SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO.1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13406
THE CHALONE WINE GROUP, LTD.
(Exact Name of Registrant as Specified in Its Charter)
California 94-1696731
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation of Organization)
621 Airpark Road, Napa, CA 94558
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (707) 254-4200
EXPLANATORY NOTE
The undersigned Registrant hereby amends its Annual Report on Form 10-K for the
fiscal year ended March 31, 2001 solely to correct a typographical error by
revising the paragraph referred to in the date of the Independent Auditors'
Report on page 38 of such Annual Report. This Amendment consists of Item 8,
Financial Statements and Supplementary Data, which includes the Independent
Auditors' Report and the revised paragraph reference therein as described above.
THE CHALONE WINE GROUP, LTD.
INDEX TO 10K/A
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Income...................................... 4
Consolidated Statements of Shareholders' Equity........................ 5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7
INDEPENDENT AUDITORS' REPORT................................................. 19
2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
ASSETS
March 31, March 31,
2001 2000
--------- ---------
Current assets:
Cash and equivalents $ 56 $ -
Accounts receivable, net 10,128 9,836
Notes receivable - affiliate - 119
Income tax receivable - 1,178
Inventory 59,333 51,826
Prepaid expenses and other 533 579
Deferred income taxes 897 894
--------- ---------
Total current assets 70,947 64,432
Investment in Chateau Duhart-Milon 7,824 9,146
Property, plant and equipment - net 67,197 64,134
Goodwill and trademarks - net of accumulated
amortization of $2,161 in 2001 and $1,743 in 2000 10,581 7,220
Other assets 1,342 733
--------- ---------
Total assets $ 157,891 $ 145,665
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,517 $ 5,650
Revolving bank loan 19,999 27,017
Current portion of related party note payable 18 18
Current maturities of long-term obligations 2,032 1,766
--------- ---------
Total current liabilities 29,566 34,451
Long-term obligations, less current maturities 48,608 30,141
Related party note payable, net of current portion 882 900
Deferred income taxes 1,012 1,743
--------- ---------
Total liabilities 80,068 67,235
--------- ---------
Minority interest 2,689 4,758
Shareholders' equity:
Common stock - authorized 15,000,000 shares no
par value; issued and outstanding: 10,248,491 and
10,224,521 shares, respectively 61,578 61,377
Retained earnings 17,901 15,851
Accumulated other comprehensive loss (4,345) (3,556)
--------- ---------
Total shareholders' equity 75,134 73,672
--------- ---------
Total liabilities and shareholders' equity $ 157,891 $ 145,665
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
3
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per share data)
Year ended March 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Gross revenues $ 62,213 $ 52,808 $ 43,973
Excise taxes (1,652) (1,351) (1,147)
-------- -------- --------
Net revenues 60,561 51,457 42,826
Cost of wines sold (39,443) (28,535) (23,201)
-------- -------- --------
Gross profit 21,118 22,922 19,625
Other operating revenues, net 213 40 194
Selling, general and administrative expenses (15,208) (13,941) (10,805)
-------- -------- --------
Operating income 6,123 9,021 9,014
Interest expense, net (3,824) (2,225) (1,761)
Other Income 891 - -
Equity in net income of Chateau Duhart-Milon 761 735 766
Minority interests (377) (1,290) (1,219)
Carmenet fire settlement gain - - 4,447
-------- -------- --------
Income before income taxes 3,574 6,241 11,247
Income taxes (1,524) (2,560) (4,611)
-------- -------- --------
Net income $ 2,050 $ 3,681 $ 6,636
======== ======== ========
Net income available to common shareholders $2,050 $3,222 $6,636
Earnings per share-basic $ 0.20 $ 0.34 $ 0.77
Earnings per share-diluted $ 0.20 $ 0.34 $ 0.75
Weighted average number of shares outstanding:
Basic 10,238 9,383 8,669
Diluted 10,252 9,483 8,852
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
4
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts in thousands)
Common Stock Accumulated
--------------------- Stock Other Compre-
Number of Subscription Retained Comprehensive hensive
Shares Amount Receivable Earnings Loss Total Income
--------- -------- ------------ -------- ------------- -------- ---------
Balance, March 31, 1998 8,394 $ 46,871 $ - $ 5,993 $ (2,459) $ 50,405
Employee stock purchase plan 8 80 - - - 80
Warrants exercised 143 1,000 - - - 1,000
Options exercised 164 882 (1,007) - - (125)
Profit sharing 12 132 - - - 132
Foreign currency
translation adjustment - - - - 163 163 $ 163
Net income - - - 6,636 - 6,636 6,636
