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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
621 Airpark Road
Napa, CA 94558
(Address of principal executive offices) (Zip Code)
(707) 254-4200
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (17 CFR ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
As of March 15, 1996, there were 2,795,278 shares of the Company's voting (no
par value common) stock, with an aggregate market value of $25,506,912 held by
non-affiliates. (For purposes of this required presentation, the registrant has
deemed its directors, executive officers, and Domaines Barons de Rothschild
(Lafite)to be affiliates, and has deducted the outstanding shares held by them
collectively from the total of 7,590,246 shares issued and outstanding.)
Documents Incorporated By Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders of The Chalone Wine Group, Ltd. to be filed within 120 days after
the end of registrant's fiscal year ended December 31, 1995 (the "Proxy
Statement") are incorporated by reference into Part III of this report.
PART I
Item 1. Business.
a. General Development of Business.
The Chalone Wine Group, Ltd. (the "Company"), was incorporated under the
laws of the State of California on June 27, 1969. It became a publicly-held
reporting company as the result of an initial public offering in May of 1984.
The Company is, to its knowledge, one of only two publicly-held U.S.
corporations whose sole activity is in the production, marketing, and selling of
premium-priced wines in the $10 per bottle and up categories.
The Company produces, markets and sells premium white and red varietal
table wines, primarily Chardonnay, Pinot Noir, Cabernet Sauvignon and Sauvignon
Blanc. The Company operates five wineries, four located in different counties of
California and the fifth located in eastern Washington State. The Company's
California wines are made principally from grapes grown at its Chalone Vineyard
and Carmenet Vineyard facilities, at vineyards owned by the Company's partner in
the Edna Valley Vineyard joint venture, and, for the Company's Acacia Winery
facility, from grapes principally grown at neighboring independent vineyards,
plus a small vineyard one-half owned and managed by the Company. The Washington
State winery's wines are made from grapes grown at a nearby vineyard one-half
owned by the Company. The Company's wines are sold primarily in the
premium-priced segment of the table wine market under the labels "Chalone
Vineyard," "Edna Valley Vineyard," "Carmenet," "Acacia," and "Canoe Ridge
Vineyard."
In addition and as a result of an investment in the Company by Domaines
Barons de Rothschild (Lafite) ("DBR"), the Company receives an allocation of the
wines of DBR, including the wines of Chateau Lafite-Rothschild and Chateau
Duhart-Milon ("Duhart-Milon"), to sell primarily to the Company's shareholders.
Significant Event
On April 26, 1995, the Company reached agreement in principle with its two
largest shareholders, DBR and an affiliate of Richard C. Hojel, Summus
Financial, Inc. ("Summus"), for the infusion of substantial new equity into the
Company and a restructuring of the Company's operational relationship with DBR
and its affiliated group of companies. On October 25, 1995, the transaction was
approved at a Special Meeting of the Shareholders. The principal terms of the
Agreement may be summarized as follows:
1. DBR converted its $12.4 million principal amount of the Company's
convertible debentures, at a conversion price of $7.00, into 1,769,143 shares of
common stock
2. The Company received a total of $4.5 million, net of expenses, in cash,
contributed in equal amounts of $2.5 million by DBR and Summus, in return for
the issuance to each of 416,667 units, each unit consisting of one share of
common stock and one warrant for the purchase of one share of common stock, at a
per-unit price of $6.00. The warrants, which have a five-year term, are
exercisable at $8.00/share.
3. The Company exchanged essentially all of its existing ownership in DBR
for a 23.5% interest in Duhart-Milon, a Bordeaux wine-producing estate located
in Pauillac, France, and an affiliated company of DBR. The effect of this
element of the overall transaction was to convert an essentially passive 11.3%
interest in DBR into an interest in an active, operating vineyard and winery
operation.
4. The Company retained one share of stock in DBR and will continue to hold
one seat on DBR's board of directors (Conseil de Surveillance), with the
Company's President continuing to fill that seat. DBR will review the Company's
nomination to that seat on an annual basis.
5. The Company's Board of Directors was increased from the current nine to
eleven positions, with each of DBR and Summus given the right to designate a
nominee to one of the newly created positions.
6. DBR was released from its existing "standstill" restriction on
increasing its ownership position in the Company, but with a commitment not to
increase that position to over 49.9% of total shares outstanding, on a fully
diluted basis, through December 31, 1999.
b. Financial Information about Industry Segments.
Although the Company operates five different wineries, and also distributes
certain French, Chilean, Portuguese and Mexican wines and small quantities of
domestic wines of other producers in the United States, the marketing and sales
of all of the wines are handled on a consolidated basis, in all of the Company's
distribution channels. Hence all of the Company's business is considered a
single industry segment.
2.
c. Narrative Description of Business.
Overview
The Company owns, either wholly or in partnership with others, six
wineries, five with related vineyards, in the United States and France. The
specific ownership is as follows:
%
Property Ownership Form of Ownership Location
-------- --------- ----------------- --------
Chalone Vineyard 100.0% Chalone Wine Group, Ltd. Soledad, California
Carmenet Winery 100.0% Chalone Wine Group, Ltd. Sonoma, California
Acacia Winery 100.0% Chalone Wine Group, Ltd. Napa, California
Marina Vineyard (Acacia) 50.0% Partnership Napa, California
Edna Valley Vineyard 50.0% Partnership San Luis Obispo
Canoe Ridge Vineyard 50.5% Limited liability corporation (LLC) Walla Walla, Washington
(effective January 1, 1996)
Chateau Duhart-Milon 23.5% Partnership Pauillac, France
With the exception of Chateau Duhart-Milon (Duhart-Milon), the Company manages
and operates all of the above properties, and consolidates the results of their
operations. Unless otherwise indicated the term "Company", as used in this
report, refers to The Chalone Wine Group, Ltd. and its consolidated
subsidiaries. The Company accounts for its investment in Duhart-Milon using the
equity method of accounting.
Each of the five domestic wineries is in a separate "viticultural area."
Viticultural areas are designations granted by the federal Bureau of Alcohol,
Tobacco and Firearms to identify grape-growing areas distinguishable by their
specific and definable geographic and climatic characteristics. Wineries may
indicate a viticultural area on a bottle label only if 85% or more of the grapes
used to produce the wine were grown in that viticultural area.
All of the Company's wines are vintage-dated and the majority of its
primary label wines are Estate Bottled. A vintage-dated wine is one produced
wholly from grapes which were harvested, crushed and fermented in the calendar
year shown on the label. The Estate Bottled designation may be applied only to
wines made exclusively by one winery from grapes grown on land owned or
controlled by the winery, all within a single viticultural area.
The Company markets its wines, through specialty wine shops and grocery
stores, fine restaurants, hotels and private clubs in 50 States, the District of
Columbia, Puerto Rico and other islands in the Caribbean, Canada, England,
continental Europe, Hong Kong and Japan, and directly from the wineries and
through direct mail order sales in California and other states where legally
permitted. In addition, the Company sells custom branded wines where the brand
is owned by the purchaser.
By growing and purchasing its grapes and producing its wines at five
separate locations, the Company lessens the potential impact of any interruption
or disruption of wine production at any one facility.
A detailed description of the Company's properties and the operations at
each is set forth at Item 2, Properties.
Vineyard Practices
The Company believes that the soils and climates of the vineyards from
which it obtains its grapes are particularly suitable for the particular
varieties of grapes grown at each of them. Like most mountain vineyards, Chalone
Vineyard and Carmenet Vineyard typically produce lower yields of grapes than
valley vineyards. The yield of grapes per acre from the Edna Valley vineyards of
the Company's Joint Venture partner, which are located in a coastal valley, and
the yields from the vineyards in the cool Carneros District of the Napa Valley,
from which the Acacia wines are made, tend to be higher than at Chalone Vineyard
and Carmenet Vineyard, but are still significantly lower than average for
California. The Canoe Ridge Vineyard is being managed for a lower than average
yield for Washington State.
The Company believes that relatively low yields tend to enhance the
varietal character of the grapes and improve the quality of the resulting wines.
Chalone Vineyard and Carmenet Vineyard are farmed, pruned and drip-irrigated so
as to produce a lower yield of grapes than the maximum which could be obtained.
Similarly, the yields from the vineyards providing grapes to the Edna Valley,
Acacia and Canoe Ridge wineries are maintained at lower levels than is typical
of many other similarly situated vineyards.
Agricultural Risks; Phylloxera
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases, pests, drought, frosts and certain other weather
conditions can materially and adversely affect the quality and quantity of
grapes available to the Company, thereby materially and adversely affecting the
supply of the Company's products and its profitability.
Many vineyards particularly in the Northern California area have been
infested with phylloxera, a root louse that
3.
renders a vine unproductive within a few years following infestation. The
current strain of phylloxera primarily affects vines of a certain type (referred
to as "AXR1"). The Company's vineyard properties, with the exception of Carmenet
Vineyard, are primarily planted to different and resistant varieties. Carmenet
Vineyard does have a portion of its vineyard planted on AXR1 but, due to its
isolated location, only a small area of the vineyard is presently affected and
the Company expects to replant on resistant rootstock over the next five to ten
years. However, there can be no assurance that the Company's existing vineyards
or the rootstocks the Company is now using in its planting and replanting
programs will not in the future become susceptible to current or new strains of
phylloxera, plant insects, or diseases, any of which could adversely affect the
Company.
Winemaking Practices
The winemaking practices used by the Company are derived from the
traditional methods of France, adapted to the particular requirements of
California. The Company believes that these methods, requiring a substantial
amount of hand labor, produce the best wines. At the Chalone Vineyard and Edna
Valley Vineyard facilities, the Company follows the traditional winemaking
practices of the Cote d'Or in the Burgundy region of France. The wines are made
from single grape varieties, principally Pinot Noir and Chardonnay. The
winemaking practices at Acacia Winery, although differing in some degree from
those at Chalone Vineyard and Edna Valley Vineyard, also follow Burgundian
winemaking practices and produce wines from single grape varieties. At Carmenet
Vineyard the Company follows the practices of the Medoc and Graves districts in
the Bordeaux region of France, whose wines are generally made from a blend of
varieties. The red wine made by Carmenet is a blend of Cabernet Sauvignon and
varying amounts of Merlot and Cabernet Franc, and the Carmenet white wine is a
blend of Sauvignon Blanc and Semillon. The wines produced at the Canoe Ridge
Vineyard facility are Merlot, Cabernet Sauvignon and Chardonnay. The Canoe Ridge
Merlot is a blend of 85% Merlot and 15% Cabernet Sauvignon, principally
utilizing state of the art techniques with the goal of producing the finest
Washington State wines.
Each of the Company's wineries is directed and managed by its own winemaker
Each of the wineries is designated a separate profit center, each with its own
General Manager, who is in most instances the winemaker. All five wineries,
including Canoe Ridge Vineyard, operate under the overall supervision of the
Company's Vice President, Production.
The Company imports 70% of its oak barrel requirements from both Burgundy
and Bordeaux and are supplemented with oak barrels produced in the United
States. The wine bottles used by the Company are made in the United States and
France to the Company's specifications, and are closed with the finest quality
imported corks, branded with the particular winery's name.
The Company operates on the principle that winemaking is a natural process
best managed with a minimum of intervention, but requiring the attention and
dedication of the winemaker. The Company uses modern laboratory equipment and
techniques to monitor the progress of each wine through all stages of the
winemaking process.
Wine Production and Wines
The following table sets forth the wine production of the Company, for
calendar years 1995, 1994, and 1993:
VINTAGE YEAR
---------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------------- -------- ------------ -------- ------------- --------
Chardonnay............. 126,500 59% 138,000 68% 126,800 65%
Sauvignon Blanc........ 6,000 3% 6,600 3% 7,100 4%
Pinot Blanc............ 7,600 4% 7,100 3% 6,700 4%
Other white wines...... 3,200 1% 2,500 1% 3,500 2%
------------- -------- ------------ -------- ------------- --------
Total white wines.. 143,300 67% 154,200 75% 144,100 75%
------------- -------- ------------ -------- ------------- --------
------------- -------- ------------ -------- ------------- --------
Pinot Noir............. 27,300 13% 23,000 11% 23,300 12%
Cabernet Sauvignon..... 25,500 12% 21,200 10% 16,600 9%
Merlot................. 13,200 6% 7,400 3% 2,300 1%
Other red wines........ 4,400 2% 1,100 1% 6,100 3%
------------- -------- ------------ -------- ------------- --------
Total red wines.... 70,400 33% 52,700 25% 48,300 25%
------------- -------- ------------ -------- ------------- --------
============= ======== ============ ======== ============= ========
Total production.. 213,700 100% 206,900 100% 192,400 100%
============= ======== ============ ======== ============= ========
The Company's wines are fermented and aged primarily in new and used
barrels, before they are bottled. White wines are aged for between six and nine
months and red wines for between nine and eighteen months after harvest. The
wine is then bottled and stored for further aging. White wines are released
between three months and two years
4.
after bottling, while red wines are released from one to three years after
bottling.
