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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13406
THE CHALONE WINE GROUP, LTD.
(Exact Name of Registrant as Specified in Its Charter)
California 94-1696731
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation of Organization)
621 Airpark Road, Napa, CA 94558
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (707) 254-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 20, 2001 there were 3,096,562 shares of the Company's voting no par
value common stock, with an aggregate market value of $39.0 million held by
non-affiliates. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of the Registrant's
common stock and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates. This
determination is not intended to be conclusive. As of June 20, 2001, there were
10,284,859 shares outstanding of the Company's voting no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2001 Annual Meeting of
Shareholders of the Chalone Wine Group, Ltd. (the "Proxy Statement"), to be
filed with the Securities and Exchange Commission within 120 days after March
31, 2001, are incorporated by reference into Part III of this report.
PART I
ITEM 1. BUSINESS.
A. GENERAL.
The Company produces, markets and sells super premium, ultra premium, and
luxury-priced white and red varietal table wines, primarily Chardonnay, Pinot
Noir, Cabernet Sauvignon, Merlot, Syrah and Sauvignon Blanc. The Company owns
and operates wineries in various counties of California and Washington State.
The Company's wines are made primarily from grapes grown at the Carmenet Winery,
Edna Valley Vineyard, Chalone Vineyard, Company-owned vineyards adjacent to the
Acacia(TM) Winery, Hewitt Vineyard and Suscol Creek Vineyard in California and
the Canoe Ridge Vineyard in Washington State, as well as from purchased grapes.
The wines are primarily sold under the labels "Chalone Vineyard(R)," "Edna
Valley Vineyard(R)," "Carmenet(R)," "Acacia(TM)," "Canoe Ridge(R) Vineyard",
"Jade Mountain(R)," "Sagelands Vineyard(R)," and "Echelon(TM)."
In France, the Company owns a minority interest in fourth-growth Bordeaux
estate Chateau Duhart-Milon ("Duhart-Milon") in partnership with Les Domaines
Barons de Rothschild (Lafite) ("DBR"). The vineyards of Duhart-Milon are located
adjacent to the world-renowned Chateau Lafite-Rothschild in the town of
Pauillac.
The Chalone Wine Group, Ltd. was incorporated under the laws of the State
of California on June 27, 1969. Unless otherwise indicated, the term "Company"
as used in this report refers to The Chalone Wine Group, Ltd. and its
consolidated subsidiaries. The Company became a publicly held reporting company
as the result of an initial public offering of common stock in 1984.
SIGNIFICANT EVENTS
ACQUISITION OF JADE MOUNTAIN BRAND AND RELATED CAPITAL ASSETS
In April 2000, the Company purchased substantially all of the assets of
Jade Mountain Winery from its sole shareholder. The purchase price of
approximately $3.5 million was financed with the Company's revolving credit
facility. The purchased assets included all of Jade Mountain's trade names,
trademarks and related intellectual property rights, inventory and fixed assets.
SALE OF HEWITT HOUSE IN RUTHERFORD BENCH
In early 2000, the Company purchased two adjacent parcels of land in
Rutherford, California; the Hewitt Ranch and the adjacent Eisle holdings. The 69
acres and two houses were bought for $16.6 million. The Company announced on
July 14, 2000 that it had sold the 10,000-square foot Hewitt House and four
surrounding landscaped acres for $7.3 million.
PRIVATE PLACEMENT
The Company completed on September 15, 2000 its private placement offering
of $30 million in long term unsecured financing. Rabobank International acted as
agent on the placement to Agstar Financial Services, PCA and Farm Credit
Services of America, PCA. The loans are structured into three pieces each with a
term of ten years.
ACQUISITION OF CANOE RIDGE VINEYARD INTEREST
The Company announced on February 7, 2001 that it had purchased the
remaining 49.5% of Canoe Ridge Vineyard, LLC for $3.96 million. The acquisition
was financed with the Company's revolving credit facility. Canoe Ridge is the
most significant single-source estate vineyard in the state of Washington, with
approximately 160 acres planted. The Company had previously owned 50.5 % of
Canoe Ridge.
CANOE RIDGE VINEYARD EXPANSION
On February 7, 2001 the Company announced plans to expand Canoe Ridge
Vineyard's winery for a total of $2.8 million, of which $1.8 million is planned
to be spent during FY02. The new 19,000 square foot building will include office
space, a conference room and most of the Canoe Ridge wine production. The
building is scheduled to be completed before the 2001 harvest.
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B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company produces and sells super premium to luxury quality table wines
and believes that its various products and brands all share similar long-term
financial performance, production processes, customer types, distribution
methods and other economic characteristics. Accordingly, these operating
segments have been aggregated as a single operating segment in the consolidated
financial statements.
C. NARRATIVE DESCRIPTION OF BUSINESS.
OVERVIEW
The Company owns the following properties in the United States and France,
either wholly or in partnership with others, all of which have related company
owned vineyards with the exception of Edna Valley Vineyard. The specific
ownership structure is as follows:
PROPERTY OWNERSHIP FORM OF OWNERSHIP LOCATION
-------- --------- ----------------- --------
Chalone Vineyard 100.0% Corporation Soledad, California
Carmenet Vineyard 100.0% Corporation Sonoma, California
Acacia
Acacia Winery 100.0% Corporation Napa, California
Acacia Vineyard 50.0% Partnership Napa, California
Edna Valley Vineyard 50.0% Partnership San Luis Obispo, California
Canoe Ridge Vineyard 100.0% Corporation Walla Walla, Washington
Chateau Duhart-Milon 23.5% Partnership Pauillac, France
Sagelands Vineyard (1) 100.0% Corporation Yakima Valley, Washington
Suscol Creek Vineyard 100.0% Corporation Napa, California
Hewitt Vineyard 100.0% Corporation Napa, California
(1) Formerly known as Staton Hills Vineyard.
With the exception of Duhart-Milon, the Company manages and operates all of the
above properties and consolidates the results of their operations. The Company
accounts for its investment in Duhart-Milon using the equity method of
accounting.
Each of the Company's domestic wineries or estate vineyards is in a
different "American Viticultural Area" ("AVA"). AVA is a designation 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. Wines may display an AVA on a bottle label only if 85% or more
of the grapes used to produce the wine were grown in that viticultural area.
For a more detailed description of the Company's properties and its
operations, see "Item 2. Properties."
VINEYARD PRACTICES
The Company believes that the soils and micro-climates of each vineyard
from which it obtains its grapes are particularly suitable for the particular
varieties of grapes with which they have been or, are being, planted.
The Company generally manages its vineyards to produce yields that are
lower than average for similarly situated vineyards in California and Washington
State and below the maximum yield that could be obtained. It believes that
relatively low yields enhance the varietal character of the grapes and improve
the quality of the resulting wines.
AGRICULTURAL RISKS
For a description of the Company's agricultural risks, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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WINEMAKING PRACTICES
The Company's philosophy is that winemaking is a natural process best
managed with minimum intervention, but requiring the attention and dedication of
a winemaker. While the Company uses a relatively high level of hand labor during
the winemaking processes, the Company also makes extensive use of modern
laboratory equipment and techniques to monitor the progress of each wine through
all stages of the winemaking process. All of the Company's wineries are operated
under the overall supervision of the Company's Chief Executive Officer. However,
each winery has its own General Manager who, in most instances, is also a
winemaker.
The principal raw materials used by the Company are grapes, oak barrels,
glass, and cork. About 75% of the oak barrels are purchased from the Burgundy
and Bordeaux regions of France and the remainder from the United States. The
Company favors French oak barrels due to Company tradition and consumer
preferences. Cork is produced and manufactured in Portugal, which is the primary
cork-producing country in the world. Glass is purchased from a variety of
different sources according to each winery's specific needs. The Company's own
vineyards provide a significant portion of the Company's grape requirements. As
needed, the Company also purchases grapes from other independent California and
Washington State growers.
WINE PRODUCTION AND WINES
This table sets forth the wine production of the Company for the 2000, 1999
and 1998 vintages. The wines' vintage is the year during which the grapes are
harvested. As of March 31, 2001, the current year's vintage had not yet been
harvested and cannot yet be estimated. The following information is presented in
terms of "equivalent" number of cases. The precise number of cases is not known
at this time because many of these vintages are still being aged in barrels and
tanks. For the purpose of this schedule and the discussion that follows, wines
purchased by the Company for resale purposes are excluded.
2000 1999 1998
------------------------ -------------------------- -------------------------
Equivalent Equivalent Equivalent
Number of Number of Number of
Cases % of Total Cases % of Total Cases % of Total
---------- ---------- ---------- ---------- ---------- ----------
Chardonnay 288,990 40% 187,500 36% 231,300 55%
Sauvignon Blanc 9,425 1% 6,000 1% 8,800 2%
Pinot Blanc 4,420 1% 5,200 1% 2,200 1%
Other white wines 13,130 2% 10,000 2% 1,400 0%
---------- ---------- ---------- ---------- ---------- ----------
Total white wines 315,965 44% 208,700 40% 243,700 58%
---------- ---------- ---------- ---------- ---------- ----------
Pinot Noir 75,920 11% 44,600 9% 35,100 8%
Cabernet Sauvignon 117,520 17% 114,200 22% 40,900 10%
Merlot 131,820 18% 110,400 21% 85,500 20%
Syrah 64,220 9% 35,200 7% 6,000 2%
Other red wines 5,525 1% 5,500 1% 10,200 2%
---------- ---------- ---------- ---------- ---------- ----------
Total red wines 395,005 56% 309,900 60% 177,700 42%
---------- ---------- ---------- ---------- ---------- ----------
Total production 710,970 100% 518,600 100% 421,400 100%
---------- ---------- ---------- ---------- ---------- ----------
The Company's wines are aged primarily in new and used oak barrels before
they are bottled. Generally, white wines are aged for between six and nine
months, and red wines for between nine and eighteen months, after harvest. The
wine is then bottled and stored for further aging.
CHALONE VINEYARD: Chalone Vineyard sales represented 10% of the Company's
consolidated revenues and 6% of its consolidated case sales for the fiscal year
ended March 31, 2001.
Chalone Vineyard has been producing Chardonnay, Pinot Blanc and Pinot Noir
(and small quantities of Chenin Blanc) since 1969. It has also begun growing
Syrah and will release its first vintage in 2002. All wines sold under this
label are produced from grapes grown at the Chalone Vineyard and are estate
bottled and bear the "Chalone" appellation.
4
CARMENET WINERY: Carmenet Winery sales represented 17% of the Company's
consolidated revenues and 15% of its consolidated case sales for the fiscal year
ended March 31, 2001.
The Company produces Bordeaux-style red and white wines under the
"Carmenet" label. The Carmenet Moon Mountain Reserve is made from Cabernet
Sauvignon, Merlot and Cabernet Franc grapes grown at the Carmenet Winery, is
estate bottled, and bears the "Sonoma Valley" AVA designation. The Carmenet
white wine is made from Sauvignon Blanc and Semillon grapes purchased from
Paragon Vineyard Co., Inc. ("Paragon") under a grape purchase agreement and
bears the "Edna Valley" appellation.
The Company also produces wines under the "Dynamite" label, which are made
from Cabernet Sauvignon, Merlot, Sauvignon Blanc and Semillon grapes and bulk
wine purchased from vineyards located in the North Coast AVA of California.
On July 31, 1996, a wildfire damaged approximately 75% of the producing
acreage at Carmenet Winery. Prior to this fire, Carmenet Winery produced
approximately 38,000 cases of wine annually, a significant portion of which was
estate bottled. The fire was caused by the electrical lines of Pacific Gas &
Electric Company ("PG&E") who have publicly acknowledged their liability. The
Company has replanted the damaged acreage but the newly planted vines are not
expected to return to pre-fire levels of production until 2003. Until the
fire-damaged acreage returns to full production, Carmenet's ability to make
estate-bottled wines will be limited. To supplement Carmenet's limited harvest
the Company attempts to purchase suitable grapes on the open market. However,
there can be no assurance that grapes of suitable quality or variety will be
available in sufficient quantity or on terms acceptable to the Company.
EDNA VALLEY VINEYARD: Edna Valley Vineyard sales represented 23% of the
Company's consolidated revenues and 23% of consolidated case sales for the
fiscal year ended March 31, 2001. Edna Valley Vineyard has been producing mostly
Chardonnay and Pinot Noir wines since 1980. The majority of wines sold under the
Edna Valley Vineyard(R) label are produced from grapes grown by Paragon, the
Company's partner in the Edna Valley Vineyard Joint Venture, and are estate
bottled.
ACACIA WINERY: Acacia Winery sales represented 16% of the Company's
consolidated revenues and 13% of its consolidated case sales for the fiscal year
ended March 31, 2001. The winery produces Chardonnay and Pinot Noir wines under
the "Acacia(TM)" label. The grapes for the production of Pinot Noir and
Chardonnay come from the Carneros region. Approximately 50% of this production
comes from Company-owned vineyards and Company-leased vineyards.
CANOE RIDGE VINEYARD: Canoe Ridge Vineyard sales represented 5% of the
Company's consolidated revenues and 4% of its consolidated case sales for the
fiscal year ended March 31, 2001. The Canoe Ridge Vineyard commenced operation
in 1994 and produces Merlot, Cabernet Sauvignon and Chardonnay wines under the
"Canoe Ridge Vineyard" label. Most of the grapes for these wines are grown at
the Company's estate vineyard and wines bear the "Columbia Valley" AVA
designation.
ECHELON: Echelon sales represented 17% of the Company's consolidated
revenues and 27% of it's consolidated case sales for the fiscal year ended March
31, 2001.
The 1997 vintage was the first to be released under the Echelon label which
features Chardonnay, Cabernet Sauvignon, Merlot, Viognier, Pinot Noir and Syrah.
Most varietals have a Central Coast appellation.
SAGELANDS VINEYARD: Sagelands Vineyard represented 2% of the Company's
consolidated revenues and 3% of the consolidated case sales for the fiscal year
ended March 31, 2001.
On June 15, 1999, the Company purchased Staton Hills(R) Winery and its
adjacent vineyards in Yakima County, Washington. The Staton Hills facility was
renamed Sagelands Vineyard and the new brand was launched in January 2000,
focusing primarily on Cabernet Sauvignon and Merlot and bearing the Columbia
Valley AVA designation. The Company retained the Staton Hills Winery brand and
continues to produce wines under this mark.
