the
chair person of its business practice group since 1998.
ROBERT B. FARVER. Mr.Farver joined the Company in 1992 as the 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.
PART II
-10-
<PAGE>
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 markups, markdowns or commissions, and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter ended High Low
----------------- ------ -----
<S> <C> <C>
March 31, 2000 $ 9.13 8.13
December 31, 1999 9.50 8.25
September 30, 1999 10.00 9.00
June 30, 1999 9.94 8.13
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
</TABLE>
On June 9, 2000, the closing price for the common stock was $8.25 per
share. The average weekly trading volume of the stock was approximately 4,233
shares during the year ended March 31, 2000.
HOLDERS OF RECORD.
As of June 9, 2000, there were approximately 5,128 holders of record of the
Company's common stock.
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.
-11-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for the fiscal years
ended March 31, 2000, 1999 and 1998, and the calendar years ended December 31,
1996 and 1995 are derived from the Company's audited consolidated financial
statements. Financial data for the twelve months ended March 31, 1997 and 1996
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. See "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER-SHARE DATA)
Year ended December 31
----------------------
1996 1995
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $31,044 $25,032
Gross profit 12,375 8,792
Revenues from other operations, net 26 108
Selling, general and administrative expenses (6,282) (5,374)
Operating income 6,119 3,516
Interest expense (1,844) (2,779)
Equity in net income of Duhart-Milon 304 74
Minority interest (621) (357)
Settlement income - -
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>
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $ 51,457 $ 42,826 $ 36,755 $ 31,188 $ 25,987
Gross profit 22,922 19,625 16,216 12,811 9,243
Revenues from other operations, net 40 194 318 107 20
Selling, general and administrative expenses (13,941) (10,805) (8,147) (6,466) (5,442)
Operating income 9,021 9,014 8,387 6,452 3,801
Interest expense (2,225) (1,761) (1,872) (1,789) (2,429)
Equity in net income of Duhart-Milon 735 766 341 281 126
Minority interest (1,290) (1,219) (1,125) (681) (387)
Settlement income - 4,447 - - -
Net income $ 3,681 $ 6,636 $ 3,410 $ 2,520 $ 600
Net income per common share $ 0.34 $ 0.75 $ 0.41 $ 0.31 $ 0.10
BALANCE SHEET DATA:
Working capital $ 30,219 $ 49,192 $ 27,794 $ 24,283 $ 22,023
Total assets 145,665 103,471 90,294 75,859 68,973
Long-term obligations less current maturities 31,279 35,273 18,124 18,379 13,415
Shareholders' equity 73,672 58,291 50,405 42,835 41,098
</TABLE>
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<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 and 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, 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 borrowings associated with present and
projected capital projects; (iv) the price and availability in the marketplace
of grapes meeting the Company's quality standards and other requirements; (v)
the effect of weather, agricultural pests and disease and other natural forces
on growing conditions and, in turn, the quality and quantity of grapes produced
by the Company; (vi) regulatory changes which might restrict or hinder the sale
and/or distribution of alcoholic beverages and (vii) the risks associated with
the assimilation of acquisitions. 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.
RESULTS OF OPERATIONS
The following table represents financial data as a percentage of net
revenues for the indicated periods:
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Gross profit 45% 46% 44%
Revenues from other operations, net 0% 0% 1%
Selling, general and administrative expenses (27)% (25)% (22)%
Operating income 18% 21% 23%
Interest expense (4)% (4)% (5)%
Settlement Income 0% 10% 0%
Equity in net income of Duhart-Milon 1% 2% 1%
Minority interest (3)% (3)% (3)%
Net income (loss) 7% 15% 9%
</TABLE>
WINE SALES
Net revenues for the year ended March 31, 2000 increased $8.6 million or
20% over the comparable period in the preceding year. This increase was
attributable to a volume increase of 18% and a 2% average price increase.
Net revenues for the year ended March 31, 1999 increased $6.1 million or
17% over the prior year comparable period. This increase was attributable to a
volume increase of 14% and a 3% average price increase.
Sales volume in the California market comprised 32% and 26% of the
Company's total sales for the year ended March 31, 2000 and 1999, respectively.
GROSS PROFIT
-13-
<PAGE>
Gross profit for the year ended March 31, 2000 increased $3.3 million or
17% over the comparable period in the preceding year. This was primarily the
result of increased sales volume and increased average sales prices.
Gross profit for the year ended March 31, 1999 increased $3.4 million or
21% over the comparable period in the preceding year. This was primarily the
result of increased sales volume and average sales prices, as well as, less
pronounced increases in average production costs partly due to the relative
success and size of the 1997 harvest.
REVENUE FROM OTHER OPERATIONS, NET
Revenue from other operations, primarily consists of revenue obtained from
third-party wineries, net of related expenses, for grape crushing or wine
bottling and net profit from sales of bulk wine. This aspect of the Company's
operation is not significant although the Company cannot predict the materiality
of such operations in the future, 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.
Such revenue for the year ended March 31, 2000 decreased $154,000 from the
comparable period in the preceding year. This was attributable to less custom
crush demand.
Such revenue for the year end March 31, 1999 decreased $124,000 from the
comparable period in the preceding year which 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the year ended March 31,
2000 increased $3.1 million or 29% 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,
(ii) expenditures in the Company's infrastructure.
Selling, general and administrative expenses in the year ended March 31,
1999 increased $2.7 million or 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.
OPERATING INCOME
Operating income remained substantially the same for the years ended March
31, 2000 and 1999. Although gross profits increased in fiscal 2000 as compared
to fiscal 1999, this increase was offset by an increase in selling, general and
administrative expenses and lower revenues from other operations as discussed
above.
Operating income for the year ended March 31, 1999 increased $627,000 or 7%
over the prior comparable year despite reduced revenue from other operations as
noted above. This increase was primarily due to higher gross profits, offset by
increased selling, general and administrative expenses. Additionally, other
revenues from operations decreased to $194,000 or 2.1% of operating income as
compared to $318,000 or 3.8% for the year ended March 31, 1998.
INTEREST EXPENSE
For the year ended March 31, 2000 interest expense increased by $464,000 or
26% as compared with the prior year. This was a result of increased borrowings
primarily to fund acquisitions that took place in the fiscal year. 2000. Also,
the Company borrowed $2.0 million to pay holders of subordinated debentures that
matured during the year.
Interest expense decreased $111,000 or 6% between the years ending March
31, 1999 and 1998 which primarily was driven by lower interest rates.
SETTLEMENT INCOME
For the year ended March 31, 1999, the Company recognized $4.4 million of
non-recurring gain arising from the final settlement of litigation related to
the July 1996 fire damage at the Carmenet Winery.