Although the Company's wines are ready to be consumed when sold, it
generally takes from one to two years, or longer, for the wine to develop fully.
The Company usually recommends that its white wines be cellared by the purchaser
for one to five years, and its red wines from two to ten years, depending on the
vintage and variety.
The Company bottles its wines primarily under the "Chalone Vineyard," "Edna
Valley Vineyard," "Carmenet," "Acacia," and "Canoe Ridge Vineyard" labels.
The "Chalone Vineyard" label is known primarily for Chardonnay, Pinot Blanc
and Pinot Noir. The Company has sold Chalone Vineyard Chardonnay , Pinot Blanc,
and Pinot Noir since 1970. In addition, the Company bottles small quantities of
Chenin Blanc under the Chalone Vineyard label. All wines sold under this label
are produced from grapes grown by the Company at the Chalone Vineyard facility
or under the Company's control at adjacent vineyards, and are Estate Bottled.
The Company produces Chardonnay and Pinot Noir wines for the Joint Venture
under the "Edna Valley Vineyard" label. The Company's first release of wines
under the Edna Valley Vineyard label was approximately 359 cases of 1979 vintage
Chardonnay, released in 1980. The majority of wines sold under the Edna Valley
Vineyard label are produced from grapes grown by Paragon Vineyard Co., Inc.
("Paragon"), the Company's co-venturer in the Edna Valley Vineyard Joint
Venture, and are Estate Bottled.
The Company produces Chardonnay and Pinot Noir wines under the "Acacia"
label. All grapes for the production of the Pinot Noir and approximately
two-thirds of the grapes for the Chardonnay are acquired at competitive prices
from various vineyards in the Napa Valley, in most cases pursuant to grape
purchase contracts. The remaining Chardonnay grapes are grown on the 42 acre
Marina Vineyard, a vineyard that surrounds the winery facility.
The Company produces and markets Bordeaux-style "Meritage" red and white
wines under the "Carmenet" label. The Carmenet red wine is made from Cabernet
Sauvignon, Merlot and Cabernet Franc grapes grown at the Carmenet Vineyard
facility, is Estate Bottled, and bears the "Sonoma Valley" viticultural area
designation. Additionally, the Company produces a red wine under the "Carmenet
Dynamite" label and is made from Cabernet Sauvignon grapes and bulk wine
purchased from various vineyards in the North Coast area of California. The
Carmenet white wine is made from Sauvignon Blanc and Semillon grapes purchased
from Paragon under a grape purchase agreement and bears the "Edna Valley"
designation.
The Canoe Ridge Vineyard subsidiary, which commenced operations in 1994,
produces Merlot, Cabernet Sauvignon and Chardonnay wines under the "Canoe Ridge
Vineyard" label. The grapes for these wines are grown at the Company's vineyard
in Benton County, Washington. The wines produced at this facility will, at least
for the near future, bear the "Columbia Valley" viticultural area designation.
In addition to its primary label wines, the Company bottles Chardonnay,
Cabernet Sauvignon, and Pinot Noir under various custom brands.
Imported Wines
As a result of the Company's investment in Duhart-Milon of the Pauillac
region of Bordeaux the Company receives an allocation of the wines of
Duhart-Milon for sale in both the wholesale market and to the Company's
shareholders. Additionally and as a result of investments by DBR in the Chalone
Wine Group, which commenced in 1989, the Company receives an allocation of the
wines of DBR, including the wines of Chateau Lafite-Rothschild and Chateau
L'Evangile of the Pauillac and Pomerol regions of Bordeaux, respectively, and of
Chateau Rieussec of the Sauternes region of Bordeaux, to sell primarily to the
Company's shareholders. DBR also produces a Pauillac wine exclusively for the
Company.
Other Domestic Wines
The Company markets the wines of Woodward Canyon, located in Washington
State's Columbia Valley, and also markets the Rhone-Valley style wines of Jade
Mountain, located in the Napa Valley.
Marketing and Distribution
The Company's five wineries, coupled with the wines of Duhart-Milon, are
positioned in the higher end of the premium category (wines selling over $3 per
bottle at retail.) The table below presents the price positioning of its labels
across those categories:
5.
{The following descriptive data is suppplied in accordance with Rule 304(d) of
Regulation S-T}
Average Retail Price
Winery Per Bottle Price Range Per Bottle Pricing By Premium Segments(1)
------ --------------------- ---------------------- ------------------------------
Acacia $16.00 $10.00 to $40.00 Super to SuperUltra
Canoe Ridge Vineyard $15.00 $13.00 to $18.00 Super to Ultra
Carmenet $18.00 $14.00 to $35.00 Super to SuperUltra
Chalone Vineyard $22.00 $15.00 to $45.00 Ultra to SuperUltra
Edna Valley Vineyard $15.00 $15.00 to $23.00 Ultra to SuperUltra
Chateau Duhart-Milon $26.00 $25.00 to $40.00 SuperUltra
- ---------------
(1) Super-ultrapremium is a segment not generally used by the trade, but which
the Company recognizes.
SuperUltra $20+
Ultra $14-$20
Super $7-$14
Popular $3-$7
The Company's wines are marketed through specialty wine shops and grocery
stores, selected restaurants, hotels and private clubs across the country and in
certain overseas markets, through mailing list sales within California and
elsewhere as permitted, and, in limited quantities, directly from the wineries.
The Company does limited advertising, relying also on word-of-mouth
recommendations, wine tastings and articles in various publications, and
promotional activities by the Company to increase public awareness of its wines.
The Company sells its wines through direct sales, independent distributors,
brokers, and its mailing list. These various channels are employed as follows:
Sales Outside California
Sales of the Company's wines outside California, in other States and in the
international market, are handled by carefully selected independent
distributors. In 1993 the Company established a sales and marketing division,
operating as Chalone Wine Estates, headed by the Company's Vice President,
Sales, to supervise and coordinate this major component of the Company's
business, as well as the Company's increasingly-important custom brands
operations. Additionally, the Company employs, under the Chalone Wine Estates
Vice President, a number of regional sales managers, working directly with the
distributors in the particular region and their customers, on a regular,
continuous basis.
The Company's wines are marketed, outside of California, in 50 States,
Puerto Rico, and the District of Columbia, and, internationally, in Bermuda and
other Caribbean islands, Canada, England, continental Europe, Hong Kong and
Japan. In 1995,
Sales Within California
Northern California Sales. Since January of 1988, Chambers & Chambers,
Inc., Wine Merchants ("Chambers & Chambers"), has handled essentially all of the
wholesale marketing of the Company's wines in Northern California, under an
arrangement in which Chambers & Chambers acts in the capacity of broker.
Chambers & Chambers also markets the Company's wines in Hawaii as a distributor.
Southern California Sales. Utilizing its own sales force, the Company has
direct responsibility for the sale of all of its wines in the large Southern
California market.
Shareholder Services. The Company offers its reserve wines, older wines and
other special wines to its shareholders, currently numbering in excess of
10,000, as well as other consumers, directly from its centralized distribution
center by phone or mail order. The Company sends two major offerings to all
mail-order customers each year and frequent additional catalogs exclusively to
and for our shareholders. Shareholders of the Company are afforded certain
additional benefits, over those provided to mailing-list customers at large.
Certain wines of limited production are offered only to shareholders. Beneficial
owners of 100 shares or more of the Company's common stock are entitled to a
20%-30% discount from retail prices on all mail-order or other direct purchases
from the
6.
Company. The Company has also provided annual discounts to shareholders based on
their sharholdings in the form of a Wine Dividend Credit. The Company confines
direct mail shipments to purchasers with addresses in California and a handful
of other States which have reciprocal cross-sale arrangements with the State of
California, because of legal restrictions on direct retail sales in other
States. Additionally, the Company typically provides for shareholders two or
three travel programs a year to various wine-growing regions of the world.
Recent trips have been to France, Chile, Australia, Portugal, and most recently
to South Africa.
Case Sales by Method of Distribution
The following table sets forth case sales by the Company, by distribution
method, for calendar years 1995, 1994, and 1993.
1995 1994 1993
---------------------- ---------------------- ----------------------
Equivalent Equivalent Equivalent
Number of % of Number of % of Number of % of
Cases Total Cases Total Cases Total
------------ -------- ------------- -------- ------------ -------
Independent distributors
United States.................. 108,831 40% 82,519 39% 62,300 36%
International.................. 8,457 3% 6,057 3% 9,015 5%
------------ -------- ------------- -------- ------------ -------
Total distributors......... 117,288 43% 88,576 42% 71,315 41%
------------ -------- ------------- -------- ------------ -------
Company direct
California wholesale........... 70,330 26% 75,078 35% 76,028 43%
Custom brands.................. 63,442 24% 29,604 14% 12,616 7%
Catalog and winery retail...... 19,247 7% 19,562 9% 15,407 9%
------------ -------- ------------- -------- ------------ -------
Total Company direct....... 153,019 57% 124,244 58% 104,051 59%
------------ -------- ------------- -------- ------------ -------
Total............................... 270,307, 100% 212,820 100% 175,366 100%
============ ======== ============= ======== ============ =======
Centralized Administration and Warehousing
The five wineries operated by the Company are all supported by a central
executive office which coordinates financial planning, administration,
distribution and marketing. In February of 1993, the Company entered into a
contract for the construction and long-term lease of a new building, of
approximately 71,500 square feet, located in the Napa Airport Business Park,
Napa County, California, to house both the Company's executive offices and a
centralized distribution center from which all of the Company's wines are staged
prior to being shipped into local markets. The Company utilizes a portion of the
warehouse space for the storage of third-party wines. The lease has a 15-year
term expiring November 2008, with a five-year extension option. Additionally,
the Company utilizes warehouse facilities as needed in local markets.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all beverages, including non-alcoholic beverages.
However, the Company believes that its primary competitors consist of
approximately 160 wineries in California, as well as a number of wineries in
Washington and Oregon, which produce wines in the premium-priced segment of the
table wine market. The Company's wines, including the wines of DBR, and others,
distributed by the Company, also compete with imported wines, particularly those
from the Burgundy and Bordeaux regions of France and, to a lesser extent, those
of Italy, Chile, and Australia.
The Company believes that the principal competitive factors in its wine
industry segment are label recognition, product quality and price. The Company
believes it generally competes favorably with respect to these factors. As
production from all of its wineries continues to increase, however, the
Company's future sales may be adversely affected by the competition described
above and by competition from new market entrants.
Employees
On December 31, 1995, the Company had 85 full-time employees, of whom 40
were involved in grape-growing and winemaking and 45 in sales and
administration. During the spring and summer, the Company adds approximately 11
to 16 part-time employees for vineyard care and maintenance and 70 to 90
part-time employees for the spring bottling. In the autumn, up to 50 additional
part-time employees are hired for the grape harvest and another 15 for winery
work.
None of the employees of the Company, its subsidiary, or of either of the
joint ventures are represented by a union. The Company believes that its and the
joint ventures' wage rates and benefits are competitive with those of other
companies in the industry and that its and the joint ventures' relations with
their respective employees are excellent.
7.
Regulation; Permits and Licenses
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, and the Company is required to
maintain various permits, bonds and licenses to comply with the regulations of
such agencies.
In addition to the required winery permits and licenses, the Company holds
federal importer's and wholesaler's permits and California importer's, beer and
wine wholesale, and beer and wine retail (off-sale) licenses. Under these
permits and licenses, the Company is authorized to import wines into the United
States from foreign countries, to import wines into California from other
states, and to warehouse and sell wines other than those of its own production.
The Canoe Ridge Vineyard subsidiary holds its own winery permit and license.
The Company's wines are subject to a federal excise tax, payable at the
time of shipment to customers. This tax, which had for many years been $0.17 per
gallon, was increased, effective January 1, 1991, to a maximum of $1.07 per
gallon. In addition, all states in which the Company's products are sold impose
varying excise taxes on alcoholic beverages.
The Company believes it is in compliance with all currently applicable
federal and state regulations.
Trademarks
CHALONE VINEYARD, CARMENET, and the ACACIA "A" plus DESIGN are federally
registered trademarks owned by the Company. EDNA VALLEY VINEYARD is a federally
registered trademark owned by Paragon and licensed exclusively to the Edna
Valley Vineyard Joint Venture. In December of 1994 the Company received a
Certificate of Registration for the CANOE RIDGE mark, and in January of 1995
filed an assignment of that federal registration to the Washington State
subsidiary. The Company's principal marks are also registered in Japan, with the
Japanese Patent Office.
Seasonality
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a discussion of the seasonal nature of the
Company's business.
8.
Item 2. Properties.