CUSTOM BRANDS: Custom brands consist primarily of Chardonnay, Cabernet
Sauvignon and Merlot. Quantities of custom brand bottling are highly dependent
upon grape supply and availability. As grapes become more scarce, the focus of
the Company's production shifts away from custom brands as they are relatively
lower margin products. The Company uses custom brands primarily as a means of
marketing and selling its label wines and does not intend to focus its efforts
in this line of business.
IMPORTS & OTHER: 9% of the Company's consolidated revenues and 9% of its
consolidated case sales in the year ended March 31, 2001 were primarily
comprised of import wines and, to a lesser degree, domestic wines purchased by
the Company for resale purposes.
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Under the terms of various agreements and investments among the Company,
Duhart-Milon, and DBR, the Company receives an allocation of the wines of DBR
and Duhart-Milon including the wines of Chateau Lafite-Rothschild and Chateau
L'Evangile in the Pauillac and Pomerol regions of Bordeaux, respectively, and of
Chateau Rieussec in the Sauternes region of Bordeaux. DBR also produces a
Pauillac wine exclusively for the Company.
MARKETING AND DISTRIBUTION
The Company's wines are positioned in the higher end of the premium
category. All the Company's wines are in the super premium to luxury segments of
the market, priced at $7 per bottle and above.
The Company sells its wines through direct sales, independent distributors,
brokers, its own shareholder list, and in limited quantities, directly from the
wineries. Distributors generally remarket the wines through specialty wine shops
and grocery stores, selected restaurants, hotels and private clubs across the
country, and in certain overseas markets. The Company relies primarily on
word-of-mouth recommendation, wine tastings, positive reviews in various
publications, select wine competitions and Company-sponsored promotional
activities in order to increase public awareness of its wines.
SALES WITHIN CALIFORNIA
Sales and marketing of all of the Company's wines within California,
including custom brands, is handled through the Company's own sales force and a
broker. The Company uses a single broker for all wholesale California sales.
SALES OUTSIDE CALIFORNIA
The Company's wines are marketed by independent distributors outside
California in 49 states and the District of Columbia and Puerto Rico and,
internationally, in Bermuda, the British West Indies, the U.S. Virgin Islands,
Canada, England, continental Europe, Hong Kong, China, and Japan. In 1993, the
Company established a sales division, operating as CHALONE WINE ESTATES, to help
supervise and coordinate sales functions of the Company's business and its
custom brands operations. The Company employs a number of regional sales
managers who work directly with distributors in a particular region and their
customers.
CASE SALES BY METHOD OF DISTRIBUTION
The following table sets forth case sales by the Company by distribution
method for the fiscal years ended March 31:
2001 2000 1999
-------------------- --------------------- ---------------------
Number % of Number of % of Number of % of
of Cases Total Cases Total Cases Total
---------- --------- ----------- --------- ----------- ---------
Independent distributors
United States 315,468 60% 238,600 53% 210,600 55%
International 24,317 3% 23,700 5% 16,800 5%
---------- --------- ----------- --------- ----------- ---------
Total distributors 339,785 63% 262,300 58% 227,400 60%
---------- --------- ----------- --------- ----------- ---------
Company direct
California wholesale 149,208 27% 124,700 28% 99,400 26%
Custom brands 23,786 4% 25,000 6% 26,500 7%
Catalog and winery retail 33,811 6% 35,500 8% 26,700 7%
---------- --------- ----------- --------- ----------- ---------
Total Company direct 206,805 37% 185,200 42% 152,600 40%
---------- --------- ----------- --------- ----------- ---------
Total 546,590 100% 447,500 100% 380,000 100%
---------- --------- ----------- --------- ----------- ---------
CENTRALIZED ADMINISTRATION AND WAREHOUSING
A leased 22,000 square foot central office located in Napa County,
California, at the Napa Airport Business Park supports all the Company's
wineries. In addition to the Company's central executive office, this facility
includes a 64,000 square foot central distribution center from which all of the
Company's wines are stored prior to shipping. The Company also rents separate
warehouse facilities, as needed in local markets and occasionally permits
storage of third party wines for a fee. The central facility lease is for a
15-year initial term, expiring in November 2008, with a five-year extension
option.
6
EMPLOYEES
On March 31, 2001, the Company had 185 full-time employees, of which 75
were in grape growing and winemaking, 20 were in sales, and 90 were
administration. During the spring and summer, the Company adds approximately 15
to 20 part-time employees for vineyard care and maintenance and 65 to 85
part-time employees for the spring bottling. In the autumn, up to 80 part-time
employees are hired for the grape harvest and related winery work. The Company's
hiring and employment policies for both full-time and part-time employees are
believed to comply with all relevant laws, including immigration laws. The
Company believes that its wage rates and benefits are competitive and that its
employee relations are excellent.
REGULATION; PERMITS AND LICENSES
The production and sale of wine are subject to extensive regulation by
various federal and state regulatory agencies, which require the Company to
maintain various permits, bonds and licenses. The Company believes it is in
compliance with all currently applicable federal and state regulation.
TRADEMARKS
CANOE RIDGE, STATON HILLS, CHALONE VINEYARD, SAGELANDS, JADE MOUNTAIN,
CARMENET, GAVILAN, ACACIA and the Acacia "A" logo are federally registered
trademarks owned by the Company. EDNA VALLEY VINEYARD is a federally registered
trademark owned by Paragon and licensed exclusively to the Edna Valley Vineyard
Joint Venture. The foregoing marks are also registered in Japan with the
Japanese Patent Office. These marks, and other common-law marks, are of
significant importance to the company's business as label and brand recognition
are important means of competition within the wine industry.
SHAREHOLDER BENEFITS
Shareholders of the Company are entitled to benefits that are not provided
to other consumers. The Company offers its reserve wines, older wines and other
special wines to qualified shareholders, who are those with 100 or more shares
of the Company's common stock, directly from its centralized distribution center
by telephone or mail order. Qualified shareholders are entitled to a 20-30%
discount from suggested retail prices on most mail order or other direct
purchases from the Company. The Company has also provided annual discounts to
shareholders based on their shareholdings in the form of a "Owners Wine Credit,"
which allows shareholders to receive a credit towards the purchase of wines for
the duration of the program. The Owners Wine Credit may be used for up to 50% of
the wine value of an order and is generally offered in the fall of each year.
The credit amount was $.25 per share for the last year. Due to restrictions on
direct retail sales of wines under state laws, the company must confine direct
wine shipments by mail to purchasers with addresses in California and 11 other
states that have reciprocal agreements with California.
Each May, qualified shareholders are invited to attend the Company's annual
Shareholder Celebration. For a nominal fee, attendees attend an all-day wine
tasting, auction and luncheon, which is typically held on the grounds of the
Chalone Vineyard in Monterey County, California. In 2000, approximately 1,500
shareholders and guests from 40 states and 5 foreign countries attended the
Celebration, which featured tastings of all of the Company's wines.
The Company also offers to shareholders, at the shareholders' expense,
travel programs to various wine-growing regions of the world. In the past, the
Company has provided travel programs to France, Chile, Australia, Portugal,
South Africa, Italy, and New Zealand. Proceeds from these trips help fund the
Chalone Wine Foundation. In addition, shareholders' interests are given a
priority in the Chalone Wine Foundation's donation program.
SEASONALITY
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation" for a discussion of the seasonal nature of the
Company's business.
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ITEM 2. PROPERTIES.
The Company's principal winemaking activities presently are conducted at
six locations, four in California and two in eastern Washington.
CHALONE VINEYARD
Chalone Vineyard is located on approximately 950 acres in Monterey,
California (of which 307 acres are planted to grapes), approximately 1,500 feet
above the floor of the Salinas Valley, in the AVA called "Chalone." The winery
produces primarily Chardonnay and Pinot Noir and markets these wines exclusively
under the "Chalone Vineyard" label.
The soil is volcanic rock over a bed of limestone, similar to the soil
found in the Burgundy region of France. The elevation of the vineyard provides
natural protection against frost and creates radical swings between daytime and
nighttime temperatures. The region is arid and has average annual rainfall of
only 14 inches. The water needs for Chalone's vineyard are supplemented by two
reservoirs and several wells, which the Company believes will supply sufficient
water for the vineyard's current and future needs.
Chalone vineyard was first established in 1919 and today is the oldest
producing vineyard in Monterey County. The Company has produced premium wines
from the vineyard since 1969, when it acquired the vineyard from a former
director of the Company, the late Richard H. Graff.
The property includes a tasting room, dining facilities for private parties
and approximately 8,500 square feet of caves for barrel storage. All operations,
from the grape growing to the final bottling, are carried out on site by the
Chalone staff. The winery's current production capacity is 48,000 cases.
CARMENET VINEYARD
Carmenet Vineyard is located on approximately 300 acres in Sonoma County,
California (of which 130 acres are plantable), located in the "Sonoma Valley"
AVA. The Company produces Bordeaux-style red and white wines on this property
which are marketed under the "Carmenet" brand name. The Company also produces
wines under the "Dynamite" label, which are made from Cabernet Sauvignon,
Merlot, Sauvignon Blanc and Semillon grapes and bulk wine purchased from
vineyards located in the North Coast AVA of California.
On July 31, 1996, a fire at the vineyard damaged approximately 75% of its
producing acres which were planted to Cabernet Sauvignon, Merlot, and Cabernet
Franc. The Company has replanted these acres with essentially the same
varieties. See "Item 1. Business, Wine Production and Wines."
The vineyard is situated in the Mayacamas Mountains just north of the town
of Sonoma, at an elevation of 1,200 feet. The vines are on steep hillsides in
rocky, well-drained soil. The average rainfall is 30 inches. The Company's water
needs are supplemented by two wells using a drip irrigation system, which the
Company believes will supply sufficient water for the vineyard's current and
future needs. The elevation of Carmenet Winery provides natural protection
against frost.
In addition to the production area, the property includes a reception area,
and 15,000 square feet of barrel caves. The barrel caves are bored into a solid
rock hillside adjacent to the fermentation building and provide an ideal
environment for aging wine in barrels without artificial temperature control.
The Company also owns 22 acres of vineyard land in the Glen Ellen area of
Sonoma Valley, approximately seven miles from the Carmenet Winery. The Glen
Ellen property includes a separate winery with a 125,000 case use permit. The
Company is using this facility for producing wines to expand production of
"Dynamite" wines.
EDNA VALLEY VINEYARD
Paragon Vineyard is located on approximately 1,100 acres in San Luis Obispo
County, California, in the "Edna Valley" AVA. The Edna Valley Vineyard
principally produces Chardonnay and Pinot Noir. It also produces limited
quantities of Viognier, Muscat, Pinot Gris, Syrah, Edna Red and sparkling wines,
all of which are marketed under the "Edna Valley Vineyard" label.
The property is operated by Paragon Vineyard Company, which leases the land
on which the winery is located to Edna Valley Vineyard (a "Joint Venture"). The
Joint Venture is 50% owned by the Company and 50% owned by Paragon. The Company
is the managing joint venture partner and it manages and supervises the winery
operations and sells and distributes its wine.
The winery features a tasting room, dining facilities for private parties
and underground cellars for wine fermentation and barrel aging. Annual
production capacity is 165,000 cases.
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ACACIA WINERY
The Acacia Winery produces primarily ultra-premium Chardonnay and Pinot
Noir wine marketed under the "Acacia" brand.
The winery is located on one of four contiguous parcels that together total
approximately 149 acres in the Carneros district of Napa County, California. The
Company owns the winery building and the winemaking equipment associated with
the winery. The parcel on which the winery is located consists of two portions;
the winery complex ("Winery Parcel") and a 41-acre producing vineyard
surrounding the winery complex called the "Marina Vineyard". The parcel is owned
pursuant to a tenancy-in-common agreement between the Company and Mr. and Mrs.
Henry Wright (the "Wrights"), each holding a 50% interest. The Company leases
the Wright's portion of both the Winery Parcel and the Marina Vineyard pursuant
to two long-term leases, which commenced retroactively as of January 1, 1988,
and expire on December 31, 2017, subject to certain exceptions. The annual rent
for the Marina Vineyard was $116,361 in the year ended March 31, 2001, subject
to an annual increase determined according to a formula based on premium quality
Carneros district Chardonnay prices. The annual rent on the Winery Parcel is
$74,250.
Pursuant to the terms of the tenancy-in-common agreement, the Wrights have
the ability at any time to offer their interest in the Winery Parcel and the
Marina Vineyard to the Company, and, if the Company declines the offer, to list
the entire property for sale to a third party. The Marina Vineyard, currently
planted to Chardonnay, is in the process of being replanted to Pinot Noir.
The Company's two vineyards adjacent to the Marina Vineyard to the east are
comprised of approximately 60 acres planted to Pinot Noir, of which 15 producing
acres are approximately 20 years old, and 45 newly developed acres that are in
their second year of production.
In January 1999, the company entered into a lease-purchase agreement for
approximately 50 acres of additional vineyard property bordering the Marina
Vineyards to the west. The new lease expires on December 31, 2023 and provides
for annual rent payments of $74,000 in its first year and increases in various
increments to $121,000 per year by 2023. The terms of the lease also provide for
the Company to purchase this property for $1.1 million in consideration of
certain biannual option payments. The Company is currently planting
approximately 47 acres of this property to Pinot Noir.
These vineyards are on low rolling clay-loam hills with good water-holding
capacity. Average rainfall is 22 inches. Two small reservoirs currently exist on
these properties and a third reservoir will be created in the summer of 2001 to
meet the vineyard's current and future irrigation needs.
None of this property is frost protected but, due to elevation and
location, no significant losses have occurred to date from frost. There are
currently no plans to install frost protection.
Grapes from the equivalent of approximately 175 additional acres, all in
the Carneros district and owned by independent growers under long-standing
contracts to Acacia, have accounted for the majority of the 60,000 case annual
production.
With the increased company-owned planting, the Company anticipates Acacia's
annual production to increase to approximately 95,000 cases over the next five
years.