EQUITY IN NET INCOME OF DUHART-MILON
The Company's 23.5% equity interest in the net income of Duhart-Milon for
the years ending March 31, 2000, 1999, and 1998 were $735,000 and $766,000, and
$341,000 respectively. These results were materially the same for 2000 and 1999
and the 125% increase in fiscal 1999 as compared to fiscal 1998 is primarily
attributable to exceptionally high demand for the 1996 vintage of Bordeaux
wines.
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 periodic
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 records the gain or loss for currency
translation in other comprehensive income or loss, which is part of shareholders
equity. The amount recorded was increased to $3.6 million from $2.3 million for
the year ended March 31, 2000 as compared to the prior year due to the decrease
in the relative worth of the French Franc when compared to the U.S. dollar
during the
-14-
<PAGE>
period. 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
MINORITY INTEREST
The minority interest in the net income of Edna Valley Vineyard ("EVV") and
Canoe Ridge Vineyard, LLC ("CRV") for the three years ended March 31, 2000
consisted of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
Year ended March 31
Minority ----------------------------
Venture Minority Owner Percent 2000 1999 1998
------- -------------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50.00% $ 925 $ 909 $ 906
Canoe Ridge Vineyard, LLC Various 49.50% 365 310 219
------ ------ ------
$1,290 $1,219 $1,125
====== ====== ======
</TABLE>
The minority interest in earnings for the year ended March 31, 2000
increased $71,000 or 6% over the comparable period ended March 31, 1999, due to
steadily improving performance at both EVV and CRV primarily as a result of
increases in both case sales and gross margins per case.
The minority interest in earnings for the year ended March 31, 1999
increased $94,000 or 8% from the prior comparable period 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, 2000 was $3.7 million, a decrease
of $3.0 million, or 45%, over the year ended March 31, 1999. This was primarily
as a result of the non-recurring gain of $2.6 million (after tax-effect)
recorded in 1999, higher selling, general and administrative expenses and
increased interest expense.
Net income for the year ended March 31, 1999 was $6.6 million, an increase
of $3.2 million as compared to the year ended March 31, 1998. Excluding the
effects of the non-recurring gain as discussed above, net income increased 20%
principally due to higher gross profits offset by higher selling, general and
administrative expenses.
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.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital as of March 31, 2000 was $30.0 million, compared to $49.1
million at March 31, 1999. The $19.1 million decrease was primarily attributable
to an increase of $23 million in borrowing under the revolving bank loan
agreement and an increase in accounts payable and accrued expenses of $3.2
million and a decrease in cash and cash equivalents of $1.7 million. This was
partially offset by an increase in inventory of $10.9 million, an increase in
accounts receivable of $1.8 million and an increase in deferred income taxes and
income tax receivable of $1.3 million. Borrowings under the Company's credit
lines totaled $57.0 million at March 31, 2000 compared to $23.9 million at March
31, 1999. The Company had no cash balances as of March 31, 2000 compared to $1.7
million at March 31, 1999.
The Company has historically financed its growth through increases in
borrowings and cash flow from operations. In addition, the Company received $6.5
million of proceeds from the sale of common stock pursuant to previously issued
common stock warrants. During fiscal 2000, the Company's primary uses of its
capital have been to finance a $30.5 million increase in property, plant and
equipment (including vineyard development and the acquisition of Sagelands
Winery) and a $10.9 million increase in inventory.
Management expects that the Company's working capital needs will grow
significantly to support expected future growth in sales volume. Due to the
lengthy aging and processing cycles involved in premium wine production,
expenditures for inventory and fixed assets need to be made one to three years
or more in advance of anticipated sales. The Company currently expects its
operating and capital spending requirements will total approximately $60.0
million for the year ending March 31, 2001.
The Company expects to finance these future capital needs through
operations, security offerings, and additional borrowings. There can be no
assurance that the Company will be able to obtain this financing on terms
acceptable to the Company.
BORROWING ARRANGEMENTS
-15-
<PAGE>
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 loan facility. As of March 31, 2000,
the Company had $13.0 million available under the revolving loan facility and
has utilized the entire term loan.
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 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 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 are highest
during 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.
OUR PROFITS DEPEND LARGELY ON SALES IN CERTAIN STATES AND ON SALES OF
CERTAIN VARIETALS
In the twelve months ended March 31, 2000, 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 90% of our net revenues in the twelve months ended March 31,
2000 were concentrated in our top four selling varietal wines. Specifically,
sales of Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot accounted for
45%, 20%,13% and 12% of our net revenues, respectively.
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.
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.
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
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<PAGE>
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 either have, or are currently planning to insure 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.
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.
It is also possible that the vineyards could be infested by new strains of
Phylloxera, insects, fungi, viruses or similar perils. For example, a new strain
of the sharpshooter (glassy winged), a flying insect that is believed to carry
Pierces' Disease and can kill vines with which it comes into contact, recently
was discovered in Southern California and is believed to be migrating north.
The weather phenomenon commonly referred to as "El Nino" produced heavy
rains and cooler weather during the Spring of 1999 and 1998, which resulted in
colder and wetter soils than are typical during California's grape growing
season. Consequently, the 1999 and 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 1999 and 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.
Current trends in the domestic and foreign wine industry point to rapid
plantings of new vineyards and replanting of old vineyards to greater densities,
with the expected result of significantly increasing the worldwide 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 35%, respectively, of our net revenues during
the twelve months ended March 31, 2000. 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 single broker in order to sell our wines
within California. Such sales represent 32% of our net revenues during the
twelve month period ended March 31, 2000. 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.
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<PAGE>
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.
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 are subject to certain hazards and product 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, the Company
cannot be certain that the Company 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 and packaging
supplies 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. Export sales
accounted for approximately 5% of total consolidated revenue for the fiscal year
ended March 31, 2000 and 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 enforcement of our trademarks. There can be no assurance that
competitors will refrain from infringing our marks or 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.
OUR ACQUISITIONS AND POTENTIAL FUTURE ACQUISITIONS INVOLVE A NUMBER OF
RISKS
Our acquisition of Staton Hills Winery (renamed Sagelands Winery) and the
possible construction of a new winery on the Suscol Ranch property we recently
acquired (and potential future acquisitions) involve risks which include
assimilating these operations into our Company; integrating, retaining and
motivating key 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
disparate entities; risks inherent in the production of wine in,
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<PAGE>
and marketing of wine from, Washington State; and the replanting of existing
vineyards from white wine grapes to red wine grapes.