The Company's principal winemaking are conducted at five locations, four in
California and one in eastern Washington. The following table shows the
producing acreage, by grape variety, at the various vineyards owned, in whole or
in part, by the Company:
At December 31, 1995
-----------------------------------
Producing Unplanted Total
-------- --------- -----
Chalone Vineyard:
Chardonnay............................................ 101 -- 101
Pinot Noir............................................ 37 -- 37
Pinot Blanc........................................... 30 -- 30
Chenin Blanc.......................................... 7 -- 7
Unplanted............................................. -- 361 361
-------------------------------------
175 361 536
-------------------------------------
Carmenet Vineyard:
Cabernet Sauvignon, Merlot, Cabernet Franc............ 52 -- 52
Unplanted............................................. -- 25 25
-------------------------------------
52 25 77
-------------------------------------
Acacia Winery (including leasehold interest):
Chardonnay............................................ 41 -- 41
Unplanted............................................. -- 4 4
-------------------------------------
41 4 44
-------------------------------------
Canoe Ridge Vineyard (including minority interest):
Cabernet Sauvignon.................................... 32 -- 32
Merlot................................................ 39 -- 39
Chardonnay............................................ 30 -- 30
Unplanted............................................. -- 81 81
-------------------------------------
101 81 182
-------------------------------------
Total Acreage.................................... 369 471 840
=====================================
Chalone Vineyard
Chalone Vineyard is located on approximately 800 acres in Monterey County,
California, approximately 1,500 feet above the floor of the Salinas Valley, in
an 8,000-acre viticultural area called "Chalone." The soil is sparse, reddish
volcanic rock underlain by limestone, and is similar to the soil found in
Burgundy. The elevation of the vineyards provides natural protection against
frost.
The average annual rainfall in the area is 14 inches. The Company
supplements the annual rainfall with a drip-irrigation system fed by a
ten-million gallon reservoir. The Company's reservoir was historically filled
from wells drilled by the Company, by water piped from an adjoining parcel of
land under an oral agreement with the property owner, and in occasional
exceptionally dry years by water piped, by temporary pipeline, from the Salinas
Valley Floor. In 1987 the Company completed installation of a permanent
waterline from the Salinas Valley floor to the vineyard premises, and in 1988
concluded the necessary easements and successfully drilled a well with
sufficient water for the vineyard's current and anticipated future needs.
In 1985, the Company installed an electrical power line from a Pacific Gas
& Electric Co. ("PG&E") terminus outside of Soledad on the Salinas Valley floor
to the Chalone Vineyard premises. The Company owns the approximately
seven-mile-long line and holds recorded easements from each of the traversed
landowners for the power line right-of-way. The Company has undertaken to
maintain the line at its expense, but has reserved the right to enter into
discussions with the traversed landowners regarding a possible annual user fee
if maintenance costs are disproportionately high. PG&E has an option to purchase
the line at its fair market value.
Chalone Vineyard was originally established in the early 1920's and is the
oldest commercial vineyard in Monterey County. The Company has produced premium
wines from Chalone Vineyard since 1969, when it acquired the property from a
predecessor corporation which had produced wines since 1966 under the direction
of Richard H. Graff, the Company's Chairman of the Board.
The present Chalone Vineyard winery was constructed in 1974 with
approximately 13,000 square feet of space, including 5,000 square feet of
underground cellars for wine fermentation and aging in barrels, and with an
annual production capacity of approximately 15,000 cases of wine. Through a
succession of expansions commenced in 1985, including the addition of
approximately 3,500 square feet of caves for barrel storage, the winery's
current production capacity has been brought to approximately 35,000 cases. The
winery also includes a tasting-room and dining
9.
facilities for private parties.
The Company produces primarily Chardonnay and Pinot Noir at this facility
and markets these wines under the "Chalone Vineyard" and "Gavilan" labels.
Carmenet Vineyard
Carmenet Vineyard consists of approximately 300 acres in Sonoma County,
California, located in the "Sonoma Valley" viticultural area. Approximately 52
acres are producing vineyard, planted to Cabernet Sauvignon (44 acres), Merlot
(five acres) and Cabernet Franc (two acres).
The vineyards are situated in the Mayacamas Mountains just north of the
town of Sonoma, at an elevation of about 1,200 feet. The grapevines grow on
steep hillsides in rocky, well-drained soil, and range up to 12 years in age.
The average annual rainfall is 30 inches. The Company has drilled two wells
which provide sufficient water to supplement the annual rainfall. All of the
vines are drip-irrigated. As at Chalone Vineyard, the elevation of Carmenet
Vineyard provides natural protection against frost.
The barrel-storage caves, comprising approximately 15,000 square feet,
consist of four large chambers with interconnecting passageways, all bored into
the solid rock hillside behind the fermentation building. The caves at Carmenet
provide the proper environment for aging wine in barrels without artificial
temperature control. The winery has an annual production capacity of
approximately 32,000 cases. The upper story of the winery tower contains a
reception area and dining facilities for customers and guests.
The Company principally produces Bordeaux-style red and white wines at this
winery and markets these wines under the "Carmenet" label.
Edna Valley Vineyard
The Edna Valley Vineyard Joint Venture was established in April 1980
between the Company and Paragon. Initially established for a 10-year first term
with a 10-year renewal option, effective January 1, 1991, the Company and
Paragon entered into a set of agreements to convert the Joint Venture into a
"permanent partnership" of unlimited duration. A significant element of the
transaction was the purchase by the Company of an option for $1,017,174 (with
$175,439 remaining due in 1997) giving it the right to convert the limited-term
venture into the permanent relationship upon final payments to Paragon of
$200,000 in 1998 and 1999 and $4,500,000 in 2000. At this time, the Company
plans to exercise this option and make all payments required through 1997. The
Company believes that the cash-flow from the Venture will be sufficient to fund
most, if not all, of the option and additional payments through 1999, as well as
a portion of the final payment in 2000. The Company is continuing to monitor the
Joint Venture's performance and evaluate whether expected future profitability
and cash flows are sufficient to warrant continued investment in the venture and
ultimate exercise of the option. Should the Joint Venture's performance
deteriorate, management may decide not to make the additional payments required
under the option.
The Company produces and markets wines for the Joint Venture from grapes
purchased from Paragon under the terms of a grape purchase agreement between
Paragon and the Joint Venture. The winery, located at the site of the Paragon
vineyards, was built by Paragon and, until 1991, was leased to the Joint
Venture. With the Company's purchase of a half-interest in the winery, in 1991,
the winery lease was terminated. The parties lease the property on which the
winery sits under a ground lease from Paragon.
The Edna Valley Vineyard winery is situated in San Luis Obispo County, in
the "Edna Valley" viticultural area, a coastal valley bounded to the north and
south by low mountain ridges. The area has a cooler climate than surrounding
areas, and the vineyards have well-drained alluvial soil. Paragon has installed
frost-protection equipment in its vineyards.
As was true previously, under the terms of the 1991 Joint Venture Agreement
the Company has responsibility for managing the operations of the Joint Venture,
and receives a management fee to cover administrative costs. The Company also
receives a commission on all sales of Edna Valley Vineyard wines.
Paragon and the Company share equally (after adjustment for Partners'
varying bases in an asset contributed to the Joint Venture) in the net profits
and losses of the Joint Venture. A six-member review committee (three
representatives from each Joint Venture partner) decides whether profits will be
distributed and whether further contributions of capital are required. Any
further contributions of capital, if required, are to be borne equally by
Paragon and the Company.
Under the terms of the grape purchase agreement, Paragon sells fixed
quantities of Chardonnay and Pinot Noir grapes, and occasionally small
quantities of other varieties, to the Joint Venture, at prices calculated by
reference to the average of the prices paid for those varieties in Napa, Sonoma
and Mendocino Counties during the preceding year, as reported by the California
Department of Agriculture, with adjustments depending on the sugar content of
the grapes supplied. The grape purchase agreement provides that the grapes
supplied by Paragon are to be harvested
10.
from areas of Paragon's Edna Valley vineyards which are jointly selected by
Paragon and the Company.
Paragon's Edna Valley vineyards comprise approximately 600 acres, planted
to several varieties of grapes. Approximately 150 acres are planted to
Chardonnay and 45 acres to Pinot Noir. The Joint Venture purchases the majority
of the annual harvest of these two varieties. Paragon also grows Sauvignon Blanc
and Semillon grapes, most of which are purchased by the Company under a separate
grape purchase agreement, for the production of Carmenet white wine at the
Carmenet Vineyard winery. The grapevines were planted in 1972 and all are
drip-irrigated. The average annual rainfall at Edna Valley Vineyard is 24
inches. Paragon has drilled seven wells to supplement the annual rainfall.
Although the water from the wells tends to be high in dissolved salts, it is
satisfactory for use in drip-irrigation during years of normal rainfall.
The Edna Valley Vineyard winery is approximately 24,000 square feet in
size, including 10,000 square feet of underground cellars for wine fermentation
and aging in barrels. The winery has an annual production capacity of
approximately 58,000 cases. In the 1991 agreements the Joint Venture partners
undertook to consider increasing the winery capacity, over time, and to increase
the volume of grape purchases from Paragon and the Joint Venture's annual wine
production proportionately. That process scheduled to commence in 1996.
The wines produced at this facility are principally Chardonnay and Pinot
Noir, which are marketed under the "Edna Valley Vineyard" label.
Acacia Winery
In July of 1986, the Company acquired substantially all of the operating
assets of Acacia Winery, located in the Carneros District of the Napa Valley, in
Napa County, California. The purchase included the winery building and
winemaking equipment previously owned by Lakeside Winery ("Lakeside"), a
California limited partnership which had owned and operated Acacia Winery since
its inception in 1979, and included a ground lease for the land on which the
winery is situated, obtained from Vista de los Vinedos ("Vista"), a partnership
whose partners were Lakeside and two individuals, Mr. and Mrs. Henry Wright
("the Wrights"). The ground lease has an initial term ending December 31, 1996,
and is renewable for two additional ten-year terms.
Vista also owned, at the time of the Acacia Winery purchase, approximately
41 acres of producing vineyard surrounding the Acacia Winery complex, known as
the Marina Vineyard. As a part of the Acacia purchase, the Company entered into
long-term contracts with Vista for the management of the Marina Vineyard and for
the purchase of its annual grape crop. The Company also obtained rights of first
refusal for the purchase of the Vista assets and alternatively for the purchase
of Lakeside's 50% interest in Vista.
In July of 1988, the Company exercised its right of first refusal for
Lakeside's interest in Vista, acquiring that interest for approximately $1.174
million, in cash. In cooperation with the Wrights, the Vista partnership was
then dissolved and the real property (the Marina Vineyard plus the acreage under
the winery) conveyed into co-tenancy, pursuant to a tenancy in common agreement.
The grape purchase and vineyard management agreements were extinguished and
replaced by a long-term vineyard lease of the Wrights' half-interest in the
Marina Vineyard, effective retroactively to January 1, 1988. The ground lease
for the winery parcel was also modified to reflect the new ownership structure,
with a similar effective date.
Under the terms of the tenancy in common agreement the Wrights have the
right at any time on or after January 1, 1998, to "put" their half-interest in
the real property to the Company and, if the Company declines to purchase, to
have the entire property listed for sale to a third party.
The vineyard lease is for a single thirty-year term, expiring December 31,
2017 (subject to a 5-year "tail-off" period in the event of a sale of the
property to a third party). The annual rental, which was fixed with regard to
the price of premium quality Carneros District Chardonnay grapes, was $82,500
for 1988, increasing by 5 per cent per annum through 1997, and thereafter fixed
according to a formula similarly based on Carneros Chardonnay grape prices.
The Marina Vineyard is planted entirely to Chardonnay grapes. The majority
of the vines were planted in the mid-1970's, although significant replanting on
new root-stock was undertaken in early 1980s. The vineyard is not
frost-protected but to date has not experienced any significant losses due to
frost damage. The vineyard is irrigated from a 22-acre-foot reservoir located on
the property. The vineyard and winery are within both the "Carneros" and the
"Napa Valley" viticultural areas.
As a result of expansion completed in 1991, the Acacia Winery has an annual
production capacity of approximately 50,000 cases. The winery has modest
tasting-room and dining facilities.
The wines produced at Acacia Winery are principally Chardonnay and Pinot
Noir, which are marketed under the "Acacia" and "Caviste" labels.
11.
Canoe Ridge Vineyard Properties
In September of 1990, the Company acquired a 50% interest in a small
vineyard located on what is called "Canoe Ridge," in eastern Washington State
(Benton County), through the formation of a joint venture ("CanoeCo Partners")
with a small, privately-held company known as CRVI. The CanoeCo property
consists of approximately 275 acres, of which approximately 100 acres are now
planted, in roughly equal proportions of Merlot, Chardonnay, and Cabernet
Sauvignon grapes. The vineyard is located at an altitude of approximately 800
feet on the eastern slope of the Canoe Ridge overlooking the Columbia River.
