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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File number 1-3358
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Vina Concha y Toro S.A.
(Exact name of Registrant as specified in its charter)
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Concha y Toro Winery Inc.
(Translation of Registrant's name into English)
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Republic of Chile
(Jurisdiction of incorporation or organization)
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Casilla 213
Nueva Tajamar 481
Torre Norte, Piso 15
Santiago, Chile
(562) 476-5000
(Address and telephone number of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
New York Stock Exchange
American Depositary Shares ("ADS"), each representing 50 Shares of common stock
Shares of common stock ("Shares" or "Common Stock"), without nominal (par)
value, of Vina Concha New York Stock Exchange* y Toro S.A. New York Stock Exchange*
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Shares of common stock without nominal (par) value 719,170,735
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 which financial statement item the Registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
* Not for trading, but only in connection with the registration of ADS.
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PART I
ITEM 1*: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............................................2
ITEM 2*: OFFER STATISTICS AND EXPECTED TIMETABLE...........................................................2
ITEM 3: KEY INFORMATION...................................................................................2
ITEM 4: INFORMATION ON THE COMPANY.......................................................................11
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS.....................................................33
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................42
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS................................................49
ITEM 8: FINANCIAL INFORMATION............................................................................52
ITEM 9: THE OFFER AND LISTING............................................................................53
ITEM 10: ADDITIONAL INFORMATION...........................................................................54
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................66
ITEM 12*: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...........................................67
ITEM 13*: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES..................................................67
ITEM 14*: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.....................67
ITEM 15: CONTROLS AND PROCEDURES..........................................................................67
ITEM 17**: FINANCIAL STATEMENTS.............................................................................67
ITEM 18: FINANCIAL STATEMENTS.............................................................................67
ITEM 19: EXHIBITS.........................................................................................68
* Omitted because the item is not applicable
** The Registrant has responded to Item 18 in lieu of this Item.
CERTAIN DEFINED TERMS
Unless otherwise specified, all references to "U.S. dollars," "dollars"
or "US$" are to United States dollars and all references to "Chilean pesos,"
"pesos" or "Ch$" are to Chilean pesos. Vina Concha y Toro S.A. ("Concha y Toro"
or the "Company"), a corporation (sociedad anonima abierta) formed under the
laws of the Republic of Chile ("Chile"), publishes its consolidated financial
statements in Chilean pesos that are adjusted to reflect changes in purchasing
power due to inflation. See Notes 2(d), 23 and 36 to the audited consolidated
balance sheets of the Company and its subsidiaries as of December 31, 2001 and
2002 and the related consolidated statements of income and cash flows for each
of the three years ending December 31, 2000, 2001 and 2002 (the "Consolidated
Financial Statements") contained in Item 18. Unless otherwise specified,
financial information regarding the Company is presented in constant Chilean
pesos as of December 31, 2002 and in accordance with generally accepted
accounting principles in the Republic of Chile ("Chilean GAAP"). Chilean GAAP
varies in certain important respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). See Note 36 to the Consolidated
Financial Statements contained in Item 18. Amounts in tables appearing in this
Annual Report may not total due to rounding.
Glossary of Special Terms
Lees: Sediment comprising dead yeast cells and other particles
remaining in wine after fermentation. Red wine is transferred off this sediment.
Some white wines are left on their lees (sur lie) to add flavor and complexity.
Maceration: Refers to period during which the must or wine remains in
contact with the grape skins. Alcohol acts as a solvent, extracting color,
tannin and aroma from the skins.
Malic Acid: Component of wine. Accounts for green and sour taste of
wine made from unripe grapes. See "malolactic fermentation."
Malolactic fermentation: Conversion by bacteria (not yeast) of malic
acid into lactic acid. Softens wine and reduces overall acidity. A process now
applied to all red wines, but not all white wines.
Must: Freshly crushed grape juice (with or without skins),
pre-fermentation.
Sparkling Wines: Effervescent wines.
Table Wines: Non-sparkling wines with at least 11.5% alcohol by volume
which are traditionally consumed with food.
Vinifera: Of, relating to or being derived from premium grapes used in
wine making.
Viniculture/Viticulture: The cultivation of grapes.
Units of Measure
1 Case = 9 Liters
Centigrade = 5/9 (Fahrenheit(degree)-32)
1 Hectare = 2.47 Acres
1 Kilogram = 2.2 Pounds
1 Kilometer = .62 Miles
1 Liter = 1.057 Quarts
1 Milliliter = 1/1000 Liter
1 U.S. Ton = 2,000 Pounds or 907 Kilograms
The Company's principal trademarks used in its business are registered
in Chile, including Concha y Toro, Subercaseaux, Tocornal, Maipo, Clos de
Pirque, Fressco, San Jose, 96, Marques de Casa Concha, Casillero del Diablo,
Trio, Terrunyo, Don Melchor, and Amelia. While the Company also registers these
trademarks in most of its principal foreign export markets, it does not have
registrations for all of its trademarks in all of its foreign export markets.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, with respect to
the financial condition, results of operations and business of the Company and
certain plans and objectives of the Company with respect to these items.
Forward-looking statements contained in this Annual Report may be identified by
the use of forward-looking terminology, such as "anticipate," "continue,"
"estimate," "expect," "intend," "may," "will," or the negative thereof or other
variations thereon or comparable terminology. In particular, among other
statements, certain statements in Item 4 -- "Information on the Company --
Business Overview" with regard to management objectives, trends in market
shares, market standing and product volumes, and the statements in Item 5 --
"Operating and Financial Review and Prospects" and Item 11 -- "Quantitative and
Qualitative Disclosures About Market Risk," with regard to trends in results of
operations, margins, overall market trends, interest rates, and exchange rates
are forward-looking in nature. By their nature, forward-looking statements
involve risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future.
There are a number of factors that could cause actual results and
developments to differ materially from those expressed or implied by these
forward-looking statements. These factors include, but are not limited to, the
risk factors identified in Item 3 -- "Key Information -- Risk Factors" of this
Annual Report and in the Company's Registration Statement on Form F-1, filed
with the Securities and Exchange Commission on October 13, 1994 (No. 33-84298),
levels of consumer spending in major economies, changes in consumer tastes and
preferences, the levels of marketing and promotional expenditures by the Company
and its competitors, raw materials and employee costs, future exchange and
interest rates, changes in tax rates and future business combinations or
dispositions.
PART I
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3: KEY INFORMATION
Selected Historical Financial Data
The following table presents selected consolidated financial data,
under the captions "Consolidated Income Statement Data -- Chilean GAAP",
"Consolidated Balance Sheet Data -- Chilean GAAP," and "Selected Financial
Ratios" for and as of the end of each of the years in the five-year period ended
December 31, 2002 derived from the Consolidated Financial Statements, which
financial statements have been audited by Ernst & Young, independent certified
public accountants. This information should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial
Statements, including the Notes thereto. The Consolidated Financial Statements
are prepared in accordance with Chilean GAAP, which differ in certain important
respects from U.S. GAAP. Note 36 to the Consolidated Financial Statements
provides a description of the principal differences between Chilean GAAP and
U.S. GAAP which affect the financial statements of the Company, the effects of
such differences on the calculation of shareholders' equity and net income, and
a reconciliation to U.S. GAAP of shareholders' equity at December 31, 2000, 2001
and 2002 and of net income for each of the three years ended December 31, 2000,
2001 and 2002. All information expressed in Chilean pesos, except dividends, is
presented in constant Chilean pesos at December 31, 2002 purchasing power. The
U.S. dollar amounts presented as of and for the year ended December 31, 2002
have been translated from Chilean pesos solely for the convenience of the
reader.
2
As of and for the Year Ended December 31,
------------------------------------------------------------------
1998 1999 2000 2001 2002
Ch$ Ch$ Ch$ Ch$ Ch$
---------- --------- -------- --------- ---------
(Expressed in millions of constant Ch$ and millions US$,
except financial ratios as per Share amounts)
Consolidated Income Statement Data
Chilean GAAP:
Revenue from sales...................... 96,567 100,696 106,660 114,991 128,321
Operating income........................ 14,794 16,150 18,155 18,663 20,510
Non-operating income (expense).......... (1,529) (1,372) (2,180) (2,267) (1,209)
Net income ............................. 11,520 12,798 13,830 13,626 16,312
Net income per Share.................... 16.02 17.80 19.23 18.95 22.68
Net income per ADS(1)................... 800.96 889.80 961.54 947.31 1,134.08
Net income per ADS in U.S. Dollars ..... 1.11 1.24 1.34 1.32 1.58
Dividend declared per Share............. 5.48 6.23 7.11 7.77 7.66
Dividends declared per ADS in
U.S. Dollars(2)........................ 0.51 0.53 0.58 0.58 0.53
Weighted average number of Shares
Outstanding(3).......................... 719,170,735 719,170,735 719,170,735 719,170,735 719,170,735
U.S. GAAP:
Revenues from sales..................... 96,567 100,696 106,660 114,991 128,321
Operating income........................ 15,110 16,024 17,404 17,607 20,495
Non-operating income (expense) net ..... (1,418) (1,476) (2,170) (2,267) (871)
Net income ............................. 11,265 11,649 13,850 12,342 16,653
Net income per Share.................... 15.66 16.20 19.26 17.16 23.16
Net income per ADS in U.S. Dollars...... 1.49 1.41 1.63 1.31 1.61
Consolidated Balance Sheet Data
Chilean GAAP:
Total assets............................ 134,606 161,617 179,857 186,564 195,782
Long-term debt.......................... 7,342 16,060 22,427 22,190 13,692
Shareholders' equity.................... 91,344 99,670 108,341 116,526 127,591
Capital stock........................... 46,570 46,570 46,570 46,570 46,570
U.S. GAAP
Total assets............................ 135,231 162,105 179,745 185,450 192,322
Long-term debt.......................... 7,342 16,060 22,427 22,190 13,692
Shareholders' equity.................... 89,457 95,856 104,458 111,702 122,429
Selected Financial Ratios (4)
Chilean GAAP
Operating margin 15.3% 16.0% 17.0% 16.2% 16.0%
Net Margin 11.9% 12.7% 13.0% 11.8% 12.7%
Debt to equity 27.6% 40.9% 42.7% 35.6% 27.4%
Debt to capitalization 21.6% 29.0% 29.9% 26.3% 21.5%
U.S. GAAP
Operating margin 15.6% 15.9% 16.3% 15.3% 16.0%
Net Margin 11.7% 11.6% 13.0% 10.7% 13.0%
Debt to equity 28.2% 42.5% 44.3% 37.2% 28.5%
Debt to capitalization 22.0% 29.8% 30.7% 27.1% 22.2%
Consumer Price Index(5) 4.30% 2.60% 4.70% 3.10% 3.00%
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(1)Determined by multiplying per Share amounts by 50 (1 ADS = 50 Shares).
(2)U.S. Dollar amounts for dividends are calculated by applying the Observed
Exchange Rate on the dividend payment date to the nominal peso amount.
(3)Calculated on the basis of the number of shares outstanding and fully paid
together with the pro-rata portion of the number of shares outstanding but
not yet fully paid for each period.
(4)These ratios, which are expressed as percentages, were calculated as
follows: Operating margin = (Operating income)/(Revenues from sales); Net
margin = (Net income)/(Revenues from sales); Debt to equity = (Short- and
long-term borrowing )/(Total shareholders' equity); Debt to capitalization
= (Short- and long-term borrowing )/(Short- and long-term borrowing plus
Total shareholders' equity). Ratios presented have been rounded.
(5)Based on the Consumer Price Index ("CPI") for the period December 1 to
November 30 of each year required to be used for price-level restatement
purposes under Chilean GAAP.
3
Unless otherwise indicated, U.S. dollar equivalent information, except
export figures, for information in Chilean pesos, is based on the Observed
Exchange Rate for December 31, 2002, which was Ch$718.61 per U.S. dollar. No
representation is made that the Chilean peso or U.S. dollar amounts shown herein
could have been or could be converted into U.S. dollars or Chilean pesos, as the
case may be, at any particular exchange rate or at all.
Exchange Rates
Banco Central de Chile (the "Central Bank of Chile") authorizes three
types of exchange rates in Chile: (i) a reference rate set by the Central Bank
of Chile, (ii) a rate set in the formal institutional market for foreign
exchange currency, and (iii) a rate set in a less regulated informal market for
foreign exchange.
Pursuant to Law 18,840, the Central Bank of Chile sets the dolar
acuerdo, which is a forecast of exchange rates used as a reference exchange rate
(the "Reference Exchange Rate"). The Reference Exchange Rate is published by the
Central Bank of Chile for each day of the next month based on the following
considerations: (i) the previous month's domestic inflation rate, (ii) a factor
for international inflation and (iii) a formula pegged to the U.S. dollar, the
Japanese yen and the Euro. These three currencies were chosen because they are
the currencies of Chile's principal trading partners.
The Central Bank of Chile also authorizes commercial banks and certain
other entities to conduct foreign exchange transactions on a free market basis
(the "Formal Exchange Market"). The daily average exchange rate (the "Observed
Exchange Rate") at which transactions are carried out in the Formal Exchange
Market are published daily in Chilean newspapers. Prior to September 2, 1999,
participants of the Formal Exchange Market were authorized to carry out their
transactions within a specified range above or below the Reference Exchange Rate
(the "Exchange Band"). As of September 2, 1999, the Central Bank of Chile
eliminated the Exchange Band, allowing the exchange rate to fluctuate freely.
The Central Bank of Chile has announced a policy to intervene in the Formal
Exchange Market only in certain exceptional cases, which interventions will be
publicly disclosed.
The Mercado Cambiario Informal (the "Informal Exchange Market") is a
currency market comprised of exchange houses and money changers in Chile. The
Informal Exchange Market reflects the supply and demand for foreign currency and
the rate of exchange in the Informal Exchange Market can fluctuate freely, above
or below the Observed Exchange Rate. Since 1990, the rate of exchange for pesos
into U.S. dollars in the Informal Exchange Market has been similar to that in
the Formal Exchange Market. The Observed Exchange Rate as of June 18, 2003 was
Ch$705.24 per U.S. dollar.
The following table sets forth the annual high, low, average and
year-end Observed Exchange Rates for U.S. dollars for each year indicated, as
reported by the Central Bank of Chile. The Federal Reserve Bank of New York does
not report any buying rate for Chilean pesos.
Annual High, Low, Average and Year-End
Observed Exchange Rate
Ch$ per US$
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Year High(1) Low(1) Average(2) Year-end
- ---- ------- ------ ---------- --------
1998...................................................... 475.41 439.18 460.29 472.41
1999...................................................... 550.93 468.69 508.78 530.07
2000...................................................... 580.37 501.04 539.49 573.65
2001...................................................... 716.62 557.13 634.94 654.79
2002...................................................... 756.56 641.75 688.94 718.61
(1) Exchange rates are the actual high and low, on a day-by-day basis, for
each period.
(2) The average of the monthly average rates during the period.
Source: Central Bank of Chile.
4
The following table sets forth the high, low and average Observed
Exchange Rate for U.S. dollars for each month during the previous six months, as
reported by the Central Bank of Chile.
Ch$ per US$
--------------------------------------------------------------
High(1) Low(1) Average(2)
------- ------ ----------
December, 2002................................... 712.38 692.94 701.95
January, 2003.................................... 738.87 709.22 722.48
February, 2003................................... 755.26 733.10 745.21
March, 2003...................................... 758.21 725.79 743.28
April, 2003...................................... 731.56 709.32 718.25
May, 2003........................................ 713.73 694.22 703.58
(1) Exchange rates are the actual high and low, on a day-by-day basis, for
each period.
(2) Average monthly rate.
Source: Central Bank of Chile.
Risk Factors
Risks Relating to the Company
Agricultural Risks. Wine-making and grape-growing are subject to a
variety of agricultural risks. Diseases, pests, drought, frosts and certain
other weather conditions can materially and adversely affect the quality,
quantity and cost of grapes available to the Company from its own vineyards and
from outside suppliers, thereby materially and adversely affecting the supply of
the Company's products and its profitability.
In October 1991, there was a severe freeze which mainly affected the
vineyards located in the Maipo region and Chile. From 1996 to 1998, Chile
experienced drought conditions which had an impact on the quality and yields of
the grapes. Future freezes or drought conditions in Chile could severely affect
the quantity or quality of the production of wine by the Company. See Item 4
- --"Information on the Company -- Chilean Wine Industry Overview."
Phylloxera, a pest which attacks roots of grapevines, has widely
infested vineyards outside of Chile but to date has never been found in Chilean
vineyards. The Company, like most Chilean wine grape growers, still uses the
French root varieties which are susceptible to phylloxera. While the Company
carefully screens new root stock for signs of infestation, and regulations
imposed by the Servicio Agricola y Ganadero (the "Chilean Agriculture Service")
require that all vegetation introduced into Chile be isolated under observation
for a period of two years, there can be no assurance that the Company's
vineyards and other Chilean vineyards will continue to be phylloxera-free.
Infestation could have a material adverse effect on the Company while vineyards
are being replanted and as they come into full production. See Item 4 --
"Information on the Company -- Chilean Wine Industry Overview -- Phylloxera."
Risks Associated with Higher Taxes, Tariffs. In 2002, the Company's
export sales to third parties represented 58.3% of total revenues and sales of
its foreign subsidiaries represented 12.5% of total revenues. Wines are subject
to a number of taxes and tariffs, including excise taxes in the United States
and the Company's other principal export markets. Additional increases in such
taxes and tariffs could depress wine consumption in those markets and could
adversely affect the Company's sales.
In addition, there is a risk that other countries could impose or
threaten to impose restrictions on imports of certain countries' wines in
connection with trade negotiations with such countries. Although Chile has not
been the specific target of such actions or threats from the United States, the
European Union or other countries, if restrictions were imposed on Chilean
wines, they could have a material adverse effect on the Company.
Increases in Chilean taxes on wine could adversely affect the Company's
wine sales in Chile. In June 2003, the Chilean government proposed an increase
in taxes on alcoholic beverages from 15% to 19%, which would apply to the
Company's products. This proposal is currently under consideration by Chile's
legislature.
Government Regulation. The production and sale of wine is subject to
extensive regulation within and outside of Chile. Those regulations control such
matters as licensing requirements, trade and pricing practices, permitted and
required labeling, advertising and relations with wholesalers and retailers.
5
For example, it is the current policy of the U.S. Bureau of Alcohol, Tobacco and
Firearms that any statements made by a wine producer promoting the potential
health benefits of wine must be balanced and must include appropriate statements
regarding the established harmful effects of alcohol use. In recent years, U.S.
federal and state regulators have required warning labels and signage. There can
be no assurance that new or revised regulations or increased licensing fees and
related requirements will not have a material adverse effect on the Company's
business and its results of operations. See Item 4 -- "Information on the
Company -- Government Regulation."
Future expansion of the Company's existing facilities and development
of new vineyards and wineries may be limited by present and future zoning
ordinances and other legal requirements. Availability of water and requirements
for handling waste water can limit the Company's growth. While the Company
believes that it will continue to be in compliance with all applicable
environmental regulations, there can be no assurance that future legislative or
regulatory developments will not impose restrictions which would have a material
adverse effect on the Company. See Item 4 -- "Information on the Company --
Government Regulation."
Dependence on Distributors. The Company relies on distributors to sell
its products in export markets. Sales to the Company's largest distributor,
Banfi Products Corporation ("Banfi") in the United States represented 26.3% of
the Company's total export revenues in 2002, and 27.3% of total export revenues
in 2001. Sales to the Company's five largest distributors, including Banfi,
represented 57.6% and 51.2% of total export revenues in 2002 and 2001,
respectively, and are expected to continue to represent a substantial majority
of the Company's total export revenues in the future. Although the Company has
long-term written agreements with most of its largest distributors, the
Company's policy with respect to most of its distributors is to have oral
agreements which may be terminated upon prior notice by either party. The
replacement or poor performance of the Company's distributors or the Company's
inability to collect accounts receivable from its distributors could materially
and adversely affect the Company's results of operations and financial
condition. In addition, the Company's strategy to expand sales in major export
markets is to a large extent dependent on the performance of its distributors.
See Item 4 -- "Information on the Company -- Business Overview -- Company Sales
- -- Export Markets -- Distribution in Export Markets."
Distributors and retailers of the Company's products often offer wines
which compete directly with the Company's products for shelf space and
consumers. Accordingly, there is a risk that these distributors or retailers may
give higher priority to products of the Company's competitors. There can be no
assurance that the Company's distributors and retailers will continue to
purchase the Company's products or provide the Company's products with adequate
levels of promotional support. See Item 4 -- "Information on the Company --
Business Overview -- Company Sales -- Export Markets -- Distribution in Export
Markets."
Dependence on Suppliers. The Company relies on Cristalerias de Chile
S.A. ("Cristalerias") to supply almost all of its bottle requirements.
Cristalerias is a principal shareholder of one of the Company's main
competitors, Vina Santa Rita S.A. ("Santa Rita"). Although the Company believes
that alternate suppliers are available, an interruption in the supply of bottles
from Cristalerias to the Company for any reason could result in a short-term
material adverse effect on the Company's operations.
The Company has a license from Tetra Pak de Chile Comercial Ltda.
("Tetra Pak Chile") to package wine in Tetra Brik packages, and purchases these
unassembled pre-printed packages from Tetra Pak Chile. Wine sold in Tetra Brik
packages accounted for approximately 77.1% and 63.2% of the Company's domestic
sales by volume and value, respectively, in 2002 and 76.8% and 64.0%,
respectively, in 2001. Although the Company believes that alternate suppliers
are available, an interruption in the supply of Tetra Brik packages to the
Company for any reason could result in a short-term material adverse effect on
the Company's operations. See -- Item 4 "Information on the Company -- Business
Overview -- Bottling."
The Company currently relies on approximately 550 outside vineyards for
supplies of grapes and approximately 50 producers for bulk wine. In 2002 and
2001, approximately 65% and 60%, respectively, of the grapes used in the
production of its premium, varietal, varietal blend and sparkling wines were
purchased by the Company from independent growers in Chile. Additionally, in
2002, the Company purchased grapes and bulk wine required to produce
approximately 100% of the popular wines sold by the Company.
Disruptions of supplies of grapes or wine or increases in prices from
these outside suppliers could have a material adverse effect on the Company's
results of operations.
Competition. The wine industry in Chile and in the Company's export
markets is intensely competitive.
6
In Chile and in approximately 95 other countries, the Company's wines compete
with wines and other beverages from Chile and other countries. Chilean wines, in
general, compete with wines produced in the United States, Europe, Australia,
South Africa, South America and New Zealand. In addition, the Company's wines
compete with other beverages including soft drinks, liquors, beer and, in Chile,
pisco (a Chilean grape spirit). Many of the Company's competitors in Chile and
abroad have significantly greater financial resources than the Company.
Due to competitive factors, the Company may not be able to increase
prices of its wines in line with rising farming, vinification, selling and
promotional costs. See Item 5 -- "Operating and Financial Review and Prospects.
There can be no assurance that in the future the Company will be able to compete
successfully with its current competitors or that it will not face greater
competition from other wineries and beverage manufacturers. See Item 4 --
"Information on the Company -- Company Sales -- Chilean Markets -- Local
Competition" and " -- Company Sales -- Export Markets -- Export Sales and
Competition."
Dependence on Consumer Spending. The success of the Company's business
depends on a number of factors which may affect the level of consumer spending
and consumer spending patterns in Chile and in the Company's export markets,
including the general state of the economy, tax rates, the deductibility of
business entertainment expenses under applicable tax laws, and consumer
preferences, confidence and income. Changes in consumer spending in Chile and in
the Company's export markets can affect the quantity and price of wines that
customers are willing to purchase. Such changes may result in reduced demand and
lower prices for the Company's products, limitations on the Company's ability to
pass through increased taxes and higher product costs to price-sensitive
consumers, increased levels of selling and promotional expenses and decreased
sales of the Company's higher-priced premium and varietal wines. Consequently,
changes in consumer spending could have a material adverse effect on the
Company. See Item 5 -- "Operating and Financial Review and Prospects."
Difficulty of Enforcing Judgments Under U.S. Federal Securities Laws.
The ability of a purchaser of American Depository Shares ("ADS") of the Company
to enforce judgments under the U.S. federal securities laws against the Company
or its directors and executive officers may be limited by several factors.
The Company is a sociedad anonima abierta (an "open stock corporation")
organized under the laws of Chile. All of the company's directors and officers
and many of its advisors reside outside of the United States (principally in
Chile). All or a substantial portion of the assets of the Company and of these
persons are located outside of the United States. As a result, it may not be
possible for investors to effect service of process within the United States on
the Company or its officer, directors or advisors, or to enforce against them in
United States courts judgments obtained in United States courts predicated upon
the civil liability provisions of the U.S. federal securities laws.
The Company's Estatutos (the "By-Laws") provide that all legal actions
brought by shareholders in their capacity as such, or among shareholders and the
Company or its directors and executive officers, must be submitted to
arbitration in Chile by an arbitrator chosen by mutual consent of both parties.
If the parties cannot select an arbitrator acceptable to both, an arbitrator
will be appointed by the ordinary courts of Chile which, the Company believes,
would likely appoint a Chilean arbitrator. The By-Laws also provide that the
arbitrator would act as an arbitro arbitrador, who under Chilean law would not
be required to apply any particular body of law or procedures and would be
authorized to decide the matter in accordance with his or her view of what is
just and equitable. Although the Ley de Sociedades Anonimas ("Chilean
Corporation Law") grants shareholders the right to bring actions against a
Chilean company in the ordinary courts of Chile in certain cases, the Chilean
Supreme Court has held in one case that a shareholder may not submit a claim
against a corporation to the ordinary courts where, as in the case of the
Company, the By-Laws provide only for arbitration. This case, however, would not
be controlling precedent in a subsequent case under Chilean law. Therefore, a
Chilean court could interpret Chilean law and the By-Laws to require that a
claim brought by a holder of ADS predicated upon U.S. federal securities laws be
submitted in Chile to arbitration. Moreover, because an arbitrator is not
required to apply any particular body of law or procedure to decide a matter, it
is not clear that an arbitrator would consider a claim predicated upon U.S.
federal securities laws. Under Chilean law, therefore, there is doubt as to the
ability of ADS holders to bring actions against the Company or its officers,
directors or advisors based upon U.S. federal securities laws whether in Chilean
courts or arbitration proceedings.
In addition, a court in the United States might require that a claim
predicated upon the U.S. federal securities laws be submitted to arbitration in
accordance with the By-Laws. In that event, a purchaser of ADS would be
effectively precluded from pursuing remedies under the U.S. federal securities
laws in U.S. courts.
The Company has been advised by its Chilean counsel, Cruzat, Ortuzar &
Mackenna, that no treaty exists between the United States and Chile for the
reciprocal enforcement of foreign judgments.
7
Chilean courts, however, have enforced judgments rendered by United States
courts by virtue of the legal principle of reciprocity and comity, consisting of
the review in Chile of the United States judgment in order to ascertain whether
certain basic principles of due process and public policy have been respected
without reviewing the merits of the subject matter in the case. Nevertheless,
the Company has been advised by Cruzat, Ortuzar & Mackenna that there is doubt
as to the enforceability in Chile of judgments rendered by United States courts
in actions predicated upon the civil liability of the U.S. federal securities
laws.
Taxes. Wines are subject to a number of taxes and tariffs, including
excise taxes in the United States and the Company's other principal export
markets. Increases in such taxes could depress wine consumption in those markets
and adversely affect the Company's sales.
Seasonality. The wine industry in general, and the Company in
particular, have historically experienced, and are expected to continue to
experience, seasonal fluctuations in revenues and net income. In the past, the
Company has had lower sales and net income during the first quarter and higher
sales and net income during the third and fourth quarters. The Company expects
this trend to continue. Sales can fluctuate significantly between quarters,
depending on the timing of certain holidays and promotional periods, and on the
rate at which distributor inventories are depleted through sales to wine
retailers. Sales volume tends to decrease if distributors begin a quarter with
larger inventory levels, which is typically the case in the first quarter of
each year. See Item 4 -- "Information on the Company -- Business Overview --
Seasonality."
Risks Relating to Chile
Dependence on the Chilean Economy. As of December 2002, 92% of the
Company's assets were located in Chile. In 2002 and 2001, sales in the Chilean
market accounted for approximately 23.5% and 27.4%, respectively, of the
Company's total revenues. Historically, domestic wine sales show a high degree
of correlation with the economic situation prevailing in a country. Accordingly,
the Company's financial condition and results of operations are dependent to a
significant extent upon economic conditions prevailing in Chile. During 1999,
there was a steep drop in economic activity in Chile, particularly in private
consumption, investment and employment. Although there have been some signs of
recovery between 2000 and 2002, unemployment rates are still high and retail
sales are weak. The main Chilean economic indicators for 2001 and 2002 show
that:
o GDP grew 3.1% and 2.1% in 2001 and 2002, respectively.
o Private consumption grew 2.7% in 2001 and 1.7% in 2002.
o The unemployment rate was 7.9% and 7.8% in December 2001 and
2002, respectively. As of April 2003, the unemployment rate
was 8.5% as compared to 8.8% in April 2002.
o Levels of investment increased 2.5% in 2001 and 1.4% in 2002.
o Retail sales increased 1.7% and 5.4% in 2001 and 2002,
respectively.
The Company's financial condition and results of operations could also be
adversely affected by changes which the Company has no control over, including:
o the economic or other policies of the Chilean government,
which has a substantial influence on many aspects of the
private sector;
o other political or economic developments in or affecting
Chile; and
o regulatory changes or administrative practices of Chilean
authorities.
The Company's financial condition and results of operations also depend
to some extent on the level of economic activity in both Latin American and
other countries. Although economic conditions are different in each country,
investors' reactions to developments in one country may affect the securities of
issuers in other countries, including Chile.
8
Volatile and Illiquid Nature of the Market for the Common Stock in
Chile. The Common Stock of the Company is traded on the Bolsa de Comercio de
Santiago (the "Santiago Stock Exchange"), the Bolsa Electronica de Chile and the
Bolsa de Correos -- Bolsa de Valores (collectively, the "Chilean Exchanges").
The Chilean securities markets are substantially smaller, less liquid and more
volatile than major securities markets in the United States. The Santiago Stock
Exchange, which is Chile's principal exchange and which accounted for over 72.5%
of Chile's equity trading volume in 2002, had a market capitalization of
approximately US$47.69 billion as of December 31, 2002, and an average monthly
trading volume of US$284 million in 2002. The ten largest companies in terms of
market capitalization represented approximately 47% of the aggregate market
capitalization of the Santiago Stock Exchange as of December 31, 2002. Daily
share trading volumes on the Santiago Stock Exchange are on average
substantially lower than those on the principal national securities exchanges in
the United States. The ten most widely-traded stocks in terms of trading volume
accounted for approximately 61% of all trading volume on the Santiago Stock
Exchange in 2002. During 2002, approximately 12.3% of the securities listed on
the Santiago Stock Exchange traded an average of 85% or more of the trading
days.
In addition, the Chilean securities markets may be affected by
developments in other emerging markets, particularly other countries in Latin
America.
Currency Fluctuations. The Chilean peso has been subject to large
fluctuations in value in the past and may be subject to significant fluctuations
in the future. See "Exchange Rates." Fluctuations in the exchange rate between
the Chilean peso and other currencies affect the performance of the Company's
ADS as well as its financial condition and results of operation in a variety of
ways.
Because the ADS are denominated in U.S. dollars, a decrease in the
value of the Chilean peso relative to the U.S. dollar may adversely affect the
value of the Company and its Common Stock underlying the ADS. Whether a
depreciation of the Chilean peso would adversely affect the value of the Company
and its assets would depend on a variety of factors, including the ability of
the Company and investors to access the foreign exchange markets in Chile, the
timing, volume and execution of the Company's treasury functions to convert
foreign currency into Chilean pesos, the value of revenues denominated in
foreign currency relative to Chilean pesos, the relative balances of Chilean
pesos and foreign currency owned by the Company at any time, and market
perceptions of the severity of the impact of such events on the Company. If
these and other factors, which may influence the value of the Company and its
assets in either direction, have an aggregate negative effect on the value of
the Company and its assets, a depreciation of the value of the Chilean peso
would result in a decrease of the valuation of the assets underlying the ADS in
U.S. dollar terms, thereby resulting in a decrease in the value of the ADS.
Because the Company's export sales are primarily denominated in foreign
currencies, changes in these foreign currencies to the Chilean peso may
adversely affect the financial condition and results of operations of the
Company. Over 70.8% of the Company's revenues are related to export sales that
are denominated in U.S. dollars, Euros, Sterling Pounds, Canadian dollars, and
Argentine pesos (sales of the Argentine subsidiaries). Changes in these foreign
currencies relative to the Chilean peso may result in operating losses for the
Company and its subsidiaries. In order to mitigate the short-term effect of
changes in currency exchange rates, the Company enters into, from time to time,
forward exchange agreements. See Item 5 -- "Operating and Financial Review and
Prospects."
With respect to the Company's operations in Argentina, which are
conducted through its Argentine subsidiaries, during 2002 the depreciation of
the Argentine peso adversely affected the financial results of the Company's
Argentine subsidiaries which account for 3.8% of the Company's total revenue. In
addition, the Company holds assets in Argentine pesos through its Argentine
subsidiaries, which assets are subject to currency fluctuation, and the Company
has been unable to purchase hedging instruments to protect against this risk at
prices acceptable to it. For 2001 and 2002, the Company recognized Ch$1,388
million (US$1.9 million) and Ch$2,993 (US$4.2 million), respectively of losses
due to the conversion of the financial statements and the depreciation of the
Argentine peso.
Because the Company purchases some of its supplies at prices set at
U.S. dollars and sells the products in other currencies, the Company is exposed
to foreign exchange risks that may adversely affect its financial condition and
results of operations. Most notably, the Company purchases bottles, corks and
Tetra Brik packages at prices set in U.S. dollars. To the extent that the
Company sells products with these components for pesos or other non-U.S.
currencies, changes in the exchange rate of the U.S. dollar relative to these
other currencies may result in losses and adversely affect the Company's
financial and operating results. See Item 5 -- "Operating and Financial Review
and Prospects."
9
In addition, cash distributions with respect to shares of Common Stock
underlying the ADS are paid by the Company to the Depositary on behalf of
shareholders in Chilean pesos. The Depositary then converts the pesos to U.S.
dollars at the then prevailing exchange rate to pay the dividend on the ADS in
U.S. dollars. If the value of the Chilean peso falls relative to the U.S. dollar
between the declaration of dividends and the distribution of such dividends by
the Depositary, the amount of U.S. dollars distributed to holders of ADS will
decrease. See "Exchange Rates."
Restrictions on Foreign Investment and Repatriation. Historically,
equity investments in Chile by individuals or entities that are neither resident
nor domiciled in Chile have faced obstacles to repatriating profits and original
investment out of Chile due to exchange control regulations. Recently, the
Central Bank of Chile relaxed foreign exchange restrictions, allowing entities
and individuals to purchase, sell, keep and remit abroad foreign currency
without restriction, although the Central Bank of Chile still imposes
obligations to file reports of such transactions with it.
The Central Bank of Chile adopted a new Foreign Exchange Regulations
Compendium (the New Regulations") published in the Official Gazette on January
23, 2002 and effective as of March 1, 2002. The New Regulations impose only
three levels of restrictions or obligations on foreign exchange transactions in
Chile: (i) certain transactions requiring exchange of foreign currency must be
conducted through the Formal Exchange Market (i.e., a commercial bank) and
reported to the Central Bank of Chile (e.g., investments, loans, deposits and
certain other transactions in excess of US$10,000); (ii) certain transactions
requiring exchange of foreign currency to be remitted abroad must be conducted
through the Formal Exchange Market without any reporting obligation (e.g., all
license and royalty payments to be remitted abroad); and (iii) certain
transactions requiring exchange of foreign currency must only be reported to the
Central Bank of Chile (i.e., payments regarding import and export transactions,
etc.).
Because the Law of the Central Bank of Chile authorizes the Central
Bank of Chile to regulate foreign exchange transactions, including those
relating to ADS facilities, it may re-establish more restrictive regulations on
foreign exchange affecting ADS holders of the Company at any time. If imposed,
such regulations could, among other things, restrict the ability of ADS holders
to dispose of the underlying shares of Common Stock of the ADS or to repatriate
proceeds of the Common Stock. The duration or impact of any such restrictions
would be difficult to assess.
The ADS facility is subject to a contract between the Depositary, the
Company and the Central Bank of Chile (the "Foreign Investment Contract") that
grants the Depositary and the holders of the ADS access to Chile's Formal
Exchange Market and permits the Depositary to remit dividends received from the
Company to holders of ADS without restriction. See Item 10 -- "Additional
Information -- Exchange Controls" for a more detailed description of the new
regulations and the Foreign Investment Contract. The Foreign Investment Contract
is currently in force and will continue to govern the ADS facility until all
parties agree to terminate it. If the Foreign Investment Contract is terminated,
the ADS facility would then become subject to the New Regulations. Under Chilean
legislation, a Foreign Investment Contract may not be altered or affected
adversely by actions of the Central Bank of Chile.
Under the Foreign Investment Contract transferees of shares withdrawn
from the ADS facility will not be entitled to access Chile's Formal Exchange
Market unless the withdrawn shares are redeposited with the Depositary. Cash and
property dividends paid by the Company with respect to ADS held by a non-Chilean
resident holder are subject to a 35% Chilean withholding tax, which is withheld
by the Company. However, stock dividends are deemed a non taxable event pursuant
to Chilean Income Tax Law, thus, not subject to Chilean taxation. See Item 10 --
"Additional Information -- Taxation."
Differences in Corporate Disclosure and Accounting-Taxation Standards.
The principal objective of Chile's securities laws that govern publicly traded
companies, such as the Company, is to promote disclosure of all material
corporate information to investors. In addition, Chilean law imposes
restrictions on insider trading and price manipulation. However, the Chilean
securities markets are not as highly regulated and supervised as the U.S.
securities markets and Chilean disclosure requirements differ from those in the
United States. These differences may result in fewer protections for holders of
ADS than if United States securities laws governed the company's domestic
securities transactions.
There are also important differences between Chilean and U.S.
accounting principles and reporting standards. As a result, Chilean financial
statements and reported earnings may differ from those reported based on U.S.
accounting and reporting standards.
10
Dividends can be paid only from the Company's income determined in accordance
with Chilean GAAP.
Differences in Shareholders' Rights. The corporate affairs of the
Company are governed by Chilean law and the By-Laws. The By-Laws perform
functions similar to those performed by both the certificate of incorporation
and the bylaws of a corporation incorporated in the United States. See Item 10
- -- "Additional Information -- Estatutos (By-Laws)." Principles of law applicable
to the Company and its shareholders, however, differ from those that would apply
if the Company were incorporated in the United States. In addition, the
shareholders of the Company may have fewer or less well-defined rights
protecting their interests under Chilean law than they would have as
shareholders of a corporation governed by the laws of a U.S. jurisdiction.
Inflation. Although inflation in Chile has moderated in recent years,
historically Chile has experienced high levels of inflation. High levels of
inflation in Chile could adversely affect the Chilean economy and have a
material adverse effect on the Company's financial condition and results of
operations. The annual rates of inflation for 2002, 2001 and 2000 were 3.0%,
3.1% and 4.7%, respectively.
The Company believes that moderate inflation will not materially affect
its business in Chile. Notwithstanding the foregoing, there can be no assurance
that inflation in Chile will not increase significantly from its current levels
and that the operating results of the Company or the value of the ADS will not
be affected adversely by a continuation of or an increase in the level of
inflation.
ITEM 4: INFORMATION ON THE COMPANY
History and Development of the Company
Concha y Toro is a corporation (sociedad anonima abierta) organized
under the laws of Chile. The Company's deed of incorporation was executed on
December 31, 1921 and the Company was registered in the Registro de Comercio de
Santiago on November 6, 1922. The term of the Company is 99 years beginning on
the date that the deed of incorporation was executed. The Company's principal
executive offices are located at Casilla 213, Nueva Tajamar 481, Torre Norte,
Piso 15, Santiago. The Company's telephone number at that location is (562)
476-5000 and the Internet address is www.conchaytoro.com. The complete legal
name of the Company is Vina Concha y Toro S.A.
The Company is the largest Chilean producer and exporter of wines in
terms of both volume and value, with total wine sales in 2002 of 123.8 million
liters and Ch$121,017 million, respectively, representing 94.3% of 2002
revenues.
The Company was founded in 1883 by Don Melchor de Concha y Toro and Don
Ramon Subercaseaux Mercado. Don Melchor was the grandson of Don Mateo de Toro y
Zambrano, who presided over the first government following Chile's independence
from Spain in 1810. The family had received the title of Marques de Casa Concha
from King Philip V of Spain in 1718. The winery was established in the Pirque
region, on the border of the Maipo River, on land which belonged to Don
Melchor's wife, Dona Emiliana Subercaseaux. The vines used came from Bordeaux,
France and were the traditional varieties of that area: Cabernet Sauvignon,
Merlot, Sauvignon Blanc and Semillon. These varieties were brought to Chile
before phylloxera devastated French vineyards. M. de Labouchere, a French
oenologist, came to Chile to oversee the planting and the first harvest. The
Company remained a family business until 1921, when the Concha family decided to
convert it into a limited liability stock company and issued shares to all of
its family members. In 1933, these shares began trading on the Santiago Stock
Exchange.
The Company owns and operates vineyards that grow grapes for use in the
Company's wine-making operations, vinification plants (which convert grapes into
wine), bottling plants and its wine distribution network, which is the most
extensive in Chile. Within Chile, the Company owns sixteen vineyards and leases
three other vineyards, located in five of Chile's six principal wine growing
regions. In addition to its properties in Chile, the Company owns 439 hectares
of land near Mendoza, Argentina.
In domestic and export markets, the Company's bottled wines are sold in
the premium, varietal, varietal blend and sparkling wine segments. In the
domestic market, the Company also sells popular wines, packaged primarily in one
liter, 1.5, and 2.0 liter Tetra Brik packages.
11
A small quantity of wine, 0.8% of total revenues, was sold in bulk form in
domestic and export markets.
The Company sells its premium wines under brand names including: Don
Melchor, Amelia, Terrunyo, Marques de Casa Concha, Casillero del Diablo, Trio
and Late Harvest. The Company sells its varietal and varietal blend wines under
the brand names Sunrise, Concha y Toro and Frontera -- and in some export
markets, under the brand names Tocornal, Cono Sur and Maipo. The Company sells
popular wines under the brand names Tocornal, Clos de Pirque, Exportaciun,
Fressco and San Jose. See "Chilean Wine Industry Overview -- Wine
Classifications," "Business Overview -- Company Sales -- Chilean Markets" and "
- -- Company Sales -- Export Markets."
The Company's first initiative toward the development of more complex
wines was the launching of Casillero del Diablo in 1965. Casillero del Diablo
was made from selected grapes and aged two years longer than the standard
Cabernet Sauvignon then being produced. Today, Casillero del Diablo is the
largest seller among the Company's premium wines. In 1996, the Company launched
a premium wine product named "Trio" in Chile, the United States and the United
Kingdom. In 1997, the Company re-launched a varietal wine product named
"Sunrise" in its Chilean and export markets. In 1999, the Company re-launched a
varietal blend wine named "Frontera" with new packaging in export markets. In
March 2000, the Company launched a premium wine named "Terrunyo" in the Chilean
and export markets. During the second half of 2000 the Company launched a new
premium line Xplorador, for the U.S. market. In the past two years, the
Company's marketing efforts have been focused on its Casillero del Diablo Brand.
Through a global marketing campaign that started in August 2001 and with a new
packaging launched in 2002, the Company's target is to transform Casillero del
Diablo into a global brand.
The Company has grown to become the largest wine producer in Chile by
combining the wine-making traditions of its founders with state-of-the-art
technology. The Company believes that key factors in its past success and in any
future success are:
o the ability to maintain competitive prices while continuing to
improve the quality of its wines;
o the development of new opportunities and markets; and
o the promotion of its higher priced varietal and premium
products.
The Company also believes that it has competitive advantages in export
markets due to the lower costs of land and labor in Chile compared to its
competitors in other principal wine-making countries such as the United States.
The Company conducts its operations directly and through subsidiaries.
The Company's distribution business is conducted through its wholly-owned
subsidiaries Comercial Peumo Ltda. ("Comercial Peumo"), Transportes Viconto
Ltda. ("Transportes Viconto") and Distribuidora Peumo Argentina S.A. ("Peumo
Argentina"). In December 2000, the Company formed a fully-owned sales and
distribution subsidiary in the United Kingdom, Concha y Toro UK Limited. This
subsidiary commenced operations in March 2001. See "Business Overview -- Other
Businesses."
The Company's wholly-owned subsidiary, Sociedad Exportadora y Comercial
Vina Maipo Ltda. ("Vina Maipo"), currently exports Vina Maipo brand wines and
holds investments in affiliated companies. The Company's wholly-owned
subsidiary, Vina Cono Sur S.A. (formerly named Vina Tocornal Ltda.), is involved
in the sale, both in the local and export market, of Tocornal and Cono Sur brand
wines and sparkling wines. In 1996, the Company, through Comercial Peumo and
Vina Maipo, acquired Vina Patagonia S.A. ("Vina Patagonia"), the Company's first
non-Chilean subsidiary. In 2001, Vina Patagonia changed its trading name to
Trivento Bodegas y Vinedos S.A. ("Vina Trivento") to reinforce the marketability
of Trivento its main brand and range of wines. Vina Trivento is located near
Mendoza, Argentina. In 1997, Vina Trivento obtained its first harvest and
commenced exporting activities during the fourth quarter of 1997. In 1999, Vina
Trivento increased its holdings through the purchase of 135 additional hectares
in the Rivadavia Valley near Mendoza. The operating assets of Vina Trivento
primarily include a total of 439 hectares of land, a cellar with a capacity of
4.5 million liters and other wine-making equipment. In 1998, the Company,
through Comercial Peumo and Vina Maipo, organized Peumo Argentina for the
purpose of distributing wines of the Company and Vina Trivento in the Argentine
market.
12
In 1997, the Company and Baron Philippe de Rothschild S.A. ("Rothschild
S.A.") formed a joint venture company organized under the laws of Chile, named
"Baron Philippe de Rothschild - Concha y Toro S.A." The joint venture company
changed its name to Vina Almaviva S.A. in June 1998 ("Vina Almaviva"). The
Company contributed approximately 40 hectares of producing vineyards located at
Puente Alto to, and controls 50% of the capital of, Vina Almaviva. Vina Almaviva
is expected to produce a "Primer Orden," or first-growth wine, the first of its
kind ever produced in Chile. "Primer Orden" wines are regarded to be the
equivalent of Grand Cru Classe wines from the Bordeaux region of France. In
1998, Vina Almaviva launched its first "Primer Orden" wines from its 1996
harvest under the name "Almaviva." Worldwide distribution (except in the U.S.
and Chile) of Almaviva is handled by select "French traders" of Bordeaux,
France. Distribution of Almaviva is handled by Banfi in the U.S. and by the
Company in Chile.