We relied on debt financing to purchase Hewitt Ranch, Suscol Ranch, Staton
Hills Winery, the Jade Mountain brand and other vineyard land and related assets
during the fiscal year ended March 31, 2000. Consequently our debt-to-equity
ratio is high in relation to our historical standards. The interest costs
associated with this debt will increase our operating expenses and the risk of
negative cash flow.
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.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets......................................... 21
Consolidated Statements of Income................................... 22
Consolidated Statements of Shareholders' Equity..................... 23
Consolidated Statements of Cash Flows............................... 24
Notes to Consolidated Financial Statements.......................... 25
INDEPENDENT AUDITORS' REPORT.............................................. 36
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<PAGE>
<TABLE>
<CAPTION>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents $ - $ 1,670
Accounts receivable, less allowance for doubtful
accounts of $129 in 2000 and $86 in 1999 9,836 8,086
Notes receivable - affiliate 119 109
Income tax receivable 1,178 616
Inventory 51,826 40,926
Prepaid expenses 579 492
Deferred income taxes 894 158
--------- ---------
Total current assets 64,432 52,057
Investment in Chateau Duhart-Milon 9,146 10,409
Notes receivable - affiliate, long-term portion - 119
Property, plant and equipment - net 64,134 33,591
Goodwill and trademarks - net of accumulated
amortization of $1,743 in 2000 and $1,495 in 1999 7,220 6,196
Other assets 733 1,099
--------- ---------
Total assets $ 145,665 $ 103,471
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 5,650 $ 2,494
Revolving bank loan 27,017 -
Current maturities of long-term obligations 1,784 371
--------- ---------
Total current liabilities 34,451 2,865
Revolving bank loan - 3,938
Long-term obligations, less current maturities 31,041 22,835
Convertible subordinated debentures - 8,500
Deferred income taxes 1,743 2,765
--------- ---------
Total liabilities 67,235 40,903
--------- ---------
Minority interest 4,758 4,277
Shareholders' equity:
Common stock - authorized 15,000,000 shares no
par value; issued and outstanding: 10,224,521 and
8,720,771 shares, respectively 61,377 48,965
Stock subscription receivable - (1,007)
Retained earnings 15,851 12,629
Accumulated other comprehensive loss (3,556) (2,296)
--------- ---------
Total shareholders' equity 73,672 58,291
--------- ---------
Total liabilities and shareholders' equity $ 145,665 $ 103,471
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended March 31,
---------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Gross revenues $ 52,808 $ 43,973 $ 37,651
Excise taxes (1,351) (1,147) (896)
-------- -------- --------
Net revenues 51,457 42,826 36,755
Cost of wines sold (28,535) (23,201) (20,539)
-------- -------- --------
Gross profit 22,922 19,625 16,216
Revenues from other operations, net 40 194 318
Selling, general and administrative expenses (13,941) (10,805) (8,147)
-------- -------- --------
Operating income 9,021 9,014 8,387
Interest expense (2,225) (1,761) (1,872)
Equity in Chateau Duhart-Milon 735 766 341
Minority interests (1,290) (1,219) (1,125)
Settlement income - 4,447 -
-------- -------- --------
Income before income taxes 6,241 11,247 5,731
Income taxes (2,560) (4,611) (2,321)
-------- -------- --------
Net income $ 3,681 $ 6,636 $ 3,410
======== ======== ========
Net income available to common shareholders $ 3,222 $ 6,636 $ 3,410
Earnings per share-basic $ 0.34 $ 0.77 $ 0.44
Earnings per share-diluted $ 0.34 $ 0.75 $ 0.41
Weighted average number of shares outstanding:
Basic 9,383 8,669 7,786
Diluted 9,483 8,852 8,409
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS)
Common Stock Accumulated Total
-------------------- Stock Other Compre-
Number of Subscription Retained Comprehensive hensive
Shares Amount Receivable Earnings Loss Total Income
--------- -------- ------------ -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 7,655 $ 41,841 $ - $ 2,583 $ (1,589) $ 42,835 $ -
Employee stock purchase plan 11 75 - - - 75
Warrants exercised 686 4,800 - - - 4,800
Options exercised 42 155 - - - 155
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
--------- -------- ------------ -------- ------------- -------- -------
Employee stock purchase plan 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
--------- -------- ------------ -------- ------------- -------- -------
Employee stock purchase plan 8 65 - - - 65
Warrants exercised and deemed
dividend 833 6,667 - (459) - 6,208
Options exercised 20 115 - - - 115
Return of common stock in
settlement of subscription
receivable (104) (1,012) 1,007 - - (5)
Debenture conversion 738 6,500 - - - 6,500
Profit sharing, net of repurchases 8 77 - - - 77
Foreign currency
translation adjustment - - - - (1,260) (1,260) (1,260)
Net income - - - 3,681 - 3,681 3,681
--------- -------- ------------ -------- ------------- -------- -------
Balance, March 31, 2000 10,224 $ 61,377 $ - $ 15,851 $ (3,556) $ 73,672 $ 2,421
========= ======== ============ ======== ============= ======== =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
Year ended March 31,
-----------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,681 $ 6,636 $ 3,410
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,758 3,814 3,138
Equity in net income of Chateau Duhart-Milon (735) (766) (341)
Deferred income taxes (1,014) 572 740
Increase in minority interest 1,290 1,219 1,125
Other (105) 25 8
Changes in:
Accounts and other receivable (2,320) (1,737) (2,023)
Inventory (7,740) (6,649) (4,860)
Prepaid expenses and other assets 279 (1,261) (479)
Accounts payable and accrued liabilities 3,159 (931) 1,624
------- ------- -------
Net cash provided by operating activities 1,253 922 2,342
------- ------- -------
Cash flows from investing activities:
Capital expenditures (10,889) (7,112) (6,331)
Vineyard property acquired (22,152) - -
Business acquired, net of cash acquired (6,127) - -
Proceeds from disposal of property and equipment 204 89 105
Collection of notes receivable 39 164 194
Investment in Edna Valley joint venture (1,090) - (1,050)
Distributions from Duhart-Milon 738 - 363
------- ------- -------
Net cash used in investing activities (39,277) (6,859) (6,719)
------- ------- -------
Cash flows from financing activities:
Borrowings on revolving bank loan-net 23,079 (7,014) 3,181
Repayment of short-term debt - (952) -
Distributions to minority interests (809) (619) (638)
Proceeds from long-term debt 10,000 25,182 -
Repayment of long-term debt (381) (12,309) (1,210)
Repayment of convertible subordinated debentures (2,000) - -
Proceeds from warrants exercised 6,208 1,000 4,800
Proceeds from issuance of common stock 257 87 230
------- ------- -------
Net cash provided by financing activities 36,354 5,375 6,363
------- ------- -------
Net increase (decrease) in cash and equivalents (1,670) (562) 1,986
Cash and equivalents at beginning of year 1,670 2,232 246
------- ------- -------
Cash and equivalents at end of year $ - $ 1,670 $ 2,232
======= ======= =======
Other cash flow information:
Interest paid $ 2,896 $ 1,779 $ 1,895
Income taxes paid 4,135 4,271 2,610
Non-cash transactions:
Debt assumed in acquisition of real property - - 1,974
Profit sharing stock contribution - 132 -
Stock issued and subscribed - (1,007) -
Debentures converted into common stock 6,500 - -
Return of stock in settlement of subscription receivable 1,012 - -
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS
The Chalone Wine Group, Ltd. ("the Company") produces and sells premium to
luxury quality table wines. 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 5% of
total revenue for the year ended March 31, 2000. The Company supplies most of
its grape needs from its estate-owned vineyards but utilizes independent grape
growers for some of its grape requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
its majority owned subsidiaries, and Edna Valley Vineyard ("EVV"), a winery
operation in San Luis Obispo County, California, owned 50% by the Company and
50% by 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 EVV operations for accounting
purposes. The Company has certain commitments related to its continuing
ownership of EVV (see Note 14). Intercompany transactions and balances have been
eliminated.