--------- --------- --------- --------- --------- --------- --------
Balance, March 31, 1999 8,721 48,965 (1,007) 12,629 (2,296) 58,291 6,799
--------- --------- --------- --------- --------- --------- --------
Employee stock purchase plan 8 65 - - - 65
Warrants exercised and deemed
dividend 833 6,667 - (459) - 6,208
Options exercised 20 115 - - - 115
Return of common stock in
settlement of subscription
receivable (104) (1,012) 1,007 - - (5)
Debenture conversion 738 6,500 - - - 6,500
Profit sharing, net of repurchases 8 77 - - - 77
Foreign currency
translation adjustment - - - - (1,260) (1,260) (1,260)
Net income - - - 3,681 - 3,681 3,681
--------- --------- --------- --------- --------- --------- --------
Balance, March 31, 2000 10,224 61,377 - 15,851 (3,556) 73,672 2,421
--------- --------- --------- --------- --------- --------- --------
Employee stock purchase plan 7 48 - - - 48
Options exercised 8 61 - - - 61
Profit sharing, net of repurchases 9 92 - - - 92
Foreign currency
translation adjustment - - - - (789) (789) (789)
Net income - - - 2,050 - 2,050 2,050
--------- --------- --------- --------- --------- --------- --------
Balance, March 31, 2001 10,248 $ 61,578 - $ 17,901 $ (4,345) $ 75,134 $ 1,261
========= ========= ========= ========= ========== ========= ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
5
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended March 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income $ 2,050 $ 3,681 $ 6,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,877 4,758 3,814
Equity in net income of Chateau Duhart-Milon (761) (735) (766)
Increase in minority interests 377 1,290 1,219
Other (799) (105) 25
Changes in:
Accounts and other receivable 1,266 (2,320) (1,737)
Inventory (5,365) (7,740) (6,649)
Prepaid expenses and other assets (34) 279 (1,261)
Deferred income taxes (734) (1,014) 572
Accounts payable and accrued liabilities 1,281 3,159 (931)
-------- -------- --------
Net cash provided by operating activities 3,158 1,253 922
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (15,200) (10,889) (7,112)
Vineyard property acquired - (22,152) -
Business acquired, net of cash acquired (3,500) (6,127) -
Proceeds from disposal of property and equipment 7,536 204 89
Collection of notes receivable (470) 39 164
Investment in Edna Valley Vineyard - (1,090) -
Acquisition of minority interest in Canoe Ridge Vineyard (3,960) -
Distributions from Duhart-Milon 1,294 738 -
-------- -------- --------
Net cash used in investing activities (14,300) (39,277) (6,859)
-------- -------- --------
Cash flows from financing activities:
Borrowings (repayment) on revolving bank loan-net (7,018) 23,079 (7,014)
Repayment of short-term debt - - (952)
Distributions to minority interests (700) (809) (619)
Proceeds from long-term debt 30,000 10,000 25,182
Repayment of long-term debt (11,285) (381) (12,309)
Repayment of convertible subordinated debentures - (2,000) -
Proceeds from warrants exercised - 6,208 1,000
Proceeds from issuance of common stock 201 257 87
-------- -------- --------
Net cash provided by financing activities 11,198 36,354 5,375
-------- -------- --------
Net increase (decrease) in cash and equivalents 56 (1,670) (562)
Cash and equivalents at beginning of year - 1,670 2,232
-------- -------- --------
Cash and equivalents at end of year $ 56 $ - $ 1,670
======== ======== ========
Other cash flow information:
Interest paid $ 3,449 $ 2,896 $ 1,779
Income taxes paid 370 4,135 4,271
Non-cash transactions:
Debenture converted into common stock - 6,500 -
Return of stock in settlement of subscription receivable - 1,012 -
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
6
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS
The Chalone Wine Group, Ltd. ("the Company") produces and sells super
premium to luxury quality table wines. The Company sells the majority of its
products to wholesale distributors, restaurants, and retail establishments
throughout the United States, Canada and Europe. Export sales accounted for
approximately 4%, 5% and 4%, respectively, of total revenue for the years ended
March 31, 2001, 2000 and 1999. The Company supplies most of its grape needs from
its estate-owned vineyards but utilizes independent grape growers for some of
its grape requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
its majority owned subsidiaries, and Edna Valley Vineyard ("EVV"), a winery
operation in San Luis Obispo County, California, owned 50% by the Company and
50% by Paragon Vineyard Company, Inc. ("Paragon"). The Company is EVV's managing
joint venture partner and supervises EVV's winery operations, sells and
distributes the wine and is deemed to control EVV for accounting purposes. The
Company has certain commitments related to its continuing ownership of EVV (see
Note 14). Intercompany transactions and balances have been eliminated.
