SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-13406
The Chalone Wine Group, Ltd.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-1696731
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
621 Airpark Road, Napa, CA 94558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (707) 254-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 15, 1998, there were 2,997,909 shares of the Company's voting no par
value common stock, with an aggregate market value of $32,976,999 held by
non-affiliates. (For purposes of this required presentation, the registrant has
deemed its directors, executive officers, Domaines Barons de Rothschild (Lafite)
and SFI Intermediate Ltd. to be affiliates, and has deducted the outstanding
shares held by them collectively from the total of 8,540,653 shares issued and
outstanding.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders of The Chalone Wine Group, Ltd. (the "Proxy Statement"), to be
filed with the Securities and Exchange Commission within 120 days after March
31, 1998, are incorporated by reference into Part III of this report.
PART I
Item 1. Business.
a. General Development of Business.
The Company produces, markets and sells premium white and red varietal
table wines, primarily Chardonnay, Pinot Noir, Cabernet Sauvignon, Merlot and
Sauvignon Blanc. The Company operates five wineries; four are located in various
counties of California, while one is located in eastern Washington state. The
Company's California wines are made principally from grapes grown at its Chalone
Vineyard(R) and Carmenet(R) vineyard estates, at vineyards owned by the
Company's partner in the Edna Valley Vineyard(R) Joint Venture, from grapes
grown at two Company-owned vineyards adjacent to the Acacia winery (the Marina
Vineyard which is managed and one-half owned by the Company) and at neighboring
independent vineyards. The wines of the Washington state winery are made from
grapes grown at a nearby vineyard, also owned by the Company.
The Company's wines are sold primarily in the premium-priced segment of the
table wine market under the labels "Chalone Vineyard", "Edna Valley Vineyard",
"Carmenet", "Acacia(TM)" and "Canoe Ridge(R) Vineyard", and, starting in April
of 1998, "Echelon(TM)".
In addition to and as a result of an investment in the Company by Domaines
Barons de Rothschild (Lafite) ("DBR"), the Company receives an allocation of the
wines of DBR, including the wines of Chateau Lafite-Rothschild, a first growth
Bordeaux region wine, and Chateau Duhart-Milon, a fourth growth Bordeaux region
wine.
The Chalone Wine Group, Ltd. was incorporated under the laws of the State
of California on June 27, 1969. Unless otherwise indicated the term "Company",
as used in this report, refers to The Chalone Wine Group, Ltd. and its
consolidated subsidiaries. It became a publicly held reporting company as the
result of an initial public offering in May of 1984. The Company is, to its
knowledge, one of only six publicly held U.S. corporations whose sole activity
is in the production, marketing and selling of wines.
Change in Fiscal Year-End
Effective as of March 31, 1997, the Company changed its fiscal year from
one ending on December 31 to one ending on March 31. Accordingly, the Company
filed a transition report pursuant to Section 13 of the Securities Exchange Act
of 1934 for the three month period ending March 31, 1997. The Company elected to
change its fiscal year after determining that the nature of its business cycle,
with typically heavy sales activity towards the end of the calendar year,
coupled with the fall harvest of its grapes, created difficulty in efficient and
effective planning and budgeting on a calendar year basis. The period of January
through March is historically the Company's slowest quarter with respect to both
sales activity and production operations.
Significant Events
Release of Echelon Label in April of 1998: Echelon, a new wine brand
produced by the Company, was released to the market in April of 1998, shortly
following the Company's fiscal year-end. This first release consisted of 60,000
cases of 1997 California Central Coast Chardonnay. The 1997 Echelon Chardonnay
is expected to be followed in August 1998 by 20,000 cases of 1997 Pinot Noir,
and in October 1998 by 15,000 cases of 1997 Merlot. All three wines are expected
to be priced between $12 and $14 at retail outlets.
Purchase of Vintage Lane Property: In March 1998, the Company purchased 22
acres of prime vineyard land in the heart of Sonoma Valley. Located on Vintage
Lane in Glen Ellen, the property includes a winery with a 1,200-ton crush
capacity. The Company will use the winery's fermentation facility to expand
production of Carmenet's "Dynamite" wines. Carmenet is located on the north side
of Sonoma Valley on Moon Mountain, about seven miles away from the new winery
and vineyard. The Company plans to use the winery as a red-wine production
facility. Its vineyards are currently planted with approximately one-third
Cabernet Franc and two-thirds Chardonnay. Management intends to replant the
Chardonnay to Merlot, as this latter variety is an important ingredient in
Carmenet's red-wine program and will thus provide Carmenet with estate Merlot
grapes to use in its reserve wines. In addition to replanting the vineyard, the
Company is also planning to offer the facility for custom crushing beginning
with the 1998 harvest. A barrel-storage warehouse is expected to be built on the
property for use after the 1999 harvest.
Exercise of Warrants in March and April of 1998: The Company recently
received gross proceeds of $5.8 million ($4.8 million in March 1998 and $1
million in April 1998) in connection with the issuance of 828,571 shares of its
common stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued as of March 29, 1993 (the "Warrants"), which
it anticipates using for additional working capital and for the reduction of
existing short-term indebtedness. Except as set forth below, the foregoing
shares will be issued pursuant to an exemption from the registration
2.
requirements of federal and state securities laws. The Company has received
notice that one institutional warrant-holder has exercised its right to demand
registration of 185,714 shares of the Company's common stock received on the
exercise of the Warrants. The Company believes that no other warrant-holders
intend to exercise such registration rights. The Company expects to file a
registration statement on Form S-3 to effect the foregoing registration on or
about June 26, 1998 at the Company's expense. The shares registered thereby may
be resold into the trading market for the common stock of the Company anytime
after the registration statement is declared effective by the Securities and
Exchange Commission, pursuant to the prospectus included therewith.
Carmenet Fire: As previously disclosed, on July 31, 1996, a wildfire
damaged approximately 75% of the producing acreage at the Company's Carmenet
Vineyard, located in Sonoma, California. Carmenet's winery structures and barrel
inventory were untouched by the blaze and no people were injured. The damaged
acreage was planted to Cabernet Sauvignon, Merlot and Cabernet Franc grapes used
for estate bottled wines produced under the Carmenet label. Prior to the fire,
Carmenet produced approximately 38,000 cases of wine annually (of which a
significant proportion was estate bottled). Carmenet's 1996 grape harvest was
reduced roughly in proportion to the percentage of the vineyard's overall
producing acreage damaged by the fire.
As intended, the Company has completed the first stage of replanting
approximately 75% of the damaged acreage. Historically, newly planted vines will
begin to produce production-quality grapes in approximately three years,
although the vines are expected to take approximately seven years to return to
the full production levels that pre-dated the fire. Until the damaged acreage
returns to full production, Carmenet's ability to make estate bottled wines will
be limited. In order to supplement Carmenet's harvest, the Company attempts to
buy suitable grapes on the open market; however, there can be no assurance that
grapes of suitable quality or variety will continue to be available in
sufficient quantity or on terms acceptable to the Company.
Preliminary investigation indicates that the fire was caused by the
electrical lines of Pacific Gas & Electric Company ("PG&E"). In public
statements, PG&E has acknowledged (1) that its own preliminary investigation
indicates PG&E's responsibility for the fire and (2) that PG&E is responsible
for the resulting damages. PG&E has made two advances to the Company for costs
related to the fire in the amounts of $425,000 and $4.5 million in January 1997
and April 1998, respectively. However, when making the advances, PG&E admitted
no liability and has reserved all rights with respect to such advances. The
Company's discussions with PG&E are on-going. The Company believes that it will
be reimbursed for losses resulting from the fire, and as a result does not
expect that the fire damage will have a material adverse effect on the Company's
financial position or operating results.
b. Financial Information about Industry Segments.
The Company operates five different wineries, and also distributes certain
French, Chilean, Portuguese and Mexican wines and small quantities of domestic
wines of other producers in the United States. The marketing and sales of all of
the wines are handled on a consolidated basis in all of the Company's
distribution channels. Hence, the Company considers all of its business to be
within a single industry segment.
For the last fiscal year, as well as the two previous calendar years, sales
of wine accounted for substantially all of the Company's consolidated revenues
and operating profits.
c. Narrative Description of Business.
Overview
The Company owns six wineries in the United States and France as shown in
the schedule below, either wholly or in partnership with others, all of which
have related vineyards with the exception of Edna Valley Vineyard. The specific
ownership structure is as follows:
Property Ownership Form of Ownership Location
-------- --------- ----------------- ---------
1. Chalone 100.0% Corporation Soledad, California
2. Carmenet Vineyard 100.0% Corporation Sonoma, California
3. Acacia
Acacia Winery 100.0% Corporation Napa, California
Marina Vineyard 50.0% Partnership Napa, California
4. Edna Valley Vineyard 50.0% Partnership San Luis Obispo, California
5. Canoe RidgeVineyard 50.5% Limited liability company Walla Walla, Washington
6. Chateau Duhart-Milon 23.5% Partnership Pauillac, France
3.
With the exception of Chateau Duhart-Milon ("Duhart-Milon"), the Company
manages and operates all of the above properties and consolidates the results of
their operations. The Company accounts for its investment in Duhart-Milon using
the equity method of accounting.
Each of the five domestic wineries is in a separate "viticultural area."
Viticultural areas are designations granted by the Federal Bureau of Alcohol,
Tobacco and Firearms to identify grape-growing areas distinguishable by their
specific and definable geographic and climatic characteristics. Wineries may
indicate a viticultural area on a bottle label only if 85% or more of the grapes
used to produce the wine were grown in that viticultural area.
All of the Company's wines are vintage dated, and the majority of its
primary label wines is estate bottled. A vintage dated wine is one produced
wholly from grapes that were harvested, crushed and fermented in the calendar
year shown on the label. The "Estate Bottled" designation may be applied only to
wines made exclusively by one winery from grapes grown on land owned or
controlled by the winery, all within a single viticultural area.
For a more detailed description of the Company's properties and its
operations, see Item 2, Properties.
Vineyard Practices
The Company believes that the soils and climates of the vineyards from
which it obtains its grapes are particularly suitable for the particular
varieties of grapes grown at each of them. Mountain vineyards, including Chalone
Vineyard and Carmenet Vineyard, normally produce lower yields of grapes than
valley vineyards. Vineyards situated closer to the floor of the valleys,
including the cool Carneros District of the Napa Valley, from which the
Company's Acacia wines are made, tend to produce higher grape yields.
The Company generally manages its vineyards to produce yields which are
lower than average for similarly situated vineyards in California and Washington
state and below the maximum yield that could be obtained. It believes that
relatively low yields enhance the varietal character of the grapes and improve
the quality of the resulting wines.
Agricultural Risks; Phylloxera
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases, pests, drought, frosts and certain other weather
conditions can materially and adversely affect the quality and quantity of
grapes available to the Company, thereby materially and adversely affecting the
supply of the Company's products and its profitability.
Many California vineyards, including vineyards in northern California, have
been infested with phylloxera, a root louse that renders a vine unproductive
within a few years following infestation. The current strain of phylloxera
primarily affects vines of a certain type. The Company's vineyard properties are
primarily planted to different rootstocks believed to be resistant to
phylloxera. However, there can be no assurance that the Company's existing
vineyards, or the rootstocks the Company is now using in its planting and
replanting programs, will not become susceptible to current or new strains of
phylloxera, plant insects or diseases, any of which could adversely affect the
Company.
Winemaking Practices
The Company's winemaking practices are derived primarily from the
traditional methods of France, adapted to the particular requirements of
California. The Company believes that these methods, while requiring relatively
high amounts of hand labor, produce the best wines. At the Chalone Vineyard and
Edna Valley Vineyard facilities, the Company follows the traditional winemaking
practices of the Cote d'Or in the Burgundy region of France. The wines are made
from single grape varieties, principally Pinot Noir and Chardonnay. The
winemaking practices at Acacia Winery, although differing in some degree from
those at Chalone Vineyard and Edna Valley Vineyard, also follow Burgundian
winemaking practices and produce wines from single grape varieties. At Carmenet
Vineyard, the Company follows the practices of the Medoc and Graves districts in
the Bordeaux region of France, whose wines are generally made from a blend of
varieties.
All of the Company's wineries are under the overall supervision of the
Company's Executive Vice President, Winegrowing. In addition, each winery is
operated as a separate profit center, with its own General Manager, who is in
most instances also the winemaker.
The Company imports approximately 70% of its oak barrels from Burgundy and
Bordeaux, with the remainder produced in the United States. The wine bottles
used by the Company are made to the Company's specifications in the United
States and France and are closed with imported corks, branded with the
particular winery's name.
The Company's winemaking practices follow the principle that winemaking is
a natural process best managed with a minimum of intervention, but requiring the
attention and dedication of a winemaker. Notwithstanding the relatively high
level of hand labor utilized in the Company's winemaking processes, the Company
also makes extensive use of modern laboratory equipment and techniques to
monitor the progress of each wine through all stages of the winemaking process.
Wine Production and Wines
The following table sets forth the wine production of the Company, for the
1997, 1996 and 1995 vintages. Vintages allude to the year during which the
grapes are harvested. Consequently, as of March 31, 1998, the 1998 vintage had
not yet been harvested and cannot yet be estimated.
4.