In connection with Vina Almaviva, the Company and Rothschild S.A.
entered into certain agreements for the distribution of their respective
products in selected regions. Rothschild S.A. will oversee the marketing and
distribution of the wines of the Company in France and in several markets in
Asia (excluding Japan), and the Company will oversee the marketing and
distribution of Rothschild S.A.'s wines throughout Latin America. Comercial
Peumo, a wholly-owned subsidiary of the Company, will distribute Rothschild
S.A.'s wines in Chile.
In addition, the Company, Rothschild S.A., and a former subsidiary of
the Company Bodegas y Vinedos, Santa Emiliana S.A. ("Santa Emiliana") that
licenses the Company to sell wine under its brand name as described further
below, have agreed that during the life of Vina Almaviva (i) each party will not
produce a Chilean wine similar to and in the same price range as the "Primer
Orden" wines to be produced by Vina Almaviva, (ii) Rothschild S.A. will not
produce and sell any Chilean wine, and the Company and Santa Emiliana will not
produce and sell any French wine, without the other party's prior consent, and
(iii) Rothschild S.A. will not sell or purchase any wine or grapes in Chile, and
the Company and Santa Emiliana will not sell or purchase any wine or grapes in
France, without the other party's prior consent.
In March 2000, the Company's Board of Directors approved the purchase
of 49.6% of Industria Corchera S.A. ("Industria" or "Industria Corchera"), a
cork manufacturer, and the Company completed the acquisition in November 2000.
In connection with the acquisition, the Company and Amorim & Irmaos S.G.P.S.
S.A. ("Amorim"), a Portuguese company that produces and distributes cork
worldwide, entered into a shareholders' agreement providing for the transfer of
shares and the administration of Industria Corchera. An English translation of
the shareholders' agreement between the Company and Amorim is filed as Exhibit
4.2 to this Annual Report. The Company and Amorim jointly own 99.68% of the
capital stock of Industria Corchera.
In addition to producing and bottling wine under its own labels, the
Company has a license from Santa Emiliana to use Santa Emiliana's brand name in
Chile. The Company bottles and sells in Chile for its own account a portion of
its varietal wine production under Santa Emiliana's labels. In addition, under a
contract with Santa Emiliana, the Company also bottles for a fee, wine produced
by Santa Emiliana which is sold by Santa Emiliana for its own account under
Santa Emiliana's labels in export markets. The Company and Santa Emiliana have a
number of directors in common, as well as a significant percentage of common
share ownership. See Item 7 -- "Major Shareholders and Related Party
Transactions -- Related Party Transactions."
Business Strategy
After gaining increasing brand recognition for its products outside
Chile, the Company continues to develop its domestic and export markets strategy
by focusing on the sale of premium and varietal wines. Additionally, the Company
will continue to promote its popular wine sales actively.
In order to promote these strategies, the Company has:
o continued investing in state-of-the-art technology and
improved production methods, which enhance the quality of its
premium and varietal wines;
o introduced new products intended to expand its varietal and
premium wine product lines;
o fortified existing distribution channels;
13
o increased its own grape production on existing or purchased
vineyards to lower the cost and improve the quality of its
principal raw material; and
o entered new markets, such as Europe and Asia, where the
potential exists to sell higher margin products.
The Company has invested approximately US$200 million in agriculture,
infrastructure and other wine business investments since 1992. In 2002, the
Company made approximately Ch$6,934 million (US$9.6 million) of capital
investments, which included increasing its vinification and cellar capacity,
planting new vineyards and buying new agriculture machinery, among others. The
Company has established a capital expenditure budget of approximately Ch$14,700
million (approximately US$20.7 million) for 2003 to support expected future
growth in sales, and the corresponding increase in demand for grapes and
production capacity. Investments will be aimed, in part, at the construction of
storage and vinification facilities for the production and bottling of all wines
with an emphasis on premium and varietal wines. The Company expects to continue
planting wine vines, and developing the corresponding infrastructure needed on
certain properties owned by the Company in Chile, as well as in Argentina.
The Company believes that a key factor in its past success and in any
future success is its ability to maintain competitive prices while improving the
quality of its wines. In order to increase its market share in the domestic
market, the Company has maintained price competitiveness with beer and wine from
other producers, introduced new wines targeted at different consumer segments,
and increased marketing and advertising support for its products. In export
markets, the Company believes that it can continue to consistently offer
high-quality wines at competitive prices in the premium, varietal and varietal
blend segments and that such wines can successfully compete with the best
European, Australian, South African and U.S. wines. See "Business Overview --
Domestic Marketing Strategies" and " -- Export Marketing Strategy."
Chilean Wine Industry Overview
Wine Producing Regions - Chile. Chile is a country well-suited for
growing fruit, including grapes. Geographically, Chile is a strip of land
running north to south approximately 4,345 kilometers (2,650 miles) long but
only 400 kilometers (244 miles) at its widest point. It is bordered by the Andes
Mountains to the east and the Pacific Ocean to the west. The area located
between the town of La Serena in the north and the Bio-Bio River in the south,
generally known as the Central Zone, is where vinifera grapes are grown.
The Central Zone stretches for approximately 500 kilometers (309 miles)
and is located between 32(degree) and 38(degree) latitude south. This location
coincides with the latitude band (30(degree) to 50(degree)) in which virtually
all of the world's wine-producing areas are located. For instance, California's
vineyards are located at approximately 34(degree) to 38(degree) latitude north
and Australia's vineyards at 32(degree) to 40(degree) latitude south. France's
vineyards are farther north between 40(degree) and 51(degree) latitude north.
The Central Zone generally has mild winters, although there was a
freeze in October 1991 which damaged a portion of the grape crop in 1992 and, to
a lesser extent, in 1993. In 1996 and early 1997, Chile experienced drought
conditions that lowered the overall yield of vinifera grapes harvested in 1997
within Chile, but added greatly to the quality of the grapes available for wine
making. Following the 1997 harvest, Chile began to experience the effects of El
Nino. El Nino brought plentiful rain and was responsible to a large degree for
replenishing the water supplies within the Central Zone during the Chilean
winter. In 1998, Chile suffered drought conditions similar to 1996, with similar
effects to overall yield of vinifera grapes and quality of grapes. Water for the
Central Zone's vineyards is supplied from natural wells and rivers that
originate in the Andes Mountains. Climatic conditions for the 2003 harvest in
Chile were exceptional, without rain during the maturing period. This allowed to
harvest grapes in perfect maturity state and sanity.
The Company owns or leases vineyards in five of the six principal
wine-growing regions in Chile. These regions include, from north to south:
Casablanca, Maipo, Rapel, Curico and Maule. Most of these regions possess
distinct weather and soil characteristics. However, they share the important
characteristics of cool nights and hot days with daily temperature variations of
12(degree)C to 20(degree)C (54(degree)F to 68(degree)F) in the summer. This type
of climatic condition is essential for the growing of "wine quality" grapes.
See "Business Overview -- Vineyards."
14
Casablanca Valley. The Casablanca Valley is located 100 kilometers (62
miles) northwest of Santiago and has deep, sandy, permeable soils and a cool
climate. The Company believes that this region represents an exceptional
microzone to produce premium white wines, such as Chardonnay and Sauvignon
Blanc, due to its climatic conditions, especially its heavy maritime influence
and morning fog during Spring and Summer.
Maipo Valley. The Maipo Valley, located just west of the Andes
Mountains and south of Santiago, is renowned worldwide for the excellence of its
red wines. The Maipo Valley has a Mediterranean-type climate, with a dry Summer
and high daily temperature variations due to a climatic combination of oceanic
and Andean influences. Its soils are alluvial and colluvial, organically poor
and abundant in gravel. They are irrigated with glacial waters flowing from the
Andes mountain range.
Rapel Valley. The Rapel Valley is located 100 to 180 kilometers (62 to
112 miles) south of Santiago between the cities of Rancagua and San Fernando. It
has a warm climate and deep, rich alluvial soils, irrigated by water from the
Rapel and Cachapoal Rivers. This region's production is oriented towards red
wines.
Curico Valley. The Curico Valley is similar to the Rapel Valley in
terms of its geographic features, soil and climatic conditions. It is located
between the Rapel and Maule Valleys, and its main commercial center is the city
of Curico.
Maule Valley. The Maule Valley is located to the south of Curico
Valley, 200 to 400 kilometers (124 to 248 miles) south of Santiago. This region
has a warm climate, generous winter rains and organically rich soils. Wines
produced from grapes grown in the Maule Valley typically have higher alcohol
content.
Non-irrigated areas in the Maule Valley are planted with a rustic grape
called Pais, which is used to produce table wine for the popular wines segment
of the domestic market.
The Company believes that Chilean land suitable for grape cultivation
is cheaper than comparable land in most of the other wine-producing areas of the
world. Chilean vineyards take typically three to four years after planting to
produce grapes that can be used for wine making. A vineyard can produce grapes
suitable for vinification for up to 40 years or more. The annual growing season
starts in September and lasts until March or April. Harvest occurs between March
and April, depending on the location of the vineyard and the variety of the
grape being grown.
Wine Producing Regions - Argentina. The Company believes that the wine
growing regions surrounding Mendoza, Argentina are capable of producing world
class wines and will complement the export products currently being made in
Chile.
Maipu Valley. The Maipu Valley is located in the upper part of the
Mendoza River, 18 kilometers (11 miles) to the southeast of the city of Mendoza.
This region has a temperate, dry climate. Its soil is alluvial and sandy,
somewhat organically poor but with very good drainage characteristics. Day and
nighttime temperatures vary by approximately 14(0)C (57(degree)F), which favors
the production of red wines.
Tupungato Valley. The Tupungato Valley is located 90 kilometers (56
miles) southwest of Mendoza and rises to approximately 1,100 meters (3,600 feet)
above sea level. Its soils are similar to those found in the Maipu Valley.
Because of the altitude and proximity to the Andes, the Tupungato Valley has a
cooler climate than the Maipu Valley, which makes this region oriented towards
the production of white wines.
Rivadavia Valley. The Rivadavia Valley is located 80 kilometers (49
miles) southeast of Mendoza, and is part of East Mendocino region. Its altitude
is 660 meters above sea level in a zone of sandy soil with very good drainage
characteristics. The average temperature is higher than in the Maipu and
Tupungato valleys which, together with the availability of water from the
Tunuyan River, allows for the optimal development of different varieties of
grapes, the most important of which are the Malbec and Syrah varieties.
Phylloxera. Phylloxera, a pest which attacks the roots of grapevines,
has widely infested vineyards outside of Chile. The pest generally renders a
vine unproductive within a few years following initial infestation. Although an
infestation of phylloxera over time decreases the amount of fruit that a vine
produces, it does not directly impair the quality of the fruit and poses no
known human health hazards. Since no pesticide has been proven to be effective
in stopping the spread of phylloxera, the only known solution is to replant
infested vineyards with resistant root stock.
15
As phylloxera has not been found in Chile to date, it is one of the few
countries where pre-phylloxera Bordeaux cuttings are widely used. The Company
still uses the original French root varieties, introduced from France
approximately 120 years ago, which remain free of this pest. To protect itself
from the possibility of phylloxera infestation, the Company carefully screens
all cuttings before planting. Regulations imposed by the Chilean Agriculture
Service require that all vegetation introduced into the country be isolated
under observation for a period of two years. There can, however, be no assurance
that the Company's and other Chilean producers' vineyards will remain free of
phylloxera infestation. Infestation would have a material adverse effect on the
Company and its production of grape crops.
Wine Classifications. Wines are classified by Chilean wine producers as
either sparkling wines or table (still) wines. Sparkling wines are wines which
obtain effervescence through a second alcoholic fermentation process. With the
exception of popular wines, Chilean table wines are generally classified
according to (i) the variety or varieties of vinifera grape from which they are
made, (ii) region of origin and (iii) vintage. Table wines are also classified
as either premium, varietal, varietal blend or popular wines.
Premium wines are wines made from selected grapes of a single variety
and aged in barrels. These wines receive extra care throughout the production
process and command higher prices. Varietal wines can be made either of a single
variety of grape or of a selective blend of varieties of grapes (known as
varietal blends). Popular wines are inexpensive wines which are not aged and are
not made from a specific variety of grapes.
In 1995, the Ministry of Agriculture implemented a decree to regulate
wine bottle labeling, which included the use of grape varieties, vintage years
and regional denominations of origin. The decree was drafted by a committee
(which included representatives of the Company) designated by the Asociacion de
Vinas de Chile A.G. (the "Exporters' Association"). The decree ordered that
Chilean premium and varietal wines must contain at least 75% of the variety of
grapes specified on the label. This decree should enhance the image of the
Chilean wine industry. The Company has adopted most of the controls set forth in
the decree and expects to benefit from the enhanced image of the Chilean wine
industry.
Business Overview
Vineyards
In order to decrease its dependence on purchased grapes and wines and
to gain greater control over the cost and quality of its principal raw material,
the Company initiated a capital investment program in the beginning of the
1990s. The Company purchased vineyards in the Maule Valley to produce grapes for
its varietal and varietal blend wines. The Company also purchased vineyards in
the Casablanca Valley, the microclimate of which was discovered by a Company
oenologist in the early 1980s. In the past years the Company has continued to
acquire land in Chile and Argentina in order to maintain its own production of
grapes in proportion to the growth in demand of its premium wines.
As of December 31, 2002, the Company had approximately 4,359 arable
hectares (approximately 10,767 acres) on sixteen owned and three leased
vineyards, located in the Casablanca, Maipo, Rapel, Curico and Maule Valleys of
the Central Zone in Chile and in three vineyards in the Maipu, Tupungato and
Rivadavia Valleys in Argentina. This represents a threefold increase in the
Company's wine producing land and greater geographic diversification from two
primary regions to five regions since the Company launched its capital
investment program in 1992. As of December 31, 2002, approximately 94% of the
arable land owned or leased by the Company is planted with wine-producing grapes
in various stages of maturity. Approximately 3,042 hectares (approximately 7,514
acres), or 74% of the Company's planted hectares, are planted primarily with
five types of noble grapes: Cabernet Sauvignon, Merlot, Carmenere, Chardonnay
and Sauvignon Blanc. In recent years, the Company has increased the planting of
these five varieties of grapes in response to increasing consumer demand in the
United States, Europe and Asia for premium and varietal wines. The Company
believes that with the plantings of these noble grape varieties, it should be
able to respond to the shift in consumer demand for premium and varietal wines
made from these varieties of grapes. There can be no assurance, however, that
consumer demand for these wines will increase in absolute terms or that
consumption of wines produced by the Company from these varieties of grapes, as
opposed to those produced by its competitors, will increase. In addition, there
can be no assurance that competitors of the Company, either singly or in the
aggregate, will not be in a better position to take advantage of changing
consumer demand patterns for premium and varietal wines, by reason of planted
acreage or otherwise.
The Company's remaining land under cultivation is planted mainly with
Pinot Blanc, Pinot Gris, Pinot Noir, Malbec, Syrah, Chenin Blanc, Riesling,
Gewurztraminer, Viognier, Sangiovese and Zinfandel grapes.
16
The Company expects that the vines planted in 1999 will be in full
production in 2003 and that vines planted in 2000 will be in full production in
2004.
The table below shows the Company's currently-producing and newly-planted
vineyards:
New Plantings Currently Total
Vineyards Plantings 2002 1999 - 2001 Producing(1) Fallow Arable
- --------- -------------- ----------- ------------ ------ ------
(in hectares)
Owned - Chile & Argentina:
Chile
Casablanca Valley:
Triangulo.................... 25.37 - 119.52 - 144.89
Maipo Valley:
Pirque....................... - - 124.07 - 124.07
Santa Isabel ................ 16.84 3.25 115.99 - 136.08
Puente Alto.................. - - 162.72 - 162.72
Mariscal..................... 20.97 25.28 - 6.61 52.86
Rapel Valley:
Vina Cono Sur (Chimbarongo). 12.90 25.08 263.74 6.57 308.29
Cachapoal-Peumo(2).......... 19.20 44.44 439.99 21.98 525.61
Rucahue..................... - 12.28 129.60 - 141.88
Palo Santo - - - 195.89 195.89
Curico Valley:
Rauco....................... - 24.25 177.64 - 201.89
San Manuel.................. - - 130.28 - 130.28
San Ignacio................. - 15.20 78.08 1.50 94.78
Maule Valley:
Lourdes..................... - 94.90 896.04 6.08 997.02
Quebrada de Agua............ - 17.63 133.31 - 150.94
Villa Alegre................ - 26.90 82.26 109.16
Mariposas................... 39.68 80.08 - 17.48 137.24
Argentina
Mendoza..................... - 124.50 282.64 - 407.14
Total owned................ 134.96 493.79 3,135.88 256.11 4,020.74
------ ------ -------- ------ --------
Leased - Chile:
Casablanca Valley:.........
Lo Ovalle(3)............... - 39.33 54.40 - 93.73
Los Perales(3)............. - 75.65 50.14 - 125.79
------ ------ -------- ------ -------
Maipo Valley:
Protectora(4).............. - - 119.10 - 119.10
Total leased............... - 114.98 223.64 - 338.62
------ ------ -------- ------ -------
Total...................... 134.96 608.77 3,359.52 256.11 4,359.36
====== ====== ======== ====== ========
- ---------------------------
(1) The Company's current producing vineyards have an average age of
approximately 11 years.
(2) This vineyard does not include 113.94 hectares of fruit trees planted
on the Company's Cachapoal-Peumo vineyards. This land can be returned
to grape production. The vineyard also does not include 43 hectares
held through Vina Almaviva.
(3) In 1998, the Company leased these vineyards in the Casablanca Valley
(93.73 and 125.79 arable hectares) with leases expiring
in 2023 and 2028, respectively.
(4) The Company leased this vineyard with 119.10 arable hectares in 1993
from Sociedad Protectora de la Infancia ("Protectora"), an
unaffiliated, non-profit institution. The lease of the land expires in
2013; however, the lease is cancelable by Protectora beginning in 2004,
with one year's notice and payment of a penalty.
17
The Company's premium red wines are primarily made from Cabernet
Sauvignon, Merlot and Carmenere grapes grown in the Maipo, Rapel and Maule
Valleys. Its premium white wines are made from Chardonnay and Sauvignon Blanc
grapes from the Maipo and Casablanca Valleys. The Company's red varietals are
made from Cabernet Sauvignon, Merlot and Pinot Noir grapes, most of which are
grown in the Maipo, Rapel and Maule Valleys, and its white varietals are made
from Chardonnay and Sauvignon Blanc grapes grown in the Rapel, Casablanca and
Maule Valleys. The red varietal blends are primarily made from a combination of
Cabernet Sauvignon and Merlot grapes from the Rapel, Curico and Maule Valleys.
The white varietal blends are mostly made from a combination of Chardonnay,
Sauvignon Blanc and Semillon grapes grown in the Central Zone. The Company
adjusts its plantings of different types of grapes to respond to changes in
consumer preferences in Chile and export markets.
The Company believes that the diverse microclimates and soils of the
areas in which its vineyards are located, as well as the trellis systems used in
its vineyards, allow it to grow a wide variety of grapes and thereby offer a
broad range of wines. In addition, the Company believes that this diversity
allows it to diminish the agricultural risks inherent in its operations.
Although Chilean Winters are relatively mild, Chilean vineyards have
suffered frost damage, however the last severe frost occurred in October 1991.
Generally, September and October are the most likely periods for frost damage,
especially in areas closest to the Andes Mountains. The Company protects its
grapes against risk from frost through various preventive techniques, including
antifreezing agents, heaters and, under certain conditions, the use of
helicopters (and/or stationary propellers) to raise the temperature of the air
by hovering over vineyards. The Company has also taken steps to protect soil
erosion and other ecological damage by using special irrigation methods. As of
December 31, 2002, the Company had an installed irrigation capacity of 3,654
hectares (9,024 acres), divided between drip irrigation (3,539 hectares (8,741
acres)) and "California" irrigation (115 hectares (284 acres)).
The Company experiments with different methods of growing and
harvesting designed to increase productivity and quality while decreasing costs.
For example, the Company imported the first two grape harvesting machines ever
used in Chile in 1993, in order to harvest grapes at the optimum moment, whether
day or night, to ensure the highest quality of the grapes as well as to decrease
costs. The Company's new vineyards and cellars have been designed to accommodate
mechanical harvesting procedures. At December 31, 2002, the Company had 15 grape
harvesting machines. The Company believes that the introduction of additional
state-of-the-art technology and machinery will reduce expected increases in
personnel costs.
Wine Production Methods
Wine production methods vary by type and quality of wine. The Company
uses the following production methods (certain wine industry terms used in the
following discussion are defined in "Certain Defined Terms -- Glossary of
Special Terms"):
Premium Reds. Select Cabernet Sauvignon and Merlot grapes from the
Company's Santa Isabel, Pirque, Peumo, Chimbarongo and Puente Alto vineyards are
processed in the Company's Puente Alto plant. As part of its capital expenditure
program, the Company has installed the most advanced stainless steel
fermentation tanks available that incorporate refrigeration and heating systems.
Grapes and their skins are crushed, separated from their stems, and the must is
fermented with the skins and pulp in stainless steel tanks at temperatures of
28(degree)C to 30(degree)C (82(degree)F to 86(degree)F), to obtain color and
develop body. The resulting wine is left in contact with the must for longer
periods in the case of premium red wines than for red varietal or varietal blend
wines. Contact with the skin and solids (the maceration process) give the wine
body, color and complexity. After separation and pressing of the solids to
extract additional must, the wine is subjected to a malolactic fermentation
process. The malolactic fermentation uses either artificially introduced or
normally present bacteria to transform the wine from a lower Ph malic acidity
product to a higher Ph lactic acidity product, producing a smoother and more
biologically stable wine with enhanced aroma and bouquet. The wines are then
aged in French and American oak barrels for a period of eight to eighteen
months, depending on wine type, brand and kind of barrel, in order to obtain
additional body and complexity. Once bottled, the wine is aged further in the
Company's wine cellars at Pirque for two to twelve months, depending on the
brand.
Premium Whites. Grapes selected from the noblest varieties, such as
Chardonnay and Sauvignon Blanc, from the Company's Santa Isabel, Puente Alto and
Casablanca vineyards are directly introduced into pneumatic presses in order to
extract clean juice. Unlike red wines, white wines are generally fermented
without their skins or seeds. This juice is then fermented in French and
American oak barrels or temperature-controlled stainless steel tanks, depending
on variety, vineyard and brand, and in the presence of yeast to convert the
sugar to alcohol.
18
Lower temperatures between 12(degree)C and 18(degree)C (53(degree)F and
64(degree)F) are considered optimal for quality during this process. The
resulting wine is aged on the lees in the same containers as used in
fermentation for at least six to eight months in order to obtain body and
complexity. Once bottled, premium white wines are aged from two to twelve months
in the Company's wine cellars.
Late Harvest is a sweet, aromatic dessert wine made from Sauvignon
Blanc grapes which have been left on the vine to over-ripen during periods of
plentiful rain and high temperatures, resulting in a high concentration of sugar
and a reduction in acidity. The vinification process for Late Harvest is similar
to that for the Company's other premium white wines.
Red Varietals and Varietal Blends. The production process for red
varietal and varietal blend wines is similar to that of premium red wines and
involves grapes from the Company's Cachapoal-Peumo, Rucahue, Chimbarongo and
Lourdes vineyards. These wines are macerated for a shorter period of time and
are stored in Chilean wood casks, stainless steel tanks and non-reactive
epoxy-lined cement tanks until bottling. Unlike aging in oak barrels, these
storage techniques do not add body or complexity to the wine. Bottling normally
begins approximately six months later.
White Varietals and Varietal Blends. Grapes from the Company's
Cachapoal-Peumo, Rauco, San Ignacio-Lontue and Casablanca vineyards are crushed
and separated from their stems before they are pressed to extract the grape
juice. The juice is then fermented in temperature-controlled stainless steel
tanks or epoxy-lined cement vessels. The wines are stored in these inert
containers for three months before bottling.
Sparkling Wine. Sparkling wines are the product of a second alcoholic
fermentation of wine with yeasts in pressurized tanks for a period from two to
eight months, depending on the type of sparkling wine. This second fermentation
allows for the retention of the characteristic effervescence. The Company
produces four types of sparkling wine in its Pirque plant. The finest of the
four, Brut Royal, is made from Chardonnay, Pinot Noir and Riesling wines
fermented first in the Puente Alto plant. The Company's most popular seller in
Chile, Demi-Sec, is made with Company-grown Chenin Blanc grapes and is produced
in the Cachapoal-Peumo plant. Finally, Moscato is made from Moscatel and
Torontel wines produced in San Ignacio-Lontue.
Popular Wine. The Company produced approximately 100% of its popular
wine from grapes and bulk wine purchased from independent growers. These grapes
are vinified at four locations using a process similar to that used for varietal
wines. Popular wines are not aged; instead, they are bottled or packaged
promptly.
Bulk Wine. Almost all the bulk wine sold by the Company is purchased
from outside suppliers.
Sources of Grapes and Purchased Wine
Grapes are the main raw material in the wine making process. In 2002
and 2001, approximately 65% and 60%, respectively, of the grapes used in the
production of premium, varietal, varietal blend and sparkling wines were
purchased from third parties. In addition, the Company purchased grapes and bulk
wine required to produce approximately 100% of its popular wines.
Prevailing prices for grapes at harvest time reflect market conditions.
During 1998 and 1999 there was excess demand for grapes, which increased their
price. Conversely, the 2000 harvest in Chile marked a record production. This
increase in production changed the prevailing market conditions and the price of
grapes decreased accordingly. During 2001 and 2002 the declining trend in grape
prices continued.
Company Vineyards. In 2002, approximately 60% of the Company's
production of premium wines and around 30% of its production of varietal,
varietal blend and sparkling wines was from grapes grown on the Company's
sixteen owned and three leased vineyards in Chile. The Company believes that
production of its own grapes offers it greater control over costs and quality
and improves reliability of supply. To that end, the Company continues to expand
its grape production. The Company's policy is that, to the extent possible, only
grapes grown in the Company's own vineyards are to be used to produce the
Company's premium wines.
Outside Suppliers. In order to satisfy its need for grapes for the
production of premium, varietal, varietal blend and sparkling wine not otherwise
met by its own vineyards, as well as its requirements for grapes and bulk wine
for 100% of its popular wines, the Company buys grapes from approximately 550
independent growers in Chile. The identity of such growers, as well as the
amounts purchased from them, does not change significantly from year to year,
and most of these growers have been selling to the Company for many years.
19
The main criteria used to select independent growers are geographic location,
the variety of grapes grown and the grower's farming methods. The Company also
purchases small quantities of grapes from entities in which several of its
directors, executive officers or members of their families have an interest. See
Item 7 -- "Major Shareholders and Related Party Transactions -- Related Party
Transactions."
In accordance with Chilean wine industry practice, most of the
Company's agreements with growers only cover one year's production and are
renewed from year to year. This renewal is not compulsory and depends on the
Company's demand and seasonal market prices. In order to minimize the risk of
crop loss, the agreements are entered into between January and March each year,
after the grapes have begun to mature and the size of the crop can be more
accurately estimated. Delivery schedules are agreed upon according to the degree
of ripeness of each grape variety. The management of these outside vineyards is
directed by the Company's own technical personnel, and the Company establishes
standards regarding the use of pesticides, cultivation, harvest date,
transportation system, sugar, acidity and Ph concentration. Selection of the
grapes and approval of their quality is carried out by the Company's technical
department. The price of the grapes is proportional to the estimated alcohol
content over 12% in the resulting wine. Payment for grapes obtained from
independent growers is made in ten interest-free installments throughout the
year. In 2002, the Company had long-term contracts with up to approximately 8%
of its growers, primarily in the Maipo and Casablanca Valleys.
Bulk Wine Purchases. The Company purchases wine in bulk from a number
of outside suppliers, for the wine used in the production of the Company's
popular wines in 2002. The Company's technical department approves such wine
purchases. Payments are traditionally made in ten interest-free monthly
installments.
Vinification
The Company seeks to use the latest technology in all areas of
vinification while maintaining the wine-making traditions of its founders. The
Company has six vinification plants which convert grapes into premium, varietal
and varietal blend wines. The location of these plants, their capacity to vinify
red and white grapes and actual production in 2002 are shown below.
2002 Standard Capacity(1) 2002 Production
------------------------- ------------------------
Plant Red Grapes White Grapes Red Grapes White Grapes
- ----- ---------- ------------ ---------- ------------
(in millions of kilograms)
Puente Alto.................................... 7.0 4.3 7.1 4.1
Cachapoal-Peumo................................ 8.0 2.5 8.0 2.5
Chimbarongo.................................... 28.0 0.0 28.9 0.0
Lontue......................................... 4.0 15.0 3.9 14.1
Lourdes........................................ 11.0 0.5 11.1 0.4
San Javier..................................... 14.0 4.0 11.9 3.6
---- ---- ---- ----
Total..................................... 72.0 26.3 70.9 24.7
==== ==== ==== ====
- ---------------------------
(1) Standard Capacity is calculated for a standard crush based on a one
month length for red grapes and a one month length for white grapes.
In addition, the Company's facilities at Pirque have the capacity to
produce 1.3 million bottles or 1.0 million liters of wine per year into
sparkling wine.
The Company uses a combination of Chilean wood casks, epoxy-lined
cement tanks, stainless steel tanks and French and American oak barrels to
ferment and store its wine. As of December 31, 2002, the Company's total storage
and fermentation capacity was approximately 168.6 million liters.
20
The following table shows the Company's approximate fermentation and
storage capacity by type of container for the years indicated:
December 31,
----------------------------------------
Type of Container 2000 2001 2002
--------- ---------- ----------
(in thousands of liters)
Epoxy-lined cement tanks...................................... 114,314 114,641 114,596
Steel tanks................................................... 39,764 42,269 49,281
French and American oak barrels............................... 3,718 4,165 4,373
Chilean wood casks............................................ 1,269 504 343
--------- ---------- ----------
Total.................................................... 159,065 161,579 168,593
Since 1987, the Company has been acquiring American and French oak
barrels for use in the production of all its premium wines, except Late Harvest.
Although the use of oak barrels increases the Company's production costs, the
Company believes that it enhances the quality of its premium wines. Oak barrels
can be purchased in several sizes and are treated prior to delivery in
accordance with the Company's needs. Oak barrels can be used for two years to
produce the highest quality premium wines, such as Don Melchor, and can be used
for another four years to produce other wines. As of December 31, 2002, the
Company had more than 19,900 French and American oak barrels.
French oak barrels are used to make the Company's premium Don Melchor,
Amelia, Terrunyo, Marques de Casa Concha and Trio brand wines, and American oak
barrels are used for its premium Casillero del Diablo brand wine. French oak
barrels are approximately three times as expensive as American oak barrels, due
in part to the fact that the wood used for these barrels is split and not cut
with a saw, which in turn reduces the amount of wood available per tree to
construct barrels. The Company believes that the higher quality of the wine
produced by French oak barrels justifies the higher cost.
For the production of varietal and varietal blend wines, the Company is
gradually replacing its older Chilean wood casks with more modern epoxy-lined
tanks and stainless steel tanks. Stainless steel tanks are the least likely to
expose the wine to contamination. In 2002, the Company increased existing
stainless steel storage capacity by 7 million liters. Most of the Company's
stainless steel tanks are fitted with cooling systems to prevent wine from
deteriorating at higher temperatures. A number of the Company's stainless steel
tanks that are used in the fermentation process are also equipped with heating
systems to regulate the fermentation process better.
Bottling
After vinification and, in the case of premium wines, aging, wine is
ready to be bottled. The Company has bottling plants in Pirque and Lontue. The
Pirque bottling plant, located 28 kilometers from Santiago, is the Company's
principal bottling plant, and all of the Company's premium, varietal, varietal
blend and sparkling wines are bottled there. The plant has four bottling lines
accommodating bottles of 1,500 ml, 1 liter, 750 ml, 375 ml and 187 ml
capacities. The facility in Pirque is equipped with the most advanced bottling
and labeling equipment available, and has an installed capacity of 9.9 million
liters per month when operating three eight hour shifts per day, six days a
week.
The Company's bottling plant in Lontue, located 200 kilometers from
Santiago, bottles wine in five liter glass jugs and in .5 liter, 1 liter, 1.5
liter and 2.0 liter Tetra Brik packages which are made of several layers of
paper, aluminum and polyethylene. Similar packages are used worldwide for juice,
milk, wine and other products. The Tetra Brik packaging line is completely
automated. The Company has a license from Tetra Pak Chile to utilize the Tetra
Brik technology and purchases pre-printed unassembled packages from Tetra Pak
Chile. The Lontue plant's Tetra Pak packaging machines have an installed
capacity of 13.0 million liters a month based on three shifts operating eight
hours a day, six days a week.
The Company has a quality control department which controls the raw
materials used in each bottling plant and tracks the product up to the point of
sale through a system of computer coding for each bottle and case produced. The
Company also uses electronic monitoring equipment to ensure that bottles are
filled to the correct level.
21
All of the Company's premium and export wines are bottled in new
bottles. To reduce pollution and costs, the Company uses recycled bottles for
almost all of its remaining bottled domestic wines. Cristalerias, a principal
shareholder of one of the Company's main competitors, Santa Rita, supplies
almost all of the Company's bottles. The Company obtains the remainder of its
bottles from other Chilean and Argentine manufacturers. Corks for most wines are
produced in Spain and Portugal but are finished by Chilean firms. The Company
owns 49.84% of the principal cork supplier, Industria Corchera. See Item 7 --
"Major Shareholders and Related Party Transactions -- Related Party
Transactions." The Company imports champagne corks from Germany. Labels are
produced in Chile, the United States and Canada. Chilean companies supply cases
and capsules (the tin, plastic or aluminum covering for the neck of a wine
bottle).
In most cases, the Company does not have contracts with its suppliers.
The Company believes that, except for bottles and Tetra Brik packages,
alternative sources of supply are readily available. The Company believes that
it could find alternate suppliers for bottles and Tetra Brik packages, but it
could be adversely and materially affected in the short-term. New bottles and
preprinted, unassembled Tetra Brik packages are priced in U.S. dollars. Changes
in the Chilean peso to U.S. dollar exchange rate could increase the cost of
components and have a material adverse effect on the Company.
Storage. The Pirque bottling plant has a wine cellar with storage
capacity of 2.5 million bottles for aging plus a warehouse for finished wine
with a capacity of 178,000 cases (1.6 million liters).
Domestic Distribution. The Company has its own direct distribution
capacity through its wholly-owned subsidiary, Comercial Peumo. Comercial Peumo
has a network of sixteen regional offices to service the entire Chilean national
territory. Its sales force is made up of 106 salespeople, fourteen area
managers, six supervisors, and seven sales managers. Comercial Peumo also
employs a specialized work force of sixty people for its merchandising
operations.
Comercial Peumo serves approximately 14,000 customers throughout Chile,
making it the largest wine-oriented distribution company in Chile. The largest
single customer accounted for 10% of the Company's domestic sales in 2002. No
other customer represented more than 10% of the Company's domestic sales.
A wholly-owned subsidiary, Transportes Viconto, transports bulk wine
products between the Company's cellars, production and bottling facilities, and
delivers wine products to container ships located in Chilean ports. Transportes
Viconto relies on a twenty-one truck fleet, with a complement of trailers and
tanks that has a total haulage capacity of 640 tons. This fleet also transports
finished products to Comercial Peumo's sixteen regional offices throughout
Chile. Comercial Peumo subcontracts third party transportation services to
distribute its products from its regional offices to its commercial clients.
Company Sales - Chilean Markets
Domestic Sales. The Company's domestic sales in liters, excluding sales
of bulk wine, in 2000, 2001 and 2002 were approximately 53.2 million liters,
54.5 million liters and 59.6 million liters, respectively, resulting in gross
revenues of Ch$34,307 million, Ch$31,356 million and Ch$29,974 million,
respectively.
The Company's bulk wine sales fluctuate from year to year because the
Company sells bulk wine in the domestic market to reduce excess inventories. In
2002, sales of bulk wine represented 0.7% of total wine sales in the domestic
market. The Company expects to concentrate future sales efforts on bottled
wines, which in turn should reduce the volume of bulk wine sales.
The Company is the largest wine producer in Chile and according to A.C.
Nielsen, in 2002, the Company had the largest share of the domestic market with
a 23% share in terms of volume and a 21% share in value. The Company competes in
all segments of the branded Chilean market and seeks to keep prices competitive
to make its products attractive to consumers. Its variety of brands allows it to
target different market segments, from its upscale premium Don Melchor to its
popular wine lines, while maintaining a competitive price/quality relationship
across the range.
In 2002, approximately 29% of the Company's sales were to mini-market
and convenience stores, 44% to supermarkets, 22% to large clients or
distributors, 3% to restaurants and 2% were direct sales (final consumers which
include internet sales). Tetra Brik packages have proven to be especially
popular in supermarkets and convenience stores.
22
The following tables show the Company's total domestic sales in
constant Chilean pesos and liters by market segment, for each of the calendar
years indicated:
Domestic Wine Sales
1998 1999 2000 2001 2002
------------------ ------------------ ----------------- ----------------- -----------------
Mill. Ch$ % Mill. Ch$ % Mill. Ch$ % Mill. Ch$ % Mill. Ch$ %
--------- ------ --------- ------ --------- ----- -------- ------ --------- ------
(in million of constant Chilean pesos as of December 31, 2002)
Premium........ 2,887 8.4% 3,370 9.4% 3,340 9.6% 3,151 10.0% 3,104 10.3%
Varietal....... 4,298 12.5% 3,963 11.1% 4,874 14.1% 4,907 15.5% 3,703 12.3%
Varietal Blend. 155 0.5% 108 0.3% 151 0.4% 182 0.6% 66 0.2%
Popular........ 25,848 75.5% 27,625 77.0% 25,380 73.2% 22,618 71.1% 22,623 74.9%
Sparkling...... 553 1.6% 785 2.2% 562 1.6% 498 1.6% 477 1.6%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Subtotal... 33,741 98.5% 35,852 100.0% 34,307 98.9% 31,356 99.4% 29,974 99.3%
Bulk........... 511 1.5% - - 368 1.1% 205 0.6% 215 0.7%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total..... 34,252 100.0% 35,852 100.0% 34,675 100.0% 31,561 100.0% 30,189 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
1998 1999 2000 2001 2002
--------------- --------------- ----------------- ----------------- -----------------
Liters % Liters % Liters % Liters % Liters %
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(in thousands of liters)
Premium........ 909 1.8% 1,030 2.0% 1,102 2.0% 1,020 1.9% 938 1.6%
Varietal....... 3,250 6.3% 3,100 5.9% 3,550 6.6% 4,073 7.5% 3,086 5.2%
Varietal Blend. 186 0.4% 112 0.2% 139 0.3% 190 0.3% 94 0.2%
Popular........ 46,268 89.3% 47,905 91.0% 48,030 88.7% 48,777 89.3% 55,051 91.9%
Sparkling...... 429 0.8% 483 0.9% 403 0.7% 396 0.7% 393 0.7%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Subtotal.. 51,042 98.5% 52,630 100.0% 53,224 98.3% 54,456 99.7% 59,561 99.4%
Bulk........... 778 1.5% - - 895 1.7% 183 0.3% 353 0.6%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total..... 51,820 100.0% 52,630 100.0% 54,119 100.0% 54,639 100.0% 59,914 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The Chilean wine market can be divided into segments based on the price
of a 750 ml bottle. The Company targets the following market segments: popular
wines with prices ranging from Ch$300-670, varietal blend wines with prices
ranging from Ch$671-1,190, varietal wines with prices ranging from
Ch$1,191-2,499, premium wines with prices ranging from Ch$2,500-7,990, and ultra
premium with prices over Ch$8,000.
Local Brands and Prices. The table below lists the Company's major
brands by segments of the Chilean wine market and approximate retail prices for
each brand per 750 ml bottle as of December 31, 2002. Prices do not vary by type
of wine within brand category.
Segment Brand Approximate Retail Price
- ------- ----- ------------------------
(in December 31, 2002 Chilean pesos)
Ultra Premium................................. Don Melchor 30,000
Terrunyo 13,000
Amelia 15,000
Premium....................................... Marques.de.Casa.Concha 5,500
Trio 4,000
Casillero del Diablo 3,000
Late Harvest(1) 2,500
Sparkling..................................... Subercaseaux 1,700
Varietal...................................... Sunrise 1,700
Santa Emiliana(2) 1,290
Popular(3).................................... Exportacion 990
Clos de Pirque 890
Tocornal 720
San Jose 500
Fressco 750
- ------------------------
(1) Late Harvest is a Sauvignon Blanc dessert wine which is only sold in
375 ml bottles at a price of Ch$2,500 per bottle.
(2) The Company has a license from Santa Emiliana to bottle and distribute
the Company's wine domestically under Santa Emiliana's labels.
(3) Popular wine prices are per 1,000 ml., except Exportacion which is
priced per 1,500 ml.
Local Competition. The Company competes with a number of other Chilean
wineries. The Company's competitors in the premium segment are large and
medium-sized Chilean wineries, mainly Santa Rita, Vina San Pedro S.A. ("San
Pedro"), Bodegas y Vinedos Santa Carolina S.A., Vina Undurraga S.A., Vina
Errazuriz S.A., Cousino Macul S.A. and Vina Tarapaca S.A. The Company also
competes, to a much lesser extent, with small Chilean wineries whose production
and sales of premium wines are aimed primarily at export markets. In late 1994,
Compania Cervecerias Unidas S.A. ("CCU"), the largest brewery in Chile, acquired
approximately 48% of San Pedro. Presently, CCU controls 60.32% of the shares in
San Pedro.
23
Sales in the popular wine segment are concentrated in wines packaged in
Tetra Brik packages. In 2002, Tetra Brik sales represented approximately 58% of
all Chilean sales by volume in the popular wine segment. The Company believes
that non-Chilean wineries have negligible sales in Chile because they find it
difficult to match the price-value relationship offered by Chilean wineries,
especially in the popular wine segment.
Popular wines produced in Chile, including those of the Company, also
compete with other beverages such as beer, pisco and soft drinks. In 2002, the
ratio of popular wine prices to beer prices increased from 1.94 in December 2001
to 1.96 in December 2002. In the face of increased competition by other
beverages and in order to continue gaining market share, the Company has
intensified its marketing efforts in the popular wine segment. See "Business
Overview -- Domestic Marketing Strategies."
The following table shows the relationship between popular wine and
beer prices and the Company's sales for the years indicated:
Relationship Between Popular Wine and Beer Prices
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Popular wine prices(1 liter).............................. 1,037 1,112 1,073 989 992
Beer prices............................................... n.a. 474 488 509 507
Ratio of popular wine prices to beer prices............... n.a. 2.35 2.20 1.94 1.96
Company's volume sales in millions of liters.............. 51.0 52.6 53.2 54.5 59.6
Percentage change from the previous year.................. 23.1% 3.1% 1.1% 2.3% 9.4%
- -------------------------------
Source: National Institute of Statistics, Consumer price index, except for the
Company's volume sales and percentage changes, which are the Company's figures.
Domestic Marketing Strategy
The Company is seeking to increase its market share in all segments of
the Chilean wine market, especially in the premium and varietal wine segment.
The Company believes it is well positioned within this market due to its
portfolio of brands which it believes successfully competes with other wine
producers in all segments of the domestic market.
In terms of distribution, the strategy of the Company is to be present
in all relevant channels for wine sales in Chile, with special focus in
supermarkets and the retail channel. Accordingly, the retail sector of the
Company has been strengthened both in commercial and marketing terms.
Regarding the portfolio of products, the Company is permanently
developing new formats and updating the presentation of its products.
Advertising methods and marketing strategies differ depending on whether the
targeted segment is comprised of potential consumers of the Company's premium,
varietal, varietal blend, or popular wines. During 2002, the greatest efforts in
advertising have been focused on strengthening the Clos de Pirque, Tocornal and
Casillero del Diablo brands in the market through mass media campaigns in
television and in the press.
Company Sales - Export Markets
According to the Exporters' Association, exports of Chilean wine
increased from approximately 74.3 million liters in 1992 to 348.6 million liters
in 2002, or approximately 16.7% per annum.
Export Sales and Competition. The Company is the largest exporter of
Chilean wines on both a volume and US$ value basis with market share in 2002 of
16.2% and 19.1% (including bulk) respectively, according to the Exporters'
Association. The Company's bottled wine market share by volume and US$ value was
24.9% and 20.6%, respectively, in 2002. The Company's closest Chilean competitor
in the bottled export segment, in terms of volume and US$ value, reported the
equivalent of 60.6% and 57.5% of the Company's sales, respectively.
24
The following table sets forth the Company's export market share among
Chilean wine producers, as a percentage of both volume and US$ value for the
years 1999 to 2002:
Export Market Share
Total Wine Bottled Wine
------------------------------- -------------------------------
Volume US$ Value Volume US$ Value
------ --------- ------ ---------
1999 16.7% 16.9% 23.1% 19.5%
2000 18.7% 18.8% 25.6% 21.1%
2001 16.1% 17.5% 23.4% 19.1%
2002 16.2% 19.1% 24.9% 20.6%
Company sales in the export market are distributed among the premium,
varietal, varietal blend, sparkling and popular wine segments. The Company also
sells bulk wine abroad. The Company's exports sales in volume, excluding bulk
sales, in 2000, 2001 and 2002 totaled 47.3 million liters, 49.2 million liters
and 56.8 million liters, respectively, resulting in revenues of US$103.3
million, US$103.9 million and US$115.3 million in 2000, 2001 and 2002,
respectively.
The following table sets forth the Company's export sales by volume and
US$ value since 1998 for each market segment. It shows that the Company's
premium wine export sales by volume and value from 1998 to 2002 increased 25.4%
and 20.4% respectively, and its varietal and varietal blend export sales
increased 21.5% and 12.9% respectively, for the same period.
Export Sales by Market Segment
1998 1999 2000 2001 2002
---------------- --------------- --------------- ---------------- -----------------
Liters US$ Liters US$ Liters US$ Liters US$ Liters US$
------ ------ ------ ------ ------- ----- ------ ------ ------ ------
(in thousands of liters and thousands of U.S. dollars)
Premium............. 6,455 23,884 7,047 25,756 7,204 27,315 7,167 26,470 8,093 28,751
Varietal............ 13,082 31,524 10,931 26,482 11,923 28,714 11,631 27,820 14,312 32,494
Varietal Blend...... 25,316 43,040 22,788 37,383 26,411 44,542 28,365 47,041 32,340 51,690
Sparkling........... 516 1,311 675 1,682 599 1,574 466 1,162 324 845
Popular............. 1,145 1,170 1,541 1,459 1,756 1,520
------ ------- ------ ------ ------ ------- ------ ------- ------ ---------
Total bottled wine 45,370 99,760 41,441 91,304 47,283 103,315 49,170 103,952 56,824 115,300
Bulk................ 609 723 174 212 641 554 1,657 1,166 2,103 1,239
------ ------- ------ ------ ------ ------- ------ ------- ------ ---------
Total............. 45,979 100,483 41,615 91,516 47,924 103,869 50,827 105,119 58,927 116,539
====== ======= ====== ====== ====== ======= ====== ======= ====== =========
Exports include sales to the Company's subsidiaries abroad.