HEWITT VINEYARD
In January 2000, the Company purchased two adjacent parcels of land in
Rutherford, California comprising 69 acres containing two private homes and an
historic cabernet sauvignon vineyard. The sale of one of the homes is described
under Item 1 Business, Significant Events. The vineyard consists of 60 planted
and 3 unplanted acres and is believed to be among the finest vineyard land in
Napa Valley's notable Rutherford Bench. The Company is using the property to
produce a luxury-priced single vineyard Cabernet Sauvignon wine that will be
released under a new label, Hewitt Vineyard. This wine is expected to debut in
2003 with an estimated initial release of approximately 1,400 cases. Ultimately,
the Company anticipates the vineyard to produce up to 15,000 cases of this
luxury quality wine.
SUSCOL CREEK VINEYARD
In March 2000 the Company purchased 164 acres of land at the southern
gateway to Napa County. The property consists of a 50-acre vineyard and 40
unplanted but plantable acres of vineyard land that is called Suscol Creek.
9
CANOE RIDGE VINEYARD
The Canoe Ridge Vineyard is located in eastern Washington State, at an
altitude of approximately 800 feet on the eastern slope of the Canoe Ridge,
overlooking the Columbia River. The vineyard is in the "Columbia Valley" AVA.
The Canoe Ridge winery has an annual production capacity of approximately 32,000
cases, and produces primarily Merlot, Chardonnay and small amounts of Cabernet
Sauvignon.
Of the vineyard's approximately 275 acres, of which 169 acres are
plantable, 161 acres are now planted to Merlot, Cabernet Sauvignon and
Chardonnay grapes. Although temperatures during the winter months can fall below
freezing, the vineyard's altitude, easterly exposure, and closeness to the
Columbia River, along with the Company's viticultural practices, are believed to
reduce the potential for freeze damage. The grapevines are grown in
well-drained, sandy-loam soil. The vineyard has an average annual rainfall of 6
inches and is irrigated with water from the Columbia River under an agreement
with an adjoining farm. In February 2001 the Company announced that it had
bought out its Washington minority partners and began to expand the winery.
SAGELANDS VINEYARD
On June 15,1999 the Company purchased Staton Hills(R) Winery, and its
adjacent vineyards in Yakima County, Washington. The purchase price included
contracts covering approximately 90 acres in Washington State's Yakima Valley
and Horse Heaven Hills. The vineyard is located in the Columbia Valley AVA. The
winery is located on a 121-acre parcel, of which approximately 9.5 acres are
planted. In addition to the vineyard area, the property includes a 20,000-square
foot production and tasting facility with an annual production capacity of
40,000 cases.
At the time of purchase, the Company also entered into long-term grape
contracts for a total of 350 acres. The Staton Hills facility was renamed
Sagelands Vineyard and the new brand was launched in January 2000.
Sagelands Vineyard focuses on Cabernet Sauvignon and Merlot from the
Columbia Valley AVA. The winery is believed to eventually be able to produce
approximately 140,000 cases. The Company retained the Staton Hills Winery brand
and continues to produce wine under this mark.
DUHART-MILON
Duhart-Milon is located in the Medoc region of Bordeaux, France, in the
town of Pauillac. The Company holds a 23.5% interest in Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"). The remaining 76.5% interest is owned by DBR. The
property consists of approximately 166 acres of producing vineyards adjacent to
the vineyards of the world renowned Chateau Lafite-Rothschild and its related
winemaking facilities. In 1855, the French Government classified the top 62
wine-producing estates in the Medoc region, choosing from over 400 such estates.
These top 62 estates were further classified into five "growths," based on their
perceived quality. "First growth" was considered the best. Under this
classification system, Duhart-Milon is rated a "fourth growth" estate. The
average annual production in recent years has been approximately 35,000 cases.
Duhart-Milon wines are sold under the "Chateau Duhart-Milon" and "Moulin de
Duhart" labels.
ITEM 3. LEGAL PROCEEDINGS.
ALLEGED VIOLATION OF SECTION 25502(A)(2) OF THE CALIFORNIA BUSINESS AND
PROFESSIONS CODE
The Company received notice dated August 28, 1998 from the California
Department of Alcoholic Beverage Control ("ABC") that it was accused, along with
36 other companies (most of them wineries) of violations of Section 25502(a)(2)
of the California Business and Professions Code which prohibits wine growers and
others from giving "something of value" to retailers. The accusation arises from
the appearance of paid advertisements of the Company and other wineries in
catalogues distributed by a certain retailer. The notice of violation requested
each of the noticed companies who agreed to the accusation to stipulate to a ten
(10) day suspension of its license or, consent to the payment of a fine not
greater than $10,000 in lieu of the suspension. The matter was tried to an
administrative law judge appointed by the ABC on July 14, 1999. The judge found
for the ABC and the ABC adopted the judge's decision. The Company, together with
16 other wine companies, has filed an appeal with the Alcoholic Beverage Control
Appeals Board, an independent body that hears appeals from ABC decisions. The
matter has been submitted to the ABC appeals board for a decision to be rendered
within 90 days pursuant to the May 24, 2001 hearing date.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company during
the period covered by this Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were executive officers of the Company as of March
31, 2001.
NAME POSITION(S) AGE
---- ---------- ---
W. Philip Woodward Chairman 62
Thomas B. Selfridge President and Chief Executive Officer 57
Daniel E. Cohn Secretary 43
Robert B. Farver Vice President, Sales and Distribution 44
Shawn Conroy Blom Vice President, Finance and Chief 40
Financial Officer
Paul Novak Vice President, Marketing 49
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
W. PHILIP WOODWARD. Mr. Woodward is a co-founder of the Company and has
been a director of the Company since 1972. He has been its chairman since August
1997 and is a member of the Board's Operating Committee. From 1974 to July 1998,
Mr. Woodward was the Company's Chief Executive Officer. Mr. Woodward is a
director of the Northern Trust Bank of California, the Wine Institute, the
American Vintners' Association, the American Center for Wine, Food and the Arts,
The Napa Opera House, The Marin Theatre Company, and Edna Valley Vineyard. He
also is a director and member of the compensation committee of the board of Hog
Island Oyster Company. Mr. Woodward also serves as president and as a director
of The Chalone Wine Foundation.
THOMAS B. SELFRIDGE. Mr. Selfridge joined the Company as President on
January 1, 1998 and was appointed the Company's Chief Executive Officer as of
July 1, 1998. He has been a director of the Company since May 1998 and is a
member of the Board's Operating Committee. Mr. Selfridge also is a director of
Edna Valley Vineyard and Canoe Ridge Vineyard. Before joining the Company, Mr.
Selfridge was Vice President-Production of Kendall-Jackson Winery, Ltd. He also
serves as secretary and as a director of The Chalone Wine Foundation.
DANIEL E. COHN, ESQ. Mr. Cohn has served as the Company's secretary since
1998. He has been a partner of Farella Braun + Martel LLP since 1991.
ROBERT B. FARVER. Mr. Farver joined the Company in 1992 as the Sales
Manager for the Northeast United States and has been the Company's Vice
President, Sales and Distribution since 1996. Previously, he was Director of
National Sales and Marketing. Mr. Farver also serves as a director of Canoe
Ridge Vineyard.
SHAWN CONROY BLOM. Ms. Blom joined the Company in December 2000 as Vice
President of Finance and Chief Financial Officer. Before joining the Company,
Ms. Blom was Chief Financial Officer of Jackson Family Farms. Prior to that time
she was Controller at Cambria Winery and Sanford Winery. Ms. Blom also serves as
a director of Canoe Ridge Vineyard.
PAUL NOVAK. Mr. Novak joined the Company in January 2000 as Vice President,
Marketing, bringing 25 years of wine industry experience. Before joining the
Company, he was Director of Marketing for Jackson Family Farms, a family of
wineries owned by Jess Jackson and his family.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on May 18, 1984, and is listed in
the Nasdaq National Market System, under the symbol "CHLN." The following table
sets forth the high and low closing quotations for the stock for each quarter
during the past two years, as reported by Nasdaq. The prices reflect
inter-dealer quotations without retail markups, markdowns or commissions, and do
not necessarily represent actual transactions.
Quarter Ended High Low
------------------------------ ------------------ -----------------
March 31, 2001 $ 9.38 $ 7.72
December 31, 2000 9.50 7.75
September 30, 2000 10.63 7.63
June 30, 2000 8.62 7.81
March 31, 2000 9.13 8.13
December 31, 1999 9.50 8.25
September 30, 1999 10.00 9.00
June 30, 1999 9.94 8.13
On June 20, 2001 the closing price for the common stock was $12.61 per
share. The average weekly trading volume of the stock was approximately 23,798
shares during the year ended March 31, 2001.
HOLDERS OF RECORD.
As of June 20, 2001, there were approximately 5,060 holders of record of
the Company's stock.
DIVIDENDS.
To date, the Company has not paid any cash dividends.
Under the terms of certain of the Company's credit facilities, the Company
is restricted from paying dividends in excess of 50% of its aggregate net
income.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for the fiscal years
ended March 31, 2001, 2000, 1999 and 1998 are derived from the Company's audited
consolidated financial statements. Financial data for the twelve months ended
March 31, 1997 is derived from the Company's unaudited consolidated financial
statements and is furnished with a view to providing the reader with comparative
results for the prior twelve month period which coincides with the Company's
current fiscal year end (March 31). This data should be read in conjunction with
the financial statements and notes thereto. See "Item 8. Financial Statements
and Supplementary Data."
12
SELECTED FINANCIAL DATA
-----------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year ended March 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
Net revenues $ 60,561 $ 51,457 $ 42,826 $ 36,755 $ 31,188
Gross profit 21,118 22,922 19,625 16,216 12,811
Other operating revenues, net 213 40 194 318 107
Selling, general and administrative expenses (15,208) (13,941) (10,805) (8,147) (6,466)
Operating income 6,123 9,021 9,014 8,387 6,452
Interest expense (3,824) (2,225) (1,761) (1,872) (1,789)
Other income 891 - - - -
Equity in net income of Duhart-Milon 761 735 766 341 281
Minority interest (377) (1,290) (1,219) (1,125) (681)
Carmenet fire settlement gain - - 4,447 - -
Net income $ 2,050 $ 3,681 $ 6,636 $ 3,410 $ 2,520
Net income per common share $ 0.20 $ 0.34 $ 0.75 $ 0.41 $ 0.31
BALANCE SHEET DATA:
Working capital $ 41,381 $ 29,981 $ 49,192 $ 27,794 $ 24,283
Total assets 157,891 145,665 103,471 90,294 75,859
Long-term obligations less current maturities 48,608 30,141 35,273 18,124 18,379
Shareholders' equity 75,134 73,672 58,291 50,405 42,835
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis should be read in conjunction with
the Selected Financial Data presented in Item 6 hereto and the Company's
Consolidated Financial Statements and related notes in Item 8 hereto.
FORWARD LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by
its employees, or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so called "forward looking statements" that involve risk
and uncertainties. Forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. When
used in this Form 10-K, the terms "anticipates," "expects," "estimates,"
"intends," "believes," and other similar terms as they relate to the Company or
its management are intended to identify such forward looking statements. In
particular, statements made in this Item 7., and the President's Letter to the
Shareholders relating to projections or predictions about the Company's future
investments in vineyards and other capital projects are forward looking
statements. The Company's actual future results may differ significantly from
those stated in any forward looking statements. Factors that may cause such
differences include, but are not limited to (i) reduced consumer spending or a
change in consumer preferences, which could reduce demand for the Company's
wines; (ii) competition from numerous domestic and foreign wine producers which
could affect the Company's ability to sustain volume and revenue growth; (iii)
interest rates and other business and economic conditions which could increase
significantly the cost and risks of borrowings associated with present and
projected capital projects; (iv) the price and availability in the marketplace
of grapes meeting the Company's quality standards and other requirements; (v)
the effect of weather, agricultural pests and disease and other natural forces
on growing conditions and, in turn, the quality and quantity of grapes produced
by the Company; (vi) regulatory changes which might restrict or hinder the sale
13
and/or distribution of alcoholic beverages and (vii) the risks associated with
the assimilation of acquisitions. Each of these factors, and other risks
pertaining to the Company, the premium wine industry and general business and
economic conditions, are more fully discussed herein and from time to time in
other filings with the Securities and Exchange Commission.
CHANGE IN FISCAL YEAR-END
On May 17, 2001, the Company made a final determination to change its
fiscal year from one ending March 31 to one ending December 31. The Company
intends to file a Transition Report on Form 10-K for the nine-month period
ending December 31, 2001.
RESULTS OF OPERATIONS
The following table represents financial data as a percentage of net
revenues for the indicated periods:
Year ended March 31,
---------------------------------------
2001 2000 1999
--------- -------- --------
Net revenues 100% 100% 100%
Gross profit 35% 45% 46%
Other operating revenues, net 0% 0% 0%
Selling, general and administrative expenses (25)% (27)% (25)%
Operating income 10% 18% 21%
Interest expense (6)% (4)% (4)%
Other income 1% 0% 0%
Equity in net income of Duhart-Milon 1% 1% 2%
Minority interest (1)% (3)% (3)%
Carmenet fire settlement gain 0% 0% 10%
Net income 3% 7% 15%
REVENUES
Net revenues for the year ended March 31, 2001 increased $9.1 million or
18% over the comparable period in the preceding year. This increase was
attributable to a volume increase of 22%, partially offset by assortment shift
to lower priced brands which reduced average revenue per case by 4%.
Net revenues for the year ended March 31, 2000 increased $8.6 million or
20% over the prior year. This increase was attributable to a volume increase of
18% and a 2% average price increase.
Sales volume in the California market comprised 32%, 32% and 26% of the
Company's total sales for the years ended March 31, 2001, 2000 and 1999,
respectively.
GROSS PROFIT
Gross profit for the year ended March 31, 2001 decreased $1.8 million or 8%
over the comparable period in the preceding year. This was primarily the result
of higher grape and bulk wine costs associated with the 1998 and 1999 vintage
wines, much of which was sold in fiscal year 2001. The per acre grape yields for
the 1998 and 1999 harvests were below normal levels resulting in higher per unit
wine costs and reduced volumes. These reduced volumes necessitated buying more
grapes at higher costs from other growers and the purchase of higher priced bulk
wine. Purchases of bulk wine are significantly more expensive than wine produced
in the Company's facilities. The 2000 harvest was back to normal levels, which
will cause future per unit wine costs to return to normal levels and provide the
opportunity for margins to improve.
Gross profit for the year ended March 31, 2000 increased $3.3 million or
17% over the comparable period in the preceding year. This was primarily the
result of increased sales volume, increased average sales prices and lower per
unit wine costs due to higher yields from the 1996 and 1997 harvests.