The information which follows is presented in terms of "equivalent" number of
cases, as it is compiled when the related wine is still being aged in barrels,
and is therefore not yet bottled and thus converted to case goods. For the
purpose of this schedule, as well as the discussion which follows, wines
purchased by the Company for resale purposes are excluded.
VINTAGE
--------------------- ---------------------- ---------------------
1997 1996 1995
--------------------- ---------------------- ---------------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------------ -------- ------------ --------- ------------ --------
Chardonnay 243,900 59% 151,900 62% 126,500 59%
Sauvignon Blanc 7,000 2% 7,200 3% 6,000 3%
Pinot Blanc 3,100 1% 5,900 2% 7,600 4%
Other white wines 5,700 1% 2,700 1% 3,200 1%
------------ -------- ------------ --------- ------------ --------
Total white wines 259,700 63% 167,700 68% 143,300 67%
------------ -------- ------------ --------- ------------ --------
Pinot Noir 54,200 13% 35,100 14% 27,300 13%
Cabernet Sauvignon 46,900 11% 26,300 11% 25,500 12%
Merlot 47,200 12% 14,700 6% 13,200 6%
Other red wines 4,500 1% 1,400 1% 4,400 2%
------------ -------- ------------ --------- ------------ --------
Total red wines 152,800 37% 77,500 32% 70,400 33%
------------ -------- ------------ --------- ------------ --------
Total production 412,500 100% 245,200 100% 213,700 100%
============ ======== ============ ========= ============ ========
The Company's wines are fermented and aged primarily in new and used oak
barrels before they are bottled. Generally, white wines are aged for between six
and nine months and red wines for between nine and eighteen months after
harvest. The wine is then bottled and stored for further aging. White wines are
generally released between three months and two years after bottling, while red
wines are released between one to three years after bottling.
Although the Company's wines are ready to be consumed when sold, it
generally takes from one to two years, and may take longer, for the wine to
develop fully.
The Company bottles its wines primarily under the "Chalone Vineyard", "Edna
Valley Vineyard", "Carmenet", "Acacia" and "Canoe Ridge Vineyard", and beginning
in April of 1998, "Echelon" labels. See Item 1, Business, Trademarks.
Chalone Vineyard: Chalone Vineyard production represented 17% of the
consolidated sales dollars and 11% of the consolidated sales quantity for the
fiscal year ended March 31, 1998.
Chalone Vineyard has been producing Chardonnay, Pinot Blanc and Pinot Noir
(and small quantities of Chenin Blanc) since 1970. All wines sold under this
label are produced from grapes grown at the Chalone Vineyard facility or under
the Company's control at adjacent vineyards, and are estate bottled.
Carmenet: Carmenet production represented 17% of the consolidated sales
dollars and 17% of the consolidated sales quantity for the fiscal year ended
March 31, 1998.
The Company produces and markets Bordeaux-style "Meritage" red and white
wines under the "Carmenet" label. The Carmenet red wine is made from Cabernet
Sauvignon, Merlot and Cabernet Franc grapes grown at the Carmenet Vineyard
facility, is estate bottled, and bears the "Sonoma Valley" viticultural area
designation. Additionally, the Company produces a red wine under the "Carmenet
Dynamite" label, which is made from Cabernet Sauvignon grapes and bulk wine
purchased from various vineyards in the North Coast area of California. The
Carmenet white wine is made from Sauvignon Blanc and Semillon grapes purchased
from Paragon Vineyard Co., Inc ("Paragon") under a grape purchase agreement and
bears the "Edna Valley" designation.
Edna Valley Vineyard: Edna Valley Vineyard production represented 25% of
the consolidated sales dollars and 27% of the consolidated sales quantity for
the fiscal year ended March 31, 1998.
Edna Valley Vineyard has been producing mostly Chardonnay and Pinot Noir
wines since 1980. The majority of wines sold under the Edna Valley Vineyard
label are produced from grapes grown by Paragon, the Company's partner in the
Edna Valley Vineyard Joint Venture, and are estate bottled.
Acacia: Acacia production represented 21% of the consolidated sales dollars
and 20% of the consolidated sales quantity for the fiscal year ended March 31,
1998.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia"
label. Most of the grapes for the production of Pinot Noir and approximately
two-thirds of the grapes for Chardonnay are acquired from various vineyards in
the Carneros region, in most cases pursuant to grape purchase contracts. The
remaining Chardonnay and Pinot Noir grapes
5.
are grown on the 41-acre Marina Vineyard, a vineyard that surrounds the winery
facility, and on two vineyards owned by the Company, which are contiguous to the
Marina Vineyard.
Canoe Ridge Vineyard: Canoe Ridge Vineyard production represented 6% of the
consolidated sales dollars and 6% of the consolidated sales quantity for the
fiscal year ended March 31, 1998.
The Canoe Ridge Vineyard, which commenced operations in 1994, produces
Merlot, Cabernet Sauvignon and Chardonnay wines under the "Canoe Ridge Vineyard"
label. The grapes for these wines are grown at the Company's vineyard in Benton
County, Washington, and the wines produced at this facility bear the "Columbia
Valley" viticultural area designation.
Custom Brands: Part of each winery's production is occasionally used for
bottling of custom brands in addition to the wines bottled under each winery
label. As such, these custom brands are often comprised of production from the
other Company wineries, for which the percentage of sales contributions are
already stated above.
These custom brands consist primarily of Chardonnay, Cabernet Sauvignon
and Pinot Noir. Quantities of custom brands bottling is highly dependent upon
grape supply and availability. As grapes become more scarce, the focus of the
Company's production shifts away from custom brands as they are generally lower
margin products. The Company uses custom brands primarily as a means of
marketing and selling its label wines and does not intend to focus its efforts
in this line of business.
Imports & Other: The remaining 14% of sales dollars and 19% of sales
quantities in the year ended March 31, 1998 were primarily comprised of import
wines and also include some wines purchased by the Company for resale purposes.
Under the terms of various agreements and investments among the Company,
Duhart-Milon and DBR, the Company receives an allocation of the wines of
Duhart-Milon and DBR, including the wines of Chateau Lafite-Rothschild and
Chateau L'Evangile of the Pauillac and Pomerol regions of Bordeaux,
respectively, and of Chateau Rieussec of the Sauternes region of Bordeaux. DBR
also produces a Pauillac wine exclusively for the Company.
General
The following raw materials are utilized in the Company's production
practices: oak barrels, glass, cork and grapes. Oak barrels are purchased mostly
from France (80%) and within the United States. French oak barrels are
emphasized due to Company tradition as well as consumer taste and preference.
Cork is purchased from Portugal, which is the primary cork-producing country in
the world. Sources of cork elsewhere are relatively scarce. Glass is purchased
from a variety of different sources according to specific needs as determined by
the Company. A substantial portion of the Company's grape requirements is met
through its own vineyards. The remaining grape requirements are met through
purchases of available grapes from California growers.
The Company uses pesticides and other hazardous substances in the operation
of its business. If hazardous substances are discovered on, or emanate from, any
of the Company's properties, and their release presents a threat of harm to
public health or the environment, the Company may be held strictly liable for
the cost of remediation. Payment of such costs could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company maintains various general liability insurance policies, the
Company's insurance may not cover such perils, may not be adequate, or may not
continue to be available at a price or on terms satisfactory to the Company. The
Company is not aware of any such issues at this time which could have a material
impact on the Company's financial position or results of operations.
El Nino
The heavy spring rains experienced during the first half of 1998 as a
result of the weather phenomenon commonly referred to as "El Nino", have
resulted in colder and wetter soils than is typical during California's grape
growing season. Consequently, California vines are experiencing a delay in
flowering and fruit setting, which is expected to postpone the harvesting of
such grapes by approximately three to four weeks. At this time, it is too early
to assess, and there is currently no indication, whether the Company's 1998
harvest will be affected by El Nino in terms of quantity or quality.
6.
Marketing and Distribution
The Company's wines are positioned in the higher end of the premium
category (wines selling over $3 per bottle at retail.) The table below presents
the price positioning of its labels across those categories:
[The following descriptive data is supplied in accordance with Rule 30(d) of
regulation S-T]
Pricing by Premium Segments (1)
Acacia $15.00 $40.00
Canoe Ridge Vineyard $12.50 $18.00
Carmenet $13.50 $40.00
Chalone Vineyard $18.00 $45.00
Edna Valley Vineyard $15.00 $23.00
Echelon $12.00 $14.50
Ch. Duhart-Milon $25.00 $40.00
(1)Super-ultrapremium is a segment not generally used by the trade, but which
the Company recognizes.
The Company sells its wines through direct sales, independent distributors,
brokers and its mailing list. These wines are then marketed through specialty
wine shops and grocery stores, selected restaurants, hotels and private clubs
across the country, in certain overseas markets and, in limited quantities,
directly from its wineries. The Company relies primarily on word-of-mouth
recommendations, wine tastings, articles in various publications and
Company-sponsored promotional activities in order to increase public awareness
of its wines.
Sales Outside California
The Company's wines are marketed outside California in 49 states and the
District of Columbia, Puerto Rico, and internationally in Bermuda and other
Caribbean islands, Canada, England, continental Europe, Hong Kong and Japan by
independent distributors. In 1993, the Company established a sales and marketing
division, operating as Chalone Wine Estates, to supervise and coordinate this
segment of the Company's business, as well as the custom brands operations under
which the Company produces wines under the purchaser's brand. The Company
employs a number of regional sales managers who work directly with the
distributors in the particular region and their customers.
Sales Within California
Sales and the marketing of all of the Company's wines within California,
including custom brands, have historically been made both through the Company's
own sales force and through a wholesale marketer, who acts in the capacity of a
broker. Starting with the upcoming fiscal year (year ending March 31, 1999), the
Company expects to use a wholesale marketer for all California sales.
The Company offers its reserve wines, older wines and other special wines
to its approximately 12,000 shareholders, as well as to other consumers,
directly from its centralized distribution center by phone or mail order. The
Company sends two major offerings to all mail-order customers each year and
frequent additional catalogs exclusively to and for our shareholders. Due to
restrictions on direct retail sales of wines under the laws of other states, the
Company confines direct mail shipments to purchasers with addresses in
California and approximately ten other states which have reciprocal cross-sale
arrangements with the State of California.
7.
Case Sales by Method of Distribution
The following table sets forth case sales by the Company by distribution
method for the year ended March 31, 1998 and calendar years 1996 and 1995.
Year ended
March 31, Year ended December 31,
----------------------- ----------------------------------------------------
1998 1996 1995
----------------------- ----------------------- -----------------------
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
---------- --------- ---------- --------- ---------- ---------
Independent distributors
United States 144,328 45% 121,403 41% 108,831 40%
International 12,306 4% 12,574 4% 8,457 3%
------- ------- ------- ------- ------- -------
Total distributors 156,634 49% 133,977 45% 117,288 43%
------- ------- ------- ------- ------- -------
Company direct
California wholesale 93,418 29% 85,378 29% 70,330 26%
Custom brands 46,840 15% 52,233 17% 63,442 24%
Catalog and winery retail 25,639 7% 27,454 9% 19,247 7%
------- ------- ------- ------- ------- -------
Total Company direct 165,897 51% 165,065 55% 153,019 57%
------- ------- ------- ------- ------- -------
Total 322,531 100% 299,042 100% 270,307 100%
======= ======= ======= ======= ======= =======
Centralized Administration and Warehousing
The Company's wineries are all supported by a leased 11,500 sq. ft. central
office located in Napa County, California, at the Napa Airport Business Park. In
addition to housing the Company's central executive office, it serves as a
central distribution center from which all of the Company's wines are stored
prior to shipping into local markets. The Company also rents separate warehouse
facilities as needed in local markets, and occasionally permits storage of third
party wines in portions of its Napa warehouse for a fee. The lease has a 15-year
initial term expiring in November 2008, with a five-year extension option.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all beverages, including non-alcoholic beverages.
However, the Company believes that its primary competitors, with the recent
addition of Echelon wines in April of 1998, consist of approximately 200
wineries in California, as well as a number of wineries in Washington and
Oregon, which produce wines in the premium-priced segment of the table wine
market. The Company's wines, including the wines of DBR and others distributed
by the Company, also compete with imported wines, particularly those from the
Burgundy and Bordeaux regions of France and, to a lesser extent, those of Italy,
Chile and Australia.
The Company believes that the principal competitive factors in its wine
industry segment are label recognition, product quality, price, and consumer
taste. Increased plantings of vineyards occurred in the past few years
throughout California in order to meet the growing wine demand. As these
vineyards yield increasingly large harvests, and the supply and availability of
grower-produced grapes increases, price competition in the wine industry is
expected to increase proportionately. The Company believes it generally competes
favorably with respect to all other factors mentioned above. As production from
all of its wineries continues to increase, however, the Company's future sales
may be adversely affected by such factors, as well as competition from new
market entrants.
Employees
On March 31, 1998, the Company had 117 full-time employees, of which 50
were involved in grape growing and winemaking and 67 were in sales and
administration. During the spring and summer, the Company adds approximately 11
to 16 part-time employees for vineyard care and maintenance and 70 to 90
part-time employees for the spring bottling. In the autumn, up to 50 additional
part-time employees are hired for the grape harvest and another 15 for winery
work. The Company's hiring and employment policies for both full-time and
part-time employees are believed to comply with all relevant laws, including
immigration laws.