Although temperatures during the winter months can fall below freezing, the
vineyard's altitude, easterly exposure, and appropriate viticultural practices
reduce the potential of freeze damage. The vineyard is irrigated with water from
the nearby Columbia River under an agreement with an adjoining farm that is
owned by several of the CRVI shareholders, one of whom is the on-site vineyard
manager.
In the summer of 1994 the Company established the Canoe Ridge Vineyard
winery, in the historic "Walla Walla Valley Railroad" engine-house building,
recently renovated for the purpose. Subsequently the Company formed a Washington
State subsidiary corporation, Canoe Ridge Winery, Inc., dba Canoe Ridge Vineyard
(CRW), to become the winemaking entity. The Company holds a 51% interest in this
new corporation and a group of some 40 Washington residents collectively holds
the remaining 49%. The subsidiary acquired from the Company all of the
winemaking equipment and supplies, all interest in the trade name CANOE RIDGE,
and, consistent with regulatory requirements, all inventory on hand. It also
assumed the lease for the winery building.
The lease is for a five-year term, with two five-year renewal options. The
monthly rent is $1,600 on a triple net basis, for the first five-year term,
subject to ordinary escalation for the renewal terms. The landlord is a small
partnership which is also one of the shareholders of the winery company. The
building itself, located in downtown Walla Walla, is approximately 9,000 square
feet in dimension. An additional small building, which will in due course serve
as office and tasting-room, is currently under construction. Ultimate annual
wine production is projected to be 25,000 cases, divided between Merlot and
Chardonnay, with small amounts of Cabernet Sauvignon.
The vineyard and winery are both located in the "Columbia Valley"
viticultural area. At a future point in time it is contemplated that an
application will be made to the Bureau of Alcohol, Tobacco and Firearms, jointly
with the owner of the remainder of the Canoe Ridge vineyard locale, to establish
a smaller viticultural area called "Canoe Ridge."
In early 1996, both vineyard and winery operations were merged into a new,
Washington State limited liability company, Canoe Ridge Vineyard, L.L.C. As a
result of its prior holdings in CanoeCo Partners and CRW, the Company holds a
50.5% membership interest in the new company, 25% directly and 25.5% indirectly
through CRW, which in the reorganization process became a wholly-owned
subsidiary of the Company. The remaining membership interests are held by the
Company's partner in CanoeCo, CRVI (25%), and the former individual shareholders
of CRW (now formed into another, separate limited liability company) (24.5%).
Management of Canoe Ridge Vineyard, L.L.C., is reposed in a group of nine Member
Delegates, five designated by the Company and four by the 49.5% minority
interests.
Applications for requisite alcoholic beverage permits and licenses, to
permit the new company to operate as a bonded winery in its own right, are
pending.
Duhart-Milon
As described above, effective October 1, 1995, the Company exchanged all of
its existing ownership in DBR for a 23.5% interest in Duhart-Milon. The
remaining 76.5% of Duhart-Milon is owned by DBR. Duhart-Milon is a wine
producing property located in Paulliac in the Medoc region of Bordeaux in
France. The property consists of approximately 166 acres of producing vineyards,
contiguous to the vineyards of Chateau Lafite-Rothschild, and winemaking
facilities located in the town of Paulliac. In 1855 the French Government
classified the top 62 wine-producing estates in the medoc region of Bordeaux
(out of over 400 such estates) into five growths based on their perceived
quality, with first growth being the best. Under the classification system
Duhart-Milon is rated as a fourth growth estate. The average annual production
has in recent years been approximately 35,000 cases and is sold under the
Chateau Duhart-Milon and Moulin de Duhart labels. Duhart-Milon employs
approximately 24 employees. DBR purchased the property in 1962. Financial
Statements for Duhart-Milon are included as an Exhibit to this report.
Item 3. Legal Proceedings.
There are no material legal proceedings pending to which the Company or
either of the Joint Ventures is a party nor to which any property of any of them
is subject, nor does the Company's management know of any such action being
contemplated.
12.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held a special Meeting of Shareholders at the Company's
executive offices, 621 Airpark Road, Napa, California, on October 25, 1995. In
attendance, in person or by proxy, were 3,261,468 shares, or, approximately
65.6% of total shares outstanding. The only matter voted upon at the Special
Meeting was the approval of transactions with Domaines Barons de Rothschild
(Lafite) and Summus Financial, Inc., et al., pursuant to the terms of an Omnibus
Agreement dated August 22, 1995 (see Item 1(a) Significant Event), with
2,247,416 shares voting for, 86,977 shares voting against and 927,075 shares
abstaining or subject to broker non-votes.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of
March 27, 1996.
Name Position(s) Age
---- ----------- ---
W. Philip Woodward President, Chief Executive 56
Officer, and Director
William L. Hamilton Executive Vice President, Chief 51
Financial Officer, Assistant
Secretary, and Director
Larry M. Brooks Vice President, Production, and 45
Managing Director, Acacia Winery
Robert B. Farver Vice President, Sales 39
b. Business Experience of Executive Officers
W. Philip Woodward. Mr. Woodward joined the Company as Vice President
and Chief Financial Officer in 1972 and in December of 1974 became its President
and Chief Executive Officer. He continued as Chief Financial Officer until
October of 1983. He has overall responsibility for all aspects of the Company's
operations. He is a director of Domaines Barons de Rothschild (Lafite) ("DBR"),
in which the Company holds an interest, a director of the Northern Trust Company
of California, director of Hog Island Oyster Company, Inc., and President and a
director of the Marin Theatre Company. He was a purchaser in the 1994 private
placement of the Company's stock referred to under "Significant Event" in Item 1
and in the 1993 private placement transaction referred to under Item 13, Certain
Relationships and Related Transactions. He has been a director of the Company
since October of 1972.
William L. Hamilton. Mr. Hamilton joined the Company as Chief Financial
and Administrative Officer in September of 1985. In November of 1986 his title
was changed to Vice President, Finance and Administration, and he was also
appointed Assistant Secretary. In February of 1996 he was appointed Secretary.
In September of 1990, he was appointed Executive Vice President of the Company.
He is a trustee of the Marin Community Foundation. He has been a director of the
Company since April of 1986.
Larry M. Brooks. Mr. Brooks joined the Company in 1986 as Winemaker of
Acacia Winery following the acquisition of Acacia Winery in 1986, where he had
been the Winemaker since Acacia's founding in 1979. In 1992 his title was
changed to Managing Director and Winemaker of Acacia Winery. In 1993 his title
was changed to include Vice President, Production.
Robert B. Farver. Mr. Farver joined the Company in 1990 as the Regional
Sales Manager for the Northeast United States. In 1994 his title was changed to
Director of National Sales and Marketing. In February of 1996 his title was
changed to Vice President, Sales.
13.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on May 18, 1984, and is listed in
the NASDAQ National Market System, under the symbol "CHLN." The following table
sets forth the high and low closing quotations for the stock for each quarter
during the past three years, as reported by NASDAQ. The prices reflect
inter-dealer quotations without retail mark-ups, mark-downs or commissions, and
do not necessarily represent actual transactions.
Period High Low
------ ---- ---
1994
First quarter........................ 6.50 4.75
Second quarter....................... 6.00 4.75
Third quarter........................ 6.50 5.25
Fourth quarter....................... 6.50 5.83
1995
First quarter........................ 8.00 5.75
Second quarter....................... 7.88 6.63
Third quarter........................ 7.75 6.50
Fourth quarter....................... 9.38 6.25
On March 15, 1996, the closing price for the common stock was $9.13 per
share. During 1995, the average weekly trading volume of the stock was
approximately 18,000 shares.
b. Holders of Record.
As of March 15, 1996, there were approximately 5,184 holders of record of
the Company's common stock.
c. Dividends.
The Company has not paid any cash dividends to and does not anticipate
declaring or paying cash dividends in the immediate future.
Under the Company's loan agreements with its bank, the Company may not,
without the bank's consent, pay dividends while indebtedness under the
agreements remains outstanding. Under the terms of the Company's convertible
subordinated debentures, the Company is restricted from paying dividends in
excess of 50% of its aggregate net income.
14.
Item 6. Selected Financial Data.
The following selected consolidated financial data for the years ended
December 31, 1995, 1994, 1993, 1992, and 1991, are derived from the audited
financial statements of the Company. This data should be read in conjunction
with the financial statements and notes thereto included at Item 8 of this
Report.
SELECTED FINANCIAL DATA
(in thousands except per-share data)
Year Ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Statement of Operations Data:
Net revenues......................... $ 25,032 $ 20,515 $ 17,824 $ 16,792 $ 14,951
Gross profit......................... 8,792 7,504 6,395 6,309 6,855
Selling, general and administrative
expenses....................... 5,374 4,633 4,432 4,610 4,119
Operating income..................... 3,418 2,871 1,963 1,699 2,736
Other expense........................ (2,681) (2,561) (2,482) (2,494) (2,144)
Equity in net income of Duhart-Milon 74 -- -- -- --
Minority interest.................... (357) (188) (372) (269) (429)
Net earnings (loss).................. 207 20 (691) (741) 58
Earnings (loss) per common share..... .04 .00 (.16) (.19) .02
Balance Sheet Data:
Working capital...................... 22,072 17,136 15,291 11,606 13,349
Total assets......................... 72,569 72,225 72,078 70,413 67,928
Long-term obligations................ 13,477 26,425 27,387 30,418 31,944
Shareholders' equity................. 41,382 24,199 22,699 17,030 17,081
15.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related notes presented at
Item 8 of this report and in conjunction with the Selected Financial Data
presented under the preceding Item 6. The discussion of results, causes or
trends should not be construed to imply that such results, causes or trends will
necessarily continue in the future.
Results of Operations
The following table sets forth the selected financial data as a percentage
of total wine sales for the years indicated:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues......................................... 100% 100% 100% 100% 100%
Gross profit..................................... 35% 37% 36% 38% 46%
Selling, general and administrative
expenses.................................... 21% 23% 25% 27% 28%
Operating income................................. 14% 14% 11% 10% 18%
Other expense.................................... (11%) (12%) (14%) (14%) (15%)
Equity in net income of Duhart-Milon 0% -- -- -- --
Minority interest................................ (1%) (1%) (2%) (2%) (3%)
Net earnings (loss).............................. 1% 0% (4%) (4%) 0%
Wine Sales
Sales for the year ended December 31, 1995, increased by 22% over the
comparable period in 1994, representing the twelfth consecutive year of
increased sales. This increase was due to unit increases at all five of the
Company's properties as well as from wines imported and distributed by the
Company. As in 1994 sales outside of California showed the most robust activity,
with California sales again remaining essentially flat. The Company's custom
brands program also contributed to the increase in sales in 1995 with an
increase of over 114% over the comparable period in 1994. Management believes
this program, which accounted for 24% of the Company's unit sales and 12% of its
revenues in 1995, will not increase in the foreseeable future, due to a shortage
of acceptable fruit, primarily due to a state-wide small harvest in 1995.
Sales for the year ended December 31, 1994, increased by 15% over the
comparable period in 1993, representing the eleventh consecutive year of
increased sales. This increase was due to unit increases at all four of the
Company's California properties as well as from wines imported and distributed
by the Company. Geographically, sales outside of California showed the most
robust activity, with California sales remaining essentially flat. The addition
of two sales representatives in January, 1994, covering territory outside of
California, had a positive effect on sales activity in these areas in 1994, and
management believes that trend will continue in 1995 and beyond.
Sales in the California market have historically represented approximately
38%, 45%, and 52% of total wholesale sales (excluding custom brands) for 1995,
1994, and 1993, respectively, while 40% would be considered more typical for the
industry during these periods. For that reason management believes that unit
sales in California will remain relatively flat with most future growth
occurring in markets outside of California.
Gross Profit
Gross profit was $8,791,929 for the year ended December 31, 1995, increased
from $7,503, in 1994. This increase of 17% was due to the increased sales
activity discussed above. Gross profit as a percent of sales for the twelve
month period ended December 31, 1995 declined to 35% from 37% in the comparable
period in 1994. This decrease is attributable to the change of product mix to
lower margin wines, most notably the custom brands program discussed above.
Gross profit of $7,503,799 for the year ended December 31, 1994, increased
from $6,395,104 in the comparable period in 1993. This increase of 17% was due
to the increased sales activity discussed above, and enhanced, in part, by
higher realizations at Acacia, Edna Valley Vineyard and Chalone Vineyard.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1995, increased approximately 16% from 1994. This increase was largely
attributable to increases in sales and marketing expenses and employee
compensation associated with increased sales levels. Selling, general and
administrative expenses as a percentage of
16.
sales for the year ended December 31, 1995, declined to 21%, the lowest level in
the Company's history, from 22% in 1994, due to expenses increasing at a slower
rate than sales during that period, a trend management believes will continue in
the future.