At March 31, 2001, Domaines Baron de Rothschild (Lafite) ("DBR"), a French
company, owned approximately 44% of the Company's outstanding common stock, and
the Company owns a 23.5% partnership interest in DBR's Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate located in
Pauillac, France. The Company accounts for this investment using the equity
method.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported financial
statement amounts and related disclosures at the date of the financial
statements. Actual results could differ from these estimates.
CASH AND EQUIVALENTS
Cash equivalents are highly liquid instruments purchased with original
maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. Wine production supplies are stated at FIFO (first-in,
first-out) cost. All bulk and bottled wine inventories are classified as current
assets in accordance with recognized industry practice, although a portion of
such inventories will be aged for periods longer than one year.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. The Company performs ongoing credit evaluations of
its customers' financial position and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have been
within management's expectations.
7
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, with depreciation
provided in amounts sufficient to allocate the depreciable assets to operations
over their estimated useful lives. The straight-line method is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for income tax purposes. The costs of property, plant and
equipment are allocated to each asset acquired based on their relative estimated
fair values at the date of acquisition.
The ranges of useful lives used in computing depreciation are (i) 15 to
35 years for vineyard development costs, (ii) 80 years for caves, (iii) 15 to 40
years for buildings and (iv) 3 to 20 years for machinery and equipment.
Capitalized costs of planting new vines and ongoing cultivation costs for
vines not yet bearing fruit, including interest, are classified as vineyard
development. Depreciation commences in the initial year the vineyard yields a
commercial crop, generally in the third or fourth year after planting.
Interest of $.8 million, $.8 million and $.1 million was capitalized to
property, plant and equipment for the years ended March 31, 2001, 2000, 1999,
respectively.
Caves represent improvement costs to dig into hillsides and structurally
reinforce underground tunnels used to age and store the Company's wines.
GOODWILL AND TRADEMARKS
The excess of the purchase price paid over acquired net assets is recorded
as goodwill and amortized over 20 to 40 years on a straight-line basis. The
payments made to extend the life of the EVV joint venture and acquire ownership
of the continuing joint venture have been recorded as goodwill and are being
amortized over 40 years beginning in January 1997. Trademarks are amortized over
their estimated useful lives from the date they are put into use.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's investee, Duhart-Milon, is the
French franc and as a result the Company records the effect of exchange gains
and losses on its equity in Duhart-Milon in other comprehensive income or loss,
a separate component of shareholder's equity.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped and title passes to the
customer. Revenue from product sold at the Company's retail locations is
recognized at the time of sale. Revenue is recorded net of sales returns,
including a provision for estimated future returns. Sales returns have
historically been insignificant. The Company generally allows thirty days from
the date of shipment for customers to make payment. No products are sold on
consignment.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the Company to compute deferred income taxes based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
8
STOCK BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value based method in accordance with APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES and provides the pro forma disclosures required by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (see Note 9). No compensation
expense has been recognized in the financial statements for employee stock
arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes financial instruments to reduce interest rate and
foreign currency exchange rate risk. The Company does not enter into financial
instruments for trading or speculative purposes. Payments or receipts on
interest rate swap agreements are recorded in interest expense. Forward exchange
contacts are used to manage exchange rate risks on certain purchase commitments,
generally french oak barrels, denominated in foreign currencies. Gains and
losses relating to firm purchase commitments are deferred and are recognized as
adjustments of carrying amounts or in income when the hedged transaction occurs.
The nominal amounts and related foreign currency transaction gains and losses,
net of the impact of hedging, were not significant in the fiscal years 2001,
2000, or 1999.
NET INCOME PER SHARE
Basic net income per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (e.g. stock options) were exercised and converted into stock. For
all periods presented, the difference between basic and diluted EPS for the
Company reflects the inclusion of dilutive stock options and stock warrants, the
effect of which is calculated using the treasury stock method as shown below.