None of the employees of the Company (including its subsidiary and joint
ventures) are represented by a union. The Company believes that its wage rates
and benefits are competitive and that its relations with the Company's employees
are excellent.
8.
Regulation; Permits and Licenses
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, which requires the Company to
maintain various permits, bonds and licenses.
In addition to the required winery permits and licenses, the Company holds
federal importer's and wholesaler's permits and California importer's, beer and
wine wholesale, and beer and wine retail (off-sale) licenses. Under these
permits and licenses, the Company is authorized to import wines into the United
States from foreign countries, to import wines into California from other
states, and to warehouse and sell wines other than those of its own production.
The Canoe Ridge Vineyard subsidiary holds its own winery permit and license. The
Company believes it is in compliance with all currently applicable federal and
state regulations.
The Company's wines are subject to a federal excise tax (since January 1,
1991, at the maximum rate of $1.07 per gallon), payable at the time of shipment
to customers, and varying state excise taxes.
Trademarks
CHALONE VINEYARD, CARMENET and ACACIA "A" logo are federally registered
trademarks owned by the Company. EDNA VALLEY VINEYARD is a federally registered
trademark owned by Paragon and licensed exclusively to the Edna Valley Vineyard
Joint Venture. CANOE RIDGE is a federally registered trademark owned by Canoe
Ridge Vineyard, LLC. These marks are also registered in Japan, with the Japanese
Patent Office. These federally registered trademarks, and other common-law
trademarks, including, but not limited to "Echelon", are of significant
importance to the Company's business as label and brand recognition are
important means of competition within the wine industry.
Shareholder Benefits
Shareholders of the Company are entitled to benefits which are not provided
to other mail-order customers at large. Certain wines of limited production are
offered only to shareholders. Beneficial owners of 100 shares or more of the
Company's common stock are entitled to a 20%-30% discount from suggested retail
prices on all mail-order or other direct purchases from the Company. The Company
has also provided annual discounts to shareholders based on their shareholdings
in the form of a "Wine Dividend Credit", which allows shareholders owning 100 or
more shares to receive a credit towards the purchase of wines during the
duration of the program. The Wine Dividend Credit may be used for up to 50% of
the wine value of an order and is generally offered in the fall of each year. In
the year ended March 31, 1998, the credit amount was $.12 per share, while it
was $.12 and $.11 per share in each of the years ended December 31, 1996 and
1995, respectively. The Company also offers to shareholders, at the
shareholders' expense, travel programs to various wine-growing regions of the
world. In the past, the Company has provided travel programs to France, Chile,
Australia, Portugal, South Africa, Italy and New Zealand. Additionally, each
spring, shareholders are invited to attend the Company's annual Shareholder
Celebration. For a nominal fee, attendees attend an all-day wine tasting,
auctions and luncheon, which typically is held in the spring on the grounds of
the Chalone Vineyard in Solano County, California. In 1998, approximately 1500
shareholders (and guests thereof) from 38 states and 4 foreign countries
attended the luncheon, which featured tastings of all of the Company's new
wines, most of its best wines, and a sumptuous luncheon.
Seasonality
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations below for a discussion of the seasonal nature of the
Company's business.
9.
Item 2. Properties.
The Company's principal winemaking activities are conducted at five
locations, four in California and one in eastern Washington. The following table
shows the producing acreage, by grape variety, at the various vineyards owned,
in whole or in part, by the Company, and vineyard acreage currently in
development, and the remaining undeveloped acreage suitable for future planting.
Acreage listed as "Developing and replanted" may consist of acreage which was
unplanted, or previously producing acreage which has been, or presently is,
being replanted.
At March 31, 1998
-------------------------------------------------
Developing
Producing & replanted Unplanted Total
--------- ----------- --------- -----
Chalone Vineyard:
Chardonnay 110 32 -- 142
Pinot Noir 43 60 -- 103
Pinot Blanc 30 -- -- 30
Chenin Blanc 8 -- -- 8
Other 2 19 -- 21
Unplanted -- -- 198 198
----- ----- ----- -----
Subtotal 193 111 198 502
----- ----- ----- -----
Carmenet Vineyard:
Cabernet Sauvignon 19 32 -- 51
Cabernet Franc 15 8 -- 23
Merlot 4 -- -- 4
Chardonnay 14 -- -- 14
Other 1 6 -- 7
Unplanted -- -- 5 5
----- ----- ----- -----
Subtotal 53 46 5 104
----- ----- ----- -----
Acacia Winery (including leasehold interest):
Chardonnay, Viogner 36 7 -- 43
Pinot Noir 15 37 -- 52
Unplanted -- -- 4 4
----- ----- ----- -----
Subtotal 51 44 4 99
----- ----- ----- -----
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon 32 16 -- 48
Merlot 39 35 -- 74
Chardonnay 29 -- -- 29
Other -- 6 -- 6
Unplanted -- -- 26 26
----- ----- ----- -----
Subtotal 100 57 26 183
----- ----- ----- -----
Total Acreage 397 258 233 888
===== ===== ===== =====
Chalone Vineyard(R)
Chalone Vineyard(R) is located on approximately 950 acres in Monterey,
California (of which 502 acres are plantable), approximately 1,500 feet above
the floor of the Salinas Valley, in a viticultural area called "Chalone." The
soil is composed of volcanic rock over a bed of limestone and is similar to the
soil found in the Burgundy region of France. The elevation of the vineyard
provides natural protection against frost. The area surrounding the vineyard has
an average annual rainfall of 14 inches. The Company's water needs are
supplemented by a reservoir and a well, which the Company believes will supply
sufficient water for the vineyard's current and future needs.
Chalone Vineyard was established in the early 1920s and is the oldest
commercial vineyard in Monterey County. The Company has produced premium wines
from the vineyard since 1969, when it acquired the vineyard from a former
director of the Company, the late Richard H. Graff.
The winery's property includes a tasting room, dining facilities for
private parties and approximately 8,500 square feet of caves for barrel storage.
The winery's current production capacity is 50,000 cases.
10.
The Company produces primarily Chardonnay and Pinot Noir at this facility
and markets these wines under the "Chalone Vineyard" and "Gavilan" labels,
although the production of further "Gavilan" vintages has been discontinued as
of March 31, 1998.
Carmenet(R) Vineyard
Carmenet(R) Vineyard is located on approximately 300 acres in Sonoma
County, California (of which 104 acres are plantable), located in the "Sonoma
Valley" viticultural area. On July 31, 1996, a fire at the vineyard damaged
approximately 75% of its producing acres. These acres were planted to Cabernet
Sauvignon, Merlot and Cabernet Franc. The Company has replanted these acres with
essentially the same varieties. See Item1, Business, Significant Events -
Carmenet Fire.
The vineyard is situated in the Mayacamas Mountains just north of the town
of Sonoma, at an elevation of about 1,200 feet. The grapevines are grown on
steep hillsides in rocky, well-drained soil. The average rainfall is 30 inches.
The Company's water needs are supplemented by two wells, which the Company
believes will supply sufficient water for the vineyard's current and future
needs, using a drip irrigation system. As at Chalone Vineyard, the elevation of
Carmenet Vineyard provides natural protection against frost.
In March of 1998, the Company purchased 22 acres of prime vineyard land in
the heart of Sonoma Valley. See Item 1, Business, Significant Events - Purchase
of Vintage Lane Property. Located on Vintage Lane in Glen Ellen, the property
includes a winery with a 1,200-ton crush capacity. The Company will use the
winery's fermentation facility to expand production of Carmenet's Dynamite
wines. Carmenet is located about seven miles away from the Vintage Lane
facility. The Company anticipates using the property and winery as a red-wine
production facility. The vineyard is currently planted with approximately
one-third Cabernet Franc and two-thirds Chardonnay. Management intends to
replant the Chardonnay to Merlot, as this later variety is an important
ingredient in Carmenet's red-wine program and will thus provide Carmenet with
estate Merlot grapes to use in its reserve wines. In addition to replanting the
vineyard land, the Company also is planning to offer the facility for custom
crushing beginning with the 1998 harvest, and to construct a barrel-storage
warehouse on the property for use after the 1999 harvest.
In addition to the production area, the winery holds a reception area,
dining facilities for customers and guests, and 15,000 square feet of barrel
caves. The barrel caves are bored into a solid rock hillside adjacent to the
fermentation building and provide an ideal environment for aging wine in barrels
without artificial temperature control. In the past, the winery had an annual
production capacity of approximately 38,000 cases. However, with the addition of
the Vintage Lane facility, the winery now has the ability to crush and ferment
up to an additional 100,000 cases.
The Company principally produces Bordeaux-style red and white wines at this
winery and markets these wines under the "Carmenet" label.
Edna Valley Vineyard(R)
Paragon Vineyard is located on approximately 1,100 acres in San Luis Obispo
County, California, in the "Edna Valley" viticultural area. The property is
operated by Paragon Vineyard Company, which leases the winery to the Edna Valley
Vineyard(R) joint venture (the "Joint Venture"). The Joint Venture is 50% owned
by the Company and 50% owned by Paragon, subject to an agreement between the
Company and Paragon entered into on January 1, 1991 as amended on December 27,
1996 (the "Edna Valley Agreement"). Pursuant to the terms of the Edna Valley
Agreement, the Company is obligated to make certain substantial future payments
in order to maintain its 50% ownership interest in the Joint Venture and to
indefinitely extend its term, among other things. The Company, as the managing
joint venture partner, manages and supervises the winery operations, and sells
and distributes the wine.
Under the terms of a grape purchase agreement, which was amended and
restated on January 1, 1997, Paragon sells fixed quantities of Chardonnay grapes
to the Joint Venture, at prices calculated by reference to the average prices
paid for Chardonnay grapes in Napa County during the preceding year, as reported
by the California Department of Agriculture, with adjustments depending on the
sugar content of the grapes supplied.
In 1996, the ground lease was amended to provide additional land for
planned expansion of the winery, which subsequently was expanded from
approximately 24,000 square feet in size to over 32,000 square feet. This area
includes 12,000 square feet of underground cellars for wine fermentation and
aging in barrels. The expansion increased the annual production capacity from
approximately 60,000 cases to over 100,000 cases. The expanded facility includes
a tasting room and dining facilities for private parties.
The wines produced at this facility are principally Chardonnay and Pinot
Noir, which are marketed under the "Edna Valley Vineyard" label.
Acacia Winery
The Acacia Winery, and its related vineyards, are located on approximately
101 acres in Napa County, California, in both the "Carneros" and the "Napa
Valley" viticultural areas. The Company owns the winery building and the
winemaking equipment associated with the winery. The land on which the winery is
located (the "Winery Parcel") and a 41-acre parcel
11.
of producing vineyard surrounding the winery complex (the "Marina Vineyard") are
owned pursuant to a tenancy in common agreement: one half is owned by the
Company and the remaining half is owned by Mr. and Mrs. Henry Wright (the
"Wrights"). The Company leases the Wright's half-interest in the Winery Parcel
and the Marina Vineyard pursuant to two long-term leases, which commenced
retroactively as of January 1, 1988, and expire on December 31, 2017, subject to
certain exceptions. The annual rent for the Marina Vineyard was $130,000 in the
year ended March 31,1998, subject to an annual increase determined according to
a formula based on premium quality Carneros District Chardonnay prices.
Pursuant to the terms of the tenancy in common agreement, the Wrights have
the ability at any time to offer their half-interest in the Winery Parcel and
the Marina Vineyard to the Company, and, if the Company declines the offer, to
list the entire property for sale to a third party.
The Marina Vineyard is planted entirely to Chardonnay grapes on low rolling
hills in well-drained clay-loam soil. The majority of the vines was planted in
the mid-1970s, although significant replanting on new root stock was undertaken
in the early 1980s. The vineyard is not frost protected, but to date has not
experienced any significant losses due to frost damage. The average annual
rainfall is 22 inches. The vineyard is irrigated from a reservoir located on the
property.
Additionally, the Company owns two vineyards contiguous to the Marina
Vineyard. These vineyards are planted to Pinot Noir, with fifteen acres
producing and 45 acres under development (for a total of 101 acres; 15 + 45 + 41
for the Marina Vineyard, of which 99 acres are plantable). These vineyards have
their own reservoir, which the Company believes has sufficient capacity to meet
the vineyards' present and future irrigation needs.
The winery has a production capacity of approximately 50,000 cases. The
wines produced at the winery are principally Chardonnay and Pinot Noir, which
are marketed under the "Acacia" and "Caviste" labels, although the production of
further "Caviste" vintages has been discontinued as of March 31, 1998. The
Acacia "A" logo is a federally registered trademark.