Selling, general and administrative expenses for the year ended December
31, 1994, increased approximately 5% from the comparable period in 1993. This
increase was largely attributable to increases in sales and marketing expenses,
including the full-year expenses of a head of the sales and marketing division
of the Company, Chalone Wine Estates, added in July, 1993. These increases were
offset in part by the reduction in administrative overhead including facilities
costs and a decrease in personnel costs. Selling, general and administrative
expenses as a percentage of sales for the year ended December 31, 1994, declined
to 22% from 24% for the comparable period of 1993, due to expenses increasing at
a slower rate than sales during that period.
Operating Income
Operating income for the year ended December 31, 1995 increased 19% over
1994. This increase was due to higher gross profits and lower selling, general
and administrative expenses, as a percentage of sales, over 1994, both discussed
above.
Operating income for the period ended December 31, 1994 increased 46% over
the comparable period in 1993, the largest increase in operating profit ever
recorded by the Company. This increase was due to higher gross profits and lower
selling, general and administrative expenses, as a percentage of sales, over the
comparable period in 1993, both discussed above.
Other Income (Expense)
Interest expense for the year ended December 31, 1995 remained essentially
unchanged at $2,778,748 from 1994. Interest on higher short-term borrowings
during the first nine months of 1995 was offset by the reduction in both
short-term and long-term borrowing in the fourth quarter of 1995, made possible
by the addition of $4,500,000 in new equity and the conversion of $12,384,000 of
convertible debentures to equity at the end of October, 1995 (see Liquidity and
Capital Resources, below.)
Interest expense for the year ended December 31, 1994 increased to
$2,752,781, an increase of 3% from 1993. This increase resulted primarily from
higher interest rates on the short-term borrowings, offset, in part, by the
reduction in both short-term and long-term borrowing made possible by the
addition of $1,476,217 in new equity during 1994.
Equity in Net Income of Duhart-Milon
Effective October 1, 1995, the Company exchanged essentially all of its
11.3% ownership interest in DBR for a 23.5% interest in Societe Civile Chateau
Duhart-Milon. The effect of this transaction was to convert an essentially
passive 11.3% interest in DBR into an interest in an active, operating vineyard
and winery operation accounted for using the equity method of accounting. The
Company's 23.5% equity interest in Duhart-Milon's net income for the three
months ended December 31, 1995, was $74,109.
Minority Interest
The Company currently has three ventures in which there is a minority
interest. The "minority interest" in earnings (losses) of these ventures for
three years ended December 31, 1995, consisted of the following:
Twelve Months Ended December 31,
--------------------------------------------
Venture Minority Owner Minority % 1995 1994 1993
------- -------------- ---------- ---- ---- ----
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50% $ 332,654 $ 219,321 $ 372,386
CanoeCo Partners CRVI 50% 5,687 (31,495) --
CRW Various 49% 18,766 100 --
------------- ------------- --------------
$ 357,107 $ 187,725 $ 372,386
============= ============= ==============
The minority interest in earnings for Edna Valley Vineyard during 1995
represents an increase of 52% from 1994, and was due to higher unit sales and
the resulting higher profits for the period. The minority interest earnings at
CanoeCo result from the 1995 harvest being the first with average vineyard
yields levels. CRW had its first complete year of operation in 1995, but had
only limited amounts of wine to sell, resulting in a small profit.
The minority interest in earnings for Edna Valley Vineyard in 1994 a
decrease of 30% from 1993, and was due to lower unit sales and the resulting
lower profits for the period. The "minority interest" in net losses at CanoeCo
for 1994 represent the losses incurred due to the lower-than-average vineyard
yields levels, and the resulting higher costs per ton of grapes yielded, typical
in the early years of a vineyard's development. CRW only operated in the
17.
last two months of 1994, and consequently had a small loss.
The Company believes that Edna Valley Vineyard will continue to contribute
significantly to its income, and hence that this minority interest will continue
to increase in the future. Effective January 1, 1996, CanoeCo and CRW merged
into one new Company, Canoe Ridge Vineyard LLC, which the Company owns 50.5%.
Management believes that the merged entity will contribute significantly to its
income, and that the minority interest will, therefore, continue to increase.
Net Earnings
The net earnings for the year ended December 31, 1995, of $206,607
represents a 924% increase over the comparable period in 1994. This improvement
was due to higher operating income, and the addition of equity in the earnings
of Duhart-Milon, both discussed above.
The net earnings for the year ended December 31, 1994, of $20,184
represents a $710,963 improvement over the loss incurred in 1993. This
improvement was due to higher operating income, discussed above.
Seasonality
The Company's wine sales from quarter to quarter are highly variable
because the exact dates when wines are released for sale vary from year to year.
Sales are typically highest during the fourth quarter, because of heavy holiday
sales and because most wines are released around the end of the third and
beginning of the fourth quarters.
Liquidity and Capital Resources
The Company's working capital increased by $4,936,000 in the year ended
December 31, 1995. This increase was primarily due to the sale in October 1995,
of 833,333 restricted shares of its common stock and a like number of warrants
for consideration, net of expenses, of $4.5 million. This new equity and the
conversion of $12.4 million in convertible debentures into equity in 1995
reduced the Company's total debt by approximately $17.0 million.
Wine sales have historically provided sufficient revenues from operations
to sustain the Company's on-going operational financial requirements except
during grape harvesting, when the Company has relied on short-term borrowings to
finance grape purchases and the increased seasonal payroll. Major capital
projects such as the expansion of the facilities at Chalone Vineyard, Carmenet
Winery, and Acacia Winery, and the acquisition of Marina and Canoe Ridge
Vineyards, have been funded with proceeds from two public offerings of the
Company's common stock, sale of 49% of the equity in the Canoe Ridge Winery
corporation, debenture issuances in 1985 and 1989, and various bank borrowings.
As more fully discussed in Notes I and F to the Company's Consolidated
Financial Statements, the Company's presently anticipated long term capital
requirements include $5,498,400 principal amounts of term loans due during 1996,
$4,500,000 to be paid in 2000 in connection with the expected exercise of the
Edna Valley Vineyard option and repayment of the remaining $8,500,000 principal
amount of debentures due in April 1999 (as reduced by the principle amount of
debentures converted into common stock at the applicable conversion price prior
to that time). The Company expects to renew its term loans during 1996 for a
period of one year from the current maturities, with interest rate basis, spread
and principal payments to remain unchanged and, depending on market conditions
at maturity, to fund the Edna Valley Vineyard option and debenture payments from
cash flow, additional bank borrowings, debt or equity placements, asset sales or
other means.
The Company currently has operating lines of credit of $15,700,000. As
of March 15, 1996, $8,637,157 was drawn on those lines.
18.
Item 8. Financial Statements and Supplementary Data.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................... 20
Consolidated Statements of Operations......................... 21
Consolidated Statements of Changes in Shareholders' Equity.... 22
Consolidated Statements of Cash Flows......................... 23
Notes to Consolidated Financial Statements.................... 24
INDEPENDENT AUDITORS' REPORT........................................ 34
19.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------------
1995 1994
----------- -----------
Current assets
Cash $ 31,959 $ 69,981
Accounts receivable, less allowance for doubtful accounts of $25,550
and $17,450...................................................... 7,652,717 4,509,134
Note receivable from officer......................................... 99,996 --
Inventories.......................................................... 27,499,273 29,422,037
Prepaid expenses..................................................... 199,210 209,321
Deferred income taxes................................................ 166,699 311,540
----------- -----------
Total current assets............................................. 35,649,854 34,522,013
Investment in Chateau Duhart-Milon................................... 12,058,636 --
Investment in Domaines Barons de Rothschild (Lafite)................. -- 12,524,077
Property, plant and equipment - net.................................. 19,864,865 20,443,994
Goodwill and trademarks, less amortization of $955,050 and $853,671 3,148,235 3,251,526
Other assets......................................................... 1,846,946 1,483,684
----------- -----------
Total assets................................................ $72,568,536 $72,225,294
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit.................................................. $10,238,869 $13,874,066
Current maturities of long-term obligations........................... 773,990 799,168
Accounts payable and accrued liabilities.............................. 2,564,596 2,712,844
----------- ------------
Total current liabilities......................................... 13,577,455 17,386,078
Long-term obligations - less current maturities............................ 5,010,644 5,541,297
Convertible subordinated debentures........................................ 8,500,000 20,884,000
Deferred income taxes...................................................... 1,073,186 1,171,435
Minority interest.......................................................... 3,024,764 3,043,375
Commitments and contingencies
Shareholders' equity
Common stock - authorized 15,000,000 shares,
no par value; issued and outstanding,
7,596,398 and 4,962,010 shares................................... 41,557,018 24,472,202
Deficit ............................................................. (66,486) (273,093)
Cumulative foreign currency translation adjustment.................... (108,045) --
----------- -----------
Total shareholders' equity........................................ 41,382,487 24,199,109
----------- -----------
Total liabilities and shareholders' equity.................. $72,568,536 $72,225,294
=========== ===========
The accompanying notes are an integral part of these statements.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
Gross revenues..................................... $25,810,269 $21,132,053 $18,325,182
Less excise taxes............................. 778,615 616,708 500,854
----------- ----------- -----------
Net revenues....................................... 25,031,654 20,515,345 17,824,328
Cost of sales...................................... 16,239,725 13,011,546 11,429,224
----------- ----------- -----------
Gross profit.............................. 8,791,929 7,503,799 6,395,104
Selling, general and administrative expenses....... 5,373,954 4,633,499 4,432,519
----------- ----------- -----------
Operating income.......................... 3,417,975 2,870,300 1,962,585
Other income (expense):
Interest (net of amounts capitalized) (2,778,748) (2,752,781) (2,685,290)
Other, net.................................... 98,006 191,579 203,764
----------- ----------- -----------
(2,680,742) (2,561,202) (2,481,526)
Equity in net income of Chateau Duhart-Milon 74,109 -- --
Minority interest.................................. (357,107) (187,725) (372,386)
----------- ----------- -----------
Earnings (loss) before income taxes....... 454,235 121,373 (891,327)
Income taxes (benefit)............................. 247,628 101,189 (200,548)
----------- ----------- -----------
Net earnings (loss) ...................... $ 206,607 $ 20,184 $ (690,779)
=========== =========== ===========
Net earnings (loss) per common share............... $ .04 $ .00 $ (.16)
======= ======= ======
Average number of shares used in
earnings per share computation.... 5,299,766 4,826,094 4,383,209
=========== =========== ===========
The accompanying notes are an integral part of these statements.
21.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
Common Stock
---------------------------- Foreign
Number of Currency
Shares Amount Deficit Translation Total
---------- ----------- --------- ----------- -----------
Balance, December 31, 1992..... 3,701,510 $16,632,696 $ 397,502 $ -- $17,030,198
Sale of common stock - net.. 835,446 5,738,980 -- 5,738,980
Exercise of warrants........ 61,000 610,000 -- 610,000
Options exercised........... 3,000 9,990 -- 9,990
Net (loss).................. -- -- (690,779) (690,779)
---------- ----------- --------- --------- -----------
Balance, December 31, 1993..... 4,600,956 $22,991,666 $(293,277) -- $22,698,389
Sale of common stock - net.. 360,004 1,480,536 -- 1,480,536
Net earnings................ -- -- 20,184 20,184
---------- ----------- --------- --------- -----------
Balance, December 31, 1994..... 4,960,960 $24,472,202 $(273,093) -- $24,199,109
Sale of common stock - net.. 838,579 4,532,070 -- 4,532,070
Conversion of convertible
debentures.............. 1,769,143 12,384,000 12,384,000
Options exercised........... 27,716 168,746 -- 168,746
Foreign currency translation
adjustment.............. (108,045) (108,045)
Net earnings................ -- -- 206,607 206,607
---------- ----------- --------- --------- -----------
Balance, December 31, 1995..... 7,596,398 $41,557,018 $ (66,486) $(108,045) $41,382,487
========== =========== ========= ========= ===========
The accompanying notes are an integral part of these statements.
22.