The Company's convertible debentures are excluded from the computation for
periods prior to their conversion since they had an antidilutive effect.
The following is a reconciliation of the figures used in deriving basic
EPS and those used in calculating diluted EPS (IN THOUSANDS, EXCEPT PER SHARE
DATA):
Effect of dilutive securities
-----------------------------
Stock
Basic EPS Warrants options Diluted EPS
--------- -------- ------- -----------
Year ended March 31, 2001
Income available to common stockholders $ 2,050 - - $ 2,050
Shares 10,238 - 14 10,252
-------- --------
EPS $ 0.20 $ 0.20
======== ========
Year ended March 31, 2000:
Income available to common stockholders (1) $ 3,222 - - $ 3,222
Shares 9,383 100 - 9,483
-------- --------
EPS $ 0.34 $ 0.34
======== ========
Year ended March 31, 1999:
Income available to common stockholders $ 6,636 - - $ 6,636
Shares 8,669 183 - 8,852
-------- --------
EPS $ 0.77 $ 0.75
======== ========
<FN>
(1) Net income available to common stockholders in 2000 is net income reduced
by the warrant related deemed dividend of $459,000.
</FN>
9
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 138 that establishes new accounting and reporting standards for
derivative instruments and hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value. These statements are effective
for the Company beginning April 1, 2001, however, management does not expect
that these new statements will have a material effect on the consolidated
financial statements (see Note 8).
SEGMENT REPORTING
The Company produces and sells premium to luxury quality table wines and
has determined that its product line operating segments, although consisting of
multiple products and brands, all have similar production processes, customer
types, distribution methods and other economic characteristics. Accordingly,
these operating segments have been aggregated as a single operating segment in
the consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and equivalents, accounts receivable, accounts payable and accrued
expenses, and certain other assets and liabilities are considered financial
instruments. Carrying values are estimated to approximate fair values for these
instruments as they are short-term in nature and are receivable or payable on
demand.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform
with the current period presentation.
NOTE 3 - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
A summary of the changes in the Company's allowance for doubtful
accounts receivable is as follows:
Balance at Charges to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
--------------- -------------- ---------------- -------------
Year ended March 31:
1999 $ 78 $ 53 $ (44) $ 87
=============== ============== ================ =============
2000 $ 87 $ 114 $ (72) $ 129
=============== ============== ================ =============
2001 $ 129 $ 320 $ (56) $ 393
=============== ============== ================ =============
NOTE 4 - ACQUISITIONS
The Company purchased exclusive brand name rights and inventory of Jade
Mountain Winery ("Jade Mountain") on April 4, 2000 and the remaining 49.5%
interest in Canoe Ridge Vineyard, LLC ("Canoe Ridge") on February 7, 2001 at
purchase prices of $3.5 million and $3.96 million, respectively, each of which
was financed through the Company's revolving credit facility. The Company also
entered into a long-term contract with the owner of Jade Mountain to purchase
Syrah, Viognier, Grenache and Merlot grapes produced from a related vineyard.
10
The Company recorded these acquisitions using the purchase method of
accounting and the related purchase prices were allocated to the assets acquired
and liabilities assumed based on their estimated fair values as of the
acquisition dates as follows (in thousands):
Jade Canoe
Mountain Ridge
Current assets $ 572 $ 2,825
Property, plant and equipment 28 2,720
Brand name rights 2,900
Goodwill and other assets 818
Liabilities (2,403)
--------------- ---------------
Total $ 3,500 $ 3,960
=============== ===============
The brand name rights and goodwill are being amortized on a straight-line basis
over 20 years.