Canoe Ridge(R) Vineyard Properties
The Canoe Ridge(R) Vineyard is located in eastern Washington state, on the
eastern slope of the Canoe Ridge, overlooking the Columbia River at an altitude
of approximately 800 feet. The vineyard is in the "Columbia Valley" viticultural
area. Of the vineyard's approximately 275 acres (of which 183 acres are
plantable), a total of 100 acres of which are now planted, in roughly equal
proportions of Chardonnay, Merlot and Cabernet Sauvignon grapes. Although
temperatures during the winter months can fall below freezing, the vineyard's
altitude and easterly exposure, coupled with the Company's viticultural
practices, are believed to reduce the potential for freeze damage. The
grapevines are grown in well-drained, sandy-loam soil. The vineyard is irrigated
with water from the Columbia River under an agreement with an adjoining farm and
has an average annual rainfall of 6 inches. The vineyard is owned by Canoe Ridge
Vineyard, LLC, a limited liability company in which the Company holds a 50.5 %
interest (the "LLC"). The Company holds 25% of the membership interest of the
LLC directly and 25.5% indirectly, through a wholly owned subsidiary of the
Company.
The winery associated with the vineyard is located in a recently renovated
historic building in downtown Walla Walla, Washington, which originally served
as the engine house for the Walla Walla Valley Railroad. The LLC leases the
winery building pursuant to a five-year lease agreement, which commenced in July
of 1994 and is subject to renewal for two five-year terms. The monthly rent is
$1,600 on a triple net basis for the first five-year term, subject to adjustment
upon renewal of the lease. An additional 900 square foot building, serving as an
office and tasting room, was constructed in 1996. The rent will be adjusted
during the first renewal period to reflect the cost of this addition. The winery
has an annual production capacity of approximately 27,000 cases, and produces
primarily Chardonnay, Merlot and small amounts of Cabernet Sauvignon.
Duhart-Milon
Duhart-Milon is located in the Medoc region of Bordeaux, France, in the
town of Pauillac. The Company holds a 23.5% interest in Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"), while the remaining 76.5% interest is owned by
DBR. The property consists of approximately 166 acres of producing vineyards,
contiguous to the vineyards of Chateau Lafite-Rothschild, and its related
winemaking facilities. In 1855, the French Government classified the top 62
wine-producing estates in the Medoc region, choosing from over 400 such estates.
These top 62 estates were further classified into five "growths," based on their
perceived quality. "First growth" was considered the best. Under this
classification system, Duhart-Milon is rated a "fourth growth" estate. The
average annual production in recent years has been approximately 35,000 cases.
The wine is sold under the "Chateau Duhart-Milon" and "Moulin de Duhart" labels.
Item 3. Legal Proceedings.
There are no material legal proceedings pending to which the Company or
either of the Joint Ventures is a party nor to which any property of any of the
foregoing is subject. With the exception of the possible litigation arising out
of the Carmenet fire (see Item 1, Business, Significant Events - Carmenet Fire),
the Company's management knows of no other action being contemplated.
12.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company during
the period covered by this Report.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of
March 31, 1998.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward(1) Chief Executive Officer 58
and Director
Thomas B. Selfridge(1) President and Director 54
William L. Hamilton Executive Vice President, Chief 53
Financial Officer, Secretary,
and Director
Larry M. Brooks Executive Vice President, Winegrowing 47
Robert B. Farver Vice President, Sales and Distribution 42
b.Business Experience of Executive Officers
W. Philip Woodward. Mr. Woodward is a co-founder of the Company and has
served as the Company's Chief Executive Officer since 1974. He has been a
director of the Company since 1972 and its chairman since 1997 and he is a
member of the Board Executive Committee. He joined the Company as Vice President
and Chief Financial Officer in 1972 and in December of 1974 became its President
and Chief Executive Officer. He continued as Chief Financial Officer until
October of 1983. Mr. Woodward is a director of Domaines Barons de Rothschild
(Lafite) ("DBR"), the Northern Trust Company of California, and Hog Island
Oyster Company, Inc., and President and a director of the Marin Theatre Company.
He is also a board member of the Wine Institute and the American Vintners'
Association.
Thomas B. Selfridge. Mr. Selfridge joined the Company as President in
January 1998. He was appointed to the Company's Board of Directors in May 1998
and is a director of Edna Valley Vineyard and Canoe Ridge Winery. He also serves
as an ex officio member of the Company's Executive Committee. On July 1, 1998,
Mr. Selfridge is expected to assume the title of Chief Executive Officer of the
Company and become a member of the Board's Executive Committee. Prior to joining
the Company, Mr. Selfridge was Executive Vice President of Kendall-Jackson
Winery, Ltd. Since joining Kendall-Jackson in 1990 as Vice President of
Production, he had wide ranging responsibilities over the areas of brand
marketing, creative services, hospitality, public relations, winemaking,
bottling, grower management, quality control and warehouse operations. In all,
Mr. Selfridge has over 25 years experience in the wine industry, initially as a
winemaker at Beaulieu Vineyard where he became president in 1983. He holds a
Master's Degree in enology from San Francisco State University and he has done
doctoral studies at the University of Pennsylvania's Wharton School of Business.
William L. Hamilton. Mr. Hamilton has served the Company as Executive Vice
President and Chief Financial Officer since 1990 and 1986, respectively. He was
also a director of the Company from 1986 to May 1998. In November of 1986, his
title was changed to Vice President, Finance and Administration, and he was also
appointed Assistant Secretary. In February of 1996 he was appointed Secretary.
Mr. Hamilton resigned effective July 1, 1998 to pursue other interests. He also
serves as a trustee of the Marin Community Foundation.
Larry M. Brooks. Mr. Brooks was appointed Executive Vice President,
Winegrowing in 1997. Mr. Brooks joined the Company following the acquisition of
Acacia Winery in 1986, where he had been the Winemaker since Acacia's founding
in 1979. In 1992 his title was changed to include Managing Director and
Winemaker of Acacia Winery. In 1993 his title was changed to include Vice
President - Production.
Robert B. Farver. Mr. Farver has served the Company as Vice President,
Sales and Distribution since 1996. Since joining the Company in 1990, he has
served as the Regional Sales Manager for the Northeast United States. In 1994
his title was changed to Director of National Sales and Marketing.
- ----------------
(1) As of July 1, 1998, Mr. Woodward is expected to relinquish the title of
Chief Executive Officer. Mr. Selfridge has been designated as his successor in
this post.
13.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on May 18, 1984, and is listed in
the Nasdaq National Market System, under the symbol "CHLN." The following table
sets forth the high and low closing quotations for the stock for each quarter
during the past two years, as reported by Nasdaq. The prices reflect
inter-dealer quotations without retail mark-ups, mark-downs or commissions, and
do not necessarily represent actual transactions.
Quarter ended High Low
------------- ---- ---
March 31, 1998 11.75 10.13
December 31, 1997 12.00 9.75
September 30, 1997 12.75 10.50
June 30, 1997 12.75 10.50
March 31, 1997 12.00 10.00
December 31, 1996 12.00 9.25
September 30, 1996 10.00 8.00
June 30, 1996 11.13 8.88
March 31, 1996 10.50 9.00
On June 15, 1998, the closing price for the common stock was $11.00 per
share. During the year ended March 31, 1998, the average weekly trading volume
of the stock was approximately 2,400 shares.
b. Holders of Record.
As of June 15, 1998, there were approximately 5,202 holders of record of
the Company's common stock.
c. Dividends.
The Company has not paid any cash dividends and does not anticipate
declaring or paying cash dividends in the immediate future.
Under the terms of the Company's 5% Convertible Subordinated Debentures,
which are redeemable in their entirety (unless sooner converted) not later than
April 19, 1999, the Company is restricted from paying dividends in excess of 50%
of its aggregate net income.
14.
Item 6. Selected Financial Data.
The following selected consolidated financial data for the year ended March
31, 1998 and the years ended December 31, 1996, 1995, 1994 and 1993 are derived
from the audited consolidated financial statements of the Company. The financial
data for the twelve months ended March 31, 1997, 1996 and 1995, however, are
derived from the unaudited consolidated financial statements of the Company and
are furnished with a view to providing the reader with comparative results for
the prior twelve-month periods which coincide with the Company's current fiscal
year-end (March 31). This data should be read in conjunction with the financial
statements and notes thereto included at Item 8 of this Report.
SELECTED FINANCIAL DATA
(in thousands except per-share data)
Year ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
Statement of Operations Data:
Net revenues $ 31,044 $ 25,032 $ 20,515 $ 17,824
Gross profit 12,375 8,792 7,504 6,395
Other revenues from operations 107 20 -- --
Selling, general and administrative expenses 6,283 5,374 4,633 4,432
Operating income 6,200 3,438 2,870 1,963
Other income/(expense), net (1,925) (2,701) (2,561) (2,482)
Equity in net income of Duhart-Milon 304 74 -- --
Minority interest (621) (357) (188) (372)
Net earnings (loss) $ 2,339 $ 207 $ 20 $ (691)
Earnings (loss) per common share $ 0.29 $ 0.04 $ -- $ (0.16)
Balance Sheet Data:
Working capital $ 23,504 $ 22,072 $ 17,136 $ 15,291
Total assets 80,179 72,569 72,225 71,921
Long-term obligations less current maturities 17,837 13,511 26,425 27,387
Shareholders' equity 43,246 41,382 24,199 22,698
Year ended March 31,
-----------------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
Statement of Operations Data:
Net revenues $ 36,755 $ 31,188 $ 25,987 $ 20,710
Gross profit 16,216 12,811 9,243 7,530
Other revenues from operations 303 107 20 --
Selling, general and administrative expenses (8,147) (6,466) (5,442) (4,754)
Operating income 8,372 6,452 3,801 2,776
Other income/(expense), net (1,857) (1,789) (2,429) (2,584)
Equity in net income of Duhart-Milon 341 281 126 --
Minority interest (1,125) (681) (387) (156)
Net earnings (loss) $ 3,410 $ 2,520 $ 600 $ (26)
Earnings (loss) per common share $ 0.41 $ 0.31 $ 0.10 $ --
Balance Sheet Data:
Working capital $ 27,794 $ 24,283 $ 22,023 $ 16,680
Total assets 90,294 75,859 68,973 70,299
Long-term obligations less current maturities 18,124 18,379 13,415 26,339
Shareholders' equity 50,405 42,835 41,098 23,931
15.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related notes presented at
Item 8 of this report and in conjunction with the Selected Financial Data
presented under the preceding Item 6.
Forward Looking Statements
From time to time, information provided by the Company, statements made by
is employees or information included in its filings with the Securities and
Exchange Commission (including the Form 10-K) may contain statements which are
not historical facts, so called "forward looking statements" which involve risks
and uncertainties. Forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. When
used in this Form 10-K, the terms "anticipates", "expects", "estimates",
"intends", "believes" and other similar terms as they relate to the Company or
its management are intended to identify such forward looking statements. In
particular, statements made in this Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, relating to projections or
predictions about the Company's future investment in vineyards and other capital
projects are forward looking statements. The Company's actual future results may
differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to (i)
reduced consumer spending or a change in consumer preferences, which could
reduce demand for the Company's wines; (ii) competition from numerous domestic
and foreign wine producers could affect the Company's ability to sustain volume
and revenue growth; (iii) interest rates and other business and economic
conditions could increase significantly the cost and risks of projected capital
spending; (iv) the price and availability in the marketplace of grapes meeting
the Company's quality standards and other requirements; and (v) the effect of
weather and other natural forces on growing conditions and, in turn, the quality
and quantity of grapes produced by the Company. Each of these factors, and
others about the Company, the premium wine industry and general business and
economic conditions, is discussed from time to time in the Company's filings
with the Securities and Exchange Commission.
Change in Fiscal Year-End
Effective with the fiscal year ending March 31, 1997, the Company changed
its fiscal year from one ending on December 31 to one ending on March 31.
Accordingly, the Company reported a three-month transition period ending March
31, 1997. The Company determined that the nature of its business cycle, with
typically heavy sales activity towards the end of the calendar year, coupled
with the fall harvest of its grapes, created difficulty in efficient and
effective planning and budgeting on a calendar year basis. A fiscal year ending
March 31 occurs at the end of what is historically the least active quarter with
respect to sales activity and operations in the production of wine.
The Company elected to file audited financial statements for the transition
period referred to above. In accordance with applicable regulations, this Report
includes consolidated balance sheets as of March 31, 1998 and December 31, 1996
and consolidated statements of operations for the twelve months ended March 31,
1998 and December 31, 1996 and 1995, respectively. With a view to providing
comparative information which more effectively highlights significant trends in
the Company's financial condition and results of operations, this Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial information for the
twelve-month periods ending March 31, 1998 and March 31, 1997, unless otherwise
indicated. See Item 6, Selected Financial Data for schedule discussed herein.
16.
Results of Operations
The following table represents financial data as a percentage of net
revenues for the indicated periods:
Year ended March 31, Year ended December 31,
------------------------------ ------------------------------------
1998 1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Net revenues 100% 100% 100% 100% 100% 100% 100%
Gross profit 44% 41% 36% 40% 35% 37% 36%
Other revenues from operations 1% 0% 0% 0% 0% 0% 0%
Selling, general and admin. expenses 22% 21% 21% 20% 21% 23% 25%
Operating income 23% 21% 15% 20% 14% 14% 11%
Other income (expense) (5%) (6%) (9%) (6%) (11%) (12%) (14%)
Equity in net income of Duhart-Milon 1% 1% 0% 1% 0% 0% 0%
Minority interest (3%) (2%) (1%) (2%) (1%) (1%) (2%)
Net earnings (loss) 9% 8% 2% 8% 1% 0% (4%)
Wine Sales
Net revenues for the year ended March 31, 1998 increased approximately 18%
over the comparable period in the preceding year. This increase was due to a 9%
increase in the number of cases, as well as a similar 8% increase in the average
sales price per case.