At March 31, 2000, Domaines Barons de Rothschild (Lafite) ("DBR"), a French
company, owned approximately 44% of the Company's outstanding common stock, and
the Company owns a 23.5% partnership interest in DBR's Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate located in
Pauillac, France. The Company accounts for this investment using the equity
method.
ACCOUNTING ESTIMATES
The preparation 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.
CASH AND EQUIVALENTS
Cash equivalents are highly liquid instruments purchased with original
maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. 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.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. The Company performs ongoing credit evaluations of
its customer's financial position and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have been
within management's expectations.
-25-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, with depreciation 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 costs of property, plant and
equipment acquisitions are allocated to each asset acquired based on their
relative estimated fair values at the date of acquisition.
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 fruit, 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.
The Company had capitalized interest of $758,000 and $65,000 for the year
ended March 31, 2000 and 1999, respectively, which is included in property,
plant and equipment.
Caves represent improvement costs to dig into hillsides and structurally
reinforce underground tunnels used to age and store the Company's wines.
GOODWILL AND TRADEMARKS
The excess of the purchase price paid over acquired net assets is recorded
as goodwill and amortized over 20 to 40 years on a straight-line basis. 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 14). Trademarks are
amortized over their estimated useful lives from the date they are put into use.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
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 in other comprehensive income or loss
as a component of shareholders' equity.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped and title passes to the
customer. Revenue from product sold at our retail locations is recognized at the
time of sale. Revenue is recorded net of sales returns, including a provision
for estimated future returns. Sales returns have historically been
insignificant. The Company generally allows thirty days from the date of
shipment for our customers to make payment. No products are sold on consignment.
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 No. 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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value based method in accordance with APB No.25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES and provides the pro forma disclosures required by SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION (see Note 10). No compensation
expense has been recognized in the financial statements for employee stock
arrangements.
-26-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes financial instruments to reduce interest rate and
foreign currency exchange rate risk. The Company does not enter into financial
instruments for trading or speculative purposes. Payments or receipts on
interest rate swap agreements are recorded in interest expense. Forward exchange
contracts are used to manage exchange rate risks on certain purchase
commitments, generally French oak barrels, denominated in foreign currencies.
Gains and losses relating to firm purchase commitments are deferred and are
recognized as adjustments of carrying amounts or in income when the hedged
transaction occurs. The notional amounts and related foreign currency
transaction gains and losses, net of the impact of hedging, were not significant
in the fiscal years 2000, 1999 or 1998.
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. 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 for
periods prior to their conversion, as these had, an antidilutive effect.
The following is a reconciliation of the figures used in deriving basic EPS
and those used in calculating diluted EPS (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
Effect of dilutive securities
-----------------------------
Stock
Basic EPS Warrants options Diluted EPS
--------- -------- ------- -----------
<S> <C> <C> <C> <C>
Year ended March 31, 2000:
Income available to common stockholders(1) $3,222 - - $3,222
Shares 9,383 100 - 9,483
------ ------
EPS $ 0.34 $ 0.34
====== ======
Year ended March 31, 1999:
Income available to common stockholders $6,636 - - $6,636
Shares 8,669 183 - 8,852
------ ------
EPS $ 0.77 $ 0.75
====== ======
Year ended March 31, 1998:
Income available to common stockholders $3,410 - - $3,410
Shares 7,786 457 166 8,409
------ ------
EPS $ 0.44 $ 0.41
====== ======
<FN>
(1) Net income available to common stockholders in 2000 is net income reduced by
the warrant related deemed dividend of $459,000 (see Note 10).
</FN>
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" that
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that derivatives be recognized in the balance
sheet at fair value and specifies the accounting for changes in fair value. In
June 1999, the FASB issued SFAS No. 137, that defers the effective date of SFAS
No. 133 until fiscal years beginning after June 15, 2000. The Company plans to
adopt SFAS No. 133 in fiscal 2002 and does not expect it to have a material
effect on the consolidated financial statements.
SEGMENT REPORTING
The Company produces and sells premium to luxury quality table wines and
has determined that its product line operating segments although consisting of
multiple products and brands all share similar long-term financial performance,
-27-
<PAGE>
production processes, customer types, distribution methods and other economic
characteristics. Accordingly, these operating segments have been aggregated as a
single operating segment in the consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and equivalents, accounts receivable, accounts payable and accrued
expenses, and certain other assets and liabilities are considered financial
instruments. Carrying values are estimated to approximate fair values for these
instruments, as they are short-term in nature and are receivable or payable on
demand.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform
with the current period presentation.
NOTE 3 - ACQUISITION OF SAGELANDS WINERY
On June 15, 1999 the Company purchased 100% of the outstanding shares of
SHW Equity Company, a holding company which, in turn, owns 100% of Sagelands
Winery (formerly Staton Hills Winery) ("SHW") and its adjacent vineyards in
Yakima County, Washington. The total acquisition price, which was paid in cash
and financed by the Company's available credit line, was approximately $6.1
million, inclusive of $3.3 million of SHW's notes payable paid by the Company.