NOTE 5 - INVENTORY
Inventory consists of the following at March 31 (IN THOUSANDS):
2001 2000
--------------- ---------------
Bulk wine $ 36,984 $ 26,989
Bottled wine 21,156 23,791
Wine packaging supplies 543 525
Other 650 521
--------------- ---------------
Total $ 59,333 $ 51,826
=============== ===============
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31 (IN
THOUSANDS):
2001 2000
-------------- --------------
Land $ 18,024 $ 17,436
Vineyards 8,691 7,946
Vineyards under development 14,562 9,302
Caves 1,678 1,678
Buildings 23,793 27,255
Machinery and equipment 30,265 23,786
-------------- --------------
97,013 87,403
Accumulated depreciation (29,816) (23,269)
-------------- --------------
Total $ 67,197 $ 64,134
============== ==============
11
NOTE 7 - INVESTMENT IN CHATEAU DUHART-MILON
Duhart-Milon's condensed balance sheet as of March 31, 2001 and 2000 and
the results of its operations for fiscal years ended March 31, 2001, 2000 and
1999 are as follows (translated into U.S. dollars at the year-end and average
exchange rate for the period, respectively) (IN THOUSANDS):
2001 2000
----------- ------------
Inventory $ 2,812 $ 2,911
Other current assets 6,068 9,737
----------- ------------
Current assets 8,880 12,648
----------- ------------
Property and equipment, net 1,619 1,917
----------- ------------
Total assets $ 10,499 $ 14,565
=========== ============
Current liabilities $ 2,066 $ 2,442
Partner's equity 8,433 12,123
----------- ------------
Total liabilities and equity $ 10,499 $ 14,565
=========== ============
Duhart-Milon's results of operations are summarized as follows (IN
THOUSANDS):
Year ended March 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
Revenues $ 5,470 $ 5,583 $ 5,941
Cost of Sales (2,453) (2,308) (2,626)
-------- -------- --------
Gross profit 3,017 3,275 3,315
-------- -------- --------
Revenues from other operations, net 221 40 154
-------- -------- --------
Net earnings $ 3,238 $ 3,315 $ 3,469
======== ======== ========
Company's share of net earnings $ 761 $ 779 $ 815
Less: amortization expense - (44) (49)
-------- -------- --------
Equity in investment of Duhart-Milon $ 761 $ 735 $ 766
======== ======== ========
On October 1, 1995, the carrying amount of the Company's investment in
Duhart-Milon was greater than its share of Duhart-Milon's net assets by
approximately $8.9 million. This difference related primarily to the underlying
value of the land owned by Duhart-Milon and, accordingly is not amortized. A
portion of that difference, however, was attributable to inventory and was
amortized based on annual sales quantities through March 31, 2001.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company recognizes currency translation gains or
losses in shareholders' equity as accumulated comprehensive income or loss,
which totaled $4,345,000 as of March 31, 2001. This amount increased from
$3,556,000 as of March 31, 2000 due to the decrease in the relative worth of the
French franc when compared to the U.S. dollar during the twelve months ended
March 31, 2001.
12
NOTE 8 - BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following at March 31 (IN
THOUSANDS):
------------ ------------
2001 2000
------------ ------------
Revolving bank loan of $25,000,000, interest at LIBOR+1.375%
(6.425% at March 31, 2001), interest payable monthly, unsecured, due $ 19,999 $ 27,017
March 31, 2002
Senior unsecured notes (series A,B, C), interest at rates ranging from
8.90% to 9.05%, payable monthly, principal payments annually starting
September 15, 2004 30,000 -
Bank term loan, unsecured, interest at varying LIBOR rates plus 1.5%
(6.16% at March 31, 2001), payable monthly, principal payable quarterly
commencing December 31, 2000 through March 2006 19,000 30,000
Mortgage note, interest at 7%, principal and interest payable monthly, due
August, 2021 1,640 1,669
Other note payable, interest at 10% - 238
------------ ------------
70,639 58,924
Less current maturities (22,031) (28,783)
------------ ------------
Long-term obligations, less current maturities $ 48,608 $ 30,141
============ ============
Related party note payable, due through 2016, interest ranging from 7% to 10% $ 900 $ 918
Less current maturities (18) (18)
------------ ------------
Related party note payable, long-term portion $ 882 $ 900
============ ============
The revolving credit facility and term loan are pursuant to an agreement
with a bank that was entered into in March 1999. The agreement includes
restrictive covenants regarding: maintenance of certain financial ratios;
mergers or acquisitions; loans, advances or debt guarantees; additional
borrowings; annual lease expenditures; annual fixed asset expenditures; changes
in control of the Company; and declaration or payment of dividends.
On September 15, 2000 the Company refinanced certain borrowings through
the issuance of $30 million of Senior Unsecured Notes (the "Notes"). Proceeds
from the Notes were used to repay a $20 million of revolving bank borrowings
under a previous credit agreement and $10 million of the $30 million term loan.
Interest on the Notes is payable quarterly at rates ranging from 8.90% to 9.05%
and principal repayments are scheduled beginning September 15, 2004 through
maturity on September 15, 2010. In connection with this refinancing, available
revolving debt borrowings under the credit agreement were reduced from $40
million to $25 million, of which the Company had borrowed $19.9 million as of
March 31, 2001, with $5.1 million unused and available.