Net revenues for the year ended March 31, 1997 increased by 20% over the
prior year comparable period. This increase was due to both unit and price
increases at all five wineries and in the imported wines distributed by the
Company.
Unit sales in the California market have remained relatively flat over each
of the three years ended March 31, 1998, 1997 and 1996 (excluding custom brands)
and comprise 29% of total unit sales for the year ended March 31, 1998. Although
California is the largest market for the Company (no single market outside of
California accounted for more than 10% of total sales in these years),
management believes that increased unit sales in markets outside of California
continue to account for most of future revenue growth.
Gross Profit
Gross profit for the year ended March 31, 1998 increased by approximately
27%, or $3.4 million over the comparable period in the preceding year, resulting
primarily from the increases in sales quantities and sales price per case
mentioned above, combined with a relatively low 2% increase in cost of sales per
case.
Gross profit for the year ended March 31, 1997 was $12.8 million as
compared to $9.2 million in the year ended March 31, 1996. For those two
periods, gross profit as a percent of net revenues for the year increased to 41%
for the year ended March 31, 1997 from 36%. This increase in gross profit is
attributable to both an 11% increase in unit sales, as well as price increases
across all brands and a shift in the product mix of wines sold to higher margin
wines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the year ended March 31,
1998 increased by 26% over the comparable period in the preceding year. This
increase is primarily the result of planned increases in marketing expenditures.
Selling, general and administrative expenses for the year ended March 31,
1997 increased approximately 19% from prior comparable period. This increase was
largely due to increased selling and marketing costs associated with increased
unit sales. Selling, general and administrative expenses as a percentage of
sales for each of the two years ended March 31, 1997 and 1996 remained flat at
21% for the comparable period in 1995, due to expenses increasing at a slower
rate than sales during that period.
Operating Income
Operating income for the year ended March 31, 1998 increased by 30% over
the comparable period in the preceding year. This increase was due to higher
unit sales and gross margins per case as discussed above. Additionally, crushing
fees received from third party wineries has consistently increased over the past
three years, and comprised 4% of the operating income for the year ended March
31, 1998 compared to 2 % in the prior comparable period.
Operating income for the year ended March 31, 1997 increased 70% over the
prior comparable year. This increase was due to higher sales, increased gross
margins, and lower selling, general and administrative expenses as a percentage
of sales, all discussed above.
17.
Other Income/(Expense), Net
The increase of 4% in net other expense between the years ending March 31,
1998 and 1997 was primarily driven by a 6% increase in net interest expense, due
to slightly higher borrowing levels.
Interest expense for the year ended March 31, 1997 decreased to $1.8
million, a decrease of 28% from $2.5 million in the prior comparable period.
This was made possible by the conversion of $12.4 million of convertible
debentures to equity in November of 1995 and the reduction of short-term
borrowings resulting from $4.5 million in new equity received at the same time.
Equity in Net Income of Duhart-Milon
Effective October 1, 1995, the Company exchanged its 11.3% ownership
interest in DBR for a 23.5% interest in Societe Civile Chateau Duhart-Milon. The
effect of this transaction was to convert an 11.3% interest in DBR, accounted
for using the cost method, into an interest in an active, operating vineyard and
winery operation, accounted for using the equity method of accounting.
The Company's 23.5% equity interests in Duhart-Milon's net income for the
years ending March 31, 1998 and 1997 were $341,000 and $281,000, respectively.
This increase of 21% is primarily attributable to exceptionally strong demand
for the Bordeaux wines and corresponding increases in prices of the wines.
Minority Interest
The Edna Valley Vineyard ("EVV") and Canoe Ridge Vineyard, LLC ("CRV")
individual financial statements are consolidated in full within the Company's
financial statements. The interest in the net earnings of EVV and CRV which thus
belongs to parties other than the Company is accounted for as "minority
interest". This "minority interest" in earnings (losses) of these ventures for
the three years ended March 31, 1998 consisted of the following (in thousands):
Year ended March 31,
Minority ----------------------------------
Venture Minority Owner Percent 1998 1997 1996
- ------- -------------- ------- ------ ------ ------
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50.00% $ 906 $ 570 $ 371
Canoe Ridge Vineyard, LLC Various 49.50% 219 111 7
CanoeCo Partners CRVI 50.00% -- -- 9
------ ------ ------
$1,125 $ 681 $ 387
====== ====== ======
The minority interest in earnings for the year ended March 31, 1998
increased 65% over the comparable period ended March 31, 1997, due to steadily
improving performance at both EVV and CRV primarily as a result of increases in
gross margins per case.
The minority interest in earnings for EVV for the year ended March 31, 1997
represents an increase of 54% from the prior comparable period. Similarly, the
minority interest for CRV increased significantly. Both increases were due to
improved performance at both EVV and CRV.
Company management believes that EVV and, to a lesser degree CRV, will both
continue to contribute significantly to the Company's consolidated income
statement.
Net Earnings
Net earnings for the year ended March 31, 1998 was $3.4 million, an
increase of 35% over the comparable year ended March 31, 1997, primarily as a
result of increased sales revenue, as discussed above.
Net earnings for the year ended March 31, 1997, were $2.5 million compared
to $600,000 in the year ended March 31, 1996. This 317% increase reflects
increased unit sales at higher gross margins, lower interest expense and lower
selling, general and administrative expenses as a percentage of sales, all of
which are discussed above.
Seasonality
The Company's wine sales from quarter to quarter are highly variable due
to, among other things, the timing of the release of wines for sale and changes
in consumer demand. Sales are typically highest during the fourth quarter
because of heavy holiday sales and because most wines are released around the
end of the third and beginning of the fourth quarters.
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to determine the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
miscalculations causing disruptions of operations, including, among other
things, temporary inefficiencies in processing transactions, sending invoices,
or engaging in similar normal business activities.
18.
The Company has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by Year 2000 software
failures. While the Company believes it is doing everything technologically
possible to assure Year 2000 compliance, it is to some extent dependent upon
vendor cooperation. The Company also recognizes that any Year 2000 compliance
failures could result in additional expenses to the Company, the materiality of
which cannot be predicted at this time.
Liquidity and Capital Resources
The Company's working capital increased $3.5 million during the year ended
March 31, 1998 to $27.8, primarily as a result of increased inventory levels as
of March 31, 1998, in light of anticipated increased sales activity for the
upcoming year. As of January 1998, the Company obtained an increase of $2
million to $18.3 in aggregate available bank lines of credit, of which $11.0
million was outstanding as of March 31, 1998. These lines are secured by
substantially all of the Company's inventory and accounts receivable, bear
interest at LIBOR plus 1.0% and mature in June, 1999 at which time Management
expects to renew the lines for one to two years.
The Company's cash and cash equivalents totaled $207,000 as of March 31,
1997, up from $2,000 as of March 31, 1996. As of March 31, 1997, the Company
also had bank lines of credit in the aggregate amount of $16.3 million
available, of which $7.8 million was outstanding, as compared to $7.9 million
outstanding as of March 31, 1996.
Wine sales have historically provided sufficient revenues to sustain the
Company's on going operational requirements except during grape harvesting, when
the Company has relied on short-term borrowings to finance grape purchases and
the increased seasonal payroll. Major capital projects such as expansion of
facilities or acquisition of vineyards have been funded with debt and equity
issues and bank borrowings. For example, the Company invested approximately
$4,600,000 in the year ended March 31, 1997 for the expansion of the facilities
at Edna Valley Vineyard and the vineyards at Acacia and Chalone Vineyard, all of
which were funded with long-term borrowings.
Future capital commitments include general vineyard development at all of
the Company's vineyards, as well as the planned building of a barrel-storage
facility on the site of the recently purchased Vintage Lane property. Management
intends to fund such projects with additional bank borrowings and the proceeds
obtained from the exercises of warrants which occurred in March and April of
1998 (see discussion below), as well as from the anticipated settlement with
PG&E. See Item 1, Business, Significant events - Carmenet Fire.
The Company recently received net proceeds of $5.8 million ($4.8 million in
March 1998, and $1 million in April 1998) from the issuance of 828,571 shares of
its common stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued on March 29, 1993 (the "Warrants"), which it
anticipates using for the reduction of existing short-term indebtedness, working
capital and the foregoing capital projects.
19.
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................... 21
Consolidated Statements of Operations .......................... 22
Consolidated Statements of Changes in Shareholders' Equity ..... 23
Consolidated Statements of Cash Flows .......................... 24
Notes to Consolidated Financial Statements ..................... 25
INDEPENDENT AUDITORS' REPORT .............................................. 38
20.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
ASSETS
March 31, December 31,
1998 1996
-------- --------
Current assets:
Cash and cash equivalents $ 2,232 $ 207
Accounts receivable, less allowance for doubtful
accounts of $92 and $71, respectively 6,597 7,003
Notes receivable 197 78
Other receivables -- 419
Note receivable from officer 65 --
Inventory 34,277 29,905
Prepaid expenses 450 229
Deferred income taxes 14 104
-------- --------
Total current assets 43,832 37,945
Investment in Chateau Duhart-Milon 9,480 11,614
Notes receivable, long-term portion 130 492
Property, plant and equipment - net 30,131 24,120
Goodwill and trademarks - net 6,473 5,618
Other assets 248 390
-------- --------
Total assets $ 90,294 $ 80,179
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,425 $ 6,051
Bank lines of credit 10,952 6,494
Other short term debt 952 --
Current maturities of long-term obligations 709 536
Income tax payable -- 1,360
-------- --------
Total current liabilities 16,038 14,441
Long-term obligations, less current maturities 9,624 9,337
Convertible subordinated debentures 8,500 8,500
Deferred income taxes 2,049 1,209
-------- --------
Total liabilities 36,211 33,487
-------- --------
Minority interest 3,678 3,446
Shareholders' equity:
Common stock 46,871 41,674
Retained earnings 5,993 2,273
Cumulative foreign currency translation adjustment (2,459) (701)
-------- --------
Total shareholders' equity 50,405 43,246
-------- --------
Total liabilities and shareholders' equity $ 90,294 $ 80,179
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
21.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
Year ended
March 31, Year ended December 31,
-------- ---------------------
1998 1996 1995
-------- -------- --------
Gross revenues $ 37,651 $ 31,909 $ 25,810
Excise taxes (896) (865) (778)
-------- -------- --------
Net revenues 36,755 31,044 25,032
Cost of wines sold (20,539) (18,669) (16,240)
-------- -------- --------
Gross profit 16,216 12,375 8,792
Other revenues from operations 303 107 20
SG&A expenses (8,147) (6,282) (5,374)
-------- -------- --------
Operating income 8,372 6,200 3,438
Other income (expense)
Interest expense (1,872) (1,844) (2,779)
Other, net 15 (81) 78
-------- -------- --------
(1,857) (1,925) (2,701)
Equity in Chateau Duhart-Milon 341 304 74
Minority interests (1,125) (621) (357)
-------- -------- --------
Income before income taxes 5,731 3,958 454
Income tax expense (2,321) (1,619) (247)
-------- -------- --------
Net income $ 3,410 $ 2,339 $ 207
======== ======== ========
Net income per common share
Basic $ 0.44 $ 0.31 $ 0.04
Diluted $ 0.41 $ 0.29 $ 0.04
Average number of shares used
in income per share computation
Basic 7,786 7,641 5,300
Diluted 8,409 8,169 5,300
The accompanying notes are an integral part of these statements.