The acquisition was recorded using the purchase method of accounting and
the purchase price was allocated to the acquired assets and liabilities assumed
based upon their estimated fair values on the date of acquisition. The amount
allocated to goodwill of $182,000 is being amortized on a straight-line basis
over 20 years. In connection with the acquisition, the purchase price was
allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash $ 62
Inventory 3,160
Property, plant and equipment 2,504
Deferred taxes and other assets 882
Goodwill 182
Liabilities (601)
------
Total $6,189
======
</TABLE>
The accompanying consolidated financial statements include operations of
Sagelands Winery for the period from June 15, 1999 through March 31, 2000. The
pro forma effect of including the operations of Sagelands Winery in the
consolidated financial statements of the Company as if it had been acquired at
the beginning of each of the last two fiscal years would not be significant.
NOTE 4 - INVENTORY
Inventory consists of the following at March 31 (IN THOUSANDS):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Bulk wine $26,989 $25,802
Bottled wine 23,791 14,387
Wine packaging supplies 525 417
Other 521 320
------- -------
$51,826 $40,926
======= =======
</TABLE>
-28-
<PAGE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31 (IN
THOUSANDS):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land $ 17,436 $ 5,216
Vineyards 10,104 5,835
Vineyards under development 7,144 5,075
Caves 1,678 1,678
Buildings 27,255 17,335
Machinery and equipment 23,786 18,888
------- -------
87,403 54,027
Accumulated depreciation (23,269) (20,436)
------- -------
$ 64,134 $ 33,591
======== ========
</TABLE>
During the fiscal year ended March 31, 2000 the Company purchased
Sagelands Winery (see Note 3) , two adjacent land parcels and residences in
Rutherford, California (Hewitt Ranch Property), and 164 acres of land in Napa
County, California (Suscol Ranch Property). The acquisition cost allocated to
the principal residence, of $6.5 million, is based on an appraised value and is
included in land and buildings. Since being acquired, this property has been
subdivided and listed for sale. Management expects that it will be sold in the
second quarter of 2000.
NOTE 6 - INVESTMENT IN CHATEAU DUHART-MILON
Duhart-Milon's condensed balance sheet as of March 31, 2000 and 1999 and
the results of operations for fiscal years ended March 31, 2000, 1999 and 1998
are as follows (translated into U.S. dollars at the year-end and average
exchange rate for the period, respectively) (IN THOUSANDS):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Inventory $ 2,911 $ 3,223
Other current assets 9,737 10,840
-------- --------
Current assets 12,648 14,063
-------- --------
Property and equipment, net 1,917 2,524
-------- --------
Total assets $ 14,565 $ 16,587
======== ========
Current liabilities $ 2,442 $ 3,111
Equity 12,123 13,476
-------- --------
Total liabilities and equity $ 14,565 $ 16,587
======== ========
</TABLE>
The results of operations are summarized as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 5,583 $ 5,941 $ 3,912
Cost of sales (2,308) (2,626) (2,337)
------- ------- -------
Gross profit 3,275 3,315 1,575
------- ------- -------
Revenues from other operations, net 40 154 112
------- ------- -------
Net earnings $ 3,315 $ 3,469 $ 1,687
======= ======= =======
Company's share of net earnings $ 779 $ 815 $ 396
Less: amortization expense (44) (49) (55)
------- ------- -------
Equity in investment of Duhart-Milon $ 735 $ 766 $ 341
======= ======= =======
</TABLE>
-29-
<PAGE>
NOTE 6 - INVESTMENT IN CHATEAU DUHART-MILON (CONTINUED)
On October 1, 1995, the carrying amount of the Company's investment in
Duhart-Milon was greater than its share of Duhart-Milon's net assets by
approximately $8.9 million. The bulk of that difference related primarily to the
underlying value of the land owned by Duhart-Milon and, accordingly is not
amortized. A portion of that difference, however, was attributable to inventory
and was amortized based on annual sales quantities through March 31, 2000.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company recognizes currency translation gains or
losses in shareholders' equity as other comprehensive income or loss, which
totaled $3,556,000 as of March 31, 2000. This amount increased from $2,296,000
as of March 31, 1999 due to the decrease in the relative worth of the French
Franc when compared to the U.S. dollar during the twelve months ended March 31,
2000.
NOTE 7 - CARMENET FIRE
On July 31, 1996 a wildfire damaged approximately 75% of the producing
acreage at the Company's Carmenet Winery, located in Sonoma, California. Prior
to the fire, the damaged acreage was planted to Cabernet Sauvignon, Merlot and
Cabernet Franc grapes used for estate bottled wines produced under the Carmenet
label. 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 completed replanting of the damaged acreage in 1998 and the
vines are expected to take approximately five years to return to full production
levels. Until the damaged acreage is returned 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.
The fire was caused by the electrical lines of Pacific Gas and Electric
("PG&E"). PG&E agreed to pay the Company $5.1 million of which $425,000 was
received and recorded as an offset to fire related inventory write-offs in
fiscal 1998, and the remaining amount, net of legal expenses, was received and
recorded as settlement income in fiscal year 1999.
NOTE 8 - BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following at March 31 (IN THOUSANDS):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Revolving bank loan of $40,000,000, interest at LIBOR+0.875%
(7.31% at March 31, 2000), payable monthly, unsecured, due March 31, 2001 $ 27,017 $ 3,938
Convertible Subordinated Debentures, interest at 5%, of which $6.5 million
was converted into 738,016 shares of common stock of the Company and
$2.0 million was repaid in April 1999 - 8,500
Bank term loan, unsecured, interest at varying LIBOR rates plus 1.2% to 1.25%
(7.31% at March 31, 2000) payable monthly, principal payable quarterly
commencing December 31, 2000 through March 2006 30,000 20,000
Mortgage note, interest at 7%, principal and interest payable monthly, due
August, 2021 1,669 1,740
Other notes payable, due through 2016, interest ranging from 7% to 10% 1,156 1,466
--------- ---------
59,842 35,644
Less current maturities (28,801) (371)
--------- ---------
$ 31,041 $ 35,273
========= =========
</TABLE>
The $40.0 million revolving credit facility and $20 million term loan are
pursuant to an agreement with a bank that was entered into in March 1999. Also
pursuant to the agreement the term loan may be increased to $30.0 million. The
agreement includes restrictive covenants 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. As of March 31, 2000, the Company was in compliance with these
covenants. Management expects to refinance the revolving bank loan during the
fiscal year ending March 31, 2001 at similar terms.
NOTE 8 - BORROWING ARRANGEMENTS (CONTINUED)
-30-
<PAGE>
Maturities of borrowings for each of the next five years ending March 31
are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2001 $ 28,801
2002 3,045
2003 3,049
2004 3,053
2005 3,057
Thereafter 18,837
----------
Total $ 59,842
==========
</TABLE>
As of April 9, 1999, the Company entered into an interest-rate swap
contract for a notional amount of $20 million, maturing on April 6, 2006. 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%. The fair value of the contract was approximately $512,000 on March
31, 2000.