The Notes were issued pursuant to a Note Purchase Agreement which contains
restrictive covenants including requirements to maintain certain financial
ratios and restrictions on additional indebtedness, asset sales, investments,
and payment of dividends. At March 31, 2001, the Company was not in compliance
with one of these covenants, but the covenant was modified on June 15, 2001
retro-actively to March 31, 2001 to enable the Company to be in compliance as of
that date. Management believes that the Company will be able to remain in
compliance with these financial covenants through March 31, 2002.
13
Maturities of borrowings for each of the next five years ending March 31
are as follows (IN THOUSANDS):
2002 $ 22,049
2003 2,058
2004 2,065
2005 6,358
2006 15,367
Thereafter 23,642
-------------
Total $ 71,539
=============
In 1999 the Company entered into an interest-rate swap contract for a
notional amount of $20.0 million, maturing on April 6, 2006. This contract
effectively converts the variable LIBOR rate which would otherwise be paid by
the Company on its $20.0 million bank term-loan balance into a fixed-rate
obligation over a period which corresponds to that of the underlying loan
agreement. During that time, the rate which the Company will be obligated to
pay, after including the lending institution's additional mark-up (which is
based on financial ratios, and varies accordingly) will be fixed between 6.95%
and 7.12%. The fair value of the contract was approximately $319,000 on March
31, 2001, which amount will be the cumulative transition adjustment recorded in
other comprehensive income as of April 1, 2001 as required under SFAS No. 133
(see Note 1).
NOTE 9 - STOCK BASED COMPENSATION
On February 10, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of stock options to officers
and other key employees of the Company, as well as non-employee directors and
consultants, for an aggregate of up to 1,000,000 shares of common stock, plus
any shares under the Company's 1987 Stock Option Plan, which expired in February
1997, or the 1988 Non-Discretionary Stock Option Plan, which expired in December
1996, that become available for issuance as a result of forfeitures to the
Company under the terms of such plans. These options generally expire 10 years
from the date of grant and vest after a three to twelve month period. As of
March 31, 2001, approximately 409,000 options were available for future grant
under the Plan.
Option activity under the plans has been as follows:
Weighted
Number of Average
Shares Exercise Price
---------------- ---------------
Outstanding, March 31, 1998 782,758 $ 9.62
Granted (weighted average fair value of $5.70) 172,520 11.40
Exercised (308,004) 8.90
Canceled (37,500) 11.23
---------------- ---------------
Outstanding, March 31, 1999 609,774 10.39
---------------- ---------------
Granted (weighted average fair value of $4.79) 146,000 9.47
Exercised (22,800) 6.11
Canceled (70,555) 10.12
---------------- ---------------
Outstanding, March 31, 2000 662,419 10.36
---------------- ---------------
Granted (weighted average fair value of $8.52) 169,640 8.43
Exercised (17,800) 8.64
Canceled (23,765) 9.97
---------------- ---------------
Outstanding, March 31, 2001 790,494 $ 10.00
================ ===============
14
Additional information regarding options outstanding as of March 31, 2001
is as follows:
Exercise Number Remaining Weighted Avg.
Prices Outstanding Contractual Life Exercise Price
- -------------- ----------- ---------------- --------------
$5.00-$7.99 62,940 2.8 years $ 6.77
$8.00-$9.99 333,274 6.1 years 8.93
$10.00-$12.00 394,280 5.6 years 11.42
----------- ---------------- --------------
790,494 5.6 years $ 10.00
=========== ================ ==============
All options outstanding at March 31, 2001 are exercisable, except for
8,160 options granted March 31, 2001 with an exercise price of $8.69.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to use salary withholdings to purchase shares of common
stock at a price equal to 85% of the lower of the market value of the stock at
the beginning or end of each three-month offer period or beginning of the
Purchase Plan start (27 months), subject to an annual limitation. Shares issued
under the plan were 6,735 shares, 6,198 shares, and 7,734 shares in each of the
years ended March 31, 2001, 2000 and 1999, respectively, at weighted average
prices of $7.15, $7.83 and $ 9.09, respectively. The weighted average fair value
per share of the awards for each of the years ended March 31, 2001, 2000 and
1999 was $8.42, $9.21and $10.69, respectively. At March 31, 2001, 12,000 shares
were reserved for future issuances under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal year 1995. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 81
months following vesting; stock volatility of 28.2%, 19.3% and 21.5% in the
years ended March 31, 2001, 2000 and 1999, respectively; risk-free interest
rates of 6.5%, 6.9% and 6.5% for the years ended March 31, 2001, 2000 and 1999,
respectively, and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's stock
option and stock purchase plan been accounted for under SFAS No. 123, net income
and earnings per share would have been reduced to the following pro forma
amounts (IN THOUSANDS, EXCEPT PER SHARE DATA):
Year ended March 31,
-------------------------------------
Net income: 2001 2000 1999
------- ------- -------
As reported (1) $ 2,050 $ 3,222 $ 6,636
Pro forma $ 1,759 $ 2,712 $ 5,727
Earnings per share:
Basic $ 0.20 $ 0.34 $ 0.77
Diluted $ 0.20 $ 0.34 $ 0.75
Pro forma basic $ 0.17 $ 0.29 $ 0.66
Pro forma diluted $ 0.17 $ 0.29 $ 0.65
(1) Net income available to common stockholders in 2000 is net income
reduced by the warrant related deemed dividend of $459,000.