22.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(All amounts in thousands)
Common Stock
------------------------ Retained Foreign
Number of Earnings/ Currency
Shares Amount (Deficit) Translation Total
-------- -------- -------- ----------- --------
Balance, December 31, 1994 4,961 $ 24,472 $ (273) $ 24,199
Sale of common stock - net 838 4,532 4,532
Conversion of convertible debentures 1,769 12,384 12,384
Options exercised 28 169 169
Foreign currency translation adjustment $ (108) (108)
Net earnings 207 207
-------- -------- -------- -------- --------
Balance, December 31, 1995 7,596 $ 41,557 $ (66) $ (108) $ 41,383
-------- -------- -------- -------- --------
Sale of common stock 9 22 22
Options exercised 19 77 77
Profit Sharing 2 18 18
Foreign currency translation adjustment (593) (593)
Net earnings 2,339 2,339
-------- -------- -------- -------- --------
Balance, December 31, 1996 7,626 $ 41,674 $ 2,273 $ (701) $ 43,246
-------- -------- -------- -------- --------
Sale of common stock 2 14 14
Options exercised 20 83 83
Profit Sharing 7 70 70
Foreign currency translation adjustment (888) (888)
Net earnings 310 310
-------- -------- -------- -------- --------
Balance, March 31, 1997 7,655 $ 41,841 $ 2,583 $ (1,589) $ 42,835
-------- -------- -------- -------- --------
Sale of common stock 11 75 75
Warrants exercised 686 4,800 4,800
Options exercised 42 155 155
Profit Sharing --
Foreign currency translation adjustment (870) (870)
Net earnings 3,410 3,410
-------- -------- -------- -------- --------
Balance, March 31, 1998 8,394 $ 46,871 $ 5,993 $ (2,459) $ 50,405
======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
23.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year ended
March 31, Year ended December 31,
-------- --------------------------
1998 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 3,410 $ 2,339 $ 207
Non-cash transactions included in earnings:
Depreciation 2,902 2,873 2,718
Amortization 236 121 147
Equity in net income of Chateau Duhart-Milon (341) (304) (74)
Increase in minority interest 1,125 621 357
Loss (gain) on sale of equipment 8 86 (15)
Changes in:
Deferred income taxes 740 199 46
Accounts and other receivable (2,653) 73 (2,136)
Distribution receivable 382 -- --
Inventory (4,860) (1,831) 1,349
Prepaid expenses and other assets (231) (236) 103
Other receivables -- (419) --
Accounts payable and accrued expense 1,624 3,494 (148)
-------- -------- --------
Net cash provided by operating activities 2,342 7,016 2,554
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,331) (6,635) (2,270)
Proceeds from disposal of property and equipment 105 362 146
Net increase (decrease) in notes receivable 194 33 (602)
Investment in Edna Valley joint venture (1,050) -- --
Investment in Duhart-Milon 363 156 --
-------- -------- --------
Net cash used in investing activities (6,719) (6,084) (2,726)
-------- -------- --------
Cash flows from financing activities:
Net change under line of credit agreement 3,181 (3,745) (3,635)
Distribution to minority interest (638) (200) (376)
Proceeds from issuance of long-term debt -- 8,894 --
Repayment of long-term debt (1,210) (5,823) (556)
Proceeds from issuance of common stock 5,030 117 4,701
-------- -------- --------
Net cash provided by financing activities 6,363 (757) 134
-------- -------- --------
Net increase (decrease) in cash 1,986 175 (38)
Cash at beginning of period 246 32 70
-------- -------- --------
Cash at end of period $ 2,232 $ 207 $ 32
======== ======== ========
Other cash flow information:
Interest paid 1,895 1,829 2,905
Income taxes paid 2,610 397 81
Non-cash transactions:
Conversion of convertible debentures to common stock -- -- 12,384
Investment in Edna Valley joint venture accrual -- 1,428 --
Debt assumed in acquisition of real property 1,974 940 --
Distribution receivable from Chateau Duhart-Milon -- -- 432
Profit sharing stock contribution -- 18 --
<FN>
The accompanying notes are an integral part of these statements.
</FN>
24.
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND OPERATIONS
The Chalone Wine Group, Ltd. produces and sells primarily super and
ultra-premium quality table wines. The Company farms its estate-owned vineyards
representing approximately 397 producing acres in Napa, Sonoma, Monterey
counties of California and in eastern Washington state. Approximately 30% of its
annual grape requirements is purchased from independent growers.
The Company sells the majority of its products to wholesale distributors,
restaurants, and retail establishments throughout the United States, Canada and
Europe. Export sales account for approximately 4% of total revenue. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations. Domaines Barons de
Rothschild (Lafite) ("DBR"), a French company, owns approximately 41% of the
Company's outstanding common stock, and the Company is DBR's partner in Societe
Civile Chateau Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate
located in Pauillac, France.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
Change in Fiscal Year-End
The Company changed its fiscal year from one ended on December 31 to one
ended on March 31, effective with the fiscal year ending March 31, 1998.
Accordingly, the Company reported a three month transition period ending March
31, 1997. See Note Q for financial data relating to the three-month period ended
March 31, 1997.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its 50% owned joint venture and its 50.5% owned subsidiary (Notes G and H,
respectively), which are controlled and managed by the Company. All significant
intercompany accounts and transactions have been eliminated as part of the
consolidation process. Additionally, the Company has a 23.5% investment in
Chateau Duhart-Milon which is accounted for using the equity method (Note F).
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 requires the Company to compute deferred income taxes based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Cash and Cash Equivalents
Cash equivalents are highly liquid instruments purchased with original
maturities of three months or less.
Inventory
Inventory is stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. Growing crops consist primarily of farming costs, which are
deferred and recognized when the related crop is harvested. Wine production
supplies are stated at FIFO (first-in, first-out) cost. All bulk and bottled
wine inventories are classified as current assets in accordance with recognized
industry practice, although a portion of such inventories will be aged for
periods longer than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
for in amounts sufficient to allocate the cost of depreciable assets to
operations over their estimated useful lives. The straight-line method is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for income tax purposes.
25.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The range of useful lives used in computing depreciation is as follows:
Years
-----
Vineyard properties 5-35
Buildings and caves 15-80
Machinery and equipment 3-20
Costs of planting new vines and ongoing cultivation costs for vines not yet
bearing, including interest, are capitalized. Depreciation commences in the
initial year the vineyard yields a commercial crop, generally in the third or
fourth year after planting.
Earnings per Share
During the most recent fiscal year, the Company adopted Statement of
Financial Accounting No.128 ("SFAS 128"), Earnings per Share, which requires
dual presentation of two earnings per share ("EPS") amounts, basic EPS and
diluted EPS, on the face of all income statements. Basic EPS excludes dilution
and is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (e.g. stock options) were exercised and
converted into stock. As a result of the adoption of SFAS 128, earnings per
share amounts for the years ended December 31, 1996 and 1995 have been restated
to conform to the new standard. For all periods presented, the difference
between basic and diluted earnings per share for the Company is the inclusion of
dilutive stock options and stock warrants, the effect of which is calculated
using the treasury stock method as shown below. The Company's convertible
debentures are excluded from the computation, as these have had, and continue to
have, an antidilutive effect.
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)
Basic EPS Diluted EPS
---------------- ---------------
Effect of dilutive securities Income
----------------------------- available to
Income common
available to stockholders
common Stock and assumed
stockholders Warrants options conversion
---------------- ------------- ------------- ---------------
Year ended March 31, 1998:
Income $ 3,410 -- -- $ 3,410
Shares 7,786 457 166 8,409
---------------- ---------------
EPS $ 0.44 $ 0.41
================ ===============
Year ended December 31, 1996:
Income $ 2,339 -- -- $ 2,339
Shares 7,641 425 103 8,169
---------------- ---------------
EPS $ 0.31 $ 0.29
================ ===============
Year ended December 31, 1995:
Income $ 207 -- -- $ 207
Shares 5,300 -- -- 5,300
---------------- ---------------
EPS $ 0.04 $ 0.04
================ ===============
Goodwill and Trademarks
The excess of the purchase price paid over the net assets acquired is being
amortized over 40 years on a straight-line basis. Trademarks are amortized over
their estimated useful lives from the date they are put into use.
26.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The payments made to extend the life of the Edna Valley joint venture and
acquire ownership of the continuing joint venture have been recorded as goodwill
and are being amortized over 40 years beginning in January 1997 (see also Note
G).
Accounting Estimates
The presentation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures at the date of the financial statements and the reported amounts of
revenues and expenses for the year. Actual results could differ from these
estimates.
Reclassifications
Certain prior period amounts have been reclassified in order to conform
with the current period presentation.
Foreign Currency Translation
The functional currency of the Company's investee, Duhart-Milon, is the
French Franc and as a result, the Company records the effect of exchange gains
and losses on its equity in Duhart-Milon as a component of shareholders' equity.
Stock-based Compensation
The Company has chosen to account for stock-based awards to employees using
the intrinsic value based method in accordance with APB No.25, Accounting for
Stock Issued to Employees.
Forward Exchange Contracts
The Company has only a limited involvement with forward exchange contracts
and does not use them for trading purposes. Forward exchange contracts are used
to manage exchange rate risks on certain purchase commitments, generally French
oak barrels, denominated in foreign currencies. Gains and losses relating to
firm purchase commitments are deferred and are recognized as adjustments of
carrying amounts or in income when the hedged transaction occurs. The Company
had no forward exchange contracts outstanding as of March 31, 1998.
Recently Issued Accounting Standard
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Management believes that this will have no
significant impact on the Company's financial position or results of operations.
SFAS No. 131, Disclosures about Segment Reporting of an Enterprise and
Related Information, establishes standards for reporting information about
operating segments in annual financial statements and requires that those
enterprises report selected information about segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
Adoption of this statement will not impact the Company's financial position,
results of operations or cash flows, and its effect, if any, will be limited to
the form and content of its disclosures. This statement is effective for years
beginning after December 15, 1997.
NOTE C - CARMENET FIRE
As previously disclosed, on July 31, 1996 a wildfire damaged approximately
75% of the producing acreage at the Company's Carmenet Vineyard, located in
Sonoma, California. Carmenet's winery structures and barrel inventory were
untouched by the blaze and no people were injured. The damaged acreage was
planted to Cabernet Sauvignon, Merlot and Cabernet Franc grapes used for estate
bottled wines produced under the Carmenet label. Prior to the fire, Carmenet
produced approximately 38,000 cases of wine annually (of which a significant
proportion was estate bottled). Carmenet's 1996 grape harvest was reduced
roughly in proportion to the percentage of the vineyard's overall producing
acreage damaged by the fire.
As intended, the Company has completed the first stage of replanting
approximately 75% of the damaged acreage. Historically, newly planted vines will
begin to produce production-quality grapes in approximately three years,
although the vines are expected to take approximately seven years to return to
the full production levels that pre-dated the fire. Until the damaged acreage
returns to full production, Carmenet's ability to make estate bottled wines will
be limited. In order to supplement Carmenet's harvest, the Company attempts to
buy suitable grapes on the open market; however, there can be no
27.
NOTE C - CARMENET FIRE (Continued)
assurance that grapes of suitable quality or variety will continue to be
available in sufficient quantity or on terms acceptable to the Company.
Preliminary investigation indicates that the fire was caused by the
electrical lines of Pacific Gas & Electric Company ("PG&E"). In public
statements, PG&E has acknowledged (1) that its own preliminary investigation
indicates PG&E's responsibility for the fire and (2) that PG&E is responsible
for the resulting damages. PG&E has made two advances to the Company for costs
related to the fire in the amounts of $425,000 and $4.5 million in January 1997
and April 1998, respectively. However, when making the advances, PG&E admitted
no liability and has reserved all rights with respect to such advances. The
Company's discussions with PG&E are on-going. The Company believes that it will
be reimbursed for losses resulting from the fire, and as a result does not
expect that the fire damage will have a material adverse effect on the Company's
financial position or operating results.
NOTE D - INVENTORY
Inventory consists of the following (in thousands):
March 31, December 31,
1998 1996
------- -------
Bulk and bottled wine $32,436 $29,051
Growing crops 824 542
Other inventory 248 120
Wine production supplies 769 192
------- -------
$34,277 $29,905
======= =======
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
March 31, December 31,
1998 1996
-------- --------
Land $ 3,376 $ 2,514
Vineyard Development 11,589 8,387
Buildings 16,760 14,927
Machinery and equipment 16,311 13,739
-------- --------
48,036 39,567
Accumulated depreciation (17,905) (15,447)
-------- --------
$ 30,131 $ 24,120
======== ========
NOTE F - INVESTMENT IN CHATEAU DUHART-MILON
During the period of April 1989 to June 1993, the Company purchased
approximately 11% of the outstanding ordinary shares of Domaines Barons de
Rothschild ("DBR") in exchange for a combination of 5% convertible subordinated
debentures and warrants, subsequently exercised.
Effective October 1, 1995, the Company exchanged essentially all of its
existing ownership in DBR for a 23.5% interest in Duhart-Milon. The remaining
76.5% of Duhart-Milon is owned by DBR.
Chateau Duhart-Milon's condensed balance sheet as of March 31, 1998 and
December 31, 1996 and results of operations for the twelve months ended March
31, 1998, the twelve months ended December 31, 1996 and the three months ended
December 31, 1995 are as follows (translated into U.S. dollars at the year end
and average exchange rate for the period, respectively) (in thousands):
28.
NOTE F - INVESTMENT IN CHATEAU DUHART-MILON (Continued)
March 31, December 31,
1998 1996
------- -------
Inventory $ 3,200 $ 3,489
Other current assets 7,254 9,387
------- -------
Current assets 10,454 12,876
------- -------
Property and equipment, net 2,327 2,441
------- -------
Total assets $12,781 $15,317
======= =======
Current liabilities $ 2,876 $ 1,787
Equity 9,905 13,530
------- -------
Total liabilities and equity $12,781 $15,317
======= =======
The results of operations are summarized as follows (in thousands):
Three Months
Year ended Year ended ended
March 31, December 31, March 31,
--------- ------------ ---------
1998 1996 1995
------- ------- -------
Revenues $ 3,912 $ 3,964 $ 557
Cost of sales (2,337) (2,651) (110)
------- ------- -------
Gross profit 1,575 1,313 447
------- ------- -------
Net operating/other (expenses)/revenues 112 236 (88)
------- ------- -------
Net earnings $ 1,687 $ 1,549 $ 359
======= ======= =======
Company's share of net earnings $ 396 $ 364 $ 84
Less: amortization expense (55) (60) (10)
------- ------- -------
Equity in investment in Duhart-Milon $ 341 $ 304 $ 74
======= ======= =======
The carrying amount of the Company's investment is greater than the amount
of its share of the underlying equity in net assets of Duhart-Milon by
approximately $7.2 million as of March 31, 1998, $8.5 million as of December 31,
1996 and $8.9 million as of December 31, 1995. This difference relates primarily
to the underlying value of the land owned by Duhart-Milon and, accordingly, is
not amortized.