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------
1995 1994 1993
---------- ------------ ----------
Cash flows from operating activities:
Net earnings (loss)........................................... $ 206,607 $ 20,184 $ (690,779)
Non-cash transactions included in earnings:
Depreciation................................................ 2,718,269 2,405,270 2,621,095
Amortization................................................ 147,036 146,178 146,178
Equity in net income of Chateau Duhart-Milon................ (74,109) -- --
Minority interest........................................... 357,107 187,725 372,386
Gain (loss) from sale of equipment.......................... (14,909) 40,439 (8,667)
Change in:
Deferred income taxes................................... 46,592 100,389 (269,885)
Accounts and other receivables.......................... (2,712,078) (455,314) (417,279)
Inventories............................................. 1,922,764 1,236,195) (2,094,778)
Prepaid expenses and other assets....................... 103,104 (13,498) (80,177)
Accounts payable and accrued liabilities................ (148,248) (300,875) (508,703)
----------- ------------ -----------
Net cash provided (used) in operating activities...... 2,552,135 894,303 (930,609)
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures.......................................... (2,269,972) (1,706,642) (1,732,623)
Proceeds from sale of property and equipment.................. 145,741 144,164 246,550
Increase in notes receivable ................................ (599,996) -- --
Option payment to extend joint venture........................ -- -- --
----------- ------------ -----------
Net cash used in investing activities................. (2,724,227) (1,562,478) (1,486,073)
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) on bank lines of credit........... (3,635,197) 399,066 (626,000)
Distribution to minority interest (Paragon)................... (375,718) (156,000) (100,000)
Proceeds from issuance of long-term debt...................... 41,273
Repayment of long-term debt................................... (555,831) (1,730,115) (2,910,866)
Contributions to joint venture................................ -- 324,000 --
Proceeds from issuance of common stock........................ 4,700,816 1,480,536 6,358,970
----------- ------------ -----------
Net cash provided from financing activities........... 134,070 317,487 2,763,377
----------- ------------ -----------
Net (decrease) increase in cash.................................. (38,022) (350,688) 346,695
Cash at beginning of year................................... 69,981 420,669 73,974
----------- ------------ -----------
Cash at end of year......................................... $ 31,959 $ 69,981 $ 420,669
=========== ============ ===========
Other cash flow information:
Interest paid .............................................. $ 2,904,582 2,837,501 $3,031,406
Income taxes paid........................................... $ 80,800 $ 800 $ 41,142
Non-cash transactions:
Conversion of convertible debentures to common stock........ $12,384,000 $ -- --
Distribution receivable from Chateau Duhart-Milon........... 431,505 -- --
The accompanying notes are an integral part of these statements.
23.
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND OPERATIONS
The Chalone Wine Group, Ltd. ("the Company") produces and sells primarily
super and ultra premium quality table wines. The Company farms its estate-owned
vineyards representing approximately 369 producing acres in Napa, Sonoma,
Monterey counties of California, and in southeastern Washington State.
Approximately 30% of its annual grape requirements are purchased from
independent growers.
The Company sells the majority of its products to wholesale distributors,
restaurants, and retail establishments throughout the United States, Canada and
Europe. Export sales account for approximately 3% of total revenue. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations. Domaines Barons de
Rothschild (Lafite) ("DBR"), a French Company, owns approximately 41% of the
Company's outstanding common stock and the Company is DBR's partner in Societe
Civile Chateau Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate
located in Pauillac, France.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its 51% owned subsidiary, and its 50% owned joint ventures (Notes F and G) which
are controlled and managed by the Company. The Company has a 23.5% investment in
Chateau Duhart-Milon which is accounted for using the equity method (Note E.)
All significant intercompany accounts and transactions have been eliminated.
Certain 1994 and 1993 balances have been reclassified to conform with current
year presentation.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 requires the Company to compute deferred income taxes based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Inventories
Inventories are stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. Growing crops consist primarily of farming costs, which are
deferred and recognized when the related crop is harvested. Wine production
supplies are stated at FIFO (first-in, first-out) cost. All bulk and bottled
wine inventories are classified as current assets in accordance with recognized
industry practice, although a portion of such inventories will be aged for
periods longer than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
for in amounts sufficient to allocate the cost of depreciable assets to
operations over their estimated useful lives. The straight-line method is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for income tax purposes.
The range of useful lives used in computing depreciation is as follows:
Years
-----
Vineyard properties 5-35
Buildings 15-80
Machinery and equipment 5-20
Costs of planting new vines and on-going cultivation costs for vines
not yet bearing, including interest, are capitalized. Depreciation commences in
the initial year the vineyard yields a commercial crop, generally in the third
or fourth year after planting.
24.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Share
Earnings per share have been computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods.
Goodwill and Trademarks
The excess of the purchase price paid over the net assets acquired is being
amortized over 40 years on a straight-line basis. Trademarks are amortized over
their estimated useful lives from the date they are put into use.
Other Assets
Other assets include the cost of the option to extend the term of the Edna
Valley Joint Venture calculated as the present value of the payments required to
maintain the rights under the option. The payments required to exercise the
option will be applied to the cost of extending the term of the venture when it
is exercised (see also Note F).
Accounting Estimates
The presentation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the year. Actual results could differ from these estimates.
Foreign Currency Translation
The functional currency of the Company's investee, Duhart-Milon, is the
French Franc and as a result, the Company records the effect of exchange gains
and losses on its equity in Duhart-Milon as a component of shareholders' equity.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" was issued in March 1995, with implementation required for
fiscal years beginning after December 15, 1995. SFAS 121 will require that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. While
the Company has not completed the process of evaluating the impact that will
result from adopting SFAS 121, the Company does not believe the adoption of SFAS
121 will have a material impact on its financial position and results of
operations when such statement is adopted.
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------------
1995 1994
------------- -------------
Bulk and bottled wine............. $ 26,773,298 $ 28,871,794
Growing crops..................... 551,648 407,125
Wine production supplies.......... 174,327 143,118
------------- -------------
$ 27,499,273 $ 29,422,037
============= =============
NOTE D - PROPERTY, PLANT AND EQUIPMENT
December 31,
----------------------------------
1995 1994
------------- -------------
Land.............................. $ 1,550,625 $ 1,550,625
Vineyard properties............... 6,248,011 6,182,639
Buildings......................... 13,515,056 13,374,182
Machinery and equipment........... 12,127,635 11,022,067
------------- -------------
33,441,327 32,129,512
Less accumulated depreciation..... 13,576,462 11,685,518
------------- -------------
$ 19,864,865 $ 20,443,994
============= =============
25.
NOTE E - INVESTMENT IN CHATEAU DUHART-MILON
During the period April 1989 to June 1993, the Company purchased
approximately 11% of the outstanding ordinary shares of DBR, in exchange for a
combination of 5% convertible subordinated debentures and warrants, subsequently
exercised.
Effective October 1, 1995, the Company exchanged essentially all of its
existing ownership in DBR for a 23.5% interest in Duhart-Milon. The remaining
76.5% of Duhart-Milon is owned by DBR.
Chateau Duhart-Milon's condensed balance sheet as of December 31, 1995 and
results of operations for the the three months then ended are as follows
(translated into U.S. dollars at the year end and average exchange rate for the
period, respectively):
December 31, 1995
-----------------
Current assets, including inventories of $3,654,415.... $16,938,735
Property and equipment, net............................ 2,516,986
-----------
Total assets........................................ 19,455,721
Current liabilities.................................... 6,039,294
-----------
Total liabilities................................... 6,039,294
-----------
Equity................................................. $13,416,427
===========
The results of operations are summarized as follows:
Three months ended
December 31, 1995
-----------------
Revenues............................................... $ 557,438
Cost of sales.......................................... 110,026
-----------
Gross profit........................................ 447,412
Operating and other expenses........................... 88,305
-----------
Net earnings........................................... $ 359,107
===========
Company's share of net earnings, net of $10,000
amortization..................................... $ 74,109
===========
The carrying amount of the Company's investment is approximately $8,900,000
greater than the amount of its share of the underlying equity in net assets of
Duhart-Milon. This difference relates primarily to the underlying value of the
land owned by Duhart-Milon and accordingly, will not be amortized
NOTE F - EDNA VALLEY VINEYARD JOINT VENTURE
Edna Valley Vineyard ("the Joint Venture") operates a winery in San Luis
Obispo County, California. The Joint Venture is 50% owned by the Company and 50%
by Paragon Vineyard Company, Inc. ("Paragon"). The Company, as the managing
joint venturer, manages and supervises the winery operations, and sells and
distributes the wine. Paragon built a winery which was leased to the Joint
Venture under an operating lease through May 1991, at which time Paragon sold a
one-half interest in the winery to the Company. Thereafter, Paragon and the
Company contributed the winery to the Joint Venture. The allocation of profits
subsequent to this transaction are being adjusted due to the Partners' varying
bases in this asset. The Joint Venture purchases its grapes from Paragon under a
grape purchase agreement, which specifies fixed quantities of grapes to be
acquired at market prices.
The Company has purchased an option, with $175,439 remaining due in 1997,
to modify the Joint Venture relationship. The option is exercisable in 1997 and
requires additional payments of $200,000 in 1998 and 1999 and $4,500,000 in
2000. The exercise of this option will extend the term of the joint venture
agreement in perpetuity and license the Edna Valley brand name on an exclusive
basis to the Joint Venture. At this time, the Company plans to exercise this
option and make all payments required through 1997. The Company believes that
the cash-flow from the Venture will be sufficient to fund most, if not all, of
the option and additional payments through 1999, as well as a portion of the
final payment in 2000. The Company is continuing to monitor the Joint Venture's
performance and evaluate whether expected future profitability and cash flows
are sufficient to warrant continued investment in the venture and ultimate
exercise of the option. Should the Joint Venture's performance deteriorate,
management may decide not to make the additional payments required under the
option. Condensed balance sheets for the Joint Venture follow:
26.
NOTE F - EDNA VALLEY VINEYARD JOINT VENTURE (Continued)
December 31,
---------------------------
1995 1994
------------ ----------
Current assets (including inventories of $5,373,644
in 1995 and $6,925,079 in 1994)................... $ 5,945,964 $7,249,923
Current assets eliminated in consolidation.......... 1,214,277 831,491
Property and equipment, net......................... 2,723,288 2,688,516
----------- -----------
Total assets................................ 9,883,529 0,769,930
Current liabilities................................. 4,460,195 5,221,124
Accrued liabilities eliminated in consolidation..... 231,640 210,932
----------- -----------
Total current liabilities................... 4,691,835 5,432,056
Total liabilities........................... 4,691,835 5,432,056
----------- -----------
Partners' Equity.................................... $ 5,191,694 $ 5,337,874
=========== ===========
The results of operations are summarized as follows:
Year ended December 31,
---------------------------------------
1995 1994 1993
--------- ---------- ----------
Revenues.................................. $6,849,922 $5,255,232 $4,579,054
Cost of sales............................. 5,124,297 3,847,497 3,018,060
---------- ---------- ----------
Gross profit......................... 1,725,625 1,407,735 1,560,994
Operating and other expenses.............. 464,863 470,873 331,587
Commissions and management fees
eliminated in consolidation.......... 655,506 558,273 543,539
---------- ---------- ----------
Net earnings.............................. 605,256 378,589 685,868
Minority interest......................... 332,654 219,321 372,960
---------- ---------- ----------
Company's share of net earnings...... $ 272,602 $ 159,268 $ 312,908
========== ========== ==========
NOTE G - INVESTMENT IN CANOE RIDGE VINEYARD
On December 31, 1990, the Company entered into a joint venture agreement
with Canoe Ridge Vineyard Incorporated (CRVI) for the formation and operation of
the Canoe Ridge Vineyard (CanoeCo). CanoeCo is 50% owned by the Company and 50%
by CRVI. The purpose of the joint venture is to own, develop and maintain
vineyard property in Benton County, Washington. The Company, as managing joint
venturer, manages and supervises the vineyard operations.
In 1994 Canoe Ridge Winery, Inc. (CRW), was formed which is owned 51%
and 49% by the Company and a group of investors, respectively. CRW was formed to
produce, sell and distribute premium wines from grapes farmed by CanoeCo.
Effective January 1, 1996, the Company exchanged its ownership interests in
CanoeCo and CRW for a 50.5% ownership interest in a newly formed company, Canoe
Ridge Vineyard LLC, which will carry on the combined operations of the
predecessor entities, CanoeCo and CRW. To date, operations of these entities
have not been significant to the Company.
27.
NOTE H - BANK LINES OF CREDIT
Bank lines of credit consist of the following:
December 31,
----------------------------------
1995 1994
--------------- ----------------
Credit line of $10,000,000 bearing interest at prime1, payable monthly, due
June, 1997.............................................................. $ 5,334,944 $ 8,915,000
Credit line of $4,800,000 bearing interest at prime1, payable monthly, due
June, 1996 ............................................................. 4,167,000 4,700,000
Credit line of $400,000 bearing interest at 1.875% over prime, payable at
February, 1996.......................................................... 236,925 259,066
Credit line of $500,000 bearing interest at 9.84%, payable at April, 1996.... 500,000 --
--------------- ----------------
$ 10,238,869 $ 13,874,066
=============== ================
The notes to bank are collateralized by substantially all inventories and
accounts receivable. Significant restrictive covenants include provisions
regarding: maintenance of certain financial ratios; mergers or acquisitions;
loans, advances or debt guarantees; additional borrowings; annual lease
expenditures; annual fixed asset expenditures; and declaration or payment of
dividends (see Note I).