OTHER OPERATING REVENUES, NET
Revenue from other operations, primarily consists of revenue obtained from
third-party wineries, net of related expenses, for grape crushing or wine
bottling and net profit from sales of bulk wine. This aspect of the Company's
operation is normally not significant. The Company cannot predict the
significance of such
14
operations in the future, as this source of revenue is highly unpredictable and
largely contingent on other wineries' demand for extra production capacity,
which can and does vary significantly from year to year.
Such revenue for the year ended March 31, 2001 increased $.2 million from
the comparable period in the preceding year. This was attributable to increased
custom crush and custom bottling demand.
Such revenue for the year-end March 31, 2000 decreased $.2 million from the
comparable period in the preceding year which was attributable to less custom
crush demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company was able to reduce its' selling, general and administrative
costs as a percentage of net revenues from 27% to 25% for the year ended March
31, 2001 compared to the previous year. Selling, general and administrative
expenses in the year ended March 31, 2001 increased $1.3 million or 9% over the
comparable period in the preceding year. This increase is primarily the result
of (i) increased selling efforts; (ii) launching of the new Sagelands brand name
and (iii) increased selling and marketing expenditures normally required to
expand sales volume.
Selling, general and administrative expenses in the year ended March 31,
2000 increased $3.1 million or 29% over the comparable period in the preceding
year. This increase is primarily the result of (i) increased selling and
marketing expenditures normally associated with increased sales quantities and,
(ii) expenditures in the Company's infrastructure.
OPERATING INCOME
Operating income in the year ended March 31, 2001 decreased $2.0 million or
22%, over the comparable period in the preceding year. The decline is due to the
decreases in gross profits and the related increases in selling , general and
administrative expenses as described above.
Operating income remained substantially the same for the years ended March
31, 2000 and 1999. Although gross profits increased in fiscal 2000 as compared
to fiscal 1999, this increase was offset by an increase in selling, general and
administrative expenses and lower revenues from other operations.
INTEREST EXPENSE
For the year ended March 31, 2001 interest expense increased by $1.6
million or 72% as compared with the prior year. This increase was a result of
(i) the Sagelands Winery acquisition which occurred during the quarter ended
June 30, 1999; (ii) the acquisition of the Hewitt Ranch property that occurred
during the fourth quarter of fiscal year 2000; (iii) the Jade Mountain
brand-name acquisition that occurred in April, 2000; (iv) the acquisition of our
partner's minority interest in Canoe Ridge Vineyard, LLC in February, 2001 and
(v) continuing capital expenditures related to winery expansion.
For the year ended March 31, 2000 interest expense increased by $.5 million
or 26% as compared with the prior year. This was a result of increased
borrowings primarily to fund acquisitions that took place in the fiscal year
2000. Also, the Company borrowed $2.0 million to pay holders of subordinated
debentures that matured during the year.
OTHER INCOME
For the year ended March 31, 2001 other income increased $.8 million as
compared with the prior year. This increase was the net result of the sale of
the 10,000-square foot Hewitt House and four surrounding landscaped acres.
For the year ended March 31, 1999, the Company recognized a non-recurring
gain of $4.4 million relating to the Carmenet fire settlement.
EQUITY IN NET INCOME OF DUHART-MILON
The Company's 23.5% equity interest in the net income of Duhart-Milon for
the years ended March 31, 2001, 2000, and 1999 were $761,000, $735,000, and
$766,000, respectively. These results were essentially unchanged over the three
year period.
The Company monitors its investment in Duhart-Milon primarily through its
on-going communication with Domaines Baron de Rothschild (DBR). Such
communication is facilitated by the presence of the Company's chairman on DBR's
Board of Directors, and DBR's representation on the Company's Board of
Directors. Additionally, various key employees of the Company make periodic
visits to Duhart-Milon's offices and production facilities.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company records the gain or loss for currency
translation in other comprehensive income or loss, which is a
15
separate component of shareholders equity. The amount recorded was increased to
$4.3 million from $3.6 million for the year ended March 31, 2001 as compared to
the prior year, due to the decrease in the relative worth of the French franc
when compared to the U.S. dollar. Although the transition to the "EURO" currency
became effective as of January 1, 1999, the Company does not anticipate that
this transition will have a material impact on its investment in Duhart-Milon.
MINORITY INTEREST
The minority interest in the net income of Edna Valley Vineyard ("EVV") and
Canoe Ridge Vineyard, LLC ("CRV") consists of the following (IN THOUSANDS):
Year ended March 31,
----------------------------------
Venture Minority Owner 2001 2000 1999
- ---------- -------------- -------- -------- --------
Edna Valley Vineyard Paragon Vineyard Co., Inc. (50.00%) $ 165 $ 925 $ 909
Canoe Ridge Vineyard, LLC Various (49.5%) 212 365 310
-------- -------- --------
$ 377 $ 1,290 $ 1,219
======== ======== ========
The Company acquired the remaining 49.5% minority interest in Canoe Ridge
Vineyard, LLC from the other partners in February 2001. Accordingly, the
minority interest in earnings for the year ended March 31, 2001 reflects ten
months of operations of the Canoe Ridge Vineyard, LLC. The minority interest in
earnings for the year ended March 31, 2001 decreased $913,000 or 71% over the
comparable period ended March 31, 2000, due primarily to lower gross profits and
increased interest costs for both EVV and CRV. The decrease was also
attributable to having only ten months of CRV minority interest, due to the
acquisition, for the year ended March 31, 2001.
The minority interest in earnings for the year ended March 31, 2000
increased $71,000 or 6% from the prior comparable period due to steadily
improving performance at both EVV and CRV primarily as a result of increases in
both case sales and gross margin per case.
Company management believes that EVV will continue to contribute
significantly to the Company's consolidated results of operations.
NET INCOME
Net income for the year ended March 31, 2001 was $2.1 million, a decrease
of $1.6 million, or 44%, over the year ended March 31, 2000. This was primarily
as a result of higher selling, general and administrative expenses and increased
interest expense.
Net income for the year ended March 31, 2000 was $3.7 million, a decrease
of $3.0 million, or 45%, as compared to the year ended March 31, 1999. This was
primarily as a result of the non-recurring gain of $2.6 million (after tax)
relating to the Carmenet fire recorded in 1999 and higher selling, general and
administrative expenses.
SEASONALITY
The Company's wine sales from quarter to quarter are highly variable due
to, among other things, the timing of the release of wines for sale and changes
in consumer demand. Sales are typically strongest during the fourth quarter
because of heavy holiday sales and because most wines generally are released
between the end of the third and beginning of the fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working Capital as of March 31, 2001 was $41.4 million, compared to $29.9
million at March 31, 2000. The $11.5 million increase was primarily attributable
to an increase in inventory ($7.5 million), offset by an increase in accounts
payable and accrued liabilities ($1.9 million) and a net decrease in revolving
bank loan borrowings ($7.1 million).
16
The net decrease in these borrowings from $27.0 million at March 31, 2000
to $19.9 million at March 31, 2001, reflect a repayment in September 2000 of $20
million financed with proceeds from long-term borrowings, offset by increases
used to fund the Jade Mountain and Canoe Ridge acquisitions ($7.5 million) and
increased inventory levels. At March 31, 2001, there were additional borrowings
of approximately $5 million available under the revolving bank loan.
The Company has historically funded its growth through increases in
borrowings and cash flow from operations. In addition, the Company received $7.3
million of proceeds from the sale of the Hewitt House during the first quarter
of fiscal 2001. During fiscal 2001, the Company's primary use of its capital was
to finance capital expenditures of $22.9 million, which includes the Jade
Mountain and Canoe Ridge acquisitions and vineyard development and a $7.5
million increase in inventory.
Management expects that the Company's working capital needs will grow
significantly to support expected future growth in sales volume. Due to the
lengthy aging and processing cycles involved in premium wine production,
expenditures for inventory and fixed assets need to be made one to three years
or more in advance of anticipated sales. The Company currently expects its
operating and capital spending requirements will total approximately $72.8
million for the year ending March 31, 2002.
The Company expects to finance these future capital needs through
operations, security offerings, and additional borrowings. There can be no
assurance that the Company will be able to obtain this financing on terms
acceptable to the Company.
BORROWING ARRANGEMENTS
On September 15, 2000 the Company refinanced certain borrowings through the
issuance of $30 million of Senior Unsecured Notes (the "Notes"). Proceeds from
the Notes were used to repay a portion of the Company's revolving bank loan in
the amount of $20 million and to repay $10 million of another $30 million term
loan. Interest on the Notes is payable quarterly at rates ranging from 8.90% to
9.05%, as amended on February 9, 2001, and principal repayments are scheduled
beginning September 15, 2004 through maturity on September 15, 2010. In
connection with this refinancing, maximum revolving debt borrowings were reduced
from $40 million to $25 million.
The Notes were issued pursuant to a Note Purchase Agreement which contains
restrictive covenants including requirements to maintain certain financial
ratios and restrictions on additional indebtedness, asset sales, investments,
and payment of dividends. At March 31, 2001 the Company was not in compliance
with one of these covenants, however, the Note holders have subsequently
waived such non-compliance. Management believes that the Company will be able to
remain in compliance with these financial covenants through March 31, 2002.
We are exposed to market risk from changes in interest rates. To manage
this exposure, we have entered into interest rate exchange agreements. We do not
use financial instruments for trading purposes and we are not a party to any
leveraged derivatives.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 138 that establishes new accounting and reporting standards for
derivative instruments and hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value. These statements are effective
for the Company beginning April 1, 2001, however, management does not expect
that these new statements will have material effect on the consolidated
financial statements (see Note 8).
DISCLOSURES ABOUT MARKET RISK
The following disclosures should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
have been drafted in compliance with regulations of the SEC concerning the use
of "Plain English." These disclosures are intended to discuss certain material
risks of the Company's business as they appear to management at this time.
However, this list is not exhaustive. Other risks may, and likely will, arise
from time to time.
OUR REVENUES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER
We believe period-to-period comparisons of our operating results are not
necessarily meaningful, and cannot be relied upon as indicators of future
performance. In addition, there can be no assurance that our revenues will grow
or be sustained in future periods or that we will maintain our current
profitability in the future. Significant factors in these quarterly
fluctuations, none of which are within our control, are changes in consumer
demand for our wines, the affect of weather and other natural forces on growing
conditions and, in turn, the quality and quantity of grapes produced by us,
interest rates and inventory levels and the timing of releases for certain
wines, among other factors. Consequently, we have experienced, and expect to
continue to experience, seasonal fluctuations in revenues and operating results.
17
A large portion of our expenses are fixed and difficult to reduce in a
short period of time. In quarters when revenues do not meet our expectations,
our level of fixed expenses tends to exacerbate the adverse effect on net
income. In quarters when our operating results are below the expectations of
public market analysts or investors, the price of our common stock may be
adversely affected.
OUR BUSINESS IS SEASONAL
Our business is subject to seasonal as well as quarterly fluctuations in
revenues and operating results. Sales volume tends to increase during summer
months and the holiday season and decrease after the holiday season. As a
result, our sales and earnings are typically highest during the fourth calendar
quarter and lowest in the first calendar quarter. Seasonal factors also affect
our level of borrowing. For example, our borrowing levels typically are highest
during winter when we have to pay growers for grapes harvested and make payments
related to the harvest. These and other factors may cause fluctuations in the
market price of our common stock.
OUR PROFITS DEPEND LARGELY ON SALES IN CERTAIN STATES AND ON SALES OF
CERTAIN VARIETALS
In the twelve months ended March 31, 2001, approximately 73% of our wine
sales were concentrated in 20 states. Changes in consumer spending in these
states and other regions of the country could affect both the quantity and price
level of wines that customers are willing to purchase.
Approximately 89% of our net revenues in the twelve months ended March 31,
2001 were concentrated in our top four selling varietal wines. Specifically,
sales of Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot accounted for 45%
, 12%, 19% and 14% of our net revenues, respectively.
COMPETITION MAY HARM OUR BUSINESS
The premium table wine industry is intensely competitive and highly
fragmented. Our wines compete in all of the premium wine market segments with
many other premium domestic and foreign wines, with imported wines coming
primarily from the Burgundy and Bordeaux regions of France and, to a lesser
extent, Italy, Chile, Argentina, South Africa and Australia. Our wines also
compete with popular-priced generic wines and with other alcoholic and, to a
lesser degree, non-alcoholic beverages, for shelf space in retail stores and for
marketing focus by our independent distributors, many of which carry extensive
brand portfolios.
The wine industry has experienced significant consolidation. Many of our
competitors have greater financial, technical, marketing and public relations
resources than we do. Our sales may be harmed to the extent we are not able to
compete successfully against such wine or alternative beverage producers.
AGRICULTURAL RISKS
Winemaking and grape growing are subject to a variety of agricultural
risks. Various diseases, pests, fungi, viruses, drought, frosts and certain
other weather conditions can affect the quality and quantity of grapes available
to the Company, decreasing the supply of the Company's products and negatively
impacting profitability.
Many California vineyards have been infested in recent years with
phylloxera. The Company's vineyard properties are primarily planted to
rootstocks believed to be resistant to phylloxera. However, there can be no
assurance that the Company's existing vineyards, or the rootstocks the Company
is now using in its planting programs, will not become susceptible to current or
new strains of phylloxera.
Pierce's Disease is a vine bacterial disease that has been in California
for more than 100 years. It kills grapevines and there is no known cure. Small
insects called sharpshooters spread this disease. A new strain of the
sharpshooter, the glassy winged, was discovered in Southern California and is
believed to be migrating north. The Company is actively supporting the efforts
of the agricultural industry to control this pest and is making every reasonable
effort to prevent a infestation in our own vineyards. We cannot, however,
guarantee that we will succeed in preventing contamination in our vineyards.
Future government restrictions regarding the use of certain materials used
in grape growing may increase vineyard costs and/or reduce production.
Grape growing requires adequate water supplies. We generally supply our
vineyards' water needs through wells and reservoirs located on our properties.
We believe that we either have, or are currently planning to insure adequate
water supplies to meet the needs of all of our vineyards. However a substantial
reduction in water supplies could result in material losses of grape crops and
vines.