NOTE G - EDNA VALLEY VINEYARD JOINT VENTURE
Edna Valley Vineyard ("the Joint Venture") operates a winery in San Luis
Obispo County, California. The Joint Venture is 50% owned by the Company and 50%
owned by Paragon Vineyard Company, Inc. ("Paragon"). The Company, as the
managing joint venturer, manages and supervises the winery operations, and sells
and distributes the wine. Paragon built a winery which was leased to the Joint
Venture under an operating lease through May 1991, at which time Paragon sold a
one-half interest in the winery to the Company. Thereafter, Paragon and the
Company contributed the winery to the Joint Venture. The allocation of profits
subsequent to this transaction are being adjusted due to the Partners' varying
bases in this asset. The Joint Venture purchases its grapes from Paragon under a
grape purchase agreement, which specifies fixed quantities of grapes to be
acquired at market prices.
In 1991, the Company and Paragon entered into an agreement ("old
agreement") to convert the Joint Venture into a "permanent partnership" of
unlimited duration. Under the old agreement the Company had made payments
totaling $1,070,000 to Paragon to have the right to expend the life of the Joint
Venture through January 1997. Under a new agreement, entered into on December
27, 1996, "new agreement", the Company agreed to a payment of $1,590,000 in
order to extend its life through 2060.
Under the new agreement, the Company made a further payment of $1,050,000
during the year ended March 31, 1998, in order to increase the Company's
ownership in the continuing Joint Venture by 12.54%. Other payments of
$1,050,000 in 1999 and $850,000 in 2001 are required in order to further
increase the Company's ownership by increments of 12.54% and 10.75%,
respectively. Concurrent with the available investment option in 2001, the
Company will also have the option
29.
NOTE G - EDNA VALLEY VINEYARD JOINT VENTURE (Continued)
to purchase 50% of the brand name, Edna Valley, for $200,000 which is currently
licensed to the Joint Venture by Paragon.
The payments made to extend the life of the Joint Venture and acquire
ownership of the continuing Joint Venture have been recorded as goodwill and has
been amortized over 40 years starting in 1997. Should the Company elect not to
exercise the next available investment option as it becomes available, its share
of the profits or losses of the Joint Venture from that point forward would be
reduced from the current 50% level to the level of ownership reached under the
new agreement.
Condensed balance sheets for the Joint Venture are as follows (in
thousands):
March 31, December 31,
1998 1996
------- -------
Inventory $ 5,940 $ 5,822
Current assets eliminated in consolidation 1,364 1,487
Other current assets 11 122
Property and equipment, net 5,476 3,761
Other assets 61 89
------- -------
Total assets $12,852 $11,281
======= =======
Current liabilities $ 5,084 $ 3,380
Current liabilities eliminated in consolidation 239 317
Other liabilities 1,776 1,799
------- -------
Total liabilities 7,099 5,496
------- -------
Total equity 5,753 5,785
------- -------
Total liabilities and equity $12,852 $11,281
======= =======
The results of operations are summarized as follows (in thousands):
Year ended
March 31, Year ended December 31,
------- -----------------------
1998 1996 1995
------- ------- -------
Revenues $ 8,673 $ 6,464 $ 6,850
Cost of sales (5,296) (4,316) (5,124)
------- ------- -------
Gross profit 3,377 2,148 1,726
------- ------- -------
Operating and other expenses (740) (386) (465)
Commissions and management fees
eliminated in consolidation (949) (768) (656)
------- ------- -------
Net earnings 1,688 994 605
Less: Minority interest 906 527 333
------- ------- -------
Company's share of net earnings $ 782 $ 467 $ 272
======= ======= =======
NOTE H - INVESTMENT IN CANOE RIDGE VINEYARD
On December 31, 1990, the Company entered into a joint venture agreement with
Canoe Ridge Vineyard Incorporated ("CRVI") for the formation and operation of
the Canoe Ridge Vineyard ("CanoeCo"). CanoeCo is 50% owned by the Company and
50% owned by CRVI. The purpose of the joint venture is to own, develop and
maintain vineyard property in Benton County, Washington. The Company, as
managing joint venturer, manages and supervises the vineyard operations
Canoe Ridge Winery, Inc. ("CRW") was formed in 1994, and was owned 50.5% by
the Company, and 49.5% by a group of investors. CRW was formed to produce, sell
and distribute premium wines from grapes farmed at CanoeCo.
Effective January 1, 1996, the Company exchanged its ownership interests in
CanoeCo and CRW for a 50.5% ownership interest in a newly formed company, Canoe
Ridge Vineyard LLC, which will carry on the combined operations of the
predecessor entities (CanoeCo and CRW).
30.
NOTE I - BANK LINES OF CREDIT
Bank lines of credit consist of the following (in thousands):
March 31, December 31,
1998 1996
------- -------
o Credit line of $10,300,000 bearing interest $ 4,000 $ 3,455
at LIBOR +1%, payable monthly due June, 1999
o Credit line of $5,500,000 bearing interest at 4,677 1,976
LIBOR+1%, payable monthly, due June, 1999
o Credit line of $2,500,000 bearing interest at 2,275 1,063
LIBOR+1%, payable monthly, due June, 1999
------- -------
$10,952 $ 6,494
======= =======
The notes to bank are collateralized by substantially all inventories and
accounts receivable. Restrictive covenants include provisions regarding:
maintenance of certain financial ratios; mergers or acquisitions; loans,
advances or debt guarantees; additional borrowings; annual lease expenditures;
annual fixed asset expenditures; and declaration or payment of dividends (see
Note J).
NOTE J - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
March 31, December 31,
1998 1996
------ ------
o Convertible subordinated debentures due in $ 8,500 $ 8,500
1999, bearing interest at 5%. Interest
payments on the debentures are due
semiannually (including amounts due to
related party-see Note O)
o Note payable, due May 2000 payable in annual 713 950
installments of principal and interest.
Interest rate at 7%
o Mortgage payable in monthly installments of 1,776 1,828
principal and interest due August 2021.
Interest at 7%
o Bank term loan, due in 2001 with monthly 5,516 5,798
installments of principal and interest.
Interest rate at LIBOR plus 1.8%
o Bank term loan, payable in monthly 215 248
installments of principal and interest due
June 2002. Interest at LIBOR plus 2.5%
o Note payable, payable in monthly installments 934 940
of principal and interest due in June 2016.
Interest rate of 7.03% (see Note O, related
party)
o Note payable, due in August 1999 payable in 1,021 --
monthly installments of principal and
interest. Interest rate of 7.85%
o Other notes payable, due in varying monthly 158 109
installments through January 2000 bearing
interest from 6.5% to 10.9%, some of which
are secured by equipment
------ ------
Less current maturities 18,833 18,373
------ ------
(709) (536)
------ ------
$18,124 $17,837
======= =======
The 5% debentures are subordinate in right of payment to all senior
indebtedness of the Company. Subject to the market price of the Company's stock,
the Company may redeem these debentures, without premium. The Company must
redeem the entirety of the issue not later than April 19, 1999. The debentures
are convertible into shares of the Company's stock at any time from and after
April 19, 1991, at a conversion rate of $8.81 per share subject to antidilution
provisions. The Company set aside and reserved 965,100 shares of its common
stock for issuance upon conversion of these debentures.
Substantially all of the Company's property and equipment is pledged as
collateral for long-term obligations. Significant restrictive covenants include
provisions regarding: maintenance of certain financial ratios; mergers or
31.
NOTE J - LONG-TERM OBLIGATIONS (Continued)
acquisitions; loans, advances or debt guarantees; additional borrowings; annual
lease expenditures; annual fixed asset expenditures; and declaration or payment
of dividends.
At March 31, 1998, maturities of long-term obligations are as follows:
Twelve months
ending March 31,
----------------
1999 $ 709
2000 9,064
2001 566
2002 4,965
2003 80
Thereafter 3,449
=============
Total $ 18,833
=============
Company management believes that the fair value of the bank lines of credit
and long term obligations are substantially equal to the book value since
interest rates on loans were negotiated during 1996 or fluctuate with short-term
market rates.
NOTE K- STOCK BASED COMPENSATION
On February 10, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "Plan"), subject to shareholder approval. The Plan provides for the
grant of stock options to officers and other key employees of the Company
(including the Edna Valley Vineyard Joint Venture, so long as the Company is the
managing joint venturer of that entity), as well as non-employee directors and
consultants, for an aggregate of up to 1,000,000 shares of common stock, plus
any shares subject to issuance under the Company's expired 1987 Stock Option
Plan or 1988 Non-Discretionary Stock Option Plan that are forfeited to the
Company under the terms of such plans. These options generally expire 10 years
from the date of grant and become exercisable after a one-year period.
Option activity under the plans is as follows:
Weighted
Number of Average
Shares Exercise Price
-------- --------------
Outstanding, December 31, 1994 (509,954 exercisable at a weighted average price of $8.36) 596,414 $ 8.17
-------- ------
Granted (Weighted average fair value of $5.80) 36,210 7.09
Exercised (27,716) 6.25
Canceled (48,317) 10.50
-------- ------
Outstanding, December 31, 1995 (520,381 exercisable at a weighted average price of $8.20) 556,591 8.13
-------- ------
Granted (weighted average fair value of $7.80) 70,840 9.74
Exercised (35,303) 6.83
Canceled (3,585) 8.67
-------- ------
Outstanding, December 31, 1996 588,543 8.40
-------- ------
Granted (weighted average fair value of $5.09) 71,930 10.41
Exercised (25,416) 5.57
Canceled --
-------- ------
Outstanding, March 31, 1997 635,057 8.61
-------- ------
Granted (weighted average fair value of $5.95) 229,150 11.65
Exercised (82,638) 7.79
Canceled (476) 9.50
-------- ------
Outstanding, March 31, 1998 781,093 $ 9.62
======== ======
32.
NOTE K- STOCK BASED COMPENSATION (Continued)
Additional information regarding options outstanding as of March 31, 1998 is as
follows:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Weighted Avg.
exercise Number Remaining Weighted Avg. Number Weighted Avg.
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------- ----------- ---------------- -------------- ----------- --------------
$5.00-$8.00 168,708 5.1 years $ 6.27 168,720 $ 6.27
$8.00-$9.99 168,845 5.1 years 9.25 168,845 9.25
$10.00-$12.38 443,540 6.3 years 11.04 227,390 11.04
------- --------- ------ ------- ------
781,093 5.8 years $ 9.62 564,955 $ 9.08
======= ========= ====== ======= ======
The Option Plan expired on February 20, 1997, and the Directors' Plan
expired on December 31, 1996. A new plan reserving 1,000,000 shares was adopted
at the 1997 Shareholder Meeting.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to have salary withholdings to purchase shares of common
stock at a price equal to 85% of the lower of the market value of the stock at
the beginning or end of each three-month offer period or beginning of the Plan
start (27 months), subject to an annual limitation. Stock issued under the plan
was 11,005 shares, 9,049 shares and 5,315 shares in the years ended March 31,
1998, December 31, 1996 and 1995, respectively, at weighted average prices of
$6.82, $6.31 and $6.04, respectively. The weighted average fair value of the
awards for each of the years ended March 31, 1998, December 31, 1996 and 1995
awards was $10.48, $9.84 and $6.99, respectively. At March 31, 1998, 13,106
shares were reserved for future issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note B, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and
its related interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal year 1995. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
102 months following vesting; stock volatility, 24.1% in the twelve-month period
ended March 31, 1998 and 17% in 1996 and 1995; risk-free interest rates, 6.59%
for the twelve months ended March 31, 1998, 6.0% in 1996 and 6.97% in 1995; and
no dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
If the computed fair values for the years ended March 31, 1998, December 31,
1996 and December 31, 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been $2,895,000 ($.26 per
share), $2,095,000 ($.26 per share) and $102,000 ($ .02 per share),
respectively.
NOTE L - COMMON STOCK
As of March 31, 1998 and December 31, 1996, 15,000,000 shares were
authorized, while 8,393,979 and 7,262,150 shares were authorized were issued,
respectively.
In October of 1995, in a private-placement transaction, the Company issued
a total of 833,334 units, each unit consisting of one share of common stock and
one warrant for the purchase of one share of common stock, for a per-unit price
of $6.00 and a net sale price of approximately $4.5 million. The warrants, which
have a five year term, are exercisable at $8.00 per share. Also on that date the
Company converted approximately $12.4 million of convertible debentures, at a
conversion price of $7.00, into 1,769,143 shares of common stock.
33.
NOTE L - COMMON STOCK (Continued)
In April of 1994, in a private-placement transaction, the Company issued a
total of 358,128 shares of its common stock, for a per-share price of $4.50 and
a net sale price of approximately $1.5 million.