Percentage of Export Sales by Volume to Regional Export Markets
(excluding bulk wine sales)
Market 1998 1999 2000 2001 2002
------ ------ ------ ------ ------
United States.................................... 35.4% 35.3% 34.6% 34.5% 32.0%
South America.................................... 9.6% 12.5% 13.3% 9.3% 8.1%
Canada........................................... 5.1% 5.9% 5.4% 5.7% 5.0%
Europe........................................... 19.9% 32.4% 29.5% 32.9% 40.7%
Central America, Mexico and the Caribbean........ 7.9% 10.1% 11.5% 10.5% 9.3%
Asia............................................. 21.5% 3.5% 5.3% 6.8% 4.5%
Other............................................ 0.6% 0.3% 0.4% 0.3% 0.3%
------ ------ ------ ------ ------
Total......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
25
Principal Export Markets. As of December 31, 2002, the Company's
principal regional export markets by US$ value were Europe, the United States,
Central America, South America, Asia and Canada. Each market is unique, and
there are differences within markets due to variations in local regulations. The
types of wine supplied by the Company vary by region and are shown in the
following table:
2002 Export Sales by Market Segment and Region
Europe U.S. South America Central America
----------------- ----------------- ----------------- ------------------
Th. US$ % Th. US$ % Th. US$ % Th. US$ %
------- ------- ------- ------- ------- ------- ------- -------
Premium ........... 13,908 26.5% 4,667 15.2% 3,263 36.7% 3,714 31.8%
Varietal .......... 23,077 43.9% 1,121 3.7% 1,573 17.7% 1,841 15.8%
Varietal Blend .... 14,308 27.2% 24,876 81.1% 2,887 32.5% 4,926 42.2%
Sparkling ......... 5 0.0% - - 340 3.8% 495 4.2%
Popular ........... - - - - 826 9.3% 695 6.0%
------- ------- ------- ------- ------- ------- ------- -------
Subtotal ........ 51,298 97.6% 30,664 100.0% 8,888 100.0% 11,671 100.0%
Bulk .............. 1,239 2.4% - 0 - - - -
Total ........... 52,537 100.0% 30,664 100.0% 8,888 100.0% 11,671 100.0%
======= ======= ======= ======= ======= ======= ======= =======
% of Total Exports 45.1% 26.3% 7.6% 10.0%
======= ======= ======= =======
Asia Canada Other Total Export Sales
----------------- ----------------- ----------------- -----------------
Th. US$ % Th. US$ % Th. US$ % Th. US$ %
------- ------- ------- ------- ------- ------- ------- -------
Premium ........... 1,829 27.4% 1,154 20.6% 216 43.1% 28,751 24.7%
Varietal .......... 3,707 55.5% 1,024 18.3% 150 29.9% 32,494 27.9%
Varietal Blend .... 1,146 17.2% 3,413 61.0% 134 26.7% 51,690 44.3%
Sparkling.......... - - 4 0.1% 1 0.2% 845 0.7%
Popular ........... - - - - - - 1,520 1.3%
------- ------- ------- ------- ------- ------- ------- -------
Subtotal ........ 6,682 100.0% 5,595 100.0% 502 100.0% 115,300 98.9%
Bulk .............. - - - - - 1,239 1.1%
Total ........... 6,682 100.0% 5,595 100.0% 502 100.0% 116,539 100.0%
======= ======= ======= ======= ======= ======= =======
% of Total Exports 5.7% 4.8% 0.4% 100.0%
======= ======= ======= =======
Europe. In 2002, sales to Europe increased by 32.6% in value terms to
approximately US$52.5 million or 45.1% by US$ value of Company exports. In 2002,
premium wine sales to Europe represented 48.4% of the Company's total premium
wine sales by US$ value. The Company's European markets can be subdivided into
three areas: non-wine-producing Western Europe, wine-producing Western Europe
and Eastern Europe.
The Company believes that greater market opportunities exist in the
non-wine-producing countries of Western Europe. For these countries, in 2002,
the order of importance by sales for the Company was as follows: the United
Kingdom and the Republic of Ireland, Sweden, Denmark, Norway, and Finland. Among
these countries, the Scandinavian countries, with the exception of Denmark,
operate under a state controlled system where each state purchases the wine and
sells it in its own stores at the retail level. The Company anticipates that in
the future, the monopoly system in these countries will be replaced by a private
or semi-private sales structure, but believes that because its brands are well
known in these areas, its sales will not be adversely affected as a result.
There can be no assurance, however, that such a regulatory change would not have
a material adverse effect on the Company's sales to such markets.
In the United Kingdom, the Company continues to broaden direct
distribution to large supermarket chains, expand sales to retail stores, liquor
outlets and independent vendors, and promote on-premise consumption (e.g., sales
to restaurants), through its Concha y Toro and Cono Sur brands. Excluding bulk
sales, sales in the United Kingdom increased 37.6% from 2001 to 2002, reaching
US$22.9 million in 2002. This increase is explained by higher sales of the
subsidiary Vina Cono Sur and a strong performance of the Concha y Toro UK
subsidiary, which started its operations in March 2001.
The Company's marketing strategy in the non-wine-producing countries of
Western Europe focuses on expanding the premium wine segment, particularly with
the Casillero del Diablo brands, and building brand recognition. Compared to
other areas of the world, the Company's involvement in this market is fairly
recent, having begun in 1989.
In the wine-producing countries of Western Europe (e.g., Italy, France,
Spain, Portugal and Germany), where the Company faces greater competition, the
Company's marketing strategy is to shift from sales of small quantities of
premium wines to higher volume sales of varietal wines in the off trade.
26
In Eastern Europe, where there are several wine-producing countries,
the market for the Company's wine is minimal, and the Company's marketing
efforts are in a preliminary stage.
United States. The U.S. market accounted for approximately US$30.7
million in 2002 sales, equal to 26.3% by US$ value of the Company's exports.
According to the Exporters' Association, the Company was the leading Chilean
exporter to the United States in 2002. Moreover, according to Impact, Databank
Adams Handbook Advance 2003, Concha y Toro was the number one imported wine
brand in the United States for the third consecutive year in 2002.
Wine markets worldwide are divided into segments according to the price
range of the wines, and competitors differ from one segment to another.
According to the wine classification method generally used in the U.S. market,
the Company believes that the following wine categories are a representation of
the wines sold by the Company in the United States: ultra premium, super premium
and premium. The Company believes that the Company's wines would be classified
within such categories as follows: Ultra premium (Don Melchor, Amelia and
Terrunyo); super premium (Marques de Casa Concha, Trio, Casillero del Diablo and
Xplorador); and premium (for the Company's varietal wines and varietal blends,
including Sunrise, Frontera and Concha y Toro, among others).
In general, neither the Company nor any other Chilean winery currently
participates in the "Primer Orden" wine segment in the United States.
The Company and its Chilean competitors are increasing their
participation in the premium segment and establishing a strong presence in the
varietal and varietal blend segments. The Company's strategy is to focus on
sales within the premium and varietal categories. In the United States, the
Company's greatest market strength is in the varietal and varietal blend
segments due to the Company's competitive price/value relationship. See
"Business Overview -- Export Marketing Strategy."
During 2002, varietal blends in the United States accounted for
approximately 81.1% and 90.1% of the Company's sales by US$ value and volume,
respectively; varietals, 3.7% and 3.0%, respectively; and premium wines, 15.2%
and 6.9%, respectively. During 2002, sales in the U.S. market increased 6.9% and
7.3% by US$ value and volume, respectively. Growth was led by higher sales of
super premium wines (Marques de Casa Concha) and also a good performance from
the Frontera range. The Company believes that the premium and varietal segments
will continue to offer opportunities for increased sales. See "Business Overview
- -- Export Marketing Strategy."
The main markets for the Company's products in the United States are
the eastern and southern states, where approximately 55% of the Company's total
revenues in the U.S. market are generated. In the United States, the Company's
products principally compete with other Chilean wines, as well as Californian
wines and wines imported from Italy, France, Australia, Spain, Germany, Portugal
and other wine-producing countries.
South America. In 2002, sales to South America decreased by 13.6% in
US$ value terms to approximately US$8.9 million or 7.6% of the Company's total
exports by US$ value. This decrease is explained mainly by the closing of the
Argentine market in 2002. The difficult economic situation in Latin America,
which worsened towards the end of 2001 with the Argentine currency crisis
contributed to these declines. The Company's primary markets by sales revenue
were Brazil, Venezuela, Peru, and Ecuador. Concha y Toro was the first Chilean
wine sold in these countries, and the Company believes it is currently the
leading Chilean exporter to these countries. In each of these countries, the
Company's products are sold through exclusive local distributors, and in some
countries, the Company's secondary brands are sold by different distributors.
Historically, export sales to South America have been limited by
economic conditions. Chilean wines have traditionally enjoyed favorable customs
treatment in South American countries compared with wine produced by nations
outside of the region. This advantage may end as these countries lower their
tariffs or follow the global trend toward open market economies.
On June 25, 1996, Chile became a partner of MERCOSUR, the South
American Common Market, which members and founders are Argentina, Brazil,
Paraguay and Uruguay. Through this association, the Company has benefited from
lower tariffs for entry of wine products into Argentina and Paraguay. The
Company has also gained, through MERCOSUR, the ability to purchase finished
Argentine wine products which can be sold under Concha y Toro's popular wine
labels in Chile or through the Vina Trivento label in Brazil.
27
In 2002, premium wine sales represented 36.7% by US$ value of exports
to South America. The Company believes this is partly because the Company's
wines have traditionally been considered prestigious and have been included on a
large number of restaurant wine lists in South America.
Central America, Mexico and the Caribbean. In US$ value terms, the
Company's 2002 sales to Central America, Mexico and the Caribbean totaled
US$11.7 million or 10.0% of the Company's exports. The primary markets for the
Company's products in this region are Mexico, Panama, Costa Rica, and the
Dominican Republic. The Company has marketed its wines for more than fifteen
years in most of the countries in this region, and the Company believes it is
the largest Chilean exporter of bottled wines in all of these countries. Sales
in US$ value terms increased slightly by 0.7% as a result of a modest recovery
in tourism mainly in the Caribbean region after the events of September 11,
2001.
Asia. The Asian market accounted for approximately US$6.7 million in
2002, equal to 5.7% by US$ value of the Company's exports. In value and volume
terms, in 2002 bottled sales to Asia decreased 21.9% and 24.3%, respectively,
from 2001, mainly explained by a decrease in sales to Japan. Japan is the most
important market in the region for the Company, representing 85% of total volume
to the region. Sales to Japan during 2002 totaled US$5.7 million representing a
26.1% decrease over the 2001 sales.
Despite the small size of the sales to these markets, the Company
believes in the long term expansion of sales to Asian countries (besides Japan),
where good performance on premium wines has been the result of having a manager
based in the region.
Canada. In 2002, the Company's sales to Canada were approximately
US$5.6 million or 4.8% by US$ value of the Company's exports. Canada is the
fifth largest national export market and the sixth largest regional export
market for the Company in US$ value terms.
The Canadian market consumes approximately 26 million cases of wine per
year. Local wineries and bottlers have approximately 35% of the Canadian market
because of preferential tax allowances and commercial regulations which favor
local wineries and bottlers of imported bulk wines and limit the penetration of
imported wine. The Canadian market is governed by provincial monopolies in nine
of the ten provinces and the three territories. The monopolies (or liquor
boards) buy and sell all imported (bottled) and locally produced liquors and
wines. Each province is autonomous, and each provincial liquor board has its own
regulations and policies. Each liquor board is also responsible as guarantor of
payments to its suppliers. Because the Canadian market is a controlled market,
the buying system is highly concentrated, and the marketing policies are
strictly regulated. The Company believes that even if privatization of the
provincial monopolies takes place, its sales will not be adversely affected
because its brands are well known in Canada. However, there can be no assurance
that privatization would not have a material adverse effect on the Company's
sales to the Canadian market.
Other. The Company's 2002 sales to other countries totaled US$0.5
million or 0.4% by US$ value of the Company's exports. Within "other" sales, in
US$ value terms, sales were led by Israel.
Bulk Wine Exports. In 2002, the Company sold US$1.2 million of bulk
wine overseas, primarily to the United Kingdom and Denmark, representing 1.1% of
its exports by US$ value. Bulk wine sales is a spot business with no long-term
commitments. Sales depend on price and availability of wine in Chile and other
wine growing countries. The Company purchases almost all of the bulk wine it
exports from outside suppliers. The Company expects bulk wine sales to diminish
in significance as it continues to promote bottled wine sales. However, bulk
wine sales may continue in countries depending on price, demand and availability
for such wines.
Distribution in Export Markets. The Company's products are distributed
in approximately ninety-five countries by a similar number of independent
distributors, including four government liquor authorities.
In 2001, the Company established a fully owned subsidiary in the United
Kingdom for the distribution of its own products in the region. In some
countries, the Company also sells premium, varietal and varietal blend wine
through a second distributor under the brand names Cono Sur and Maipo. The
Company sells "F.O.B. Chilean port" to its distributors in export markets. In
2002, the United States, the United Kingdom, Sweden, Denmark and Canada, the
Company's five largest national export markets, accounted for 62.9% of the
Company's exports by US$ value. The Company believes that its success in export
markets is based on developing good relationships with established distributors
and the good price/quality relationship of its products. While the Company has
long-term written agreements with most of its largest distributors, namely those
in the United States, Canada, Japan, Venezuela and Brazil, there are currently
no written agreements with a majority of the Company's distributors.
28
Independent Distributors. The Company's exclusive agent and importer in
the United States is Banfi, which imports and re-sells the Company's products to
distributors who service all 50 states. Banfi was the Company's largest single
customer in 2002, purchasing approximately 2.0 million cases of wine which
represented 30.9% and 26.3% of the Company's export sales by volume and US$
value, respectively. The Company has a renewable 20-year contract with Banfi
which expires in 2013. The contract prohibits the Company from selling to any
other U.S. importer and prohibits Banfi from carrying other Chilean wines
without the Company's approval. Banfi carries a number of competitors' products,
including Riunite, one of the best-selling imported wines in the United States,
and Santa Emiliana. Banfi also imports wines produced by its own wineries in
Italy. The Company and Banfi share the U.S. marketing costs for the Company's
wines.
In Japan, the Company has a distribution agreement with Mitsubishi
Corporation as the exclusive importer of the Company's products in Japan and
Mercian Corporation as its exclusive distributor. The written agreement
commenced in January 1997 and is automatically renewable for successive one-year
terms.
In December 2000, the Company formed the company Concha y Toro UK
Limited for the distribution of its wines in the United Kingdom. Concha y Toro
UK Limited is a wholly-owned subsidiary of the Company, and started its
operations in March 2001. The Company terminated its agreement with Cheviot
Wines U.K., a subsidiary of W.M. Morton Limited, a Scottish company. In 1994,
the Company entered into a contract with Western Wines Agency to distribute Vina
Cono Sur wines in supermarkets and chain stores in the United Kingdom and the
Republic of Ireland.
The Company has two distributors in Brazil: Expand Group and United
Distillers and Vintners Brazil Ltda. Expand Group commercializes all of the
Company's wines, except Casillero del Diablo, which is distributed by United
Distillers and Vintners Brazil Ltda.
Government Liquor Authorities. In Canada and the Scandinavian countries
(excluding Denmark), the Company's wine is sold through government liquor
authorities. In such countries, products may be offered as a general listing or
a special listing. General listings are those that are purchased by liquor
boards on a regular basis and require a minimum sales level per period (which
varies depending on the Canadian province and from country to country in
Scandinavia). Sales to government liquor authorities represented 15.3% and 14.8%
of the Company's export sales by volume and US$ value, respectively, in 2002. In
these countries, the Company operates with agents that work on a commission
basis and are responsible for promotion and public relations.
The Company's 2002 sales, excluding bulk sales, to these countries are
shown below:
Exports to Government Liquor Authorities
Country 2002 Export
------- -----------
(in thousand liters)
Canada..................... 2,837
Sweden..................... 3,826
Finland.................... 829
Norway..................... 1,219
Export Marketing Strategy
The Company is seeking to focus future growth in export markets on the
sale of premium and varietal wines. The Company believes future growth is
possible if the company is successful in the following efforts:
o improving the quality of its wines as a result of
state-of-the-art technology used by the Company in the
vinification process and vineyard management;
o increasing production from current and new vineyards;
o changing attitudes of consumers, especially in the United
Kingdom and the United States, with respect to the quality of
Chilean wines, creating a growth opportunity for the Company
for its premium and higher-priced wines;
o launching new products;
29
o marketing efforts and upgrading packaging for all product
lines; and
o promotional and advertisement campaigns, including on-premise
sales (e.g., sales to restaurants).
Another key part in the Company's export marketing strategy has been to
diversify its export markets on a regional basis. Diversification helps protect
against economic, and in some cases political, changes which may affect the
market for the Company's products. In particular, the Company has expanded its
sales to Asian countries, mainly Japan, where the consumption of wine is
increasing.
The Company believes that there is a trend towards the consumption of
varietal wines in general, and certain varietal wines in particular, in its
major export markets, principally the United States, Europe, Asia and Canada.
The Company has tailored its new grape plantings to respond to this trend. See
"Business Overview -- Vineyards."
Seasonality
The Company has experienced, and expects to continue to experience,
seasonal fluctuations in its revenues and net income. Both domestic and export
wine sales tend to be lower during the first quarter of the year and higher
during the third quarter in anticipation of the year-end holiday period. Sales
volumes also typically decrease if distributors begin a quarter with
larger-than-normal inventory levels, which is usually the case in the first
quarter of the year. For these reasons, the operating results of the Company in
any one quarter of the year may not be indicative of the year-end results.
The following table sets forth the average quarterly percentage of the
Company's sales in the domestic and export segments for the 2000-2002 periods,
as a percentage of sales by volume.
Average Percentage of Wine Sales by Volume in 2000 - 2002
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Domestic................... 19.7% 26.1% 26.7% 27.5%
Export..................... 20.5% 27.2% 26.5% 25.7%
Bulk(1).................... 19.0% 33.9% 27.9% 19.1%
Weighted Average........... 20.1% 26.8% 26.6% 26.6%
- -------------------------
(1) Seasonal fluctuations in bulk wine sales follow a different pattern in
part because bulk wine sales are made on a spot basis. In order not to
distort the data for domestic and export wine sales, seasonal
fluctuations in bulk wine sales are presented separately.
Other Businesses
Vina Trivento. Established in 1996 in Mendoza, Argentina. In 2002,
Trivento had revenues of Ch$4,329 million (US$6.2 million) for the sale of
609,000 cases. Approximately 35% of its sales, 216,000 cases were shipped to
foreign markets. In 2002 export volume increased 45% with the largest volume
growth achieved in the United States, Brazil, Germany and Finland.
Compared to 2001, domestic market sales in 2002 increased five-fold to
393,000 cases. A new opportunity arose following the devaluation of the
Argentine peso, which encouraged the Company to develop a business plan to take
advantage of the moment. The success of the strategy has considerably
strengthened the Company's position in this market.
Other Fruit. The Company planted fruit trees on its Cachapoal-Peumo
farms in the 1980s to diversify its operations and take advantage of a growing
export market for Chilean fruit. Currently, the Company owns approximately 114
hectares of fruit trees including peaches, nectarines, avocados, lemons, oranges
and kiwis. The 2002 fruit harvest totaled 1.9 million kilos, from which 83
thousand boxes of fruit were exported. Fruticola, a former subsidiary of the
Company, the shares of which were distributed to the then existing shareholders
of the Company in 1986, is the Company's principal customer for fruit. Two of
the Company's directors are also directors of Fruticola, and there are
substantial shareholders in common. See Item 7 -- "Major Shareholders and
Related Party Transactions -- Related Party Transactions." While the Company
plans to continue its operations in this area, the Company has no plans to
expand such operations and could decide to return the land to grape production
in order to meet future grape requirements for wine-making.
30
Other Products. In January 1995, the Company acquired 75% of Villa
Alegre, a company that produces and markets mineral water. Distribution of the
product has been jointly carried out by Villa Alegre and the Company's
subsidiary, Comercial Peumo. In 2002, Villa Alegre's total sales amounted to
Ch$393 million (US$546 thousand) and its net profit amounted to Ch$30 million
(US$42 thousand).
Affiliated Companies
Vina Almaviva. In 1997, the Company and Rothschild S.A. formed a joint
venture company, Vina Almaviva, to produce a "Primer Orden" or first-growth wine
in Chile. The Company contributed approximately 40 hectares of producing
vineyards located at Puente Alto, Maipo Valley in exchange for 50% of the
capital stock of Vina Almaviva.
In 2002, Vina Almaviva had revenues of Ch$2,733 million (US$3.8
million). Almaviva's main markets are France, Germany, Japan, Switzerland and
the United States. In 2002, the Company recognized income from Vina Almaviva of
Ch$534 million (US$743 thousand) from its equity investment.
Industria Corchera. In November 2000, the Company acquired 49.6% of
Industria Corchera. In 2002 its share increased to 49.84%. In 2002, Industria
Corchera's total sales amounted to Ch$8,720 million (US$12.1 million), and the
Company recognized income from Industria for Ch$227 million (US$316 thousand)
from its equity investment.
Government Regulation
Chilean Regulation. The Company is subject to the full range of
governmental regulations generally applicable to companies engaged in business
in Chile, such as labor laws, social security laws, public health, consumer
protection, environmental laws, securities laws and anti-trust laws, as well as
regulations to ensure sanitary and safe conditions in the production, bottling
and distribution of beverages. The main regulatory entity for Chilean sociedades
anonimas is the Superintendencia de Valores y Seguros de Chile ("Superintendency
of Securities" or "S.V.S.").
Alcoholic Beverages Regulations. The Company is subject to regulation
in the production and distribution of alcoholic beverages. Chilean law regulates
what beverages come within the scope of regulation as "alcoholic beverages," the
type of alcohol which can be used in the manufacture of alcoholic beverages, the
additional products that can be used in the production of certain alcoholic
beverages, and the packaging and labeling and procedures that must be followed
to import alcoholic beverages. The manufacturing and bottling of alcoholic and
non-alcoholic beverages is also subject to supervision by the National Health
Service, which inspects plants on a regular basis.
Chilean law requires a license for the manufacture and sale of
alcoholic beverages, and the Company believes it has all the licenses necessary
for its business.
There are currently no material legal or administrative proceedings
pending against the Company pertaining to any Chilean regulatory matter, and the
Company believes that it is in compliance in all material respects with all
applicable statutory and administrative regulations relating to its business.
Environmental Regulation. The Chilean Constitution of 1980 grants all
citizens the right to live in an environment free of pollution. It further
provides that it is a State's duty to enforce this right and to protect the
environment. The Chilean Constitution also provides that citizens can file a
complaint with the corresponding Court of Appeals seeking review of government
and private party actions on the grounds that such actions infringe the
citizens' rights to a clean environment .
In 1994, the Chilean Congress enacted the Chilean framework
environmental law, Law No. 19.300, which sets forth that any new project or
activity or modification to an existing project or activity that may have an
impact on the environment requires a favorable environmental impact assessment.
Law No. 19.300 also created a new environmental institution, composed of the
National and the Regional Environmental Commissions, which are entities that
coordinate the environmental activities performed by governmental agencies and
that, among other duties, approve or reject environmental impact assessments,
and set environmental emission and air quality standards.
31
Law No. 19.300 also established environmental liability standards,
according to which perpetrators of environmental damage are liable to compensate
the victims and restore the environment.
U.S. Regulation. The sale of wine in the United States is subject to
extensive regulation covering virtually every aspect of the Company's
operations, including marketing, pricing, labeling, packaging and advertising.
State agencies regulate the delivery and use of all alcoholic beverages within
their jurisdictions, while the federal government, through the Bureau of
Alcohol, Tobacco and Firearms, is responsible for the regulation of imports
through permit requirements and label approval processes. Importers of wine to
the United States are required to obtain various licenses, bonds and permits,
including a federal Importer's Permit, to comply with the regulations of all
such agencies.
In 1997, U.S. and Chilean news organizations announced that members of
the California wine industry had petitioned the U.S. Department of Commerce to
impose trade sanctions against Chilean wine producers. These rumors have been
denied by the California Association of Wine Grape Growers and other industry
officials and, to date, no allegations of violations of U.S. antitrust laws have
been announced by any U.S. federal or state agency. There can be no assurance,
however, that no U.S. federal or state agency will commence any action and/or
impose any trade sanctions relating to alleged violations of U.S. antitrust
laws.
The Company believes it is in compliance in all material respects with
all presently applicable U.S. federal and state regulations.
Trademarks. The Company has Chilean registrations for the principal
trademarks used in its business, including Concha y Toro, Subercaseaux,
Tocornal, Maipo, Clos de Pirque, 96, Fressco, San Jose, Marques de Casa Concha,
Trio, Casillero del Diablo, Amelia, Terrunyo and Don Melchor. While the Company
also has foreign registrations for many of these trademarks in most of its
principal export markets, it does not have registrations for all of its
trademarks in all of its export markets. The Company believes that its brands
and trademarks are important to its business and is seeking to protect them
through registration in many countries where they are not currently recorded.
Organizational Structure
In order to improve the efficiency of intercompany operations and
improve the ease of preparation and consolidation of the financial statements,
the Company opted to modify in 2002 the ownership structure of the group
companies. Generally, these modifications contemplate that a holding company
will own the foreign subsidiaries, whereas another holding company will own the
domestic group companies, with Vina Concha y Toro S.A. as the group's parent
company.
In 2002, VCT Internacional S.A. was formed to control the Argentine
subsidiaries. Comercial Peumo S.A. changed its name to Inversiones Concha y Toro
S.A. and became a holding company. The following table lists the significant
subsidiaries and affiliates of the Company, the percentage of direct and
indirect ownership by the Company, and the respective country of incorporation:
Subsidiary Direct and Indirect Ownership Country of Incorporation
Inversiones Concha y Toro S.A.......... 100% Chile
VCT Internacional S.A.................. 100% Chile
Vina Cono Sur S.A...................... 100% Chile
Sociedad Exportadora y Comercial Vina
Maipo Ltda............................. 100% Chile
Villa Alegre S.A....................... 75% Chile
Concha y Toro UK Limited............... 100% United Kingdom
Trivento Bodegas y Vinedos S.A......... 100% Argentina
Distribuidora Peumo Argentina S.A...... 100% Argentina
Transportes Viconto Ltda............... 100% Chile
Vina Almaviva S.A...................... 50% Chile
Industria Corchera S.A................. 49.84% Chile
Comercial Peumo Ltda................... 100% Chile
Sociedad Exportadora y Comercial
Oneworldwines Ltda..................... 99% Chile
32
Property, Plants, Equipment
The Company's headquarters are located at the World Trade Center, Las
Condes, Santiago. To finance these new offices, the Company entered into a
twelve-year lease-back agreement in January 1998.
In addition, the Company owns 6,788 hectares and leases 525 hectares of
land throughout Chile, and owns 439 hectares of land in Argentina. Of these,
approximately 4,359 hectares are suitable for planting vineyards. A majority of
the remaining 3,393 hectares are comprised of roads, hills, fruit orchards and
riverbanks. The remainder is used for vinification and bottling plants, cellars
and other buildings. None of the Company's properties that are material to its
business are mortgaged or otherwise encumbered.
As mentioned above, the Company leases 525 hectares, comprising one
lease in the Maipo Valley and two leases in the Casablanca Valley. In the Maipo
Valley, the Company leases 133 hectares from an unaffiliated non-profit Chilean
institution, approximately 119 of which are suitable for vineyards or
agricultural purposes. The lease expires in 2013. The lease may be terminated by
the lessor beginning in 2004, with one year's notice and payment of a penalty.
In the Casablanca Valley, the Company leases two properties of 282 and 110
hectares with leases expiring in 2028 and 2023, respectively.
Comercial Peumo leases warehouses in Arica, Antofagasta and Los Angeles
for distribution. The Company leases four plants for vinification of popular
wine from purchased grapes. The Company believes it would be able to obtain
replacement properties at acceptable costs for its leased vineyards, warehouses
and vinification plants should its leases not be renewed. See "Business Overview
- -- Vineyards."
Although the Company believes that it is in compliance with all
applicable environmental regulations, it is still in the process of improving
the water treatment systems in all of its manufacturing plants. The Company has
water treatment systems, owned or contracted to third parties, in four of its
plants: Lontue, Chimbarongo, Santa Elisa and Puente Alto.
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Operating Results
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto, included in Item
18 herein. The Consolidated Financial Statements are prepared in accordance with
Chilean GAAP, which differ in certain important respects from U.S. GAAP. See
Note 36 to the Consolidated Financial Statements for a discussion of (i) the
principal differences between Chilean GAAP and U.S. GAAP which affect the
financial statements of the Company, (ii) the effects of such differences on the
calculation of net income and shareholders' equity and (iii) a reconciliation to
U.S. GAAP of net income for each of 2000, 2001 and 2002 and of shareholders'
equity as of December 31, 2000, 2001 and 2002. The amounts in dollars are
presented only for the convenience of the reader.
General
The Company primarily produces and bottles wine for sale in Chile and
approximately 95 export markets. The Company has vinification operations in
Argentina through Vina Trivento, which produces wine primarily for the export
market, and also sells wine in Argentina. In addition, the Company distributes
wine in the Argentine market through Distribuidora Peumo-Argentina. In 2001, the
Company opened a sales and distribution subsidiary in the United Kingdom, Concha
y Toro UK, in an effort to improve the position of Concha y Toro in this market.
The Company uses the average cost method for valuing inventory.
Inventory costs and cost of sales are affected by beginning inventory, purchases
and production of grapes in the first and second quarter of the year and
purchases of bulk wine primarily in the second half of the year.
Harvest takes place in March and April. The Company allocates the cost
of grapes purchased and produced during the first quarter of each year to
inventories which then affects the average price of wine and the cost of goods
sold starting at the end of the first quarter but mainly during the second
quarter.
33
The table below shows the percentage of the Company's revenues from
different activities for the last three years. Domestic wine sales as a
percentage of total revenues have decreased from 32.5% in 2000 to 23.5% in 2002
reflecting the fall in prices in the domestic market following increasing
competition among the leading wineries. Revenues related to exports comprising
exports to third parties, sales of Concha y Toro UK and sales from the Argentine
subsidiaries have increased each year as a percentage of total revenues to 61.6%
in 2000, 66.8% in 2001 and 70.8% in 2002.
% of Total Sales by Value
2000 2001 2002
----- ----- -----
Domestic Wine(1).......................... 32.5% 27.4% 23.5%
Exports to third parties - Wine(1)........ 55.3% 55.2% 58.3%
Concha y Toro UK.......................... - 6.1% 8.7%
Argentine Operations...................... 6.3% 5.5% 3.8%
Other(2).................................. 5.9% 5.8% 5.7%
----- ----- -----
Total............................ 100.0% 100.0% 100.0%
===== ===== =====
- ------------------------------
(1) Including sales of bulk wine.
(2) Primarily represents bottling revenues for Santa Emiliana and the sales of
fruit and mineral water.
The Company sells premium, varietal, varietal blend, popular, sparkling
and bulk wines. The following table shows the breakdown by value between the
Company's domestic and export sales by type of wine for the last three years,
including bulk wine sales.
% of Wine Sales by Value
2000 2001 2002
-------------------- ------------------- --------------------
Domestic Export Domestic Export Domestic Export
-------- ------ -------- ------ -------- ------
Premium................. 9.6% 26.3% 10.0% 25.2% 10.3% 24.7%
Varietal................ 14.1 27.6 15.5 26.5 12.3 27.9
Varietal Blend.......... 0.4 42.9 0.6 44.8 0.2 44.3
Popular................. 73.2 1.2 71.7 1.4 74.9 0.7
Sparkling............... 1.6 1.5 1.6 1.1 1.6 1.3
Bulk.................... 1.1 0.5 0.6 1.0 0.7 1.1
----- ----- ----- ----- ----- -----
Total.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
The following table sets forth selected income statement data of the
Company expressed as a percentage of revenues for the years indicated. The table
also shows the year-to-year percentage change for such selected income statement
data.
Year Ended December 31, % Change
---------------------------------- ---------------------
2000 2001 2002 2000-2001 2001-2002
-------- -------- -------- --------- ---------
Revenues ............................ 100.0% 100.0% 100.0% 7.8% 11.6%
Cost of sales ....................... (64.3) (63.0) (61.0) 5.6 8.1
-------- -------- --------
Gross margin ........................ 35.7 37.0 39.0 11.8 17.5
Selling and administrative expenses.. (18.7) (20.8) (23.0) 20.1 23.5
-------- -------- --------
Operating income .................... 17.0 16.2 16.0 2.8 9.9
Non-operating income ................ 1.4 2.4 2.0 79.9 -3.8
Non-operating expenses .............. (2.3) (2.1) (1.1) 0.0 -44.6
Price-level restatement and foreign
exchange losses, net ................ (1.2) (2.2) (1.9) 104.1 -2.9
Income tax .......................... (2.0) (2.4) (2.3) 29.0% -7.8
-------- -------- -------- -------- --------
Net income .......................... 13.0% 11.8% 12.7% -1.5% 19.7%
======== ======== ======== ======== ========
Year ended December 31, 2002 compared to year ended December 31, 2001
Figures expressed in Chilean pesos (Ch$) as of December 31, 2002
Revenues. Total revenues in 2002 increased 11.6% to Ch$128,321 million
as compared to Ch$114,991 million in 2001. Revenue growth is mainly the result
of higher exports to third parties and higher sales from our subsidiaries Concha
y Toro UK and Vina Trivento. On the other hand, domestic sales decreased 4.4%.
34
Total export revenues from third parties increased 17.9% to Ch$74,819
million, as a result of higher volumes exported and by the 6.0% rise in the
average peso/dollar exchange rate in 2002.
Sales from the UK subsidiary increased 59.5% to Ch$11,126 million as a
result of the more aggressive sales and marketing strategy that the Company has
followed in this market.
Exports. The following figures representing export volumes and revenues
in dollars include sales to the Company's distribution subsidiary in the UK. In
2002 sales to Concha y Toro UK totaled US$10.7 million (546 thousand cases). In
2002, no sales were made to Distribuidora Peumo-Argentina.
Total bottled export revenues increased 10.9% to US$115.3 million from
US$103.9 million on a 15.6% increase in volumes with consolidated shipments of
6,313,788 cases in 2002.
By market, volume growth increased 43% in Europe, led by the UK and
Scandinavia. UK growth stems mainly from the achievements of the UK subsidiary,
Concha y Toro UK, which is building up brands and placing special emphasis on
Casillero del Diablo.
U.S. sales volume expanded 7.3%, driven by higher Super Premium wine
sales (Marques de Casa Concha) and also a fine performance from the Frontera
range. During the course of 2002, the Company invested in mass media advertising
for its leading brands in the key states of New York, Florida, and Texas.
Volumes in Canada increased 1.0%, in Central America 2.7% and in South
America 0.6%.
Volume exported to Asia decreased by 24.3%. Sales to Japan, the largest
market in the region, decreased 29.3% as a result of a decrease in consumption
and reduced stocks held by our distributor. Other countries in the region posted
better results, but on a smaller scale.
During 2002, the Company exported 2,572,000 cases to Europe; 2,020,000
cases to the U.S.; 513,000 cases to South America; 588,000 cases to Central
America; 283,000 cases to Asia; and 315,000 cases to Canada.
Prices. The average price per case declined 4.0% to US$18.26 from
US$19.03 in 2001, reflecting a more competitive market environment in certain
key markets.
Domestic Revenues. Domestic Revenues (excluding bulk) declined 4.4% to
Ch$29,974 million from Ch$31,356 million in 2001. In an extremely competitive
local market, a 12.6% decline in average prices offset a 9.4% increase in
volume.
In a scenario of weak yet positive growth in consumption, the Company's
sales volume increased 12.9% in Popular wines as a result of strong performances
by the Tocornal and Clos de Pirque ranges.
Cost of Sales. In 2002, the cost of sales increased 8.1% to Ch$78,249
million from Ch$72,391 million in 2001, reflecting an increase in the volume of
sales. Cost of sales as a percentage of total sales declined to 6.1% from 63%,
mainly as a result of lower average wine costs.
Gross Margin. Gross margin improved to 39% from 37% as a result of
higher exports, a higher exchange rate, and lower average wine costs.
Selling and Administrative Expenses. Selling and Administrative
Expenses("SG&A") increased 23.5% to Ch$29,562 million. As a percentage of
revenues SG&A increased to 23.0% from the 20.8% recorded in 2001. This increase
mainly reflects higher remuneration and export-side SG&A relating to higher
export volumes, higher marketing expenses of the UK subsidiary and an increase
in marketing expenses in the export markets.
Operating Income. Operating Income increased 9.9% to Ch$20,510 million
compared to Ch$18,663 million in 2001. Operating margin decreased from 16.2% to
16.0%.
Non-operating Income. Non-operating income decreased 3.8% to Ch$2,624
million. This results from a 33.9% higher contribution of equity income from
related companies amounting to Ch$761 million which was offset by a 13.7%
decrease in other non-operating incoming totaling Ch$1,863 million.
35
Non-operating Expenses. Non-operating expenses decreased 44.6% to
Ch$1,354 million mainly as a result of a reduction in interest expenses to
Ch$1,087 million in 2002 from Ch$2,197 million in 2001. This resulted from lower
average interest rates and a decrease in financial debt during the year.
Price Level Restatement and Foreign Exchange Differences. Price level
restatement and foreign exchange differences decreased 2.9% to Ch$2,479 million.
This results from a 70% decrease in price level restatement loss to Ch$258
million which was partly offset by a 32.5% increase in foreign exchange losses
to Ch$2,221 million resulting mainly from adjustments corresponding to the
devaluation of the Argentine peso during the year from 1.70 to 3.37.
Income Tax. Income tax increased 7.8% to Ch$2,979 million from Ch$2,764
million in 2001. The increase in income tax is lower than the increase in net
income before taxes, mainly due to the recognition in the income tax of the
losses in Argentina.
Net Income. As a result of the above factors, net income increased
19.7% to Ch$16,312 million from Ch$13,626.
Year ended December 31, 2001 compared to year ended December 31, 2000
(Figures expressed in Ch$ as of December 31, 2002)
Revenues. In 2001, total revenues increased 7.8% to Ch$114,991 million
from Ch$106,660 million in 2000. Growth in consolidated revenues was led by the
Company's exports to third parties and sales of the wholly owned distribution
subsidiary Concha y Toro UK.
Exports to third parties increased 14.8% to Ch$61,609 million, as a
result of higher volumes and an increase in the average price in Chilean pesos.
The UK subsidiary Concha y Toro UK started business in March 2001. Its
sales from such date to December totaled Ch$6,974 million and represented 6.1%
of total revenues for 2001.
In 2001, revenues from wine sales in Chile declined 8.6% following a
series of price cuts in a very competitive market.
Argentine operations comprise Vina Trivento and the distribution
subsidiary Distribuidora Peumo-Argentina. Total sales of the Argentine
subsidiaries were lower in 2001 reflecting a weaker economic environment and in
2001 represented 5.5% of consolidated revenues.
Wine sales, including sales of bulk wine, accounted for 94.2% of total
revenues in 2001, while other sales primarily bottling fees from Santa Emiliana
and sales of mineral water accounted for 5.8% of total revenues in 2001.
Export Revenues. In 2001, total export revenues to third parties
(including bulk wine sales) increased 14.8% to Ch$ 61,609 million. This increase
from 2000 to 2001 was calculated after readjusting the total export revenues to
third parties for 2000 to exclude such export revenues from sales to the
distributor in the United Kingdom. The readjustment for the calculation of the
increase in total export revenues to third parties was made since as of 2001,
distribution of the Company's products to the United Kingdom has been made
through Concha y Toro UK, a subsidiary of the Company, and as a result such
sales are no longer considered export revenues to third parties.
Bottled Wine Sales - Value. In 2001, bottled export revenues, expressed
in Chilean pesos, increased 14.1% to Ch$63,457 million. The result arises from
higher volumes and an increase in the average price in Chilean pesos that was
favored by 13.7% depreciation in the average exchange rate.
In U.S. dollars, export revenues increased 0.6% to US$103.9 million
from US$103.3 million. This is the product of a 4% increase in volumes and a
3.2% decline in the average price in dollars.
Export figures in dollars now include shipments to the Company's
subsidiary in Argentina and the United Kingdom. Sales to Distribuidora
Peumo-Argentina totaled US$1,782,500 (102,590 cases) while sales to the Concha y
Toro UK subsidiary since March 2001 have totaled US$8,160,600 (355,200 cases).
36
In terms of sales by region, the largest increases in 2001 occurred in
Asia (+25.6%), Europe (+10.6%), and the U.S. (+4.2%). European growth reflects
the strong performance of the company's UK Subsidiary Concha y Toro UK, which
produced an increase in sales of 19.1%. The Company also obtained solid results
in Norway, Ireland and Denmark.
The Company believes the increase in U.S. sales was largely in response
to the Company's strategy introduced in mid 2000 to focus on sales of Premium
wines. Year on year comparisons reveal a 40% increase in the sales of Premium
wines in the US.
Exports to Central and South America declined by 12.5% and 31.5%,
respectively, in 2001. The contraction in these markets reflects the slowdown in
economic activity and consumption in Argentina, Brazil, Mexico and Uruguay.
Bottled Wine Sales - Volume. During 2001, the Company exported
5,460,000 cases, representing a 4% increase in volume compared to 2000.
Volume growth by market was as follows: Europe 16.1%, Asia 33.5%, the
US 3.6% and Canada 9.6%. Shipments to Central and South America decreased by
5.2% and 27.3%, respectively.
The Company shipped 1,884,000 cases to the US, 1,798,000 cases to
Europe, 572,450 cases to Central America, 510,000 cases to South America,
374,000 to Asia and 312,000 cases to Canada.
Prices. Overall the average price per case decreased 3.2% to US$19.03
from US$19.67 per case. This is mainly explained by lower sales of premium wines
in Central and South America with the consequence that the share of varietal
blend wines in the product mix increased, and also due to a more competitive
price environment in some markets.
Bulk Wine Sales. Bulk wine sales totaled Ch$765 million. Bulk sales in
volume terms amounted to 1,657 thousand liters.
Domestic Revenues. 2001 domestic sales (excluding bulk) declined 8.6%
to Ch$31,356 million from Ch$34,307 million in 2000. In an extremely competitive
environment the Company's average price per bottle declined 10.7%, while
domestic volume increased 2.3% as compared with 2000.
Cost of Sales. Total cost of sales increased to Ch$72,391 million from
Ch$68,571 million. The cost of sales as a percentage of total sales decreased in
2001 to 63.0% from 64.3% in 2000, as a result of lower wine costs in 2001.
Cost of sales excluding the operations of foreign subsidiaries
increased 5% to Ch$60,570 million, but as a percentage of sales, cost of sales
decreased to 60.2% from 63.8%. The 3.6-percentage point improvement mainly
reflects lower wine costs. Excluding the operations of our foreign subsidiaries,
the Company's gross margin increased to 39.8% in 2001 from 36.2% in 2000. The
company's foreign subsidiaries have yet to achieve optimal cost structures and
additionally, the UK subsidiary has a lower margin characteristic of the
distribution business.
Selling and Administrative Expenses. SG&A as a percentage of revenues
increased to 20.8% from 18.7% in 2000. Over the period, SG&A increased to
Ch$23,937 million from Ch$19,934 million. This increase is mainly due to higher
sales and marketing related expenses in export and domestic markets,
reorganization of the marketing division of the Company, reorganization of the
sales division for export markets, expenses associated with the new subsidiary
Concha y Toro UK, and depreciation costs of the investment in SAP, a software
program used throughout the Company and its subsidiaries.
Operating Income. Operating income increased 2.8% to Ch$18,663 million
compared to Ch$18,155 million in 2000. Operating margin decreased to 16.2% from
17% as the increase in SG&A offset the increase at the gross margin level.
Non-Operating Income. Non-operating income increased to Ch$2,729
million from. This increase is the result of an increase in equity income from
Vina Almaviva and of gains from the sale of fixed assets.
37
Non-Operating Expenses. Non-operating expenses in 2001 were Ch$2,442
million, similar to Ch$2,450 million in 2000. In 2001, interest expenses
decreased to Ch$2,197 million from Ch$2,294 million due to lower average
interest rates and the reduction of financial debt. As of December 2001,
financial debt stood at US$60 million, and financial debt to equity ratio was
0.35. Lower interest expenses were offset by higher other non-operating
expenses.
Price Level Restatement and Foreign Exchange Differences. Price level
restatement and foreign exchange differences in 2001 amounted to Ch$2,552
million as compared to Ch$ 1,250 million in 2000. Foreign exchange losses
increased to Ch$1,676 million and reflects the loss of Ch$1,381 million
corresponding to the Company's subsidiaries in Argentina due to the depreciation
of the Argentine peso, based on an exchange rate of 1.7 Argentine Pesos per US
dollar, as stipulated in SVS Directive 81, of January 22, 2002.
Income Tax. Income tax increased 29% to Ch$2,764 million mainly due to
the impact of the increase in corporate tax on deferred taxes. The Company's
effective tax rate was 16.9% in 2001 compared to 13.4% in 2000.
Net Income. Net income for 2001 was Ch$13,626 million, representing a
1.5% decline from 2000.
Liquidity and Capital Resources
Liquidity
The Company's main source of liquidity has been cash generated by its
operating activities, which amounted to Ch$19,108 million, Ch$21,506 and
Ch$12,555 million during 2002, 2001 and 2000 respectively. In the Company's
opinion, its working capital of Ch$41,059 million as of December 31, 2002 is
sufficient for the Company's present requirements.
At December 31, 2002, the Company had Ch$3,479 million of cash, time
deposits and other cash equivalents and approximately Ch$68,085 million
available under undrawn bank lines of credit.
Net cash flows used in 2002 prior to the effect of inflation in cash
and cash equivalents was Ch$598 million, while in 2001 net cash flow generated
was negative Ch$193 million. The effect of inflation increased cash and cash
equivalents in Ch$123 million in 2002 and Ch$25 million in 2001.
Net cash flows from operating activities were Ch$19,108 million in
2002, Ch$21,506 million in 2001 and Ch$12,555 million in 2000. Net cash flows
used in financing activities were negative Ch$13,082 million in 2002, negative
Ch$11,233 million in 2001 and negative Ch$952 million in 2000. Net cash flows
used in investing activities was Ch$5,429 million in 2002, Ch$10,466 million in
2001 and Ch$9,807 million in 2000.
