THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE, IN RELIANCE UPON CERTAIN EXEMPTIVE
PROVISIONS OF SUCH LAWS. SUCH SECURITIES CANNOT BE SOLD OR TRANSFERRED EXCEPT
IF, IN THE OPINION OF COUNSEL TO THE ISSUER, SUCH SALE OR TRANSFER WOULD BE: (1)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION; AND (2) IN A TRANSACTION WHICH
IS EXEMPT UNDER APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO EFFECTIVE
REGISTRATION STATEMENTS UNDER SUCH LAWS, OR IN A TRANSACTION WHICH IS OTHERWISE
IN COMPLIANCE WITH SUCH LAWS.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$2,750,000 August 21, 2002
FOR VALUE RECEIVED, The Chalone Wine Group, Ltd., a California
corporation ("Maker") promises to pay to SFI Intermediate Limited or its
affiliates ("Holder"), in lawful money of the United States, the principal sum
of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000) together with
interest thereon and other amounts specified herein, as specified below. This
Note is issued pursuant to a Convertible Note Purchase Agreement dated August
21, 2002 among Maker, Holder and Les Domaines Baron de Rothschild (Lafite)
("Note Purchase Agreement").
1. INTEREST. Simple interest on the principal sum shall accrue
at a rate of nine percent (9%) per annum and shall be payable at the time
specified in Paragraph 2 of this Note. Interest shall be calculated on the basis
of a 365 day year and the actual number of days elapsed.
2. MATURITY. The entire principal sum and all accrued interest shall be
due and payable in full two years from the date of this Note (the "Maturity
Date"), except to the extent that such indebtedness is, pursuant to Paragraph 4,
5 or 8 hereof, converted into shares of Common Stock of Maker.
3. PREPAYMENT. This Note may be prepaid in whole or in part, at any
time, without penalty or premium, upon 20 days prior written notice to Holder of
Maker's intention to prepay this Note (a "PREPAYMENT NOTICE"), provided that (i)
if Maker gives a Prepayment Notice within 180 days after the date of this Note
or (ii) if the Board of Directors or any officer or agent of Maker has held
substantive discussions or negotiations with any third party regarding a
transaction or has authorized or entered into any agreement or formal indication
of interest with respect to a transaction, in any such case, which if
consummated would constitute a Change of Control Transaction (as such term is
defined in Section 5 below), then such prepayment shall be subject to Holder's
consent (which consent may, at the option of the Holder, be subject to Maker's
agreement to convert the indebtedness under this Note into shares of Common
Stock as provided below). Any partial prepayment shall be applied first to
accrued and unpaid interest on this Note and then to the outstanding principal
amount of this Note.
4. CONVERSION BY MAKER. At the Maturity Date (or, with the prior
written consent of Holder, at such date prior to the Maturity Date selected by
Maker), Maker may elect to pay the entire outstanding principal sum and all
accrued and unpaid interest or may elect to convert all or any part of the
outstanding principal balance of this Note and all or any part of the accrued
and unpaid interest into shares of Common Stock of Maker at a conversion price
of $9.4207 per share (the "Conversion Price"); provided, however, that: Maker
shall not be entitled to exercise this conversion right if, at the time of
conversion, Maker is insolvent or is in bankruptcy proceedingsprovided, further,
however, that, notwithstanding the foregoing proviso, if, as a result of the
provisions of the Subordination Agreement, dated even date herewith, among
Holder and certain senior lenders of Maker, or otherwise, on the Maturity Date
Maker is unable or otherwise fails to either pay the entire outstanding
principal sum and all accrued and unpaid interest on this Note or convert all
such amounts into shares of Common Stock of Maker as provided above, at the sole
election of Holder pursuant to written notice to Maker, all or any part of the
outstanding principal balance of this Note and all or any part of the interest
accrued and unpaid thereon shall be converted into shares of Common Stock of
Maker as provided above within the two business days following receipt by Maker
of such notice. For purposes of this Paragraph 4, Maker will be insolvent if the
fair value of Maker's assets does not exceed the reasonably estimated amount of
Maker's liabilities or if Maker is unable to pay its debts as they become due.
Maker acknowledges that its right to convert this Note into shares of Common
Stock is a contract for financial accommodation and to issue a security of Maker
within the meaning of 11 U.S.C. ss. 365(c)(2).