15
NOTE 10 - COMMON STOCK
Presently the Company does not have any outstanding convertible debentures
or warrants to purchase its common stock.
To date the Company has not paid any cash dividends. Under the terms of
certain of the Company's credit facilities, the Company is restricted from
paying dividends in excess of 50% of its aggregate net income (see Note 8).
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company has a qualified profit-sharing plan, which provides for
Company contributions, as determined annually by the Board of Directors, based
on the Company's previous year performance. These contributions may be in the
form of common stock or cash as determined by the Board of Directors. The
Company contributed $168,813, $143,000, and $154,000 for the year ended March
31, 2001, 2000, and 1999, respectively. At March 31, 2001, the plan held
approximately 38,600 shares of the Company's common stock. At the participant's
option, upon termination of service of any plan participant, the Company will
repurchase that participant's shares held in the plan at market value.
The Company sponsors a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code covering substantially all full-time U.S.
employees. Participating employees may contribute up to 15% of their eligible
compensation up to the annual Internal Revenue Service contribution limit. As
determined by the Board of Directors, the Company matches employee contributions
according to a specified formula and contributed $182,176, $131,000, and $99,000
to this plan in 2001, 2000, and 1999, respectively.
NOTE 12 - INCOME TAXES
The provision for income taxes for the years ended March 31 are summarized
as follows (IN THOUSANDS):
2001 2000 1999
------------ ------------- ------------
Federal
Current $ 1,782 $ 2,949 $ 3,121
Deferred (583) (966) 471
------------ ------------- ------------
1,199 1,983 3,592
------------ ------------- ------------
State
Current 477 625 920
Deferred (152) (48) 99
------------ ------------- ------------
325 577 1,019
------------ ------------- ------------
$ 1,524 $ 2,560 $ 4,611
============ ============= ============
The provisions for income taxes differ from amounts computed at the U.S.
Federal statutory rate as follows (IN THOUSANDS):
Year ended March 31,
2001 2000 1999
------- ------- -------
Income tax at statutory rate $ 1,215 $ 2,123 $ 3,824
State tax net of federal benefit 208 381 655
Effect of acquisitions, net 47 38 33
Other 54 18 99
------- ------- -------
$ 1,524 $ 2,560 $ 4,611
======= ======= =======
16
The Company's deferred tax assets (liabilities) were as follows at March
31 (IN THOUSANDS):
2001 2000
----------- -------------
Basis difference in property, plant and equipment $ (2,072) $ (2,442)
Net operating loss carryforward 3,083 3,129
Basis difference in inventory 512 368
Other 629 363
Valuation allowance (2,267) (2,267)
----------- -------------
Net deferred tax liability $ (115) $ (849)
=========== =============
Classified as:
Current deferred tax assets $ 897 $ 894
=========== =============
Long-term deferred tax liabilities $ (1,012) $ (1,743)
=========== =============
The Company and its subsidiaries file their federal tax returns on a
consolidated basis. As of March 31, 2001, Sagelands Vineyard has a federal net
operating loss carryforward of approximately $9.2 million that will expire
through 2015. A valuation allowance has been established for a portion of the
related deferred tax asset that management believes may not be realized due to
annual limitations resulting from the ownership change in Sagelands Vineyard.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of income include the following transactions
with related parties (IN THOUSANDS):
Year ended March 31,
-----------------------------------
2001 2000 1999
-------- ---------- --------
Convertible debenture interest expense - owners and directors $ - $ - $ 325
Wine purchases from related parties 1,781 2,384 2,651
Grape purchases from related parties 5,002 2,612 3,093
Interest income on note receivable from joint venture partner - - 31
Lease expense for land and facilities to joint venture partner 15 19 20
Consulting fee to affiliate of an officer - - 270
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2001 future minimum lease payments (excluding the effect
of future increases in payments based on indices which cannot be estimated at
the present time) required under noncancelable operating leases with terms in
excess of one year are as follows: 2002--$870,000, 2003--$878,000,
2004--$870,000, 2005--$830,000, 2006--$855,000 and thereafter--$8.5 million.