The Company's total assets increased 4.9% from Ch$186,564 million at
December 31, 2001 to Ch$195,782 million at December 31, 2002. The increase in
total assets is due to a net increase in fixed asset additions of Ch$1,847
million, principally due to the construction and expansion of cellars for the
vinification and aging of wine, the planting of new vineyards, and the purchase
of machinery and equipment. Other assets also increased, following further
investment in related companies.
With respect to current assets during 2002, inventories decreased by
Ch$532 million, and accounts receivable increased by Ch$5,961 million. Current
liabilities increased to Ch$47,069 million at December 31, 2002 from Ch$41,651
million at December 31, 2001, in part explained by the change in the structure
of financial debt from long-term to short-term. Long-term liabilities decreased
to Ch$21,053 million at December 31, 2002 from Ch$28,328 million at December 31,
2001. For further detail on interest bearing debt as of December 31, 2001, see
Item 11 -- "Quantitative and Qualitative Disclosures About Market Risk."
Long-term debt includes the Company's Series AA bonds that were issued
in October 1991 in an aggregate amount valued at 250,000 Unidades de Fomento
("UF") on the date of their placement. This debt was valued at Ch$648 million at
December 31, 2002, and bears interest at the real rate of 6.0% per annum. These
obligations, which are payable in semi-annual installments from March 1, 1996
through September 1, 2003, contain covenants which provide that the Company's
total liabilities must not exceed 1.4 times its net worth and that current
assets must be at least equal to current liabilities. At December 31, 2002, the
Company's total liabilities were 53.4% of its net worth and the current assets
were 1.9 times its current liabilities. The Company believes that the terms and
conditions of its debt agreements are customary and that it is in compliance in
all material respects with such terms and conditions.
38
Total shareholders' equity increased 9.5% from Ch$116,526 million at
December 31, 2001 to Ch$127,591 million at December 31,
2002.
Capital Expenditures
Total capital expenditures were Ch$6,934 million (US$9.6 million) in
2002, Ch$11,879 million in 2001 and Ch$13,874 million in 2000. Capital
expenditures in 2002 were lower as compared to the investment of 2001 and 2000
primarily due to lower investments in winemaking and cellar facilities and a
lower investment in the administration area. Capital expenditures in the period
2000-2002 included, the acquisition of additional properties in Chile, the
increase in vinification and cellar capacity and investments to increase
capacity in its related wineries and the acquisition of new lands, plantings,
machinery and barrels for aging of wines, among others.
For 2003, the Company established a capital expenditure budget of
Ch$14,700 million (approximately US$20.7 million) to promote future growth in
sales, and support the expected increases in demand for grapes and the need for
production capacity. Investments will be focused, in part, on the construction
of storage and fermentation facilities for the production and bottling of all
wines with an emphasis on premium and varietal wines. The following table sets
forth the Company's capital expenditures for the different areas for the years
ended 2000, 2001 and 2002 and planned capital investment for 2003.
(Ch$ Millions)
Area: 2000 2001 2002 2003
- ----- ------ ------ ------ ------
Agriculture.......................................... 5,425 1,615 2,140 2,860
Oenology, technical and bottling facilities.......... 5,292 6,801 3,540 9,070
Vina Trivento (Argentina)............................ 1,054 407 - 800
Other (administration and other subsidiaries)........ 2,103 3,056 1,254 1,970
Total...................................... 13,874 11,879 6,934 14,700
====== ====== ====== ======
The Company expects to continue planting wine vines and developing the
corresponding infrastructure needed on certain properties owned by the Company
in Chile and in Argentina. Funds will also be used to increase the capacity of
the Company's vinification and storage facilities including the acquisition of
French and American oak barrels. The Company has committed capital expenditures
for Ch$11,200 million (approximately US$15 million) as of 2004.
Impact of Inflation and Foreign Currency Fluctuations
The Company is required under Chilean GAAP to restate non-monetary
assets and liabilities, equity and income and expense accounts to reflect the
effect of variations in the purchasing power of the Chilean peso. During
inflationary periods, monetary items generate a gain or loss in purchasing power
which is influenced by the currency in which they are denominated. Non-monetary
assets and liabilities are restated so as to correct the effect of inflation and
remain constant in real terms from period to period. See Note 2(d) and Note 23
to the Consolidated Financial Statements contained in Item 18.
The net monetary correction gain or loss each year is calculated as
follows:
o Non-monetary assets and liabilities, shareholders' equity and
income and expense accounts are restated using the CPI
published by Chile's National Institute of Statistics.
o The CPI effect on inventories is calculated based on the
turnover of inventory during the year.
o Monetary assets and liabilities denominated in foreign
currency and UF are restated at the applicable year-end
exchange rates.
In general, inflation has the adverse effect of diminishing the
purchasing power of the Company's peso-denominated monetary assets which are not
price-level indexed and has the positive effect of reducing the real value of
the Company's peso-denominated monetary liabilities which are not price-level
indexed.
39
Company exports are mostly denominated in U.S. dollars, although they
are also denominated in Euros, Sterling Pounds, Canadian dollars and Argentine
pesos (sales of the Argentine subsidiaries). Total revenues from exports
including exports to third parties and sales of the foreign subsidiaries as a
percentage of total revenues have increased from 66.8 % in 2001to 70.8% in 2002.
To the extent that U.S. dollar-denominated revenues exceed U.S.
dollar-denominated operating costs, the Company's results of operations will be
impacted by the difference between the changes in exchange rates and the Chilean
rate of inflation. The Company purchases bottles, corks and Tetra Brik
containers in prices set in U.S. dollars.
To the extent that the Chilean peso depreciates against the U.S. dollar
at a lower rate than the rate of Chilean inflation, the Company's export sales
will increase less than inflation adjusted peso costs, and margins as reported
in Chilean pesos will decrease. The reverse situation would occur with respect
to domestic sales denominated in Chilean pesos and related U.S. dollar
denominated costs. The rates of nominal depreciation (appreciation) of the
Chilean peso against the U.S. dollar for 2000, 2001 and 2002 were 8.2%, 14.1%
and 9.7% respectively, while the Chilean price-level restatement factors for the
same periods were 4.7%, 3.1% and 3.0% respectively.
While the Company denominates its export prices in U.S. dollars (other
than to Canada, Argentina and some European countries as discussed above),
retail prices in the importing countries are denominated in local currencies.
Changes in the exchange rate between the U.S. dollar and the local currency can
have an impact on the local currency price and thereby on the volume of the
Company's wine sold in such markets. For details on Foreign Exchange Differences
see Note 24 to the Consolidated Financial Statements contained in Item 18.
The Company enters into forward foreign exchange agreements to minimize
its exposure to the risks of changes in foreign exchange rates. Since 1993, the
Company has attempted to balance U.S. dollar-denominated assets and liabilities.
See Item 11 - "Quantitative and Qualitative Disclosures About Market Risk."
Certain Accounting Policies: Investments in Argentina
The Company currently has investments in two limited companies in the
Republic of Argentina (Vina Trivento and Peumo Argentina).
Those investments were recorded using the investment valuation
methodology for stable countries, which means accounting for the investment in
Argentine pesos and converting these entries to Chilean pesos at the rate of
exchange at the date of reporting.
As a result of the economic situation in Argentina which caused, among
others things, a depreciation of the local currency, during 2001 the Company
decided to amend the valuation methodology for such investments, using the
criteria for unstable countries, which means accounting for the investments in
United States dollars.
As a result of converting the financial statements of its Argentine
subsidiaries and of the depreciation of the Argentine peso, the Company recorded
a net charge to the Parent Company's income of Ch$2,993 million in 2002 and
Ch$1,388 million in 2001.
A proportion of assets kept in the Argentine subsidiaries is stated in
Argentine pesos, so they are affected by any further depreciation of that
currency. In addition, it is not economically feasible to purchase financial
instruments that eliminate or reduce the risk of further currency depreciation,
such as making forward contracts to exchange Argentine pesos.
Certain Accounting Policies: Translation of foreign currency financial
statements
Financial statements of consolidated foreign subsidiaries have been
converted into Chilean pesos in accordance with Technical Bulletin No. 64,
"Accounting for Investments Abroad" ("BT 64"), of the Chilean Association of
Accountants, as follows:
Financial statements of foreign operations with the Chilean peso as the
functional currency are those whose activities are considered an extension of
Chilean operations, and are translated as follows:
40
Monetary assets and liabilities are translated at the year-end exchange
rate. Non-monetary items, primarily property, plant and equipment and
shareholders' equity, are measured using historical exchange rates in effect at
the time of the transactions adjusted by changes in the Chilean CPI during the
year. The statement of operations is translated into Chilean pesos at the
average exchange rate of the month in which the transactions occur, except for
those expenses related to assets and liabilities that have been remeasured at
historical exchange rates. Exchange differences resulting from the above
translation are recorded in the statement of operations.
Financial statements of foreign subsidiaries whose activities do not
constitute an extension of the Chilean operations, or which operate in countries
that are exposed to significant risks, restrictions or inflation/exchange
fluctuations, are remeasured using the U.S. dollar as the functional currency
and then translated into Chilean pesos at the year-end exchange rate.
Remeasurement into U.S. dollar is performed as follows:
Monetary assets and liabilities are translated at year-end rates of
exchange between the U.S. dollar and the local currency. All non-monetary assets
and liabilities and shareholders' equity are translated at historical rates of
exchange between U.S. dollar and the local currency. Income and expense accounts
are translated at the exchange rate prevailing at the end of the month in which
the transactions occur, except for those expenses related to assets and
liabilities that have been remeasured at historical exchange rates. Any exchange
differences are included in the results of operations for the period.
On the Parent Company's books, price-level restatements based on
Chilean inflation are applied to the beginning balance of the investment account
and then the participation in the net income of the subsidiary (determined as
described above) is recorded. The Parent Company then compares this value to its
participation in the equity of the investee as remeasured into U.S. dollars and
translated into Chilean pesos. The difference is recorded as an adjustment to
the investment account with a corresponding adjustment to the foreign currency
translation account in shareholders' equity.
Certain Accounting Policies: Income Recognition, Provision for Bad Debt and
Export Revenues
The Company's income is recorded on an accrual basis, under which the
income is deemed earned at the moment the sales are shipped and the invoice is
issued. There is a 60 day period, between the issuance of the invoice and
receipt of income for domestic sales, and a 90 day period for exports. The
Company makes a provision for bad debts for sales to domestic customers that are
in arrears for a period longer the Company's average debt period. In the case of
export sales, the Company has taken out insurance that guarantees debt
collection mostly in its entirety. The insurance coverage is generally 90% of
the value of the sales, except for sales to Argentina where the coverage is 65%.
In addition, there is no insurance coverage when the claim originates from
events unrelated to the Company, such as political risk which is covered in only
a few countries. However, there will be delays in collection against the
insurance policy, and therefore, until the insurance company pays the Company
pursuant to the policy, the Company will have to cover its own liabilities and
may have exchange rate risks associated with such coverage for the period
between the filing of a claim and its payment.
Over 70.8% of the Company's revenues are from exports, which could be
affected by economic conditions in these export markets. There are also exchange
rate risks associated with export revenues, and therefore, the Company attempts
to balance its assets and liabilities that are stated in foreign currencies,
thus minimizing exchange rate risks. To the extent economically feasible, the
Company purchases financial instruments that eliminate or reduce these risks,
however, as in the case of Argentine pesos, these financial instruments are not
always available to the Company at prices acceptable to it.
Research and Development
The Company's research and development efforts do not involve material
expenditures, as the Company relies primarily on technical assistance and
technology transfer agreements with domestic and foreign companies and
institutes. In 2001, the Company entered into an association with Financiere
Mercier, a prestigious nursery in France. Mercier will provide the expertise to
develop vines resistant to pests and different soil conditions. In addition, the
Company's agricultural engineers regularly attend training courses. The Company
also has the on-site expertise of American consultants at its disposal
throughout the year.
In Chile, the Company develops multiple research projects with Chilean
universities, among them Universidad de Chile, Universidad de Concepcion and
Universidad Catolica del Maule.
41
Trend Information
The most significant trend affecting the Company's results currently
and in the past two fiscal years has been an increase in competition in both the
domestic and the export markets.
In the domestic market, a greater availability of grapes and wine has
led to increasing competition among the leading wineries. This has resulted in
falling prices. In addition, domestic sales have been impacted by the slowdown
in economic activity that has had a negative impact on consumption in Chile.
In the export markets, the sales volume of the Company has continued to
increase. However, the Company has faced increasing competition in some key
markets resulting in falling prices or increasing marketing needs. The most
dynamic region for the Company in the past three years has been Europe. The
Company expects this trend to continue in the future and it has established a
subsidiary in the United Kingdom. The Company believes it is very well
established in continental Europe.
With respect to consumption trends, the Company believes that there is
a major trend towards the consumption of varietal wines in general, and certain
varietal wines in particular, in its major export markets, principally the
United States, Europe, Asia and Canada. The Company has tailored its new grape
plantings to respond to this trend. In addition, the Company has experienced a
shift towards the consumption of wines from the New World including wines from
Australia, Chile, the U.S., South Africa and Argentina.
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The Company is managed by a Board of Directors consisting of seven
directors. The entire Board of Directors is elected every three years at an
annual general shareholders' meeting. Directors are not subject to term limits.
If a vacancy occurs, the Board of Directors elects a temporary director to fill
the vacancy until the next regularly scheduled meeting of shareholders in which
Directors are elected, and at which time the entire Board of Directors will be
elected for a new three year term. The Company's By-Laws provide that directors
need not be shareholders.
The following table lists each director of the Company, his current
position, his age at May 31, 2003, years with the Company and year of
appointment to the Board of Directors:
Years with Current
Age at May 31, the Position
Name Position 2003 Company Held Since
- ---- -------- ------------- ---------- ----------
Directors:
Alfonso Larrain Santa Maria.................. Chairman 66 33 1998
Rafael Guilisasti Gana....................... Vice Chairman 49 24 1998
Sergio Calvo Salas........................... Director 80 22 1980
Mariano Fontecilla de Santiago Concha........ Director 78 28 1995
Francisco Marin Estevez...................... Director 64 20 1982
Eduardo Morande Fernandez.................... Director 72 17 1985
Albert Cussen Mackenna....................... Director 52 5 1998
The following provides biographical information about the directors of
the Company.
Alfonso Larrain, Chairman
Joined the Company as a director in 1968. General Manager from 1973 to 1989 and
Vice-Chairman from 1989 to 1998. In his long career at the winery, he has worked
on implementing an aggressive policy of opening up new markets. When he became
Chairman in September 1998, the Company's focus changed to one of enhancing its
prestige in its major markets as a producer of fine wines. He is also director
of Santa Emiliana and the Santiago Chamber of Commerce and is the President of
Fundacion Cultura Nacional.
42
Rafael Guilisasti Gana, Vice Chairman
Vice Chairman of the Board since September 1998. Previously, Export Director of
the Company, a position he held since 1985. During his service as Export
Director, total exports of the company grew significantly, including from US$5
million to US$100 million in 1998. Since 1996, Mr. Guilisasti has been the
President of the Exporters' Association. The Exporters' Association comprises
approximately 85% of Chilean wineries and its goal is to promote Chilean wines
in international markets and to monitor the political and legal aspects of the
Chilean wine industry. He is general manager of Santa Emiliana and Chairman of
Vina Almaviva.
Sergio Calvo Salas, Director
Mr. Calvo has broad experience in the brokerage business working at Irarrazabal
& Rodriguez Corredores de Bolsa and White Weld & Co. President and Senior
Partner at Compania Minera de Exportacion between 1957 and 1977. Director of
Embotelladora Andina during 1969-1970 and 1973-1974. Acquired and currently acts
as President of Metalurgica Manlac S.A. Director of the Company since 1980. He
is also a director of Santa Emiliana.
Mariano Fontecilla De Santiago Concha, Director
Law studies. Former Chilean ambassador to Norway, Spain and Italy. Direct
descendant of the first Marques de Casa Concha and of the founder of the
Company, Don Melchor de Concha y Toro. Made an honorary member of the Chilean
Brotherhood of Wine for his contribution to Chilean wines. Director of the
Company for several periods, initially in 1949 yet most recently since 1995.
President of Santa Emiliana since 1998.
Francisco Marin Estevez, Director
Agricultural Engineer. Broad experience in the private sector. He has served
as director of the Company since 1982.
Eduardo Morande Fernandez, Director
Agriculturist, joined Industria Corchera in 1951. Contributed to the development
of Industria Corchera and forged Industria Corchera's association with Amorim,
he is currently the President of Industria Corchera. Director of the Company
since 1985.
Albert Cussen Mackenna, Director
Civil Engineer, broad experience in the financial sector. Operations Manager,
Commercial Manager and Planning and Development Manager of Banco Santiago from
1978 to 1986. CEO of AFP Provida S.A. between 1986 and 1996 and CEO of Cruz
Blanca S.A. between 1996 and 1997. CODELCO CFO between 1997 and 1999 and CEO of
Madeco between 1999 and 2002. Member of the Latin America Advisory Committee to
the Board of the New York Stock Exchange. Director of the Company since 1998.
Executive Officers
The following table lists each executive officer of the Company, his
current position, his age at May 31, 2003, years with the Company and year of
appointment as an executive officer:
Age at Years Current
May 31, with the Position
Name Position 2003 Company Held Since
- ---- -------- ------ ------- ----------
Eduardo Guilisasti Gana.......... General Manager (Chief Executive 50 24 1989
Officer)
Goetz Von Gersdorff.............. Technical Director 75 40 1993
Andres Larrain Santa Maria....... Agricultural Manager 64 29 1978
Carlos Saavedra Echeverria....... Engineering and New Projects Manager 58 29 1992
Osvaldo Solar Venegas............ Administration and Finance Manager 41 15 1992
(Chief Financial Officer)
Cristian Ceppi Lewin............. Export Manager South Zone 36 12 2001
Thomas Domeyko Cassel............ Export Manager North Zone 36 9 2001
Jose Antonio Manasevich G........ Operations Manager 37 10 1996
Carlos Halaby R.................. Oenology Manager 50 13 1997
Daniel Duran Urizar.............. Technology and Information Manager 31 8 2001
43
The following provides biographical information about the executive officers of
the Company.
Eduardo Guilisasti Gana, Chief Executive Officer
Civil Engineer. Joined the Company in 1978 as Commercial Manager. Appointed CEO
in 1989. Under his leadership the Company initiated a broad vineyard and
cellar-oriented investment plan and expansion in the export markets. In the past
decade the market value of the Company has increased ten-fold. Other highlights
of this period include the Company's consolidation of a worldwide sales network
that includes 95 countries and the strengthening of the leadership position in
the sale of fine wines in each market segment. In addition, through the adoption
of viticulture research and technology, the winery has transformed into a leader
in the industry. He is a director of Vina Almaviva.
Goetz Von Gersdorff, Technical Director
Oenologist. Following his studies and practical experience in Germany and
oenology positions at two Chilean wineries, Goetz Von Gersdorff joined the
Company in 1962 as head oenologist. Throughout his long career, he has
participated in the creation of new premium and sparkling wines. He has been
Technical Director since 1993 and oversees the quality control of wines as well
as the technical progress and development of the Oenology Department.
Andres Larrain Santa Maria, Agricultural Manager
Agriculture Manager since 1978 and responsible for advancing new grape-types and
plantings as well as running of every vineyard. Directs a multidisciplinary team
including executives, technicians, administrative staff and skilled labor. He is
a director of Fruticola.
Carlos Saavedra Echeverria, Engineering and New Projects Manager
Began his career in charge of the Company's Imports Division in 1973. Appointed
head of the Supply, Maintenance and Haulage Department in 1974. Contributed to
the planning of the Pirque bottling plant. Appointed Production Manager in 1992.
In 1997, he was appointed Engineering and Projects Manager.
Osvaldo Solar Venegas, Chief Financial Officer
Commercial Engineer. Has been in charge of financial matters since 1992,
initially as Financial Manager and since September 1996, as Administration and
Financial Manager. Duties include managing and developing the financial
information, human resources, accounting and administrative divisions. He is a
director of Industria Corchera.
Cristian Ceppi Lewin, Export Manager South Zone
Commercial Engineer. Began his career at the Company as Product Manager for the
Fressco and Tocornal ranges. Assumed the position of Marketing Sub-Manager for
liqueurs and in 1992 became Marketing Sub-Manager for popular wines. Held the
position of Marketing Manager from 1994 to 1996. Commercial Manager until
assuming the position of General Manager at Comercial Peumo S.A. In December
2000, he was appointed Export Manager for the South Zone.
Thomas Domeyko Cassel, Export Manager North Zone
Commercial Engineer. Joined the Company in January 1994 as Deputy CFO. Appointed
International Business Manager in 1996. Moved to Mendoza, Argentina in 1997 as
General Manager of Vina Trivento. Appointed Export Manager for the North Zone in
December 2000.
Jose Antonio Manasevich, Operations Manager
Civil Engineer. Joined the Company as financial analyst in 1992. Became
Sub-Manager of Planning and Development before assuming the position of
Operations Sub-Manager. Operations Manager since 1996. Responsibilities include
the logistical processes of supply, bottling and client dispatch. He is a
director of Industria Corchera.
Daniel Duran, Information Technology Manager
Civil Engineer. Joined the Company in 1995 as planning and development projects
analyst. Sub-Manager of Logistics and Sub-Manager of Planning and Projects since
1998. Information Technology Manager since May 2001. Responsible for development
and implementation of technology solutions.
Carlos Halaby, Oenology Manager
Oenologist. Distinguished by the National Association of Winemaking Agronomy
Engineers in Chile for presenting the "Best Viticulture Dissertation of 1980,"
Carlos Halaby joined the Company in 1990. After a decade with the Company and
serving as head winemaker for fine wines until March 2000, he assumed the
position of Oenology Manager. Technical and administrative responsibility for
the Company's Oenology Area.
44
Director and Officer Compensation
In accordance with the Company's By-Laws, directors' compensation for
any given fiscal year is determined annually at the general shareholders'
meeting occurring in the immediately following fiscal year. Compensation paid in
2002 in respect of 2001 equaled 3.5% of the net profits of the Company.
The following table sets forth the compensation paid to each of the
directors of the Company in 2002.
Directors' Compensation Paid in 2002
Total
Compensation
------------
(in thousands of Ch$)
Attendance:
Alfonso Larrain Santa Maria...................... 66,144
Rafael Guilisastti Gana.......................... 66,144
Sergio Calvo Salas............................... 66,144
Mariano Fontecilla de Santiago Concha............ 66,144
Francisco Marin Estevez.......................... 66,144
Eduardo Morande Fernandez........................ 66,144
Albert Cussen Mackenna........................... 66,144
Remuneration:
Alfonso Larrain Santa Maria...................... 70,175
Remuneration Directors Committee:
Rafael Guilisastti Gana.......................... 571
Francisco Marin Estevez.......................... 652
Albert Cussen Mackenna........................... 734
Total..................................... 535,140
=======
In 2002, aggregate compensation paid by the Company to all directors
and executive officers of the Company and subsidiaries was approximately
Ch$1,970 million.
Board Practices
Members of the current Board of Directors were elected at the annual
general shareholders' meeting held on April 29, 2002, and will serve until April
2005, assuming no vacancies occur. The Company's executive officers are
appointed by the Board of Directors and hold office at the discretion of the
Board.
There are no service contracts between the directors of the Company and
the Company or any of its subsidiaries providing for benefits upon termination
of a director's employment.
In compliance with the current rules and regulations, a Directors'
Committee was established at the Company, on May 23, 2001. The Committee's
members are Albert Cussen Mackenna, Rafael Guilisasti Gana and chairman
Francisco Marin Estevez. Company attorney, Alfonso Canales Undurraga also took
part in Committee meetings in the capacity of secretary.
The Directors' Committee met eight times in 2002. The most important issues
discussed by the Committee involved:
o Assessment of the External Auditor's reports on the Company,
the balance sheet and other financial statements put forward
by management;
o The proposal of external auditors and credit risk rating
companies to be proposed to the shareholders;
45
o Examination of background information on business operations
conducted during the year relating to articles 44 and 89 of
the Corporations Law and, for the same purpose, review of the
auditor's report commissioned by the Committee;
o Examination of the system of compensation for managers and
senior management;
o Analysis of in-house control systems used at the Company,
including its affiliated companies.
o Report on activities proposed in the 2001 Letter to the
General Manager.
o Preliminary audit report for the fiscal year 2002.
o Contracting of specialists for the Board of Directors
Committee.
An annual budget for Committee operations of Ch$20 million was approved
at the Ordinary Shareholders' Meeting. During 2002, the Committee contracted the
services of independent consultants amounting to Ch$11,244 thousand.
The Company is subject to United States securities laws, including the
Sarbanes-Oxley Act of 2002, passed into law in 2002 to restore investor
confidence in the wake of several unprecedented corporate scandals and
collapses. The Sarbanes-Oxley Act's provisions are wide ranging and include
provisions affecting disclosures by public companies and corporate governance.
The integrity of management and auditors is at the heart of the
Sarbanes-Oxley Act. The Sarbanes-Oxley Act will eventually require listed
companies to have an audit committee composed of independent directors. It also
promotes auditor independence by prohibiting auditors from providing certain
non-audit services whilst conducting audits. The Company's existing oversight
and corporate governance practices, in many respects fully honor the spirit and
requirements of the Sarbanes-Oxley Act reforms. The Company has long had an
Audit Committee in place that it believes is independent and intends, as the
Sarbanes-Oxley Act requirements come into force, to maintain this independence.
Auditor independence has been strengthened with the adoption by the Company of
an Auditor independence policy.
The Company's Board of Directors is committed to implementing measures
that will promote investor confidence and market integrity. In response to the
Sarbanes-Oxley Act, the Company has formalized a methodology to ensure accuracy
and completeness of information disclosed to the market. The Company is
committed to complying with the laws and regulations applicable in all countries
in which the Company operates. Upon enactment of new laws and regulations
resulting from, or coming into force of the provisions of the Sarbanes-Oxley
Act, the Company will adjust its corporate governance structure in a way so as
to ascertain full compliance.
Employees
As of December 31, 2000, 2001 and 2002, the Company had 1,490, 1,495
and 1,483 employees, respectively. Of the work force at December, 2002, 579 were
laborers and 904 held administrative and sales positions. The Company also hires
temporary workers during the harvesting season, which in 2002 averaged 997
temporary workers.
Eleven labor unions represent an aggregate of approximately 433 of the
Company's employees (approximately 78 administrative employees, 46 sales
employees, and 309 plant employees). Labor relations with unionized personnel
are governed by collective bargaining agreements negotiated in 2001 that expire
in 2004, 2008 and 2009. During 2001, the Company negotiated collective
bargaining agreements with three of the labor unions. During 2002, the
collective union contract with Comercial Peumo expired but it was renewed until
June 30, 2003. The Company believes that it currently has a good working
relationship with its labor unions; however, the Company is unable to predict
the outcome of any future negotiations with such labor unions.
In certain circumstances, the Company pays severance benefits
equivalent to five labor days for each year of services rendered by the
employee. The Company has agreed with 2 labor unions (representing 122 of its
workers) to pay such severance benefits to their members in all circumstances.
Additionally, the Company has agreed with the 18 employees covered by one
collective bargaining agreement to pay the equivalent of one month's salary for
each year of service. Under Chilean law, all employees who are terminated for
reasons other than misconduct are entitled to the basic payment of one month's
salary for each year worked, or six-month portion thereof, subject to a limit of
11 months' severance pay for employees hired after August 4, 1981. Severance
payments to employees hired before August 14, 1981 are not subject to this
limit.
46
The Company does not maintain any pension or retirement programs for
its employees. Workers in Chile are covered by a national pension law which
establishes a system of independent pension plans administered by the
Administradoras de Fondos de Pensiones ("Pension Fund Administrators"). The
Company has no liability for the performance of the pension plans or any pension
payments to be made to the employees in Chile.
All employees, including management, are entitled to a discount of 30%
off the retail price on wine purchases from Company-owned facilities. Each
employee may buy no more than 2 cases per month.
All of the Company's administrative employees participate, directly or
indirectly, in an annual bonus pool equal to 4.0% of net profits in proportion
to their salary. Executive officers and assistant managers share, directly or
indirectly, in an additional pool whereby each executive officer and manager
receives 0.1% and 0.038% of net profits, respectively.
47
Share Ownership
The following table reflects the number of shares owned indirectly by
the directors and executive officers and their percentage ownership of the
Company at June 17, 2003. Executive officers not listed do not own Shares.
Share Ownership of Directors and Senior Management(1)
No. of Shares % of Total
Owned Subscribed Shares(2)
------------- --------------------
Eduardo Guilisasti Gana(3)............................... 166,617,323 23.2%
Rafael Guilisasti Gana(3)................................ 165,354,969 23.0%
Alfonso Larrain Santa Maria(4)........................... 74,338,721 10.3%
Francisco Marin Estevez(5)............................... 63,952,556 8.9%
Mariano Fontecilla de Santiago Concha(6)................. 26,822,245 3.7%
Sergio Calvo Salas(7).................................... 18,503,632 2.6%
Eduardo Morande Fernandez(8)............................. 14,455,303 2.0%
Goetz Von Gersdorff(10).................................. 134,478 -(9)
Osvaldo Solar Venegas(11)................................ 32,868 -(9)
Albert Cussen Mackenna................................... 1,100 -(9)
Directors and Executive Officers in the aggregate........ 367,715,654 51.1%
- ------------------------------
(1) Calculated on the basis of 719,170,735 outstanding shares on June 17,
2003.
(2) Shares held indirectly through investment companies and not
individually owned.
(3) Eduardo Guilisasti Gana, Rafael Guilisasti Gana, Jose Guilisasti Gana
and Pablo Guilisasti Gana (collectively, the "Family Principal
Shareholders") are the sons of Mr. Eduardo Guilisasti Tagle, the former
Chairman of the Company. Mr. Eduardo Guilisasti Tagle died on August
20, 1998. The shares attributed to each Family Principal Shareholder
include 80,888,538 and 81,609,003 shares held by Inversiones Totihue
S.A. ("Totihue") and Rentas Santa Barbara S.A. ("Santa Barbara"),
respectively, as well as shares held directly or indirectly by members
of such Family Principal Shareholder's immediate family and affiliated
entities. Totihue and Santa Barbara are controlled by the Family
Principal Shareholders pursuant to powers of attorney granted by the
board of directors of Totihue and Santa Barbara. Each power of attorney
grants any two Family Principal Shareholders, acting together, the
power to, among others, vote or direct the voting of, or dispose or
direct the disposition of, the shares held by Totihue or Santa Barbara,
as the case may be. Mr. Eduardo Guilisasti Gana is the Company's
General Manager and Mr. Rafael Guilisasti Gana is the Company's Vice
Chairman. The address for Mr. Eduardo Guilisasti Gana and Mr. Rafael
Guilisasti Gana is c/o Vina Concha y Toro S.A., Casilla 213, Avenida
Nueva Tajamar 481, Torre Norte, Piso 15, Santiago, Chile. The other
Family Principal Shareholders, Messrs. Jose Guilisasti Gana and Pablo
Guilisasti Gana, are neither directors nor executive officers of the
Company. The address for Messrs. Jose Guilisasti Gana and Pablo
Guilisasti Gana is c/o Fruticola Viconto S.A., Barros Errazuriz 1968,
Piso 10, Providencia, Santiago, Chile.
(4) Mr. Alfonso Larrain Santa Maria is the Company's Chairman of the Board.
The number of shares attributed to Mr. Larrain includes 124,592 shares
held by his brother, Andres Larrain Santa Maria, shares held by other
members of his family and affiliated entities, and also includes
29,954,278 shares held by Fundacion Cultura Nacional ("Cultura
Nacional"). Cultura Nacional is a Chilean non-profit institution which
primarily funds grade school religious education. Mr. Alfonso Larrain
Santa Maria is the Chairman of Cultura Nacional. Mr. Larrain's address
is c/o Vina Concha y Toro S.A., Casilla 213, Avenida Nueva Tajamar 481,
Torre Norte, Piso 15, Santiago, Chile.
(5) Mr. Francisco Marin Estevez is a director of the Company. The number of
shares attributed to Mr. Marin includes shares owned by members of his
family and affiliated entities. Mr. Marin's address is c/o Vina Concha
y Toro S.A., Casilla 213, Avenida Nueva Tajamar 481, Torre Norte, Piso
15, Santiago, Chile.
(6) Mr. Mariano Fontecilla de Santiago Concha is a director of the Company.
The number of shares attributed to Mr. Fontecilla includes shares owned
by members of his family and affiliated entities. Mr. Fontecilla's
address is c/o Vina Concha y Toro S.A., Casilla 213, Avenida Nueva
Tajamar 481, Torre Norte, Piso 15, Santiago, Chile.
(7) Mr. Sergio Calvo Salas is a director of the Company. The number of
shares attributed to Mr. Calvo includes shares owned by members of his
family and affiliated entities. Mr. Calvo's address is c/o Vina Concha
y Toro S.A., Casilla 213, Avenida Nueva Tajamar 481, Torre Norte, Piso
15, Santiago, Chile.
(8) Mr. Eduardo Morande Fernandez is a director of the Company. The number
of shares attributed to Mr. Morande includes shares owned by members of
his family and affiliated entities. Mr. Morande's address is c/o Vina
Concha y Toro S.A., Casilla 213, Avenida Nueva Tajamar 481, Torre
Norte, Piso 15, Santiago, Chile.
(9) Less than 1%.
(10) Mr. Goetz Von Gersdorff is the Company's technical director. The number
of shares attributed to Mr. Von Gersdorff includes shares owned by
members of his family and affiliated entities. Mr. Von Gersdorff's
address is c/o Vina Concha y Toro S.A., Casilla 213, Avenida Nueva
Tajamar 481, Torre Norte, Piso 15, Santiago, Chile.
(11) Mr. Osvaldo Solar Venegas is the Company's Administration and Finance
Manager. Mr. Solar's address is c/o Vina Concha y Toro S.A., Casilla
213, Avenida Nueva Tajamar 481, Torre Norte, Piso 15, Santiago, Chile.
48
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The Company's only outstanding voting securities are the shares of its
Common Stock. According to the Company's shareholder records, the Company's
719,170,735 shares of Common Stock outstanding were held by 861 shareholders of
record as of June 17, 2003. There are no differences in the voting rights of the
shareholders.
The principal shareholders of the Company are Rentas Santa Barbara S.A.
("Santa Barbara"), Inversiones Totihue S.A. ("Totihue"), the Bank of New York
(according to Circular 1375 issued by the S.V.S. on February 12, 1998,
hereinafter "Circular 1375 S.V.S.," which states that the Depositary shall be
the shareholder of record of the shares underlying the ADS), AFP Provida S.A.,
AFP Habitat S.A., Fundacion Cultura Nacional ("Cultura Nacional"), Compania de
Inversiones el Milagro ("El Milagro"), Constructora Santa Marta Ltda. ("Santa
Marta"), AFP Santa Maria S.A., AFP Cuprum S.A., AFP Summa Bansander S.A.,
Inversiones Quivolgo S.A. ("Quivolgo"), La Gloria S.A. ("La Gloria"), Foger Soc.
Gestion Patrimonial Ltda. and Inversiones El Maiten S.A. ("El Maiten").
Santa Barbara and Totihue are investment companies controlled by
Eduardo Guilisasti Gana, Rafael Guilisasti Gana, Jose Guilisasti Gana and Pablo
Guilisasti Gana (collectively, the "Family Principal Shareholders"). El Milagro,
Santa Marta, La Gloria, Quivolgo, Foger Soc. Gestion Patrimonial Ltda. and El
Maiten are investment companies controlled by directors of the Company. All of
the principal shareholders, with the exception of The Bank of New York
(according to Circular 1375 S.V.S.) and the AFPs (Administradoras de Fondos de
Pensiones, or "Pension Funds") are companies controlled by the directors or
executive officers of the Company.
For information concerning the beneficial ownership in shares of Common
Stock of the Family Principal Shareholders and other Directors and Executive
Officers of the Company, see Item 6 -- "Directors, Senior Management and
Employees--Share Ownership."
49
The following table sets forth certain information concerning direct
ownership of the Company's Common Stock with respect to the principal holders of
the outstanding subscribed shares of Common Stock.
Direct Share Ownership of Principal Shareholders
As of December 31st,
----------------------------------------------------
2001 2002 As of June 17, 2003
------------------------ ------------------------- ----------------------------
No. of % of Total No. of % of Total No. of % of Total
Shares Subscribed Shares Subscribed Shares Subscribed
Principal Shareholders Owned Shares Owned Shares Owned Shares
- ---------------------- ----------- ---------- ----------- ---------- ----------- ----------
Rentas Santa Barbara S.A.(2) 79,321,165 11.03% 81,609,003 11.35% 81,609,003 11.35%
Inversiones Totihue S.A.(2) 78,820,186 10.96% 80,888,538 11.25% 80,888,538 11.25%
The Bank of New York(1) 102,217,500 14.21% 66,600,100 9.26% 60,646,600 8.43%
AFP Provida S.A.(3) 38,514,932 5.36% 42,026,137 5.84% 45,901,991 6.38%
AFP Habitat S.A.(3) 32,808,877 4.56% 36,177,216 5.03% 44,863,295 6.24%
Fundacion Cultura Nacional(4) 35,000,000 4.87% 35,000,000 4.87% 29,954,278 4.17%
Cia. De Inversiones El Milagro(5) 22,490,664 3.13% 24,041,608 3.34% 24,041,608 3.34%
Constructora Santa Marta Ltda.(6) 21,457,885 2.98% 21,457,885 2.98% 21,457,885 2.98%
AFP Santa Maria S.A.(3) 15,358,108 2.14% 17,241,884 2.40% 20,599,808 2.86%
AFP Cuprum S.A.(3) 18,277,201 2.54% 21,765,956 3.03% 20,509,376 2.85%
AFP Summa Bansander S.A.(3) 13,159,070 1.83% 21,665,344 3.01% 18,866,912 2.62%
Inversiones Quivolgo S.A.(7) 14,522,723 2.02% 17,596,855 2.45% 17,607,858 2.45%
La Gloria S.A.(7) 14,900,000 2.07% 15,405,000 2.14% 15,405,000 2.14%
Foger Soc. Gestion Patrimonial
Ltda.(6). 12,352,442 1.72% 13,896,263 1.93% 13,896,263 1.93%
Inversiones El Maiten S.A.(8) 12,575,736 1.75% 12,952,466 1.80% 13,094,621 1.82%
Total Largest 15 Shareholders 511,776,489 71.16% 508,324,255 70.68% 509,343,036 70.82%
Other Shareholders 207,394,246 28.84% 210,846,480 29.32% 209,827,699 29.18%
Total 719,170,735 100.00% 719,170,735 100.00% 719,170,735 100.00%
- ---------------------------------
(1) Depositary Bank for the ADS.
(2) Investment Company controlled by the Guilisasti Family ("Family Principal
Shareholders").
(3) Chilean Pension Fund.
(4) Cultura Nacional is a Chilean non profit institution. Shares are attributed
to Mr. Alfonso Larrain, its Chairman.
(5) Investment Company controlled by Mr. Mariano Fontecilla de Santiago Concha.
(6) Investment Company controlled by Mr. Francisco Marin Estevez.
(7) Investment Company controlled by Mr. Alfonso Larrain Santa Maria.
(8) Investment Company controlled by Mr. Sergio Calvo Salas.
In August 1999, members of the Guilisasti family and other affiliated
parties entered into a Shareholders' Agreement relating to, among others, the
transfer and voting of Common Stock. An English translation of such
Shareholders' Agreement is filed as Exhibit 3.4 to this Annual Report.
Pursuant to the Shareholders' Agreement, each party that is a holder of
Common Stock agreed to provide to Totihue and Santa Barbara the right to
purchase all or part of any shares the selling shareholder wishes to sell from
time to time. In addition, both Santa Barbara and Totihue agreed to provide to
one another rights to purchase all or part of any Common Stock it wishes to sell
from time to time. Santa Barbara and Totihue will have 30 days from the date of
receipt of notice of the proposed sale to accept the offer (in whole or in part)
to purchase the selling shareholder's Common Stock subject to the proposed sale.
The preferential purchase rights of Santa Barbara and Totihue described
above are applicable in the case of transfer of subscription rights of
shareholders party to the Shareholders' Agreement resulting from a capital
increase, as well as in the case of issuance of capital stock in the event of a
merger or split-off. The preferential purchase rights of Santa Barbara and
Totihue are not applicable to a transfer of Common Stock to certain persons,
including subsidiaries in which the transferor controls 75% or more of such
subsidiary's capital stock, and direct ascendants and descendants of such
transferor.
The Shareholders' Agreement is of indefinite duration and may be
modified or terminated pursuant to a written agreement signed by the
shareholders party to the Shareholders' Agreement holding no less than 75% of
the Common Stock subject to the Shareholders' Agreement.
50
According to information made available to the Company, at June 17,
2003, there were a total of 1,212,932 ADS outstanding representing 60,646,600 or
8.43% of the total shares of Common Stock of the Company at such date.
Related Party Transactions
In the ordinary course of its business, the Company engages in
transactions with its affiliates. In addition, the Company has engaged in
transactions with directors and executive officers of the Company. The principal
transactions with such related parties during the last three fiscal years are as
follows:
Santa Emiliana. Santa Emiliana is a Chilean corporation (sociedad
anonima abierta) which produces wines for export and domestic markets and is
listed in the Chilean Exchanges. Santa Emiliana was originally a subsidiary of
the Company until 1986 when the Company distributed shares of Santa Emiliana to
the Company's then existing shareholders. Although Santa Emiliana is a separate
corporation, the Company and Santa Emiliana remain under common control. Certain
of the principal shareholders of the Company own directly and indirectly
approximately 58.3% of Santa Emiliana's outstanding capital stock and,
additionally, the Company and Santa Emiliana have other common shareholders.
Santa Emiliana's seven member Board of Directors includes three of the Company's
seven directors (Alfonso Larrain Santa Maria, Mariano Fontecilla de Santiago
Concha and Sergio Calvo Salas). Santa Emiliana and the Company have various
business dealings, the most significant of which are described below.
The Company has a license from Santa Emiliana to use Santa Emiliana's
brand name in Chile. The Company bottles (or packages in Tetra Brik containers)
and sells in Chile for its own account a portion of its varietal wine production
under Santa Emiliana's labels. The Company pays licensing fees to Santa Emiliana
for the use of its labels. Licensing fees are based on the Company's gross
revenues from sales of wines under Santa Emiliana's labels.
Santa Emiliana does not have its own bottling facilities. Pursuant to a
contract with Santa Emiliana, the Company bottles wine produced by Santa
Emiliana. This wine is sold by Santa Emiliana in export markets for its own
account under Santa Emiliana's labels. The Company receives a per bottle fee for
bottling services provided to Santa Emiliana. This fee is for the same amount as
the Company would charge to an unrelated wine producer for bottling services.
With the Company's consent, Banfi, the Company's exclusive distributor in the
United States, also acts as the exclusive distributor for Santa Emiliana's wines
in the United States. In April 2003, the Board approved the subscription of a
new bottling contract between Concha y Toro and Santa Emiliana for an estimated
amount of Ch$4,700 million for the first year. This operation, according to the
Directors' Committee reflects market conditions.
With the Company's consent, Banfi, the Company's exclusive distributor
in the United States, also acts as the exclusive distributor for Santa
Emiliana's wines in the United States.
In 2002, the Company recognized Ch$3,840 million in revenues from Santa
Emiliana, or 3.0% of total revenues, including mainly revenues from sales in
bottling fees and administrative services. In 2002, the Company paid Santa
Emiliana Ch$378 million in licensing fees. The Company recognized revenues from
Santa Emiliana of Ch$3,886 million in 2001 and Ch$3,905 million in 2000. The
Company paid Santa Emiliana Ch$512 million in 2001 and Ch$529 million in 2000 in
licensing fees.
From time to time, the Company engages in other transactions with Santa
Emiliana, including purchases of wine in bulk at market prices, grapes and other
raw materials. In 2002, 2001 and 2000 total purchases from Santa Emiliana
totaled Ch$699 million, Ch$976 million and Ch$2,091 million, respectively.
Fruticola. Fruticola is the Company's principal customer for fruit. In
2002, 2001, and 2000, the Company sold Ch$392 million, Ch$301 million and Ch$383
million, respectively, of fruit to Fruticola for export. In addition, Fruticola
rents a floor from the Company in Santiago at market rates. The Company also
purchases grapes from Fruticola for vinification. In 2002, 2001 and 2000, the
Company purchased Ch$211 million, Ch$186 million and Ch$317 million of grapes
from Fruticola, respectively. Fruticola is a Chilean corporation (sociedad
anonima abierta) listed on the Chilean Exchanges. Fruticola was formerly a
subsidiary of the Company until 1986 when the Company distributed Fruticola
shares to the Company's then existing shareholders.
51
The Company and Fruticola are under common control. One of the
Company's seven directors is a member of Fruticola's seven-member Board of
Directors (Rafael Guilisasti Gana). Mr. Andres Larrain Santa Maria, the
Company's Agricultural Manager, and Mr. Felipe Larrain Vial, son of the
Company's Chairman, are also directors of Fruticola. Certain Principal
Shareholders directly and indirectly own approximately 53% of the outstanding
common stock of Fruticola.
Industria Corchera. In November of 2000, the Company acquired 49.6% of
the capital stock of Industria Corchera through a direct purchase of shares from
Quivolgo, Totihue and two investment companies controlled by a director of the
Company. Based on a prior economic valuation of Industria Corchera by
PriceWaterhouse, the Company invested a total of US$6 million. The purchase
price will be paid in five annual installments with the last installment due in
2005. The liability is expressed in U.S. dollars and accrues interest at an
annual interest rate of Libor - 1%. In November 2002, with the acquisition of
4,818 shares, representing 0.24% of the capital stock of Industria Corchera, the
Company increased its ownership in Industria Conchera to 49.84%.
Industria Corchera is the primary cork supplier for the Company. The
Company purchased Ch$4,992 million, Ch$3,600 million and Ch$3,646 million of
cork and other raw material from Industria in 2002, 2001 and 2000, respectively.
The Company believes that the price and terms it receives from Industria
Corchera are equivalent to those available from its other cork suppliers. The
Company and Industria Corchera have one director in common, Mr. Eduardo Morande
Fernandez. Mr. Osvaldo Solar Venegas, the Company's CFO, is a director of
Industria Corchera.