The weather phenomenon commonly referred to as "El Nino" produced heavy
rains and cooler weather during the Spring of 1999 and 1998, which resulted in
colder and wetter soils than are typical during California's grape growing
season. Consequently, the 1999 and 1998 harvest was postponed by approximately
four to six
18
weeks depending on the geographic location and varietals. The unusual
weather conditions resulting from El Nino impacted the quantity and quality of
the Company's 1998 estate harvest. The size of the Company's most significant
crops ranged from normal-sized yields to 50% of normal yields (depending on the
varietal and particular estate).
Despite the reduction in the yield, the harvested estate crops in
combination with contracted grape purchases, are expected to permit the Company
to meet originally anticipated sales-projections for its 1999 and 1998 vintage
Chardonnay, Cabernet, and Merlot varietals. Together these varietals have
historically comprised between 80% to 85% of our aggregate annual production.
WE MAY NOT BE ABLE TO GROW OR ACQUIRE ENOUGH QUALITY GRAPES FOR OUR WINES
The adequacy of our grape supply is influenced by consumer demand for wine
in relation to industry-wide production levels. While we believe that we can
secure sufficient supplies of grapes from a combination of our own production
and from grape supply contracts with independent growers, we cannot be certain
that grape supply shortages will not occur. A shortage in the supply of wine
grapes could result in an increase in the price of some or all grape varieties
and a corresponding increase in our wine production costs.
Current trends in the domestic and foreign wine industry point to rapid
plantings of new vineyards and replanting of old vineyards to greater densities,
with the expected result of significantly increasing the worldwide supply of
premium wine grapes and the amount of wine which will be produced in the future.
This expected increase in grape production could result in an excess of supply
over demand and force wineries to reduce, or not increase prices.
WE DEPEND ON THIRD PARTIES TO SELL OUR WINE
We sell our products primarily through independent distributors and brokers
for resale to retail outlets, restaurants, hotels and private clubs across the
United States and in some overseas markets. To a lesser degree, we rely on
direct sales from our wineries, our wine library and direct mail. Sales to our
largest distributor and to our nineteen largest distributors combined,
represented approximately 4% and 41%, respectively, of our net revenues during
the twelve months ended March 31, 2001. Sales to our nineteen largest
distributors are expected to continue to represent a substantial portion of our
net revenues in the future. We use a single broker to sell our wines within
California. Such sales represent 32% of our net revenues during the twelve month
period ended March 31, 2001. The laws and regulations of several states prohibit
changes of distributors, except under certain limited circumstances, making it
difficult to terminate a distributor for poor performance, without reasonable
cause, as defined by applicable statutes. The resulting difficulty or inability
to replace distributors, poor performance of our major distributors or our
inability to collect accounts receivable from our major distributors could harm
our business.
NEW REGULATIONS OR INCREASED REGULATORY COSTS COULD HARM OUR BUSINESS
The wine industry is subject to extensive regulation by the Federal Bureau
of Alcohol Tobacco and Firearms and various foreign agencies, state liquor
authorities and local authorities. These regulations and laws dictate such
matters as licensing requirements, trade and pricing practices, permitted
distribution channels, permitted and required labeling, advertising and
relations with wholesalers and retailers. Any expansion of our existing
facilities or development of new vineyards or wineries may be limited by present
and future zoning ordinances, environmental restrictions and other legal
requirements. In addition, new regulations or requirements or increases in exise
taxes, income taxes, property and sales taxes or international tariffs, could
reduce our profits. Future legal or regulatory challenges to the industry,
either individually or in the aggregate, could harm our business.
WE WILL NEED MORE WORKING CAPITAL TO GROW
The premium wine industry is a capital-intensive business, which requires
substantial capital expenditures to develop and acquire vineyards to improve or
expand wine production. Further, the farming of vineyards and acquisition of
grapes and bulk wine require substantial amounts of working capital. We project
the need for significant capital spending and increased working capital
requirements over the next several years, which must be financed by cash from
operations or, by additional borrowings or additional equity.
19
ADVERSE PUBLIC OPINION ABOUT ALCOHOL MAY HARM OUR BUSINESS
A number of research studies suggest that various health benefits may
result from the moderate consumption of alcohol, but other studies suggest that
alcohol consumption does not have any health benefits and may in fact increase
the risk of stroke, cancer and other illnesses. If an unfavorable report on
alcohol consumption gains general support, it could harm the wine industry and
our business.
WE USE PESTICIDES AND OTHER HAZARDOUS SUBSTANCES IN THE OPERATION OF OUR
BUSINESS
We use pesticides and other hazardous substances in the operation of our
business. If hazardous substances are discovered on, or emanate from, any of our
properties, and their release presents a threat of harm to public health or the
environment, we may be held strictly liable for the cost of remediation. Payment
of such costs could have a material adverse effect on our business, financial
condition and results of operations. We maintain insurance against these kinds
of risks, and others, under various insurance policies. However, our insurance
may not be adequate or may not continue to be available at a price or on terms
that are satisfactory to us.
CONTAMINATION OF OUR WINES WOULD HARM OUR BUSINESS
We are subject to certain hazards and product liability risks, such as
potential contamination, through tampering or otherwise, of ingredients or
products. Contamination of any of our wines could result in the need for a
product recall which could significantly damage our reputation for product
quality, which we believe is one of our principle competitive advantages. We
maintain insurance against certain of these kinds of risks, and others, under
various general liability and product liability insurance policies. However, our
insurance may not be adequate or may not continue to be available at a price or
on terms that are satisfactory to us.
THE LOSS OF KEY EMPLOYEES WOULD DAMAGE OUR REPUTATION AND BUSINESS
Our success depends to some degree upon the continued services of a number
of key employees. Although some key employees are under employment contracts
with us for specific terms, the loss of the services of one or more of our key
employees could harm our business and our reputation, particularly if one or
more of our key employees resigns to join a competitor or to form a competing
company. In such an event, despite provisions in our employment contracts, which
are designed to prevent the unauthorized disclosure or use of our trade secrets,
practices or procedures by such personnel under these circumstances, we cannot
be certain that we would be able to enforce these provisions or prevent such
disclosures.
SHIFTS IN FOREIGN EXCHANGE RATES OR THE IMPOSITION OF ADVERSE TRADE
REGULATIONS COULD HARM OUR BUSINESS
We conduct some of our import and export activity for wine and packaging
supplies in foreign currencies. We purchase foreign currency on the spot market
on an as-needed basis and engage in limited financial hedging activities to
offset the risk of exchange rate fluctuations. There is a risk that a shift in
certain foreign exchange rates or the imposition of unforeseen and adverse trade
regulations could adversely impact the costs of these items and have an adverse
impact on our operating results.
In addition, the imposition of unforeseen and adverse trade regulations
could have an adverse effect on our imported wine operations. Export sales
accounted for approximately 4% of total consolidated revenue for the fiscal year
ended March 31, 2001 and the volume of international transactions is increasing,
which may increase this risk in the future.
INFRINGEMENT OF OUR TRADEMARKS MAY DAMAGE OUR BRAND NAMES OR OUR BUSINESS
Our wines are branded consumer products, and we distinguish our wines from
our competitors by enforcement of our trademarks. There can be no assurance that
competitors will refrain from infringing our marks or using trademarks,
tradenames or trade dress which dilute our intellectual property rights, and any
such actions may require us to become involved in litigation to protect these
rights. Litigation of this nature can be very expensive and tends to divert
management's time and attention.
OUR ACQUISITIONS AND POTENTIAL FUTURE ACQUISITIONS INVOLVE A NUMBER OF
RISKS
Our acquisition of Staton Hills Winery (renamed Sagelands Winery) and the
possible construction of a new winery on the Suscol Ranch property we recently
acquired (and potential future acquisitions) involve risks
20
which include assimilating these operations into our Company; integrating,
retaining and motivating key personnel; integrating and managing
geographically-dispersed operations because Staton Hills is in Washington State
and our Company is headquartered in California; integrating the technology and
infrastructures of disparate entities; risks inherent in the production of wine
in, and marketing of wine from, Washington State; and the replanting of existing
vineyards from white wine grapes to red wine grapes.
We relied on debt financing to purchase Hewitt Ranch, Suscol Ranch, Staton
Hills Winery, the Jade Mountain brand and other vineyard land and related assets
during the fiscal year ended March 31, 2001. Consequently our debt-to-equity
ratio is high in relation to our historical standards. The interest costs
associated with this debt will increase our operating expenses and the risk of
negative cash flow.
THE MARKET PRICE OF OUR COMMON STOCK FLUCTUATES
All of the foregoing risks, among others not known or mentioned in this
report, may have a significant effect on the market price of our shares. Stock
markets have experienced extreme price and volume trading volatility in recent
months and years. This volatility has had a substantial effect on the market
prices of securities of many companies for reasons frequently unrelated or
disproportionate to the specific company's operating performance. These broad
market fluctuations may reduce the market price of our shares.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets......................................... 22
Consolidated Statements of Income................................... 23
Consolidated Statements of Shareholders' Equity..................... 24
Consolidated Statements of Cash Flows............................... 25
Notes to Consolidated Financial Statements.......................... 26
INDEPENDENT AUDITORS' REPORT.............................................. 38
21
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
ASSETS
March 31, March 31,
2001 2000
--------- ---------
Current assets:
Cash and equivalents $ 56 $ -
Accounts receivable, net 10,128 9,836
Notes receivable - affiliate - 119
Income tax receivable - 1,178
Inventory 59,333 51,826
Prepaid expenses and other 533 579
Deferred income taxes 897 894
--------- ---------
Total current assets 70,947 64,432
Investment in Chateau Duhart-Milon 7,824 9,146
Property, plant and equipment - net 67,197 64,134
Goodwill and trademarks - net of accumulated
amortization of $2,161 in 2001 and $1,743 in 2000 10,581 7,220
Other assets 1,342 733
--------- ---------
Total assets $ 157,891 $ 145,665
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,517 $ 5,650
Revolving bank loan 19,999 27,017
Current portion of related party note payable 18 18
Current maturities of long-term obligations 2,032 1,766
--------- ---------
Total current liabilities 29,566 34,451
Long-term obligations, less current maturities 48,608 30,141
Related party note payable, net of current portion 882 900
Deferred income taxes 1,012 1,743
--------- ---------
Total liabilities 80,068 67,235
--------- ---------
Minority interest 2,689 4,758
Shareholders' equity:
Common stock - authorized 15,000,000 shares no
par value; issued and outstanding: 10,248,491 and
10,224,521 shares, respectively 61,578 61,377
Retained earnings 17,901 15,851
Accumulated other comprehensive loss (4,345) (3,556)
--------- ---------
Total shareholders' equity 75,134 73,672
--------- ---------
Total liabilities and shareholders' equity $ 157,891 $ 145,665
========= =========
The accompanying notes are an integral part of the consolidated financial statements
22
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per share data)
Year ended March 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Gross revenues $ 62,213 $ 52,808 $ 43,973
Excise taxes (1,652) (1,351) (1,147)
-------- -------- --------
Net revenues 60,561 51,457 42,826
Cost of wines sold (39,443) (28,535) (23,201)
-------- -------- --------
Gross profit 21,118 22,922 19,625
Other operating revenues, net 213 40 194
Selling, general and administrative expenses (15,208) (13,941) (10,805)
-------- -------- --------
Operating income 6,123 9,021 9,014
Interest expense, net (3,824) (2,225) (1,761)
Other Income 891 - -
Equity in net income of Chateau Duhart-Milon 761 735 766
Minority interests (377) (1,290) (1,219)
Carmenet fire settlement gain - - 4,447
-------- -------- --------
Income before income taxes 3,574 6,241 11,247
Income taxes (1,524) (2,560) (4,611)
-------- -------- --------
Net income $ 2,050 $ 3,681 $ 6,636
======== ======== ========
Net income available to common shareholders $2,050 $3,222 $6,636
Earnings per share-basic $ 0.20 $ 0.34 $ 0.77
Earnings per share-diluted $ 0.20 $ 0.34 $ 0.75
Weighted average number of shares outstanding:
Basic 10,238 9,383 8,669
Diluted 10,252 9,483 8,852
The accompanying notes are an integral part of the consolidated financial statements
23
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts in thousands)
Accumulated
Common Stock Stock Other Compre-
Number of Subscription Retained Comprehensive hensive
Shares Amount Receivable Earnings Loss Total Income
--------- -------- ------------ -------- ------------- ------- -------
Balance, March 31, 1998 8,394 $ 46,871 $ - $ 5,993 $ (2,459) $ 50,405
Employee stock purchase plan 8 80 - - - 80
Warrants exercised 143 1,000 - - - 1,000
Options exercised 164 882 (1,007) - - (125)
Profit sharing 12 132 - - - 132
Foreign currency
translation adjustment - - - - 163 163 $ 163
Net income - - - 6,636 - 6,636 6,636
------ -------- -------- -------- -------- -------- -------
Balance, March 31, 1999 8,721 48,965 (1,007) 12,629 (2,296) 58,291 6,799
------ -------- -------- -------- -------- -------- -------
Employee stock purchase plan 8 65 - - - 65
Warrants exercised and deemed
dividend 833 6,667 - (459) - 6,208
Options exercised 20 115 - - - 115
Return of common stock in
settlement of subscription
receivable (104) (1,012) 1,007 - - (5)
Debenture conversion 738 6,500 - - - 6,500
Profit sharing, net of repurchases 8 77 - - - 77
Foreign currency
translation adjustment - - - - (1,260) (1,260) (1,260)
Net income - - - 3,681 - 3,681 3,681
------ -------- -------- -------- -------- -------- -------
Balance, March 31, 2000 10,224 61,377 - 15,851 (3,556) 73,672 2,421
------ -------- -------- -------- -------- -------- -------
Employee stock purchase plan 7 48 - - - 48
Options exercised 8 61 - - - 61
Profit sharing, net of repurchases 9 92 - - - 92
Foreign currency
translation adjustment - - - - (789) (789) (789)
Net income - - - 2,050 - 2,050 2,050
------ -------- -------- -------- -------- -------- -------
Balance, March 31, 2001 10,248 $ 61,578 - $ 17,901 $ (4,345) $ 75,134 $ 1,261
====== ======== ======== ======== ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements
24
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended March 31,
---------------------------------
2001 2000 1999
------- ------- -------
Cash flows from operating activities:
Net income $ 2,050 $ 3,681 $ 6,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,877 4,758 3,814
Equity in net income of Chateau Duhart-Milon (761) (735) (766)
Increase in minority interests 377 1,290 1,219
Other (799) (105) 25
Changes in:
Accounts and other receivable 1,266 (2,320) (1,737)
Inventory (5,365) (7,740) (6,649)
Prepaid expenses and other assets (34) 279 (1,261)
Deferred income taxes (734) (1,014) 572
Accounts payable and accrued liabilities 1,281 3,159 (931)
------- ------- -------
Net cash provided by operating activities 3,158 1,253 922
------- ------- -------
Cash flows from investing activities:
Capital expenditures (15,200) (10,889) (7,112)
Vineyard property acquired - (22,152) -
Business acquired, net of cash acquired (3,500) (6,127) -
Proceeds from disposal of property and equipment 7,536 204 89
Collection of notes receivable (470) 39 164
Investment in Edna Valley Vineyard - (1,090) -
Acquisition of minority interest in Canoe Ridge Vineyard (3,960)
Distributions from Duhart-Milon 1,294 738 -
------- ------- -------
Net cash used in investing activities (14,300) (39,277) (6,859)
------- ------- -------
Cash flows from financing activities:
Borrowings (repayment) on revolving bank loan-net (7,018) 23,079 (7,014)
Repayment of short-term debt - - (952)
Distributions to minority interests (700) (809) (619)
Proceeds from long-term debt 30,000 10,000 25,182
Repayment of long-term debt (11,285) (381) (12,309)
Repayment of convertible subordinated debentures - (2,000) -
Proceeds from warrants exercised - 6,208 1,000
Proceeds from issuance of common stock 201 257 87
------- ------- -------
Net cash provided by financing activities 11,198 36,354 5,375
------- ------- -------
Net increase (decrease) in cash and equivalents 56 (1,670) (562)
Cash and equivalents at beginning of year - 1,670 2,232
------- ------- -------
Cash and equivalents at end of year $ 56 $ - $ 1,670
======= ======= =======
Other cash flow information:
Interest paid $ 3,449 $ 2,896 $ 1,779
Income taxes paid 370 4,135 4,271
Non-cash transactions:
Debenture converted into common stock - 6,500 -
Return of stock in settlement of subscription receivable - 1,012 -
The accompanying notes are an integral part of the consolidated financial statements
25
THE CHALONE WINE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS
The Chalone Wine Group, Ltd. ("the Company") produces and sells super
premium to luxury quality table wines. The Company sells the majority of its
products to wholesale distributors, restaurants, and retail establishments
throughout the United States, Canada and Europe. Export sales accounted for
approximately 4%, 5% and 4%, respectively, of total revenue for the years ended
March 31, 2001, 2000 and 1999. The Company supplies most of its grape needs from
its estate-owned vineyards but utilizes independent grape growers for some of
its grape requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
its majority owned subsidiaries, and Edna Valley Vineyard ("EVV"), a winery
operation in San Luis Obispo County, California, owned 50% by the Company and
50% by Paragon Vineyard Company, Inc. ("Paragon"). The Company is EVV's
managing joint venture partner and supervises EVV's winery operations, sells and
distributes the wine and is deemed to control EVV for accounting purposes. The
Company has certain commitments related to its continuing ownership of EVV (see
Note 14). Intercompany transactions and balances have been eliminated.