NOTE 9 - STOCK BASED COMPENSATION
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 forfeitures to the
Company under the terms of such plans. These options generally expire 10 years
from the date of grant and vest after a three to twelve month period. As of
March 31, 2000 approximately 579,000 options were available for future grant
under the Plan.
Option activity under the plans has been as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- --------------
<S> <C> <C>
Outstanding, March 31, 1997 635,057 $ 8.61
Granted (weighted average fair value or $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 or $5.70) 172,520 11.40
Exercised (308,004) 8.90
Canceled (37,500) 11.23
----------- --------------
Outstanding March 31, 1999 608,109 10.39
----------- --------------
Granted (weighted average fair value or $4.79) 119,000 9.35
Exercised (22,800) 6.11
Canceled (70,555) 10.12
----------- --------------
Outstanding March 31, 2000 633,754 $ 10.38
=========== ==============
</TABLE>
NOTE 9 - STOCK BASED COMPENSATION (CONTINUED)
-31-
<PAGE>
Additional information regarding options outstanding as of March 31, 2000
is as follows:
<TABLE>
<CAPTION>
Options Outstanding (all exercisable)
-------------------------------------------------------
Range of Weighted Avg.
exercise Number Remaining Weighted Avg.
Prices Outstanding Contractual Life Exercise Price
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
$5.00-$7.99 62,940 3.8 years $ 6.77
$8.00-$9.99 192,934 5.8 years 9.31
$10.00-$12.00 377,880 6.8 years 11.52
---------------- ------------------ -----------------
633,754 6.2 years $ 10.38
================ ================== =================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to use 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 8,118 shares, 7,734 shares, and 11,005 shares in each of the
years ended March 31, 2000, 1999, 1998, respectively, at weighted average prices
of $7.99, $9.09, and $6.82, respectively. The weighted average fair value per
share of the awards for each of the years ended March 31, 2000, 1999, 1998 was
$9.21, $10.69, and $10.48, respectively. At March 31, 2000, 14,409 shares were
reserved for future issuances under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION
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 19.29%, 21.53% and 24.1% in
the years ended March 31, 2000, 1999 and 1998, respectively; risk-free interest
rates of 6.93%, 6.49% and 6.59% for the years ended March 31, 2000, 1999 and
1998, respectively, 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's stock
option and stock purchase plan been accounted for under SFAS No. 123, net income
and earnings per share would have been reduced to the following pro forma
amounts (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
2000 1999 1998
----------- -------------- -------------
<S> <C> <C> <C>
Net Income:
As reported (1) $ 3,222 $ 6,636 $ 3,410
Pro forma $ 2,712 $ 5,727 $ 2,895
Earnings per share:
Basic $ 0.34 $ 0.77 $ 0.44
Diluted $ 0.34 $ 0.75 $ 0.42
Pro forma basic $ 0.29 $ 0.66 $ 0.37
Pro forma diluted $ 0.29 $ 0.65 $ 0.35
<FN>
(1) Net income available to common stockholders in 2000 is net income reduced by
the warrant related deemed dividend of $459,000 (see Note 10).
</FN>
</TABLE>
NOTE 10 - COMMON STOCK
In March 2000, holders of 833,334 warrants to purchase the Company's stock
exercised their rights and purchased an
-32-
<PAGE>
equivalent number of common shares at an exercise price of $7.45 per share. The
warrants were originally issued by the Company in 1995 with an exercise price of
$8.00. In February 2000, the Company's Board of Directors authorized a reduction
of the exercise price to $7.45 and on March 8, 2000, the warrants were exercised
and converted to common stock. The difference between the aggregate warrant
proceeds at the modified versus original exercise price was $459,000 and was
recorded by the Company as a deemed dividend, thereby, increasing the balance of
common stock with a corresponding decrease to retained earnings and income
available to common shareholders.
On April 20, 1999, convertible subordinated debentures (convertible to
965,098 shares of the Company's common stock) 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 $1.0 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 of
the Company's outstanding $7.00 warrants issued as of March 29, 1993.
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 (see Note 8).
NOTE 11 - 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 Company
contributed $143,000, $154,000 and $138,000 for the year ended March 31, 2000,
1999, and 1998, respectively. At March 31, 2000, the plan held approximately
31,000 shares of the Company's common stock. At the participant's option, upon
termination of service of any plan participant, the Company will repurchase that
participant's shares held in the plan at market value.
The Company sponsors a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code covering substantially all full-time U.S.
employees. Participating employees may contribute up to 15% of their eligible
compensation up to the annual Internal Revenue Service contribution limit. As
determined annually by the Board of Directors, the Company matches employee
contributions according to a specified formula and contributed $131,000, $99,000
and $92,000 in 2000, 1999 and 1998, respectively.
NOTE 12 - INCOME TAXES
The provisions for income taxes for the years ended March 31 are summarized
as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal
Current $ 2,949 $ 3,121 $ 1,261
Deferred (966) 471 585
------------- ------------- -------------
1,983 3,592 1,846
------------- ------------- -------------
State
Current 625 920 319
Deferred (48) 99 156
------------ ------------- --------------
577 1,019 475
------------ ------------- --------------
$ 2,560 $ 4,611 $ 2,321
============ ============= ==============
</TABLE>
The provisions for income taxes differ from amounts computed at the
statutory rate as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------
2000 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $ 2,123 $ 3,824 $ 1,949
State tax net of federal benefit 381 655 334
Reconciling items:
Effect of acquisitions, net 38 33 33
Other 18 99 5
------------ ------------- -------------
$ 2,560 $ 4,611 $ 2,321
============ ============= =============
</TABLE>
NOTE 12 - INCOME TAXES (CONTINUED)
-33-
<PAGE>
The Company's deferred tax assets (liabilities) were as follows at March 31
(IN THOUSANDS):
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Basis difference in property, plant and equipment $ (2,442) $ (2,561)
Net operating loss carryforward 3,129 -
Basis difference in inventory 368 158
Other 363 (204)
Valuation allowance (2,267) -
------------ -------------
Net deferred tax liability $ (849) $ (2,607)
============ =============
Classified as:
Current deferred tax assets $ 894 $ 158
============ =============
Long-term deferred tax liabilities $ (1,743) $ (2,765)
============ =============
</TABLE>
The Company and its subsidiaries file their federal tax returns on a
consolidated basis. As of March 31, 1999, Sagelands Winery has a federal net
operating loss carryforward of approximately $9.2 million that will expire
through 2015. A valuation allowance has been established for a portion of the
related deferred tax asset that management believes may not be realized due to
annual limitations resulting from the ownership change in Sagelands Winery.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of income include the following transactions
with related parties (IN THOUSANDS):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
2000 1999 1998
----------- -------------- -------------
<S> <C> <C> <C>
Convertible debenture interest expense - owners and directors $ - $ 325 $ 325
Note payable interest - director - - 49
Wine purchases from related parties 2,384 2,651 1,717
Grape purchases from related parties 2,612 3,093 2,483
Interest income on note recievable from joint venture partner - 31 40
Lease expense for land and facilities to joint venture partner 19 20 12
Consulting fee to affiliate of an officer - 270 -
</TABLE>
In addition to the above, during the year ended March 31, 2000, the Company
received proceeds of $6.2 million in connection with the exercise of common
stock warrants previously granted to two of its major stockholders (see Note
10), and $6.5 million related to the conversion of debentures, held by owners
and directors, to the Company's common stock (see Note 8 and 10).