Vina Almaviva. Vina Almaviva is a 50-50% joint venture company between
the Company and Baron Philippe de Rothschild. The Company purchases from
Almaviva used French oak barrels (used during one aging season) and the Almaviva
wine that is sold in Chile through Distribuidora Peumo. Total purchases from
Almaviva in 2002, 2001, and 2000 were Ch$252 million, Ch$111 million and Ch$135
million, respectively. In addition, the Company sells to Almaviva raw materials
and services. Sales to Almaviva totaled in 2002, 2001, and 2000, Ch$302 million,
Ch$239 million and Ch$176 million, respectively. In 2001, the Company sold a
piece of land to Vina Almaviva. The price was Ch$1,074 million and was paid in
cash at the date of the transaction.
Transactions with Directors and Executive Officers. The Company
purchases small quantities of grapes, plants and other services from entities in
which several of its directors, executive officers or members of their families
have interests. In 2002, 2001, and 2000, the Company purchased an aggregate of
approximately Ch$464 million, Ch$649 million and Ch$598 million, respectively,
of such goods and services from such entities.
Other. Article 89 of the Chilean Corporation Law requires that the
Company's transactions with related parties be on a market basis or on terms
similar to those customarily prevailing in the market. Directors and executive
officers of companies that violate Article 89 are liable for losses resulting
from such violation. In addition, Article 44 of the Chilean Corporation Law
provides that any transaction in which a director has a personal interest or is
acting on behalf of a third party may be approved only when the board of
directors has been informed of such director's interest and the terms of such
transactions are similar to those prevailing in the market. Chilean law requires
that an interested director abstain from voting on such a transaction. See "Item
10 -- Directors" for further information relating to conflict of interest
transactions. Resolutions approving such transactions must be reported to the
Company's shareholders at the next shareholder's meeting. Violation of Article
44 may result in administrative or criminal sanctions and civil liability to the
Company and shareholders or interested third parties who suffer losses as a
result of such violation. The Company believes that it has complied with the
requirements of Article 89 and Article 44 in all transactions with related
parties during fiscal year 2002.
For additional information concerning the Company's transactions with affiliates
and other related parties, see Note 6 to the Consolidated Financial Statements.
ITEM 8: FINANCIAL INFORMATION
See Item 18 -- "Financial Statements" and the financial statements
referred to therein for consolidated financial statements and other financial
information. For information on legal or arbitration proceedings, See Item 10 --
"Additional Information -- Legal Proceedings and Arbitration." For a discussion
on the Company's policy on dividend distributions, See Item 10 -- "Additional
Information -- Policy on Dividend Distributions." For information regarding the
total amount of export sales and the percent and amount of export sales in the
total amount of sales, See Item 5 -- "Operating and Financial Review and
Prospects- Operating Results."
52
ITEM 9: THE OFFER AND LISTING
Prior to the offerings of the ADS and the shares of Common Stock in
October 1994, there was no public market for such securities in the United
States. The Common Stock is currently traded on the Chilean Exchanges. In 2002,
trading on the Santiago Stock Exchange accounted for approximately 60% of the
trading volume of the Common Stock. The ADS are listed on the New York Stock
Exchange and trade under the symbol "VCO."
The tables below show, for the periods indicated, high and low closing
sale prices of a share of Common Stock in nominal Chilean pesos and the
quarterly shares trading volume of the Common Stock on the Santiago Stock
Exchange. The U.S. dollar figures reflect, for the periods indicated, actual
high and low closing prices for the ADS on the New York Stock Exchange in the
United States. The ADS may or may not actually trade at 50 times the price per
share. See Item 3 -- "Key Information -- Exchange Rates" for the exchange rates
applicable during the periods set forth below. The following information is not
restated in constant Chilean pesos.
Annual High and Low Closing Sale Prices
Chilean Pesos U.S. Dollars Per
Per Shares(2) ADS(3)
----------------- ------------------
Year Ended December High Low High Low
- ------------------- ----- ----- ----- -----
1998 305.0 190.0 35.88 18.50
1999 420.0 220.0 39.94 23.63
2000 452.0 370.0 43.50 35.00
2001 650.0 470.0 48.10 35.00
2002 500.0 410.0 38.30 28.05
Quarterly High and Low Closing Sale Prices
Chilean Pesos U.S. Dollars Per
Per Shares(2) ADS(3)
---------------- -----------------
Share
Year Quarter Volume(ooo)(1) High Low High Low
- ---- ----------- ----------- ----- ----- ----- ------
2000
1st Quarter 17,150.82 452.0 370.0 43.50 36.88
2nd Quarter 7,233.79 410.0 380.0 40.06 35.94
3rd Quarter 14,992.94 430.0 375.0 38.19 35.00
4th Quarter 7,658.36 445.0 410.0 39.13 36.25
2001
1st Quarter 5,215.19 530.0 435.0 45.00 38.13
2nd Quarter 2,776.29 583.5 480.0 48.10 39.75
3rd Quarter 5,981.01 650.0 550.0 47.05 40.50
4th Quarter 5,290.55 573.0 470.0 42.13 35.00
2002
1st Quarter 5,465.28 500.0 410.0 38.30 30.91
2nd Quarter 14,878.88 483.0 438.0 36.15 32.85
3rd Quarter 20,344.59 475.7 420.0 33.05 28.05
4th Quarter 11,691.66 494.0 425.0 31.92 28.45
2003
1st Quarter 7,412.88 500.0 475.0 34.40 31.65
53
Monthly High and Low Closing Sale Prices
Chilean Pesos U.S. Dollars Per
Per Shares(2) ADS(3)
---------------- ----------------
Share
Month Ended Volume (ooo)(1) High Low High Low
------------- ------------ ----- ----- ----- -----
December 2002 3,840.48 494.0 445.0 34.60 31.45
January 2003 2,700.56 496.0 480.0 34.40 32.70
February 2003 2,272.46 500.0 485.0 34.30 31.97
March 2003 2,439.84 485.0 475.0 33.18 31.65
April 2003 3,176.35 550.0 482.0 39.50 33.05
May 2003 6,190.35 600.0 525.0 42.95 37.01
- ---------------------------
(1) Source: Santiago Stock Exchange.
(2) Source: Santiago Stock Exchange. Chilean pesos per Share reflect nominal
price at trade date.
(3) Source: Monthly Report-The Bank of New York. Reflects actual high/low
closing prices.
According to the Company's records, as of June 17, 2003, there were 861 holders
of record of the Common Stock. Only the Depositary, as shareholder of record for
the shares underlying the ADS (according to Circular 1375 S.V.S.), has an
address in the United States.
ITEM 10: ADDITIONAL INFORMATION
Legal and Arbitration Proceedings
The Company is not involved in any litigation or arbitration
proceedings which, if determined adversely to the Company, individually or in
the aggregate, would have a material adverse effect on the Company and its
subsidiaries taken as a whole, nor to the Company's knowledge, are any such
proceedings threatened.
Estatutos (By-Laws)
The following is a summary of certain information regarding the
Company's By-Laws and provisions of Chilean law. This summary is not complete.
For a complete overview of the provisions of the By-Laws discussed in this
summary, you are encouraged to read the Company's By-Laws, filed as Exhibit 1.1
to this Annual Report.
Registration and corporate purposes. The Company is a corporation
(sociedad anonima abierta) organized by means of a public deed (escritura
publica) dated December 31, 1921, the abstract of which was recorded on Page
1051, Number 875, of Santiago's Registry of Commerce in 1922 and published in
Chile's Official Gazette on November 6, 1922. Its existence was approved by a
Supreme Decree Number 1556, dated October 18, 1922. After corporate amendments
were made, the Company's public deed was recorded on Page 15,664, Number 12,447
of Santiago's Registry of Commerce in 1999 and recorded at Chile's Securities
Registry of the Superintendency of Securities under No. 0043 on June, 14, 1982.
As set forth in Article 2 of the Company's By-Laws, the purposes of the Company
are: the operation and marketing of the wine-making industry in all its forms
and all its distinct phases, whether with its own stock or stock purchased from
third parties; the operation of agricultural real estate owed by the Company or
leased from third parties; and the carrying out of real estate investments
including acquiring, transferring and constructing real estate, either with its
own personnel or through third parties.
Directors. Under the Chilean Corporation Law, a corporation may not
enter into a contract or agreement in which a director has a direct or indirect
interest (a conflicting interest transaction) without prior approval by the
Board of Directors, and only if the terms of the conflicting interest
transaction are similar to those of an arm's length transaction.
If the conflicting interest transaction involves a "material amount,"
the Board of Directors is required to produce a statement declaring in advance
that the conflicting interest transaction is similar in its terms to an arm's
length transaction. A conflicting interest transaction is deemed to involve a
"material amount" if the amount involved is both greater than 2,000 Unidades de
Fomento (as of June 17, 2003, approximately US$47,850) and exceeds 1% of the
assets of the corporation, or if the amount exceeds 20,000 Unidades de Fomento
(as of June 17, 2003, approximately US$478,500) regardless of the size of the
54
transaction. If the Board of Directors believes that it is not possible to
ascertain whether the conflicting interest transaction is similar to an arm's
length transaction, it may reject the conflicting interest transaction, or
appoint independent advisors to make such a determination. If the Board appoints
independent advisors, the report prepared by the advisors must be made available
to the shareholders and the Board of Directors for 20 business days from the
date the report was received from the independent advisors.
The shareholders will be notified in writing of the receipt of the
report. After this period the Board may approve or reject the subject
transaction, but the Board is not required to follow the independent advisors'
conclusion. The Board may treat the conflicting interest transaction and the
report as confidential information. Shareholders representing at least 5% of the
voting shares of the Company may request the Board to call a shareholders'
meeting in order to approve or reject the conflicting interest transaction by a
two-thirds majority of the outstanding voting shares.
Interested directors are excluded from all decisions of the Board
relating to the conflicting interest transaction. All decisions adopted by the
Board in respect of the conflicting interest transaction must be reported in the
following shareholders' meeting. The controller of the corporation or the
related party who intends to enter into the conflicting interest transaction
shall make available to the Board of Directors, at the time the transaction is
being considered by the Board, all information relating to the transaction filed
with any non-Chilean regulatory entities or stock exchanges. If a suit for
damages arises from such a transaction, the defendant (i.e., one or more
directors, the controller, a related party, or all of the foregoing) bears the
burden of proof that the transaction was on terms equally or more beneficial to
the corporation than an arm's length transaction, unless the conflicting
interest transaction had been previously approved by the shareholders.
The amount of any director's remuneration is established each year at
the annual shareholders' meeting. Directors are not entitled to vote on any
proposal relating to compensation for themselves or any member of the Board.
Directors are forbidden from borrowing or otherwise making use of
corporate money or assets for their own benefit, unless previously authorized by
the Board of Directors. Directors are also prohibited from borrowing or
otherwise making use of corporate money or assets for the benefit of companies
in which such directors are either directors or owners of a 10% interest or
more, unless previously authorized by the Board of Directors. Directors who
receive such loans are excluded from voting on that matter. However,
shareholders' authorization is not required if authorized by the Board of
Directors. These rules can only be modified by law.
It is not necessary to hold shares of the Company to be elected a
director, and there is no age limit established for the retirement of directors.
Rights, preferences and restrictions regarding shares. At least thirty
percent of the Company's annual net income calculated in accordance with Chilean
GAAP is required to be distributed in cash to the shareholders, unless the
shareholders unanimously decide otherwise. Any remaining profits may be used to
establish a reserve fund (that may be capitalized at any time, amending the
corporate By-Laws, by the vote of a majority of the voting stock issued), or to
pay future dividends.
Compulsory minimum dividends become due thirty days after the date on
which the shareholders meeting has approved the distribution of profits for that
fiscal year. Any additional dividends approved by the shareholders become due on
the date set by the shareholders or the Board of Directors.
Dividends are to be paid quarterly and whenever the corporate treasury
has accumulated sufficient funds to pay shareholders the equivalent of at least
5% of the book value of their stock. Accrued dividends that corporations fail to
pay or make available to their shareholders within certain periods are to be
adjusted from the date on which those dividends became due and that of actual
payment. Overdue dividends will accrue annual interest established for
adjustable operations over the same period.
Dividends and other cash benefits unclaimed by shareholders after five
years from the date on which they became due will become the property of the
Chilean Fire Department.
55
The Company has only one class of shares and, therefore, there are no
preferences or limitations on the voting rights of shareholders. Each
shareholder is entitled to one vote per share. In shareholders' meetings,
determinations are generally made by a simple majority of shareholders entitled
to vote. However, the Chilean Corporation Law provides that certain
determinations require the vote of a two-thirds majority of the voting stock
issued.
The Company's directors are elected every three years and their terms
are not staggered. Chilean law does not permit cumulative voting. However,
shareholders may accumulate their votes in favor of just one person or
distribute their votes to more than one person. In addition, by unanimous
agreement of the shareholders present and entitled to vote, the vote may be
omitted and the election made by acclamation.
In the event of liquidation, the Chilean Corporation Law provides that
corporations may carry out distributions to shareholders on account of a
reimbursement of capital only after the payment of corporate indebtedness.
There are no redemption or sinking fund provisions applicable to the
Company, nor are there any liabilities to shareholders relating to future
capital calls by the corporation.
Under Chilean law, certain provisions affect an existing or prospective
holder of securities as a result of the shareholder owning a substantial number
of shares. The Securities Market Law establishes that (a) any person who,
directly or indirectly, (i) owns 10% or more of the subscribed capital of a
corporation (the "majority shareholders") whose shares are registered in the
Securities Registry of the Superintendency of Securities, or (ii) owns any such
percentage because of the purchase of shares; and (b) all directors, the chief
executive officer and the other principal officers of any corporation whose
shares are registered with the Superintendency of Securities, regardless of the
number of shares they own, must report any purchase or sale of shares made by
such persons or entities within two business days of such transactions to the
Superintendency of Securities and to each of the stock exchanges in Chile where
such corporation has securities registered. In addition, majority shareholders
must inform the Superintendency of Securities and the stock exchanges with
respect to whether the purchase is aimed at acquiring control of the corporation
or merely a financial investment.
The Securities Market Law also provides that when one or more persons
intend to take over a corporation subject to oversight by the Superintendency of
Securities, they must give prior public notice. This notice must include the
price to be offered per share and the conditions of the proposed transaction,
including the expected manner of acquiring the shares.
Chapter XXV of the Securities Market Law was recently enacted in order
that controlling shareholders share with minority shareholders the benefits of a
change of control, by requiring that certain share acquisitions be made pursuant
to a tender offer.
The Chilean Corporation Law provides shareholders with preemptive
rights. The Act requires that options to purchase stock representing capital
increases in corporations and debentures duly convertible into stock of the
issuing corporation, or any other securities extending future rights over such
stock, must be offered, at least once, to existing shareholders, proportionally
to the number of shares owned by them. A corporation must distribute any bonus
stock in the same manner.
The Chilean Corporation Law also provides shareholders with a right to
withdraw from a corporation in certain situations. Unless there is an ongoing
bankruptcy proceeding, if a shareholders' meeting approves any of the following
matters, dissenting shareholders will be automatically entitled to withdraw from
the corporation upon payment by the corporation of the market value of their
shares:
a) conversion of the corporation into a different type of legal
entity;
b) merger of the corporation;
c) disposition of 50% or more of the assets of the corporation,
whether or not including the
d) disposition of liabilities;
56
e) guarantee of a third party's liabilities with collateral exceeding
50% of the corporation's assets;
f) establishment of preferences in connection with a series of shares,
or any other modification of existing preferences, in which case
only dissenting shareholders in the affected series will have the
right to withdraw; and curing certain errors or defects affecting
the corporate charter, or amending the By-Laws in respect of one or
more of the matters listed above.
In addition, shareholders may withdraw if a person becomes the owner of
two-thirds of the outstanding shares of the corporation as a consequence of a
share acquisition and such person does not make a tender offer for the remaining
shares within 30 days.
The Company's By-Laws do not provide for additional circumstances under
which shareholders may withdraw.
Action necessary to change the rights of holders of stock. Rights of
shareholders are established by law and pursuant to the By-Laws of a
corporation. Any change to the rights of shareholders must be adopted by a
majority of shareholders or, in some cases, by a two-thirds majority vote, as
discussed above. However, the amendment of certain rights requires a unanimous
vote of the shareholders, including the right of shareholders to receive at
least 30% of the net profits for each fiscal year. Notwithstanding the
foregoing, no decision of the shareholders can deprive a shareholder from his
proprietary interest in its stock.
The Company's By-Laws do not provide for additional conditions in
connection with matters described in this subsection.
Shareholders' meetings. Annual shareholders' meetings are to be held
during the months of January, February, March or April of each year. During the
meetings, determinations are made relating to particular matters, which may or
may not be specifically indicated in the notice of such meeting. The quorum for
a shareholders' meeting is established by the presence, in person or by proxy,
of shareholders representing at least an absolute majority (50% plus one) of the
issued voting stock of the Company; if a quorum is not present at the first
meeting, the meeting can be reconvened and upon the meeting being reconvened,
shareholders present at the reconvened meeting are deemed to constitute a quorum
regardless of the percentage of the voting stock represented. In that case,
decisions will be made by the absolute majority of stock with voting rights
present or otherwise represented. The following matters are specifically
reserved for annual meetings:
a) review of the state of the corporation and of the reports of
internal and independent auditors, and the approval or rejection of
the annual report, balance sheet, financial statements and records
submitted by the officers or liquidators of the corporation;
b) distribution of profits, including the distribution of dividends;
c) election or revocation of regular and alternate Board members,
liquidators and management supervisors; and
d) determinations regarding compensation of the Board members;
e) designation of a newspaper to publish the notice of meetings; and,
f) in general, any other matter to be dealt with by the annual meeting
relating to the Company and not specifically reserved to
extraordinary shareholders' meetings.
Extraordinary shareholders' meetings may be held at any time. During
extraordinary meetings, determinations are made relating to any matter which
Chilean law or the Company's By-Laws reserve for consideration at such
extraordinary meetings, which matters shall be expressly set forth in the
relevant notice. Whenever in an extraordinary shareholders' meeting
determinations must be made relating to matters specifically reserved to annual
meetings, the operation and decisions of such extraordinary meeting will follow
the requirements applicable to annual meetings.
57
The following matters are specifically reserved for extraordinary
meetings:
a) dissolution of the corporation;
b) transformation, merger or spin off of the corporation, and
amendments to its By-Laws;
c) issuance of bonds or debentures convertible into stock;
d) transfer of corporate fixed assets and liabilities; and
e) guarantees of third parties' obligations, except when these third
parties are affiliated companies (in which case approval of the
Board of Directors will suffice).
In addition to the above, annual and extraordinary shareholders'
meetings must be called by the Board of Directors in the following
circumstances:
- when requested by shareholders representing at least 10% of issued
stock; and
- when required by the Superintendency of Securities.
Only holders of stock registered in the Record of Shareholders five
days before the date of the pertinent meeting may participate with the right to
speak and vote in shareholders' meetings. Directors and officers other than
shareholders may participate in shareholders' meetings with the right to speak.
Shareholders may be represented at meetings by other individuals,
regardless of whether or not those persons are shareholders themselves.
Representation must be conferred five days before the date of the relevant
meeting, in writing, and for the total number of shares held by the shareholder.
Limitations on the right to own securities. The right to own any kind
of property is guaranteed by the Chilean Constitution, and the Chilean
Corporation Law does not contain any general limitation regarding the right to
own securities. There are, however, certain limitations on the right of
foreigners to own securities of Chilean corporations, but only for certain
special types of companies. The Company's securities are not restricted by these
limitations, and the Company's By-Laws do not contain restrictions or
limitations in this respect.
Takeover defenses. The Company's By-Laws do not contain any provisions
that would have the effect of delaying, deferring or preventing a change in
control of the Company and that would operate only with respect to a merger,
acquisition or corporate restructuring involving the Company (or any of its
subsidiaries).
Ownership threshold. The Company's By-Laws do not contain any ownership
threshold above which shareholder ownership must be disclosed.
Changes in capital. The By-Laws do not impose any conditions that are
more stringent than those required by law for effecting changes in the capital
of the Company.
Material Contracts
Vina Almaviva. On June 30, 1997, the Company entered into a joint
venture with Baron Philippe de Rothschild S.A. ("BPR"), a French company,
establishing Vina Almaviva S.A. ("Vina Almaviva," formerly "Rothschild S.A.")
for the production of "Primer Orden" wines in Chile. For a discussion of Vina
Almaviva, see Item 4 - "Information on the Company--History and Development of
the Company."
Industria Corchera. In November of 2000, the Company purchased 49.6% of
the capital stock of Industria Corchera from certain directors of the Company.
In November, 2002 the Company increased its ownership to 49.84%. See Item 7 -
"Major Shareholders and Related Party Transactions - Related Party Transactions"
for a discussion of the acquisition and the agreements with Industria Corchera.
In connection with this acquisition, the Company and Amorim entered
into a shareholders' agreement establishing provisions, among others, for the
transfer of shares and other agreements in relation to the administration of
Industria Corchera. An English translation of the shareholders' agreement
between the Company and Amorim was filed as Exhibit 4.2 to the Company's Annual
58
Report on Form 20-F (No. 1-3358) for the fiscal year ended December 31, 2000 and
incorporated by reference herein. The Company and Amorim jointly own 99.68% of
the capital stock of Industria Corchera.
Policy on Dividend Distributions
In accordance with Chilean law, the Company must distribute cash
dividends equal to at least 30% of the Company's annual net income calculated in
accordance with Chilean GAAP, unless otherwise decided by a unanimous vote of
the holders of the shares, and unless and to the extent that the Company has
accumulated losses. If there is no net income in a given year, the Company may
elect, but is not legally obligated, to distribute dividends out of retained
earnings. Shareholders who do not expressly elect to receive a dividend other
than in cash are legally presumed to have decided to receive the dividend in
cash. A U.S. holder of ADS may, in the absence of an effective registration
statement under the Securities Act or an available exemption from the
registration requirement thereunder, effectively be required to receive a
dividend in cash.
The Company's dividend policy approved at the general shareholders'
meeting is to distribute 40% of net earnings. For fiscal year 2002, interim
dividends Nos. 208, 209 and 210 of Ch$1.50 per share were paid on September 30,
2002, December 30, 2002 and March 31, 2003, respectively. A final dividend No.
211 of Ch$4.58 per share was paid on May 28, 2003 against the profits of the
2002 fiscal year. Total dividends disbursed against the profits of 2002 fiscal
year were 40% of net earnings.
For fiscal year 2003, the Board approved to pay three provisional
dividends of Ch$1.70 per share, charged against the profits for fiscal year
2003. These will be paid on September 30, 2003, December 30, 2003 and March 31,
2004, while the remaining profits up to a limit of 40% of the earnings shall be
disbursed in May 2004.
The above detailed dividend policy is the Board's intent; however,
fulfillment thereof will be contingent on cash flows. Consequently, at the
annual shareholders' meeting, the Board shall solicit shareholder approval to
modify the amounts and payment dates should the necessity arise.
Exchange Controls
The Central Bank of Chile is responsible for, among other things,
monetary policies and control of foreign exchange transactions.
The Central Bank of Chile adopted a new Foreign Exchange Regulations
Compendium (the New Regulations") published in the Official Gazette on January
23, 2002 and effective as of March 1, 2002. The New Regulations impose only
three levels of restrictions or obligations on foreign exchange transactions in
Chile: (i) certain transactions requiring exchange of foreign currency must be
conducted through the Formal Exchange Market (i.e., a commercial bank) and
reported to the Central Bank of Chile (e.g., investments, loans, deposits and
certain other transactions in excess of US$10,000); (ii) certain transactions
requiring exchange of foreign currency to be remitted abroad must be conducted
through the Formal Exchange Market without any reporting obligation (e.g., all
license and royalty payments to be remitted abroad); and (iii) certain
transactions requiring exchange of foreign currency must only be reported to the
Central Bank of Chile (i.e., payments regarding import and export transactions,
etc.).
Because the Law of the Central Bank of Chile authorizes the Central
Bank of Chile to regulate foreign exchange transactions, including those
relating to ADS facilities, more restrictive regulations on foreign exchange
affecting ADS holders of the Company at any time may be imposed`. If imposed,
such regulations could, among other things, restrict the ability of ADS holders
to dispose of the underlying shares of Common Stock of the ADS or to repatriate
proceeds of the Common Stock. The duration or impact of any such restrictions
would be difficult to assess.
The ADS facility is subject to a contract between the Depositary, the
Company and the Central Bank of Chile (the "Foreign Investment Contract") that
grants the Depositary and the holders of the ADS access to Chile's Formal
Exchange Market and permits the Depositary to remit dividends received from the
Company to holders of ADS without restriction. See Item 10 -- "Additional
Information -- Exchange Controls" for a more detailed description of the new
regulations and the Foreign Investment Contract. The Foreign Investment Contract
is currently in force and will continue to govern the ADS facility until all
parties agree to terminate it. If the Foreign Investment Contract is terminated,
the ADS facility would then become subject to the New Regulations. Under
Chilean legislation, a Foreign Investment Contract may not be altered or
affected adversely by actions of the Central Bank of Chile.
59
The following is a summary of certain provisions that are contained in
the Foreign Investment Contract. This summary does not purport to be complete
and is qualified in its entirety by reference to the Foreign Investment Contract
and Chapter XXVI of the former Foreign Exchange Regulations, which were filed as
Exhibits 2.2 and 4.4, respectively, to the Company's Registration Statement on
Form F-1 (No. 33-84298) and incorporated by reference herein. Although Chapter
XXVI of the former Foreign Exchange Regulations are no longer in force, their
terms do apply to the Company through the Foreign Investment Contract.
Under Chapter XXVI of the former Foreign Exchange Regulations and the
Foreign Investment Contract, the Central Bank of Chile agreed to grant to the
Depositary, on behalf of ADS holders, and to any investor neither resident nor
domiciled in Chile who withdraws Common Stock upon delivery of ADS (such shares
of Common Stock being referred to herein as "Withdrawn Shares"), access to the
Formal Exchange Market to convert pesos to U.S. dollars (and to remit such
dollars outside of Chile) in respect of shares of Common Stock represented by
ADS or Withdrawn Shares, including amounts received as (a) cash dividends; (b)
proceeds from the sale in Chile of Withdrawn Shares; (c) proceeds from the sale
in Chile of rights to subscribe for additional shares of Common Stock; (d)
proceeds from the liquidation, merger or consolidation of the Company; and (e)
other distributions, including without limitation those resulting from any
recapitalization, as a result of holding shares of Common Stock represented by
ADS or Withdrawn Shares. However, Chapter XXVI also provided that access to the
Formal Exchange Market for repatriation of the sales proceeds of Withdrawn
Shares or distributions thereon would be conditioned upon receipt by the Central
Bank of Chile of certification by the Depositary (or the custodian on its
behalf) that such Shares had been withdrawn in exchange for ADS, a waiver of the
benefits of the Foreign Investment Contract until such Withdrawn Shares were
redeposited, and the Withdrawn Shares are redeposited with the Depositary.
Investors receiving Withdrawn Shares in exchange for ADS will have the right to
redeposit such shares in exchange for ADS, provided that the conditions to
redeposit are satisfied. For a description of the Formal Exchange Market, See
Item 3 -- "Key Information -- Exchange Rates."
Chapter XXVI of the former Foreign Exchange Regulations provided that
access to the Formal Exchange Market for repatriation of dividend or
distribution payments would be conditioned upon certification by the Company to
the Central Bank of Chile that a dividend or distribution payment had been made
and any applicable tax had been withheld. Cash, dividends and other
distributions paid by the Company with respect to ADS held by a non-Chilean
resident holder are subject to a 35% Chilean withholding tax, which is withheld
by the Company. However, stock dividends are deemed a non taxable event pursuant
to Chilean Income Tax Law, thus, not subject to Chilean taxation. See Item 10 --
"Additional Information -- Taxation."
Chapter XXVI of the former Foreign Exchange Regulations and the Foreign
Investment Contract provide that a person who brings foreign currency into Chile
must convert it into Chilean pesos (Liquidation restriction) on the same date
and has five days within which to invest in shares of Common Stock in order to
receive the benefits of the Foreign Investment Contract. If such person decides
within such period not to acquire shares of Common Stock, he can access the
Formal Exchange Market to reacquire U.S. dollars, provided that the applicable
request to purchase U.S. dollars is presented to the Central Bank of Chile
within five days, plus two additional days to request the Central Bank
authorization of the initial conversion into pesos. Shares acquired as described
above may be deposited for ADS and receive the benefits of the Foreign
Investment Contract, subject to receipt by the Central Bank of Chile of a
certificate from the Depositary (or the Custodian on its behalf) that such
deposit has been effected and that the related ADS have been issued and a
declaration from the person making such deposit waiving the benefits of the
Foreign Investment Contract with respect to the deposited shares of Common
Stock.
Access to the Formal Exchange Market under any of the circumstances
described above is not automatic. Pursuant to former Chapter XXVI, such access
required approval of the Central Bank of Chile based on a request presented
through a banking institution established in Chile. The Foreign Investment
Contract provides that if the Central Bank of Chile has not acted on such
request within seven banking days, the request will be deemed approved.
As noted above, all the rights, procedures and exchange benefits
contained in the Foreign Investment Contract are still in force in connection
with the ADS issuance.
60
Taxation
The following discussion is a summary of certain Chilean and U.S.
federal income tax considerations relating to an investment in the ADS or the
shares. The discussion is based on current law and is for general information
only. Moreover, while the Company's tax advisors believe this discussion to be a
correct interpretation of existing laws in force as of the date of this Annual
Report, no assurances can be given that the courts or tax authorities
responsible for the administration of such laws will agree with this
interpretation or that changes in such laws will not occur. In addition, the
discussion does not address all possible tax consequences relating to an
investment in the ADS or the shares.
Each holder of ADS or shares of Common Stock should consult his or her
own tax advisor regarding the particular tax consequences of the purchase,
ownership and disposition of ADS or shares of Common Stock.
Chile
There is no Double Taxation Treaty between Chile and the United States,
although negotiations are currently taking place. Accordingly, the following
discussion is based exclusively on Chilean domestic tax legislation.
The discussion summarizes the material Chilean income tax consequences
of the purchase, ownership and disposition of ADS or shares of Common Stock by
an individual who is neither domiciled in, nor a resident of, Chile for tax
purposes or a legal entity that is not organized under the laws of Chile and
does not have a permanent establishment in Chile (a "foreign holder"). However,
it is not a full description of all tax considerations that may be relevant to a
decision related to the ADS or shares of Common Stock. The discussion is based
on Chilean income tax laws, regulations and rulings of the Chilean Internal
Revenue Service, including Rulings N(0) 324 of 1990, N(0) 3985 of 1994, N(0)
1969 of 1995, N(0) 3807 of 2000 and Circular Letter N(0) 7 of 2002, all of which
are subject to change.
It is not intended as tax advice to any particular investor, which can
be rendered only in light of that investor's particular tax situation. For
purposes of Chilean taxation, an individual holder is a resident of Chile if he
has resided in Chile for more than six consecutive months in a calendar year, or
a total of more than six months, whether consecutive or not, within two
consecutive tax years.
Pursuant to the Chilean Constitution, provisions contained in statutes
such as tax rates applicable to foreign investors, the computation of taxable
income for Chilean purposes and the manner in which Chilean taxes are imposed
and collected, may only be amended by another statute. In addition, the Chilean
tax authorities enact rulings, circular letters and regulations of either
general or specific application and interpret the provisions of Chilean tax law.
Pursuant to article 26 of the Chilean Tax Code, Chilean taxes may not be
assessed retroactively against taxpayers who act in good faith relying on such
rulings, regulations and interpretations, but Chilean tax authorities may change
such rulings, regulations and interpretations prospectively.
Cash Dividends and Other Distributions
Cash dividends paid by the Company with respect to the ADS or shares of
Common Stock held by a foreign holder will be subject to a 35% Chilean
withholding tax (the "Withholding Tax"), which will be withheld and paid to the
Chilean Treasury by the Company. The Chilean tax system is integrated, thus a
credit against the Withholding Tax is available based on the level of corporate
income tax actually paid by the Company on the income to be distributed (the
"First-Category Tax"); however, this credit does not reduce the Withholding Tax
on a one-for-one basis because it also increases the base on which the
Withholding Tax is imposed. From 1991 until 2001, the First-Category Tax rate
was 15% resulting in an effective dividend withholding tax rate of approximately
23.52%. For 2002, the First-Category Tax rate was 16% resulting in an effective
dividend withholding tax rate of approximately 22.62%. Finally, for current year
2003, the First-Category Tax rate is 16.5% resulting in an effective dividend
withholding tax rate of approximately 22.14%.
61
The example below illustrates the effective Chilean Withholding Tax
burden on a cash dividend received by a foreign holder, assuming a Withholding
Tax rate of 35%, an effective First-Category Tax rate of 16.5% and a
distribution of 50% of the net income of the Company distributable after payment
of the First-Category Tax:
Company taxable income................................................ 200.0
First-Category Tax (16.5% of Ch$200).................................. (33.0)
Net distributable income.............................................. 167.00
Dividend distributed (50% of net distributable income)................ 83.50
Gross Up to compute Withholding Tax: Ch$83.5 plus Ch$16.5 First
Category Tax effectively paid......................................... (100.00)
Withholding Tax Rate 35% of Ch$100.00 equal to Ch$35; minus credit
for 50% of First Category Tax (16.5%)................................. 18.50
Net withholding tax................................................... (18.50)
Net dividend received................................................. 65.00
Approximate effective dividend withholding rate (18.5/83.5)........... 22.14%
In general, the effective dividend Withholding Tax rate, after giving
effect to the credit for the First-Category Tax, can be calculated using the
following formula:
Effective dividend Withholding Tax rate = (Withholding Tax rate (35))-(First-Category Tax rate (16.5))
------------------------------------------------------------
1-- (First-Category Tax rate (16.5)) Tax Rate (16.5%)
Under Chilean income tax law, dividends generally are assumed to have
been paid out of the Company's oldest retained profits for purposes of
determining the level of First-Category Tax that was paid by the Company. For
years prior to 1991, the First-Category tax was 10%. Although this reduced
First-Category Tax resulted in relatively greater amounts of distributable
post-tax income for those years, the credit against the Withholding Tax for the
First-Category Tax paid by the Company for those years will commensurably be
diminished. Distributions of profits made with retained profits of those years,
therefore, resulted in an effective dividend withholding tax rate of
approximately 27.8%. Distributions of profits made with retained earnings of
years 2001 and 2002, resulted or will result in an effective dividend
withholding tax rate of approximately 23.52% and 22.62%, respectively.
Dividend distributions made in property would be subject to the same
Chilean tax rules as cash dividends. Stock dividends are deemed a non taxable
event, thus, not subject to Chilean taxation. The assignment of preemptive
rights relating to Common Stock will not be subject to Chilean taxation.
Disposition of the preemptive rights on compensated basis would be deemed in
Chile as ordinary business income.
Capital Gains
Gains from the sale or exchange of ADS by a foreign holder (or ADRs
evidencing ADS) outside of Chile will be deemed a foreign source income, not
subject to Chilean taxation. Gains from the sale or exchange of ADS by a Chilean
resident outside of Chile, will be deemed a foreign source income, but subject
to taxation in Chile as Chilean residents are subject to taxes in Chile on their
worldwide income.
The deposit and withdrawal of Common Stock in exchange for ADRs is not
subject to Chilean taxation. Taxation, if any, will be triggered at the time
Common Stocks are sold. The tax base of shares of Common Stock received in
exchange for ADS for capital gains tax assessment will be the acquisition cost
of the shares. The acquisition cost of the shares delivered to any holder upon
surrender of ADRs shall be the highest reported sales price of the shares on the
Santiago Stock Exchange for the day on which the transfer of the shares is
recorded under the name of the holder. Consequently, the conversion of ADS into
shares of Common Stock and the immediate sale of the shares for the value
established under the Deposit Agreement, as amended, would normally not generate
a capital gain subject to taxation in Chile.
If a capital gain is recognized on a sale or exchange of shares of
Common Stock acquired upon surrender of ADRs (as distinguished from sales or
exchanges of ADS abroad representing such shares) made by a foreign or Chilean
resident or domiciled holder, such gain will be deemed a non taxable event
provided that the requirements of Article 18 ter of the Chilean Income Tax Law
are met. Article 18 ter was introduced to the Chilean Income Tax Law by Law N(0)
19,768 which was published in the Official Gazette on November 7, 2001. The
62
requirements of Article 18 ter of the Chilean Income Tax Law are: (i) the share
at the time of sale must have a market presence. In case the market presence of
the share was lost, the sale must be made within the following 90 days after the
loss of the share's market presence; (ii) the share must have been acquired and
sold after April 19, 2001; and, (iii) the acquisition and sale must have been
made, amongst others, in a Chilean stock exchange market or in a foreign stock
exchange market authorized by the Chilean Superintendency of Securities.
At this point, no specific guidelines have been issued by the Chilean
Internal Revenue regarding Article 18 ter and ADR operations. We believe, based
on the Congress discussions of Law 19,768, that the reference contained in
Article 18 ter to a foreign exchange stock market authorized by the Chilean
Superintendency of Securities covers the ADRs deposit and withdrawals in
exchange of shares of Common Stock.
Accordingly, provided that the deposit and withdrawal of the ADRs in
exchange of shares of Common Stock is made after April 19, 2001 and that such
shares of Common Stock are sold in a Chilean exchange stock market having a
market presence at the time of sale, any capital gain made on such sale will be
deemed a non taxable event under Article 18 ter of the Chilean Income Tax Law.
In case the sale is made within the following 90 days after the loss of the
share's market presence only a portion of the capital gain made will be
considered as a non taxable event.
In case the requirements of Article 18 ter are not met and a capital
gain is realized at the time of the sale of Common Stock, such capital gain,
made either by a foreign holder or by Chilean resident holder, will be subject
to both the First-Category Tax and the Withholding Tax (the former being
creditable against the latter) if either (i) the foreign holder has held the
Common Stock for less than one year since exchanging ADS for the Common Stock,
or (ii) the foreign holder acquired and disposed of the Common Stock in the
ordinary course of its business or as a habitual trader of shares. In all other
cases, gain on the disposition of Common Stock will exclusively be subject to
the First-Category Tax (presently imposed at a rate of 16.5%), and no
Withholding Tax will apply.
Amounts received by a foreign holder on the sale of preemptive rights
relating to the shares of Common Stock will be deemed as business income, thus,
subject to both the First-Category Tax and the Withholding Tax (the former being
creditable against the latter).
Other Chilean Taxes
There are no gift, inheritance or estate taxes applicable to the
ownership, transfer or disposition of ADS by a foreign holder, but such taxes
will generally apply to the transfer at death or by gift of the Common Stock by
a foreign holder. There are no Chilean stamp, issue, registration or similar
taxes or duties payable by holders of Common Stock or ADS.
Withholding Tax Certificates
Upon request, the Company will provide to foreign holders appropriate
documentation evidencing the payment of the Withholding Tax (net of applicable
First-Category Tax).
U.S. Federal Income Taxes
The following discussion summarizes the material U.S. federal income
tax consequences of the purchase, ownership, and disposition of the ADS or
shares of Common Stock. However, it is not a full description of all tax
considerations that may be relevant to a decision related to the ADS or shares
of Common Stock. The discussion is based on the United States Internal Revenue
Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, and judicial and administrative interpretations thereof, all as in
effect on the date hereof and all of which are subject to change.
The U.S. federal income tax treatment of a U.S. Holder (as defined
below) of ADS or shares of Common Stock may vary depending upon his particular
situation. Certain U.S. Holders (including, but not limited to, insurance
companies, tax-exempt organizations, financial institutions, persons subject to
the alternative minimum tax, persons holding offsetting position in respect of
the ADSs or shares of Common Stock, broker-dealers and persons owning, directly
or indirectly, 10% or more of the voting shares of the Company) may be subject
to special rules not discussed below. The following summary is limited to U.S.
Holders who hold the ADS or shares of Common Stock as "capital assets" within
the meaning of Section 1221 of the Code. The discussion below also does not
address the effect of any state or local tax law on a U.S. Holder of the ADS or
shares of Common Stock. In addition, the following discussion assumes that the
Company is not currently, and will not in the future be, classified as a
"passive foreign investment company" ("PFIC") within the meaning of the Code.
63
As used herein, the term "U.S. Holder" means a holder of ADS or shares
of Common Stock that is (i) an individual who is a citizen or resident of the
United States, (ii) a partnership, corporation, or other entity organized in or
under the laws of the United States or any state thereof, (iii) an estate that
is subject to U.S. federal income taxation without regard to the source of its
income, or (iv) a trust if (1) a court within the United States is able to
exercise primary supervision over the administration of the trust, and (2) one
or more United States persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Holder" refers to any holder of ADS
or shares of Common Stock other than a U.S. Holder.
For U.S. federal income tax purposes, holders of ADS (or ADRs
evidencing ADS) generally will be treated as the owners of the Common Stock
represented by those ADS.
Cash Dividends and Other Distributions
For U.S. federal income tax purposes, the gross amount of a
distribution with respect to ADS or shares of Common Stock will include the net
amount of any Chilean tax withheld (i.e., the Withholding Tax reduced by any
credit for First-Category Tax paid), and will be treated as a dividend on the
date of receipt by the Depositary or the holder of such shares, respectively, to
the extent of the Company's current and accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions, if any, in
excess of such current and accumulated earnings and profits as determined for
U.S. federal income tax purposes will constitute a non-taxable return of capital
to a U.S. Holder and will be applied against and reduce such U.S. Holder's tax
basis in such ADS or shares of Common Stock. To the extent that such
distributions are in excess of such basis, the distributions will constitute
capital gain. U.S. Holders that are corporations will not be allowed a deduction
for dividends received in respect of distributions on ADS or shares of Common
Stock. For the tax years 2003 through 2008, individual U.S. Holders are
generally subject to a minimum tax rate on dividends equal to 15%, which
corresponds to the maximum tax rate for long-term capital gains. However, under
current legislation, for tax years beginning after December 31, 2008, dividends
will be taxed at the same rate as other items of ordinary income, which will
exceed the tax rate for long-term capital gains. U.S. Holders should consult
their personal tax advisors to determine the applicability of the 15% rate for
dividends, if any, paid to them.
If a dividend distribution is paid with respect to ADS or shares of
Common Stock in Chilean pesos, the amount includable in income will be the U.S.
dollar value, on the date of receipt by the Depositary or the holder of such
shares of Common Stock, respectively, of the Chilean pesos amount distributed.
Any subsequent gain or loss in respect of such Chilean pesos arising from
exchange rate fluctuations will generally be ordinary income or loss for U.S.
Holders, although under certain limited circumstances may be capital gain or
loss. If the Depositary converts the Chilean pesos to U.S. dollars on the date
it receives such pesos, U.S. Holders will not recognize any such gain or loss.
Subject to the limitations and conditions set forth in the Code, U.S.
Holders may elect to claim a credit against their U.S. federal income tax
liability for the net amount of any Chilean tax withheld (i.e., the Withholding
Tax reduced by any credit for First-Category Tax paid) from dividends received
in respect of the ADS or shares of Common Stock. Dividends generally will
constitute non-U.S. source "passive income" or "financial services income" for
U.S. federal income tax purposes. The rules relating to the determination of the
foreign tax credit are complex and prospective purchasers should consult their
personal tax advisors to determine whether and to what extent they would be
entitled to such credit. U.S. Holders that do not elect to claim foreign tax
credits may instead claim a deduction for Chilean tax withheld.
A Non-U.S. Holder of ADS or shares of Common Stock generally will not
be subject to U.S. federal income tax on dividends received on Common Stock or
ADS, unless such income is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States.
Capital Gains
The sale or other disposition of ADS or shares of Common Stock (or
preemptive rights with respect to such shares) will generally result in the
recognition of capital gain or loss in an amount equal to the difference between
the amount realized on the sale or other disposition and the holder's tax basis
in such ADS or shares of Common Stock. The Holder's initial tax basis in the ADS
or shares of Common Stock will be such Holder's cost for the ADS or shares of
Common Stock. Gain or loss upon the sale or other disposition of ADS or shares
of Common Stock will be long-term or short-term capital gain or loss, depending
on whether the ADS or shares of Common Stock have been held for more than one
year. However, as discussed under the heading "Chile," gain realized from a sale
or other disposition of share of Common Stock by a U.S. Holder, unlike gain
realized a sale or disposition of ADS, would be taxable in Chile. Because U.S.
64
taxpayers generally may only take a foreign tax credit against the U.S. federal
income tax liability in respect of non-U.S. source income, in the case of gain
realized from the sale or other disposition of shares of Common Stock, a U.S.
Holder may not be able to use the foreign tax credit for Chilean tax imposed on
that gain (because such gain would generally be U.S. source for U.S. federal
income tax purposes) unless such U.S. Holder can apply such foreign tax credit
against its U.S. federal income tax liability in respect of non-U.S. source
income.
Deposits and withdrawals of Common Stock by U.S. Holders in exchange
for ADS will not result in the realization of gain or loss for U.S. federal
income tax purposes.
A Non-U.S. Holder of ADS or shares of Common Stock will not be subject
to U.S. federal income tax on gain from the sale or other disposition of such
ADS or shares unless such gain is effectively connected with the conduct by the
Non-U.S. Holder of a U.S. trade or business.
Passive Foreign Investment Companies
The Company believes that it will not be classified as a PFIC for any
prior taxable year, its current taxable year, or any succeeding taxable year.
Under the Code, a foreign corporation will be a PFIC for any taxable
year in which either (1) 75% or more of its income is passive income or (2) the
average percentage of the value of its assets that produce (or are held for the
production of) passive income is 50% or more.
If the Company were classified as a PFIC for a taxable year, unless a
U.S. Holder made a timely qualified electing fund ("QEF") election, a portion of
distributions made by the Company (including distributions attributable to prior
taxable years) to such U.S. Holder could be subject to current tax as ordinary
income (at the highest applicable effective rates) plus an interest charge. Gain
on the sale or disposition of ADS or shares of Common Stock would be subject to
the same tax treatment.
A U.S. Holder making a QEF election with respect to the Company
generally would not be subject to these rules, but, rather, would pay tax on his
pro rata share of the Company's ordinary earnings and net capital gains for each
taxable year it holds ADS or shares of Common Stock regardless of whether the
U.S. Holder received any distribution with respect to the ADS or shares of
Common Stock.
Backup Withholding and Information Reporting
Dividends paid to a non-corporate U.S. Holder on, and proceeds from a
non-corporate U.S. Holder's sale or other disposition of, ADS or shares of
Common Stock may have to be reported to the U.S. Internal Revenue Service
("IRS"). Such payments may also be subject to a backup withholding tax unless
the U.S. Holder (i) provides an accurate taxpayer identification number and
otherwise complies with the requirements of the backup withholding rules or (ii)
otherwise establishes an exemption.
Subject to certain certification requirements, dividends paid to a
Non-U.S. Holder on, and proceeds from a Non-U.S. Holder's sale or other
disposition of, ADS or shares of Common Stock will generally not have to be
reported to the IRS and will not be subject to backup withholding tax.