5. CONVERSION BY HOLDER. At the sole election of Holder pursuant to
written notice to Maker, all or any part of the outstanding principal balance of
this Note and all or any part of the interest accrued and unpaid thereon may be
converted within the two business days immediately prior to the Anticipated
Closing Date of a Change of Control Transaction (as defined below) into shares
of Common Stock of Maker at the Conversion Price. "Change of Control
Transaction" means the consummation of any transaction or series of related
transactions approved by Maker's Board of Directors that results in the holders
of record of Maker's capital stock immediately prior to the transaction or
transactions holding less than fifty percent (50%) of the voting power of Maker
immediately after the transaction or transactions, including the acquisition of
Maker by another entity and any reorganization, merger, consolidation or share
exchange, or which results in the sale of all or substantially all of the assets
of Maker. "Anticipated Closing Date" means the date that Maker's Board of
Directors determines to be the expected closing date of the Change of Control
Transaction. Notwithstanding the foregoing, any conversion pursuant to this
Section shall be conditioned upon the actual closing of a Change of Control
Transaction and shall not be deemed to have occurred if such Change of Control
Transaction is not consummated.
6. MECHANICS OF CONVERSION. Upon either Holder's or Maker's election to
convert this Note, the specified part of the outstanding principal and accrued
interest of the Note shall be converted without any further action by Holder and
whether or not the Note is surrendered to Maker or its transfer agent. Maker
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless the Note is either delivered to Maker
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or its transfer agent. Maker shall, as soon as practicable after such delivery,
issue and deliver to Holder, a certificate or certificates with appropriate
restrictive legends for the number of shares of Common Stock to which Holder
shall be entitled. If a fractional share would otherwise be issuable upon
conversion of this Note, Maker will in lieu of such issuance pay the cash value
of that fractional share.
7. ADJUSTMENTS FOR STOCK SPLITS; REVERSE STOCK SPLITS. In case Maker's
Common Stock shall be subdivided into a greater number of shares, the Conversion
Price shall be proportionately reduced, and conversely, in case Maker's Common
Stock shall be combined into a smaller number of shares, the Conversion Price
shall be proportionately increased.
8. DEFAULT AND REMEDIES. Maker will be in default under this Note if
Maker fails to make the payment of principal and interest hereunder when due and
such failure has not been corrected within five days after written notice by
Holder to Maker at the address set forth below. Additionally, Maker will be
deemed in default under this Note if Maker has breached a provision of the Note
Purchase Agreement and such breach has not been cured within the applicable cure
period specified in the Note Purchase Agreement. Upon Maker's default, Holder
may exercise any and all of the remedies provided at law or, upon written notice
to Maker, may require the immediate conversion of this Note into Common Stock of
Maker at the Conversion Price.
9. WAIVERS. Maker, and any endorsers or guarantors hereof, severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor, acceleration, intent to accelerate, and nonpayment of this
Note, and expressly agree that this Note, or any payment hereunder, may be
extended by mutual agreement of Maker and Holder from time to time without
notice without in any way affecting the liability of Maker or any endorsers or
guarantors hereof. No extension of time for the payment of this Note, or any
installment hereof, agreed to by Holder with any person now or hereafter liable
for the payment of this Note, shall affect the original liability of Maker under
this Note, even if Maker is not a party to such agreement.
10. MAXIMUM LEGAL RATE OF INTEREST. If Holder ever receives interest or
anything deemed interest in connection with this Note in excess of the maximum
lawful amount, an amount equal to the excessive interest shall be applied to the
reduction of the principal, and if it exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Maker. If interest otherwise payable to
Holder would exceed the maximum lawful amount, the interest payable shall be
reduced to the maximum amount permitted under applicable law.
11. SUBORDINATION. This Note is subordinate to all other debt
for borrowed money of Maker. Upon the request of Maker, Holder shall promptly
execute such reasonable and customary documents that either Maker or its
creditors deem necessary or desirable to effectuate the foregoing subordination.
12. NO TRANSFER. Holder shall not sell, assign, transfer, pledge,
give or otherwise dispose of all or any part of its respective rights or
obligations under this Note.
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13. MISCELLANEOUS.
a. Maker shall pay all costs, including, without
limitation, reasonable attorneys' fees incurred by Holder in collecting the sums
due hereunder.
b. This Note may be modified only by a written agreement
executed by Maker and Holder.
c. This Note shall be governed by California law.
d. The terms of this Note shall inure to the benefit of and
bind Maker and Holder and their respective heirs, legal representatives and
successors and assigns.
e. If this Note is destroyed, lost or stolen, Maker will
deliver a new note to Holder on the same terms and conditions as this Note with
a notation of the unpaid principal and accrued and unpaid interest in
substitution of the prior Note. Holder shall furnish to Maker reasonable
evidence that the Note was destroyed, lost or stolen and any security or
indemnity that may be reasonably required by Maker in connection with the
replacement of this Note.
IN WITNESS WHEREOF, Maker has executed this Note as of the date and
year first above written.
MAKER
The Chalone Wine Group, Ltd.
By: _________________________________
Name: _______________________________
Title: ______________________________
Notice Addresses:
Maker: 621 AIRPARK ROAD, NAPA, CALIFORNIA 94558 Attn: THOMAS SELFRIDGE
Facsimile: 707-254-4204
Holder: ________________________, Attn: _________________
Facsimile: ___________ E-mail: __________________
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