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2000, future minimum lease payments (excluding the effect
of future increases in payments based on indices which cannot be estimated at
the present time) required under noncancelable operating leases with terms in
excess of one year are as follows: 2001--$908,000, 2002--$870,000,
2003--$878,000, 2004--$870,000, 2005--$830,000, and thereafter--$8.5 million.
Rent expense charged to operations was $1,072,000, $788,000 and $635,000
for the years ended March 31, 2000, 1999, and 1998 respectively.
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. Under a new
agreement, entered into on December 27, 1996 ("new agreement"), the Company
agreed to further payments totaling $4,540,000. All required payments have all
been made pursuant to the new agreement to date and as of March 31, 2000,
$850,000 remains outstanding and is due December 2001. This final payment will
guarantee the Company's 50% ownership throughout the remaining life of the Joint
Venture. Also at December 2001 the Company will 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
NOTE 14 - COMMITMENTS AND CONTINGENCIES
-34-
<PAGE>
requirements and a smaller portion of its future bulk wine requirements. The
Company estimates that it has contracted to purchase approximately 9,000 to
13,000 tons of grapes per year over the next ten years. 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 15 - QUARTERLY DATA (UNAUDITED)
The Company's quarterly operating results for the fiscal year ended March
31, 2000, 1999 and 1998 are summarized below (IN THOUSANDS, EXCEPT PER SHARE
DATA):
<TABLE>
<CAPTION>
Gross EPS
Quarter ended revenues Gross Profit Net Income (diluted)
-------------------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
March 31, 2000 $ 12,442 $ 4,603 $ 72 $ (0.04)
December 31, 1999 16,361 7,469 1,669 0.18
September 30, 1999 13,177 5,819 1,014 0.11
June 30, 1999 10,828 5,031 926 0.10
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
</TABLE>
EPS calculations for each of the quarters are based on the weighted average
common and common equivalent shares outstanding for each period, and the sum of
the quarters may not necessarily be equal to the full year EPS amount. EPS for
the quarter ended March 31, 2000 was calculated using net income available to
common stockholders which is net income reduced by the warrant related deemed
dividend of $459,000 (see Note 10)
NOTE 16 - SUBSEQUENT EVENT
On April 4, 2000, the Company purchased exclusive brand name rights and
inventory of Jade Mountain Winery, a vineyard located in Napa county, California
producing Rhone varietal wines. The acquisition price of $3.5 million, which was
financed with the Company's available revolving credit facility, was allocated
to an intangible asset in the amount of $2.9 million representing the brand name
rights with the remaining $600,000 allocated to inventory based on estimated
fair values. The brand name rights will be amortized over 20 years. In addition,
the Company has entered into a long-term contract with the owner of Jade
Mountain to purchase Syrah, Viognier, Grenache and Merlot grapes produced from a
related vineyard.
-35-
<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. and subsidiaries, as of March 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Chalone
Wine Group, Ltd. and subsidiaries as of March 31, 2000 and 1999 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/DELOITTE & TOUCHE LLP
San Francisco, California
May 26, 2000
-36-
<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 2000 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2000.
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 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2000.
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 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2000.
-37-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A(1). FINANCIAL STATEMENTS.
The following financial statements of the Company are included in PART II,
ITEM 8:
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................. 21
Consolidated Statements of Income............................ 22
Consolidated Statements of Shareholders' Equity.............. 23
Consolidated Statements of Cash Flows........................ 24
Notes to Consolidated Financial Statements................... 25
INDEPENDENT AUDITORS' REPORT....................................... 36
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 the following reports on Form 8-K during the last quarter
of the period covered by this Report:
March 10, 2000--Reporting the issuance of 833,334 shares of the Company's
common stock upon the exercise of warrants.
February 8, 2000--Reporting the commitment entered into to acquire property
in Rutherford, California.
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.
-38-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993 (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
(Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement between the Company
and DBR, dated September 30, 1991. (vi)
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (vii)
4.7 Form of Warrant for the purchase in the aggregate of up to 828,571
shares of the Company's common stock, issued to certain designed
investors, effective July 14, 1993. (viii)
4.8 Voting Agreement, between Richard H. Graff, William L. Hamilton,
John A. McQuown, W. Philip Woodward, DBR, Richard C. Hojel,
and Summus Financial, Inc., dated March 29, 1993. (viii)
-------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 3.1 and 3.2, respectively, to the Company's
Registration Statement on Form S-1 (File No. 33-8666), filed September 11, 1986.
(ii) Incorporated by reference to Exhibit No. 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1988, dated March 11, 1989.
(iii) Incorporated by reference to Exhibit No. 3.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1991, dated March 25, 1992.
(iv) Incorporated by reference to Exhibit Nos. 3.4 and 3.6, respectively, to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993, dated March 26, 1994.
(v) Incorporated by reference to Exhibit Nos. 1, 4 and 5, respectively, to the Company's
Current Report on Form 8-K dated April 28, 1989.
(vi) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the Company's
Current Report on Form 8-K dated September 30, 1991.
(vii) Incorporated by reference to Exhibit No. 1 to the Company's Current Report on Form 8-K
dated March 31, 1993.
(viii) Incorporated by reference to Exhibits 1 and 6, respectively, to the Exhibit herein
referenced as Exhibit 4.8.
</FN>
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C> <C>
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (i)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (ii)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (ii)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (iii)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (iii)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (iii)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (iii)
10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (iv)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (v)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (v)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (v)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (vi)
---------------
<FN>
(i) Incorporated by reference to Exhibit No. 1 to the Company's Current Report on Form 8-K
dated April 27, 1994.
(ii) Incorporated by reference to Exhibit D to Appendix I to the Company's Proxy Statement
for a Special Meeting of Shareholders, filed October 25, 1995.