Rent expense charged to operations was $1,350,666, $1,072,000, and
$788,000 for the years ended March 31, 2001, 2000 and 1999, respectively.
In 1991, the Company and Paragon entered into an agreement ("old
agreement") to provide the Company with the option to convert EVV into a
"permanent partnership" of unlimited duration. Under the old agreement, the
Company had made payments totaling $1,070,000 to Paragon to have the right to
extend the life of the joint venture. Under a new agreement, entered into on
December 27, 1996 ("new agreement"), the Company agreed to further payments
totaling $4,540,000. All required payments have all been made pursuant to the
new agreement to date and as of March 31, 2001, $850,000 remains outstanding and
is due December 2001. This final payment will provide for the Company's
continued 50% ownership throughout the remaining life of the joint venture.
Also, at December 2001, the Company will have the option to purchase 50% of the
brand name, Edna Valley, for $200,000, which is currently licensed to the joint
venture by Paragon. The payments made to extend the life of the joint venture
and maintain continuing ownership of the joint venture have been recorded as
goodwill and are being amortized over 40 years.
17
The Company has contracted with various growers and certain wineries to
supply a large portion of its future grape requirements and a smaller portion of
its future bulk wine requirements. The Company estimates that it has contracted
to purchase approximately 9,000 to 13,000 tons of grapes per year over the next
ten years. While most of these contracts stipulate that prices will be
determined by current market conditions at the time of purchase, several
long-term contracts provide for minimum grape or bulk wine prices.
NOTE 15 - QUARTERLY DATA (UNAUDITED)
The Company's quarterly operating results for the fiscal year ended March
31, 2001 and 2000 are summarized below (IN THOUSANDS, EXCEPT PER SHARE DATA):
Gross EPS
Quarter ended revenues Gross profit Net income (diluted)
- ---------------------- ----------- -------------- ------------- ----------
March 31, 2001 $ 14,656 $ 4,938 $ 473 $ 0.05
December 31, 2000 18,828 6,453 789 0.08
September 30, 2000 14,211 4,315 240 0.02
June 30, 2000 14,518 5,412 548 0.05
March 31, 2000 12,442 4,603 72 (0.04)
December 31, 1999 16,361 7,469 1,669 0.18
September 30, 1999 13,177 5,819 1,014 0.11
June 30, 1999 10,828 5,031 926 0.10
EPS calculations for each of the quarters are based on the weighted
average common and common equivalent shares outstanding for each period, and the
sum of the quarters may not be necessarily equal to the full year EPS amount.
EPS for the quarter ended March 31, 2001 was calculated using net income
available to common stockholders.
18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The Chalone Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The
Chalone Wine Group, Ltd. and subsidiaries, as of March 31, 2001 and 2000, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Chalone
Wine Group, Ltd. and subsidiaries as of March 31, 2001 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
May 11, 2001 (June 15, 2001 as to the fourth paragraph of Note 8)
19
C. EXHIBITS.
A copy of any exhibits (at a reasonable cost) or the Exhibit Index will be
furnished to any shareholder of the Company upon receipt of a written request
therefor. Such request should be sent to The Chalone Wine Group, Ltd., 621
Airpark Road, Napa, California 94558, Attention: Investor Relations.
23.1 Consent of Deloitte & Touche LLP to incorporation by
reference, dated September 13, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE CHALONE WINE GROUP, LTD.
By /S/ THOMAS B. SELFRIDGE
--------------------------------------------------------------
Thomas B. Selfridge
Chief Executive Officer
(Principal Executive Officer)
By /S/ SHAWN CONROY BLOM
----------------------------------------------------------------
Shawn Conroy Blom
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: September 13, 2001
20