NOTE I - LONG-TERM OBLIGATIONS
December 31,
----------------------------------
1995 1994
--------------- ----------------
Convertible subordinated debentures due in 1999, bearing interest at 5%.
Interest payments on the debentures are due semiannually (including
amounts due to related party-see Note N) ............................... $ 8,500,000 $ 20,884,000
Mortgages paid in June, 1995................................................. -- 11,139
Bank term loan, payable in monthly installments of principal and interest due
February 1996. Interest rates at LIBOR plus 2%.......................... 3,219,100 3,383,500
Bank term loan, payable in monthly installments of principal and interest due
October 1996. Interest rate at prime plus 1/2%.......................... 2,069,200 2,214,400
Bank term loan, payable in June, 1996. Interest at prime plus 1%............. 210,140 240,973
Joint Venture purchase option payable in annual installments of principal and
interest. Imputed interest rate of 8% (see Note F)...................... 175,439 347,629
Other note payable, due in June 1996 payable in annual installments of
principal and interest. Interest rate of 10% (including amounts due to
related party-see Note N)............................................... 59,954 114,458
Other notes payable, due in varying monthly installments through Jan 2000
bearing interest at 10.75% to 10.9%, secured by equipment............... 50,801 28,366
--------------- ----------------
14,284,634 27,224,465
Less current maturities...................................................... 773,990 799,168
--------------- ----------------
$ 13,510,644 $ 26,425,297
=============== ================
Bank term loans of $3,219,000 and $2,069,200 at December 31, 1995, have
been reflected as long term obligations because the Company entered into an
agreement with the Bank on March 7, 1996, that allows the Company the option to
renew the term loans for a period of one year from the current maturities of the
term notes subject to certain terms and conditions. The agreement calls for
interest rate basis, spread and principle payments to remain unchanged from the
existing agreements. The agreement also calls for a renewal fee of .2% of the
amounts renewed due on the signing of the renewal notes. Management believes
that the Company will comply with the terms and conditions of the March 7, 1996
agreement and will exercise its option to renew the terms for a period of one
year from the current maturity dates.
The 5% debentures are subordinate in right of payment to all senior
indebtedness of the Company. Subject to
- --------------------
(1) The Company may fix its interest rate at LIBOR plus 2% rather than prime for
periods up to the term of its credit line.
28.
NOTE I - LONG-TERM OBLIGATIONS (Continued)
the market price of the Company's stock, the Company may redeem these
debentures, without premium. The Company must redeem the entirety of the issue
not later than April 19, 1999. The debentures are convertible into shares of the
Company's stock at any time from and after April 19, 1991, at a conversion rate
of $9.60 per share subject to antidilution provisions. The Company set aside and
reserved 967,301 shares of its common stock for issuance upon conversion of
these debentures.
Substantially all of the Company's property and equipment is pledged as
collateral for long-term obligations. Significant restrictive covenants include
provisions regarding: maintenance of certain financial ratios; mergers or
acquisitions; loans, advances or debt guarantees; additional borrowings; annual
lease expenditures; annual fixed asset expenditures; and declaration or payment
of dividends.
At December 31, 1995, maturities of long-term obligations are as follows:
1996...................................... $ 773,990
1997...................................... 4,992,324
1998...................................... 7,439
1999...................................... 8,507,439
2000...................................... 3,442
-----------
Total..................................... $14,284,634
===========
Company management believes that the fair value of the bank lines of credit
and long term obligations are substantially equal to the book value since
interest rates on loans were negotiated during 1995 or fluctuate with short-term
market rates.
NOTE J- STOCK OPTIONS
The Company has an Incentive Stock Option Plan (the 1982 Plan), and a Stock
Option Plan (the 1987 Plan) (collectively, the Plans). The 1982 Plan provided
for the issuance of incentive stock options within the meaning of Section 422A
of the Internal Revenue Code, and the 1987 Plan provides for the issuance of
incentive stock options or non-statutory options on essentially identical terms.
The 1982 Plan was terminated in 1987, except for outstanding, unexercised
options. At December 31, 1995, there were issued and outstanding options under
both Plans totaling 495,022 shares, and shares in a like amount had been
reserved for issuance upon exercise thereof. In addition to options granted
pursuant to these two Plans, there were outstanding at December 31, 1995,
non-statutory options covering an additional 61,569 shares. Options generally
vest within one to two years, and are exercisable during the ten years,
following date of grant. The table below summarizes all stock option activity
for the three-year period ended December 31, 1995:
Exercise Price
-------------------
Shares From To
------- ------ -------
Balance at December 31, 1992.......... 486,867 $ 3.33 $ 12.38
Granted.......................... 93,960 6.00 6.50
Exercised........................ (3,000) 3.33 3.33
Lapsed........................... (8,134) 8.13 9.50
------- ------ -------
Balance at December 31, 1993.......... 569,693 $ 5.50 $ 12.38
Granted.......................... 58,910 5.00 6.75
Lapsed........................... (32,189) 5.63 11.00
------- ------ -------
Balance at December 31, 1994.......... 596,414 $ 5.00 $ 12.38
Granted.......................... 36,210 6.75 9.38
Exercised........................ (27,716) 6.00 6.88
Lapsed........................... (48,317) 6.00 10.13
------- ------ -------
Balance at December 31, 1995.......... 556,591 $ 5.00 $ 12.38
======= ====== =======
Total options exercisable at
December 31, 1995 ............... 520,381
========
In September, 1995, an officer of the Company exercised options for 16,666
shares for $99,996 and the Company received a note secured by the stock in
payment of the exercise price. The note was paid in March, 1996. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value method of accounting for stock options and other
equity instruments. The Company is required to adopt SFAS No. 123 in fiscal
1996. Under the new standard, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is generally the vesting period. The new standard does not
29.
NOTE J- STOCK OPTIONS (Continued)
impact cash flows. Companies are not required to adopt SFAS No. 123 and are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to
Employees." The Company has decided not to adopt SFAS No. 123. The Company will
be required to disclose in a note to the financial statements proforma net
income and earnings per share as if the new method of accounting had been
applied.
NOTE K - COMMON STOCK
In October of 1995, in a private-placement transaction, the Company issued
a total of 833,334 units, each unit consisting of one share of common stock and
one warrant for the purchase of one share of common stock, for a per-unit price
of $6.00 and a net sale price of approximately $4.5 million. The warrants, which
have a five year term, are excerscisable at $8.00 per share. Also on that date
the Company converted approximately $12.4 million of convertible debentures, at
a conversion price of $7.00, into 1,769,143 shares of common stock.
In April of 1994, in a private-placement transaction, the Company issued a
total of 358,128 shares of its common stock, for a per-share price of $4.50 and
a net sale price of approximately $1.5 million.
In March and July of 1993, in a private-placement transaction ratified by
the shareholders at the 1993 Annual Meeting, the Company issued a total of
828,571 shares of its common stock plus five-year warrants entitling the holders
to purchase an additional 828,571 shares at an exercise price of $7.00 per
share, for a unit price of $7.00 and an aggregate sale price of $5.8 million.
The Company has an Employee Stock Purchase Plan and 50,000 common shares
are reserved for issuance under the Plan. During 1995, 1994 and 1993, employees
purchased approximately 5,315 shares for $31,978, 935 shares for $4,390, and
8,252 shares for $48,178, respectively, through payroll deductions.
The Company has reserved as of December 31, 1995 3,195,857 shares of common
stock in connection with stock option and stock purchase plans, warrants and
convertible subordinated debentures.
NOTE L - EMPLOYEE BENEFIT PLANS
The Company has a Qualified Profit-Sharing Plan which provides for Company
contributions, as determined annually by the Board of Directors, based on the
Company's previous year performance. These contributions may be in the form of
common stock or cash as determined by the Board of Directors. The Board has
approved a contribution of $20,000 for 1995. There were no Plan contributions in
1994 or 1993. At December 31, 1995, the plan held 7,255 shares of the Company's
common stock.
NOTE M - INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
Year-ended December 31,
-----------------------------------------
1995 1994 1993
-------- -------- --------
Federal
Current................ $136,641 $ -- $ 68,537
Deferred............... 24,634 61,588 (239,975)
-------- -------- ---------
161,275 61,588 (171,438)
State
Current................ 64,394 800 800
Deferred............... 21,959 38,801 (29,910)
-------- -------- ---------
86,353 39,601 (29,110)
-------- -------- --------
$247,628 $101,189 $(200,548)
======== ======== =========
30.
NOTE M - INCOME TAXES (Continued)
The tax effects of the items comprising the Company's net deferred tax
liability in the Company's balance sheets are as follows:
December 31,
-----------------------
1995 1994
---------- ----------
Deferred tax liability:
Difference between book and tax basis of
property, plant and equipment............ $2,249,693 $2,437,057
Deferred tax assets:
Operating loss carryforwards............... 688,281 973,759
Difference between book and tax basis of
inventory................................ 166,699 311,540
Tax credit carryforwards................... 418,004 296,399
Other...................................... 157,644 105,464
---------- ----------
1,430,628 1,687,162
Valuation allowance........................ (87,422 (110,000)
---------- ----------
1,343,206 1,577,162
---------- ----------
Net deferred tax liability $ 906,487 $ 859,895
========== ==========
The provision (benefit) for income taxes differs from amounts computed at
the statutory rate as follows:
Year-ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
U.S. federal income tax (benefit) at
statutory rate ..................... $147,445 $ 41,267 $(303,051)
Reconciling items:
Other............................... 67,004 26,743 69,324
Effect of acquisitions, net......... 33,179 33,179 33,179
-------- -------- ---------
$247,628 $101,189 $(200,548)
======== ======== =========
At December 31, 1995, the Company had net operating loss and investment tax
credit carryovers available to reduce future taxable income which would
otherwise be taxable for income tax purposes as follows:
Expiration date Net Operating Investment
December 31, Loss Tax Credit
------------------ ------------ -----------
1996.................................... $ -- $ 14,000
1997.................................... 313,000 60,000
1998.................................... 438,000 59,000
1999.................................... 311,000 105,000
2000................................... -- 17,000
2001.................................... -- 7,000
2003.................................... -- 156,000
2007.................................... 847,000 --
2008.................................... 825,000 --
2009.................................... 12,000 --
----------- ----------
$ 2,746,000 $ 418,000
============ ===========
At December 31, 1995, the Company had significant deferred tax assets
related to operating losses available for carryforward. These deferred tax
assets have been recorded under the guidelines of SFAS No. 109, Accounting for
Income Taxes, on the premise that future taxable income will more likely than
not be adequate to realize future tax benefits of the available net operating
loss carryforwards. Under tax regulations, realization of tax benefits per
period will be limited and full realization will depend on future taxable income
over a number of years.
31.
NOTE N - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of operations include the following amounts
resulting from transactions with related parties:
Year ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------- -------------
Interest expense:
Interest on notes payable to a partnership in which an
officer of the Company is a partner.................. $ -- $ 2,448 $ 6,107
Interest on convertible debentures held by a related
party of the Company................................. 516,000 619,200 619,200
Interest on notes payable to joint venture partner
(Paragon)............................................ 36,076 54,072 71,180
Lease expense for land and facilities....................... 10,240 10,000 18,000
Consulting fees paid to officer of the Company 65,000 79,750 --
The balance sheet includes the following amounts resulting from
transactions with related parties:
December 31,
-----------------------------------
1995 1994
---------------- ----------------
Accounts receivable
Accounts receivable from a dirctor of the Company...... $ 85,426 $ --
Note receivable from officer of the Company............ 99,996 --
Distribution receivable from Duhart-Milon.............. 431,505 --
Inventory
Wine purchases from related parties.................... 443,047 776,562
Grape purchases from related parties................... 1,520,872 2,028,981
Due to related parties................................. -- 270,411
Other asset
Option to extend term of joint venture (see Note F).... 1,017,174 1,017,174
Note receivable from joint venture partner (Paragon)... 500,000 --
Property, plant & equipment
Building contributed to joint venture by the partners.. 1,799,053 1,799,053
Long-term obligations
Payable for purchase of option to extend term of joint
venture (see Notes F and I).......................... 175,439 347,629
Note payable to joint venture partner (see Note I)..... 59,954 114,458
Convertible debentures held by a related party of the
Company (see Note I and K)........................... -- 12,384,000
NOTE O - COMMITMENTS AND CONTINGENCIES
Future minimum lease payments required under noncancelable operating leases
with terms in excess of one year are as follows:
Year-ending
December 31, Total
---------------- ------------------
1996...................................... 542,360
1997...................................... 585,372
1998...................................... 457,372
1999...................................... 457,372
2000...................................... 457,372
Thereafter................................ 4,852,802
------------------
Total..................................... $ 7,352,650
==================
Rental expense charged to operations was as follows: $832,962, $637,343,
and $511,351 for the years ended December 31, 1995, 1994, and 1993,
respectively. Future lease commitments include $10,240 per year until 2052 for
land leased by Paragon to the Edna Valley Joint Venture (see Note F).