(iii) Incorporated by reference to Exhibit Nos. 1, 3, 4 and 2, respectively, to the Company's
Current Report on Form 8-K dated May 30, 1991.
(iv) Incorporated by reference to Exhibit No. 10.10 to the Company's Registration Statement
on Form S-1 (File No. 33-8666), filed September 11, 1986.
(v) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1988, dated March
11, 1989.
(vi) Incorporated by reference to Exhibit Nos. 10.16, 10.17 and 10.24, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31, 1988, dated
March 11, 1989.
</FN>
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C> <C>
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (i)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (iii)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (iii)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (iii)
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (iv)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (v)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (vi)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (vi)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (vi)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (iv)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (vii)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (vii)
---------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 10.17 and 10.18, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1989, dated March
27, 1990.
(ii) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31, 1988, dated
March 11, 1989.
(iii) Incorporated by reference to Exhibit Nos. 10.23, 10.24 and 10.25, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31, 1991, dated
March 25, 1992.
(iv) Incorporated by reference to Exhibit Nos. 10.22 and 10.29, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993, dated March
26, 1994.
(v) Incorporated by reference to Exhibit No. 10.27 to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, dated March 26, 1991.
(vi) Incorporated by reference to Exhibit Nos. 10.24 through 10.27, respectively, to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, dated March 29, 1993.
(vii) Incorporated by reference to Exhibit Nos. 10.23 through 10.27, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31, 1994, dated
March 27, 1995.
</FN>
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C> <C>
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (i)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington state investors, dated
November 30, 1994. (i)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (i)
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (ii)
10.29 Credit Agreement between the Company and Wells Fargo Bank, (iii)
dated December 29, 1995.
10.30 Credit Agreement between Edna Valley Vineyard and (iv)
Wells Fargo Bank, dated July 31, 1995.
10.31 Purchase Agreement between the Company, (iv)
Richard H. Graff, Trustee, Graff 1993 Trust Dated June 10, 1993,
a trust and Richard H. Graff an individual, dated July 1, 1996.
10.32 Promissory Note between the Company and Richard H. Graff, (iv)
dated July 1, 1996.
10.33 Secured Purchase Money Promissory Note between the Company (iv)
and Richard H. Graff, Trustee, Graff 1993 Trust, dated July 1, 1996.
10.34 Residential Lease between the Company and Richard H. Graff, (iv)
dated July 1, 1996.
10.35 Consulting and Non-Competition Agreement between the Company (iv)
and Richard H. Graff, dated July 1, 1996.
10.36 Credit Agreement between the Canoe Ridge
Vineyard, LLC, (iv) and Wells Fargo Bank, dated
August 15, 1996.
10.37 Credit Agreement between the Company and Wells Fargo Bank, (iv)
dated September 25, 1996.
10.38 Amendment To Joint Venture Agreement
of Edna Valley Vineyard between Paragon Vineyard Co., Inc., (iv)
and the Company, dated December 23, 1996.
---------------
<FN>
(i) Incorporated by reference to Exhibit Nos. 10.23 through 10.27, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, dated March
27, 1995.
(ii) Incorporated by reference to Appendix I to the Company's Proxy Statement for a
Special Meeting of Shareholders, filed October 25, 1995.
(iii) Incorporated by reference to Exhibit No. 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(iv) Incorporated by reference to Exhibit Nos. 10.30 through 10.38, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
</FN>
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C> <C>
10.39 Credit Agreement between the Company and Wells Fargo Bank,
dated July 30, 1997. (i)
10.40 Credit Agreement between Edna Valley Vineyard and
Wells Fargo Bank, dated July 30, 1997. (i)
10.41 Credit Agreement between Canoe Ridge Vineyard, LLC,
and Wells Fargo Bank, dated July 30, 1997. (i)
10.42 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
January 5, 1998. (i)
10.43 Second Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
June 9, 1998. (i)
10.44 First Amendment to Credit Agreement between Edna Valley Vineyard
and Wells Fargo Bank incorporated as Exhibit 10.40, dated June 9,
1998. (i)
10.45 First Amendment to Credit Agreement between Canoe Ridge
Vineyard, LLC and Wells Fargo Bank incorporated as Exhibit 10.41,
dated June 9, 1998. (i)
10.46 Lease-Purchase Agreement between the Company and Frances
Goodwin, Trustee of Lois Martinez Trust, dated December 30, 1999. (ii)
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. (ii)
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. (ii)
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. (ii)
10.50 Purchase Agreement among Peter Ansdell, SHW Equity Co., and
the Company, and SHW Equity Co., dated June 15, 1999. (ii)
23 Consent of Deloitte & Touche LLP to incorporation by reference,
dated June 29, 2000.
27 Financial Data Schedule
__________________
(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.
(ii) Incorporated by reference to Exhibit Nos. 10.46 through 10.50, respectively, to
the Company's Annual Report on Form 10-K for the year ended March 31, 1999.
</TABLE>
-43-
<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
Dated: June 29, 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.
By:/S/ THOMAS B. SELFRIDGE June 29, 2000
-----------------------------------
Thomas B. Selfridge
Chief Executive Officer
(Principal Executive Officer)
By:/S/ W. PAUL OGORZELEC June 29, 2000
-----------------------------------
Paul Ogorzelec
Chief Financial Officer
(Principal Financial and Accounting
Officer)
/S/ THOMAS B. SELFRIDGE Director June 29, 2000
-----------------------------------
Thomas B. Selfridge
/S/ W. PHILIP WOODWARD Chairman June 29, 2000
-----------------------------------
W. Philip Woodward
/S/ CHRISTOPE SALIN Vice Chairman June 29, 2000
-----------------------------------
Christophe Salin
-44-
<PAGE>
/S/ CRISTINA G. BANKS Director June 29, 2000
-----------------------------------
Cristina G. Banks
/S/ WILLIAM G. MYERS Director June 29, 2000
-----------------------------------
William G. Myers
/S/ JAMES H. NIVEN Director June 29, 2000
-----------------------------------
James H. Niven
/S/ ERIC DE ROTHSCHILD Director June 29, 2000
-----------------------------------
Eric de Rothschild
/S/ MARK HOJEL Director June 29, 2000
-----------------------------------
Mark Hojel
/S/ YVES-ANDRE ISTEL Director June 29, 2000
-----------------------------------
Yves-Andre Istel
/S/ PHILLIP M. PLANT Director June 29, 2000
-----------------------------------
Phillip M. Plant
/S/ C. RICHARD KRAMLICH Director June 29, 2000
-----------------------------------
C. Richard Kramlich
-45-