The backup withholding currently applies at a rate of 28%.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the holder's
U.S. federal income tax liability if the required information is furnished to
the IRS.
Documents on Display
The Company files reports and other information with the Securities and
Exchange Commission (the "SEC"). Any documents that the Company files with the
SEC may be read and copied at the SEC's public reference rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549; and 500 Madison Street, Suite 1400,
Chicago, Illinois 60661.
65
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal line of business is the production and bottling
of wine for sale both domestically and internationally. The principal exposures
to market risks faced by the Company are interest rate risk, foreign currency
exchange rate risk and risk of fluctuations in the price of raw materials.
Interest Rate Risk
The Company's exposure to interest rate risk relates to its debt
obligations. As of December 31, 2002 and 2001 the Company's total long-term
interest-bearing debt amounted to Ch$14,352 million and Ch$22,190 million
respectively, of which, as of December 31, 2002, approximately 94% was
variable-rate debt and 6% was fixed-rate debt. Of the Company's floating-rate
debt, which totaled Ch$13,525 million, 27.8% was denominated in Euros and tied
to LIBOR and the other 72.2% was denominated in Unidades de Fomento. The Company
has not used any type of financial instruments to minimize interest rate risk
exposure but is considering hedging as a means to mitigate this risk.
The fair market value of long-term debt at December 31, 2002 is
approximately the value at which it is presented in the consolidated financial
statements and, as noted above, consists primarily of variable rate debt
(average of 2.1%) with maturities through 2007.
The underlying table presents cash flows related to interest payments,
amortization of debt obligations and related interest rates by fiscal year
maturing with respect to the Company's debt obligations. Variable rates
disclosed represent the weighted average rates of the portfolio at year-end.
Interest Bearing Debt As of December 31, 2002
(in million of Ch$)
-------------------
Expected Maturity Date
----------------------
Average 2007 and Fair Value
Long-Term Debt Interest 2004 2005 2006 Thereafter Total Long-Term
Variable Rate Rate Mn.Ch$ Mn.Ch$ Mn.Ch$ Mn.Ch$ Mn.Ch$ Debt
-------------- -------- ------ ------ ------ ------ ------ ------
Ch$ (UF)....... 1.36% 4,275 5,487 - - 9,762 9,762
Euro........... 3.99% 538 1,075 1,075 1,075 3,763 3,763
------ ------ ------ ------ ------ ------
Total........ 4,812 6,562 1,075 1,075 13,525 13,525
====== ====== ====== ====== ====== ======
Fixed Rate
----------
UF (Leasing)... 7.00% 101 110 119 498 828 828
Total........ 101 110 119 498 828 828
====== ====== ====== ====== ====== ======
Exchange Rate Risk
The Company's export sales are primarily denominated in U.S. dollars,
except for certain export sales to Canada and Europe, where prices are
denominated in Canadian dollars, Sterling Pounds and Euros. Sales of the
Company's Argentine subsidiaries are denominated in Argentine pesos. During 2002
and 2001, 70.8% and 66.8%, respectively, of the Company's total revenues were
related to export sales. As a result of these transactions, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company distributes its products.
In addition a proportion of the Argentine subsidiaries' assets is
valued in Argentine pesos and would therefore be affected by devaluation of the
local currency. Given the present situation in Argentina, it is not economically
feasible to purchase financial instruments that either eliminate or mitigate
country risk. In the income statements as of December 31, 2002 and 2001, the
Company recognized Ch$2,993 million and Ch$1,388 million of losses from the
conversion of the financial statements of the subsidiaries in Argentina and the
depreciation of the Argentine peso.
To mitigate the short-term effect of changes in currency exchange rates
on the Company's functional currency based sales, since 1993, the Company has
adopted a policy of attempting to balance U.S. dollar denominated assets and
liabilities to minimize its exposure to U.S. dollar - Chilean peso exchange rate
risks. To this end, the Company from time to time enters into forward exchange
agreements as a way to reduce risk.
66
As of December 31, 2002, the Company held U.S. dollar forwards
amounting to US$12.5 million, which expired in the first quarter of 2003.
Commodity Price Risk
The Company relies on outside vineyards for supplies of grapes and bulk
wine. Grapes purchased from outside vineyards are subject to fluctuation in
price and quality and generally cost more than grapes from the Company's
vineyards.
In 2002 and 2001, approximately 65% and 60%, respectively, of the
grapes used in the production of its premium, varietal, varietal blends and
sparkling wines was purchased by the Company from independent growers in Chile.
Additionally, in 2002, the Company purchased the grapes and bulk wine required
to produce approximately 100% of the popular wines sold by the Company.
Disruptions of supplies of grapes or wine or increases in prices from these
outside suppliers could have a material adverse effect on the Company's results
of operations.
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15: CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company, under the
supervision and with the participation of its management, including the Chief
Executive Officer and the Chief Financial Officer, performed an evaluation of
the effectiveness of its disclosure controls and procedures. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures of the Company are
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. The
Company's management necessarily applied its judgment in assessing the costs and
benefits of such controls and procedures, which by their nature can provide only
reasonable assurance regarding management's control objectives. There have been
no significant changes in the Company's internal controls or other factors that
could significantly negatively affect internal controls subsequent to the date
of their evaluation.
ITEM 17: FINANCIAL STATEMENTS
See Item 18 -- "Financial Statements."
ITEM 18: FINANCIAL STATEMENTS
Financial Statements:
The following financial statements, together with the report of Ernst &
Young thereon, are filed as part of this Annual Report:
67
Page
Report of Independent Accountants........................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2002................ F-2
Consolidated Statements of Income for each of the years
ended December 31, 2000, 2001, and 2002.................................... F-4
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2000, 2001, and 2002.......................................... F-5
Notes to the Consolidated Financial Statements.............................. F-8
ITEM 19: EXHIBITS
List of Exhibits
1.1* By-Laws (Estatutos) of the Company, together with an English
translation filed as Exhibit 1.1 to the Company's Annual Report on Form
20-F (No. 1-3358) for the fiscal year ended December 31, 2000.
2.1* Form of Deposit Agreement among the Company, The Bank of New York and
holders from time to time of American Depositary Receipts issued
thereunder, including the form of American Depositary Receipt, filed as
Exhibit 4.1 to the Company's Registration Statement on Form F-1 (No.
33-84298) and incorporated by reference herein.
2.2* Form of Foreign Investment Contract among the Company, The Bank of New
York and the Central Bank of Chile relating to the foreign exchange
treatment of the investment in ADS and ADRs (with English translation),
filed as Exhibit 4.3 to the Company's Registration Statement on Form
F-1 (No. 33-84298) and incorporated by reference herein.
2.3* Central Bank of Chile Chapter XXVI, filed as Exhibit 4.4 to the
Company's Registration Statement on Form F-1 (No. 33-84298) and
incorporated by reference herein.
3.1* Agency Agreement dated as of August 31, 1993 between the Company and
Banfi Products Corporation, filed as Exhibit 10.1 to the Company's
Registration Statement on Form F-1 (No. 33-84298) and incorporated by
reference herein.
3.2* English Translation of Powers of Attorney granted by the Board of
Directors of Inversiones Totihue S.A. to Family Principal Shareholders
filed as Exhibit 3.2 to the Company's Annual Report on Form 20-F (No.
1-3358) for the fiscal year ended December 31, 1998.
3.3* English Translation of Powers of Attorney granted by the Board of
Directors of Rentas Santa Barbara S.A. to Family Principal Shareholders
filed as Exhibit 33 to the Company's Annual Report on Form 20-F (No.
1-3358) for the fiscal year ended December 31, 1998.
3.4* English Translation of Shareholders Agreement, dated August 20, 1999,
entered into by Guilisasti family and other affiliated parties relating
to, among others, the transfer and voting of Common Stock filed as
Exhibit 3.4 to the Company's Annual Report on Form 20-F (No. 1-3358)
for the fiscal year ended December 31, 1999.
4.1* English Translation of the Shareholders' Agreement, dated June 30,
1997, entered into by Vina Concha y Toro S.A. and Baron Philippe de
Rothschild, relating to the creation of Vina Almaviva S.A. filed as
Exhibit 4.1 to the Company's Annual Report on Form 20-F (No. 1-3358)
for the fiscal year ended December 31, 2000.
4.2* English Translation of the Shareholders' Agreement, dated November 15,
2000, entered into by Vina Concha y Toro S.A. and Amorim & Irmaos,
S.G.P.S. S.A. relating to, among others, the transfer and voting of
common stock and the management and administration of Industria
Corchera, S.A. filed as Exhibit 4.2 to the Company's Annual Report on
Form 20-F (No. 1-3358) for the fiscal year ended December 31, 2000.
68
10.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (This exhibit "accompanies" this report as required by the
Sarbanes-Oxley Act of 2002 and is not to be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.)
10.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (This exhibit "accompanies" this report as required by the
Sarbanes-Oxley Act of 2002 and is not to be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.)
*Previously filed.
69
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VINA CONCHA Y TORO S.A.
Registrant
By: /s/ EDUARDO GUILISASTI G
---------------------------------------------
Name: Eduardo Guilisasti G.
Title: Gerente General/
General Manager
(Chief Executive Officer)
Date: June 30, 2003
By: /s/ OSVALDO SOLAR V
---------------------------------------------
Name: Osvaldo Solar V.
Title: Gerente de Administracion y Finanzas/
Administration and Financial Manager
(Chief Financial Officer)
Date: June 30, 2003
CERTIFICATIONS
I, Eduardo Guilisasti Gana, certify that:
1. I have reviewed this annual report on Form 20-F of Vina Concha y
Toro S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ EDUARDO GUILISASTI GANA
- ---------------------------------
Eduardo Guilisasti Gana
Chief Executive Officer
June 30, 2003
CERTIFICATIONS
I, Osvaldo Solar Venegas, certify that:
1. I have reviewed this annual report on Form 20-F of Vina Concha y
Toro S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ OSVALDO SOLAR VENEGAS
- ---------------------------------
Osvaldo Solar Venegas
Chief Financial Officer
June 30, 2003
EXHIBIT INDEX
Exhibit
Number Page
1.1* By-Laws (Estatutos) of the Company, together with an
English translation filed as Exhibit 1.1 to the
Company's Annual Report on Form 20-F (No. 1-3358) for
the fiscal year ended December 31, 2000.
2.1* Form of Deposit Agreement among the Company, The Bank
of New York and holders from time to time of American
Depositary Receipts issued thereunder, including the
form of American Depositary Receipt, filed as Exhibit
4.1 to the Company's Registration Statement on Form F-1
(No. 33-84298) and incorporated by reference herein.
2.2* Form of Foreign Investment Contract among the Company,
The Bank of New York and the Central Bank of Chile
relating to the foreign exchange treatment of the
investment in ADS and ADRs (with English translation),
filed as Exhibit 4.3 to the Company's Registration
Statement on Form F-1 (No. 33-84298) and incorporated
by reference herein
2.3* Central Bank of Chile Chapter XXVI, filed as Exhibit
4.4 to the Company's Registration Statement on Form F-1
(No. 33-84298) and incorporated by reference herein.
3.1* Agency Agreement dated as of August 31, 1993 between
the Company and Banfi Products Corporation, filed as
Exhibit 10.1 to the Company's Registration Statement on
Form F-1 (No. 33-84298) and incorporated by reference
herein.
3.2* English Translation of Powers of Attorney granted by
the Board of Directors of Inversiones Totihue S.A. to
Family Principal Shareholders filed as Exhibit 3.2 to
the Company's Annual Report on Form 20-F (No. 1-3358)
for the fiscal year ended December 31, 1998.
3.3* English Translation of Powers of Attorney granted by
the Board of Directors of Rentas Santa Barbara S.A. to
Family Principal Shareholders filed as Exhibit 3.3 to
the Company's Annual Report on Form 20-F (No. 1-3358)
for the fiscal year ended December 31, 1998.
3.4* English Translation of Shareholders Agreement, dated
August 20, 1999, entered into by Guilisasti family and
other affiliated parties relating to, among others, the
transfer and voting of Common Stock filed as Exhibit
3.4 to the Company's Annual Report on Form 20-F (No.
1-3358) for the fiscal year ended December 31, 1999.
4.1* English Translation of the Shareholders' Agreement,
dated June 30, 1997, entered into by Vina Concha y Toro
S.A. and Baron Philippe de Rothschild, relating to the
creation of Vina Almaviva S.A. filed as Exhibit 4.1 to
the Company's Annual Report on Form 20-F (No. 1-3358)
for the fiscal year ended December 31, 2000.
4.2* English Translation of the Shareholders' Agreement,
dated November 15, 2000, entered into by Vina Concha y
Toro S.A. and Amorim & Irmaos, S.G.P.S. S.A. relating
to, among others, the transfer and voting of common
stock and the management and administration of
Industria Corchera, S.A. filed as Exhibit 4.2 to the
Company's Annual Report on Form 20-F (No. 1-3358) for
the fiscal year ended December 31, 2000.
10.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (This exhibit
"accompanies" this report as required by the
Sarbanes-Oxley Act of 2002 and is not to be deemed
"filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.)
10.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (This exhibit
"accompanies" this report as required by the
Sarbanes-Oxley Act of 2002 and is not to be deemed
"filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.)
*Previously filed.
2
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of the Independent Auditors..................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2002........... F-2
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2002.................................. F-4
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 2002............ F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2002............................... F-6
Notes to the Consolidated Financial Statements......................... F-8
Ch$ - Chilean pesos
ThCh$ - Thousands of Chilean pesos
US$ - United States dollars
ThUS$ - Thousands of United States dollars
UF - The UF (Unidad de Fomento) is an inflation-indexed,
peso-denominated monetary unit. The UF rate is set daily in
advance, based on the change in the Consumer Price Index of the
previous month.
[GRAPHIC OMITTED] ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Vina Concha y Toro S.A. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Vina Concha y
Toro S.A. and subsidiaries (the "Company") as of December 31, 2001 and 2002, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vina Concha y Toro
S.A. and subsidiaries as of December 31, 2001 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in Chile.
Accounting principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the United
States of America would have affected shareholders' equity as of December 31,
2001 and 2002, and the net income for each of the three years in the period
ended December 31, 2002, to the extent summarized in Note 36 to these
consolidated financial statements.
As more fully explained in Note 3 to these consolidated financial statements, as
of December 31, 2001, the Company changed its method of accounting for its
investments in Argentine subsidiaries.
ERNST & YOUNG LIMITADA /s/ ERNST & YOUNG
Santiago, Chile
February 21, 2003
F-1
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
--------------------------------------------
As of December 31,
--------------------------------------------
Note 2001 2002 2002
------------ ------------ ------------
ASSETS ThCh$ ThCh$ ThUS$
Note 2(aa)
Current assets:
Cash ............................................. 2,136,269 2,298,101 3,198
Time deposits .................................... 33 366,385 1,051,351 1,463
Marketable securities, net ....................... 4 256,019 130,407 182
Accounts receivable, net ......................... 5 30,623,666 36,804,118 51,216
Notes receivable, net ............................ 5 2,097,626 1,864,015 2,594
Other accounts receivable ........................ 5 823,357 837,193 1,165
Amounts due from related companies ............... 6 602,871 576,600 802
Inventories, net ................................. 7 35,207,996 34,675,899 48,254
Income taxes recoverable ......................... 1,861,188 1,911,582 2,660
Prepaid expenses ................................. 32 6,325,205 6,748,659 9,391
Deferred income taxes ............................ 8 d) 831,132 1,229,602 1,711
Other current assets ............................. 209,574 - -
------------ ------------ ------------
Total current assets ......................... 81,341,288 88,127,527 122,636
------------ ------------ ------------
Property, plant and equipment: 9
Land ............................................. 17,382,260 17,750,514 24,701
Buildings and infrastructure ..................... 75,121,537 77,597,262 107,983
Machinery and equipment .......................... 29,640,378 31,223,721 43,450
Other fixed assets ............................... 7,244,693 9,194,897 12,795
Revaluation from fixed asset technical appraisal.. 3,665,044 3,550,780 4,941
Less: Accumulated depreciation ................... (34,660,775) (39,076,795) (54,378)
------------ ------------ ------------
Total Property, plant and equipment, net ..... 98,393,137 100,240,379 139,492
------------ ------------ ------------
Other assets:
Investments in related companies ................. 10 4,465,658 5,353,147 7,450
Investments in other companies ................... 11 240,047 264,592 368
Goodwill, net .................................... 12 1,305,478 1,223,977 1,703
Intangibles ...................................... 13 536,220 681,411 948
Accumulated amortization ......................... 13 (92,244) (115,846) (161)
Other assets ..................................... 374,418 7,000 10
------------ ------------ ------------
Total other assets ........................... 6,829,577 7,414,281 10,318
------------ ------------ ------------
Total assets ............................... 186,564,002 195,782,187 272,446
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
--------------------------------------------
As of December 31,
--------------------------------------------
Note 2001 2002 2002
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY ThCh$ ThCh$ ThUS$
Note 2(aa)
Current liabilities:
Short-term debt due to banks and financial institutions .... 14 14,130,548 8,690,654 12,094
Current portion of long-term debt due to banks and
financial institutions ................................... 14 4,490,012 10,897,193 15,164
Current portion of bonds payable ........................... 17 624,545 648,480 902
Long-term liabilities with maturities within one year ...... 99,520 105,439 147
Dividends payable .......................................... 1,054,677 1,090,334 1,517
Accounts payable ........................................... 10,931,316 11,938,412 16,613
Notes payable .............................................. 330,999 1,512,215 2,104
Other payables ............................................. 850,089 506,304 705
Amounts payable to related companies ....................... 6 1,743,574 2,162,025 3,009
Accrued expenses ........................................... 18 4,980,448 7,692,272 10,704
Withholdings ............................................... 1,854,545 1,565,124 2,178
Income taxes payable ....................................... 8 551,073 106,199 148
Deferred revenue ........................................... 9,984 41,717 58
Other current liabilities .................................. 15 - 112,460 157
------------ ------------ ------------
Total current liabilities .............................. 41,651,330 47,068,828 65,500
------------ ------------ ------------
Long-term liabilities:
Due to banks and financial institutions .................... 16 20,540,348 13,524,572 18,820
Bonds payable .............................................. 17 636,191 - -
Long-term notes payables ................................... - 167,066 233
Miscellaneous payables ..................................... 1,013,575 897,037 1,248
Amounts payable to related companies ....................... 6 2,529,127 2,155,830 3,000
Accrued expenses ........................................... 19 462,772 569,245 792
Deferred income taxes ...................................... 8 2,624,259 3,232,987 4,499
Other long-term liabilities ................................ 521,626 506,433 705
------------ ------------ ------------
Total long-term liabilities ............................ 28,327,898 21,053,170 29,297
------------ ------------ ------------
Commitments and contingencies.................................. 27
Minority interest ............................................. 20 58,820 69,345 97
------------ ------------ ------------
Shareholders' equity:
Paid-in capital, no par value .............................. 21 41,703,330 41,703,330 58,033
Additional paid-in capital - share premium ................. 21 4,866,239 4,866,239 6,772
Other reserves ............................................. 21 8,647,874 9,063,846 12,613
Reserve for future dividends ............................... 21 50,868,739 58,972,299 82,065
Net income for the year .................................... 13,625,572 16,312,013 22,699
Less: Provisional Dividends ................................ (3,185,800) (3,326,883) (4,630)
------------ ------------ ------------
Total shareholders' equity ............................. 116,525,954 127,590,844 177,552
------------ ------------ ------------
Total liabilities and shareholders' equity ......... 186,564,002 195,782,187 272,446
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------
Note 2000 2001 2002 2002
------------ ------------ ------------ ------------
ThCh$ ThCh$ ThCh$ ThUS$
Note 2(aa)
Operating income:
Sales ......................................... 34 106,660,384 114,990,534 128,320,533 178,567
Cost of sales ................................. (68,570,712) (72,391,209) (78,248,927) (108,889)
------------ ------------ ------------ ------------
Gross profit .................................. 38,089,672 42,599,325 50,071,606 69,678
Administrative and selling expenses ......... (19,934,192) (23,936,597) (29,561,803) (41,137)
------------ ------------ ------------ ------------
Operating income ............................ 18,155,480 18,662,728 20,509,803 28,541
------------ ------------ ------------ ------------
Non-operating income and expenses:
Interest income ............................... 118,965 129,092 108,223 151
Equity participation in net income of related
companies .................................. 10 405,034 576,829 761,039 1,059
Other non-operating income .................... 22 997,084 2,030,920 1,755,173 2,442
Equity participation in net losses of related
companies .................................. 10 - (8,298) - -
Goodwill amortization ......................... 12 (24,730) (84,552) (81,430) (113)
Interest expense .............................. (2,293,500) (2,197,105) (1,086,778) (1,513)
Other non-operating expenses .................. 22 (132,265) (161,285) (185,577) (258)
Price-level restatement, net .................. 23 (1,040,520) (876,403) (258,122) (359)
Foreign exchange losses, net .................. 24 (210,016) (1,675,716) (2,221,143) (3,091)
------------ ------------ ------------ ------------
Non-operating expenses, net ................ (2,179,948) (2,266,518) (1,208,615) (1,682)
------------ ------------ ------------ ------------
Income before income taxes and minority interest .. 15,975,532 16,396,210 19,301,188 26,859
Income taxes .................................. 8 (2,142,191) (2,764,057) (2,978,657) (4,145)
------------ ------------ ------------ ------------
Income before minority interest ................... 13,833,341 13,632,153 16,322,531 22,714
Minority interest ............................. 20 (3,117) (6,581) (10,518) (15)
------------ ------------ ------------ ------------
Net income for the year .................... 13,830,224 13,625,572 16,312,013 22,699
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Additional Reserves Net income
Paid-in paid-in Other for future Provisional for the year Total
Capital capital Reserves dividends Dividends
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------
Balance as of January 1, 2000............ 37,508,368 4,376,742 7,493,644 31,350,127 (2,595,919) 11,510,916 89,643,878
1999 net income distribution............. - - - 8,914,997 2,595,919 (11,510,916) -
Dividends declared....................... - - - (2,013,678) - - (2,013,678)
Foreign currency translation adjustment.. - - 23,345 - - - 23,345
Price-level restatement.................. 1,762,893 205,707 352,201 1,844,140 (14,959) 4,149,982
Net income for the year.................. - - - - 13,023,668 13,023,668
Interim dividends........................ - - - - (2,804,766) - (2,804,766)
---------------------------------------------------------------------------------------
Balance as of December 31, 2000.......... 39,271,261 4,582,449 7,869,190 40,095,586 (2,819,725) 13,023,668 102,022,429
Balance as of December 31, 2000
restated to constant Chilean Pesos
as of December 31, 2002.................. 41,703,330 4,866,239 8,356,529 42,578,706 2,994,351 13,830,224 108,340,678
=======================================================================================
Balance as of January 1, 2001............ 39,271,261 4,582,449 7,869,190 40,095,586 (2,819,725) 13,023,668 102,022,429
2000 net loss distribution............... - - 10,203,943 2,819,725 (13,023,668) -
Dividends declared....................... - - (2,402,031) - - (2,402,031)
Foreign currency translation adjustment.. - - 282,859 - - - 282,859
Price-level restatement.................. 1,217,409 142,055 243,945 1,489,627 (72,493) - 3,020,543
Net income for the year.................. - - - - 13,228,711 13,228,711
Interim Dividends........................ - - - - (3,020,517) - (3,020,517)
---------------------------------------------------------------------------------------
Balance as of December 31, 2001.......... 40,488,670 4,724,504 8,395,994 49,387,125 (3,093,010) 13,228,711 113,131,994
Balance as of December 31, 2001
restated to constant Chilean Pesos
as of December 31, 2002.................. 41,703,330 4,866,239 8,647,874 50,868,739 (3,185,800) 13,625,572 116,525,954
=======================================================================================
Balance as of January 1, 2002............ 40,488,670 4,724,504 8,395,994 49,387,125 (3,093,010) 13,228,711 113,131,994
2001 net loss distribution............... - - - 10,135,701 3,093,010 (13,228,711) -
Dividends declared....................... - - - (2,272,579) - - (2,272,579)
Foreign currency translation adjustment.. - - 415,972 - - - 415,972
Price-level restatement.................. 1,214,660 141,735 251,880 1,722,052 (90,615) - 3,239,712
Net income for the year.................. - - - - - 16,312,013 16,312,013
Interim Dividends........................ - - - - (3,236,268) - (3,236,268)
Balances as of December 31, 2002......... 41,703,330 4,866,239 9,063,846 58,972,299 (3,326,883) 16,312,013 127,590,844
=======================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
2000 2001 2002 2002
------------ ------------ ------------ ------------
ThCh$ ThCh$ ThCh$ ThUS$
Note 2(aa)
Cash flows from operating activities:
Received from customers ................................... 107,890,160 128,732,837 185,044,714 257,504
Interest received.......................................... 104,194 136,057 603,378 840
Dividends and other distributions received ................ 64,017 15,487 11,035 15
Other income received...................................... 399,734 575,728 943,369 1,313
Payments to suppliers and personal ........................ (92,359,727) (101,325,107) (161,681,221) (224,992)
Interest Paid ............................................. (1,924,268) (2,582,934) (1,325,929) (1,845)
Interest taxes Paid ....................................... (2,083,895) (650,058) (2,554,611) (3,555)
Payment of other expenses ................................ (963,871) (518,829) (951,496) (1,324)
V.A.T. and others taxes recovered (paid) .................. 1,429,128 (2,877,626) (981,104) (1,365)
------------ ------------ ------------ ------------
Net cash provided by operating activities............. 12,555,472 21,505,555 19,108,135 26,591
------------ ------------ ------------ ------------
Cash flows from financing activities:
Bank financing ............................................ 27,838,679 33,079,650 22,395,241 31,165
Dividends paid ............................................ (5,100,637) (5,644,713) (5,410,212) (7,529)
Payment of bank financing.................................. (23,166,359) (38,182,110) (29,627,745) (41,229)
Payment of loans obtained from related companies .......... (523,604) (566,069) (599,841) (835)
------------ ------------ ------------ ------------
Net cash used in financing activities................. (951,921) (11,313,242) (13,242,557) (18,428)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment....... 799,668 1,427,415 1,505,622 2,095
Sale of marketable securities.............................. 868,735 - - -
Additions to property, plant and equipment ................ (10,551,911) (9,850,043) (5,562,463) (7,741)
Payment of capitalized interest ........................... (923,723) (750,881) (459,054) (639)
Payment for shares of Industria Corchera .................. - (994,790) (543,600) (756)
Other investment disbursements............................. - (217,506) (208,027) (289)
------------ ------------ ------------ ------------
Net cash used in investing activities................. (9,807,231) (10,385,805) (5,267,522) (7,330)
------------ ------------ ------------ ------------
Positive (negative) net cash flow for the year................ 1,796,320 (193,492) 598,056 823
------------ ------------ ------------ ------------
Effect of price-level restatement on cash and cash
equivalents................................................ (14,216) 25,017 123,130 171
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ...... 1,782,104 (168,475) 721,186 1,004
Cash and cash equivalents beginning of year .................. 1,144,659 2,926,763 2,758,288 3,838
------------ ------------ ------------ ------------
Cash and cash equivalents end of year ........................ 2,926,763 2,758,288 3,479,474 4,842
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
------------------------------------------------------------
Year Ended December 31
------------------------------------------------------------
2000 2001 2002 2002
------------ ------------ ------------ ------------
ThCh$ ThCh$ ThCh$ ThUS$
Note 2(aa)
Reconciliation of net income to net cash provided by
operating activities:
Net income for the year ....................................... 13,830,224 13,625,572 16,312,013 22,699
Net gain on sales of property, plant and equipment ........... (258,793) (1,294,233) (1,411,127) (1,964)
Gain on sales of investments ................................. (189,000) - - -
Charges (credits) to income which do not represent cash flows:.... 8,872,758 12,862,073 13,841,494 19,261
Depreciation .................................................. 4,980,839 5,953,126 6,860,457 9,547
Amortization of intangibles ................................... 21,973 38,159 53,176 74
Write-offs..................................................... 1,962,870 1,838,639 1,524,288 2,121
Equity participation in income of related companies .......... (405,034) (576,829) (761,039) (1,059)
Equity participation in losses of related companies ........... - 8,298 - -
Amortization of goodwill ...................................... 24,730 84,552 81,430 113
Price-level restatement, net .................................. 1,250,536 876,403 258,122 359
Deferred taxes ................................................ 1,142,191 2,764,057 2,978,657 4,145
Minority interest ............................................. 3,117 6,581 10,518 15
Foreign currency translation, net ............................. - 1,675,716 2,221,143 3,091
Other credits to income which do not represent cash flows ..... - (220,646) (772,466) (1,075)
Other charges to income which do not represent cash flows...... (108,464) 414,017 1,387,208 1,930
Changes in assets which affect cash flows: ....................... (14,271,406) (2,000,659) (7,234,475) (10,067)
Decrease (increase) in trade receivables ...................... (7,409,715) (2,728,672) (5,561,300) (7,739)
Decrease (increase) in inventory .............................. (3,101,224) 2,964,461 (1,556,598) (2,166)
Decrease (increase) in other assets ........................... (3,760,467) (2,236,448) (116,577) (162)
Changes in liabilities which affect cash flows: .................. 4,571,689 (1,687,198) (2,399,770) (3,339)
Increase (decrease) in accounts payable associated with
operating results ......................................... 4,456,936 1,647,967 (782) (1)
Increase (decrease) in interest payable ....................... 931,331 (484,738) (213,395) (297)
Increase (decrease) in income tax payable ..................... 1,175,695 (925,263) (2,477,906) (3,448)
Increase (decrease) in other accounts payable associated with
non-operating results ............................................ (1,105,556) (1,227,986) 505,667 704
Net increase in value added tax and other accounts payable .... (886,717) (697,178) (213,354) (297)
------------ ------------ ------------ ------------
Net cash flows provided by operating activities ............... 12,555,472 21,505,555 19,108,135 26,590
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 1 - Registration of Securities
Vina Concha y Toro S.A. is a corporation organized under the laws of the
Republic of Chile registered and subject to the supervision of the Chilean
Superintendency of Securities and Insurance ("SVS") and the Securities and
Exchange Commission ("SEC") of the United States.
Note 2 - Summary of Significant Accounting Principles
a) Periods covered
These financial statements reflect the Company's financial positions as
of December 31, 2001 and 2002, and the results of its operations, the
changes in its shareholders' equity and its cash flows for the years
ended December 31, 2000, 2001 and 2002.
b) Basis for consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Chile and the
accounting regulations of the SVS (collectively "Chilean GAAP"). The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The consolidated financial statements include the accounts of Vina Concha
y Toro S.A. (the "Parent Company") and subsidiaries. The Parent Company
and its subsidiaries are referred to as the "Company". All intercompany
balances and transactions have been eliminated in consolidation. In
addition, the participation of minority shareholders has been recognized
and shown as minority interest.
The consolidated financial statements for the years 2001 and 2002 include
the following subsidiaries:
Company Ownership interest
As of December 31,
-------------------------------------------------------------------------
2001 2002
----------------------------------- ------------------------------------
Direct Indirect Total Direct Indirect Total
% % % %
Comercial Peumo Ltda. 0.00 100.00 100.00 0.00 100.00 100.00
Sociedad Exportadora y Comercial
Oneworldwine Ltda. 99.00 0.00 99.00 99.00 0.00 99.00
Sociedad Exportadora y Comercial Vina
Maipo Ltda. 99.00 1.00 100.00 0.00 100.00 100.00
Transportes Viconto Ltda. 0.00 100.00 100.00 0.00 100.00 100.00
Vina Cono Sur S.A. 50.00 50.00 100.00 0.00 100.00 100.00
Trivento Bodegas y Vinedos S.A. 0.00 100.00 100.00 0.00 100.00 100.00
Distribuidora Peumo Argentina S.A. 0.00 100.00 100.00 0.00 100.00 100.00
Concha y Toro UK Limited 99.00 1.00 100.00 99.00 1.00 100.00
Villa Alegre S.A. 75.00 0.00 75.00 0.00 75.00 75.00
Comercial Peumo S.A. 99.90 0.10 100.00 - - -
Inversiones Concha y Toro S.A. - - - 99.98 0.02 100.00
VCT Internacional S.A. - - - 0.00 100.00 100.00
F-8
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
c) Translation of foreign currency financial statements
Financial statements of consolidated foreign subsidiaries have been
converted into Chilean pesos in accordance with Technical Bulletin No.
64, "Accounting for Investments Abroad" ("BT 64"), of the Chilean
Association of Accountants, as follows:
Financial statements of foreign operations with the Chilean peso as the
functional currency are those whose activities are considered an
extension of the Chilean operations, and are translated as follows:
o Monetary assets and liabilities are translated at the year-end
exchange rate.
o Non-monetary items, primarily property, plant and equipment and
shareholders' equity, are measured using historical exchange
rates in effect at the time of the transactions adjusted by
changes in the Chilean CPI during the year.
o The statement of operations is translated into Chilean pesos at
the average exchange rate of the month in which the
transactions occur, except for those expenses related to assets
and liabilities that have been remeasured at historical
exchange rates.
o Exchange differences resulting from the above translation are
recorded in the statement of operations.
Financial statements of foreign subsidiaries whose activities do not
constitute an extension of the Chilean operations, or which operate in
countries that are exposed to significant risks, restrictions or
inflation/exchange fluctuations, are remeasured using the US dollar as
the functional currency and then translated into Chilean pesos at the
year end exchange rate. Remeasurement into US dollar is performed as
follows:
o Monetary assets and liabilities are translated at year-end
rates of exchange between the US dollar and the local currency.
o All non-monetary assets and liabilities and shareholders'
equity are translated at historical rates of exchange between
the US dollar and the local currency.
o Income and expense accounts are translated at the exchange rate
prevailing at the end of the month in which the transactions
occur, except for those expenses related to assets and
liabilities that have been remeasured at historical exchange
rates.
o Any exchange differences are included in the results of
operations for the period.
On the Parent Company's books, price-level restatements based on Chilean
inflation are applied to the beginning balance of the investment account
and then the participation in the net income of the subsidiary
(determined as described above) is recorded. The Parent Company then
compares this value to its participation in the equity of the investee as
remeasured into US dollars and translated into Chilean pesos. The
difference is recorded as an adjustment to the investment account with a
corresponding adjustment to the foreign currency translation account in
shareholders' equity.
As described in Note 3, as of December 31, 2001, the Company changed its
method of accounting for its Argentine subsidiaries.
F-9
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
d) Price-level restatement
The consolidated financial statements, which are expressed in Chilean
pesos, have been restated to reflect the effects of variations in the
purchasing power of the local currency during each year. For this
purpose, and in conformity with current Chilean regulations, non-monetary
assets and liabilities, shareholders' equity accounts and income and
expense accounts have been restated each year in terms of year-end
constant pesos. The resulting net charge or credit to the consolidated
statement of operations arises as a result of the gain or loss in
purchasing power from holding non-monetary assets and liabilities exposed
to the effects of inflation. In accordance with Chilean tax regulations
and accounting practices, the restatements were calculated based on the
official Consumer Price Index ("CPI") of the National Institute of
Statistics, which was 4.7%, 3.1% and 3.0% for the years ended November
30, 2000, 2001 and 2002, respectively. The index is based on the "prior
month rule," pursuant to which the inflation adjustments are based on the
CPI at the close of the month preceding the close of the respective
period or transaction. This index is considered by the business
community, the accounting profession and the Chilean government to be the
index that most closely complies with the technical requirement of
reflecting the variation in the general level of prices in the country.
Consequently, this index is widely used for financial reporting purposes
in Chile.
For comparative purposes, the consolidated financial statements for the
years ended December 31, 2000 and 2001 and the amounts disclosed in the
related footnotes have also been restated in terms of Chilean pesos of
December 31, 2002 purchasing power.
The above-mentioned price-level restatements do not purport to present
appraised or replacement values and are only intended to restate all
non-monetary financial statement components in terms of local currency of
similar purchasing power and to include in the net gain or loss in
purchasing power arising from the holding of monetary assets and
liabilities exposed to the effects of inflation.
Certain assets and liabilities are denominated in UF units (Unidad de
Fomento). The UF is a Chilean inflation-indexed peso-denominated monetary
unit which is set daily in advance based on changes in the CPI. The
adjustments to the closing value of UF-denominated assets and liabilities
are included in the price-level restatement account in the consolidated
statements of operations. Each UF was equivalent to Ch.$ 15,769.92, Ch.$
16,262.66 and Ch.$ 16,744.12 as of December 31, 2000, 2001 and 2002,
respectively.
F-10
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
e) Assets and liabilities denominated in foreign currencies
Assets and liabilities denominated in foreign currencies are presented
in Chilean pesos at the exchange rate at the end of each year informed
by the Central Bank of Chile. The detail of exchange rates for foreign
currencies as of December 2000, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Ch.$ Ch.$ Ch.$
U.S. dollar 573.65 654.79 718.61
Canadian dollar 382.51 410.73 455.62
Deutsche mark 275.50 295.62 -
French franc 82.15 88.14 -
Italian lira 0.28 0.30 -
Argentine peso 573.65 385.17 213.24
Euros 538.84 578.18 752.55
Australian dollar 319.01 334.21 404.78
Spanish Peseta 3.24 3.47 -
British pounds 856.58 948.01 1,152.91
f) Time deposits
Time deposits include capital plus interest and restatements accrued at
each year-end.
g) Marketable securities
Investments in shares are stated at the lower between restated cost and
market value. Investments in mutual funds are stated at quoted market
value at year end.
h) Allowance for doubtful accounts
The Company and its subsidiaries have made allowances for doubtful
debtors based on a case-by-case assessment of debtors whose overdue
balance exceeds six months.
i) Inventories
Inventories of raw materials, materials and supplies are presented at
price-level restated cost, in accordance with Article No. 41 of the
Income Tax Law. These values do not exceed net realizable value.
Bulk wine inventory is stated at weighted average cost plus price level
restatement in accordance with Technical Bulletin No. 3 of the Chilean
Association of Accountants, which do not exceed net realizable value.
Cost of bulk wine is calculated using the absorption costing method,
which includes indirect costs incurred during the production process plus
direct acquisition or grape production costs. These values do not exceed
net realizable value. Approximately 1% of bulk wine inventories will not
be sold within one year because of the duration of the aging process.
These inventories are also included as in-process inventories within
current assets, in accordance with the general practices of the wine
industry.
F-11
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
i) Inventories, continued
Finished goods and in-process wine inventories are stated at cost plus
price level restatement, in accordance with Article 41 of Income Tax Law,
which do not exceed net realizable value. Finished goods and in process
wine inventories include the cost of purchased grapes and agricultural
costs, including overhead for the production of grapes, as well as all
direct and indirect costs associated with the wine-making process,
including the bottling process.
The Company records a provision for obsolescence based on inventory
turnover and/or the evaluation of its use.
j) Prepaid expenses
Prepaid expenses include mainly deferred harvest costs, which are
calculated according to the absorption cost method, which includes direct
and indirect costs. These costs are charged to the cost of wine once the
harvest is completed in the following period.
k) Property, plant and equipment
Property, plant and equipment are presented at acquisition and/or
building or development cost plus price-level restatement. This cost
includes applicable financing costs incurred by the Company until the
asset is ready for use. The value resulting from the technical appraisal
of 1979 is included in the balance of property, plant and equipment and
includes annual price level restatements.
Fixed asset maintenance costs are charged to income as incurred.
l) Leased assets
Assets acquired through financial lease agreements are recorded at the
present value of each contract, which is calculated by discounting
regular installments and the related purchase option at the interest rate
included in each respective agreement. Lease payables are recorded net of
interest not accrued in the short and long-term portion.
m) Depreciation
Depreciation is calculated according to the straight-line method based on
the estimated useful lives of the different classes of assets and
includes depreciation pertaining to fixed asset technical appraisals.
n) Intangible assets
Intangible assets represent rights or privileges acquired that will
benefit the Company's operations beyond the period in which they were
acquired. These refer primarily to water rights and industrial brand name
rights, which are amortized over 20 and 10-year periods, respectively.
These assets are presented at restated cost plus other acquisition
related costs, which do not include financing cost.
o) Investments in related companies
Investments in shares of public and private companies in which the
Company does exercise significant influence are valued according to the
equity method, including the elimination of unrealized gains or losses.
F-12
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
p) Investments in other companies
Investments in shares quoted in the Chilean Stock Market in which the
Company cannot exercise significant influence are valued at the lower
between of restated cost and quoted market value of the portfolio at the
date of the financial statements.
q) Goodwill
Goodwill represents the difference between the acquisition cost of shares
of related companies and the equity proportional value of these
investments at the date of the acquisition. These differences are
amortized over 5 to 20 years, using the straight - line method.
r) Bonds payable
Bonds are stated at the value of principal outstanding plus accrued
interest at the end of each period.
s) Income and deferred taxes
The Company determines and records its income taxes on an accrual basis
based on the net taxable income in conformity with current Chilean tax
regulations.
Effective January 1, 2000, the effects of deferred income taxes are
recorded in accordance with Technical Bulletin No. 60 and the
complementary technical bulletins thereto issued by the Chilean
Association of Accountants. The effects of deferred income taxes as of
January 1, 2000, which were not previously recorded, are recognized in
income over the estimated reversal periods corresponding to the
underlying temporary differences at that date. A valuation allowance was
recorded against net deferred tax assets, where it is more likely than
not that such assets will not be realized.
t) Staff severance indemnities
The Company has agreed with all of its employees to pay severance
benefits equivalent to five business days for each year of service
rendered. Additionally, the company has agreed with the 48 employees
covered by one union to pay them the equivalent of one month of salary
for each year of service. These benefits are paid annually.
As specified by law, in the event that an employee is dismissed under
certain specific circumstances, the employee is entitled to receive one
month of salary for each year of service. In such cases, the additional
severance benefit amounts specified by law are charged to expense at the
date of payment.
The provision for staff severance indemnities is recorded at the present
value of the accrued benefits.
u) Vacations
The cost of employees' vacations is recorded on an accrual basis.
F-13
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 2 - Summary of Significant Accounting Principles, continued
v) Statement of cash flows
The Company prepares the statement of cash flows using the direct method,
considering the balances of cash, bank accounts and financial investments
whose original maturity date is less than 90 and which do not have any
material risk of value loss, as cash and cash equivalents.
Cash flows provided by operating activities include all cash flows
related to the Company, also including interest paid, financial income
and, in general, all cash flows which are not defined as being part of
investing or financial activities. It should be noted that the concept of
operations applied in the preparation of this statement is broader than
that used in the statement of income.
w) Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements in order to conform to the current year method of
presentation.
x) Revenue recognition
The Company recognizes revenues from sales of its goods upon shipment as
this indicates that significant risks and benefits of these assets have
been transferred to the buyer. Revenues from services are recognized when
services have been performed.
y) Derivative contracts
The Company has foreign exchange forward contracts that have been
designated as hedge instruments against variations in the foreign
exchange rate of specific items, and are recorded in accordance with
Technical Bulletin No. 57 issued by the Chilean Association of
Accountants.
z) Computer software
Investments in computer programs relate principally to capitalized costs
incurred in the implementation of the SAP R/3 system and other
complementary or additional programs, which are presented under other
fixed assets within property, plant and equipment and which are being
amortized over an 8-year period, using the straight-line method.
aa) Convenience translation to U.S. dollars
The Company maintains its accounting records and prepares its financial
statements in Chilean pesos. The United States dollar amounts disclosed
in the accompanying financial statements are presented solely for the
convenience of the reader at the December 31, 2002 closing exchange Ch.$
718.61 per US$ 1. This translation should not be construed as a
representation that the Chilean peso amounts actually represent or have
been, or could be, converted into United States dollars.
F-14
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 3 - Changes in Accounting Principles
a) As of December 31, 2001, the Company modified its criterion for the
valuation of investments in Argentina due to the economic situation in
that country, resulting from the significant devaluation of the Argentine
peso at that date. Accordingly, the conversion of the financial
statements of the subsidiaries in Argentina, Distribuidora Peumo
Argentina S.A. and Trivento Bodegas y Vinedos S.A., where the Company has
indirect participation of 100% in both entities, the methodology for the
valuation of investments maintained in non-stable economies contained in
Technical Bulletin No. 64 of the Chilean Association of Accountants was
applied. This requires that the functional currency of these investments
be the U.S. dollar.
As of December 31, 2000, those financial statements were converted to
Chilean pesos using the methodology of valuation of the investments in
stable economies, which requires that the functional currency of the
above-mentioned investments be the Argentine pesos and the translation of
the related figures to Chilean pesos based on the year-end exchange rate.
The net charge to income for the year 2001 arising from the conversion of
the financial statements of the subsidiaries in Argentina and the
devaluation of Argentine peso amounted to Th.Ch.$ 1,381,376.
b) During 2002, there were no changes in accounting principles.