The Company has reserved as of March 31, 1998, 3,519,676 shares of common
stock in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
The Company recently received gross proceeds of $5.8 million ($4.8 million
in March of 1998 and $1 million following the year ended March 31, 1998, in
April of 1998) in connection with the issuance of 828,571 shares of its common
stock upon the exercise by the principal holders of all the Company's
outstanding $7.00 warrants issued on March 29, 1993 (the "Warrants"), which it
anticipates using for additional working capital and for the reduction of
existing short-term indebtedness. Except as set forth below, the foregoing
shares will be issued pursuant to an exemption from the registration
requirements of federal and state securities laws. The Company has received
notice that one institutional warrant-holder has exercised its right to demand
registration of 185,714 shares of the Company's common stock received on the
exercise of the Warrants. The Company believes that no other warrant-holders
intend to exercise such registration rights. The Company filed a registration
statement on Form S-3 to effect the foregoing registration on June 26, 1998 at
the Company's expense. The shares registered thereby may be resold into the
trading market for the common stock of the Company anytime after the
registration statement is declared effective by the Securities and Exchange
Commission, pursuant to the prospectus included therewith.
NOTE M - EMPLOYEE BENEFIT PLANS
The Company has a Qualified Profit-Sharing Plan which provides for Company
contributions, as determined annually by the Board of Directors, based on the
Company's previous year performance. These contributions may be in the form of
common stock or cash as determined by the Board of Directors. The Board has
approved a contribution of $143,000 for the year ended March 31, 1998, $73,000
for the year ended December 31, 1996 and $20,000 for the year ended December 31,
1995. At March 31, 1998, the plan held 15,088 shares of the Company's common
stock.
NOTE N - INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
Year ended
March 31, Year ended December 31,
--------- -----------------------
1998 1996 1995
------ ------ ------
Federal
Current $1,261 $1,056 $ 136
Deferred 585 184 25
------ ------ ------
1,846 1,240 161
------ ------ ------
State
Current 319 364 64
Deferred 156 15 22
------ ------ ------
475 379 86
------ ------ ------
$2,321 $1,619 $ 247
====== ====== ======
34.
NOTE N - INCOME TAXES (Continued)
The tax effects of the items comprising the Company's net deferred tax
liability in the Company's balance sheets are as follows (in thousands):
March 31, December 31,
1998 1996
------- -------
Deferred tax liability:
Difference between book and tax basis of property, plant and equipment $ 2,105 $ 2,090
Other 10 --
------- -------
Deferred tax assets: 2,115 2,090
------- -------
Difference between book and tax basis of inventory -- --
Tax credit carryforwards
Other 14 104
66 763
Valuation allowance -- 202
------- -------
Net deferred tax liability 80 1,069
------- -------
-- (84)
------- -------
80 985
------- -------
$ 2,035 $ 1,105
======= =======
The provision for income taxes differs from amounts computed at the
statutory rate as follows (in thousands):
Year ended
March 31, Year ended December 31,
------- -----------------------
1998 1996 1995
------- ------- -------
U.S. federal income tax at statutory rate $ 1,949 $ 1,395 $ 91
State tax net of federal benefit 334 230 57
Reconciling items:
Other 5 (39) 66
Effect of acquisitions, net 33 33 33
------- ------- -------
$ 2,321 $ 1,619 $ 247
======= ======= =======
NOTE O - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of operations include the following amounts
resulting from transactions with related parties (in thousands):
Year ended
March 31, Year ended December 31,
--------- -----------------------
1998 1996 1995
---- ---- ----
Interest expense:
Interest on convertible debentures held by a related party of the Company $ 167 $ 167 $ 516
Interest on note payable to director 49 39 -
Interest on notes payable to joint venture partner - 2 36
Interest revenue:
Interest on note receivable from director of the Company - 3 -
Interest on note receivable from officer of the Company 2 1 -
Interest on note receivable from joint venture partner 40 48 -
Amortization expense for joint venture agreement 64 - -
Lease expense for land and facilities 12 10 10
Consulting fee to officer of the Company - 33 65
35.
NOTE O - TRANSACTIONS WITH RELATED PARTIES (Continued)
The balance sheet includes the following amounts resulting from
transactions with related parties (in thousands):
March 31, December 31,
1998 1996
----- -----
Receivables
Accounts receivable from a director of the Company $ -- $ 27
Note receivable from a director of the Company 70
Note receivable from officer of the Company 65 --
Inventory
Wine purchases from related parties 1,717 1,120
Grape purchases from related parties 2,483 2,136
Goodwill - investment in joint venture (see Note G) 3,619 2,445
Notes receivable - joint venture partner (Paragon) 327 500
Property, plant & equipment, net
Building contributed to joint venture by the partners 1,192 1,304
Accounts Payable and accrued liabilities
Payables for inventory purchases to related parties -- 1,309
Long-term obligations
Note payable to director of the Company -- 940
Convertible debentures held by a related party of the 5,000 5,000
Company (see Note I and K)
NOTE P - COMMITMENTS AND CONTINGENCIES
As of March 31, 1998, future minimum lease payments (excluding the effect
of future increases in payments based on indexes which cannot be estimated at
the present time) required under noncancelable operating leases with terms in
excess of one year are as follow (in thousands):
Year ending
March 31,
---------
1999 $ 687
2000 674
2001 666
2002 649
2003 654
Thereafter 5,074
-------
Total $ 8,404
=======
Rental expense charged to operations was as follows: $635,000 for the year
ended March 31, 1998 and $658,000 and $833,000 for the two years ended December
31, 1996 and 1995, respectively. Future lease commitments include $16,000 per
year until 2052 for land leased by Paragon to the Edna Valley Joint Venture (see
Note G).
Additionally, in April of 1998, the Company entered into a three-year lease
agreement (starting May 1998) for a barrel storage facility in Sonoma,
California. Total lease payments under this agreement will be $118,000. These
payments are excluded from the schedule featured above, as this lease was
effective following the end of the fiscal year.
36.
NOTE Q - SELECTED FINANCIAL INFORMATION -THREE MONTHS ENDED MARCH 31, 1997
The Company changed its fiscal year from December 31 to March 31, effective
with the fiscal year beginning April 1, 1997. Selected financial information
derived from the consolidated statement of operations for the three months ended
March 31, 1997 and from the consolidated balance sheet at that date, as
previously reported in the Company's transition report on Form 10-K for the
three months ended March 31, 1997, is as follows (in thousands, except per share
data):
Net revenues $ 5,390
Net Income $ 311
EPS $ 0.04
Total assets $75,859
NOTE R - QUARTERLY DATA (Unaudited)
The Company's quarterly operating results for the fiscal year ended March
31, 1998, the three-month transition period ended March 31, 1997 and the years
ended December 31, 1996, 1995 are summarized below:
(All amounts in thousands, except per share data)
Gross Gross Net EPS
Quarter ended revenues profit loss/income (diluted)
------------- -------- ------ ----------- ---------
March 31, 1998 $ 8,936 $ 4,137 $ 535 $ 0.06
December 31, 1997 11,178 4,878 1,404 0.17
September 30, 1997 9,250 3,783 804 0.10
June 30, 1997 8,287 3,418 667 0.08
March 31, 1997 5,520 2,384 311 0.04
December 31, 1996 9,857 4,100 888 0.11
September 30, 1996 8,207 3,157 668 0.08
June 30, 1996 8,449 3,170 653 0.08
March 31, 1996 5,396 1,948 130 0.02
December 31, 1995 8,596 3,115 429 0.08
September 30, 1995 5,380 1,935 (29) (0.01)
June 30, 1995 7,411 2,245 70 0.01
March 31, 1995 4,423 1,497 (263) (0.04)
37.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The CHALONE Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Chalone
Wine Group, Ltd. (the "Company") (a California corporation), as of March 31,
1998 and December 31, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended March 31,
1998 and for each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of March 31, 1998 and December 31, 1996 and the consolidated
results of its operations and its cash flows for the year ended March 31, 1998
and for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
May 14, 1998
38.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
See Part I, Item 4 - Executive Officers of the Registrant. Additional
information required by this Item is hereby incorporated by reference to the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 1998. See "Director Nominees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" therein.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the Proxy Statement relating to the 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after March
31, 1998. Please see "Board Meetings and Compensation", "Executive
Compensation", "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph".
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement relating to the 1998 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 1998. Please see "Shareholding Information as to Directors,
Director Nominees and Management".
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is hereby incorporated by reference
to the Company's Proxy Statement relating to the 1998 Annual Meeting to be filed
with the Securities and Exchange Commission within 120 days after March 31,
1998. Please see "Certain Relationships and Related Transactions". Reference is
also made to the information contained in Note O of Notes to Consolidated
Financial Statements of this Report under the caption "Transactions with Related
Parties."
39.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a(1). Financial Statements.
The following financial statements of the Company are included in Part II,
Item 8:
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................. 21
Consolidated Statements of Operations ........................ 22
Consolidated Statements of Changes in Shareholders' Equity ... 23
Consolidated Statements of Cash Flows ........................ 24
Notes to Consolidated Financial Statements ................... 25
INDEPENDENT AUDITORS' REPORT ............................................ 38
a (2). Financial Statement Schedules.
Schedules are omitted because they are not applicable, not required, were
filed subsequent to the filing of the Form 10-K, or because the information
required to be set forth therein is included in the consolidated financial
statements or in notes thereto.
b. Reports on Form 8-K.
The Company filed one report on Form 8-K during the last quarter of the
period covered by this Report, dated May 8, 1998, covering the issuance of
shares upon the exercise of the Company's 1993 warrants.
c. Exhibits.
A copy of any exhibits (at a reasonable cost) or the Exhibit Index will be
furnished to any shareholder of the Company upon receipt of a written request
therefor. Such request should be sent to The Chalone Wine Group, Ltd., 621
Airpark Road, Napa, California 94558, Attention: Investor Relations.
40.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
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>
41.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (i)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (ii)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (ii)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (iii)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (iii)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (iii)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (iii)
10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (iv)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (v)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (v)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (v)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (vi)
<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>
42.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (i)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (iii)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (iii)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (iii)
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (iv)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (v)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (vi)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (vi)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (vi)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (iv)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (vii)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (vii)
<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>
43.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (i)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington state investors, dated
November 30, 1994. (i)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (i)
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (ii)
10.29 Credit Agreement between the Company and Wells Fargo Bank, (iii)
dated December 29, 1995.
10.30 Credit Agreement between Edna Valley Vineyard and (iv)
Wells Fargo Bank, dated July 31, 1995.
10.31 Purchase Agreement between the Company, (iv)
Richard H. Graff, Trustee, Graff 1993 Trust Dated June 10, 1993,
a trust and Richard H. Graff an individual, dated July 1, 1996.
10.32 Promissory Note between the Company and Richard H. Graff, (iv)
dated July 1, 1996.
10.33 Secured Purchase Money Promissory Note between the Company (iv)
and Richard H. Graff, Trustee, Graff 1993 Trust,
dated July 1, 1996.
10.34 Residential Lease between the Company and Richard H. Graff, (iv)
dated July 1, 1996.
10.35 Consulting and Non-Competition Agreement between the Company (iv)
and Richard H. Graff, dated July 1, 1996.
10.36 Credit Agreement between the Canoe Ridge
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>
44.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
10.39 Credit Agreement between the Company and Wells Fargo
Bank, dated July 30, 1997.
10.40 Credit Agreement between Edna Valley Vineyard and Wells
Fargo Bank, dated July 30, 1997.
10.41 Credit Agreement between Canoe Ridge Vineyard, LLC, and
Wells Fargo Bank, dated July 30, 1997.
10.42 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39,
dated January 5, 1998.
10.43 Second Amendment to Credit Agreement between the
Company and Wells Fargo Bank incorporated as Exhibit
10.39, dated June 9, 1998.
10.44 First Amendment to Credit Agreement between Edna Valley
Vineyard and Wells Fargo Bank incorporated as Exhibit
10.40, dated June 9, 1998.
10.45 First Amendment to Credit Agreement between Canoe Ridge
Vineyard, LLC and Wells Fargo Bank incorporated as
Exhibit 10.41, dated June 9, 1998.
45.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
24 Consent of Deloitte & Touche LLP to incorporation by
reference, dated June 26, 1998.
27 Financial Data Schedule
46.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CHALONE WINE GROUP, LTD.
By /s/ W. Philip Woodward
------------------------------------
W. Philip Woodward
Chief Executive Officer
(Principal Executive Officer)
By /s/ William L. Hamilton
------------------------------------
William L. Hamilton
Executive Vice President (Principal Financial
and Principal Accounting Officer)
Dated: June 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ W. Philip Woodward President, Chief June 26, 1998
-------------------------------------------- Executive Officer,
W. Philip Woodward Director, and Chairman
of the Board (Principal
Executive Officer)
/s/ Thomas B. Selfridge President and Director June 26, 1998
--------------------------------------------
Thomas B. Selfridge
/s/ C. Richard Kramlich Director June 26, 1998
--------------------------------------------
C. Richard Kramlich
/s/ William G. Myers Director June 26, 1998
--------------------------------------------
William G. Myers
47.
/s/ James H. Niven Director June 26, 1998
--------------------------------------------
James H. Niven
/s/ Eric de Rothschild Director June 26, 1998
--------------------------------------------
Eric de Rothschild
/s/ Christophe Salin Director June 26, 1998
--------------------------------------------
Christophe Salin
/s/ Mark Hojel Director June 26, 1998
--------------------------------------------
Mark Hojel
/s/ Yves-Andre Istel Director June 26, 1998
--------------------------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director June 26, 1998
--------------------------------------------
Phillip M. Plant
48.