At March 31, 2001, Domaines Baron de Rothschild (Lafite) ("DBR"), a French
company, owned approximately 44% of the Company's outstanding common stock, and
the Company owns a 23.5% partnership interest in DBR's Societe Civile Chateau
Duhart-Milon ("Duhart-Milon"), a Bordeaux wine-producing estate located in
Pauillac, France. The Company accounts for this investment using the equity
method.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported financial
statement amounts and related disclosures at the date of the financial
statements. Actual results could differ from these estimates.
CASH AND EQUIVALENTS
Cash equivalents are highly liquid instruments purchased with original
maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market. Cost for bulk and
bottled wines is determined on an accumulated weighted average basis and
includes grape purchases and supplies, farming and harvesting costs, winery and
bottling costs. Wine production supplies are stated at FIFO (first-in,
first-out) cost. All bulk and bottled wine inventories are classified as current
assets in accordance with recognized industry practice, although a portion of
such inventories will be aged for periods longer than one year.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. The Company performs ongoing credit evaluations of
its customers' financial position and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have been
within management's expectations.
26
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, with depreciation provided
in amounts sufficient to allocate the depreciable assets to operations over
their estimated useful lives. The straight-line method is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for income tax purposes. The costs of property, plant and
equipment are allocated to each asset acquired based on their relative estimated
fair values at the date of acquisition.
The ranges of useful lives used in computing depreciation are (i) 15 to
35 years for vineyard development costs, (ii) 80 years for caves, (iii) 15 to 40
years for buildings and (iv) 3 to 20 years for machinery and equipment.
Capitalized costs of planting new vines and ongoing cultivation costs for
vines not yet bearing fruit, including interest, are classified as vineyard
development. Depreciation commences in the initial year the vineyard yields a
commercial crop, generally in the third or fourth year after planting.
Interest of $.8 million, $.8 million and $.1 million was capitalized to
property, plant and equipment for the years ended March 31, 2001, 2000, 1999,
respectively.
Caves represent improvement costs to dig into hillsides and structurally
reinforce underground tunnels used to age and store the Company's wines.
GOODWILL AND TRADEMARKS
The excess of the purchase price paid over acquired net assets is recorded
as goodwill and amortized over 20 to 40 years on a straight-line basis. The
payments made to extend the life of the EVV joint venture and acquire ownership
of the continuing joint venture have been recorded as goodwill and are being
amortized over 40 years beginning in January 1997. Trademarks are amortized over
their estimated useful lives from the date they are put into use.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's investee, Duhart-Milon, is the
French franc and as a result the Company records the effect of exchange gains
and losses on its equity in Duhart-Milon in other comprehensive income or loss,
a separate component of shareholder's equity.
REVENUE RECOGNITION
Revenue is recognized when the product is shipped and title passes to the
customer. Revenue from product sold at the Company's retail locations is
recognized at the time of sale. Revenue is recorded net of sales returns,
including a provision for estimated future returns. Sales returns have
historically been insignificant. The Company generally allows thirty days from
the date of shipment for customers to make payment. No products are sold on
consignment.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the Company to compute deferred income taxes based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
27
STOCK BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value based method in accordance with APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES and provides the pro forma disclosures required by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (see Note 9). No compensation
expense has been recognized in the financial statements for employee stock
arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes financial instruments to reduce interest rate and
foreign currency exchange rate risk. The Company does not enter into financial
instruments for trading or speculative purposes. Payments or receipts on
interest rate swap agreements are recorded in interest expense. Forward exchange
contacts are used to manage exchange rate risks on certain purchase commitments,
generally french oak barrels, denominated in foreign currencies. Gains and
losses relating to firm purchase commitments are deferred and are recognized as
adjustments of carrying amounts or in income when the hedged transaction occurs.
The nominal amounts and related foreign currency transaction gains and losses,
net of the impact of hedging, were not significant in the fiscal years 2001,
2000, or 1999.
NET INCOME PER SHARE
Basic net income per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (e.g. stock options) were exercised and converted into stock. For
all periods presented, the difference between basic and diluted EPS for the
Company reflects the inclusion of dilutive stock options and stock warrants, the
effect of which is calculated using the treasury stock method as shown below.
The Company's convertible debentures are excluded from the computation for
periods prior to their conversion since they had an antidilutive effect.
The following is a reconciliation of the figures used in deriving basic EPS
and those used in calculating diluted EPS (IN THOUSANDS, EXCEPT PER SHARE DATA):
Effect of dilutive securities
-----------------------------
Stock
Basic EPS Warrants options Diluted EPS
--------- -------- ------- -----------
Year ended March 31, 2001
Income available to common stockholders $ 2,050 - - $ 2,050
Shares 10,238 - 14 10,252
--------- --------
EPS $ 0.20 $ 0.20
========= ========
Year ended March 31, 2000:
Income available to common stockholders (1) $ 3,222 - - $ 3,222
Shares 9,383 100 - 9,483
--------- --------
EPS $ 0.34 $ 0.34
========= ========
Year ended March 31, 1999:
Income available to common stockholders $ 6,636 - - $ 6,636
Shares 8,669 183 - 8,852
--------- --------
EPS $ 0.77 $ 0.75
========= ========
(1) Net income available to common stockholders in 2000 is net income reduced
by the warrant related deemed dividend of $459,000.
28
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 138 that establishes new accounting and reporting standards for
derivative instruments and hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value. These statements are effective
for the Company beginning April 1, 2001, however, management does not expect
that these new statements will have a material effect on the consolidated
financial statements (see Note 8).
SEGMENT REPORTING
The Company produces and sells premium to luxury quality table wines and
has determined that its product line operating segments, although consisting of
multiple products and brands, all have similar production processes, customer
types, distribution methods and other economic characteristics. Accordingly,
these operating segments have been aggregated as a single operating segment in
the consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and equivalents, accounts receivable, accounts payable and accrued
expenses, and certain other assets and liabilities are considered financial
instruments. Carrying values are estimated to approximate fair values for these
instruments as they are short-term in nature and are receivable or payable on
demand.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform
with the current period presentation.
NOTE 3 - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
A summary of the changes in the Company's allowance for doubtful accounts
receivable is as follows:
Balance at Charges to Balance at
Beginning of Costs and End of
Year ended March 31: Period Expenses Deductions Period
--------------- --------------- ----------------- -------------
1999 $ 78 $ 53 $ (44) $ 87
=============== =============== ================= =============
2000 $ 87 $ 114 $ (72) $ 129
=============== =============== ================= =============
2001 $ 129 $ 320 $ (56) $ 393
=============== =============== ================= =============
NOTE 4 - ACQUISITIONS
The Company purchased exclusive brand name rights and inventory of Jade
Mountain Winery ("Jade Mountain") on April 4, 2000 and the remaining 49.5%
interest in Canoe Ridge Vineyard, LLC ("Canoe Ridge") on February 7, 2001 at
purchase prices of $3.5 million and $3.96 million, respectively, each of which
was financed through the Company's revolving credit facility. The Company also
entered into a long-term contract with the owner of Jade Mountain to purchase
Syrah, Viognier, Grenache and Merlot grapes produced from a related vineyard.
29
The Company recorded these acquisitions using the purchase method of
accounting and the related purchase prices were allocated to the assets acquired
and liabilities assumed based on their estimated fair values as of the
acquisition dates as follows (in thousands):
Jade Canoe
Mountain Ridge
Current assets $ 572 $ 2,825
Property, plant and equipment 28 2,720
Brand name rights 2,900
Goodwill and other assets 818
Liabilities (2,403)
--------------- ---------------
Total $ 3,500 $ 3,960
=============== ===============
The brand name rights and goodwill are being amortized on a straight-line
basis over 20 years.
NOTE 5 - INVENTORY
Inventory consists of the following at March 31 (IN THOUSANDS):
2001 2000
--------------- ---------------
Bulk wine $ 36,984 $ 26,989
Bottled wine 21,156 23,791
Wine packaging supplies 543 525
Other 650 521
--------------- ---------------
Total $ 59,333 $ 51,826
=============== ===============
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31 (IN
THOUSANDS):
2001 2000
-------------- --------------
Land $ 18,024 $ 17,436
Vineyards 8,691 7,946
Vineyards under development 14,562 9,302
Caves 1,678 1,678
Buildings 23,793 27,255
Machinery and equipment 30,265 23,786
-------------- --------------
97,013 87,403
Accumulated depreciation (29,816) (23,269)
-------------- --------------
Total $ 67,197 $ 64,134
============== ==============
30
NOTE 7 - INVESTMENT IN CHATEAU DUHART-MILON
Duhart-Milon's condensed balance sheet as of March 31, 2001 and 2000 and
the results of its operations for fiscal years ended March 31, 2001, 2000 and
1999 are as follows (translated into U.S. dollars at the year-end and average
exchange rate for the period, respectively) (IN THOUSANDS):
2001 2000
------------ ------------
Inventory $ 2,812 $ 2,911
Other current assets 6,068 9,737
------------ ------------
Current assets 8,880 12,648
------------ ------------
Property and equipment, net 1,619 1,917
------------ ------------
Total assets $ 10,499 $ 14,565
============ ============
Current liabilities $ 2,066 $ 2,442
Partner's equity 8,433 12,123
------------ ------------
Total liabilities and equity $ 10,499 $ 14,565
============ ============
Duhart-Milon's results of operations are summarized as follows (IN
THOUSANDS):
Year ended March 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Revenues $ 5,470 $ 5,583 $ 5,941
Cost of Sales (2,453) (2,308) (2,626)
------- ------- -------
Gross profit 3,017 3,275 3,315
------- ------- -------
Revenues from other operations, net 221 40 154
------- ------- -------
Net earnings $ 3,238 $ 3,315 $ 3,469
======= ======= =======
Company's share of net earnings $ 761 $ 779 $ 815
Less: amortization expense - (44) (49)
------- ------- -------
Equity in investment of Duhart-Milon $ 761 $ 735 $ 766
======= ======= =======
On October 1, 1995, the carrying amount of the Company's investment in
Duhart-Milon was greater than its share of Duhart-Milon's net assets by
approximately $8.9 million. This difference related primarily to the underlying
value of the land owned by Duhart-Milon and, accordingly is not amortized. A
portion of that difference, however, was attributable to inventory and was
amortized based on annual sales quantities through March 31, 2001.
Since the investment in Duhart-Milon is a long-term investment denominated
in a foreign currency, the Company recognizes currency translation gains or
losses in shareholders' equity as accumulated comprehensive income or loss,
which totaled $4,345,000 as of March 31, 2001. This amount increased from
$3,556,000 as of March 31, 2000 due to the decrease in the relative worth of the
French franc when compared to the U.S. dollar during the twelve months ended
March 31, 2001.