Note 4 - Marketable Securities
Instrument As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Equity securities 385 385
Mutual fund quotes 255,634 130,022
---------- ----------
Total 256,019 130,407
========== ==========
Note 5 - Short-term Receivables
Short-term
Trade accounts receivable
Description As of December 31,
-------------------------------------------------
2001 2002
----------------------- -----------------------
ThCh$ % ThCh$ %
Trade accounts receivable - export sales, net 21,304,049 69.57 28,520,267 77.49
Trade accounts receivable - domestic sales, net 9,319,617 30.43 8,283,851 22.51
---------- ---------- ---------- ----------
Total trade accounts receivable, net 30,623,666 100.00 36,804,118 100.00
========== ========== ========== ==========
F-15
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 5 - Short-term Receivables, continued
Notes Receivable
Description As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Checks, net 1,966,263 1,600,891
Notes receivable, net 540 2,248
Notes receivable denominated in foreign currencies 130,823 260,876
---------- ----------
Total notes receivable, net 2,097,626 1,864,015
========== ==========
Other Accounts Receivable
Description As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Receivable from employees 353,425 389,643
Reimbursable amounts 84,074 124,038
Other accounts receivable 385,858 323,512
---------- ----------
Total other accounts receivable 823,357 837,193
========== ==========
Maturities of short-term receivables are as follows:
More than 90 days
Up to 90 Days up to 1 year Total
------------------------- ------------------------- --------------------------
2001 2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- ----------- -----------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Trade accounts receivable 25,848,667 34,533,056 4,865,360 2,425,350 30,714,027 36,958,406
Provision for doubtful accounts - - - - (90,361) (154,288)
----------- -----------
Trade accounts receivable, net 30,623,666 36,804,118
Notes receivable 2,087,914 2,030,434 111,695 10,003 2,199,609 2,040,437
Provision for doubtful accounts - - - - (101,983) (176,422)
----------- -----------
Notes receivable, net 2,097,626 1,864,015
----------- -----------
Other accounts receivable 823,357 830,193 - - 823,357 830,193
Provision for doubtful accounts - - - - - -
----------- -----------
Other accounts receivable, net 823,357 830,193
F-16
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 6 - Balances and Transactions with Related Companies
Balances and transactions with related companies include all those transactions
performed with affiliates. In addition, this note discloses all those
significant transactions with related companies, whose total amount exceeds 1%
of the Company's results, as well as operations related to the sale and purchase
of shares.
a) Notes and accounts receivable:
As of December 31,
-------------------
Company 2001 2002
-------- --------
ThCh$ ThCh$
Bodegas y Vinedos Santa Emiliana S.A 202,484 342,551
Vina Almaviva S.A 205,089 184,577
Fruticola Viconto S.A 180,563 47,666
Villard Fine Wine S.A 14,735 1,779
Altagracia S.A - 27
-------- --------
Total 602,871 576,600
======== ========
b) Notes and accounts payable:
As of December 31,
-------------------------------------------------
Short-term Long-term Short-term Long-term
---------- ---------- ---------- ----------
Company 2001 2002 2001 2002
------------------------------------------ ---------- ---------- ---------- ----------
ThCh$ ThCh$ ThCh$ ThCh$
Comercial Greenwich Ltda 10,291 - - -
Industria Corchera S.A 1,186,163 1,566,652 - -
Importadora y Comercial Huasco S.A 7,629 38,296 - -
Forestal Quivolgo S.A 88,782 89,679 415,284 353,987
Agricola Greenwich Ltda 2,267 - - -
Osvaldo Solar Varela 156 - - -
Inversiones Totihue S.A 235,209 242,057 1,120,909 955,464
Eduardo Rafael Morande Montt 22,919 23,586 109,223 93,102
Carmen Montt Luco 22,919 23,586 109,223 93,102
Carmen Gloria Morande Montt 22,919 23,586 109,223 93,102
Juan Ignacio Morande Montt 22,919 23,586 109,223 93,102
Catalina Del Rosario Morande Montt 22,919 23,586 109,223 93,102
Victor Javier Morande Montt 22,919 23,586 109,223 93,102
Maria Veronica Morande Montt 22,919 23,586 109,223 93,102
Jose Vicente Morande Montt 22,919 23,586 109,223 93,102
Eduardo Ignacio Morande Fernandez 25,006 25,734 119,150 101,563
Agricola Alto de Quitralman Ltda - 1,417 - -
Agricola Sextafrut S.A 4,719 - - -
Inversiones y Asesorias de Asis Ltda - 716 - -
Asesorias e Inversiones Bombini y Cia Ltda - 8,786 - -
---------- ---------- ---------- ----------
1,743,574 2,162,025 2,529,127 2,155,830
========== ========== ========== ==========
F-17
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 6 - Balances and Transactions with Related Companies, continued
c) Transactions:
For the year ended December 31,
----------------------------------------
Company Relationship Type of transaction 2001 2002
------------------- --------------------
Amount Income Amount Income
--------- --------- ---------- --------
ThCh$ ThCh$ ThCh$ ThCh$
Fruticola Viconto S.A. Common Mgmt. Sale of fruit, products and Services 300,669 - 391,606 -
Purchase of raw materials 186,227 - 210,742
Bodegas y Vinedos Santa Common Mgmt. Sale of raw materials, products
Emiliana S.A. and services 3,885,957 306,673 3,840,399 307,232
Purchase of raw materials and
other purchases 975,885 - 698,783 -
Industria Corchera S.A. Affiliate Sale of services 1,246 - 86 -
Purchase of raw materials 3,600,388 - 4,992,102 -
Vina Almaviva S.A. Affiliate Sale of raw materials, services
and others 239,226 - 301,594 -
Sale of land 1,074,322 521,626 - -
Purchase of raw materials,
products and others 111,225 - 252,236 -
Importadora y Com. Huasco S.A. Common Mgmt. Purchase of machinery and spare
parts 33,675 - 65,843 -
Purchase of shares of Ind. Corchera - - 11,630 -
Agricola Alto de Quiltraman Ltda. Common Mgmt. Purchase of products 440,933 203,056
Sales of Products - - 40 -
Juanita Morande Errazuriz Shareholder Purchase of shares of Ind. Corchera - - 481 -
Note 7 - Inventories
Inventories, stated as described in Note 2 i), are summarized as follows:
As of December 31,
--------------------------------
2001 2002
----------- -----------
ThCh$ ThCh$
Wine, bottled and bulk 28,418,056 26,826,102
In process wine 1,969,182 2,344,458
Materials and supplies 4,813,581 5,824,735
Other products 142,413 182,523
Provision for obsolescence (135,236) (501,919)
----------- -----------
Total 35,207,996 34,675,899
=========== ===========
F-18
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 8 - Income and Deferred Taxes
a) Income taxes payable
The detail of consolidated income taxes payable is as follows:
As of December 31,
----------------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Provision for income tax 1,801,546 2,687,619
Less:
Monthly tax provisional payments (1,134,440) (2,332,354)
Other credits (116,033) (249,066)
---------- ----------
Income taxes payable, net 551,073 106,199
========== ==========
b) As of December 31, 2001 and 2002, consolidated net taxable income
amounted to ThCh$12,010,308 and ThCh$16,797,619, respectively.
c) "Income taxes" as presented in the consolidated statement of income for
the years ended December 31, are summarized as follows:
For the years ended December 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Current tax expense (provision for income taxes) (1,114,285) (1,801,546) (2,687,619)
Effect of deferred tax assets and liabilities for the year (1,226,102) (1,696,240) (278,304)
Tax benefit provided by tax losses - 355,727 1,954,112
Change in valuation allowance - - (1,648,831)
---------- ---------- ----------
Amortization of complementary accounts 198,196 378,002 (318,015)
---------- ---------- ----------
Total (2,142,191) (2,764,057) (2,978,657)
========== ========== ==========
F-19
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 8 - Income and Deferred Taxes, continued
d) Deferred taxes
Changes in the Chilean Income Tax Law, effective beginning on January 1, 2001,
require that income tax rates increase gradually between 2001 and 2004 from 15%
to 17%. Consequently, deferred tax balances as of December 31, 2002 were
calculated based on tax rates applicable at the estimated date of the turnover
of originating temporary differences.
As of December 31,
-----------------------------------------------------------------------------------------------------
2001 2002
------------------------------------------------- -------------------------------------------------
Deferred tax asset Deferred tax liability Deferred tax asset Deferred tax liability
----------------------- ----------------------- ----------------------- -----------------------
Temporary differences Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Provision for doubtful 27,459 - - - 58,832 - - -
accounts
Provision for vacations 116,274 - - - 146,864 - - -
Financial lease agreements - - - 7,485 - - - 13,952
Production expenses - - 23,001 733,702 - - 37,268 638,923
Fixed assets depreciation - - - 4,710,809 - - - 5,136,769
Staff severance indemnities - 78,542 - - - 96,625 - -
Other events 5,181 - - 31,436 101,074 - - -
Inventories 106,959 - - - 171,940 - - -
Unrealized gains tax
Liabilities 242,533 88,677 - - 187,366 86,093 - -
Tax losses 355,727 - - - 2,249,625 - - -
Complementary accounts,
net of amortization - - - 2,691,954 - - - 2,373,939
Valuation allowance - - - - 1,648,831 - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 854,133 167,219 23,001 2,791,478 1,266,870 182,718 37,268 3,415,705
========== ========== ========== ========== ========== ========== ========== ==========
Tax loss carryforwards relate to Argentine subsidiaries and expire as follows:
YEAR THCH$
---- -----
2003 -
2004 48,442
2005 32,274
2006 674,326
2007 1,416,213
F-20
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 9 - Property, Plant and Equipment
a) The following is a summary of property, plant and equipment as of
December 31, 2001 and 2002:
Gross Fixed Accumulated Gross Fixed Accumulated
Assets Depreciation Assets Depreciation
------------ ------------ ------------ ------------
2001 2002
---------------------------- ----------------------------
ThCh$ ThCh$ ThCh$ ThCh$
Land 17,382,260 - 17,750,514 -
------------ ------------ ------------ ------------
17,382,260 - 17,750,514 -
------------ ------------ ------------ ------------
Plantations 17,504,002 (3,072,871) 22,855,498 (3,827,098)
Buildings and facilities 41,360,389 (6,543,588) 37,474,378 (7,578,047)
Permanent vineyards 16,257,146 (7,211,773) 17,267,386 (7,559,537)
------------ ------------ ------------ ------------
75,121,537 (16,828,232) 77,597,262 (18,964,682)
------------ ------------ ------------ ------------
Machinery and equipment 27,545,556 (11,820,051) 27,196,800 (12,671,290)
Transportation equipment 2,094,822 (1,313,834) 4,026,921 (2,143,084)
------------ ------------ ------------ ------------
29,640,378 (13,133,885) 31,223,721 (14,814,374)
------------ ------------ ------------ ------------
Bottles and packaging 708,137 (417,973) 921,489 (476,375)
Other fixed assets 5,283,142 (2,420,512) 7,019,994 (2,995,727)
Lease fixed assets 1,253,414 (188,012) 1,253,414 (238,149)
------------ ------------ ------------ ------------
7,244,693 (3,026,497) 9,194,897 (3,710,251)
------------ ------------ ------------ ------------
Revaluation from fixed asset technical appraisal 3,665,044 (1,672,161) 3,550,780 (1,587,488)
------------ ------------ ------------ ------------
3,665,044 (1,672,161) 3,550,780 (1,587,488)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Property, plant and equipment 133,053,912 (34,660,775) 139,317,174 (39,076,795)
============ ============ ============ ============
b) Depreciation for the year ended December 31, 2002 amounted to
ThCh$6,860,457 (ThCh$4,980,839 and ThCh$5,953,126 in 2000 and 2001,
respectively), including depreciation related to fixed asset technical
revaluation.
As of December 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Depreciation (selling and administrative expenses) (521,136) (929,967) (897,120)
Depreciation (Agricultural cost) (1,074,385) (1,193,398) (1,523,919)
Depreciation (Cost of sales) (3,385,318) (3,829,761) (4,439,418)
---------- ---------- ----------
Total (4,980,839) (5,953,126) (6,860,457)
========== ========== ==========
c) The detail of interest capitalized for financing costs is as follows:
For the years ended
December 31,
------------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Vineyards under development 424,107 268,575
Constructions-in-progress 352,941 199,469
---------- ----------
Total 777,048 468,044
========== ==========
F-21
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 9 - Property, Plant and Equipment, continued
d) Technical revaluation: in accordance with Circular 1,529 of the
Superintendency of Securities and Insurance, the Company recorded the
increase in value resulting from a technical appraisal of its principal
fixed assets as of December 31, 1979. As of December 31, 2001 and 2002,
this higher value was comprised by the following restated amounts:
As of December 31,
----------------------------------------------------------
2001 2002
--------------------------- ---------------------------
Item Accumulated Accumulated
Asset Value Depreciation Asset Value Depreciation
------------ ------------ ------------ ------------
ThCh$ ThCh$ ThCh$ ThCh$
Land 1,699,366 - 1,699,366 -
Plantations 267,185 (219,237) 263,298 (222,672)
Buildings and facilities 1,432,315 (1,187,523) 1,354,324 (1,131,024)
Machinery and equipment 266,178 (265,401) 233,792 (233,792)
------------ ------------ ------------ ------------
Total 3,665,044 (1,672,161) 3,550,780 (1,587,488)
============ ============ ============ ============
e) Leased assets are accounted for in conformity with Technical Bulletin No.
22 of the Chilean Association of Accountants and relate to floor No. 15
and office 1602 Sur of the World Trade Center Building, as follows:
As of December 31,
--------------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Lease fixed assets 1,253,414 1,253,414
Accumulated depreciation (188,012) (238,149)
---------- ----------
Total 1,065,402 1,015,265
========== ==========
The Company does not legally own lease fixed assets and therefore it
cannot freely dispose of them until it exercises the related purchase
option.
f) Operating leases:
The Company has entered long-term lease agreements for land where it has
developed grape plantations for wine production. As of December 31, 2002,
minimum future payments related to these operating lease agreements are
as follows:
-------------
Year ended December 31, 2002
-------------
ThCh$
2003 310,176
2004 290,837
2005 290,837
2006 290,837
2007 290,837
2008 290,837
2009 and thereafter 2,072,769
-------------
Total 3,837,130
=============
Rental expense for operating leases amounted to ThCh$ 1,140,763, Th.Ch.$
1,323,815 and Th.Ch.$ 1,788,250 for the years ended December 31, 2000,
2001 and 2002, respectively.
F-22
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 9 - Property, Plant and Equipment, continued
g) Investments in computer programs
During 2002, the Company acquired CO-PA module of SAP for ThCh$ 35,075.
During 2001, there were no investments in computer programs.
Note 10 - Investments in Related Companies
Significant Events
a) Changes in ownership structure
In order to improve the efficiency of intercompany operations and improve
the ease of the preparation and consolidation of the financial
statements, the Company opted to modify the ownership structure of the
Group companies.
Basically, these modifications contemplate that the Group has a Parent
Company, which has the ownership of foreign subsidiaries, and another
investment company has the ownership of domestic Group companies,
maintaining Vina Concha y Toro S.A. as the Group's Parent Company.
The above-mentioned modifications primarily included the formation of VCT
Internacional S.A., which is owned by 70.2% by Inversiones Concha y Toro
S.A. (formerly - Comercial Peumo S.A.) and 29.8% by Vina Maipo Ltda. This
company received the transfer of the shares of and rights that Vina Maipo
Ltda. and Vina Concha y Toro S.A. had on Trivento Bodega y Vinedos S.A.
and Distribuidora Peumo Argentina S.A., both of which are located in
Argentina. Accordingly, VCT Internacional controls 93.6% of Trivento
Bodegas y Vinedos S.A. and 99.99% of Distribuidora Peumo Argentina.
Consequently, Comercial Peumo Ltda. has the remaining portion of
ownership interest in the above-mentioned companies of 6.4% and 0.01%,
respectively.
On a subsequent date, Comercial Peumo S.A. changed its name to
Inversiones Concha y Toro S.A. and became an investment company. This
company received the transfer of the shares and rights which Vina Concha
y Toro had in Vina Maipo Ltda. (99%), Villa Alegre S.A. (75%) and Vina
Cono Sur S.A. (50%).
As a result of these change, Vina Concha y Toro has the direct ownership
of the shares and rights in the following subsidiaries and affiliates:
Company %
------------------------------------ -------------
Inversiones Concha y Toro S.A. 99.98
Oneworldwines Ltda. 99.00
Concha y Toro UK Ltda. 99.00
Vina Almaviva S.A. 50.00
Industria Corchera S.A. 49.84
In addition, Inversiones Concha y Toro S.A. has the shares and rights of
the following companies:
Company %
------------------------------------ -------------
VCT Internacional S.A. 70.20
Vina Maipo Ltda. 99.00
Comercial Peumo Ltda. 99.90
Vina Cono Sur S.A. 50.00
Villa Alegre S.A. 75.00
F-23
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 10 - Investments in Related Companies, continued
b) During November 2002, the Company acquired 4,818 shares of Industria
Corchera S.A., which represents 0.24% of the total amount of shares
issued and resulted in an increase in Vina Concha y Toro S.A.'s ownership
to 49.84% of the equity of Industria Corchera S.A. The amount of the
above-mentioned transaction was ThCh$ 12,111.
c) Valuation of investments in Argentina
The financial statements of the Argentine subsidiaries, Distribuidora
Peumo Argentina S.A. and Trivento Bodegas y Vinedos S.A., in which Vina
Concha y Toro has indirect ownership interest of 100%, have been
translated in conformity with the method indicated in Technical Bulletin
No. 64 of the Chilean Association of Accountants, which requires that the
control of investments in unstable economies be maintained in historical
US Dollars.
The net effect of the conversion of the financial statements of the
above-mentioned subsidiaries gave rise to a net charge to the Parent
Company's income by way of the application of the equity method of
accounting of ThCh$1,387,809 and ThCh$2,993,424 as of December 31, 2001
and 2002, respectively.
Detail of investments
Company Ownership percentage Equity of investee Accrued income Equity Method value
---------------------- --------------------- ------------------------------ --------------------
2000 2001 2002 2001 2002 2000 2001 2002 2001 2002
------ ------ ------ --------- --------- --------- --------- --------- --------- ---------
% % % ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Industria Corchera S.A. 49.60 49.60 49.84 5,064,933 5,749,626 78,500 (8,298) 226,956 2,512,207 2,865,614
Vina Almaviva S.A. 50.00 50.00 50.00 3,906,900 4,975,066 326,534 576,829 534,083 1,953,451 2,487,533
--------- --------- --------- --------- ---------
405,034 568,531 761,039 4,465,658 5,353,147
========= ========= ========= ========= =========
Note 11 - Investments in Other Companies
2002:
a) During January 2002, the Company acquired 101 shares of La Rosa Sofruco
S.A. at a restated cost of ThCh$ 175.
b) During June 2002, the Company acquired 2,280 shares of La Rosa Sofruco
S.A. at a restated cost of ThCh$ 4,126.
c) During November 2002, the Company acquired 930 shares of La Rosa Sofruco
S.A. at a restated cost of ThCh$ 1,644.
d) During December 2002, the Company acquired 3 shares of Union Sede Oriente
S.A. at a restated cost of ThCh$ 18,600.
2001:
a) During December 2001, the Company acquired 30,400 shares of La Rosa
Sofruco S.A. at a restated cost of ThCh$ 55,346.
F-24
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 11 - Investments in Other Companies, continued
Detail of investments
Number of Ownership
Company shares Percentage Book Value
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Sociedad Agricola La Rosa Sofruco S.A 241,645 0.00 228,585 234,530
Cia. General de Electricidad Industrial S.A 13,483 0.00 7,579 7,579
The Chilean Chamber of Commerce 1 0.00 1,341 1,341
Termas de Puyehue S.A 2,000 0.00 111 111
Union Sede Oriente S.A 3 0.00 - 18,600
Other minor investments - 0.00 2,431 2,431
---------- ----------
Total 240,047 264,592
========== ==========
Note 12 - Goodwill
The detail of goodwill is as follows:
For the year ended December 31, As of December 31,
Company Amortization Net Balance
------------------------------------ -----------------------
2000 2001 2002 2001 2002
---------- ---------- ---------- ---------- ----------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Villa Alegre S.A 12,715 11,409 11,409 34,227 22,818
Vina Almaviva S.A 6,428 6,101 2,979 3,050 -
Industria Corchera S.A 5,587 67,042 67,042 1,268,201 1,201,159
---------- ---------- ---------- ---------- ----------
Total 24,730 84,552 81,430 1,305,478 1,223,977
========== ========== ========== ========== ==========
Note 13 - Intangibles
Intangible assets are as follows:
As of December 31,
--------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
amount Amortization amount Amortization
---------- ---------- ---------- ----------
2001 2002
----------------------- -----------------------
ThCh$ ThCh$ ThCh$ ThCh$
Industrial trademarks 315,207 (69,442) 460,444 (75,502)
Telephone line rights 11,261 (515) 11,261 (1,627)
Water rights 209,339 (22,287) 209,293 (38,304)
Software licenses 413 - 413 (413)
---------- ---------- ---------- ----------
Total 536,220 (92,244) 681,411 (115,846)
========== ========== ========== ==========
Amortization expense for the years ended December 31, 2000, 2001 and 2002 was
ThCh$21,973, ThCh$38,159 and ThCh$53,176, respectively.
F-25
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 14 - Short-term Bank Debt
Bank or
Registration Financial
N(degree) institution U.S. dollars Euros Other currencies U.F.
----------------------- ----------------------- ----------------------- -----------------------
2001 2002 2001 2002 2001 2002 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Short-term
portion
Banco de
97036000-K Santiago - - - - - - 342,095 -
Banco de
97024000-4 A. Edwards - - - - - - - -
Banco de
97004000-5 Chile 1,376,603 2,466,104 - - - - 1,689,593 1,678,096
Banco
97008000-6 Santander 884,927 - 600,424 - - - 4,504,320 -
97008000-7 Citibank - - - - - - 1,196,555 -
97032000-8 Banco BHIF - 1,445,771 1,320,588 - - - 1,016,288 3,100,683
Foreign
bank Banco Banco
Sudameris Sudameris - - - - 6,657 - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 2,261,530 3,911,875 1,921,012 - 6,657 - 8,748,851 4,778,779
========== ========== ========== ========== ========== ========== ========== ==========
Bank or
Registration Financial
N(degree) institution Non-adjustable Ch$ Total
----------------------- -----------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
Short-term
portion
Banco de
97036000-K Santiago - - 342,095 -
Banco de
97024000-4 A. Edwards 1,192,498 - 1,192,498 -
Banco de
97004000-5 Chile - - 3,066,196 4,144,200
Banco
97008000-6 Santander - - 5,989,671 -
97008000-7 Citibank - - 1,196,555 -
97032000-8 Banco BHIF - - 2,336,876 4,546,454
Foreign
bank Banco Banco
Sudameris Sudameris - - 6,657 -
---------- ---------- ---------- ----------
Total 1,192,498 - 14,130,548 8,690,654
========== ========== ========== ==========
Short term portion US Dollar Euros Other currencies
--------------------- ---------------------- ----------------------
2001 2002 2001 2002 2001 2002
--------- --------- --------- --------- ---------- ---------
Principal owed 2,225,916 3,880,494 1,896,509 - - -
Weighted average interest rate 3.92% 2.64% 4.77%
Short term portion U.F. Non-adjustable Ch$ Total
--------------------- --------------------- ------------------------
2001 2002 2001 2002 2001 2002
--------- --------- --------- ---------- ---------- ----------
Principal owed 8,610,918 4,769,979 1,178,417 - 13,911,760 8,650,473
Weighted average interest rate 4.09% 0.86% 7.56% 4.45% 1.66%
Long term portion US Dollar Euros Other currencies
--------------------- ---------------------- ----------------------
2001 2002 2001 2002 2001 2002
--------- --------- --------- --------- ---------- ---------
Principal owed 4,114,046 9,745,084 - 20,434 - -
Weighted average interest rate 4.32% 2.66%
Long term portion U.F. Non-adjustable Ch$ Total
--------------------- ---------------------- ------------------------
2001 2002 2001 2002 2001 2002
--------- --------- --------- ---------- ---------- ----------
Principal owed 114,230 949,407 152,314 - 4,380,590 10,714,925
Weighted average interest rate 5.00% 1.36% 7.92% 4.46% 2.54%
F-26
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 14 - Short-term Bank Debt, continued
Bank or
Registration Financial
N(degree) institution U.S. dollars Euros Other currencies U.F.
----------------------- ----------------------- ----------------------- -----------------------
2001 2002 2001 2002 2001 2002 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term
portion
Banco de
97024000-4 A. Edwards - - - - - - - -
Foreign bank Rabobank - - - 20,434 - - - -
Banco de
97004000-5 Chile 12,071 723,164 - - - - - -
Banco
97039000-6 Santander - - - - - - 37,456 7,085
Banco
Estado
97030000-7 Chile - - - - - - 76,774 1,051,455
Dresdner
97005000-0 Banque Nat. 2,771,540 2,903,460 - - - - - -
97008000-7 Citibank 1,435,553 5,736,141 - - - - - -
Banco
Credito e
97006000-6 Inv. 4,304 455,454 - - - - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
4,223,468 9,818,219 - 20,434 - - 114,230 1,058,540
========== ========== ========== ========== ========== ========== ========== ==========
Bank or
Registration Financial
N(degree) institution Non-adjustable Ch$ Total
----------------------- -----------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
Long-term
portion
Banco de
97024000-4 A. Edwards 152,314 - 152,314 -
Foreign bank Rabobank - - - 20,434
Banco de
97004000-5 Chile - - 12,071 723,164
Banco
97039000-6 Santander - - 37,456 7,085
Banco
Estado
97030000-7 Chile - - 76,774 1,051,455
Dresdner
97005000-0 Banque Nat. - - 2,771,540 2,903,460
97008000-7 Citibank - - 1,435,553 5,736,141
Banco
Credito e
97006000-6 Inv. - - 4,304 455,454
---------- ---------- ---------- ----------
152,314 - 4,490,012 10,897,193
========== ========== ========== ==========
Percentaje of Liabilities denominated in foreign currency 70.2000%
Percentage of Liabilities denominated in Chilean pesos 29.8000%
F-27
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 15 - Other Current Liabilities
The detail is as follows:
As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Obligations from forward contracts - 112,460
---------- ----------
Total other current liabilities - 112,460
========== ==========
Note 16 - Long-term Bank Debt
Date of close year Prior year
Years to Maturity of the current closing date
------------------------------------------------------ ----------------------
Tax Bank or Currency or Total long- Weighted
Registration Financial Adjustment More term average Total long-
No. Institution Index than portion Interest term at
1 to 2 2 to 3 3 to 5 5 to 10 10 at year-end rate year-end
- -----------------------------------------------------------------------------------------------------------------------------------
97004000-5 Banco de Chile US$ - - - - - - - 1,348,867
97005000-0 Dresdner Banque
National US$ - - - - - - - 2,697,735
97008000-7 Citibank N.A. US$ - - - - - - - 4,341,450
97006000-6 Banco Credito e Inv. US$ - - - - - - - 1,364,948
Foreign bank Rabobank Euro 537,546 1,075,093 1,075,093 1,075,018 - 3,762,750 3.99% -
97030000-7 BancoEstado UF 1,582,319 3,692,079 - - - 5,274,398 1.33% 6,298,204
97039000-6 Banco Santander UF 2,692,454 1,794,970 4,487,424 1.38% 4,489,144
---------- ---------- ---------- ---------- ---------- ---------- ------- ----------
Total 4,812,319 6,562,142 1,075,093 1,075,018 - 13,524,572 20,540,348
========== ========== ========== ========== ========== ========== ======= ==========
Liabilities denominated in foreign currency 27.82%
Liabilities denominated in Chilean pesos 72.18%
F-28
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 17 - Short and Long-term Bonds Payable
N(degree)of registration
of the instrument Frequency Country
------------------------ in which
Nominal Restatement Interest Pay of Payment of Value Par The instrument
Series value unit rate interest amortization 2001 2002 was placed
--------------------------------------------------------------------------------------------------------------------
Short-term portion of bonds payable
150 AA 635,947 U.F. 6.00% Semi annual Semi-annual 624,545 648,480 Chile
-------------------
624,545 648,480
===================
Long-term portion of bonds payable
150 AA - U.F. 6.00% Semi annual Semi-annual 636,191 - Chile
-------------------
636,191 -
===================
Note 18 - Provisions and Write-offs
The detail is as follows:
As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh$ ThCh$
Advertising expenses 2,824,520 4,639,450
Employee legal bonus and profit participation 694,676 604,628
Directors' compensation 487,838 571,349
Provision for vacations 718,681 868,255
Other provisions - Argentine subsidiaries 133,995 484,820
Other provisions 120,738 523,770
---------- ----------
Total provisions 4,980,448 7,692,272
========== ==========
The most significant charges to income related to write-offs are as follows:
For the years ended December 31,
--------------------------------------
2001 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Label write-offs 6,853 22,356 344,705
Degradation of wines 400,403 1,306,085 311,986
Reprocessing 395,766 629,732 867,597
As of December 31, 2001 and 2002, there are provisions recorded which are
presented deducting the related asset accounts as per the following detail:
As of December 31,
--------------------------
2001 2002
---------- ----------
Doubtful accounts (90,361) (154,288)
Uncollectible notes (101,983) (176,422)
Obsolescence of inventories (135,236) (501,919)
F-29
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 19 - Accrued Expenses
Accrued expenses consists in staff severance indemnities and are recorded at the
present value of the total liability according to the accrued cost of the
benefit considering an interest rate of 6.86% per annum and an average
capitalization period of 15 years. Changes during each year were as follows:
2001 2002
---------- ----------
ThCh$ ThCh$
Balance at the beginning of the year 390,187 462,772
Price-level restatement (1) (11,732) (13,479)
Increase during the year 135,925 143,076
Payments during the year (51,608) (23,124)
---------- ----------
Balance as of December 31, 462,772 569,245
========== ==========
(1) Reflects the effect of price-level restatement for comparative purposes
at the beginning of each period, adjusted to constant pesos of December
31, 2002.
Note 20 - Minority Interest
The detail is as follows:
As of December 2001 As of December 2002
------------------------ ------------------------
Related Liability Result Liability Result
---------- ---------- ---------- ----------
Villa Alegre S.A 57,527 (6,292) 65,089 (7,560)
Soc. Export. y Com. Oneworldwine Ltda 1,293 (289) 4,256 (2,958)
---------- ---------- ---------- ----------
58,820 (6,581) 69,345 (10,518)
========== ========== ========== ==========
Note 21 - Movements in Shareholders' Equity
The company's paid in capital as of December 31,2002 is as follows
Number of shares
Series No. of subscribed No. of paid No. of voting
shares shares right shares
0 719,170,735 719,170,735 719,170,735
Capital (Amount)
Series Subscribed Paid-in
capital capital
0 41,703,330 41,703,330
F-30
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 21 - Movements in Shareholders' Equity, continued
a) Other Reserves
Other reserves is detailed as follows
As of December 31,
-----------------------
2001 2002
---------- ----------
ThCh $ ThCh $
Accumulated capital restatement 1,701,942 1,701,942
Revaluation from fixed asset technical appraisal 3,868,689 3,868,689
Adjustment to the value of fixed assets 1,021,956 1,021,956
Revaluation from fixed asset technical appraisal in subsidiaries 489,081 489,081
Special laws 673,913 673,913
Fluctuation market value of securities 521,292 521,292
Cumulative translation adjustment 371,001 786,973
---------- ----------
Total other reserves 8,647,874 9,063,846
========== ==========
b) Cumulative translation adjustment
This relates to the net difference between the Consumer Price Index (C.P.I.) and
U.S. dollar at the end of the year for investments abroad, in accordance with
Technical Bulletin No. 64 of the Chilean Association of Accountants. The detail
of this adjustment presented by subsidiary is as follows:
Balance as of
Company Restated Opening Exchange December 31,
Balance Difference 2001
------------ ------------ ------------
Distribuidora Peumo Argentina S.A 76,088 21,575 97,663
Trivento Bodegas y Vinedos S.A 3,568 269,770 273,338
------------ ------------ ------------
Total 79,656 291,345 371,001
============ ============ ============
Balance as of
Company Restated Opening Exchange December 31,
Balance Difference 2002
------------ ------------ ------------
Distribuidora Peumo Argentina S.A 97,663 48,414 146,077
Trivento Bodegas y Vinedos S.A 273,338 367,558 640,896
------------ ------------ ------------
Total 371,001 415,972 786,973
============ ============ ============
c) Dividends
The Company's dividend policy proposed by the Board of Directors for 2002
consists of the distribution of up to 40% of net income for the year divided
into three provisional dividends payable in September 2002, December 2002 and
March 2003 and the payment of a final dividend in May 2003.
There are no restrictions for the payment of dividends.
F-31
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 22 - Other Non-Operating Income and Expenses
The detail is as follows:
Other Non-operating income
For the year ended December 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Dividends received 46,718 15,284 11,036
Gain on sale of fixed assets 258,793 1,319,071 1,432,934
Leasing 5,119 23,477 20,231
Administrative services - 12,760 12,793
Other agricultural services 50,060 24,714 13,740
Insurance claim recovery 200,153 155,282 51,220
Business discounts - 18,080 -
Sale of glass 47,252 22,145 10,626
Sale of other products 25,978 23,546 28,662
Gain on sale of shares 253,865 - -
Other 109,146 416,561 173,931
---------- ---------- ----------
Total 997,084 2,030,920 1,755,173
========== ========== ==========
Other Non-operating expenses
For the year ended December 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Amortization of intangible assets 21,973 38,159 53,176
Loss on sale of fixed assets - 24,838 21,807
Adjustment of fixed asset - - 35,177
Dividends not collected 771 555 526
Other agricultural expenses - - 15,723
Other expenses 109,521 97,733 59,168
---------- ---------- ----------
Total 132,265 161,285 185,577
========== ========== ==========
F-32
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 23 - Price-level Restatement
Restatement
index Year ended December 31,
------------------------
Assets (Charges) / Credits 2001 2002
---------- ----------
ThCh$ ThCh$
Inventories CPI 594,624 852,252
Property, plant and equipment CPI 2,644,770 2,603,075
Investment in related companies CPI 114,727 243,900
Marketable securities CPI 11 11
Other accounts receivable UF 54 3,945
Recoverable taxes CPI 16,646 31,906
Prepaid expenses UF 29,638 104,545
Other non-monetary assets CPI 58,304 62,926
Cost and expense accounts CPI 1,802,439 2,921,625
---------- ----------
Total (Charges) credits 5,261,213 6,824,185
---------- ----------
Liabilities (Charges) / Credits
Shareholders' equity CPI (3,111,159) (3,239,712)
Minority interest CPI 5,076 (1,713)
Bank and financial institutions liabilities UF (534,274) (133,963)
Long-term bank short-term portion UF (192) (29,590)
Bonds payable UF (18,268) (19,801)
Long-term obligations with maturity within 1 year UF (6,825) (14,421)
Notes payable UF 382 (8,029)
Other accounts payable UF - (898)
Long-term bank and financial institutions liabilities UF (326,845) (280,691)
Long-term bonds payable UF (21,347) -
Other long-term accounts payable UF (67,778) (61,477)
Income accounts CPI (2,056,386) (3,292,012)
---------- ----------
Total (charges) credits (6,137,616) (7,082,307)
---------- ----------
Net (loss) gain from price-level restatement (876,403) (258,122)
========== ==========
F-33
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 24 - Foreign Exchange Differences
The detail of these is as follows:
Currency Year ended December 31,
------------------------------
Assets (Charges) / Credits 2001 2002
------------ ------------
ThCh$ ThCh$
Cash Euro (34,342) 59,906
Cash US$ 102,868 169,245
Time deposits US$ (35,418) (61,020)
Trade accounts receivable CAD 64,372 64,739
Trade accounts receivable Euro 299,779 1,019,746
Trade accounts receivable US$ 2,057,551 1,782,561
Other accounts receivable CAD 1,072 1,656
Other accounts receivable Euro (1,048) 16,035
Other accounts receivable US$ 55,468 50,878
Accounts receivable from related companies Euro - (20,524)
Accounts receivable from related companies US$ 1,763,658 1,041,274
Prepaid expenses US$ 39,687 6,398
Other current assets US$ (846,175) -
------------ ------------
Total (charges) credits 3,467,472 4,130,894
------------ ------------
Liabilities (Charges) / Credits
Bank debt Euro (51,823) (413,644)
Bank debt US$ (1,100,365) (653,262)
Long-term bank debt, short-term portion Euro - (533)
Long-term bank debt, short-term portion US$ (505,451) (865,570)
Accounts payable AUD (78) (352)
Accounts payable CAD 1,211 -
Accounts payable ESP (382) -
Accounts payable FRF (559) -
Accounts payable ITL 5,137 -
Accounts payable Euro (16,353) (84,674)
Accounts payable US$ (1,095,269) (331,648)
Accounts payable GBP 142 (971)
Notes payable CAD - (8,238)
Notes payable Euro - (714)
Notes payable US$ (3,253) (33,504)
Accounts payable to related companies US$ (149,708) (92,969)
Other accounts payable US$ - (3,635)
Other accounts payable Euro - (3,015)
Accrued expenses CAD (8,658) (12,526)
Accrued expenses Euro (12,498) (98,153)
Accrued expenses US$ (157,669) (234,848)
Other current liabilities US$ - (47,558)
Long-term bank debt Euro - (198,000)
Long-term bank debt US$ (337,669) -
Long-term notes payable Euro - (11,131)
Long-term accounts payable to related companies US$ (313,403) (191,460)
Adjustment for financial statement translation US$ (1,387,809) (2,993,424)
Adjustment for financial statement translation GBP (8,731) (72,208)
------------ ------------
Total (Charges) / credits (5,143,188) (6,352,037)
------------ ------------
(Loss) gain from exchange difference (1,675,716) (2,221,143)
============ ============
F-34
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 25 - Statement of Cash Flows
Future cash commitments for liabilities which represent investing activities are
as follows:
Years to Maturity
Currency Short- ---------------------------------------------------------------------------------
of adjustment term More than Total
index portion 2004 2005 2006 2007 2008 6 years owed
--------- --------- --------- --------- --------- --------- --------- ---------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Lease payable U.F. 161,161 161,161 161,161 161,161 161,161 161,161 241,746 1,208,712
Lease farms U.F. 78,647 59,308 59,308 59,308 59,308 59,308 1,069,472 1,444,659
Lease farms US$ 231,529 231,529 231,529 231,529 231,529 231,529 1,003,297 2,392,471
Investment in Industria
Corchera S.A US$ 558,269 1,077,915 1,077,915 - - - - 2,714,099
Purchase of land U.F. - - - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Total 1,029,606 1,529,913 1,529,913 451,998 451,998 451,998 2,314,515 7,759,941
========= ========= ========= ========= ========= ========= ========= =========
F-35
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 26 - Derivative Contracts
Description of the Contract
- ----------------------------------------------------------------------------------------------------------------------------------
Type of Type of Amount of Date of Expiration Currency Purchase / Hedged Item Hedged Hedged
Derivative Agreement the Contract Sales Position Amount Entity
Amount
FU CCPE 358,975 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 358,975 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 358,975 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 359,050 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 359,025 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 359,050 1ST. Quarter of 2003 US$ S Export customers 359,545 359,305
FR CCPE 355,400 1ST. Quarter of 2003 US$ S Export customers 354,810 359,305
FR CCPE 711,600 1ST. Quarter of 2003 US$ S Export customers 709,620 718,610
FR CCPE 355,600 1ST. Quarter of 2003 US$ S Export customers 355,015 359,305
FR CCPE 709,000 1ST. Quarter of 2003 US$ S Export customers 697,910 718,610
FU CCPE 354,375 1ST. Quarter of 2003 US$ S Export customers 353,445 359,305
FR CCPE 354,375 1ST. Quarter of 2003 US$ S Export customers 353,445 359,305
FR CCPE 354,375 1ST. Quarter of 2003 US$ S Export customers 353,445 359,305
FR CCPE 355,625 1ST. Quarter of 2003 US$ S Export customers 351,790 359,305
FU CCPE 348,585 1ST. Quarter of 2003 US$ S Export customers 346,850 359,305
FU CCPE 348,645 1ST. Quarter of 2003 US$ S Export customers 346,850 359,305
FU CCPE 348,500 1ST. Quarter of 2003 US$ S Export customers 346,850 359,305
FU CCPE 350,015 1ST. Quarter of 2003 US$ S Export customers 347,960 359,305
FU CCPE 350,030 1ST. Quarter of 2003 US$ S Export customers 347,960 359,305
FU CCPE 706,690 1ST. Quarter of 2003 US$ S Export customers 697,080 718,610
FU CCPE 713,300 1ST. Quarter of 2003 US$ S Export customers 709,510 718,610
ACCOUNTS AFFECTED VALUE OF ASSET / LIABILITIES
- --------------------------------------------------------------
TYPE OF NAME AMOUNT REALIZED UNREALIZED
DERIVATIVE
FU Other current liab. 330 - 330
FR Other current liab. 330 - 330
FR Other current liab. 330 - 330
FR Other current liab. 255 - 255
FR Other current liab. 280 - 280
FR Other current liab. 255 - 255
FR Other current liab. 3.905 - 3.905
FR Other current liab. 7.010 - 7.010
FR Other current liab. 3.705 - 3.705
FR Other current liab. 9.610 - 9.610
FU Other current liab. 4.930 - 4.930
FR Other current liab. 4.930 - 4.930
FR Other current liab. 4.930 - 4.930
FR Other current liab. 3.680 - 3.680
FU Other current liab. 10.720 - 10.720
FU Other current liab. 10.660 - 10.660
FU Other current liab. 10.805 - 10.805
FU Other current liab. 9.290 - 9.290
FU Other current liab. 9.275 - 9.275
FU Other current liab. 11.920 - 11.920
FU Other current liab 5.310 - 5.310
F-36
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 27 - Contingencies and Restrictions
a) Wine contracts: The Company enters into long-term agreements for the
acquisition of grapes and wine, which expire on various dates through
2013.
b) On December 15, 2000, the decrees Nos. 3,692, 3,693 and 3,694 issued by
the Ministry of Public Works dated August 28, 2000 were published in
the Official Gazette, which entitles the expropriation of lots 481
property of Vina Concha y Toro and, 480- A and 480-B the property of
Vina Concha y Toro S.A. and Vina Tocornal Ltda. (currently - Vina Cono
Sur S.A.). The total indemnity established amounted to
Th.Ch.$ 2,080,314.
On July 9, 2001, the Company and its subsidiary, Vina Cono Sur S.A.
filed a claim on the Second Civil Court of San Miguel against the
Chilean State for the provisional amount of the compensations fixed for
the expropriation for three above-mentioned lots. To date, the claim
resolution related to July 9. 2001, is still pending. During 2001 and
2002, Vina Concha y Toro S.A. and Cono Sur received the full amount of
indemnities related to the expropriations of the above-mentioned lots.
The effect on income was Th.Ch.$1,294,233 and Th.Ch.$ 1,411,127 in 2001
and 2002, respectively, and was reflected as other non-operating income
within non-operating results.
c) Restrictions to index limits are generated by covenants associated with
the issuance of bonds payable, as follows
c.1) Maintain assets free of liens or encumbrances equal to at least
30% of all liabilities, calculated semi-annually.
c.2) Maintain adequate insurance coverage for all operating assets.
c.3) Comply with the following financial statement positions:
Debt/shareholders' equity ratio no higher than 1.4 times
Current assets must be equal to or greater than current
liabilities.
Make provisions for probable contingencies.
c.4) Provide the public with periodic financial information.
c.5) Do not cede or transfer essential operating assets, which would
jeopardize the continuity of current operations.
c.6) Do not make investments in financial instruments issued by
related parties, or make loans to related parties, or realize any
other operations with related parties on terms less favorable to
Vina Concha y Toro than those existing in the market.
Acceleration causes:
- If payments of principal and interest are not made when
due,
- If any declaration made by the issuer in relation to the
issuance of the bonds were to be maliciously false,
- In the event the issuer is in non-compliance with any of
the points above, and the noncompliance is not corrected
within 30 days,
- If any other creditor of the issuer legitimately demands
and receives payment prior to the normal maturity of an
obligation, except in the event that the obligation does
not exceed 3% of the total assets of the issuer,
- If the issuer does not make direct or indirect payments
when due to other creditors for amounts greater than 2% of
the total assets of the issuer, or
- If the issuer is dissolved or liquidated.
F-37
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 27 - Contingencies and Restrictions, continued
Direct Guarantees
Debtor Type of Assets Affected
Beneficiary Name Relationship Guarantee Type Book Value
- --------------------------------------------------------------------------------------------------
Banco Santander - - Letter of credit - -
Banco Santiago - - Letter of credit - -
Chilean customs - - - -
Outstanding Balances
At Financial Statement's Guarantee
Beneficiary Closing Date Release Assets
12-31-2001 12-31-2002 31-12-2003
- ----------------------------------------------------------------------
Banco Santander - 142,672 - -
Banco Santiago 81,218 81,218 - -
Chilean customs - 649,571 - -
Indirect Guarantees
Debtor Type of Assets Affected
Beneficiary Name Relationship Guarantee Type Book Value
- --------------------------------------------------------------------------------------------------------
Della Toffola Sud.AG Trivento Bodegas y Subsidiary Guarantee - -
Argentina Vinedos S.A
Outstanding Balances
At Financial Statement's Guarantee
Beneficiary Closing Date Release Assets
12-31-2001 12-31-2002 31-12-2003
- --------------------------------------------------------------------
Della Toffola Sud.AG - 279,931 39,990 79,980
Argentina
e) In the ordinary course of business, the Company acts as defendant or
co-defendant in various litigation matters. Although there can be no
assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings
would not be likely to have a material adverse effect on its results of
operations, financial condition, or liquidity.