32.
NOTE P - QUARTERLY DATA (Unaudited)
The Company's quarterly operating results for years ended December 31,
1995, 1994, and 1993, are summarized below:
(In thousands, except per share data)
Gross Gross Net Net (Loss)Earnings
Revenues Profit (Loss) Earnings per Common Share
1995 Quarters:
Fourth Quarter.......... $ 8,596 $ 3,115 $ 429 $ .07
Third Quarter........... 5,380 1,935 (29) (.01)
Second Quarter.......... 7,411 2,245 70 .01
First Quarter........... 4,423 1,497 (263) (.05)
1994 Quarters:
Fourth Quarter.......... 6,555 2,286 164 $ .03
Third Quarter........... 4,998 1,885 15 .00
Second Quarter.......... 5,512 1,862 57 .01
First Quarter........... 4,067 1,471 (216) (.05)
1993 Quarters:
Fourth Quarter.......... 6,055 2,065 219 .05
Third Quarter........... 4,140 1,468 (411) (.09)
Second Quarter.......... 4,251 1,470 (189) (.04)
First Quarter........... 3,879 1,392 (309) (.08)
33.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The CHALONE Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Chalone
Wine Group, Ltd. (the Company) (a California corporation), as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company, at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 11, 1996
34.
Item 9. Disagreements on Accounting and Financial Disclosure.
None; not applicable.
PART III
Item 10. Directors and Executive Officers.
a. Directors, Executive Officers, and Significant Employees.
See "Executive Officers of the Registrant" in Part I of this Report.
b. Business Experience of Directors and Management; Other Directorships.
The information required by this Item is hereby incorporated by
reference to the Company's Proxy Statement under the heading "Election of
Directors" and the caption "Compliance with Section 16(a) of the Securities and
Exchange Act of 1934" filed with the Securities and Exchange Commission.
Item 11. Executive Compensation.
a. Executive Compensation.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement under captions "Executive Compensation," and
"Compensation Committee Report on Compensation of Executive Officers."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is hereby incorporated herein by
reference to the Proxy Statement under the headings "Election of Directors" and
"Shareholding Information as to Directors, Director Nominees and Management."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is hereby incorporated by
reference to the Company's Proxy Statement under the heading "Certain
Relationships and Related Transactions." Reference is also made to the
information contained in Note N of Notes to Consolidated Financial Statements on
page 32 of this Report under the caption "Transactions with Related Parties."
35.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a(1). Financial Statements.
The following financial statements of the Company are included in Part II,
Item 8:
Page
Financial Statements:
Consolidated Balance Sheets................................. 20
Consolidated Statements of Operations....................... 21
Consolidated Statements of Changes in
Shareholders' Equity...................................... 22
Consolidated Statements of Cash Flows....................... 23
Notes to Consolidated Financial
Statements................................................ 24
Independent Auditors' Report.................................... 34
a(2). Financial Statement Schedules.
Schedules are omitted because they are not applicable, not required, were
filed subsequent to the filing of the Form 10-K, or because the information
required to be set forth therein is included in the consolidated financial
statements or in notes thereto.
b. Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed during the last
quarter of the period covered by this Report.
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.
36.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993 (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
(Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement between the Company
and DBR, dated September 30, 1991. (vi)
- ------------------------------
(i) Incorporated by reference to Exhibit Nos. 3.1 and 3.2, respectively, to
the Company's Registration Statement on Form S-1 (File No. 33-8666),
filed September 11, 1986.
(ii) Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988, dated March 11,
1989.
(iii) Incorporated by reference to Exhibit No. 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, dated March 25,
1992.
(iv) Incorporated by reference to Exhibit Nos. 3.4 and 3.6, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31,
1993, dated March 26, 1994.
(v) Incorporated by reference to Exhibit Nos. 1, 4 and 5, respectively, to
the Company's Current Report on Form 8-K dated April 28, 1989.
(vi) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the
Company's Current Report on Form 8-K dated September 30, 1991.
37.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (i)
4.7 Form of Warrant for the purchase in the aggregate of up to 828,571
shares of the Company's common stock, issued to certain designed
investors, effective July 14, 1993. (ii)
4.8 Voting Agreement, between Richard H. Graff, William L. Hamilton,
John A. McQuown, W. Philip Woodward, DBR, Richard C. Hojel,
and Summus Financial, Inc., dated March 29, 1993. (ii)
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (iii)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (iv)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (iv)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (v)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (v)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (v)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (v)
- ------------------------------
(i) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
(ii) Incorporated by reference to Exhibits 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
(iii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(iv) Incorporated by reference to Exhibit D to Appendix I to the Company's
Proxy Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(v) Incorporated by reference to Exhibit Nos. 1, 3, 4 and 2, respectively, to
the Company's Current Report on Form 8-K dated May 30, 1991.
38.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (i)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (ii)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (ii)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (ii)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (iii)
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (iv)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (v)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (v)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (v)
- ------------------------------
(i) Incorporated by reference to Exhibit No. 10.10 to the Company's
Registration Statement on Form S-1 (File No. 33-8666), filed September
11, 1986.
(ii) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iii) Incorporated by reference to Exhibit Nos. 10.16, 10.17 and 10.24,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iv) Incorporated by reference to Exhibit Nos. 10.17 and 10.18, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1989, dated March 27, 1990.
(v) Incorporated by reference to Exhibit Nos. 10.23, 10.24 and 10.25,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, dated March 25, 1992.
39.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (i)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (ii)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (iii)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (iii)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (iii)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (i)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (iv)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (iv)
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (iv)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington State investors, dated
November 30, 1994. (iv)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (iv)
- ------------------------------
(i) Incorporated by reference to Exhibit Nos. 10.22 and 10.29, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1993, dated March 26, 1994.
(ii) Incorporated by reference to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, dated March 26,
1991.
(iii) Incorporated by reference to Exhibit Nos. 10.24 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, dated March 29, 1993.
(iv) Incorporated by reference to Exhibit Nos. 10.23 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, dated March 27, 1995.
40.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
------ ------------------- -------------
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (i)
10.30 Credit Agreement between the Company and Wells Fargo Bank, 49
dated December 29, 1995.
11 Statement re Computation of Earnings Per Share for the
periods ended December 31, 1995, 1994, and 1993. 93
24 Consent of Deloitte & Touche to incorporation by reference dated
March 27, 1995. 94
99 Financial Statements of Chateau Duhart Milon 95
27 Financial Data Schedule 104
- ------------------------------
(i) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.
41.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CHALONE WINE GROUP, LTD.
By /s/ W. Philip Woodward
--------------------------------------------------
W. Philip Woodward
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ William L. Hamilton
--------------------------------------------------
William L. Hamilton
Executive Vice President (Principal Financial
and Principal Accounting Officer)
By /s/ Wendy W. Bentson
--------------------------------------------------
Wendy W. Bentson
Controller
Dated: March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ W. Philip Woodward President, Chief March 20, 1996
-------------------------- Executive Officer,
W. Philip Woodward and Director (Principal
Executive Officer)
/s/ Richard H. Graff Chairman of the Board March 20, 1996
-------------------------- of Directors
Richard H. Graff
/s/ William L. Hamilton Executive Vice President, March 20, 1996
-------------------------- Chief Financial Officer,
William L. Hamilton and Director (Principal
Financial and Principal
Accounting Officer)
/s/ Wendy W. Bentson Controller March 20, 1996
--------------------------
Wendy W. Bentson
42.
/s/ C. Richard Kramlich Director March 20, 1996
--------------------------
C. Richard Kramlich
/s/ J. A. McQuown Director March 20, 1996
--------------------------
J. A. McQuown
/s/ James H. Niven Director March 20, 1996
--------------------------
James H. Niven
/s/ Eric de Rothschild Director March 20, 1996
--------------------------
Eric de Rothschild
/s/ Christophe Salin Director March 20, 1996
--------------------------
Christophe Salin
/s/ Mark Hojel Director March 20, 1996
--------------------------
Mark Hojel
/s/ Yves-Andre Istel Director March 20, 1996
--------------------------
Yves-Andre Istel
/s/ Phillip M. Plant Director March 20, 1996
--------------------------
Phillip M. Plant
43.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
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3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993 (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
(Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement between the Company
and DBR, dated September 30, 1991. (vi)
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(i) Incorporated by reference to Exhibit Nos. 3.1 and 3.2, respectively, to
the Company's Registration Statement on Form S-1 (File No. 33-8666),
filed September 11, 1986.
(ii) Incorporated by reference to Exhibit No. 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988, dated March 11,
1989.
(iii) Incorporated by reference to Exhibit No. 3.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, dated March 25,
1992.
(iv) Incorporated by reference to Exhibit Nos. 3.4 and 3.6, respectively, to
the Company's Annual Report on Form 10-K for the year ended December 31,
1993, dated March 26, 1994.
(v) Incorporated by reference to Exhibit Nos. 1, 4 and 5, respectively, to
the Company's Current Report on Form 8-K dated April 28, 1989.
(vi) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the
Company's Current Report on Form 8-K dated September 30, 1991.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
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4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (i)
4.7 Form of Warrant for the purchase in the aggregate of up to 828,571
shares of the Company's common stock, issued to certain designed
investors, effective July 14, 1993. (ii)
4.8 Voting Agreement, between Richard H. Graff, William L. Hamilton,
John A. McQuown, W. Philip Woodward, DBR, Richard C. Hojel,
and Summus Financial, Inc., dated March 29, 1993. (ii)
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (iii)
4.10 Form of Warrant for the purchase in the aggregate of up to 833,333
shares of the Company's common stock, issued to certain designed
investors, effective October 25, 1995. (iv)
4.11 Voting Agreement, between the W. Phillip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (iv)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (v)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (v)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (v)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (v)
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(i) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
(ii) Incorporated by reference to Exhibits 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
(iii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(iv) Incorporated by reference to Exhibit D to Appendix I to the Company's
Proxy Statement for a Special Meeting of Shareholders, filed October 25,
1995.
(v) Incorporated by reference to Exhibit Nos. 1, 3, 4 and 2, respectively, to
the Company's Current Report on Form 8-K dated May 30, 1991.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
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10.5 Amended and Restated Commercial Winery and
Agricultural Lease, dated July 31, 1986, assigned by
Assignment and Assumption Agreement among
the Company, Lakeside Winery and Vista de Los Vinedos,
dated August 5, 1986. (i)
10.6 Novation and Modification Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988,
amending Agreement incorporated as Exhibit 10.5. (ii)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (ii)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (ii)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (iii)
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated as
Exhibit 10.9, dated February 7, 1990. (iv)
10.12 Profit Sharing Trust Agreement. (ii)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (ii)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (v)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (v)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (v)
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(i) Incorporated by reference to Exhibit No. 10.10 to the Company's
Registration Statement on Form S-1 (File No. 33-8666), filed September
11, 1986.
(ii) Incorporated by reference to Exhibit Nos. 10.22, 10.20 and 10.21,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iii) Incorporated by reference to Exhibit Nos. 10.16, 10.17 and 10.24,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, dated March 11, 1989.
(iv) Incorporated by reference to Exhibit Nos. 10.17 and 10.18, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1989, dated March 27, 1990.
(v) Incorporated by reference to Exhibit Nos. 10.23, 10.24 and 10.25,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, dated March 25, 1992.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
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10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (i)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard Incorporated [CRVI], dated December 31, 1990. (ii)
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (iii)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (iii)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (iii)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (i)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (iv)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24, 1994. (iv)
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (iv)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington State investors, dated
November 30, 1994. (iv)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (iv)
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(i) Incorporated by reference to Exhibit Nos. 10.22 and 10.29, respectively,
to the Company's Annual Report on Form 10-K for the year ended December
31, 1993, dated March 26, 1994.
(ii) Incorporated by reference to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, dated March 26,
1991.
(iii) Incorporated by reference to Exhibit Nos. 10.24 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, dated March 29, 1993.
(iv) Incorporated by reference to Exhibit Nos. 10.23 through 10.27,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, dated March 27, 1995.
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Description Numbered Page
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10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (i)
10.30 Credit Agreement between the Company and Wells Fargo Bank, 49
dated December 29, 1995.
11 Statement re Computation of Earnings Per Share for the
periods ended December 31, 1995, 1994, and 1993. 93
24 Consent of Deloitte & Touche to incorporation by reference dated
March 27, 1995. 94
99 Financial Statements of Chateau Duhart Milon 95
27 Financial Data Schedule 104
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(i) Incorporated by reference to Appendix I to the Company's Proxy
Statement for a Special Meeting of Shareholders, filed October 25,
1995.