31
NOTE 8 - BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following at March 31 (IN THOUSANDS):
------------ ------------
2001 2000
------------ ------------
Revolving bank loan of $25,000,000, interest at LIBOR+1.375%
(6.425% at March 31, 2001), interest payable monthly, unsecured, due $ 19,999 $ 27,017
March 31, 2002
Senior unsecured notes (series A,B, C), interest at rates ranging from
8.90% to 9.05%, payable monthly, principal payments annually starting
September 15, 2004 30,000 -
Bank term loan, unsecured, interest at varying LIBOR rates plus 1.5%
(6.16% at March 31, 2001), payable monthly, principal payable quarterly
commencing December 31, 2000 through March 2006 19,000 30,000
Mortgage note, interest at 7%, principal and interest payable monthly, due
August, 2021 1,640 1,669
Other note payable, interest at 10% - 238
------------ ------------
70,639 58,924
Less current maturities (22,031) (28,783)
------------ ------------
Long-term obligations, less current maturities $ 48,608 $ 30,141
============ ============
Related party note payable, due through 2016, interest ranging from 7% to 10% $ 900 $ 918
Less current maturities (18) (18)
------------ ------------
Related party note payable, long-term portion $ 882 $ 900
============ ============
The revolving credit facility and term loan are pursuant to an agreement
with a bank that was entered into in March 1999. The agreement includes
restrictive covenants regarding: maintenance of certain financial ratios;
mergers or acquisitions; loans, advances or debt guarantees; additional
borrowings; annual lease expenditures; annual fixed asset expenditures; changes
in control of the Company; and declaration or payment of dividends.
On September 15, 2000 the Company refinanced certain borrowings through the
issuance of $30 million of Senior Unsecured Notes (the "Notes"). Proceeds from
the Notes were used to repay a $20 million of revolving bank borrowings under a
previous credit agreement and $10 million of the $30 million term loan. Interest
on the Notes is payable quarterly at rates ranging from 8.90% to 9.05% and
principal repayments are scheduled beginning September 15, 2004 through maturity
on September 15, 2010. In connection with this refinancing, available revolving
debt borrowings under the credit agreement were reduced from $40 million to $25
million, of which the Company had borrowed $19.9 million as of March 31, 2001,
with $5.1 million unused and available.
The Notes were issued pursuant to a Note Purchase Agreement which contains
restrictive covenants including requirements to maintain certain financial
ratios and restrictions on additional indebtedness, asset sales, investments,
and payment of dividends. At March 31, 2001, the Company was not in compliance
with one of these covenants, but the covenant was modified on June 15, 2001
retroactively to March 31, 2001 to enable the Company to be in compliance as of
that date. Management believes that the Company will be able to remain in
compliance with these financial covenants through March 31, 2002.
Maturities of borrowings for each of the next five years ending March 31
are as follows (IN THOUSANDS):
2002 $ 22,049
2003 2,058
2004 2,065
2005 6,358
2006 15,367
Thereafter 23,642
-------------
Total $ 71,539
=============
32
In 1999 the Company entered into an interest-rate swap contract for a
notional amount of $20.0 million, maturing on April 6, 2006. This contract
effectively converts the variable LIBOR rate which would otherwise be paid by
the Company on its $20.0 million bank term-loan balance into a fixed-rate
obligation over a period which corresponds to that of the underlying loan
agreement. During that time, the rate which the Company will be obligated to
pay, after including the lending institution's additional mark-up (which is
based on financial ratios, and varies accordingly) will be fixed between 6.95%
and 7.12%. The fair value of the contract was approximately $319,000 on March
31, 2001, which amount will be the cumulative transition adjustment recorded in
other comprehensive income as of April 1, 2001, as required under SFAS No. 133
(see Note 1).
NOTE 9 - STOCK BASED COMPENSATION
On February 10, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of stock options to officers
and other key employees of the Company, as well as non-employee directors and
consultants, for an aggregate of up to 1,000,000 shares of common stock, plus
any shares under the Company's 1987 Stock Option Plan, which expired in February
1997, or the 1988 Non-Discretionary Stock Option Plan, which expired in December
1996, that become available for issuance as a result of forfeitures to the
Company under the terms of such plans. These options generally expire 10 years
from the date of grant and vest after a three to twelve month period. As of
March 31, 2001, approximately 409,000 options were available for future grant
under the Plan.
Option activity under the plans has been as follows:
Weighted
Number of Average
Shares Exercise Price
---------------- ---------------
Outstanding, March 31, 1998 782,758 $ 9.62
Granted (weighted average fair value of $5.70) 172,520 11.40
Exercised (308,004) 8.90
Canceled (37,500) 11.23
---------------- ---------------
Outstanding, March 31, 1999 609,774 10.39
---------------- ---------------
Granted (weighted average fair value of $4.79) 146,000 9.47
Exercised (22,800) 6.11
Canceled (70,555) 10.12
---------------- ---------------
Outstanding, March 31, 2000 662,419 10.36
---------------- ---------------
Granted (weighted average fair value of $8.52) 169,640 8.43
Exercised (17,800) 8.64
Canceled (23,765) 9.97
---------------- ---------------
Outstanding, March 31, 2001 790,494 $ 10.00
================ ===============
33
Additional information regarding options outstanding as of March 31, 2001
is as follows:
Exercise Number Remaining Weighted Avg.
Prices Outstanding Contractual Life Exercise Price
- ---------------- --------------- ------------------ -----------------
$5.00-$7.99 62,940 2.8 years $ 6.77
$8.00-$9.99 333,274 6.1 years 8.93
$10.00-$12.00 394,280 5.6 years 11.42
--------------- ------------------ -----------------
790,494 5.6 years $ 10.00
=============== ================== =================
All options outstanding at March 31, 2001 are exercisable, except for 8,160
options granted March 31, 2001 with an exercise price of $8.69.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to use salary withholdings to purchase shares of common
stock at a price equal to 85% of the lower of the market value of the stock at
the beginning or end of each three-month offer period or beginning of the
Purchase Plan start (27 months), subject to an annual limitation. Shares issued
under the plan were 6,735 shares, 6,198 shares, and 7,734 shares in each of the
years ended March 31, 2001, 2000 and 1999, respectively, at weighted average
prices of $7.15, $7.83 and $ 9.09, respectively. The weighted average fair value
per share of the awards for each of the years ended March 31, 2001, 2000 and
1999 was $8.42, $9.21and $10.69, respectively. At March 31, 2001, 12,000 shares
were reserved for future issuances under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal year 1995. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 81
months following vesting; stock volatility of 28.2%, 19.3% and 21.5% in the
years ended March 31, 2001, 2000 and 1999, respectively; risk-free interest
rates of 6.5%, 6.9% and 6.5% for the years ended March 31, 2001, 2000 and 1999,
respectively, and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's stock
option and stock purchase plan been accounted for under SFAS No. 123, net income
and earnings per share would have been reduced to the following pro forma
amounts (IN THOUSANDS, EXCEPT PER SHARE DATA):
Year ended March 31,
-------------------------------------
Net income: 2001 2000 1999
----------- ------------ ---------
As reported (1) $ 2,050 $ 3,222 $ 6,636
Pro forma $ 1,759 $ 2,712 $ 5,727
Earnings per share:
Basic $ 0.20 $ 0.34 $ 0.77
Diluted $ 0.20 $ 0.34 $ 0.75
Pro forma basic $ 0.17 $ 0.29 $ 0.66
Pro forma diluted $ 0.17 $ 0.29 $ 0.65
(1) Net income available to common stockholders in 2000 is net income reduced by
the warrant related deemed dividend of $459,000.
34
NOTE 10 - COMMON STOCK
Presently the Company does not have any outstanding convertible debentures
or warrants to purchase its common stock.
To date the Company has not paid any cash dividends. Under the terms of
certain of the Company's credit facilities, the Company is restricted from
paying dividends in excess of 50% of its aggregate net income (see Note 8).
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company has a qualified profit-sharing plan, which provides for Company
contributions, as determined annually by the Board of Directors, based on the
Company's previous year performance. These contributions may be in the form of
common stock or cash as determined by the Board of Directors. The Company
contributed $168,813, $143,000, and $154,000 for the year ended March 31, 2001,
2000, and 1999, respectively. At March 31, 2001, the plan held approximately
38,600 shares of the Company's common stock. At the participant's option, upon
termination of service of any plan participant, the Company will repurchase that
participant's shares held in the plan at market value.
The Company sponsors a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code covering substantially all full-time U.S.
employees. Participating employees may contribute up to 15% of their eligible
compensation up to the annual Internal Revenue Service contribution limit. As
determined by the Board of Directors, the Company matches employee contributions
according to a specified formula and contributed $182,176, $131,000, and $99,000
to this plan in 2001, 2000, and 1999, respectively.
NOTE 12 - INCOME TAXES
The provision for income taxes for the years ended March 31 are summarized
as follows (IN THOUSANDS):
2001 2000 1999
------------ ------------- ------------
Federal
Current $ 1,782 $2,949 $3,121
Deferred (583) (966) 471
------------ ------------- ------------
1,199 1,983 3,592
------------ ------------- ------------
State
Current 477 625 920
Deferred (152) (48) 99
------------ ------------- ------------
325 577 1,019
------------ ------------- ------------
$ 1,524 $ 2,560 $ 4,611
============ ============= ============
The provisions for income taxes differ from amounts computed at the U.S.
Federal statutory rate as follows (IN THOUSANDS):
Year ended March 31,
2001 2000 1999
---------- ---------- ----------
Income tax at statutory rate $ 1,215 $ 2,123 $ 3,824
State tax net of federal benefit 208 381 655
Effect of acquisitions, net 47 38 33
Other 54 18 99
---------- ---------- ----------
$ 1,524 $ 2,560 $ 4,611
========== ========== ==========
35
The Company's deferred tax assets (liabilities) were as follows at March 31
(IN THOUSANDS):
2001 2000
------------ -------------
Basis difference in property, plant and equipment $ (2,072) $ (2,442)
Net operating loss carryforward 3,083 3,129
Basis difference in inventory 512 368
Other 629 363
Valuation allowance (2,267) (2,267)
------------ -------------
Net deferred tax liability $ (115) $ (849)
============ =============
Classified as:
Current deferred tax assets $ 897 $ 894
============ =============
Long-term deferred tax liabilities $ (1,012) $ (1,743)
============ =============
The Company and its subsidiaries file their federal tax returns on a
consolidated basis. As of March 31, 2001, Sagelands Vineyard has a federal net
operating loss carryforward of approximately $9.2 million that will expire
through 2015. A valuation allowance has been established for a portion of the
related deferred tax asset that management believes may not be realized due to
annual limitations resulting from the ownership change in Sagelands Vineyard.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of income include the following transactions
with related parties (IN THOUSANDS):
Year ended March 31,
---------------------------------
2001 2000 1999
------- ------ ------
Convertible debenture interest expense - owners and directors $ - $ - $ 325
Wine purchases from related parties 1,781 2,384 2,651
Grape purchases from related parties 5,002 2,612 3,093
Interest income on note receivable from joint venture partner - - 31
Lease expense for land and facilities to joint venture partner 15 19 20
Consulting fee to affiliate of an officer - - 270
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2001 future minimum lease payments (excluding the effect of
future increases in payments based on indices which cannot be estimated at the
present time) required under noncancelable operating leases with terms in excess
of one year are as follows: 2002--$870,000, 2003--$878,000, 2004--$870,000,
2005--$830,000, 2006--$855,000 and thereafter--$8.5 million.
Rent expense charged to operations was $1,350,666, $1,072,000, and $788,000
for the years ended March 31, 2001, 2000 and 1999, respectively.
In 1991, the Company and Paragon entered into an agreement ("old
agreement") to provide the Company with the option to convert EVV into a
"permanent partnership" of unlimited duration. Under the old agreement, the
Company had made payments totaling $1,070,000 to Paragon to have the right to
extend the life of the joint venture. Under a new agreement, entered into on
December 27, 1996 ("new agreement"), the Company agreed to further payments
totaling $4,540,000. All required payments have all been made pursuant to the
new agreement to date and as of March 31, 2001, $850,000 remains outstanding and
is due December 2001. This final payment will provide for the Company's
continued 50% ownership throughout the remaining life of the joint venture.
Also, at December 2001, the Company will have the option to purchase 50% of the
brand name, Edna Valley, for $200,000, which is currently licensed to the joint
venture by Paragon. The payments made to extend the life of the joint venture
and maintain continuing ownership of the joint venture have been recorded as
goodwill and are being amortized over 40 years.
36
The Company has contracted with various growers and certain wineries to
supply a large portion of its future grape requirements and a smaller portion of
its future bulk wine requirements. The Company estimates that it has contracted
to purchase approximately 9,000 to 13,000 tons of grapes per year over the next
ten years. While most of these contracts stipulate that prices will be
determined by current market conditions at the time of purchase, several
long-term contracts provide for minimum grape or bulk wine prices.
NOTE 15 - QUARTERLY DATA (UNAUDITED)
The Company's quarterly operating results for the fiscal year ended March
31, 2001 and 2000 are summarized below (IN THOUSANDS, EXCEPT PER SHARE DATA):
Gross EPS
Quarter ended revenues Gross profit Net income (diluted)
- ---------------------- ----------- -------------- ------------- ----------
March 31, 2001 $ 14,656 $ 4,938 $ 473 $ 0.05
December 31, 2000 18,828 6,453 789 0.08
September 30, 2000 14,211 4,315 240 0.02
June 30, 2000 14,518 5,412 548 0.05
March 31, 2000 12,442 4,603 72 (0.04)
December 31, 1999 16,361 7,469 1,669 0.18
September 30, 1999 13,177 5,819 1,014 0.11
June 30, 1999 10,828 5,031 926 0.10
EPS calculations for each of the quarters are based on the weighted average
common and common equivalent shares outstanding for each period, and the sum of
the quarters may not be necessarily equal to the full year EPS amount. EPS for
the quarter ended March 31, 2001 was calculated using net income available to
common stockholders.
37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The Chalone Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Chalone
Wine Group, Ltd. and subsidiaries, as of March 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Chalone
Wine Group, Ltd. and subsidiaries as of March 31, 2001 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/DELOITTE & TOUCHE LLP
San Francisco, California
May 11, 2001 (June 15, 2001 as to the last paragraph of Note 8)
38
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Part I, Item 4 - Executive Officers of the Registrant. Additional
information required by this Item is incorporated herein by reference to the
Company's Proxy Statement relating to the 2001 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after March
31, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after March 31, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A(1). FINANCIAL STATEMENTS.