F-38
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency
Assets
Current Assets
As of December 31,
-------------------------
Currency 2001 2002
------------ ----------
ThCh$ ThCh$
Cash Ch$ 688,790 1,127,468
Cash ARS 49,238 209,283
Cash GBP 331,405 257,559
Cash US$ 788,764 688,513
Cash EUR 278,072 15,278
Time deposits US$ 366,385 1,051,351
Marketable securities Ch$ 256,019 130,407
Trade accounts receivable Ch$ 9,321,142 8,284,941
Trade accounts receivable US$ 14,620,479 19,459,887
Trade accounts receivable ARS 1,257,259 1,090,428
Trade accounts receivable GBP 1,801,469 2,216,177
Trade accounts receivable EUR 2,569,141 4,812,300
Trade accounts receivable CAD 1,054,176 940,385
Notes receivable Ch$ 1,966,803 1,603,139
Notes receivable US$ 6,518 -
Notes receivable ARS 124,305 260,876
Other accounts receivable Ch$ 459,693 607,162
Other accounts receivable ARS 82,865 11,077
Other accounts receivable GBP 55,955 59,719
Other accounts receivable US$ 164,437 62,226
Other accounts receivable EUR 16,884 -
Other accounts receivable CAD 14,538 12,866
Other accounts receivable UF 28,985 84,143
Notes and accounts receivable from
related companies Ch$ 602,871 450,832
Notes and accounts receivable from
related companies US$ - 125,768
Recoverable taxes Ch$ 712,283 982,801
Recoverable taxes ARG 577,402 613,819
Recoverable taxes US$ 571,503 314,962
F-39
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, continued
As of December 31,
--------------------------
Currency 2001 2002
------------ ------------
ThCh$ ThCh$
Inventories Ch$ 32,245,142 32,663,906
Inventories ARS 45,071 1,120,003
Inventories GBP 790,022 629,106
Inventories US$ 2,095,627 262,884
Inventories FRF 32,134 -
Prepaid expenses Ch$ 5,868,655 5,359,800
Prepaid expenses ARS 139,206 197,596
Prepaid expenses US$ - 385,346
Prepaid expenses UF 317,344 801,992
Prepaid expenses EUR - 3,925
Deferred taxes Ch$ 831,132 1,229,602
Other current assets US$ 209,574 -
Net property, plant and equipment Ch$ 88,367,652 89,789,921
Net property, plant and equipment ARS - 10,439,137
Net property, plan and equipment GBP 50,789 11,321
Net property, plant and equipment US$ 9,974,696 -
Total property, plant and equipment
Other Assets
Other assets Ch$ 6,352,453 7,157,921
Other assets ARS 383,319 5,028
Other assets US$ 86,802 237,144
Other assets UF 7,003 7,000
Other assets EUR - 7,188
Total Assets
Ch$ 147,672,635 149,387,900
ARS 2,658,665 13,947,247
GBP 3,029,640 3,173,882
US$ 28,884,785 22,588,081
EUR 2,864,097 4,838,691
CAD 1,068,714 953,251
UF 353,332 893,135
FRF 32,134 -
F-40
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, Continued
Current Liabilities
---------------------------------------- ------------------------------------------
Up to 90 Days 90 Days to 1 Year
------------------ -------------------- ---------------------- -------------------
2001 2002 2001 2002
------------------ -------------------- ---------------------- -------------------
Annual Annual Annual Annual
Average Average Average Average
Currency Amount Interest Amount Interest Amount Interest Amount Interest
Rate Rate Rate Rate
Short-term bank debt Ch$ 1,192,497 7.00% - - - - - -
Short-term bank debt US$ 2,261,531 3.92% 3,566,555 2.64% - - 345,319 2.64%
Short-term bank debt UF 795,166 4.09% 8,776 0.86% 7,953,685 4.09% 4,770,004 0.86%
Short-term bank debt EUR - - - - 1,921,012 - - -
Short-term bank debt ARS 6,657 - - - - - - -
Current maturities of long-term debt UF 52,828 4.29% 50,062 1.36% 61,402 4.29% 1,008,479 1.36%
Current maturities of long-term debt Ch$ 152,314 7.29% - - - - - -
Current maturities of long-term debt EUR - - 20,434 - - - - -
Current maturities of long-term debt US$ 1,422,672 3.62% 6,445,771 2.66% 2,800,795 3.62% 3,372,447 2.66%
Bonds payable UF 332,269 6.00% 319,516 6.00% 292,276 6.00% 328,964 6.00%
Long-term debt with maturities
within one year UF 40,306 - - - 59,214 7.00% 105,439 7.00%
Dividends payable Ch$ 1,054,677 - 1,090,334 - - - - -
Accounts payable Ch$ 8,641,844 - 10,740,713 - - - - -
Accounts payable ARS 309,513 - 43,888 - - - - -
Accounts payable US$ 1,608,180 - 1,072,766 - - - - -
Accounts payable AUD - - 353 - - - - -
Accounts payable ESP 45,240 - - - - - - -
Accounts payable EUR 7,575 - - - - - - -
Accounts payable FRF 803 - - - - - - -
Accounts payable GBP 146,586 - 80,692 - - - - -
Accounts payable UF 9,330 - - - - - - -
Accounts payable CAD 162,243 - - - - - - -
Notes payable Ch$ 161,997 - - - - - - -
Notes payable US$ 92,857 - 552,686 - - - - -
Notes payable UF 74,628 - 527,220 - - - - -
Notes payable CAD - - 142,658 - - - - -
Notes payable EUR 1,517 - 35,788 - - - - -
Notes payable ARS - - 253,863 - - - - -
F-41
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, continued
Current Liabilities
---------------------------------------- ------------------------------------------
Up to 90 Days 90 Days to 1 Year
------------------ -------------------- ---------------------- -------------------
2001 2002 2001 2002
------------------ -------------------- ---------------------- -------------------
Annual Annual Annual Annual
Average Average Average Average
Currency Amount Interest Amount Interest Amount Interest Amount Interest
Rate Rate Rate Rate
Notes and accounts payable to
related companies Ch$ 1,212,869 - 1,615,867 - - - - -
Notes and accounts payable to
related companies US$ 530,705 - 546,158 - - - - -
Other accounts payable Ch$ 814,229 - 327,982 - - - - -
Other accounts payable ARS 20,526 - - - - - - -
Other accounts payable US$ 1,042 - 34,630 - - - - -
Other accounts payable EUR 14,292 - - - - - - -
Other accounts payable GBP - - 143,692 - - - - -
Other accounts payable UF - - - - - - - -
Accrued expenses Ch$ 2,451,058 - 2,532,364 - - - - -
Accrued expenses ARS 158,682 - 471,585 - - - - -
Accrued expenses US$ 2,035,346 - 3,792,071 - - - - -
Accrued expenses EUR 230,537 - 475,318 - - - - -
Accrued expenses CAD 95,061 - 153,645 - - - - -
Accrued expenses GBP 9,764 - 267,289 - - - - -
Accrued expenses UF - - - - - - - -
Withholdings payable Ch$ 1,531,838 - 1,260,838 - - - - -
Withholdings payable ARS 96,556 - 76,493 - - - - -
Withholdings payable US$ 103,779 - 201,326 - - - - -
Withholdings payable EUR 741 - 7,703 - - - - -
Withholdings payable GBP 121,631 - 17,588 - - - - -
Withholdings payable UF - - 1,176 - - - - -
Income taxes Ch$ 551,073 - 106,199 - - - - -
Deferred revenues Ch$ 9,984 - 41,717 - - - - -
Other current liabilities US$ - - 4,117 - - - - -
Other current liabilities UF - - 9,901 - - - - -
Other current liabilities ARS - - 98,442 - - - - -
F-42
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, continued
Current Liabilities
---------------------------------------- ------------------------------------------
Up to 90 Days 90 Days to 1 Year
------------------ -------------------- ---------------------- -------------------
2001 2002 2001 2002
------------------ -------------------- ---------------------- -------------------
Annual Annual Annual Annual
Average Average Average Average
Currency Amount Interest Amount Interest Amount Interest Amount Interest
Rate Rate Rate Rate
Total current liabilities
Ch$ 17,716,014 - 17,716,014 -
US$ 8,056,112 - 16,216,080 - 2,800,796 - 3,717,766
UF 1,304,527 - 916,651 - 8,366,577 - 6,212,886 -
EUR 254,662 - 539,243 - 1,921,012 - - -
ARS 591,934 - 944,271 - - - - -
AUD - - 353 - - -
ESP 45,240 - - - - - - -
FRF 803 - - - - - - -
GBP 277,981 - 509,261 - - - - -
CAD 257,304 - 296,303 - - - - -
F-43
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, continued
Long-term Liabilities as of December 31, 2001
-------------------- ------------------- ------------------ ------------------
1 to 3 Years 3 to 5 Years 5 to 10 Years More Than 10 Years
-------------------- ------------------- ------------------ ------------------
Annual Annual Annual Annual
Average Average Average Average
Currency Amount Interest Amount Interest Amount Interest Amount Interest
Rate Rate Rate Rate
Long-term bank debt US$ 9,753,000 3.67% - - - - - -
Long-term bank debt UF 10,787,348 5.00% - - - - - -
Bonds payable UF 636,191 6.00% - - - - - -
Other long-term accounts payable UF 305,054 7.00% 616,798 7.00% - - - -
Other long-term accounts payable ARG 91,723 - - - - - - -
Long-term accounts payable to related
companies US$ 2,529,127 - - - - - - -
Long-term accrued expenses Ch$ 462,772 - - - - - - -
Long-term accrued expenses ARG - - - - - - - -
Long-term deferred taxes Ch$ 709,064 - - - - - 1,915,195 -
Other long-term liabilities Ch$ - - - - 521,626 - - -
Total long-term liabilities US$ 12,282,127 - - - - - - -
UF 11,728,593 - 616,798 - - - - -
Ch$ 1,171,836 - - - 521,626 - 1,915,195 -
ARS 91,723 - - - - - - -
F-44
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 28 - Foreign and Domestic Currency, continued
Long-term Liabilities as of December 31, 2002
-------------------- ------------------- ------------------ ------------------
1 to 3 Years 3 to 5 Years 5 to 10 Years More Than 10 Years
-------------------- ------------------- ------------------ ------------------
Annual Annual Annual Annual
Average Average Average Average
Currency Amount Interest Amount Interest Amount Interest Amount Interest
Rate Rate Rate Rate
Long-term bank debt US$ - - - - - - - -
Long-term bank debt UF 9,761,822 2.60% - - - - - -
Long-term bank debt EUR 1,612,640 0.95% 2,150,110 0.95% - - - -
Bonds payable UF - 6.0% - - - - - -
Notes payable EUR 167,066 - - - - - - -
Other long-term accounts payable UF 16,224 7.0% - - - - 811,531 7.0%
Other long-term accounts payable ARS 69,282 - - - - - - -
Notes and accounts payable to related
companies US$ 2,155,830 - - - - - - -
Long-term accrued expenses Ch$ - - - - - - 569,245 -
Long-term deferred taxes Ch$ 1,195,118 - 584,555 - 1,453,314 - - -
Other long-term liabilities US$ 506,433 - - - - - - -
Total long-term liabilities US$ 2,662,263 - - - - - - -
UF 9,778,046 - - - - - 811,531 -
EUR 1,779,706 - 2,150,110 - - - - -
ARS 69,282 - - - - - - -
Ch$ 1,195,118 - 584,555 - 1,453,314 - 569,245 -
F-45
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 29 - Sanctions
As of December 31, 2002, the Company and subsidiaries, directors and/or
administrators have not been subject to fines or sanctions from the
Superintendency of Securities and Insurance.
Note 30 - Subsequent Events
Between December 31, 2002, and the date of issuance of these financial
statements there has been no significant subsequent event which might alter the
Company's position and/or the interpretation of these financial statements.
Note 31 - Environment
During 2001 and 2002, the Company invested and disbursed funds destined, direct
or indirectly to the improvement of environmental conditions. The detail of
these disbursements is as follows:
nvestments As of December 31,
-----------------------
(ADDITIONS) 2001 2002
----------- ----------
ThCh$ ThCh$
Water treatment plants 9,580 -
Expenses As of December 31,
-----------------------
(Additions) 2001 2002
----------- ----------
ThCh$ ThCh$
Maintenance and supplies of water treatment plants 165,010 159,062
As of December 31, 2001 and 2002, the net balance of assets destined to improve
the environment amounted to ThCh$ 351,928 and ThCh$ 343,425, respectively.
Note 32 - Prepaid Expenses
The detail of these is as follows:
As of December 31,
---------------------
2001 2002
--------- ---------
ThCh $ ThCh $
Next harvest expenses 5,635,620 5,653,402
Prepaid insurance 208,765 589,911
Other prepaid expenses 480,820 505,346
--------- ---------
Total 6,325,205 6,748,659
========= =========
Note 33 - Time Deposits
The detail of these is as follows:
As of December 31,
---------------------
2001 2002
--------- ---------
Bank Currency ThCh $ ThCh $
Citibank New York US$ 350,745 1,051,351
Banco Sudameris Savings Fund ARS 15,640 -
--------- ---------
Total 366,385 1,051,351
========= =========
F-46
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 34 - Operating Income
The detail of these is as follows:
As of December 31,
-------------------------
2001 2002
----------- -----------
ThCh $ ThCh $
Sale of Wine 108,341,682 121,076,617
Sale of Services 3,726,934 3,664,171
Sale of other products 2,921,918 3,579,745
----------- -----------
114,990,534 128,320,533
=========== ===========
Note 35 - Significant Events
March 21, 2002
The Company informed the Chilean Superintendency of Securities and Insurance and
the Chilean Stock Exchange of the General Shareholders' Meeting to be held on
April 29, 2002. The agenda was as follows:
1. Approval of the annual report, balance sheet, financial statements and
the report of the independent auditors for the twelve-month period
ended December 31, 2001.
2. Distribution of income and dividend distribution policy.
3. Vote to appoint Directors
4. Appointment of the Company's independent external auditors for 2002.
5. Directors' remuneration.
6. Determinate the Directors' remuneration which forms part of the
Committee as to issues related article 50 bis of law 18,046; and to
determine the functioning expense budget for the same committee for
2002.
7. Determination of the publication in which notice of the next
shareholders' meeting is to be published.
8. Operations as governed by Article No. 44 of Law No. 18046
9. Any other business
April 30, 2002
On April 30, 2002, the Company informed the Superintendency of Securities and
Insurance and the Stock Exchange that the Company's General Shareholders'
Meeting, held on April 29, 2002, and through a voting process, the following
persons were appointed as Company's Directors for a 3-year period:
Mr. Alfonso Larrain Santa Maria. - Chairman
Mr. Rafael Guilisasti Gana - Vice-president
Mr. Mariano Fontecilla de Santiago Concha - Director
Mr. Francisco Marin Estevez - Director
Mr. Sergio Calvo Salas - Director
Mr. Eduardo Morande Fernandez - Director
Mr. Albert Cussen Mackenna- Director
F-47
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 35 - Significant Events, continued
April 30, 2002
On April 30, 2002 the Company informed the Superintendency of Securities and
Insurance and the Stock Exchange that the General Shareholders' Meeting held on
April 29, 2002, the shareholders approved the following dividend's policy:
- - The distribution of a No. 207 final dividend of Ch$ 3.16 per share
which will be paid on May 29, 2002. This dividend is additional to
those provisional dividends Nos. 204 and 205 of Ch$ 1.40 per share
each, which were distributed and paid on September 28 and December 28,
2001, respectively. Additionally, the Company paid dividend No. 206 of
Ch$ 1.40 on March 28, 2002.
- - Maintaining as dividend's policy the distribution of 40% of net income.
Accordingly, the Company will propose the distribution of three
provisional dividends of Ch$ 1.50 each with a charge to net income for
2002, which will be paid on September 30 and December 30, 20002, and
March 31, 2003. A fourth dividend will be paid for the amount which is
pending payment to complete the distribution of the above-mentioned 40%
of the Company's net income for the year ended December 31, 2002, as
and when deemed to be necessary by the Company's shareholders at the
Shareholders' Meeting which will be held in 2003.
- - The Company's dividend policy is dependant on cash available for
distribution.
Note 36 - Differences Between Chilean and United States Generally Accepted
Accounting Principles
Chilean GAAP varies in certain important respects from accounting principles
generally accepted in the United States of America ("U.S. GAAP"). Such
differences involve certain methods for measuring the amounts shown on the face
of the financial statements, as well as additional disclosures.
1. Differences in Measurement Methods
The principal methods applied in the preparation of the accompanying
financial statements that have resulted in amounts that differ from
those that would have otherwise been determined under U.S. GAAP are as
follows:
a) Inflation Accounting
The cumulative inflation rate in Chile as measured by the
Consumer Price Index for the three-years ended December 31, 2002
was approximately 11.18%. Pursuant to Chilean GAAP, the Company's
financial statements recognize certain effects of inflation. The
inclusion of price-level adjustments in the accompanying
consolidated financial statements is considered appropriate under
the prolonged inflationary conditions affecting the Chilean
economy even though the cumulative inflation rate for the last
three years does not exceed 100%. As allowed pursuant to Form
20-F, the reconciliation included herein of consolidated net
income and shareholders' equity, as determined in accordance with
US GAAP, does not include adjustments to eliminate the effect of
inflation accounting under Chilean GAAP.
F-48
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
b) Business Combinations, Goodwill and Intangible Assets
As required by Statement of Financial Accounting Standard No.
141, "Business Combinations", ("SFAS 141"), all business
combinations consummated after June 30, 2001 have to be accounted
for under the purchase method, which requires that the purchase
price be allocated to the acquired assets and liabilities on the
basis of fair market value. Any excess of the cost of the
investment over such fair value is treated as goodwill. Under
Chilean GAAP, goodwill is recorded based on the difference
between the investment purchase price and the amount of the
underlying equity in the carrying value of the investee's net
assets. Prior to June 30, 2001, accounting rules generally
accepted in the United States of America for business
combinations were not significantly different from the new rules
in which respect to the purchases of Villa Alegre S.A., Vina
Almaviva S.A. and Industria Corchera S.A. The difference in
accounting treatment between Chilean and U.S. GAAP for these
specific transactions performed prior June 30, 2001 was not
significant to the Company's financial position and results of
operations.
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible
Assets", ("SFAS 142"). SFAS 142 applies to all goodwill and
identified intangible assets acquired in a business combination.
Under the new standard, beginning January 1, 2002, all goodwill,
including that acquired before initial application of the
standard, and indefinite-lived intangible assets are not
amortized, but must be tested for impairment at least annually.
The Company has performed the impairment test of goodwill
required by the standard, which did not result in any impairment.
The table below presents the reported net income under Chilean
and U.S. GAAP that would have been for the years ended December
31, 2000 and 2001 if amortization expense recognized in those
periods related to goodwill is excluded:
Years Ended December 31,
-------------------------
2000 2001
ThCh$ ThCh$
Reported net income under Chilean GAAP 13,830,224 13,625,572
Add back: Goodwill amortization ...... 24,730 84,552
---------- ----------
Adjusted Net Income .................. 13,854,954 13,710,124
Reported net income under U.S. GAAP .. 13,850,468 12,342,188
Add back: Goodwill amortization ...... 24,730 84,552
---------- ----------
Adjusted Net Income .................. 13,875,198 12,426,740
========== ==========
F-49
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States Ggnerally accepted
accounting principles, continued
b) Business Combinations, Goodwill and Intangible Assets, continued
The table below presents the reported and adjusted earnings per
share amounts under Chilean and U.S. GAAP that would have been
for the years ended December 31, 2000 and 2001 if amortization
expense recognized in those periods related to goodwill is
excluded:
Earnings per share 2000 2001
------------------ ----------- -----------
Chilean GAAP (1) Ch$ Ch$
Reported net income .................................... 19.23 18.95
Goodwill amortization .................................. 0.03 0.12
----------- -----------
Adjusted net income .................................... 19.26 19.07
U.S. GAAP (1)
Reported net income .................................... 19.26 17.16
Goodwill amortization .................................. 0.03 0.12
Adjusted net income .................................... 19.29 17.28
=========== ===========
Weighted average number of total shares outstanding .... 719,170,735 719,170,735
=========== ===========
(1) Basic and diluted earnings per share have been calculated by dividing net
income by the weighted average number of common shares outstanding during
the year. There are no potentially dilutive effects on the earnings of the
Company as it had not issued convertible debt or equity securities.
c) Marketable Securities
In accordance with accounting principles generally accepted in
Chile, marketable securities are stated at the lower of
price-level restated cost or market value. For U.S. GAAP
purposes, the Company's portfolio of marketable securities have
been classified as available-for-sale, in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115"). Consequently, the adjustment to market value has been
recorded in equity. The required disclosures for investments
classified as available-for-sale in accordance with SFAS 115 is
shown in paragraph 2 c). Additionally, when securities are sold,
the gain or loss may be different under Chilean and U.S. GAAP.
The effect of this difference is included in the reconciliation
of shareholders' equity in paragraph 1 m) below.
d) Revaluation of Fixed Assets
As mentioned in Note 9 d), certain fixed assets are reported in
the financial statements at amounts determined in accordance with
technical appraisals. The revaluation of fixed assets is an
accounting principle that is not generally accepted in the United
States. The effects of the reversal of this revaluation on
property, plant and equipment, the related accumulated
depreciation, the depreciation charge for each year and the
income impact on the sale of these assets is shown under
paragraph l m) below.
F-50
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences Between Chilean and United States generally accepted
accounting principles, continued
E) Inventories
Until 1999 the valuation of wine inventories includes overhead
costs only through the completion of the fermentation process.
U.S. GAAP requires that the cost of finished goods include direct
and indirect costs related to the bottling process, as well as
indirect costs related to the aging process. For U.S. GAAP
purposes these indirect costs have been included in the cost of
inventories for periods prior to December 31, 1999. Beginning
January 1, 2000, the Company changed its accounting policy for
inventories to include indirect costs that had not been
considered previously, thus eliminating U.S. and Chilean GAAP
differences for items produced from that date.
The adjustment included in paragraph 1 m) below represents items
remaining in inventory as of December 31, 2001 and 2002 that were
produced in prior years, consisting primarily of premium wines.
f) Capitalized Interest
Beginning in 1994, the Company began to capitalize interest for
Chilean GAAP purposes relative to qualifying assets (consisting
principally of storage and aging containers and vineyards, which
require 3 to 5 years to be ready for production) during the
period that such assets are being constructed or prepared for
productive use. Subsequently, the amount of interest capitalized
each year has been the same for both U.S. and Chilean GAAP
purposes, as the qualifying assets have been put into productive
use, the corresponding capitalized interest is being amortized
accordingly.
The adjustment included in paragraph 1 m) below correspond to the
amount of capitalized interest for U.S. GAAP purposes prior to
1994, which is being amortized using the straight-line method
based on the estimated useful lives of the related assets.
g) Capitalized Leases
During 1993 and 1998, the Company entered into long-term
agreements covering certain vineyard property for periods from 20
to 30 years. In accordance with Chilean GAAP these transactions
are reported as operating leases. However, for U.S. GAAP purposes
these transactions should be recorded as capital leases. The
costs associated with the leases were capitalized (for both
Chilean and U.S. GAAP purposes) as part of the cost of the
vineyard to be amortized over the remaining life of the lease,
until the vineyards have been developed for productive use. The
difference between the fixed asset depreciation plus interest
charges under U.S. GAAP and the lease payments plus fixed asset
depreciation under Chilean GAAP were determined to not be
significant. The effect on total assets, long-term debt and the
current portion of long-term debt was as follows :
As of December 31,
-----------------------------
2001 2002
------------- ------------
Effect on: ThCh$ ThCh$
Total assets (net) 2,450,043 2,251,214
Long-term debt 2,099,561 2,095,189
Current portion of long-term debt 79,002 92,279
F-51
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences Between Chilean and United States generally accepted
accounting principles, continued
h) Deferred Income Taxes
Prior to December 31, 1999, deferred taxes were not recognized
for Chilean GAAP. Starting January 1, 2000, the Company recorded
income taxes in accordance with Technical Bulletin No. 60 of the
Chilean Association of Accountants, recognizing through the
liability method, the deferred tax effects of temporary
differences between the financial and tax values of assets and
liabilities. As a transitional provision, a contra (referred to
as "complementary") asset and liability was recorded offsetting
the effects of the deferred tax assets and liabilities not
recorded prior to January 1, 2000. Such complementary asset and
liability are being amortized to income over the estimated
reversal periods corresponding to the underlying temporary
differences to which the deferred tax asset or liability relates.
For U.S. GAAP purposes, deferred taxes were recognized on a
comprehensive basis for all periods presented in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Therefore, beginning in 2000, the
only difference between Chilean GAAP and U.S. GAAP related to
deferred taxes is the reversal of the amortization of the
complementary deferred tax asset and liability accounts recorded
under Chilean GAAP. Additionally, the Company has recognized the
deferred tax effect related to other U.S. GAAP adjustments that
give rise to temporary differences. The effect of accounting for
deferred taxes under U.S. GAAP is included in the reconciliation
of consolidated net income and shareholder's equity in paragraph
1 m) below.
i) Comprehensive Income
The Company presents comprehensive income and its components with
the objective to report a measure of all changes in shareholders'
equity that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive
income is the total net income and other non-owner equity
transactions that result in changes in equity.
The following represents accumulated other comprehensive income
balance, net of taxes, for the years ended December 31, 2000,
2001 and 2002:
Year Ended December 31, 2002
--------------------------------------
Before-tax Tax (Expense) Net-of-tax
Amount or Benefit Amount
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Beginning balance ................................................. 615,717 (93,120) 522,597
Price-level restatement (1) ....................................... (18,120) 2,899 (15,221)
Unrealized losses on securities available for sale:
Unrealized losses arising during the period ....................... (15,902) 2,544 (13,358)
Less: reclassification adjustment for losses included in net income - - -
---------- ---------- ----------
Net unrealized losses ........................................... (15,902) 2,544 (13,358)
Adjustment for translation differences ............................ 495,205 (79,233) 415,972
---------- ---------- ----------
Ending balance .................................................... 1,076,900 (166,910) 909,990
========== ========== ==========
F-52
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
apcounting Principles, continued
i) Comprehensive Income, continued
Year Ended December 31, 2001
----------------------------------
Before-tax Tax (Expense) Net-of-tax
Amount or Benefit Amount
--------- -------- --------
ThCh$ ThCh$ ThCh$
Beginning balance ................................................................. 196,784 (29,517) 167,267
Price-level restatement (1) ....................................................... (11,613) 1,858 (9,755)
Unrealized losses on securities available for sale:
Unrealized losses arising during the period ....................................... 87,786 (14,046) 73,740
Less: reclassification adjustment for losses included in net income ............... - - -
--------- -------- --------
Net unrealized losses ............................................................. 87,786 (14,046) 73,740
Adjustment for translation differences ............................................ 342,759 (51,414) 291,345
--------- -------- --------
Ending balance .................................................................... 615,717 (93,120) 522,597
========= ======== ========
Year Ended December 31, 2000
----------------------------------
Before-tax Tax (Expense) Net-of-tax
Amount or Benefit Amount
--------- -------- --------
ThCh$ ThCh$ ThCh$
Beginning balance ................................................................. 383,722 (57,558) 326,164
Price-level restatement (1) ....................................................... (38,599) 5,790 (32,809)
Unrealized losses on securities available for sale:
Unrealized losses arising during the period ....................................... (177,504) 26,626 (150,878)
Less: reclassification adjustment for losses included in net income ............... - - -
-------- -------- --------
Net unrealized losses ........................................................... (177,504) 26,626 (150,878)
Adjustment for translation differences ............................................ 29,165 (4,375) 24,790
-------- -------- --------
Ending balance .................................................................... 196,784 (29,517) 167,267
======== ======== ========
(1) Reflects the effect of price-level restatement for comparative purposes on
the comprehensive income at the beginning of each period, adjusted to
constant pesos of December 31, 2002.
j) Non-operating Vs. Operating Items
Under U.S. GAAP, the items included as non-operating income and
expenses ( see Note 22) would be operating income and expenses except
for interest income and expenses, dividends received and gain/loss on
sale of fixed assets, which would be considered other income and
expenses.
k) Derivatives
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Forward
exchange contracts are used to manage foreign exchange rate risks
arising from accounts receivable denominated in foreign
currencies.
As of December 31, 2001 and 2002, the Company had outstanding
forward exchange contracts all having maturity dates of less than
one year as described in Note 26.
F-53
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
k) Derivatives, continued
Under Chilean GAAP, forward contracts between the U.S. dollar and
the Chilean peso or the U.F. are valued at the closing spot
exchange rate of each balance sheet date, with the initial
discount or premium being amortized over the life of the contract
in accordance with Chilean hedge accounting criteria.
Beginning January 1, 2001, the Company adopted Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by Statement of
Financial Accounting Standard No.138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133" (collectively "SFAS 133"),
which established comprehensive accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging
activities. The Standard required that all derivative instruments
be recorded in the balance sheet at fair value. However, the
accounting for changes in fair value of the derivative instrument
depends on whether the derivative instrument qualifies as a
hedge. The standards also require formal documentation procedures
for hedging relationships and effectiveness testing when hedge
accounting is to be applied. If the derivative instrument does
not qualify as a hedge, changes in fair value are reported in
earnings when they occur. If the derivative instrument qualifies
as a hedge, the accounting treatment varies based on the type of
risk being hedged.
While the Company enters into derivatives for the purpose of
mitigating its foreign currency risks, these operations do not
meet the strict documentation requirements to qualify for hedge
accounting under U.S. GAAP. Therefore, under U.S. GAAP changes in
the respective fair values of all derivative instruments would be
reported in earnings when they occur.
The difference in the accounting treatment for foreign exchange
forward contracts between Chilean and US GAAP are not material
due to the short-term nature of the contracts, and therefore and
has consequently been omitted from the reconciliation to U.S.
GAAP included under paragraph 1 m) below.
Current Chilean accounting rules do not consider the existence of
derivative instruments embedded in other contracts and therefore
they are not reflected in the financial statements. For U.S. GAAP
purposes, certain implicit or explicit terms included in host
contracts that affect some or all of the cash flows or the value
of other exchanges required by the contract in a manner similar
to a derivative instrument, must be separated from the host
contract and accounted for at fair value. As of December 31, 2001
and 2002 the Company did not have embedded derivatives requiring
bifurcation.
l) Dividends
The company has a legal obligation to declare and pay dividends
equal to at least 30% of consolidated net income as determined in
accordance with Chilean GAAP. Accordingly, an adjustment was made
in the accompanying U.S. GAAP reconciliation in paragraph 1 m) to
recognize as dividends the difference between the dividends
recorded as provisional dividends under Chile GAAP and 30% of net
income.
F-54
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
m) Effects of conforming to U.S. GAAP
The following is a reconciliation of consolidated net income
under Chilean GAAP to the corresponding U.S. GAAP amounts:
Years Ended December 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Net income in accordance with Chilean GAAP 13,830,224 13,625,572 16,312,013
Reversal of Goodwill Amortization (par. 1 b) - - 81,430
Reversal of additional depreciation of revaluation by technical
appraisal (par. 1 d) 24,165 31,853 29,590
Revaluation adjustment on sales of fixed assets (par. 1 d) 10,236 - -
Adjustment of inventories (par. 1 e) (713,427) (1,025,085) (43,918)
Capitalized interest, net (par. 1 f) (62,090) (62,090) (62,090)
Deferred taxes (par. 1 h) 30,043 (378,002) 318,015
Deferred tax effect of U.S. GAAP adjustments (par. 1 h) 731,317 149,940 17,525
---------- ---------- ----------
Net income in accordance with U.S. GAAP 13,850,468 12,342,188 16,652,565
---------- ---------- ----------
Other comprehensive income:
Unrealized holding gains and losses on available-for-sale
securities, net of taxes (par. 1 c) (150,878) 73,740 (13,358)
Foreign currency translation 24,790 291,345 415,972
---------- ---------- ----------
Total comprehensive income 13,724,380 12,707,273 17,055,179
========== ========== ==========
The following is a reconciliation of consolidated shareholders' equity
differences under Chilean GAAP to the corresponding amounts under U.S. GAAP:
As of December 31,
----------------------------
2001 2002
------------ ------------
ThCh$ ThCh$
Shareholders' equity in accordance with Chilean GAAP 116,525,954 127,590,844
Reversal of Goodwill Amortization (par. 1 b) - 81,430
Marketable securities (par. 1 c) 231,142 216,528
Reversal of revaluation of technical appraisal (par. 1 d) (1,992,882) (1,963,292)
Adjustment of inventories (par.1 e) 55,164 11,246
Capitalized interest, net (par. 1 f) 629,305 567,215
Deferred taxes (par.1 h) (2,691,954) (2,373,939)
Deferred tax effect of U.S. GAAP adjustments (par. 1 h) (152,791) (134,010)
Minimum dividend (par. 1 l) (901,871) (1,566,721)
------------ ------------
Shareholders' equity in accordance with U.S. GAAP 111,702,067 122,429,301
============ ============
F-55
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
m) Effects of conforming to U.S. GAAP, continued
The following summarizes the changes in shareholders' equity
under U.S. GAAP during the years ended December 31, 2001 and
2002:
2001 2002
ThCh$ ThCh$
Balance as of January 1...................................................104,457,704 111,702,067
Dividends paid.............................................................(2,545,841) (2,336,212)
Provisional dividends......................................................(3,185,799) (3,326,883)
Mandatory dividends, previous date..........................................1,170,601 901,871
Mandatory dividends, closing date............................................(901,871) (1,566,721)
Unrealized gains on Available-for-sale investments, net of taxes ..............73,740 (13,358)
Cumulative translation adjustment.............................................291,345 415,972
Net income in accordance with U.S. GAAP....................................12,342,188 16,652,565
----------- ------------
Balance as of December 31.................................................111,702,067 122,429,301
=========== ============
2. Additional Disclosure Requirements
The following disclosures of information are not generally required for
presentation in the financial statements under Chilean accounting
principles, but are required or recommended under U.S. GAAP.
a) Nature of Operations and Concentrations
Vina Concha y Toro S.A. is a vertically integrated company
engaged principally in the production and sale of wine The
Company's wines are sold in 95 countries. Export sales
represented 58.3% of total sales; domestic sales represented
23.5%, while other revenues, including revenues from our
subsidiaries in Argentina, (Trivento Bodegas y Vinedos S.A. and
Distribuidora Peumo Argentina S.A.) and United Kingdom (Concha y
Toro UK Ltd.) represented 18.2% of revenues. Export sales are
denominated in foreign currencies.
Although the economic situation in Chile has remained stable in
recent years, a return to higher levels of inflation and currency
fluctuations could adversely affect the Company's operations.
The current economic situation in Argentina underscores the fact
that owning subsidiaries in unstable countries carries a certain
amount of risk. In fact, in the consolidated statement of income
for the year ended December 31, 2001, Vina Concha y Toro
recognized over US$2 million of losses, due to the depreciation
of the local currency, the Argentine Peso, with regard to the
U.S. dollar.
Wine making and grape growing are subject to a variety of
agricultural risks. Diseases, pests, drought, frosts and certain
other weather conditions can materially and adversely affect the
quality, quantity and cost of grapes available to the Company
from its own vineyards and from outside suppliers, thereby
materially and adversely affecting the supply of the Company's
products and its profitability.
F-56
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
a) Nature of Operations and Concentrations, continued
Wines are subject to a number of taxes and tariffs in the United
States and the Company's other principal export markets.
Significant increases in such taxes and tariffs could depress
wine consumption in those markets and could adversely affect the
Company's sales. The production and sale of wine is subject to
extensive domestic and international regulation.
The Company relies on distributors to sell its products in export
markets. Although the Company has long-term written agreements
with most of its largest distributors, the Company's policy with
respect to most of its distributors is to have oral agreements
which are terminable upon prior notice by either party. The
replacement or poor performance of the Company's distributors or
the Company's inability to collect accounts receivable from its
distributors could materially and adversely affect the Company's
results of operations and financial condition.
The Company relies on Cristalerias de Chile S.A. ("Cristalerias")
to supply almost all of its bottle requirements and has a license
from Tetra Pak de Chile Comercial Ltda ("Tetra Pak Chile") to
package wine in Tetra Brik packages. Cristalerias is a principal
shareholder of one of the Company's main competitors. Although
the Company believes that alternate suppliers are available, an
interruption in the supply of bottles from Cristalerias or Tetra
Brik packages to the Company for any reason could result in a
short-term materially adverse effect on the Company's operations.
Approximately 29.2% of the Company's employees are covered by a
collective bargaining agreement.
The Company relies on third party vineyards for supplies of
grapes and bulk wine. Grapes purchased from third party vineyards
are subject to fluctuations in price and quality and generally
cost more than grapes from the Company's vineyards. In addition
to its purchase of grapes, the Company depends on wine produced
by third parties for its production of popular wine. Disruptions
of supplies of grapes or wine or increases in prices from these
outside suppliers could have a material adverse effect on the
Company.
b) Earnings Per Share
The following disclosure of net income per share information is
not generally required for presentation in the financial
statements under Chilean GAAP but is required under U.S. GAAP.
Earnings per share are determined by dividing consolidated net
income by the weighted average number of total shares
outstanding.
Years Ended December 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
CH$ CH$ CH$
Earnings per share (based on U.S. GAAP) (1) ....... 19.08 17.67 23.16
Earnings per share (based on Chilean GAAP) (1) .... 18.67 18.95 22.68
----------- ----------- -----------
Weighted average number of total shares
outstanding...................................... 719,170,735 719,170,735 719,170,735
=========== =========== ===========
(1) Basic and diluted earnings per share have been calculated by dividing net
income by the weighted average number of common shares outstanding during
the year. The Company has not issued convertible debt or equity securities.
Consequently, there are no potentially dilutive effects on the earnings of
the Company.
F-57
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
Note 36 - Differences between Chilean and United States generally accepted
accounting principles, continued
c) Market Value Disclosures
As of December 31, 2002, bond obligations are presented in the
consolidated financial statements at nominal face value plus
accrued interest totaling ThCh$ 648,480. The fair market value of
these financial instruments determined based on current market
interest rates is estimated to be ThCh$ 635,947.
The fair market values of cash and cash equivalents, short-term
borrowings, and notes and loans payable approximate the values at
which these accounts are presented in the financial statements as
of December 31, 2002.
The following is a summary of available-for-sale securities:
Year Ended December 31, 2002
---------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
------- ------- ------- --------
Available-for-Sale Investments: ThCh$ ThCh$ ThCh$
Investments in equity securities. 264,977 216,528 - 481,505
------- ------- ------- --------
Total............................ 264,977 216,528 - 481,505
======= ======= ======= ========
Year Ended December 31, 2001
---------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
------- ------- ------- --------
Available-for-Sale Investments: ThCh$ ThCh$ ThCh$
Investments in equity securities. 240,432 231,142 - 471,574
------- ------- ------- --------
Total............................ 240,432 231,142 - 471,547
======= ======= ======= ========
Certain marketable securities are classified as other assets (as
described in Note 13) for Chilean GAAP purposes. These securities
are considered marketable securities for U.S. GAAP presentation
purposes.
d) Useful Life of Property, Plant and Equipment
The Company's property, plant, and equipment are being
depreciated over the following useful lives :
YEARS
-----
Buildings and infrastructure 15 to 40
Machinery and equipment 3 to 10
Other fixed assets 5 to 15
Leased assets 20 to 30
F-58
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
e) Income Taxes
Income taxes is charged to the results of operations under each
year presented under US GAAP is as follows:
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Charge for the period under Chilean GAAP (2,142,191) (2,764,057) (2,978,657)
U.S. GAAP Adjustments:
Deferred tax effect of applying SFAS No. 109 30,043 (378,002) 318,015
Deferred tax effect of U.S. GAAP adjustments 731,317 149,940 17,525
---------- ---------- ----------
Benefit (Charge) for the period under U.S. GAAP (1,380,831) (2,992,119) (2,643,117)
========== ========== ==========
The reconciliation of theoretical tax at statutory rate as per
Chilean GAAP is as follows:
2000 2001 2002
---------- ---------- ----------
ThCh$ ThCh$ ThCh$
Tax expense at statutory Chilean tax rates (2,395,862) (2,458,444) (3,086,507)
Increase (decrease) in rates resulting from:
Non-deductible expenses 90,773 (495,992) (313,534)
Tax loss carryforward 355,727 1,954,112
Change in the valuation allowance 0 0 (1,648,831)
Effects of foreign tax rates (41,508) (19,569) 255,428
Effect of change in corporate tax rate (553,710)
Amortization of complementary accounts 198,196 378,002 (318,015)
Other 6,210 29,929 178,690
---------- ---------- ----------
Tax expense at effective tax rates (2,142,191) (2,764,057) (2,978,657)
========== ========== ==========
F-59
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
e) Income taxes, continued
Significant components of the Company's deferred tax assets and
liabilities, under U.S. GAAP, arising from continuing operations
as of December 31 are as follows:
Temporary Differences Year Ended December 31, 2001 Year Ended December 31, 2002
------------------------------------- --------------------------------------
SFAS N SFAS N
SFAS N (Degree)109 SFAS N SFAS N (Degree)109 SFAS N
(Degree)109 Applied to (Degree)109 (Degree)109 Applied to (Degree)109
Applied to US GAAP US GAAP Applied to US GAAP US GAAP
Chile GAAP Adjustments Balance Chile GAAP Adjustments Balance
---------- ---------- ---------- ---------- ---------- ----------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Provision for doubtful accounts . 27,459 - 27,459 58,832 - 58,832
Provision for vacations ......... 116,274 - 116,274 146,864 - 146,864
Staff severance indemnities ..... 78,542 - 78,542 96,625 - 96,625
Inventories ..................... 106,959 (8,826) 98,133 171,940 (1,856) 170,084
Unrealized gains ................ 331,210 (36,983) 294,227 273,459 (35,727) 237,732
Valuation allowance ............. - - - 1,648,831 - 1,648,831
Other ........................... 5,181 - 5,181 101,074 - 101,074
---------- ---------- ---------- ---------- ---------- ----------
Total deferred assets ....... 1,021,352 (45,809) 975,543 4,747,250 (37,583) 4,709,667
---------- ---------- ---------- ---------- ---------- ----------
Financial lease agreements ...... 7,485 - 7,485 13,952 - 13,952
Production expenses ............. 756,703 - 756,703 676,191 - 676,191
Fixed assets depreciation ....... 4,710,809 106,982 4,817,791 5,136,769 96,427 5,233,196
Other ........................... 31,436 - 31,436 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total deferred liabilities .. 5,506,433 106,982 5,613,415 5,826,912 96,427 5,923,339
---------- ---------- ---------- ---------- ---------- ----------
Net deferred tax assets
(liabilities) ............... (4,485,081) (152,791) (4,637,872) (1,079,662) (134,010) (1,213,672)
========== ========== ========== ========== ========== ==========
The Chilean statutory first category (corporate) income tax rate was
15% for 2000 and 2001 and 16% for 2002. Enacted income tax rates are
scheduled to be 16.5% and 17% for the taxation years ended December 31,
2003 and 2004, respectively. The effect of these rate changes on
deferred taxes under U.S. GAAP was an increase in deferred tax expense
of ThCh$ 553,710
f) Shareholders' equity
As of December 31, 2002, the authorized share capital of the
Company was comprised of 719,170,735 nominal shares without
stated value all of which were issued, outstanding, registered
and freely traded on the three Chilean stock exchanges. Of these
authorized shares, 142,000,000 were registered and freely traded
on the U.S. stock exchange via the ADR mechanism. Shareholders
elect the members of the Board of Directors with each share
having equal voting rights.
The payment of dividends to foreign shareholders is subject to a
withholding tax of 35%, net of corporate income taxes paid.
As more fully explained in Note 21 in accordance with Chilean
regulations, other reserves of ThCh$ 9,063,846 included in
shareholders' equity as of December 31, 2002 are not
distributable as dividends.
F-60
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
g) Lease commitments
The Company leases certain vineyard property under long-term
non-cancelable leases which are accounted for as capital leases
for U.S. GAAP purposes. Rentals are due in monthly installments
and are stated in U.S. dollars and UF. Rentals in U.F. are
adjusted each year by the increase in the Consumer Price Index.
The related future minimum lease payments as of December 31, 2002
were as follows:
Year ended December 31, ThCh$
2003 310,176
2004 290,837
2005 290,837
2006 290,837
2007 290,837
Thereafter 2,363,606
----------
Total future minimum lease payments 3,837,130
Interest (1,747,778)
----------
Present value of net minimum lease
payments 2,089,352
==========
The Company also leases certain office space under a long-term
lease which is accounted for as a capital lease for Chilean
accounting purposes. Rentals are due in quarterly installments
through January 2010 and are stated in U.F. The lease liability
is recorded in other payables. The related future minimum lease
payments as of December 31, 2002 were as follows:
Year ended December 31, ThCh$
2003 161,161
2004 161,161
2005 161,161
2006 161,161
2007 161,161
Thereafter 402,907
---------
Total future minimum lease payments 1,208,712
Interest (275,518)
---------
Present value of net minimum lease payment 933,194
F-61
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
h) New accounting pronouncements
In June 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is incurred, not when it is "planned". The Company is
required to adopt the provisions of SFAS No. 146 for exit or
disposal activities that are initiated after December 31, 2002
and does not expect the adoption to have a material impact on the
Company's results of operations or financial position.
In November 2002, the FASB issued the Financial Accounting
Standards Board Interpretation No. 45, "Guarantor's Accounting
and Disclosure requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others." The Interpretation expands
on the accounting guidance of Statements No. 5, 57, and 107 and
incorporates without change the provisions of FASB Interpretation
No. 34, which is being superseded. The Interpretation elaborates
on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It
also clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and
annual financial statements. This guidance does not apply to
certain guarantee contracts, such as those issued by insurance
companies or for a lessee's residual value guarantee embedded in
a capital lease. The provisions related to recognizing a
liability at inception of the guarantee for the fair value of the
guarantor's obligations would not apply to product warranties or
to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December
31, 2002, regardless of the guarantor's fiscal year-end. The
disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The Company is evaluating the impact FIN 45
may have on its future Consolidated Financial Statements.
In January, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities". Many variable
interest entities have commonly been referred to as
special-purpose entities or off-balance sheet structures, but the
guidance applies to a larger population of entities.
Consolidation by a primary beneficiary of the assets, liabilities
and results of activities of variable interest entities will
provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company.
To further assist financial statement users in assessing a
company's risks, the Interpretation also requires disclosures
about variable interest entities that the company is not required
to consolidate but in which it has a significant variable
interest. The consolidation requirements of Interpretation 46
apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply
in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
The interpretation FIN 46 will have no impact on net loss or
stockholders' equity.
F-62
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
i) Credit arrangements
The Company has renewable line of credit arrangements for
short-term Chilean peso borrowing with various Chilean and
foreign banks totaling, in the aggregate ThCh$ 36,649,110 of
which ThCh$ 10,500,000 was available as of December 31, 2002.
j) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally of
cash deposits, marketable securities and trade accounts
receivable.
The Company maintains cash and cash equivalents, short and
long-term investments and certain other financial instruments
with various financial institutions. These financial institutions
are located in Chile and the Company's policy is designed to
limit exposure to any one institution. The Company performs
periodic evaluations of the relative credit standing of these
financial institutions.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities
comprising the Company's customer base and their dispersion
around the world. The Company does not require collateral or
security for its accounts receivable.
As of December 31, 2002, the Company had no significant
concentration of credit risk.
k) Advertising costs
Advertising costs are expensed as incurred. Advertising expense
of ThCh$ 4,927,576 ThCh$ 5,874,525 and ThCh$ 11,122,826 were
recorded in 2000, 2001 and 2002, respectively.
l) Segment Information
Management considers the Company's principal business activities
to be concentrated in one industry segment and consist of the
production and distribution of wine. Revenues from sales of wine
(the Company's principal product) by major geographic areas based
on location of customer are as follows:
Years ended December 31,
-------------------------------------
2000 2001 2002
----------- ----------- -----------
ThCh$ ThCh$ ThCh$
Chile 47,876,191 31,560,843 37,492,796
United States 16,089,509 19,176,144 21,881,018
South America 7,073,308 12,135,472 10,474,800
Central America 5,389,919 5,564,583 5,745,701
Europe 20,518,975 27,889,888 41,045,407
Canada 3,064,489 3,826,948 4,000,016
Asia 3,978,081 5,882,289 4,705,465
Other 2,669,912 8,954,367 2,975,330
----------- ----------- -----------
Total Revenues 106,660,384 114,990,534 128,320,533
=========== =========== ===========
Total assets of the Argentine subsidiary, the only foreign
country where the Company has assets, amounted to ThCh$
16,269,769, which represents 8.4% of the Company's consolidated
assets.
F-63
VINA CONCHA Y TORO S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Adjusted for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002, and thousands of U.S. dollars)
-----------------
l) Segment Information, continued
Sales to one major customer were ThCh$ 16,089,447 in 2000, ThCh$
19,176,144 in 2001 and ThCh$ 16,755,203 in 2002.
m) Allowance for doubtful accounts
The following is a rollforward of the changes to the allowance
for doubtful accounts:
Balance at Price-level Charged to Balance at
beginning Restatement costs and end
of year (1) expenses Write-offs of year
Th.ch.$ Th.ch.$ Th.ch.$ Th.ch.$ Th.ch.$
------- ------- ------- ------- -------
Year ended December 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts 372,933 (27,451) 63,347 (208,564) 200,265
Year ended December 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts 200,265 (6,022) 27,020 (28,919) 192,344
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts 192,344 (5,602) (143,968) - (330,710)
------- ------- ------- ------- -------
(1) Reflects the effect of price-level restatement for comparative purposes on
the allowance for doubtful accounts at the beginning of each period,
adjusted to constant Chilean pesos of December 31, 2002.
F-64