The following financial statements of the Company are included in PART II,
ITEM 8:
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................... 22
Consolidated Statements of Income..................................... 23
Consolidated Statements of Shareholders' Equity....................... 24
Consolidated Statements of Cash Flows................................. 25
Notes to Consolidated Financial Statements............................ 26
INDEPENDENT AUDITORS' REPORT................................................ 38
A(2). FINANCIAL STATEMENT SCHEDULES.
Schedules are omitted because they are not applicable, not required, were
filed subsequent to the filing of the Form 10-K, or because the information
required to be set forth herein is included in the consolidated financial
statements or in notes thereto.
39
B. REPORTS ON FORM 8-K.
The Company filed the following reports on Form 8-K during the last quarter
of the period covered by this Report:
None.
C. EXHIBITS.
A copy of any exhibits (at a reasonable cost) or the Exhibit Index will be
furnished to any shareholder of the Company upon receipt of a written request
therefor. Such request should be sent to The Chalone Wine Group, Ltd., 621
Airpark Road, Napa, California 94558, Attention: Investor Relations.
40
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. (i)
3.2 Amendment to Restated Articles, filed June 6, 1988. (ii)
3.3 Amendment to Restated Articles, filed May 17, 1991. (iii)
3.4 Amendment to Restated Articles, filed July 14, 1993. (iv)
3.5 Bylaws, as amended through December 1992. (i)
3.6 1993 Bylaw amendments. (iv)
4.1 5% Convertible Subordinated Debenture Due 1999 (SDBR
Debenture), issued to Les Domaines Barons de Rothschild
Lafite) ("DBR"), dated April 19, 1989. (v)
4.2 Shareholders' Agreement between the Company and DBR,
dated April 19, 1989. (v)
4.3 Form of 5% Convertible Subordinated Debenture Due
1999 (third-party debentures), issued April 19 and 28, 1989. (v)
4.4 5% Convertible Subordinated Debenture Due 1999 (1991
Debenture), issued to DBR, dated September 30, 1991. (vi)
4.5 Addendum to Shareholders' Agreement, between the Company
and DBR, dated September 30, 1991. (vi)
4.6 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated March 29, 1993. (vii)
- --------
(i) 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.
(ii) 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.
(iii) 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.
(iv) Incorporated by reference to Exhibit Nos. 1 and 3, respectively, to the
Company's Current Report on Form 8-K dated September 30, 1991.
(vii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated March 31, 1993.
41
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
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 designated
investors, effective July 14, 1993. (i)
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. (i)
4.9 Common Stock Purchase Agreement, between the Company and
certain designated investors, dated April 22, 1994. (ii)
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 designated
investors, effective October 25, 1995. (iii)
4.11 Voting Agreement, between W. Philip Woodward, DBR,
and Summus Financial, Inc., dated October 25, 1995. (iii)
10.1 Joint Venture Agreement between the Company and Paragon
Vineyard Co., Inc. ("Paragon"), effective January 1, 1991. (iv)
10.2 Revised Grape Purchase Agreement between Edna Valley Vineyard
Joint Venture and Paragon, effective January 1, 1991. (iv)
10.3 License Agreement between Edna Valley Vineyard Joint Venture
and Paragon, effective January 1, 1991. (iv)
10.4 Ground Lease between Edna Valley Vineyard Joint Venture and
Paragon, effective June 1, 1991. (iv)
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. (v)
- --------
(i) Incorporated by reference to Exhibit Nos. 1 and 6, respectively, to the
Exhibit herein referenced as Exhibit 4.8.
(ii) Incorporated by reference to Exhibit No. 1 to the Company's Current
Report on Form 8-K dated April 27, 1994.
(iii) Incorporated by reference to Exhibit D to Appendix 1 to the Company's
Proxy Statement for a Special Meeting of Shareholders, filed October
25, 1995.
(iv) 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.
(v) 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.
42
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
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. (i)
10.7 Tenancy in Common Agreement, between the Company
and Henry P. and Marina C. Wright, dated July 15, 1988. (i)
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. (i)
10.9 1988 Qualified Profit-Sharing Plan, approved May 21, 1988. (ii)
10.11 Amendment No. 2 to Qualified Profit Sharing Plan, incorporated
as Exhibit 10.9, dated February 7, 1990. (iii)
10.12 Profit Sharing Trust Agreement (i)
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. (i)
10.14 1987 Stock Option Plan, as amended effective May 16, 1991. (iv)
10.15 1988 Non-Discretionary Stock Option Plan, as amended effective
May 16, 1991. (iv)
10.16 Employee Stock Purchase Plan, as amended effective May 16, 1991. (iv)
10.17 Amendment/Extension of Employee Stock Purchase Plan,
effective July 13, 1993. (v)
10.18 Agreement of Joint Venture, between the Company and Canoe
Ridge Vineyard, Incorporated [CRVI], dated December 31, 1990. (vi)
- -------
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) 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.
43
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
10.19 Credit Agreement between the Company and Wells Fargo Bank,
dated July 20, 1992. (i)
10.20 Industrial Real Estate Lease, dated February 19, 1993. (i)
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. (i)
10.22 First Amendment to Industrial Real Estate Lease incorporated as
Exhibit 10.20, dated December 8, 1993. (ii)
10.23 Credit Agreement between the Company and Wells Fargo Bank,
dated August 30, 1993. (iii)
10.24 First Amendment to Credit Agreement between the Company and
Wells Fargo Bank, attached as Exhibit 10.22, dated March 24,
1994. (iii)
10.25 Credit Agreement between the Company and Wells Fargo Bank,
dated July 29, 1994. (iii)
10.26 Canoe Ridge Winery, Inc., Shareholders' Agreement, among the
Company and designated Washington State investors, dated
November 30, 1994. (iii)
10.27 Amendment to Employee Stock Purchase Plan, effective
January 1, 1995. (iii)
10.28 Omnibus Agreement between the Company, DBR,
and Summus Financial, dated August 22, 1995. (iv)
10.29 Credit Agreement between the Company and Wells Fargo Bank,
dated December 29, 1995. (v)
- -------
(i) 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.
(ii) 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.
(iii) 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.
(iv) Incorporated by reference 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 No. 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
44
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
10.30 Credit Agreement between Edna Valley Vineyard and
Wells Fargo Bank, dated July 31, 1995. (i)
10.31 Purchase Agreement between the Company,
Richard H. Graff, Trustee, Graff 1993 Trust dated
June 10, 1993, a trust and Richard H. Graff an
individual, dated July 1, 1996. (i)
10.32 Promissory Note between the Company and Richard H. Graff,
dated July 1, 1996. (i)
10.33 Secured Purchase Money Promissory Note between the Company
and Richard H. Graff, Trustee, Graff 1993 Trust, dated July 1,
1996. (i)
10.34 Residential Lease between the Company and Richard H. Graff,
dated July 1, 1996. (i)
10.35 Consulting and Non-Competition Agreement between the Company
and Richard H. Graff, date July 1, 1996. (i)
10.36 Credit Agreement between the Canoe Ridge Vineyard, LLC,
and Wells Fargo Bank, dated August 15, 1996. (i)
10.37 Credit Agreement between the Company and Wells Fargo Bank,
dated September 25, 1996. (i)
10.38 Amendment to Joint Venture Agreement
of Edna Valley Vineyard between Paragon Vineyard Co., Inc.,
and the Company, dated December 23, 1996. (i)
10.39 Credit Agreement between the Company and Wells Fargo Bank,
dated July 30, 1997. (ii)
10.40 Credit Agreement between Edna Valley Vineyard and
Wells Fargo Bank, dated July 30, 1997. (ii)
10.41 Credit Agreement between Canoe Ridge Vineyard, LLC,
and Wells Fargo Bank, dated July 30, 1997. (ii)
10.42 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
January 5, 1998. (ii)
10.43 Second Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.39, dated
June 9, 1998. (ii)
- --------
(i) Incorporated by reference to Exhibit nos. 10.30 through 10.38,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
(ii) Incorporated by reference to Exhibit nos. 10.39 through 10.45,
respectively, to the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
45
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
10.44 First Amendment to Credit Agreement between Edna Valley
Vineyard and Wells Fargo Bank incorporated as Exhibit 10.40,
dated June 9, 1998. (i)
10.45 First Amendment to Credit Agreement between Canoe Ridge
Vineyard, LLC and Wells Fargo Bank incorporated as
Exhibit 10.41, dated June 9, 1998. (i)
10.46 Lease-Purchase Agreement between the Company and Frances
Goodwin, Trustee of Lois Martinez Trust, dated December 30, 1999. (ii)
10.47 Credit Agreement by and between Cooperative Centrale Raiffeisen-
Boerenleenbank B.A., "Rabobank Nederland," New York Branch
and the Company, dated March 31, 1999. (ii)
10.48 Term Loan Promissory Note between Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York
Branch and the Company, dated March 31, 1999. (ii)
10.49 Revolving Loan Promissory Note between Cooperative
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch and the Company, dated March 31, 1999. (ii)
10.50 Purchase Agreement among Peter Ansdell, SHW Equity Co., and
the Company, and SHW Equity Co., dated June 15, 1999. (ii)
10.51 Senior unsecured notes (series A,B,C) between Agstar Financial
Services, Farm Credit Services of America and the Company,
dated September 15, 2000. (iii)
10.52 Amendments to agreement between Agstar Financial Services,
Farm Credit Services of America and the Company dated
February, 2001. (iv)
10.53 Revolving Loan Promissory Note renewal between Cooperative
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch and the Company, dated March 31, 2001. (v)
23 Consent of Deloitte & Touche LLP to incorporation by
reference, dated June 28, 2001.
- -------
(i) Incorporated by reference to Exhibit Nos. 10.39 through 10.45,
respectively, to the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
(ii) Incorporated by reference to Exhibit Nos. 10.46 through 10.50,
respectively, to the Company's Annual Report on Form 10-K for the year
ended March 31, 1999.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE CHALONE WINE GROUP, LTD.
By /s/ THOMAS B. SELFRIDGE
--------------------------------------------------------------
Thomas B. Selfridge
Chief Executive Officer
(Principal Executive Officer)
By /s/ SHAWN CONROY BLOM
----------------------------------------------------------------
Shawn Conroy Blom
Vice President of Finance and Chief Financial Officer
Dated: June 28, 2001
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/ THOMAS B. SELFRIDGE Director June 28, 2001
- ---------------------------------------------
Thomas B. Selfridge
/s/ W. PHILIP WOODWARD Chairman June 28, 2001
- ---------------------------------------------
W. Philip Woodward
/s/ CHRISTOPHE SALIN Vice Chairman June 28, 2001
- ---------------------------------------------
Christophe Salin
/s/ CRISTINA G. BANKS Director June 28, 2001
- ---------------------------------------------
Cristina G. Banks
/s/ WILLIAM G. MYERS Director June 28, 2001
- ---------------------------------------------
William G. Myers
/s/ JAMES H. NIVEN Director June 28, 2001
- ---------------------------------------------
James H. Niven
47
/s/ ERIC DE ROTHSCHILD Director June 28, 2001
- ---------------------------------------------
Eric de Rothschild
/s/ MARK HOJEL Director June 28, 2001
- ---------------------------------------------
Mark Hojel
/s/ YVES-ANDRE ISTEL Director June 28, 2001
- ---------------------------------------------
Yves-Andre Istel
/s/ PHILLIP M. PLANT Director June 28, 2001
- ---------------------------------------------
Phillip M. Plant
/s/ C. RICHARD KRAMLICH Director June 28, 2001
- ---------------------------------------------
C. Richard Kramlich
48
THE CHALONE WINE GROUP, LTD.
DIRECTORS, OFFICERS & WINERY LOCATIONS
BOARD OF DIRECTORS
W. Philip Woodward, CHAIRMAN
Thomas B. Selfridge, PRESIDENT & CHIEF EXECUTIVE OFFICER
Cristina G. Banks
Mark A. Hojel
Yves-Andre Istel
C. Richard Kramlich
William G. Myers
James H. Niven
Phillip M. Plant
Eric de Rothschild
Christophe Salin
OFFICERS
W. Philip Woodward, CHAIRMAN
Thomas B. Selfridge, PRESIDENT & CHIEF EXECUTIVE OFFICER
Shawn Conroy Blom, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER
Robert B. Farver, VICE PRESIDENT OF SALES AND DISTRIBUTION
Paul K. Novak, VICE PRESIDENT OF MARKETING
ACACIA WINERY
2750 Las Amigas Road, Napa, California 94559
707.226.9991
CANOE RIDGE VINEYARD
1102 W. Cherry Street, Walla Walla, Washington 99362
509.527.0885
CARMENET WINERY
1700 Moon Mountain Drive, Sonoma, California 95476
707.996.5870
CHALONE VINEYARD
Stonewall Canyon Road & Highway 146, Soledad, California 93960
831.678.1717
ECHELON VINEYARDS
4910 Edna Road, Suite A, San Luis Obispo, California 93401
707.254.4200
EDNA VALLEY VINEYARD
2585 Biddle Ranch Road, San Luis Obispo, California 93401
805.544.5855
JADE MOUNTAIN
P.O. Box 596, Angwin, California 94508
707.226.7373
SAGELANDS WINERY
71 Gangl Road, Wapato, Washington 98951
509.877.2112
NAPA PROGRAM
621 Airpark Road, Napa, California 94558
707.963.3808
49
CORPORATE OFFICE
621 Airpark Road, Napa, California 94558-6272
707.254.4200
HTTP://WWW.CHALONEWINEGROUP.COM
CHALONE WINE FOUNDATION
707.254.4219
COMMON STOCK
Chalone Wine Group, Ltd.
Common stock is currently traded over-the-counter in the NASDAQ National Market
System, under the symbol "CHLN."
STOCK TRANSFER AGENT
BankBoston, N.A.
c/o EquiServe
P.O. Box 8040
Boston, MA 02266-8040
Investor Relations Number 781.575.3120
Internet Address: HTTP://WWW.EQUISERVE.COM
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Francisco, California
LEGAL COUNSEL
Farella Braun + Martel, LLP
San Francisco, California
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Wednesday, August 22, 2001,
at 10:00am at Chalone Wine Group's corporate office, 621 Airpark Road, Napa,
California.
ANNUAL REPORT (FORM 10-K)
A copy of the Company's Annual Report, Form 10-K for the year ended March 31,
2001 is filed with the Securities & Exchange Commission and is available to
shareholders by written request to:
Chalone Wine Group
Attn: Investor Relations
621 Airpark Road
Napa, California 94558-6272
50